Loans, Allowance for Loan Losses and Credit Quality

12 Months Ended

Dec. 31, 2011

Loans Allowances For Loan Losses And Credit Quality [Abstract]

Loans, Allowance for Loan Losses and Credit Quality

Note 3.  Loans, Allowance for Loan Losses and Credit Quality

The composition of net loans at December 31 was as follows:

	2011			2010
Commercial	$	39,514,607		$	31,045,424
Commercial real estate		132,269,368			133,494,431
Residential real estate - 1st lien		159,535,958			166,475,010
Residential real estate - Jr lien		45,886,967			47,359,808
Consumer		11,465,139			13,058,124
		388,672,039			391,432,797
Deduct (add):
Allowance for loan losses		3,886,502			3,727,935
Unearned net loan fees		(7,251	)		74,351
Loans held-for-sale		2,285,567			2,363,938
		6,164,818			6,166,224
Net loans	$	382,507,221		$	385,266,573

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

			90 Days		Total						Non-Accrual		Over 90 Days
December 31, 2011	30-89 Days		or More		Past Due		Current		Total Loans		Loans		and Accruing
Commercial	$	655,168	$	265,668	$	920,836	$	38,593,771	$	39,514,607	$	1,066,945	$	59,618
Commercial real estate		2,266,412		1,288,616		3,555,028		128,714,340		132,269,368		3,714,146		98,554
Residential real estate - 1st lien		5,614,513		2,517,282		8,131,795		149,118,596		157,250,391		2,703,920		969,078
Residential real estate - Jr lien		431,885		2,754,129		3,186,014		42,700,953		45,886,967		464,308		111,061
Consumer		152,151		1,498		153,649		11,311,490		11,465,139		0		1,498
Total	$	9,120,129	$	6,827,193	$	15,947,322	$	370,439,150	$	386,386,472	$	7,949,319	$	1,239,809
			90 Days		Total						Non-Accrual		Over 90 Days
December 31, 2010	30-89 Days		or More		Past Due		Current		Total Loans		Loans		and Accruing
Commercial	$	915,924	$	54,376	$	970,300	$	30,075,124	$	31,045,424	$	61,226	$	29,446
Commercial real estate		939,910		130,512		1,070,422		132,424,009		133,494,431		1,145,194		94,982
Residential real estate		6,117,292		2,108,870		8,226,162		203,244,718		211,470,880		3,219,911		1,194,477
Consumer		242,742		38,466		281,208		12,776,916		13,058,124		0		38,466
Total	$	8,215,868	$	2,332,224	$	10,548,092	$	378,520,767	$	389,068,859	$	4,426,331	$	1,357,371

The changes in the allowance for loan losses for the years ended December 31 are summarized as follows:

	2011			2010
Balance at beginning of year	$	3,727,935		$	3,450,542
Provision for loan losses		1,000,000			1,016,668
Recoveries of amounts charged off		100,240			113,413
		4,828,175			4,580,623
Amounts charged off		(941,673	)		(852,688	)
Balance at end of year	$	3,886,502		$	3,727,935

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

For the year ended December 31, 2011
							Residential			Residential
				Commercial			Real Estate			Real Estate
	Commercial			Real Estate			1st Lien			Jr Lien			Consumer			Unallocated		Total
Allowance for loan losses
Beginning balance	$	302,421		$	1,391,898		$	1,830,816		$	0		$	151,948		$	50,852	$	3,727,935
Charge-offs		(22,050	)		(197,367	)		(521,608	)		(96,961	)		(103,687	)		0		(941,673	)
Recoveries		13,225			8,479			42,593			20			35,923			0		100,240
Provisions		48,718			182,929			226,692			428,625			40,595			72,441		1,000,000
Ending balance	$	342,314		$	1,385,939		$	1,578,493		$	331,684		$	124,779		$	123,293	$	3,886,502
Allowance for loan losses
Evaluated for impairment
Individually	$	70,600		$	57,500		$	283,200		$	47,200		$	0		$	0	$	458,500
Collectively		271,714			1,328,439			1,295,293			284,484			124,779			123,293		3,428,002
Total	$	342,314		$	1,385,939		$	1,578,493		$	331,684		$	124,779		$	123,293	$	3,886,502
Loans evaluated for impairment
Individually	$	1,000,120		$	3,669,260		$	2,366,326		$	434,664		$	0				$	7,470,370
Collectively		38,514,487			128,600,108			157,169,632			45,452,303			11,465,139				$	381,201,669
Total	$	39,514,607		$	132,269,368		$	159,535,958		$	45,886,967		$	11,465,139				$	388,672,039

For the year ended December 31, 2010
			Commercial		Residential
	Commercial		Real Estate		Real Estate		Consumer		Unallocated		Total
Allowance for loan losses evaluated for impairment
Individually	$	3,700	$	51,200	$	337,800	$	0	$	0	$	392,700
Collectively		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 evaluated for impairment
Individually	$	61,226	$	1,145,194	$	3,219,911	$	0			$	4,426,331
Collectively		30,984,199		132,349,237		210,614,907		13,058,124				387,006,466
Total	$	31,045,425	$	133,494,431	$	213,834,818	$	13,058,124			$	391,432,797

Impaired loans by class were as follows:

For the year ended December 31, 2011
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized *
With no related allowance recorded
Commercial	$	380,624	$	391,800	$	0	$	332,523	$	0
Commercial real estate		2,041,101		2,246,905		0		960,407		0
Residential real estate 1st lien		1,000,819		1,191,437		0		1,210,137		0
Residential real estate Jr lien		125,786		185,142		0		25,157		0
With an allowance recorded
Commercial		619,496		637,729		70,600		237,724		0
Commercial real estate		1,628,159		1,653,646		57,500		1,128,795		0
Residential real estate 1st lien		1,365,507		1,869,338		283,200		1,629,151		0
Residential real estate Jr lien		308,878		321,475		47,200		61,776		0
Total
Commercial	$	1,000,120	$	1,029,529	$	70,600	$	570,247	$	0
Commercial real estate	$	3,669,260	$	3,900,551	$	57,500	$	2,089,202	$	0
Residential real estate 1st lien	$	2,366,326	$	3,060,775	$	283,200	$	2,839,288	$	0
Residential real estate Jr lien	$	434,664	$	506,617	$	47,200	$	86,933	$	0
Total	$	7,470,370	$	8,497,472	$	458,500	$	5,585,670	$	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 all periods presented.

Interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The Company is not contractually committed to lend additional funds to debtors with impaired, non-accrual or restructured loans.

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 the 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 known increase in loan risk, even if considered temporary in nature.

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

Total Loans
					Residential		Residential
			Commercial		Real Estate		Real Estate
December 31, 2011	Commercial		Real Estate		- 1st Lien		- Jr Lien		Consumer		Total
Group A	$	36,971,880	$	119,410,381	$	153,954,603	$	44,943,201	$	11,459,371	$	366,739,436
Group B		530,523		4,037,860		98,603		322,022		0		4,989,008
Group C		2,012,204		8,821,127		5,482,751		621,745		5,768		16,943,595
Total	$	39,514,607	$	132,269,368	$	159,535,957	$	45,886,968	$	11,465,139	$	388,672,039

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 guarantors, 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 only, on a limited basis, reduced interest rates for borrowers below the current market rate for the borrower.  The Company has not forgiven principal within the terms of original restructurings, nor has it converted variable rate terms to fixed rate terms.

The TDRs by class were as follows:

For the year ended December 31, 2011
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Commercial		10	$	985,666	$	985,666
Commercial real estate		6		1,202,546		1,202,546
Residential real estate 1st lien		4		299,505		299,505
Residential real estate Jr lien		2		71,928		71,928
Total		22	$	2,559,646	$	2,559,646

The TDRs for which there was a payment default during the period were as follows:

For the year ended December 31, 2011
	Number of Contracts		Recorded Investment
Commercial		8	$	741,090
Commercial real estate		1		401,002
Residential real estate 1st lien		2		178,492
Residential real estate Jr lien		1		34,687
Total		12	$	1,355,271

With respect to the calculation of the allowance for loan losses, non-accrual TDRs meeting the impaired threshold 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 typically calculated using the fair value of collateral method.