5. Loans, Allowance for Loan Losses and Credit Quality

9 Months Ended

Sep. 30, 2012

Notes to Financial Statements

Loans, Allowance for Loan Losses and Credit Quality

The composition of net loans follows:

	September 30, 2012			December 31, 2011			September 30, 2011
Commercial & industrial	$	47,484,639		$	39,514,607		$	34,570,063
Commercial real estate		136,016,554			132,269,368			137,892,249
Residential real estate - 1st lien		168,541,410			159,535,958			159,755,182
Residential real estate - Jr lien		46,029,238			45,886,967			46,843,024
Consumer		11,022,804			11,465,139			11,899,588
		409,094,645			388,672,039			390,960,106
Deduct (add):
Allowance for loan losses		4,115,230			3,886,502			3,835,840
Deferred net loan costs (fees)		(101,742	)		(7,251	)		20,474
Loans held-for-sale		1,483,940			2,285,567			2,411,242
		5,497,428			6,164,818			6,267,556
Net Loans	$	403,597,217		$	382,507,221		$	384,692,550

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

			90 Days		Total						Non-Accrual		Over 90 Days
September 30, 2012	30-89 Days		or More		Past Due		Current		Total Loans		Loans		and Accruing
Commercial & industrial	$	254,847	$	326,693	$	581,540	$	46,903,099	$	47,484,639	$	613,817	$	75,042
Commercial real estate		426,428		1,331,505		1,757,933		134,258,621		136,016,554		2,321,320		53,936
Residential real estate - 1st lien		749,535		1,102,424		1,851,959		165,205,511		167,057,470		1,441,659		825,843
Residential real estate - Jr lien		456,984		109,222		566,206		45,463,032		46,029,238		326,882		109,222
Consumer		123,197		14,077		137,274		10,885,530		11,022,804		4,841		9,236
Total	$	2,010,991	$	2,883,921	$	4,894,912	$	402,715,793	$	407,610,705	$	4,708,519	$	1,073,279

			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 & industrial	$	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
September 30, 2011	30-89 Days		or More		Past Due		Current		Total Loans		Loans		and Accruing
Commercial & industrial	$	667,668	$	583,258	$	1,250,926	$	33,319,137	$	34,570,063	$	917,328	$	21,824
Commercial real estate		3,066,295		1,025,858		4,092,153		133,800,096		137,892,249		2,911,034		209,506
Residential real estate - 1st lien		1,673,594		2,192,883		3,866,477		153,477,463		157,343,940		2,768,549		619,848
Residential real estate - Jr lien		380,341		403,815		784,156		46,058,868		46,843,024		537,892		208,754
Consumer		92,843		2,869		95,712		11,803,876		11,899,588		0		1,010
Total	$	5,880,741	$	4,208,683	$	10,089,424	$	378,459,440	$	388,548,864	$	7,134,803	$	1,060,942

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 & industrial, 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 compared to first lien residential mortgage loans, 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 September 30, 2012 and December 31, 2011, and 23 percent as of September 30, 2011. No changes in the Company’s policies or methodology pertaining to the general component for loan losses were made during the first nine 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 & Industrial – 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 of the allowance for loan losses 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 of the allowance of loan losses is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component 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 (excluding loans held-for-sale).

For the quarter ended September 30, 2012
							Residential			Residential
	Commercial			Commercial			Real Estate			Real Estate
	& Industrial			Real Estate			1st Lien			Jr Lien			Consumer			Unallocated		Total
Allowance for loan losses
Beginning balance	$	383,523		$	1,386,183		$	1,473,661		$	368,939		$	126,914		$	186,899	$	3,926,119
Charge-offs		(34,375	)		(2,821	)		(56,126	)		(9,447	)		(9,065	)		0		(111,834	)
Recoveries		17,978			24,587			1,426			60			6,895			0		50,946
Provisions		51,298			36,941			85,324			38,815			5,965			31,656		249,999
Ending balance	$	418,424		$	1,444,890		$	1,504,285		$	398,367		$	130,709		$	218,555	$	4,115,230

For the nine months ended September 30, 2012
							Residential			Residential
	Commercial			Commercial			Real Estate			Real Estate
	& Industrial			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		(159,309	)		(57,878	)		(239,600	)		(69,734	)		(69,437	)		0		(595,958	)
Recoveries		20,498			25,450			3,248			1,479			24,010			0		74,685
Provisions		214,921			91,379			162,144			134,938			51,357			95,262		750,001
Ending balance	$	418,424		$	1,444,890		$	1,504,285		$	398,367		$	130,709		$	218,555	$	4,115,230
Allowance for loan losses
Evaluated for impairment
Individually	$	0		$	8,900		$	110,700		$	46,400		$	0		$	0	$	166,000
Collectively		418,424			1,435,990			1,393,585			351,967			130,709			218,555		3,949,230
Total	$	418,424		$	1,444,890		$	1,504,285		$	398,367		$	130,709		$	218,555	$	4,115,230
Loans evaluated for impairment
Individually	$	446,484		$	2,187,060		$	1,261,272		$	297,898		$	0				$	4,192,714
Collectively		47,038,155			133,829,494			165,796,198			45,731,340			11,022,804					403,417,991
Total	$	47,484,639		$	136,016,554		$	167,057,470		$	46,029,238		$	11,022,804				$	407,610,705

For the year ended December 31, 2011
							Residential			Residential
	Commercial			Commercial			Real Estate			Real Estate
	& Industrial			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			154,884,065			45,452,303			11,465,139					378,916,102
Total	$	39,514,607		$	132,269,368		$	157,250,391		$	45,886,967		$	11,465,139				$	386,386,472

For the quarter ended September 30, 2011
	Commercial			Commercial			Residential
	& Industrial			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(Reductions)		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			Commercial			Residential
	& Industrial			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(Reductions)		(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			201,294,086			11,899,588					381,980,370
Total	$	34,570,063		$	137,892,249		$	204,186,964		$	11,899,588				$	388,548,864

Impaired loans by segments were as follows:

For the nine months ended September 30, 2012
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized *
With no related allowance recorded
Commercial & industrial	$	446,484	$	478,798	$	0	$	562,425	$	0
Commercial real estate		1,996,452		2,426,167		0		2,083,657		0
Residential real estate 1st lien		900,217		1,149,862		0		860,886		0
Residential real estate Jr lien		0		0		0		39,329		0
With an allowance recorded
Commercial & industrial		0		0		0		290,929		0
Commercial real estate		190,608		192,108		8,900		1,151,053		0
Residential real estate 1st lien		361,055		402,647		110,700		961,084		0
Residential real estate Jr lien		297,898		319,472		46,400		295,737		0
Total
Commercial & industrial	$	446,484	$	478,798	$	0	$	853,354	$	0
Commercial real estate	$	2,187,060	$	2,618,275	$	8,900	$	3,234,710	$	0
Residential real estate 1st lien	$	1,261,272	$	1,552,509	$	110,700	$	1,821,970	$	0
Residential real estate Jr lien	$	297,898	$	319,472	$	46,400	$	335,066	$	0
Total	$	4,192,714	$	4,969,054	$	166,000	$	6,245,100	$	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 & industrial	$	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 & industrial		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 & industrial	$	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 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 & industrial	$	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 & industrial		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 & industrial	$	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

__________

*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 borrowers 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 purpose 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		Commercial		Real Estate		Real Estate
September 30, 2012	& Industrial		Real Estate		1st Lien		Jr Lien		Consumer		Total
Group A	$	45,649,737	$	127,984,841	$	164,474,055	$	45,373,633	$	11,005,770	$	394,488,036
Group B		590,534		3,787,365		408,051		318,848		0		5,104,798
Group C		1,244,368		4,244,348		3,659,304		336,757		17,034		9,501,811
Total	$	47,484,639	$	136,016,554	$	168,541,410	$	46,029,238	$	11,022,804	$	409,094,645

	Total Loans
					Residential		Residential
	Commercial		Commercial		Real Estate		Real Estate
December 31, 2011	& Industrial		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		Commercial		Residential
September 30, 2011	& Industrial		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

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 is deemed to have 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 payment 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.  However, the Company evaluates each TDR situation on its own merits and does not foreclose the granting of any particular type of concession.

For the nine months ended September 30, 2012
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Commercial real estate		2	$	1,030,645	$	1,030,645
Residential real estate 1st lien		1		143,757		146,306
Total		3	$	1,174,402	$	1,176,951

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

	Number of		Recorded
	Contracts		Investment
Commercial & industrial		1	$	158,076

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.