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Loans

6 Months Ended

Jun. 30, 2021

(3) Loans

Major classifications of loans at June 30, 2021 and December 31, 2020 are summarized as follows:

(Dollars in thousands)
	June 30, 2021			December 31, 2020
Real estate loans:
Construction and land development	$	90,579			94,124
Single-family residential		257,901			272,325
Single-family residential - Banco de la Gente non-traditional		25,198			26,883
Commercial		340,216			332,971
Multifamily and farmland		59,142			48,880
Total real estate loans		773,036			775,183

Loans not secured by real estate:
Commercial loans		104,506			161,740
Farm loans		742			855
Consumer loans		6,519			7,113
All other loans		3,557			3,748

Total loans		888,360			948,639

Less allowance for loan losses		(9,287	)		(9,908	)

Total net loans	$	879,073			938,731

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, Durham and Rowan 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, 2021, 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, 2021, single-family residential loans comprised approximately 32% of the Bank’s total loan portfolio, and include Banco’s non-traditional single-family residential loans, which were approximately 3% 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, 2021, commercial real estate loans comprised approximately 38% 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, 2021, commercial loans comprised approximately 12% of the Bank’s total loan portfolio, including $35.7 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans. The Company had $75.8 million in PPP loans at December 31, 2020.

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, 2021 and December 31, 2020:

June 30, 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	$	49		-		49		90,530		90,579		-
Single-family residential		1,114		44		1,158		256,743		257,901		-
Single-family residential -
Banco de la Gente non-traditional		306		41		347		24,851		25,198		-
Commercial		-		-		-		340,216		340,216		-
Multifamily and farmland		-		-		-		59,142		59,142		-
Total real estate loans		1,469		85		1,554		771,482		773,036		-

Loans not secured by real estate:
Commercial loans		110		-		110		104,396		104,506		-
Farm loans		-		-		-		742		742		-
Consumer loans		61		1		62		6,457		6,519		-
All other loans		-		-		-		3,557		3,557		-
Total loans	$	1,640		86		1,726		886,634		888,360		-

December 31, 2020
(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	$	298		-		298		93,826		94,124		-
Single-family residential		3,660		270		3,930		268,395		272,325		-
Single-family residential -
Banco de la Gente non-traditional		3,566		105		3,671		23,212		26,883		-
Commercial		36		-		36		332,935		332,971		-
Multifamily and farmland		-		-		-		48,880		48,880		-
Total real estate loans		7,560		375		7,935		767,248		775,183		-

Loans not secured by real estate:
Commercial loans		-		-		-		161,740		161,740		-
Farm loans		-		-		-		855		855		-
Consumer loans		45		2		47		7,066		7,113		-
All other loans		-		-		-		3,748		3,748		-
Total loans	$	7,605		377		7,982		940,657		948,639		-

The following table presents non-accrual loans as of June 30, 2021 and December 31, 2020:

(Dollars in thousands)
	June 30, 2021		December 31, 2020
Real estate loans:
Single-family residential		1,273		1,266
Single-family residential -
Banco de la Gente non-traditional		1,516		1,709
Commercial		412		440
Multifamily and farmland		111		117
Total real estate loans		3,312		3,532

Loans not secured by real estate:
Commercial loans		59		212
Consumer loans		7		14
Total	$	3,378		3,758

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 $19.7 million, $21.3 million and $22.5 million at June 30, 2021, December 31, 2020 and June 30, 2020, respectively. Interest income recognized on accruing impaired loans was $536,000, $1.2 million, and $635,000 for the six months ended June 30, 2021, the year ended December 31, 2020 and the six months ended June 30, 2020, respectively. Interest income recognized on accruing impaired loans was $253,000 and $306,000 for the three months ended June 30, 2021 and 2020, 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, 2021:

June 30, 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	$	78		-		78		78		3
Single-family residential		4,886		277		4,417		4,694		31
Single-family residential -
Banco de la Gente non-traditional		12,692		-		12,075		12,075		806
Commercial		2,466		441		1,987		2,428		15
Multifamily and farmland		116		-		111		111		-
Total impaired real estate loans		20,238		718		18,668		19,386		855

Loans not secured by real estate:
Commercial loans		319		59		199		258		3
Consumer loans		15		-		11		11		-
Total impaired loans	$	20,572		777		18,878		19,655		858

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, 2021 and 2020.

(Dollars in thousands)
	Three months ended								Six months ended
	June 30, 2021				June 30, 2020				June 30, 2021				June 30, 2020
	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	$	91		1		157		4		97		3		166		7
Single-family residential		6,100		57		4,778		59		5,731		118		4,734		118
Single-family residential -
Banco de la Gente stated income		10,835		160		13,856		193		11,407		337		14,028		421
Commercial		2,682		29		3,115		43		2,779		64		2,700		72
Multifamily and farmland		113		1		-		-		114		2		-		-
Total impaired real estate loans		19,821		248		21,906		299		20,128		524		21,628		618

Loans not secured by real estate:
Commercial loans		315		5		643		6		362		11		487		15
Farm loans (non RE)		-		-		-		-				-		-		-
Consumer loans		15		-		77		1		22		1		83		2
Total impaired loans	$	20,151		253		22,626		306		20,512		536		22,198		635

The following table presents impaired loans as of and for the year ended December 31, 2020:

December 31, 2020
(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		Interest Income Recognized
Real estate loans:
Construction and land development	$	108		-		108		108		4		134		8
Single-family residential		5,302		379		4,466		4,845		33		4,741		262
Single-family residential -
Banco de la Gente non-traditional		13,417		-		12,753		12,753		862		13,380		798
Commercial		2,999		1,082		1,891		2,973		14		2,940		139
Multifamily and farmland		119		-		117		117		-		29		6
Total impaired real estate loans		21,945		1,461		19,335		20,796		913		21,224		1,213

Loans not secured by real estate:
Commercial loans		515		211		244		455		5		564		32
Consumer loans		41		-		37		37		1		60		5
Total impaired loans	$	22,501		1,672		19,616		21,288		919		21,848		1,250

Impaired loans collectively evaluated for impairment totaled $5.7 million and $6.2 million at June 30, 2021 and 2020, respectively and are included in the tables above.

The following tables present changes in the allowance for loan losses for the three and six months ended June 30, 2021 and 2020. PPP loans are excluded from the allowance for loan losses as PPP loans are 100 percent guaranteed by the SBA. PPP loans are classified as risk grade 3.

(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, 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		-			-			-			-			-		(78	)		-		(158	)		-		(236	)
Recoveries		90			78			-			48			-		6			-		74			-		296
Provision		(248	)		(198	)		(72	)		(80	)		26		(277	)		-		45			123		(681	)
Ending balance	$	1,038			1,723			980			2,180			148		996			-		89			2,133		9,287

Three months ended June 30, 2021:
Allowance for loan losses:
Beginning balance	$	1,061			1,850			1,033			2,252			145		1,244			-		91			1,856		9,532
Charge-offs		-			-			-			-			-		(78	)		-		(73	)		-		(151	)
Recoveries		40			18			-			36			-		-			-		38			-		132
Provision		(63	)		(145	)		(53	)		(108	)		3		(170	)		-		33			277		(226	)
Ending balance	$	1,038			1,723			980			2,180			148		996			-		89			2,133		9,287

Allowance for loan losses at June 30, 2021:
Ending balance: individually
evaluated for impairment	$	1			5			790			10			-		-			-		-			-		806
Ending balance: collectively
evaluated for impairment		1,037			1,718			190			2,170			148		996			-		89			2,133		8,481
Ending balance	$	1,038			1,723			980			2,180			148		996			-		89			2,133		9,287

Loans at June 30, 2021:
Ending balance	$	90,579			257,901			25,198			340,216			59,142		104,506			742		10,076			-		888,360

Ending balance: individually evaluated for impairment	$	6			1,426			10,722			1,741			-		59			-		-			-		13,954
Ending balance: collectively evaluated for impairment	$	90,573			256,475			14,476			338,475			59,142		104,447			742		10,076			-		874,406

(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, 2020:
Allowance for loan losses:
Beginning balance	$	694			1,274		1,073		1,305			120			688			-		138			1,388		6,680
Charge-offs		(5	)		-		-		(7	)		-			(109	)		-		(257	)		-		(378	)
Recoveries		2			25		-		34			-			26			-		106			-		193
Provision		840			514		41		719			(5	)		375			-		175			279		2,938
Ending balance	$	1,531			1,813		1,114		2,051			115			980			-		162			1,667		9,433

Three months ended June 30, 2020:
Allowance for loan losses:
Beginning balance	$	1,293			1,713		1,084		1,799			118			1,017			-		180			908		8,112
Charge-offs		-			-		-		-			-			(78	)		-		(90	)		-		(168	)
Recoveries		-			9		-		11			-			-			-		52			-		72
Provision		238			91		30		241			(3	)		41			-		20			759		1,417
Ending balance	$	1,531			1,813		1,114		2,051			115			980			-		162			1,667		9,433

Allowance for loan losses at June 30, 2020:
Ending balance: individually
evaluated for impairment	$	2			5		894		11			-			-			-		-			-		912
Ending balance: collectively
evaluated for impairment		1,529			1,808		220		2,040			115			980			-		162			1,667		8,521
Ending balance	$	1,531			1,813		1,114		2,051			115			980			-		162			1,667		9,433

Loans at June 30, 2020:
Ending balance	$	110,077			268,174		29,325		303,828			49,465			188,398			887		16,389			-		966,543

Ending balance: individually
evaluated for impairment	$	8			1,657		12,297		2,084			-			275			-		-			-		16,321
Ending balance: collectively
evaluated for impairment	$	110,069			266,517		17,028		301,744			49,465			188,123			887		16,389			-		950,222

The provision for loan losses for the three months ended June 30, 2021 was a recovery of $226,000, compared to a provision of $1.4 million for the three months ended June 30, 2020. The decrease in the provision for loan losses is primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves due to a net decrease in the volume of loans in the general reserve pool. At June 30, 2021, the balance of loans with existing modifications as a result of the COVID-19 pandemic was $283,000. At December 31, 2020, the balance of loans with existing modifications as a result of the COVID-19 pandemic was $18.3 million. The Company continues to track all loans that are currently modified or have been modified as a result of the COVID-19 pandemic. The loan balances associated with COVID-19 pandemic related modifications have been grouped into their own pool within the Company’s Allowance for Loan and Lease Losses (“ALLL”) model as they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. Of all loans modified as a result of the COVID-19 pandemic, $108.2 million have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be present in loans that are currently modified and/or loans that were once modified. At December 31, 2020, the balance for all loans that were then currently modified or previously modified but returned to their original terms was $119.6 million. The $11.4 million decrease from December 31, 2020 to June 30, 2021 in the balance of currently or previously modified loans that had returned to their original terms is primarily due to loans paid off during the six months ended June 30, 2021. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.

The provision for loan losses for the six months ended June 30, 2021 was a recovery of $681,000, compared to a provision of $2.9 million for the six months ended June 30, 2020. The decrease in the provision for loan losses is primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves due to a net decrease in the volume of loans in the general reserve pool.

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, 2021 and December 31, 2020:

June 30, 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	$	-		4,463		-		-		-		427		-		724		-		5,614
2- High Quality		8,186		105,826		-		36,894		20		15,825		-		2,034		1,430		170,215
3- Good Quality		78,058		124,184		9,350		257,930		55,338		80,494		728		3,450		1,442		610,974
4- Management Attention		4,218		17,083		11,515		34,508		3,110		5,711		14		278		685		77,122
5- Watch		39		2,999		1,862		10,031		563		1,985		-		5		-		17,484
6- Substandard		78		3,346		2,471		853		111		64		-		28		-		6,951
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	90,579		257,901		25,198		340,216		59,142		104,506		742		6,519		3,557		888,360

December 31, 2020
(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	$	228		9,867		-		-		-		406		-		678		-		11,179
2- High Quality		9,092		121,331		-		40,569		22		19,187		-		2,237		1,563		194,001
3- Good Quality		76,897		115,109		10,170		241,273		44,890		128,727		832		3,826		1,477		623,201
4- Management Attention		4,917		20,012		12,312		39,370		3,274		11,571		23		336		708		92,523
5- Watch		2,906		2,947		1,901		10,871		694		1,583		-		6		-		20,908
6- Substandard		84		3,059		2,500		888		-		266		-		30		-		6,827
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	94,124		272,325		26,883		332,971		48,880		161,740		855		7,113		3,748		948,639

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $2.2 million and $3.8 million at June 30, 2021 and December 31, 2020, 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 were no performing loans classified as TDR loans at June 30, 2021 and December 31, 2020.

There were no new TDR modifications during the three and six months ended June 30, 2021 and 2020.

There were no loans modified as TDR that defaulted during the six months ended June 30, 2021 and 2020, 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.

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 may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. A second round of PPP funding, signed into law by President Trump on April 24, 2020, provided $320 billion additional funding for the PPP. The Bank is participating as a lender in the PPP. Total PPP loans originated as of June 30, 2021 amounted to $128.1 million. The outstanding balance of PPP loans was $35.7 million and $75.8 million at June 30, 2021 and December 31, 2020, respectively. The Bank has received $5.7 million and $4.0 million in fees from the SBA for PPP loans originated as of June 30, 2021. The Bank recognized $2.5 million and $1.4 million PPP loan fee income for the six months ended June 30, 2021 and the year ended December 31, 2020 respectively. PPP loan fee income recognized for the three months ended June 30, 2021 was $1.5 million. No PPP loan fee income was recognized for the three and six months ended June 30, 2020.