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( Continued) 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.
Loans that do not share risk characteristics are evaluated on an individual basis. When the borrower is experiencing financial difficulty and repayment is expected to be provided through the sale of the collateral, the expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
i. Allowance for Credit Losses- Unfunded Commitments Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’ s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
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