Loans

9 Months Ended

Sep. 30, 2024

Loans

Loans

(5)   Loans

Major classifications of loans at September 30, 2024 and December 31, 2023 are summarized as follows:

(Dollars in thousands)
	September 30, 2024			December 31, 2023
Real estate loans:
Construction and land development	$	124,322			136,401
Single-family residential		378,697			372,825
Commercial		462,917			425,820
Multifamily and farmland		69,860			63,042
Total real estate loans		1,035,796			998,088
Loans not secured by real estate:
Commercial		65,364			70,544
Farm		478			550
Consumer		6,717			6,966
All other		15,822			16,918
Total loans		1,124,177			1,093,066
Less allowance for credit losses		(10,616	)		(11,041	)
Total net loans	$	1,113,561			1,082,025

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, 2024 and December 31, 2023:

September 30, 2024
(Dollars in thousands)
	Loans 30-89 Days Past Due		Nonaccrual Loans		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	131		38		169		124,153		124,322		-
Single-family residential		1,159		3,612		4,771		373,926		378,697		-
Commercial		427		6		433		462,484		462,917		-
Multifamily and farmland		-		-		-		69,860		69,860		-
Total real estate loans		1,717		3,656		5,373		1,030,423		1,035,796		-
Loans not secured by real estate:
Commercial		175		250		425		64,939		65,364		-
Farm		-		-		-		478		478		-
Consumer		27		16		43		6,674		6,717		-
All other		-		-		-		15,822		15,822		-
Total loans	$	1,919		3,922		5,841		1,118,336		1,124,177		-

December 31, 2023
(Dollars in thousands)
	Loans 30-89 Days Past Due		Nonaccrual Loans		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	5		45		50		136,351		136,401		-
Single-family residential		3,761		3,302		7,063		365,762		372,825		-
Commercial		13		-		13		425,807		425,820		-
Multifamily and farmland		-		76		76		62,966		63,042		-
Total real estate loans		3,779		3,423		7,202		990,886		998,088		-
Loans not secured by real estate:
Commercial		125		463		588		69,956		70,544		-
Farm		-		1		1		549		550		-
Consumer		63		-		63		6,903		6,966		-
All other		-		-		-		16,918		16,918		-
Total loans	$	3,967		3,887		7,854		1,085,212		1,093,066		-

The following table presents non-accrual loans as of September 30, 2024 and December 31, 2023:

	September 30, 2024
	Nonaccrual Loans		Nonaccrual Loans		Total
	With No		With		Nonaccrual
(Dollars in thousands)	Allowance		Allowance		Loans
Real estate loans:
Construction and land development	$	38		-		38
Single-family residential		3,612		-		3,612
Multifamily and farmland		6		-		6
Total real estate loans		3,656		-		3,656
Loans not secured by real estate:
Commercial		250		-		250
Consumer		16		-		16
Total	$	3,922		-		3,922

	December 31, 2023
	Nonaccrual Loans		Nonaccrual Loans		Total
	With No		With		Nonaccrual
(Dollars in thousands)	Allowance		Allowance		Loans
Real estate loans:
Construction and land development	$	45		-		45
Single-family residential		3,302		-		3,302
Multifamily and farmland		76		-		76
Total real estate loans		3,423		-		3,423
Loans not secured by real estate:
Commercial		31		432		463
Consumer		1		-		1
Total	$	3,455		432		3,887

No interest income was recognized on non-accrual loans for the nine months ended September 30, 2024 and 2023.

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.

A change to the allowance for credit losses is evaluated based on the nature of the 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 tables show the amortized cost basis at September 30, 2024 and 2023 of the loans to borrowers experiencing financial difficulty that were modified during the nine months ended September 30, 2024 and 2023, disaggregated by loan class and type of concession granted. One $30,000 loan to a borrower experiencing financial difficulty was modified during the three months ended September 30, 2024. No loans to borrowers experiencing financial difficulty were modified during the three months ended September 30, 2023. Modifications during the three months ended September 30, 2024 and 2023 are not presented in tables due to immateriality.

(Dollars in thousands)
	Amortized Cost Basis at September 30, 2024		% of Loan Class			Modification Type	Financial Effect
Loan class:
Single-family residential	$	230		0.06	%	Interest rate reduction and term extension	Adjustable rate loan converted to fixed rate loan and HELOC converted to amortizing term loan
Commercial not secured by real estate		71		0.11	%	Term extension	Line of credit converted to amortizing term loan
Total	$	301

(Dollars in thousands)
	Amortized Cost Basis at September 30, 2023		% of Loan Class			Modification Type	Financial Effect
Loan class:
Single-family residential	$	154		0.04	%	Term extension	Forbearance agreement on matured home equity line of credit (HELOC) that was modified to 180 month term.
Commercial real estate		673		0.16	%	Term extension	Extended existing amortization from 148 months to 173 months to keep existing payment the same with the current market rate.
Total	$	827

No loans modified in the nine months ended September 30, 2024 and 2023 that were made to borrowers experiencing financial difficulty had been written off at September 30, 2024 and 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 tables show the performance of loans that have been modified in the nine months ended September 30, 2024 and 2023.

September 30, 2024
(Dollars in thousands)
	Payment Status (Amortized Cost Basis)
	Current		30 - 89 Days Past Due		90 + Days Past Due
Loan type:
Single-family residential	$	230
Commercial not secured by real estate		71		-		-
Total	$	301		-		-

September 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	$	154		-		-
Commercial real estate		673		-		-
Total	$	827		-		-

The following tables present changes in the allowance for credit losses for the three and nine months ended September 30, 2024 and 2023.

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Commercial		Multifamily and Farmland		Commercial			Farm			Consumer and All Other			Total
Three months ended September 30, 2024
Allowance for credit losses:
Beginning balance	$	3,318			3,484			2,374		271		368			1			200			10,016
Charge-offs		-			-			-		-		(50	)		-			(157	)		(207	)
Recoveries		-			29			-		-		6			-			69			104
Provision (recovery) for loan losses (1)		245			(19	)		179		63		130			-			105			703
Ending balance	$	3,563			3,494			2,553		334		454			1			217			10,616
Allowance for credit loss-loans	$	3,563			3,494			2,553		334		454			1			217			10,616
Allowance for credit losses - loan commitments		1,144			1			-		-		11			-			3			1,159
Total allowance for credit losses	$	4,707			3,495			2,553		334		465			1			220			11,775
Nine months ended September 30, 2024
Allowance for credit losses:
Beginning balance	$	3,913			3,484			2,317		268		812			2			245			11,041
Charge-offs		-			(126	)		-		-		(797	)		-			(513	)		(1,436	)
Recoveries		-			99			202		-		45			-			134			480
Provision (recovery) for loan losses (1)		(350	)		37			34		66		394			(1	)		351			531
Ending balance	$	3,563			3,494			2,553		334		454			1			217			10,616
Allowance for credit loss-loans	$	3,563			3,494			2,553		334		454			1			217			10,616
Allowance for credit losses - loan commitments		1,144			1			-		-		11			-			3			1,159
Total allowance for credit losses	$	4,707			3,495			2,553		334		465			1			220			11,775
(1) Excludes provision for credit losses related to unfunded commitments. Note 8,"Commitments and Contingencies" in the consolidated financial statements provides more detail concerning the provision for credit losses related to unfunded commitments.

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Commercial			Multifamily and Farmland			Commercial			Farm		Consumer and All Other			Unallocated			Total
Three months ended September 30, 2023
Allowance for credit losses:
Beginning balance	$	3,227		3,302		2,365			288			367			2		238			-			9,789
Charge-offs		-		-		-			-			(94	)		-		(141	)		-			(235	)
Recoveries		-		8		1			-			8			-		24			-			41
Provision (recovery) for loan losses (1)		391		105		(12	)		(15	)		90			-		131			-			690
Ending balance	$	3,618		3,415		2,354			273			371			2		252			-			10,285
Allowance for credit loss-loans	$	3,618		3,415		2,354			273			371			2		252			-			10,285
Allowance for credit losses - loan commitments		2,071		58		-			-			-			-		2			-			2,131
Total allowance for credit losses	$	5,689		3,473		2,354			273			371			2		254			-			12,416
Nine months ended September 30, 2023
Allowance for credit losses:
Beginning balance	$	1,415		3,085		3,207			164			657			-		214			1,752			10,494
Adjustment for CECL
implementation (1)		1,584		64		(986	)		115			(295	)		2		48			(1,752	)		(1,220	)
Charge-offs		-		-		-			-			(129	)		-		(450	)		-			(579	)
Recoveries		-		131		5			-			40			-		106			-			282
Provision (recovery) for loan losses (1)		619		135		128			(6	)		98			-		334			-			1,308
Ending balance	$	3,618		3,415		2,354			273			371			2		252			-			10,285
Allowance for credit loss-loans	$	3,618		3,415		2,354			273			371			2		252			-			10,285
Allowance for credit losses - loan commitments		2,071		58		-			-			-			-		2			-			2,131
Total allowance for credit losses	$	5,689		3,473		2,354			273			371			2		254			-			12,416
(1) Excludes adjustment for CECL implemenation and provision for credit losses related to unfunded commitments. Note 8,"Commitments and Contingencies" in the consolidated financial statements provides more detail concerning the implementation adjustment and provision for credit losses related to unfunded commitments.

There were no collateral dependent loans individually evaluated at September 30, 2024 and December 31, 2023.

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.

· 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.

· 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 affected in the future.

The following table presents by credit quality indicator, loan class and year of origination, the amortized cost of the Bank’s loans as of September 30, 2024.

	Term Loans by Origination Year														Revolving
															Loans
(dollars in thousands)													Revolving		Converted to		Total
	2024		2023		2022		2021		2020		Prior		Loans		Term Loans		Loans
September 30, 2024
Real Estate Loans
Construction and land development
Pass	$	32,962		30,168		43,073		6,959		6,315		4,328		-		-		123,805
Watch		-		-		-		444		-		-		-		-		444
Substandard		-		-		-		-		-		73		-		-		73
Total Construction and land development	$	32,962		30,168		43,073		7,403		6,315		4,401		-		-		124,322
Single family
Pass	$	16,100		34,921		76,307		44,736		22,387		68,475		108,479		-		371,405
Watch		-		-		-		-		-		1,432		993		-		2,425
Substandard		-		32		929		-		127		3,558		221		-		4,867
Total single family	$	16,100		34,953		77,236		44,736		22,514		73,465		109,693		-		378,697
Commercial
Pass	$	50,958		46,966		125,291		73,004		59,129		101,599		2,118		-		459,065
Watch		-		-		-		-		-		3,445		-		-		3,445
Substandard		-		-		-		-		401		6		-		-		407
Total commercial	$	50,958		46,966		125,291		73,004		59,530		105,050		2,118		-		462,917
Multifamily and farmland
Pass	$	411		8,556		20,994		20,961		6,193		12,190		443		-		69,748
Watch		-		-		-		-		-		44		-		-		44
Substandard		-		-		-		-		-		68		-		-		68
Total multifamily and farmland	$	411		8,556		20,994		20,961		6,193		12,302		443		-		69,860
Total real estate loans	$	100,431		120,643		266,594		146,104		94,552		195,218		112,254		-		1,035,796
Loans not secured by real estate
Commercial
Pass	$	7,786		10,597		10,960		3,475		1,890		12,959		16,591		-		64,258
Watch		-		307		-		71		267		210		1		-		856
Substandard		-		27		223		-		-		-		-		-		250
Total Commercial	$	7,786		10,931		11,183		3,546		2,157		13,169		16,592		-		65,364
Farm
Pass	$	56		199		20		55		-		5		143		-		478
Watch		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total farm	$	56		199		20		55		-		5		143		-		478
Consumer
Pass	$	1,580		1,423		876		212		118		74		2,395		-		6,678
Watch		-		-		22		-		-		-		-		-		22
Substandard		-		5		-		-		-		9		3		-		17
Total consumer	$	1,580		1,428		898		212		118		83		2,398		-		6,717
All other
Pass	$	611		-		6,276		401		230		3,011		5,162		-		15,691
Watch		-		-		-		-		-		131		-		-		131
Substandard		-		-		-		-		-		-		-		-		-
Total all other	$	611		-		6,276		401		230		3,142		5,162		-		15,822
Total loans not secured by real estate	$	10,033		12,558		18,377		4,214		2,505		16,399		24,295		-		88,381
Total loans	$	110,464		133,201		284,971		150,318		97,057		211,617		136,549		-		1,124,177

The following table presents by credit quality indicator, loan class and year of origination, gross loan charge-offs during the nine months ended September 30, 2024.

	Gross Loan Charge-offs by Origination Year														Revolving
															Loans
(dollars in thousands)													Revolving		Converted to		Total
	2024		2023		2022		2021		2020		Prior		Loans		Term Loans		Loans
Real estate loans:
Construction and land development	$	-		-		-		-		-		-		-		-		-
Single-family residential		-		-		126		-		-		-		-		-		126
Commercial		-		-		-		-		-		-		-		-		-
Multifamily and farmland		-		-		-		-		-		-		-		-		-
Total real estate loans		-		-		126		-		-		-		-		-		126
Loans not secured by real estate:
Commercial		-		347		397		3		50		-		-		-		797
Consumer		-		23		4		-		-		379		-		-		406
All other		-		-		-		-		-		107		-		-		107
Total gross charge-offs	$	-		370		527		3		50		486		-		-		1,436

The following table presents by credit quality indicator, loan class and year of origination, the amortized cost of the Bank’s loans as of December 31, 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
December 31, 2023
Real Estate Loans
Construction and land development
Pass	$	40,034		71,429		10,736		6,692		1,721		3,914		1,337		-		135,863
Watch		-		-		448		-		-		-		-		-		448
Substandard		-		-		-		-		-		90		-		-		90
Total Construction and land development	$	40,034		71,429		11,184		6,692		1,721		4,004		1,337		-		136,401
Single family
Pass	$	32,333		76,326		47,490		24,813		12,984		64,847		106,962		-		365,755
Watch		-		-		-		-		89		1,389		860		-		2,338
Substandard		-		-		-		-		11		4,342		379		-		4,732
Total single family	$	32,333		76,326		47,490		24,813		13,084		70,578		108,201		-		372,825
Commercial
Pass	$	45,755		109,255		78,645		61,973		29,579		92,753		2,158		-		420,118
Watch		232		-		-		116		-		4,943		-		-		5,291
Substandard		-		-		-		411		-		-		-		-		411
Total commercial	$	45,987		109,255		78,645		62,500		29,579		97,696		2,158		-		425,820
Multifamily and farmland
Pass	$	7,987		13,286		21,512		6,624		3,158		9,851		501		-		62,919
Watch		-		-		-		-		-		47		-		-		47
Substandard		-		-		-		-		-		76		-		-		76
Total multifamily and farmland	$	7,987		13,286		21,512		6,624		3,158		9,974		501		-		63,042
Total real estate loans	$	126,341		270,296		158,831		100,629		47,542		182,252		112,197		-		998,088
Loans not secured by real estate
Commercial
Pass	$	9,561		14,122		4,841		2,942		2,232		12,030		23,411		-		69,139
Watch		-		-		-		-		57		102		783		-		942
Substandard		31		-		-		-		-		-		-		-		31
Loss		-		82		-		-		-		-		350				432
Total Commercial	$	9,592		14,204		4,841		2,942		2,289		12,132		24,544		-		70,544
Farm
Pass	$	198		42		83		-		1		27		199		-		550
Watch		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total farm	$	198		42		83		-		1		27		199		-		550
Consumer
Pass	$	2,262		1,352		404		222		72		58		2,591		-		6,961
Watch		-		-		-		-		-		-		-		-		-
Substandard		-		-		2		-		-		-		3		-		5
Total consumer	$	2,262		1,352		406		222		72		58		2,594		-		6,966
All other
Pass	$	79		6,401		474		274		599		3,698		5,256		-		16,781
Watch		-		-		-		-		-		74		63		-		137
Substandard		-		-		-		-		-		-		-		-		-
Total all other	$	79		6,401		474		274		599		3,772		5,319		-		16,918
Total loans not secured by real estate	$	12,131		21,999		5,804		3,438		2,961		15,989		32,656		-		94,978
Total loans	$	138,472		292,295		164,635		104,067		50,503		198,241		144,853		-		1,093,066

The following table presents by credit quality indicator, loan class and year of origination, gross loan charge-offs during the year ended December 31, 2023.

	Gross Loan Charge-offs by Origination Year														Revolving
															Loans
(dollars in thousands)													Revolving		Converted to		Total
	2023		2022		2021		2020		2019		Prior		Loans		Term Loans		Loans
Real estate loans:
Construction and land development	$	-		-		-		-		-		-		-		-		-
Single-family residential		-		-		-		-		-		-		-		-		-
Commercial		-		-		-		-		-		-		-		-		-
Multifamily and farmland		-		-		-		-		-		-		-		-		-
Total real estate loans		-		-		-		-		-		-		-		-		-
Loans not secured by real estate:
Commercial		-		49		51		16		-		13		-		-		129
Farm		-		-		-		-		-		-		-		-		-
Consumer		-		41		53		6		1		468		-		-		569
All other		-		-		-		-		-		-		-		-		-
Total gross charge-offs	$	-		90		104		22		1		481		-		-		698