5. Loans, Allowance for Loan Losses and Credit Quality

6 Months Ended

Jun. 30, 2013

Notes to Financial Statements

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

The composition of net loans follows:

	June 30, 2013			December 31, 2012			June 30, 2012
Commercial & industrial	$	57,608,840		$	49,283,948		$	52,696,811
Commercial real estate		138,664,212			139,807,517			131,239,549
Residential real estate - 1st lien		174,902,277			171,114,515			166,621,140
Residential real estate - Jr. lien		45,145,675			47,029,023			46,253,285
Consumer		9,491,326			10,642,151			11,370,898
		425,812,330			417,877,154			408,181,683
Deduct (add):
Allowance for loan losses		4,522,179			4,312,080			3,926,119
Deferred net loan costs		(247,624	)		(169,501	)		(76,703	)
Loans held-for-sale		1,019,119			1,501,706			2,984,024
		5,293,674			5,644,285			6,833,440
Net Loans	$	420,518,656		$	412,232,869		$	401,348,243

The following is an age analysis of past due loans (including non-accrual), net of loans held-for-sale, by segment:

			90 Days		Total						Non-Accrual		90 Days or More
June 30, 2013	30-89 Days		or More		Past Due		Current		Total Loans		Loans		and Accruing
Commercial & industrial	$	572,834	$	29,329	$	602,163	$	57,006,677	$	57,608,840	$	497,287	$	0
Commercial real estate		1,251,943		213,084		1,465,027		137,199,185		138,664,212		1,165,336		45,653
Residential real estate - 1st lien		1,933,003		1,143,585		3,076,588		170,806,570		173,883,158		1,660,626		596,814
Residential real estate - Jr. lien		292,954		41,068		334,022		44,811,653		45,145,675		348,815		5,951
Consumer		75,781		0		75,781		9,415,545		9,491,326		0		0
Total	$	4,126,515	$	1,427,066	$	5,553,581	$	419,239,630	$	424,793,211	$	3,672,064	$	648,418
			90 Days		Total						Non-Accrual		90 Days or More
December 31, 2012	30-89 Days		or More		Past Due		Current		Total Loans		Loans		and Accruing
Commercial & industrial	$	782,937	$	377,145	$	1,160,082	$	48,123,866	$	49,283,948	$	596,777	$	0
Commercial real estate		785,890		888,179		1,674,069		138,133,448		139,807,517		1,892,195		53,937
Residential real estate - 1st lien		4,654,077		844,803		5,498,880		164,113,929		169,612,809		1,928,097		281,845
Residential real estate - Jr. lien		379,363		57,128		436,491		46,592,532		47,029,023		338,383		41,434
Consumer		132,624		844		133,468		10,508,683		10,642,151		0		844
Total	$	6,734,891	$	2,168,099	$	8,902,990	$	407,472,458	$	416,375,448	$	4,755,452	$	378,060
			90 Days		Total						Non-Accrual		90 Days or More
June 30, 2012	30-89 Days		or More		Past Due		Current		Total Loans		Loans		and Accruing
Commercial & industrial	$	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

For all loan segments, loans over 30 days are considered delinquent.

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. No changes in the Company’s policies or methodology pertaining to the allowance for loan losses were made during the first six months of 2013.

Unsecured loans, primarily consumer loans, are charged off when they become uncollectible and no later than 120 days past due. Unsecured loans to customers who subsequently file bankruptcy are charged off within 30 days of receipt of the notification of filing or by the end of the month in which the loans become 120 days past due, whichever occurs first. For secured loans, both residential and commercial, the potential loss on impaired loans is carried as a loan loss reserve specific allocation; the loss portion is charged off when collection of the full loan appears unlikely. The unsecured portion of a real estate loan is that portion of the loan exceeding the "fair value" of the collateral less the cost to sell. Value of the collateral is determined in accordance with the Company’s appraisal policy. The unsecured portion of an impaired real estate secured loan is charged off by the end of the month in which the loan becomes 180 days past due.

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 and industrial, commercial real estate, residential real estate first (“1st”) lien, residential real estate junior (“Jr”) lien and consumer loans. The Company does not disaggregate its portfolio segments further into classes. Loss ratios are calculated by loan segment 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.

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. Major 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 and industrial 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 the same risk factors as commercial and industrial loans. 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 the 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 for loan losses is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component reflects management’s estimate of 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 June 30, 2013
							Residential			Residential
	Commercial			Commercial			Real Estate			Real Estate
	& Industrial			Real Estate			1st Lien			Jr Lien		Consumer			Unallocated			Total
Allowance for loan losses
Beginning balance	$	436,389		$	1,763,037		$	1,511,139		$	386,070	$	119,032		$	277,717		$	4,493,384
Charge-offs		(1,352	)		(107,936	)		(3,052	)		0		(8,783	)		0			(121,122	)
Recoveries		792			0			3,010			60		26,056			0			29,918
Provision (credit)		79,415			42,939			16,865			28,031		(20,058	)		(27,193	)		120,000
Ending balance	$	515,244		$	1,698,040		$	1,527,962		$	414,161	$	116,248		$	250,524		$	4,522,179

For the six months ended June 30, 2013
							Residential			Residential
	Commercial			Commercial			Real Estate			Real Estate
	& Industrial			Real Estate			1st Lien			Jr Lien		Consumer			Unallocated			Total
Allowance for loan losses
Beginning balance	$	428,381		$	1,536,440		$	1,563,576		$	332,556	$	138,699		$	312,428		$	4,312,080
Charge-offs		(19,287	)		(107,936	)		(3,052	)		0		(26,009	)		0			(156,284	)
Recoveries		992			0			8,636			120		30,385			0			40,133
Provision (credit)		105,158			269,536			(41,198	)		81,485		(26,827	)		(61,904	)		326,250
Ending balance	$	515,244		$	1,698,040		$	1,527,962		$	414,161	$	116,248		$	250,524		$	4,522,179
Allowance for loan losses
Evaluated for impairment
Individually	$	0		$	29,000		$	121,700		$	91,100	$	0		$	0		$	241,800
Collectively		515,244			1,669,040			1,406,262			323,061		116,248			250,524			4,280,379
Total	$	515,244		$	1,698,040		$	1,527,962		$	414,161	$	116,248		$	250,524		$	4,522,179
Loans evaluated for impairment
Individually	$	305,425		$	1,068,160		$	1,366,685		$	348,815	$	0					$	3,089,085
Collectively		57,303,415			137,596,052			172,516,473			44,796,860		9,491,326						421,704,126
Total	$	57,608,840		$	138,664,212		$	173,883,158		$	45,145,675	$	9,491,326					$	424,793,211

For the year ended December 31, 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	)		(57,923	)		(246,237	)		(135,622	)		(96,491	)		0		(695,582	)
Recoveries		29,769			51,863			5,538			1,538			32,452			0		121,160
Provision		215,607			156,561			225,782			134,956			77,959			189,135		1,000,000
Ending balance	$	428,381		$	1,536,440		$	1,563,576		$	332,556		$	138,699		$	312,428	$	4,312,080
Allowance for loan losses
Evaluated for impairment
Individually	$	0		$	0		$	134,800		$	39,200		$	0		$	0	$	174,000
Collectively		428,381			1,536,440			1,428,776			293,356			138,699			312,428		4,138,080
Total	$	428,381		$	1,536,440		$	1,563,576		$	332,556		$	138,699		$	312,428	$	4,312,080
Loans evaluated for impairment
Individually	$	435,165		$	1,762,615		$	1,641,960		$	309,606		$	0				$	4,149,346
Collectively		48,848,783			138,044,902			167,970,849			46,719,417			10,642,151					412,226,102
Total	$	49,283,948		$	139,807,517		$	169,612,809		$	47,029,023		$	10,642,151				$	416,375,448

For the quarter ended June 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	$	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			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		(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			162,291,392			45,951,489			11,370,898					399,105,574
Total	$	52,696,811		$	131,239,549		$	163,637,116		$	46,253,285		$	11,370,898				$	405,197,659

Impaired loans by segments were as follows:

	As of June 30, 2013
			Unpaid				Average		Average
	Recorded		Principal		Related		Recorded		Recorded
	Investment		Balance		Allowance		Investment (1)		Investment (2)
With no related allowance recorded
Commercial & Industrial	$	305,425	$	348,569	$	0	$	314,456	$	354,692
Commercial real estate		971,245		1,030,645		0		1,360,330		1,494,425
Residential real estate - 1st lien		897,190		1,122,551		0		953,984		977,522
Residential real estate - Jr lien		24,591		32,254		0		20,143		18,660
With an allowance recorded
Commercial & Industrial		0		0		0		0		0
Commercial real estate		96,915		96,915		29,000		200,883		133,922
Residential real estate - 1st lien		469,495		539,218		121,700		474,361		522,028
Residential real estate - Jr lien		324,224		349,871		91,100		324,436		314,261
Total
Commercial & Industrial	$	305,425	$	348,569	$	0	$	314,456	$	354,692
Commercial real estate	$	1,068,160	$	1,127,560	$	29,000	$	1,561,213	$	1,628,347
Residential real estate - 1st lien	$	1,366,685	$	1,661,769	$	121,700	$	1,428,345	$	1,499,550
Residential real estate - Jr lien	$	348,815	$	382,125	$	91,100	$	344,579	$	332,921
Total	$	3,089,085	$	3,520,023	$	241,800	$	3,648,593	$	3,815,510
(1) For the quarter ended June 30, 2013
(2) For the six months ended June 30, 2013

For the year ended December 31, 2012
			Unpaid				Average
	Recorded		Principal		Related		Recorded
	Investment		Balance		Allowance		Investment
With no related allowance recorded
Commercial & industrial	$	435,165	$	473,664	$	0	$	536,973
Commercial real estate		1,762,615		2,123,371		0		2,019,449
Residential real estate - 1st lien		1,024,598		1,250,224		0		893,629
Residential real estate - Jr lien		15,694		76,680		0		34,602
With an allowance recorded
Commercial & industrial		0		0		0		232,743
Commercial real estate		0		0		0		920,842
Residential real estate - 1st lien		617,362		669,288		134,800		892,339
Residential real estate - Jr lien		293,912		319,020		39,200		295,372
Total
Commercial & industrial	$	435,165	$	473,664	$	0	$	769,716
Commercial real estate	$	1,762,615	$	2,123,371	$	0	$	2,940,291
Residential real estate - 1st lien	$	1,641,960	$	1,919,512	$	134,800	$	1,785,968
Residential real estate - Jr lien	$	309,606	$	395,700	$	39,200	$	329,974
Total	$	4,149,346	$	4,912,247	$	174,000	$	5,825,949

	As of June 30, 2012
			Unpaid				Average		Average
	Recorded		Principal		Related		Recorded		Recorded
	Investment		Balance		Allowance		Investment (1)		Investment (2)
With no related allowance recorded
Commercial	$	985,350	$	1,098,373	$	0	$	711,297	$	601,073
Commercial real estate		2,307,560		2,658,965		0		2,148,538		2,112,726
Residential real estate - 1st lien		701,424		924,758		0		771,255		847,776
Residential real estate - Jr lien		31,532		36,024		0		15,766		52,439
With an allowance recorded
Commercial		0		0		0		272,109		387,905
Commercial real estate		1,151,655		1,167,055		15,100		1,392,722		1,471,201
Residential real estate - 1st lien		644,300		683,961		144,300		1,058,887		1,161,093
Residential real estate - Jr lien		270,264		284,776		21,000		288,086		295,016
Total
Commercial	$	985,350	$	1,098,373	$	0	$	983,406	$	988,978
Commercial real estate	$	3,459,215	$	3,826,020	$	15,100	$	3,541,260	$	3,583,927
Residential real estate - 1st lien	$	1,345,724	$	1,608,719	$	144,300	$	1,830,142	$	2,008,869
Residential real estate - Jr lien	$	301,796	$	320,800	$	21,000	$	303,852	$	347,455
Total	$	6,092,085	$	6,853,912	$	180,400	$	6,658,660	$	6,929,229
(1) For the quarter ended June 30, 2012
(2) For the six months ended June 30, 2012

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

For all loans segments, the accrual of interest is discontinued when a loan is specifically determined to be impaired or when the loan is delinquent 90 days and management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is generally not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on impaired loans are generally applied as a reduction of the loan principal balance. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

As of the balance sheet dates, the Company was 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 purpose 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
June 30, 2013	& Industrial		Real Estate		1st Lien		Jr Lien		Consumer		Total
Group A	$	55,985,055	$	131,939,691	$	171,245,755	$	44,215,183	$	9,489,361	$	412,875,045
Group B		567,569		2,321,844		178,847		461,445		0		3,529,705
Group C		1,056,216		4,402,677		2,458,556		469,047		1,965		8,388,461
Total	$	57,608,840	$	138,664,212	$	173,883,158	$	45,145,675	$	9,491,326	$	424,793,211

Total Loans
					Residential		Residential
	Commercial		Commercial		Real Estate		Real Estate
December 31, 2012	& Industrial		Real Estate		1st Lien		Jr Lien		Consumer		Total
Group A	$	47,689,238	$	131,643,756	$	166,374,493	$	46,162,420	$	10,632,404	$	402,502,311
Group B		593,838		4,139,367		404,752		318,248		0		5,456,205
Group C		1,000,872		4,024,394		2,833,564		548,355		9,747		8,416,932
Total	$	49,283,948	$	139,807,517	$	169,612,809	$	47,029,023	$	10,642,151	$	416,375,448

Total Loans
					Residential		Residential
	Commercial		Commercial		Real Estate		Real Estate
June 30, 2012	& Industrial		Real Estate		1st Lien		Jr Lien		Consumer		Total
Group A	$	50,347,984	$	119,388,434	$	159,049,480	$	45,302,653	$	11,350,308	$	385,438,859
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	$	163,637,116	$	46,253,285	$	11,370,898	$	405,197,659

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.

TDR’s by segment for the periods presented were as follows:

For the quarter and the six months ended June 30, 2013

			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Residential real estate - Jr lien		1	$	23,425	$	23,425

For the year ended December 31, 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						3			200,241				205,588
Total						5		$	1,230,886			$	1,236,233
	For the quarter ended June 30, 2012									For the six months ended June 30, 2012
			Pre-			Post-								Pre-		Post-
			Modification			Modification								Modification		Modification
	Number		Outstanding			Outstanding				Number				Outstanding		Outstanding
	of		Recorded			Recorded				of				Recorded		Recorded
	Contracts		Investment			Investment				Contracts				Investment		Investment
Commercial real estate		0	$	0		$	0				2			$	1,030,645	$	1,030,645
Residential real estate - 1st lien		1		23,944			27,336				2				147,301		152,219
Total		1	$	23,944		$	27,336				4			$	1,177,946	$	1,182,864

There were no TDRs for which there was a payment default under the restructured terms during the twelve month period ended June 30, 2013. The TDR’s for which there was a payment default during the twelve month period ended June 30, 2012 were as follows:

	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

TDRs are treated as other impaired loans and carry individual specific reserves with respect to the calculation of the allowance for loan losses. 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 is typically calculated using the fair value of collateral method. At June 30, 2013, December 31, 2012, and June 30, 2012, the allowance related to TDRs was approximately $0, $23,000 and $0, respectively.

At June 30, 2013, the Company did not have any commitments to lend additional funds to borrowers with loans classified as TDRs.