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Allowance for Credit Losses and Allowance for Unfunded Commitments and Letters of Credit
 9 Months Ended
Sep. 30, 2022
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 the present value of expected future cash flows within the loan portfolio, which, are deducted from the loan’s amortized cost basis to determine the expected credit losses of the loan portfolio. 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, risk ratings 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 the borrower is experiencing financial difficulty such that full satisfaction of the contractual terms of the loan is in question. 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 collateral dependent loans, 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, 2022(in thousands)
Commercial loans:
Commercial real estate$57,119 $— $11 $251 $57,381 
Commercial business51,985 (295)482 1,913 54,085 
Agriculture8,895 (706)98 1,146 9,433 
Construction5,914 — 9 2,224 8,147 
Consumer loans:
One-to-four family residential real estate24,626 — 331 (943)24,014 
Other consumer1,396 (431)187 659 1,811 
Total$149,935 $(1,432)$1,118 $5,250 $154,871 
Beginning BalanceCharge-offsRecoveriesProvision
(Recapture)		Ending Balance
Nine Months Ended September 30, 2022
Commercial loans:
Commercial real estate$61,254 $(299)$172 $(3,746)$57,381 
Commercial business54,712 (2,019)1,570 (178)54,085 
Agriculture8,148 (730)247 1,768 9,433 
Construction5,397 — 153 2,597 8,147 
Consumer loans:
One-to-four family residential real estate24,123 (3)916 (1,022)24,014 
Other consumer1,944 (918)654 131 1,811 
Total$155,578 $(3,969)$3,712 $(450)$154,871 
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
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 
The $707 thousand decrease in the ACL at September 30, 2022 compared to the ACL at December 31, 2021 was primarily due to significant improvements in portfolio risk ratings. Additionally, problem loans decreased during the period and their percentage within the portfolio is now near pre-pandemic levels. Specifically regarding the forecast used in the September 30, 2022 estimate, management expects the forecasted national unemployment rate to be near pre-pandemic levels early in the forecast period, increasing a little later in the forecast period. Additionally, the commercial real estate index has slowed during the year and is expected to grow more slowly through the forecast period. The home price index is projected to moderate over the forecast period and real GDP growth has slowed during the year and is projected to continue to decline through the forecast period. 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, 2022 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,
2022202120222021
(in thousands)
Beginning balance$9,000 $10,000 $8,500 $8,300 
Net changes in the allowance for unfunded commitments and letters of credit(500)500 — 2,200 
Ending balance$8,500 $10,500 $8,500 $10,500 

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 $250 thousand 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
20222021202020192018PriorTotal
September 30, 2022(in thousands)
Commercial loans:
Commercial real estate
Pass$983,823 $1,021,822 $688,119 $603,943 $431,582 $1,402,281 $71,235 $8,932 $5,211,737 
Special mention— 1,865 3,566 19,591 — 11,763 — — 36,785 
Substandard— 7,519 7,393 33,951 4,258 69,411 3,997 — 126,529 
Total commercial real estate$983,823 $1,031,206 $699,078 $657,485 $435,840 $1,483,455 $75,232 $8,932 $5,375,051 
Commercial business
Pass$436,851 $713,165 $364,061 $224,851 $180,781 $272,401 $1,413,129 $6,807 $3,612,046 
Special mention2,362 10,652 1,564 6,588 392 653 28,105 425 50,741 
Substandard93 3,297 3,823 17,399 21,636 28,945 44,645 1,071 120,909 
Total commercial business$439,306 $727,114 $369,448 $248,838 $202,809 $301,999 $1,485,879 $8,303 $3,783,696 
Agriculture
Pass$113,968 $129,433 $72,571 $69,576 $24,244 $103,310 $346,565 $1,160 $860,827 
Special mention— 140 — 4,306 — — 899 — 5,345 
Substandard548 1,343 5,126 524 20 1,761 27,766 — 37,088 
Total agriculture$114,516 $130,916 $77,697 $74,406 $24,264 $105,071 $375,230 $1,160 $903,260 
Construction
Pass$176,863 $221,956 $27,571 $14,115 $2,618 $3,466 $55,628 $7,121 $509,338 
Special mention— 745 — — — — — — 745 
Substandard— — — 1,727 448 50 — — 2,225 
Total construction$176,863 $222,701 $27,571 $15,842 $3,066 $3,516 $55,628 $7,121 $512,308 
Consumer loans:
One-to-four family residential real estate
Pass$126,882 $364,441 $126,287 $39,728 $40,319 $91,542 $278,903 $856 $1,068,958 
Substandard— — 76 — 543 1,141 260 244 2,264 
Total one-to-four family real estate$126,882 $364,441 $126,363 $39,728 $40,862 $92,683 $279,163 $1,100 $1,071,222 
Other consumer
Pass$7,115 $3,121 $1,479 $994 $1,579 $8,969 $23,328 $107 $46,692 
Substandard— 20 — — — 10 2 — 32 
Total consumer$7,115 $3,141 $1,479 $994 $1,579 $8,979 $23,330 $107 $46,724 
Total$1,848,505 $2,479,519 $1,301,636 $1,037,293 $708,420 $1,995,703 $2,294,462 $26,723 $11,692,261 
Less:
Allowance for credit losses154,871 
Loans, net$11,537,390 
Revolving Loans Amortized Cost BasisRevolving Loans Converted to Term Loans Amortized Cost Basis
Term Loans
Amortized Cost Basis by Origination Year
20212020201920182017PriorTotal
December 31, 2021(in thousands)
Commercial loans:
Commercial real estate
Pass$1,068,493 $760,545 $650,593 $492,348 $515,233 $1,180,115 $74,754 $3,644 $4,745,725 
Special mention2,252 — 19,016 6,196 163 27,270 — 2,199 57,096 
Substandard4,119 5,897 45,769 9,112 29,917 82,599 1,029 — 178,442 
Total commercial real estate$1,074,864 $766,442 $715,378 $507,656 $545,313 $1,289,984 $75,783 $5,843 $4,981,263 
Commercial business
Pass$891,957 $426,004 $280,823 $217,605 $144,363 $232,356 $1,028,616 $35,411 $3,257,135 
Special mention621 135 6,097 747 105 51 34,256 236 42,248 
Substandard4,329 4,610 18,393 28,066 20,568 27,462 18,796 1,661 123,885 
Total commercial business$896,907 $430,749 $305,313 $246,418 $165,036 $259,869 $1,081,668 $37,308 $3,423,268 
Agriculture
Pass$147,561 $87,964 $74,658 $29,739 $46,058 $79,693 $266,573 $5,448 $737,694 
Special mention162 — 445 — — — 565 — 1,172 
Substandard— 7,717 9,148 1,616 5,532 1,833 29,125 1,878 56,849 
Total agriculture$147,723 $95,681 $84,251 $31,355 $51,590 $81,526 $296,263 $7,326 $795,715 
Construction
Pass$228,661 $53,880 $35,795 $3,183 $3,285 $2,189 $55,765 $— $382,758 
Substandard— — 1,748 — — 249 — — 1,997 
Total construction$228,661 $53,880 $37,543 $3,183 $3,285 $2,438 $55,765 $— $384,755 
Consumer loans:
One-to-four family real estate
Pass$390,153 $140,799 $56,520 $51,549 $32,447 $111,307 $222,747 $1,347 $1,006,869 
Substandard85 470 183 562 234 4,736 485 284 7,039 
Total one-to-four family real estate$390,238 $141,269 $56,703 $52,111 $32,681 $116,043 $223,232 $1,631 $1,013,908 
Other consumer
Pass$7,045 $2,711 $1,950 $13,489 $560 $1,277 $15,853 $97 $42,982 
Substandard— — — — 1 13 23 9 46 
Total consumer$7,045 $2,711 $1,950 $13,489 $561 $1,290 $15,876 $106 $43,028 
Total$2,745,438 $1,490,732 $1,201,138 $854,212 $798,466 $1,751,150 $1,748,587 $52,214 $10,641,937 
Less:
Allowance for credit losses155,578 
Loans, net$10,486,359