5. Loans, Allowance for Loan Losses and Credit Quality

6 Months Ended

Jun. 30, 2012

Notes to Financial Statements

Loans, Allowance for Loan Losses and Credit Quality

Note 5.  Loans, Allowance for Loan Losses and Credit Quality

The composition of net loans follows:

	June 30, 2012			December 31, 2011			June 30, 2011
Commercial	$	52,696,811		$	39,514,607		$	36,860,487
Commercial real estate		131,239,549			132,269,368			137,273,305
Residential real estate - 1st lien		166,621,140			159,535,958			161,038,426
Residential real estate - Jr. lien		46,253,285			45,886,967			46,289,717
Consumer		11,370,898			11,465,139			12,059,910
		408,181,683			388,672,039			393,521,845
Deduct (add):
Allowance for loan losses		3,926,119			3,886,502			3,851,369
Unearned net loan fees		(76,703	)		(7,251	)		38,803
Loans held-for-sale		2,984,024			2,285,567			1,555,288
		6,833,440			6,164,818			5,445,460
Net Loans	$	401,348,243		$	382,507,221		$	388,076,385

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

			90 Days		Total						Non-Accrual		Over 90 Days
June 30, 2012	30-89 Days		or More		Past Due		Current		Total Loans		Loans		and Accruing
Commercial	$	690,163	$	608,100	$	1,298,263	$	51,398,548	$	52,696,811	$	1,159,782	$	31,517
Commercial real estate		403,082		2,609,864		3,012,946		128,226,603		131,239,549		3,571,542		96,622
Residential real estate - 1st lien		1,148,563		1,263,035		2,411,598		161,225,518		163,637,116		1,629,611		704,780
Residential real estate - Jr lien		315,398		80,602		396,000		45,857,285		46,253,285		340,427		71,155
Consumer		157,491		17,131		174,622		11,196,276		11,370,898		0		17,131
Total	$	2,714,697	$	4,578,732	$	7,293,429	$	397,904,230	$	405,197,659	$	6,701,362	$	921,205
			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
June 30, 2011	30-89 Days		or More		Past Due		Current		Total Loans		Loans		and Accruing
Commercial	$	563,870	$	107,318	$	671,188	$	36,189,299	$	36,860,487	$	350,498	$	4,838
Commercial real estate		1,003,076		817,168		1,820,244		135,453,061		137,273,305		1,517,465		393,707
Residential real estate - 1st lien		1,473,327		1,959,554		3,432,881		156,050,257		159,483,138		2,514,155		571,001
Residential real estate - Jr lien		280,423		297,726		578,149		45,711,568		46,289,717		459,626		207,758
Consumer		107,179		1,228		108,407		11,951,503		12,059,910		0		1,228
Total	$	3,427,875	$	3,182,994	$	6,610,869	$	385,355,688	$	391,966,557	$	4,841,744	$	1,178,532

Allowance for loan losses

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 probable. 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 first lien, residential real estate junior lien, and consumer loans. The Company does not disaggregate its portfolio segments further into classes.  Loss ratios are calculated for one year, two year and five year look back periods.  The highest loss ratio among these look-back periods is then applied against the respective segment.  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. 

During the fourth quarter of 2011 the Company modified its allowance methodology by further segmenting the residential real estate portfolio into first lien residential mortgages and junior lien residential mortgages, also known as home equity loans.  The change was made to allow the Company to more closely monitor and appropriately reserve for the risk inherent with home equity lending, given the modest repayment requirements, relaxed documentation characteristic of home equity lending, higher loan to value ratios, subordinate lien position, and recent decline of home property values. The residential real estate junior lien portfolio accounted for 22 percent of the total residential real estate portfolio as of June 30, 2012, December 31, 2011, and June 30, 2011. No changes in the Company’s policies or methodology pertaining to the general component for loan losses were made during the first six months of 2012.

The qualitative factors are determined based on the various risk characteristics of each loan segment. The Company has policies, procedures and internal controls that management believes are 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 risk factors. The non-owner occupied commercial real estate portion includes both residential and commercial construction loans, vacant land and real estate development loans, multi-family dwelling loans 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 entail 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 factors 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 - 1st Lien – All loans in this segment are collateralized by first mortgages on 1 – 4 family 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.

Residential Real Estate – Jr. Lien – All loans in this segment are collateralized by junior lien mortgages on 1 – 4 family residential real estate and repayment is primarily 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 businesses 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 loan segments, 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 or temporary 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 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 following summarizes changes in the allowance for loan losses and select loan information, by portfolio segment.

For the quarter ended June 30, 2012
							Residential			Residential
				Commercial			Real Estate			Real Estate
	Commercial			Real Estate			1st Lien			Jr Lien		Consumer			Unallocated		Total
Allowance for loan losses
Beginning balance	$	388,576		$	1,389,368		$	1,595,453		$	318,075	$	124,022		$	136,995	$	3,952,489
Charge-offs		(115,100	)		(8,259	)		(125,000	)		0		(36,714	)		0		(285,073	)
Recoveries		1,268			108			366			62		6,900			0		8,704
Provision		108,779			4,966			2,842			50,802		32,706			49,904		249,999
Ending balance	$	383,523		$	1,386,183		$	1,473,661		$	368,939	$	126,914		$	186,899	$	3,926,119

For the six months ended June 30, 2012
							Residential			Residential
				Commercial			Real Estate			Real Estate
	Commercial			Real Estate			1st Lien			Jr Lien			Consumer			Unallocated		Total
Allowance for loan losses
Beginning balance	$	342,314		$	1,385,939		$	1,578,493		$	331,684		$	124,779		$	123,293	$	3,886,502
Charge-offs		(124,934	)		(55,057	)		(183,474	)		(60,287	)		(60,373	)		0		(484,125	)
Recoveries		2,520			863			1,823			1,418			17,116			0		23,740
Provision		163,623			54,438			76,819			96,124			45,392			63,606		500,002
Ending balance	$	383,523		$	1,386,183		$	1,473,661		$	368,939		$	126,914		$	186,899	$	3,926,119
Allowance for loan losses
Evaluated for impairment
Individually	$	0		$	15,100		$	144,300		$	21,000		$	0		$	0	$	180,400
Collectively		383,523			1,371,083			1,329,361			347,939			126,914			186,899		3,745,719
Total	$	383,523		$	1,386,183		$	1,473,661		$	368,939		$	126,914		$	186,899	$	3,926,119
Loans evaluated for impairment
Individually	$	985,350		$	3,459,215		$	1,345,724		$	301,796		$	0				$	6,092,085
Collectively		51,711,461			127,780,334			165,275,416			45,951,489			11,370,898					402,089,598
Total	$	52,696,811		$	131,239,549		$	166,621,140		$	46,253,285		$	11,370,898				$	408,181,683

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
Provision		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 quarter ended June 30, 2011
				Commercial			Residential
	Commercial			Real Estate			Real Estate			Consumer			Unallocated			Total
Allowance for loan losses
Beginning balance	$	256,448		$	1,396,946		$	1,756,119		$	151,865		$	148,540		$	3,709,918
Charge-offs		(2,427	)		0			(82,646	)		(26,523	)		0			(111,596	)
Recoveries		3,416			1,091			600			10,440			0			15,547
Provision (reduction)		(10,870	)		(2,687	)		291,867			(3,250	)		(37,560	)		237,500
Ending balance	$	246,567		$	1,395,350		$	1,965,940		$	132,532		$	110,980		$	3,851,369

For the six months ended June 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		(3,127	)		0		(271,446	)		(64,113	)		0		(338,686	)
Recoveries		11,522			2,181		600			22,817			0		37,120
Provision (reduction)		(64,249	)		1,271		405,970			21,880			60,128		425,000
Ending balance	$	246,567		$	1,395,350	$	1,965,940		$	132,532		$	110,980	$	3,851,369
Individually evaluated for impairment	$	0		$	6,100	$	366,300		$	0		$	0	$	372,400
Collectively evaluated  for impairment		246,567			1,389,250		1,599,640			132,532			110,980		3,478,969
Total	$	246,567		$	1,395,350	$	1,965,940		$	132,532		$	110,980	$	3,851,369
Loans
Individually evaluated for impairment	$	856,643		$	1,471,703	$	2,644,713		$	0				$	4,973,059
Collectively evaluated for impairment		36,003,844			135,801,602		204,683,430			12,059,910				$	388,548,786
Total	$	36,860,487		$	137,273,305	$	207,328,143		$	12,059,910				$	393,521,845

Impaired loans by segments were as follows:

For the six months ended June 30, 2012
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized *
With no related allowance recorded
Commercial	$	985,350	$	1,098,373	$	0	$	601,073	$	0
Commercial real estate		2,307,560		2,658,965		0		2,112,726		0
Residential real estate 1st lien		701,424		924,758		0		847,776		0
Residential real estate Jr lien		31,532		36,024		0		52,439		0
With an allowance recorded
Commercial		0		0		0		387,905		0
Commercial real estate		1,151,655		1,167,055		15,100		1,471,201		0
Residential real estate 1st lien		644,300		683,961		144,300		1,161,093		0
Residential real estate Jr lien		270,264		284,776		21,000		295,016		0
Total
Commercial	$	985,350	$	1,098,373	$	0	$	988,978	$	0
Commercial real estate	$	3,459,215	$	3,826,020	$	15,100	$	3,583,927	$	0
Residential real estate 1st lien	$	1,345,724	$	1,608,719	$	144,300	$	2,008,869	$	0
Residential real estate Jr lien	$	301,796	$	320,800	$	21,000	$	347,455	$	0
Total	$	6,092,085	$	6,853,912	$	180,400	$	6,929,229	$	0

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 six months ended June 30, 2011
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized*
With no related allowance recorded
Commercial	$	856,643	$	859,175			$	294,667	$	0
Commercial real estate		1,260,762		1,276,902				480,280		0
Residential real estate		865,299		1,058,921				1,323,348		0
With an allowance recorded
Commercial		0		0		0		42,028		0
Commercial real estate		210,941		210,941		6,100		833,777		0
Residential real estate		1,779,414		2,176,749		366,300		1,655,730		0
Total
Commercial	$	856,643	$	859,175	$	0	$	336,695	$	0
Commercial real estate	$	1,471,703	$	1,487,843	$	6,100	$	1,314,057	$	0
Residential real estate	$	2,644,713	$	3,235,670	$	366,300	$	2,979,078	$	0
Total	$	4,973,059	$	5,582,688	$	372,400	$	4,629,830	$	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 segments as of the balance sheet dates were as follows:

	Total Loans
					Residential		Residential
			Commercial		Real Estate		Real Estate
June 30, 2012	Commercial		Real Estate		1st Lien		Jr Lien		Consumer		Total
Group A	$	50,347,984	$	119,388,434	$	162,033,504	$	45,302,653	$	11,350,308	$	388,422,883
Group B		400,125		4,660,012		412,798		321,946		0		5,794,881
Group C		1,948,702		7,191,103		4,174,838		628,686		20,590		13,963,919
Total	$	52,696,811	$	131,239,549	$	166,621,140	$	46,253,285	$	11,370,898	$	408,181,683

	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	$	153,954,604	$	44,943,200	$	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	$	159,535,958	$	45,886,967	$	11,465,139	$	388,672,039

	Total Loans
			Commercial		Residential
June 30, 2011	Commercial		Real Estate		Real Estate		Consumer		Total
Group A	$	33,713,261	$	121,191,043	$	201,366,558	$	12,045,442	$	368,316,305
Group B		990,727		7,129,125		594,832		0		8,714,684
Group C		2,156,499		8,953,137		5,366,753		14,468		16,490,856
Total	$	36,860,487	$	137,273,305	$	207,328,143	$	12,059,910	$	393,521,845

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 accrued interest

● 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 or reduced accrued interest within the terms of original restructurings, nor has it converted variable rate terms to fixed rate terms.

The following table presents loans modified as TDRs by segment during the six months ended June 30, 2012:

			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Residential real estate 1st lien		1	$	23,944	$	26,493

The following table presents TDRs for the twelve month period ended June 30, 2012 for which there was a payment default under the restructured terms during the period:

	Number of		Recorded
	Contracts		Investment
Commercial		3	$	283,363
Commercial real estate		1		398,002
Residential real estate 1st lien		1		107,584
Total		5	$	788,949

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