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 Triangle region of North Carolina as well as Atlanta, Georgia. 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, Charleston, Raleigh and Atlanta including doctors, dentists, and small business owners. The principal component of the loan portfolio is loans secured by real estate mortgages which account for 82.1% of total loans at December 31, 2017. Commercial loans comprise 59.8% of total real estate loans and consumer loans account for 40.2%. Commercial real estate loans are further categorized into owner occupied which represents 22.8% of total loans and non-owner occupied loans represent 22.6%. Commercial construction loans represent only 3.7% 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, 2017, approximately $97.7 million, or 7.0% of our loans had loan-to-value ratios which exceeded regulatory supervisory limits, of which 76 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. 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.

The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $2.3 million and $2.0 million as of December 31, 2017 and December 31, 2016, respectively.


	December 31,
(dollars in thousands)	2017				2016
Commercial
Owner occupied RE	$	316,818		22.8%	285,938		24.6%
Non-owner occupied RE		312,798		22.6%	239,574		20.6%
Construction		51,179		3.7%	33,393		2.9%
Business		226,158		16.3%	202,552		17.4%
Total commercial loans		906,953		65.4%	761,457		65.5%
Consumer
Real estate		273,050		19.7%	215,588		18.5%
Home equity		156,141		11.3%	137,105		11.8%
Construction		28,351		2.0%	31,922		2.7%
Other		22,575		1.6%	17,572		1.5%
Total consumer loans		480,117		34.6%	402,187		34.5%
Total gross loans, net of deferred fees		1,387,070		100.0%	1,163,644		100.0%
Less – allowance for loan losses		(15,523	)		(14,855	)
Total loans, net	$	1,371,547			1,148,789

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



	December 31,
(dollars in thousands)		2017	2016
Variable rate loans	$	349,493	290,462
Fixed rate loans		1,037,577	873,182
	$	1,387,070	1,163,644

At December 31, 2017, approximately $487.0 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, 2017
		Owner		Non-owner
(dollars in thousands)		occupied RE		occupied RE	Construction	Business	Total
Current		$	316,818	312,477	51,179	224,861	905,335
30-59 days past due			-	129	-	416	545
60-89 days past due			-	-	-	-	-
Greater than 90 days			-	192	-	881	1,073
		$	316,818	312,798	51,179	226,158	906,953

	December 31, 2016
		Owner		Non-owner
		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

As of December 31, 2017 and 2016, loans 30 days or more past due represented 0.34% and 0.55% of our total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.12% and 0.38% as of December 31, 2017 and 2016, respectively.

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


	December 31, 2017
		Owner		Non-owner
(dollars in thousands)		occupied RE		occupied RE	Construction	Business	Total
Pass		$	312,628	306,965	51,179	215,729	886,501
Special Mention			1,770	2,082	-	5,540	9,392
Substandard			2,420	3,751	-	4,889	11,060
Doubtful			-	-	-	-	-
		$	316,818	312,798	51,179	226,158	906,953

	December 31, 2016
		Owner		Non-owner
		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

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, 2017
(dollars in thousands)		Real estate		Home equity	Construction	Other	Total
Current		$	271,284	154,821	28,351	22,506	476,962
30-59 days past due			681	325	-	69	1,075
60-89 days past due			131	995	-	-	1,126
Greater than 90 days			954	-	-	-	954
		$	273,050	156,141	28,351	22,575	480,117


	December 31, 2016
		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

Consumer loans 30 days or more past due were 0.23% and 0.17% as of December 31, 2017 and 2016, respectively.

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


	December 31, 2017
(dollars in thousands)		Real estate		Home equity	Construction	Other	Total
Pass		$	269,422	152,545	28,351	22,367	472,685
Special Mention			715	1,025	-	88	1,828
Substandard			2,913	2,571	-	120	5,604
Doubtful			-	-	-	-	-
Loss			-	-	-	-	-
		$	273,050	156,141	28,351	22,575	480,117

		December 31, 2016
		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

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)		2017		2016
Commercial
Owner occupied RE		$	-	276
Non-owner occupied RE			1,581	2,711
Construction			-	-
Business			910	686
Consumer
Real estate			992	550
Home equity			1,144	256
Construction			-	-
Other			1	13
Nonaccruing troubled debt restructurings			2,673	990
Total nonaccrual loans, including nonaccruing TDRs			7,301	5,482
Other real estate owned			242	639
Total nonperforming assets		$	7,543	6,121
Nonperforming assets as a percentage of:
Total assets			0.46%	0.46%
Gross loans			0.54%	0.53%
Total loans over 90 days past due		$	2,027	1,984
Loans over 90 days past due and still accruing			-	-
Accruing TDRs			5,145	5,675

Foregone interest income on the nonaccrual loans for the year ended December 31, 2017 was approximately $309,000 and approximately $439,000 for the same period in 2016.

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, 2017
			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	$	2,281		2,235	464	179
Non-owner occupied RE		6,827		3,665	2,646	750
Construction		-		-	-	-
Business		3,735		2,764	1,993	1,061
Total commercial		12,843		8,664	5,103	1,990
Consumer
Real estate		2,062		2,037	2,037	1,379
Home equity		2,010		1,575	680	286
Construction		-		-	-	-
Other		171		170	170	22
Total consumer		4,243		3,782	2,887	1,687
Total	$	17,086		12,446	7,990	3,677


			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

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,
	2017			2016		2015
	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	$	2,255	104	2,263	112	884	6
Non-owner occupied RE		4,144	199	4,106	200	6,137	128
Construction		-	-	-	-	1,888	74
Business		2,823	162	2,873	135	4,067	148
Total commercial		9,222	465	9,242	447	12,976	356
Consumer
Real estate		2,047	69	1,854	81	1,112	46
Home equity		1,576	97	257	2	252	7
Construction		-	-	-	-	-	-
Other		174	6	203	6	208	7
Total consumer		3,797	172	2,314	89	1,572	60
Total	$	13,019	637	11,556	536	14,548	416

Allowance for Loan Losses

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


	Year ended December 31,
(dollars in thousands)			2017		2016		2015
Balance, beginning of period		$	14,855		13,629		11,752
Provision for loan losses			2,000		2,300		3,200
Loan charge-offs:
Commercial
Owner occupied RE			-		(5	)	(48	)
Non-owner occupied RE			(589	)	(100	)	(258	)
Construction			-		(42	)	(50	)
Business			(638	)	(1,031	)	(881	)
Total commercial			(1,227	)	(1,178	)	(1,237	)
Consumer
Real estate			-		(194	)	(173	)
Home equity			(400	)	(66	)	(93	)
Construction			-		-		-
Other			(11	)	(210	)	(5	)
Total consumer			(411	)	(470	)	(271	)
Total loan charge-offs			(1,638	)	(1,648	)	(1,508	)
Loan recoveries:
Commercial
Owner occupied RE			-		-		-
Non-owner occupied RE			119		155		10
Construction			-		-		-
Business			86		403		129
Total commercial			205		558		139
Consumer
Real estate			86		10		-
Home equity			13		1		46
Construction			-		-		-
Other			2		5		-
Total consumer			101		16		46
Total recoveries			306		574		185
Net loan charge-offs			(1,332	)	(1,074	)	(1,323	)
Balance, end of period		$	15,523		14,855		13,629

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


	Year ended December 31, 2017
(dollars in thousands)		Commercial			Consumer		Unallocated	Total
Balance, beginning of period		$	10,039		4,816		-	14,855
Provision			920		1,080		-	2,000
Loan charge-offs			(1,227	)	(411	)	-	(1,638	)
Loan recoveries			205		101		-	306
Net loan charge-offs			(1,022	)	(310	)	-	(1,332	)
Balance, end of period		$	9,937		5,586		-	15,523

	Year ended December 31, 2016
		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

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


	December 31, 2017
		Allowance for loan losses			Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,990	1,687	3,677	8,664	3,782	12,446
Collectively evaluated		7,947	3,899	11,846	898,289	476,335	1,374,624
Total	$	9,937	5,586	15,523	906,953	480,117	1,387,070

	December 31, 2016
	Allowance for loan losses				Recorded investment in loans
	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