Loans and Allowance for Credit Losses on Loans

6 Months Ended

Jun. 30, 2022

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

On January 1, 2020, the Company adopted the current expected credit loss (“CECL”) model under ASU 2016-13 (Topic 326) using the modified retrospective approach. The allowance for credit losses on loans is an estimate of the current expected credit losses in the loan portfolio. Loans are charged-off against the allowance when management determines that a loan balance has become uncollectible. Subsequent recoveries, if any, are credited to the allowance for credit losses on loans.

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.

Management has also considered other qualitative 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 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 fluctuate 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 $8,153,000 of Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans at June 30, 2022, and $88,726,000 at December 31, 2021. 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. These loans are generally revolving lines of credit.

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. These are generally term loans and are acquired.

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.

Loan Distribution

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

	June 30,		December 31,
	2022		2021
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	531,421	$	682,834
Real estate:
CRE - owner occupied		597,521		595,934
CRE - non-owner occupied		993,621		902,326
Land and construction		155,389		147,855
Home equity		116,641		109,579
Multifamily		221,938		218,856
Residential mortgages		448,958		416,660
Consumer and other		18,354		16,744
Loans		3,083,843		3,090,788
Deferred loan fees, net		(1,391)		(3,462)
Loans, net of deferred fees		3,082,452		3,087,326
Allowance for credit losses on loans		(45,490)		(43,290)
Loans, net	$	3,036,962	$	3,044,036

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

	Three Months Ended June 30, 2022
			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	$	6,801	$	6,397	$	19,413	$	2,006	$	722	$	2,544	$	4,757	$	148	$	42,788
Charge-offs		(355)		—		—		—		—		—		—		—		(355)
Recoveries		79		4		—		—		31		—		—		3,124		3,238
Net recoveries		(276)		4		—		—		31		—		—		3,124		2,883
Provision for (recapture of) credit losses on loans		77		(392)		2,061		492		(58)		280		475		(3,116)		(181)
End of period balance	$	6,602	$	6,009	$	21,474	$	2,498	$	695	$	2,824	$	5,232	$	156	$	45,490

	Three Months Ended June 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	$	11,600	$	8,368	$	16,431	$	2,754	$	1,171	$	2,751	$	918	$	303	$	44,296
Charge-offs		(105)		—		—		—		—		—		—		—		(105)
Recoveries		115		4		—		68		16		—		—		55		258
Net recoveries		10		4		—		68		16		—		—		55		153
Provision for (recapture of) credit losses on loans		(753)		(166)		54		(686)		(118)		199		1,050		(73)		(493)
End of period balance	$	10,857	$	8,206	$	16,485	$	2,136	$	1,069	$	2,950	$	1,968	$	285	$	43,956

	Six Months Ended June 30, 2022
			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	$	8,414	$	7,954	$	17,125	$	1,831	$	864	$	2,796	$	4,132	$	174	$	43,290
Charge-offs		(371)		—		—		—		—		—		—		—		(371)
Recoveries		133		7		—		—		55		—		—		3,124		3,319
Net recoveries		(238)		7		—		—		55		—		—		3,124		2,948
Provision for (recapture of) credit losses on loans		(1,574)		(1,952)		4,349		667		(224)		28		1,100		(3,142)		(748)
End of period balance	$	6,602	$	6,009	$	21,474	$	2,498	$	695	$	2,824	$	5,232	$	156	$	45,490

	Six Months Ended June 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		(368)		—		—		—		—		—		—		—		(368)
Recoveries		928		8		—		884		39		—		—		70		1,929
Net (charge-offs) recoveries		560		8		—		884		39		—		—		70		1,561
Provision for (recapture of) credit losses on loans		(1,290)		(362)		69		(1,257)		(267)		146		1,025		(69)		(2,005)
End of period balance	$	10,857	$	8,206	$	16,485	$	2,136	$	1,069	$	2,950	$	1,968	$	285	$	43,956

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

	June 30, 2022
						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	$	222	$	418	$	918	$	1,558
Real estate:
CRE - Owner Occupied		1,094		—		—		1,094
Home equity		—		—		63		63
Total	$	1,316	$	418	$	981	$	2,715

	December 31, 2021
					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	$	94	$	1,028	$	278	$	1,400
Real estate:
CRE - Owner Occupied		1,126		—		—		1,126
Home equity		84		—		—		84
Multifamily		1,128		—		—		1,128
Total	$	2,432	$	1,028	$	278	$	3,738

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

	June 30, 2022
	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	$	6,449	$	1,691	$	991	$	9,130	$	522,291	$	531,421
Real estate:
CRE - Owner Occupied		—		—		1,094		1,094		596,427		597,521
CRE - Non-Owner Occupied		—		—		—		—		993,621		993,621
Land and construction		—		—		—		—		155,389		155,389
Home equity		—		—		—		—		116,641		116,641
Multifamily		—		—		—		—		221,938		221,938
Residential mortgages		—		—		—		—		448,958		448,958
Consumer and other		—		—		—		—		18,354		18,354
Total	$	6,449	$	1,691	$	2,085	$	10,224	$	3,073,619	$	3,083,843

	December 31, 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	$	2,714	$	168	$	408	$	3,290	$	679,544	$	682,834
Real estate:
CRE - Owner Occupied		—		—		1,126		1,126		594,808		595,934
CRE - Non-Owner Occupied		—		—		—		—		902,326		902,326
Land and construction		—		—		—		—		147,855		147,855
Home equity		—		—		—		—		109,579		109,579
Multifamily		—		—		—		—		218,856		218,856
Residential mortgages		599		—		—		599		416,061		416,660
Consumer and other		—		—				—		16,744		16,744
Total	$	3,313	$	168	$	1,534	$	5,015	$	3,085,773	$	3,090,788

Past due loans 30 days or greater totaled $10,224,000 and $5,015,000 at June 30, 2022 and December 31, 2021, respectively, of which $1,316,000 and $1,258,000 were on nonaccrual, at June 30, 2022 and December 31, 2021, respectively. At June 30, 2022, there were also $418,000 of loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2021, there were also $2,202,000 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 June 30, 2022 and December 31, 2021.

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 June 30, 2022 and December 31, 2021. 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 June 30, 2022 and December 31, 2021. 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 June 30, 2022												Amortized
											2017 and			Cost
	06/30/2022		12/31/2021		12/31/2020		12/31/2019		12/31/2018		Prior			Basis		Total
	(Dollars in thousands)
Commercial:
Pass	$	95,919	$	53,413	$	45,686	$	9,416	$	9,239	$	9,031	$	270,442	$	493,146
Special Mention		2,500		5,660		479		111		400		318		22,197		31,665
Substandard		4		463		223		610		10		76		4,584		5,970
Substandard-Nonaccrual		-		474		57		-		26		83		-		640
Total		98,423		60,010		46,445		10,137		9,675		9,508		297,223		531,421
CRE - Owner Occupied:
Pass		68,066		162,615		123,243		57,289		45,689		112,933		8,080		577,915
Special Mention		-		5,738		5,924		-		207		409		-		12,278
Substandard		825		-		3,138		-		1,458		813		-		6,234
Substandard-Nonaccrual		-		-		1,094		-		-		-		-		1,094
Total		68,891		168,353		133,399		57,289		47,354		114,155		8,080		597,521
CRE - Non-Owner Occupied:
Pass		194,717		363,614		126,203		110,251		15,443		171,247		2,601		984,076
Special Mention		-		-		404		-		-		353				757
Substandard		-		-		2,712		-		-		6,076		-		8,788
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		194,717		363,614		129,319		110,251		15,443		177,676		2,601		993,621
Land and construction:
Pass		77,361		68,164		7,778		2,080		-		-		6		155,389
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		77,361		68,164		7,778		2,080		-		-		6		155,389
Home equity:
Pass		-		-		-		-		35		-		116,370		116,405
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		144		92		236
Substandard-Nonaccrual		-		-		-		-		-		-				-
Total		-		-		-		-		35		144		116,462		116,641
Multifamily:
Pass		19,789		99,389		27,610		26,351		15,362		22,280		50		210,831
Special Mention		-		1,099		-		4,263		-				-		5,362
Substandard		-		5,745		-		-		-		-		-		5,745
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		19,789		106,233		27,610		30,614		15,362		22,280		50		221,938
Residential mortgage:
Pass		79,470		318,949		16,733		7,534		2,934		23,116		-		448,736
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		222		-		222
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		79,470		318,949		16,733		7,534		2,934		23,338		-		448,958
Consumer and other:
Pass		73		514		-		23		1,395		872		15,477		18,354
Special Mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-				-
Substandard-Nonaccrual		-		-		-		-		-		-		-		-
Total		73		514		-		23		1,395		872		15,477		18,354
Total loans	$	538,724	$	1,085,837	$	361,284	$	217,928	$	92,198	$	347,973	$	439,899	$	3,083,843
Risk Grades:
Pass	$	535,395	$	1,066,658	$	347,253	$	212,944	$	90,097	$	339,479	$	413,026	$	3,004,852
Special Mention		2,500		12,497		6,807		4,374		607		1,080		22,197		50,062
Substandard		829		6,208		6,073		610		1,468		7,331		4,676		27,195
Substandard-Nonaccrual		-		474		1,151		-		26		83		-		1,734
Grand Total	$	538,724	$	1,085,837	$	361,284	$	217,928	$	92,198	$	347,973	$	439,899	$	3,083,843

													Revolving
													Loans
		Term Loans Amortized Cost Basis by Originated Period as of December 31, 2021											Amortized
													Cost
		2021	2020		2019		2018		2017		Prior Periods		Basis		Total
	(Dollars in thousands)
Commercial:
Pass	$	208,645	65,257	$	15,086	$	12,281	$	7,311	$	5,507	$	349,717	$	663,804
Special Mention		2,210	512		219		764		243		204		4,024		8,176
Substandard		3,709	930		-		13		302		2		4,776		9,732
Substandard-Nonaccrual		595	442		37		-		-		48		-		1,122
Total		215,159	67,141		15,342		13,058		7,856		5,761		358,517		682,834
CRE - Owner Occupied:
Pass		170,504	135,103		65,596		57,017		31,657		107,203		14,486		581,566
Special Mention		568	2,254		672		-		-		355		-		3,849
Substandard		985	6,042		-		1,477		-		889		-		9,393
Substandard-Nonaccrual		-	1,100		-		-		-		26		-		1,126
Total		172,057	144,499		66,268		58,494		31,657		108,473		14,486		595,934
CRE - Non-Owner Occupied:
Pass		374,470	141,404		115,170		45,959		68,125		134,454		2,068		881,650
Special Mention		-	5,388		-		-		1,133		3,816		-		10,337
Substandard		-	5,842		-		-		-		4,497		-		10,339
Substandard-Nonaccrual		-	-		-		-		-		-		-		-
Total		374,470	152,634		115,170		45,959		69,258		142,767		2,068		902,326
Land and construction:
Pass		125,844	11,401		4,385		-		-		1,300		3,566		146,496
Special Mention		1,359	-		-		-		-		-		-		1,359
Substandard		-	-		-		-		-		-		-		-
Substandard-Nonaccrual		-	-		-		-		-		-		-		-
Total		127,203	11,401		4,385		-		-		1,300		3,566		147,855
Home equity:
Pass		-	-		-		46		-		-		106,738		106,784
Special Mention		-	-		-		-		-		-		1,931		1,931
Substandard		-	-		-		-		-		54		726		780
Substandard-Nonaccrual		-	84		-		-		-		-		-		84
Total		-	84		-		46		-		54		109,395		109,579
Multifamily:
Pass		102,535	27,955		30,820		16,151		16,261		13,895		-		207,617
Special Mention		5,804	-		4,307		-		-		-		-		10,111
Substandard		-	-		-		-		-		-		-		-
Substandard-Nonaccrual		1,128	-		-		-		-		-		-		1,128
Total		109,467	27,955		35,127		16,151		16,261		13,895		-		218,856
Residential mortgage:
Pass		360,424	17,875		8,065		3,070		6,015		19,967		-		415,416
Special Mention		-	-		-		-		-		1,244		-		1,244
Substandard		-	-		-		-		-		-		-		-
Substandard-Nonaccrual		-	-		-		-		-		-		-		-
Total		360,424	17,875		8,065		3,070		6,015		21,211		-		416,660
Consumer and other:
Pass		491	2		40		1,426		14		1,000		13,756		16,729
Special Mention		-	-		-		-		-		-		-		-
Substandard		15	-		-		-		-		-		-		15
Substandard-Nonaccrual		-	-		-		-		-		-		-		-
Total		506	2		40		1,426		14		1,000		13,756		16,744
Total loans	$	1,359,286	421,591	$	244,397	$	138,204	$	131,061	$	294,461	$	501,788	$	3,090,788
Risk Grades:.
Pass	$	1,342,913	398,997	$	239,162	$	135,950	$	129,383	$	283,326	$	490,331	$	3,020,062
Special Mention		9,941	8,154		5,198		764		1,376		5,619		5,955		37,007
Substandard		4,709	12,814		-		1,490		302		5,442		5,502		30,259
Substandard-Nonaccrual		1,723	1,626		37		-		-		74		-		3,460
Grand Total	$	1,359,286	421,591	$	244,397	$	138,204	$	131,061	$	294,461	$	501,788	$	3,090,788

The amortized cost basis of collateral-dependent loans by business assets was $446,000 and $1,028,000 at June 30, 2022 and December 31, 2021, respectfully.

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 June 30, 2022 was $177,000 of accruing loans. The book balance of troubled debt restructurings at December 31, 2021 was $500,000 which included $372,000 of nonaccrual loans and $128,000 of accruing loans. There were no specific reserves established with respect to these loans as of June 30, 2022, and approximately $290,000 in specific reserves were established with respect to these loans as of December 31, 2021.

There were no loans modified as a troubled debt restructuring during the six months ended June 30, 2022. There was one new loan with total recorded investment of $3,000 that was modified as a troubled debt restructuring during the six months ended June 30, 2021.

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

	During the Six Months Ended
		June 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

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 six months ended June 30, 2022 and 2021.

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.