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Allowance for Credit Losses and Allowance for Unfunded Commitments and Letters of Credit
 9 Months Ended
Sep. 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 uncollectible 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 nine months ended September 30, 2020:
Beginning BalanceCharge-offsRecoveriesProvision
(Recapture)		Ending Balance
Three Months Ended September 30, 2020(in thousands)
Commercial loans:
Commercial real estate
$50,233 $— $65 $11,026 $61,324 
Commercial business
53,186 (3,164)1,124 (574)50,572 
Agriculture
14,868 (1,269)27 (1,165)12,461 
Construction
7,953 — 11 999 8,963 
Consumer loans:
One-to-four family residential real estate
23,711 (16)1,301 (2,889)22,107 
Other consumer
1,595 (133)76 3 1,541 
Total$151,546 $(4,582)$2,604 $7,400 $156,968 
Prior Year
Ending Balance		Impact of Adopting ASC 326Beginning BalanceCharge-offsRecoveriesProvision
(Recapture)		Ending Balance
Nine Months Ended September 30, 2020(in thousands)
Commercial loans:
Commercial real estate
$20,340 $7,533 $27,873 $(101)$92 $33,460 $61,324 
Commercial business
30,292 762 31,054 (10,290)2,795 27,013 50,572 
Agriculture
15,835 (9,325)6,510 (5,995)69 11,877 12,461 
Construction
8,571 (1,750)6,821 — 688 1,454 8,963 
Consumer loans:
One-to-four family residential real estate
7,435 4,237 11,672 (26)2,005 8,456 22,107 
Other consumer
883 778 1,661 (599)330 149 1,541 
Unallocated612 (603)9 — — (9)— 
Total$83,968 $1,632 $85,600 $(17,011)$5,979 $82,400 $156,968 
The following tables show a detailed analysis of the ALLL for the three and nine months ended September 30, 2019:
Beginning BalanceCharge-offsRecoveriesProvision
(Recapture)		Ending Balance
Three Months Ended September 30, 2019(in thousands)
Commercial loans:
Commercial real estate
$15,648 $(466)$1,731 $1,009 $17,922 
Commercial business
29,700 (2,623)349 3,453 30,879 
Agriculture
12,671 (55)67 1,216 13,899 
Construction
12,457 (17)2,555 (3,143)11,852 
Consumer loans:
One-to-four family residential real estate
7,619 (202)440 (399)7,458 
Other consumer
715 (9)74 (201)579 
Unallocated1,707 — — (1,636)71 
Total$80,517 $(3,372)$5,216 $299 $82,660 
Beginning BalanceCharge-offsRecoveriesProvision
(Recapture)		Ending Balance
Nine Months Ended September 30, 2019(in thousands)
Commercial loans:
Commercial real estate
$14,766 $(1,708)$2,801 $2,063 $17,922 
Commercial business
34,658 (8,445)1,368 3,298 30,879 
Agriculture
9,589 (194)189 4,315 13,899 
Construction
14,395 (232)3,329 (5,640)11,852 
Consumer loans:
One-to-four family residential real estate
8,024 (1,004)1,224 (786)7,458 
Other consumer
787 (64)148 (292)579 
Unallocated1,150 — — (1,079)71 
Total83,369 (11,647)9,059 1,879 82,660 
The $73.0 million increase in the ACL at September 30, 2020 compared to the ALLL at December 31, 2019 was primarily the result of COVID-19 and the 2020 downturn in the national and global economies as well as increased unemployment rates. The ACL at September 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 EndedNine Months Ended
September 30,September 30,
2020201920202019
(in thousands)
Beginning balance$8,800 $3,980 $3,430 $4,330 
Impact of adopting ASC 326— — 1,570 $— 
Net changes in the allowance for unfunded commitments and letters of credit
800 (400)4,600 (750)
Ending balance$9,600 $3,580 $9,600 $3,580 
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 uncollectible and when identified, are charged-off.
The following is an analysis of the credit quality of our loan portfolio, as of September 30, 2020 and December 31, 2019:
Revolving Loans Amortized Cost BasisRevolving Loans Converted to Term Loans Amortized Cost Basis
 Term Loans
Amortized Cost Basis by Origination Year
20202019201820172016PriorTotal (1)
September 30, 2020(in thousands)
Commercial loans:
Commercial real estate
Pass$491,625 $636,127 $499,924 $542,049 $434,390 $1,032,016 $48,664 $3,552 $3,688,347 
Special mention8,717 59,899 18,993 15,175 47,881 50,571 2,148 — 203,384 
Substandard— 9,977 17,307 13,014 45,421 43,650 5,935 — 135,304 
Total commercial real estate
$500,342 $706,003 $536,224 $570,238 $527,692 $1,126,237 $56,747 $3,552 $4,027,035 
Commercial business
Pass$1,175,587 $409,759 $357,128 $233,037 $240,648 $256,178 $915,373 $8,674 $3,596,384 
Special mention4,856 51,204 8,635 25,626 6,514 11,907 35,819 — 144,561 
Substandard3,791 6,005 17,758 5,836 7,153 6,369 44,651 3,501 95,064 
Total commercial business
$1,184,234 $466,968 $383,521 $264,499 $254,315 $274,454 $995,843 $12,175 $3,836,009 
Agriculture
Pass$147,892 $99,483 $42,464 $59,828 $60,007 $62,529 $290,986 $12,273 $775,462 
Special mention— 519 — 33 272 — 1,801 — 2,625 
Substandard2,676 13,010 6,950 4,278 2,399 4,482 37,918 490 72,203 
Total agriculture
$150,568 $113,012 $49,414 $64,139 $62,678 $67,011 $330,705 $12,763 $850,290 
Construction
Pass$89,744 $101,060 $24,130 $4,531 $782 $1,883 $25,536 $— $247,666 
Special mention— 2,259 — — — — — — 2,259 
Substandard— 17,622 5,539 — — 57 33 — 23,251 
Total construction
$89,744 $120,941 $29,669 $4,531 $782 $1,940 $25,569 $— $273,176 
Consumer loans:
One-to-four family residential real estate
Pass$88,632 $83,137 $72,896 $33,149 $24,987 $87,267 $265,475 $3,110 $658,653 
Special mention— — — — — 206 297 — 503 
Substandard— 735 227 1,177 344 2,463 1,133 197 6,276 
Total one-to-four family real estate
$88,632 $83,872 $73,123 $34,326 $25,331 $89,936 $266,905 $3,307 $665,432 
Other consumer
Pass$4,412 $3,684 $4,299 $1,172 $327 $1,161 $20,937 $736 $36,728 
Substandard31 — — 6 4 171 24 41 277 
Total consumer
$4,443 $3,684 $4,299 $1,178 $331 $1,332 $20,961 $777 $37,005 
Total$2,017,963 $1,494,480 $1,076,250 $938,911 $871,129 $1,560,910 $1,696,730 $32,574 $9,688,947 
Less:
Allowance for credit losses156,968 
Loans, net$9,531,979 
__________
(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 BasisRevolving Loans Converted to Term Loans Amortized Cost Basis
Term Loans
Amortized Cost Basis by Origination Year
20192018201720162015PriorTotal
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 mention1,824 305 7,019 3,360 — 3,426 — — 15,934 
Substandard47 10,698 9,320 36,229 20,278 11,738 — 5,071 93,381 
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 mention2,241 6,673 56 2,006 52 585 12,710 — 24,323 
Substandard85 17,240 3,458 9,534 3,227 3,972 26,639 1,396 65,551 
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 mention557 2,535 1,381 — 64 576 5,336 — 10,449 
Substandard7,291 6,047 6,173 5,907 1,477 5,698 30,669 6,388 69,650 
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 
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 
Substandard— 228 800 400 623 3,156 905 481 6,593 
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 
Substandard— — 1 — — 8 27 — 36 
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