Allowance for Credit Losses and Unfunded Commitments and Letters of Credit

12 Months Ended

Dec. 31, 2020

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 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, trends in problem loans, 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 two-factor models utilize a mix of seven macroeconomic factors, including the four most commonly used factors: Real GDP, National Unemployment Rate, Home Price Index and Commercial Real Estate Index. The three additional factors are Nominal GDP, Producer Price Index and Core Consumer Price Index. The Consumer segment two-factor models utilize a mix of three macroeconomic factors: National Unemployment Rate, Home Price Index and Prime Rate. The Company utilizes an 18 month reasonable and supportable forecast for the macroeconomic factors, after which they revert to their historical mean using a straight-line basis constructed on their 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, 2020, 2019 and 2018:


	Beginning Balance		Impact of Adopting ASC 326		Charge-offs		Recoveries		Provision (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
Unallocated	612		(603)		—		—		(9)		—
Total	$	83,968	$	1,632	$	(21,092)	$	6,932	$	77,700	$	149,140


	Beginning Balance		Charge-offs		Recoveries		Provision (Recapture)		Ending Balance
Year Ended December 31, 2019	(in thousands)
Commercial loans:
Commercial real estate	$	14,864	$	(2,160)	$	3,377	$	4,259	$	20,340
Commercial business	34,658		(11,290)		3,066		3,858		30,292
Agriculture	9,589		(245)		299		6,192		15,835
Construction	14,395		(242)		3,641		(9,223)		8,571
Consumer loans:
One-to-four family residential real estate	8,024		(1,196)		1,773		(1,166)		7,435
Other consumer	786		(82)		165		14		883
Unallocated	1,053		—		—		(441)		612
Total	$	83,369	$	(15,215)	$	12,321	$	3,493	$	83,968


	Beginning Balance		Charge-offs		Recoveries		Provision (Recapture)		Ending Balance
Year Ended December 31, 2018	(in thousands)
Commercial loans:
Commercial real estate	$	16,260	$	(3,840)	$	3,186	$	(742)	$	14,864
Commercial business	25,101		(7,437)		2,829		14,165		34,658
Agriculture	9,662		(5,507)		1,104		4,330		9,589
Construction	15,092		(124)		1,686		(2,259)		14,395
Consumer loans:
One-to-four family residential real estate	8,904		(1,451)		2,516		(1,945)		8,024
Other consumer	627		(196)		188		167		786
Unallocated	—		—		—		1,053		1,053
Total	$	75,646	$	(18,555)	$	11,509	$	14,769	$	83,369

The $63.5 million increase in the ACL at December 31, 2020 compared to the ACL at January 1, 2020 was primarily due to the COVID-19 pandemic and its impact on the economic forecast. Specifically regarding the forecast used in the December 31, 2020 ACL estimate, management expects the forecasted national unemployment rate to be above the pre-pandemic levels through the forecast period due to persistent lock downs and slow rollout of the vaccine. Additionally, the commercial real estate index decline during the year is expected to continue into 2021, the home price index is projected to moderate over the forecast period and Real GDP is projected to rise above average during the latter half of 2021 through the remainder of 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 December 31, 2020 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,
	2020		2019		2018
	(in thousands)
Beginning balance	$	3,430	$	4,330	$	3,130
Impact of Adopting ASC 326	1,570		—		—
Net changes in the allowance for unfunded commitments and letters of credit	3,300		(900)		1,200
Ending balance	$	8,300	$	3,430	$	4,330

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 December 31, 2020 and 2019:


													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 (1)
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
Special mention	—		—		—		—		—		—		—		—		—
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 residential 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 residential 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
Special mention	—		—		—		—		—		—		—		—		—
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

_________

(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
	2019		2018		2017		2016		2015		Prior						Total
December 31, 2019	(in thousands)
Commercial loans:
Commercial real estate
Pass	$	699,336	$	562,992	$	621,113	$	565,928	$	441,220	$	873,687	$	52,276	$	19,986	$	3,836,538
Special mention	1,824		305		7,019		3,360		—		3,426		—		—		15,934
Substandard	47		10,698		9,320		36,229		20,278		11,738		—		5,071		93,381

Total commercial real estate	$	701,207	$	573,995	$	637,452	$	605,517	$	461,498	$	888,851	$	52,276	$	25,057	$	3,945,853
Commercial business
Pass	$	479,481	$	442,222	$	330,934	$	301,337	$	157,436	$	199,089	$	963,663	$	25,577	$	2,899,739
Special mention	2,241		6,673		56		2,006		52		585		12,710		—		24,323
Substandard	85		17,240		3,458		9,534		3,227		3,972		26,639		1,396		65,551

Total commercial business	$	481,807	$	466,135	$	334,448	$	312,877	$	160,715	$	203,646	$	1,003,012	$	26,973	$	2,989,613
Agriculture
Pass	$	107,152	$	54,950	$	70,337	$	71,874	$	33,597	$	56,342	$	280,984	$	10,036	$	685,272
Special mention	557		2,535		1,381		—		64		576		5,336		—		10,449
Substandard	7,291		6,047		6,173		5,907		1,477		5,698		30,669		6,388		69,650

Total agriculture	$	115,000	$	63,532	$	77,891	$	77,781	$	35,138	$	62,616	$	316,989	$	16,424	$	765,371
Construction
Pass	$	183,525	$	91,342	$	40,514	$	1,067	$	939	$	1,601	$	33,388	$	7,793	$	360,169
Special mention	—		1,264		—		—		—		—		41		—		1,305
Substandard	—		—		—		—		—		59		—		—		59

Total construction	$	183,525	$	92,606	$	40,514	$	1,067	$	939	$	1,660	$	33,429	$	7,793	$	361,533
Consumer loans:
One-to-four family residential real estate
Pass	$	103,315	$	77,877	$	32,440	$	25,052	$	27,294	$	80,370	$	283,830	$	554	$	630,732

Substandard	—		228		800		400		623		3,156		905		481		6,593

Total one-to-four family residential real estate	$	103,315	$	78,105	$	33,240	$	25,452	$	27,917	$	83,526	$	284,735	$	1,035	$	637,325
Other consumer
Pass	$	9,276	$	5,713	$	1,974	$	758	$	848	$	1,306	$	23,351	$	508	$	43,734

Substandard	—		—		1		—		—		8		27		—		36

Total consumer	$	9,276	$	5,713	$	1,975	$	758	$	848	$	1,314	$	23,378	$	508	$	43,770
Total	$	1,594,130	$	1,280,086	$	1,125,520	$	1,023,452	$	687,055	$	1,241,613	$	1,713,819	$	77,790	$	8,743,465
Less:
Allowance for credit losses																	83,968
Loans, net																	$	8,659,497