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 September 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 September 30, 2015
	Allowance Excluding PCI Loans			Allowance for PCI Loans			Total Allowance
(Amounts in thousands)
Beginning balance	$	20,144		$	114		$	20,258
Provision for (recovery of) loan losses		400			(94	)		306
Benefit attributable to the FDIC indemnification asset		—			75			75

Provision for (recovery of) loan losses charged to operations		400			(19	)		381
Recovery of loan losses recorded through the
FDIC indemnification asset		—			(75	)		(75	)
Charge-offs		(689	)		—			(689	)
Recoveries		252			—			252

Net charge-offs		(437	)		—			(437	)

Ending balance	$	20,107		$	20		$	20,127


	Three Months Ended September 30, 2014
	Allowance Excluding PCI Loans			Allowance for PCI Loans			Total Allowance
(Amounts in thousands)
Beginning balance	$	23,493		$	418		$	23,911
Recovery of loan losses		(2,335	)		(214	)		(2,549	)
Benefit attributable to the FDIC indemnification asset		—			110			110

Recovery of loan losses charged to operations		(2,335	)		(104	)		(2,439	)
Recovery of loan losses recorded through the
FDIC indemnification asset		—			(110	)		(110	)
Charge-offs		(1,118	)		—			(1,118	)
Recoveries		915			—			915

Net charge-offs		(203	)		—			(203	)

Ending balance	$	20,955		$	204		$	21,159


	Nine Months Ended September 30, 2015
	Allowance Excluding PCI Loans			Allowance for PCI Loans			Total Allowance
(Amounts in thousands)
Beginning balance	$	20,169		$	58		$	20,227
Provision for (recovery of) loan losses		1,766			(38	)		1,728
Benefit attributable to the FDIC indemnification asset		—			29			29

Provision for (recovery of) loan losses charged to operations		1,766			(9	)		1,757
Recovery of loan losses recorded through the
FDIC indemnification asset		—			(29	)		(29	)
Charge-offs		(2,940	)		—			(2,940	)
Recoveries		1,112			—			1,112

Net charge-offs		(1,828	)		—			(1,828	)

Ending balance	$	20,107		$	20		$	20,127


	Nine Months Ended September 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		733			(551	)		182
Benefit attributable to the FDIC indemnification asset		—			451			451

Provision for (recovery of) loan losses charged to operations		733			(100	)		633
Recovery of loan losses recorded through the
FDIC indemnification asset		—			(451	)		(451	)
Charge-offs		(5,119	)		—			(5,119	)
Recoveries		2,019			—			2,019

Net charge-offs		(3,100	)		—			(3,100	)

Ending balance	$	20,955		$	204		$	21,159

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


	Three Months Ended September 30, 2015
	Commercial			Consumer Real Estate			Consumer and Other			Total
(Amounts in thousands)
Beginning balance	$	12,995		$	6,468		$	681		$	20,144
Provision for (recovery of) loan losses charged to operations		6			20			374			400
Loans charged off		(150	)		(130	)		(409	)		(689	)
Recoveries credited to allowance		102			86			64			252

Net charge-offs		(48	)		(44	)		(345	)		(437	)

Ending balance	$	12,953		$	6,444		$	710		$	20,107


	Three Months Ended September 30, 2014
	Commercial			Consumer Real Estate			Consumer and Other			Total
(Amounts in thousands)
Beginning balance	$	16,747		$	6,123		$	623		$	23,493
(Recovery of) provision for loan losses charged to operations		(3,131	)		561			235			(2,335	)
Loans charged off		(558	)		(219	)		(341	)		(1,118	)
Recoveries credited to allowance		613			192			110			915

Net recoveries (charge-offs)		55			(27	)		(231	)		(203	)

Ending balance	$	13,671		$	6,657		$	627		$	20,955


	Nine Months Ended September 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		754			136			876			1,766
Loans charged off		(1,111	)		(622	)		(1,207	)		(2,940	)
Recoveries credited to allowance		300			441			371			1,112

Net charge-offs		(811	)		(181	)		(836	)		(1,828	)

Ending balance	$	12,953		$	6,444		$	710		$	20,107


	Nine Months Ended September 30, 2014
	Commercial			Consumer Real Estate			Consumer and Other			Total
(Amounts in thousands)
Beginning balance	$	16,090		$	6,597		$	635		$	23,322
(Recovery of) provision for loan losses charged to operations		(478	)		592			619			733
Loans charged off		(2,839	)		(1,184	)		(1,096	)		(5,119	)
Recoveries credited to allowance		898			652			469			2,019

Net charge-offs		(1,941	)		(532	)		(627	)		(3,100	)

Ending balance	$	13,671		$	6,657		$	627		$	20,955

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 September 30, 2015
	Commercial		Consumer Real Estate			Consumer and Other		Total
(Amounts in thousands)
Beginning balance	$	—	$	114		$	—	$	114
Recovery of PCI loan losses		—		(94	)		—		(94	)
Benefit attributable to FDIC indemnification asset		—		75			—		75

Recovery of loan losses charged to operations		—		(19	)		—		(19	)
Recovery of loan losses recorded through the FDIC indemnification asset		—		(75	)		—		(75	)

Ending balance	$	—	$	20		$	—	$	20


	Three Months Ended September 30, 2014
	Commercial			Consumer Real Estate			Consumer and Other		Total
(Amounts in thousands)
Beginning balance	$	16		$	402		$	—	$	418
Recovery of PCI loan losses		(8	)		(206	)		—		(214	)
Benefit attributable to FDIC indemnification asset		—			110			—		110

Recovery of loan losses charged to operations		(8	)		(96	)		—		(104	)
Recovery of loan losses recorded through the FDIC indemnification asset		—			(110	)		—		(110	)

Ending balance	$	8		$	196		$	—	$	204


	Nine Months Ended September 30, 2015
	Commercial			Consumer Real Estate			Consumer and Other		Total
(Amounts in thousands)
Beginning balance	$	37		$	21		$	—	$	58
Recovery of PCI loan losses		(37	)		(1	)		—		(38	)
Benefit (provision) attributable to
FDIC indemnification asset		30			(1	)		—		29

Recovery of loan losses charged to operations		(7	)		(2	)		—		(9	)
(Recovery of) provision for loan losses recorded through the FDIC indemnification asset		(30	)		1			—		(29	)

Ending balance	$	—		$	20		$	—	$	20


	Nine Months Ended September 30, 2014
	Commercial			Consumer Real Estate			Consumer and Other		Total
(Amounts in thousands)
Beginning balance	$	77		$	678		$	—	$	755
Recovery of PCI loan losses		(69	)		(482	)		—		(551	)
Benefit attributable to FDIC indemnification asset		55			396			—		451

Recovery of loan losses charged to operations		(14	)		(86	)		—		(100	)
Recovery of loan losses recorded through the FDIC indemnification asset		(55	)		(396	)		—		(451	)

Ending balance	$	8		$	196		$	—	$	204

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:


	September 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	$	—	$	—	$	51,526	$	1,087
Commercial and industrial		—		—		86,339		516
Multi-family residential		—		—		93,848		1,532
Single family non-owner occupied		1,404		117		142,509		3,076
Non-farm, non-residential		14,131		1,711		473,456		4,702
Agricultural		—		—		2,449		18
Farmland		—		—		27,791		194

Total commercial loans		15,535		1,828		877,918		11,125
Consumer real estate loans
Home equity lines		—		—		127,599		1,162
Single family owner occupied		6,132		760		494,515		4,205
Owner occupied construction		353		53		39,957		264

Total consumer real estate loans		6,485		813		662,071		5,631
Consumer and other loans
Consumer loans		—		—		75,168		710
Other		—		—		7,058		—

Total consumer and other loans		—		—		82,226		710

Total loans, excluding PCI loans	$	22,020	$	2,641	$	1,622,215	$	17,466


	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:


	September 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	$	5,580	$	—	$	13,392	$	37
Waccamaw lines of credit		—		—		461		—
Peoples commercial		5,102		—		5,875		—
Other		1,281		—		1,358		—

Total commercial loans		11,963		—		21,086		37
Consumer real estate loans
Waccamaw serviced home equity lines		31,261		—		37,342		—
Waccamaw residential		1,840		1		2,638		—
Peoples residential		1,175		19		1,215		21

Total consumer real estate loans		34,276		20		41,195		21
Consumer and other loans
Waccamaw consumer⁽¹⁾		—		—		2		—

Total loans	$	46,239	$	20	$	62,283	$	58

(1)	Closed during the first quarter of 2015.