Portfolio loans and allowance for loan losses

12 Months Ended

Dec. 31, 2019

Portfolio loans and allowance for loan losses

Portfolio loans and allowance for loan losses

Note 4. Portfolio loans and allowance for loan losses

Distributions of portfolio loans were as follows (dollars in thousands):

	December 31,
	2019		2018
Commercial	$	1,748,368	$	1,405,106
Commercial real estate		2,793,417		2,366,823
Real estate construction		401,861		288,197
Retail real estate		1,693,769		1,480,133
Retail other		49,834		28,169
Portfolio loans	$	6,687,249	$	5,568,428
Allowance for loan losses		(53,748)		(50,648)
Portfolio loans, net	$	6,633,501	$	5,517,780

Net deferred loan origination costs included in the tables above were $6.2 million and $5.6 million as of December 31, 2019 and 2018, respectively. Net accretable purchase accounting adjustments included in the table above reduced loans by $20.2 million and $13.9 million as of December 31, 2019 and 2018, respectively.

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 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. 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):

	December 31, 2019
					Special				Substandard
	Pass		Watch		Mention		Substandard		Non-accrual
Commercial	$	1,458,416	$	172,526	$	66,337	$	41,273	$	9,096
Commercial real estate		2,477,398		186,963		105,487		26,204		9,178
Real estate construction		351,923		45,262		3,928		737		630
Retail real estate		1,661,691		9,125		5,355		7,001		8,935
Retail other		47,698		—		—		—		57
Total	$	5,997,126	$	413,876	$	181,107	$	75,215	$	27,896

	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):

	December 31, 2019
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+Days		Loans
Commercial	$	1,075	$	1,014	$	199	$	9,096
Commercial real estate		2,653		3,121		584		9,178
Real estate construction		19		—		—		630
Retail real estate		5,021		1,248		828		8,935
Retail other		52		68		—		57
Total	$	8,820	$	5,451	$	1,611	$	27,896

	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 years ended December 31, 2019, 2018 and 2017 if impaired loans had been current in accordance with their original terms was approximately $2.3 million, $1.7 million, and $1.4 million, respectively. The amount of interest collected on impaired loans and recognized on a cash basis that was included in interest income was insignificant in both 2019 and 2018 and was $0.3 million in 2017.

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

	December 31,
	2019		2018
In compliance with modified terms	$	5,005	$	8,319
30 — 89 days past due		—		127
Included in non-performing loans		702		392
Total	$	5,707	$	8,838

Loans still outstanding, classified as TDRs during the 12 months ended December 31, 2019 consisted of one commercial loan for short-term interest rate relief, with a recorded investment of $0.3 million. Loans classified as TDRs during the 12 months ended December 31, 2018 consisted of one retail real estate modifications 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 12 months ended December 31, 2019 and 2018 if performing TDRs had been in accordance with their original terms instead of modified terms was insignificant.

One commercial real estate TDR, 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 12 months ended December 31, 2019, which was then transferred to OREO by year end. There were no TDRs that were entered into during the prior 12 months that were subsequently classified as non-performing and had payment defaults during the 12 months ended December 31, 2018.

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).

	December 31, 2019
	Unpaid		Recorded
	Contractual		Investment		Recorded		Total				Average
	Principal		with No		Investment		Recorded		Related		Recorded
	Balance		Allowance		with Allowance		Investment		Allowance		Investment
Commercial	$	14,415	$	4,727	$	5,026	$	9,753	$	3,330	$	13,774
Commercial real estate		14,487		9,883		2,039		11,922		1,049		16,678
Real estate construction		1,116		974		—		974		—		873
Retail real estate		15,581		13,898		474		14,372		474		14,003
Retail other		87		58		—		58		—		42
Total	$	45,686	$	29,540	$	7,539	$	37,079	$	4,853	$	45,370

	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.

Allowance for Loan Losses

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 totaled approximately $1.7 billion, $1.2 billion and $1.8 billion as of December 31, 2019, 2018 and 2017, respectively.

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):

	Year Ended December 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		4,893		3,002		(70)		2,102		479		10,406
Charged-off		(6,478)		(3,257)		—		(1,162)		(863)		(11,760)
Recoveries		2,047		308		551		1,084		464		4,454
Ending balance	$	18,291	$	21,190	$	3,204	$	10,495	$	568	$	53,748

	Year Ended December 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		5,767		3,227		(259)		(4,824)		518		4,429
Charged-off		(3,968)		(4,352)		(97)		(1,815)		(712)		(10,944)
Recoveries		1,251		449		218		1,327		336		3,581
Ending balance	$	17,829	$	21,137	$	2,723	$	8,471	$	488	$	50,648

	Year Ended December 31, 2017
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Beginning balance	$	13,303	$	20,623	$	1,870	$	11,648	$	351	$	47,795
Provision for loan losses		(1,091)		2,439		581		3,263		111		5,303
Charged-off		(994)		(1,965)		(48)		(2,691)		(541)		(6,239)
Recoveries		3,561		716		458		1,563		425		6,723
Ending balance	$	14,779	$	21,813	$	2,861	$	13,783	$	346	$	53,582

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

	As of December 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	$	3,330	$	1,049	$	—	$	474	$	—	$	4,853
Loans collectively evaluated for impairment		14,961		20,141		3,204		10,021		568		48,895
Ending balance	$	18,291	$	21,190	$	3,204	$	10,495	$	568	$	53,748
Loans:
Loans individually evaluated for impairment	$	9,740	$	10,018	$	539	$	13,676	$	58	$	34,031
Loans collectively evaluated for impairment		1,738,615		2,781,495		400,887		1,679,397		49,776		6,650,170
PCI loans evaluated for impairment		13		1,904		435		696		—		3,048
Ending balance	$	1,748,368	$	2,793,417	$	401,861	$	1,693,769	$	49,834	$	6,687,249

	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