Allowance for Loan Losses

6 Months Ended

Jun. 30, 2012

Allowance for Loan Losses [Abstract]

Allowance for Loan Losses

(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 lending policies and procedures

• Changes in experience and depth of lending and management staff

• Changes in quality of Bank’s credit review system

• Changes in nature and volume of the loan portfolio

• Changes in past due, classified and nonaccrual loans and TDRs

• Changes in economic and business conditions

• Changes in competition or legal and regulatory requirements

• Changes in concentrations within the loan portfolio

• Changes in the underlying collateral for collateral dependent loans

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 $21,931 adequate to cover loan losses inherent in the loan portfolio, at June 30, 2012. 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, 2012 and December 31, 2011. 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 for consumer 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 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 six months ending June 30, 2012
Allowance for loan losses:
Beginning balance	$	2,876		$	10,571		$	5,796		$	974		$	719		$	321		$	21,257
Charge-offs		(418	)		(1,639	)		(1,469	)		(105	)		(125	)		—			(3,756	)
Recoveries		100			175			161			113			16			—			565
Provision		(21	)		2,594			1,891			113			(348	)		(364	)		3,865
Ending Balance	$	2,537		$	11,701		$	6,379		$	1,095		$	262		$	(43	)	$	21,931

	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

	Commercial			Commercial			Residential			Real Estate
	& Agriculture			Real Estate			Real Estate			Construction		Consumer			Unallocated			Total
For the three months ending June 30, 2012
Allowance for loan losses:
Beginning balance	$	3,042		$	10,970		$	6,257		$	857	$	603		$	295		$	22,024
Charge-offs		(286	)		(863	)		(703	)		—		(81	)		—			(1,933	)
Recoveries		65			151			109			52		(2	)		—			375
Provision		(284	)		1,443			716			186		(258	)		(338	)		1,465
Ending Balance	$	2,537		$	11,701		$	6,379		$	1,095	$	262		$	(43	)	$	21,931

	Commercial			Commercial			Residential			Real Estate
	& Agriculture			Real Estate			Real Estate			Construction			Consumer			Unallocated		Total
For the three months ending June 30, 2011
Allowance for loan losses:
Beginning balance	$	3,509		$	11,680		$	5,971		$	1,712		$	690		$	94	$	23,656
Charge-offs		(724	)		(2,086	)		(1,711	)		(529	)		(38	)		—		(5,088	)
Recoveries		119			66			23			250			23			—		481
Provision		(83	)		1,053			1,901			(237	)		(5	)		71		2,700
Ending Balance	$	2,821		$	10,713		$	6,184		$	1,196		$	670		$	165	$	21,749

	Commercial & Agriculture		Commercial Real Estate		Residential Real Estate		Real Estate Construction		Consumer		Unallocated			Total
June 30, 2012
Allowance for loan losses:
Ending balance:
Individually evaluated for impairment	$	264	$	3,092	$	953	$	74	$	44	$	—		$	4,427
Ending balance:
Collectively evaluated for impairment	$	2,273	$	8,609	$	5,426	$	1,021	$	218	$	(43	)	$	17,504
Ending Balance	$	2,537	$	11,701	$	6,379	$	1,095	$	262	$	(43	)	$	21,931
Loan balances outstanding:
Ending balance:
Individually evaluated for impairment	$	5,182	$	15,570	$	3,698	$	331	$	46				$	24,827
Ending balance:
Collectively evaluated for impairment	$	72,878	$	373,328	$	250,781	$	41,995	$	10,200				$	749,182
Ending Balance	$	78,060	$	388,898	$	254,479	$	42,326	$	10,246				$	774,009

	Commercial & Agriculture		Commercial Real Estate		Residential Real Estate		Real Estate Construction		Consumer		Unallocated		Total
December 31, 2011
Allowance for loan losses:
Ending balance:
Individually evaluated for impairment	$	618	$	3,094	$	860	$	239	$	—	$	—	$	4,811
Ending balance:
Collectively evaluated for impairment	$	2,258	$	7,477	$	4,936	$	735	$	719	$	321	$	16,446
Ending Balance	$	2,876	$	10,571	$	5,796	$	974	$	719	$	321	$	21,257
Loan balances outstanding:
Ending balance:
Individually evaluated for impairment	$	5,258	$	17,700	$	3,846	$	576	$	—			$	27,380
Ending balance:
Collectively evaluated for impairment	$	81,137	$	354,152	$	271,149	$	39,214	$	12,236			$	757,888
Ending Balance	$	86,395	$	371,852	$	274,995	$	39,790	$	12,236			$	785,268

The following table represents credit exposures by internally assigned grades for the period ended June 30, 2012 and December 31, 2011. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. Residential real estate loans with an internal credit risk grade include commercial loans that are secured by conventional 1-4 family residential properties. Real estate construction loans with an internal credit risk grade include commercial construction, land development and other land loans. 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.

June 30, 2012	Commercial & Agriculture		Commercial Real Estate		Residential Real Estate		Real Estate Construction		Consumer		Total
Pass	$	68,583	$	340,403	$	88,941	$	36,516	$	773	$	535,216
Special Mention		3,392		14,404		2,933		687		—		21,416
Substandard		6,085		34,091		13,350		2,559		11		56,096
Doubtful		—		—		—		—		—		—
Ending Balance	$	78,060	$	388,898	$	105,224	$	39,762	$	784	$	612,728

December 31, 2011	Commercial & Agriculture		Commercial Real Estate		Residential Real Estate		Real Estate Construction		Consumer		Total
Pass	$	73,011	$	319,084	$	92,577	$	31,697	$	2,208	$	518,577
Special Mention		4,358		15,321		5,071		702		—		25,452
Substandard		9,026		37,447		17,764		5,067		—		69,304
Doubtful		—		—		—		—		—		—
Ending Balance	$	86,395	$	371,852	$	115,412	$	37,466	$	2,208	$	613,333

The following tables present performing and nonperforming loans based solely on payment activity for the period ended June 30, 2012 and December 31, 2011 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		Real Estate Construction		Consumer		Total
June 30, 2012
Performing	$	148,623	$	2,564	$	9,442	$	160,629
Nonperforming		632		—		20		652
Total	$	149,255	$	2,564	$	9,462	$	161,281

	Residential Real Estate		Real Estate Construction		Consumer		Total
December 31, 2011
Performing	$	159,291	$	2,324	$	10,027	$	171,642
Nonperforming		292		—		1		293
Total	$	159,583	$	2,324	$	10,028	$	171,935

The following table includes an aging analysis of the recorded investment of past due loans outstanding as of June 30, 2012 and December 31, 2011.

													Past Due
	30-59		60-89										90 Days
	Days		Days		90 Days or		Total Past						and
June 30, 2012	Past Due		Past Due		Greater		Due		Current		Total Loans		Accruing
Commericial & Agriculture	$	114	$	153	$	619	$	886	$	77,174	$	78,060	$	239
Commercial Real Estate		3,851		2,344		10,099		16,294		372,604		388,898		—
Residential Real Estate		2,385		1,328		5,262		8,975		245,504		254,479		20
Real Estate Construction		—		628		382		1,010		41,316		42,326		—
Consumer		126		38		20		184		10,062		10,246		20
Total	$	6,476	$	4,491	$	16,382	$	27,349	$	746,660	$	774,009	$	279

													Past Due
	30-59		60-89										90 Days
	Days		Days		90 Days or		Total Past						and
December 31, 2011	Past Due		Past Due		Greater		Due		Current		Total Loans		Accruing
Commericial & Agriculture	$	229	$	174	$	509	$	912	$	85,483	$	86,395	$	19
Commercial Real Estate		4,156		1,369		9,466		14,991		356,861		371,852		737
Residential Real Estate		3,614		1,182		6,504		11,300		263,695		274,995		511
Real Estate Construction		—		—		45		45		39,745		39,790		45
Consumer		89		16		2		107		12,129		12,236		2
Total	$	8,088	$	2,741	$	16,526	$	27,355	$	757,913	$	785,268	$	1,314

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 presents loans on nonaccrual status as of June 30, 2012 and December 31, 2011.

	June 30, 2012		December 31, 2011
Commericial & Agriculture	$	576	$	940
Commercial Real Estate		15,287		15,346
Residential Real Estate		10,668		8,915
Real Estate Construction		610		567
Consumer		11		—
Total	$	27,152	$	25,768

Loan modifications that are considered troubled debt restructurings completed during the quarter and six month periods ended June 30, 2012 were as follows:

	For the Quarter Ended June 30, 2012
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commericial & Agriculture		1	$	442	$	442
Commercial Real Estate		—		—		—
Residential Real Estate		15		865		786
Real Estate Construction		—		—		—
Consumer		4		46		46
Total Loan Modifications		20	$	1,353	$	1,274

	For the Six-Month Period Ended June 30, 2012
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commericial & Agriculture		4	$	487	$	479
Commercial Real Estate		3		1,206		1,206
Residential Real Estate		20		865		786
Real Estate Construction		—		—		—
Consumer		4		46		46
Total Loan Modifications		31	$	2,604	$	2,517

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 origination loans, so modified loans present a higher risk of loss than do new origination loans.

During the six-month period ended June 30, 2012, there were no defaults on any loans which were modified and considered TDRs during the twelve months previous to June 30, 2012.

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.

The following tables include the recorded investment and unpaid principal balances for impaired financing receivables with the associated allowance amount, if applicable, as of June 30, 2012 and December 31, 2011.

June 30, 2012	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commericial & Agriculture	$	4,907	$	6,716	$	—	$	4,102	$	176
Commercial Real Estate		3,553		6,716		—		6,167		409
Residential Real Estate		1,259		1,694		—		1,849		124
Real Estate Construction		—		37		—		78		2
Consumer and Other		2		2		—		1		—
Total		9,721		15,165		—		12,197		711
With an allowance recorded:
Commericial & Agriculture	$	276	$	286	$	264	$	270	$	4
Commercial Real Estate		12,017		12,900		3,092		10,665		294
Residential Real Estate		2,438		3,670		953		2,161		121
Real Estate Construction		331		859		74		336		—
Consumer and Other		44		44		44		15		—
Total		15,106		17,759		4,427		13,447		419
Total:
Commericial & Agriculture	$	5,183	$	7,002	$	264	$	4,372	$	180
Commercial Real Estate		15,570		19,616		3,092		16,832		703
Residential Real Estate		3,697		5,364		953		4,010		245
Real Estate Construction		331		896		74		414		2
Consumer and Other		46		46		44		16		—
Total		24,827		32,924		4,427		25,644		1,130

December 31, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commericial & Agriculture	$	2,914	$	3,010	$	—	$	1,892	$	217
Commercial Real Estate		3,804		4,739		—		3,678		343
Residential Real Estate		862		953		—		1,468		60
Real Estate Construction		—		—		—		914		—
Total		7,580		8,702		—		7,952		620
With an allowance recorded:
Commericial & Agriculture	$	2,344	$	3,645	$	618	$	2,822	$	264
Commercial Real Estate		13,896		16,534		3,094		9,851		925
Residential Real Estate		2,984		4,127		860		2,283		202
Real Estate Construction		576		1,103		239		448		17
Total		19,800		25,409		4,811		15,404		1,408
Total:
Commericial & Agriculture	$	5,258	$	6,655	$	618	$	4,714	$	481
Commercial Real Estate		17,700		21,273		3,094		13,529		1,268
Residential Real Estate		3,846		5,080		860		3,751		262
Real Estate Construction		576		1,103		239		1,362		17
Total		27,380		34,111		4,811		23,356		2,028