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Allowance for Loan Losses
 6 Months Ended
Jun. 30, 2011
Allowance for Loan Losses  
Allowance for Loan Losses

Note 4.  Allowance for Loan Losses

 

The Company has established an allowance for loan losses to account for probable incurred losses inherent in the loan portfolio as of the date of the balance sheet.  The allowance is comprised of three components: specific credit allocation, general portfolio allocation, and a qualitatively determined allocation.  The specific credit allocation is assigned to loans that have been individually evaluated for impairment, such as loans placed on non-accrual status and any other loan which Management has identified as impaired.  The general portfolio allocation is determined by collectively evaluating pools of loans and applying historical loss factors across the various credit risk grades and loan segments in the portfolio.  The qualitatively determined allocation is determined through judgments the Company makes regarding certain qualitative factors that may impact the credit quality of various segments of the loan portfolio.

 

Specific Credit Allocation

 

The specific credit allocation of the allowance is determined through the measurement of impairment on certain loans that have been identified during each reporting period as impaired.  A loan is considered impaired when, based on certain information and events surrounding a borrower, it is determined that the likelihood of the Company receiving all scheduled payments, including interest, when due is remote.  Once a loan is classified as impaired, the Company places the loan under the supervision of its Special Assets department.  The Special Assets department is responsible for performing comprehensive analyses of impaired loans, including obtaining updated financial information regarding the borrower, obtaining updated appraisals on any collateral securing such loans and ultimately determining the extent to which such loans are impaired.  Once the amount of impairment on specific impaired loans has been determined, the Company establishes a corresponding valuation allowance which then becomes a component of the Company’s specific credit allocation in the allowance for loan losses.

 

General Portfolio Allocation

 

The general portfolio allocation of the allowance is determined by pooling performing loans by collateral type and purpose, such as the stratification presented in Note 3.  These loans are then further segmented by an internal loan grading system that classifies loans as: pass, special mention, substandard and doubtful.  Estimated loss rates are then applied to each segment according to loan grade to determine the amount of the general portfolio allocation.  Estimated loss rates are determined through an analysis of historical loss rates for each segment of the loan portfolio, based on the Company’s prior experience with such loans.

 

Qualitative Portfolio Allocation

 

The qualitatively determined allocation of the allowance is determined by estimates the Company makes in regard to certain internal and external factors that may have either a positive or negative impact on the overall credit quality of the loan portfolio.  Internal factors include trends in credit quality of the loan portfolio, the existence and the effects of concentrations, the composition and volume of the loan portfolio and the quality of loan review as well as any other factor determined by Management to have an impact on the credit quality of the loan portfolio.  External factors include local, state and national economic and business conditions.  While Management regularly reviews the estimated impact these internal and external factors are expected to have on the loan portfolio, there can be no assurance that an adverse change in any one or combination of these factors will not be in excess of Management’s expectations.

 

The determination of the amount of the allowance and any corresponding increase or decrease in the level of provisions for loan losses is based on Management’s best estimate of the current credit quality of the loan portfolio and any probable inherent losses as of the balance sheet date.  The nature of the process in which Management determines the appropriate level of the allowance involves the exercise of considerable judgment and the use of estimates.  While Management utilizes its best judgment and all available information in determining the adequacy of the allowance, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including but not limited to, the performance of the loan portfolio, changes in current and future economic conditions and the view of regulatory agencies regarding the level of classified assets.  Continued weakness in economic conditions and any other factor that may adversely affect credit quality, result in higher levels of past due and non-accruing loans, defaults, and additional loan charge-offs, which may require additional provisions for loan losses in future periods and a higher balance in the Company’s allowance for loan losses.

 

Each segment of loans in the portfolio possess varying degrees of risk, based on, among other things, the type of loan being made, the purpose of the loan, the type of collateral securing the loan, and the sensitivity the borrower has to changes in certain external factors such as economic conditions.  The following provides a summary of the risks associated with various segments of the Company’s loan portfolio, which are factors Management regularly considers when evaluating the adequacy of the allowance:

 

·  Real estate secured – consist primarily of loans secured by commercial real estate, multi-family, farmland, and 1-4 family residential properties.  Also included in this segment are equity lines of credit secured by real estate.  As the majority of this segment is comprised of commercial real estate loans, risks associated with this segment lie primarily within that loan type.  Adverse economic conditions may result in a decline in business activity and increased vacancy rates for commercial properties.  These factors, in conjunction with a decline in real estate prices, may expose the Company to the potential for losses if a borrower cannot continue to service the loan with operating revenues, and the value of the property has declined to a level such that it no longer fully covers the Company’s recorded investment in the loan.

 

·  Commercial and Industrial – consist primarily of commercial and industrial loans (business lines of credit), agriculture loans, and other commercial purpose loans.  Repayment of commercial and industrial loans is generally provided from the cash flows of the related business to which the loan was made.  Adverse changes in economic conditions may result in a decline in business activity, which can impact a borrower’s ability to continue to make scheduled payments.  The risk of repayment of agriculture loans arises largely from factors beyond the control of the Company or the related borrower, such as commodity prices and weather conditions.

 

·  Construction / Land segments – although construction and land loans generally possess a higher inherent risk of loss than other portfolio segments, improvements in the mix, collateral and nature of loans in this segment have resulted in an improvement in the risk profile of this segment of the portfolio.  Risk arises from the necessity to complete projects within specified cost and time limits.  Trends in the construction industry may also impact the credit quality of these loans, as demand drives construction activity.  In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of future construction projects.

 

·  Installment – the installment loan portfolio is comprised primarily of a large number of small loans with scheduled amortization over a specific period. The majority of installment loans are made for consumer and business purchases.  Weakened economic conditions may result in an increased level of delinquencies within this segment, as economic pressures may impact the capacity of such borrowers to repay their obligations.

 

The following table summarizes the allocation of the allowance, as well as the activity in the allowance attributed to various segments in the loan portfolio as of and for the three and six months ended June 30, 2011:

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

All Other

 

 

 

(dollar amounts in thousands)

 

Secured

 

Commercial

 

Construction

 

Land

 

Installment

 

Loans

 

Total

 

Balance, March 31, 2011

 

$

11,940

 

$

9,796

 

$

998

 

$

1,414

 

$

195

 

$

24

 

$

24,367

 

Charge-offs

 

(3,251

)

(1,879

)

-    

 

(94

)

(114

)

-    

 

(5,338

)

Recoveries

 

33

 

226

 

88

 

15

 

10

 

-    

 

372

 

Provision for loan losses

 

1,326

 

(73

)

(586

)

1,551

 

83

 

(2

)

2,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2011

 

$

10,048

 

$

8,070

 

$

500

 

$

2,886

 

$

174

 

$

22

 

$

21,700

 

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

All Other

 

 

 

(dollar amounts in thousands)

 

Secured

 

Commercial

 

Construction

 

Land

 

Installment

 

Loans

 

Total

 

Balance, December 31, 2010

 

$

11,885

 

$

9,507

 

$

1,353

 

$

2,000

 

$

166

 

$

29

 

$

24,940

 

Charge-offs

 

(4,828

)

(2,854

)

(291

)

(768

)

(133

)

-    

 

(8,874

)

Recoveries

 

42

 

1,051

 

111

 

129

 

17

 

-    

 

1,350

 

Provision for loan losses

 

2,949

 

366

 

(673

)

1,525

 

124

 

(7

)

4,284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2011

 

$

10,048

 

$

8,070

 

$

500

 

$

2,886

 

$

174

 

$

22

 

$

21,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of allowance attributed to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specifically evaluated impaired loans

 

$

917

 

$

605

 

$

-    

 

$

102

 

$

-    

 

$

-    

 

$

1,624

 

General portfolio allocation

 

$

9,131

 

$

7,465

 

$

500

 

$

2,784

 

$

174

 

$

22

 

$

20,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated  for impairment

 

$

14,535

 

$

3,445

 

$

1,292

 

$

3,724

 

$

-    

 

$

-    

 

$

22,996

 

Specific reserves to total loans individually evaluated for impairment

 

6.31%

 

17.56%

 

0.00%

 

2.74%

 

0.00%

 

0.00%

 

7.06%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans collectively evaluated  for impairment

 

$

432,306

 

$

152,844

 

$

23,146

 

$

26,078

 

$

6,748

 

$

213

 

$

641,335

 

General reserves to total loans collectively evaluated for impairment

 

2.11%

 

4.88%

 

2.16%

 

10.68%

 

2.58%

 

10.33%

 

3.13%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross loans

 

$

446,841

 

$

156,289

 

$

24,438

 

$

29,802

 

$

6,748

 

$

213

 

$

664,331

 

Total allowance to gross loans

 

2.25%

 

5.16%

 

2.05%

 

9.68%

 

2.58%

 

10.33%

 

3.27%

 

 

The following table summarizes the allocation of the allowance, as well as the activity in the allowance attributed to various segments in the loan portfolio as of and for the year ended December 31, 2010:

 

 

 

Real Estate

 

 

 

 

 

 

 

 

 

All Other

 

 

 

(dollar amounts in thousands)

 

Secured

 

Commercial

 

Construction

 

Land

 

Installment

 

Loans

 

Total

 

Balance, December 31, 2009

 

$

6,851

 

$

4,814

 

$

1,007

 

$

1,644

 

$

40

 

$

16

 

$

14,372

 

Charge-offs

 

(5,500

)

(13,738

)

(1,259

)

(2,985

)

(371

)

-    

 

(23,853

)

Recoveries

 

120

 

1,436

 

10

 

1,311

 

13

 

-    

 

2,890

 

Provisions for loan losses

 

10,414

 

16,995

 

1,595

 

2,030

 

484

 

13

 

31,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2010

 

$

11,885

 

$

9,507

 

$

1,353

 

$

2,000

 

$

166

 

$

29

 

$

24,940

 

Amount of allowance attributed to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specifically evaluated impaired loans

 

$

1,085

 

$

461

 

$

476

 

$

235

 

$

-    

 

$

-    

 

$

2,257

 

General portfolio allocation

 

$

10,800

 

$

9,046

 

$

877

 

$

1,765

 

$

166

 

$

29

 

$

22,683

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

20,260

 

$

2,503

 

$

2,560

 

$

3,372

 

$

94

 

$

-    

 

$

28,789

 

Specific reserves to total loans individually evaluated for impairment

 

5.36%

 

18.42%

 

18.59%

 

6.97%

 

0.00%

 

0.00%

 

7.84%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans collectively evaluated for impairment

 

$

413,701

 

$

158,629

 

$

41,359

 

$

27,313

 

$

7,298

 

$

214

 

$

648,514

 

General reserves to total loans collectively evaluated for impairment

 

2.61%

 

5.70%

 

2.12%

 

6.46%

 

2.27%

 

13.55%

 

3.50%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross loans

 

$

433,961

 

$

161,132

 

$

43,919

 

$

30,685

 

$

7,392

 

$

214

 

$

677,303

 

Total allowance to gross loans

 

2.74%

 

5.90%

 

3.08%

 

6.52%

 

2.25%

 

13.55%

 

3.68%

 

 

Total charge-offs for the six months ended June 30, 2011 included a $4.4 million charge-off upon the transfer of certain loans to held for sale status during the period.

 

For comparative purposes, the following table summarizes activity in the allowance for loan losses for the three and six months ended June 30, 2010:

 

 

 

For the three

 

For the six

 

 

 

months ended

 

months ended

 

(dollars in thousands)

 

June 30, 2010

 

June 30, 2010

 

Balance at beginning of period

 

$

18,559

 

$

14,372

 

Provisions for loan losses

 

16,100

 

21,300

 

Loans charged-off:

 

 

 

 

 

Commercial real estate

 

2,583

 

2,583

 

Farmland

 

235

 

235

 

Residential 1-4 family

 

282

 

282

 

Commercial and industrial

 

7,869

 

8,818

 

Agriculture

 

1,209

 

1,209

 

Construction

 

525

 

988

 

Land

 

956

 

956

 

Other

 

9

 

107

 

 

 

 

 

 

 

Total loan charge-offs

 

13,668

 

15,178

 

 

 

 

 

 

 

Recoveries of loans previously charged off

 

1,143

 

1,640

 

 

 

 

 

 

 

Balance at end of period

 

$

22,134

 

$

22,134