Loans, Allowances for Loan Losses and Credit Quality

9 Months Ended

Sep. 30, 2011

Loans Allowances For Loan Losses And Credit Quality [Abstract]

Loans Allowances For Loan Losses And Credit Quality [Text Block]

Note 6. Loans, Allowance for Loan Losses and Credit Quality

The composition of net loans follows:

	September 30, 2011		December 31, 2010

Commercial	$	34,570,063	$	31,045,424
Commercial real estate		137,892,249		133,494,431
Residential real estate		206,598,206		213,834,818
Consumer		11,899,588		13,058,124
		390,960,106		391,432,797
Deduct:
Allowance for loan losses		3,835,840		3,727,935
Unearned net loan fees		20,474		74,351
Loans held-for-sale		2,411,242		2,363,938
		6,267,556		6,166,224
Net Loans	$	384,692,550	$	385,266,573

The following is an age analysis of past due loans (including non-accrual) by class:

			90 Days		Total						Over 90 Days
September 30, 2011	30-89 Days		or More		Past Due		Current		Total Loans		and Accruing

Commercial	$	667,668	$	583,258	$	1,250,926	$	33,319,137	$	34,570,063	$	21,824
Commercial real estate		3,066,295		1,025,858		4,092,153		133,800,096		137,892,249		209,506
Residential real estate		2,053,935		2,596,698		4,650,633		199,536,331		204,186,964		828,602
Consumer		92,843		2,869		95,712		11,803,876		11,899,588		1,010
Total	$	5,880,741	$	4,208,683	$	10,089,424	$	378,459,440	$	388,548,864	$	1,060,942

			90 Days		Total						Over 90 Days
December 31, 2010	30-89 Days		or More		Past Due		Current		Total Loans		and Accruing

Commercial	$	915,924	$	54,376	$	970,300	$	30,075,124	$	31,045,424	$	29,446
Commercial real estate		939,910		130,512		1,070,422		132,424,009		133,494,431		94,982
Residential real estate		6,117,292		2,108,870		8,226,162		203,244,718		211,470,880		1,194,477
Consumer		242,742		38,466		281,208		12,776,916		13,058,124		38,466
Total	$	8,215,868	$	2,332,224	$	10,548,092	$	378,520,767	$	389,068,859	$	1,357,371

The allowance for loan losses is established through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

As described below, the allowance consists of general, specific and unallocated components. However, the entire allowance is available to absorb losses in the loan portfolio, regardless of specific, general and unallocated components considered in determining the amount of the allowance.

General component

The general component of the allowance for loan losses is based on historical loss experience, adjusted for qualitative factors and stratified by the following loan segments: commercial, commercial real estate, residential real estate, and consumer loans. Management uses an average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels of and trends in delinquencies and non-performing loans, levels of and trends in loan risk groups, trends in volumes and terms of loans, effects of any changes in loan related policies, experience, ability and the depth of management, documentation and credit data exception levels, national and local economic trends, external factors such as competition and regulation and lastly concentrations of credit risk in a variety of areas, including portfolio product mix, the level of loans to individual borrowers and their related interests, loans to industry segments, and the geographic distribution of commercial real estate loans. This evaluation is inherently subjective as it requires estimates that are susceptible to revision as more information becomes available. There were no changes in the Company’s policies or methodology pertaining to the general component for loan losses since December 31, 2010.

The qualitative factors are determined based on the various risk characteristics of each loan segment. The Company has policies, procedures and internal controls commensurate with the risk profile of each of these segments. Risk characteristics relevant to each portfolio segment are as follows:

Commercial – Loans in this segment include commercial and industrial loans and to a lesser extent loans to finance agricultural production. Commercial loans are made to businesses and are generally secured by assets of the business, including trade assets and equipment. While not the primary collateral, in many cases these loans may also be secured by the real estate of the business. Repayment is expected from the cash flows of the business. A weakened economy, soft consumer spending, unfavorable foreign trade conditions and the rising cost of labor or raw materials are examples of issues that can impact the credit quality in this segment.

Commercial Real Estate – Loans in this segment are principally made to businesses and are generally secured by either owner-occupied, or non-owner occupied commercial real estate. A relatively small portion of this segment includes farm loans secured by farm land and buildings. As with commercial loans, repayment of owner-occupied commercial real estate loans is expected from the cash flows of the business and the segment would be impacted by similar issues. The non-owner occupied commercial real estate portion includes both residential and commercial construction loans, vacant land and real estate development loans and multi-family dwelling and commercial rental property loans. Repayment of construction loans is expected from permanent financing takeout; the Company generally requires a commitment or eligibility for the take-out financing prior to construction loan origination. Real estate development loans are generally repaid from the sale of the subject real property as the project progresses. Construction and development lending run additional risks, including the project exceeding budget, not being constructed according to plans, not receiving permits, or the pre-leasing or occupancy rate not meeting expectations. Repayment of multi-family loans and commercial rental property loans is expected from the cash flow generated by rental payments received from the individuals or businesses occupying the real estate. Commercial real estate loans are impacted by issues such as competitive market forces, vacancy rates, cap rates, net operating incomes, lease renewals and overall economic demand. In addition, loans in the recreational and tourism sector can be affected by weather conditions, such as unseasonably low winter snowfalls. Commercial real estate lending also carries a higher degree of environmental risk than other real estate lending.

Residential Real Estate – All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.

Consumer – Loans in this segment are made to individuals for consumer and household purposes. This segment includes both loans secured by automobiles and other consumer goods, as well as loans that are unsecured. This segment also includes overdrafts, which are extensions of credit made to both individuals and business to cover temporary shortages in their deposit accounts and are generally unsecured. The Company maintains policies restricting the size and length of these extensions of credit. The overall health of the economy, including unemployment rates, has an impact on the credit quality of this segment.

Specific component

The specific component relates to loans that are impaired. A specific allowance is established when a loan’s impaired basis is less than the carrying value of the loan. For all classes of loans, except consumer loans, a loan is considered impaired when, based on current information and events, in management’s estimation it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans are loan(s) to a borrower that in aggregate are greater than $100,000 and that are in non-accrual status or are troubled debt restructurings (TDR). Factors considered by management in determining impairment include payment status, collateral value and probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management evaluates the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length and frequency of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis, by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Impaired loans may also include troubled loans that are restructured. A TDR occurs when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that would otherwise not be granted. TDRs may include the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a loan’s terms, or a combination of the two.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment evaluation, unless such loans are subject to a restructuring agreement.

Unallocated component

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

The changes in the allowance for loan losses for the third quarter ended September 30 are summarized as follows:

	2011			2010

Balance at beginning of period	$	3,851,369		$	3,439,261
Provision for loan losses		287,500			433,334
Recoveries of amounts charged off		39,216			22,975
		4,178,085			3,895,570
Amounts charged off		(342,245	)		(189,136	)
Balance at end of period	$	3,835,840		$	3,706,434

The changes in the allowance for loan losses for the nine months ended September 30 are summarized as follows:

	2011			2010

Balance at beginning of year	$	3,727,935		$	3,450,542
Provision for loan losses		712,500			858,334
Recoveries of amounts charged off		76,335			48,147
		4,516,770			4,357,023
Amounts charged off		(680,930	)		(650,589	)
Balance at end of period	$	3,835,840		$	3,706,434

The following summarizes changes in the allowance for loan losses and select loan information, by portfolio segment.

For the third quarter ended September 30, 2011
				Commercial			Residential
	Commercial			Real Estate			Real Estate			Consumer			Unallocated			Total

Allowance for loan losses
Beginning balance	$	246,567		$	1,395,350		$	1,965,940		$	132,532		$	110,980		$	3,851,369
Charge-offs		(18,924	)		(21,679	)		(291,077	)		(10,565	)		0			(342,245	)
Recoveries		1,144			4,241			27,355			6,476			0			39,216
Provisions		51,343			148,745			129,545			615			(42,748	)		287,500
Ending balance	$	280,130		$	1,526,657		$	1,831,763		$	129,058		$	68,232		$	3,835,840

For the nine months ended September 30, 2011
				Commercial			Residential
	Commercial			Real Estate			Real Estate			Consumer			Unallocated		Total

Allowance for loan losses
Beginning balance	$	302,421		$	1,391,898		$	1,830,816		$	151,948		$	50,852	$	3,727,935
Charge-offs		(22,050	)		(21,679	)		(562,524	)		(74,677	)		0		(680,930	)
Recoveries		12,665			6,422			27,955			29,293			0		76,335
Provisions		(12,906	)		150,016			535,516			22,494			17,380		712,500
Ending balance	$	280,130		$	1,526,657		$	1,831,763		$	129,058		$	68,232	$	3,835,840

Individually evaluated for impairment	$	42,100		$	104,500		$	352,600		$	0		$	0	$	499,200
Collectively evaluated for impairment		238,030			1,422,157			1,479,163			129,058			68,232		3,336,640
Total	$	280,130		$	1,526,657		$	1,831,763		$	129,058		$	68,232	$	3,835,840

Loans
Individually evaluated for impairment	$	841,032		$	2,834,584		$	2,892,878		$	0				$	6,568,494
Collectively evaluated for impairment		33,729,031			135,057,665			203,705,328			11,899,588					384,391,612
Total	$	34,570,063		$	137,892,249		$	206,598,206		$	11,899,588				$	390,960,106

			Commercial		Residential
December 31, 2010	Commercial		Real Estate		Real Estate		Consumer		Unallocated		Total

Allowance for loan losses
Individually evaluated for impairment	$	3,700	$	51,200	$	337,800	$	0	$	0	$	392,700
Collectively evaluated for impairment		298,721		1,340,698		1,493,016		151,948		50,852		3,335,235
Total	$	302,421	$	1,391,898	$	1,830,816	$	151,948	$	50,852	$	3,727,935

Loans
Individually evaluated for impairment	$	61,226	$	1,145,194	$	3,219,911	$	0			$	4,426,331
Collectively evaluated for impairment		30,984,198		132,349,237		210,614,907		13,058,124				387,006,466
Total	$	31,045,424	$	133,494,431	$	213,834,818	$	13,058,124			$	391,432,797

Impaired loans by class were as follows:

For the nine months ended September 30, 2011
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized*

With no related allowance recorded
Commercial	$	397,993	$	400,678	$	0	$	320,498	$	0
Commercial real estate		1,320,096		1,350,647		0		690,234		0
Residential real estate		1,079,821		1,370,967		0		1,262,466		0

With an allowance recorded
Commercial		443,039		443,887		42,100		142,281		0
Commercial real estate		1,514,488		1,517,237		104,500		1,003,954		0
Residential real estate		1,813,057		2,316,927		352,600		1,695,062		0

Total
Commercial	$	841,032	$	844,565	$	42,100	$	462,779	$	0
Commercial real estate	$	2,834,584	$	2,867,884	$	104,500	$	1,694,188	$	0
Residential real estate	$	2,892,878	$	3,687,894	$	352,600	$	2,957,528	$	0
Total	$	6,568,494	$	7,400,343	$	499,200	$	5,114,495	$	0

For the year ended December 31, 2010
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized*

With no related allowance recorded
Commercial	$	24,930	$	61,460	$	0	$	106,737	$	0
Commercial real estate		0		0		0		494,150		0
Residential real estate		1,138,290		1,527,508		0		1,186,068		0

With an allowance recorded
Commercial		36,296		39,856		3,700		37,300		0
Commercial real estate		1,145,194		1,145,672		51,200		1,158,924		0
Residential real estate		2,081,621		2,303,744		337,800		1,661,441		0

Total
Commercial	$	61,226	$	101,316	$	3,700	$	144,037	$	0
Commercial real estate	$	1,145,194	$	1,145,672	$	51,200	$	1,653,074	$	0
Residential real estate	$	3,219,911	$	3,831,252	$	337,800	$	2,847,509	$	0
Total	$	4,426,331	$	5,078,240	$	392,700	$	4,644,620	$	0

*Interest income recognized on impaired loans is immaterial for both periods presented.

Credit Quality Grouping

In developing the allowance for loan losses, management uses credit quality grouping to help evaluate trends in credit quality. The Company groups credit risk into Groups A, B and C. The manner the Company utilizes to assign risk grouping is driven by loan purpose. Commercial purpose loans are individually risk graded while the retail portion of the portfolio is generally grouped by delinquency pool.

Group A loans - Acceptable Risk – are loans that are expected to perform as agreed under their respective terms. Such loans carry a normal level of risk that does not require management attention beyond that warranted by the loan or loan relationship characteristics, such as loan size or relationship size. Group A loans include commercial loans that are individually risk rated and retail loans that are rated by pool. Group A retail loans include both performing consumer and residential real estate loans. Residential real estate loans are loans to individuals secured by 1-4 family homes, including first mortgages, home equity and home improvement loans. Loan balances fully secured by deposit accounts or that are fully guaranteed by the Federal Government are considered acceptable risk.

Group B loans – Management Involved - are loans that require greater attention than the acceptable loans in Group A. Characteristics of such loans may include, but are not limited to, borrowers that are experiencing negative operating trends such as reduced sales or margins, borrowers that have exposure to adverse market conditions such as increased competition or regulatory burden, or that have had unexpected or adverse changes in management. These loans have a greater likelihood of migrating to an unacceptable risk level if these characteristics are left unchecked. Group B is limited to commercial loans that are individually risk rated.

Group C loans – Unacceptable Risk – are loans that have distinct shortcomings that require a greater degree of management attention. Examples of these shortcomings include a borrower's inadequate capacity to service debt, poor operating performance, or insolvency. These loans are more likely to result in repayment through collateral liquidation. Group C loans range from those that are likely to sustain some loss if the shortcomings are not corrected, to those for which loss is imminent and non-accrual treatment is warranted. Group C loans include individually rated commercial purpose loans, and retail loans adversely rated in accordance with the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification Policy. Group C retail loans include 1-4 family residential real estate loans and home equity loans past due 90 days or more with loan-to-value ratios greater than 60%, home equity loans 90 days or more past due where bank does not hold first mortgage, irrespective of loan-to-value, loans in bankruptcy where repayment is likely but not yet established, and lastly consumer loans that are 90 days or more past due.

Commercial purpose loan ratings are assigned by the commercial account officer; for larger and more complex commercial loans, the credit rating is a collaborative assignment by the lender and the credit analyst. The credit risk rating is based on the borrower's expected performance, i.e., the likelihood that the borrower will be able to service its obligations in accordance with the loan terms. Credit risk ratings are meant to measure risk versus simply record history. Assessment of expected future payment performance requires consideration of numerous factors. While past performance is part of the overall evaluation, expected performance is based on an analysis of the borrower's financial strength, and historical and projected factors such as size and financing alternatives, capacity and cash flow, balance sheet and income statement trends, the quality and timeliness of financial reporting, and the quality of the borrower’s management. Other factors influencing the credit risk rating to a lesser degree include collateral coverage and control, guarantor strength and commitment, documentation, structure and covenants and industry conditions. There are uncertainties inherent in this process.

Credit risk ratings are dynamic and require updating whenever relevant information is received. The risk ratings of larger or more complex loans, and Group B and C rated loans, are assessed at the time of their respective annual reviews, during quarterly updates, in action plans or at any other time that relevant information warrants update. Lenders are required to make immediate disclosure to the Chief Credit Officer of any increase in loan risk, even if considered temporary in nature.

The risk ratings within the loan portfolio by class were as follows:

Total Loans

			Commercial		Residential
September 30, 2011	Commercial		Real Estate		Real Estate		Consumer		Total

Group A	$	31,263,167	$	121,785,036	$	200,493,345	$	11,884,313	$	365,425,861
Group B		889,433		7,157,279		587,332		0		8,634,044
Group C		2,417,463		8,949,934		5,517,529		15,275		16,900,201
Total	$	34,570,063	$	137,892,249	$	206,598,206	$	11,899,588	$	390,960,106

Total Loans

			Commercial		Residential
December 31, 2010	Commercial		Real Estate		Real Estate		Consumer		Total

Group A	$	28,148,610	$	118,056,754	$	207,263,295	$	12,997,587	$	366,466,246
Group B		1,617,895		9,455,795		883,271		0		11,956,961
Group C		1,278,919		5,981,882		5,688,252		60,537		13,009,590
Total	$	31,045,424	$	133,494,431	$	213,834,818	$	13,058,124	$	391,432,797

Modifications of Loans and TDRs

A loan is classified as a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider.

The Company has granted such a concession if it has modified a troubled loan in any of the following ways:

·	Reduced the original contractual interest rate to a rate that is below the current market rate for the borrower;

·	Converted a variable-rate loan to a fixed-rate loan;

·	Extended the term of the loan beyond an insignificant delay;

·	Deferred or forgiven principal in an amount greater than three months of payments; or,

·	Performed a refinancing and deferred or forgiven principal on the original loan.

An insignificant delay or insignificant shortfall in the amount of payments typically would not require the loan to be accounted for as a TDR. However, pursuant to regulatory guidance, any delay longer than three months is generally not considered insignificant. The assessment of whether a concession has been granted also takes into account payments expected to be received from third parties, including third-party guarantees, provided that the third party has the ability to perform on the guarantee.

The Company’s TDRs are principally a result of extending loan repayment terms to relieve cash flow difficulties. The Company has not as a practice reduced interest rates for borrowers below their rate at the time of the restructures, nor has it forgiven principal within the terms of the original restructurings.

The following tables present TDRs by class for the third quarter and nine months ended September 30, 2011;

For the third quarter ended September 30, 2011
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment

Troubled debt restructurings
Commercial		3	$	317,590	$	317,590
Commercial real estate		4		905,279		902,530
Residential real estate		1		106,258		109,413
		8	$	1,329,127	$	1,329,533

For the nine months ended September 30, 2011
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment

Troubled debt restructurings
Commercial		9	$	824,227	$	807,599
Commercial real estate		6		1,202,546		1,193,202
Residential real estate		4		254,049		247,403
		19	$	2,280,822	$	2,248,204

The following tables present TDRs within the third quarter and twelve month period ended September 30, 2011 for which there was a payment default during the period;

For the third quarter ended September 30, 2011
	Number of Contracts		Recorded Investment
Troubled debt restructurings
that subsequently defaulted
Commercial		3	$	317,590
Commercial real estate		1		414,570
		4	$	732,161

For the nine months ended September 30, 2011
	Number of Contracts		Recorded Investment
Troubled debt restructurings
that subsequently defaulted
Commercial		7	$	628,224
Commercial real estate		1		414,570
Residential real estate		2		105,801
		10	$	1,148,595

With respect to the calculation of the allowance for loan losses, TDRs are treated as other impaired loans and carry individual specific allocations. These loans are categorized as non-performing, may be past due, and are generally adversely risk rated. The TDRs that have defaulted under their restructured terms are generally in collection status and their reserve allocation is calculated using the fair value of collateral method.