Allowance for Loan Losses

9 Months Ended

Sep. 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 $22,687 adequate to cover loan losses inherent in the loan portfolio, at September 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 September 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 loans 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 these changes was a reduction in the allowance for this loan type and is represented as a decrease in the provision. The allowance related to the unallocated segment was also reduced.


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

For the three months ending September 30, 2011

Allowance for loan losses:

Beginning balance	$	2,821		$	10,713		$	6,184		$	1,196		$	670		$	165	$	21,749
Charge-offs		(145	)		(710	)		(703	)		—			(42	)		—		(1,600	)
Recoveries		111			166			136			98			27			—		538
Provision		1,162			284			336			(83	)		(21	)		322		2,000

Ending Balance	$	3,949		$	10,453		$	5,953		$	1,211		$	634		$	487	$	22,687


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

For the nine months ending September 30, 2011

Allowance for loan losses:

Beginning balance	$	3,639		$	9,827		$	4,569		$	2,139		$	726		$	868		$	21,768
Charge-offs		(1,053	)		(2,926	)		(3,126	)		(778	)		(151	)		—			(8,034	)
Recoveries		284			299			245			348			77			—			1,253
Provision		1,079			3,253			4,265			(498	)		(18	)		(381	)		7,700

Ending Balance	$	3,949		$	10,453		$	5,953		$	1,211		$	634		$	487		$	22,687

The allowance for loan losses activity is summarized for the three and nine month periods ended September 30, 2010 as follows.


	Three			Nine
	Months			Months
	Ended			Ended
Balance beginning of period	$	18,932		$	15,271
Loans charged-off		(4,085	)		(9,030	)
Recoveries		653			919
Provision for loan losses		6,100			14,440

Balance Seotember 30, 2010	$	21,600		$	21,600


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

September 30, 2011

Allowance for loan losses:

Ending balance:
Individually evaluated for impairment	$	2,107	$	3,517	$	388	$	176	$	364	$	—	$	6,552


Ending balance:
Collectively evaluated for impairment	$	1,842	$	6,936	$	5,565	$	1,035	$	270	$	487	$	16,135


Loan balances outstanding:

Ending Balance	$	85,680	$	359,731	$	282,412	$	38,767	$	11,661			$	778,251


Ending balance:
Individually evaluated for impairment	$	5,474	$	16,992	$	3,995	$	834	$	—			$	27,295


Ending balance:
Collectively evaluated for impairment	$	80,206	$	342,739	$	278,417	$	37,933	$	11,661			$	750,956


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

Pass	$	71,389	$	309,086	$	99,733	$	29,366	$	1,214	$	510,788
Special Mention		2,015		12,761		5,591		754		—		21,121
Substandard		12,276		37,884		14,055		6,194		—		70,409
Doubtful		—		—		—		—		—		—

Ending Balance	$	85,680	$	359,731	$	119,379	$	36,314	$	1,214	$	602,318


	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

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

The following tables present performing and nonperforming loans based solely on payment activity for the period ended September 30, 2011 and December 31, 2010 that have not been assigned an internal risk grade. 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 Troubled Debt Restructurings (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.


	Residential		Real Estate		Consumer
	Real Estate		Construction		and Other		Total

September 30, 2011
Performing	$	162,202	$	2,453	$	10,436	$	175,091
Nonperforming		831		—		11		842

Total	$	163,033	$	2,453	$	10,447	$	175,933


	Residential		Real Estate		Consumer
	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 September 30, 2011 and December 31, 2010.


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

Commericial & Agriculture	$	139	$	274	$	406	$	819	$	81,366	$	3,495	$	85,680
Commercial Real Estate		2,718		3,407		194		6,319		341,494		11,918		359,731
Residential Real Estate		752		726		769		2,247		271,239		8,926		282,412
Real Estate Construction		1,067		47		—		1,114		37,006		647		38,767
Consumer and Other		73		35		7		115		11,546		—		11,661

Total	$	4,749	$	4,489	$	1,376	$	10,614	$	742,651	$	24,986	$	778,251


	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

Loan modifications that are considered troubled debt restructurings completed during the quarters and nine month periods ended September 20, 2011 were as follows:


	For the Quarter Ended September 30, 2011
			Pre-		Post-
			Modification		Modification
	Number		Outstanding		Outstanding
	of		Recorded		Recorded
	Contracts		Investment		Investment

Commericial & Agriculture		—	$	—	$	—
Commercial Real Estate		—		—		—
Residential Real Estate		1		143		144
Real Estate Construction		—		—		—
Consumer and Other		—		—		—

Total Loan Modifications		1	$	143	$	144


	For the Nine Month Period Ended September 30, 2011
			Pre-		Post-
			Modification		Modification
	Number		Outstanding		Outstanding
	of		Recorded		Recorded
	Contracts		Investment		Investment

Commericial & Agriculture		—	$	—	$	—
Commercial Real Estate		—		—		—
Residential Real Estate		1		143		144
Real Estate Construction		—		—		—
Consumer and Other		—		—		—

Total Loan Modifications		1	$	143	$	144

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new originations loans, so modified loans present a higher risk of loss than do new origination loans.

During the nine month period ended September 30, 2011, no loans modified and considered TDRs made during the twelve months previous to September 30, 2011, have defaulted.

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 September 30, 2011 and December 31, 2010.


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

With no related allowance recorded:
Commericial & Agriculture	$	1,858	$	1,950	$	—	$	1,829	$	123
Commercial Real Estate		2,482		3,561		—		2,936		223
Residential Real Estate		1,115		1,115		—		988		55
Real Estate Construction		—		—		—		667		—
Consumer and Other		—		—		—		—		—

With an allowance recorded:
Commericial & Agriculture	$	3,616	$	4,175	$	1,893	$	2,789	$	207
Commercial Real Estate		14,510		16,220		3,706		10,039		711
Residential Real Estate		2,880		3,447		776		2,586		139
Real Estate Construction		834		1,362		176		893		41
Consumer and Other		—		—		—		—		—

Total:
Commericial & Agriculture	$	5,474	$	6,125	$	1,893	$	4,618	$	330
Commercial Real Estate		16,992		19,781		3,706		12,975		934
Residential Real Estate		3,995		4,562		776		3,574		194
Real Estate Construction		834		1,362		176		1,560		41
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