Allowance for Loan and Lease Losses

6 Months Ended

Mar. 31, 2020

The allowance for loan and lease losses under the incurred loss model is determined based on an ongoing evaluation, driven primarily by monitoring changes in loan risk grades, delinquencies, and other credit risk indicators, which are inherently subjective. The Company considers the uncertainty related to certain industry sectors and the extent of credit exposure to specific borrowers within the portfolio. In addition, consideration is given to concentration risks associated with the various loan portfolios, current economic conditions and other environmental factors that might impact the portfolio. The Company also considers changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry, or customer-specific concentrations), trends in loan performance, the level of allowance coverage relative to similar banking institutions under an incurred loss model and macroeconomic factors, such as changes in unemployment rates, gross domestic product, and consumer bankruptcy filings.

Changes to the allowance for loan and lease losses are made by charges to the provision for loan and lease losses, which is reflected on the consolidated statements of income. Past due status is monitored as an indicator of credit deterioration. Loans that are 90 days or more past due are put on nonaccrual status unless a repayment is eminent. Loans deemed to be uncollectible are charged off against the allowance for loan and lease losses. Recoveries of amounts previously charged-off are credited to the allowance for loan and lease losses.

The allowance for loan and lease losses consist of reserves for probable losses that have been identified related to specific borrowing relationships that are individually evaluated for impairment ("specific reserve"), as well as probable losses inherent in the loan portfolio that are not specifically identified ("collective reserve").

The specific reserve relates to impaired loans. A loan is impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due (interest as well as principal) according to the contractual terms of the loan agreement. Specific reserves are determined on a loan-by-loan basis based on management’s best estimate of the Company's exposure, given the current payment status of the loan, the present value of expected payments, and the value of any underlying collateral. Impaired loans also include loans modified in TDRs. Generally, the impairment related to troubled debt restructurings is measured based on the fair value of the collateral, less cost to sell, or the present value of expected payments relative to the unpaid principal balance. If the impaired loan is identified as collateral dependent, then the fair value of the collateral method of measuring the amount of the impairment is utilized. This method requires obtaining an independent appraisal of the collateral and reducing the appraised value by applying a discount factor to the appraised value, if necessary, and including costs to sell.

Management’s estimate for collective reserves reflects losses incurred in the loan portfolio as of the consolidated balance sheet reporting date. Incurred loss estimates primarily are based on historical loss experience and portfolio mix. Incurred loss estimates may be adjusted for qualitative factors such as current economic conditions and current portfolio trends including credit quality, concentrations, aging of the portfolio, and/or significant policy and underwriting changes, which may not be reflected in the historical loss experience.

The following tables present the Company’s allowance for loan and lease losses roll forward for the three and six months ended March 31, 2020 and 2019.


Three Months Ended March 31, 2020	Commercial Real Estate		Agriculture		Commercial Non-Real Estate		Residential Real Estate		Consumer		Other		Total
	(dollars in thousands)
Beginning balance, January 1, 2020	$	17,462	$	32,029	$	17,389	$	4,620	$	288	$	993	$	72,781
Charge-offs	(1,417)		(4,522)		(3,577)		(118)		(25)		(707)		(10,366)
Recoveries	114		1,305		59		147		28		87		1,740
Provision	48,285		714		17,895		3,602		465		738		71,699
(Improvement) impairment of ASC 310-30 loans	(30)		—		—		105		21		—		96
Ending balance, March 31, 2020	$	64,414	$	29,526	$	31,766	$	8,356	$	777	$	1,111	$	135,950


Three Months Ended March 31, 2019	Commercial Real Estate		Agriculture		Commercial Non-Real Estate		Residential Real Estate		Consumer		Other		Total
	(dollars in thousands)
Beginning balance, January 1, 2019	$	16,348	$	31,785	$	12,093	$	4,611	$	430	$	926	$	66,193
Charge-offs	(75)		(5,767)		(110)		(310)		(85)		(249)		(6,596)
Recoveries	162		199		104		125		44		99		733
Provision	(855)		7,508		962		(344)		(15)		150		7,406
Impairment of ASC 310-30 loans	23		—		—		244		—		—		267
Ending balance, March 31, 2019	$	15,603	$	33,725	$	13,049	$	4,326	$	374	$	926	$	68,003


Six Months Ended March 31, 2020	Commercial Real Estate		Agriculture		Commercial Non-Real Estate		Residential Real Estate		Consumer		Other		Total
	(dollars in thousands)
Beginning balance, October 1, 2019	$	16,827	$	30,819	$	17,567	$	4,095	$	427	$	1,039	$	70,774
Charge-offs	(1,454)		(9,128)		(5,059)		(287)		(45)		(1,060)		(17,033)
Recoveries	234		1,408		172		312		48		137		2,311
Provision	48,857		6,692		19,086		3,794		326		995		79,750
(Improvement) impairment of ASC 310-30 loans	(50)		(265)		—		442		21		—		148
Ending balance, March 31, 2020	$	64,414	$	29,526	$	31,766	$	8,356	$	777	$	1,111	$	135,950


Six Months Ended iMarch 31, 2019	Commercial Real Estate		Agriculture		Commercial Non-Real Estate		Residential Real Estate		Consumer		Other		Total
	(dollars in thousands)
Beginning balance, October 1, 2018	$	16,777	$	28,121	$	13,610	$	4,749	$	257	$	1,026	$	64,540
Charge-offs	(946)		(7,028)		(1,471)		(642)		(334)		(394)		(10,815)
Recoveries	259		357		228		287		128		131		1,390
Provision	(68)		12,275		682		(369)		323		163		13,006
(Improvement) impairment of ASC 310-30 loans	(419)		—		—		301		—		—		(118)
Ending balance, March 31, 2019	$	15,603	$	33,725	$	13,049	$	4,326	$	374	$	926	$	68,003

The following tables provide details regarding the allowance for loan and lease losses and balance by type of allowance as of March 31, 2020 and September 30, 2019. These tables are presented net of unamortized discount on acquired loans and excludes loans of $792.1 million measured at fair value, loans held for sale of $4.3 million, and guaranteed loans of $138.0 million for March 31, 2020 and loans measured at fair value of $813.0 million, loans held for sale of $7.4 million, and guaranteed loans of $145.9 million for September 30, 2019.


As of March 31, 2020	Commercial Real Estate		Agriculture		Commercial Non-Real Estate		Residential Real Estate		Consumer		Other		Total
	(dollars in thousands)
Allowance for loan and lease losses
Individually evaluated for impairment	$	7,020	$	8,136	$	8,601	$	2,115	$	36	$	—	$	25,908
Collectively evaluated for impairment	57,285		21,390		23,136		5,747		720		1,111		109,389
ASC 310-30 loans	109		—		29		494		21		—		653
Total allowance	$	64,414	$	29,526	$	31,766	$	8,356	$	777	$	1,111	$	135,950
Financing Receivables
Individually evaluated for impairment	$	132,679	$	347,879	$	93,477	$	10,901	$	127	$	—	$	585,063
Collectively evaluated for impairment	4,486,167		1,365,625		1,415,903		774,083		52,001		39,908		8,133,687
ASC 310-30 loans	21,611		2,970		178		28,263		383		—		53,405
Loans Outstanding	$	4,640,457	$	1,716,474	$	1,509,558	$	813,247	$	52,511	$	39,908	$	8,772,155


As of September 30, 2019	Commercial Real Estate		Agriculture		Commercial Non-Real Estate		Residential Real Estate		Consumer		Other		Total
	(dollars in thousands)
Allowance for loan and lease losses
Individually evaluated for impairment	$	4,159	$	8,234	$	6,062	$	1,795	$	97	$	—	$	20,347
Collectively evaluated for impairment	12,509		22,320		11,476		2,188		330		1,039		49,862
ASC 310-30 loans	159		265		29		112		—		—		565
Total allowance	$	16,827	$	30,819	$	17,567	$	4,095	$	427	$	1,039	$	70,774
Financing Receivables
Individually evaluated for impairment	$	54,275	$	329,479	$	42,910	$	7,119	$	208	$	—	$	433,991
Collectively evaluated for impairment	4,418,611		1,501,164		1,480,949		763,645		51,112		47,541		8,263,022
ASC 310-30 loans	22,124		2,756		221		30,280		438		—		55,819
Loans Outstanding	$	4,495,010	$	1,833,399	$	1,524,080	$	801,044	$	51,758	$	47,541	$	8,752,832

For acquired loans not accounted for under ASC 310-30 (purchased non-impaired), the Company utilizes specific and collective reserve calculation methods similar to originated loans. The required ALLL for these loans is included in the individually evaluated for impairment bucket of the ALLL if the loan is rated substandard or worse, and in the collectively evaluated for impairment bucket for pass rated loans.

The Company maintains an ALLL for acquired loans accounted for under ASC 310-30 as a result of impairment to loan pools arising from the periodic re-valuation of these loans. Any impairment in the individual pool is generally recognized in the current period as provision for loan and lease losses. Any improvement in the estimated cash flows, is generally not recognized immediately, but is instead reflected as an adjustment to the related loan pools yield on a prospective basis once any previously recorded impairment has been recaptured.

The ALLL for ASC 310-30 loans totaled $0.7 million and $0.6 million at March 31, 2020 and September 30, 2019, respectively. For both the three and six months ended March 31, 2020, loan pools accounted for under ASC 310-30 had a net impairment of provision of $0.1 million. For the three and six months ended March 31, 2019, loan pools accounted for under ASC 310-30 had a net impairment of $0.3 million and a net reversal of provision of $0.1 million, respectively.

The reserve for unfunded loan commitments was $1.1 million and $0.5 million at March 31, 2020 and September 30, 2019, respectively and is recorded in accrued expenses and other liabilities on the consolidated balance sheets.