Loans and Allowance for Credit Losses on Loans

9 Months Ended

Sep. 30, 2021

Loans and Allowance for Credit Losses on Loans

Loans and Allowance for Credit Losses on Loans

5) Loans and Allowance for Credit Losses on Loans

The allowance for credit losses on loans was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The loan portfolio is classified into eight segments of loans - commercial, commercial real estate – owner occupied, commercial real estate – non-owner occupied, land and construction, home equity, multifamily, residential mortgages and consumer and other.

The risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial loans primarily rely on the identified cash flows of the borrower for repayment and secondarily on the underlying collateral provided by the borrower. However, the cash flows of the borrowers may not be as expected and the collateral securing these loans may vary in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable, inventory or equipment and may incorporate a personal guarantee; however, some loans may be unsecured. Included in commercial loans are $164,506,000 of Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans at September 30, 2021 and $290,679,000 at December 31, 2020. No allowance for credit losses has been recorded for PPP loans as they are fully guaranteed by the SBA.

Commercial Real Estate (“CRE”)

CRE loans rely primarily on the cash flows of the properties securing the loan and secondarily on the value of the property that is securing the loan. CRE loans comprise two segments differentiated by owner occupied CRE and non-owner CRE. Owner occupied CRE loans are secured by commercial properties that are at least 50% occupied by the borrower or borrower affiliate. Non-owner occupied CRE loans are secured by commercial properties that are less than 50% occupied by the borrower or borrower affiliate. CRE loans may be adversely affected by conditions in the real estate markets or in the general economy.

Land and Construction

Land and construction loans are generally based on estimates of costs and value associated with the complete project. Construction loans usually involve the disbursement of funds with repayment substantially dependent on the success of the completion of the project. Sources of repayment for these loans may be permanent loans from HBC or other lenders, or proceeds from the sales of the completed project. These loans are monitored by on-site inspections and are considered to have higher risk than other real estate loans due to the final repayment dependent on numerous factors including general economic conditions.

Home Equity

Home equity loans are secured by 1-4 family residences that are generally owner occupied. Repayment of these loans depends primarily on the personal income of the borrower and secondarily on the value of the property securing the loan which can be impacted by changes in economic conditions such as the unemployment rate and property values.

Multifamily

Multifamily loans are loans on residential properties with five or more units. These loans rely primarily on the cash flows of the properties securing the loan for repayment and secondarily on the value of the properties securing the loan. The cash flows of these borrowers can fluctuate along with the values of the underlying property depending on general economic conditions.

Residential Mortgages

Residential mortgage loans are secured by 1-4 family residences which are generally owner-occupied. Repayment of these loans depends primarily on the personal income of the borrower and secondarily on the value of the property securing the loan which can be impacted by changes in economic conditions such as the unemployment rate and property values. During the third quarter of 2021, the Company purchased a single family residential mortgage loan portfolio totaling $41,938,000, tied to homes all located in California, with average principal balances of $974,000, and a weighted average yield of approximately 2.92% (net of servicing fees). During the second quarter of 2021, the Company purchased two single family residential mortgage loan portfolios totaling $140,030,000, tied to home all located in California, with average principal balances of $585,000, and a weighted average yield of approximately 3.37% (net of servicing fees).

Consumer and Other

Consumer and other loans are secured by personal property or are unsecured and rely primarily on the income of the borrower for repayment and secondarily on the collateral value for secured loans. Borrower income and collateral values can vary depending on economic conditions.

Loans by portfolio segment and the allowance for credit losses on loans were as follows for the periods indicated:

	September 30,		December 31,
	2021		2020
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	743,450	$	846,386
Real estate:
CRE - owner occupied		580,624		560,362
CRE - non-owner occupied		829,022		693,103
Land and construction		141,277		144,594
Home equity		106,690		111,885
Multifamily		205,952		166,425
Residential mortgages		211,467		85,116
Consumer and other		20,106		18,116
Loans		2,838,588		2,625,987
Deferred loan fees, net		(5,729)		(6,726)
Loans, net of deferred fees		2,832,859		2,619,261
Allowance for credit losses on loans		(43,680)		(44,400)
Loans, net	$	2,789,179	$	2,574,861

Changes in the allowance for credit losses on loans were as follows for the periods indicated:

	Three Months Ended September 30, 2021
			CRE		CRE
			Owner		Non-owner		Land &		Home		Multi-		Residential		Consumer
	Commercial		Occupied		Occupied		Construction		Equity		Family		Mortgage		and Other		Total
	(Dollars in thousands)
Beginning of period balance	$	10,857	$	8,206	$	16,485	$	2,136	$	1,069	$	2,950	$	1,968	$	285	$	43,956
Charge-offs		(65)		—		—		—		—		—		—		—		(65)
Recoveries		263		4		—		—		36		—		—		—		303
Net recoveries		198		4		—		—		36		—		—		—		238
Provision for (recapture of) credit losses on loans		(822)		57		665		(112)		(94)		(61)		(97)		(50)		(514)
End of period balance	$	10,233	$	8,267	$	17,150	$	2,024	$	1,011	$	2,889	$	1,871	$	235	$	43,680

	Three Months Ended September 30, 2020
			CRE		CRE
			Owner		Non-owner		Land &		Home		Multi-		Residential		Consumer
	Commercial		Occupied		Occupied		Construction		Equity		Family		Mortgage		and Other		Total
	(Dollars in thousands)
Beginning of period balance	$	13,179	$	8,547	$	15,449	$	2,552	$	1,851	$	1,828	$	825	$	1,213	$	45,444
Charge-offs		(502)		-		-		-		-		-		-		(96)		(598)
Recoveries		343		-		-		19		16		-		-		1		379
Net (charge-offs) recoveries		(159)		-		-		19		16		-		-		(95)		(219)
Provision for (recapture of) credit losses on loans		(220)		736		(124)		(27)		14		21		(46)		(157)		197
End of period balance	$	12,800	$	9,283	$	15,325	$	2,544	$	1,881	$	1,849	$	779	$	961	$	45,422

	Nine Months Ended September 30, 2021
			CRE		CRE
			Owner		Non-owner		Land &		Home		Multi-		Residential		Consumer
	Commercial		Occupied		Occupied		Construction		Equity		Family		Mortgage		and Other		Total
	(Dollars in thousands)
Beginning of period balance	$	11,587	$	8,560	$	16,416	$	2,509	$	1,297	$	2,804	$	943	$	284	$	44,400
Charge-offs		(433)		—		—		—		—		—		—		—		(433)
Recoveries		1,191		12		—		884		75		—		—		70		2,232
Net recoveries		758		12		—		884		75		—		—		70		1,799
Provision for (recapture of) credit losses on loans		(2,112)		(305)		734		(1,369)		(361)		85		928		(119)		(2,519)
End of period balance	$	10,233	$	8,267	$	17,150	$	2,024	$	1,011	$	2,889	$	1,871	$	235	$	43,680

	Nine Months Ended September 30, 2020
			Owner		Non-owner		Land &		Home		Multi-		Residential		Consumer
	Commercial		Occupied		Occupied		Construction		Equity		Family		Mortgage		and Other		Total
	(Dollars in thousands)
Beginning of period balance	$	10,453	$	3,825	$	3,760	$	2,621	$	2,244	$	57	$	243	$	82	$	23,285
Adoption of Topic 326		(3,663)		3,169		7,912		(1,163)		(923)		1,196		435		1,607		8,570
Balance at adoption on January 1, 2020		6,790		6,994		11,672		1,458		1,321		1,253		678		1,689		31,855
Charge-offs		(1,637)		—		—		—		—		—		—		(99)		(1,736)
Recoveries		598		1		—		51		70		—		—		2		722
Net (charge-offs) recoveries		(1,039)		1		—		51		70		—		—		(97)		(1,014)
Provision for (recapture of) credit losses on loans		7,049		2,288		3,653		1,035		490		596		101		(631)		14,581
End of period balance	$	12,800	$	9,283	$	15,325	$	2,544	$	1,881	$	1,849	$	779	$	961	$	45,422

Management’s methodology for estimating the allowance balance consists of several key elements, which include pooling loans with similar characteristics into segments and using a discounted cash flow calculation to estimate losses. The discounted cash flow model inputs include loan level cash flow estimates for each loan segment based on peer and bank historic loss correlations with certain economic factors. Management uses a four quarter forecast of each economic factor that is used for each loan segment and the economic factors are assumed to revert to the historic mean over an eight quarter period after the forecast period. The economic factors management has selected include the California unemployment rate, California gross domestic product, California home price index, and a national CRE value index. These factors are evaluated and updated occasionally and as economic conditions change. Additionally, management uses qualitative adjustments to the discounted cash flow quantitative loss estimates in certain cases when management has assessed an adjustment is necessary. These qualitative adjustments are applied by pooled loan segment and have been made for increased risk due to loan quality trends, collateral risk, or other risks management determines are not adequately captured in the discounted cash flow loss estimation. Specific allowances on individually evaluated loans are combined to the allowance on pools of loans with similar risk characteristics to derive to total allowance for credit losses on loans.

The decrease in the allowance for credit losses on loans and related negative provision for credit losses on loans for the nine months ended September 30, 2021, was primarily attributed to a net decrease of $199,000 in the reserve for pooled loans, driven by improvements in forecasted macroeconomic conditions offset by changes in the portfolio, and a $521,000 decrease in specific reserves for individually evaluated loans compared to December 31, 2020. The decrease in the allowance for credit losses for pooled loans from December 31, 2020 is largely the result of improvements in the economic factors used in our methodology and reductions in qualitative adjustments for risks such as collateral values, concentrations of credit risk (geographic, large borrower, and industry), economic conditions, changes in underwriting standards, experience and depth of lending staff, trends in delinquencies, and the level of criticized loans to address asset-specific risks and current conditions that were not fully considered by the macroeconomic variables driving the quantitative estimate.

The following tables presents the amortized cost basis of nonperforming loans and loans past due over 90 days and still accruing for the periods indicated:

	September 30, 2021
						Restructured
	Nonaccrual		Nonaccrual			and Loans
	with no Specific		with Specific			over 90 Days
	Allowance for		Allowance for			Past Due
	Credit		Credit			and Still
	Losses		Losses			Accruing	Total
	(Dollars in thousands)
Commercial	$	89	$	1,216	$	157	$	1,462
Real estate:
CRE - Owner Occupied		1,136		—		—		1,136
CRE - Non-Owner Occupied		—		—		485		485
Home equity		94		—		—		94
Multifamily		1,149		—		—		1,149
Consumer and other		407		—		—		407
Total	$	2,875	$	1,216	$	642	$	4,733

	December 31, 2020
					Restructured
	Nonaccrual		Nonaccrual		and Loans
	with no Specific		with no Specific		over 90 Days
	Allowance for		Allowance for		Past Due
	Credit		Credit		and Still
	Losses		Losses		Accruing		Total
	(Dollars in thousands)
Commercial	$	752	$	1,974	$	81	$	2,807
Real estate:
CRE - Owner Occupied		3,706		—		—		3,706
Home equity		949		—		—		949
Consumer and other		407		—		—		407
Total	$	5,814	$	1,974	$	81	$	7,869

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

	September 30, 2021
	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total
	Past Due		Past Due		Past Due		Past Due		Current		Total
	(Dollars in thousands)
Commercial	$	5,105	$	1,070	$	291	$	6,466	$	736,984	$	743,450
Real estate:
CRE - Owner Occupied		568		—		1,136		1,704		578,920		580,624
CRE - Non-Owner Occupied		—		—		485		485		828,537		829,022
Land and construction		—		—		—		—		141,277		141,277
Home equity		—		—		—		—		106,690		106,690
Multifamily		—		—		—		—		205,952		205,952
Residential mortgages		—		—		—		—		211,467		211,467
Consumer and other		—		—		407		407		19,699		20,106
Total	$	5,673	$	1,070	$	2,319	$	9,062	$	2,829,526	$	2,838,588

	December 31, 2020
	30 - 59		60 - 89		90 Days or
	Days		Days		Greater		Total
	Past Due		Past Due		Past Due		Past Due		Current		Total
	(Dollars in thousands)
Commercial	$	3,524	$	259	$	392	$	4,175	$	842,211	$	846,386
Real estate:
CRE - Owner Occupied		1,133		—		29		1,162		559,200		560,362
CRE - Non-Owner Occupied		—		485		—		485		692,618		693,103
Land and construction		—		—		—		—		144,594		144,594
Home equity		—		—				—		111,885		111,885
Multifamily		—		—		—		—		166,425		166,425
Residential mortgages		—		—		—		—		85,116		85,116
Consumer and other		—		—		407		407		17,709		18,116
Total	$	4,657	$	744	$	828	$	6,229	$	2,619,758	$	2,625,987

Past due loans 30 days or greater totaled $9,062,000 and $6,229,000 at September 30, 2021 and December 31, 2020, respectively, of which $1,732,000 and $1,918,000 were on nonaccrual, at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021, there were also $2,359,000 of loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2020, there were also $5,870,000 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.

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, and 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 their contractual loan terms. Loans categorized as special mention have potential weaknesses that may, if not checked or corrected, weaken the credit or inadequately protect the Company’s position at some future date. These loans pose elevated risk, but their weaknesses do not yet justify a substandard classification. Classified loans are those loans that are assigned a substandard, substandard-nonaccrual, or doubtful risk rating using the following definitions:

Special Mention. A Special Mention asset has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the asset or in the credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

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 will 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 credit losses on loans. Therefore, there is no balance to report as of September 30, 2021 and December 31, 2020.

Loans may be reviewed at any time throughout a loan’s duration. If new information is provided, a new risk assessment may be performed if warranted.

The following tables present term loans amortized cost by vintage and loan grade classification, and revolving loans amortized cost by loan grade classification at September 30, 2021 and December 31, 2020. The loan grade classifications are based on the Bank’s internal loan grading methodology. Loan grade categories for doubtful and loss rated loans are not included on the tables below as there are no loans with those grades at September 30, 2021 and December 31, 2020. The vintage year represents the period the loan was originated or in the case of renewed loans, the period last renewed.  The amortized balance is the loan balance less any purchase discounts, plus any loan purchase premiums.  The loan categories are based on the loan segmentation in the Company's CECL reserve methodology based on loan purpose and type. 

														Revolving
														Loans
		Term Loans Amortized Cost Basis by Originated Period as of September 30, 2021												Amortized
											2016 and			Cost
	9/30/2021		12/31/2020		12/31/2019		12/31/2018		12/31/2017		Prior			Basis		Total
	(Dollars in thousands)
Commercial:
Pass	$	244,357	$	77,588	$	17,048	$	14,440	$	8,248	$	7,666	$	357,811	$	727,158
Special Mention		192		528		225		879		518		225		1,245		3,812
Substandard		1,769		3,266		-		31		472		3		5,634		11,175
Substandard-Nonaccrual		713		440		49		-		-		103		-		1,305
Total		247,031		81,822		17,322		15,350		9,238		7,997		364,690		743,450
CRE - Owner Occupied:
Pass		117,435		143,755		72,641		58,229		36,514		120,856		14,424		563,854
Special Mention		-		7,928		676		-		-		363		-		8,967
Substandard		-		3,150		-		1,879		735		903		-		6,667
Substandard-Nonaccrual		-		1,109		-		-		-		27		-		1,136
Total		117,435		155,942		73,317		60,108		37,249		122,149		14,424		580,624
CRE - Non-Owner Occupied:
Pass		271,803		144,254		119,996		50,388		71,693		143,970		3,646		805,750
Special Mention		-		8,152		-		-		1,741		8,410				18,303
Substandard		-		3,099		-		1,385		-		485		-		4,969
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		271,803		155,505		119,996		51,773		73,434		152,865		3,646		829,022
Land and construction:
Pass		108,338		20,750		4,427		-		-		1,310		5,093		139,918
Special Mention		-		-		-		-		-		-		-		-
Substandard		1,359		-		-		-		-		-		-		1,359
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		109,697		20,750		4,427		-		-		1,310		5,093		141,277
Home equity:
Pass		-		-		-		52		-		-		103,690		103,742
Special Mention		-		-		-		-		-		-		1,931		1,931
Substandard		-		-		-		-		-		143		780		923
Substandard-Nonaccrual		-		94		-		-		-		-				94
Total		-		94		-		52		-		143		106,401		106,690
Multifamily:
Pass		75,736		30,474		35,318		16,238		18,798		20,928		-		197,492
Special Mention		5,833		-		-		-		-				-		5,833
Substandard		604		874		-		-		-		-		-		1,478
Substandard-Nonaccrual		1,149		-		-		-		-		-		-		1,149
Total		83,322		31,348		35,318		16,238		18,798		20,928		-		205,952
Residential mortgage:
Pass		150,146		18,095		8,130		3,113		6,053		24,672		-		210,209
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		1,258		-		1,258
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		150,146		18,095		8,130		3,113		6,053		25,930		-		211,467
Consumer and other:
Pass		408		3		48		1,442		16		1,025		16,740		19,682
Special Mention		-		-		-		-		-		-		-		-
Substandard		17		-		-		-		-		-				17
Substandard-Nonaccrual		-		-		-		407		-		-		-		407
Total		425		3		48		1,849		16		1,025		16,740		20,106
Total loans	$	979,859	$	463,559	$	258,558	$	148,483	$	144,788	$	332,347	$	510,994	$	2,838,588
Risk Grades:
Pass	$	968,223	$	434,919	$	257,608	$	143,902	$	141,322	$	320,427	$	501,404	$	2,767,805
Special Mention		6,025		16,608		901		879		2,259		8,998		3,176		38,846
Substandard		3,749		10,389		-		3,295		1,207		2,792		6,414		27,846
Substandard-Nonaccrual		1,862		1,643		49		407		-		130		-		4,091
Grand Total	$	979,859	$	463,559	$	258,558	$	148,483	$	144,788	$	332,347	$	510,994	$	2,838,588

														Revolving
														Loans
		Term Loans Amortized Cost Basis by Originated Period as of December 31, 2020												Amortized
												2015 and		Cost
		2020		2019		2018		2017		2016		Prior		Basis		Total
	(Dollars in thousands)
Commercial:
Pass	$	431,369	$	33,350	$	21,154	$	13,840	$	7,341	$	8,292	$	296,286	$	811,632
Special Mention		15,720		716		1,301		953		713		170		1,937		21,510
Substandard		4,036		-		19		758		2,396		73		3,236		10,518
Substandard-Nonaccrual		2,106		56		36		-		115		26		387		2,726
Total		453,231		34,122		22,510		15,551		10,565		8,561		301,846		846,386
CRE - Owner Occupied:
Pass		168,224		73,064		68,068		51,705		50,716		109,350		15,964		537,091
Special Mention		3,151		2,568		4,128		783		-		2,569		-		13,199
Substandard		2,561		-		400		2,954		-		451		-		6,366
Substandard-Nonaccrual		3,678		-		-		-		-		28		-		3,706
Total		177,614		75,632		72,596		55,442		50,716		112,398		15,964		560,362
CRE - Non-Owner Occupied:
Pass		166,550		128,361		68,796		99,816		57,422		150,683		1,926		673,554
Special Mention		11,930		-		2,557		-		-		-		-		14,487
Substandard		3,166		-		1,411		-		485		-		-		5,062
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		181,646		128,361		72,764		99,816		57,907		150,683		1,926		693,103
Land and construction:
Pass		114,932		22,054		-		-		-		1,343		4,906		143,235
Special Mention		-		-		-		-		-		-		-		-
Substandard		1,359		-		-		-		-		-		-		1,359
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		116,291		22,054		-		-		-		1,343		4,906		144,594
Home equity:
Pass		266		-		74		-		-		-		109,848		110,188
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		143		605		748
Substandard-Nonaccrual		117		-		-		-		-		-		832		949
Total		383		-		74		-		-		143		111,285		111,885
Multifamily:
Pass		31,481		39,183		17,248		24,572		16,235		30,751		880		160,350
Special Mention		-		-		-		-		-		5,186		-		5,186
Substandard		889		-		-		-		-		-		-		889
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		32,370		39,183		17,248		24,572		16,235		35,937		880		166,425
Residential mortgage:
Pass		12,798		10,048		3,246		7,324		28,115		15,568		-		77,099
Special Mention		5,089		-		1,630		-				-		-		6,719
Substandard		-		-		-		-		-		1,298		-		1,298
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		17,887		10,048		4,876		7,324		28,115		16,866		-		85,116
Consumer and other:
Pass		10		522		1,486		20		116		987		14,568		17,709
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Substandard-Nonaccrual		-		-		407		-		-		-		-		407
Total		10		522		1,893		20		116		987		14,568		18,116
Total loans	$	979,432	$	309,922	$	191,961	$	202,725	$	163,654	$	326,918	$	451,375	$	2,625,987
Risk Grades:.
Pass	$	925,630	$	306,582	$	180,072	$	197,277	$	159,945	$	316,974	$	444,378	$	2,530,858
Special Mention		35,890		3,284		9,616		1,736		713		7,925		1,937		61,101
Substandard		12,011		-		1,830		3,712		2,881		1,965		3,841		26,240
Substandard-Nonaccrual		5,901		56		443		-		115		54		1,219		7,788
Grand Total	$	979,432	$	309,922	$	191,961	$	202,725	$	163,654	$	326,918	$	451,375	$	2,625,987

The following table presents the amortized cost basis of collateral-dependent loans by loan classification at September 30, 2021:

	Collateral Type
	Real
	Estate		Business
	Property		Assets			Total
	(Dollars in thousands)
Commercial	$	25	$	1,191	$	1,216
Total	$	25	$	1,191	$	1,216

The following table presents the amortized cost basis of collateral-dependent loans by loan classification at December 31, 2020:

	Collateral Type
	Real
	Estate		Business
	Property		Assets		Unsecured		Total
	(Dollars in thousands)
Commercial	$	29	$	1,815	$	130	$	1,974
Total	$	29	$	1,815	$	130	$	1,974

When management determines that foreclosures are probable, expected credit losses for collateral-dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. For loans for which foreclosure is not probable, but for which repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty, management has elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, adjusted for selling costs as appropriate. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value.

The book balance of troubled debt restructurings at September 30, 2021 was $499,000, which included $408,000 of nonaccrual loans and $91,000 of accruing loans. The book balance of troubled debt restructurings at December 31, 2020 was $674,000, which included $468,000 of nonaccrual loans and $206,000 of accruing loans. Approximately $341,000 and $352,000 in specific reserves were established with respect to these loans as of September 30, 2021 and December 31, 2020, respectively.

There were no loans modified as a troubled debt restructuring during the three months ended September 30, 2021. There were seven new loans with total recorded investment of $510,000 that were modified as a troubled debt restructuring during the three months ended September 30, 2020.

There was one new loan with total recorded investment of $3,000 that was modified as a troubled debt restructuring during the nine months ended September 30, 2021. There were ten new loans with total recorded investment of $520,000 that were modified as a troubled debt restructuring during the nine months ended September 30, 2020.

During the three and nine months ended September 30, 2021, 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 in the allowance for credit losses on loans.

The following table presents loans by class modified as troubled debt restructurings for the periods indicated:

	During the Three Months Ended
	September 30, 2021
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		—	$	—	$	—
Total		—	$	—	$	—

	During the Three Months Ended
	September 30, 2020
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		7	$	510	$	510
Total		7	$	510	$	510

	During the Nine Months Ended
		September 30, 2021
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		1	$	3	$	3
Total		1	$	3	$	3

	During the Nine Months Ended
		September 30, 2020
				Pre-modification		Post-modification
		Number		Outstanding		Outstanding
		of		Recorded		Recorded
Troubled Debt Restructurings:		Contracts		Investment		Investment
	(Dollars in thousands)
Commercial		10	$	520	$	520
Total		10	$	520	$	520

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 months ended September 30, 2021 and 2020.

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.

On April 7, 2020, U.S. banking agencies issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The statement describes accounting for COVID-19-related loan modifications and clarifies the interaction between current accounting rules and the temporary relief provided by the CARES Act. Initially, the Bank made accommodations for payment deferrals for a number of customers with a window of up to 90 days, with the potential of an additional 90 days of payment deferral (180 days maximum) upon application. The Bank also waived all customary applicable fees. Of the loans for which deferrals were originally granted, nearly all have returned to regular payment status. At September 30, 2021, there were four remaining second deferments totaling $1,372,000, of which one loan was secured by real estate, two loans were secured by business assets, and one loan was unsecured.