Note 5.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level management deems adequate to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by provisions charged to operations and reduced by net charge-offs. While management uses its best judgment and information available, the ultimate adequacy of the allowance is dependent on a variety of factors that may be beyond the Company’s control: the performance of the Company’s loan portfolio, the economy, changes in interest rates, the view of regulatory authorities towards loan classifications, and other factors. These uncertainties may result in a material change to the allowance for loan losses in the near term; however, the amount of the change cannot reasonably be estimated.

The Company’s allowance is comprised of specific reserves related to loans individually evaluated, including credit relationships, and general reserves related to loans not individually evaluated that are segmented into groups with similar risk characteristics, based on an internal risk grading matrix. General reserve allocations are based on management’s judgments of qualitative and quantitative factors about macro and micro economic conditions reflected within the loan portfolio and the economy. For loans acquired in a business combination, loans identified as credit impaired at the acquisition date are grouped into pools and evaluated separately from the non-PCI portfolio. The Company aggregates PCI loans into the following pools: Waccamaw commercial, Waccamaw lines of credit, Waccamaw serviced home equity lines, Waccamaw residential, Waccamaw consumer, Peoples commercial, and Peoples residential. The Company closed the Waccamaw consumer loan pool during the first quarter of 2015 due to an insignificant remaining balance. Provisions calculated for PCI loans are offset by an adjustment to the FDIC indemnification asset to reflect the indemnified portion, 80%, of the post-acquisition exposure. While allocations are made to various portfolio segments, the allowance for loan losses, excluding reserves allocated to specific loans and PCI loan pools, is available for use against any loan loss management deems appropriate. As of June 30, 2015, management believed the allowance was adequate to absorb probable loan losses inherent in the loan portfolio.

The following tables present the aggregate activity in the allowance for loan losses in the periods indicated:


	Three Months Ended June 30, 2015
	Allowance Excluding PCI Loans			Allowance for PCI Loans		Total Allowance
(Amounts in thousands)
Beginning balance	$	20,138		$	114	$	20,252
Provision for loan losses		276			—		276
Benefit attributable to the FDIC indemnification asset		—			—		—

Provision for (recovery of) loan losses charged to operations		276			—		276
Provision for loan losses recorded through the FDIC indemnification asset		—			—		—
Charge-offs		(673	)		—		(673	)
Recoveries		403			—		403

Net charge-offs		(270	)		—		(270	)

Ending balance	$	20,144		$	114	$	20,258


	Three Months Ended June 30, 2014
	Allowance Excluding PCI Loans			Allowance for PCI Loans			Total Allowance
(Amounts in thousands)
Beginning balance	$	23,305		$	493		$	23,798
Provision for (recovery of) loan losses		1,216			(75	)		1,141
Benefit attributable to the FDIC indemnification asset		—			138			138

Provision for loan losses charged to operations		1,216			63			1,279
Recovery of loan losses recorded through the FDIC indemnification asset		—			(138	)		(138	)
Charge-offs		(1,785	)		—			(1,785	)
Recoveries		757			—			757

Net charge-offs		(1,028	)		—			(1,028	)

Ending balance	$	23,493		$	418		$	23,911


	Six Months Ended June 30, 2015
	Allowance Excluding PCI Loans			Allowance for PCI Loans			Total Allowance
(Amounts in thousands)
Beginning balance	$	20,169		$	58		$	20,227
Provision for loan losses		1,366			56			1,422
Benefit attributable to the FDIC indemnification asset		—			(46	)		(46	)

Provision for loan losses charged to operations		1,366			10			1,376
Provision for loan losses recorded through the FDIC indemnification asset		—			46			46
Charge-offs		(2,251	)		—			(2,251	)
Recoveries		860			—			860

Net charge-offs		(1,391	)		—			(1,391	)

Ending balance	$	20,144		$	114		$	20,258


	Six Months Ended June 30, 2014
	Allowance Excluding PCI Loans			Allowance for PCI Loans			Total Allowance
(Amounts in thousands)
Beginning balance	$	23,322		$	755		$	24,077
Provision for (recovery of) loan losses		3,068			(337	)		2,731
Benefit attributable to the FDIC indemnification asset		—			341			341

Provision for loan losses charged to operations		3,068			4			3,072
Recovery of loan losses recorded through the FDIC indemnification asset		—			(341	)		(341	)
Charge-offs		(4,001	)		—			(4,001	)
Recoveries		1,104			—			1,104

Net charge-offs		(2,897	)		—			(2,897	)

Ending balance	$	23,493		$	418		$	23,911

The following table presents the components of the activity in the allowance for loan losses, excluding PCI loans, by loan segment, in the periods indicated:


	Three Months Ended June 30, 2015
	Commercial			Consumer Real Estate			Consumer and Other			Total
(Amounts in thousands)
Beginning balance	$	13,054		$	6,446		$	638		$	20,138
Provision for (recovery of) loan losses charged to operations		98			(99	)		277			276
Loans charged off		(280	)		(90	)		(303	)		(673	)
Recoveries credited to allowance		123			211			69			403

Net chargeoffs		(157	)		121			(234	)		(270	)

Ending balance	$	12,995		$	6,468		$	681		$	20,144


	Three Months Ended June 30, 2014
	Commercial			Consumer Real Estate			Consumer and Other			Total
(Amounts in thousands)
Beginning balance	$	16,339		$	6,393		$	573		$	23,305
Provision for (recovery of) loan losses charged to operations		1,436			(454	)		234			1,216
Loans charged off		(1,231	)		(255	)		(299	)		(1,785	)
Recoveries credited to allowance		203			439			115			757

Net (charge-offs) recoveries		(1,028	)		184			(184	)		(1,028	)

Ending balance	$	16,747		$	6,123		$	623		$	23,493


	Six Months Ended June 30, 2015
	Commercial			Consumer Real Estate			Consumer and Other			Total
(Amounts in thousands)
Beginning balance	$	13,010		$	6,489		$	670		$	20,169
Provision for loan losses charged to operations		748			116			502			1,366
Loans charged off		(961	)		(492	)		(798	)		(2,251	)
Recoveries credited to allowance		198			355			307			860

Net chargeoffs		(763	)		(137	)		(491	)		(1,391	)

Ending balance	$	12,995		$	6,468		$	681		$	20,144


	Six Months Ended June 30, 2014
	Commercial			Consumer Real Estate			Consumer and Other			Total
(Amounts in thousands)
Beginning balance	$	16,090		$	6,597		$	635		$	23,322
Provision for loan losses charged to operations		2,653			31			384			3,068
Loans charged off		(2,281	)		(965	)		(755	)		(4,001	)
Recoveries credited to allowance		285			460			359			1,104

Net charge-offs		(1,996	)		(505	)		(396	)		(2,897	)

Ending balance	$	16,747		$	6,123		$	623		$	23,493

The following tables present the components of the activity in the allowance for loan losses for PCI loans, by loan segment, in the periods indicated:


	Three Months Ended June 30, 2015
	Commercial		Consumer Real Estate		Consumer and Other		Total
(Amounts in thousands)
Beginning balance	$	—	$	114	$	—	$	114
Provision for PCI loan losses		—		—		—		—
Benefit attributable to FDIC indemnification asset		—		—		—		—

Recovery of loan losses charged to operations		—		—		—		—
Provision for loan losses recorded through the FDIC indemnification asset		—		—		—		—

Ending balance	$	—	$	114	$	—	$	114


	Three Months Ended June 30, 2014
	Commercial		Consumer Real Estate			Consumer and Other		Total
Beginning balance	$	8	$	485		$	—	$	493
Provision for (recovery of) PCI loan losses		8		(83	)		—		(75	)
Benefit attributable to FDIC indemnification asset		—		138			—		138

Provision for loan losses charged to operations		8		55			—		63
Recovery of loan losses recorded through the FDIC indemnification asset		—		(138	)		—		(138	)

Ending balance	$	16	$	402		$	—	$	418


	Six Months Ended June 30, 2015
	Commercial			Consumer Real Estate			Consumer and Other		Total
(Amounts in thousands)
Beginning balance	$	37		$	21		$	—	$	58
(Recovery of) provision for PCI loan losses		(37	)		93			—		56
Benefit (provision) attributable to FDIC indemnification asset		29			(75	)		—		(46	)

(Recovery of) provision for loan losses charged to operations		(8	)		18			—		10
(Recovery of) provision for loan losses recorded through the FDIC indemnification asset		(29	)		75			—		46

Ending balance	$	—		$	114		$	—	$	114


	Six Months Ended June 30, 2014
	Commercial			Consumer Real Estate			Consumer and Other		Total
Beginning balance	$	77		$	678		$	—	$	755
Recovery of PCI loan losses		(61	)		(276	)		—		(337	)
Benefit attributable to FDIC indemnification asset		55			286			—		341

Recovery of loan losses charged to operations		(6	)		10			—		4
Recovery of loan losses recorded through the FDIC indemnification asset		(55	)		(286	)		—		(341	)

Ending balance	$	16		$	402		$	—	$	418

The following tables present the Company’s allowance for loan losses and recorded investment in loans evaluated for impairment, excluding PCI loans, by loan class, as of the dates indicated:


	June 30, 2015
(Amounts in thousands)	Loans Individually Evaluated for Impairment		Allowance for Loans Individually Evaluated		Loans Collectively Evaluated for Impairment		Allowance for Loans Collectively Evaluated
Commercial loans
Construction, development, and other land	$	—	$	—	$	46,459	$	957
Commercial and industrial		—		—		83,086		495
Multi-family residential		—		—		96,735		1,621
Single family non-owner occupied		1,149		41		143,023		3,253
Non-farm, non-residential		14,227		1,657		453,276		4,774
Agricultural		—		—		1,898		14
Farmland		—		—		28,616		182

Total commercial loans		15,376		1,698		853,093		11,296
Consumer real estate loans
Home equity lines		—		—		128,823		1,288
Single family owner occupied		5,777		543		491,897		4,390
Owner occupied construction		356		—		37,252		247

Total consumer real estate loans		6,133		543		657,972		5,925
Consumer and other loans
Consumer loans		—		—		72,178		681
Other		—		—		7,472		—

Total consumer and other loans		—		—		79,650		681

Total loans, excluding PCI loans	$	21,509	$	2,241	$	1,590,715	$	17,902


	December 31, 2014
(Amounts in thousands)	Loans Individually Evaluated for Impairment		Allowance for Loans Individually Evaluated		Loans Collectively Evaluated for Impairment		Allowance for Loans Collectively Evaluated
Commercial loans
Construction, development, and other land	$	—	$	—	$	51,608	$	1,151
Commercial and industrial		—		—		85,353		690
Multi-family residential		—		—		98,880		1,917
Single family non-owner occupied		833		45		135,223		3,183
Non-farm, non-residential		9,477		1,000		475,353		4,805
Agricultural		—		—		1,642		13
Farmland		—		—		30,233		206

Total commercial loans		10,310		1,045		878,292		11,965
Consumer real estate loans
Home equity lines		—		—		134,006		1,330
Single family owner occupied		5,738		437		489,820		4,498
Owner occupied construction		—		—		32,983		224

Total consumer real estate loans		5,738		437		656,809		6,052
Consumer and other loans
Consumer loans		—		—		69,429		670
Other		—		—		6,555		—

Total consumer and other loans		—		—		75,984		670

Total loans, excluding PCI loans	$	16,048	$	1,482	$	1,611,085	$	18,687

The following table presents the Company’s allowance for loan losses related to PCI loans and recorded investment in PCI loans, by loan pool, as of the dates indicated:


	June 30, 2015				December 31, 2014
(Amounts in thousands)	Loan Pools		Allowance for Loan Pools With Impairment		Loan Pools		Allowance for Loan Pools With Impairment
Commercial loans
Waccamaw commercial	$	11,873	$	—	$	13,392	$	37
Waccamaw lines of credit		201		—		461		—
Peoples commercial		4,856		—		5,875		—
Other		1,307		—		1,358		—

Total commercial loans		18,237		—		21,086		37
Consumer real estate loans
Waccamaw serviced home equity lines		33,703		—		37,342		—
Waccamaw residential		1,933		94		2,638		—
Peoples residential		1,192		20		1,215		21

Total consumer real estate loans		36,828		114		41,195		21
Consumer and other loans
Waccamaw consumer⁽¹⁾		—		—		2		—

Total loans	$	55,065	$	114	$	62,283	$	58

(1)	Closed during the first quarter of 2015.