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 81.1% of total loans at December 31, 2014. Commercial loans comprise 60.2% of total real estate loans and consumer loans account for 39.8%. Commercial real estate loans are further categorized into owner occupied which represents 21.9% of total loans and non-owner occupied loans represent 21.1%. Commercial construction loans represent only 5.8% 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, 2014, approximately $93.4 million, or 10.7% of our loans had loan-to-value ratios which exceeded regulatory supervisory limits, of which 100 loans totaling approximately $40.5 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.

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 loan class. 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.

Consumer
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. 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 $1.8 million and $1.3 million as of December 31, 2014 and December 31, 2013, respectively.


	December 31,
(dollars in thousands)				2014					2013
Commercial
Owner occupied	$	191,061		21.9	%	$	185,129		25.2	%
Non-owner occupied		183,440		21.1	%		166,016		22.6	%
Construction		50,995		5.8	%		30,906		4.2	%
Business		149,986		17.2	%		129,687		17.7	%
Total commercial loans		575,482		66.0	%		511,738		69.7	%
Consumer
Residential		146,859		16.9	%		110,590		15.1	%
Home equity		95,629		11.0	%		78,479		10.7	%
Construction		39,226		4.5	%		19,888		2.7	%
Other		14,250		1.6	%		12,961		1.8	%
Total consumer loans		295,964		34.0	%		221,918		30.3	%
Total gross loans, net of deferred fees		871,446		100.0	%		733,656		100.0	%
Less – allowance for loan losses		(11,752	)				(10,213	)
Total loans, net	$	859,694				$	723,443

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


	December 31,
(dollars in thousands)		2014	2013
Variable rate loans	$	227,232	223,764
Fixed rate loans		644,214	509,892
	$	871,446	733,656

At December 31, 2014, approximately $241.1 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 risk categories include Pass, Special Mention, Substandard, and Doubtful, each of which is defined by banking regulatory agencies. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for credit losses.

We categorize our loans into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. A description of the general characteristics of the risk grades is as follows:

●	Pass—These loans range from minimal credit risk to average however still acceptable credit risk.

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

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

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

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


	December 31, 2014
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Current	$	190,801	180,577	50,212	148,317	569,907
30-59 days past due		-	49	-	35	84
60-89 days past due		-	246	-	155	401
Greater than 90 days		260	2,568	783	1,479	5,090
	$	191,061	183,440	50,995	149,986	575,482

	December 31, 2013
	Owner		Non-owner
	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

As of December 31, 2014 and 2013, loans 30 days or more past due represented 0.73% and 1.30% of our total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.64% and 1.02% as of December 31, 2014 and 2013, respectively.

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


	December 31, 2014
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Pass	$	184,158	173,711	48,140	140,432	546,441
Special Mention		5,035	3,376	129	4,715	13,255
Substandard		1,868	6,353	2,726	4,839	15,786
Doubtful		-	-	-	-	-
	$	191,061	183,440	50,995	149,986	575,482

	December 31, 2013
	Owner		Non-owner
	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

Consumer
We manage a consistent process for assessing consumer loan credit quality by monitoring our loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our risk categories include Pass, Special Mention, Substandard, and Doubtful, which are defined above. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for loan losses.

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


	December 31, 2014
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Current	$	146,362	95,311	39,226	14,247	294,146
30-59 days past due		40	-	-	-	40
60-89 days past due		-	130	-	3	133
Greater than 90 days		457	188	-	-	645
	$	146,859	95,629	39,226	14,250	295,964

	December 31, 2013
	Real estate		Home equity	Construction	Other	Total
Current	$	108,703	78,402	19,888	12,877	219,870
30-59 days past due		806	-	-	84	890
60-89 days past due		467	-	-	-	467
Greater than 90 days		614	77	-	-	691
	$	110,590	78,479	19,888	12,961	221,918

Consumer loans 30 days or more past due were 0.09% and 0.28% as of December 31, 2014 and 2013, respectively.

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


	December 31, 2014
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Pass	$	144,070	91,084	39,226	14,013	288,393
Special Mention		953	3,268	-	139	4,360
Substandard		1,836	1,277	-	98	3,211
Doubtful		-	-	-	-	-
Loss		-	-	-	-	-
	$	146,859	95,629	39,226	14,250	295,964

	December 31, 2013
	Real estate		Home equity	Construction	Other	Total
Pass	$	106,693	75,304	19,888	12,641	214,526
Special Mention		1,455	2,176	-	212	3,843
Substandard		2,442	999	-	108	3,549
Doubtful		-	-	-	-	-
Loss		-	-	-	-	-
	$	110,590	78,479	19,888	12,961	221,918

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)	2014		2013
Commercial
Owner occupied RE	$	322	1,199
Non-owner occupied RE		2,344	373
Construction		783	914
Business		1,408	712
Consumer
Real estate		457	76
Home equity		188	77
Construction		-	-
Other		1	3
Nonaccruing troubled debt restructurings		1,147	4,983
Total nonaccrual loans, including nonaccruing TDRs		6,650	8,337
Other real estate owned		3,307	1,198
Total nonperforming assets	$	9,957	9,535
Nonperforming assets as a percentage of:
Total assets		0.97%	1.07%
Gross loans		1.14%	1.30%
Total loans over 90 days past due	$	5,735	6,493
Loans over 90 days past due and still accruing		-	-
Accruing TDRs		8,562	8,045

Foregone interest income on the nonaccrual loans for the year ended December 31, 2014 was approximately $414,000 and approximately $543,000 for the same period in 2013.

Impaired Loans

The table below summarizes key information for impaired loans. Our impaired loans include loans on nonaccrual status and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans may have estimated impairment which is included in the allowance for loan losses. Our commercial and consumer impaired loans are evaluated individually to determine the related allowance for loan losses.



			December 31, 2014
			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	$	1,122		1,122	1,060	371
Non-owner occupied RE		5,813		4,522	2,777	801
Construction		5,268		2,726	1,315	324
Business		5,385		4,565	3,528	2,464
Total commercial		17,588		12,935	8,680	3,960
Consumer
Real estate		1,620		1,620	1,299	585
Home equity		347		347	347	191
Construction		-		-	-	-
Other		310		310	310	310
Total consumer		2,277		2,277	1,956	1,086
Total	$	19,865		15,212	10,636	5,046


			December 31, 2013
			Recorded investment
					Impaired loans
	Unpaid				with related	Related
	Principal			Impaired	allowance for	allowance for
	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

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,
			2014		2013		2012
	Average		Recognized	Average	Recognized	Average	Recognized
	recorded		interest	recorded	interest	recorded	interest
(dollars in thousands)	investment		income	investment	income	investment	income
Commercial
Owner occupied RE	$	1,568	47	1,519	47	3,881	17
Non-owner occupied RE		5,693	104	5,932	261	5,811	392
Construction		1,977	75	2,054	57	2,127	66
Business		4,522	154	4,521	189	3,880	84
Total commercial		13,760	380	14,026	554	15,699	559
Consumer
Real estate		2,094	53	1,186	100	1,397	44
Home equity		251	10	610	8	518	12
Construction		-	-	-	-	-	-
Other		282	13	234	9	240	14
Total consumer		2,627	76	2,030	117	2,155	70
Total	$	16,387	456	16,056	671	17,854	629

Allowance for Loan Losses

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


	Year ended December 31,
(dollars in thousands)	2014			2013		2012
Balance, beginning of period	$	10,213		9,091		8,925
Provision for loan losses		4,175		3,475		4,550
Loan charge-offs:
Commercial
Owner occupied RE		-		(390	)	(1,857	)
Non-owner occupied RE		(2,069	)	(249	)	(513	)
Construction		-		-		-
Business		(645	)	(1,664	)	(1,230	)
Total commercial		(2,714	)	(2,303	)	(3,600	)
Consumer
Real estate		(51	)	(22	)	(214	)
Home equity		(87	)	(106	)	(691	)
Construction		-		-		-
Other		(35	)	(47	)	-
Total consumer		(173	)	(175	)	(905	)
Total loan charge-offs		(2,887	)	(2,478	)	(4,505	)
Loan recoveries:
Commercial
Owner occupied RE		-		1		4
Non-owner occupied RE		2		1		42
Construction		127		-		-
Business		117		115		27
Total commercial		246		117		73
Consumer
Real estate		-		-		2
Home equity		5		8		32
Construction		-		-		-
Other		-		-		14
Total consumer		5		8		48
Total recoveries		251		125		121
Net loan charge-offs		(2,636	)	(2,353	)	(4,384	)
Balance, end of period	$	11,752		10,213		9,091

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


						Year ended December 31, 2014
(dollars in thousands)	Commercial			Consumer		Unallocated	Total
Balance, beginning of period	$	8,239		1,974		-	10,213
Provision		2,445		1,730		-	4,175
Loan charge-offs		(2,714	)	(173	)	-	(2,887	)
Loan recoveries		246		5		-	251
Net loan charge-offs		(2,468	)	(168	)	-	(2,636	)
Balance, end of period	$	8,216		3,536		-	11,752

						Year ended December 31, 2013
	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

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


	December 31, 2014
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	3,960	1,086	5,046	12,935	2,277	15,212
Collectively evaluated		4,256	2,450	6,706	562,547	293,687	856,234
Total	$	8,216	3,536	11,752	575,482	295,964	871,446

						December 31, 2013
	Allowance for loan losses				Recorded investment in loans
	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	219,647	717,274
Total	$	8,239	1,974	10,213	511,738	221,918	733,656