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3. Loans
 6 Months Ended
Jun. 30, 2019
Receivables [Abstract]  
3. Loans

Major classifications of loans at June 30, 2019 and December 31, 2018 are summarized as follows:

 

(Dollars in thousands)            
   

June 30,

2019

    

December 31,

2018

  
Real estate loans:            
Construction and land development   $ 86,920       94,178  
Single-family residential     264,724       252,983  
Single-family residential -                
Banco de la Gente non-traditional     32,499       34,261  
Commercial     281,895       270,055  
Multifamily and farmland     44,065       33,163  
Total real estate loans     710,103       684,640  
                 
Loans not secured by real estate:                
Commercial loans     103,466       97,465  
Farm loans     1,060       926  
Consumer loans     8,684       9,165  
All other loans     10,054       11,827  
                 
Total loans     833,367       804,023  
                 
Less allowance for loan losses     6,541       6,445  
                 
Total net loans   $ 826,826       797,578  

 

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 June 30, 2019, 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 June 30, 2019, 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 June 30, 2019, 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 June 30, 2019, 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 June 30, 2019 and December 31, 2018:

 

June 30, 2019                                    
(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   $ 257       -       257       86,663       86,920       -  
Single-family residential     2,608       682       3,290       261,434       264,724       -  
Single-family residential -                                                
Banco de la Gente non-traditional     827       -       827       31,672       32,499       -  
Commercial     324       -       324       281,571       281,895       -  
Multifamily and farmland     -       -       -       44,065       44,065       -  
Total real estate loans     4,016       682       4,698       705,405       710,103       -  
                                                 
Loans not secured by real estate:                                                
Commercial loans     150       -       150       103,316       103,466       -  
Farm loans     -       -       -       1,060       1,060       -  
Consumer loans     43       4       47       8,637       8,684       -  
All other loans     -       -       -       10,054       10,054       -  
Total loans   $ 4,209       686       4,895       828,472       833,367       -  

 

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       -  

 

The following table presents non-accrual loans as of June 30, 2019 and December 31, 2018:

 

(Dollars in thousands)            
   

June 30,

2019

    

December 31,

2018

  
Real estate loans:            
Construction and land development   $ -       1  
Single-family residential     1,224       1,530  
Single-family residential -                
Banco de la Gente non-traditional     1,616       1,440  
Commercial     85       244  
     Multifamily and farmland     -       -  
Total real estate loans     2,925       3,215  
                 
Loans not secured by real estate:                
Commercial loans     85       89  
Consumer loans     17       10  
Total   $ 3,027       3,314  

 

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 $21.4 million, $22.8 million and $24.3 million at June 30, 2019, December 31, 2018 and June 30, 2018, respectively. Interest income recognized on accruing impaired loans was $668,000, $1.3 million, and $697,000 for the six months ended June 30, 2019, the year ended December 31, 2018 and the six months ended June 30, 2018, 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 June 30, 2019:

 

June 30, 2019                              
(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   $ 189       -       189       189       5  
Single-family residential     4,785       413       3,928       4,341       29  
Single-family residential -                                        
Banco de la Gente stated income     15,694       -       14,975       14,975       988  
Commercial     1,734       -       1,728       1,728       13  
Multifamily and farmland     -       -       -       -       -  
Total impaired real estate loans     22,402       413       20,820       21,233       1,035  
                                         
Loans not secured by real estate:                                        
Commercial loans     280       38       80       118       -  
Consumer loans     105       -       101       101       2  
Total impaired loans   $ 22,787       451       21,001       21,452       1,037  

 

The following table presents the average impaired loan balance and the interest income recognized by loan class for the three and six months ended June 30, 2019 and 2018.

 

(Dollars in thousands)                                                
     Three months ended              Six months ended          
    June 30, 2019       June 30, 2018       June 30, 2019     June 30, 2018      
     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   $ 232       2       373       5       248       6       341       11  
Single-family residential     4,214       57       6,306       66       4,826       118       6,325       135  
Single-family residential -                                                                
Banco de la Gente stated income     15,347       239       14,841       230       15,010       491       14,981       467  
Commercial     1,739       22       2,304       42       1,801       45       2,359       80  
Multifamily and farmland     -       -       -       -       -       -       4       -  
Total impaired real estate loans     21,532       320       23,824       343       21,885       660       24,010       693  
                                                                 
Loans not secured by real estate:                                                                
Commercial loans     114       3       98       -       106       4       100       -  
Farm loans (non RE)     -       -       -       -       -       -       -       -  
Consumer loans     104       2       141       2       107       4       146       4  
Total impaired loans   $ 21,750       325       24,063       345       22,098       668       24,256       697  

 

The following table presents impaired loans as of and for the year ended December 31, 2018:

 

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  

 

Changes in the allowance for loan losses for the three and six months ended June 30, 2019 and 2018 were as follows:

 

(Dollars in thousands)                                                            
    Real Estate Loans                                              
    Construction and Land Development     Single-Family Residential     Single-Family Residential - Banco de la Gente Stated Income     Commercial     Multifamily and Farmland     Commercial     Farm     Consumer and All Other     Unallocated     Total  
Six months ended June 30, 2019:                                                            
Allowance for loan losses:                                                            
Beginning balance   $ 813       1,325       1,177       1,278       83       626       -       161       982       6,445  
Charge-offs     (21 )     (22 )     -       -       -       (1 )     -       (316 )     -       (360 )
Recoveries     3       53       -       23       -       14       -       108       -       201  
Provision     (32 )     (44 )     (61 )     33       27       (91 )     -       208       215       255  
Ending balance   $ 763       1,312       1,116       1,334       110       548       -       161       1,197       6,541  
                                                                                 

 

Three months ended June 30, 2019:

 

                                                                              
Allowance for loan losses:                                                                                
Beginning balance   $ 831       1,256       1,174       1,292       98       610       -       162       1,138       6,561  
Charge-offs     (21 )     (9 )     -       -       -       -       -       (166 )     -       (196 )
Recoveries     2       5       -       19       -       8       -       65       -       99  
Provision     (49 )     60       (58 )     23       12       (70 )     -       100       59       77  
Ending balance   $ 763       1,312       1,116       1,334       110       548       -       161       1,197       6,541  
                                                                                 
Allowance for loan losses at June 30, 2019:                                                                                
Ending balance: individually                                                                                
evaluated for impairment   $ -       2       970       12       -       -       -       -       -       984  
Ending balance: collectively                                                                                
evaluated for impairment     763       1,310       146       1,322       110       548       -       161       1,197       5,557  
Ending balance   $ 763       1,312       1,116       1,334       110       548       -       161       1,197       6,541  
                                                                                 
Loans at June 30, 2019:                                                                                
Ending balance   $ 86,920       264,724       32,499       281,895       44,065       103,466       1,060       18,738       -       833,367  
                                                                                 
Ending balance: individually                                                                                
evaluated for impairment   $ 11       1,738       13,508       1,643       -       38       -       -       -       16,938  
Ending balance: collectively                                                                                
evaluated for impairment   $ 86,909       262,986       18,991       280,252       44,065       103,428       1,060       18,738       -       816,429  

  

(Dollars in thousands)                                                            
    Real Estate Loans                                      
    Construction and Land Development     Single-Family Residential     Single-Family Residential - Banco de la Gente Stated Income     Commercial     Multifamily and Farmland     Commercial     Farm     Consumer and All Other     Unallocated     Total  
Six months ended June 30, 2018:                                                            
Allowance for loan losses:                                                            
Beginning balance   $ 804       1,812       1,280       1,193       72       574       -       155       476       6,366  
Charge-offs     -       (43 )     -       (271 )     (5 )     (2 )     -       (186 )     -       (507 )
Recoveries     3       27       -       7       1       16       -       102       -       156  
Provision     (139 )     (158 )     (47 )     491       4       (1 )     -       79       33       262  
Ending balance   $ 668       1,638       1,233       1,420       72       587       -       150       509       6,277  
                                                                                 
Three months ended June 30, 2018:                                                                                
Allowance for loan losses:                                                                                
Beginning balance   $ 651       1,640       1,265       1,298       73       706       -       136       604       6,373  
Charge-offs     -       (43 )     -       (271 )     -       (2 )     -       (85 )     -       (401 )
Recoveries     1       22       -       4       -       8       -       39       -       74  
Provision     16       19       (32 )     389       (1 )     (125 )     -       60       (95 )     231  
Ending balance   $ 668       1,638       1,233       1,420       72       587       -       150       509       6,277  
                                                                                 
Allowance for loan losses at June 30, 2018:                                                                                
Ending balance: individually                                                                                
evaluated for impairment   $ -       2       1,066       18       -       -       -       -       -       1,086  
Ending balance: collectively                                                                                
evaluated for impairment     668       1,636       167       1,402       72       587       -       150       509       5,191  
Ending balance   $ 668       1,638       1,233       1,420       72       587       -       150       509       6,277  
                                                                                 
Loans at June 30, 2018:                                                                                
Ending balance   $ 79,769       250,620       35,847       269,792       28,667       93,580       1,023       22,586       -       781,884  
                                                                                 
Ending balance: individually                                                                                
evaluated for impairment   $ 95       2,132       14,975       2,103       -       94       -       -       -       19,399  
Ending balance: collectively                                                                                
evaluated for impairment   $ 79,674       248,488       20,872       267,689       28,667       93,486       1,023       22,586       -       762,485  

 

The provision for loan losses for the three months ended June 30, 2019 was $77,000, compared to $231,000 for the three months ended June 30, 2018. The decrease in the provision for loan losses is primarily attributable to a reduction in the required level of the allowance for loan losses in the Company’s Accounting Standards Codification (“ASC”) 450-20 reserve calculation resulting from lower historical loss rates and lower qualitative adjustments for economic conditions and other factors.

 

The provision for loan losses for the six months ended June 30, 2019 was $255,000, as compared to $262,000 for the six months ended June 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 June 30, 2019 and December 31, 2018:

 

June 30,2019              
(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   $ 82       7,788       -       -       -       586       -       792       -       9,248  
2- High Quality     27,751       131,136       -       23,245       326       23,039       -       2,896       2,063       210,456  
3- Good Quality     49,964       100,854       13,094       220,899       39,442       72,668       933       4,521       7,253       509,628  
4- Management Attention     6,015       18,695       14,355       34,730       3,739       6,847       127       431       738       85,677  
5- Watch     3,041       3,303       2,164       2,936       558       234       -       12       -       12,248  
6- Substandard     67       2,948       2,886       85       -       92       -       32       -       6,110  
7- Doubtful     -       -       -       -       -       -       -       -       -       -  
8- Loss     -       -       -       -       -       -       -       -       -       -  
Total   $ 86,920       264,724       32,499       281,895       44,065       103,466       1,060       8,684       10,054       833,367  

 

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        

 

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $2.2 million and $4.7 million at June 30, 2019 and December 31, 2018, 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 zero and $92,000 in performing loans classified as TDR loans at June 30, 2019 and December 31, 2018, respectively.

 

There were no new TDR modifications during the three and six months ended June 30, 2019 and 2018.

 

There were no loans modified as TDR that defaulted during the three and six months ended June 30, 2019 and 2018, 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.