Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2012

Loans and Allowance For Loan Losses [Abstract]

Loans and Allowance for Loan Losses

NOTE 3 – 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 Low Country regions of South Carolina. 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 Greenville, Columbia, and Charleston including doctors, dentists, and small business owners. The principal component of the loan portfolio is loans secured by real estate mortgages which account for 80.9% of total loans at December 31, 2012. Commercial loans comprise 65.9% of total real estate loans and consumer loans account for 34.1%. Commercial loans are further categorized into owner occupied which represents 24.6% of total loans and non-owner occupied of 25.6%. Commercial construction loans represent only 3.1% 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. As of December 31, 2012, approximately $70.8 million, or 11.0% of our loans had loan-to-value ratios which exceeded regulatory supervisory limits, of which 59 loans totaling approximately $20.7 million had loan-to-value ratios of 100% or more. 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 collectively for groups of smaller loans with similar characteristics and individually for larger impaired loans. Our allowance levels are influenced by loan volumes, loan grade migration 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. We apply historic grade-specific loss factors to each funded loan. In the development of our statistically derived loan grade loss factors, we observe historical losses over the most recent eight 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, we determine the allowance on a collective basis utilizing forecasted losses to represent our best estimate of inherent loss. We pool loans, generally by product types with similar risk characteristics. In addition, we establish an allowance for consumer loans that have been modified in a TDR, whether on accrual or nonaccrual status.

The following table summarizes the composition of our loan portfolio.

	December 31,
(dollars in thousands)	2012			2011
Commercial
Owner occupied	$	158,790			149,254
Non-owner occupied		165,163			164,623
Construction		20,347			17,841
Business		114,169			111,831
Total commercial loans		458,469			443,549
Consumer
Residential		86,559			57,798
Home equity		77,895			82,664
Construction		13,749			5,546
Other		9,277			9,077
Total consumer loans		187,480			155,085
Total gross loans, net of deferred fees		645,949			598,634
Less – allowance for loan losses		(9,091	)		(8,925	)
Total loans, net	$	636,858			589,709

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

	December 31,
(dollars in thousands)	2012		2011
Variable rate loans	$	219,462		249,840
Fixed rate loans		426,487		348,794
	$	645,949		598,634

At December 31, 2012, approximately $136.1 million of the Company’s mortgage loans were pledged as collateral for advances from the FHLB, as set forth in Note 8.

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 categories include Pass, Special Mention, Substandard, Doubtful, and Loss, 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.

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

							December 31, 2012
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE		Construction		Business		Total
Current	$	157,036		163,700		19,341		112,322		452,399
30-59 days past due		306		-		-		539		845
60-89 days past due		-		463		-		100		563
Greater than 90 days		1,448		1,000		1,006		1,208		4,662
	$	158,790		165,163		20,347		114,169		458,469

							December 31, 2011
	Owner		Non-owner
	occupied RE		occupied RE		Construction		Business		Total
Current	$	144,922		161,772		16,528		107,609		430,831
30-59 days past due		20		645		2		172		839
60-89 days past due		3,004		294		-		789		4,087
Greater than 90 days		1,308		1,912		1,311		3,261		7,792
	$	149,254		164,623		17,841		111,831		443,549

As of December 31, 2012 and 2011, loans 30 days or more past due represented 1.11% and 2.37% of our total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.94% and 2.12% as of December 31, 2012 and 2011, respectively.

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

	December 31, 2012
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE		Construction		Business		Total
Pass	$	148,255		141,352		18,265		105,024		412,896
Special Mention		7,446		9,358		-		2,750		19,554
Substandard		3,089		14,453		2,082		6,395		26,019
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-
	$	158,790		165,163		20,347		114,169		458,469
	December 31, 2011
	Owner		Non-owner
	occupied RE		occupied RE		Construction		Business			Total
Pass	$	139,746		138,407		12,801		103,908		394,862
Special Mention		4,289		12,721		-		2,321		19,331
Substandard		5,219		13,495		5,040		5,602		29,356
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-
	$	149,254		164,623		17,841		111,831		443,549

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 categories include Pass, Special Mention, Substandard, Doubtful, and Loss, 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 loan losses.

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

							December 31, 2012
(dollars in thousands)	Real estate		Home equity		Construction		Other		Total
Current	$	85,999		77,430		13,749		9,233		186,411
30-59 days past due		560		100		-		-		660
60-89 days past due		-		-		-		44		44
Greater than 90 days		-		365		-		-		365
	$	86,559		77,895		13,749		9,277		187,480
							December 31, 2011
	Real estate		Home equity		Construction		Other		Total
Current	$	56,748		82,229		5,546		9,072		153,595
30-59 days past due		343		80		-		5		428
60-89 days past due		-		-		-		-		-
Greater than 90 days		707		355		-		-		1,062
	$	57,798		82,664		5,546		9,077		155,085

Consumer loans 30 days or more past due were 0.17% and 0.25% as of December 31, 2012 and 2011, respectively.

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

							December 31, 2012
(dollars in thousands)	Real estate		Home equity		Construction		Other		Total
Pass	$	83,173		73,718		13,749		8,752		179,392
Special Mention		2,307		2,290		-		170		4,767
Substandard		1,079		1,887		-		355		3,321
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-
	$	86,559		77,895		13,749		9,277		187,480
							December 31, 2011
	Real estate		Home equity		Construction		Other		Total
Pass	$	54,973		79,129		5,546		8,637		148,285
Special Mention		525		2,142		-		65		2,732
Substandard		2,300		1,393		-		375		4,068
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-
	$	57,798		82,664		5,546		9,077		155,085

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)	2012			2011
Commercial
Owner occupied RE	$	155			1,061
Non-owner occupied RE		1,255			1,745
Construction		1,006			1,314
Business		202			503
Consumer
Real estate		119			476
Home equity		577			386
Construction		-			-
Other		44			-
Nonaccruing troubled debt restructurings		4,809			4,779
Total nonaccrual loans, including nonaccruing TDRs		8,167			10,264
Other real estate owned		1,719			3,686
Total nonperforming assets	$	9,886			13,950
Nonperforming assets as a percentage of:
Total assets		1.24	%		1.82	%
Gross loans		1.53	%		2.33	%
Total loans over 90 days past due	$	5,027			8,854
Loans over 90 days past due and still accruing		-			-
Accruing TDRs		9,421			7,429

Foregone interest income on the non-accrual loans for the year ended December 31, 2012 was approximately $402,000 and approximately $419,000 for the same period in 2011.

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 impaired loans are evaluated individually to determine the related allowance for loan losses while our consumer impaired loans are evaluated on a collective basis.

			December 31, 2012
			Recorded investment
					Impaired loans
	Unpaid				with related		Related
	Principal		Impaired		allowance for		allowance for
(dollars in thousands)	Balance		loans		loan losses		loan losses
Commercial
Owner occupied RE	$	3,071		2,271		2,116		398
Non-owner occupied RE		7,497		7,162		2,218		831
Construction		4,824		2,082		1,075		213
Business		4,048		4,048		3,329		2,092
Total commercial		19,440		15,563		8,738		3,534
Consumer
Real estate		985		985		162		24
Home equity		770		770		605		91
Construction		-		-		-		-
Other		270		270		-		-
Total consumer		2,025		2,025		767		115
Total	$	21,465		17,588		9,505		3,649
			December 31, 2011
			Recorded investment
					Impaired loans
	Unpaid				with related		Related
	Principal		Impaired		allowance for		allowance for
	Balance		loans		loan losses		loan losses
Commercial
Owner occupied RE	$	5,070		5,070		4,922		870
Non-owner occupied RE		4,685		3,638		985		578
Construction		4,056		2,068		1,597		498
Business		4,904		4,604		4,459		1,807
Total commercial		18,715		15,380		11,963		3,753
Consumer
Real estate		1,694		1,694		839		126
Home equity		386		386		386		58
Construction		-		-		-		-
Other		233		233		-		-
Total consumer		2,313		2,313		1,225		184
Total	$	21,028		17,693		13,188		3,937

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,
	2012				2011				2010
	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	$	3,881		17		3,521		220		960		47
Non-owner occupied RE		5,811		392		2,520		281		3,048		44
Construction		2,127		66		1,425		81		1,430		6
Business		3,880		84		3,331		207		2,688		118
Total commercial		15,699		559		10,797		789		8,126		215
Consumer
Real estate		1,397		44		1,729		64		1,764		37
Home equity		518		12		399		-		222		2
Construction		-		-		-		-		-		-
Other		240		14		38		13		7		1
Total consumer		2,155		70		2,166		77		1,993		40
Total	$	17,854		629		12,963		866		10,119		255

Allowance for Loan Losses

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

	Year ended December 31,
(dollars in thousands)	2012			2011
Balance, beginning of period	$	8,925			8,386
Provision for loan losses		4,550			5,270
Loan charge-offs:
Commercial
Owner occupied RE		(1,857	)		(72	)
Non-owner occupied RE		(513	)		(1,052	)
Construction		-			(67	)
Business		(1,230	)		(3,243	)
Total commercial		(3,600	)		(4,434	)
Consumer
Real estate		(214	)		(129	)
Home equity		(691	)		(175	)
Construction		-			-
Other		-			(200	)
Total consumer		(905	)		(504	)
Total loan charge-offs		(4,505	)		(4,938	)
Loan recoveries:
Commercial
Owner occupied RE		4			14
Non-owner occupied RE		42			42
Construction		-			-
Business		27			149
Total commercial		73			205
Consumer
Real estate		2			-
Home equity		32			2
Construction		-			-
Other		14			-
Total consumer		48			2
Total recoveries		121			207
Net loan charge-offs		(4,384	)		(4,731	)
Balance, end of period	$	9,091			8,925

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

	Year ended December 31, 2012
(dollars in thousands)	Commercial			Consumer			Unallocated			Total
Balance, beginning of period	$	8,061			864			-			8,925
Provision		3,447			1,103			-			4,550
Loan charge-offs		(3,600	)		(905	)		-			(4,505	)
Loan recoveries		73			48			-			121
Net loan charge-offs		(3,527	)		(857	)		-			(4,384	)
Balance, end of period	$	7,981			1,110			-			9,091
	Year ended December 31, 2011
	Commercial			Consumer			Unallocated			Total
Balance, beginning of period	$	6,706			1,447			233			8,386
Provision		5,584			(81	)		(233	)		5,270
Loan charge-offs		(4,434	)		(504	)		-			(4,938	)
Loan recoveries		205			2			-			207
Net loan charge-offs		(4,229	)		(502	)		-			(4,731	)
Balance, end of period	$	8,061			864			-			8,925

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

									December 31, 2012
	Allowance for loan losses						Recorded investment in loans
(dollars in thousands)	Commercial		Consumer		Total		Commercial		Consumer		Total
Individually evaluated	$	3,534		-		3,534		15,563		-		15,563
Collectively evaluated		4,447		1,110		5,557		442,906		187,480		630,396
Total	$	7,981		1,110		9,091		458,469		187,480		645,949
									December 31, 2011
	Allowance for loan losses						Recorded investment in loans
	Commercial		Consumer		Total		Commercial		Consumer		Total
Individually evaluated	$	3,753		-		3,753		15,380		-		15,380
Collectively evaluated		4,308		864		5,172		428,169		155,085		583,284
Total	$	8,061		864		8,925		443,549		155,085		598,634