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3. Loans
 9 Months Ended
Sep. 30, 2018
Receivables [Abstract]  
3. Loans

Major classifications of loans at September 30, 2018 and December 31, 2017 are summarized as follows: 

 

(Dollars in thousands)      
   September 30, 2018  December 31, 2017
Real estate loans:          
Construction and land development  $76,987    84,987 
Single-family residential   249,812    246,703 
Single-family residential -          
Banco de la Gente non-traditional   34,742    37,249 
Commercial   275,629    248,637 
Multifamily and farmland   31,102    28,937 
Total real estate loans   668,272    646,513 
           
Loans not secured by real estate:          
Commercial loans   97,085    89,022 
Farm loans   994    1,204 
Consumer loans   9,512    9,888 
All other loans   10,861    13,137 
           
Total loans   786,724    759,764 
           
Less allowance for loan losses   6,295    6,366 
           
Total net loans  $780,429    753,398 

 

The Bank grants loans and extensions of credit primarily within the Catawba Valley region of North Carolina, which encompasses Catawba, Alexander, Iredell and Lincoln counties, and also in Mecklenburg, Wake and Durham counties of North Carolina. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate, the value of which is dependent upon the real estate market. Risk characteristics of the major components of the Bank’s loan portfolio are discussed below:

 

·Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. As of September 30, 2018, construction and land development loans comprised approximately 10% of the Bank’s total loan portfolio.

 

·Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. As of September 30, 2018, single-family residential loans comprised approximately 36% of the Bank’s total loan portfolio, and include Banco’s non-traditional single-family residential loans, which were approximately 4% of the Bank’s total loan portfolio.

 

·Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. As of September 30, 2018, commercial real estate loans comprised approximately 35% of the Bank’s total loan portfolio.

 

·Commercial loans – Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid or fluctuate in value based on the success of the business. As of September 30, 2018, commercial loans comprised approximately 12% of the Bank’s total loan portfolio.

 

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

The following tables present an age analysis of past due loans, by loan type, as of September 30, 2018 and December 31, 2017:

 

September 30, 2018                  
(Dollars in thousands)                  
   Loans 30-89 Days Past Due  Loans 90 or More Days Past Due  Total Past Due Loans  Total Current Loans  Total Loans  Accruing Loans 90 or More Days Past Due
Real estate loans:                              
Construction and land development  $1,170    38    1,208    75,779    76,987    —   
Single-family residential   2,597    366    2,963    246,849    249,812    —   
Single-family residential -                              
Banco de la Gente non-traditional   940    485    1,425    33,317    34,742    —   
Commercial   1,157    100    1,257    274,372    275,629    —   
Multifamily and farmland   —      —      —      31,102    31,102    —   
Total real estate loans   5,864    989    6,853    661,419    668,272    —   
                               
Loans not secured by real estate:                              
Commercial loans   490    94    584    96,501    97,085    —   
Farm loans   —      —      —      994    994    —   
Consumer loans   85    35    120    9,392    9,512    —   
All other loans   —      —      —      10,861    10,861    —   
Total loans  $6,439    1,118    7,557    779,167    786,724    —   

 

December 31, 2017                  
(Dollars in thousands)                  
   Loans 30-89 Days Past Due  Loans 90 or More Days Past Due  Total Past Due Loans  Total Current Loans  Total Loans  Accruing Loans 90 or More Days Past Due
Real estate loans:                              
Construction and land development  $277    —      277    84,710    84,987    —   
Single-family residential   3,241    193    3,434    243,269    246,703    —   
Single-family residential -                              
Banco de la Gente non-traditional   4,078    465    4,543    32,706    37,249    —   
Commercial   588    —      588    248,049    248,637    —   
Multifamily and farmland   —      12    12    28,925    28,937    —   
Total real estate loans   8,184    670    8,854    637,659    646,513    —   
                               
Loans not secured by real estate:                              
Commercial loans   53    100    153    88,869    89,022    —   
Farm loans   —      —      —      1,204    1,204    —   
Consumer loans   113    5    118    9,770    9,888    —   
All other loans   —      —      —      13,137    13,137    —   
Total loans  $8,350    775    9,125    750,639    759,764    —   

 

The following table presents non-accrual loans as of September 30, 2018 and December 31, 2017: 

 

(Dollars in thousands)      
   September 30, 2018  December 31, 2017
Real estate loans:          
Construction and land development  $39    14 
Single-family residential   1,824    1,634 
Single-family residential -          
Banco de la Gente non-traditional   1,475    1,543 
Commercial   445    396 
     Multifamily and farmland   —      12 
Total real estate loans   3,783    3,599 
           
Loans not secured by real estate:          
Commercial loans   94    100 
Consumer loans   42    12 
Total  $3,919    3,711 

 

At each reporting period, the Bank determines which loans are impaired. Accordingly, the Bank’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan that is collateral-dependent is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank. REAS is staffed by certified appraisers that also perform appraisals for other companies. Factors, including the assumptions and techniques utilized by the appraiser, are considered by management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. An allowance for each impaired loan that is not collateral dependent is calculated based on the present value of projected cash flows. If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans under $250,000 are not individually evaluated for impairment with the exception of the Bank’s troubled debt restructured (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Accruing impaired loans were $23.6 million, $24.6 million and $21.3 million at September 30, 2018, December 31, 2017 and September 30, 2017, respectively. Interest income recognized on accruing impaired loans was $1.0 million, $1.4 million, and $1.1 million for the nine months ended September 30, 2018, the year ended December 31, 2017 and the nine months ended September 30, 2017, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

 

The following table presents impaired loans as of September 30, 2018:

 

(Dollars in thousands)               
                
   Unpaid Contractual Principal Balance  Recorded Investment With No Allowance  Recorded Investment With Allowance  Recorded Investment in Impaired Loans  Related Allowance
Real estate loans:                         
Construction and land development  $337    —      282    282    11 
Single-family residential   5,533    429    4,620    5,049    36 
Single-family residential -                         
Banco de la Gente non-traditional   16,565    —      15,934    15,934    1,055 
Commercial   2,371    190    1,861    2,051    13 
Multifamily and farmland   —      —      —      —      —   
Total impaired real estate loans   24,806    619    22,697    23,316    1,115 
                          
Loans not secured by real estate:                         
Commercial loans   257    94    1    95    —   
Consumer loans   158    —      155    155    2 
Total impaired loans  $25,221    713    22,853    23,566    1,117 

 

The following table presents the average impaired loan balance and the interest income recognized by loan class for the three and nine months ended September 30, 2018 and 2017.

 

(Dollars in thousands)                        
   Three months ended  Nine months ended
   September 30, 2018  September 30, 2017  September 30, 2018  September 30, 2017
   Average Balance  Interest Income Recognized  Average Balance  Interest Income Recognized  Average Balance  Interest Income Recognized  Average Balance  Interest Income Recognized
Real estate loans:                                        
Construction and land development  $320    2    246    5    326    14    253    11 
Single-family residential   6,441    73    4,783    71    6,350    207    5,113    202 
Single-family residential -                                        
Banco de la Gente non-traditional   14,602    236    17,283    225    14,851    703    17,235    694 
Commercial   2,320    17    3,852    18    2,307    97    3,712    144 
Multifamily and farmland   —      —      12    —      3    —      45    —   
Total impaired real estate loans   23,683    328    26,176    319    23,837    1,021    26,358    1,051 
                                         
Loans not secured by real estate:                                        
Commercial loans   96    —      243    —      99    —      130    3 
Consumer loans   144    3    183    3    147    7    206    8 
Total impaired loans  $23,923    331    26,602    322    24,083    1,028    26,694    1,062 

 

The following table presents impaired loans as of and for the year ended December 31, 2017:

 

(Dollars in thousands)                     
                      
   Unpaid Contractual Principal Balance  Recorded Investment With No Allowance  Recorded Investment With Allowance  Recorded Investment in Impaired Loans  Related Allowance  Average Outstanding Impaired Loans  YTD Interest Income Recognized
Real estate loans:                                   
Construction and land development  $282    —      277    277    6    253    17 
Single-family residential   5,226    1,135    3,686    4,821    41    5,113    265 
Single-family residential -                                   
Banco de la Gente non-traditional   17,360    —      16,805    16,805    1,149    16,867    920 
Commercial   2,761    807    1,661    2,468    1    3,411    148 
Multifamily and farmland   78    —      12    12    —      28    —   
Total impaired real estate loans   25,707    1,942    22,441    24,383    1,197    25,672    1,350 
                                    
Loans not secured by real estate:                                   
Commercial loans   264    100    4    104    —      149    3 
Consumer loans   158    —      154    154    2    194    9 
Total impaired loans  $26,129    2,042    22,599    24,641    1,199    26,015    1,362 

 

Changes in the allowance for loan losses for the three and nine months ended September 30, 2018 and 2017 were as follows:

  

(Dollars in thousands)                              
   Real Estate Loans               
   Construction and Land Development  Single-Family Residential  Single-Family Residential - Banco de la Gente Non-traditional  Commercial  Multifamily and Farmland  Commercial  Farm  Consumer and All Other  Unallocated  Total
Nine months ended September 30, 2018:                           
Allowance for loan losses:                                                  
Beginning balance  $804    1,812    1,280    1,193    72    574    —      155    476    6,366 
Charge-offs   (53)   (115)   —      (271)   (5)   (4)   —      (318)   —      (766)
Recoveries   4    55    —      101    1    23    —      139    —      323 
Provision   (63)   (293)   (75)   438    10    12    —      182    161    372 
Ending balance  $692    1,459    1,205    1,461    78    605    —      158    637    6,295 
                                                   
Three months ended September 30, 2018:                                                  
Allowance for loan losses:                                                  
Beginning balance  $668    1,638    1,233    1,420    72    587    —      150    509    6,277 
Charge-offs   (53)   (73)   —      —      —      (1)   —      (132)   —      (259)
Recoveries   1    28    —      94    —      7    —      37    —      167 
Provision   76    (134)   (28)   (53)   6    12    —      103    128    110 
Ending balance  $692    1,459    1,205    1,461    78    605    —      158    637    6,295 
                                                   
Allowance for loan losses at September 30, 2018:                                                  
Ending balance: individually                                                  
evaluated for impairment  $5    2    1,036    12    —      —      —      —      —      1,055 
Ending balance: collectively                                                  
evaluated for impairment   687    1,457    169    1,449    78    605    —      158    637    5,240 
Ending balance  $692    1,459    1,205    1,461    78    605    —      158    637    6,295 
                                                   
Loans at September 30, 2018:                                                  
Ending balance  $76,987    249,812    34,742    275,629    31,102    97,085    994    20,373    —      786,724 
                                                   
Ending balance: individually                                                  
evaluated for impairment  $98    2,171    14,557    1,879    —      94    —      —      —      18,799 
Ending balance: collectively                                                  
evaluated for impairment  $76,889    247,641    20,185    273,750    31,102    96,991    994    20,373    —      767,925 

 

(Dollars in thousands)                              
   Real Estate Loans               
   Construction and Land Development  Single-Family Residential  Single-Family Residential - Banco de la Gente Non-traditional  Commercial  Multifamily and Farmland  Commercial  Farm  Consumer and All Other  Unallocated  Total
Nine months ended September 30, 2017:                           
Allowance for loan losses:                                                  
Beginning balance  $1,152    2,126    1,377    1,593    52    675    —      204    371    7,550 
Charge-offs   —      (64)   —      —      (66)   (63)   —      (288)   —      (481)
Recoveries   12    26    —      17    —      23    —      102    —      180 
Provision   (178)   (211)   (101)   (192)   86    (74)   —      143    122    (405)
Ending balance  $986    1,877    1,276    1,418    72    561    —      161    493    6,844 
                                                   
Three months ended September 30, 2017:                                                  
Allowance for loan losses:                                                  
Beginning balance  $1,183    1,819    1,293    1,463    75    704    —      158    472    7,167 
Charge-offs   —      (20)   —      —      —      (26)   —      (106)   —      (152)
Recoveries   2    9    —      4    —      8    —      24    —      47 
Provision   (199)   69    (17)   (49)   (3)   (125)   —      85    21    (218)
Ending balance  $986    1,877    1,276    1,418    72    561    —      161    493    6,844 
                                                   
Allowance for loan losses at September 30, 2017:                                                  
Ending balance: individually                                                  
evaluated for impairment  $—      —      1,104    42    —      —      —      —      —      1,146 
Ending balance: collectively                                                  
evaluated for impairment   986    1,877    172    1,376    72    561    —      161    493    5,698 
Ending balance  $986    1,877    1,276    1,418    72    561    —      161    493    6,844 
                                                   
Loans at September 30, 2017:                                                  
Ending balance  $75,483    247,184    37,840    245,279    28,662    87,019    895    25,075    —      747,437 
                                                   
Ending balance: individually                                                  
evaluated for impairment  $10    1,875    15,732    3,069    —      229    —      —      —      20,915 
Ending balance: collectively                                                  
evaluated for impairment  $75,473    245,309    22,108    242,210    28,662    86,790    895    25,075    —      726,522 

 

The provision for loan losses for the three months ended September 30, 2018 was an expense of $110,000, as compared to a credit of $218,000 for the three months ended September 30, 2017. The increase in the provision for loan losses is primarily attributable to a $39.3 million increase in loans from September 30, 2017 to September 30, 2018.

 

The provision for loan losses for the nine months ended September 30, 2018 was an expense of $372,000, as compared to a credit of $405,000 for the nine months ended September 30, 2017. The increase in the provision for loan losses is primarily attributable to a $39.3 million increase in loans from September 30, 2017 to September 30, 2018.

 

The Company utilizes an internal risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. These risk grades are evaluated on an ongoing basis. A description of the general characteristics of the eight risk grades is as follows:

 

·Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists. Certificates of deposit or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade.
·Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Company’s range of acceptability. The organization or individual is established with a history of successful performance though somewhat susceptible to economic changes.
·Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the Company’s range of acceptability but higher than normal. This may be a new organization or an existing organization in a transitional phase (e.g. expansion, acquisition, market change).
·Risk Grade 4 – Management Attention: These loans have higher risk and servicing needs but still are acceptable. Evidence of marginal performance or deteriorating trends is observed. These are not problem credits presently, but may be in the future if the borrower is unable to change its present course.
·Risk Grade 5 – Watch: These loans are currently performing satisfactorily, but there has been some recent past due history on repayment and there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Company’s position at some future date.
·Risk Grade 6 – Substandard: A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
·Risk Grade 7 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans classified as Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.
·Risk Grade 8 – Loss: Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be realized in the future. Loss is a temporary grade until the appropriate authority is obtained to charge the loan off.

 

The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of September 30, 2018 and December 31, 2017:

 

September 30, 2018                              
(Dollars in thousands)                              
    Real Estate Loans                          
    Construction and Land Development    Single-Family Residential    Single-Family Residential - Banco de la Gente Non-traditional    Commercial    Multifamily and Farmland    Commercial    Farm    Consumer    All Other    Total 
                                                   
1- Excellent Quality  $410    7,583    —      —      —      662    —      668    —      9,323 
2- High Quality   15,413    125,945    —      35,362    430    24,141    —      3,462    2,174    206,927 
3- Good Quality   51,835    91,936    13,927    215,902    25,758    65,302    845    4,733    7,924    478,162 
4- Management Attention   5,210    17,218    15,392    21,271    3,813    6,601    149    581    763    70,998 
5- Watch   3,924    3,844    2,425    2,649    1,101    273    —      18    —      14,234 
6- Substandard   195    3,286    2,998    445    —      106    —      50    —      7,080 
7- Doubtful   —      —      —      —      —      —      —      —      —      —   
8- Loss   —      —      —      —      —      —      —      —      —      —   
Total  $76,987    249,812    34,742    275,629    31,102    97,085    994    9,512    10,861    786,724 

 

December 31, 2017                              
(Dollars in thousands)                              
    Real Estate Loans                           
    Construction and Land Development    Single-Family Residential    Single-Family Residential - Banco de la Gente Non-traditional    Commercial    Multifamily and Farmland    Commercial    Farm    Consumer    All Other    Total 
                                                   
1- Excellent Quality  $152    8,590    —      —      —      446    —      791    —      9,979 
2- High Quality   20,593    120,331    —      34,360    561    17,559    —      3,475    2,410    199,289 
3- Good Quality   53,586    89,120    14,955    196,439    25,306    65,626    1,085    5,012    9,925    461,054 
4- Management Attention   4,313    20,648    15,113    13,727    1,912    5,051    119    562    802    62,247 
5- Watch   6,060    4,796    3,357    3,671    1,146    223    —      23    —      19,276 
6- Substandard   283    3,218    3,824    440    12    117    —      25    —      7,919 
7- Doubtful   —      —      —      —      —      —      —      —      —      —   
8- Loss   —      —      —      —      —      —      —      —      —      —   
Total  $84,987    246,703    37,249    248,637    28,937    89,022    1,204    9,888    13,137    759,764 

 

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $2.2 million and $4.5 million at September 30, 2018 and December 31, 2017, respectively. The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower. There was $93,000 and $21,000 in performing loans classified as TDR loans at September 30, 2018 and December 31, 2017, respectively.

 

The following table presents an analysis of TDR loan modifications during the three months ended September 30, 2018.

 

Three months ended September 30, 2018         
(Dollars in thousands)         
   Number of Contracts  Pre-Modification Outstanding Recorded Investment  Post-Modification Outstanding Recorded Investment
Real estate loans               
Single-family residential   1   $61    61 
Total real estate TDR loans   1    61    61 
                
Total TDR loans   1   $61    61 

 

During the three months ended September 30, 2018, one loan was modified that was considered to be a new TDR loan. The interest rate was modified on this TDR loan.

 

The following table presents an analysis of TDR loan modifications during the nine months ended September 30, 2018. 

 

Nine months ended September 30, 2018         
(Dollars in thousands)         
   Number of Contracts  Pre-Modification Outstanding Recorded Investment  Post-Modification Outstanding Recorded Investment
Real estate loans               
Single-family residential   2   $94    94 
Total real estate TDR loans   2    94    94 
                
Total TDR loans   2   $94    94 

 

During the nine months ended September 30, 2018, two loan were modified that was considered to be new TDR loans. The interest rates were modified on these TDR loans.

 

The following table presents an analysis of TDR loan modifications during the three and nine months ended September 30, 2017. 

 

Three and nine months ended September 30, 2017         
(Dollars in thousands)         
   Number of Contracts  Pre-Modification Outstanding Recorded Investment  Post-Modification Outstanding Recorded Investment
Real estate loans               
Single-family residential   2   $22    22 
Total real estate TDR loans   2    22    22 
                
Total TDR loans   2   $22    22 

  

During the three and nine months ended September 30, 2017, two loans were modified that were considered to be new TDR loans. The interest rate was modified on these TDR loans.

 

There were no loans modified as TDR that defaulted during the three and nine months ended September 30, 2018 and 2017, which were within 12 months of their modification date. Generally, a TDR loan is considered to be in default once it becomes 90 days or more past due following a modification.