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Loans

9 Months Ended

Sep. 30, 2022

(3) Loans

Major classifications of loans at September 30, 2022 and December 31, 2021 are summarized as follows:

(Dollars in thousands)
	September 30, 2022			December 31, 2021
Real estate loans:
Construction and land development	$	112,854			95,760
Single-family residential		312,208			266,111
Single-family residential -
Banco de la Gente non-traditional		20,469			23,147
Commercial		399,015			337,841
Multifamily and farmland		62,040			58,366
Total real estate loans		906,586			781,225

Loans not secured by real estate:
Commercial loans		76,434			91,172
Farm loans		961			796
Consumer loans		6,438			6,436
All other loans		14,488			5,240

Total loans		1,004,907			884,869

Less allowance for loan losses		(10,030	)		(9,355	)

Total net loans	$	994,877			875,514

The Bank makes 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, Rowan and Forsyth 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.

	·	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.

	·	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 the 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.

	·	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.

	·	Multifamily and farmland loans – Decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans.

Loans are considered past due if the required principal and interest payments have not been received within 30 days 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. Generally, a loan is placed on non-accrual status when it is over 90 days past due and there is reasonable doubt that all principal will be collected. 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, 2022 and December 31, 2021:

September 30, 2022
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	513		-		513		112,341		-		112,854		-
Single-family residential		1,050		158		1,208		311,000		-		312,208		-
Single-family residential -
Banco de la Gente non-traditional		602		191		793		19,676		-		20,469		-
Commercial		123		-		123		398,892		-		399,015		-
Multifamily and farmland		-		-		-		62,040		-		62,040		-
Total real estate loans		2,288		349		2,637		903,949		-		906,586		-

Loans not secured by real estate:
Commercial loans		1,237		-		1,237		75,197		-		76,434		-
Farm loans		-		-		-		961		-		961		-
Consumer loans		41		3		44		6,394		-		6,438		-
All other loans		-		-		-		14,488		-		14,488		-
Total loans	$	3,566		352		3,918		1,000,989		-		1,004,907		-

December 31, 2021
(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	$	-		-		-		95,760		95,760		-
Single-family residential		2,323		634		2,957		263,154		266,111		-
Single-family residential -
Banco de la Gente non-traditional		2,593		112		2,705		20,442		23,147		-
Commercial		488		-		488		337,353		337,841		-
Multifamily and farmland		-		-		-		58,366		58,366		-
Total real estate loans		5,404		746		6,150		775,075		781,225		-

Loans not secured by real estate:
Commercial loans		43		-		43		91,129		91,172		-
Farm loans		-		-		-		796		796		-
Consumer loans		38		-		38		6,398		6,436		-
All other loans		-		-		-		5,240		5,240		-
Total loans	$	5,485		746		6,231		878,638		884,869		-

The following table presents non-accrual loans as of September 30, 2022 and December 31, 2021:

(Dollars in thousands)
	September 30, 2022		December 31, 2021
Real estate loans:
Construction and land development	$	-		-
Single-family residential		1,999		1,642
Single-family residential -
Banco de la Gente non-traditional		1,462		1,232
Commercial		133		200
Multifamily and farmland		96		105
Total real estate loans		3,690		3,179

Loans not secured by real estate:
Commercial loans		-		49
Consumer loans		18		2
Total	$	3,708		3,230

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 less estimated selling costs. 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 Restructurings (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Impaired loans were $15.7 million and $18.3 million at September 30, 2022 and December 31, 2021, respectively. Interest income recognized on accruing impaired loans was $649,000 and $754,000 for the nine months ended September 30, 2022 and 2021, respectively. Interest income recognized on accruing impaired loans was $217,000 and $253,000 for the three months ended September 30, 2022 and the three months ended September 30, 2021, 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, 2022:

September 30, 2022
(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	$	59		-		59		59		1
Single-family residential		3,929		240		3,381		3,621		62
Single-family residential -
Banco de la Gente non-traditional		10,557		-		9,890		9,890		619
Commercial		1,996		426		1,502		1,928		9
Multifamily and farmland		107		-		96		96		-
Total impaired real estate loans		16,648		666		14,928		15,594		691

Loans not secured by real estate:
Commercial loans		130		-		130		130		1
Consumer loans		21		-		20		20		-
Total impaired loans	$	16,799		666		15,078		15,744		692

The following table presents impaired loans as of and for the year ended December 31, 2021:

December 31, 2021
(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	$	73		-		73		73		3
Single-family residential		5,138		524		4,374		4,898		86
Single-family residential -
Banco de la Gente non-traditional		11,753		-		10,922		10,922		687
Commercial		2,138		435		1,608		2,043		11
Multifamily and farmland		113		-		105		105		-
Total impaired real estate loans		19,215		959		17,082		18,041		787

Loans not secured by real estate:
Commercial loans		282		49		170		219		2
Consumer loans		8		-		4		4		-
Total impaired loans	$	19,505		1,008		17,256		18,264		789

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, 2022 and 2021.

(Dollars in thousands)
	Three months ended								Nine months ended
	September 30, 2022				September 30, 2021				September 30, 2022				September 30, 2021
	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	$	60		1		76		1		65		4		91		5
Single-family residential		1,393		51		5,875		49		1,131		150		5,683		166
Single-family residential -
Banco de la Gente stated income		12,487		134		10,349		140		13,454		407		11,090		477
Commercial		1,939		25		2,280		20		1,985		75		2,617		85
Multifamily and farmland		97		1		110		2		100		4		113		4
Total impaired real estate loans		15,976		212		18,690		212		16,735		640		19,594		737

Loans not secured by real estate:
Commercial loans		138		3		248		5		163		7		330		16
Farm loans (non RE)		-		-		-		-				-		-		-
Consumer loans		21		1		9		-		14		2		19		1
Total impaired loans	$	16,135		216		18,947		217		16,912		649		19,943		754

Impaired loans collectively evaluated for impairment totaled $5.1 million at September 30, 2022 and December 31, 2021 and are included in the tables above. Allowance on impaired loans collectively evaluated for impairment totaled $44,000 and $52,000 at September 30, 2022 and December 31, 2021, respectively.

The following tables present changes in the allowance for loan losses for the three and nine months ended September 30, 2022 and 2021. Unallocated balances in the following tables include allowance for loan losses based on qualitative factors such as economic outlook, concentrations of credit, interest rate risk and loan volume trends. Paycheck Protection Program (“PPP”) loans are excluded from the allowance for loan losses as PPP loans are 100 percent guaranteed by the Small Business Administration (“SBA”).

(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, 2022:
Allowance for loan losses:
Beginning balance	$	1,193		2,013			864			2,234			150			711			-		110			2,080			9,355
Charge-offs		-		(120	)		-			-			-			(20	)		-		(450	)		-			(590	)
Recoveries		-		219			-			6			-			64			-		87			-			376
Provision		180		78			(101	)		885			5			(14	)		-		467			(611	)		889
Ending balance	$	1,373		2,190			763			3,125			155			741			-		214			1,469			10,030

Three months ended September 30, 2022:
Allowance for loan losses:
Beginning balance	$	1,272		2,171			813			3,156			157			633			-		216			1,371			9,789
Charge-offs		-		(89	)		-			-			-			(13	)		-		(204	)		-			(306	)
Recoveries		-		92			-			2			-			8			-		37			-			139
Provision		101		16			(50	)		(33	)		(2	)		113			-		165			98			408
Ending balance	$	1,373		2,190			763			3,125			155			741			-		214			1,469			10,030

Allowance for loan losses at September 30, 2022:
Ending balance: individually
evaluated for impairment	$	-		37			605			6			-			-			-		-			-			648
Ending balance: collectively
evaluated for impairment		1,373		2,153			158			3,119			155			741			-		214			1,469			9,382
Ending balance	$	1,373		2,190			763			3,125			155			741			-		214			1,469			10,030

Loans at September 30, 2022:
Ending balance	$	112,854		312,208			20,469			399,015			62,040			76,434			961		20,926			-			1,004,907

Ending balance: individually
evaluated for impairment	$	-		547			8,703			1,401			-			-			-		-			-			10,651
Ending balance: collectively
evaluated for impairment	$	112,854		311,661			11,766			397,614			62,040			76,434			961		20,926			-			994,256

(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, 2021:
Allowance for loan losses:
Beginning balance	$	1,196			1,843			1,052			2,212		122			1,345			-		128			2,010			9,908
Charge-offs		-			-			-			-		-			(293	)		-		(249	)		-			(542	)
Recoveries		121			165			-			50		3			7			-		114			-			460
Provision		(421	)		(306	)		(162	)		46		22			(153	)		-		98			13			(863	)
Ending balance	$	896			1,702			890			2,308		147			906			-		91			2,023			8,963

Three months ended September 30, 2021:
Allowance for loan losses:
Beginning balance	$	1,038			1,723			980			2,180		148			996			-		89			2,133			9,287
Charge-offs		-			-			-			-		-			(215	)		-		(91	)		-			(306	)
Recoveries		31			86			-			2		4			1			-		40			-			164
Provision		(173	)		(107	)		(90	)		126		(5	)		124			-		53			(110	)		(182	)
Ending balance	$	896			1,702			890			2,308		147			906			-		91			2,023			8,963

Allowance for loan losses at September 30, 2021:
Ending balance: individually
evaluated for impairment	$	1			58			710			7		-			-			-		-			-			776
Ending balance: collectively
evaluated for impairment		895			1,644			180			2,301		147			906			-		91			2,023			8,187
Ending balance	$	896			1,702			890			2,308		147			906			-		91			2,023			8,963

Loans at September 30, 2021:
Ending balance	$	80,009			258,403			24,043			363,174		58,856			94,376			633		11,511			-			891,005

Ending balance: individually
evaluated for impairment	$	6			1,398			10,236			1,450		-			54			-		-			-			13,144
Ending balance: collectively
evaluated for impairment	$	80,003			257,005			13,807			361,724		58,856			94,322			633		11,511			-			877,861

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 Bank’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 Bank’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). PPP loans are classified as risk grade 3.

	·	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 Bank’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 Bank 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 September 30, 2022 and December 31, 2021:

September 30, 2022
(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	$	-		3,808		-		-		-		1,381		-		523		-		5,712
2- High Quality		18,162		129,784		-		30,197		17		16,163		-		2,064		1,427		197,814
3- Good Quality		93,266		163,179		7,777		334,206		59,539		56,973		961		3,600		12,782		732,283
4- Management Attention		1,307		11,046		9,130		31,732		1,869		1,127		-		225		133		56,569
5- Watch		60		915		1,150		2,321		519		786		-		-		146		5,897
6- Substandard		59		3,476		2,412		559		96		4		-		26		-		6,632
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	112,854		312,208		20,469		399,015		62,040		76,434		961		6,438		14,488		1,004,907

December 31, 2021
(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	$	-		5,923		-		-		-		371		-		581		-		6,875
2- High Quality		11,752		109,337		-		28,546		19		16,177		-		2,039		1,309		169,179
3- Good Quality		80,325		129,856		8,712		272,786		54,945		68,183		792		3,510		3,931		623,040
4- Management Attention		3,534		14,964		10,478		30,937		2,754		5,214		4		284		-		68,169
5- Watch		76		2,464		1,703		4,938		543		1,177		-		1		-		10,902
6- Substandard		73		3,567		2,254		634		105		50		-		21		-		6,704
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	95,760		266,111		23,147		337,841		58,366		91,172		796		6,436		5,240		884,869

There were no new TDR modifications during the three and nine months ended September 30, 2022 and 2021.

There were no loans modified as TDR loans that defaulted during the nine months ended September 30, 2022 and 2021, which were within 12 months of their modification date.

On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals were able to apply for loans from existing SBA lenders and other approved regulated lenders, subject to certain limitations and eligibility criteria. A second round of PPP funding provided a total of $320 billion additional funding for the PPP. The Bank participated as a lender in the PPP. Total PPP loans originated during the years ended December 31, 2020 and 2021 amounted to $128.1 million. The outstanding balance of PPP loans was $103,000 and $18.0 million at September 30, 2022 and December 31, 2021, respectively. These loans are classified as commercial loans in the tables above. The Bank recognized $54,000 and $489,000 of PPP loan fee income for the three months ended September 30, 2022 and the three months ended September 30, 2021, respectively. The Bank recognized $948,000 and $3.0 million of PPP loan fee income for the nine months ended September 30, 2022 and nine months ended September 30, 2021, respectively.