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Loans

9 Months Ended

Sep. 30, 2021

(3)	Loans

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

(Dollars in thousands)
	September 30, 2021			December 31, 2020
Real estate loans:
Construction and land development	$	80,009			94,124
Single-family residential		258,403			272,325
Single-family residential -
Banco de la Gente non-traditional		24,043			26,883
Commercial		363,174			332,971
Multifamily and farmland		58,856			48,880
Total real estate loans		784,485			775,183

Loans not secured by real estate:
Commercial loans		94,376			161,740
Farm loans		633			855
Consumer loans		6,321			7,113
All other loans		5,190			3,748

Total loans		891,005			948,639

Less allowance for loan losses		(8,963	)		(9,908	)

Total net loans	$	882,042			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 September 30, 2021, construction and land development loans comprised approximately9% 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 September 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 September 30, 2021, commercial real estate loans comprised approximately 41% 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 September 30, 2021, commercial loans comprised approximately 11% of the Bank’s total loan portfolio, including $25.6 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 September 30, 2021 and December 31, 2020:

September 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	$	6		-		6		80,003		80,009		-
Single-family residential		850		230		1,080		257,323		258,403		-
Single-family residential -
Banco de la Gente non-traditional		450		39		489		23,554		24,043		-
Commercial		28		37		65		363,109		363,174		-
Multifamily and farmland		-		-		-		58,856		58,856		-
Total real estate loans		1,334		306		1,640		782,845		784,485		-

Loans not secured by real estate:
Commercial loans		176		-		176		94,200		94,376		-
Farm loans		-		-		-		633		633		-
Consumer loans		66		1		67		6,254		6,321		-
All other loans		8		-		8		5,182		5,190		-
Total loans	$	1,584		307		1,891		889,114		891,005		-

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 September 30, 2021 and December 31, 2020:

(Dollars in thousands)
	September 30, 2021		December 31, 2020
Real estate loans:
Single-family residential	$	1,020		1,266
Single-family residential -
Banco de la Gente non-traditional		1,244		1,709
Commercial		271		440
Multifamily and farmland		109		117
Total real estate loans		2,644		3,532

Loans not secured by real estate:
Commercial loans		54		212
Consumer loans		6		14
Total	$	2,704		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 $18.2 million, $21.3 million and $21.0 million at September 30, 2021, December 31, 2020 and September 30, 2020, respectively. Interest income recognized on accruing impaired loans was $754,000, $1.2 million, and $934,000 for the nine months ended September 30, 2021, the year ended December 31, 2020 and the nine months ended September 30, 2020, respectively. Interest income recognized on accruing impaired loans was $217,000 and $299,000 for the three months ended September 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 September 30, 2021:

September 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	$	75		-		75		75		3
Single-family residential		4,506		275		4,021		4,296		80
Single-family residential -
Banco de la Gente non-traditional		12,269		-		11,383		11,383		724
Commercial		2,229		439		1,692		2,131		12
Multifamily and farmland		115		-		109		109		-
Total impaired real estate loans		19,194		714		17,280		17,994		819

Loans not secured by real estate:
Commercial loans		299		54		183		237		3
Consumer loans		12		-		8		8		-
Total impaired loans	$	19,505		768		17,471		18,239		822

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, 2021 and 2020.

(Dollars in thousands)
	Three months ended								Nine months ended
	September 30, 2021				September 30, 2020				September 30, 2021				September 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	$	76		1		153		-		91		5		123		7
Single-family residential		5,875		49		5,107		63		5,683		166		4,451		181
Single-family residential -
Banco de la Gente stated income		10,349		140		13,402		197		11,090		477		13,785		617
Commercial		2,280		20		2,665		31		2,617		85		2,772		103
Multifamily and farmland		110		2		-		-		113		4		-		-
Total impaired real estate loans		18,690		212		21,327		291		19,594		737		21,131		908

Loans not secured by real estate:
Commercial loans		248		5		494		7		330		16		553		22
Consumer loans		9		-		74		1		19		1		57		4
Total impaired loans	$	18,947		217		21,895		299		19,943		754		21,741		934

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 $5.1 million and $5.8 million at September 30, 2021 and December 31, 2020, respectively and are included in the tables above. Allowance on impaired loans collectively evaluated for impairment totaled $45,000 and $61,000 at September 30, 2021 and December 31, 2020, respectively.

The following tables present changes in the allowance for loan losses for the three and nine months ended September 30, 2021 and 2020. 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. 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
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

(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, 2020:
Allowance for loan losses:
Beginning balance	$	694			1,274			1,073			1,305			120			688			-		138			1,388		6,680
Charge-offs		(5	)		(65	)		-			(7	)		-			(109	)		-		(343	)		-		(529	)
Recoveries		2			59			-			45			-			27			-		148			-		281
Provision		573			482			(11	)		751			(4	)		355			-		254			1,060		3,460
Ending balance	$	1,264			1,750			1,062			2,094			116			961			-		197			2,448		9,892

Three months ended September 30, 2020:
Allowance for loan losses:
Beginning balance	$	1,531			1,813			1,114			2,051			115			980			-		162			1,667		9,433
Charge-offs		-			(65	)		-			-			-			-			-		(87	)		-		(152	)
Recoveries		-			34			-			11			-			2			-		42			-		89
Provision		(267	)		(32	)		(52	)		32			1			(21	)		-		80			781		522
Ending balance	$	1,264			1,750			1,062			2,094			116			961			-		197			2,448		9,892

Allowance for loan losses at September 30, 2020:
Ending balance: individually
evaluated for impairment	$	2			4			859			11			-			-			-		-			-		876
Ending balance: collectively
evaluated for impairment		1,262			1,746			203			2,083			116			961			-		197			2,448		9,016
Ending balance	$	1,264			1,750			1,062			2,094			116			961			-		197			2,448		9,892

Loans at September 30, 2020:
Ending balance	$	96,866			272,246			28,099			318,596			49,584			182,862			851		21,128			-		970,232

Ending balance: individually
evaluated for impairment	$	8			1,582			11,630			1,685			-			255			-		-			-		15,160
Ending balance: collectively
evaluated for impairment	$	96,858			270,664			16,469			316,911			49,584			182,607			851		21,128			-		955,072

The provision for loan losses for the three months ended September 30, 2021 was a recovery of $182,000, compared to a provision of $522,000 for the three months ended September 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 in the general reserve pool. At September 30, 2021, there were no loans with existing modifications as a result of the COVID-19 pandemic. 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. All loans modified as a result of the COVID-19 pandemic, totaling $100.9 million at September 30, 2021, 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 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 $18.7 million decrease from December 31, 2020 to September 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 nine months ended September 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 nine months ended September 30, 2021 was a recovery of $863,000, compared to a provision of $3.5 million for the nine months ended September 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 September 30, 2021 and December 31, 2020:

September 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	$	-		7,380		-		-		-		382		-		613		-		8,375
2- High Quality		8,982		104,288		-		35,384		19		17,846		-		1,979		1,413		169,911
3- Good Quality		67,245		124,534		9,028		283,657		55,335		69,324		621		3,415		3,777		616,936
4- Management Attention		3,626		16,239		10,878		33,620		2,841		5,122		12		290		-		72,628
5- Watch		82		2,904		1,722		9,802		552		1,644		-		1		-		16,707
6- Substandard		74		3,058		2,415		711		109		58		-		23		-		6,448
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	80,009		258,403		24,043		363,174		58,856		94,376		633		6,321		5,190		891,005

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

Past due TDR loans and non-accrual TDR loans totaled $1.6 million and $3.8 million at September 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 September 30, 2021 and December 31, 2020.

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

There were no loans modified as TDR that defaulted during the nine months ended September 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 September 30, 2021 amounted to $128.1 million. The outstanding balance of PPP loans was $25.6 million and $75.8 million at September 30, 2021 and December 31, 2020, respectively. The Bank has received $5.7 million in fees from the SBA for PPP loans originated as of September 30, 2021. The Bank recognized $3.0 million and $1.4 million PPP loan fee income for the nine months ended September 30, 2021 and the year ended December 31, 2020 respectively. PPP loan fee income recognized for the three months ended September 30, 2021 was $489,000. PPP loan fee income recognized for the three and nine months ended September 30, 2020 was $361,000.