Portfolio Loans

3 Months Ended

Mar. 31, 2021

Portfolio Loans

Portfolio loans

Note 4: Portfolio Loans

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

	As of
	March 31,		December 31,
	2021		2020
Commercial	$	2,067,371	$	2,014,576
Commercial real estate		2,912,966		2,892,535
Real estate construction		422,633		461,786
Retail real estate		1,343,299		1,407,852
Retail other		33,031		37,428
Portfolio loans	$	6,779,300	$	6,814,177
ACL		(93,943)		(101,048)
Portfolio loans, net	$	6,685,357	$	6,713,129

Net deferred loan origination fees included in the balances above were ($3.4) million as of March 31, 2021, compared to $2.4 million of net deferred loan origination costs as of December 31, 2020. Net accretable purchase accounting adjustments included in the balances above reduced loans by $9.0 million as of March 31, 2021, and $10.9 million as of December 31, 2020. The March 31, 2021, commercial balance includes loans originated under PPP with an amortized cost of $522.1 million, compared to $446.4 million in loans originated under PPP included in the December 31, 2020, commercial balance.

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 frequent review.

The following table is a summary of risk grades segregated by category of portfolio loans (dollars in thousands):

	March 31, 2021
					Special				Substandard
	Pass		Watch		Mention		Substandard		Non-accrual
Commercial	$	1,830,063	$	123,390	$	78,546	$	27,423	$	7,949
Commercial real estate		2,400,446		407,244		68,900		31,212		5,164
Real estate construction		400,306		19,918		9		2,400		—
Retail real estate		1,318,247		9,879		2,376		4,302		8,495
Retail other		32,933		—		—		—		98
Portfolio loans	$	5,981,995	$	560,431	$	149,831	$	65,337	$	21,706

	December 31, 2020
					Special				Substandard
	Pass		Watch		Mention		Substandard		Non-accrual
Commercial	$	1,768,755	$	136,948	$	72,447	$	27,903	$	8,523
Commercial real estate		2,393,372		383,277		75,486		34,897		5,503
Real estate construction		434,681		24,481		77		2,546		1
Retail real estate		1,382,616		10,264		2,471		3,702		8,799
Retail other		37,324		—		—		—		104
Portfolio loans	$	6,016,748	$	554,970	$	150,481	$	69,048	$	22,930

Risk grades of portfolio loans, further sorted by origination year, are as follows (dollars in thousands):

Risk Grade Ratings	Term Loans Amortized Cost Basis by Origination Year													Revolving
As of March 31, 2021	2021		2020		2019		2018		2017			Prior		loans		Total
Commercial:
Pass	$	388,147	$	536,074	$	131,127	$	97,322	$	88,238	$	126,916	$	462,239	$	1,830,063
Watch		4,830		14,828		18,085		6,890		9,185		12,947		56,625		123,390
Special Mention		2,061		4,241		5,590		8,369		6,680		18,831		32,774		78,546
Substandard		587		8,912		3,569		2,993		1,815		125		9,422		27,423
Substandard non-accrual		—		501		2,392		336		2,168		552		2,000		7,949
Total commercial		395,625		564,556		160,763		115,910		108,086		159,371		563,060		2,067,371
Commercial real estate:
Pass		195,095		732,186		462,732		342,786		315,383		334,934		17,330		2,400,446
Watch		13,209		91,440		133,721		89,517		29,142		48,557		1,658		407,244
Special Mention		19,920		9,818		7,902		9,949		7,172		13,716		423		68,900
Substandard		2,500		15,325		3,557		2,425		4,400		3,005		—		31,212
Substandard non-accrual		—		784		739		821		882		1,938		—		5,164
Total commercial real estate		230,724		849,553		608,651		445,498		356,979		402,150		19,411		2,912,966
Real estate construction:
Pass		40,766		167,230		143,555		39,297		1,164		1,680		6,614		400,306
Watch		2,079		11,915		3,653		330		1,785		156		—		19,918
Special Mention		—		—		9		—		—		—		—		9
Substandard		—		2,400		—		—		—		—		—		2,400
Substandard non-accrual		—		—		—		—		—		—		—		—
Total real estate construction		42,845		181,545		147,217		39,627		2,949		1,836		6,614		422,633
Retail real estate:
Pass		161,016		207,536		144,201		118,052		117,359		351,700		218,383		1,318,247
Watch		189		2,557		2,040		1,407		291		846		2,549		9,879
Special Mention		377		33		—		18		—		1,948		—		2,376
Substandard		323		882		91		56		168		2,497		285		4,302
Substandard non-accrual		483		137		76		650		1,128		4,818		1,203		8,495
Total retail real estate		162,388		211,145		146,408		120,183		118,946		361,809		222,420		1,343,299
Retail other:
Pass		2,014		6,835		8,062		4,652		1,949		800		8,621		32,933
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Substandard non-accrual		—		14		7		5		14		58		—		98
Total retail other		2,014		6,849		8,069		4,657		1,963		858		8,621		33,031
Total portfolio loans	$	833,596	$	1,813,648	$	1,071,108	$	725,875	$	588,923	$	926,024	$	820,126	$	6,779,300

Risk Grade Ratings	Term Loans Amortized Cost Basis by Origination Year													Revolving
As of December 31, 2020	2020		2019		2018		2017		2016			Prior		loans		Total
Commercial:
Pass	$	812,536	$	158,307	$	107,565	$	93,190	$	61,847	$	79,970	$	455,340	$	1,768,755
Watch		16,544		22,247		14,954		13,724		2,577		10,943		55,959		136,948
Special Mention		6,402		2,671		2,069		7,164		6,763		13,733		33,645		72,447
Substandard		7,772		3,791		2,371		1,939		819		1,233		9,978		27,903
Substandard non-accrual		150		3,045		451		2,168		641		68		2,000		8,523
Total commercial		843,404		190,061		127,410		118,185		72,647		105,947		556,922		2,014,576
Commercial real estate:
Pass		717,559		503,977		360,573		384,843		180,555		227,068		18,797		2,393,372
Watch		88,297		110,526		90,412		33,734		32,887		27,023		398		383,277
Special Mention		16,490		8,858		10,490		10,505		7,102		21,808		233		75,486
Substandard		17,445		4,166		1,491		7,812		2,111		1,377		495		34,897
Substandard non-accrual		1,091		776		821		882		286		1,647		—		5,503
Total commercial real estate		840,882		628,303		463,787		437,776		222,941		278,923		19,923		2,892,535
Real estate construction:
Pass		179,232		171,663		64,025		1,468		761		1,444		16,088		434,681
Watch		18,485		3,657		337		1,838		164						24,481
Special Mention		67		10		—		—		—		—		—		77
Substandard		2,400		—		—		—		146		—		—		2,546
Substandard non-accrual		—		—		—		—		—		1		—		1
Total real estate construction		200,184		175,330		64,362		3,306		1,071		1,445		16,088		461,786
Retail real estate:
Pass		319,302		162,711		135,065		136,427		140,600		257,147		231,364		1,382,616
Watch		2,715		2,053		1,396		349		579		233		2,939		10,264
Special Mention		509		—		—		—		1,962		—		—		2,471
Substandard		899		96		56		26		727		1,631		267		3,702
Substandard non-accrual		687		78		646		1,147		233		4,815		1,193		8,799
Total retail real estate		324,112		164,938		137,163		137,949		144,101		263,826		235,763		1,407,852
Retail other:
Pass		8,357		9,430		5,600		2,516		691		440		10,290		37,324
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Substandard non-accrual		14		7		5		15		5		57		1		104
Total retail other		8,371		9,437		5,605		2,531		696		497		10,291		37,428
Total portfolio loans	$	2,216,953	$	1,168,069	$	798,327	$	699,747	$	441,456	$	650,638	$	838,987	$	6,814,177

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, 2021
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+Days		Loans
Commercial	$	52	$	2,614	$	—	$	7,949
Commercial real estate		4,377		—		—		5,164
Real estate construction		—		—		—		—
Retail real estate		2,248		621		1,149		8,495
Retail other		8		9		—		98
Past due and non-accrual loans	$	6,685	$	3,244	$	1,149	$	21,706

	December 31, 2020
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+Days		Loans
Commercial	$	243	$	—	$	—	$	8,523
Commercial real estate		—		—		—		5,503
Real estate construction		237		235		—		1
Retail real estate		6,248		400		1,305		8,799
Retail other		66		149		66		104
Past due and non-accrual loans	$	6,794	$	784	$	1,371	$	22,930

Gross interest income recorded on 90+ day past due loans and that would have been recorded on non-accrual loans if they had been accruing interest in accordance with their original terms was $0.5 million for the three months ended March 31, 2021 and 2020. 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, 2021 and 2020.

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

	As of
	March 31,		December 31,
	2021		2020
In compliance with modified terms		3,135		3,814
30 – 89 days past due		164		15
Included in non-performing loans		1,338		1,249
TDR loans	$	4,637	$	5,078

We did not newly classify any loans as TDRs during the three months ended March 31, 2021, that were in compliance with their modified terms or 30 – 89 days past due. During the three months ended March 31, 2021, one commercial loan for $0.5 million was newly classified as a non-performing TDR. This loan had been non-accrual since the second quarter of 2020. Also, during the three months ended March 31, 2021, one retail real estate loan for $0.1 million that had been a performing TDR for longer than 12 months became non-performing. During the three months ended March 31, 2020, three commercial loans for $0.5 million and one commercial real estate loan for $0.7 million were newly classified as non-performing TDRs. These loans had been non-accrual since 2019.

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 months ended March 31, 2021 or 2020.

Gross interest income that would have been recorded in the three months ended March 31, 2021 and 2020, if TDRs had performed in accordance with their original terms compared with their modified terms, was insignificant.

Modified loans with payment deferrals that fall under the CARES Act or revised Interagency Statement that suspended requirements under GAAP related to TDR classification are not included in the Company’s TDR totals.

At March 31, 2021, the Company had $0.4 million of residential real estate in the process of foreclosure. The Company follows FHFA 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 June 30, 2021. Additionally, the Company follows all COVID-19 related state foreclosure and eviction orders. As these guidelines and orders may likely be updated, most foreclosures will be delayed into late-2021 or beyond.

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

	March 31, 2021
	Unpaid		Amortized
	Contractual		Cost		Amortized		Total				Average
	Principal		with No		Cost		Amortized		Related		Amortized
	Balance		Allowance		with Allowance		Cost		Allowance		Cost
Commercial	$	16,008	$	2,987	$	4,817	$	7,804	$	2,483	$	7,524
Commercial real estate		6,523		5,552		—		5,552		—		8,075
Real estate construction		287		287		—		287		—		450
Retail real estate		5,342		4,959		25		4,984		25		5,560
Retail other		—		—		—		—		—		—
Loans evaluated individually	$	28,160	$	13,785	$	4,842	$	18,627	$	2,508	$	21,609

	December 31, 2020
	Unpaid		Amortized
	Contractual		Cost		Amortized		Total				Average
	Principal		with No		Cost		Amortized		Related		Amortized
	Balance		Allowance		with Allowance		Cost		Allowance		Cost
Commercial	$	16,771	$	4,001	$	4,371	$	8,372	$	1,600	$	7,920
Commercial real estate		7,406		6,067		—		6,067		—		9,349
Real estate construction		292		292		—		292		—		581
Retail real estate		5,873		5,490		25		5,515		25		7,439
Retail other		—		—		—		—		—		10
Loans evaluated individually	$	30,342	$	15,850	$	4,396	$	20,246	$	1,625	$	25,299

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 March 31, 2021, there were $15.3 million of collateral dependent loans secured by real estate or business assets.

Management estimates the ACL 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 March 31, 2021, the Company expects the markets in which it operates to experience continued economic uncertainty around the 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 ACL calculation as they are 100% government guaranteed.

The following table details activity in the ACL. Allocation of a portion of the ACL 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, 2021
			Commercial		Real Estate		Retail
	Commercial		Real Estate		Construction		Real Estate		Retail Other		Total
ACL beginning balance	$	23,866	$	46,230	$	8,193	$	21,992	$	767	$	101,048
Provision for credit losses		(665)		(2,695)		(1,250)		(2,276)		90		(6,796)
Charged-off		(262)		(303)		(209)		(3)		(187)		(964)
Recoveries		86		74		145		265		85		655
ACL ending balance	$	23,025	$	43,306	$	6,879	$	19,978	$	755	$	93,943

	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 326-30	$	18,291	$	21,190	$	3,204	$	10,495	$	568	$	53,748
Adoption of ASC 326-30		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
ACL ending balance	$	22,725	$	35,967	$	7,193	$	17,454	$	1,045	$	84,384

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

	As of March 31, 2021
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
ACL:
Ending balance attributed to:
Loans individually evaluated for impairment	$	2,483	$	—	$	—	$	25	$	—	$	2,508
Loans collectively evaluated for impairment		20,542		43,306		6,879		19,953		755		91,435
ACL ending balance	$	23,025	$	43,306	$	6,879	$	19,978	$	755	$	93,943
Loans:
Loans individually evaluated for impairment	$	7,804	$	3,644	$	287	$	4,613	$	—	$	16,348
Loans collectively evaluated for impairment		2,059,567		2,907,414		422,346		1,338,315		33,031		6,760,673
PCD loans evaluated for impairment		—		1,908		—		371		—		2,279
Loans ending balance	$	2,067,371	$	2,912,966	$	422,633	$	1,343,299	$	33,031	$	6,779,300

	As of December 31, 2020
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
ACL:
Ending balance attributed to:
Loans individually evaluated for impairment	$	1,600	$	—	$	—	$	25	$	—	$	1,625
Loans collectively evaluated for impairment		22,266		46,230		8,193		21,967		767		99,423
ACL ending balance	$	23,866	$	46,230	$	8,193	$	21,992	$	767	$	101,048
Loans:
Loans individually evaluated for impairment	$	8,372	$	4,161	$	292	$	5,149	$	—	$	17,974
Loans collectively evaluated for impairment		2,006,204		2,886,468		461,494		1,402,337		37,428		6,793,931
PCD loans evaluated for impairment		—		1,906		—		366		—		2,272
Loans ending balance	$	2,014,576	$	2,892,535	$	461,786	$	1,407,852	$	37,428	$	6,814,177