NOTE 4 – Loans and Allowance for Loan Losses

The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily in the Upstate, Midlands, and Lowcountry regions of South Carolina, the Triangle and Triad regions of North Carolina as well as Atlanta, Georgia. The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. The Company focuses its lending activities primarily on the professional markets in these regions including doctors, dentists, and small business owners. The principal component of the loan portfolio is loans secured by real estate mortgages which account for 82.8% of total loans at December 31, 2019. Commercial loans comprise 61.5% of total real estate loans and consumer loans account for 38.5%. Commercial real estate loans are further categorized into owner occupied which represents 21.0% of total loans and non-owner occupied loans represent 25.8%. Commercial construction loans represent only 4.1% of the total loan portfolio.

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). The various types of loans are individually underwritten and monitored to manage the associated risks.

The allowance for loan losses is management's estimate of credit losses inherent in the loan portfolio at the balance sheet date. We have an established process to determine the adequacy of the allowance for loan losses that assesses the losses inherent in our portfolio. While we attribute portions of the allowance to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. Our process involves procedures to appropriately consider the unique risk characteristics of our commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured individually for each impaired loan. Our allowance levels are influenced by loan volume, loan grade or delinquency status, historic loss experience and other economic conditions.

Portfolio Segment Methodology

Commercial
Commercial loans are assessed for estimated losses by grading each loan using various risk factors identified through periodic reviews. The Company applies historic grade-specific loss factors to each loan class. In the development of statistically derived loan grade loss factors, the Company observes historical losses over 20 quarters for each loan grade. These loss estimates are adjusted as appropriate based on additional analysis of external loss data or other risks identified from current economic conditions and credit quality trends. The allowance also includes an amount for the estimated impairment on nonaccrual commercial loans and commercial loans modified in a TDR, whether on accrual or nonaccrual status.

Consumer
For consumer loans, the Company determines the allowance on a collective basis utilizing historical losses over 20 quarters to represent its best estimate of inherent loss. The Company pools loans, generally by loan class with similar risk characteristics. The allowance also includes an amount for the estimated impairment on nonaccrual consumer loans and consumer loans modified in a TDR, whether on accrual or nonaccrual status.

The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $3.3 million and $2.8 million as of December 31, 2019 and December 31, 2018, respectively.


	December 31,
(dollars in thousands)				2019			2018
Commercial
Owner occupied RE	$	407,851		21.0%	367,018		21.9%
Non-owner occupied RE		501,878		25.8%	404,296		24.1%
Construction		80,486		4.1%	84,411		5.0%
Business		308,123		15.9%	272,980		16.3%
Total commercial loans		1,298,338		66.8%	1,128,705		67.3%
Consumer
Real estate		398,245		20.5%	320,943		19.1%
Home equity		179,738		9.3%	165,937		9.9%
Construction		41,471		2.1%	37,925		2.3%
Other		25,733		1.3%	23,822		1.4%
Total consumer loans		645,187		33.2%	548,627		32.7%
Total gross loans, net of deferred fees		1,943,525		100.0%	1,677,332		100.0%
Less – allowance for loan losses		(16,642	)		(15,762	)
Total loans, net	$	1,926,883			1,661,570

The composition of gross loans by rate type is as follows:


	December 31,
(dollars in thousands)	2019		2018
Variable rate loans	$	432,540	402,148
Fixed rate loans		1,510,985	1,275,184
	$	1,943,525	1,677,332

At December 31, 2019, approximately $716.0 million of the Company’s mortgage loans were pledged as collateral for advances from the FHLB, as set forth in Note 10.

Credit Quality Indicators

Commercial
We manage a consistent process for assessing commercial loan credit quality by monitoring our loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our risk categories include Pass, Special Mention, Substandard, and Doubtful, each of which is defined by banking regulatory agencies. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for credit losses.

We categorize our loans into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. A description of the general characteristics of the risk grades is as follows:

●	Pass—These loans range from minimal credit risk to average however still acceptable credit risk.

●	Special mention—A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

●	Substandard—A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

●	Doubtful—A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.

The following tables provide past due information for outstanding commercial loans and include loans on nonaccrual status.


	December 31, 2019
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Current	$	406,594	501,676	80,486	307,710	1,296,466
30-59 days past due		706	151	-	178	1,035
60-89 days past due		-	-	-	-	-
Greater than 90 days		551	51	-	235	837
	$	407,851	501,878	80,486	308,123	1,298,338

	December 31, 2018
	Owner		Non-owner
	occupied RE		occupied RE	Construction	Business	Total
Current	$	367,018	404,179	84,411	272,864	1,128,472
30-59 days past due		-	117	-	36	153
60-89 days past due		-	-	-	-	-
Greater than 90 days		-	-	-	80	80
	$	367,018	404,296	84,411	272,980	1,128,705

As of December 31, 2019 and 2018, loans 30 days or more past due represented 0.23% and 0.26% of our total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.10% and 0.01% as of December 31, 2019 and 2018, respectively.

The tables below provide a breakdown of outstanding commercial loans by risk category.


	December 31, 2019
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Pass	$	404,237	492,941	80,486	301,504	1,279,168
Special Mention		1,312	744	-	3,108	5,164
Substandard		2,302	8,193	-	3,511	14,006
Doubtful		-	-	-	-	-
	$	407,851	501,878	80,486	308,123	1,298,338

	December 31, 2018
	Owner		Non-owner
	occupied RE		occupied RE	Construction	Business	Total
Pass	$	363,621	400,266	84,411	266,898	1,115,196
Special Mention		296	118	-	2,971	3,385
Substandard		3,101	3,912	-	3,111	10,124
Doubtful		-	-	-	-	-
	$	367,018	404,296	84,411	272,980	1,128,705

Consumer
We manage a consistent process for assessing consumer loan credit quality by monitoring our loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our risk categories include Pass, Special Mention, Substandard, and Doubtful, which are defined above. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for loan losses.

The following tables provide past due information for outstanding consumer loans and include loans on nonaccrual status.


	December 31, 2019
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Current	$	396,445	179,051	41,471	25,650	642,617
30-59 days past due		799	369	-	83	1,251
60-89 days past due		-	118	-	-	118
Greater than 90 days		1,001	200	-	-	1,201
	$	398,245	179,738	41,471	25,733	645,187

	December 31, 2018
	Real estate		Home equity	Construction	Other	Total
Current	$	317,267	165,727	37,925	23,603	544,522
30-59 days past due		2,555	30	-	106	2,691
60-89 days past due		923	-	-	113	1,036
Greater than 90 days		198	180	-	-	378
	$	320,943	165,937	37,925	23,822	548,627

Consumer loans 30 days or more past due were 0.13% and 0.25% as of December 31, 2019 and 2018, respectively.

The tables below provide a breakdown of outstanding consumer loans by risk category.


	December 31, 2019
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Pass	$	392,572	176,532	41,471	25,421	635,996
Special Mention		2,267	775	-	261	3,303
Substandard		3,406	2,431	-	51	5,888
Doubtful		-	-	-	-	-
Loss		-	-	-	-	-
	$	398,245	179,738	41,471	25,733	645,187

	December 31, 2018
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Pass	$	314,586	162,626	37,925	23,586	538,723
Special Mention		1,792	864	-	139	2,795
Substandard		4,565	2,447	-	97	7,109
Doubtful		-	-	-	-	-
Loss		-	-	-	-	-
	$	320,943	165,937	37,925	23,822	548,627

Nonperforming assets

The following table shows the nonperforming assets and the related percentage of nonperforming assets to total assets and gross loans. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when we believe, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received.


	December 31,
(dollars in thousands)	2019		2018
Commercial
Owner occupied RE	$	-	-
Non-owner occupied RE		188	210
Construction		-	-
Business		235	81
Consumer
Real estate		1,829	1,980
Home equity		431	1,006
Construction		-	-
Other		-	12
Nonaccruing troubled debt restructurings		4,111	2,541
Total nonaccrual loans, including nonaccruing TDRs		6,794	5,830
Other real estate owned		-	-
Total nonperforming assets	$	6,794	5,830
Nonperforming assets as a percentage of:
Total assets		0.30%	0.31%
Gross loans		0.35%	0.35%
Total loans over 90 days past due	$	2,038	458
Loans over 90 days past due and still accruing		-	-
Accruing TDRs		5,219	6,742

Foregone interest income on the nonaccrual loans for the year ended December 31, 2019 was approximately $23,000 and approximately $53,000 for the same period in 2018.

Impaired Loans

The table below summarizes key information for impaired loans. Our impaired loans include loans on nonaccrual status and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans may have estimated impairment which is included in the allowance for loan losses. Our commercial and consumer impaired loans are evaluated individually to determine the related allowance for loan losses.


					December 31, 2019
				Recorded investment
				Impaired loans	Impaired loans
	Unpaid			with no related	with related	Related
	Principal		Impaired	allowance for	allowance for	allowance for
(dollars in thousands)	Balance		loans	loan losses	loan losses	loan losses
Commercial
Owner occupied RE	$	2,791	2,726	2,270	456	75
Non-owner occupied RE		4,512	4,051	2,419	1,632	465
Construction		-	-	-	-	-
Business		1,620	1,531	558	973	452
Total commercial		8,923	8,308	5,247	3,061	992
Consumer
Real estate		2,727	2,720	1,638	1,082	364
Home equity		885	838	459	379	66
Construction		-	-	-	-	-
Other		147	147	-	147	16
Total consumer		3,759	3,705	2,097	1,608	446
Total	$	12,682	12,013	7,344	4,669	1,438


					December 31, 2018
				Recorded investment
				Impaired loans	Impaired loans
	Unpaid			with no related	with related	Related
	Principal		Impaired	allowance for	allowance for	allowance for
(dollars in thousands)	Balance		loans	loan losses	loan losses	loan losses
Commercial
Owner occupied RE	$	2,827	2,762	2,311	451	75
Non-owner occupied RE		3,321	2,807	603	2,204	558
Construction		-	-	-	-	-
Business		3,745	2,520	515	2,005	895
Total commercial		9,893	8,089	3,429	4,660	1,528
Consumer
Real estate		2,993	2,892	1,494	1,398	456
Home equity		1,935	1,421	1,421	-	-
Construction		-	-	-	-	-
Other		170	170	-	170	30
Total consumer		5,098	4,483	2,915	1,568	486
Total	$	14,991	12,572	6,344	6,228	2,014

The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class.


	Year ended December 31,
	2019			2018		2017
	Average		Recognized	Average	Recognized	Average	Recognized
	recorded		interest	recorded	interest	recorded	interest
(dollars in thousands)	investment		income	investment	income	investment	income
Commercial
Owner occupied RE	$	2,739	128	2,784	142	2,255	104
Non-owner occupied RE		4,161	255	2,860	174	4,144	199
Construction		-	-	-	-	-	-
Business		1,582	79	2,883	162	2,823	162
Total commercial		8,482	462	8,527	478	9,222	465
Consumer
Real estate		2,771	131	2,930	151	2,047	69
Home equity		853	42	1,453	99	1,576	97
Construction		-	-	-	-	-	-
Other		153	5	174	5	174	6
Total consumer		3,777	178	4,557	255	3,797	172
Total	$	12,259	640	13,084	733	13,019	637

Allowance for Loan Losses

The following table summarizes the activity related to our allowance for loan losses:


	Year ended December 31,
(dollars in thousands)	2019			2018		2017
Balance, beginning of period	$	15,762		15,523		14,855
Provision for loan losses		2,300		1,900		2,000
Loan charge-offs:
Commercial
Owner occupied RE		(110	)	-		-
Non-owner occupied RE		(239	)	(432	)	(589	)
Construction		-		-		-
Business		(910	)	(695	)	(638	)
Total commercial		(1,259	)	(1,127	)	(1,227	)
Consumer
Real estate		-		(749	)	-
Home equity		(174	)	(217	)	(400	)
Construction		-		-		-
Other		(82	)	(53	)	(11	)
Total consumer		(256	)	(1,019	)	(411	)
Total loan charge-offs		(1,515	)	(2,146	)	(1,638	)
Loan recoveries:
Commercial
Owner occupied RE		-		-		-
Non-owner occupied RE		2		132		119
Construction		-		-		-
Business		43		229		86
Total commercial		45		361		205
Consumer
Real estate		37		5		86
Home equity		2		115		13
Construction		-		-		-
Other		11		4		2
Total consumer		50		124		101
Total recoveries		95		485		306
Net loan charge-offs		(1,420	)	(1,661	)	(1,332	)
Balance, end of period	$	16,642		15,762		15,523

The following tables summarize the activity in the allowance for loan losses by our commercial and consumer portfolio segments.


	Year ended December 31, 2019
(dollars in thousands)	Commercial			Consumer		Total
Balance, beginning of period	$	10,768		4,994		15,762
Provision		1,818		482		2,300
Loan charge-offs		(1,259	)	(256	)	(1,515	)
Loan recoveries		45		50		95
Net loan charge-offs		(1,214	)	(206	)	(1,420	)
Balance, end of period	$	11,372		5,270		16,642

	Year ended December 31, 2018
	Commercial			Consumer		Total
Balance, beginning of period	$	9,937		5,586		15,523
Provision		1,597		303		1,900
Loan charge-offs		(1,127	)	(1,019	)	(2,146	)
Loan recoveries		361		124		485
Net loan charge-offs		(766	)	(895	)	(1,661	)
Balance, end of period	$	10,768		4,994		15,762

The following table disaggregates our allowance for loan losses and recorded investment in loans by method of impairment evaluation.


	December 31, 2019
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	992	446	1,438	8,308	3,705	12,013
Collectively evaluated		10,380	4,824	15,204	1,290,030	641,482	1,931,512
Total	$	11,372	5,270	16,642	1,298,338	645,187	1,943,525

	December 31, 2018
	Allowance for loan losses				Recorded investment in loans
	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,528	486	2,014	8,089	4,483	12,572
Collectively evaluated		9,240	4,508	13,748	1,120,616	544,144	1,664,760
Total	$	10,768	4,994	15,762	1,128,705	548,627	1,677,332