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Loans

12 Months Ended

Dec. 31, 2022

(3) Loans

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

(Dollars in thousands)
	December 31, 2022			December 31, 2021
Real estate loans:
Construction and land development	$	114,446			95,760
Single-family residential		322,262			266,111
Single-family residential - Banco de la Gente non-traditional		20,019			23,147
Commercial		406,750			337,841
Multifamily and farmland		65,562			58,366
Total real estate loans		929,039			781,225

Loans not secured by real estate:
Commercial loans		81,307			91,172
Farm loans		938			796
Consumer loans		6,834			6,436
All other loans		14,490			5,240

Total loans		1,032,608			884,869

Less allowance for loan losses		(10,494	)		(9,355	)

Total net loans	$	1,022,114			875,514

The above table includes deferred costs, net of deferred fees, totaling $909,000 at December 31, 2022. The above table includes deferred costs, net of deferred fees, totaling $198,000 at December 31, 2021 including $945,000 in deferred PPP loan fees.

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.

On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals were able to apply for loans from existing SBA lenders and other approved regulated lenders, subject to certain limitations and eligibility criteria. A second round of PPP funding provided a total of $320 billion additional funding for the PPP. The Bank participated as a lender in the PPP. Total PPP loans originated during the years ended December 31, 2020 and 2021 amounted to $128.1 million. The outstanding balance of PPP loans was $103,000 and $18.0 million at December 31, 2022 and 2021, respectively. These loans are classified as commercial loans in the tables above. The Bank recognized $948,000 and $3.4 million of PPP loan fee income for the year ended December 31, 2022 and year ended December, 2021, respectively.

The following tables present an age analysis of past due loans, by loan type, as of December 31, 2022 and 2021:

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		-

December 31, 2021
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	-		-		-		95,760		95,760		-
Single-family residential		2,323		634		2,957		263,154		266,111		-
Single-family residential - Banco de la Gente non-traditional		2,593		112		2,705		20,442		23,147		-
Commercial		488		-		488		337,353		337,841		-
Multifamily and farmland		-		-		-		58,366		58,366		-
Total real estate loans		5,404		746		6,150		775,075		781,225		-

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

The following table presents the Bank’s non-accrual loans as of December 31, 2022 and 2021:

(Dollars in thousands)
	December 31, 2022		December 31, 2021
Real estate loans:
Construction and land development	$	53		-
Single-family residential		1,914		1,642
Single-family residential - Banco de la Gente non-traditional		1,532		1,232
Commercial		129		200
Multifamily and farmland		91		105
Total real estate loans		3,719		3,179

Loans not secured by real estate:
Commercial loans		-		49
Consumer loans		9		2
Total	$	3,728		3,230

At the end of 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 who also perform appraisals for third parties. Factors, including the assumptions and techniques utilized by the appraiser, are considered by management in determining the fair value of collateral. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. An allowance for each impaired loan that is not collateral dependent is calculated based on the present value of projected cash flows. If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans under $250,000 are not individually evaluated for impairment with the exception of the Bank’s Troubled Debt Restructurings (“TDR loans”) in the residential mortgage loan portfolio, which are individually evaluated for impairment. Impaired loans collectively evaluated for impairment totaled $4.9 million and $5.3 million at December 31, 2022 and 2021, respectively. Accruing impaired loans were $15.4 and $18.3 million at December 31, 2022 and December 31, 2021, respectively. Interest income recognized on accruing impaired loans was $862,000 and $1.0 million for the years ended December 31, 2022 and 2021, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

The following tables present the Bank’s impaired loans as of December 31, 2022, 2021 and 2020:

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		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	110		-		110		110		2		75		8
Single-family residential		3,912		236		3,300		3,536		60		5,194		194
Single-family residential - Banco de la Gente non-traditional		10,441		-		9,748		9,748		611		8,757		552
Commercial		1,785		421		1,346		1,767		9		1,916		93
Multifamily and farmland		104		-		91		91		-		96		5
Total impaired real estate loans		16,352		657		14,595		15,252		682		16,038		852

Loans not secured by real estate:
Commercial loans		116		-		116		116		1		137		8
Consumer loans		11		-		9		9		-		15		2
Total impaired loans	$	16,479		657		14,720		15,377		683		16,190		862

December 31, 2021
(Dollars in thousands)

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	73		-		73		73		3		82		6
Single-family residential		5,138		524		4,374		4,898		86		6,017		253
Single-family residential - Banco de la Gente non-traditional		11,753		-		10,922		10,922		687		10,325		609
Commercial		2,138		435		1,608		2,043		11		2,385		109
Multifamily and farmland		113		-		105		105		-		110		6
Total impaired real estate loans		19,215		959		17,082		18,041		787		18,919		983

Loans not secured by real estate:
Commercial loans		282		49		170		219		2		271		19
Consumer loans		8		-		4		4		-		11		1
Total impaired loans	$	19,505		1,008		17,256		18,264		789		19,201		1,003

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		YTD 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

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at December 31, 2022 and 2021 are presented below. The Bank’s valuation methodology is discussed in Note 16.

(Dollars in thousands)
	Fair Value Measurements December 31, 2022		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	211		-		-		211
Impaired loans	$	14,694		-		-		14,694

(Dollars in thousands)
	Fair Value Measurements December 31, 2021		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	3,637		-		-		3,637
Impaired loans	$	17,475		-		-		17,475

Fair Value

December 31, 2022

Fair Value

December 31, 2021

Valuation

Technique

Significant

Unobservable

Inputs

General Range of Significant Unobservable Input Values

Mortgage loans held for sale

211

3,637

Rate lock commitment

N/A

Impaired loans

14,694

17,475

Appraised value and discounted cash flows

Discounts to reflect current market conditions and ultimate collectability

0 - 25%

The following table presents changes in the allowance for loan losses for the year ended December 31, 2022. PPP loans are excluded from the allowance for loan losses as PPP loans are 100 percent guaranteed by the SBA.

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial		Multifamily and Farmland		Commercial			Farm		Consumer and All Other			Unallocated			Total
Twelve months ended December 31, 2022
Allowance for loan losses:
Beginning balance	$	1,193		2,013			864			2,234		150		711			-		110			2,080			9,355
Charge-offs		-		(128	)		-			-		-		(33	)		-		(591	)		-			(752	)
Recoveries		-		229			-			9		-		72			-		109			-			419
Provision		222		208			(101	)		964		14		(93	)		-		586			(328	)		1,472
Ending balance	$	1,415		2,322			763			3,207		164		657			-		214			1,752			10,494

Allowance for loan losses December 31, 2022
Ending balance: individually evaluated for impairment	$	-		36			597			6		-		-			-		-			-			639
Ending balance: collectively evaluated for impairment		1,415		2,286			166			3,201		164		657			-		214			1,752			9,855
Ending balance	$	1,415		2,322			763			3,207		164		657			-		214			1,752			10,494

Loans at December 31, 2022
Ending balance	$	114,446		322,262			20,019			406,750		65,562		81,307			938		21,324			-			1,032,608

Ending balance: individually evaluated for impairment	$	-		537			8,555			1,388		-		-			-		-			-			10,480
Ending balance: collectively evaluated for impairment	$	114,446		321,725			11,464			405,362		65,562		81,307			938		21,324			-			1,022,128

Changes in the allowance for loan losses for the year ended December 31, 2021 were as follows:

(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
Twelve months ended December 31, 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		-			(89	)		-			-			-		(293	)		-		(380	)		-		(762	)
Recoveries		121			271			-			52			3		786			-		139			-		1,372
Provision		(124	)		(12	)		(188	)		(30	)		25		(1,127	)		-		223			70		(1,163	)
Ending balance	$	1,193			2,013			864			2,234			150		711			-		110			2,080		9,355

Allowance for loan losses December 31, 2021
Ending balance: individually evaluated for impairment	$	1			57			672			7			-		-			-		-			-		737
Ending balance: collectively evaluated for impairment		1,192			1,956			192			2,227			150		711			-		110			2,080		8,618
Ending balance	$	1,193			2,013			864			2,234			150		711			-		110			2,080		9,355

Loans at December 31, 2021
Ending balance	$	95,760			266,111			23,147			337,841			58,366		91,172			796		11,676			-		884,869

Ending balance: individually evaluated for impairment	$	6			1,633			9,795			1,437			-		49			-		-			-		12,920
Ending balance: collectively evaluated for impairment	$	95,754			264,478			13,352			336,404			58,366		91,123			796		11,676			-		871,949

Changes in the allowance for loan losses for the year ended December 31, 2020 were as follows:

(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
Twelve months ended December 31, 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	)		-		(903	)		-		(434	)		-		(1,414	)
Recoveries		36			70			-			70			-		34			-		173			-		383
Provision		471			564			(21	)		844			2		1,526			-		251			622		4,259
Ending balance	$	1,196			1,843			1,052			2,212			122		1,345			-		128			2,010		9,908

Allowance for loan losses December 31, 2020
Ending balance: individually evaluated for impairment	$	1			4			844			8			-		-			-		-			-		857
Ending balance: collectively evaluated for impairment		1,195			1,839			208			2,204			122		1,345			-		128			2,010		9,051
Ending balance	$	1,196			1,843			1,052			2,212			122		1,345			-		128			2,010		9,908

Loans at December 31, 2020
Ending balance	$	94,124			272,325			26,883			332,971			48,880		161,740			855		10,861			-		948,639

Ending balance: individually evaluated for impairment	$	7			1,558			11,353			2,118			-		212			-		-			-		15,248
Ending balance: collectively evaluated for impairment	$	94,117			270,767			15,530			330,853			48,880		161,528			855		10,861			-		933,391

Impaired loans collectively evaluated for impairment totaled $4.9 million, $5.3 million and $5.8 million at December 31, 2022, 2021 and 2020, respectively and are included in the tables above. Allowance on impaired loans collectively evaluated for impairment totaled $44,000, $42,000 and 61,000 at December 31, 2022, 2021 and 2020, respectively.

The Bank utilizes an internal risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. These risk grades are evaluated on an ongoing basis. A description of the general characteristics of the eight risk grades is as follows:

Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists. CD or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade.

	·	Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Bank’s range of acceptability. The organization or individual is established with a history of successful performance though somewhat susceptible to economic changes.
	·	Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the Bank’s range of acceptability but higher than normal. This may be a new organization or an existing organization in a transitional phase (e.g. expansion, acquisition, market change).
	·	Risk Grade 4 – Management Attention: These loans have higher risk and servicing needs but still are acceptable. Evidence of marginal performance or deteriorating trends is observed. These are not problem credits presently, but may be in the future if the borrower is unable to change its present course.
	·	Risk Grade 5 – Watch: These loans are currently performing satisfactorily, but there has been some recent past due history on repayment and there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date.
	·	Risk Grade 6 – Substandard: A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
	·	Risk Grade 7 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.
	·	Risk Grade 8 – Loss: Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be realized in the future. Loss is a temporary grade until the appropriate authority is obtained to charge the loan off.

The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of December 31, 2022 and 2021.

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

1- Excellent Quality	$	-		2,782		-		-		-		1,365		-		527		-		4,674
2- High Quality		14,912		138,124		-		33,353		17		13,302		-		2,384		1,366		203,458
3- Good Quality		94,113		166,329		7,442		340,926		63,270		64,422		938		3,663		12,851		753,954
4- Management Attention		5,257		10,615		8,968		27,957		2,061		1,507		-		244		128		56,737
5- Watch		54		922		1,136		3,963		123		711		-		1		145		7,055
6- Substandard		110		3,490		2,473		551		91		-		-		15		-		6,730
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	114,446		322,262		20,019		406,750		65,562		81,307		938		6,834		14,490		1,032,608

December 31, 2021
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total

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

Past due TDR loans and non-accrual TDR loans totaled $3.7 million and $2.2 million at December 31, 2022 and December 31, 2021, 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 December 31, 2022 and December 31, 2021.

There were no new TDR modifications during the years ended December 31, 2022 and 2021.

There were no TDR loans with a payment default occurring within 12 months of the restructure date, and the payment default occurring during the years ended December 31, 2022 and 2021. TDR loans are deemed to be in default if they become past due by 90 days or more.