Portfolio loans

9 Months Ended

Sep. 30, 2019

Portfolio loans

Portfolio loans

Note 4: Portfolio loans

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

	September 30,		December 31,
	2019		2018
Commercial	$	1,680,491	$	1,405,106
Commercial real estate		2,793,380		2,366,823
Real estate construction		426,559		288,197
Retail real estate		1,717,555		1,480,133
Retail other		51,430		28,169
Portfolio loans	$	6,669,415	$	5,568,428
Allowance for loan losses		(52,965)		(50,648)
Portfolio loans, net	$	6,616,450	$	5,517,780

Net deferred loan origination costs included in the table above were $5.4 million as of September 30, 2019 and $5.6 million as of December 31, 2018. Net accretable purchase accounting adjustments included in the table above reduced loans by $22.5 million as of September 30, 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 acceptable credits, ranging from investment or near investment grade, to loans made to borrowers who exhibit credit fundamentals that meet or exceed industry standards.

● Watch- This category includes loans that warrant a higher than average level of monitoring to ensure that weaknesses do not cause the inability of the credit to perform as expected. These loans are not necessarily a problem due to other inherent strengths of the credit, such as guarantor strength, but have above average concern and monitoring.

● 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):

	September 30, 2019
					Special				Substandard
	Pass		Watch		Mention		Substandard		Non-accrual
Commercial	$	1,393,420	$	167,439	$	63,516	$	47,765	$	10,708
Commercial real estate		2,474,248		189,443		91,689		38,018		11,852
Real estate construction		397,377		24,050		5,151		1,130		611
Retail real estate		1,670,187		14,231		7,565		7,963		8,591
Retail other		51,752		79		—		13		65
Total	$	5,986,984	$	395,242	$	167,921	$	94,889	$	31,827

	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):

	September 30, 2019
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+Days		Loans
Commercial	$	464	$	584	$	698	$	10,708
Commercial real estate		474		3,040		222		11,852
Real estate construction		229		198		—		611
Retail real estate		4,119		3,252		354		8,591
Retail other		66		8		2		65
Total	$	5,352	$	7,082	$	1,276	$	31,827

	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 September 30, 2019 and 2018 if impaired loans had been current in accordance with their original terms was $0.5 million and $0.4 million, respectively. The gross interest income that would have been recorded in the nine months ended September 30, 2019 and 2018 if impaired loans had been current in accordance with their original terms was $1.6 million and $1.1 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 and nine months ended September 30, 2019 and 2018.

A summary of troubled debt restructurings (“TDR”) loans is as follows (dollars in thousands):

	September 30,		December 31,
	2019		2018
In compliance with modified terms	$	8,778	$	8,319
30 — 89 days past due		—		127
Included in non-performing loans		3,557		392
Total	$	12,335	$	8,838

Loans classified as a TDR during the three and nine months ended September 30, 2019 included one commercial loan for short-term interest rate relief, with a recorded investment of $0.3 million. There were no loans classified as TDRs during the three months ended September 30, 2018. Loans classified as a TDR during the nine months ended September

30, 2018 included one retail real estate modification for short-term interest rate relief, with a recorded investment of $0.1 million.

The gross interest income that would have been recorded in the three and nine months ended September 30, 2019 and 2018 if TDRs had performed in accordance with their original terms compared with their modified terms was insignificant.

One commercial real estate TDR, with a recorded investment of $3.2 million, that was entered into during the last 12 months, was 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 nine months ended September 30, 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 and nine months ended September 30, 2018.

At September 30, 2019, the Company had $3.1 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).

	September 30, 2019
	Unpaid		Recorded
	Contractual		Investment		Recorded		Total				Average
	Principal		with No		Investment		Recorded		Related		Recorded
	Balance		Allowance		with Allowance		Investment		Allowance		Investment
Commercial	$	16,593	$	9,237	$	3,262	$	12,499	$	2,671	$	16,070
Commercial real estate		19,011		8,566		8,823		17,389		2,497		18,104
Real estate construction		1,071		929		—		929		—		759
Retail real estate		14,869		13,141		474		13,615		474		13,569
Retail other		98		67		—		67		—		37
Total	$	51,642	$	31,940	$	12,559	$	44,499	$	5,642	$	48,539

	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 September 30, 2019 totaled approximately $1.7 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 September 30, 2019
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Beginning balance	$	16,733	$	20,188	$	3,305	$	10,613	$	536	$	51,375
Provision for loan losses		463		3,167		(359)		(86)		226		3,411
Charged-off		(817)		(1,168)		—		(226)		(288)		(2,499)
Recoveries		147		33		164		221		113		678
Ending balance	$	16,526	$	22,220	$	3,110	$	10,522	$	587	$	52,965
	As of and for the Nine Months Ended September 30, 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		3,417		1,981		54		2,212		375		8,039
Charged-off		(5,187)		(1,183)		—		(943)		(596)		(7,909)
Recoveries		467		285		333		782		320		2,187
Ending balance	$	16,526	$	22,220	$	3,110	$	10,522	$	587	$	52,965

	As of and for the Three Months Ended September 30, 2018
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Beginning balance	$	17,586	$	23,047	$	2,915	$	9,293	$	464	$	53,305
Provision for loan losses		2,388		(1,291)		(15)		(399)		75		758
Charged-off		(1,144)		(62)		—		(695)		(286)		(2,187)
Recoveries		136		58		32		423		218		867
Ending balance	$	18,966	$	21,752	$	2,932	$	8,622	$	471	$	52,743
	As of and for the Nine Months Ended September 30, 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		7,111		1,154		22		(4,609)		346		4,024
Charged-off		(3,841)		(1,487)		(97)		(1,637)		(608)		(7,670)
Recoveries		917		272		146		1,085		387		2,807
Ending balance	$	18,966	$	21,752	$	2,932	$	8,622	$	471	$	52,743

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

	As of September 30, 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	$	2,671	$	2,497	$	—	$	474	$	—	$	5,642
Loans collectively evaluated for impairment		13,855		19,723		3,110		10,048		587		47,323
Ending balance	$	16,526	$	22,220	$	3,110	$	10,522	$	587	$	52,965
Loans:
Loans individually evaluated for impairment	$	12,481	$	14,954	$	494	$	12,693	$	67	$	40,689
Loans collectively evaluated for impairment		1,667,992		2,775,991		425,630		1,703,940		51,363		6,624,916
PCI loans evaluated for impairment		18		2,435		435		922		—		3,810
Ending balance	$	1,680,491	$	2,793,380	$	426,559	$	1,717,555	$	51,430	$	6,669,415

	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