NOTE 4 – 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 Lowcountry 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, 2016. Commercial loans comprise 59.2% of total real estate loans and consumer loans account for 40.8%. Commercial real estate loans are further categorized into owner occupied which represents 24.6% of total loans and non-owner occupied loans represent 20.6%. Commercial construction loans represent only 2.9% 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, 2016, approximately $105.3 million, or 9.1% of our loans had loan-to-value ratios which exceeded regulatory supervisory limits, of which 93 loans totaling approximately $36.6 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. The Company applies historic grade-specific loss factors to each loan class. In the development of statistically derived loan grade loss factors, the Company observes historical losses over 20 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, the Company determines the allowance on a collective basis utilizing historical losses over 20 quarters to represent its best estimate of inherent loss. The Company pools 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.

During the third quarter of 2015, the Company began using 20 quarters to measure commercial and consumer historical losses rather than a 12 quarter period as used in the past. The Company believes that the longer period used to determine historical losses for both its commercial and consumer loans captures a longer economic cycle, including periods of economic uncertainty which are unlike those the Company has experienced in the past three years. The Company also believes that using 20 quarters to measure historical losses is more indicative of the expected losses and risks inherent in the portfolio.

The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $2.0 million and $1.7 million as of December 31, 2016 and December 31, 2015, respectively.


		December 31,
(dollars in thousands)	2016				2015
Commercial
Owner occupied RE	$ 285,938		24.6%	236,083	23.5%
Non-owner occupied RE	239,574		20.6%	205,604	20.5%
Construction	33,393		2.9%	41,751	4.1%
Business	202,552		17.4%	171,743	17.1%
Total commercial loans	761,457		65.5%	655,181	65.2%
Consumer
Residential	215,588		18.5%	174,802	17.4%
Home equity	137,105		11.8%	116,563	11.6%
Construction	31,922		2.7%	43,318	4.3%
Other	17,572		1.5%	15,080	1.5%
Total consumer loans	402,187		34.5%	349,763	34.8%
Total gross loans, net of deferred fees	1,163,644		100.0%	1,004,944	100.0%
Less – allowance for loan losses	(14,855)			(13,629)
Total loans, net	$ 1,148,789			991,315

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


	December 31,
(dollars in thousands)	2016	2015
Variable rate loans	$ 290,462	254,749
Fixed rate loans	873,182	750,195
	$ 1,163,644	1,004,944

At December 31, 2016, approximately $396.0 million of the Company’s mortgage loans were pledged as collateral for advances from the FHLB, as set forth in Note 9.

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, 2016
	Owner	Non-owner
(dollars in thousands)	occupied RE	occupied RE	Construction	Business	Total
Current	$ 284,700	238,346	33,393	200,624	757,063
30-59 days past due	981	-	-	1,423	2,404
60-89 days past due	257	56	-	-	313
Greater than 90 days	-	1,172	-	505	1,677
	$ 285,938	239,574	33,393	202,552	761,457


				December 31, 2015
	Owner	Non-owner
	occupied RE	occupied RE	Construction	Business	Total
Current	$ 235,795	201,381	41,354	170,644	649,174
30-59 days past due	-	-	-	205	205
60-89 days past due	43	1,452	-	18	1,513
Greater than 90 days	245	2,771	397	876	4,289
	$ 236,083	205,604	41,751	171,743	655,181

As of December 31, 2016 and 2015, loans 30 days or more past due represented 0.55% and 0.66% of our total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.38% and 0.60% as of December 31, 2016 and 2015, respectively.

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


				December 31, 2016
	Owner	Non-owner
(dollars in thousands)	occupied RE	occupied RE	Construction	Business	Total
Pass	$ 282,055	234,957	33,393	193,517	743,922
Special Mention	1,097	975	-	2,489	4,561
Substandard	2,786	3,642	-	6,546	12,974
Doubtful	-	-	-	-	-
	$ 285,938	239,574	33,393	202,552	761,457

				December 31, 2015
	Owner	Non-owner
	occupied RE	occupied RE	Construction	Business	Total
Pass	$ 230,460	198,144	39,678	161,920	630,202
Special Mention	3,887	1,574	286	5,511	11,258
Substandard	1,736	5,886	1,787	4,312	13,721
Doubtful	-	-	-	-	-
	$ 236,083	205,604	41,751	171,743	655,181

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, 2016
(dollars in thousands)	Real estate	Home equity	Construction	Other	Total
Current	$ 214,228	136,638	31,922	17,427	400,215
30-59 days past due	1,041	210	-	126	1,377
60-89 days past due	282	-	-	6	288
Greater than 90 days	37	257	-	13	307
	$ 215,588	137,105	31,922	17,572	402,187

				December 31, 2015
	Real estate	Home equity	Construction	Other	Total
Current	$ 174,576	116,305	43,258	14,994	349,133
30-59 days past due	187	-	60	86	333
60-89 days past due	39	-	-	-	39
Greater than 90 days	-	258	-	-	258
	$ 174,802	116,563	43,318	15,080	349,763

Consumer loans 30 days or more past due were 0.17% and 0.06% as of December 31, 2016 and 2015, respectively.

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


				December 31, 2016
(dollars in thousands)	Real estate	Home equity	Construction	Other	Total
Pass	$ 211,563	134,124	31,922	17,485	395,094
Special Mention	1,064	2,109	-	16	3,189
Substandard	2,961	872	-	71	3,904
Doubtful	-	-	-	-	-
Loss	-	-	-	-	-
	$ 215,588	137,105	31,922	17,572	402,187

				December 31, 2015
	Real estate	Home equity	Construction	Other	Total
Pass	$ 172,589	112,080	42,319	14,967	341,955
Special Mention	961	3,388	-	45	4,394
Substandard	1,252	1,095	999	68	3,414
Doubtful	-	-	-	-	-
Loss	-	-	-	-	-
	$ 174,802	116,563	43,318	15,080	349,763

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)	2016	2015
Commercial
Owner occupied RE	$ 276	704
Non-owner occupied RE	2,711	4,170
Construction	-	-
Business	686	779
Consumer
Real estate	550	-
Home equity	256	258
Construction	-	-
Other	13	5
Nonaccruing troubled debt restructurings	990	701
Total nonaccrual loans, including nonaccruing TDRs	5,482	6,617
Other real estate owned	639	2,475
Total nonperforming assets	$ 6,121	9,092
Nonperforming assets as a percentage of:
Total assets	0.46%	0.75%
Gross loans	0.53%	0.90%
Total loans over 90 days past due	$ 1,984	4,547
Loans over 90 days past due and still accruing	-	-
Accruing TDRs	5,675	7,266

Foregone interest income on the nonaccrual loans for the year ended December 31, 2016 was approximately $439,000 and approximately $644,000 for the same period in 2015.

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, 2016
		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	$ 2,284	2,243	2,224	263
Non-owner occupied RE	7,238	4,031	1,638	457
Construction	-	-	-	-
Business	3,699	2,593	1,610	1,154
Total commercial	13,221	8,867	5,472	1,874
Consumer
Real estate	1,853	1,843	1,843	682
Home equity	207	257	-	-
Construction	-	-	-	-
Other	261	190	177	88
Total consumer	2,321	2,290	2,020	770
Total	$ 15,542	11,157	7,492	2,644


		December 31, 2015
		Recorded investment
			Impaired loans
	Unpaid		with related	Related
	Principal	Impaired	allowance for	allowance for
	Balance	loans	loan losses	loan losses
Commercial
Owner occupied RE	$ 964	863	863	260
Non-owner occupied RE	9,144	5,792	4,161	1,321
Construction	1,855	1,787	397	31
Business	4,756	3,861	2,936	1,932
Total commercial	16,719	12,303	8,357	3,544
Consumer
Real estate	1,121	1,121	805	489
Home equity	260	258	-	-
Construction	-	-	-	-
Other	201	201	201	191
Total consumer	1,582	1,580	1,006	680
Total	$ 18,301	13,883	9,363	4,224

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,
	2016		2015		2014
	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	$ 2,263	112	884	6	1,568	47
Non-owner occupied RE	4,106	200	6,137	128	5,693	104
Construction	-	-	1,888	74	1,977	75
Business	2,873	135	4,067	148	4,522	154
Total commercial	9,242	447	12,976	356	13,760	380
Consumer
Real estate	1,854	81	1,112	46	2,094	53
Home equity	257	2	252	7	251	10
Construction	-	-	-	-	-	-
Other	203	6	208	7	282	13
Total consumer	2,314	89	1,572	60	2,627	76
Total	$ 11,556	536	14,548	416	16,387	456

Allowance for Loan Losses

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


	Year ended December 31,
(dollars in thousands)	2016	2015	2014
Balance, beginning of period	$ 13,629	11,752	10,213
Provision for loan losses	2,300	3,200	4,175
Loan charge-offs:
Commercial
Owner occupied RE	(5)	(48)	-
Non-owner occupied RE	(100)	(258)	(2,069)
Construction	(42)	(50)	-
Business	(1,031)	(881)	(645)
Total commercial	(1,178)	(1,237)	(2,714)
Consumer
Real estate	(194)	(173)	(51)
Home equity	(66)	(93)	(87)
Construction	-	-	-
Other	(210)	(5)	(35)
Total consumer	(470)	(271)	(173)
Total loan charge-offs	(1,648)	(1,508)	(2,887)
Loan recoveries:
Commercial
Owner occupied RE	-	-	-
Non-owner occupied RE	155	10	2
Construction	-	-	127
Business	403	129	117
Total commercial	558	139	246
Consumer
Real estate	10	-	-
Home equity	1	46	5
Construction	-	-	-
Other	5	-	-
Total consumer	16	46	5
Total recoveries	574	185	251
Net loan charge-offs	(1,074)	(1,323)	(2,636)
Balance, end of period	$ 14,855	13,629	11,752

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


	Year ended December 31, 2016
(dollars in thousands)	Commercial	Consumer	Unallocated	Total
Balance, beginning of period	$ 9,672	3,957	-	13,629
Provision	987	1,313	-	2,300
Loan charge-offs	(1,178)	(470)	-	(1,648)
Loan recoveries	558	16	-	574
Net loan charge-offs	(620)	(454)	-	(1,074)
Balance, end of period	$ 10,039	4,816	-	14,855

	Year ended December 31, 2015
	Commercial	Consumer	Unallocated	Total
Balance, beginning of period	$ 8,216	3,536	-	11,752
Provision	2,554	646	-	3,200
Loan charge-offs	(1,237)	(271)	-	(1,508)
Loan recoveries	139	46	-	185
Net loan charge-offs	(1,098)	(225)	-	(1,323)
Balance, end of period	$ 9,672	3,957	-	13,629

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


					December 31, 2016
	Allowance for loan losses			Recorded investment in loans
(dollars in thousands)	Commercial	Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$ 1,874	770	2,644	8,867	2,290	11,157
Collectively evaluated	8,165	4,046	12,211	752,590	399,897	1,152,487
Total	$ 10,039	4,816	14,855	761,457	402,187	1,163,644

					December 31, 2015
	Allowance for loan losses			Recorded investment in loans
	Commercial	Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$ 3,544	680	4,224	12,303	1,580	13,883
Collectively evaluated	6,128	3,277	9,405	642,878	348,183	991,061
Total	$ 9,672	3,957	13,629	655,181	349,763	1,004,944