Note 4: Portfolio loans

The distribution of portfolio loans is as follows (dollars in thousands):


	March 31,		December 31,
	2019		2018
Commercial	$	1,657,022	$	1,405,106
Commercial real estate		2,699,491		2,366,823
Real estate construction		387,623		288,197
Retail real estate		1,718,415		1,480,133
Retail other		52,530		28,169
Portfolio loans	$	6,515,081	$	5,568,428

Allowance for loan losses		(50,915)		(50,648)
Portfolio loans, net	$	6,464,166	$	5,517,780

Net deferred loan origination costs included in the table above were $5.4 million as of March 31, 2019 and $5.6 million as of December 31, 2018. Net accretable purchase accounting adjustments included in the table above reduced loans by $28.2 million as of March 31, 2019 and $13.9 million as of December 31, 2018.

The Company utilizes a loan grading scale to assign a risk grade to all of its loans. A description of the general characteristics of each grade is as follows:

Pass- This category includes loans that are all considered strong credits, ranging from investment or near investment grade, to loans made to borrowers who exhibit credit fundamentals that exceed industry standards and loan policy guidelines and loans that exhibit acceptable credit fundamentals.

Watch- This category includes loans on management’s “Watch List” and is intended to be utilized on a temporary basis for a pass grade borrower where a significant risk-modifying action is anticipated in the near future.

Special mention- This category is for “Other Assets Specially Mentioned” loans that have potential weaknesses, which may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date.

Substandard- This category includes “Substandard” loans, determined in accordance with regulatory guidelines, for which the accrual of interest has not been stopped. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Substandard Non-accrual- This category includes loans that have all the characteristics of a “Substandard” loan with additional factors that make collection in full highly questionable and improbable. Such loans are placed on non-accrual status and may be dependent on collateral with a value that is difficult to determine.

All loans are graded at their inception. Most commercial lending relationships that are $1.0 million or less are processed through an expedited underwriting process. If the credit receives a pass grade, it is aggregated into a homogenous pool of either: $0.35 million or less, or $0.35 million to $1.0 million. These pools are monitored on a regular basis and reviewed annually. Most commercial loans greater than $1.0 million are included in a portfolio review at least annually. Commercial loans greater than $0.35 million that have a grading of special mention or worse are reviewed on a quarterly basis. Interim reviews may take place if circumstances of the borrower warrant a more timely review.

The following table is a summary of risk grades segregated by category of portfolio loans (excluding accretable purchase accounting adjustments and clearings) (dollars in thousands):


	March 31, 2019
					Special				Substandard
	Pass		Watch		Mention		Substandard		Non-accrual
Commercial	$	1,359,640	$	180,954	$	59,595	$	41,525	$	16,243
Commercial real estate		2,406,213		168,415		89,262		33,585		9,761
Real estate construction		362,541		19,652		3,105		1,346		1,126
Retail real estate		1,671,219		14,202		6,802		7,678		9,080
Retail other		51,101		90		—		16		20
Total	$	5,850,714	$	383,313	$	158,764	$	84,150	$	36,230


	December 31, 2018
					Special				Substandard
	Pass		Watch		Mention		Substandard		Non-accrual
Commercial	$	1,126,257	$	172,449	$	47,000	$	42,532	$	17,953
Commercial real estate		2,106,711		137,214		85,148		36,205		10,298
Real estate construction		268,069		14,562		3,899		1,888		18
Retail real estate		1,448,964		6,425		6,792		5,435		6,698
Retail other		26,707		—		—		—		30
Total	$	4,976,708	$	330,650	$	142,839	$	86,060	$	34,997

An analysis of portfolio loans that are past due and still accruing or on a non-accrual status is as follows (dollars in thousands):


	March 31, 2019
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+Days		Loans
Commercial	$	410	$	1,500	$	72	$	16,243
Commercial real estate		1,662		595		—		9,761
Real estate construction		191		—		—		1,126
Retail real estate		4,442		1,596		284		9,080
Retail other		364		20		—		20
Total	$	7,069	$	3,711	$	356	$	36,230


	December 31, 2018
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+Days		Loans
Commercial	$	158	$	140	$	775	$	17,953
Commercial real estate		148		558		—		10,298
Real estate construction		121		—		58		18
Retail real estate		4,578		1,368		766		6,698
Retail other		48		2		2		30
Total	$	5,053	$	2,068	$	1,601	$	34,997

The gross interest income that would have been recorded in the three months ended March 31, 2019 and 2018 if impaired loans had been current in accordance with their original terms was $0.7 million and $0.4 million, respectively. The amount of interest collected on those loans and recognized on a cash basis that was included in interest income was insignificant for the three months ended March 31, 2019 and 2018.

A summary of restructured loans is as follows (dollars in thousands):


	March 31,		December 31,
	2019		2018
In compliance with modified terms	$	11,127	$	8,319
30 — 89 days past due		184		127
Included in non-performing loans		360		392
Total	$	11,671	$	8,838

There was $3.1 million of loans newly classified as troubled debt restructurings (“TDR”) during the three months ended March 31, 2019, which included one commercial loan for payment modification. There were no loans newly classified as TDRs during the three months ended March 31, 2018.

The gross interest income that would have been recorded in the three months ended March 31, 2019 and 2018 if TDRs had performed in accordance with their original terms compared with their modified terms was insignificant.

There were no TDRs that were entered into during the last twelve months that were subsequently classified as non-performing and had payment defaults (a default occurs when a loan is 90 days or more past due or transferred to non-accrual) during the three months ended March 31, 2019. There were no TDRs that were entered into during the prior twelve months that were subsequently classified as non-performing and had payment defaults during the three months ended March 31, 2018.

At March 31, 2019, the Company had $3.4 million of residential real estate in the process of foreclosure.

The following tables provide details of loans identified as impaired, segregated by category. The unpaid contractual principal balance represents the recorded balance prior to any partial charge-offs. The recorded investment represents customer balances net of any partial charge-offs recognized on the loan. The average recorded investment is calculated using the most recent four quarters (dollars in thousands).


	March 31, 2019
	Unpaid		Recorded
	Contractual		Investment		Recorded		Total				Average
	Principal		with No		Investment		Recorded		Related		Recorded
	Balance		Allowance		with Allowance		Investment		Allowance		Investment
Commercial	$	19,507	$	5,605	$	10,787	$	16,392	$	4,126	$	15,165
Commercial real estate		20,174		13,818		4,498		18,316		1,231		18,448
Real estate construction		930		820		—		820		—		586
Retail real estate		16,795		14,815		115		14,930		42		13,792
Retail other		48		20		—		20		—		40
Total	$	57,454	$	35,078	$	15,400	$	50,478	$	5,399	$	48,031


	December 31, 2018
	Unpaid		Recorded
	Contractual		Investment		Recorded		Total				Average
	Principal		with No		Investment		Recorded		Related		Recorded
	Balance		Allowance		with Allowance		Investment		Allowance		Investment
Commercial	$	21,442	$	6,858	$	12,001	$	18,859	$	4,319	$	13,364
Commercial real estate		19,079		13,082		4,498		17,580		1,181		18,077
Real estate construction		478		453		—		453		—		712
Retail real estate		14,418		13,196		61		13,257		61		14,110
Retail other		117		33		—		33		—		40
Total	$	55,534	$	33,622	$	16,560	$	50,182	$	5,561	$	46,303

Management's evaluation as to the ultimate collectability of loans includes estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.

The Company holds acquired loans from business combinations with uncollected principal balances. These loans are carried net of a fair value adjustment for credit risk and interest rates and are only included in the allowance calculation to the extent that the reserve requirement exceeds the fair value adjustment. As the acquired loans renew, it is generally necessary to establish an allowance, which represents an amount that, in management’s opinion, will be adequate to absorb probable credit losses in such loans. The recorded investment of all acquired loans as of March 31, 2019 totaled approximately $2.0 billion.

The following table details activity in the allowance for loan losses. Allocation of a portion of the allowance to one category does not preclude its availability to absorb losses in other categories (dollars in thousands):


	As of and for the Three Months Ended March 31, 2019
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Beginning balance	$	17,829	$	21,137	$	2,723	$	8,471	$	488	$	50,648
Provision for loan losses		1,793		(1,089)		2		1,357		48		2,111
Charged-off		(1,807)		(15)		—		(517)		(130)		(2,469)
Recoveries		183		64		82		192		104		625
Ending balance	$	17,998	$	20,097	$	2,807	$	9,503	$	510	$	50,915


	As of and for the Three Months Ended March 31, 2018
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Beginning balance	$	14,779	$	21,813	$	2,861	$	13,783	$	346	$	53,582
Provision for loan losses		3,003		1,536		2		(3,662)		129		1,008
Charged-off		(781)		(1,315)		(97)		(530)		(207)		(2,930)
Recoveries		576		56		33		245		79		989
Ending balance	$	17,577	$	22,090	$	2,799	$	9,836	$	347	$	52,649

The following table presents the allowance for loan losses and recorded investments in portfolio loans by category (dollars in thousands):


	As of March 31, 2019
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Allowance for loan losses
Ending balance attributed to:
Loans individually evaluated for impairment	$	4,126	$	1,231	$	—	$	42	$	—	$	5,399
Loans collectively evaluated for impairment		13,872		18,866		2,807		9,461		510		45,516
Ending balance	$	17,998	$	20,097	$	2,807	$	9,503	$	510	$	50,915

Loans:
Loans individually evaluated for impairment	$	16,361	$	15,733	$	385	$	13,296	$	20	$	45,795
Loans collectively evaluated for impairment		1,640,630		2,679,200		387,238		1,705,025		52,510		6,464,603
PCI loans evaluated for impairment		31		4,558		—		94		—		4,683
Ending balance	$	1,657,022	$	2,699,491	$	387,623	$	1,718,415	$	52,530	$	6,515,081


	As of December 31, 2018
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Allowance for loan losses
Ending balance attributed to:
Loans individually evaluated for impairment	$	4,319	$	1,181	$	—	$	61	$	—	$	5,561
Loans collectively evaluated for impairment		13,510		19,956		2,723		8,410		488		45,087
Ending balance	$	17,829	$	21,137	$	2,723	$	8,471	$	488	$	50,648

Loans:
Loans individually evaluated for impairment	$	18,441	$	15,318	$	453	$	13,159	$	33	$	47,404
Loans collectively evaluated for impairment		1,386,247		2,349,243		287,744		1,466,876		28,136		5,518,246
PCI loans evaluated for impairment		418		2,262		—		98		—		2,778
Ending balance	$	1,405,106	$	2,366,823	$	288,197	$	1,480,133	$	28,169	$	5,568,428