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Allowance for Credit Losses and Allowance for Unfunded Commitments and Letters of Credit
 9 Months Ended
Sep. 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 BalanceCharge-offsRecoveriesProvision
(Recapture)		Ending Balance
Three Months Ended September 30, 2021(in thousands)
Commercial loans:
Commercial real estate$53,250 $— $518 $(2,016)$51,752 
Commercial business57,554 (1,183)328 (1,138)55,561 
Agriculture7,920 — 6 1,039 8,965 
Construction6,559 — 8 (200)6,367 
Consumer loans:
One-to-four family residential real estate16,519 — 203 2,133 18,855 
Other consumer1,186 (296)213 182 1,285 
Total$142,988 $(1,479)$1,276 $— $142,785 
Beginning BalanceCharge-offsRecoveriesProvision
(Recapture)		Ending Balance
Nine Months Ended September 30, 2021(in thousands)
Commercial loans:
Commercial real estate$68,934 $(316)$570 $(17,436)$51,752 
Commercial business45,250 (5,493)4,416 11,388 55,561 
Agriculture9,052 (122)23 12 8,965 
Construction7,636 — 575 (1,844)6,367 
Consumer loans:
One-to-four family residential real estate16,875 (146)757 1,369 18,855 
Other consumer1,393 (808)489 211 1,285 
Total$149,140 $(6,885)$6,830 $(6,300)$142,785 
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 business53,186 (3,164)1,124 (574)50,572 
Agriculture14,868 (1,269)27 (1,165)12,461 
Construction7,953 — 11 999 8,963 
Consumer loans:
One-to-four family residential real estate23,711 (16)1,301 (2,889)22,107 
Other consumer1,595 (133)76 3 1,541 
Total$151,546 $(4,582)$2,604 $7,400 $156,968 
Beginning BalanceImpact of Adopting ASC 326Charge-offsRecoveriesProvision
(Recapture)		Ending Balance
Nine Months Ended September 30, 2020(in thousands)
Commercial loans:
Commercial real estate$20,340 $7,533 $(101)$92 $33,460 $61,324 
Commercial business30,292 762 (10,290)2,795 27,013 50,572 
Agriculture15,835 (9,325)(5,995)69 11,877 12,461 
Construction8,571 (1,750)— 688 1,454 8,963 
Consumer loans:
One-to-four family residential real estate7,435 4,237 (26)2,005 8,456 22,107 
Other consumer883 778 (599)330 149 1,541 
Unallocated612 (603)— — (9)— 
Total83,968 1,632 (17,011)5,979 82,400 156,968 
The $6.4 million decrease in the ACL at September 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 September 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 September 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 September 30,Nine Months Ended September 30,
2021202020212020
(in thousands)
Beginning balance$10,000 $8,800 $8,300 $3,430 
Impact of adopting ASC 326— — — 1,570 
Net changes in the allowance for unfunded commitments and letters of credit500 800 2,200 4,600 
Ending balance$10,500 $9,600 $10,500 $9,600 
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)
September 30, 2021(in thousands)
Commercial loans:
Commercial real estate
Pass$1,250,051 $490,402 $460,118 $359,635 $342,653 $823,529 $58,180 $4,263 $3,788,831 
Special mention21,356 10,947 24,415 9,575 26,238 29,400 — 2,199 124,130 
Substandard10,148 1,659 53,222 5,944 25,747 76,825 1,978 — 175,523 
Total commercial real estate$1,281,555 $503,008 $537,755 $375,154 $394,638 $929,754 $60,158 $6,462 $4,088,484 
Commercial business
Pass$864,775 $418,353 $279,874 $224,100 $140,381 $260,224 $1,033,171 $21,028 $3,241,906 
Special mention109 19 6,223 1,487 145 127 59,678 244 68,032 
Substandard5,412 3,911 22,329 27,519 20,825 28,389 16,382 1,646 126,413 
Total commercial business$870,296 $422,283 $308,426 $253,106 $161,351 $288,740 $1,109,231 $22,918 $3,436,351 
Agriculture
Pass$150,807 $78,668 $73,200 $31,159 $48,274 $78,461 $283,932 $1,770 $746,271 
Special mention3,158 1,078 700 186 64 — 3,913 — 9,099 
Substandard6,429 7,398 7,676 1,830 4,709 1,140 30,823 610 60,615 
Total agriculture$160,394 $87,144 $81,576 $33,175 $53,047 $79,601 $318,668 $2,380 $815,985 
Construction
Pass$174,463 $80,720 $8,279 $3,238 $2,110 $4,569 $32,315 $310 $306,004 
Substandard— — 20,511 — — 54 — — 20,565 
Total construction$174,463 $80,720 $28,790 $3,238 $2,110 $4,623 $32,315 $310 $326,569 
Consumer loans:
One-to-four family residential real estate
Pass$290,818 $131,779 $48,990 $40,142 $18,438 $55,278 $234,434 $1,426 $821,305 
Substandard1,235 398 193 — 85 527 62 72 2,572 
Total one-to-four family real estate$292,053 $132,177 $49,183 $40,142 $18,523 $55,805 $234,496 $1,498 $823,877 
Other consumer
Pass$5,483 $2,841 $1,895 $1,467 $582 $947 $15,662 $1,201 $30,078 
Substandard— 15 — — 1 2 23 — 41 
Total consumer$5,483 $2,856 $1,895 $1,467 $583 $949 $15,685 $1,201 $30,119 
Total$2,784,244 $1,228,188 $1,007,625 $706,282 $630,252 $1,359,472 $1,770,553 $34,769 $9,521,385 
Less:
Allowance for credit losses142,785 
Loans, net$9,378,600 
__________
(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