Allowance for Loan Losses

6 Months Ended

Jun. 30, 2011

Allowance for Loan Losses [Abstract]

(4) Allowance for Loan Losses

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Corporation has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: Commercial and Agricultural loans, Commercial Real Estate loans, Real Estate Mortgage loans, Real Estate Construction loans and Consumer loans. Historical loss percentages for each risk category are calculated and used as the basis for calculating loan loss allowance allocations. These historical loss percentages are calculated over a three-year period for all portfolio segments. Certain economic factors are also considered for trends which management uses to establish the directionality of changes to the unallocated portion of the reserve. The following economic factors are analyzed:

•

Changes in economic and business conditions

•

Changes in lending policies and procedures

•

Changes in experience and depth of lending and management staff

•

Changes in concentrations within the loan portfolio

•

Changes in past due, classified and nonaccrual loans and Troubled Debt Restructurings (TDRs)

•

Changes in quality of Citizens’ credit review system

•

Changes in competition or legal and regulatory requirements

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Corporation considers the allowance for loan losses of $21,749 adequate to cover loan losses inherent in the loan portfolio, at June 30, 2011. The following tables present by portfolio segment, the changes in the allowance for loan losses and the loan balances outstanding for the period ended June 30, 2011 and December 31, 2010. Management has reviewed its analysis of the allowance for loan losses and made modifications to the beginning balances in this table. The analysis at December 31, 2010 was based on information available at the time. Since then we have improved our information systems and management reporting tools to allow us to better segregate the portfolio. In order to consistently provide this information, we have adjusted the beginning balances to correspond with the current methodology. The allowance for Real Estate Construction was reduced not only by charge-offs, but also due to a decrease in both the loan balances outstanding and the historical charge-offs for this type. The net result of which was a reduction in the allowance. The allowance related to the unallocated segment was also reduced. While the segment itself is lower, the reduction was the effect of distributing the impact of economic factors among the loan segments as an adjustment to the historical loss factor.


	Commercial			Commercial			Residential			Real Estate
	& Agriculture			Real Estate			Real Estate			Construction			Consumer			Unallocated			Total

For the six months ending June 30, 2011

Allowance for loan losses:

Beginning balance	$	3,639		$	9,827		$	4,569		$	2,139		$	726		$	868		$	21,768
Charge-offs		(908	)		(2,216	)		(2,423	)		(778	)		(109	)		—			(6,434	)
Recoveries		173			133			109			250			50			—			715
Provision		(83	)		2,969			3,929			(415	)		3			(703	)		5,700

Ending Balance	$	2,821		$	10,713		$	6,184		$	1,196		$	670		$	165		$	21,749

The allowance for loan losses activity is summarized as follows for June 30, 2010.


	2010
Balance January 1,	$	15,271
Loans charged-off		(4,945	)
Recoveries		266
Provision for loan losses		8,340

Balance June 30,	$	18,932


	Commercial		Commercial		Residential		Real Estate
	& Agriculture		Real Estate		Real Estate		Construction		Consumer		Unallocated		Total

June 30, 2011

Allowance for loan losses:

Ending balance:
Individually evaluated for impairment	$	674	$	2,575	$	133	$	38	$	369	$	—	$	3,789


Ending balance:
Collectively evaluated for impairment	$	2,147	$	8,138	$	6,051	$	1,158	$	301	$	165	$	17,960


Loan balances outstanding:

Ending Balance	$	79,834	$	351,706	$	285,098	$	37,816	$	11,171			$	765,625


Ending balance:
Individually evaluated for impairment	$	3,956	$	12,115	$	2,232	$	864	$	—			$	19,167


Ending balance:
Collectively evaluated for impairment	$	75,878	$	339,591	$	282,866	$	36,952	$	11,171			$	746,458


	Commercial		Commercial		Residential		Real Estate
	& Agriculture		Real Estate		Real Estate		Construction		Consumer		Unallocated		Total

December 31, 2010

Allowance for loan losses:

Ending balance:
Individually evaluated for impairment	$	1,322	$	1,384	$	355	$	375	$	427	$	—	$	3,863


Ending balance:
Collectively evaluated for impairment	$	3,055	$	4,220	$	8,307	$	1,156	$	299	$	868	$	17,905


Loan balances outstanding:

Ending Balance	$	84,913	$	336,251	$	295,038	$	39,341	$	11,780			$	767,323


Ending balance:
Individually evaluated for impairment	$	5,925	$	7,814	$	2,347	$	1,821	$	1,266			$	19,173


Ending balance:
Collectively evaluated for impairment	$	78,988	$	328,437	$	292,691	$	37,520	$	10,514			$	748,150

The following table represents credit exposures by internally assigned grades for the period ended June 30, 2011 and December 31, 2010. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Corporation’s internal credit risk grading system is based on experiences with similarly graded loans.

The Corporation’s internally assigned grades are as follows:

•

Pass — loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

•

Special Mention — loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

•

Substandard — loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that Citizens will sustain some loss if the deficiencies are not corrected.

•

Doubtful — loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

•

Loss — loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

•

Unrated— Generally, consumer loans are not risk-graded, except when collateral is used for a business purpose Commercial


	Commercial
	&		Commercial		Residential		Real Estate		Consumer
June 30, 2011	Agriculture		Real Estate		Real Estate		Construction		and Other		Total

Pass	$	66,660	$	298,641	$	102,464	$	28,384	$	725	$	496,874
Special Mention		3,025		16,122		6,130		876		—		26,153
Substandard		9,711		35,063		12,921		6,243		—		63,938
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—

Ending Balance	$	79,396	$	349,826	$	121,515	$	35,503	$	725	$	586,965


	Commercial
	&		Commercial		Residential		Real Estate		Consumer
December 31, 2010	Agriculture		Real Estate		Real Estate		Construction		and Other		Total

Pass	$	70,825	$	284,083	$	111,248	$	28,815	$	556	$	495,527
Special Mention		2,972		12,674		2,821		937		—		19,404
Substandard		11,116		39,416		16,482		7,492		44		74,550
Doubtful		—		78		—		—		—		78
Loss		—		—		—		—		—		—

Ending Balance	$	84,913	$	336,251	$	130,551	$	37,244	$	600	$	589,559

The following table present performing and nonperforming loans based solely on payment activity for the period ended June 30, 2011 and December 31, 2010. Payment activity is reviewed by management on a monthly basis to determine how loans are performing. Loans are considered to be nonperforming when they become 90 days past due. Nonperforming loans also include certain loans that have been modified in TDRs where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Corporation’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.


	Commercial
	&		Commerical		Residential		Real Estate		Consumer
	Agriculture		Real Estate		Real Estate		Construction		and Other		Total

June 30, 2011
Performing	$	438	$	1,880	$	162,752	$	2,313	$	10,435	$	177,818
Nonperforming		—		—		831		—		11		842

Total	$	438	$	1,880	$	163,583	$	2,313	$	10,446	$	178,660


	Commercial
	&		Commerical		Residential		Real Estate		Consumer
	Agriculture		Real Estate		Real Estate		Construction		and Other		Total

December 31, 2010
Performing	$	—	$	—	$	162,702	$	2,097	$	11,169	$	175,968
Nonperforming		—		—		1,785		—		11		1,796

Total	$	—	$	—	$	164,487	$	2,097	$	11,180	$	177,764

Following is a table which includes an aging analysis of the recorded investment of past due loans outstanding as of June 30, 2011 and December 31, 2010.


	30-59		60-89		90 Days
	Days		Days		or		Total						Total
June 30, 2011	Past Due		Past Due		Greater		Past Due		Current		Nonaccrual		Loans

Commericial & Agriculture	$	510	$	704	$	498	$	1,712	$	75,853	$	2,269	$	79,834
Commercial Real Estate		5,048		734		1,447		7,229		332,470		12,007		351,706
Residential Real Estate		1,163		2,299		707		4,169		273,705		7,224		285,098
Real Estate Construction		—		—		649		649		35,962		1,205		37,816
Consumer and Other		52		11		11		74		11,097		—		11,171

Total	$	6,773	$	3,748	$	3,312	$	13,833	$	729,087	$	22,705	$	765,625


	30-59		60-89		90 Days
	Days		Days		or		Total						Total
December 31, 2010	Past Due		Past Due		Greater		Past Due		Current		Nonaccrual		Loans

Commericial & Agriculture	$	471	$	309	$	904	$	1,684	$	80,568	$	2,661	$	84,913
Commercial Real Estate		3,467		39		349		3,855		324,337		8,059		336,251
Residential Real Estate		3,042		340		382		3,764		281,688		9,586		295,038
Real Estate Construction		258		246		581		1,085		36,387		1,869		39,341
Consumer and Other		118		39		25		182		11,598		—		11,780

Total	$	7,356	$	973	$	2,241	$	10,570	$	734,578	$	22,175	$	767,323

Impaired Loans: Larger (greater than $350) commercial loans and commercial real estate loans, many of which are 60 days or more past due, are tested for impairment. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

Nonaccrual Loans: Loans are considered for nonaccrual status upon reaching 90 days delinquency, unless the loan is well secured and in the process of collection, although the Corporation may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income.

The following table includes the recorded investment and unpaid principal balances for impaired financing receivables with the associated allowance amount, if applicable as of June 30, 2011 and December 31, 2010.


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
June 30, 2011	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded:
Commericial & Agriculture	$	352	$	352	$	—	$	376	$	6
Commercial Real Estate		2,051		2,051		—		2,410		37
Residential Real Estate		252		252		—		941		5
Real Estate Construction		387		387		—		1,325		12
Consumer and Other		—		—		—		—		—

With an allowance recorded:
Commericial & Agriculture	$	3,150	$	3,604	$	454	$	3,902	$	156
Commercial Real Estate		7,294		10,064		2,770		9,267		231
Residential Real Estate		1,453		1,980		527		2,451		17
Real Estate Construction		439		477		38		477		20
Consumer and Other		—		—		—		—		—

Total:
Commericial & Agriculture	$	3,502	$	3,956	$	454	$	4,278	$	162
Commercial Real Estate		9,345		12,115		2,770		11,677		268
Residential Real Estate		1,705		2,232		527		3,392		22
Real Estate Construction		826		864		38		1,802		32
Consumer and Other		—		—		—		—		—


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
December 31, 2010	Investment		Balance		Allowance		Investment		Recognized

With no related allowance recorded:
Commericial & Agriculture	$	2,259	$	2,259	$	—	$	3,129	$	24
Commercial Real Estate		1,849		1,849		—		5,579		11
Residential Real Estate		635		635		—		2,035		31
Real Estate Construction		477		477		—		293		34
Consumer and Other		125		125		—		125		—

With an allowance recorded:
Commericial & Agriculture	$	3,346	$	3,665	$	1,322	$	1,612	$	191
Commercial Real Estate		4,582		5,966		1,384		4,569		256
Residential Real Estate		1,357		1,712		355		1,146		69
Real Estate Construction		969		1,344		375		1,377		7
Consumer and Other		1,145		1,141		427		1,145		31

Total:
Commericial & Agriculture	$	5,605	$	5,924	$	1,322	$	4,741	$	215
Commercial Real Estate		6,431		7,815		1,384		10,148		267
Residential Real Estate		1,992		2,347		355		3,181		100
Real Estate Construction		1,446		1,821		375		1,670		41
Consumer and Other		1,270		1,266		427		1,270		31