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 80.6% of total loans at December 31, 2013. Commercial loans comprise 64.3% of total real estate loans and consumer loans account for 35.7%. Commercial loans are further categorized into owner occupied which represents 25.1% of total loans and non-owner occupied loans represent 22.5%. Commercial construction loans represent only 4.2% 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, 2013, approximately $84.1 million, or 11.4% of our loans had loan-to-value ratios which exceeded regulatory supervisory limits, of which 78 loans totaling approximately $32.7 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 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.

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 class of loan. In the development of our statistically derived loan grade loss factors, we observe historical losses over 12 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, we determine the allowance on a collective basis utilizing historical losses over 12 quarters to represent our best estimate of inherent loss. We pool loans, generally by loan class 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 allowance also includes an amount for the estimated impairment on nonaccrual consumer loans and consumer loans modified in a TDR, whether on accrual or nonaccrual status.

The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $1.3 million as of December 31, 2013 and December 31, 2012, respectively.



	December 31,
(dollars in thousands)	2013			2012
Commercial
Owner occupied	$	185,129			158,790
Non-owner occupied		166,016			165,163
Construction		30,906			20,347
Business		129,687			114,169
Total commercial loans		511,738			458,469
Consumer
Residential		114,201			86,559
Home equity		78,479			77,895
Construction		19,888			13,749
Other		12,961			9,277
Total consumer loans		225,529			187,480
Total gross loans, net of deferred fees		737,267			645,949
Less – allowance for loan losses		(10,213	)		(9,091	)
Total loans, net	$	727,054			636,858

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:

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

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

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

							December 31, 2013
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE		Construction		Business		Total
Current	$	183,609		161,758		29,992		128,883		504,242
30-59 days past due		791		859		-		44		1,694
60-89 days past due		-		-		-		-		-
Greater than 90 days		729		3,399		914		760		5,802
	$	185,129		166,016		30,906		129,687		511,738

							December 31, 2012
	Owner		Non-owner
	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

As of December 31, 2013 and 2012, loans 30 days or more past due represented 1.29% and 1.11% of our total loan portfolio, respectively. Commercial loans 30 days or more past due were 1.02% and 0.94% as of December 31, 2013 and 2012, respectively.

							December 31, 2013
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE		Construction		Business		Total
Pass	$	176,320		147,378		27,797		120,254		471,749
Special Mention		5,563		7,987		-		3,629		17,179
Substandard		3,246		10,651		3,109		5,804		22,810
Doubtful		-		-		-		-		-
	$	185,129		166,016		30,906		129,687		511,738

							December 31, 2012
	Owner		Non-owner
	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		-		-		-		-		-
	$	158,790		165,163		20,347		114,169		458,469

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.

							December 31, 2013
(dollars in thousands)	Real estate		Home equity		Construction		Other		Total
Current	$	112,314		78,402		19,888		12,877		223,481
30-59 days past due		806		-		-		84		890
60-89 days past due		467		-		-		-		467
Greater than 90 days		614		77		-		-		691
	$	114,201		78,479		19,888		12,961		225,529

Greater than 90 days

- 365 - - 365


							December 31, 2012
	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
	$	86,559		77,895		13,749		9,277		187,480

Pass


								December 31, 2013
(dollars in thousands)		Real estate		Home equity		Construction		Other		Total
	$	110,304		75,304		19,888		12,641		218,137
Special Mention			1,455		2,176		-		212		3,843
Substandard			2,442		999		-		108		3,549
Doubtful			-		-		-		-		-
Loss			-		-		-		-		-
		$	114,201		78,479		19,888		12,961		225,529

							December 31, 2012
	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

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.

Construction

- -

	December 31,
(dollars in thousands)	2013			2012
Commercial
Owner occupied RE	$	1,199			155
Non-owner occupied RE		373			1,255
Construction		914			1,006
Business		712			202
Consumer
Real estate		76			119
Home equity		77			577
Other		3			44
Nonaccruing troubled debt restructurings		4,983			4,809
Total nonaccrual loans, including nonaccruing TDRs		8,337			8,167
Other real estate owned		1,198			1,719
Total nonperforming assets	$	9,535			9,886
Nonperforming assets as a percentage of:
Total assets		1.07	%		1.24	%
Gross loans		1.29	%		1.53	%
Total loans over 90 days past due	$	6,493			5,027
Loans over 90 days past due and still accruing		-			-
Accruing TDRs		8,045			9,421

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, 2013
			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	$	1,935		1,935		1,666		333
Non-owner occupied RE		5,957		5,622		6,125		1,441
Construction		4,612		1,870		1,855		246
Business		5,494		4,684		2,807		1,813
Total commercial		17,998		14,111		12,453		3,833
Consumer
Real estate		1,829		1,807		1,447		704
Home equity		239		239		239		188
Construction		-		-		-		-
Other		225		225		4		4
Total consumer		2,293		2,271		1,690		896
Total	$	20,291		16,382		14,143		4,729

Consumer

			December 31, 2012
			Recorded investment
					Impaired loans
	Unpaid				with related		Related
	Principal		Impaired		allowance for		allowance for
	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
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

interest

	Year ended December 31,
	2013				2012				2011
	Average		Recognized		Average		Recognized		Average		Recognized
	recorded		interest		recorded		interest		recorded
(dollars in thousands)	investment		income		investment		income		investment		income
Commercial
Owner occupied RE	$	1,519		47		3,881		17		3,521		220
Non-owner occupied RE		5,932		261		5,811		392		2,520		281
Construction		2,054		57		2,127		66		1,425		81
Business		4,521		189		3,880		84		3,331		207
Total commercial		14,026		554		15,699		559		10,797		789
Consumer
Real estate		1,186		100		1,397		44		1,729		64
Home equity		610		8		518		12		399		-
Construction		-		-		-		-		-		-
Other		234		9		240		14		38		13
Total consumer		2,030		117		2,155		70		2,166		77
Total	$	16,056		671		17,854		629		12,963		866

	Year ended December 31,
(dollars in thousands)	2013			2012			2011
Balance, beginning of period	$	9,091			8,925			8,386
Provision for loan losses		3,475			4,550			5,270
Loan charge-offs:
Commercial
Owner occupied RE		(390	)		(1,857	)		(72	)
Non-owner occupied RE		(249	)		(513	)		(1,052	)
Construction		-			-			(67	)
Business		(1,664	)		(1,230	)		(3,243	)
Total commercial		(2,303	)		(3,600	)		(4,434	)
Consumer
Real estate		(22	)		(214	)		(129	)
Home equity		(106	)		(691	)		(175	)
Construction		-			-			-
Other		(47	)		-			(200	)
Total consumer		(175	)		(905	)		(504	)
Total loan charge-offs		(2,478	)		(4,505	)		(4,938	)
Loan recoveries:
Commercial
Owner occupied RE		1			4			14
Non-owner occupied RE		1			42			42
Construction		-			-			-
Business		115			27			149
Total commercial		117			73			205
Consumer
Real estate		-			2			-
Home equity		8			32			2
Construction		-			-			-
Other		-			14			-
Total consumer		8			48			2
Total recoveries		125			121			207
Net loan charge-offs		(2,353	)		(4,384	)		(4,731	)
Balance, end of period	$	10,213			9,091			8,925

	Year ended December 31, 2013
(dollars in thousands)	Commercial			Consumer			Unallocated		Total
Balance, beginning of period	$	7,981			1,110			-		9,091
Provision		2,444			1,031			-		3,475
Loan charge-offs		(2,303	)		(175	)		-		(2,478	)
Loan recoveries		117			8			-		125
Net loan charge-offs		(2,186	)		(167	)		-		(2,353	)
Balance, end of period	$	8,239			1,974			-		10,213

	Year ended December 31, 2012
	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

									December 31, 2013
	Allowance for loan losses						Recorded investment in loans
(dollars in thousands)	Commercial		Consumer		Total		Commercial		Consumer		Total
Individually evaluated	$	3,833		896		4,729		14,111		2,271		16,382
Collectively evaluated		4,406		1,078		5,484		497,627		223,258		720,885
Total	$	8,239		1,974		10,213		511,738		225,529		737,267

									December 31, 2012
	Allowance for loan losses						Recorded investment in loans
	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