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Portfolio loans and allowance for credit losses

12 Months Ended

Dec. 31, 2020

Portfolio loans and allowance for credit losses

Note 4. Portfolio Loans and Allowance for Credit Losses

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


	As of December 31,
	2020		2019
Commercial	$	2,014,576	$	1,748,368
Commercial real estate		2,892,535		2,793,417
Real estate construction		461,786		401,861
Retail real estate		1,407,852		1,693,769
Retail other		37,428		49,834
Portfolio loans	$	6,814,177	$	6,687,249

Allowance		(101,048)		(53,748)
Portfolio loans, net	$	6,713,129	$	6,633,501

Net deferred loan origination costs included in the balances above were $2.4 million and $6.2 million as of December 31, 2020 and 2019, respectively. Net accretable purchase accounting adjustments included in the balances above reduced loans by $10.9 million and $20.2 million as of December 31, 2020 and 2019, respectively. The December 31, 2020, commercial balance includes loans originated under the PPP with an amortized cost of $446.4 million.

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


	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


	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
Portfolio loans	$	5,997,126	$	413,876	$	181,107	$	75,215	$	27,896

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


	Term Loans Amortized Cost Basis by Origination Year
														Revolving
As of December 31, 2020	2020		2019		2018		2017		2016			Prior		loans		Total
Commercial:
Risk rating
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:
Risk rating
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:
Risk rating
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:
Risk rating
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:
Risk rating
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

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):


	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


	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
Past due and non-accrual loans	$	8,820	$	5,451	$	1,611	$	27,896

Gross interest income that would have been recorded in the years ended December 31, 2020, 2019, and 2018, if non-accrual loans and 90+ days past due loans had been current in accordance with their original terms, was approximately $1.8 million, $2.3 million, and $1.7 million, respectively. The amount of interest collected on those loans and recognized on a cash basis that was included in interest income was insignificant in 2020, 2019, and 2018.

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


	December 31,
	2020		2019
In compliance with modified terms	$	3,814	$	5,005
30 – 89 days past due		15		—
Included in non-performing loans		1,249		702
TDR loans	$	5,078	$	5,707

Loans still outstanding that were newly classified as a TDR in compliance with modified terms during the year ended December 31, 2020, consisted of three retail real estate loans for payment modifications, with a recorded investment of $0.8 million. Loans newly classified as a TDR in compliance with modified terms during the year ended December 31, 2019, and outstanding at December 31, 2019, consisted of one commercial loan for short-term interest rate relief, with a recorded investment of $0.3 million.

Gross interest income that would have been recorded in the years ended December 31, 2020 and 2019, if TDRs had performed in accordance with their original terms instead of modified terms, was insignificant.

There were no TDRs that were entered into during the year ended December 31, 2020, 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). One commercial real estate TDR that was entered into during the year ended December 31, 2019, was subsequently classified as non-performing and had payment defaults; it was then transferred to OREO by December 31, 2019.

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. As of December 31, 2020, the Company had 98 commercial loans on payment deferrals representing $208.6 million in loans, 351 mortgage/personal loans on payment deferrals representing $47.7 million in loans and an additional loan for $0.1 million related to a purchased home equity lines of credit pool.

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. 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):


	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


	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
Loans evaluated individually	$	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 December 31, 2020, there were $14.8 million of collateral dependent loans which are secured by real estate or business assets.

Allowance for Credit Losses

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 December 31, 2020, 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 allowance calculation as they are 100% government guaranteed.

The following table details activity in the allowance for credit 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):


	As of and for the Year Ended December 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		10,832		17,511		1,452		9,050		(48)		38,797
Charged-off		(6,376)		(1,972)		(18)		(2,057)		(665)		(11,088)
Recoveries		404		195		601		1,212		346		2,758
Ending balance	$	23,866	$	46,230	$	8,193	$	21,992	$	767	$	101,048


	As of and for the 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 credit 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


	As of and for the 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 credit 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

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


	As of December 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	$	1,600	$	—	$	—	$	25	$	—	$	1,625
Loans collectively evaluated for impairment		22,266		46,230		8,193		21,967		767		99,423
Allowance, 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


	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
Allowance, 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
Loans, ending balance	$	1,748,368	$	2,793,417	$	401,861	$	1,693,769	$	49,834	$	6,687,249