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 85.5% of total loans at December 31, 2021. Commercial loans comprise 57.3% of total real estate loans and consumer loans account for 42.7%. Commercial real estate loans are further categorized into owner occupied which represents 19.6% of total loans and non-owner occupied loans represent 26.8%. Commercial construction loans represent only 2.6% 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.

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act or the “Act”) to provide emergency assistance and health care response for individuals, families, and businesses affected by the coronavirus pandemic. The Small Business Administration (“SBA”) received funding and authority through the Act to modify existing loan programs and establish a new loan program to assist small businesses nationwide adversely impacted by the COVID-19 emergency. The Act temporarily permits the SBA to guarantee 100% of certain loans under a new program titled the “Paycheck Protection Program” and also provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the PPP.

In an effort to assist our clients as best we could through the pandemic, we became an approved SBA lender in March 2020 and processed 853 loans under the PPP for a total of $97.5 million, receiving SBA lender fee income of $3.9 million. As the regulations and guidance for PPP loans and the forgiveness process continued to change and evolve, management recognized the operational risk and complexity associated with this portfolio and decided to pursue the sale of the PPP loan portfolio to a third party better suited to support and serve our PPP clients through the loan forgiveness process. The loan sale allowed our team to focus on serving our clients and proactively monitoring and addressing credit risk brought on by the pandemic. On June 26, 2020, we completed the sale of our PPP loan portfolio to The Loan Source Inc., together with its servicing partner, ACAP SME LLC, and immediately recognized SBA lender fee income of $2.2 million, net of sale and processing costs, which is included in other noninterest income in the consolidated financial statements.

The SBA offered a second round of PPP loans through May 31, 2021; however, we did not originate any new PPP loans. We did, however, receive referral fees of approximately $268,000 during the three months ended June 30, 2021 from The Loan Source Inc. for PPP loans they originated to our clients.

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.

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.

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The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $5.0 million and $3.9 million as of December 31, 2021 and December 31, 2020, respectively.


	December 31,
(dollars in thousands)	2021					2020
Commercial
Owner occupied RE	$	488,965		19.6	%	433,320		20.2	%
Non-owner occupied RE		666,833		26.8	%	585,269		27.3	%
Construction		64,425		2.6	%	61,467		2.9	%
Business		333,049		13.4	%	307,599		14.4	%
Total commercial loans		1,553,272		62.4	%	1,387,655		64.8	%
Consumer
Real estate		694,401		27.9	%	536,311		25.0	%
Home equity		154,839		6.2	%	156,957		7.3	%
Construction		59,846		2.4	%	40,525		1.9	%
Other		27,519		1.1	%	21,419		1.0	%
Total consumer loans		936,605		37.6	%	755,212		35.2	%
Total gross loans, net of deferred fees		2,489,877		100.0	%	2,142,867		100.0	%
Less – allowance for loan losses		(30,408	)			(44,149	)
Total loans, net	$	2,459,469				2,098,718

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


	December 31,
(dollars in thousands)	2021		2020
Floating rate loans	$	376,805		400,506
Fixed rate loans		2,113,072		1,742,361
	$	2,489,877		2,142,867

At December 31, 2021, approximately $936.9 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.

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•

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, 2021
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE		Construction		Business		Total
Current	$	488,965		666,833		64,425		333,049		1,553,272
30-59 days past due		-		-		-		-		-
60-89 days past due		-		-		-		-		-
Greater than 90 days		-		-		-		-		-
	$	488,965		666,833		64,425		333,049		1,553,272


	December 31, 2020
	Owner		Non-owner
	occupied RE		occupied RE		Construction		Business		Total
Current	$	432,711		584,565		61,467		307,261		1,386,004
30-59 days past due		403		282		-		35		720
60-89 days past due		-		-		-		266		266
Greater than 90 days		206		422		-		37		665
	$	433,320		585,269		61,467		307,599		1,387,655

As of December 31, 2021 and 2020, loans 30 days or more past due represented 0.09% and 0.17% of our total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.00% and 0.08% as of December 31, 2021 and 2020, respectively.

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


	December 31, 2021
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE		Construction		Business		Total
Pass	$	487,422		589,280		64,425		328,371		1,469,498
Special Mention		327		48,310		-		1,530		50,167
Substandard		1,216		29,243		-		3,148		33,607
Doubtful		-		-		-		-		-
	$	488,965		666,833		64,425		333,049		1,553,272


	December 31, 2020
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE		Construction		Business		Total
Pass	$	430,291		576,095		61,328		301,838		1,369,552
Special Mention		624		587		-		1,703		2,914
Substandard		2,405		8,587		139		4,058		15,189
Doubtful		-		-		-		-		-
	$	433,320		585,269		61,467		307,599		1,387,655

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.

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


	December 31, 2021
(dollars in thousands)	Real estate		Home equity		Construction		Other		Total
Current		693,712		153,309		59,846		27,515		934,382
30-59 days past due		135		1,356		-		4		1,495
60-89 days past due		-		174		-		-		174
Greater than 90 days		554		-		-		-		554
	$	694,401		154,839		59,846		27,519		936,605

	December 31, 2020
	Real estate		Home equity		Construction		Other		Total
Current	$	534,648		156,657		40,525		21,419		753,249
30-59 days past due		-		-		-		-		-
60-89 days past due		332		-		-		-		332
Greater than 90 days		1,331		300		-		-		1,631
	$	536,311		156,957		40,525		21,419		755,212

Consumer loans 30 days or more past due were 0.09% as of December 31, 2021 and 2020, respectively.

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


	December 31, 2021
(dollars in thousands)	Real estate		Home equity		Construction		Other		Total
Pass	$	684,923		148,933		59,846		27,365		921,067
Special Mention		4,294		2,986		-		129		7,409
Substandard		5,184		2,920		-		25		8,129
Doubtful		-		-		-		-		-
	$	694,401		154,839		59,846		27,519		936,605

	December 31, 2020
(dollars in thousands)	Real estate		Home equity		Construction		Other		Total
Pass	$	530,515		152,154		40,525		21,290		744,484
Special Mention		1,968		1,005		-		91		3,064
Substandard		3,828		3,798		-		38		7,664
Doubtful		-		-		-		-		-
	$	536,311		156,957		40,525		21,419		755,212

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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)	2021			2020
Commercial
Owner occupied RE	$	-			-
Non-owner occupied RE		270			1,143
Construction		-			139
Business		-			195
Consumer
Real estate		989			2,536
Home equity		653			547
Construction		-			-
Other		-			-
Nonaccruing troubled debt restructurings		2,952			3,509
Total nonaccrual loans, including nonaccruing TDRs		4,864			8,069
Other real estate owned		-			1,169
Total nonperforming assets	$	4,864			9,238
Nonperforming assets as a percentage of:
Total assets		0.17	%		0.37	%
Gross loans		0.20	%		0.43	%
Total loans over 90 days past due	$	554			2,296
Loans over 90 days past due and still accruing		-			-
Accruing TDRs		3,299			4,893

Foregone interest income on the nonaccrual loans for the year ended December 31, 2021 was approximately $55,000 and approximately $61,000 for the same period in 2020.

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, 2021
			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	$	1,261		1,261		1,261		-		-
Non-owner occupied RE		2,012		1,070		270		800		171
Construction		-		-		-		-		-
Business		1,104		1,104		-		1,104		452
Total commercial		4,377		3,435		1,531		1,904		623
Consumer
Real estate		2,638		2,561		1,743		818		144
Home equity		2,206		2,044		1,989		55		55
Construction		-		-		-		-		-
Other		123		123		-		123		14
Total consumer		4,967		4,728		3,732		996		213
Total	$	9,344		8,163		5,263		2,900		836

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					December 31, 2020
			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	$	1,753		1,649		1,497		152		76
Non-owner occupied RE		3,212		2,188		705		1,483		366
Construction		141		139		139		-		-
Business		2,892		2,449		279		2,170		897
Total commercial		7,998		6,425		2,620		3,805		1,339
Consumer
Real estate		4,362		4,031		3,108		923		190
Home equity		2,498		2,371		2,096		275		163
Construction		-		-		-		-		-
Other		135		135		-		135		17
Total consumer		6,995		6,537		5,204		1,333		370
Total	$	14,993		12,962		7,824		5,138		1,709

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,
	2021					2020			2019
	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	$	1,387		65		2,423		88		2,739		128
Non-owner occupied RE		3,128		182		4,217		221		4,161		255
Construction		55		-		56		6		-		-
Business		2,218		62		2,306		243		1,582		79
Total commercial		6,788		309		9,002		558		8,482		462
Consumer
Real estate		3,641		98		3,372		170		2,771		131
Home equity		1,964		85		2,128		5		853		42
Construction		-		-		-		-		-		-
Other		129		4		141		79		153		5
Total consumer		5,734		187		5,641		254		3,777		178
Total	$	12,522		496		14,643		812		12,259		640

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Allowance for Loan Losses

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


	Year ended December 31,
(dollars in thousands)	2021			2020			2019
Balance, beginning of period	$	44,149			16,642			15,762
Provision for loan losses		(12,400	)		29,600			2,300
Loan charge-offs:
Commercial
Owner occupied RE		-			(94	)		(110	)
Non-owner occupied RE		(837	)		(1,508	)		(239	)
Construction		-			-			-
Business		(1,181	)		(1,309	)		(910	)
Total commercial		(2,018	)		(2,911	)		(1,259	)
Consumer
Real estate		-			(134	)		-
Home equity		(139	)		(299	)		(174	)
Construction		-			-			-
Other		(9	)		(70	)		(82	)
Total consumer		(148	)		(503	)		(256	)
Total loan charge-offs		(2,166	)		(3,414	)		(1,515	)
Loan recoveries:
Commercial
Owner occupied RE		94			65			-
Non-owner occupied RE		263			670			2
Construction		-			-			-
Business		239			470			43
Total commercial		596			1,205			45
Consumer
Real estate		18			18			37
Home equity		201			69			2
Construction		-			-			-
Other		10			29			11
Total consumer		229			116			50
Total recoveries		825			1,321			95
Net loan charge-offs		(1,341	)		(2,093	)		(1,420	)
Balance, end of period	$	30,408			44,149			16,642

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

	Year ended December 31, 2021
(dollars in thousands)	Commercial			Consumer			Total
Balance, beginning of period	$	29,166			14,983			44,149
Provision		(7,014	)		(5,386	)		(12,400	)
Loan charge-offs		(2,018	)		(148	)		(2,166	)
Loan recoveries		596			229			825
Net loan charge-offs		(1,422	)		81			(1,341	)
Balance, end of period	$	20,730			9,678			30,408

	Year ended December 31, 2020
	Commercial			Consumer			Total
Balance, beginning of period	$	11,372			5,270			16,642
Provision		19,500			10,100			29,600
Loan charge-offs		(2,911	)		(503	)		(3,414	)
Loan recoveries		1,205			116			1,321
Net loan charge-offs		(1,706	)		(387	)		(2,093	)
Balance, end of period	$	29,166			14,983			44,149

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

	December 31, 2021
	Allowance for loan losses						Recorded investment in loans
(dollars in thousands)	Commercial		Consumer		Total		Commercial		Consumer		Total
Individually evaluated	$	623		213		836		3,435		4,728		8,163
Collectively evaluated		20,107		9,465		29,572		1,549,837		931,877		2,481,714
Total	$	20,730		9,678		30,408		1,553,272		936,605		2,489,877

	December 31, 2020
	Allowance for loan losses						Recorded investment in loans
	Commercial		Consumer		Total		Commercial		Consumer		Total
Individually evaluated	$	1,339		370		1,709		6,425		6,537		12,962
Collectively evaluated		27,827		14,613		42,440		1,381,230		748,675		2,129,905
Total	$	29,166		14,983		44,149		1,387,655		755,212		2,142,867