Note 6. Loans

3 Months Ended

Mar. 31, 2012

Loans and Leases Receivable, Description

6.    Loans

Major classifications of loans are as follows as of March 31, 2012 and December 31, 2011:

	March 31, 2012			December 31, 2011
Commercial	$	18,747,827		$	19,956,000
Real Estate
Construction		44,774,394			46,600,467
Commercial		297,951,623			298,042,808
Residential		286,022,104			288,609,383
Multifamily		36,604,964			39,798,866
Installment and Consumer		14,123,721			14,790,362
	$	698,224,633		$	707,797,886
Less:  Allowance for loan losses		(11,849,317	)		(11,012,088	)
Net Loans	$	686,375,316		$	696,785,798

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 lending has been a small part of the Bank’s portfolio which continues to be the case in 2012.  Commercial 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.  Commercial 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 commercial loans.

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.  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 prolonged weak economy such as the Bank has experienced.  Most of the Bank’s real estate development loans are performing even three years into the economic downturn and the Bank’s borrowers’ inventories are decreasing.  The greatest risk to the Bank within this segment are loans secured by raw land and condominium development loans.  These two groups have been most severely affected by the prolonged economic downturn.  In the case of loans secured by undeveloped acreage, the price per acre has decreased dramatically as other lenders liquidate the collateral on these raw land or “dirt” loans.  The Bank has a few customers continuing to service the debt from free cash flow, but this becomes more problematic as the housing market continues a slow recovery or in some cases a non-recovery.  In the case of condominium loans, 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.

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.  The most significant risk factor 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 $19.1 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, 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 their “Rehab and Go” and “Equity is Cash” programs.  Often rehab dollars were not invested in the property, the properties were over-appraised and as rental property damage was prevalent but no replacement reserves were required as would be in a commercial real estate loan.

Multi-family real estate loans - The loans in this category are collateralized by properties with more than four family dwelling units.  The Bank requires borrowers 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 despite improved new car sales in 2011 because dealer incentive financing makes this non-competitive.  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 March 31, 2012 and December 31, 2011:

	As of March 31, 2012
	Current			Days Past Due												Total
	Loans				30-59			60-89		Over 90			Total			Loans
Commercial	$	18,454,195		$	41,704		$	79,240		$	172,688		$	293,632		$	18,747,827
Real estate
Construction		42,705,667			75,000			871,531			1,122,196			2,068,727			44,774,394
Commercial		287,389,736			2,623,885			954,547			6,983,455			10,561,887			297,951,623
Residential		260,174,667			6,352,577			2,282,495			17,212,365			25,847,437			286,022,104
Multifamily		34,848,872			-			-			1,756,092			1,756,092			36,604,964
Installment and other		13,338,469			340,856			35,840			408,556			785,252			14,123,721
Total Loans		656,911,606			9,434,022			4,223,653			27,655,352			41,313,027			698,224,633
Purchase Credit-Impaired Loans		(25,475,813	)		(1,039,156	)		(238,480	)		(5,420,696	)		(6,698,332	)		(32,174,145	)
Total loans, excluding Purchase Credit-Impaired Loans	$	631,435,793		$	8,394,866		$	3,985,173		$	22,234,656		$	34,614,695		$	666,050,488

	As of December 31, 2011
	Current			Days Past Due												Total
	Loans				30-59			60-89		Over 90			Total			Loans
Commercial	$	19,443,774		$	58,506		$	152,148		$	301,572		$	512,226		$	19,956,000
Real estate
Construction		44,707,804			189,794			119,174			1,583,695			1,892,663			46,600,467
Commercial		287,520,615			3,033,167			1,358,887			6,130,139			10,522,193			298,042,808
Residential		268,286,798			3,360,425			2,702,845			14,259,315			20,322,585			288,609,383
Multifamily		37,933,674			415,821			-			1,449,371			1,865,192			39,798,866
Installment and other		14,017,731			283,519			14,331			474,781			772,631			14,790,362
Total Loans		671,910,396			7,341,232			4,347,385			24,198,873			35,887,490			707,797,886
Purchase Credit-Impaired Loans		(31,085,630	)		(146,855	)		(885,441	)		(5,037,404	)		(6,069,700	)		(37,155,330	)
Total loans, excluding Purchase Credit-Impaired Loans	$	640,824,766		$	7,194,377		$	3,461,944		$	19,161,469		$	29,817,790		$	670,642,556

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 March 31, 2012 and December 31, 2011:

	As of March 31, 2012
	Nonaccrual			Past due 90 days or more and accruing
Commercial	$	265,552		$	10,508
Real estate
Construction		2,129,656			109,960
Commercial		8,051,411			744,131
Residential		18,400,878			1,214,749
Multifamily		1,880,337			-
Installment and other		131,496			322,927
Total Loans		30,859,330			2,402,275
Purchase Credit-Impaired Loans:
Commercial		(1,923	)		-
Real Estate
Construction		-			-
Commercial		(1,399,647	)		-
Residential		(4,458,315	)		(12,736	)
Multifamily		(603,395	)		-
Installment & Other		-			-
Total Purchase Credit-Impaired Loans		(6,463,280	)		(12,736	)
Total loans, excluding Purchase Credit-Impaired Loans	$	24,396,050		$	2,389,539

	As of December 31, 2011
	Nonaccrual			Past due 90 days or more and accruing
Commercial	$	393,391		$	47,156
Real estate
Construction		1,101,343			732,911
Commercial		7,455,567			426,242
Residential		15,931,722			757,514
Multifamily		1,990,563			-
Installment and other		62,742			412,039
		26,935,328			2,375,862
Purchase Credit-Impaired Loans:
Commercial		(2,919	)		(12,749	)
Real Estate
Construction		-			-
Commercial		(1,602,816	)		-
Residential		(4,671,780	)		(12,914	)
Multifamily		(603,395	)		-
Installment & Other		-			-
Total Purchase Credit-Impaired Loans		(6,880,910	)		(25,663	)
Total loans, excluding Purchase Credit-Impaired Loans	$	20,054,418		$	2,350,199

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 March 31, 2012 and December 31, 2011:

	As of March 31, 2012
			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial	$	17,109,371	$	867,331	$	738,371	$	32,754	$	18,747,827
Real estate
Construction		41,649,913		-		2,960,943		163,538		44,774,394
Commercial		265,460,413		11,677,487		20,758,951		54,772		297,951,623
Multifamily		32,365,706		2,358,921		1,763,889		116,448		36,604,964
Total	$	356,585,403	$	14,903,739	$	26,222,154	$	367,512	$	398,078,808
Current	$	354,215,774	$	14,000,389	$	15,018,769	$	163,538	$	383,398,470
30-59		1,259,798		649,691		831,100		-		2,740,589
60-89		487,932		-		1,417,386		-		1,905,318
Over 90		621,899		253,659		8,954,899		203,974		10,034,431
Total	$	356,585,403	$	14,903,739	$	26,222,154	$	367,512	$	398,078,808

	As of December 31, 2011
			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial	$	17,834,473	$	1,192,000	$	895,121	$	34,406	$	19,956,000
Real estate
Construction		41,739,351		555,665		4,140,419		165,032		46,600,467
Commercial		270,211,863		10,912,130		16,864,133		54,682		298,042,808
Multifamily		34,959,277		2,849,026		1,874,115		116,448		39,798,866
Total	$	364,744,964	$	15,508,821	$	23,773,788	$	370,568	$	404,398,141
Current	$	361,193,743	$	15,233,112	$	13,013,980	$	165,032	$	389,605,867
30-59		3,052,889		-		644,399		-		3,697,288
60-89		320,762		275,709		1,033,738		-		1,630,209
Over 90		177,570		-		9,081,671		205,536		9,464,777
Total	$	364,744,964	$	15,508,821	$	23,773,788	$	370,568	$	404,398,141

 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 March 31, 2012 and December 31, 2011:

	As of March 31, 2012
	Performing		Nonperforming		Total
Residential Real Estate	$	266,406,477	$	19,615,627	$	286,022,104
Installment & Other		13,669,298		454,423		14,123,721
Total	$	280,075,775	$	20,070,050	$	300,145,825

	As of December 31, 2011
	Performing		Nonperforming		Total
Residential Real Estate	$	271,920,147	$	16,689,236	$	288,609,383
Installment & Other		14,315,581		474,781		14,790,362
Total	$	286,235,728	$	17,164,017	$	303,399,745

At March 31, 2012, the Corporation has identified $52.1 million of loans as impaired, including $26.1 million of 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 performing troubled debt restructuring consists of loans that have been modified and are performing in accordance with the modified terms for a sufficient length of time, generally six months, or loans that were modified on a proactive basis.  A summary of the details regarding impaired loans follows:

	March 31, 2012		December 31, 2011
Loans for which there was a related allowance for loan loss	$	24,628,452	$	24,368,902
Impaired loans with no related allowance		27,463,538		24,144,704
Total Impaired Loans	$	52,091,990	$	48,513,606
Average quarterly balance of impaired loans	$	50,302,798	$	46,524,919
Related allowance for loan losses		7,281,135		6,466,579
Interest income recognized while impaired		294,198		842,282

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2012 and December 31, 2011:

	As of March 31, 2012
					Allowance
	Unpaid Principal		Partial Charge-		For Loan Losses		Recorded
	Balance		offs		Allocation		Investment
Loans with no related allowance recorded:
Commercial	$	114,014	$	4,230	$	-	$	109,784
Real estate
Construction		914,905		15,846		-		899,059
Commercial		11,981,449		1,048,643		-		10,932,806
Residential		15,364,728		123,292		-		15,241,436
Multifamily		130,880		6,636		-		124,244
Installment & Other		156,223		14		-		156,209
Total		28,662,199		1,198,661		-		27,463,538

Loans with a related allowance recorded:
Commercial		155,926		158		66,131		89,637
Real estate
Construction		1,686,245		16,429		475,440		1,194,376
Commercial		5,059,626		189,998		1,694,595		3,175,033
Residential		16,437,744		360,215		4,318,113		11,759,416
Multifamily		1,757,918		1,824		662,239		1,093,855
Installment & Other		99,617		-		64,617		35,000
Total		25,197,076		568,624		7,281,135		17,347,317
Total Impaired Loans	$	53,859,275	$	1,767,285	$	7,281,135	$	44,810,855

	As of December 31, 2011
					Allowance
	Unpaid Principal		Partial Charge-		For Loan Losses		Recorded
	Balance		offs		Allocation		Investment
Loans with no related allowance recorded:
Commercial	$	366,920	$	11,218	$	-	$	355,702
Real estate
Construction		1,481,875		13,850		-		1,468,025
Commercial		7,968,827		1,034,776		-		6,934,051
Residential		14,640,519		82,953		-		14,557,566
Multifamily		734,274		5,508		-		728,766
Installment & Other		100,594		-		-		100,594
Total		25,293,009		1,148,305		-		24,144,704

Loans with a related allowance recorded:
Commercial		37,396		-		24,175		13,221
Real estate
Construction		774,837		14,643		274,218		485,976
Commercial		8,066,785		185,080		1,743,062		6,138,643
Residential		14,715,142		376,919		3,847,056		10,491,167
Multifamily		1,279,699		17,902		523,481		738,316
Installment & Other		89,587		-		54,587		35,000
Total		24,963,446		594,544		6,466,579		17,902,323
Total Impaired Loans	$	50,256,455	$	1,742,849	$	6,466,579	$	42,047,027

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of March 31, 2012 and December 31, 2011:

	As of March 31, 2012
					Commercial			Residential
	Commercial		Construction		Real Estate			Real Estate			Multifamily			Consumer			Total
Allowance for loan losses:
Beginning balance	$	163,865	$	583,784	$	3,748,857		$	5,569,743		$	786,919		$	158,920		$	11,012,088
Charge-offs		-		-		(143,813	)		(726,279	)		(47,751	)		(66,603	)		(984,446	)
Recoveries		5,358		32,786		122,116			145,206			-			16,209			321,675
Provision		31,833		159,206		9,819			1,072,246			169,594			57,302			1,500,000
Ending Balance	$	201,056	$	775,776	$	3,736,979		$	6,060,916		$	908,762		$	165,828		$	11,849,317
Loans:
Ending balance	$	18,747,827	$	44,774,394	$	297,951,623		$	286,022,104		$	36,604,964		$	14,123,721		$	698,224,633
Allowance for loan losses;
Individually evaluated for impairment		66,131		475,440		1,694,595			3,389,255			571,340			64,617			6,261,378
Collectively evaluated for impairment		134,925		300,336		2,042,384			1,742,803			246,523			101,211			4,568,182
Acquired		-		-		-			928,858			90,899			-			1,019,757
Total allowance for loan losses		201,056		775,776		3,736,979			6,060,916			908,762			165,828			11,849,317
Recorded Investment	$	18,546,771	$	43,998,618	$	294,214,644		$	279,961,188		$	35,696,202		$	13,957,893		$	686,375,316
Ending Balance:
Individually evaluated for impairment	$	265,552	$	2,568,875	$	15,802,437		$	31,318,965		$	1,880,337		$	255,824		$	52,091,990
Collectively evaluated for impairment		18,470,585		41,114,486		279,591,718			238,580,641			33,747,070			13,855,203			625,359,703
Acquired		11,690		1,091,033		2,557,468			16,122,498			977,557			12,694			20,772,940
Total ending balance	$	18,747,827	$	44,774,394	$	297,951,623		$	286,022,104		$	36,604,964		$	14,123,721		$	698,224,633

	As of December 31, 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		(299,829	)		(256,279	)		(1,199,872	)		(4,971,619	)		(117,115	)		(283,184	)		(7,127,898	)
Recoveries		10,232			36,965			86,453			88,024			-			21,720			243,394
Provision		40,717			355,143			2,043,222			5,859,527			(106,944	)		178,335			8,370,000
Ending Balance	$	163,865		$	583,784		$	3,748,857		$	5,569,743		$	786,919		$	158,920		$	11,012,088
Loans:
Ending balance	$	19,956,000		$	46,600,467		$	298,042,808		$	288,609,383		$	39,798,866		$	14,790,362		$	707,797,886
Allowance for loan losses;
Individually evaluated for impairment		24,176			274,218			1,741,553			2,767,300			523,481			54,586			5,385,314
Collectively evaluated for impairment		139,689			309,566			2,005,795			1,722,687			263,438			104,334			4,545,509
Acquired		-			-			1,509			1,079,756			-			-			1,081,265
Total allowance for loan losses		163,865			583,784			3,748,857			5,569,743			786,919			158,920			11,012,088
Recorded Investment	$	19,792,135		$	46,016,683		$	294,293,951		$	283,039,640		$	39,011,947		$	14,631,442		$	696,785,798
Ending Balance:
Individually evaluated for impairment	$	393,391		$	2,227,927		$	14,815,756		$	28,895,790		$	1,990,563		$	190,179		$	48,513,606
Collectively evaluated for impairment		19,526,299			43,272,500			280,378,746			240,804,604			36,824,488			14,587,610			635,394,247
Acquired		36,310			1,100,040			2,848,306			18,908,989			983,815			12,573			23,890,033
Total ending balance	$	19,956,000		$	46,600,467		$	298,042,808		$	288,609,383		$	39,798,866		$	14,790,362		$	707,797,886

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 March 31, 2012 and December 31, 2011.

	As of March 31, 2012
	Contractually Required Payments Receivable
	Credit Impaired		Non-Credit Impaired		Carrying Value of Purchased Loans
Commercial	$	129,001	$	898,355	$	709,145
Real Estate
Construction		2,680,523		44,075		1,494,297
Commercial		10,166,463		10,196,228		13,308,033
Residential		43,186,229		53,718,957		72,774,200
Multifamily		2,296,524		-		1,580,951
Installment and Consumer		15,719		3,143,934		1,843,160
Total	$	58,474,459	$	68,001,549	$	91,709,786

	As of December 31, 2011
	Contractually Required Payments Receivable
	Credit Impaired		Non-Credit Impaired		Carrying Value of Purchased Loans
Commercial	$	235,856	$	972,354	$	828,188
Real Estate
Construction		3,676,897		44,697		2,191,129
Commercial		10,509,579		12,485,797		15,459,924
Residential		48,061,689		56,780,596		79,049,005
Multifamily		2,302,782		-		1,587,210
Installment and Consumer		18,223		3,485,572		2,018,806
Total	$	64,805,026	$	73,769,016	$	101,134,262

As of March 31, 2012 the estimated contractually-required payments receivable on credit impaired and non-credit impaired loans was $58.5 million and $68.0 million, respectively.  The cash flows expected to be collected related to principal as of March 31, 2012 on all purchased loans is $91.7 million.  These amounts are based upon the estimated fair values of the underlying collateral or discounted cash flows at March 31, 2012.  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 March 31, 2012.

ACCRETABLE YIELD

	For Three Months Ended March 31,
	2012		2011
Beginning Balance	$	9,760,544	$	14,414,324
Additions		0		0
Accretion(1)		1,354,334		1,095,427
Ending Balance	$	8,406,210	$	13,318,897

(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.