Allowance for Loan Losses

9 Months Ended

Sep. 30, 2011

Allowance for Loan Losses [Abstract]

Allowance for Loan Losses

Note 4. Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The methodology used for measuring the appropriateness of the allowance for loan losses relies on several key elements, which include specific allowances for identified impaired loans, a risk-allocated allowance for the remainder of the portfolio and a general valuation allowance estimate. For additional information regarding Citizens policies and methodology used to estimate the allowance for loan losses, see Note 1 to the Consolidated Financial Statements of the Corporation’s 2010 Annual Report on Form 10-K.

A summary of the allowance for loan losses, segregated by portfolio segment, as of September 30, 2011 and December 31, 2010 was as follows:

	For the three months ended September 30, 2011
	Allowance for													Allowance for
	Loan Losses at		Provision for											Loan Losses at
(in thousands)	June 30, 2011		Loan Losses			Charge-offs			Recoveries		Net charge-offs			September 30, 2011
Commercial and industrial	$	17,618		(4,122	)	$	(994	)	$	721	$	(273	)	$	13,223
Small business		12,933		(1,161	)		(1,132	)		180		(952	)		10,820
Commercial real estate		83,627		(1,065	)		(5,860	)		537		(5,323	)		77,239
Total commercial		114,178		(6,348	)		(7,986	)		1,438		(6,548	)		101,282
Residential mortgage		43,925		11,856			(18,369	)		5		(18,364	)		37,417
Direct consumer		32,688		10,888			(6,398	)		688		(5,710	)		37,866
Indirect consumer		15,501		1,085			(3,430	)		633		(2,797	)		13,789
Total	$	206,292	$	17,481		$	(36,183	)	$	2,764	$	(33,419	)	$	190,354

	For the nine months ended September 30, 2011
	Allowance for												Allowance for
	Loan Losses at		Provision for										Loan Losses at
(in thousands)	December 31, 2010		Loan Losses		Charge-offs			Recoveries		Net charge-offs			September 30, 2011
Commercial and industrial	$	26,619	$	18,478	$	(34,722	)	$	2,848	$	(31,874	)	$	13,223
Small business		16,334		3,026		(9,063	)		523		(8,540	)		10,820
Commercial real estate		156,623		59,880		(140,952	)		1,688		(139,264	)		77,239
Total commercial		199,576		81,384		(184,737	)		5,059		(179,678	)		101,282
Residential mortgage		47,623		15,989		(26,431	)		236		(26,195	)		37,417
Direct consumer		32,255		22,422		(19,388	)		2,577		(16,811	)		37,866
Indirect consumer		16,577		4,006		(8,541	)		1,747		(6,794	)		13,789
Total	$	296,031	$	123,801	$	(239,097	)	$	9,619	$	(229,478	)	$	190,354

The activity within the allowance for loan losses, for the three and nine months ended September 30, 2011 is presented below.

	September 30, 2011
	Allowance for		Allowance for
	Loans Individually		Loans Collectively				Total
	Evaluated for		Evaluated for		Unallocated		Allowance for
(in thousands)	Impairment		Impairment		Allowance		Loan Losses
Commercial and industrial	$	96	$	13,127	$	—	$	13,223
Small business		3		10,817		—		10,820
Commercial real estate		6,148		67,091		4,000		77,239
Total commercial		6,247		91,035		4,000		101,282
Residential mortgage		2,540		34,877		—		37,417
Direct consumer		184		37,682		—		37,866
Indirect consumer		—		13,789		—		13,789
Total allowance for loan losses	$	8,971	$	177,383	$	4,000	$	190,354

	September 30, 2011
	Recorded Investment		Recorded Investment
	of Loans Individually		of Loans Collectively					Total
	Evaluated for		Evaluated for		Unearned			Recorded
(in thousands)	Impairment		Impairment		(Fees)/Costs			Investment
Commercial and industrial	$	11,588	$	1,219,532	$	245		$	1,231,365
Small business		65		299,858		204			300,127
Commercial real estate		41,799		1,604,010		(1,908	)		1,643,901
Total commercial		53,452		3,123,400		(1,459	)		3,175,393
Residential mortgage		11,701		643,582		(722	)		654,561
Direct consumer		1,624		953,804		(597	)		954,831
Indirect consumer		—		867,470		20,072			887,542
Total portfolio loans	$	66,777	$	5,588,256	$	17,294		$	5,672,327

	December 31, 2010
	Allowance for		Allowance for
	Loans Individually		Loans Collectively				Total
	Evaluated for		Evaluated for		Unallocated		Allowance for
(in thousands)	Impairment		Impairment		Allowance		Loan Losses
Commercial and industrial	$	9,298	$	17,321	$	—	$	26,619
Small business		173		16,161		—		16,334
Commercial real estate		23,519		128,604		4,500		156,623
Total commercial		32,990		162,086		4,500		199,576
Residential mortgage		1,110		46,513		—		47,623
Direct consumer		130		32,125		—		32,255
Indirect consumer		—		16,577		—		16,577
Total allowance for loan losses	$	34,230	$	257,301	$	4,500	$	296,031

	December 31, 2010
	Recorded Investment		Recorded Investment
	of Loans Individually		of Loans Collectively					Total
	Evaluated for		Evaluated for		Unearned			Recorded
(in thousands)	Impairment		Impairment		(Fees)/Costs			Investment
Commercial and industrial	$	42,251	$	1,085,404	$	12,872		$	1,140,527
Small business		1,254		332,267		179			333,700
Commercial real estate		98,408		2,024,321		(1,994	)		2,120,735
Total commercial		141,913		3,441,992		11,057			3,594,962
Residential mortgage		5,358		749,368		1,519			756,245
Direct consumer		1,175		1,047,286		(2,931	)		1,045,530
Indirect consumer		—		802,894		16,971			819,865
Total portfolio loans	$	148,446	$	6,041,540	$	26,616		$	6,216,602

Impaired loans. A loan is considered impaired when Citizens determines that it is probable that all the contractual principal and interest due under the loan may not be collected. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Citizens recognized $0.3 million and $1.9 million of interest income on nonperforming loans for the three and nine months ended September 30, 2011, respectively. Had nonaccrual loans performed in accordance with their original contract terms, the Corporation would have recognized additional interest income of approximately $1.6 million and $3.6 million for the three and nine months ended September 30, 2011, respectively. There were no significant commitments outstanding to lend additional funds to clients whose loans were classified as restructured at September 30, 2011.

A summary of information regarding loans individually reviewed for impairment, segregated by class, as of September 30, 2011 and December 31, 2010, are set forth in the following table.

	September 30, 2011
											Average Recorded Investment
	Unpaid		Recorded
	Contractual		Investment with		Recorded				Specific
	Principal		No Specific		Investment with		Total Recorded		Related		Quarter To
(in thousands)	Balance		Allowance		Specific Allowance		Investment		Allowance		Date		Year To Date
Nonaccrual loans (impaired)
Land hold	$	—	$	—	$	—	$	—	$	—	$	—	$	1,003
Land development		—		—		—		—		—		170		1,341
Construction		491		93		164		257		4		329		3,513
Income producing		27,646		12,432		7,545		19,977		1,626		18,506		37,219
Owner-occupied		24,955		10,384		11,181		21,565		4,518		18,681		27,027
Total commercial real estate		53,092		22,909		18,890		41,799		6,148		37,686		70,103
Commercial and industrial		20,099		10,689		899		11,588		96		12,452		26,920
Small business		131		—		65		65		3		66		660
Total commercial		73,322		33,598		19,854		53,452		6,247		50,204		97,683
Residential mortgage		11,540		—		11,540		11,540		2,509		11,752		8,368
Direct consumer		1,627		—		1,524		1,524		169		1,279		1,299
Total consumer		13,167		—		13,064		13,064		2,678		13,031		9,667
Total nonaccrual loans (impaired)		86,489		33,598		32,918		66,516		8,925		63,235		107,350
Accrual loans (impaired)
Residential mortgage		161		—		161		161		31		161		161
Direct consumer		100		—		100		100		15		360		101
Total accrual loans (impaired)		261		—		261		261		46		521		262
Total impaired loans	$	86,750	$	33,598	$	33,179	$	66,777	$	8,971	$	63,756	$	107,612

	December 31, 2010
											Average
											Recorded
											Investment
	Unpaid		Recorded
	Contractual		Investment with		Recorded				Specific
	Principal		No Specific		Investment with		Total Recorded		Related		Quarter To
(in thousands)	Balance		Allowance		Specific Allowance		Investment		Allowance		Date
Nonaccrual loans (impaired)
Land hold	$	2,007	$	—	$	2,007	$	2,007	$	1,719	$	2,882
Land development		5,954		1,224		1,458		2,682		842		16,526
Construction		9,151		—		6,769		6,769		1,413		22,752
Income producing		76,310		21,315		33,145		54,460		11,759		112,214
Owner-occupied		39,018		13,153		19,337		32,490		7,786		50,976
Total commercial real estate		132,440		35,692		62,716		98,408		23,519		205,350
Commercial and industrial		51,300		9,357		32,894		42,251		9,298		45,521
Small business		1,272		445		809		1,254		173		714
Total commercial		185,012		45,494		96,419		141,913		32,990		251,585
Residential mortgage		5,196		—		5,196		5,196		1,079		5,129
Direct consumer		1,127		—		1,074		1,074		115		1,107
Total consumer		6,323		—		6,270		6,270		1,194		6,236
Total nonaccrual loans (impaired)		191,335		45,494		102,689		148,183		34,184		257,821
Accrual loans (impaired)
Residential mortgage		162		—		162		162		31		163
Direct consumer		101		—		101		101		15		26
Total accrual loans (impaired)		263		—		263		263		46		189
Total impaired loans	$	191,598	$	45,494	$	102,952	$	148,446	$	34,230	$	258,010

Troubled Debt Restructurings. A modified loan is considered a Troubled Debt Restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made that would not otherwise be considered for a borrower with similar credit characteristics. While commercial loan modifications vary depending on circumstances, the most common types of modifications for residential and consumer loans include below market rate reductions and/or maturity extensions, and generally do not include forgiveness of principal balances. Modified terms are dependent upon the financial position and needs of the individual borrower Citizens does not employ modification programs for temporary or trial periods, all modifications are permanent. The modified loan does not revert back to its original terms, even if the modified loan agreement is violated. If the modification agreement is violated, the loan is handled by the special loans group for resolution, which may result in foreclosure.

Citizens classifies TDRs as nonaccruing loans unless the loan qualified for accruing status at the time of the restructure, or the loan has performed according to the new contractual terms for at least six months. To qualify for accruing status at the time of the restructure, the original loan must have been less than 90 days past due at the time of the restructure and the modification must not have resulted in an impairment. At September 30, 2011 the majority of Citizens’ TDRs are on nonaccrual status and are reported as impaired. Impaired and TDR classifications may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring. Otherwise, TDRs are classified as impaired loans and TDRs for the remaining life of the loan.

The recorded investment balance of TDRs approximated $35.5 million at September 30, 2011. $12.2 million of TDRs were on accrual status and $23.3 million of TDRs were on nonaccrual status at September 30, 2011. TDRs are evaluated separately in Citizens’ allowance for loan loss methodology based on the expected cash flows for loans in this status. At September 30, 2011, the allowance for loan losses included specific reserves of $2.1 million which included $2.5 million related to mortgage TDRs and $0.2 million related to direct consumer TDRs. For the three and nine months ended September 30, 2011, Citizens charged off $2.1 million and $6.0 million, respectively, for the portion of TDRs deemed to be uncollectible.

The following table provides information on loans modified as a TDR during the three and nine months ended September 30, 2011.

			Three Months Ended September 30, 2011
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number		Recorded		Recorded		Coupon
(in thousands)	of Loans		Investment		Investment		Rate
Residential mortgage		10	$	2,265	$	2,411		2.3	%
Direct consumer		1		331		336		5.1
Total portfolio loans		11	$	2,596	$	2,747		2.6

			Nine Months Ended September 30, 2011
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number		Recorded		Recorded		Coupon
(in thousands)	of Loans		Investment		Investment		Rate
Commercial and industrial		2	$	1,807	$	1,807		6.5	%
Commercial real estate		2		11,988		8,283		7.4
Total commercial		4		13,795		10,090		7.2
Residential mortgage		32		8,092		8,365		2.8
Direct consumer		7		1,599		1,605		6.3
Total portfolio loans		43	$	23,486	$	20,060		5.3

The following table provides information on how loans were modified as a TDR during the three and nine months ended September 30, 2011.

	Three Months Ended
	September 30, 2011
	Recorded
(in thousands)	Investment
Interest rate adjustments	$	2,215
Combination of rate and maturity		532
Total	$	2,747

	Nine Months Ended
	September 30, 2011
	Recorded
(in thousands)	Investment
|
Extended maturity	$	2,202
Interest rate adjustments		6,989
Combination of rate and maturity		10,689
Total	$	20,060

A TDR loan is considered to have a payment default when one or more payments is over 90 days past due. During the nine months ended September 30, 2011 there were two loans of approximately $0.4 million in payment default.