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Allowance for Credit Losses and Allowance for Unfunded Commitments and Letters of Credit
 3 Months Ended
Mar. 31, 2021
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, 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 multi-factor models utilize a mix of 15 macroeconomic factors, including the four most commonly used factors: Real GDP, National Unemployment Rate, Disposable Personal Income and Private Inventories. The Consumer segment multi-factor models utilize a mix of three macroeconomic factors: National Unemployment Rate, Home Price Index and Disposable Income. The Company utilizes an 18 month reasonable and supportable forecast for the macroeconomic factors, after which the probability of default reverts to its historical mean using a straight-line basis constructed on each macroeconomic factor’s 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 periods indicated:
Beginning BalanceCharge-offsRecoveriesProvision
(Recapture)		Ending Balance
Three Months Ended March 31, 2021(in thousands)
Commercial loans:
Commercial real estate$68,934 $— $36 $(11,920)$57,050 
Commercial business45,250 (3,339)3,214 13,280 58,405 
Agriculture9,052 — 12 423 9,487 
Construction7,636 — 46 (1,131)6,551 
Consumer loans:
One-to-four family residential real estate16,875 — 51 (1,288)15,638 
Other consumer1,393 (127)61 (164)1,163 
Total$149,140 $(3,466)$3,420 $(800)$148,294 
Beginning BalanceImpact of Adopting ASC 326Charge-offsRecoveriesProvision
(Recapture)		Ending Balance
Three Months Ended March 31, 2020(in thousands)
Commercial loans:
Commercial real estate$20,340 $7,533 $(101)$14 $9,336 $37,122 
Commercial business30,292 762 (1,684)860 15,340 45,570 
Agriculture15,835 (9,325)(4,726)41 9,260 11,085 
Construction8,571 (1,750)— 442 1,582 8,845 
Consumer loans:
One-to-four family residential real estate7,435 4,237 (10)282 5,715 17,659 
Other consumer883 778 (268)124 127 1,644 
Unallocated612 (603)— — 140 149 
Total$83,968 $1,632 $(6,789)$1,763 $41,500 $122,074 
The $846 thousand decrease in the ACL at March 31, 2021 compared to the ACL at December 31, 2020 was primarily due to a slight improvement in the economic outlook, which remains impacted by the COVID-19 pandemic and its impact on our borrowers. Specifically regarding the forecast used in the March 31, 2021 estimate, management expects the forecasted national unemployment rate to be above the pre-pandemic levels through the forecast period due to pandemic-related effects and shifting workforce requirements. Additionally, the commercial real estate index decline is expected to continue through 2021, the home price index is projected to moderate over the forecast period and Real GDP is projected to rise above average for the remainder of the year. The models used for calculating the ACL are sensitive to changes in these and other economic factors, which could result in volatility as these assumptions change over time. The ACL at March 31, 2021 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
March 31,
20212020
(in thousands)
Beginning balance$8,300 $3,430 
Impact of adopting ASC 326— 1,570 
Net changes in the allowance for unfunded commitments and letters of credit1,500 1,000 
Ending balance$9,800 $6,000 
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 the periods indicated:
Revolving Loans Amortized Cost BasisRevolving Loans Converted to Term Loans Amortized Cost Basis
 Term Loans
Amortized Cost Basis by Origination Year
20212020201920182017PriorTotal (1)
March 31, 2021(in thousands)
Commercial loans:
Commercial real estate
Pass$205,152 $668,655 $603,542 $459,888 $491,550 $1,229,742 $49,274 $2,781 $3,710,584 
Special mention— 3,127 65,107 19,094 4,420 99,370 5 — 191,123 
Substandard— 3,467 34,749 16,559 31,448 91,434 2,551 — 180,208 
Total commercial real estate$205,152 $675,249 $703,398 $495,541 $527,418 $1,420,546 $51,830 $2,781 $4,081,915 
Commercial business
Pass$586,311 $829,165 $347,668 $273,408 $178,663 $376,297 $945,271 $12,322 $3,549,105 
Special mention— 588 8,346 6,237 2,063 1,131 49,369 143 67,877 
Substandard— 6,594 26,640 36,756 27,226 33,731 44,046 838 175,831 
Total commercial business$586,311 $836,347 $382,654 $316,401 $207,952 $411,159 $1,038,686 $13,303 $3,792,813 
Agriculture
Pass$57,282 $121,511 $85,485 $39,930 $56,638 $106,969 $209,154 $550 $677,519 
Special mention— 3,398 1,366 163 — 2,371 7,962 — 15,260 
Substandard— 6,022 10,424 2,693 4,140 3,194 31,804 744 59,021 
Total agriculture$57,282 $130,931 $97,275 $42,786 $60,778 $112,534 $248,920 $1,294 $751,800 
Construction
Pass$41,447 $130,122 $44,121 $7,909 $3,471 $5,579 $31,682 $— $264,331 
Special mention— — — — — — — — — 
Substandard— — 18,148 — — 55 — — 18,203 
Total construction$41,447 $130,122 $62,269 $7,909 $3,471 $5,634 $31,682 $— $282,534 
Consumer loans:
One-to-four family residential real estate
Pass$106,212 $157,286 $68,489 $53,753 $25,686 $88,323 $228,917 $308 $728,974 
Special mention— — — — — 125 — — 125 
Substandard— 835 1,381 245 491 2,735 309 219 6,215 
Total one-to-four family real estate$106,212 $158,121 $69,870 $53,998 $26,177 $91,183 $229,226 $527 $735,314 
Other consumer
Pass$2,107 $3,595 $2,807 $3,250 $871 $1,211 $17,277 $610 $31,728 
Substandard— 36 39 — 3 3 36 97 214 
Total consumer$2,107 $3,631 $2,846 $3,250 $874 $1,214 $17,313 $707 $31,942 
Total$998,511 $1,934,401 $1,318,312 $919,885 $826,670 $2,042,270 $1,617,657 $18,612 $9,676,318 
Less:
Allowance for credit losses148,294 
Loans, net$9,528,024 
__________
(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
20202019201820172016PriorTotal
December 31, 2020(in thousands)
Commercial loans:
Commercial real estate
Pass$674,444 $645,328 $478,881 $502,112 $408,972 $946,980 $52,049 $11,332 $3,720,098 
Special mention3,348 39,374 21,285 30,232 46,197 50,115 5 2,139 192,695 
Substandard2,916 24,860 13,571 15,652 43,735 41,138 3,389 4,259 149,520 
Total commercial real estate$680,708 $709,562 $513,737 $547,996 $498,904 $1,038,233 $55,443 $17,730 $4,062,313 
Commercial business
Pass$1,087,400 $366,435 $324,360 $199,010 $218,313 $214,677 $1,000,725 $11,540 $3,422,460 
Special mention3,002 26,361 8,471 24,582 7,004 10,650 22,426 — 102,496 
Substandard3,625 7,376 11,061 5,905 6,396 3,743 32,134 2,772 73,012 
Total commercial business$1,094,027 $400,172 $343,892 $229,497 $231,713 $229,070 $1,055,285 $14,312 $3,597,968 
Agriculture
Pass$142,163 $90,612 $44,434 $58,366 $58,893 $59,396 $244,135 $9,299 $707,298 
Special mention— 90 285 33 — — 85 13 506 
Substandard5,193 12,480 5,868 4,258 284 3,502 38,780 1,458 71,823 
Total agriculture$147,356 $103,182 $50,587 $62,657 $59,177 $62,898 $283,000 $10,770 $779,627 
Construction
Pass$134,693 $66,974 $10,066 $3,498 $763 $1,805 $29,323 $3,753 $250,875 
Substandard— 17,732 — — — 56 — — 17,788 
Total construction$134,693 $84,706 $10,066 $3,498 $763 $1,861 $29,323 $3,753 $268,663 
Consumer loans:
One-to-four family real estate
Pass$161,021 $77,756 $62,696 $29,737 $20,889 $78,098 $243,325 $3,655 $677,177 
Special mention— — 332 — — 195 — — 527 
Substandard— 849 227 1,166 344 1,968 1,005 307 5,866 
Total one-to-four family real estate$161,021 $78,605 $63,255 $30,903 $21,233 $80,261 $244,330 $3,962 $683,570 
Other consumer
Pass$5,548 $3,109 $3,886 $989 $244 $1,060 $19,911 $474 $35,221 
Substandard30 — — 5 — 170 53 40 298 
Total consumer$5,578 $3,109 $3,886 $994 $244 $1,230 $19,964 $514 $35,519 
Total$2,223,383 $1,379,336 $985,423 $875,545 $812,034 $1,413,553 $1,687,345 $51,041 $9,427,660 
Less:
Allowance for credit losses149,140 
Loans, net$9,278,520