4) Loans

Loans at year-end were as follows:

	2015			2014
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	556,522		$	462,403
Real estate:
Commercial and residential		625,665			478,335
Land and construction		84,428			67,980
Home equity		76,833			61,644
Consumer		16,010			18,867

Loans		1,359,458			1,089,229
Deferred loan fees, net		(742	)		(586	)

Loans, net of deferred fees		1,358,716			1,088,643
Allowance for loan losses		(18,926	)		(18,379	)

Loans, net	$	1,339,790		$	1,070,264

At December 31, 2015, total net loans included in the table above include $141,343,000 of the non-PCI loans acquired in the Focus transaction.

Changes in the allowance for loan losses were as follows:

	For the Year Ended December 31, 2015
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Balance, beginning of year	$	11,187		$	7,070		$	122		$	18,379
Charge-offs		(527	)		(2	)		(9	)		(538	)
Recoveries		877			146			30			1,053

Net recoveries		350			144			21			515
Provision (credit) for loan losses		(789	)		862			(41	)		32

Balance, end of year	$	10,748		$	8,076		$	102		$	18,926

	For the Year Ended December 31, 2014
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Balance, beginning of year	$	12,533		$	6,548		$	83		$	19,164
Charge-offs		(815	)		(87	)		(25	)		(927	)
Recoveries		418			62			—			480

Net charge-offs		(397	)		(25	)		(25	)		(447	)
Provision (credit) for loan losses		(949	)		547			64			(338	)

Balance, end of year	$	11,187		$	7,070		$	122		$	18,379

	For the Year Ended December 31, 2013
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Balance, beginning of year	$	12,866		$	6,034		$	127		$	19,027
Charge-offs		(1,676	)		(276	)		—			(1,952	)
Recoveries		2,621			283			1			2,905

Net recoveries		945			7			1			953
Provision (credit) for loan losses		(1,278	)		507			(45	)		(816	)

Balance, end of year	$	12,533		$	6,548		$	83		$	19,164

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, based on the impairment method as follows at year-end:

	December 31, 2015
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	174	$	112	$	—	$	286
Collectively evaluated for impairment		10,574		7,964		102		18,640
Acquired with deterioriated credit quality		—		—		—		—

Total allowance balance	$	10,748	$	8,076	$	102	$	18,926


Loans:
Individually evaluated for impairment	$	2,014	$	4,272	$	4	$	6,290
Collectively evaluated for impairment		554,271		782,654		16,006		1,352,931
Acquired with deterioriated credit quality		237		—		—		237

Total loan balance	$	556,522	$	786,926	$	16,010	$	1,359,458

	December 31, 2014
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	404	$	—	$	—	$	404
Collectively evaluated for impairment		10,783		7,070		122		17,975

Total allowance balance	$	11,187	$	7,070	$	122	$	18,379


Loans:
Individually evaluated for impairment	$	2,701	$	3,315	$	6	$	6,022
Collectively evaluated for impairment		459,702		604,644		18,861		1,083,207

Total loan balance	$	462,403	$	607,959	$	18,867	$	1,089,229

Purchased Credit Impaired Loans:

The Company has purchased loans, for which there was, at acquisition, evidence of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of these loans is as follows:

	2015
	(Dollars in thousands)
Commercial	$	876
Outstanding balance		876
Carrying amount, net of discount of $639,000		237

For those purchased credit impaired loans discussed above, the Company increased the allowance for loan losses by $0 during 2015. No allowance for loan losses were reversed during 2015.

For these purchased credit impaired loans, the Company cannot reasonably estimate the cash flows expected to be collected on the loans and therefore has continued to account for those loans using the cost recovery method of income recognition. As such, no portion of a purchase discount adjustment has been determined to meet the definition of an accretable yield adjustment on those loans accounted for using the cost recovery method. If, in the future, cash flows from the borrowers can be reasonably estimated, a portion of the purchase discount would be allocated to an accretable yield adjustment based upon the present value of the future estimated cash flows versus the current carrying value of the loan and the accretable yield portion would be recognized as interest income over the remaining life of the loan. Until such accretable yield can be calculated, under the cost recovery method of income recognition, all payments will be used to reduce the carrying value of the loan and no income will be recognized on the loan until the carrying value is reduced to zero. Any loan accounted for under the cost recovery method is also still included as a nonaccrual loan.

The following table presents loans held-for-investment individually evaluated for impairment by class of loans as of December 31, 2015 and December 31, 2014. The recorded investment included in the following table represents loan principal net of any partial charge-offs recognized on the loans. The unpaid principal balance represents the recorded balance prior to any partial charge-offs.

	December 31, 2015						December 31, 2014
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(Dollars in thousands)
With no related allowance recorded:
Commercial	$	745	$	745	$	—	$	2,282	$	1,872	$	—
Real estate:
Commercial and residential		3,851		2,992		—		2,510		1,651		—
Land and construction		237		219		—		1,808		1,319		—
Home Equity		302		302		—		345		345		—
Consumer		4		4		—		6		6		—

Total with no related allowance recorded		5,139		4,262		—		6,951		5,193		—
With an allowance recorded:
Commercial		1,506		1,506		174		829		829		404
Real estate:
Home Equity		759		759		112		—		—		—

Total with an allowance recorded		2,265		2,265		286		829		829		404

Total	$	7,404	$	6,527	$	286	$	7,780	$	6,022	$	404

The following table presents interest recognized and cash-basis interest earned on impaired loans for the periods indicated:

	For the Year Ended December 31, 2015
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	1,774	$	3,006	$	764	$	475	$	5	$	6,024
Interest income during impairment	$	14	$	—	$	—	$	2	$	—	$	16
Cash-basis interest earned	$	—	$	—	$	—	$	—	$	—	$	—

	For the Year Ended December 31, 2014
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	4,069	$	2,758	$	1,628	$	529	$	56	$	9,040
Interest income during impairment	$	56	$	—	$	—	$	—	$	—	$	56
Cash-basis interest earned	$	—	$	—	$	—	$	—	$	—	$	—

Nonperforming loans include both smaller dollar balance homogenous loans that are collectively evaluated for impairment and individually classified loans. Nonperforming loans were as follows at year-end:

	2015		2014
	(Dollars in thousands)
Nonaccrual loans — held-for-investment	$	4,716	$	5,855
Restructured and loans over 90 days past due and still accruing		1,662		—

Total nonperforming loans	$	6,378	$	5,855


Other restructured loans	$	149	$	167
Impaired loans, excluding loans held-for-sale	$	6,527	$	6,022

The following table presents the nonperforming loans by class at year-end:

	2015						2014
	Nonaccrual		Restructured and Loans over 90 Days Past Due and Still Accruing		Total		Nonaccrual		Restructured and Loans over 90 Days Past Due and Still Accruing		Total
	(Dollars in thousands)
Commercial	$	724	$	1,378	$	2,102	$	2,534	$	—	$	2,534
Real estate:
Commercial and residential		2,992		—		2,992		1,651		—		1,651
Land and construction		219		—		219		1,320		—		1,320
Home equity		777		284		1,061		344		—		344
Consumer		4		—		4		6		—		6

Total	$	4,716	$	1,662	$	6,378	$	5,855	$	—	$	5,855

The following table presents the aging of past due loans as of December 31, 2015 by class of loans:

	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Loans Not Past Due		Total
	(Dollars in thousands)
Commercial	$	3,285	$	262	$	1,704	$	5,251	$	551,271	$	556,522
Real estate:
Commercial and residential		—		—		—		—		625,665		625,665
Land and construction		219		—		—		219		84,209		84,428
Home equity		—		—		284		284		76,549		76,833
Consumer		—		—		—		—		16,010		16,010

Total	$	3,504	$	262	$	1,988	$	5,754	$	1,353,704	$	1,359,458

The following table presents the aging of past due loans as of December 31, 2014 by class of loans:

	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Loans Not Past Due		Total
	(Dollars in thousands)
Commercial	$	3,002	$	195	$	1,978	$	5,175	$	457,228	$	462,403
Real estate:
Commercial and residential		—		—		1,065		1,065		477,270		478,335
Land and construction		—		—		—		—		67,980		67,980
Home equity		—		—		—		—		61,644		61,644
Consumer		—		—		—		—		18,867		18,867

Total	$	3,002	$	195	$	3,043	$	6,240	$	1,082,989	$	1,089,229

Past due loans 30 days or greater totaled $5,754,000 and $6,240,000 at December 31, 2015 and December 31, 2014, respectively, of which $591,000 and $3,130,000 were on nonaccrual. At December 31, 2015, there were also $4,125,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2014, there were also $2,725,000 loans less than 30 days past due included in nonaccrual loans held- for-investment. Management's classification of a loan as "nonaccrual" is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. The loans may or may not be collateralized, and collection efforts are pursued.

Credit Quality Indicators

Concentrations of credit risk arise when a number of clients are engaged in similar business activities, or activities in the same geographic region, or have similar features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The Company's loan portfolio is concentrated in commercial (primarily manufacturing, wholesale, and service) and real estate lending, with the balance in consumer loans. While no specific industry concentration is considered significant, the Company's lending operations are located in the Company's market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the Company's borrowers could be adversely impacted by a continued downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers' ability to repay their loans.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information; historical payment experience; credit documentation; public information; and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Nonclassified loans generally include those loans that are expected to be repaid in accordance with contractual loans terms. Classified loans are those loans that are assigned a substandard, substandard-nonaccrual, or doubtful risk rating using the following definitions:

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Substandard-Nonaccrual. Loans classified as substandard-nonaccrual are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any, and it is probable that the Company will not receive payment of the full contractual principal and interest. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. In addition, the Company no longer accrues interest on the loan because of the underlying weaknesses.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss. Loans classified as loss are considered uncollectable or of so little value that their continuance as assets is not warranted. This classification does not necessarily mean that a loan has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery would occur. Loans classified as loss are immediately charged off against the allowance for loan losses. Therefore, there is no balance to report at December 31, 2015 or 2014.

The following table provides a summary of the loan portfolio by loan type and credit quality classification for the periods indicated:

	December 31, 2015						December 31, 2014
	Nonclassified		Classified*		Total		Nonclassified		Classified*		Total
	(Dollars in thousands)
Commercial	$	547,536	$	8,986	$	556,522	$	455,767	$	6,636	$	462,403
Real estate:
Commercial and residential		617,865		7,800		625,665		472,061		6,274		478,335
Land and construction		84,209		219		84,428		66,660		1,320		67,980
Home equity		75,511		1,322		76,833		60,736		908		61,644
Consumer		15,705		305		16,010		18,518		349		18,867

Total	$	1,340,826	$	18,632	$	1,359,458	$	1,073,742	$	15,487	$	1,089,229


*	Classified loans in the table above include SBA guarantees.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company's underwriting policy.

For the year ended December 31, 2015, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included a reduction of the stated interest rate of the loan, or an extension of maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.

The book balance of troubled debt restructurings at December 31, 2015 was $153,000, which included $4,000 of nonaccrual loans and $149,000 of accruing loans. The book balance of troubled debt restructurings at December 31, 2014 was $1,083,000, which included $916,000 of nonaccrual loans and $167,000 of accruing loans. Approximately $3,000 and $113,000 in specific reserves were established with respect to these loans as of December 31, 2015 and December 31, 2014. As of December 31, 2015 and December 31, 2014, the Company had no additional amounts committed on any loan classified as a troubled debt restructuring.

There were no loans by class modified as troubled debt restructurings during the twelve month period ended December 31, 2015 and 2014.

A loan is considered to be in payment default when it is 30 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings within twelve months following the modification during the years ended December 31, 2015 and 2014.

HBC makes loans to executive officers, directors, and their affiliates. The following table presents the loans outstanding to these related parties for the periods indicated:

	2015			2014
	(Dollars in thousands)
Balance, beginning of year	$	576		$	590
Advances on loans during the year		4,175			—
Repayment on loans during the year		(4,189	)		(14	)

Balance, end of year	$	562		$	576