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

6 Months Ended

Jun. 30, 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 Balance		Charge-offs		Recoveries		Provision (Recapture)		Ending Balance
Three Months Ended June 30, 2021	(in thousands)
Commercial loans:
Commercial real estate	$	57,050	$	(316)	$	16	$	(3,500)	$	53,250
Commercial business	58,405		(971)		874		(754)		57,554
Agriculture	9,487		(122)		5		(1,450)		7,920
Construction	6,551		—		521		(513)		6,559
Consumer loans:
One-to-four family residential real estate	15,638		(146)		503		524		16,519
Other consumer	1,163		(385)		215		193		1,186
Total	$	148,294	$	(1,940)	$	2,134	$	(5,500)	$	142,988

	Beginning Balance		Charge-offs		Recoveries		Provision (Recapture)		Ending Balance
Six Months Ended June 30, 2021	(in thousands)
Commercial loans:
Commercial real estate	$	68,934	$	(316)	$	52	$	(15,420)	$	53,250
Commercial business	45,250		(4,310)		4,088		12,526		57,554
Agriculture	9,052		(122)		17		(1,027)		7,920
Construction	7,636		—		567		(1,644)		6,559
Consumer loans:
One-to-four family residential real estate	16,875		(146)		554		(764)		16,519
Other consumer	1,393		(512)		276		29		1,186
Total	$	149,140	$	(5,406)	$	5,554	$	(6,300)	$	142,988

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

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

The $6.2 million decrease in the ACL at June 30, 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 June 30, 2021 estimate, management expects the forecasted national unemployment rate to return to pre-pandemic levels in 2023. Additionally, the commercial real estate index decline is expected to continue through 2021, followed by a slight increase in 2022. The home price index is projected to moderate over the forecast period and real GDP growth is projected to continue to be above average during this time. 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 June 30, 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 June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
	(in thousands)
Beginning balance	$	9,800	$	6,000	$	8,300	$	3,430
Impact of adopting ASC 326	—		—		—		1,570
Net changes in the allowance for unfunded commitments and letters of credit	200		2,800		1,700		3,800
Ending balance	$	10,000	$	8,800	$	10,000	$	8,800

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 Basis		Revolving Loans Converted to Term Loans Amortized Cost Basis
	Term Loans
	Amortized Cost Basis by Origination Year
	2021		2020		2019		2018		2017		Prior						Total (1)
June 30, 2021	(in thousands)
Commercial loans:
Commercial real estate
Pass	$	389,826	$	648,251	$	584,280	$	443,700	$	452,989	$	1,163,730	$	57,550	$	2,775	$	3,743,101
Special mention	1,875		10,168		58,636		21,408		26,722		60,889		—		2,195		181,893
Substandard	507		3,917		43,600		10,882		28,362		87,655		1,154		—		176,077
Total commercial real estate	$	392,208	$	662,336	$	686,516	$	475,990	$	508,073	$	1,312,274	$	58,704	$	4,970	$	4,101,071
Commercial business
Pass	$	881,501	$	585,999	$	325,418	$	245,432	$	163,134	$	316,525	$	980,429	$	16,876	$	3,515,314
Special mention	—		1,243		8,311		6,293		4,955		990		43,386		251		65,429
Substandard	336		5,808		24,959		29,854		22,175		31,814		41,282		1,317		157,545
Total commercial business	$	881,837	$	593,050	$	358,688	$	281,579	$	190,264	$	349,329	$	1,065,097	$	18,444	$	3,738,288
Agriculture
Pass	$	97,908	$	95,853	$	82,533	$	37,066	$	54,739	$	102,476	$	259,260	$	1,744	$	731,579
Special mention	109		4,593		738		325		64		—		4,526		—		10,355
Substandard	—		6,343		10,045		1,643		3,862		2,529		30,317		907		55,646
Total agriculture	$	98,017	$	106,789	$	93,316	$	39,034	$	58,665	$	105,005	$	294,103	$	2,651	$	797,580
Construction
Pass	$	115,216	$	101,292	$	19,352	$	6,699	$	3,448	$	4,897	$	30,302	$	304	$	281,510
Substandard	—		—		18,739		—		—		54		—		—		18,793
Total construction	$	115,216	$	101,292	$	38,091	$	6,699	$	3,448	$	4,951	$	30,302	$	304	$	300,303
Consumer loans:
One-to-four family residential real estate
Pass	$	130,355	$	146,145	$	58,921	$	49,106	$	23,838	$	81,118	$	227,230	$	622	$	717,335
Special mention	—		2,350		—		—		314		—		—		—		2,664
Substandard	—		81		1,201		239		172		2,132		172		155		4,152
Total one-to-four family real estate	$	130,355	$	148,576	$	60,122	$	49,345	$	24,324	$	83,250	$	227,402	$	777	$	724,151
Other consumer
Pass	$	4,289	$	3,294	$	2,270	$	1,789	$	671	$	1,122	$	18,006	$	192	$	31,633
Substandard	—		25		38		—		2		2		23		—		90
Total consumer	$	4,289	$	3,319	$	2,308	$	1,789	$	673	$	1,124	$	18,029	$	192	$	31,723
Total	$	1,621,922	$	1,615,362	$	1,239,041	$	854,436	$	785,447	$	1,855,933	$	1,693,637	$	27,338	$	9,693,116
Less:
Allowance for credit losses																	142,988
Loans, net																	$	9,550,128

__________

(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
	2020		2019		2018		2017		2016		Prior						Total
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 mention	3,348		39,374		21,285		30,232		46,197		50,115		5		2,139		192,695
Substandard	2,916		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 mention	3,002		26,361		8,471		24,582		7,004		10,650		22,426		—		102,496
Substandard	3,625		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
Substandard	5,193		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
Substandard	30		—		—		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 losses																	149,140
Loans, net																	$	9,278,520