Note 6 - Loans

9 Months Ended

Sep. 30, 2011

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 6 - Loans

The Company makes various business and consumer loans in the normal course of business.  A brief description of these types of loans is as follows:

One-to-four family residential – This portfolio primarily consists of loans secured by properties in the Company’s normal lending area.  The Company originates fixed and adjustable rates for terms of 10 to 30 years, including conventional and jumbo loans.  These loans generally have an original loan-to-value ratio (“LTV”) of 80% or less.  Those loans with an initial LTV of more than 80% typically have private mortgage insurance to protect the Bank.  This type of loan has historically possessed a lower than average level of loss to the Bank.

Multifamily residential – This portfolio is moderately seasoned and is generally secured by properties in the Bank’s normal lending area.  These loans generally have an initial LTV of 75% and an initial debt service coverage ratio of 1.2x to 1.0x.  This Bank has not experienced any significant losses in this loan portfolio over the past 18 months.

Construction – This portfolio has decreased significantly over the past several years as fewer construction loans have been made during the economic downturn.  These loans are located in the Company’s normal lending area and had an initial LTV of 80%.  Approximately 57% of these loans are secured by residential properties and 43% are secured by commercial properties.  This type of loan has historically possessed a lower than average level of loss to the Bank.

Commercial land and residential development – These categories include raw undeveloped land and developed residential lots held by builders and developers.  Generally, the initial LTV for raw land was 65% and the initial LTV for developed lots was 90%.  Given the significant decline in value for both developed and undeveloped land due to reduced demand, these loan portfolios possess an increased level of risk compared to other loan categories.

Other commercial real estate – This portfolio consists of nonresidential improved real estate which includes churches, shopping centers, office buildings, etc.  These loans typically had an initial LTV of 75% and an initial debt service ratio of 1.2x to 1.0x.  These properties are generally located in the Company’s normal lending area.  Decreased rental income due to the economic slowdown has caused some deterioration in values.  However, this loan portfolio has historically possessed a lower than average loss history compared to the Bank’s entire portfolio.

 Consumer real estate – This category includes home equity lines of credit (“HELOCs”) and loans secured by residential lots purchased by consumers.  The HELOCs generally had an adjustable rate tied to prime rate and a term of 15 years.  The HELOCs initially had an LTV of up to 85%.  The residential lot loans typically had a term of five years or less and were made at an initial LTV of up to 90%.  Many of these properties have declined in value over the past several years.  However, the loss history for these types of loans has been lower than average for the Bank over the past 18 months.

Commercial business – These loans include loans to businesses that are not secured by real estate.  These loans are typically secured by accounts receivable, inventory, equipment, etc.  Commercial loans are typically granted to local businesses that have a strong track record of profitability and performance.  This category of loans incurred slightly lower than average losses for the Bank over the past 18 months.

Other consumer - These loans are either unsecured or secured by automobiles, marketable securities, etc.  They are generally granted to local customers that have a banking relationship with our Bank.  The loss history for this category of loans has been higher than the Bank average over the past 18 months.

The following is a summary of loans outstanding by category at the periods presented:

	Loans covered by FDIC-loss share agreements		Loans not covered by FDIC-loss share agreements		Total		Loans covered by FDIC-loss share agreements		Loans not covered by FDIC-loss share agreements		Total
	(Dollars in thousands)
Real estate:
One-to-four family residential	$	36,543	$	115,313	$	151,856	$	32,755	$	101,014	$	133,769
Multifamily residential		2,965		18,810		21,775		2,993		20,674		23,667
Construction		1,454		19,631		21,085		207		20,214		20,421
Land and development		21,893		50,395		72,288		29,838		62,887		92,725
Other commercial real estate		79,943		226,980		306,923		52,117		234,483		286,600
Consumer real estate		9,514		104,078		113,592		8,827		109,194		118,021
Total real estate		152,312		535,207		687,519		126,737		548,466		675,203
Commercial business		10,233		40,918		51,151		13,060		34,993		48,053
Other consumer		6,395		5,940		12,335		7,779		5,475		13,254
Total loans	$	168,940	$	582,065		751,005	$	147,576	$	588,934		736,510
Less: Allowance for loan losses						12,956						11,924
Total net loans					$	738,049					$	724,586

The Company, through its normal lending activity, originates substantially all of its loans to borrowers that are located in the Piedmont (central) Region of North and South Carolina and the North Georgia Region. The Company also has presold loans in process of settlement which totaled $865,000 at September 30, 2011, and $4.0 million at December 31, 2010.  These presold loans in process of settlement were not included in the table above.

As of September 30, 2011, the Company had $168.9 million in loans covered by FDIC loss-share agreements as a result of the acquisition of loans from Bank of Hiawassee and New Horizons Bank in separate FDIC-assisted transactions (referred to as “covered loans”).  The loans acquired in the Bank of Hiawassee transaction in March 2010 are covered by two loss-share agreements between the FDIC and the Bank, which afford the Bank significant protection against future loan losses.  Under these loss-share agreements, the FDIC will cover 80% of net loan losses up to $102 million and 95% of net loan losses that exceed $102 million.  The term of the loss-share agreements is ten years for losses and recoveries on residential real estate loans and five years for losses and eight years on recoveries on nonresidential loans. At acquisition, the Bank recorded an estimated receivable from the FDIC in the amount of $36.3 million, which represented the discounted value of the FDIC’s estimated portion of the expected future loan losses.  New loans made after the acquisition date are not covered by the FDIC loss-share agreements. These covered loans totaled $123.6 million at September 30, 2011.

In April 2011 the Company acquired New Horizons Bank in an FDIC-assisted transaction.  As part of this transaction, the Company acquired $49.3 million in loans at fair value. Of the acquired loans, $47.4 million are covered by two loss-share agreements between the FDIC and the Bank.  Under these loss-share agreements, the FDIC will cover 80% of net loan losses and qualified expenses.  The term of the loss-share agreements is ten years for losses and recoveries on residential real estate loans and five years for losses and eight years on recoveries on nonresidential loans. At acquisition, the Bank recorded an estimated receivable from the FDIC in the amount of $19.9 million, which represented the discounted value of the FDIC’s estimated portion of the expected future loan losses.  The remaining $1.9 million in loans acquired in the New Horizons Bank transaction were not covered by FDIC loss-share agreements.  As such, any losses incurred on these non-covered loans will be the sole responsibility of the Bank. New loans made after the acquisition date are not covered by the FDIC loss-share agreements. These covered loans totaled $45.3 million at September 30, 2011.

A portion of the fair value discount on the acquired loans has an accretable yield associated with those loans that is accreted into interest income over the estimated remaining life of the loans.  The remaining nonaccretable difference represents cash flows not expected to be collected.  The changes in the accretable yield and the carrying amounts of the covered loans for the three- and nine-month periods ended September 30, 2011 are presented in the following tables.

	Three Months Ended						Nine Months Ended
	September 30, 2011						September 30, 2011
	Accretable Yield			Carrying Amount			Accretable Yield			Carrying Amount
	(in thousands)
Balance at beginning of period	$	(729	)	$	177,047		$	1,050		$	147,576
Additions due to acquisition		-			-			(1,813	)		49,260
Reductions from payments and foreclosures, net		(106	)		(8,405	)		(285	)		(28,407	)
Accretion		298			298			511			511
Balance at end of period	$	(537	)	$	168,940		$	(537	)	$	168,940