Allowance for Credit Losses and Allowance for Unfunded Commitments and Letters of Credit

6 Months Ended

Jun. 30, 2020

Allowance For Credit Losses and Allowance for Unfunded Commitments and Letters Of Credit [Abstract]

Allowance For Credit Losses And Allowance for Unfunded Loan Commitments And Letters Of Credit Text Block

Allowance for Credit Losses and Allowance for Unfunded Commitments and Letters of Credit

The ACL is determined through quarterly assessments of expected credit losses within the loan portfolio and is deducted from the loan’s amortized cost basis to present the net amount of loans expected to be collected. We estimate the ACL using relevant and reliable available information, which is derived from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Additions to and recaptures from the ACL are charged to current period earnings through the provision for credit losses. Loan amounts that are determined to be uncollectable are charged directly against the ACL and netted against amounts recovered on previously charged-off loans.

For the purpose of calculating portfolio level reserves, we have segmented our loan portfolio into two portfolio segments (Commercial and Consumer). The Commercial and Consumer portfolio segments are then further broken down into loan classes by risk characteristics. The risk characteristics include regulatory call codes, type of industry and collateral type.

The ACL is comprised of reserves measured on a collective (pool) basis using a quantitative DCF model for all loan classes with similar risk characteristics and then qualitatively adjusted for large loan concentrations, trends in problem loans, policy exemptions granted, and other factors. The quantitative DCF model utilizes anticipated period cash flows determined on a loan-level basis. The anticipated cash flows take into account contractual principal and interest payments, anticipated segment level prepayments, probability of defaults and historical loss given defaults. The majority of our loan classes utilize regression models to calculate probability of defaults, in which macroeconomic factors are correlated to historical quarterly defaults. The Commercial segment two-factor models utilize a mix of seven macroeconomic factors, including the four most commonly used factors: Real GDP, National Unemployment Rate, Home Price Index and Commercial Real Estate Index. The three additional factors are Nominal GDP, Producer Price Index and Core Consumer Price Index. The Consumer segment two-factor models utilize a mix of three macroeconomic factors: National Unemployment Rate, Home Price Index and Prime Rate. The Company utilizes an 18 month reasonable and supportable forecast for the macroeconomic factors, after which they revert to their historical mean using a straight-line basis constructed on their absolute historical quarterly change.

Loans are individually measured for credit losses if they do not share similar risk characteristics of other loans within their respective pools. Individually measured loans are primarily nonaccrual and collateral dependent with balances equal to or greater than $500,000 and for which foreclosure is probable. Commercial real estate loans are secured by commercial real estate, including owner occupied and non-owner occupied commercial real estate, as well as multifamily residential real estate. Commercial business loans are primarily secured by non-real estate collateral, including equipment and other non-real estate fixed assets, inventory, receivables, and cash. Agricultural loans are secured by farmland and other agricultural real estate, as well as equipment, inventory, such as crops and livestock, non-real estate fixed assets, and cash. Construction loans are secured by one-to-four family residential real estate and commercial real estate in varying stages of development. One-to-four family residential real estate loans are secured by one-to-four family residential properties. Other consumer loans are secured by personal property. For loans measured on an individual basis, the Company calculates the allowance as the difference between the amortized cost of the loan and the fair market value of the collateral. The fair market value of the collateral is determined by either the discounted expected future cash flows from the operation of the collateral or the appraised value of the collateral, less costs to sell. If the fair value of the collateral is greater than the amortized cost of the loan, no reserve is recorded.

The Company also records an allowance for credit losses on unfunded loan commitments and letters of credit. We estimate expected credit losses on unfunded commitments in which we are exposed to credit risk, unless we have the option to unconditionally cancel the obligation. Expected credit losses are calculated based on the likelihood that funding will occur and an estimate of what will be funded by analyzing the most recent four-quarter utilization rates, current utilization, and our quantitative ACL rate. The allowance for unfunded commitments and letters of credit is included in “Other Liabilities” on the Consolidated Balance Sheets, with changes to the balance being charged to noninterest expense.

We do not measure an allowance for credit losses on accrued interest receivable balances because these balances are written-off in a timely manner as a reduction to interest income when loans are placed on nonaccrual status.

The following tables show a detailed analysis of the ACL for the three and six months ended June 30, 2020:

	Beginning Balance		Charge-offs			Recoveries		Provision (Recapture)			Ending Balance		Allowance on Individually Measured Loans		Allowance on Collectively Measured Loans
Three Months Ended June 30, 2020	(in thousands)
Commercial loans:
Commercial real estate	$	37,122	$	—		$	13	$	13,098		$	50,233	$	—	$	50,233
Commercial business	45,570		(5,442		)	811		12,247			53,186		3,208		49,978
Agriculture	11,085		—			1		3,782			14,868		828		14,040
Construction	8,845		—			235		(1,127		)	7,953		—		7,953
Consumer loans:
One-to-four family residential real estate	17,659		—			422		5,630			23,711		—		23,711
Other consumer	1,644		(198		)	130		19			1,595		—		1,595
Unallocated	149		—			—		(149		)	—		—		—
Total	$	122,074	$	(5,640	)	$	1,612	$	33,500		$	151,546	$	4,036	$	147,510

	Prior Year Ending Balance		Impact of Adopting ASC 326			Beginning Balance		Charge-offs			Recoveries		Provision (Recapture)			Ending Balance		Allowance on Individually Measured Loans		Allowance on Collectively Measured Loans
Six Months Ended June 30, 2020	(in thousands)
Commercial loans:
Commercial real estate	$	20,340	$	7,533		$	27,873	$	(101	)	$	27	$	22,434		$	50,233	$	—	$	50,233
Commercial business	30,292		762			31,054		(7,126		)	1,671		27,587			53,186		3,208		49,978
Agriculture	15,835		(9,325		)	6,510		(4,726		)	42		13,042			14,868		828		14,040
Construction	8,571		(1,750		)	6,821		—			677		455			7,953		—		7,953
Consumer loans:
One-to-four family residential real estate	7,435		4,237			11,672		(10		)	704		11,345			23,711		—		23,711
Other consumer	883		778			1,661		(466		)	254		146			1,595		—		1,595
Unallocated	612		(603		)	9		—			—		(9		)	—		—		—
Total	$	83,968	$	1,632		$	85,600	$	(12,429	)	$	3,375	$	75,000		$	151,546	$	4,036	$	147,510

The following tables show a detailed analysis of the ALLL for the three and six months ended June 30, 2019:

	Beginning Balance		Charge-offs			Recoveries		Provision (Recapture)			Ending Balance		Allowance on Individually Measured Loans		Allowance on Collectively Measured Loans
Three Months Ended June 30, 2019	(in thousands)
Commercial loans:
Commercial real estate	$	16,359	$	(564	)	$	556	$	(703	)	$	15,648	$	44	$	15,604
Commercial business	34,545		(4,316		)	492		(1,021		)	29,700		691		29,009
Agriculture	10,690		(61		)	64		1,978			12,671		712		11,959
Construction	11,965		(20		)	691		(179		)	12,457		—		12,457
Consumer loans:
One-to-four family residential real estate	8,311		(321		)	450		(821		)	7,619		27		7,592
Other consumer	823		(5		)	59		(162		)	715		1		714
Unallocated	581		—			—		1,126			1,707		—		1,707
Total	$	83,274	$	(5,287	)	$	2,312	$	218		$	80,517	$	1,475	$	79,042

	Beginning Balance		Charge-offs			Recoveries		Provision (Recapture)			Ending Balance		Allowance on Individually Measured Loans		Allowance on Collectively Measured Loans
Six Months Ended June 30, 2019	(in thousands)
Commercial loans:
Commercial real estate	$	14,766	$	(1,242	)	$	1,070	$	1,054		$	15,648	$	44	$	15,604
Commercial business	34,658		(5,822		)	1,019		(155		)	29,700		691		29,009
Agriculture	9,589		(139		)	122		3,099			12,671		712		11,959
Construction	14,395		(215		)	774		(2,497		)	12,457		—		12,457
Consumer loans:
One-to-four family residential real estate	8,024		(802		)	784		(387		)	7,619		27		7,592
Other consumer	787		(55		)	74		(91		)	715		1		714
Unallocated	1,150		—			—		557			1,707		—		1,707
Total	83,369		(8,275		)	3,843		1,580			80,517		1,475		79,042

The $67.6 million increase in the ACL at June 30, 2020 compared to the ALLL at December 31, 2019 was primarily the result of COVID-19 and the corresponding downturn in the national and world economies. The ACL at June 30, 2020 does not include a reserve for the PPP loans as these loans are fully guaranteed by the SBA.

Changes in the allowance for unfunded commitments and letters of credit, a component of “Other liabilities” in the Consolidated Balance Sheets, are summarized as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
	(in thousands)
Beginning balance	$	6,000	$	3,780	$	3,430	$	4,330
Impact of adopting ASC 326	—		—		1,570		$	—
Net changes in the allowance for unfunded commitments and letters of credit	2,800		200		3,800		(350		)
Ending balance	$	8,800	$	3,980	$	8,800	$	3,980

Credit Quality Indicators

The extension of credit in the form of loans or other credit products to consumer and commercial clients is one of our principal business activities. Our policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry and type of borrower and by limiting the aggregation of debt to a single borrower.

We evaluate the credit quality of our loan portfolio using regulatory risk ratings, which are based on relevant information about the borrower’s financial condition, including current financial condition, historical payment experience, credit documentation and current economic trends. Risk ratings are reviewed and updated whenever appropriate, with more periodic reviews as the risk and dollar value of the loss on the loan increases. All loans risk rated special mention or worse with amortized costs exceeding $100,000 are reviewed at least quarterly with more frequent review for specific loans.

Pass rated loans are generally considered to have sufficient sources of repayment in order to repay the loan in full in accordance with all terms and conditions. Special Mention rated loans have potential weaknesses that, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Loans with a risk rating of Substandard or worse are reviewed to assess the ability of our borrowers to service all interest and principal obligations and, as a result, the risk rating or accrual status may be adjusted accordingly. Loans risk rated as Substandard reflect loans where a loss is possible if loan weaknesses are not corrected. Doubtful rated loans have a high probability of loss; however, the amount of loss has not yet been determined. Loss rated loans are considered uncollectable and when identified, are charged-off.

The following is an analysis of the credit quality of our loan portfolio, as of June 30, 2020 and December 31, 2019

													Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term Loans Amortized Cost Basis
	Term Loans
	Amortized Cost Basis by Origination Year
	2020		2019		2018		2017		2016		Prior						Total (1)
June 30, 2020	(in thousands)
Commercial loans:
Commercial real estate
Pass	$	332,517	$	650,893	$	521,112	$	569,062	$	483,908	$	1,121,467	$	48,813	$	2,424	$	3,730,196
Special mention	10,217		64,490		18,809		13,462		44,503		44,766		—		—		196,247
Substandard	—		2,050		23,736		6,535		39,711		33,096		—		1,072		106,200
Doubtful	—		—		—		—		—		—		—		—		—
Total commercial real estate	$	342,734	$	717,433	$	563,657	$	589,059	$	568,122	$	1,199,329	$	48,813	$	3,496	$	4,032,643
Commercial business
Pass	$	1,075,991	$	440,684	$	355,598	$	259,075	$	256,579	$	284,232	$	920,762	$	5,951	$	3,598,872
Special mention	4,944		47,663		36,645		26,728		6,702		11,349		34,348		—		168,379
Substandard	923		4,340		21,141		6,358		8,679		7,581		40,155		3,085		92,262
Doubtful	—		—		—		—		—		—		—		—		—
Total commercial business	$	1,081,858	$	492,687	$	413,384	$	292,161	$	271,960	$	303,162	$	995,265	$	9,036	$	3,859,513
Agriculture
Pass	$	118,361	$	103,163	$	44,586	$	60,678	$	60,533	$	69,132	$	274,960	$	17,136	$	748,549
Special mention	—		521		—		—		271		275		1,429		—		2,496
Substandard	1,977		12,736		5,684		5,662		7,985		6,209		51,994		2,658		94,905
Doubtful	—		—		—		—		—		—		—		—		—
Total agriculture	$	120,338	$	116,420	$	50,270	$	66,340	$	68,789	$	75,616	$	328,383	$	19,794	$	845,950
Construction
Pass	$	58,564	$	140,987	$	32,706	$	9,610	$	1,025	$	1,999	$	32,630	$	—	$	277,521
Special mention	—		17,912		488		—		—		—		—		—		18,400
Substandard	—		2,472		5,526		—		—		58		38		—		8,094
Doubtful	—		—		—		—		—		—		—		—		—
Total construction	$	58,564	$	161,371	$	38,720	$	9,610	$	1,025	$	2,057	$	32,668	$	—	$	304,015
Consumer loans:
One-to-four family residential real estate
Pass	$	75,255	$	90,453	$	82,106	$	35,033	$	25,963	$	97,256	$	278,444	$	790	$	685,300
Special mention	—		—		—		—		—		219		—		—		219
Substandard	442		739		227		1,215		397		2,532		1,011		755		7,318
Doubtful	—		—		—		—		—		—		—		—		—
Total one-to-four family real estate	$	75,697	$	91,192	$	82,333	$	36,248	$	26,360	$	100,007	$	279,455	$	1,545	$	692,837
Other consumer
Pass	$	3,500	$	4,237	$	4,734	$	1,409	$	420	$	1,536	$	20,611	$	439	$	36,886
Special mention	—		—		—		—		—		—		—		—		—
Substandard	—		11		—		—		4		7		32		—		54
Doubtful	—		—		—		—		—		—		—		—		—
Total consumer	$	3,500	$	4,248	$	4,734	$	1,409	$	424	$	1,543	$	20,643	$	439	$	36,940
Total	$	1,682,691	$	1,583,351	$	1,153,098	$	994,827	$	936,680	$	1,681,714	$	1,705,227	$	34,310	$	9,771,898
Less:
Allowance for credit losses																	151,546
Loans, net																	$	9,620,352

__________

(1) Loans that are on short-term deferments are treated as Pass loans and will not be reported as past due provided that they are performing in accordance with the modified terms.

													Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term Loans Amortized Cost Basis
	Term Loans
	Amortized Cost Basis by Origination Year
	2019		2018		2017		2016		2015		Prior						Total
December 31, 2019	(in thousands)
Commercial loans:
Commercial real estate
Pass	$	699,336	$	562,992	$	621,113	$	565,928	$	441,220	$	873,687	$	52,276	$	19,986	$	3,836,538
Special mention	1,824		305		7,019		3,360		—		3,426		—		—		15,934
Substandard	47		10,698		9,320		36,229		20,278		11,738		—		5,071		93,381
Doubtful	—		—		—		—		—		—		—		—		—
Total commercial real estate	$	701,207	$	573,995	$	637,452	$	605,517	$	461,498	$	888,851	$	52,276	$	25,057	$	3,945,853
Commercial business
Pass	$	479,481	$	442,222	$	330,934	$	301,337	$	157,436	$	199,089	$	963,663	$	25,577	$	2,899,739
Special mention	2,241		6,673		56		2,006		52		585		12,710		—		24,323
Substandard	85		17,240		3,458		9,534		3,227		3,972		26,639		1,396		65,551
Doubtful	—		—		—		—		—		—		—		—		—
Total commercial business	$	481,807	$	466,135	$	334,448	$	312,877	$	160,715	$	203,646	$	1,003,012	$	26,973	$	2,989,613
Agriculture
Pass	$	107,152	$	54,950	$	70,337	$	71,874	$	33,597	$	56,342	$	280,984	$	10,036	$	685,272
Special mention	557		2,535		1,381		—		64		576		5,336		—		10,449
Substandard	7,291		6,047		6,173		5,907		1,477		5,698		30,669		6,388		69,650
Doubtful	—		—		—		—		—		—		—		—		—
Total agriculture	$	115,000	$	63,532	$	77,891	$	77,781	$	35,138	$	62,616	$	316,989	$	16,424	$	765,371
Construction
Pass	$	183,525	$	91,342	$	40,514	$	1,067	$	939	$	1,601	$	33,388	$	7,793	$	360,169
Special mention	—		1,264		—		—		—		—		41		—		1,305
Substandard	—		—		—		—		—		59		—		—		59
Doubtful	—		—		—		—		—		—		—		—		—
Total construction	$	183,525	$	92,606	$	40,514	$	1,067	$	939	$	1,660	$	33,429	$	7,793	$	361,533
Consumer loans:
One-to-four family real estate
Pass	$	103,315	$	77,877	$	32,440	$	25,052	$	27,294	$	80,370	$	283,830	$	554	$	630,732
Special mention	—		—		—		—		—		—		—		—		—
Substandard	—		228		800		400		623		3,156		905		481		6,593
Doubtful	—		—		—		—		—		—		—		—		—
Total one-to-four family real estate	$	103,315	$	78,105	$	33,240	$	25,452	$	27,917	$	83,526	$	284,735	$	1,035	$	637,325
Other consumer
Pass	$	9,276	$	5,713	$	1,974	$	758	$	848	$	1,306	$	23,351	$	508	$	43,734
Special mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		1		—		—		8		27		—		36
Doubtful	—		—		—		—		—		—		—		—		—
Total consumer	$	9,276	$	5,713	$	1,975	$	758	$	848	$	1,314	$	23,378	$	508	$	43,770
Total	$	1,594,130	$	1,280,086	$	1,125,520	$	1,023,452	$	687,055	$	1,241,613	$	1,713,819	$	77,790	$	8,743,465
Less:
Allowance for credit losses																	83,968
Loans, net																	$	8,659,497