Loans and Asset Quality Information | Note 7 – Loans and Asset Quality Information The following is a summary of the major categories of total loans outstanding: ($ in thousands) March 31, 2019 December 31, 2018 March 31, 2018 Amount Percentage Amount Percentage Amount Percentage All loans: Commercial, financial, and agricultural $ 468,388 11% $ 457,037 11% $ 411,662 10% Real estate – construction, land development & other land loans 553,760 13% 518,976 12% 542,960 13% Real estate – mortgage – residential (1-4 family) first mortgages 1,061,049 25% 1,054,176 25% 995,662 24% Real estate – mortgage – home equity loans / lines of credit 354,669 8% 359,162 8% 373,797 9% Real estate – mortgage – commercial and other 1,794,794 42% 1,787,022 42% 1,718,698 42% Installment loans to individuals 69,503 1% 71,392 2% 71,257 2% Subtotal 4,302,163 100% 4,247,765 100% 4,114,036 100% Unamortized net deferred loan costs (fees) 1,624 1,299 (251 ) Total loans $ 4,303,787 $ 4,249,064 $ 4,113,785 At March 31, 2019 and December 31, 2018, there was a remaining unaccreted discount on the retained portion of sold SBA loans amounting to $6.2 million and $5.7 million, respectively. As of March 31, 2019 and December 31, 2018, there was a remaining accretable discount of $14.1 million and $15.0 million, respectively, related to purchased non-impaired loans. Both types of discounts are amortized as yield adjustments over the respective lives of the loans, so long as the loans perform. The following table presents changes in the recorded investment of purchased credit impaired (“PCI”) loans. ($ in thousands) PCI loans For the For the Year For the Balance at beginning of period $ 17,393 23,165 23,165 Change due to payments received and accretion (1,556 ) (5,799 ) (1,023 ) Change due to loan charge-offs (8 ) (10 ) — Transfers to foreclosed real estate — (4 ) — Other 38 41 5 Balance at end of period $ 15,867 17,393 22,147 The following table presents changes in the accretable yield for PCI loans. ($ in thousands) Accretable Yield for PCI loans For the For the Year For the Balance at beginning of period $ 4,750 4,688 4,688 Accretion (392 ) (2,050 ) (374 ) Reclassification from (to) nonaccretable difference 237 849 155 Other, net 550 1,263 (73 ) Balance at end of period $ 5,145 4,750 4,396 During the first three months of 2019, the Company received $133,000 in payments that exceeded the carrying amount of the related PCI loans, of which $112,000 was recognized as loan discount accretion income and $21,000 was recorded as additional loan interest income. During the first three months of 2018, the Company received $68,000 in payments that exceeded the carrying amount of the related PCI loans, all of which was recognized as loan discount accretion income. Nonperforming assets are defined as nonaccrual loans, troubled debt restructured (“TDR”) loans, loans past due 90 or more days and still accruing interest, and foreclosed real estate. Nonperforming assets are summarized as follows. ($ in thousands) March 31, December 31, March 31, Nonperforming assets Nonaccrual loans $ 20,684 22,575 21,849 TDRs- accruing 12,457 13,418 18,495 Accruing loans > 90 days past due — — — Total nonperforming loans 33,141 35,993 40,344 Foreclosed real estate 6,390 7,440 11,307 Total nonperforming assets $ 39,531 43,433 51,651 Purchased credit impaired loans not included above (1) $ 15,867 17,393 22,147 (1) In the March 3, 2017 acquisition of Carolina Bank, and the October 1, 2017 acquisition of Asheville Savings Bank, the Company acquired $19.3 million and $9.9 million, respectively, in PCI loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from nonperforming loans, including $0.6 million, $0.6 million, and $0.5 million in PCI loans at March 31, 2019, December 31, 2018, and March 31, 2018, respectively, that were contractually past due 90 days or more. At March 31, 2019 and December 31, 2018, the Company had $1.5 million and $0.7 million in residential mortgage loans in process of foreclosure, respectively. The following is a summary of the Company’s nonaccrual loans by major categories. ($ in thousands) March 31, December 31, Commercial, financial, and agricultural $ 980 919 Real estate – construction, land development & other land loans 1,677 2,265 Real estate – mortgage – residential (1-4 family) first mortgages 9,958 10,115 Real estate – mortgage – home equity loans / lines of credit 1,632 1,685 Real estate – mortgage – commercial and other 6,280 7,452 Installment loans to individuals 157 139 Total $ 20,684 22,575 The following table presents an analysis of the payment status of the Company’s loans as of March 31, 2019. ($ in thousands) Accruing Accruing Accruing Nonaccrual Accruing Total Loans Commercial, financial, and agricultural $ 817 319 — 980 466,067 468,183 Real estate – construction, land development & other land loans 369 93 — 1,677 551,446 553,585 Real estate – mortgage – residential (1-4 family) first mortgages 6,480 485 — 9,958 1,038,072 1,054,995 Real estate – mortgage – home equity loans / lines of credit 624 — — 1,632 352,081 354,337 Real estate – mortgage – commercial and other 438 275 — 6,280 1,778,884 1,785,877 Installment loans to individuals 526 51 — 157 68,585 69,319 Purchased credit impaired 340 389 551 — 14,587 15,867 Total $ 9,594 1,612 551 20,684 4,269,722 4,302,163 Unamortized net deferred loan costs 1,624 Total loans $ 4,303,787 The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2018. ($ in thousands) Accruing Accruing Accruing Nonaccrual Accruing Total Loans Commercial, financial, and agricultural $ 191 5 — 919 455,692 456,807 Real estate – construction, land development & other land loans 849 212 — 2,265 515,472 518,798 Real estate – mortgage – residential (1-4 family) first mortgages 14,178 1,369 — 10,115 1,022,261 1,047,923 Real estate – mortgage – home equity loans / lines of credit 1,048 254 — 1,685 355,831 358,818 Real estate – mortgage – commercial and other 709 520 — 7,452 1,768,205 1,776,886 Installment loans to individuals 359 220 — 139 70,422 71,140 Purchased credit impaired 990 138 583 — 15,682 17,393 Total $ 18,324 2,718 583 22,575 4,203,565 4,247,765 Unamortized net deferred loan costs 1,299 Total loans $ 4,249,064 The following table presents the activity in the allowance for loan losses for all loans for the three months ended March 31, 2019. ($ in thousands) Commercial, Real Estate Real Estate Real Estate Real Estate Installment Unallo Total As of and for the three months ended March 31, 2019 Beginning balance $ 2,889 2,243 5,197 1,665 7,983 952 110 21,039 Charge-offs (246 ) (264 ) (30 ) (80 ) (836 ) (281 ) — (1,737 ) Recoveries 414 287 160 128 271 33 — 1,293 Provisions 652 18 (817 ) (339 ) 702 302 (18 ) 500 Ending balance $ 3,709 2,284 4,510 1,374 8,120 1,006 92 21,095 Ending balances as of March 31, 2019: Allowance for loan losses Individually evaluated for impairment $ 857 28 858 — 312 — — 2,055 Collectively evaluated for impairment $ 2,852 2,256 3,596 1,362 7,723 990 92 18,871 Purchased credit impaired $ — — 56 12 85 16 — 169 Loans receivable as of March 31, 2019: Ending balance – total $ 468,388 553,760 1,061,049 354,669 1,794,794 69,503 — 4,302,163 Unamortized net deferred loan costs 1,624 Total loans $ 4,303,787 Ending balances as of March 31, 2019: Loans Individually evaluated for impairment $ 1,044 797 10,891 21 8,396 — — 21,149 Collectively evaluated for impairment $ 467,139 552,788 1,044,104 354,316 1,777,481 69,319 — 4,265,147 Purchased credit impaired $ 205 175 6,054 332 8,917 184 — 15,867 The following table presents the activity in the allowance for loan losses for the year ended December 31, 2018. ($ in thousands) Commercial, Real Estate Real Estate Real Estate Real Estate Installment Unallo Total As of and for the year ended December 31, 2018 Beginning balance $ 3,111 2,816 6,147 1,827 6,475 950 1,972 23,298 Charge-offs (2,128 ) (158 ) (1,734 ) (711 ) (1,459 ) (781 ) — (6,971 ) Recoveries 1,195 4,097 833 364 1,503 309 — 8,301 Provisions 711 (4,512 ) (49 ) 185 1,464 474 (1,862 ) (3,589 ) Ending balance $ 2,889 2,243 5,197 1,665 7,983 952 110 21,039 Ending balances as of December 31, 2018: Allowance for loan losses Individually evaluated for impairment $ 226 134 955 48 906 — — 2,269 Collectively evaluated for impairment $ 2,661 2,109 4,143 1,608 7,070 941 110 18,642 Purchased credit impaired $ 2 — 99 9 7 11 — 128 Loans receivable as of December 31, 2018: Ending balance – total $ 457,037 518,976 1,054,176 359,162 1,787,022 71,392 — 4,247,765 Unamortized net deferred loan costs 1,299 Total loans $ 4,249,064 Ending balances as of December 31, 2018: Loans Individually evaluated for impairment $ 696 1,345 12,391 296 9,525 — — 24,253 Collectively evaluated for impairment $ 456,111 517,453 1,035,532 358,522 1,767,361 71,140 — 4,206,119 Purchased credit impaired $ 230 178 6,253 344 10,136 252 — 17,393 The following table presents the activity in the allowance for loan losses for all loans for the three months ended March 31, 2018. ($ in thousands) Commercial, Real Estate Real Estate Real Estate Real Estate Installment Unallo Total As of and for the three months ended March 31, 2018 Beginning balance $ 3,111 2,816 6,147 1,827 6,475 950 1,972 23,298 Charge-offs (239 ) (2 ) (243 ) (176 ) (41 ) (118 ) — (819 ) Recoveries 499 3,046 145 153 582 53 — 4,478 Provisions (835 ) (3,543 ) (157 ) 462 (1,025 ) (41 ) 1,480 (3,659 ) Ending balance $ 2,536 2,317 5,892 2,266 5,991 844 3,452 23,298 Ending balances as of March 31, 2018: Allowance for loan losses Individually evaluated for impairment $ 143 22 1,120 — 398 — — 1,683 Collectively evaluated for impairment $ 2,391 2,295 4,598 2,225 5,581 844 3,452 21,386 Purchased credit impaired $ 2 — 174 41 12 — — 229 Loans receivable as of March 31, 2018: Ending balance – total $ 411,662 542,960 995,662 373,797 1,718,698 71,257 — 4,114,036 Unamortized net deferred loan fees (251 ) Total loans $ 4,113,785 Ending balances as of March 31, 2018: Loans Individually evaluated for impairment $ 433 3,242 13,783 23 9,063 — — 26,544 Collectively evaluated for impairment $ 410,816 539,317 973,550 373,501 1,697,319 70,842 — 4,065,345 Purchased credit impaired $ 413 401 8,329 273 12,316 415 — 22,147 The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of March 31, 2019. ($ in thousands) Recorded Unpaid Related Average Impaired loans with no related allowance recorded: Commercial, financial, and agricultural $ 28 29 — 169 Real estate – mortgage – construction, land development & other land loans 458 782 — 472 Real estate – mortgage – residential (1-4 family) first mortgages 4,789 5,112 — 4,708 Real estate – mortgage –home equity loans / lines of credit 21 30 — 21 Real estate – mortgage –commercial and other 4,016 4,808 — 3,745 Installment loans to individuals — — — — Total impaired loans with no allowance $ 9,312 10,761 — 9,115 Impaired loans with an allowance recorded: Commercial, financial, and agricultural $ 1,016 1,016 857 701 Real estate – mortgage – construction, land development & other land loans 339 339 28 599 Real estate – mortgage – residential (1-4 family) first mortgages 6,102 6,303 858 6,934 Real estate – mortgage –home equity loans / lines of credit — — — 137 Real estate – mortgage –commercial and other 4,380 4,998 312 5,215 Installment loans to individuals — — — — Total impaired loans with allowance $ 11,837 12,655 2,055 13,586 Interest income recorded on impaired loans during the three months ended March 31, 2019 was insignificant. The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of December 31, 2018. ($ in thousands) Recorded Unpaid Related Average Impaired loans with no related allowance recorded: Commercial, financial, and agricultural $ 310 310 — 957 Real estate – mortgage – construction, land development & other land loans 485 803 — 2,366 Real estate – mortgage – residential (1-4 family) first mortgages 4,626 4,948 — 4,804 Real estate – mortgage –home equity loans / lines of credit 22 31 — 91 Real estate – mortgage –commercial and other 3,475 4,237 — 3,670 Installment loans to individuals — — — — Total impaired loans with no allowance $ 8,918 10,329 — 11,888 Impaired loans with an allowance recorded: Commercial, financial, and agricultural $ 386 387 226 422 Real estate – mortgage – construction, land development & other land loans 860 864 134 385 Real estate – mortgage – residential (1-4 family) first mortgages 7,765 7,904 955 8,963 Real estate – mortgage –home equity loans / lines of credit 274 275 48 184 Real estate – mortgage –commercial and other 6,050 6,054 906 5,911 Installment loans to individuals — — — 2 Total impaired loans with allowance $ 15,335 15,484 2,269 15,867 Interest income recorded on impaired loans during the year ended December 31, 2018 was insignificant. Interest income recorded on impaired loans during the three months ended March 31, 2018 was insignificant. The Company tracks credit quality based on its internal risk ratings. Upon origination, a loan is assigned an initial risk grade, which is generally based on several factors such as the borrower’s credit score, the loan-to-value ratio, the debt-to-income ratio, etc. Loans that are risk-graded as substandard during the origination process are declined. After loans are initially graded, they are monitored regularly for credit quality based on many factors, such as payment history, the borrower’s financial status, and changes in collateral value. Loans can be downgraded or upgraded depending on management’s evaluation of these factors. Internal risk-grading policies are consistent throughout each loan type. The following describes the Company’s internal risk grades in ascending order of likelihood of loss: Risk Grade Description Pass: 1 Loans with virtually no risk, including cash secured loans. 2 Loans with documented significant overall financial strength. These loans have minimum chance of loss due to the presence of multiple sources of repayment – each clearly sufficient to satisfy the obligation. 3 Loans with documented satisfactory overall financial strength. These loans have a low loss potential due to presence of at least two clearly identified sources of repayment – each of which is sufficient to satisfy the obligation under the present circumstances. 4 Loans to borrowers with acceptable financial condition. These loans could have signs of minor operational weaknesses, lack of adequate financial information, or loans supported by collateral with questionable value or marketability. 5 Loans that represent above average risk due to minor weaknesses and warrant closer scrutiny by management. Collateral is generally required and felt to provide reasonable coverage with realizable liquidation values in normal circumstances. Repayment performance is satisfactory. P (Pass) Consumer loans (<$500,000) that are of satisfactory credit quality with borrowers who exhibit good personal credit history, average personal financial strength and moderate debt levels. These loans generally conform to Bank policy, but may include approved mitigated exceptions to the guidelines. Special Mention: 6 Existing loans with defined weaknesses in primary source of repayment that, if not corrected, could cause a loss to the Bank. Classified: 7 An existing loan inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. 8 Loans that have a well-defined weakness that make the collection or liquidation in full highly questionable and improbable. Loss appears imminent, but the exact amount and timing is uncertain. 9 Loans that are considered uncollectible and are in the process of being charged-off. This grade is a temporary grade assigned for administrative purposes until the charge-off is completed. F (Fail) Consumer loans (<$500,000) with a well-defined weakness, such as exceptions of any kind with no mitigating factors, history of paying outside the terms of the note, insufficient income to support the current level of debt, etc. The following table presents the Company’s recorded investment in loans by credit quality indicators as of March 31, 2019. ($ in thousands) Pass Special Classified Classified Total Commercial, financial, and agricultural $ 460,963 4,667 1,573 980 468,183 Real estate – construction, land development & other land loans 544,496 5,960 1,452 1,677 553,585 Real estate – mortgage – residential (1-4 family) first mortgages 1,009,860 16,271 18,905 9,958 1,054,994 Real estate – mortgage – home equity loans / lines of credit 345,187 1,466 6,052 1,632 354,337 Real estate – mortgage – commercial and other 1,752,757 18,664 8,177 6,280 1,785,878 Installment loans to individuals 68,606 227 329 157 69,319 Purchased credit impaired 8,148 4,025 3,694 — 15,867 Total $ 4,190,017 51,280 40,182 20,684 4,302,163 Unamortized net deferred loan costs 1,624 Total loans 4,303,787 The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2018. ($ in thousands) Pass Special Classified Classified Total Commercial, financial, and agricultural $ 452,372 3,056 459 919 456,806 Real estate – construction, land development & other land loans 509,251 5,668 1,614 2,265 518,798 Real estate – mortgage – residential (1-4 family) first mortgages 1,004,458 12,238 21,113 10,115 1,047,924 Real estate – mortgage – home equity loans / lines of credit 348,792 1,688 6,653 1,685 358,818 Real estate – mortgage – commercial and other 1,750,810 14,484 4,140 7,452 1,776,886 Installment loans to individuals 70,357 231 413 139 71,140 Purchased credit impaired 8,355 5,214 3,824 — 17,393 Total $ 4,144,395 42,579 38,216 22,575 4,247,765 Unamortized net deferred loan costs 1,299 Total loans 4,249,064 Troubled Debt Restructurings The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. The vast majority of the Company’s troubled debt restructurings are due to interest rate reductions combined with restructured amortization schedules. The Company does not generally grant principal forgiveness. All loans classified as troubled debt restructurings are considered to be impaired and are evaluated as such for determination of the allowance for loan losses. The Company’s troubled debt restructurings can be classified as either nonaccrual or accruing based on the loan’s payment status. The troubled debt restructurings that are nonaccrual are reported within the nonaccrual loan totals presented previously. The following table presents information related to loans modified in a troubled debt restructuring during the three months ended March 31, 2019 and 2018. ($ in thousands) For three months ended For the three months ended Number of Pre- Post- Number of Pre- Post- TDRs – Accruing Commercial, financial, and agricultural — $ — $ — — $ — $ — Real estate – construction, land development & other land loans — — — — — — Real estate – mortgage – residential (1-4 family) first mortgages 1 55 55 — — — Real estate – mortgage – home equity loans / lines of credit — — — — — — Real estate – mortgage – commercial and other — — — — — — Installment loans to individuals — — — — — — TDRs – Nonaccrual Commercial, financial, and agricultural — — — — — — Real estate – construction, land development & other land loans — — — 1 61 61 Real estate – mortgage – residential (1-4 family) first mortgages — — — 2 254 264 Real estate – mortgage – home equity loans / lines of credit — — — — — — Real estate – mortgage – commercial and other — — — — — — Installment loans to individuals — — — — — — Total TDRs arising during period 1 $ 55 $ 55 3 $ 315 $ 325 Accruing restructured loans that were modified in the previous 12 months and that defaulted during the three months ended March 31, 2019 and 2018 are presented in the table below. The Company considers a loan to have defaulted when it becomes 90 or more days delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to foreclosed real estate. ($ in thousands) For the three months ended For the three months ended Number of Recorded Number of Recorded Accruing TDRs that subsequently defaulted Real estate – mortgage – residential (1-4 family first mortgages) 1 $ 93 — $ — Real estate – mortgage – commercial and other — — 1 570 Total accruing TDRs that subsequently defaulted 1 $ 93 1 $ 570 |