| Loans | (3) Loans
Major classifications of loans at September 30, 2011 and December 31, 2010 are summarized as follows: (Dollars in thousands) | | | | | | September 30, 2011 | | December 31, 2010 | Real estate loans | | | | Construction and land development | $ | 103,901 | | 124,048 | Single-family residential | | 271,019 | | 287,307 | Commercial | | 211,352 | | 213,487 | Multifamily and farmland | | 4,923 | | 6,456 | Total real estate loans | | 591,195 | | 631,298 | | | | | | | Commercial loans (not secured by real estate) | | 53,082 | | 60,994 | Consumer loans (not secured by real estate) | | 10,634 | | 11,500 | All other loans (not secured by real estate) | | 22,754 | | 22,368 | | | | | | | Total loans | | 677,665 | | 726,160 | | | | | | | Less allowance for loan losses | | 16,348 | | 15,493 | | | | | | | Total net loans | $ | 661,317 | | 710,667 |
The Company 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, Union and Wake 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. 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 September 30, 2011 and December 31, 2010: September 30, 2011 | | | | | | | | | | (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 | $ | 1,138 | | 3,636 | | 4,774 | | 99,127 | | 103,901 | | - | Single-family residential | | 8,170 | | 4,490 | | 12,660 | | 258,359 | | 271,019 | | 1,411 | Commercial | | 1,367 | | 1,962 | | 3,329 | | 208,023 | | 211,352 | | - | Multifamily and farmland | | 215 | | - | | 215 | | 4,708 | | 4,923 | | - | Total real estate loans | | 10,890 | | 10,088 | | 20,978 | | 570,217 | | 591,195 | | 1,411 | | | | | | | | | | | | | | | Commercial loans (not secured by real estate) | | 306 | | 35 | | 341 | | 52,741 | | 53,082 | | - | Consumer loans (not secured by real estate) | | 123 | | 6 | | 129 | | 10,505 | | 10,634 | | - | All other loans (not secured by real estate) | | - | | - | | - | | 22,754 | | 22,754 | | - | Total loans | $ | 11,319 | | 10,129 | | 21,448 | | 656,217 | | 677,665 | | 1,411 |
December 31, 2010 | | | | | | | | | | (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 | $ | 2,306 | | 8,870 | | 11,176 | | 112,872 | | 124,048 | | 197 | Single-family residential | | 19,377 | | 5,936 | | 25,313 | | 261,994 | | 287,307 | | - | Commercial | | 382 | | 1,482 | | 1,864 | | 211,623 | | 213,487 | | - | Multifamily and farmland | | - | | - | | - | | 6,456 | | 6,456 | | - | Total real estate loans | | 22,065 | | 16,288 | | 38,353 | | 592,945 | | 631,298 | | 197 | | | | | | | | | | | | | | | Commercial loans (not secured by real estate) | | 1,098 | | 720 | | 1,818 | | 59,176 | | 60,994 | | 13 | Farm loans (not secured by real estate) | | - | | - | | - | | - | | - | | - | Consumer loans (not secured by real estate) | | 98 | | 13 | | 111 | | 11,389 | | 11,500 | | - | All other loans (not secured by real estate) | | - | | - | | - | | 22,368 | | 22,368 | | - | Total loans | $ | 23,261 | | 17,021 | | 40,282 | | 685,878 | | 726,160 | | 210 |
The following table presents the Company's non-accrual loans as of September 30, 2011 and December 31, 2010:
(Dollars in thousands) | | | | | | September 30, 2011 | | December 31, 2010 | Real estate loans | | | | Construction and land development | $ | 17,088 | | 22,916 | Single-family residential | | 5,665 | | 10,837 | Commercial | | 4,174 | | 5,351 | Multifamily and farmland | | - | | - | Total real estate loans | | 26,927 | | 39,104 | | | | | | | Commercial loans (not secured by real estate) | | 437 | | 816 | Consumer loans (not secured by real estate) | | 127 | | 142 | All other loans (not secured by real estate) | | - | | - | Total | $ | 27,491 | | 40,062 |
At each reporting period, the Company determines which loans are impaired. Accordingly, the Company's impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan, which is generally collateral-dependent, is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. 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. No interest income is recognized on impaired loans subsequent to their classification as impaired.
The following tables present the Company's impaired loans as of September 30, 2011 and December 31, 2010: September 30, 2011 | | | | | | | | | (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 | Real estate loans | | | | | | | | | | | | Construction and land development | $ | 27,114 | | 17,088 | | - | | 17,088 | | - | | 19,753 | Single-family residential | | 6,792 | | 5,148 | | 517 | | 5,665 | | 1,316 | | 7,846 | Commercial | | 5,237 | | 3,196 | | 978 | | 4,174 | | 1 | | 4,482 | Multifamily and farmland | | - | | - | | - | | - | | - | | - | Total impaired real estate loans | | 39,143 | | 25,432 | | 1,495 | | 26,927 | | 1,317 | | 32,081 | | | | | | | | | | | | | | | Commercial loans (not secured by real estate) | | 494 | | 437 | | - | | 437 | | - | | 631 | Consumer loans (not secured by real estate) | | 143 | | 127 | | - | | 127 | | - | | 138 | All other loans (not secured by real estate) | | - | | - | | - | | - | | - | | - | Total impaired loans | $ | 39,780 | | 25,996 | | 1,495 | | 27,491 | | 1,317 | | 32,850 |
December 31, 2010 | | | | | | | | | (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 | Real estate loans | | | | | | | | | | | | Construction and land development | | 31,346 | | 20,787 | | 2,130 | | 22,916 | | 1,055 | | 18,767 | Single-family residential | | 12,376 | | 9,847 | | 990 | | 10,837 | | 168 | | 12,573 | Commercial | | 6,018 | | 4,991 | | 359 | | 5,351 | | 148 | | 4,769 | Multifamily and Farmland | | - | | - | | - | | - | | - | | 27 | Total impaired real estate loans | | 49,740 | | 35,625 | | 3,479 | | 39,104 | | 1,371 | | 36,136 | | | | | | | | | | | | | | | Commercial loans (not secured by real estate) | | 1,243 | | 811 | | 5 | | 816 | | 5 | | 1,479 | Farm loans (non RE) | | | | | | | | - | | | | | Consumer loans (not secured by real estate) | | 152 | | 142 | | - | | 142 | | - | | 79 | All other loans (not secured by real estate) | | - | | - | | - | | - | | | | - | Total impaired loans | $ | 51,135 | | 36,578 | | 3,484 | | 40,062 | | 1,376 | | 37,694 |
Changes in the allowance for loan losses for the nine months ended September 30, 2011 were as follows: (Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real Estate Loans | | | | | | | | | | | | Construction and land development | | Single- family residential | | Commercial | | Multifamily and farmland | | Commercial | | Consumer | | Unallocated | | Total | | Allowance for loan losses: | | | | | | | | | | | | | | | | | Beginning balance | $ | 5,774 | | 6,097 | | 1,409 | | 17 | | 1,174 | | 430 | | 592 | | 15,493 | | Charge-offs | | (5,028 | ) | (2,579 | ) | (1,180 | ) | - | | (313 | ) | (434 | ) | - | | (9,534 | ) | Recoveries | | 235 | | 198 | | 23 | | - | | 114 | | 122 | | - | | 693 | | Provision | | 5,134 | | 2,400 | | 1,404 | | (4 | ) | 23 | | 173 | | 566 | | 9,696 | | Ending balance | $ | 6,115 | | 6,116 | | 1,656 | | 13 | | 998 | | 292 | | 1,158 | | 16,348 | | | | | | | | | | | | | | | | | | | | | Ending balance: Individually | | | | | | | | | | | | | | | | | | evaluated for impairment | $ | - | | 1,316 | | 1 | | - | | - | | - | | - | | 1,317 | | Ending balance: Collectively | | | | | | | | | | | | | | | | | | evaluated for impairment | | 6,115 | | 4,800 | | 1,655 | | 13 | | 998 | | 292 | | 1,158 | | 15,031 | | Ending balance | $ | 6,115 | | 6,116 | | 1,656 | | 13 | | 998 | | 292 | | 1,158 | | 16,348 | |
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 9. A description of the general characteristics of the nine 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 very high risk and servicing needs but still are acceptable. Evidence of marginal performance or deteriorating trends are evident. 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 are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Company's position at some future date. This frequently results from deviating from prudent lending practices, for instance over-advancing on collateral. |
· | 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 – Low Substandard: These loans have the general characteristics of a Grade 6 Substandard loan, with heightened potential concerns. The exact amount of loss is not yet known because neither the liquidation value of the collateral nor the borrower's predicted repayment ability is known with confidence. |
· | Risk Grade 8 – Doubtful: Loans classified 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 9 – Loss: Loans classified 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 grade as of September 30, 2011 and December 31, 2010.
September 30, 2011 | | | | | | | | | | | | | (Dollars in thousands) | | | | | | | | | | | | | | | Real Estate Loans | | | | | | | | | | | Construction and land development | | Single- family residential | | Commercial | | Multifamily and farmland | | Commercial | | Consumer | | All other | | Total | | | | | | | | | | | | | | | | | | 1- Excellent Quality | $ | 199 | | 21,428 | | - | | - | | 738 | | 1,075 | | - | | 23,440 | 2- High Quality | $ | 5,088 | | 65,657 | | 21,969 | | 134 | | 10,410 | | 4,201 | | 3,298 | | 110,757 | 3- Good Quality | $ | 27,736 | | 108,619 | | 137,239 | | 3,482 | | 33,647 | | 4,711 | | 19,449 | | 334,883 | 4- Management Attention | $ | 45,272 | | 52,572 | | 40,570 | | 365 | | 6,847 | | 501 | | 7 | | 146,134 | 5- Watch | $ | 6,037 | | 9,833 | | 1,898 | | 727 | | 499 | | 9 | | - | | 19,003 | 6- Substandard | $ | 19,569 | | 12,910 | | 9,676 | | 215 | | 941 | | 137 | | - | | 43,448 | 7- Low Substandard | $ | - | | - | | - | | - | | - | | - | | - | | - | 8- Doubtful | $ | - | | - | | - | | - | | - | | - | | - | | - | 9- Loss | $ | - | | - | | - | | - | | - | | - | | - | | - | Total | $ | 103,901 | | 271,019 | | 211,352 | | 4,923 | | 53,082 | | 10,634 | | 22,754 | | 677,665 |
December 31, 2010 | | | | | | | | | | | | | (Dollars in thousands) | | | | | | | | | | | | | | | Real Estate Loans | | | | | | | | | | | Construction and land development | | Single- family residential | | Commercial | | Multifamily and farmland | | Commercial | | Consumer | | All other | | Total | | | | | | | | | | | | | | | | | | 1- Excellent Quality | $ | 19 | | 27,698 | | 102 | | - | | 630 | | 1,006 | | - | | 29,455 | 2- High Quality | $ | 5,789 | | 70,990 | | 21,591 | | 2,856 | | 9,673 | | 4,491 | | 5,145 | | 120,535 | 3- Good Quality | $ | 33,991 | | 109,800 | | 129,530 | | 2,256 | | 39,248 | | 5,360 | | 17,223 | | 337,408 | 4- Management Attention | $ | 46,283 | | 55,001 | | 43,731 | | 1,121 | | 8,143 | | 454 | | | | 154,733 | 5- Watch | $ | 8,076 | | 7,959 | | 5,569 | | - | | 1,590 | | 38 | | | | 23,232 | 6- Substandard | $ | 29,502 | | 15,022 | | 12,605 | | 223 | | 1,678 | | 145 | | | | 59,175 | 7- Low Substandard | $ | - | | 756 | | 359 | | - | | - | | - | | | | 1,115 | 8- Doubtful | $ | 388 | | 81 | | - | | - | | 17 | | - | | | | 486 | 9- Loss | $ | - | | - | | - | | - | | 15 | | 6 | | - | | 21 | Total | $ | 124,048 | | 287,307 | | 213,487 | | 6,456 | | 60,994 | | 11,500 | | 22,368 | | 726,160 |
At September 30, 2011, troubled debt restructured (“TDR”) loans amounted to $48.5 million, including $16.0 million in performing TDR loans. The terms of these loans have been renegotiated to provide a reduction in principal or interest as a result of the deteriorating financial position of the borrower. At December 31, 2010, TDR loans amounted to $56.7 million, including $10.0 million in performing TDR loans.
The following table presents an analysis of TDR loans by loan type as of September 30, 2011. (Dollars in thousands) | | | | | | | | Number of Contracts | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment | Real estate loans | | | | | | Construction and land development | 31 | | $ | 24,708 | | 17,311 | Single-family residential | 240 | | | 26,285 | | 24,955 | Commercial | 18 | | | 8,695 | | 4,783 | Multifamily and farmland | 1 | | | 322 | | 215 | Total real estate TDR loans | 290 | | | 60,010 | | 47,264 | | | | | | | | | Commercial loans (not secured by real estate) | 22 | | | 1,776 | | 1,157 | Consumer loans (not secured by real estate) | 8 | | | 142 | | 127 | All other loans (not secured by real estate) | - | | | - | | - | Total TDR loans | 320 | | $ | 61,928 | | 48,548 |
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