Note 6. Loans

3 Months Ended

Sep. 30, 2011

Loans and Leases Receivable, Description

6.    Loans

Major classifications of loans are as follows as of  September 30, 2011 and December 31, 2010:

	September 30, 2011				December 31, 2010
Commercial	$	20,207,120		$	25,451,474
Real Estate
Construction		52,801,281			55,974,007
Commercial		292,769,929			285,862,944
Residential		296,180,755			319,789,488
Multifamily		38,443,240			41,073,712
Installment and Consumer		15,811,406			18,677,070
	$	716,213,731		$	746,828,695
Less:  Allowance for loan losses		(9,899,594	)		(9,526,592	)
Net Loans	$	706,314,137		$	737,302,103

Credit risk tends to be geographically concentrated in that 96% of the loan customers are located in the local markets serviced by the Bank in Wisconsin.  The Bank's extension of credit is governed by its credit risk policy which was established to control the quality of the Bank's loans. This policy is  reviewed and approved by the Board of Directors on a regular basis.

Commercial loans - Historically commercial and industrial (“C&I”) lending has been a small part of the Bank’s portfolio which continues to be the case in 2011.  C&I balances have decreased during these difficult economic times.  Reductions of outstanding balances on lines of credit have occurred as well as the demand for term financing as businesses made little, if any, investment in new equipment.  C&I loans are collateralized by general business assets such as accounts receivable, inventory and equipment and have no real estate component.  During weak economic periods the Bank can be exposed to heightened risk if a business is out of compliance with debtor covenants supporting C&I loans.  The Bank was active in policing such requirements prior to and at the beginning of the 2008 crisis.  Nearly three years later these issues have been largely resolved and this segment of loans presents minimal risk going forward.

Real estate construction loans - Loans to residential real estate developers comprise most of the dollars outstanding in real estate construction loans.  Historically, real estate construction loans have been made to developers who are well known to the Bank, have prior successful project experience and are well capitalized.  Loans are made to customers in the Bank’s Southeastern Wisconsin market with experience and knowledge of the local economy.  Real estate construction loans of this type are generally larger in size and involve greater risks than residential mortgage loans because payments depend on the success of the project or in the case of commercial development, successful management of the property.  The Bank will generally make credit extensions to borrowers with adequate outside liquidity to support the project in the event the actual performance is less than projected.  Developers with which the Bank does business have the ability to service the development debt personally or through their companies, however, these individuals are not immune to a weak economy. The Bank’s remaining real estate development loans are performing even three years into the economic downturn and our borrowers’ inventories are decreasing.  The greatest risk to the Bank within this segment is condominium development loans.  This group has been most severely affected by the prolonged economic downturn.  Risk factors the Bank inherits upon the failure of a developer include the existence and/or control of the condo association, the availability of term financing to initial buyers of units and partial project completion for common use areas.  The Bank does have condominium exposure in several other projects with aggregate loan balances of $4.0 million to the second developers following foreclosures.  These are the Bank’s customers who were able to buy incomplete developments at deep discounts from other banks that had foreclosed on the original developer.  In all cases the selling banks also agreed to fixed-rate mortgage loans to qualified borrowers at prevailing rates to allow the second developer to sell units without the issue of term financing availability.  This group of condominium loans presents a much lower risk.

Commercial real estate loans - The Bank’s commercial real estate lending efforts are focused on owner occupied, improved property such as office buildings, warehouses, small manufacturing operations and retail facilities located in its market areas.  The most significant risk factor in the third year of the financial crisis is occupancy. The fact that the Bank prefers owner occupied commercial real estate mitigates that risk, provided of course, the owner’s business survives.   The Bank’s $18.3 million per-borrower legal lending limit would permit it to compete for activity in the middle market, but management prefers to seek small businesses as its target borrowers. Loans to such businesses are approved based on the creditworthiness, economic feasibility and cash flow abilities of the borrower.

Residential real estate loans - Loans in this segment of the portfolio have historically represented the lowest risk due to the large number of individual loans with relatively small average balances.  The Bank considers owner-occupied one-to-four family loans to be low risk because underwriting has always required 20% equity and qualified borrowers with proper debt service coverage ratios.  These loans provide a foundation for the sale of all other retail banking products and have always been a staple of the Bank’s portfolio.  However, in the acquisition of Bank of Elmwood (the “Acquired Bank”) by the Bank from the FDIC in October 2009 (the “Acquisition”) the Bank acquired a number of residential real estate loans that do not meet the Bank’s underwriting standards and these borrowers were encouraged to bring loans current, pay delinquent taxes, refinance at another financial institution and comply with the Bank’s underwriting standards or face foreclosure.   The greatest risks to the Bank in this segment are those one-to-four family residential real estate loans that are not owner occupied.  Many of these scattered site owner’s loans were generated by the Acquired Bank through its “Rehab and Go” and “Equity is Cash” programs.  Often rehab dollars were not invested in the property, the properties were over-appraised and rental property damage was prevalent but no replacement reserves were required as would be in a commercial real estate loan.  The Bank is in the middle of a three year project to eliminate this group of loans acquired in the Acquisition.  These loans were deeply discounted in the Bank’s bid to the FDIC and the Bank believes the credit risk associated with these loans is mitigated by this discount.

Multi-family real estate loans - The loans in this category are collateralized by properties with more than four family dwelling units.  The Bank has always been conservative in requiring borrowers to be well-qualified and to provide their personal guaranty, as well as insisting on proper debt service coverage ratios and equity sufficient to sustain reasonable debt service in the event of interest rate pressure.  Loans in this category typically have maturities of 3, 4 or 5 years and are amortized over 15 to 20 years.  While any loan presents risk to the Bank, loans in this segment are performing quite well in the downturn because of the Bank’s underwriting criteria and with significant foreclosure activity in the market, many former homeowners are back in the rental market.

Installment and other loans - These loans consist of auto loans, mobile home loans and unsecured consumer loans which have been decreasing at the Bank for several years.  Auto loan volume decreased as sales of new cars declined drastically in 2009.  The Bank has historically limited its exposure to mobile home loans and unsecured consumer loans.  However, the Bank acquired a number of such consumer loans in the Acquisition, many of which continue to perform, despite not meeting the Bank’s historical underwriting standards.

The following table presents the contractual aging of the recorded investment in loans as of September 30, 2011 and December 31, 2010:

	As of September 30, 2011
	Current			Days Past Due												Total
	Loans				30-59			60-89		Over 90			Total			Loans
Commercial	$	19,859,144		$	48,538		$	6,412		$	293,026		$	347,976		$	20,207,120
Real estate
Construction		51,105,551			692,911			--			1,002,819			1,695,730			52,801,281
Commercial		284,107,680			1,549,778			1,783,302			5,329,169			8,662,249			292,769,929
Residential		274,092,670			3,427,864			2,933,223			15,726,998			22,088,085			296,180,755
Multifamily		36,649,568			333,945			-			1,459,727			1,793,672			38,443,240
Installment and other		14,905,995			403,294			54,856			447,261			905,411			15,811,406
Total Loans		680,720,608			6,456,330			4,777,793			24,259,000			35,493,123			716,213,731
Purchase Credit-    Impaired Loans		(39,342,480	)		(740,717	)		(159,681	)		(6,549,344	)		(7,449,742	)		(46,792,222	)
Total loans, excluding    Purchase Credit-    Impaired Loans	$	641,378,128		$	5,715,613		$	4,618,112		$	17,709,656		$	28,043,381		$	669,421,509

	As of December 31, 2010
	Current			Days Past Due												Total
	Loans				30-59			60-89		Over 90			Total			Loans
Commercial	$	24,972,641		$	220,354		$	200,920		$	57,559		$	478,833		$	25,451,474
Real estate
Construction		53,001,023			47,899			1,362,911			1,562,174			2,972,984			55,974,007
Commercial		270,383,215			4,046,092			434,278			10,999,359			15,479,729			285,862,944
Residential		295,608,455			5,789,198			2,331,859			16,059,976			24,181,033			319,789,488
Multifamily		37,025,673			851,102			-			3,196,937			4,048,039			41,073,712
Installment and other		17,650,012			437,779			131,220			458,059			1,027,058			18,677,070
Total Loans		698,641,019			11,392,424			4,461,188			32,334,064			48,187,676			746,828,695
Purchase Credit-    Impaired Loans		(41,308,636	)		(1,808,362	)		(448,907	)		(11,899,509	)		(14,156,778	)		(55,465,414	)
Total loans, excluding    Purchase Credit-    Impaired Loans	$	657,332,383		$	9,584,062		$	4,012,281		$	20,434,555		$	34,030,898		$	691,363,281

Commercial loans deemed to be inadequately collateralized and past due 90 days or more for principal or interest are placed in a non-accrual status.  Residential real estate loans are not subject to these guidelines if well-secured, as deemed by the Senior Loan Committee, and in the process of collection.

The following table presents the recorded investment in nonaccrual loans and loans past due ninety days or more and still accruing by class of loans as of September 30, 2011 and December 31, 2010:

	As of September 30, 2011
	Nonaccrual			Past due 90 days or more and accruing
Commercial	$	344,946		$	181,082
Real estate
Construction		1,168,843			-
Commercial		6,962,310			306,917
Residential		15,021,923			2,181,792
Multifamily		1,586,753			-
Installment and other		62,344			384,917
Total Loans		25,147,119			3,054,708
Purchase Credit Impaired Loans:
Commercial		(89,414	)		-
Real Estate
Construction		-			-
Commercial		(1,635,716	)		-
Residential		(5,075,775	)		(242,593	)
Multifamily		(603,395	)		-
Installment & Other		-			-
Total Purchase Credit-Impaired Loans		(7,404,300	)		(242,593	)
Total loans, excluding Purchase Credit-Impaired Loans	$	17,742,819		$	2,812,115

	As of December 31, 2010
	Nonaccrual			Past due 90 days or more and accruing
Commercial	$	70,042		$	4,339
Real estate
Construction		1,485,837			246,743
Commercial		13,034,876			114,159
Residential		17,147,456			2,732,296
Multifamily		3,196,937			-
Installment and other		80,568			377,491
Total Loans		35,015,716			3,475,028
Purchase Credit Impaired Loans:
Commercial		(16,822	)		-
Real Estate
Construction		(235,598	)		-
Commercial		(4,440,670	)		-
Residential		(6,537,049	)		(2,041,589	)
Multifamily		(603,395	)		-
Installment & Other		-			-
Total Purchase Credit-Impaired Loans		(11,833,534	)		(2,041,589	)
Total loans, excluding Purchase Credit-Impaired Loans	$	23,182,182		$	1,433,439

Management uses an internal asset classification system as a means of identifying problem and potential problem assets.  At the quarterly meetings, the Board of Directors of the Bank reviews trends for loans classified as “Special Mention,” “Substandard” and “Doubtful” for the previous twelve months both as a total dollar volume in each classified category and as the percent of capital each classified category represents.  A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at a future date. An asset is classified Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as Loss are those considered uncollectible and viewed as non-bankable assets, worthy of charge-off. Assets that do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that may or may not be within the control of the customer are classified as “Pass.”   The following tables present the risk category of loans by class of loans based on the most recent analysis performed and the contractual aging as of September 30, 2011 and December 31, 2010:

	As of September 30, 2011
			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial	$	17,336,659	$	1,516,993	$	1,241,524	$	111,944	$	20,207,120
Real estate
Construction		45,397,410		1,252,783		6,104,941		46,147		52,801,281
Commercial		261,674,983		12,827,121		18,177,428		90,397		292,769,929
Multifamily		35,060,941		1,461,601		1,920,698		-		38,443,240
Total	$	359,469,993	$	17,058,498	$	27,444,591	$	248,488	$	404,221,570
Current	$	358,434,330	$	15,354,745	$	17,932,866	$	-	$	391,721,941
30-59		391,112		1,009,750		1,224,312		-		2,625,174
60-89		246,515		694,003		849,195		-		1,789,713
Over 90		398,036		-		7,438,218		248,488		8,084,742
Total	$	359,469,993	$	17,058,498	$	27,444,591	$	248,488	$	404,221,570

	As of December 31, 2010
			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial	$	23,375,444	$	1,665,817	$	396,098	$	14,115	$	25,451,474
Real estate
Construction		44,791,225		8,293,423		2,889,359		-		55,974,007
Commercial		241,042,464		19,435,523		25,254,718		130,239		285,862,944
Multifamily		36,404,929		1,003,816		3,664,967		-		41,073,712
Total	$	345,614,062	$	30,398,579	$	32,205,142	$	144,354	$	408,362,137
Current	$	342,900,085	$	28,567,600	$	13,914,866	$	-	$	385,382,551
30-59		2,037,955		468,067		2,659,426		-		5,165,448
60-89		522,361		1,362,912		112,836		-		1,998,109
Over 90		153,661		-		15,518,014		144,354		15,816,029
Total	$	345,614,062	$	30,398,579	$	32,205,142	$	144,354	$	408,362,137

Excluding purchased credit-impaired loans, approximately $13.6 million of the Substandard and Doubtful loans were nonperforming as of September 30, 2011.

For residential real estate and installment loan classes, the Bank also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity.  The following table presents the recorded investment in those loan classes based on payment activity as of September 30, 2011 and December 31, 2010:

	As of September 30, 2011
	Performing		Nonperforming		Total
Residential Real Estate	$	278,977,040	$	17,203,715	$	296,180,755
Installment & Other		15,364,145		447,261		15,811,406
Total	$	294,341,185	$	17,650,976	$	311,992,161

	As of December 31, 2010
	Performing		Nonperforming		Total
Residential Real Estate	$	299,909,738	$	19,879,750	$	319,789,488
Installment & Other		18,219,011		458,059		18,677,070
Total	$	318,128,749	$	20,337,809	$	338,466,558

At September 30, 2011, the Corporation has identified $48.9 million of loans as impaired, including performing troubled debt restructurings. A loan is identified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.  A summary of the details regarding impaired loans follows:

	September 30, 2011		December 31, 2010
Loans for which there was a related allowance for loan loss	$	18,340,152	$	16,617,148
Impaired loans with no related allowance		30,577,804		16,112,165
Total Impaired Loans	$	48,917,956	$	32,729,313
Average quarterly balance of impaired loans	$	43,546,312	$	24,470,966
Related allowance for loan losses		4,313,124		3,986,548

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2011 and December 31, 2010:

	As of September 30, 2011
	Unpaid Principal Balance		Partial Charge- offs		Allowance For Loan Losses Allocation		Recorded Investment
Loans with no related allowance recorded:
Commercial	$	608,174	$	287,869	$	-	$	320,305
Real estate
Construction		4,033,053		13,944		-		4,019,109
Commercial		10,522,296		1,174,946		-		9,347,350
Residential		16,457,392		298,943		-		16,158,449
Multifamily		734,274		3,854		-		730,420
Installment & Other		2,171		-		-		2,171
Total		32,357,360		1,779,556		-		30,577,804

Loans with a related allowance recorded:
Commercial		24,686		45		24,641		-
Real estate
Construction		746,906		-		313,501		433,405
Commercial		6,723,162		8,324		1,238,000		5,476,838
Residential		9,987,487		150,130		2,302,040		7,535,317
Multifamily		874,025		17,692		339,865		516,468
Installment & Other		160,077		-		95,077		65,000
Total		18,516,343		176,191		4,313,124		14,027,028
Total Impaired Loans	$	50,870,703	$	1,955,747	$	4,313,124	$	44,604,832

	As of December 31, 2010
	Unpaid Principal Balance		Partial Charge- offs		Allowance For Loan Losses Allocation		Recorded Investment
Loans with no related allowance recorded:
Commercial	$	-	$	-	$	-	$	-
Real estate
Construction		2,005,213		-		-		2,005,213
Commercial		6,497,934		-		-		6,497,934
Residential		7,478,138		-		-		7,478,138
Multifamily		130,880		-		-		130,880
Installment & Other		-		-		-		-
Total		16,112,165		-		-		16,112,165

Loans with a related allowance recorded:
Commercial		14,115		-		14,115		-
Real estate
Construction		1,002,247		-		113,964		888,283
Commercial		7,653,948		175,000		1,211,358		6,267,590
Residential		8,098,270		606,300		2,406,059		5,085,911
Multifamily		549,300		-		222,483		326,817
Installment & Other		80,568		-		18,568		62,000
Total		17,398,448		781,300		3,986,547		12,630,601
Total Impaired Loans	$	33,510,613	$	781,300	$	3,986,547	$	28,742,766

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2011 and December 31, 2010:

	For the Nine Months Ended September 30, 2011
									Commercial				Residential
	Commercial				Construction				Real Estate				Real Estate				Multifamily				Consumer				Total
Allowance for loan losses:
Beginning balance		$	412,745			$	447,955			$	2,819,054			$	4,593,811			$	1,010,978			$	242,049			$	9,526,592
Charge-offs			(285,714	)			(18,004	)			(1,106,111	)			(3,411,781	)			(117,115	)			(216,071	)			(5,154,796	)
Recoveries			2,405				380				68,665				67,103				-				19,245				157,798
Provision			69,027				268,222				1,849,383				3,496,205				(500,032	)			187,195				5,370,000
Ending balance		$	198,463			$	698,553			$	3,630,991			$	4,745,338			$	393,831			$	232,418			$	9,899,594
	As of September 30, 2011
										Commercial				Residential
		Commercial				Construction				Real Estate				Real Estate				Multifamily				Consumer				Total
Loans:
Ending balance		$	20,207,120			$	52,573,281			$	292,997,929			$	296,180,755			$	38,443,240			$	15,811,406			$	716,213,731
ALL
Individually  evaluated			24,641				313,501				1,238,000				2,074,483				339,865				95,077				4,085,567
Collectively evaluated			173,822				385,052				2,392,991				2,443,298				53,966				137,341				5,586,470
Acquired			-				-				-				227,557				-				-				227,557
Total ALL			198,463				698,553				3,630,991				4,745,338				393,831				232,418				9,899,594
Recorded Investment		$	20,008,657			$	51,874,728			$	289,366,938			$	291,435,417			$	38,049,409			$	15,578,988			$	706,314,137
Ending Balance:
Individually evaluated		$	344,946			$	4,766,015			$	16,062,187			$	25,995,806			$	1,586,753			$	162,249			$	48,917,956
Collectively evaluated			19,808,259				43,879,322				272,697,691				248,713,849				35,868,053				15,649,157				636,616,331
Acquired			53,915				3,927,944				4,238,051				21,471,100				988,434				-				30,679,444
Total ending balance		$	20,207,120			$	52,573,281			$	292,997,929			$	296,180,755			$	38,443,240			$	15,811,406			$	716,213,731

	As of December 31, 2010
					Commercial		Residential
	Commercial		Construction		Real Estate		Real Estate		Multifamily		Consumer		Total
Loans:
Ending balance	$	25,451,474	$	55,974,007	$	285,862,944	$	319,789,488	$	41,073,712	$	18,677,070	$	746,828,695
ALL
Individually  evaluated		14,115		113,964		1,211,358		2,406,059		222,483		18,568		3,986,547
Collectively evaluated		398,630		333,991		1,607,696		1,458,116		788,495		223,481		4,810,409
Acquired		-		-		-		729,636		-		-		729,636
Total ALL		412,745		447,955		2,819,054		4,593,811		1,010,978		242,049		9,526,592
Recorded Investment	$	25,038,729	$	55,526,052	$	283,043,890	$	315,195,677	$	40,062,734	$	18,435,021	$	737,302,103
Ending Balance:
Individually evaluated	$	14,115	$	3,007,460	$	13,976,882	$	14,970,108	$	680,180	$	80,568	$	32,729,313
Collectively evaluated		24,892,894		44,664,827		263,312,796		273,659,587		38,576,591		18,596,502		663,703,197
Acquired		544,465		8,301,720		8,573,266		31,159,793		1,816,941		-		50,396,185
Total ending balance	$	25,451,474	$	55,974,007	$	285,862,944	$	319,789,488	$	41,073,712	$	18,677,070	$	746,828,695

The Corporation continues to evaluate loans purchased in conjunction with the Acquisition for impairment in accordance with GAAP.  The purchased loans were considered impaired at the Acquisition date if there was evidence of deterioration since origination and if it was probable that not all contractually required principal and interest payments would be collected.  The following table reflects the carrying value of all purchased loans as of September 30, 2011 and December 31, 2010.

	As of September 30, 2011
	Contractually Required Payments Receivable
	Credit Impaired		Non-Credit Impaired		Carrying Value of Purchased Loans
Commercial	$	344,479	$	1,482,815	$	1,374,034
Real Estate
Construction		10,285,352		123,589		7,536,440
Commercial		12,469,164		12,693,194		17,206,891
Residential		52,320,034		61,076,076		85,643,587
Multifamily		2,308,937		417,631		1,927,310
Installment and Consumer		6,025		3,940,677		2,254,980
Total	$	77,733,991	$	79,733,982	$	115,943,242

	As of December 31, 2010
	Contractually Required Payments Receivable
	Credit Impaired		Non-Credit Impaired		Carrying Value of Purchased Loans
Commercial	$	1,163,657	$	3,374,952	$	3,431,480
Real Estate
Construction		13,895,239		357,379		8,605,686
Commercial		17,679,889		16,580,216		22,774,024
Residential		62,201,020		72,406,187		99,498,903
Multifamily		2,644,213		422,239		2,154,090
Installment and Consumer		6,836		5,213,526		2,879,377
Total	$	97,590,854	$	98,354,499	$	139,343,560

As of September 30, 2011 the estimated contractually-required payments receivable on credit impaired and non-credit impaired loans was $77.7 million and $79.7 million, respectively.  The cash flows expected to be collected related to principal as of September 30, 2011 on all purchased loans is $115.9 million.  These amounts are based upon the estimated fair values of the underlying collateral or discounted cash flows at September 30, 2011.  The difference between the contractually required payments at Acquisition and the cash flow expected to be collected at Acquisition is referred to as the non-accretable difference.  Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.  Subsequent increases in cash flows will result in a reversal of the provision for loan losses charged to earnings to the extent of prior charges or a reclassification of the difference from non-accretable discount to accretable discount, with a positive impact on interest income.  Further, any excess of cash flows expected over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.  

The change in the carrying amount of accretable yield for purchased loans was as follows for the three months ended September 30, 2011.

ACCRETABLE YIELD

	For Three Months Ended September 30,
	2011		2010
Beginning Balance	$	11,808,262	$	18,400,259
Accretion(1)		1,130,934		2,497,273
Ending Balance	$	10,677,328	$	15,902,986

	For Nine Months Ended September 30,
	2011		2010
Beginning Balance	$	14,414,324	$	23,859,358
Accretion(1)		3,736,996		7,956,372
Ending Balance	$	10,677,328	$	15,902,986

(1) Accretable yield is recognized as the purchased loans pay down, mature, renew or pay off.

Contractual maturities of loans with accretable yield range from 1 year to 30 years.  Actual maturities may differ from contractual maturities because borrowers have the right to prepay or renew their loan prior to maturity or the loan may be charged off.