4) Loans

Loans at year‑end were as follows:


	December 31,		December 31,
	2017		2016
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	573,296	$	604,331
Real estate:
CRE		772,867		662,228
Land and construction		100,882		81,002
Home equity		79,176		82,459
Residential mortgages		44,561		52,887
Consumer		12,395		20,460
Loans		1,583,177		1,503,367
Deferred loan fees, net		(510)		(760)
Loans, net of deferred fees		1,582,667		1,502,607
Allowance for loan losses		(19,658)		(19,089)
Loans, net	$	1,563,009	$	1,483,518

At December 31, 2017 and December 31, 2016, total net loans included in the table above include $58,551,000 and $88,453,000, respectively, of the non-PCI loans acquired in the Focus transaction.

Changes in the allowance for loan losses were as follows:


	Year Ended December 31, 2017
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	10,656	$	8,327	$	106	$	19,089
Charge-offs		(2,239)		—		—		(2,239)
Recoveries		1,585		1,124		—		2,709
Net (charge-offs) recoveries		(654)		1,124		—		470
Provision (credit) for loan losses		606		(501)		(6)		99
End of year balance	$	10,608	$	8,950	$	100	$	19,658


	Year Ended December 31, 2016
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	10,748	$	8,076	$	102	$	18,926
Charge-offs		(1,966)		—		(41)		(2,007)
Recoveries		365		568		—		933
Net (charge-offs) recoveries		(1,601)		568		(41)		(1,074)
Provision (credit) for loan losses		1,509		(317)		45		1,237
End of year balance	$	10,656	$	8,327	$	106	$	19,089


	Year Ended December 31, 2015
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	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
End of year balance	$	10,748	$	8,076	$	102	$	18,926

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, 2017
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	290	$	—	$	—	$	290
Collectively evaluated for impairment		10,318		8,950		100		19,368
Acquired with deteriorated credit quality		—		—		—		—
Total allowance balance	$	10,608	$	8,950	$	100	$	19,658
Loans:
Individually evaluated for impairment	$	1,775	$	998	$	1	$	2,774
Collectively evaluated for impairment		571,521		996,488		12,394		1,580,403
Acquired with deteriorated credit quality		—		—		—		—
Total loan balance	$	573,296	$	997,486	$	12,395	$	1,583,177


	December 31, 2016
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	329	$	—	$	—	$	329
Collectively evaluated for impairment		10,327		8,327		106		18,760
Acquired with deteriorated credit quality		—		—		—		—
Total allowance balance	$	10,656	$	8,327	$	106	$	19,089
Loans:
Individually evaluated for impairment	$	2,057	$	885	$	3	$	2,945
Collectively evaluated for impairment		602,029		877,691		20,457		1,500,177
Acquired with deteriorated credit quality		245		—		—		245
Total loan balance	$	604,331	$	878,576	$	20,460	$	1,503,367

The following table presents loans held‑for‑investment individually evaluated for impairment by class of loans as of December 31, 2017 and December 31, 2016. 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, 2017						December 31, 2016
					Allowance						Allowance
	Unpaid				for Loan		Unpaid				for Loan
	Principal		Recorded		Losses		Principal		Recorded		Losses
	Balance		Investment		Allocated		Balance		Investment		Allocated
	(Dollars in thousands)
With no related allowance recorded:
Commercial	$	1,243	$	1,243	$	—	$	1,808	$	1,808	$	—
Real estate:
CRE		500		500		—		1,278		419		—
Land and construction		138		119		—		218		199		—
Home Equity		379		379		—		267		267		—
Consumer		1		1		—		3		3		—
Total with no related allowance recorded		2,261		2,242		—		3,574		2,696		—

With an allowance recorded:
Commercial		589		532		290		494		494		329
Real estate:
Land and construction		—		—		—		—		—		—
Total with an allowance recorded		589		532		290		494		494		329
Total	$	2,850	$	2,774	$	290	$	4,068	$	3,190	$	329

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


	Year Ended December 31, 2017
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	2,455	$	567	$	359	$	337	$	1	$	3,719
Interest income during impairment	$	—	$	—	$	3	$	—	$	—	$	3
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—


	Year Ended December 31, 2016
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	1,822	$	1,922	$	208	$	625	$	3	$	4,580
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—

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:



	2017		2016
	(Dollars in thousands)
Nonaccrual loans - held-for-investment	$	2,250	$	3,059
Restructured and loans over 90 days past due and still accruing		235		—
Total nonperforming loans		2,485		3,059
Other restructured loans		289		131
Total impaired loans	$	2,774	$	3,190

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


	December 31, 2017						December 31, 2016
				Restructured						Restructured
				and Loans						and Loans
				over 90 Days						over 90 Days
				Past Due						Past Due
				and Still						and Still
	Nonaccrual			Accruing	Total		Nonaccrual			Accruing	Total
	(Dollars in thousands)
Commercial	$	1,250	$	235	$	1,485	$	2,171	$	—	$	2,171
Real estate:
CRE		501		—		501		419		—		419
Land and construction		119				119		199		—		199
Home equity		379		—		379		267		—		267
Consumer		1		—		1		3		—		3
Total	$	2,250	$	235	$	2,485	$	3,059	$	—	$	3,059

The following table presents the aging of past due loans as of December 31, 2017 by class of loans:


	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total		Loans Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
	(Dollars in thousands)
Commercial	$	4,288	$	1,224	$	589	$	6,101	$	567,195	$	573,296
Real estate:
CRE		—		—		500		500		772,367		772,867
Land and construction		—		—		119		119		100,763		100,882
Home equity		223		—		—		223		78,953		79,176
Residential mortgages		—		—		—		—		44,561		44,561
Consumer		—		—		—		—		12,395		12,395
Total	$	4,511	$	1,224	$	1,208	$	6,943	$	1,576,234	$	1,583,177

The following table presents the aging of past due loans as of December 31, 2016 by class of loans:


	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total		Loans Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total
	(Dollars in thousands)
Commercial	$	3,998	$	857	$	2,036	$	6,891	$	597,440	$	604,331
Real estate:
CRE		632		—		—		632		661,596		662,228
Land and construction		—		—		199		199		80,803		81,002
Home equity		—		267		—		267		82,192		82,459
Residential mortgages		—		—		—		—		52,887		52,887
Consumer		—		—		—		—		20,460		20,460
Total	$	4,630	$	1,124	$	2,235	$	7,989	$	1,495,378	$	1,503,367

Past due loans 30 days or greater totaled $6,943,000 and $7,989,000 at December 31, 2017 and December 31, 2016, respectively, of which $1,410,000 and $2,057,000 were on nonaccrual. At December 31, 2017, there were also $840,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2016, there were also $1,002,000 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. In addition, loans of so little value that their continuance as assets is not warranted are classified as loss. 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 will 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, 2017 or 2016.

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


	December 31, 2017						December 31, 2016
	Nonclassified		Classified		Total		Nonclassified		Classified		Total
Commercial	$	554,913	$	18,383	$	573,296	$	594,255	$	10,076	$	604,331
Real estate:
CRE		766,988		5,879		772,867		659,777		2,451		662,228
Land and construction		100,763		119		100,882		80,803		199		81,002
Home equity		78,486		690		79,176		81,866		593		82,459
Residential mortgages		44,561		—		44,561		52,887		—		52,887
Consumer		12,394		1		12,395		20,455		5		20,460
Total	$	1,558,105	$	25,072	$	1,583,177	$	1,490,043	$	13,324	$	1,503,367

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 in compliance with the Company’s underwriting policy.

The book balance of troubled debt restructurings at December 31, 2017 was $325,000, which included $16,000 of nonaccrual loans and $309,000 of accruing loans. The book balance of troubled debt restructurings at December 31, 2016 was $133,000, which included $2,000 of nonaccrual loans and $131,000 of accruing loans. Approximately $1,000 and $2,000 in specific reserves were established with respect to these loans as of December 31, 2017 and December 31, 2016. As of December 31, 2017 and December 31, 2016, the Company had no additional amounts committed on any loan classified as a troubled debt restructuring.

The following table presents loans by class modified as troubled debt restructurings:


	During the Year Ended
		December 31, 2017
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		3	$	213	$	213
Total		3	$	213	$	213

During the twelve months ended December 31, 2017, there were no troubled debt restructurings in which the amount of principal or accrued interest owed from the borrower was forgiven or which resulted in a charge-off or change to the allowance for loan losses. There were no new loans modified as troubled debt restructurings during the twelve months ended December 31, 2016.

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, 2017 and 2016.

A loan that is a troubled debt restructuring on nonaccrual status may return to accruing status after a period of at least six months of consecutive payments in accordance with the modified terms.

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:


	2017		2016
	(Dollars in thousands)
Beginning of year balance	$	547	$	562
Repayment on loans during the year		(16)		(15)
End of year balance	$	531	$	547