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Allowance for Credit Losses and Unfunded Commitments and Letters of Credit
 12 Months Ended
Dec. 31, 2022
Allowance For Credit Losses And Unfunded Loan Commitments And Letters Of Credit  
Allowance For Credit Losses And Allowance for Unfunded Commitments And Letters Of Credit Text Block [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 exceptions 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 most commonly used factors: Real GDP, National Unemployment Rate, Disposable Personal Income, Home Price Index 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 are 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 years ended December 31, 2022, 2021 and 2020:

Beginning BalanceCharge-offsRecoveriesProvision
(Recapture)		Ending Balance
Year Ended December 31, 2022(in thousands)
Commercial loans:
Commercial real estate
$61,254 $(299)$207 $(6,306)$54,856 
Commercial business
54,712 (2,108)2,183 3,049 57,836 
Agriculture
8,148 (799)869 853 9,071 
Construction
5,397 — 387 7,358 13,142 
Consumer loans:
One-to-four family residential real estate
24,123 (3)943 (2,708)22,355 
Other consumer
1,944 (1,240)770 (296)1,178 
Total$155,578 $(4,449)$5,359 $1,950 $158,438 

Beginning BalanceInitial ACL recorded for PCD loans acquired during the periodCharge-offsRecoveriesProvision
(Recapture)		Ending Balance
Year Ended December 31, 2021(in thousands)
Commercial loans:
Commercial real estate
$68,934 $2,225 $(1,044)$633 $(9,494)$61,254 
Commercial business
45,250 30 (6,364)4,862 10,934 54,712 
Agriculture
9,052 38 (322)355 (975)8,148 
Construction
7,636 35 — 593 (2,867)5,397 
Consumer loans:
One-to-four family residential real estate
16,875 286 (170)907 6,225 24,123 
Other consumer
1,393 2 (1,163)735 977 1,944 
Unallocated— — — — — — 
Total$149,140 $2,616 $(9,063)$8,085 $4,800 $155,578 

 Beginning BalanceImpact of Adopting ASC 326Charge-offsRecoveriesProvision
(Recapture)		Ending Balance
Year Ended December 31, 2020(in thousands)
Commercial loans:
Commercial real estate
$20,340 $7,533 $(1,419)$131 $42,349 $68,934 
Commercial business
30,292 762 (12,396)3,438 23,154 45,250 
Agriculture
15,835 (9,325)(6,427)172 8,797 9,052 
Construction
8,571 (1,750)— 709 106 7,636 
Consumer loans:
One-to-four family residential real estate
7,435 4,237 (84)2,083 3,204 16,875 
Other consumer
883 778 (766)399 99 1,393 
Unallocated612 (603)— — (9)— 
Total$83,968 $1,632 $(21,092)$6,932 $77,700 $149,140 
The $2.9 million increase in the ACL at December 31, 2022 compared to the ACL at December 31, 2021 was primarily due to the increase in the size of the loan portfolio. This was partially offset by significant improvement in the portfolio composition with declining special mention and substandard loans as a percentage of the portfolio, lower anticipated losses given default and the reductions of pandemic-related model inputs. The ACL 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:
Years Ended December 31,
202220212020
(in thousands)
Beginning balance$8,500 $8,300 $3,430 
Impact of Adopting ASC 326— — 1,570 
Net changes in the allowance for unfunded commitments and letters of credit
(500)200 3,300 
Ending balance$8,000 $8,500 $8,300 
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 $250,000 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 December 31, 2022 and 2021:
Revolving Loans Amortized Cost BasisRevolving Loans Converted to Term Loans Amortized Cost Basis
Term Loans
Amortized Cost Basis by Origination Year
20222021202020192018PriorTotal (1)
December 31, 2022(in thousands)
Commercial loans:
Commercial real estate
Pass$1,182,136 $1,009,480 $636,056 $588,494 $394,552 $1,295,185 $75,487 $12,551 $5,193,941 
Special mention1,698 — 1,357 15,199 1,513 13,590 — — 33,357 
Substandard318 7,460 20,317 30,422 2,904 60,343 3,723 — 125,487 
Total commercial real estate$1,184,152 $1,016,940 $657,730 $634,115 $398,969 $1,369,118 $79,210 $12,551 $5,352,785 
Commercial business
Pass$521,615 $658,452 $337,927 $208,199 $159,105 $247,086 $1,456,332 $9,736 $3,598,452 
Special mention1,129 3,681 617 6,335 187 193 17,988 74 30,204 
Substandard2,716 6,162 2,210 16,164 20,321 28,402 39,037 6,896 121,908 
Total commercial business$525,460 $668,295 $340,754 $230,698 $179,613 $275,681 $1,513,357 $16,706 $3,750,564 
Agriculture
Pass$141,623 $119,538 $68,621 $67,689 $20,570 $91,411 $301,607 $1,345 $812,404 
Special mention3,890 659 — 198 — 33 598 — 5,378 
Substandard1,425 1,280 2,104 2,986 20 6,105 17,201 — 31,121 
Total agriculture$146,938 $121,477 $70,725 $70,873 $20,590 $97,549 $319,406 $1,345 $848,903 
Construction
Pass$220,558 $208,472 $20,334 $14,329 $2,437 $3,192 $67,559 $1,037 $537,918 
Special mention— 734 — — — — — — 734 
Substandard— — — 1,717 443 49 — — 2,209 
Total construction$220,558 $209,206 $20,334 $16,046 $2,880 $3,241 $67,559 $1,037 $540,861 
Consumer loans:
One-to-four family residential real estate 
Pass$156,406 $354,364 $124,150 $37,546 $39,054 $84,403 $277,930 $1,288 $1,075,141 
Substandard— — — 253 498 932 510 160 2,353 
Total one-to-four family residential real estate$156,406 $354,364 $124,150 $37,799 $39,552 $85,335 $278,440 $1,448 $1,077,494 
Other consumer
Pass$5,235 $2,614 $1,169 $819 $1,209 $7,833 $21,276 $201 $40,356 
Substandard— — — — — 10 — — 10 
Total consumer$5,235 $2,614 $1,169 $819 $1,209 $7,843 $21,276 $201 $40,366 
Total$2,238,749 $2,372,896 $1,214,862 $990,350 $642,813 $1,838,767 $2,279,248 $33,288 $11,610,973 
Less:
Allowance for credit losses158,438 
Loans, net$11,452,535 
_________
(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
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 residential 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 residential 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