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Loans and Allowance for Credit Losses on Loans | 9 Months Ended
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Sep. 30, 2021
Receivables [Abstract] |
Loans and Allowance for Credit Losses on Loans | Loans and Allowance for Credit Losses on Loans Under the accounting relief provisions of the Coronavirus Aid, Relief and Economic Security ("CARES") Act passed in March 2020, we postponed the adoption of the CECL standard from January 1, 2020 to December 31, 2020. Upon adoption we used a modified retrospective method effective October 1, 2020 (the beginning of the first reporting period in which the standard was effective due to the postponement of CECL) through a cumulative adjustment to retained earnings. The cumulative adjustment to retained earnings was recorded, net of taxes, based on economic forecasts and other assumptions as of December 31, 2019. Results for reporting periods beginning after September 30, 2020 have been presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable GAAP. Certain prior period credit quality disclosures related to impaired loans and individually and collectively evaluated loans were superseded with the CECL accounting standards and have not been included below. Refer to Notes 1 and 3 under Part II, Item 8, of our 2020 Form 10-K for additional information regarding the adoption of CECL. In addition, refer to Note 5 under Part I, Item 1, of our September 30, 2020 Form 10-Q for prior period information. The following table presents the amortized cost of loans by class as of September 30, 2021 and December 31, 2020.
(in thousands) | September 30, 2021 | December 31, 2020
Commercial and industrial | $ | 377,965 |  | $ | 498,408 |
Real estate: |  |
Commercial owner-occupied | 398,543 |  | 304,963 |
Commercial investor-owned | 1,157,344 |  | 961,208 |
Construction | 125,060 |  | 73,046 |
Home equity | 92,396 |  | 104,813 |
Other residential | 117,778 |  | 123,395 |
Installment and other consumer loans | 47,933 |  | 22,723 |
Total loans, at amortized cost 1 | 2,317,019 |  | 2,088,556 |
Allowance for credit losses on loans | (22,414) |  | (22,874) |
Total loans, net | $ | 2,294,605 |  | $ | 2,065,682 |
1 Amortized cost includes net deferred loan origination fees of $(2.9) million and $(4.9) million at September 30, 2021 and December 31, 2020, respectively. Amounts are also net of unrecognized purchase discounts of $2,834 thousand and $815 thousand at September 30, 2021 and December 31, 2020, respectively. Amortized cost excludes accrued interest, which totaled $7.7 million and $8.8 million at September 30, 2021 and December 31, 2020, respectively, and is included in interest receivable and other assets in the consolidated statements of condition. Lending Risks Commercial and Industrial Loans - Commercial loans are generally made to established small and mid-sized businesses to provide financing for their growth and working capital needs, equipment purchases and acquisitions. Management examines historical, current, and projected cash flows to determine the ability of the borrower to repay obligations as agreed. Commercial loans are made based primarily on the identified cash flows of the borrower and secondarily on the underlying collateral and guarantor support. The cash flows of borrowers, however, may not occur as expected, and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed, such as accounts receivable and inventory, and typically include personal guarantees. We target stable businesses with guarantors who provide additional sources of repayment and have proven to be resilient in periods of economic stress. A weakened economy, and resultant decreased consumer and/or business spending, may have an effect on the credit quality of commercial loans. In April 2020, the Bank began participating in the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"). As of September 30, 2021, there were 871 PPP loans outstanding, including 31 loans totaling $9.6 million that ARB financed prior to the merger date. PPP loans totaling $164.8 million (net of $4.2 million in unrecognized fees and costs) and $291.6 million (net of $5.4 million in unrecognized fees and costs) as of September 30, 2021 and December 31, 2020, respectively, were included in commercial and industrial loan balances. Of the 871 PPP loans outstanding as of September 30, 2021, 790 loans totaling $123.9 million were funded by Bank of Marin and ARB during the first half of 2021 under the second round of the PPP stimulus plan. PPP loans have terms of two to five years and earn interest at 1%. In addition, the SBA paid the Bank a fee of 1%-5% depending on the loan amount, which was netted with loan origination costs and accreted/amortized into interest income using the effective yield method over the contractual life of each loan. The recognition of fees and costs is accelerated when the SBA forgives the loan and/or the loan is paid off prior to maturity. PPP loans are fully guaranteed by the SBA and have virtually no risk of loss. We expect the vast majority of the PPP loans to be fully forgiven by the SBA. Commercial Real Estate Loans - Commercial real estate loans, which include income producing investment properties and owner-occupied real estate used for business purposes, are subject to underwriting standards and processes similar to commercial loans discussed above. We underwrite these loans to be repaid from cash flow from either the business or investment property and supported by real property collateral. Underwriting standards for commercial real estate loans include, but are not limited to, debt coverage and loan-to-value ratios. Furthermore, a large majority of our loans are guaranteed by the owners of the properties. Conditions in the real estate markets or downturn in the general economy may adversely affect our commercial real estate loans. In the event of a vacancy, we expect guarantors to carry the loans until they find a replacement tenant. The owner's substantial equity investment provides a strong economic incentive to continue to support the commercial real estate projects. As such, we have generally experienced a relatively low level of loss and delinquencies in this portfolio. Construction Loans - Construction loans are generally made to developers and builders to finance construction, renovation and occasionally land acquisitions in anticipation of near-term development. Construction loans include interest reserves that are used for the payment of interest during the development and marketing periods and are capitalized as part of the loan balance. When a construction loan is placed on nonaccrual status before the depletion of the interest reserve, we apply the interest funded by the interest reserve against the loan's principal balance. These loans are underwritten after evaluation of the borrower's financial strength, reputation, prior track record, and independent appraisals. We monitor all construction projects to determine whether they are on schedule, completed as planned and in accordance with the approved construction budgets. Significant events can affect the construction industry, including: the inherent volatility of real estate markets and vulnerability to delays due to weather, change orders, inability to obtain construction permits, labor or material shortages, and price changes. Estimates of construction costs and value associated with the completed project may be inaccurate. Repayment of construction loans is largely dependent on the ultimate success of the project. Consumer Loans - Consumer loans primarily consist of home equity lines of credit, other residential loans, floating homes, and indirect auto loans, along with a small number of installment loans. Our other residential loans include tenancy-in-common fractional interest loans ("TIC") located almost entirely in San Francisco County. We originate consumer loans utilizing credit score information, debt-to-income ratio and loan-to-value ratio analysis. Diversification among consumer loan types, coupled with relatively small loan amounts that are spread across many individual borrowers, mitigates risk. We do not originate sub-prime residential mortgage loans, nor is it our practice to underwrite loans commonly referred to as "Alt-A mortgages," the characteristics of which are reduced documentation, borrowers with low FICO scores or collateral with high loan-to-value ratios. Credit Quality Indicators We use a risk rating system to evaluate asset quality, and to identify and monitor credit risk in individual loans, and in the loan portfolio. Our definitions of “Special Mention” risk graded loans, or worse, are consistent with those used by the Federal Deposit Insurance Corporation ("FDIC"). Our internally assigned grades are as follows: Pass and Watch - Loans to borrowers of acceptable or better credit quality. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Bank’s policy regarding debt-service-coverage ratios. These borrowers are capable of sustaining normal economic, market or operational setbacks without significant financial consequences. Negative external industry factors are generally not present. The loan may be secured, unsecured or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. This category also includes “Watch” loans, where the primary source of repayment has been delayed. “Watch” is intended to be a transitional grade, with either an upgrade or downgrade within a reasonable period. Special Mention - Potential weaknesses that deserve close attention. If left uncorrected, those potential weaknesses may result in deterioration of the payment prospects for the asset. Special Mention assets do not present sufficient risk to warrant adverse classification. Substandard - Inadequately protected by either the current sound worth and paying capacity of the obligor or the collateral pledged, if any. A Substandard asset has a well-defined weakness or weaknesses that jeopardize(s) the liquidation of the debt. Substandard assets are characterized by the distinct possibility that we will sustain some loss if such weaknesses or deficiencies are not corrected. Well-defined weaknesses include adverse trends or developments of the borrower’s financial condition, managerial weaknesses and/or significant collateral deficiencies. Doubtful - Critical weaknesses that make collection or liquidation in full improbable. There may be specific pending events that work to strengthen the asset; however, the amount or timing of the loss may not be determinable. Pending events generally occur within one year of the asset being classified as Doubtful. Examples include: merger, acquisition, or liquidation; capital injection; guarantee; perfecting liens on additional collateral; and refinancing. Such loans are placed on non-accrual status and usually are collateral-dependent. We regularly review our credits for accuracy of risk grades whenever we receive new information. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk and complexity. In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. We monitor construction loans monthly. We review home equity and other consumer loans based on delinquency. We also review loans graded “Watch” or worse, regardless of loan type, no less than quarterly. The following tables present the loan portfolio by loan class, origination year and internal risk rating as of September 30, 2021 and December 31, 2020. Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to perm loans, are presented by year of origination.
(in thousands) | Term Loans - Amortized Cost by Origination Year | Revolving Loans Amortized Cost |
September 30, 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Total
Commercial and industrial: |  |  |  |  |  |  |  |
Pass | $ | 130,037 |  | $ | 54,621 |  | $ | 28,941 |  | $ | 18,245 |  | $ | 3,044 |  | $ | 33,707 |  | $ | 101,044 |  | $ | 369,639 |
Special Mention | — |  | 1,787 |  | 613 |  | 346 |  | — |  | 2 |  | 4,037 |  | 6,785 |
Substandard | — |  | — |  | — |  | — |  | — |  | — |  | 1,541 |  | 1,541 |
Total commercial and industrial | $ | 130,037 |  | $ | 56,408 |  | $ | 29,554 |  | $ | 18,591 |  | $ | 3,044 |  | $ | 33,709 |  | $ | 106,622 |  | $ | 377,965 |
Commercial real estate, owner-occupied: |  |  |  |  |  |  |  |
Pass | $ | 40,399 |  | $ | 43,782 |  | $ | 50,976 |  | $ | 53,139 |  | $ | 42,410 |  | $ | 109,020 |  | $ | — |  | $ | 339,726 |
Special Mention | — |  | — |  | — |  | 7,889 |  | 16,418 |  | 20,110 |  | — |  | 44,417 |
Substandard | — |  | 7,155 |  | 289 |  | — |  | — |  | 6,838 |  | — |  | 14,282 |
Doubtful | — |  | 118 |  | — |  | — |  | — |  | — |  | — |  | 118 |
Total commercial real estate, owner-occupied | $ | 40,399 |  | $ | 51,055 |  | $ | 51,265 |  | $ | 61,028 |  | $ | 58,828 |  | $ | 135,968 |  | $ | — |  | $ | 398,543 |
Commercial real estate, investor-owned: |  |  |  |  |  |  |  |
Pass | $ | 153,943 |  | $ | 188,064 |  | $ | 188,508 |  | $ | 135,653 |  | $ | 83,895 |  | $ | 352,715 |  | $ | 90 |  | $ | 1,102,868 |
Special Mention | — |  | 1,210 |  | 2,715 |  | 19,345 |  | 1,796 |  | 27,167 |  | — |  | 52,233 |
Substandard | — |  | — |  | — |  | 709 |  | — |  | 1,534 |  | — |  | 2,243 |
Total commercial real estate, investor-owned | $ | 153,943 |  | $ | 189,274 |  | $ | 191,223 |  | $ | 155,707 |  | $ | 85,691 |  | $ | 381,416 |  | $ | 90 |  | $ | 1,157,344 |
Construction: |  |  |  |  |  |  |  |
Pass | $ | 26,902 |  | $ | 63,355 |  | $ | 25,696 |  | $ | 9,107 |  | $ | — |  | $ | — |  | $ | — |  | $ | 125,060 |
Total construction | $ | 26,902 |  | $ | 63,355 |  | $ | 25,696 |  | $ | 9,107 |  | $ | — |  | $ | — |  | $ | — |  | $ | 125,060 |
Home equity: |  |  |  |  |  |  |  |
Pass | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 259 |  | $ | 91,333 |  | $ | 91,592 |
Substandard | — |  | — |  | — |  | — |  | — |  | 384 |  | 420 |  | 804 |
Total home equity | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 643 |  | $ | 91,753 |  | $ | 92,396 |
Other residential: |  |  |  |  |  |  |  |
Pass | $ | 14,229 |  | $ | 32,700 |  | $ | 26,347 |  | $ | 17,476 |  | $ | 8,374 |  | $ | 18,652 |  | $ | — |  | $ | 117,778 |
Total other residential | $ | 14,229 |  | $ | 32,700 |  | $ | 26,347 |  | $ | 17,476 |  | $ | 8,374 |  | $ | 18,652 |  | $ | — |  | $ | 117,778 |
Installment and other consumer: |  |  |  |  |  |  |  |
Pass | $ | 12,311 |  | $ | 8,514 |  | $ | 11,620 |  | $ | 5,777 |  | $ | 1,129 |  | $ | 6,833 |  | $ | 1,749 |  | $ | 47,933 |
Total installment and other consumer | $ | 12,311 |  | $ | 8,514 |  | $ | 11,620 |  | $ | 5,777 |  | $ | 1,129 |  | $ | 6,833 |  | $ | 1,749 |  | $ | 47,933 |
Total loans: |  |  |  |  |  |  |  |
Pass | $ | 377,821 |  | $ | 391,036 |  | $ | 332,088 |  | $ | 239,397 |  | $ | 138,852 |  | $ | 521,186 |  | $ | 194,216 |  | $ | 2,194,596 |
Total Special Mention | $ | — |  | $ | 2,997 |  | $ | 3,328 |  | $ | 27,580 |  | $ | 18,214 |  | $ | 47,279 |  | $ | 4,037 |  | $ | 103,435 |
Total Substandard | $ | — |  | $ | 7,155 |  | $ | 289 |  | $ | 709 |  | $ | — |  | $ | 8,756 |  | $ | 1,961 |  | $ | 18,870 |
Total Doubtful | $ | — |  | $ | 118 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 118 |
Totals | $ | 377,821 |  | $ | 401,306 |  | $ | 335,705 |  | $ | 267,686 |  | $ | 157,066 |  | $ | 577,221 |  | $ | 200,214 |  | $ | 2,317,019 |
(in thousands) | Term Loans - Amortized Cost by Origination Year | Revolving Loans Amortized Cost |
December 31, 2020 | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Total
Commercial and industrial: |  |  |  |  |  |  |  |
Pass | $ | 308,237 |  | $ | 22,589 |  | $ | 12,596 |  | $ | 4,508 |  | $ | 5,915 |  | $ | 34,282 |  | $ | 85,889 |  | $ | 474,016 |
Special Mention | — |  | 2,034 |  | 1,318 |  | 141 |  | 11 |  | 49 |  | 19,092 |  | 22,645 |
Substandard | 1,747 |  | — |  | — |  | — |  | — |  | — |  | — |  | 1,747 |
Total commercial and industrial | $ | 309,984 |  | $ | 24,623 |  | $ | 13,914 |  | $ | 4,649 |  | $ | 5,926 |  | $ | 34,331 |  | $ | 104,981 |  | $ | 498,408 |
Commercial real estate, owner-occupied: |  |  |  |  |  |  |  |
Pass | $ | 31,029 |  | $ | 27,581 |  | $ | 32,603 |  | $ | 43,843 |  | $ | 12,768 |  | $ | 101,014 |  | $ | — |  | $ | 248,838 |
Special Mention | — |  | — |  | 11,764 |  | 17,062 |  | 7,343 |  | 6,601 |  | — |  | 42,770 |
Substandard | 7,147 |  | — |  | — |  | — |  | 6,208 |  | — |  | — |  | 13,355 |
Total commercial real estate, owner-occupied | $ | 38,176 |  | $ | 27,581 |  | $ | 44,367 |  | $ | 60,905 |  | $ | 26,319 |  | $ | 107,615 |  | $ | — |  | $ | 304,963 |
Commercial real estate, investor-owned: |  |  |  |  |  |  |  |
Pass | $ | 162,300 |  | $ | 144,751 |  | $ | 173,955 |  | $ | 100,842 |  | $ | 94,862 |  | $ | 253,611 |  | $ | 117 |  | $ | 930,438 |
Special Mention | — |  | 10,695 |  | — |  | 1,819 |  | — |  | 8,124 |  | — |  | 20,638 |
Substandard | — |  | 2,716 |  | 4,435 |  | — |  | 1,553 |  | 1,428 |  | — |  | 10,132 |
Total commercial real estate, investor-owned | $ | 162,300 |  | $ | 158,162 |  | $ | 178,390 |  | $ | 102,661 |  | $ | 96,415 |  | $ | 263,163 |  | $ | 117 |  | $ | 961,208 |
Construction: |  |  |  |  |  |  |  |
Pass | $ | 31,654 |  | $ | 30,150 |  | $ | 11,242 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 73,046 |
Total construction | $ | 31,654 |  | $ | 30,150 |  | $ | 11,242 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 73,046 |
Home equity: |  |  |  |  |  |  |  |
Pass | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 128 |  | $ | 694 |  | $ | 102,614 |  | $ | 103,436 |
Special Mention | — |  | — |  | — |  | — |  | — |  | — |  | 799 |  | 799 |
Substandard | — |  | — |  | — |  | — |  | — |  | 391 |  | 187 |  | 578 |
Total home equity | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 128 |  | $ | 1,085 |  | $ | 103,600 |  | $ | 104,813 |
Other residential: |  |  |  |  |  |  |  |
Pass | $ | 34,447 |  | $ | 31,079 |  | $ | 23,673 |  | $ | 10,574 |  | $ | 6,035 |  | $ | 17,587 |  | $ | — |  | $ | 123,395 |
Total other residential | $ | 34,447 |  | $ | 31,079 |  | $ | 23,673 |  | $ | 10,574 |  | $ | 6,035 |  | $ | 17,587 |  | $ | — |  | $ | 123,395 |
Installment and other consumer: |  |  |  |  |  |  |  |
Pass | $ | 2,361 |  | $ | 4,382 |  | $ | 3,483 |  | $ | 1,543 |  | $ | 3,423 |  | $ | 4,921 |  | $ | 2,593 |  | $ | 22,706 |
Substandard | — |  | — |  | — |  | 17 |  | — |  | — |  | — |  | 17 |
Total installment and other consumer | $ | 2,361 |  | $ | 4,382 |  | $ | 3,483 |  | $ | 1,560 |  | $ | 3,423 |  | $ | 4,921 |  | $ | 2,593 |  | $ | 22,723 |
Total loans: |  |  |  |  |  |  |  |
Pass | $ | 570,028 |  | $ | 260,532 |  | $ | 257,552 |  | $ | 161,310 |  | $ | 123,131 |  | $ | 412,109 |  | $ | 191,213 |  | $ | 1,975,875 |
Total Special Mention | $ | — |  | $ | 12,729 |  | $ | 13,082 |  | $ | 19,022 |  | $ | 7,354 |  | $ | 14,774 |  | $ | 19,891 |  | $ | 86,852 |
Total Substandard | $ | 8,894 |  | $ | 2,716 |  | $ | 4,435 |  | $ | 17 |  | $ | 7,761 |  | $ | 1,819 |  | $ | 187 |  | $ | 25,829 |
Totals | $ | 578,922 |  | $ | 275,977 |  | $ | 275,069 |  | $ | 180,349 |  | $ | 138,246 |  | $ | 428,702 |  | $ | 211,291 |  | $ | 2,088,556 |
The following table shows the amortized cost of loans by class, payment aging and non-accrual status as of September 30, 2021 and December 31, 2020.
Loan Aging Analysis by Class
(in thousands) | Commercial and industrial | Commercial real estate, owner-occupied | Commercial real estate, investor-owned | Construction | Home equity | Other residential | Installment and other consumer | Total
September 30, 2021 |  |  |  |  |  |  |  |
30-59 days past due | $ | 181 |  | $ | — |  | $ | — |  | $ | — |  | $ | 143 |  | $ | — |  | $ | 73 |  | $ | 397 |
60-89 days past due | 924 |  | — |  | — |  | — |  | 121 |  | — |  | 1 |  | 1,046 |
90 days or more past due | — |  | — |  |  | — |  | — |  | — |  | — |  | — |
Total past due | 1,105 |  | — |  | — |  | — |  | 264 |  | — |  | 74 |  | 1,443 |
Current | 376,860 |  | 398,543 |  | 1,157,344 |  | 125,060 |  | 92,132 |  | 117,778 |  | 47,859 |  | 2,315,576 |
Total loans 1 | $ | 377,965 |  | $ | 398,543 |  | $ | 1,157,344 |  | $ | 125,060 |  | $ | 92,396 |  | $ | 117,778 |  | $ | 47,933 |  | $ | 2,317,019 |
Non-accrual loans 2 | $ | — |  | $ | 7,273 |  | $ | 709 |  | $ | — |  | $ | 441 |  | $ | — |  | $ | — |  | $ | 8,423 |
Non-accrual loans with no allowance | $ | — |  | $ | 7,273 |  | $ | 709 |  | $ | — |  | $ | 441 |  | $ | — |  | $ | — |  | $ | 8,423 |
December 31, 2020 |  |  |  |  |  |  |  |
30-59 days past due | $ | — |  | $ | — |  | $ | 1,673 |  | $ | — |  | $ | 274 |  | $ | — |  | $ | 136 |  | $ | 2,083 |
60-89 days past due | — |  | — |  | — |  | — |  | — |  | — |  | 622 |  | 622 |
90 days or more past due | — |  | — |  | — |  | — |  | — |  | — |  | — |  | — |
Total past due | — |  | — |  | 1,673 |  | — |  | 274 |  | — |  | 758 |  | 2,705 |
Current | 498,408 |  | 304,963 |  | 959,535 |  | 73,046 |  | 104,539 |  | 123,395 |  | 21,965 |  | 2,085,851 |
Total loans 1 | $ | 498,408 |  | $ | 304,963 |  | $ | 961,208 |  | $ | 73,046 |  | $ | 104,813 |  | $ | 123,395 |  | $ | 22,723 |  | $ | 2,088,556 |
Non-accrual loans 2 | $ | — |  | $ | 7,147 |  | $ | 1,610 |  | $ | — |  | $ | 459 |  | $ | — |  | $ | 17 |  | $ | 9,233 |
Non-accrual loans with no allowance | $ | — |  | $ | 7,147 |  | $ | 1,610 |  | $ | — |  | $ | 459 |  | $ | — |  | $ | 17 |  | $ | 9,233 |
1 There were no loans past due more than ninety days accruing interest at September 30, 2021 or December 31, 2020. 2 None of the non-accrual loans as of September 30, 2021 or December 31, 2020 were earning interest on a cash basis. We recognized no interest income on non-accrual loans for the three and nine months ended September 30, 2021 and 2020. Other than a $118 thousand owner-occupied commercial real estate loan assumed in the ARB acquisition, there were no new loans placed on non-accrual status during the nine months ended September 30, 2021. Accrued interest of $20 thousand was reversed from interest income for loans that were placed on non-accrual status during the nine months ended September 30, 2020. Collateral Dependent Loans The following table presents the amortized cost basis of individually analyzed collateral-dependent non-accrual loans by class at September 30, 2021 and December 31, 2020.
| Amortized Cost by Collateral Type |
(in thousands) | Commercial Real Estate | Residential Real Estate |  | Other | Total | Allowance for Credit Losses
September 30, 2021 |  |  |  |  |  |
Commercial real estate, owner-occupied | $ | 7,273 |  | $ | — |  |  | $ | — |  | $ | 7,273 |  | $ | — |
Commercial real estate, investor-owned | 709 |  | — |  |  | — |  | 709 |  | — |
Home equity | — |  | 441 |  |  | — |  | 441 |  | — |
Total | $ | 7,982 |  | $ | 441 |  |  | $ | — |  | $ | 8,423 |  | $ | — |
December 31, 2020 |  |  |  |  |  |
Commercial real estate, owner-occupied | $ | 7,147 |  | $ | — |  |  | $ | — |  | $ | 7,147 |  | $ | — |
Commercial real estate, investor-owned | 1,610 |  | — |  |  | — |  | 1,610 |  | — |
Home equity | — |  | 459 |  |  | — |  | 459 |  | — |
Installment and other consumer | — |  | — |  |  | 17 |  | 17 |  | — |
Total | $ | 8,757 |  | $ | 459 |  |  | $ | 17 |  | $ | 9,233 |  | $ | — |
No collateral-dependent loans were in process of foreclosure at September 30, 2021 or December 31, 2020. In addition, the weighted average loan-to-value of collateral dependent loans was approximately 61.7% at September 30, 2021 and 59.2% at December 31, 2020. Troubled Debt Restructuring Our loan portfolio includes certain loans modified in a troubled debt restructuring (“TDR”), where we have granted economic concessions to borrowers experiencing financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDRs on non-accrual status at the time of restructure may be returned to accruing status after management considers the borrower’s sustained repayment performance for a reasonable period, generally nine months, and obtains reasonable assurance of repayment and performance. We may remove a loan from TDR designation if it meets all of the following conditions: •The loan is subsequently refinanced or restructured at current market interest rates and the new terms are consistent with the treatment of creditworthy borrowers under regular underwriting standards; •The borrower is no longer considered to be in financial difficulty; •Performance on the loan is reasonably assured; and •Existing loan did not have any forgiveness of principal or interest. We removed one commercial loan with a remaining amortized cost of $2 thousand and an unfunded commitment of $600 thousand from TDR designation during the nine months ended September 30, 2021 after meeting all of the conditions above. There were no loans removed from TDR designation during the nine months ended September 30, 2020. In accordance with section 4013 of the CARES Act, subsequently amended by section 541 of the Economic Aid Act, we elected to apply the temporary accounting relief provisions for loan modifications that met certain criteria, which would otherwise be designated TDRs under existing G AAP. As of September 30, 2021, 2 borrowing relationships with 5 loans totaling $23.6 million were continuing to benefit from payment relief. The weighted average loan-to-value ratio of the remaining payment relief loans was approximately 33%. We accrue and recognize interest income on loans under payment relief based on the original contractual interest rates. When payments resume at the end of the relief period, the payments will generally be applied to accrued interest due until accrued interest is fully paid. The following table summarizes the carrying amount of TDR loans by loan class as of September 30, 2021 and December 31, 2020.
(in thousands) |
Recorded Investment in Troubled Debt Restructurings 1 | September 30, 2021 | December 31, 2020
Commercial and industrial | $ | 1,394 |  | $ | 1,021 |
Commercial real estate, owner-occupied | 7,155 |  | 7,147 |
Commercial real estate, investor-owned | 1,718 |  | 3,305 |
Home equity | 273 |  | 281 |
Installment and other consumer | 706 |  | 752 |
Total | $ | 11,246 |  | $ | 12,506 |
1 TDR loans on non-accrual status totaled $7.4 million at both September 30, 2021 and December 31, 2020. Unfunded commitments for TDR loans totaled $242 thousand as of September 30, 2021. The following table presents information for loans modified in a TDR during the presented periods, including the number of modified contracts, the recorded investment in the loans prior to modification, and the recorded investment in the loans at period end after being restructured. The table excludes fully charged-off TDR loans and loans modified in a TDR and subsequently paid-off during the years presented, if applicable.
(dollars in thousands) | Number of Contracts Modified | Pre-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment at Period End
TDRs during the three months ended September 30, 2021: |  |  |  |
Commercial and industrial | 1 | $ | 1,101 |  | $ | 1,101 |  | $ | 1,101 |
TDRs during the three months ended September 30, 2020: |  |  |  |
Commercial real estate, investor-owned | 1 | $ | 1,553 |  | $ | 1,553 |  | $ | 1,553 |
TDRs during the nine months ended September 30, 2021: |  |  |  |
Commercial and industrial | 1 |  | $ | 1,101 |  | $ | 1,101 |  | $ | 1,101 |
TDRs during the nine months ended September 30, 2020: |  |  |  |
Commercial and industrial | 1 |  | $ | 170 |  | $ | 162 |  | $ | 144 |
Commercial real estate, investor-owned | 1 |  | 1,553 |  | 1,553 |  | 1,553 |
Home equity | 1 |  | 276 |  | 276 |  | 276 |
Installment and other consumer | 3 |  | 211 |  | 211 |  | 210 |
Total | 6 |  | $ | 2,210 |  | $ | 2,202 |  | $ | 2,183 |
The loan modified in 2021 reflected a maturity date extension and other loan term and payment modifications. The loans modified in 2020 reflected debt consolidation, interest rate concessions, and/or other loan term and payment modifications. During the nine months ended September 30, 2021 and 2020, there were no defaults on loans that had been modified in a TDR within the prior twelve-month period. We report defaulted TDRs based on a payment default definition of more than ninety days past due. Purchased Loans with Credit Deterioration For purchased loans with a more-than-insignificant amount of credit deterioration since origination ("PCD loans") the initial allowance for credit losses at the date of acquisition was added to the purchase price (or fair value) to determine the initial amortized cost basis. Subsequent changes in expected credit losses (favorable or unfavorable) are recognized through net income as adjustments to the allowance for credit losses on loans. Refer to Notes 1 and 3 under Part II, Item 8, of our 2020 Form 10-K for additional information regarding the accounting for PCD and non-PCD loans. A reconciliation of the unpaid principal balance (or par value) to the purchase price (or fair value) for PCD loans as of the August 6, 2021 merger date is presented below.
(in thousands) |
Unpaid principal balance (par value) | $ | 92,029 |
Non-credit discount | (1,662) |
Amortized cost basis | 90,367 |
Initial allowance for credit losses on PCD loans | (1,505) |
Purchase price (PCD loans at fair value) | $ | 88,862 |
Allowance for Credit Losses on Loans Rollforward The following table discloses activity in the allowance for credit losses on loans for the periods presented.
Allowance for Credit Losses on Loans Rollforward
(in thousands) | Commercial and industrial | Commercial real estate, owner-occupied | Commercial real estate, investor-owned | Construction | Home equity | Other residential | Installment and other consumer | Unallocated | Total
Three months ended September 30, 2021 |  |  |  |  |  |  |
Beginning balance | $ | 1,590 |  | $ | 2,037 |  | $ | 10,761 |  | $ | 1,142 |  | $ | 412 |  | $ | 613 |  | $ | 238 |  | $ | 2,307 |  | $ | 19,100 |
Provision (reversal) - CECL | 126 |  | (30) |  | 1,011 |  | 77 |  | 247 |  | 4 |  | 384 |  | (19) |  | 1,800 |
Initial allowance for PCD loans | 405 |  | 559 |  | 533 |  | — |  | — |  | 6 |  | 2 |  | — |  | 1,505 |
Charge-offs | — |  | — |  | — |  | — |  | — |  | — |  | (2) |  | — |  | (2) |
Recoveries | 3 |  | — |  | — |  | 8 |  | — |  | — |  | — |  | — |  | 11 |
Ending balance | $ | 2,124 |  | $ | 2,566 |  | $ | 12,305 |  | $ | 1,227 |  | $ | 659 |  | $ | 623 |  | $ | 622 |  | $ | 2,288 |  | $ | 22,414 |
Three months ended September 30, 2020 |  |  |  |  |  |  |
Beginning balance | $ | 2,609 |  | $ | 2,910 |  | $ | 10,403 |  | $ | 836 |  | $ | 1,044 |  | $ | 1,266 |  | $ | 426 |  | $ | 1,374 |  | $ | 20,868 |
Provision - incurred loss | (79) |  | 225 |  | 1,221 |  | 24 |  | (6) |  | (6) |  | (20) |  | (109) |  | 1,250 |
Charge-offs | (10) |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | (10) |
Recoveries | 5 |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | 5 |
Ending balance | $ | 2,525 |  | $ | 3,135 |  | $ | 11,624 |  | $ | 860 |  | $ | 1,038 |  | $ | 1,260 |  | $ | 406 |  | $ | 1,265 |  | $ | 22,113 |
Allowance for Credit Losses on Loans Rollforward
(in thousands) | Commercial and industrial | Commercial real estate, owner-occupied | Commercial real estate, investor | Construction | Home equity | Other residential | Installment and other consumer | Unallocated | Total
Nine months ended September 30, 2021 |  |  |  |  |  |  |
Beginning balance | $ | 2,530 |  | $ | 2,778 |  | $ | 12,682 |  | $ | 1,557 |  | $ | 738 |  | $ | 998 |  | $ | 291 |  | $ | 1,300 |  | $ | 22,874 |
Provision (reversal) - CECL | (821) |  | (771) |  | (910) |  | (356) |  | (129) |  | (381) |  | 331 |  | 988 |  | (2,049) |
Initial allowance for PCD loans | 405 |  | 559 |  | 533 |  | — |  | — |  | 6 |  | 2 |  | — |  | 1,505 |
Charge-offs | — |  | — |  | — |  | — |  | — |  | — |  | (2) |  | — |  | (2) |
Recoveries | 10 |  | — |  | — |  | 26 |  | 50 |  | — |  | — |  | — |  | 86 |
Ending balance | $ | 2,124 |  | $ | 2,566 |  | $ | 12,305 |  | $ | 1,227 |  | $ | 659 |  | $ | 623 |  | $ | 622 |  | $ | 2,288 |  | $ | 22,414 |
Nine months ended September 30, 2020 |  |  |  |  |  |  |
Beginning balance | $ | 2,334 |  | $ | 2,462 |  | $ | 8,483 |  | $ | 638 |  | $ | 850 |  | $ | 973 |  | $ | 284 |  | $ | 653 |  | $ | 16,677 |
Provision - incurred loss | 208 |  | 673 |  | 3,141 |  | 219 |  | 188 |  | 287 |  | 122 |  | 612 |  | 5,450 |
Charge-offs | (30) |  | — |  | — |  | — |  | — |  | — |  | — |  | — |  | (30) |
Recoveries | 13 |  | — |  | — |  | 3 |  | — |  | — |  | — |  | — |  | 16 |
Ending balance | $ | 2,525 |  | $ | 3,135 |  | $ | 11,624 |  | $ | 860 |  | $ | 1,038 |  | $ | 1,260 |  | $ | 406 |  | $ | 1,265 |  | $ | 22,113 |
We adopted the CECL accounting standard on December 31, 2020, which we had previously postponed under the optional accounting relief provisions of the CARES Act passed in March 2020 to the earlier of the end of the national emergency or December 31, 2020. During the first nine months of 2020, we applied the incurred loss method under previous GAAP in determining the allowance for credit losses on loans. Pledged Loans Our FHLB line of credit is secured under terms of a blanket collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $1.091 billion and $1.165 billion at September 30, 2021 and December 31, 2020, respectively. In addition, we pledge eligible TIC loans, which totaled $109.2 million and $113.6 million at September 30, 2021 and December 31, 2020, respectively, to secure our borrowing capacity with the Federal Reserve Bank ("FRB"). Also, see Note 6, Borrowings. Related Party Loans The Bank has, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders and their businesses or associates. These loans are granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to us. Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features. Related party loans totaled $8.6 million at September 30, 2021 and $6.4 million at December 31, 2020. In addition, undisbursed commitments to related parties totaled $8.6 million at September 30, 2021 and $9.1 million at December 31, 2020.

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