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Portfolio Loans

6 Months Ended

Jun. 30, 2021

Note 4: Portfolio Loans

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


	As of
	June 30,		December 31,
	2021		2020
Portfolio loans
Commercial	$	2,054,550	$	2,014,576
Commercial real estate		2,920,312		2,892,535
Real estate construction		500,599		461,786
Retail real estate		1,525,810		1,407,852
Retail other		184,379		37,428
Total portfolio loans	$	7,185,650	$	6,814,177

ACL		(95,410)		(101,048)

Portfolio loans, net	$	7,090,240	$	6,713,129

Net deferred loan origination (fees) costs included in the balances above were ($0.3) million as of June 30, 2021, compared to $2.4 million as of December 31, 2020. Net accretable purchase accounting adjustments included in the balances above reduced loans by $11.5 million as of June 30, 2021, and $10.9 million as of December 31, 2020. The June 30, 2021, commercial balance includes loans originated under PPP with an amortized cost of $390.4 million, compared to $446.4 million in loans originated under PPP included in the December 31, 2020, balance.

During the three and six months ended June 30, 2021, the Company purchased retail real estate loans totaling $32.2 million, compared to no retail real estate loan purchases during the three months ended June 30, 2020, and $43.9 million of retail real estate loan purchases in the six months ended June 30, 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. Commercial lending relationships that are $1.0 million or less are usually 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 typically reviewed on a quarterly basis. Interim reviews may take place if circumstances of the borrower warrant a more frequent review. GSB’s policies are similar in nature to Busey Bank’s policies and the Company is migrating such loan production and grading toward the Busey Bank policies.

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


	As of June 30, 2021
					Special				Substandard
	Pass		Watch		Mention		Substandard		Non-accrual
Portfolio loans
Commercial	$	1,816,456	$	131,361	$	76,706	$	19,349	$	10,678
Commercial real estate		2,446,143		379,546		67,179		18,679		8,765
Real estate construction		482,718		15,473		8		2,400		—
Retail real estate		1,496,677		13,878		2,342		4,672		8,241
Retail other		184,338		—		—		—		41
Total portfolio loans	$	6,426,332	$	540,258	$	146,235	$	45,100	$	27,725


	As of December 31, 2020
					Special				Substandard
	Pass		Watch		Mention		Substandard		Non-accrual
Portfolio loans
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
Total 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):


	As of June 30, 2021
	Term Loans Amortized Cost Basis by Origination Year													Revolving
Risk Grade Ratings	2021		2020		2019		2018		2017			Prior		loans		Total
Commercial
Pass	$	550,732	$	363,044	$	118,095	$	94,495	$	79,018	$	129,150	$	481,922	$	1,816,456
Watch		11,051		7,412		20,256		5,597		8,415		9,830		68,800		131,361
Special Mention		2,739		2,650		2,864		4,845		6,920		18,111		38,577		76,706
Substandard		3,794		4,588		3,504		1,807		1,338		80		4,238		19,349
Substandard non-accrual		4,356		469		1,591		—		2,144		118		2,000		10,678
Total commercial		572,672		378,163		146,310		106,744		97,835		157,289		595,537		2,054,550

Commercial real estate
Pass		420,841		691,476		441,952		313,315		269,126		291,896		17,537		2,446,143
Watch		39,642		53,762		130,096		84,131		28,486		41,473		1,956		379,546
Special Mention		22,415		7,389		6,780		9,907		10,285		9,794		609		67,179
Substandard		2,134		9,898		2,465		2,397		25		1,760		—		18,679
Substandard non-accrual		78		775		1,233		821		4,004		1,854		—		8,765
Total commercial real estate		485,110		763,300		582,526		410,571		311,926		346,777		20,102		2,920,312

Real estate construction
Pass		99,885		183,938		148,531		34,750		957		1,277		13,380		482,718
Watch		2,330		10,174		886		283		1,659		141		—		15,473
Special Mention		—		—		8		—		—		—		—		8
Substandard		—		2,400		—		—		—		—		—		2,400
Substandard non-accrual		—		—		—		—		—		—		—		—
Total real estate construction		102,215		196,512		149,425		35,033		2,616		1,418		13,380		500,599

Retail real estate
Pass		335,450		246,690		133,617		110,169		110,300		349,052		211,399		1,496,677
Watch		2,925		2,415		2,002		1,515		305		388		4,328		13,878
Special Mention		377		31		—		—		—		1,934		—		2,342
Substandard		730		967		73		98		235		2,485		84		4,672
Substandard non-accrual		339		161		74		536		1,200		4,673		1,258		8,241
Total retail real estate		339,821		250,264		135,766		112,318		112,040		358,532		217,069		1,525,810

Retail other
Pass		22,532		28,477		35,134		23,894		13,223		4,535		56,543		184,338
Watch		—		—		—		—		—		—		—		—
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Substandard non-accrual		—		13		7		5		14		2		—		41
Total retail other		22,532		28,490		35,141		23,899		13,237		4,537		56,543		184,379

Total portfolio loans	$	1,522,350	$	1,616,729	$	1,049,168	$	688,565	$	537,654	$	868,553	$	902,631	$	7,185,650


	As of December 31, 2020
	Term Loans Amortized Cost Basis by Origination Year													Revolving
Risk Grade Ratings	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):


	As of June 30, 2021
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+Days		Loans
Past due and non-accrual loans
Commercial	$	241	$	—	$	2	$	10,678
Commercial real estate		330		—		—		8,765
Real estate construction		—		426		—		—
Retail real estate		2,014		814		587		8,241
Retail other		54		9		1		41
Total past due and non-accrual loans	$	2,639	$	1,249	$	590	$	27,725


	As of December 31, 2020
	Loans past due, still accruing						Non-accrual
	30-59 Days		60-89 Days		90+Days		Loans
Past due and non-accrual 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
Total 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 $0.4 million for the three months ended June 30, 2021 and 2020. 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 $0.9 million for the six months ended June 30, 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 and six months ended June 30, 2021 and 2020.

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


	As of
	June 30,		December 31,
	2021		2020
Performing TDR loans:
In compliance with modified terms	$	2,518	$	3,814
30 – 89 days past due		—		15
Non-performing TDR loans		1,314		1,249
Total TDR loans	$	3,832	$	5,078

We did not newly classify any loans as performing TDRs during the three or six months ended June 30, 2021. Loans newly classified as performing TDRs during the three and six months ended June 30, 2020, included one retail real estate loan for $0.2 million for payment modification.

During the six months ended June 30, 2021, one commercial loan for $0.5 million was newly classified as a non-performing TDR for payment and rate modifications. This loan had been non-accrual since the second quarter of 2020. Also, during the six months ended June 30, 2021, one retail real estate loan for $0.1 million that had been a performing TDR for longer than 12 months, with a rate modification, became non-performing. During the six months ended June 30, 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 for payment and rate modifications. 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 and six months ended June 30, 2021 or 2020.

Gross interest income that would have been recorded in the three and six months ended June 30, 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.

As of June 30, 2021, the Company had $0.2 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, as well as all COVID-19 related state foreclosure and eviction orders. The existing moratoriums on single-family foreclosures expired on July 31, 2021; however, moratoriums on single-family real estate owned evictions have been extended until September 30, 2021.

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):


	As of June 30, 2021
	Unpaid		Amortized
	Contractual		Cost		Amortized		Total				Average
	Principal		with No		Cost		Amortized		Related		Amortized
	Balance		Allowance		with Allowance		Cost		Allowance		Cost
Loans evaluated on an individual basis
Commercial	$	14,624	$	2,237	$	8,348	$	10,585	$	4,470	$	8,156
Commercial real estate		9,647		8,360		—		8,360		—		7,683
Real estate construction		283		283		—		283		—		395
Retail real estate		4,295		3,911		25		3,936		25		4,933
Retail other		—		—		—		—		—		—
Total loans evaluated individually	$	28,849	$	14,791	$	8,373	$	23,164	$	4,495	$	21,167


	As of December 31, 2020
	Unpaid		Amortized
	Contractual		Cost		Amortized		Total				Average
	Principal		with No		Cost		Amortized		Related		Amortized
	Balance		Allowance		with Allowance		Cost		Allowance		Cost
Loans evaluated on an individual basis
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
Total 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 June 30, 2021, there were $17.2 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 June 30, 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 tables detail 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 June 30, 2021
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
ACL beginning balance	$	23,025	$	43,306	$	6,879	$	19,978	$	755	$	93,943
Day 1 PCD		3,546		336		—		129		167		4,178
Provision for credit losses		(1,420)		(3,390)		671		404		2,035		(1,700)
Charged-off		(1,000)		(317)		—		(157)		(64)		(1,538)
Recoveries		205		39		49		151		83		527
ACL ending balance	$	24,356	$	39,974	$	7,599	$	20,505	$	2,976	$	95,410


	As of and for the Six Months Ended June 30, 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
Day 1 PCD		3,546		336		—		129		167		4,178
Provision for credit losses		(2,084)		(6,085)		(579)		(1,873)		2,125		(8,496)
Charged-off		(1,262)		(620)		(209)		(160)		(251)		(2,502)
Recoveries		290		113		194		417		168		1,182
ACL ending balance	$	24,356	$	39,974	$	7,599	$	20,505	$	2,976	$	95,410


	As of and for the Three Months Ended June 30, 2020
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
ACL 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
ACL 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 326-30	$	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		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
ACL ending balance	$	24,146	$	42,680	$	7,792	$	20,405	$	1,023	$	96,046

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


	As of June 30, 2021
			Commercial		Real Estate		Retail Real
	Commercial		Real Estate		Construction		Estate		Retail Other		Total
ACL
Ending balance attributed to:
Loans individually evaluated for impairment	$	4,470	$	—	$	—	$	25	$	—	$	4,495
Loans collectively evaluated for impairment		19,886		39,974		7,599		20,480		2,976		90,915
ACL ending balance	$	24,356	$	39,974	$	7,599	$	20,505	$	2,976	$	95,410

Loans
Loans individually evaluated for impairment	$	10,585	$	8,360	$	283	$	3,936	$	—	$	23,164
Loans collectively evaluated for impairment		2,043,965		2,911,952		500,316		1,521,874		184,379		7,162,486
Loans ending balance	$	2,054,550	$	2,920,312	$	500,599	$	1,525,810	$	184,379	$	7,185,650


	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	$	6,067	$	292	$	5,515	$	—	$	20,246
Loans collectively evaluated for impairment		2,006,204		2,886,468		461,494		1,402,337		37,428		6,793,931
Loans ending balance	$	2,014,576	$	2,892,535	$	461,786	$	1,407,852	$	37,428	$	6,814,177