Portfolio loans

9 Months Ended

Sep. 30, 2020

Portfolio loans

Portfolio loans

Note 4: Portfolio loans

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

	September 30, 2020		December 31, 2019
Commercial	$	2,281,031	$	1,748,368
Commercial real estate		2,912,408		2,793,417
Real estate construction		407,266		401,861
Retail real estate		1,480,520		1,693,769
Retail other		40,086		49,834
Portfolio loans	$	7,121,311	$	6,687,249
Allowance		(98,841)		(53,748)
Portfolio loans, net	$	7,022,470	$	6,633,501

Net deferred loan origination fees included in the balances above were $(6.0) million as of September 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 $13.2 million as of September 30, 2020 and $20.2 million as of December 31, 2019. The September 30, 2020 commercial balance includes loans originated under PPP with an amortized cost of $736.4 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 or third quarters 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. September 30, 2020 includes purchase discounts and clearings in the pass rating. December 31, 2019 excludes purchase discounts and clearings. (dollars in thousands):

	September 30, 2020
					Special				Substandard
	Pass		Watch		Mention		Substandard		Non-accrual
Commercial	$	2,011,113	$	145,817	$	82,942	$	33,247	$	7,912
Commercial real estate		2,541,455		255,447		71,315		37,052		7,139
Real estate construction		376,787		26,820		603		2,797		259
Retail real estate		1,452,145		10,960		4,069		4,848		8,498
Retail other		39,996		—		—		—		90
Total	$	6,421,496	$	439,044	$	158,929	$	77,944	$	23,898

	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 September 30, 2020 is as follows (dollars in thousand):

	Term Loans Amortized Cost Basis by Origination Year
														Revolving
As of September 30, 2020	2020		2019		2018		2017		2016			Prior		loans		Total
Commercial:
Risk rating
Pass	$	1,029,324	$	173,103	$	117,434	$	100,388	$	67,473	$	87,096	$	436,295	$	2,011,113
Watch		24,601		21,566		16,918		14,606		3,488		13,653		50,985		145,817
Special Mention		6,011		2,572		2,166		7,181		6,853		14,949		43,210		82,942
Substandard		8,450		3,578		2,528		4,437		935		1,292		12,027		33,247
Substandard non-accrual		348		3,076		586		540		792		70		2,500		7,912
Total commercial	$	1,068,734	$	203,895	$	139,632	$	127,152	$	79,541	$	117,060	$	545,017	$	2,281,031
Commercial real estate:
Risk rating
Pass	$	557,205	$	565,460	$	425,448	$	439,438	$	215,498	$	315,026	$	23,380	$	2,541,455
Watch		52,304		71,844		62,609		28,787		21,629		18,186		88		255,447
Special Mention		8,429		14,981		5,479		12,664		6,096		23,170		496		71,315
Substandard		19,809		4,662		1,197		7,165		2,137		1,587		495		37,052
Substandard non-accrual		923		795		1,939		1,475		287		1,720		—		7,139
Total commercial real estate	$	638,670	$	657,742	$	496,672	$	489,529	$	245,647	$	359,689	$	24,459	$	2,912,408
Real estate construction:
Risk rating
Pass	$	107,927	$	188,254	$	60,326	$	1,188	$	568	$	1,868	$	16,656	$	376,787
Watch		17,661		4,266		2,515		2,205		173						26,820
Special Mention		592		11		—		—		—		—		—		603
Substandard		2,577		—		47		25		148		—		—		2,797
Substandard non-accrual		—		—		256		—		—		3		—		259
Total real estate construction	$	128,757	$	192,531	$	63,144	$	3,418	$	889	$	1,871	$	16,656	$	407,266
Retail real estate:
Risk rating
Pass	$	273,752	$	180,799	$	152,772	$	158,192	$	157,611	$	293,570	$	235,449	$	1,452,145
Watch		1,570		2,090		1,255		320		570		255		4,900		10,960
Special Mention		516		—		70		589		1,975		919		—		4,069
Substandard		1,642		100		330		82		770		1,655		269		4,848
Substandard non-accrual		275		81		697		688		239		4,929		1,589		8,498
Total retail real estate	$	277,755	$	183,070	$	155,124	$	159,871	$	161,165	$	301,328	$	242,207	$	1,480,520
Retail other:
Risk rating
Pass	$	6,974	$	10,695	$	6,798	$	3,336	$	961	$	777	$	10,455	$	39,996
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Substandard non-accrual		15		7		—		2		1		64		1		90
Total retail other	$	6,989	$	10,702	$	6,798	$	3,338	$	962	$	841	$	10,456	$	40,086

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):

	September 30, 2020
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+Days		Loans
Commercial	$	53	$	—	$	—	$	7,912
Commercial real estate		74		294		—		7,139
Real estate construction		—		—		—		259
Retail real estate		4,606		1,558		262		8,498
Retail other		98		25		17		90
Total	$	4,831	$	1,877	$	279	$	23,898

	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 September 30, 2020 and 2019 if non-accrual loans and 90+ days past due loans had been current in accordance with their original terms was $0.5 million. The gross interest income that would have been recorded in the nine months ended September 30, 2020 and 2019 if non-accrual loans and 90+ days past due loans had been current in accordance with their original terms was $1.4 million and $1.6 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, 2020 and 2019.

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

		September 30,		December 31,
	2020		2019
In compliance with modified terms	$	3,927	$	5,005
30 — 89 days past due		291		—
Included in non-performing loans		1,253		702
Total	$	5,471	$	5,707

Loans newly classified as a TDR in compliance with modified terms during the three months ended September 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 nine months ended September 30, 2020, included two retail real estate loans for payment modifications with a recorded investment of $0.4 million. Loans newly classified as a TDR in compliance with modified terms during the three months ended September 30, 2019, included one commercial loan for short-term interest rate relief, with a recorded investment of $0.3 million. Loans newly classified as a TDR in compliance with modified terms during the nine months ended September 30, 2019, included one commercial loan for payment modification with a recorded investment of $0.6 million and one commercial loan for short-term interest rate relief, with a recorded investment of $0.3 million.

The gross interest income that would have been recorded in the three and nine months ended September 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 nine months ended September 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 nine months ended September 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 TDR classification are not included in the Company’s TDR totals.

At September 30, 2020, the Company had $1.2 million of residential real estate in the process of foreclosure. The Company has elected to follow the Federal Housing Finance Agency guidelines on single-family foreclosures and real

estate owned evictions on portfolio loans. The agency has extended the moratoriums on single-family foreclosures and real estate owned evictions until at least December 31, 2020 which will delay many foreclosures into 2021.

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).

	September 30, 2020
	Unpaid		Amortized
	Contractual		Cost		Amortized		Total				Average
	Principal		with No		Cost		Amortized		Related		Amortized
	Balance		Allowance		with Allowance		Cost		Allowance		Cost
Commercial	$	15,464	$	2,554	$	5,205	$	7,759	$	1,694	$	8,746
Commercial real estate		9,047		7,737		594		8,331		236		11,613
Real estate construction		569		552		—		552		—		709
Retail real estate		5,285		4,578		474		5,052		474		9,059
Retail other		—		—		—		—		—		23
Total	$	30,365	$	15,421	$	6,273	$	21,694	$	2,404	$	30,150

	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. Loans are written down to the lower of cost or fair value of underlying collateral, less estimated costs to sell. As of September 30, 2020, there were $17.5 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 beginning in 2010. As of September 30, 2020, the Company expects the markets in which it operates to experience declines in economic conditions and increases in the unemployment rates and levels 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 September 30, 2020
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
Beginning balance	$	24,146	$	42,680	$	7,792	$	20,405	$	1,023	$	96,046
Provision for credit losses		2,593		3,703		(381)		(383)		17		5,549
Charged-off		(2,500)		(569)		(18)		(139)		(171)		(3,397)
Recoveries		124		103		26		301		89		643
Ending balance	$	24,363	$	45,917	$	7,419	$	20,184	$	958	$	98,841

	As of and for the Nine Months Ended September 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		10,739		17,090		1,082		6,635		110		35,656
Charged-off		(5,682)		(1,833)		(18)		(1,139)		(575)		(9,247)
Recoveries		300		164		197		901		289		1,851
Ending balance	$	24,363	$	45,917	$	7,419	$	20,184	$	958	$	98,841

	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

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

	As of September 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	$	1,694	$	236	$	—	$	474	$	—	$	2,404
Loans collectively evaluated for impairment		22,669		45,681		7,419		19,710		958		96,437
Ending balance	$	24,363	$	45,917	$	7,419	$	20,184	$	958	$	98,841
Loans:
Loans individually evaluated for impairment	$	7,759	$	6,415	$	297	$	4,666	$	—	$	19,137
Loans collectively evaluated for impairment		2,273,272		2,904,077		406,714		1,475,468		40,086		7,099,617
PCD loans evaluated for impairment		—		1,916		255		386		—		2,557
Ending balance	$	2,281,031	$	2,912,408	$	407,266	$	1,480,520	$	40,086	$	7,121,311

	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