Portfolio loans

6 Months Ended

Jun. 30, 2020

Portfolio loans

Portfolio loans

Note 4: Portfolio loans

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

	June 30, 2020		December 31, 2019
Commercial	$	2,357,954	$	1,748,368
Commercial real estate		2,847,014		2,793,417
Real estate construction		433,031		401,861
Retail real estate		1,548,215		1,693,769
Retail other		42,806		49,834
Portfolio loans	$	7,229,020	$	6,687,249
Allowance		(96,046)		(53,748)
Portfolio loans, net	$	7,132,974	$	6,633,501

Net deferred loan origination fees included in the balances above were $(11.1) million as of June 30, 2020 compared to $6.2 million of net deferred loan origination costs as of December 31, 2019. Net accretable purchase accounting adjustments included in the balances above reduced loans by $15.5 million as of June 30, 2020 and $20.2 million as of December 31, 2019. The June 30, 2020 commercial balance includes loans originated under PPP with an amortized cost of $729.3 million.

During the first quarter of 2020, the Company purchased $43.9 million of retail real estate loans. There were no purchases during the second quarter of 2020.

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. June 30, 2020 includes purchase discounts and clearings in the pass rating. December 31, 2019 excludes purchase discounts and clearings. (dollars in thousands):

	June 30, 2020
					Special				Substandard
	Pass		Watch		Mention		Substandard		Non-accrual
Commercial	$	2,078,284	$	136,817	$	94,439	$	41,978	$	6,436
Commercial real estate		2,476,189		233,826		93,676		34,314		9,009
Real estate construction		405,327		23,907		685		2,832		280
Retail real estate		1,518,644		12,124		3,617		4,613		9,217
Retail other		42,653		—		—		—		153
Total	$	6,521,097	$	406,674	$	192,417	$	83,737	$	25,095

	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 or renewal year at June 30, 2020 is as follows (dollars in thousand):

	Term Loans Amortized Cost Basis by Origination or Renewal Year
														Revolving
As of June 30, 2020	2020		2019		2018		2017		2016			Prior		loans		Total
Commercial:
Risk rating
Pass	$	931,544	$	193,072	$	139,275	$	129,906	$	79,484	$	94,852	$	510,151	$	2,078,284
Watch		23,426		22,915		20,322		8,145		3,017		15,488		43,504		136,817
Special Mention		5,947		5,442		3,226		7,039		6,930		15,579		50,276		94,439
Substandard		11,291		3,222		4,258		5,588		1,286		1,372		14,961		41,978
Substandard non-accrual		29		3,659		713		541		804		690		—		6,436
Total commercial	$	972,237	$	228,310	$	167,794	$	151,219	$	91,521	$	127,981	$	618,892	$	2,357,954
Commercial real estate:
Risk rating
Pass	$	315,356	$	577,080	$	473,528	$	496,679	$	226,747	$	357,509	$	29,290	$	2,476,189
Watch		40,462		69,029		44,938		28,018		27,333		23,329		717		233,826
Special Mention		12,212		16,494		17,895		14,233		6,800		24,553		1,489		93,676
Substandard		17,409		5,862		3,216		5,635		1,863		329		—		34,314
Substandard non-accrual		300		1,337		3,752		1,496		391		1,733		—		9,009
Total commercial real estate	$	385,739	$	669,802	$	543,329	$	546,061	$	263,134	$	407,453	$	31,496	$	2,847,014
Real estate construction:
Risk rating
Pass	$	61,660	$	200,254	$	122,501	$	1,535	$	407	$	1,299	$	17,671	$	405,327
Watch		9,071		10,092		2,411		2,128		205						23,907
Special Mention		673		12		—		—		—		—		—		685
Substandard		2,600		—		48		34		150		—		—		2,832
Substandard non-accrual		—		—		275		—		—		5		—		280
Total real estate construction	$	74,004	$	210,358	$	125,235	$	3,697	$	762	$	1,304	$	17,671	$	433,031
Retail real estate:
Risk rating
Pass	$	232,130	$	186,986	$	172,855	$	176,644	$	167,885	$	340,407	$	241,737	$	1,518,644
Watch		1,102		2,221		1,943		333		986		722		4,817		12,124
Special Mention		526		—		174		—		1,988		929		—		3,617
Substandard		1,487		214		333		160		751		1,216		452		4,613
Substandard non-accrual		280		175		793		732		248		5,437		1,552		9,217
Total retail real estate	$	235,525	$	189,596	$	176,098	$	177,869	$	171,858	$	348,711	$	248,558	$	1,548,215
Retail other:
Risk rating
Pass	$	6,101	$	12,360	$	8,099	$	4,079	$	1,253	$	1,084	$	9,677	$	42,653
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Substandard non-accrual		63		7		—		2		17		63		1		153
Total retail other	$	6,164	$	12,367	$	8,099	$	4,081	$	1,270	$	1,147	$	9,678	$	42,806

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):

	June 30, 2020
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+Days		Loans
Commercial	$	41	$	35	$	—	$	6,436
Commercial real estate		117		242		—		9,009
Real estate construction		—		—		—		280
Retail real estate		3,681		943		271		9,217
Retail other		71		36		14		153
Total	$	3,910	$	1,256	$	285	$	25,095

	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 June 30, 2020 and 2019 if non-accrual loans and 90+ days past due loans had been current in accordance with their original terms was $0.4 million. The gross interest income that would have been recorded in the six months ended June 30, 2020 and 2019 if non-accrual loans and 90+ days past due loans had been current in accordance with their original terms was $0.9 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 six months ended June 30, 2020 and 2019.

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

		June 30,		December 31,
	2020		2019
In compliance with modified terms	$	4,191	$	5,005
30 — 89 days past due		125		—
Included in non-performing loans		1,662		702
Total	$	5,978	$	5,707

Loans newly classified as a TDR in compliance with modified terms during the three and six months ended June 30, 2020, included one retail real estate loan for payment modification with a recorded investment of $0.2 million. Loans newly classified as a TDR in compliance with modified terms during the three and six months ended June 30, 2019, included one commercial loan for payment modification with a recorded investment of $0.6 million.

The gross interest income that would have been recorded in the three and six months ended June 30, 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 last 12 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 and six months ended June 30, 2020. One commercial real estate TDR, with a recorded investment of $3.2 million, that was entered into during the prior 12 months, was subsequently classified as non-performing and had payment defaults during the three and six months ended June 30, 2019.

Modified loans with payment deferrals that fall under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) or revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions that suspended requirements under GAAP related to TDRs are not included in the Company’s TDR totals.

At June 30, 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).

	June 30, 2020
	Unpaid		Amortized
	Contractual		Cost		Amortized		Total				Average
	Principal		with No		Cost		Amortized		Related		Amortized
	Balance		Allowance		with Allowance		Cost		Allowance		Cost
Commercial	$	11,739	$	3,186	$	3,077	$	6,263	$	1,248	$	9,467
Commercial real estate		10,847		9,105		1,000		10,105		486		13,583
Real estate construction		576		559		—		559		—		836
Retail real estate		5,371		4,705		474		5,179		474		10,817
Retail other		—		—		—		—		—		30
Total	$	28,533	$	17,555	$	4,551	$	22,106	$	2,208	$	34,733

	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 June 30, 2020, there were $17.3 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 beginning in 2010. As of June 30, 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. PPP loans were excluded from the allowance calculation as they are 100% government guaranteed.

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 June 30, 2020
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Beginning balance	$	22,725	$	35,967	$	7,193	$	17,454	$	1,045	$	84,384
Provision for credit losses		2,473		6,861		574		2,981		2		12,891
Charged-off		(1,140)		(165)		—		(292)		(105)		(1,702)
Recoveries		88		17		25		262		81		473
Ending balance	$	24,146	$	42,680	$	7,792	$	20,405	$	1,023	$	96,046
	As of and for the Six Months Ended June 30, 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		8,146		13,387		1,463		7,018		93		30,107
Charged-off		(3,182)		(1,264)		—		(1,000)		(404)		(5,850)
Recoveries		176		61		171		600		200		1,208
Ending balance	$	24,146	$	42,680	$	7,792	$	20,405	$	1,023	$	96,046

	As of and for the Three Months Ended June 30, 2019
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Beginning balance	$	17,998	$	20,097	$	2,807	$	9,503	$	510	$	50,915
Provision for loan losses		1,161		(97)		411		941		101		2,517
Charged-off		(2,563)		—		—		(200)		(178)		(2,941)
Recoveries		137		188		87		369		103		884
Ending balance	$	16,733	$	20,188	$	3,305	$	10,613	$	536	$	51,375
	As of and for the Six Months Ended June 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		2,954		(1,186)		413		2,298		149		4,628
Charged-off		(4,370)		(15)		—		(717)		(308)		(5,410)
Recoveries		320		252		169		561		207		1,509
Ending balance	$	16,733	$	20,188	$	3,305	$	10,613	$	536	$	51,375

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

	As of June 30, 2020
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Allowance
Ending balance attributed to:
Loans individually evaluated for impairment	$	1,248	$	486	$	—	$	474	$	—	$	2,208
Loans collectively evaluated for impairment		22,898		42,194		7,792		19,931		1,023		93,838
Ending balance	$	24,146	$	42,680	$	7,792	$	20,405	$	1,023	$	96,046
Loans:
Loans individually evaluated for impairment	$	6,263	$	10,105	$	559	$	5,179	$	—	$	22,106
Loans collectively evaluated for impairment		2,351,687		2,834,987		432,217		1,542,624		42,806		7,204,321
PCD loans evaluated for impairment		4		1,922		255		412		—		2,593
Ending balance	$	2,357,954	$	2,847,014	$	433,031	$	1,548,215	$	42,806	$	7,229,020

	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