Loans Receivable and the Allowance for Credit Losses

3 Months Ended

Mar. 31, 2020

Loans Receivable and the Allowance for Credit Losses

The composition of loans by class of receivable was as follows:


	As of
(in thousands)	March 31, 2020		December 31, 2019
Agricultural	$	145,435	$	140,446
Commercial and industrial	864,702		835,236
Commercial real estate:
Construction & development	282,921		298,077
Farmland	168,777		181,885
Multifamily	217,108		227,407
Commercial real estate-other	1,111,640		1,107,490
Total commercial real estate	1,780,446		1,814,859
Residential real estate:
One- to four- family first liens	389,055		407,418
One- to four- family junior liens	165,235		170,381
Total residential real estate	554,290		577,799
Consumer	80,889		82,926
Loans held for investment, net of unearned income	3,425,762		3,451,266
Allowance for credit losses	(51,187)		(29,079)
Total loans held for investment, net	$	3,374,575	$	3,422,187

Loans with unpaid principal in the amount of $918.2 million and $945.9 million at March 31, 2020 and December 31, 2019, respectively, were pledged to the FHLB as collateral for borrowings.

Non-accrual and Delinquent Status

Loans are placed on non-accrual when (1) payment in full of principal and interest is no longer expected or (2) principal or interest has been in default for 90 days or more unless the loan is both well secured with marketable collateral and in the process of collection. All loans rated doubtful or worse, and certain loans rated substandard, are placed on non-accrual.

A non-accrual loan may be restored to an accrual status when (1) all past due principal and interest has been paid (excluding renewals and modifications that involve the capitalizing of interest) or (2) the loan becomes well secured with marketable collateral and is in the process of collection. An established track record of performance is also considered when determining accrual status.

Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment.

As of March 31, 2020, the Company had no commitments to lend additional funds to borrowers who have a nonperforming loan.

The following table presents the amortized cost basis of loans based on delinquency status:


			Age Analysis of Past-Due Financial Assets										90 Days or More Past Due And Accruing
(in thousands)	Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total
March 31, 2020
Agricultural	$	137,398	$	6,416	$	416	$	1,205	$	145,435	$	—
Commercial and industrial	858,489		1,999		436		3,778		864,702		62
Commercial real estate:
Construction and development	281,109		431		649		732		282,921		—
Farmland	157,371		1,760		2,062		7,584		168,777		—
Multifamily	216,242		866		—		—		217,108		—
Commercial real estate-other	1,102,517		987		447		7,689		1,111,640		174
Total commercial real estate	1,757,239		4,044		3,158		16,005		1,780,446		174
Residential real estate:
One- to four- family first liens	384,069		2,339		993		1,654		389,055		44
One- to four- family junior liens	164,590		331		136		178		165,235		—
Total residential real estate	548,659		2,670		1,129		1,832		554,290		44
Consumer	80,528		140		46		175		80,889		23
Total	$	3,382,313	$	15,269	$	5,185	$	22,995	$	3,425,762	$	303

December 31, 2019
Agricultural	$	137,715	$	975	$	—	$	1,756	$	140,446	$	—
Commercial and industrial	828,842		846		270		5,278		835,236		—
Commercial real estate:
Construction and development	294,995		2,256		621		205		298,077		—
Farmland	175,281		362		—		6,242		181,885		—
Multifamily	227,013		394		—		—		227,407		—
Commercial real estate-other	1,102,504		1,965		347		2,674		1,107,490		—
Total commercial real estate	1,799,793		4,977		968		9,121		1,814,859		—
Residential real estate:
One- to four- family first liens	402,471		2,579		857		1,511		407,418		99
One- to four- family junior liens	169,592		518		108		163		170,381		25
Total residential real estate	572,063		3,097		965		1,674		577,799		124
Consumer	82,558		150		80		138		82,926		12
Total	$	3,420,971	$	10,045	$	2,283	$	17,967	$	3,451,266	$	136

The following table presents the amortized cost basis of loans on non-accrual status, loans past due 90 days or more and still accruing by class of loan and related interest income recognized:


(in thousands)	Beginning of Period Nonaccrual		End of Period Nonaccrual		Nonaccrual with no Allowance for Credit Losses		90 Days or More Past Due And Accruing		Interest Income Recognized on Nonaccrual
As of and for the Three Months Ended March 31, 2020
Agricultural	$	2,894	$	3,585	$	2,519	$	—	$	64
Commercial and industrial	13,276		11,755		6,140		62		56
Commercial real estate:
Construction and development	1,494		867		701		—		35
Farmland	10,402		13,682		11,566		—		84
Multifamily	—		—		—		—		1
Commercial real estate-other	10,141		10,517		6,885		174		21
Total commercial real estate	22,037		25,066		19,152		174		141
Residential real estate:
One- to four- family first liens	2,557		2,777		581		44		8
One- to four- family junior liens	513		568		1		—		1
Total residential real estate	3,070		3,345		582		44		9
Consumer	206		222		25		23		2
Total	$	41,483	$	43,973	$	28,418	$	303	$	272

Credit Quality Information

The Company aggregates loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as: current financial information, historical payment experience, credit documentation, and other factors. The Company analyzes loans individually to classify the loans as to credit risk. This analysis includes non-homogenous loans, such as agricultural, commercial and industrial, and commercial real estate loans. Loans not meeting the criteria described below that are analyzed individually are considered to be pass-rated. The Company uses the following definitions for risk ratings:

Special Mention/Watch - A special mention/watch asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention/watch assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard - Substandard loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

Homogenous loans, including residential real estate and consumer loans, are not individually risk rated. Instead, these loans are categorized based on performance: performing and nonperforming. Nonperforming loans include those loans on nonaccrual, loans greater than 90 days past due and on accrual, and TDRs on accrual.

The following table sets forth the amortized cost basis of loans by class of receivable by credit quality indicator and vintage based on the most recent analysis performed, as of March 31, 2020. As of March 31, 2020, there were no 'loss' rated credits.


	Term Loans by Origination Year																Revolving Loans
March 31, 2020 (in thousands)	2020		2019		2018		2017		2016		Prior				Total
Agricultural
Pass	$	14,609	$	15,786	$	8,035	$	3,272	$	3,135	$	3,220	$	74,018	$	122,075
Special mention / watch	3,749		1,268		591		404		897		344		5,543		12,796
Substandard	124		1,443		1,009		176		256		2,786		4,770		10,564
Doubtful	—		—		—		—		—		—		—		—
Total	$	18,482	$	18,497	$	9,635	$	3,852	$	4,288	$	6,350	$	84,331	$	145,435
Commercial and industrial
Pass	$	62,134	$	135,839	$	99,140	$	113,934	$	54,861	$	127,025	$	227,607	$	820,540
Special mention / watch	334		2,143		2,717		4,012		990		5,545		9,814		25,555
Substandard	2,384		3,259		1,046		1,381		1,417		2,666		6,454		18,607
Doubtful	—		—		—		—		—		—		—		—
Total	$	64,852	$	141,241	$	102,903	$	119,327	$	57,268	$	135,236	$	243,875	$	864,702
CRE - Construction and development
Pass	$	18,964	$	136,833	$	44,024	$	34,407	$	2,285	$	2,076	$	29,539	$	268,128
Special mention / watch	989		800		590		—		—		35		9,059		11,473
Substandard	615		1,979		—		—		116		45		565		3,320
Doubtful	—		—		—		—		—		—		—		—
Total	$	20,568	$	139,612	$	44,614	$	34,407	$	2,401	$	2,156	$	39,163	$	282,921
CRE - Farmland
Pass	$	10,749	$	38,099	$	19,395	$	20,402	$	12,113	$	28,798	$	3,521	$	133,077
Special mention / watch	1,672		7,034		1,973		1,998		1,255		1,296		703		15,931
Substandard	1,218		5,165		3,890		1,851		427		6,647		571		19,769
Doubtful	—		—		—		—		—		—		—		—
Total	$	13,639	$	50,298	$	25,258	$	24,251	$	13,795	$	36,741	$	4,795	$	168,777
CRE - Multifamily
Pass	$	50,291	$	21,562	$	23,646	$	25,045	$	21,887	$	59,026	$	14,490	$	215,947
Special mention / watch	—		—		—		—		85		—		—		85
Substandard	—		1,076		—		—		—		—		—		1,076
Doubtful	—		—		—		—		—		—		—		—
Total	$	50,291	$	22,638	$	23,646	$	25,045	$	21,972	$	59,026	$	14,490	$	217,108
CRE - other
Pass	$	115,059	$	216,822	$	113,410	$	186,570	$	148,073	$	201,195	$	60,246	$	1,041,375
Special mention / watch	1,668		21,535		6,378		7,060		4,520		10,027		273		51,461
Substandard	—		1,693		7,223		4,432		1,278		4,043		135		18,804
Doubtful	—		—		—		—		—		—		—		—
Total	$	116,727	$	240,050	$	127,011	$	198,062	$	153,871	$	215,265	$	60,654	$	1,111,640
RRE - One- to four- family first liens
Performing	$	32,556	$	76,673	$	59,926	$	56,374	$	49,581	$	101,470	$	8,805	$	385,385
Nonperforming	—		139		269		578		347		2,321		16		3,670
Total	$	32,556	$	76,812	$	60,195	$	56,952	$	49,928	$	103,791	$	8,821	$	389,055
RRE - One- to four- family junior liens
Performing	$	2,215	$	16,329	$	19,152	$	9,441	$	4,848	$	9,022	$	103,524	$	164,531
Nonperforming	—		84		—		33		253		312		22		704
Total	$	2,215	$	16,413	$	19,152	$	9,474	$	5,101	$	9,334	$	103,546	$	165,235
Consumer
Performing	$	7,561	$	23,785	$	17,137	$	8,025	$	6,031	$	7,657	$	10,471	$	80,667
Nonperforming	—		35		49		68		28		40		2		222
Total	$	7,561	$	23,820	$	17,186	$	8,093	$	6,059	$	7,697	$	10,473	$	80,889

The following table sets forth the risk category of loans by class of loans and credit quality indicator used on the most recent analysis performed as of December 31, 2019:


2019 (in thousands)	Pass		Special Mention / Watch		Substandard		Doubtful		Loss		Total
Agricultural	$	117,374	$	13,292	$	9,780	$	—	$	—	$	140,446
Commercial and industrial	794,526		19,038		21,635		1		36		835,236
Commercial real estate:
Construction and development	283,921		11,423		2,733		—		—		298,077
Farmland	141,107		21,307		19,471		—		—		181,885
Multifamily	226,124		90		1,193		—		—		227,407
Commercial real estate-other	1,036,418		50,691		20,381		—		—		1,107,490
Total commercial real estate	1,687,570		83,511		43,778		—		—		1,814,859
Residential real estate:
One- to four- family first liens	396,175		4,547		6,532		164		—		407,418
One- to four- family junior liens	168,229		1,282		870		—		—		170,381
Total residential real estate	564,404		5,829		7,402		164		—		577,799
Consumer	82,650		39		218		19		—		82,926
Total	$	3,246,524	$	121,709	$	82,813	$	184	$	36	$	3,451,266

Allowance for Credit Losses

At March 31, 2020, the economic forecast used by the Company showed a significant increase in Midwest unemployment, significant decreases in national retail sales, the CRE index, and US GDP, and moderate increases in the national home price index and US rental vacancy rate for the first forecasted quarter. The forecast projected gradual improvement in the Midwest unemployment, national retail sales, and US GDP forecasts over the next three quarters with these loss drivers remaining significantly worse compared to recent historical trends over the past several years. The CRE index and US rental vacancy rate forecasts project further decline over the next two quarters before a gradual improvement. The national home price index forecast remains favorable over the next three quarters. The significant change in current and forecasted conditions was largely a result of the COVID-19 pandemic.

We have made a policy election to report interest receivable as a separate line on the balance sheet. Accrued interest receivable, which is recorded within 'Other Assets' totaled $12.2 million at March 31, 2020 and is excluded from the estimate of credit losses.

The changes in the allowance for credit losses by portfolio segment were as follows:



	For the Three Months Ended March 31, 2020 and 2019
(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Total
For the Three Months Ended March 31, 2020
Beginning balance, prior to adoption of ASC 326	$	3,748	$	8,394	$	13,804	$	2,685	$	448	$	29,079
Day 1 transition adjustment from adoption of ASC 326	(2,557)		2,728		1,300		2,050		463		3,984
Charge-offs	(84)		(471)		(720)		—		(222)		(1,497)
Recoveries	25		213		8		7		46		299
Credit loss expense⁽¹⁾	14		8,445		8,746		1,683		434		19,322
Ending balance	$	1,146	$	19,309	$	23,138	$	6,425	$	1,169	$	51,187

For the Three Months Ended March 31, 2019
Beginning balance	$	3,637	$	7,478	$	15,635	$	2,349	$	208	$	29,307
Charge-offs	(134)		(354)		(650)		(49)		(168)		(1,355)
Recoveries	7		48		8		9		34		106
Credit loss expense	181		422		(195)		963		223		1,594
Ending balance	$	3,691	$	7,594	$	14,798	$	3,272	$	297	$	29,652

(1) The difference in the credit loss expense reported herein as compared to the Consolidated Statements of Income is associated with the credit loss expense of $2.4 million related to off-balance sheet credit exposures.

The composition of allowance for credit losses by portfolio segment based on evaluation method were as follows:


	As of March 31, 2020
(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Total
Loans held for investment, net of unearned income
Individually evaluated for impairment	$	3,256	$	10,778	$	23,764	$	710	$	21	$	38,529
Collectively evaluated for impairment	142,179		853,924		1,756,682		553,580		80,868		3,387,233
Total	$	145,435	$	864,702	$	1,780,446	$	554,290	$	80,889	$	3,425,762
Allowance for credit losses:
Individually evaluated for impairment	$	251	$	1,920	$	1,651	$	103	$	—	$	3,925
Collectively evaluated for impairment	895		17,389		21,487		6,322		1,169		47,262
Total	$	1,146	$	19,309	$	23,138	$	6,425	$	1,169	$	51,187


	As of December 31, 2019
(in thousands)	Agricultural		Commercial and Industrial		Commercial Real Estate		Residential Real Estate		Consumer		Total
Loans held for investment, net of unearned income
Individually evaluated for impairment	$	4,312	$	12,242	$	16,082	$	838	$	21	$	33,495
Collectively evaluated for impairment	135,246		822,939		1,781,306		572,865		82,864		3,395,220
Purchased credit impaired loans	888		55		17,471		4,096		41		22,551
Total	$	140,446	$	835,236	$	1,814,859	$	577,799	$	82,926	$	3,451,266
Allowance for loan losses:
Individually evaluated for impairment	$	212	$	2,198	$	1,180	$	73	$	—	$	3,663
Collectively evaluated for impairment	3,536		6,194		11,836		2,152		448		24,166
Purchased credit impaired loans	—		2		788		460		—		1,250
Total	$	3,748	$	8,394	$	13,804	$	2,685	$	448	$	29,079

The following table presents the amortized cost basis of collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:


	As of March 31, 2020
(in thousands)	Primary Type of Collateral
	Real Estate		Accounts Receivable		Equipment		Other		Total		ACL Allocation
Agricultural	$	1,181	$	—	$	1,708	$	367	$	3,256	$	251
Commercial and industrial	1,060		—		5,703		4,016		10,779		1,920
Commercial real estate:
Construction and development	700		—		—		—		700		—
Farmland	13,195		—		—		—		13,195		657
Multifamily	—		—		—		—		—		—
Commercial real estate-other	9,869		—		—		—		9,869		994
Residential real estate:
One- to four- family first liens	710		—		—		—		710		103
One- to four- family junior liens	—		—		—		—		—		—
Consumer	—		—		21		—		21		—
Total	$	26,715	$	—	$	7,432	$	4,383	$	38,530	$	3,925

Troubled Debt Restructurings

TDRs totaled $11.7 million and $11.0 million as of March 31, 2020 and December 31, 2019, respectively. The following table sets forth information on the Company's TDRs by class of financing receivable occurring during the stated periods. TDRs may include multiple concessions, and the disclosure classifications in the table are based on the primary concession provided to the borrower.


	Three Months Ended March 31,
	2020								2019
	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
(dollars in thousands)











CONCESSION - Extended maturity date

Commercial and industrial	1	$	242	$	242	—	$	—	$	—



Commercial real estate-other	2	485		485		—	—		—

One- to four- family junior liens	—	—		—		1	51		51












Total	3	$	727	$	727	1	$	51	$	51

For the three months ended March 31, 2020, the Company had zero TDRs that redefaulted within 12 months subsequent to restructure. For the three months ended March 31, 2019, the Company had zero TDRs that redefaulted within 12 months subsequent to restructure.

Pre-ASC 326 Adoption Impaired Loan Disclosures

The following table presents loans individually evaluated for impairment by class of receivable, as of December 31, 2019:


	December 31, 2019
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Agricultural	$	2,383	$	2,913	$	—
Commercial and industrial	7,391		10,875		—
Commercial real estate:
Construction and development	1,181		1,218		—
Farmland	4,306		4,331		—
Multifamily	—		—		—
Commercial real estate-other	5,709		5,854		—
Total commercial real estate	11,196		11,403		—
Residential real estate:
One- to four- family first liens	577		578		—
One- to four- family junior liens	—		—		—
Total residential real estate	577		578		—
Consumer	21		21		—
Total	$	21,568	$	25,790	$	—
With an allowance recorded:
Agricultural	$	1,929	$	1,930	$	212
Commercial and industrial	4,851		5,417		2,198
Commercial real estate:
Construction and development	135		135		135
Farmland	1,109		1,148		347
Multifamily	—		—		—
Commercial real estate-other	3,642		4,229		698
Total commercial real estate	4,886		5,512		1,180
Residential real estate:
One- to four- family first liens	261		262		73
One- to four- family junior liens	—		—		—
Total residential real estate	261		262		73
Consumer	—		—		—
Total	$	11,927	$	13,121	$	3,663
Total:
Agricultural	$	4,312	$	4,843	$	212
Commercial and industrial	12,242		16,292		2,198
Commercial real estate:
Construction and development	1,316		1,353		135
Farmland	5,415		5,479		347
Multifamily	—		—		—
Commercial real estate-other	9,351		10,083		698
Total commercial real estate	16,082		16,915		1,180
Residential real estate:
One- to four- family first liens	838		840		73
One- to four- family junior liens	—		—		—
Total residential real estate	838		840		73
Consumer	21		21		—
Total	$	33,495	$	38,911	$	3,663

The following table presents the average recorded investment and interest income recognized for loans individually evaluated for impairment by class of receivable, during the stated period:


	Three Months Ended March 31,
	2019
(in thousands)	Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Agricultural	$	1,538	$	—
Commercial and industrial	2,343		—
Commercial real estate:
Construction and development	—		—
Farmland	1,011		—
Multifamily	—		—
Commercial real estate-other	1,185		6
Total commercial real estate	2,196		6
Residential real estate:
One- to four- family first liens	75		—
One- to four- family junior liens	305		1
Total residential real estate	380		1
Consumer	—		—
Total	$	6,457	$	7
With an allowance recorded:
Agricultural	$	2,735	$	—
Commercial and industrial	5,460		—
Commercial real estate:
Construction and development	—		—
Farmland	1,442		—
Multifamily	—		—
Commercial real estate-other	3,966		3
Total commercial real estate	5,408		3
Residential real estate:
One- to four- family first liens	394		1
One- to four- family junior liens	—		—
Total residential real estate	394		1
Consumer	11		—
Total	$	14,008	$	4
Total:
Agricultural	$	4,273	$	—
Commercial and industrial	7,803		—
Commercial real estate:
Construction and development	—		—
Farmland	2,453		—
Multifamily	—		—
Commercial real estate-other	5,151		9
Total commercial real estate	7,604		9
Residential real estate:
One- to four- family first liens	469		1
One- to four- family junior liens	305		1
Total residential real estate	774		2
Consumer	11		—
Total	$	20,465	$	11

Purchased Credit Impaired Loans (Pre-ASC 326 Adoption)

The following table summarizes the outstanding balance and carrying amount of our PCI loans that were identified prior to the adoption of ASC 326:


	December 31, 2019
(in thousands)
Agricultural	$	904
Commercial and industrial	147
Commercial real estate	17,803
Residential real estate	4,136
Consumer	57
Outstanding balance	23,047
Carrying amount	22,551
Allowance for credit losses	1,250
Carrying amount, net of allowance for credit losses	$	21,301