NOTE E - LOANS

The following is a summary of loans at December 31, 2019 and 2018:


	2019					2018
			Percent					Percent
	Amount		of total			Amount			of total
	(dollars in thousands)
Real estate loans:
1-to-4 family residential	$	151,697		14.73	%	$	159,597		16.19	%
Commercial real estate		459,115		44.58	%		457,611		46.41	%
Multi-family residential		69,124		6.71	%		63,459		6.44	%
Construction		221,878		21.55	%		170,404		17.28	%
Home equity lines of credit (“HELOC”)		44,514		4.32	%		49,713		5.04	%

Total real estate loans		946,328		91.89	%		900,784		91.36	%

Other loans:
Commercial and industrial		75,748		7.35	%		74,181		7.52	%
Loans to individuals		9,779		0.95	%		12,597		1.28	%
Overdrafts		234		0.02	%		217		0.02	%
Total other loans		85,761		8.32	%		86,995		8.82	%

Gross loans		1,032,089					987,779

Less deferred loan origination fees, net		(2,114)		(0.18)	%		(1,739)		(0.18)	%

Total loans		1,029,975		100.00	%		986,040		100.00	%

Allowance for loan losses		(8,324)					(8,669)

Total loans, net	$	1,021,651				$	977,371

Loans are primarily made in central and eastern North Carolina, southeast Virginia and northwest South Carolina. Real estate loans can be affected by the condition of the local real estate market and can be affected by the local economic conditions.

At December 31, 2019, the Company had pre-approved but unused lines and letters of credit totaling $234.2 million. In management’s opinion, these commitments, and undisbursed proceeds on loans reflected above, represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

A description of the various loan products provided by the Bank is presented below.

Residential 1‑to‑4 Family Loans

Residential 1‑to‑4 family loans are mortgage loans that typically convert from construction loans into permanent financing and are secured by properties within the Bank’s market areas.

Commercial Real Estate Loans

Commercial real estate loans are underwritten based on the borrower’s ability to generate adequate cash flow to repay the subject debt within reasonable terms. Commercial real estate loans typically include both owner and non-owner occupied properties with higher principal loan amounts and the repayment of these loans is generally dependent on the successful management of the property. Commercial real estate loans are sensitive to market and general economic conditions. Repayment analysis must be performed and consists of an identified primary/cash flow source of repayment and a secondary/liquidation source of repayment. The primary source of repayment is cash flow from income generated from rental or lease of the property. However, the cash flow can be supplemented with the borrower’s and guarantor’s global cash flow position. Other credit issues such as the business fundamentals and financial strength of the borrower/guarantor can be considered in determining adequacy of repayment ability. The secondary source of repayment is liquidation of the collateral, supplemented by liquidation cushion provided by the financial assets of the borrower/guarantor. Management monitors and evaluates commercial real estate loans based on collateral, market area, and risk grade.

Multi-family Residential Loans

Multi-family residential loans are typically nonfarm properties with 5 or more dwelling units in structures which include apartment buildings used primarily to accommodate households on a more or less permanent basis. Successful performance of these types of loans is primarily dependent on occupancy rates, rental rates, and property management.

Construction Loans

Construction loans are non-revolving extensions of credit secured by real property of which the proceeds are used to acquire and develop land and to construct commercial or residential buildings. The primary source of repayment for these types of loans is the sale of the improved property or permanent financing in which case the property is expected to generate the cash flow necessary for repayment on a permanent loan basis. Property cash flow may be supplemented with financial support from the borrowers/guarantors. Proper underwriting of a construction loan consists of the initial process of obtaining, analyzing, and approving various aspects of information pertaining to: the analysis of the permanent financing source, creditworthiness of the borrower and guarantors, ability of contractor to perform under the terms of the contract, and the feasibility, marketability, and valuation of the project.

Also, consideration is given to the cost of the project and sources of funds needed to complete construction as well as identifying any sources of equity funding. Construction loans are traditionally considered to be higher risk loans involving technical and legal requirements inherently different from other types of loans; however with thorough credit underwriting, proper loan structure, and diligent loan servicing, these risks can be mitigated. Some examples of risks inherent in this type of lending include: underestimated costs, inflation of material and labor costs, site difficulties (i.e. rock, soil), project not built to plans, weather delays and natural disasters, borrower/contractor/subcontractor disputes which prompt liens, and interest rates increasing beyond budget.

Home Equity Lines of Credit

Home equity lines of credit are consumer-purpose revolving extensions of credit which are secured by first or second liens on owner-occupied residential real estate. Appropriate risk management and compliance practices are exercised to ensure that loan-to-value, lien perfection, and compliance risks are addressed and managed within the Bank’s established guidelines. The degree of utilization of revolving commitments within this loan segment is reviewed periodically to identify changes in the behavior of this borrowing group.

Commercial and Industrial Loans

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to generate positive cash flow, operate profitably and prudently expand its business. Underwriting standards are designed to promote relationships to include a full range of loan, deposit, and cash management services. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower and the guarantors. The cash flows of the borrower, however, may not be as expected and the collateral securing these loans may fluctuate in value. In the case of loans secured by accounts receivable, the availability of funds for repayment can be impacted by the borrower’s ability to collect amounts due from its customers.

Loans to Individuals

Consumer loans are approved using Bank policies and procedures established to evaluate each credit request. All lending decisions and credit risks are clearly documented. Several factors are considered in making these decisions such as credit score, adjusted net worth, liquidity, debt ratio, disposable income, credit history, and loan-to-value of the collateral. This process, combined with the relatively smaller loan amounts, spreads the risk among many individual borrowers.

Overdrafts

Overdrafts on customer accounts are classified as loans for reporting purposes.

Non-Accrual and Past Due Loans

The following tables present as of December 31, 2019 and 2018 an age analysis of past due loans, segregated by class of loans:


	December 31, 2019
	30-59		60-89		90+		Non-		Total
	Days		Days		Days		Accrual		Past		Total
	Past Due		Past Due		Accruing		Loans		Due		Current		Loans
	(dollars in thousands)
Total loans
Commercial and industrial	$	1,108	$	34	$	46	$	2,824	$	4,012	$	71,736	$	75,748
Construction		—		—		—		181		181		221,697		221,878
Multi-family residential		—		—		—		—		—		69,124		69,124
Commercial real estate		393		82		321		1,832		2,628		456,487		459,115
Loans to individuals & overdrafts		5		—		—		155		160		9,853		10,013
1‑to‑4 family residential		859		810		864		505		3,038		148,659		151,697
HELOC		168		—		—		444		612		43,902		44,514
Deferred loan (fees) cost, net		—		—		—		—		—		—		(2,114)

	$	2,533	$	926	$	1,231	$	5,941	$	10,631	$	1,021,458	$	1,029,975

Loans- PCI
Commercial and industrial	$	—	$	—	$	46	$	—	$	46	$	1,057	$	1,103
Construction		—		—		—		—		—		677		677
Multi-family residential		—		—		—		—		—		897		897
Commercial real estate		—		—		321		—		321		5,449		5,770
Loans to individuals & overdrafts		—		—		—		—		—		—		—

1‑to‑4 family residential		—		—		864		—		864		6,354		7,218
HELOC		—		—		—		—		—		48		48

	$	—	$	—	$	1,231	$	—	$	1,231	$	14,482	$	15,713

Loans- excluding PCI
Commercial and industrial	$	1,108	$	34	$	—	$	2,824	$	3,966	$	70,679	$	74,645
Construction		—		—		—		181		181		221,020		221,201
Multi-family residential		—		—		—		—		—		68,227		68,227
Commercial real estate		393		82		—		1,832		2,307		451,038		453,345
Loans to individuals & overdrafts		5		—		—		155		160		9,853		10,013
1‑to‑4 family residential		859		810		—		505		2,174		142,305		144,479
HELOC		168		—		—		444		612		43,854		44,466
Deferred loan (fees) cost, net		—		—		—		—		—		—		(2,114)

	$	2,533	$	926	$	—	$	5,941	$	9,400	$	1,006,976	$	1,014,262

Non-Accrual and Past Due Loans


	December 31, 2018
	30-59		60-89		90+		Non-		Total
	Days		Days		Days		Accrual		Past				Total
	Past Due		Past Due		Accruing		Loans		Due		Current		Loans
	(dollars in thousands)
Total loans
Commercial and industrial	$	27	$	203	$	1,665	$	4,170	$	6,065	$	68,116	$	74,181
Construction		—		—		69		587		656		169,748		170,404
Multi-family residential		—		—		—		—		—		63,459		63,459
Commercial real estate		103		483		—		1,074		1,660		455,951		457,611
Loans to individuals & overdrafts		1		24		—		—		25		12,789		12,814
1‑to‑4 family residential		502		505		1,433		386		2,826		156,771		159,597
HELOC		—		43		—		1,040		1,083		48,630		49,713
Deferred loan (fees) cost, net		—		—		—		—		—		—		(1,739)

	$	633	$	1,258	$	3,167	$	7,257	$	12,315	$	975,464	$	986,040

Loans- PCI
Commercial and industrial	$	—	$	—	$	1,665	$	—	$	1,665	$	99	$	1,764
Construction		—		—		69		—		69		682		751
Multi-family residential		—		—		—		—		—		937		937
Commercial real estate		—		—		—		—		—		7,579		7,579
Loans to individuals & overdrafts		—		—		—		—		—		—		—
1‑to‑4 family residential		—		—		1,433		—		1,433		6,755		8,188
HELOC		—		—		—		—		—		49		49

	$	—	$	—	$	3,167	$	—	$	3,167	$	16,101	$	19,268
Loans- excluding PCI

Commercial and industrial	$	27	$	203	$	—	$	4,170	$	4,400	$	68,017	$	72,417
Construction		—		—		—		587		587		169,066		169,653
Multi-family residential		—		—		—		—		—		62,522		62,522
Commercial real estate		103		483		—		1,074		1,660		448,372		450,032
Loans to individuals & overdrafts		1		24		—		—		25		12,789		12,814
1‑to‑4 family residential		502		505		—		386		1,393		150,016		151,409
HELOC		—		43		—		1,040		1,083		48,581		49,664
Deferred loan (fees) cost, net		—		—		—		—		—		—		(1,739)

	$	633	$	1,258	$	—	$	7,257	$	9,148	$	959,363	$	966,772

There were six loans in the aggregate amount of $1.2 million greater than 90 days past due and still accruing interest at December 31, 2019 and there were seventeen loans in the aggregate amount of $3.2 million greater than 90 days past due and still accruing interest at December 31, 2018. All loans greater than 90 days past due and still accruing are acquired loans that are considered past due rather than non-accrual loans due to the accounting treatment of acquired loans. In accordance with the ASC 310‑20 guidance, if the loan pays differently than contractually required, than an adjustment to the discount premium is made in order to maintain the same effective interest rate.

Impaired Loans

The following tables present information on loans, excluding PCI loans and loans evaluated collectively as a homogenous group, that were considered to be impaired as of December 31, 2019 and December 31, 2018:


							December 31, 2019
			Contractual				Year to Date
			Unpaid		Related		Average		Interest Income
	Recorded		Principal		Allowance		Recorded		Recognized on
	Investment		Balance		for Loan Losses		Investment		Impaired Loans
	(dollars in thousands)
2019:
With no related allowance recorded:
Commercial and industrial	$	2,796	$	4,051	$	—	$	4,186	$	122
Construction		440		537		—		500		26
Commercial real estate		5,585		6,750		—		5,632		272
Loans to individuals & overdrafts		284		293		—		193		12
Multi-family residential		197		197		—		206		13
HELOC		543		678		—		793		36
1‑to‑4 family residential		395		1,816		—		1,204		86

Subtotal:		10,240		14,322		—		12,714		567
With an allowance recorded:
Commercial and industrial		731		1,056		403		572		41
Construction		—		—		—		13		—
Commercial real estate		—		—		—		—		—
Loans to individuals & overdrafts		—		—		—		—		—
Multi-family Residential		—		—		—		—		—
HELOC		160		222		—		212		10
1‑to‑4 family residential		81		94		10		563		7
Subtotal:		972		1,372		413		1,360		58
Totals:
Commercial		9,749		12,591		403		11,109		474
Consumer		284		293		-		193		12
Residential		1,179		2,810		10		2,772		139

Grand Total:	$	11,212	$	15,694	$	413	$	14,074	$	625

Impaired loans at December 31, 2019 were approximately $11.2 million and included $5.9 million in non-accrual loans and $6.2 million in loans still in accruing status. Recorded investment represents the current principal balance for the loan. Approximately $972,000 of the $11.2 million in impaired loans at December 31, 2019 had specific allowances aggregating $413,000 while the remaining $10.2 million had no specific allowances recorded. Of the $10.2 million with no allowance recorded, partial charge-offs through December 31, 2019 amounted to $4.1 million.


							December 31, 2018
			Contractual				Year to Date
			Unpaid		Related		Average		Interest Income
	Recorded		Principal		Allowance		Recorded		Recognized on
	Investment		Balance		for Loan Losses		Investment		Impaired Loans
	(dollars in thousands)
2018:
With no related allowance recorded:
Commercial and industrial	$	4,210	$	4,495	$	—	$	2,899	$	229
Construction		561		647		—		473		16
Commercial real estate		4,744		6,903		—		5,053		372
Loans to individuals & overdrafts		101		109		—		51		9
Multi-family residential		215		215		—		225		15
HELOC		1,040		1,204		—		884		50
1‑to‑4 family residential		572		732		—		1,169		79

Subtotal:		11,443		14,305		—		10,754		770
With an allowance recorded:
Commercial and industrial		127		325		51		234		13
Construction		27		27		14		13		—
Commercial real estate		—		—		—		—		—
Loans to individuals & overdrafts		—		—		—		—		—
Multi-family Residential		—		—		—		—		—
HELOC		—		—		—		—		—
1‑to‑4 family residential		137		555		22		374		23
Subtotal:		291		907		87		621		36
Totals:
Commercial		10,007		12,612		65		8,897		645
Consumer		101		109		—		51		9
Residential		1,626		2,491		22		2,427		152

Grand Total:	$	11,734	$	15,212	$	87	$	11,375	$	806

Impaired loans at December 31, 2018 were approximately $11.7 million and were comprised of $7.3 million in non-accrual loans and $4.4 million in loans still in accruing status. Recorded investment represents the current principal balance for the loan. Approximately $291,000 of the $11.7 million in impaired loans at December 31, 2018 had specific allowances aggregating $87,000 while the remaining $11.4 million had no specific allowances recorded. Of the $11.4 million with no allowance recorded, partial charge-offs through December 31, 2018 amounted to $3.5 million.

Troubled Debt Restructurings

The following tables present loans that were modified as troubled debt restructurings (“TDRs”) within the previous twelve months with a breakdown of the types of concessions made by loan class during the twelve months ended December 31, 2019 and 2018:


	Twelve Months Ended December 31, 2019
		Pre-Modification		Post-Modification
	Number	Outstanding		Outstanding
	of	Recorded		Recorded
	loans	Investments		Investments
	(dollars in thousands)
Extended payment terms:
Commercial and industrial	6	$	2,535	$	2,380
Commercial real estate	1		752		687
Construction	1		260		259
1‑to‑4 family residential	3		232		208

Total	11	$	3,779	$	3,534

As noted in the tables above, there were eleven loans that were considered TDRs during the year ended December 31, 2019, for reasons due to extended terms. These loans were renewed at terms that vary from those that the Company would enter into for new loans of this type.


	Twelve Months Ended December 31, 2018
		Pre-Modification		Post-Modification
	Number	Outstanding		Outstanding
	of	Recorded		Recorded
	loans	Investments		Investments
	(dollars in thousands)
Extended payment terms:
Commercial and industrial	6	$	1,579	$	1,517
Commercial real estate	3		1,283		895
1‑to‑4 family residential	1		409		389

Total	10	$	3,271	$	2,801

As noted in the tables above, there were ten loans that were considered TDRs during the year ended December 31, 2018, for reasons due to extended terms. These loans were renewed at terms that vary from those that the Company would enter into for new loans of this type.

The following tables present loans that were modified as TDRs within the previous twelve months for which there was a payment default together with a breakdown of the types of concessions made by loan class during the twelve months ended December 31, 2019 and 2018:


	Twelve months ended
	December 31, 2019
	Number	Recorded
	of loans	investment
	(dollars in thousands)
Extended payment terms:
Commercial and industrial	2	$	1,566

Total	2	$	1,566


	Twelve months ended
	December 31, 2018
	Number	Recorded
	of loans	investment
	(dollars in thousands)
Extended payment terms:
Commercial and industrial	4	$	1,036
Commercial real estate	1		334

Total	5	$	1,370

At December 31, 2019, the Company had forty-two loans with an aggregate balance of $9.4 million that were considered to be troubled debt restructurings. Of those TDRs, twenty-eight loans with a balance totaling $6.2 million were still accruing as of December 31, 2019. The remaining fourteen TDRs with a balance totaling $3.2 million were in non-accrual status. All TDRs are included in non-performing assets and impaired loans.

At December 31, 2018, the Company had thirty-six loans with an aggregate balance of $6.9 million that were considered to be troubled debt restructurings. Of those TDRs, twenty loans with a balance totaling $4.4 million were still accruing as of December 31, 2018. The remaining sixteen TDRs with a balance totaling $2.5 million were in non-accrual status. All TDRs are included in non-performing assets and impaired loans.

Credit Quality Indicators

As part of the on-going monitoring of the credit quality of the loan portfolio, management utilizes a risk grading matrix to assign a risk grade to each of the Company’s loans. All non-consumer loans are graded on a scale of 1 to 9. A description of the general characteristics of these nine different risk grades is as follows:

Risk Grade 1 (Superior) - Credits in this category are virtually risk-free and are well-collateralized by cash-equivalent instruments. The repayment program is well-defined and achievable. Repayment sources are numerous. No material documentation deficiencies or exceptions exist.

Risk Grade 2 (Very Good) - This grade is reserved for loans secured by readily marketable collateral, or loans within guidelines to borrowers with liquid financial statements. A liquid financial statement is a financial statement with substantial liquid assets relative to debts. These loans have excellent sources of repayment, with no significant identifiable risk of collection, and conform in all respects to Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).

Risk Grade 3 (Good) - These loans have excellent sources of repayment, with no significant identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics:

oConformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).

oDocumented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources.

oAdequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

Risk Grade 4 (Acceptable) - This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics:

oGeneral conformity to the Bank’s policy requirements, product guidelines and underwriting standards, with limited exceptions. Any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors.

oDocumented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources.

oAdequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

Risk Grade 5 (Acceptable With Care) - This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss. Loans assigned this grade may demonstrate some or all of the following characteristics:

oAdditional exceptions to the Bank’s policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank. Although the combination and/or severity of identified exceptions is greater, all exceptions have been properly mitigated by other factors.

oUnproven, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time. Repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not historic) performance.

oMarginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor.

Risk Grade 6 (Watch List or Special Mention) – Loans in this category can have the following characteristics:

oLoans with underwriting guideline tolerances and/or exceptions and with no mitigating factors.

oExtending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date. Potential weaknesses are the result of deviations from prudent lending practices.

oLoans where adverse economic conditions that develop subsequent to the loan origination that do not jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

Risk Grade 7 (Substandard) - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans consistently not meeting the repayment schedule should be downgraded to substandard. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action.

Risk Grade 8 (Doubtful) - Loans classified 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. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.

Risk Grade 9 (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 the loan even though partial recovery may be affected in the future.

Consumer loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows:

Risk Grades 1 – 5 (Pass) – The loans in this category range from loans secured by cash with no risk of principal deterioration (Risk Grade 1) to loans that show signs of weakness in either adequate sources of repayment or collateral but have demonstrated mitigating factors that minimize the risk of delinquency or loss (Risk Grade 5).

Risk Grade 6 (Watch List or Special Mention) - Watch list or Special Mention loans include the following characteristics:

oLoans within guideline tolerances or with exceptions of any kind that have not been mitigated by other economic or credit factors.

oLoans where adverse economic conditions that develop subsequent to the loan origination that don’t jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

Risk Grade 9 (Loss) - Loans classified 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 affected in the future.

The following tables present information on risk ratings of the commercial and consumer loan portfolios, segregated by loan class as of December 31, 2019 and 2018:

Total Loans:


December 31, 2019
Commercial
Credit
Exposure By	Commercial				Commercial
Internally	and				real		Multi-family
Assigned Grade	industrial		Construction		estate		residential
	(dollars in thousands)

Superior	$	4,014	$	—	$	337	$	—
Very good		349		110		1,245		—
Good		5,976		8,674		62,643		4,839
Acceptable		19,197		16,249		255,751		41,113
Acceptable with care		40,579		196,228		133,190		23,172
Special mention		242		436		1,490		—
Substandard		5,391		181		4,459		—
Doubtful		—		—		—		—
Loss		—		—		—		—
	$	75,748	$	221,878	$	459,115	$	69,124


Consumer Credit
Exposure By
Internally	1‑to‑4 family
Assigned Grade	residential		HELOC

Pass	$	147,958	$	43,585
Special mention		1,246		76
Substandard		2,493		853
	$	151,697	$	44,514


Consumer Credit
Exposure Based	Loans to
On Payment	individuals &
Activity	overdrafts

Pass	$	9,727
Special mention		286
	$	10,013

Total Loans:


December 31, 2018
Commercial
Credit
Exposure By	Commercial			Commercial
Internally	and		real				Multi-family
Assigned Grade	industrial		Construction		estate		residential
	(dollars in thousands)

Superior	$	1,662	$	—	$	21	$	—
Very good		2,266		246		1,120		—
Good		5,773		12,106		47,959		5,116
Acceptable		22,332		30,897		263,017		37,832
Acceptable with care		34,626		125,788		139,484		20,296
Special mention		879		711		1,789		—
Substandard		6,643		656		4,221		215
Doubtful		—		—		—		—
Loss		—		—		—		—
	$	74,181	$	170,404	$	457,611	$	63,459


Consumer Credit
Exposure By
Internally		1‑to‑4 family
Assigned Grade	residential		HELOC

Pass	$	155,117	$	48,143
Special mention		900		88
Substandard		3,580		1,482
	$	159,597	$	49,713


Consumer Credit
Exposure Based	Loans to
On Payment		individuals &
Activity	overdrafts

Pass	$	10,891
Special mention		1,923
	$	12,814

The process of determining the allowance for loan losses is driven by the risk grade system and the loss experience on non-risk graded homogeneous types of loans. The Bank’s allowance for loan losses is calculated and determined, at a minimum, each fiscal quarter end. The allowance for loan losses represents management’s estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio. In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to a review of individual loans, historical loan loss experience, the value and adequacy of collateral and economic conditions in the Bank’s market areas. For loans determined to be impaired, the impairment is based on discounted expected cash flows using the loan’s initial effective interest rate or the fair value of the collateral (less selling costs) for certain collateral dependent loans. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize changes to the allowance based on their judgments about information available to them at the time of their examinations. Loans are charged off when in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against the allowance, and subsequent recoveries are added to the allowance. The Credit Management Committee of the Board of Directors has responsibility for oversight.

Management believes the allowance for loan losses of $8.3 million at December 31, 2019 is adequate to provide for inherent losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires continuous evaluation and considerable judgment. Management’s judgments are based on numerous assumptions about current events which it believes to be reasonable, but which may or may not be valid. Thus, there can be no assurance that credit losses in future periods will not exceed the current allowance or that future increases in the allowance will not be required. No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting future operating results of the Bank.

For PCI loans acquired from Legacy Select and Premara, the contractually required payments including principal and interest, cash flows expected to be collected and fair values as of the closing date of the merger and December 31, 2019 and 2018 were:


	December 31,		December 31,
	2019		2018
	(dollars in thousands)
Contractually required payments	$	20,598	$	24,823
Nonaccretable difference		1,694		1,962
Cash flows expected to be collected		18,904		22,861
Accretable yield		3,191		3,593
Fair value	$	15,713	$	19,268

The following table documents changes to the amount of the PCI accretable yield as of December 31, 2019 and 2018:


	2019		2018
	(dollars in thousands)

Accretable yield, beginning of period	$	3,593	$	3,307
Additions		—		—
Accretion		(904)		(1,541)
Reclassification from nonaccretable difference		360		576
Other changes, net		142		1,251

Accretable yield, end of period	$	3,191	$	3,593

Allowance for Loan Losses

The allowance for loan losses is a reserve established through provisions for loan losses charged to income and represents management’s best estimate of probable loan losses inherent within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated losses and risk inherent in the loan portfolio. The Company’s allowance for loan loss methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of reserves is designed to account for changes in credit quality as they occur. The provision for loan losses reflects loan quality trends, including the levels of, and trends related to, past due loans and economic conditions at the local and national levels. It also considers the quality and risk characteristics of the Company’s loan origination and servicing policies and practices.

Individual reserves are calculated according to ASC Section 310‑10‑35 against loans evaluated individually and deemed to most likely be impaired. Impaired loans include all loans in non-accrual status, all troubled debt restructures, all substandard loans that are deemed to be collateral dependent, and other loans that management determines require reserves.

The Company’s allowance for loan losses model calculates historical loss rates using a loss migration analysis associating losses to the risk-graded pool to which they relate for each of the previous twelve quarters. Then, using a twelve quarter look back period, loss factors are calculated for each risk-graded pool.

The model incorporates various internal and external qualitative and environmental factors as described in the Interagency Policy Statement on the Allowance for Loan and Lease Losses, dated December 2006. Input for these factors is determined on the basis of management observation, judgment, and experience. The factors utilized by the Company are as follows:

Internal Factors

Concentrations – Measures the increased risk derived from concentration of credit exposure in particular industry segments within the portfolio.

Policy exceptions – Measures the risk derived from granting terms outside of underwriting guidelines.

Compliance exceptions– Measures the risk derived from granting terms outside of regulatory guidelines.

Document exceptions– Measures the risk exposure resulting from the inability to collect due to improperly executed documents and collateral imperfections.

Financial information monitoring – Measures the risk associated with not having current borrower financial information.

Nonaccrual – Reflects increased risk of loans with characteristics that merit nonaccrual status.

Delinquency – Reflects the increased risk deriving from higher delinquency rates.

Personnel turnover – Reflects staff competence in various types of lending.

Portfolio growth – Measures the impact of growth and potential risk derived from new loan production.

External Factors

GDP growth rate – Impact of general economic factors that affect the portfolio.

North Carolina unemployment rate – Impact of local economic factors that affect the portfolio.

South Carolina unemployment rate – Impact of local economic factors that affect the portfolio.

Peer group delinquency rate – Measures risk associated with the credit requirements of competitors.

Prime rate change – Measures the effect on the portfolio in the event of changes in the prime lending rate.

Each pool is assigned an adjustment to the potential loss percentage by assessing its characteristics against each of the factors listed above.

Reserves are generally divided into three allocation segments:

Individual reserves. These are calculated according to ASC Section 310‑10‑35 against loans evaluated individually and deemed to most likely be impaired. All loans in non-accrual status and all substandard loans that are deemed to be collateral dependent are assessed for impairment. Loans are deemed uncollectible based on a variety of credit, collateral, documentation and other issues. In the case of uncollectible receivables, the collateral is considered unsecured and therefore fully charged off.

Formula reserves. Formula reserves are held against loans evaluated collectively. Loans are grouped by type or by risk grade, or some combination of the two. Loss estimates are based on historical loss rates for each respective loan group. Formula reserves represent the Company’s best estimate of losses that may be inherent, or embedded, within the group of loans, even if it is not apparent at this time which loans within any group or pool represent those embedded losses.

Qualitative and external reserves. If individual reserves represent estimated losses tied to specific loans, and formula reserves represent estimated losses tied to a pool of loans but not yet to any specific loan, then these reserves represent an estimate of losses that are likely to be incurred, but are not yet tied to any loan or group of loans.

All information related to the calculation of the three segments, including data analysis, assumptions, and calculations are documented. Assigning specific individual reserve amounts, formula reserve factors, or unallocated amounts based on unsupported assumptions or conclusions is not permitted.

The following tables present a roll forward of the Company’s allowance for loan losses by loan segment for the twelve-month periods ended December 31, 2019, 2018 and 2017, respectively (in thousands):

2019


	Commercial						1 to 4				Loans to		Multi-
	and				Commercial		family				individuals &		family
Allowance for loan losses	industrial		Construction		real estate		residential		HELOC		overdrafts		residential		Total

Loans – excluding PCI
Balance, beginning of period 01/01/2019	$	762	$	1,385	$	3,024	$	1,663	$	555	$	206	$	471	$	8,066
Provision for loan losses		1,143		328		(371)		(259)		(169)		152		(52)		772
Loans charged-off		(790)		—		(10)		—		(150)		(206)		—		(1,156)
Recoveries		12		18		194		33		93		23		—		373
Balance, end of period 12/31/2019	$	1,127	$	1,731	$	2,837	$	1,437	$	329	$	175	$	419	$	8,055

PCI Loans
Balance, beginning of period 01/01/2019	$	214	$	—	$	385	$	4	$	—	$	—	$	—	$	603
Provision for loan losses		(36)		6		(371)		52		—		—		15		(334)
Loans charged-off		—		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		—		—		—
Balance, end of period 12/31/2019	$	178	$	6	$	14	$	56	$	—	$	—	$	15	$	269

Total Loans
Balance, beginning of period 01/01/2019	$	976	$	1,385	$	3,409	$	1,667	$	555	$	206	$	471	$	8,669
Provision for loan losses		1,107		334		(742)		(207)		(169)		152		(37)		438
Loans charged-off		(790)		—		(10)		—		(150)		(206)		—		(1,156)
Recoveries		12		18		194		33		93		23		—		373
Balance, end of period 12/31/2019	$	1,305	$	1,737	$	2,851	$	1,493	$	329	$	175	$	434	$	8,324

Ending Balance: individually evaluated for impairment	$	403	$	—	$	—	$	10	$	—	$	—	$	—	$	413
Ending Balance: collectively evaluated for impairment	$	902	$	1,737	$	2,851	$	1,483	$	329	$	175	$	434	$	7,911

Loans:
Ending Balance: collectively evaluated for impairment non PCI loans	$	71,118	$	220,761	$	447,760	$	144,003	$	43,763	$	9,729	$	68,030	$	1,005,164
Ending Balance: collectively evaluated for impairment PCI loans	$	1,103	$	677	$	5,770	$	7,218	$	48	$	—	$	897	$	15,713
Ending Balance: individually evaluated for impairment	$	3,527	$	440	$	5,585	$	476	$	703	$	284	$	197	$	11,212
Ending Balance	$	75,748	$	221,878	$	459,115	$	151,697	$	44,514	$	10,013	$	69,124	$	1,032,089

2018


	Commercial						1 to 4				Loans to		Multi-
	and				Commercial		family				individuals &		family
Allowance for loan losses	industrial		Construction		real estate		residential		HELOC		overdrafts		residential		Total

Loans – excluding PCI
Balance, beginning of period 01/01/2018	$	742	$	1,955	$	3,304	$	1,058	$	549	$	305	$	791	$	8,704
Provision for loan losses		(23)		(576)		(326)		585		31		1		(320)		(628)
Loans charged-off		(196)		—		(2)		(12)		(68)		(191)		—		(469)
Recoveries		239		6		48		32		43		91		—		459
Balance, end of period 12/31/2018	$	762	$	1,385	$	3,024	$	1,663	$	555	$	206	$	471	$	8,066

PCI Loans
Balance, beginning of period 01/01/2018	$	65	$	—	$	66	$	—	$	—	$	—	$	—	$	131
Provision for loan losses		149		—		319		4		—		—		—		472
Loans charged-off		—		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		—		—		—
Balance, end of period 12/31/2018	$	214	$	—	$	385	$	4	$	—	$	—	$	—	$	603

Total Loans
Balance, beginning of period 01/01/2018	$	807	$	1,955	$	3,370	$	1,058	$	549	$	305	$	791	$	8,835
Provision for loan losses		126		(576)		(7)		589		31		1		(320)		(156)
Loans charged-off		(196)		—		(2)		(12)		(68)		(191)		—		(469)
Recoveries		239		6		48		32		43		91		—		459
Balance, end of period 12/31/2018	$	976	$	1,385	$	3,409	$	1,667	$	555	$	206	$	471	$	8,669

Ending Balance: individually evaluated for impairment	$	51	$	14	$	—	$	22	$	—	$	—	$	—	$	87
Ending Balance: collectively evaluated for impairment	$	925	$	1,371	$	3,409	$	1,645	$	555	$	206	$	471	$	8,582

Loans:
Ending Balance: collectively evaluated for impairment non PCI loans	$	68,891	$	169,065	$	444,354	$	150,700	$	48,747	$	12,713	$	62,307	$	956,777
Ending Balance: collectively evaluated for impairment PCI loans	$	1,764	$	751	$	7,579	$	8,188	$	49	$	—	$	937	$	19,268
Ending Balance: individually evaluated for impairment	$	3,526	$	588	$	5,678	$	709	$	917	$	101	$	215	$	11,734

Ending Balance	$	74,181	$	170,404	$	457,611	$	159,597	$	49,713	$	12,814	$	63,459	$	987,779

2017


	Commercial						1 to 4				Loans to		Multi-
	and				Commercial		family				individuals &		family
Allowance for loan losses	industrial		Construction		real estate		residential		HELOC		overdrafts		residential		Total

Loans – excluding PCI
Balance, beginning of period 01/01/2017	$	1,211	$	1,301	$	3,448	$	846	$	611	$	317	$	628	$	8,362
Provision for loan losses		(607)		642		754		188		92		55		161		1,285
Loans charged-off		(73)		(17)		(914)		(22)		(179)		(101)		—		(1,306)
Recoveries		211		29		16		46		25		34		2		363
Balance, end of period 12/31/2017	$	742	$	1,955	$	3,304	$	1,058	$	549	$	305	$	791	$	8,704

PCI Loans
Balance, beginning of period 01/01/2017	$	37	$	—	$	—	$	—	$	12	$	—	$	—	$	49
Provision for loan losses		28		—		66		—		(12)		—		—		82
Loans charged-off		—		—		—		—		—		—		—		—
Recoveries		—		—		—		—		—		—		—		—
Balance, end of period 12/31/2017	$	65	$	—	$	66	$	—	$	—	$	—	$	—	$	131

Total Loans
Balance, beginning of period 01/01/2017	$	1,248	$	1,301	$	3,448	$	846	$	623	$	317	$	628	$	8,411
Provision for loan losses		(579)		642		820		188		80		55		161		1,367
Loans charged-off		(73)		(17)		(914)		(22)		(179)		(101)		—		(1,306)
Recoveries		211		29		16		46		25		34		2		363
Balance, end of period 12/31/2017	$	807	$	1,955	$	3,370	$	1,058	$	549	$	305	$	791	$	8,835

Ending Balance: individually evaluated for impairment	$	50	$	—	$	—	$	11	$	—	$	—	$	—	$	61
Ending Balance: collectively evaluated for impairment	$	757	$	1,955	$	3,370	$	1,047	$	549	$	305	$	791	$	8,774

Loans:
Ending Balance: collectively evaluated for impairment non PCI loans	$	102,148	$	176,479	$	389,617	$	146,504	$	51,958	$	10,176	$	75,777	$	952,659
Ending Balance: collectively evaluated for impairment PCI loans	$	2,933	$	1,069	$	9,056	$	9,119	$	46	$	67	$	971	$	23,261
Ending Balance: individually evaluated for impairment	$	1,083	$	385	$	4,427	$	1,278	$	602	$	1	$	235	$	8,011

Ending Balance	$	106,164	$	177,933	$	403,100	$	156,901	$	52,606	$	10,244	$	76,983	$	983,931