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5. Loans, Allowance for Loan Losses and Credit Quality

9 Months Ended

Sep. 30, 2013

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

The composition of net loans follows:

	September 30, 2013			December 31, 2012			September 30, 2012

Commercial & industrial	$	55,500,735		$	49,283,948		$	47,484,639
Commercial real estate		147,280,787			139,807,517			136,016,554
Residential real estate - 1st lien		175,737,499			171,114,515			168,541,410
Residential real estate - Jr lien		45,279,400			47,029,023			46,029,238
Consumer		9,412,856			10,642,151			11,022,804
		433,211,277			417,877,154			409,094,645
Deduct (add):
Allowance for loan losses		4,799,431			4,312,080			4,115,230
Deferred net loan costs		(281,747	)		(169,501	)		(101,742	)
Loans held-for-sale		1,229,490			1,501,706			1,483,940
		5,747,174			5,644,285			5,497,428
Net Loans	$	427,464,103		$	412,232,869		$	403,597,217

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
September 30, 2013	30-89 Days		or More		Past Due		Current		Total Loans		Loans		and Accruing

Commercial & industrial	$	75,101	$	269,744	$	344,845	$	55,155,890	$	55,500,735	$	493,272	$	0
Commercial real estate		982,378		546,252		1,528,630		145,752,157		147,280,787		1,740,350		50,965
Residential real estate - 1st lien		1,270,029		1,071,400		2,341,429		172,166,580		174,508,009		1,999,274		344,193
Residential real estate - Jr lien		539,828		223,200		763,028		44,516,372		45,279,400		669,292		62,359
Consumer		95,907		8,755		104,662		9,308,194		9,412,856		0		8,755
Total	$	2,963,243	$	2,119,351	$	5,082,594	$	426,899,193	$	431,981,787	$	4,902,188	$	466,272

			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
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

For all loan segments, loans over 30 days past due 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 nine 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. 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”) regardless of amount. A specific allowance is established for an impaired loan when its 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. 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 September 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	$	515,244		$	1,698,040		$	1,527,962		$	414,161	$	116,248		$	250,524		$	4,522,179
Charge-offs		(42,327	)		(16,913	)		(3,957	)		0		(10,647	)		0			(73,844	)
Recoveries		1,126			185,791			3,128			21,110		2,441			0			213,596
Provision (credit)		4,891			72,698			(14,415	)		81,589		22,894			(30,157	)		137,500
Ending balance	$	478,934		$	1,939,616		$	1,512,718		$	516,860	$	130,936		$	220,367		$	4,799,431

For the Nine Months Ended September 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		(61,614	)		(124,849	)		(7,009	)		0		(36,655	)		0			(230,127	)
Recoveries		2,117			185,791			11,764			21,230		32,826			0			253,728
Provision (credit)		110,050			342,234			(55,613	)		163,074		(3,934	)		(92,061	)		463,750
Ending balance	$	478,934		$	1,939,616		$	1,512,718		$	516,860	$	130,936		$	220,367		$	4,799,431

Allowance for loan losses
Evaluated for impairment
Individually	$	0		$	115,700		$	110,500		$	185,700	$	0		$	0		$	411,900
Collectively		478,934			1,823,916			1,402,218			331,160		130,936			220,367			4,387,531
Total	$	478,934		$	1,939,616		$	1,512,718		$	516,860	$	130,936		$	220,367		$	4,799,431

Loans evaluated for impairment
Individually	$	319,010		$	1,716,870		$	1,734,139		$	669,292	$	0					$	4,439,311
Collectively		55,181,725			145,563,917			172,773,870			44,610,108		9,412,856						427,542,476
Total	$	55,500,735		$	147,280,787		$	174,508,009		$	45,279,400	$	9,412,856					$	431,981,787

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 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

Impaired loans by segments were as follows:

	As of September 30, 2013
			Unpaid				Average		Average
	Recorded		Principal		Related		Recorded		Recorded
	Investment		Balance		Allowance		Investment (1)		Investment (2)

With no related allowance recorded
Commercial & industrial	$	319,010	$	366,022	$	0	$	312,218	$	345,772
Commercial real estate		1,199,398		1,269,979		0		1,085,322		1,420,668
Residential real estate - 1st lien		1,156,159		1,390,485		0		1,026,675		1,022,181
Residential real estate - Jr lien		102,913		110,997		0		63,752		39,723

With an allowance recorded
Commercial & industrial		0		0		0		0		0
Commercial real estate		517,472		517,472		115,700		307,194		229,809
Residential real estate - 1st lien		577,980		657,154		110,500		523,738		536,016
Residential real estate - Jr lien		566,379		595,494		185,700		445,302		377,291

Total
Commercial & industrial	$	319,010	$	366,022	$	0	$	312,218	$	345,772
Commercial real estate	$	1,716,870	$	1,787,451	$	115,700	$	1,392,516	$	1,650,477
Residential real estate - 1st lien	$	1,734,139	$	2,047,639	$	110,500	$	1,550,413	$	1,558,197
Residential real estate - Jr lien	$	669,292	$	706,491	$	185,700	$	509,054	$	417,014

Total	$	4,439,311	$	4,907,603	$	411,900	$	3,764,201	$	3,971,460

(1) For the Quarter Ended September 30, 2013

(2) For the Nine Months Ended September 30, 2013

As of 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 September 30, 2012

			Unpaid				Average		Average
	Recorded		Principal		Related		Recorded		Recorded
	Investment		Balance		Allowance		Investment (1)		Investment (2)

With no related allowance recorded
Commercial & industrial	$	446,484	$	478,798	$	0	$	715,917	$	562,425
Commercial real estate		1,996,452		2,426,167		0		2,152,006		2,083,657
Residential real estate - 1st lien		900,217		1,149,862		0		800,820		860,886
Residential real estate - Jr lien		0		0		0		15,766		39,329

With an allowance recorded
Commercial & industrial		0		0		0		0		290,929
Commercial real estate		190,608		192,108		8,900		671,132		1,151,053
Residential real estate - 1st lien		361,055		402,647		110,700		502,679		961,084
Residential real estate - Jr lien		297,898		319,472		46,400		284,081		295,737

Total
Commercial & industrial	$	446,484	$	478,798	$	0	$	715,917	$	853,354
Commercial real estate	$	2,187,060	$	2,618,275	$	8,900	$	2,823,138	$	3,234,710
Residential real estate - 1st lien	$	1,261,272	$	1,552,509	$	110,700	$	1,303,499	$	1,821,970
Residential real estate - Jr lien	$	297,898	$	319,472	$	46,400	$	299,847	$	335,066

Total	$	4,192,714	$	4,969,054	$	166,000	$	5,142,401	$	6,245,100

(1) For the Quarter Ended September 30, 2012

(2) For the Nine Months Ended September 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 considered by management to be 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 considered by management to be 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:

As of September 30, 2013
					Residential		Residential
	Commercial		Commercial		Real Estate		Real Estate
	& Industrial		Real Estate		1st Lien		Jr Lien		Consumer		Total

Group A	$	51,937,275	$	139,168,914	$	171,694,502	$	44,144,667	$	9,404,101	$	416,349,459
Group B		2,412,663		3,572,369		175,081		497,992		0		6,658,105
Group C		1,150,797		4,539,504		2,638,426		636,741		8,755		8,974,223
Total	$	55,500,735	$	147,280,787	$	174,508,009	$	45,279,400	$	9,412,856	$	431,981,787

As of December 31, 2012
					Residential		Residential
	Commercial		Commercial		Real Estate		Real Estate
	& 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

As of September 30, 2012
					Residential		Residential
	Commercial		Commercial		Real Estate		Real Estate
	& Industrial		Real Estate		1st Lien		Jr Lien		Consumer		Total

Group A	$	45,649,737	$	127,984,841	$	162,990,115	$	45,373,633	$	11,005,770	$	393,004,096
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	$	167,057,470	$	46,029,238	$	11,022,804	$	407,610,705

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.

There were no TDR’s for the quarter ended September 30, 2013. TDR’s by segment for the periods presented were as follows:

For the nine months ended September 30, 2013

Pre-

Post-

Modification

Outstanding

Number of

Recorded

Contracts

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 September 30, 2012

Pre-

Post-

Modification

Outstanding

Number of

Recorded

Contracts

Investment

Residential real estate - 1st lien

1

$

52,940

$

53,369

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		3		200,241		205,588
Total		5	$	1,230,886	$	1,236,233

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

	Number of		Recorded
	Contracts		Investment

Commercial & industrial		1	$	158,076

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 September 30, 2013, December 31, 2012, and September 30, 2012, the allowance related to TDRs was approximately $0, $23,000 and $29,000, respectively.

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

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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