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Loans

3 Months Ended

Mar. 31, 2023

(3) Loans

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

(Dollars in thousands)
	March 31, 2023			December 31, 2022
Real estate loans:
Construction and land development	$	120,836			114,446
Single-family residential		327,260			322,262
Single-family residential -
Banco de la Gente non-traditional		19,415			20,019
Commercial		410,775			406,750
Multifamily and farmland		69,139			65,562
Total real estate loans		947,425			929,039

Loans not secured by real estate:
Commercial loans		79,252			81,307
Farm loans		632			938
Consumer loans		7,240			6,834
All other loans		16,322			14,490

Total loans		1,050,871			1,032,608

Less allowance for credit losses		(9,617	)		(10,494	)

Total net loans	$	1,041,254			1,022,114

The Bank makes loans and extensions of credit primarily within the Catawba Valley region of North Carolina, which encompasses Catawba, Alexander, Iredell and Lincoln counties and also in Mecklenburg, Wake, Rowan and Forsyth counties of North Carolina. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate, the value of which is dependent upon the real estate market. Risk characteristics of the major components of the Bank’s loan portfolio are discussed below:

	·	Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral.

	·	Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans.

	·	Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over the loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property.

	·	Commercial loans – Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid, or fluctuate in value based on the success of the business.

	·	Multifamily and farmland loans – Decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans.

Loans are considered past due if the required principal and interest payments have not been received within 30 days of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Generally, a loan is placed on non-accrual status when it is over 90 days past due and there is reasonable doubt that all principal will be collected. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following tables present an age analysis of past due loans, by loan type, as of March 31, 2023 and December 31, 2022:

March 31, 2023
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	94		-		94		120,742		120,836		-
Single-family residential		3,313		455		3,768		323,492		327,260		-
Single-family residential -
Banco de la Gente non-traditional		2,443		82		2,525		16,890		19,415		-
Commercial		-		-		-		410,775		410,775		-
Multifamily and farmland		-		-		-		69,139		69,139		-
Total real estate loans		5,850		537		6,387		941,038		947,425		-

Loans not secured by real estate:
Commercial loans		156		-		156		79,096		79,252		-
Farm loans		-		-		-		632		632		-
Consumer loans		47		-		47		7,193		7,240		-
All other loans		-		-		-		16,322		16,322		-
Total loans	$	6,053		537		6,590		1,044,281		1,050,871		-

December 31, 2022
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	363		-		363		114,083		114,446		-
Single-family residential		4,318		256		4,574		317,688		322,262		-
Single-family residential -
Banco de la Gente non-traditional		2,977		264		3,241		16,778		20,019		-
Commercial		306		-		306		406,444		406,750		-
Multifamily and farmland		-		-		-		65,562		65,562		-
Total real estate loans		7,964		520		8,484		920,555		929,039		-

Loans not secured by real estate:
Commercial loans		3		-		3		81,304		81,307		-
Farm loans		-		-		-		938		938		-
Consumer loans		71		-		71		6,763		6,834		-
All other loans		-		-		-		14,490		14,490		-
Total loans	$	8,038		520		8,558		1,024,050		1,032,608		-

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

	CECL						Incurred Loss
	March 31, 2023						December 31, 2022
	Nonaccrual Loans		Nonaccrual Loans		Total		Total
	With No		With		Nonaccrual		Nonaccrual
(Dollars in thousands)	Allowance		Allowance		Loans		Loans
Real estate loans:
Construction and land development	$	50		-		50		53
Single-family residential		2,029		-		2,029		1,914
Single-family residential -
Banco de la Gente non-traditional		1,350		-		1,350		1,532
Commercial		125		-		125		129
Multifamily and farmland		87		-		87		91
Total real estate loans		3,641		-		3,641		3,719

Loans not secured by real estate:
Commercial loans		-		-		-		-
Consumer loans		3		-		3		9
Total	$	3,644		-		3,644		3,728

Interest income is not recognized on non-accrual loans.

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

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

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

The following table shows the amortized cost basis at March 31, 2023 of the loans modified to borrowers experiencing financial difficulty, disaggregated by loan class and type of concession granted.

(Dollars in thousands)
	Term Extension
	Amortized Cost Basis at March 31, 2023		% of Loan Class
Loan class:
Commercial real estate		686		0.17	%
Total	$	686

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

Term Extension
Loan Class		Financial Effect
Commercial real estate		Extended existing amortization from 148 months to 173 months to keep existing payment the same with the current market rate.

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

No loans modified in the three months ended March 31, 2023 that were made to borrowers experiencing financial difficulty had been written off at March 31, 2023.

The Bank closely monitors the performance of those loans that are modified because borrowers are experiencing financial difficulty so as to understand the effectiveness of its modification efforts. The following table shows the performance of loans that have been modified in the last 12 months.

(Dollars in thousands)
	Payment Status (Amortized Cost Basis)
	Current		30 - 89 Days Past Due		90 + Days Past Due
Loan type:
Commercial real estate		686		-		-
Total	$	686		-		-

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

December 31, 2022
(Dollars in thousands)

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance
Real estate loans:
Construction and land development	$	110		-		110		110		2
Single-family residential		3,912		236		3,300		3,536		60
Single-family residential -
Banco de la Gente non-traditional		10,441		-		9,748		9,748		611
Commercial		1,785		421		1,346		1,767		9
Multifamily and farmland		104		-		91		91		-
Total impaired real estate loans		16,352		657		14,595		15,252		682

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

The following table presents the average impaired loan balance and the interest income recognized by loan class for the three months ended March 31, 2022 and the twelve months ended December 31, 2022.

(Dollars in thousands)
	Three months ended				Twelve months ended
	March 31, 2022				December 31, 2022
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
Real estate loans:
Construction and land development	$	71		2		75		8
Single-family residential		5,723		47		5,194		194
Single-family residential -
Banco de la Gente stated income		9,566		139		8,757		552
Commercial		2,032		25		1,916		93
Multifamily and farmland		103		1		96		5
Total impaired real estate loans		17,495		214		16,038		852

Loans not secured by real estate:
Commercial loans		188		2		137		8
Consumer loans		7		-		15		2
Total impaired loans	$	17,690		216		16,190		862

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

The following tables present changes in the allowance for credit losses for the three months ended March 31, 2023 and 2022. The March 31, 2023 table reflects the CECL methodology and the March 31, 2022 table reflects the Incurred Loss methodology. Paycheck Protection Program (“PPP”) loans are excluded from the allowance for credit losses because PPP loans are guaranteed by the Small Business Administration (“SBA”). No loans were individually evaluated as of March 31, 2023.

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single-Family Residential - Banco de la Gente non-traditional			Commercial			Multifamily and Farmland		Commercial			Farm			Consumer and All Other			Unallocated			Total
Three months ended March 31, 2023
Allowance for credit losses:
Beginning balance	$	1,415			2,322			763			3,207			164		657			-			214			1,752			10,494
Adjustment for CECL implementation		3,781			715			(576	)		(986	)		115		(295	)		2			54			(1,752	)		1,058
Charge-offs		-			-			-			-			-		-			-			(166	)		-			(166	)
Recoveries		-			11			-			2			-		9			-			60			-			82
Provision (recovery) for unfunded commitments		(193	)		(8	)		-			-			-		-			-			(2	)		-			(203	)
Provision (recovery) for loan losses		250			37			(6	)		21			19		(23	)		(1	)		130			-			427
Ending balance	$	5,253			3,077			181			2,244			298		348			1			290			-			11,692
Allowance for credit loss-loans	$	3,249			3,010			181			2,244			298		348			1			286			-			9,617
Allowance for credit losses loan commitments		2,004			67			-			-			-		-			-			4			-			2,075
Total allowance for credit losses	$	5,253			3,077			181			2,244			298		348			1			290			-			11,692

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single-Family Residential - Banco de la Gente non-traditional			Commercial		Multifamily and Farmland			Commercial			Farm		Consumer and All Other			Unallocated			Total
Three months ended March 31, 2022
Allowance for loan losses:
Beginning balance	$	1,193			2,013			864			2,234		150			711			-		110			2,080			9,355
Charge-offs		-			(31	)		-			-		-			(4	)		-		(125	)		-			(160	)
Recoveries		-			117			-			2		-			19			-		22			-			160
Provision (recovery)		(30	)		(4	)		(23	)		775		(3	)		(80	)		-		121			(685	)		71
Ending balance	$	1,163			2,095			841			3,011		147			646			-		128			1,395			9,426

Allowance for loan losses March 31, 2022
Ending balance: individually evaluated for impairment	$	1			38			657			6		-			-			-		-			-			702
Ending balance: collectively evaluated for impairment		1,162			2,057			184			3,005		147			646			-		128			1,395			8,724
Ending balance	$	1,163			2,095			841			3,011		147			646			-		128			1,395			9,426

Loans at March 31, 2022:
Ending balance	$	95,025			272,991			22,137			354,169		58,927			73,409			863		12,237			-			889,758

Ending balance: individually evaluated for impairment	$	4			859			9,494			1,426		-			-			-		-			-			11,783

Ending balance: collectively evaluated for impairment	$	95,021			272,132			12,643			352,743		58,927			73,409			863		12,237			-			877,975

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

The Bank uses the following credit quality indicators:

	·	Pass – Includes loans ranging from excellent quality with a minimal amount of credit risk to loans with higher risk and servicing needs but still are considered to be acceptable. The higher risk loans in this category are not problem credits presently, but may be in the future if the borrower is unable to change its present course.
	·	Watch – These loans are currently performing satisfactorily, but there has been some recent past due history on repayment and there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date.
	·	Substandard – A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

The following table presents by credit quality indicator, loan class and year of origination, the amortized cost of the Bank’s loans as of March 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
March 31, 2023
Real Estate Loans
Construction and land development
Pass	$	3,279		72,777		24,090		11,141		2,135		4,912		2,349		-		120,683
Watch		-		-		-		-		-		49		-		-		49
Substandard		-		-		-		-		-		104		-		-		104
Total Construction and land development	$	3,279		72,777		24,090		11,141		2,135		5,065		2,349		-		120,836
Single family
Pass	$	9,654		67,967		46,587		26,348		14,079		56,773		101,968		-		323,376
Watch		-		-		-		-		91		382		-		-		473
Substandard		-		-		-		-		-		3,016		395		-		3,411
Total single family	$	9,654		67,967		46,587		26,348		14,170		60,171		102,363		-		327,260
Single family-Banco de la
Gente non-traditional
Pass	$	-		-		-		-		-		17,104		-		-		17,104
Watch		-		-		-		-		-		412		-		-		412
Substandard		-		-		-		-		-		1,899		-		-		1,899
Total Banco de la Gente
non-traditional	$	-		-		-		-		-		19,415		-		-		19,415
Commercial
Pass	$	14,091		106,570		74,741		68,156		33,437		108,031		1,426		-		406,452
Watch		-		-		-		120		-		3,659		-		-		3,779
Substandard		-		-		-		419		-		125		-		-		544
Total commercial	$	14,091		106,570		74,741		68,695		33,437		111,815		1,426		-		410,775
Multifamily and farmland
Pass	$	3,616		16,971		23,211		6,688		3,852		14,019		575		-		68,932
Watch		-		-		-		-		-		120		-		-		120
Substandard		-		-		-		-		-		87		-		-		87
Total multifamily and
farmland	$	3,616		16,971		23,211		6,688		3,852		14,226		575		-		69,139
Total real estate loans	$	30,640		264,285		168,629		112,872		53,594		210,692		106,713		-		947,425
Loans not secured by real estate
Commercial
Pass	$	3,518		18,150		5,351		5,001		3,398		14,006		29,544		-		78,968
Watch		-		-		-		-		128		155		1		-		284
Substandard		-		-		-		-		-		-		-		-		-
Total Commercial	$	3,518		18,150		5,351		5,001		3,526		14,161		29,545		-		79,252
Farm
Pass	$	38		18		-		334		23		70		149		-		632
Watch		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total farm	$	38		18		-		334		23		70		149		-		632
Consumer
Pass	$	1,065		2,164		778		377		129		110		2,607		-		7,230
Watch		-		-		-		-		-		-		-		-		-
Substandard		-		-		4		1		-		1		4		-		10
Total consumer	$	1,065		2,164		782		378		129		111		2,611		-		7,240
All other
Pass	$	7,054		546		477		477		818		4,172		2,636		-		16,180
Watch		-		-		-		-		-		76		66		-		142
Substandard		-		-		-		-		-		-		-		-		-
Total all other	$	7,054		546		477		477		818		4,248		2,702		-		16,322
Total loans not secured by real estate	$	11,675		20,878		6,610		6,190		4,496		18,590		35,007		-		103,446
Total loans	$	42,315		285,163		175,239		119,062		58,090		229,282		141,720		-		1,050,871
Current period gross charge-offs	$	-		16		29		3		-		118		-		-		166

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

December 31, 2022
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total

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