NEW INDEPENDENT BANCSHARES, INC. AND SUBSIDIARY Notes to the Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES( Continued)
h. Allowance for Credit Losses- Loans The allowance for credit losses is deducted from the loans ' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed and expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.
The allowance for credit losses represents management’ s estimate of lifetime credit losses inherent in the loan portfolio as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments and calculates the allowance for credit losses for each using a roll rate methodology:
Real Estate Loans: Real estate loans are either commercial or residential in nature.
● Commercial real estate lending is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or the general economy. Commercial real estate loans are collateralized by the borrower ' s underlying real estate. Therefore diminished cash flows not only affect the ability to repay the loan, it may reduce the underlying collateral value.
● Residential real estate loans are generally secured by 1-4 family residences that are owneroccupied. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by unemployment levels in the market area due to economic conditions. Repayment may also be impacted by changes in residential property values.
Commercial Non-Real Estate Loans: The principal risk of commercial and industrial loans is that these loans are primarily based on the identified cash flows of the borrower and secondarily on the collateral underlying the loans. Some commercial loans are secured by accounts receivable, inventory, and equipment. If cash flow from business operations is reduced, the borrower ' s ability to repay the loan may diminish, and over time, it may also be difficult to substantiate the current value of inventory and equipment. Repayment of these loans is more sensitive than other types of loans to adverse conditions in the general economy.
Installment: Installment loans include dealer loans and other types of consumer installment loans. These consumer-type loans are typically dependent on the borrower maintaining employment through the life of the loan as well as the borrower maintaining the underlying collateral adequately.
Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors and economic conditions not already captured.
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