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Loans

3 Months Ended

Mar. 31, 2022

(3)

Loans

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

(Dollars in thousands)
	March 31, 2022			December 31, 2021
Real estate loans:
Construction and land development	$	95,025			95,760
Single-family residential		272,991			266,111
Single-family residential -
Banco de la Gente non-traditional		22,137			23,147
Commercial		354,169			337,841
Multifamily and farmland		58,927			58,366
Total real estate loans		803,249			781,225

Loans not secured by real estate:
Commercial loans		73,409			91,172
Farm loans		863			796
Consumer loans		6,170			6,436
All other loans		6,067			5,240

Total loans		889,758			884,869

Less allowance for loan losses		(9,426	)		(9,355	)

Total net loans	$	880,332			875,514

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. As of March 31, 2022, construction and land development loans comprised approximately 11% 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 March 31, 2022, single-family residential loans comprised approximately 33% of the Bank’s total loan portfolio, including Banco single-family residential non-traditional loans which were approximately 2% 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 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. As of March 31, 2022, commercial real estate loans comprised approximately 40% 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 March 31, 2022, commercial loans comprised approximately 8% of the Bank’s total loan portfolio, including $6.6 million in Paycheck Protection Program (“PPP”) loans.

	·	Multifamily and farmland loans – Decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. As of March 31, 2022, construction and land development loans comprised approximately 7% of the Bank’s total loan portfolio.

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, 2022 and December 31, 2021:

March 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	$	274		-		274		94,751		95,025		-
Single-family residential		3,545		542		4,087		268,904		272,991		-
Single-family residential -
Banco de la Gente non-traditional		2,700		136		2,836		19,301		22,137		-
Commercial		219		-		219		353,950		354,169		-
Multifamily and farmland		-		-		-		58,927		58,927		-
Total real estate loans		6,738		678		7,416		795,833		803,249		-

Loans not secured by real estate:
Commercial loans		17		-		17		73,392		73,409		-
Farm loans		-		-		-		863		863		-
Consumer loans		74		-		74		6,096		6,170		-
All other loans		-		-		-		6,067		6,067		-
Total loans	$	6,829		678		7,507		882,251		889,758		-

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 non-accrual loans as of March 31, 2022 and December 31, 2021:

(Dollars in thousands)
	March 31, 2022		December 31, 2021
Real estate loans:
Construction and land development	$	-		-
Single-family residential		1,793		1,642
Single-family residential -
Banco de la Gente non-traditional		1,215		1,232
Commercial		191		200
Multifamily and farmland		102		105
Total real estate loans		3,301		3,179

Loans not secured by real estate:
Commercial loans		-		49
Consumer loans		8		2
Total	$	3,309		3,230

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 less estimated selling costs. 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 Restructurings (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Impaired loans were $17.1 million, $18.3 million and $20.6 million at March 31, 2022, December 31, 2021 and March 31, 2021, respectively. Interest income recognized on accruing impaired loans was $216,000, $1.0 million, and $283,000 for the three months ended March 31, 2022, the year ended December 31, 2021 and the three months ended March 31, 2021, 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 March 31, 2022:

March 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	$	68		-		68		68		2
Single-family residential		4,361		520		3,581		4,101		64
Single-family residential -
Banco de la Gente non-traditional		11,306		-		10,658		10,658		671
Commercial		2,112		433		1,587		2,020		10
Multifamily and farmland		111		-		101		101		-
Total impaired real estate loans		17,958		953		15,995		16,948		747

Loans not secured by real estate:
Commercial loans		157		-		157		157		2
Consumer loans		14		-		10		10		-
Total impaired loans	$	18,129		953		16,162		17,115		749

The following table presents impaired loans as of and for the year ended December 31, 2021:

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
Real estate loans:
Construction and land development	$	73		-		73		73		3
Single-family residential		5,138		524		4,374		4,898		86
Single-family residential -
Banco de la Gente non-traditional		11,753		-		10,922		10,922		687
Commercial		2,138		435		1,608		2,043		11
Multifamily and farmland		113		-		105		105		-
Total impaired real estate loans		19,215		959		17,082		18,041		787

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

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 2021 and the year ended December 31, 2021:

(Dollars in thousands)
	Three months ended								Twelve months ended
	March 31, 2022				March 31,2021				December 31, 2021
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
Real estate loans:
Construction and land development	$	71		2		106		2		82		6
Single-family residential		5,723		47		5,490		60		6,017		253
Single-family residential -
Banco de la Gente stated income		9,566		139		11,832		177		10,325		609
Commercial		2,032		25		2,955		36		2,385		109
Multifamily and farmland		103		1		116		1		110		6
Total impaired real estate loans		17,495		214		20,499		276		18,919		983

Loans not secured by real estate:
Commercial loans		188		2		413		6		271		19
Consumer loans		7		-		28		1		11		1
Total impaired loans	$	17,690		216		20,940		283		19,201		1,003

Impaired loans collectively evaluated for impairment totaled $5.3 million at March 31, 2022 and December 31, 2021 and are included in the tables above. Allowance on impaired loans collectively evaluated for impairment totaled $47,000 and $52,000 at March 31, 2022 and December 31, 2021, respectively.

The following tables present changes in the allowance for loan losses for the three months ended March 31, 2022 and 2021. 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 Small Business Administration (“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
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

(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, 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		-			-			-			-		-		-			-		(85	)		-			(85	)
Recoveries		50			60			-			12		-		3			-		39			-			164
Provision (recovery)		(185	)		(53	)		(19	)		28		23		(104	)		-		9			(154	)		(455	)
Ending balance	$	1,061			1,850			1,033			2,252		145		1,244			-		91			1,856			9,532

Allowance for loan losses March 31, 2021
Ending balance: individually
evaluated for impairment	$	2			4			826			8		-		-			-		-			-			840
Ending balance: collectively
evaluated for impairment		1,059			1,846			207			2,244		145		1,244			-		91			1,856			8,692
Ending balance	$	1,061			1,850			1,033			2,252		145		1,244			-		91			1,856			9,532

Loans March 31, 2021:
Ending balance	$	87,878			264,356			26,278			337,943		57,914		160,892			860		10,376			-			946,497

Ending balance: individually
evaluated for impairment	$	7			1,444			11,193			2,098		-		141			-		-			-			14,883
Ending balance: collectively
evaluated for impairment	$	87,871			262,912			15,085			335,845		57,914		160,751			860		10,376			-			931,614

The provision for loan losses for the three months ended March 31, 2022 was $71,000, compared to a recovery of $455,000 for the three months ended March 31, 2021. The increase in the provision for loan losses is primarily attributable to an increase in reserves on loans in a pool that had once been given payment modifications as a result of the COVID-19 pandemic, and an increase in reserves due to a net increase in the volume of loans in the general reserve pool. Loans that were previously modified have been separated from the pools for the general reserve to recognize their heightened susceptibility to an environment still affected by the economic effects of the pandemic. Separating the previously modified loans into their own pool allows for more specific reserving factors to be considered that would not be applicable to loans in the pools for the general reserve. There were no loans with modifications as a result of the COVID-19 pandemic at March 31, 2022 and December 31, 2021. The Bank continues to track all loans that were previously 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 Bank’s Allowance for Loan and Lease Losses (“ALLL”) model as management considers that they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. Loans included in this pool totaled $82.2 million and $88.7 million at March 31, 2022 and December 31, 2021, respectively. The full effects of stimulus in the current environment are still unknown, and additional losses in this pool of loans may be present but not as yet identified. 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 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). PPP loans are classified as risk grade 3.

	·	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 March 31, 2022 and December 31, 2021:

March 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	$	-		3,134		-		-		-		360		-		566		-		4,060
2- High Quality		14,575		110,673		-		28,727		18		14,907		-		1,868		1,232		172,000
3- Good Quality		77,106		140,596		8,314		289,913		55,602		54,571		861		3,412		4,835		635,210
4- Management Attention		3,205		13,430		10,146		32,259		2,668		2,474		2		306		-		64,490
5- Watch		71		1,612		1,450		2,646		537		1,097		-		1		-		7,414
6- Substandard		68		3,546		2,227		624		102		-		-		17		-		6,584
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	95,025		272,991		22,137		354,169		58,927		73,409		863		6,170		6,067		889,758

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 $3.3 million and $2.2 million at March 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 March 31, 2022 and December 31, 2021.

There were no new TDR modifications during the three months ended March 31, 2022 and 2021.

There were no loans modified as TDR loans that defaulted during the three months ended March 31, 2022 and 2021, 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 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 $6.6 million and $18.0 million at March 31, 2022 and December 31, 2021, respectively. The Bank has received $5.7 million in fees from the SBA for PPP loans originated during the years ended December 31, 2020 and 2021. The Bank recognized $600,000 and $999,000 of PPP loan fee income for the three months ended March 31, 2022 and the three months ended March 31, 2021, respectively.