Loans

6 Months Ended

Jun. 30, 2023

Loans

Loans

(3) Loans

Major classifications of loans at June 30, 2023 and December 31, 2022 are summarized as follows:

(Dollars in thousands)
	June 30, 2023			December 31, 2022
Real estate loans:
Construction and land development	$	114,215			114,446
Single-family residential		331,124			322,262
Single-family residential -
Banco de la Gente non-traditional		18,907			20,019
Commercial		428,084			406,750
Multifamily and farmland		67,727			65,562
Total real estate loans		960,057			929,039
Loans not secured by real estate:
Commercial loans		75,450			81,307
Farm loans		428			938
Consumer loans		7,097			6,834
All other loans		14,692			14,490
Total loans		1,057,724			1,032,608
Less allowance for credit losses		(9,789	)		(10,494	)
Total net loans	$	1,047,935			1,022,114

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 June 30, 2023 and December 31, 2022:

June 30, 2023
(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	$	88		-		88		114,127		114,215		-
Single-family residential		1,351		426		1,777		329,347		331,124		-
Single-family residential -
Banco de la Gente non-traditional		630		117		747		18,160		18,907		-
Commercial		485		-		485		427,599		428,084		-
Multifamily and farmland		-		-		-		67,727		67,727		-
Total real estate loans		2,554		543		3,097		956,960		960,057		-
Loans not secured by real estate:
Commercial loans		95		-		95		75,355		75,450		-
Farm loans		-		-		-		428		428		-
Consumer loans		59		2		61		7,036		7,097		-
All other loans		-		-		-		14,692		14,692		-
Total loans	$	2,708		545		3,253		1,054,471		1,057,724		-

December 31, 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 Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	363		-		363		114,083		114,446		-
Single-family residential		4,318		256		4,574		317,688		322,262		-
Single-family residential -
Banco de la Gente non-traditional		2,977		264		3,241		16,778		20,019		-
Commercial		306		-		306		406,444		406,750		-
Multifamily and farmland		-		-		-		65,562		65,562		-
Total real estate loans		7,964		520		8,484		920,555		929,039		-
Loans not secured by real estate:
Commercial loans		3		-		3		81,304		81,307		-
Farm loans		-		-		-		938		938		-
Consumer loans		71		-		71		6,763		6,834		-
All other loans		-		-		-		14,490		14,490		-
Total loans	$	8,038		520		8,558		1,024,050		1,032,608		-

The following table presents non-accrual loans as of June 30, 2023 and December 31, 2022:

	CECL Methodology						Incurred Loss Methodology
	June 30, 2023						December 31, 2022
	Nonaccrual Loans		Nonaccrual Loans		Total		Total
	With No		With		Nonaccrual		Nonaccrual
(Dollars in thousands)	Allowance		Allowance		Loans		Loans
Real estate loans:
Construction and land development	$	49		-		49		53
Single-family residential		1,952		-		1,952		1,914
Single-family residential -
Banco de la Gente non-traditional		1,419		-		1,419		1,532
Commercial		-		-		-		129
Multifamily and farmland		83		-		83		91
Total real estate loans		3,503		-		3,503		3,719
Loans not secured by real estate:
Commercial loans		54		-		54		-
Consumer loans		4		-		4		9
Total	$	3,561		-		3,561		3,728

Interest income is not recognized on non-accrual loans.

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination or acquisition.  The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty.  An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.  Occasionally, the Bank modifies loans by providing principal forgiveness on certain loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses.  The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. 

In some cases, the Bank may modify a certain loan by providing multiple types of concessions.  Typically, one type of concession, such as a term extension, is granted initially.  If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

The following table shows the amortized cost basis at June 30, 2023 of the loans to borrowers experiencing financial difficulty that were modified during the six months ended June 30, 2023, disaggregated by loan class and type of concession granted.  There were no loans to borrowers experiencing financial difficulty that were modified during the three months ended June 30, 2023

(Dollars in thousands)
	Term Extension
	Amortized Cost Basis at June 30, 2023		% of Loan Class
Loan class:
Single-family residential		157		0.05	%
Commercial real estate		680		0.16	%
Total	$	837

The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty.

Term Extension
Loan Class	Financial Effect
Single-family residential	Forbearance agreement on matured home equity line of credit (HELOC) that was modified to 180 month term.
Commercial real estate	Extended existing amortization from 148 months to 173 months to keep existing payment the same with the current market rate.

Upon the Bank’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off.  Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

No loans modified in the six months ended June 30, 2023 that were made to borrowers experiencing financial difficulty had been written off at June 30, 2023.

The Bank closely monitors the performance of those loans that are modified because borrowers are experiencing financial difficulty so as to understand the effectiveness of its modification efforts.  The following table shows the performance of loans that have been modified in the six months ended June 30, 2023.

(Dollars in thousands)
	Payment Status (Amortized Cost Basis)
	Current		30 - 89 Days Past Due		90 + Days Past Due
Loan type:
Single-family residential		157		-		-
Commercial real estate		680		-		-
Total	$	837		-		-

The following table presents impaired loans as of and for the year ended December 31, 2022:

December 31, 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	$	110		-		110		110		2
Single-family residential		3,912		236		3,300		3,536		60
Single-family residential -
Banco de la Gente non-traditional		10,441		-		9,748		9,748		611
Commercial		1,785		421		1,346		1,767		9
Multifamily and farmland		104		-		91		91		-
Total impaired real estate loans		16,352		657		14,595		15,252		682
Loans not secured by real estate:
Commercial loans		116		-		116		116		1
Consumer loans		11		-		9		9		-
Total impaired loans	$	16,479		657		14,720		15,377		683

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, 2022 and the twelve months ended December 31, 2022.

(Dollars in thousands)
	Three months ended				Six months ended				Twelve months ended
	June 30, 2022				June 30, 2022				December 31, 2022
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
Real estate loans:
Construction and land development	$	65		1		91		1		75		8
Single-family residential		1,231		51		6,100		57		5,194		194
Single-family residential -
Banco de la Gente stated income		13,273		135		10,835		160		8,757		552
Commercial		1,984		26		2,682		29		1,916		93
Multifamily and farmland		100		1		113		1		96		5
Total impaired real estate loans		16,653		214		19,821		248		16,038		852
Loans not secured by real estate:
Commercial loans		151		2		315		5		137		8
Consumer loans		16		1		15		-		15		2
Total impaired loans	$	16,820		217		20,151		253		16,190		862

Impaired loans collectively evaluated for impairment totaled $5.3 million $4.9 million at June 30, 2022 and December 31, 2022, respectively and are included in the tables above.  Allowance on impaired loans collectively evaluated for impairment totaled $47,000 and $44,000 at June 30, 2022 and December 31, 2022, respectively.

The following tables present changes in the allowance for credit losses for the three and six months ended June 30, 2023 and 2022.  The June 30, 2023 table reflects the CECL methodology and the June 30, 2022 table reflects the Incurred Loss methodology.  Paycheck Protection Program (“PPP”) loans are excluded from the allowance for credit losses because PPP loans are guaranteed by the Small Business Administration (“SBA”).   No loans were individually evaluated as of June 30, 2023.   

(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
Three months ended June 30, 2023
Allowance for credit losses:
Beginning balance	$	5,253			3,077			181			2,244			298			348			1			290			-			11,692
Charge-offs		-			-			-			-			-			(35	)		-			(142	)		-			(177	)
Recoveries		-			111			-			1			-			23			-			23			-			158
Provision (recovery) for unfunded commitments		163			21			-			-			-			-			-			-			-			184
Provision (recovery) for loan losses		(22	)		(2	)		2			120			(10	)		31			1			71			-			191
Ending balance	$	5,394			3,207			183			2,365			288			367			2			242			-			12,048
Six months ended June 30, 2023
Allowance for credit losses:
Beginning balance	$	1,415			2,322			763			3,207			164			657			-			214			1,752			10,494
Adjustment for CECL implementation		3,781			715			(576	)		(986	)		115			(295	)		2			54			(1,752	)		1,058
Charge-offs		-			-			-			-			-			(35	)		-			(308	)		-			(343	)
Recoveries		-			123			-			3			-			32			-			82			-			240
Provision (recovery) for unfunded commitments		(30	)		13			-			-			-			-			1			(2	)		-			(18	)
Provision (recovery) for loan losses		228			34			(4	)		141			9			8			(1	)		202			-			617
Ending balance	$	5,394			3,207			183			2,365			288			367			2			242			-			12,048
Allowance for credit loss-loans	$	3,228			3,119			183			2,365			288			367			1			238			-			9,789
Allowance for credit losses loan commitments		2,166			88			-			-			-			-			1			4			-			2,259
Total allowance for credit losses	$	5,394			3,207			183			2,365			288			367			2			242			-			12,048

(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
Six months ended June 30, 2022:
Allowance for loan losses:
Beginning balance	$	1,193		2,013			864			2,234		150		711			-		110			2,080			9,355
Charge-offs		-		(31	)		-			-		-		(7	)		-		(246	)		-			(284	)
Recoveries		-		127			-			4		-		55			-		51			-			237
Provision		79		62			(51	)		918		7		(126	)		-		301			(709	)		481
Ending balance	$	1,272		2,171			813			3,156		157		633			-		216			1,371			9,789
Three months ended June 30, 2022:
Allowance for loan losses:
Beginning balance	$	1,163		2,095			841			3,011		147		646			-		128			1,395			9,426
Charge-offs		-		-			-			-		-		(3	)		-		(121	)		-			(124	)
Recoveries		-		10			-			2		-		36			-		29			-			77
Provision		109		66			(28	)		143		10		(46	)		-		180			(24	)		410
Ending balance	$	1,272		2,171			813			3,156		157		633			-		216			1,371			9,789
Allowance for loan losses at June 30, 2022:
Ending balance: individually
evaluated for impairment	$	-		37			640			6		-		-			-		-			-			683
Ending balance: collectively
evaluated for impairment		1,272		2,134			173			3,150		157		633			-		216			1,371			9,106
Ending balance	$	1,272		2,171			813			3,156		157		633			-		216			1,371			9,789
Loans at June 30, 2022:
Ending balance	$	103,241		292,685			21,378			386,368		62,687		70,691			1,006		21,417			-			959,473
Ending balance: individually
evaluated for impairment	$	-		845			9,214			1,413		-		-			-		-			-			11,472
Ending balance: collectively
evaluated for impairment	$	103,241		291,840			12,164			384,955		62,687		70,691			1,006		21,417			-			948,001

The Bank utilizes several credit quality indicators to manage credit risk in an ongoing manner.  The Bank uses an internal risk grade system that categorizes loans into pass, watch or substandard categories. 

 The Bank uses the following credit quality indicators:

· Pass – Includes loans ranging from excellent quality with a minimal amount of credit risk to loans with higher risk and servicing needs but still are considered to be acceptable. The higher risk loans in this category are not problem credits presently, but may be in the future if the borrower is unable to change its present course.

· 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.

· 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.

The following table presents by credit quality indicator, loan class and year of origination, the amortized cost of the Bank’s loans as of June 30, 2023.

	Term Loans by Origination Year														Revolving
															Loans
(dollars in thousands)													Revolving		Converted to		Total
	2023		2022		2021		2020		2019		Prior		Loans		Term Loans		Loans
June 30, 2023
Real Estate Loans
Construction and land
development
Pass	$	13,426		66,208		18,146		7,142		2,068		4,750		2,334		-		114,074
Watch		-		-		-		-		-		42		-		-		42
Substandard		-		-		-		-		-		99		-		-		99
Total Construction and
land development	$	13,426		66,208		18,146		7,142		2,068		4,891		2,334		-		114,215
Single family
Pass	$	20,280		70,055		46,318		25,809		13,811		52,627		98,548		-		327,448
Watch		-		-		-		-		91		378		-		-		469
Substandard		-		-		-		-		-		2,763		444		-		3,207
Total single family	$	20,280		70,055		46,318		25,809		13,902		55,768		98,992		-		331,124
Single family-Banco de la
Gente non-traditional
Pass	$	-		-		-		-		-		16,515		-		-		16,515
Watch		-		-		-		-		-		430		-		-		430
Substandard		-		-		-		-		-		1,962		-		-		1,962
Total Banco de la Gente
non-traditional	$	-		-		-		-		-		18,907		-		-		18,907
Commercial
Pass	$	26,532		110,957		78,023		71,100		31,987		104,313		1,039		-		423,951
Watch		-		-		-		119		-		3,599		-		-		3,718
Substandard		-		-		-		415		-		-		-		-		415
Total commercial	$	26,532		110,957		78,023		71,634		31,987		107,912		1,039		-		428,084
Multifamily and farmland
Pass	$	7,103		16,861		22,227		6,515		3,279		10,933		610		-		67,528
Watch		-		-		-		-		-		116		-		-		116
Substandard		-		-		-		-		-		83		-		-		83
Total multifamily and
farmland	$	7,103		16,861		22,227		6,515		3,279		11,132		610		-		67,727
Total real estate loans	$	67,341		264,081		164,714		111,100		51,236		198,610		102,975		-		960,057
Loans not secured by real estate
Commercial
Pass	$	5,347		17,046		4,841		4,332		3,010		13,290		27,307		-		75,173
Watch		-		-		-		-		105		117		1		-		223
Substandard		-		-		-		-		-		-		54		-		54
Total Commercial	$	5,347		17,046		4,841		4,332		3,115		13,407		27,362		-		75,450
Farm
Pass	$	49		49		98		-		17		59		156		-		428
Watch		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total farm	$	49		49		98		-		17		59		156		-		428
Consumer
Pass	$	1,611		1,773		626		304		96		95		2,582		-		7,087
Watch		-		-		-		-		-		-		-		-		-
Substandard		-		-		3		2		-		1		4		-		10
Total consumer	$	1,611		1,773		629		306		96		96		2,586		-		7,097
All other
Pass	$	-		5,890		522		442		770		4,251		2,676		-		14,551
Watch		-		-		-		-		-		76		65		-		141
Substandard		-		-		-		-		-		-		-		-		-
Total all other	$	-		5,890		522		442		770		4,327		2,741		-		14,692
Total loans not secured
by real estate	$	7,007		24,758		6,090		5,080		3,998		17,889		32,845		-		97,667
Total loans	$	74,348		288,839		170,804		116,180		55,234		216,499		135,820		-		1,057,724
Current period gross charge-offs	$	-		34		67		3		-		239		-		-		343

The following table presents the credit risk profile of each loan type based on credit quality indicators as of December 31, 2022:

December 31, 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
Pass	$	114,282		317,850		16,410		402,236		65,348		80,596		938		6,818		14,345		1,018,823
Watch		54		922		1,136		3,963		123		711		-		1		145		7,055
Substandard		110		3,490		2,473		551		91		-		-		15		-		6,730
Total	$	114,446		322,262		20,019		406,750		65,562		81,307		938		6,834		14,490		1,032,608