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3. Loans
 12 Months Ended
Dec. 31, 2018
Receivables [Abstract]  
Loans

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

 

(Dollars in thousands)      
  

December 31,

2018

 

December 31,

2017

Real estate loans:          
Construction and land development  $94,178    84,987 
Single-family residential   252,983    246,703 
Single-family residential -          
Banco de la Gente non-traditional   34,261    37,249 
Commercial   270,055    248,637 
Multifamily and farmland   33,163    28,937 
Total real estate loans   684,640    646,513 
           
Loans not secured by real estate:          
Commercial loans   97,465    89,022 
Farm loans   926    1,204 
Consumer loans   9,165    9,888 
All other loans   11,827    13,137 
           
Total loans   804,023    759,764 
           
Less allowance for loan losses   6,445    6,366 
           
Net loans  $797,578    753,398 

 

The above table includes deferred costs, net of deferred fees, totaling $1.6 million at December 31, 2018 and 2017.

 

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 December 31, 2018, construction and land development loans comprised approximately 12% 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 December 31, 2018, single-family residential loans comprised approximately 36% of the Bank’s total loan portfolio, including Banco single-family residential non-traditional 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 December 31, 2018, commercial real estate loans comprised approximately 34% 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 December 31, 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 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 December 31, 2018 and 2017:

 

December 31, 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  $3    —      3    94,175    94,178    —   
Single-family residential   4,162    570    4,732    248,251    252,983    —   
Single-family residential -                              
Banco de la Gente non-traditional   4,627    580    5,207    29,054    34,261    —   
Commercial   228    —      228    269,827    270,055    —   
Multifamily and farmland   —      —      —      33,163    33,163    —   
Total real estate loans   9,020    1,150    10,170    674,470    684,640    —   
                               
Loans not secured by real estate:                              
Commercial loans   445    90    535    96,930    97,465    —   
Farm loans   —      —      —      926    926    —   
Consumer loans   99    4    103    9,062    9,165    —   
All other loans   —      —      —      11,827    11,827    —   
Total loans  $9,564    1,244    10,808    793,215    804,023    —   

 

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 the Bank’s non-accrual loans as of December 31, 2018 and 2017:

 

(Dollars in thousands)      
  

December 31,

2018

 

December 31,

2017

Real estate loans:          
Construction and land development  $1    14 
Single-family residential   1,530    1,634 
Single-family residential -          
Banco de la Gente non-traditional   1,440    1,543 
Commercial   244    396 
     Multifamily and farmland   —      12 
Total real estate loans   3,215    3,599 
           
Loans not secured by real estate:          
Commercial loans   89    100 
Consumer loans   10    12 
Total  $3,314    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. Impaired loans collectively evaluated for impairment totaled $4.8 million and $4.9 million at December 31, 2018 and 2017, respectively. Accruing impaired loans were $22.8 million and $24.6 million at December 31, 2018 and December 31, 2017, respectively. Interest income recognized on accruing impaired loans was $1.3 million and $1.4 million for the years ended December 31, 2018 and 2017, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual. 

 

The following tables present the Bank’s impaired loans as of December 31, 2018, 2017 and 2016:

 

December 31, 2018                     
(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  $281    —      279    279    5    327    19 
Single-family residential   5,059    422    4,188    4,610    32    6,271    261 
Single-family residential -                                   
Banco de la Gente non-traditional   16,424    —      15,776    15,776    1,042    14,619    944 
Commercial   1,995    —      1,925    1,925    17    2,171    111 
Total impaired real estate loans   23,759    422    22,168    22,590    1,096    23,388    1,335 
                                    
Loans not secured by real estate:                                   
Commercial loans   251    89    1    90    —      96    —   
Consumer loans   116    —      113    113    2    137    7 
Total impaired loans  $24,126    511    22,282    22,793    1,098    23,621    1,342 

 

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 

  

December 31, 2016                     
(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    —      278    278    11    330    13 
Single-family residential   5,354    703    4,323    5,026    47    7,247    164 
Single-family residential -                                   
Banco de la Gente non-traditional   18,611    —      18,074    18,074    1,182    17,673    861 
Commercial   3,750    1,299    2,197    3,496    166    4,657    152 
Multifamily and farmland   78    —      78    78    —      78    —   
Total impaired real estate loans   28,075    2,002    24,950    26,952    1,406    29,985    1,190 
                                    
Loans not secured by real estate:                                   
Commercial loans   27    —      27    27    —      95    —   
Consumer loans   211    —      202    202    3    222    8 
Total impaired loans  $28,313    2,002    25,179    27,181    1,409    30,302    1,198 

 

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at December 31, 2018 and 2017 are presented below. The Company’s valuation methodology is discussed in Note 15.

 

(Dollars in thousands)            
  

Fair Value Measurements December 31,

2018

  Level 1 Valuation  Level 2 Valuation  Level 3 Valuation
Mortgage loans held for sale  $680    —      —      680 
Impaired loans  $21,695    —      —      21,695 
Other real estate  $27    —      —      27 

 

(Dollars in thousands)            
  

Fair Value Measurements December 31,

2017

  Level 1 Valuation  Level 2 Valuation  Level 3 Valuation
Mortgage loans held for sale  $857    —      —      857 
Impaired loans  $23,442    —      —      23,442 
Other real estate  $118    —      —      118 

 

Changes in the allowance for loan losses for the year ended December 31, 2018 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 
Allowance for loan losses:                                                  
Beginning balance  $804    1,812    1,280    1,193    72    574    —      155    476    6,366 
Charge-offs   (53)   (116)   —      (453)   (5)   (54)   —      (452)   —      (1,133)
Recoveries   10    106    —      105    1    32    —      168    —      422 
Provision   52    (477)   (103)   433    15    74    —      290    506    790 
Ending balance  $813    1,325    1,177    1,278    83    626    —      161    982    6,445 
                                                   
                                                   
 Ending balance: individually
                                                  
evaluated for impairment  $—      —      1,023    15    —      —      —      —      —      1,038 
Ending balance: collectively                                                  
evaluated for impairment   813    1,325    154    1,263    83    626    —      161    982    5,407 
Ending balance  $813    1,325    1,177    1,278    83    626    —      161    982    6,445 
                                                   
Loans:                                                  
Ending balance  $94,178    252,983    34,261    270,055    33,163    97,465    926    20,992    —      804,023 
                                                   
 Ending balance: individually
                                                  
evaluated for impairment  $96    1,779    14,310    1,673    —      89    —      —      —      17,947 
Ending balance: collectively                                                  
evaluated for impairment  $94,082    251,204    19,951    268,382    33,163    97,376    926    20,992    —      786,076 

  

Changes in the allowance for loan losses for the year ended December 31, 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 
Allowance for loan losses:                                                  
Beginning balance  $1,152    2,126    1,377    1,593    52    675    —      204    371    7,550 
Charge-offs   —      (249)   —      —      (66)   (194)   —      (473)   —      (982)
Recoveries   14    85    —      21    —      31    —      154    —      305 
Provision   (362)   (150)   (97)   (421)   86    62    —      270    105    (507)
Ending balance  $804    1,812    1,280    1,193    72    574    —      155    476    6,366 
                                                   
                                                   
 Ending balance: individually
                                                  
evaluated for impairment  $—      —      1,093    37    —      —      —      —      —      1,130 
Ending balance: collectively                                                  
evaluated for impairment   804    1,812    187    1,156    72    574    —      155    476    5,236 
Ending balance  $804    1,812    1,280    1,193    72    574    —      155    476    6,366 
                                                   
Loans:                                                  
Ending balance  $84,987    246,703    37,249    248,637    28,937    89,022    1,204    23,025    —      759,764 
                                                   
 Ending balance: individually
                                                  
evaluated for impairment  $98    1,855    15,460    2,251    —      100    —      —      —      19,764 
Ending balance: collectively                                                  
evaluated for impairment  $84,889    244,848    21,789    246,386    28,937    88,922    1,204    23,025    —      740,000 

  

Changes in the allowance for loan losses for the year ended December 31, 2016 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 
Allowance for loan losses:                                                  
Beginning balance  $2,185    2,534    1,460    1,917    —      842    —      172    479    9,589 
Charge-offs   (7)   (275)   —      (318)   —      (146)   —      (492)   —      (1,238)
Recoveries   10    55    —      19    —      170    —      151    —      405 
Provision   (1,036)   (188)   (83)   (25)   52    (191)   —      373    (108)   (1,206)
Ending balance  $1,152    2,126    1,377    1,593    52    675    —      204    371    7,550 
                                                   
                                                   
 Ending balance: individually
                                                  
evaluated for impairment  $—      —      1,160    159    —      —      —      —      —      1,319 
Ending balance: collectively                                                  
evaluated for impairment   1,152    2,126    217    1,434    52    675    —      204    371    6,231 
Ending balance  $1,152    2,126    1,377    1,593    52    675    —      204    371    7,550 
                                                   
Loans:                                                  
Ending balance  $61,749    240,700    40,189    247,521    21,047    87,596    —      25,009    —      723,811 
                                                   
 Ending balance: individually
                                                  
evaluated for impairment  $—      935    16,718    3,648    —      —      —      —      —      21,301 
Ending balance: collectively                                                  
evaluated for impairment  $61,749    239,765    23,471    243,873    21,047    87,596    —      25,009    —      702,510 

  

The Bank 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. CD 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 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 December 31, 2018 and 2017.

 

December 31, 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  $504    5,795    —      —      —      605    —      673    —      7,577 
2- High Quality   24,594    128,588    —      25,321    395    20,520    —      3,229    2,145    204,792 
3- Good Quality   59,549    92,435    13,776    211,541    27,774    69,651    785    4,699    8,932    489,142 
4- Management Attention   5,707    19,200    15,012    30,333    3,906    6,325    141    529    750    81,903 
5- Watch   3,669    3,761    2,408    2,616    1,088    264    —      18    —      13,824 
6- Substandard   155    3,204    3,065    244    —      100    —      17    —      6,785 
7- Doubtful   —      —      —      —      —      —      —      —      —      —   
8- Loss   —      —      —      —      —      —      —      —      —      —   
Total  $94,178    252,983    34,261    270,055    33,163    97,465    926    9,165    11,827    804,023 

 

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 

 

TDR loans modified in 2018, past due TDR loans and non-accrual TDR loans totaled $4.7 million and $4.5 million at December 31, 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 were $92,000 and $21,000 in performing loans classified as TDR loans at December 31, 2018 and December 31, 2017, respectively.

 

The following table presents an analysis of loan modifications during the year ended December 31, 2018:

 

Year ended December 31, 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 TDR loans   2   $94    94 

 

During the year ended December 31, 2018, two loans were modified that were considered to be new TDR loans. The interest rate was modified on these TDR loans.

 

The following table presents an analysis of loan modifications during the year ended December 31, 2017:

 

Year ended December 31, 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 TDR loans   2   $22    22 

 

During the year ended December 31, 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 TDR loans with a payment default occurring within 12 months of the restructure date, and the payment default occurring during the years ended December 31, 2018 and 2017. TDR loans are deemed to be in default if they become past due by 90 days or more.