5) Loans

Loans were as follows for the periods indicated:


	June 30,		December 31,
	2018		2017
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	609,468	$	573,296
Real estate:
CRE		1,030,884		772,867
Land and construction		128,891		100,882
Home equity		121,278		79,176
Residential mortgages		54,367		44,561
Consumer		12,060		12,395
Loans		1,956,948		1,583,177
Deferred loan fees, net		(315)		(510)
Loans, net of deferred fees		1,956,633		1,582,667
Allowance for loan losses		(26,664)		(19,658)
Loans, net	$	1,929,969	$	1,563,009

At June 30, 2018, total net loans included in the table above include $48,522,000, $117,393,000 and $204,459,000, of the loans acquired in the Focus Business Bank (“Focus”), Tri-Valley, and United American acquisitions that were not purchased credit impaired loans, respectively. At December 31, 2017, total net loans included in the table above include $58,551,000, of the loans acquired in the Focus transaction that were not purchased credit impaired loans.

The total provision for loan losses was $7,198,000 for the second quarter of 2018, and $7,704,000 for the first six months of 2018, compared to a credit provision for loan losses of ($46,000) for the second quarter of 2017, and a provision for loan losses of $275,000 for the first six months of 2017. Net charge-offs totaled $673,000 for the second quarter of 2018, and $698,000 for the first six months of 2018, compared to net recoveries of $308,000 for the second quarter of 2017, and net recoveries of $33,000 for the first six months of 2017. The net charge-offs of $673,000 for the second quarter of 2018 included a $750,000 unsecured commercial loan, partially offset by smaller net recoveries.

Based on information received in July 2018 from a borrower regarding events that occurred in the second quarter of 2018, management of the Company determined that loans associated with that borrower’s $22,874,000 lending relationship became impaired and were placed on nonaccrual status as of June 30, 2018. The Company recorded a $6,100,000 specific reserve for this relationship, and accordingly, increased the provision for loan losses by $6,100,000 for the second quarter of 2018.

Changes in the allowance for loan losses were as follows for the periods indicated:


	Three Months Ended June 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	11,165	$	8,858	$	116	$	20,139
Charge-offs		(870)		—		—		(870)
Recoveries		175		22		—		197
Net (charge-offs) recoveries		(695)		22		—		(673)
Provision for loan losses		7,052		140		6		7,198
End of period balance	$	17,522	$	9,020	$	122	$	26,664


	Three Months Ended June 30, 2017
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	11,252	$	7,743	$	140	$	19,135
Charge-offs		(1,702)		—		—		(1,702)
Recoveries		1,122		888		—		2,010
Net (charge-offs) recoveries		(580)		888		—		308
Provision (credit) for loan losses		587		(649)		16		(46)
End of period balance	$	11,259	$	7,982	$	156	$	19,397


	Six Months Ended June 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	10,608	$	8,950	$	100	$	19,658
Charge-offs		(1,115)		—		—		(1,115)
Recoveries		332		85		—		417
Net (charge-offs) recoveries		(783)		85		—		(698)
Provision (credit) for loan losses		7,697		(15)		22		7,704
End of period balance	$	17,522	$	9,020	$	122	$	26,664


	Six Months Ended June 30, 2017
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Beginning of period balance	$	10,656	$	8,327	$	106	$	19,089
Charge-offs		(2,068)		—		—		(2,068)
Recoveries		1,172		929		—		2,101
Net (charge-offs) recoveries		(896)		929		—		33
Provision (credit) for loan losses		1,499		(1,274)		50		275
End of period balance	$	11,259	$	7,982	$	156	$	19,397

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 at the following period‑ends:


	June 30, 2018
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	7,464	$	—	$	—	$	7,464
Collectively evaluated for impairment		10,058		9,020		122		19,200
Acquired with deteriorated credit quality		—		—		—		—
Total allowance balance	$	17,522	$	9,020	$	122	$	26,664
Loans:
Individually evaluated for impairment	$	20,433	$	6,377	$	—	$	26,810
Collectively evaluated for impairment		589,035		1,329,043		12,060		1,930,138
Acquired with deteriorated credit quality		—		—		—		—
Total loan balance	$	609,468	$	1,335,420	$	12,060	$	1,956,948


	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

The following table presents loans held-for-investment individually evaluated for impairment by class of loans as of June 30, 2018 and December 31, 2017. 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. The recorded investment in consumer loans collateralized by residential real estate property that are in process of foreclosure according to local requirements of the applicable jurisdiction are not material as of the periods indicated:


	June 30, 2018						December 31, 2017
					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	$	5,817	$	5,817	$	—	$	1,243	$	1,243	$	—
Real estate:
CRE		5,801		5,801		—		500		500		—
Land and construction		—		—		—		138		119		—
Home Equity		576		576		—		379		379		—
Consumer		—		—		—		1		1		—
Total with no related allowance recorded		12,194		12,194		—		2,261		2,242		—

With an allowance recorded:
Commercial		14,616		14,616		7,464		589		532		290
Total with an allowance recorded		14,616		14,616		7,464		589		532		290
Total	$	26,810	$	26,810	$	7,464	$	2,850	$	2,774	$	290

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


	Three Months Ended June 30, 2018
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,803	$	3,151	$	—	$	470	$	—	$	15,424
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—


	Three Months Ended June 30, 2017
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	3,181	$	706	$	192	$	325	$	2	$	4,406
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—


	Six Months Ended June 30, 2018
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	8,460	$	2,268	$	40	$	439	$	—	$	11,207
Interest income during impairment	$	—	$	—	$		$	—	$	—	$	—
Cash-basis interest recognized	$	—	$	—	$	—	$	—	$	—	$	—


	Six Months Ended June 30, 2017
			Real Estate
					Land and		Home
	Commercial		CRE		Construction		Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	2,888	$	611	$	194	$	306	$	2	$	4,001
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 period‑end:


	June 30,				December 31,
	2018		2017		2017
	(Dollars in thousands)
Nonaccrual loans - held-for-investment	$	26,034	$	2,987	$	2,250
Restructured and loans over 90 days past due and still accruing		511		171		235
Total nonperforming loans		26,545		3,158		2,485
Other restructured loans		265		121		289
Total impaired loans	$	26,810	$	3,279	$	2,774

The following table presents the nonperforming loans by class for the periods indicated:


	June 30, 2018						December 31, 2017
				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	$	19,882	$	286	$	20,168	$	1,250	$	235	$	1,485
Real estate:
CRE		5,801		—		5,801		501		—		501
Land and construction		—		—		—		119		—		119
Home equity		351		225		576		379		—		379
Consumer		—		—		—		1		—		1
Total	$	26,034	$	511	$	26,545	$	2,250	$	235	$	2,485

The following tables present the aging of past due loans by class for the periods indicated:


	June 30, 2018
	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	$	5,645	$	1,068	$	1,127	$	7,840	$	601,628	$	609,468
Real estate:
CRE		—		—		501		501		1,030,383		1,030,884
Land and construction		—		—		—		—		128,891		128,891
Home equity		775		—		—		775		120,503		121,278
Residential mortgages		—		—		—		—		54,367		54,367
Consumer		—		—		—		—		12,060		12,060
Total	$	6,420	$	1,068	$	1,628	$	9,116	$	1,947,832	$	1,956,948


	December 31, 2017
	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

Past due loans 30 days or greater totaled $9,116,000 and $6,943,000 at June 30, 2018 and December 31, 2017, respectively, of which $1,502,000 and $1,410,000 were on nonaccrual, respectively. At June 30, 2018, there were also $24,532,000 of loans less than 30 days past due included in nonaccrual loans held-for-investment, which included $22,874,000 of loans related to one lending relationship. At December 31, 2017, there were also $840,000 of 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 being pursued.

Credit Quality Indicators

Concentrations of credit risk arise when a number of customers 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 remaining 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 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 June 30, 2018 and December 31, 2017.

The following table provides a summary of the loan portfolio by loan type and credit quality classification at period end:


	June 30, 2018						December 31, 2017
	Nonclassified		Classified		Total		Nonclassified		Classified		Total
Commercial	$	583,809	$	25,659	$	609,468	$	554,913	$	18,383	$	573,296
Real estate:
CRE		1,024,855		6,029		1,030,884		766,988		5,879		772,867
Land and construction		128,891		—		128,891		100,763		119		100,882
Home equity		120,702		576		121,278		78,486		690		79,176
Residential mortgages		54,367		—		54,367		44,561		—		44,561
Consumer		12,060		—		12,060		12,394		1		12,395
Total	$	1,924,684	$	32,264	$	1,956,948	$	1,558,105	$	25,072	$	1,583,177

The increase in classified assets at June 30, 2018 was primarily due to seasonal advances on lines of credit associated with a lending relationship that was moved to classified loans in the fourth quarter of 2017, which totaled $22,874,000 at June 30, 2018, compared to $12,500,000 at December 31, 2017. 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 accordance with the Company’s underwriting policy.

The balance of troubled debt restructurings at June 30, 2018 was $750,000, which included $99,000 of nonaccrual loans and $651,000 of accruing loans. The 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. Approximately $77,000 and $2,000 of specific reserves were established with respect to these loans as of June 30, 2018 and December 31, 2017.

The following table presents loans by class modified as troubled debt restructurings during the three and six months period ended June 30, 2018:


	During the Three and Six Months Ended
		June 30, 2018
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		2	$	224	$	224
Equity		1		225		225
Total		3	$	449	$	449

There were no new loans modified as troubled debt restructurings during the six months ended June 30, 2017.

During the three and six months ended June 30, 2018 and June 30, 2017, there were no new loans modified as 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. The Company has committed to lend no additional amounts as of June 30, 2018 to customers with outstanding loans that are classified as troubled debt restructurings.

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 three and six months ended June 30, 2018 and 2017.

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.