Note 4.

Loans

Loan Portfolio

Loans, net of unearned income, consisted of the following at December 31, 2012 and 2011:


	December 31, 2012		December 31, 2011
(Amounts in thousands)
Covered loans	$	219,055	$	—
Non-covered loans
Commercial loans
Construction, development, and other land		49,460		61,768
Commercial and industrial		88,714		91,939
Multi-family residential		65,694		77,050
Single family non-owner occupied		135,647		106,743
Non-farm, non-residential		445,889		336,005
Agricultural		1,709		1,374
Farmland		34,401		37,161

Total commercial loans		821,514		712,040
Consumer real estate loans
Home equity lines		111,081		111,387
Single family owner occupied		472,951		473,067
Owner occupied construction		16,223		19,577

Total consumer real estate loans		600,255		604,031
Consumer and other loans
Consumer loans		78,163		67,129
Other		5,666		12,867

Total consumer and other loans		83,829		79,996

Total non-covered loans		1,505,598		1,396,067

Total loans held for investment, net of unearned income	$	1,724,653	$	1,396,067

Loans held for sale	$	6,672	$	5,820

Covered loans held for investment consisted of the following at December 31, 2012:


(Amounts in thousands)	December 31, 2012
Covered loans
Commercial loans
Construction, development, and other land	$	34,569
Commercial and industrial		6,972
Multi-family residential		2,611
Single family non-owner occupied		11,693
Non-farm, non-residential		51,486
Agricultural		144
Farmland		1,260

Total commercial loans		108,735
Consumer real estate loans
Home equity lines		81,445
Single family owner occupied		23,557
Owner occupied construction		1,644

Total consumer real estate loans		106,646
Consumer and other loans
Consumer loans		3,674

Total covered loans	$	219,055

Acquired Impaired Loans

Acquired credit impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality,” formerly American Institute of Certified Public Accountants Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans exhibit evidence of credit deterioration when it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration, as of the purchase date, may include measures such as nonaccrual status, credit scores, declines in collateral value, current loan to value percentages, and days past due. The Company considers expected prepayments and estimates the amount and timing of expected principal, interest, and other cash flows for each loan or pool of loans meeting the criteria above, and determines the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount, representing the excess of the loan’s or pool’s cash flows expected to be collected over the amount deemed paid for the loan or pool of loans, is accreted into interest income over the remaining life of the loan or pool (accretable yield). The Company records a discount on these loans at acquisition to record them at their realizable cash flows. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference which is included in the carrying amount of the loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reversal of the nonaccretable difference with a positive impact on interest income prospectively. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

Purchased performing loans are recorded at fair value and include credit and interest rate marks associated with acquisition accounting adjustments, as accounted for under the contractual cash flow method of accounting. The fair value adjustment is accreted as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. A provision for loan losses is recorded for any credit deterioration in these loans subsequent to the acquisition. Additional information regarding the carrying amount of acquired loans at the acquisition date can be found in “Note 2 – Business Combinations and Branching Activity” herein.

When the fair values of acquired loans are established, certain loans are identified as impaired. The Company has estimated the cash flows to be collected on the acquired impaired loans and discounted those cash flows at a market rate of interest. The following tables present the carrying balance of acquired impaired loans during the periods indicated.


	Year Ended December 31, 2012
	Peoples		Waccamaw		Other		Total
(Amounts in thousands)
Balance, January 1	$	—	$	—	$	2,886	$	2,886
Impaired loans acquired		32,603		117,572		—		150,175
Balance, December 31	$	26,907	$	112,093	$	2,340	$	141,340


	Year Ended December 31, 2011
(Amounts in thousands)
Balance, January 1	$	3,221
Balance, December 31	$	2,886

The outstanding principal balance of acquired impaired loans was $198.34 million at December 31, 2012, and $7.71 million at December 31, 2011.

The following tables present changes in the accretable yield on acquired impaired loans during the periods indicated:


	Year Ended December 31, 2012
	Peoples			Waccamaw			Other			Total
(Amounts in thousands)
Balance, January 1	$	—		$	—		$	919		$	919
Additions		3,400			26,481			—			29,881
Accretion		(856	)		(3,315	)		(1,089	)		(5,260	)
Reclassifications from nonaccretable difference		—			—			185			185
Disposals		(202	)		(1,280	)		—			(1,482	)

Balance, December 31	$	2,342		$	21,886		$	15		$	24,243


	Year Ended December 31, 2011
(Amounts in thousands)
Balance, January 1	$	944
Accretion		(174	)
Reclassifications from nonaccretable difference		149
Disposals		—

Balance, December 31	$	919

Off-Balance Sheet Financial Instruments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized on the balance sheet. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparties. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties.

Standby letters of credit and written financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. To the extent deemed necessary, collateral of varying types and amounts is held to secure customer performance under certain of those letters of credit outstanding.

Financial instruments whose contract amounts represent credit risk are commitments to extend credit (including availability of lines of credit) of $215.77 million and standby letters of credit and financial guarantees written of $6.81 million at December 31, 2012. Additionally, the Company had gross notional amounts of outstanding commitments to lend related to secondary market mortgage loans of $14.84 million at December 31, 2012.

Related Party Loans

In the normal course of business, the Company’s subsidiary bank has made loans to directors and executive officers of the Company, its subsidiaries, and to affiliates of such directors and officers (collectively referred to as “related parties”). All loans and commitments made to such officers and directors and to companies in which they are officers, or have significant ownership interest, have been made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to the Company. The aggregate dollar amount of loans to related parties totaled $16.62 million and $18.41 million at December 31, 2012 and 2011, respectively. During 2012, $2.58 million in new loans and increases were made and repayments on such loans to related parties totaled $1.58 million. Changes in the composition of the Company’s subsidiary board members and executive officers resulted in a decrease in loans to related parties of $2.79 million for the year ended 2012.

Overdrafts

Customer overdrafts totaling $1.55 million at December 31, 2012, and $1.48 million at December 31, 2011, were reclassified as loans.