Portfolio loans

3 Months Ended

Mar. 31, 2020

Portfolio loans

Portfolio loans

Note 4: Portfolio loans

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

	March 31, 2020		December 31, 2019
Commercial	$	1,767,191	$	1,748,368
Commercial real estate		2,825,003		2,793,417
Real estate construction		448,313		401,861
Retail real estate		1,656,628		1,693,769
Retail other		48,364		49,834
Portfolio loans	$	6,745,499	$	6,687,249
Allowance		(84,384)		(53,748)
Portfolio loans, net	$	6,661,115	$	6,633,501

Net deferred loan origination costs included in the table above were $6.4 million as of March 31, 2020 and $6.2 million as of December 31, 2019. Net accretable purchase accounting adjustments included in the table above reduced loans by $17.7 million as of March 31, 2020 and $20.2 million as of December 31, 2019.

During the first quarter of 2020, the Company purchased $43.9 million of retail real estate loans.

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. 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. March 31, 2020 includes purchase discounts and clearings in the pass rating. December 31, 2019 excludes purchase discounts and clearings. (dollars in thousands):

	March 31, 2020
					Special				Substandard
	Pass		Watch		Mention		Substandard		Non-accrual
Commercial	$	1,481,538	$	150,303	$	85,231	$	42,727	$	7,392
Commercial real estate		2,509,301		178,151		100,365		28,245		8,941
Real estate construction		415,302		28,808		3,222		699		282
Retail real estate		1,624,543		13,075		3,652		6,387		8,971
Retail other		48,273		—		—		5		86
Total	$	6,078,957	$	370,337	$	192,470	$	78,063	$	25,672

	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

Risk grades of portfolio loans, further sorted by origination year at March 31, 2020 is as follows (dollars in thousand):

	Term Loans Amortized Cost Basis by Origination Year
														Revolving
As of March 31, 2020	2020		2019		2018		2017		2016			Prior		loans		Total
Commercial:
Risk rating
Pass	$	183,585	$	217,732	$	158,089	$	136,995	$	84,025	$	129,623	$	571,489	$	1,481,538
Watch		11,686		29,396		17,424		10,367		4,617		12,958		63,855		150,303
Special Mention		12,010		5,723		1,918		7,316		7,148		15,166		35,950		85,231
Substandard		2,860		6,108		4,640		5,646		1,939		1,425		20,109		42,727
Substandard non-accrual		—		3,245		1,871		541		997		738		—		7,392
Total commercial	$	210,141	$	262,204	$	183,942	$	160,865	$	98,726	$	159,910	$	691,403	$	1,767,191
Commercial real estate:
Risk rating
Pass	$	154,317	$	597,120	$	485,314	$	551,251	$	262,300	$	425,072	$	33,927	$	2,509,301
Watch		20,142		61,908		37,717		19,038		19,039		17,375		2,932		178,151
Special Mention		15,788		15,758		18,964		14,042		6,810		28,508		495		100,365
Substandard		2,802		12,855		3,741		6,211		1,884		637		115		28,245
Substandard non-accrual		—		1,345		3,813		1,484		564		1,735		—		8,941
Total commercial real estate	$	193,049	$	688,986	$	549,549	$	592,026	$	290,597	$	473,327	$	37,469	$	2,825,003
Real estate construction:
Risk rating
Pass	$	26,489	$	204,437	$	139,119	$	20,465	$	412	$	1,534	$	22,846	$	415,302
Watch		10,936		12,936		2,582		2,140		214						28,808
Special Mention		2,367		703		—		—		152		—		—		3,222
Substandard		—		—		655		44		—		—		—		699
Substandard non-accrual		—		—		275		—		—		7		—		282
Total real estate construction	$	39,792	$	218,076	$	142,631	$	22,649	$	778	$	1,541	$	22,846	$	448,313
Retail real estate:
Risk rating
Pass	$	51,441	$	201,517	$	199,235	$	204,376	$	184,629	$	381,085	$	402,260	$	1,624,543
Watch		296		3,599		1,893		441		1,034		736		5,076		13,075
Special Mention		108		—		180		—		2,001		1,363		—		3,652
Substandard		—		1,285		447		537		761		2,904		453		6,387
Substandard non-accrual		100		209		863		486		254		5,541		1,518		8,971
Total retail real estate	$	51,945	$	206,610	$	202,618	$	205,840	$	188,679	$	391,629	$	409,307	$	1,656,628
Retail other:
Risk rating
Pass	$	6,126	$	13,896	$	9,331	$	4,942	$	1,601	$	1,419	$	10,958	$	48,273
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		5		5
Substandard non-accrual		16		47		—		3		17		—		3		86
Total retail other	$	6,142	$	13,943	$	9,331	$	4,945	$	1,618	$	1,419	$	10,966	$	48,364

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

	March 31, 2020
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+Days		Loans
Commercial	$	1,047	$	—	$	—	$	7,392
Commercial real estate		690		387		159		8,941
Real estate construction		—		—		—		282
Retail real estate		6,910		997		1,287		8,971
Retail other		107		12		94		86
Total	$	8,754	$	1,396	$	1,540	$	25,672

	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

The gross interest income that would have been recorded in the three months ended March 31, 2020 and 2019 if non-accrual loans and 90+ days past due loans had been current in accordance with their original terms was $0.5 million and $0.7 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, 2020 and 2019.

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

		March 31,		December 31,
	2020		2019
In compliance with modified terms	$	4,949	$	5,005
30 — 89 days past due		—		—
Included in non-performing loans		1,686		702
Total	$	6,635	$	5,707

There were no loans newly classified as TDRs in compliance with modified terms during the three months ended March 31, 2020. Loans newly classified as a TDR in compliance with modified terms during the three months ended March 31, 2019 consisted of one commercial modification for short-term payment relief, with an amortized cost of $3.1 million. Commercial non-performing loans of $0.5 million and commercial real estate non-performing loans of $0.7 million were newly classified as TDRs included in non-performing loans for short-term payment relief during the three months ended March 31, 2020.

The gross interest income that would have been recorded in the three months ended March 31, 2020 and 2019 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 prior twelve months that were subsequently classified as non-performing and had payment defaults during the three months ended March 31, 2020 or 2019.

At March 31, 2020, the Company had $1.3 million of residential real estate in the process of foreclosure.

The following tables provide details of loans evaluated individually, segregated by category. With the adoption of CECL, the Company only evaluated loans with disparate risk characteristics on an individual basis. The unpaid contractual principal balance represents the customer outstanding balance excluding any partial charge-offs. The amortized cost represents customer balances net of any partial charge-offs recognized on the loan. The average amortized cost is calculated using the most recent four quarters (dollars in thousands).

	March 31, 2020
	Unpaid		Amortized
	Contractual		Cost		Amortized		Total				Average
	Principal		with No		Cost		Amortized		Related		Amortized
	Balance		Allowance		with Allowance		Cost		Allowance		Cost
Commercial	$	11,795	$	3,751	$	3,671	$	7,422	$	2,822	$	11,493
Commercial real estate		11,992		9,111		1,206		10,317		642		15,226
Real estate construction		579		562		—		562		—		888
Retail real estate		7,642		6,597		474		7,071		474		12,767
Retail other		—		—		—		—		—		34
Total	$	32,008	$	20,021	$	5,351	$	25,372	$	3,938	$	40,408

	December 31, 2019
	Unpaid		Amortized
	Contractual		Cost		Amortized		Total				Average
	Principal		with No		Cost		Amortized		Related		Amortized
	Balance		Allowance		with Allowance		Cost		Allowance		Cost
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

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. Collateral dependent loans are loans in which repayment is expected to be provided solely by the underlying collateral and there are no other available and reliable sources of repayment. They are written down to the lower of cost or fair value of underlying collateral, less estimated costs to sell. As of March 31, 2020, there were $13.5 million of collateral dependent loans which are secured by real estate or business assets.

Management estimates the allowance balance using relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Company’s historical loss experience from 2010-2019. As of March 31, 2020, the Company expects the markets in which it operates to experience a decline in economic conditions and an increase in the unemployment rate and level of delinquencies over the next 12 months. Management adjusted the historical loss experience for these expectations with an immediate reversion to historical loss rate beyond this forecast period.

The following table details activity in the allowance. 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, 2020
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Beginning balance, prior to adoption of ASC 326	$	18,291	$	21,190	$	3,204	$	10,495	$	568	$	53,748
Adoption of ASC 326		715		9,306		2,954		3,292		566		16,833
Provision for credit losses		5,673		6,526		889		4,037		91		17,216
Charged-off		(2,042)		(1,099)		—		(708)		(299)		(4,148)
Recoveries		88		44		146		338		119		735
Ending balance	$	22,725	$	35,967	$	7,193	$	17,454	$	1,045	$	84,384

	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

The following table presents the allowance and amortized cost of portfolio loans by category (dollars in thousands):

	As of March 31, 2020
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Allowance
Ending balance attributed to:
Loans individually evaluated for impairment	$	2,822	$	642	$	—	$	474	$	—	$	3,938
Loans collectively evaluated for impairment		19,903		35,325		7,193		16,980		1,045		80,446
Ending balance	$	22,725	$	35,967	$	7,193	$	17,454	$	1,045	$	84,384
Loans:
Loans individually evaluated for impairment	$	7,414	$	8,452	$	307	$	6,618	$	—	$	22,791
Loans collectively evaluated for impairment		1,759,769		2,814,686		447,751		1,649,557		48,364		6,720,127
PCD loans evaluated for impairment		8		1,865		255		453		—		2,581
Ending balance	$	1,767,191	$	2,825,003	$	448,313	$	1,656,628	$	48,364	$	6,745,499

	As of December 31, 2019
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Allowance
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