Loans

12 Months Ended

Dec. 31, 2011

Loans

NOTE 3 – Loans

Loans were comprised of the following classifications at December 31:

	2011			2010
Commercial:
Commercial and Industrial Loans and Leases	$	293,172		$	218,443
Commercial Real Estate Loans		452,071			339,555
Agricultural Loans		167,693			165,166
Retail:
Home Equity Loans		77,070			64,437
Consumer Loans		47,409			53,807
Residential Mortgage Loans		86,134			77,310
Subtotal		1,123,549			918,718
Less:  Unearned Income		(2,556	)		(1,482	)
Allowance for Loan Losses		(15,312	)		(13,317	)
Loans, net	$	1,105,681		$	903,919

The following table presents the activity in the allowance for loan losses by portfolio class for the year ended December 31, 2011:

	Commercial
	and
	Industrial			Commercial					Home						Residential
	Loans and			Real Estate			Agricultural		Equity			Consumer			Mortgage
	Leases			Loans			Loans		Loans			Loans			Loans			Unallocated		Total
Beginning Balance	$	3,713		$	7,497		$	750	$	220		$	362		$	543		$	232	$	13,317
Provision for Loan Losses		1,195			4,265			176		287			23			340			514		6,800
Recoveries		98			139			—		6			125			16			—		384
Loans Charged-off		(1,513	)		(2,604	)		—		(255	)		(320	)		(497	)		—		(5,189	)
Ending Balance	$	3,493		$	9,297		$	926	$	258		$	190		$	402		$	746	$	15,312

The following table presents the activity in the allowance for loan losses for the years ended December 31, 2010 and 2009:

	2010			2009
Beginning Balance	$	11,016		$	9,522
Provision for Loan Losses		5,225			3,750
Loan Charged-off		(4,214	)		(3,174	)
Recoveries		1,290			918
Ending Balance	$	13,317		$	11,016

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 December 31, 2011:

			Commercial
			and
			Industrial		Commercial				Home				Residential
			Loans and		Real Estate		Agricultural		Equity		Consumer		Mortgage
	Total		Leases		Loans		Loans		Loans		Loans		Loans		Unallocated
Allowance for Loan Losses:
Ending Allowance Balance Attributable to Loans:
Individually Evaluated for Impairment	$	4,834	$	466	$	4,368	$	—	$	—	$	—	$	—	$	—
Collectively Evaluated for Impairment		10,401		3,027		4,852		926		258		190		402		746
Acquired with Deteriorated Credit Quality		77		—		77		—		—		—		—		—
Total Ending Allowance
Balance	$	15,312	$	3,493	$	9,297	$	926	$	258	$	190	$	402	$	746
Loans:
Loans Individually Evaluated for Impairment	$	16,613	$	3,567	$	13,046	$	—	$	—	$	—	$	—	$	—
Loans Collectively Evaluated for Impairment		1,096,571		287,924		427,063		170,513		77,323		47,431		86,317		—
Loans Acquired with Deteriorated Credit Quality		16,121		2,596		13,209		—		—		164		152		—
Total Ending Loans Balance (1)	$	1,129,305	$	294,087	$	453,318	$	170,513	$	77,323	$	47,595	$	86,469	$	—

⁽¹⁾ Total recorded investment in loans includes $5,756 in accrued interest.

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 December 31, 2010:

			Commercial
			and
			Industrial		Commercial				Home				Residential
			Loans and		Real Estate		Agricultural		Equity		Consumer		Mortgage
	Total		Leases		Loans		Loans		Loans		Loans		Loans		Unallocated
Allowance for Loan Losses:
Ending Allowance Balance Attributable to Loans:
Individually Evaluated for Impairment	$	4,583	$	1,387	$	3,196	$	—	$	—	$	—	$	—	$	—
Collectively Evaluated for Impairment		8,734		2,326		4,301		750		220		362		543		232
Total Ending Allowance Balance	$	13,317	$	3,713	$	7,497	$	750	$	220	$	362	$	543	$	232
Loans:
Loans Individually Evaluated for Impairment	$	16,833	$	3,421	$	13,357	$	55	$	—	$	—	$	—	$	—
Loans Collectively Evaluated for Impairment		907,525		215,840		327,413		167,933		64,652		54,048		77,639		—
Total Ending Loans Balance (1)	$	924,358	$	219,261	$	340,770	$	167,988	$	64,652	$	54,048	$	77,639	$	—

⁽¹⁾ Total recorded investment in loans includes $5,640 in accrued interest.

The following table presents loans individually evaluated for impairment by class of loans including purchase credit impaired loans that subsequently result in additional allowance for loans losses as of and for the year ended December 31, 2011:

	Unpaid				Allowance for		Average		Interest		Cash
	Principal		Recorded		Loan Losses		Recorded		Income		Basis
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases	$	1,084	$	1,066	$	—	$	1,107	$	9	$	9
Commercial Real Estate Loans		5,959		5,894		—		4,438		75		75
Agricultural Loans		—		—		—		19		6		6
With An Allowance Recorded:
Commercial and Industrial Loans and Leases		2,502		2,501		466		3,642		11		11
Commercial Real Estate Loans		7,400		7,230		4,445		9,390		37		34
Agricultural Loans		—		—		—		—		—		—
Total	$	16,945	$	16,691	$	4,911	$	18,596	$	138	$	135

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

	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
	Balance		Investment		Allocated
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases	$	570	$	585	$	—
Commercial Real Estate Loans		2,243		2,231		—
Agricultural Loans		55		55		—
With An Allowance Recorded:
Commercial and Industrial Loans and Leases		2,779		2,836		1,387
Commercial Real Estate Loans		11,062		11,126		3,196
Agricultural Loans		—		—		—
Total	$	16,709	$	16,833	$	4,583

The following table presents information for loans individually evaluated for impairment for the years ended December 31, 2010 and 2009:

	2010		2009
Average Balance of Impaired Loans During the Year	$	10,166	$	6,676
Interest Income Recognized During Impairment		78		73
Interest Income Recognized on Cash Basis		78		71

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2011 and 2010:

					Loans Past Due
					Over 90 Days
	Non-Accrual				& Still Accruing
	2011		2010		2011		2010
Commercial and Industrial Loans and Leases	$	3,471	$	514	$	—	$	547
Commercial Real Estate Loans		13,289		8,718		—		103
Agricultural Loans		—		55		—		—
Home Equity Loans		90		156		—		—
Consumer Loans		259		103		—		38
Residential Mortgage Loans		748		604		—		—
Total	$	17,857	$	10,150	$	—	$	688

The following table presents the aging of the recorded investment in past due loans as of December 31, 2011 by class of loans:

							Greater than
			30-59 Days		60-89 Days		90 Days		Total		Loans Not
	Total		Past Due		Past Due		Past Due		Past Due		Past Due
Commercial and Industrial Loans and Leases	$	294,087	$	220	$	—	$	1,141	$	1,361	$	292,726
Commercial Real Estate Loans		453,318		381		148		5,920		6,449		446,869
Agricultural Loans		170,513		10		—		—		10		170,503
Home Equity Loans		77,323		176		6		90		272		77,051
Consumer Loans		47,595		287		117		221		625		46,970
Residential Mortgage Loans		86,469		2,752		893		748		4,393		82,076
Total (1)	$	1,129,305	$	3,826	$	1,164	$	8,120	$	13,110	$	1,116,195

⁽¹⁾ Total recorded investment in loans includes $5,756 in accrued interest.

The following table presents the aging of the recorded investment in past due loans as of December 31, 2010 by class of loans:

							Greater than
			30-59 Days		60-89 Days		90 Days		Total		Loans Not
	Total		Past Due		Past Due		Past Due		Past Due		Past Due
Commercial and Industrial Loans and Leases	$	219,261	$	1,876	$	782	$	1,011	$	3,669	$	215,592
Commercial Real Estate Loans		340,770		149		700		5,843		6,692		334,078
Agricultural Loans		167,988		363		—		55		418		167,570
Home Equity Loans		64,652		132		12		156		300		64,352
Consumer Loans		54,048		604		95		108		807		53,241
Residential Mortgage Loans		77,639		2,112		580		604		3,296		74,343
Total (1)	$	924,358	$	5,236	$	2,169	$	7,777	$	15,182	$	909,176

⁽¹⁾ Total recorded investment in loans includes $5,640 in accrued interest.

Troubled Debt Restructurings:

The Company has allocated $198 of specific reserves on $409 in principal to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2011. The Company had allocated $348 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2010. The Company has not committed to lending any additional amounts as of December 31, 2011 and December 31, 2010 to customers with outstanding loans that are classified as troubled debt restructurings.

For the year ended December 31, 2011, one troubled debt restructuring occurred. Pre-modification and post-modification outstanding recorded investment for this loan totaled $284 and $50, respectively. The modification of the terms of this loan included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

The troubled debt restructuring described above did not increase the allowance for loan losses for the year ended December 31, 2011. The troubled debt restructuring resulted in charge-offs of $145 during the year ended December 31, 2011.

For the year ended December 31, 2011, there were no payment defaults within the twelve months following modification for troubled debt restructurings.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. For the year ended December 31, 2011, no troubled debt restructurings subsequently defaulted.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. This evaluation is performed under the company's internal underwriting policy.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company classifies loans as to credit risk by individually analyzing loans. This analysis includes commercial and industrial loans, commercial real estate loans, and agricultural loans with an outstanding balance greater than $100. This analysis is typically performed on at least an annual basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as 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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100 or are included in groups of homogeneous loans. Based on the most recent analysis performed, the risk category of loans by class of loans is a follows:

			Special
	Pass		Mention		Substandard		Doubtful		Total
December 31, 2011
Commercial and Industrial Loans and Leases	$	264,037	$	16,188	$	13,862	$	—	$	294,087
Commercial Real Estate Loans		396,057		28,272		28,989		—		453,318
Agricultural Loans		165,153		2,744		2,616		—		170,513
Total	$	825,247	$	47,204	$	45,467	$	—	$	917,918

			Special
	Pass		Mention		Substandard		Doubtful		Total
December 31, 2010
Commercial and Industrial Loans and Leases	$	192,494	$	14,782	$	11,985	$	—	$	219,261
Commercial Real Estate Loans		295,863		27,304		17,603		—		340,770
Agricultural Loans		161,871		3,294		2,823		—		167,988
Total	$	650,228	$	45,380	$	32,411	$	—	$	728,019

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For home equity, consumer and residential mortgage loan classes, the Company 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 home equity, consumer and residential mortgage loans based on payment activity as of December 31, 2011 and 2010:

	Home Equity		Consumer		Residential
	Loans		Loans		Mortgage Loans
December 31, 2011
Performing	$	77,233	$	47,336	$	85,721
Nonperforming		90		259		748
Total	$	77,323	$	47,595	$	86,469

	Home Equity		Consumer		Residential
	Loans		Loans		Mortgage Loans
December 31, 2010
Performing	$	64,496	$	53,907	$	77,035
Nonperforming		156		141		604
Total	$	64,652	$	54,048	$	77,639

The following table presents financing receivable purchased and/or sold during the year ended December 31, 2011 by portfolio class:

	Commercial
	and
	Industrial		Commercial				Home				Residential
	Loans and		Real Estate		Agricultural		Equity		Consumer		Mortgage
	Leases		Loans		Loans		Loans		Loans		Loans		Total
Purchases	$	69,898	$	111,629	$	—	$	13,329	$	1,169	$	22,901	$	218,926

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The recorded investment of those loans is as follows:

	December 31, 2011
Commercial and Industrial Loans	$	2,596
Commercial Real Estate Loans		13,209
Home Equity Loans		—
Consumer Loans		164
Residential Mortgage Loans		152
Total	$	16,121
Carrying Amount, Net of Allowance of $77	$	16,044

Accretable yield, or income expected to be collected, is as follows:

	December 31, 2011
Balance at January 1, 2011	$	—
New Loans Purchased		2,042
Accretion of Income		(1,130	)
Reclassifications from Non-accretable Difference		129
Charge-off Accretion		(74	)
Balance at December 31, 2011	$	967

For those purchased loans disclosed above, the Company increased the allowance for loan losses by $77 for the year ended December 31, 2011. No allowances for loan losses were reversed during the same period.

Contractually required payments receivable of loans purchased during the year:

Commercial and Industrial Loans	$	4,542
Commercial Real Estate Loans		19,260
Home Equity Loans		28
Consumer Loans		217
Residential Mortgage Loans		458
Total	$	24,505
Cash Flows Expected to be Collected at Acquisition	$	19,695
Fair Value of Acquired Loans at Acquisition		17,653

Certain directors, executive officers, and principal shareholders of the Company, including their immediate families and companies in which they are principal owners, were loan customers of the Company during 2011. A summary of the activity of these loans follows:

Balance				Changes							Balance
January 1,				in Persons		Deductions					December 31,
2011		Additions		Included		Collected			Charged-off		2011
$	4,338	$	5,630	$	2,187	$	(5,415	)	$	—	$	6,740