5. Loans, Allowance for Loan Losses and Credit Quality

6 Months Ended

Jun. 30, 2015

Accounts, Notes, Loans and Financing Receivable, Gross, Allowance, and Net [Abstract]

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

The composition of net loans as of the balance sheet dates was as follows:

	June 30,			December 31,			June 30,
	2015			2014			2014
Commercial & industrial	$	73,561,125		$	64,390,220		$	64,475,384
Commercial real estate		172,565,221			166,611,830			164,302,843
Residential real estate - 1st lien		162,109,916			163,966,124			169,367,709
Residential real estate - Jr lien		43,816,552			44,801,483			44,564,026
Consumer		7,429,236			8,035,298			7,883,342
		459,482,050			447,804,955			450,593,304
Deduct (add):
Allowance for loan losses		5,095,212			4,905,874			4,876,816
Deferred net loan costs		(307,235	)		(303,394	)		(288,237	)
		4,787,977			4,602,480			4,588,579
Net Loans	$	454,694,073		$	443,202,475		$	446,004,725

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

													90 Days or
			90 Days		Total						Non-Accrual		More
June 30, 2015	30-89 Days		or More		Past Due		Current		Total Loans		Loans		and Accruing
Commercial & industrial	$	177,758	$	174,184	$	351,942	$	73,209,183	$	73,561,125	$	767,235	$	0
Commercial real estate		740,547		239,619		980,166		171,585,055		172,565,221		1,909,917		5,313
Residential real estate - 1st lien		2,222,425		828,694		3,051,119		159,058,797		162,109,916		1,927,300		528,211
Residential real estate - Jr lien		346,444		82,021		428,465		43,388,087		43,816,552		311,571		82,021
Consumer		38,159		8,987		47,146		7,382,090		7,429,236		0		8,987
Total	$	3,525,333	$	1,333,505	$	4,858,838	$	454,623,212	$	459,482,050	$	4,916,023	$	624,532
													90 Days or
			90 Days		Total						Non-Accrual		More
December 31, 2014	30-89 Days		or More		Past Due		Current		Total Loans		Loans		and Accruing
Commercial & industrial	$	439,151	$	299,095	$	738,246	$	63,651,974	$	64,390,220	$	552,386	$	23,579
Commercial real estate		988,924		5,313		994,237		165,617,593		166,611,830		1,934,096		5,313
Residential real estate - 1st lien		4,446,138		1,484,334		5,930,472		158,035,652		163,966,124		1,263,046		980,138
Residential real estate - Jr lien		637,917		179,920		817,837		43,983,646		44,801,483		404,061		115,852
Consumer		56,392		0		56,392		7,978,906		8,035,298		0		0
Total	$	6,568,522	$	1,968,662	$	8,537,184	$	439,267,771	$	447,804,955	$	4,153,589	$	1,124,882
													90 Days or
			90 Days		Total						Non-Accrual		More
June 30, 2014	30-89 Days		or More		Past Due		Current		Total Loans		Loans		and Accruing
Commercial & industrial	$	373,363	$	605,406	$	978,769	$	63,496,615	$	64,475,384	$	1,347,748	$	102,961
Commercial real estate		1,378,654		94,609		1,473,263		162,829,580		164,302,843		1,661,324		5,313
Residential real estate - 1st lien		2,542,507		991,146		3,533,653		165,834,056		169,367,709		1,943,475		231,085
Residential real estate - Jr lien		228,014		110,451		338,465		44,225,561		44,564,026		453,304		57,241
Consumer		54,479		17,927		72,406		7,810,936		7,883,342		0		17,927
Total	$	4,577,017	$	1,819,539	$	6,396,556	$	444,196,748	$	450,593,304	$	5,405,851	$	414,527

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

As of June 30, 2015, there were four residential mortgage loans in process of foreclosure totaling $403,526.

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.

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 estimated 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, three year, four 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 reserve methodology was modified during the quarter ended June 30, 2015 to eliminate using the higher of the 1999-2001 losses as compared to current losses, by eliminating the use of the 1999-2001 period.  The 1999-2001 information has become dated and the Bank’s credit portfolio management has evolved during that time.  The revised methodology now considers the highest annual loss rates for the most recent one to five year look back periods for each segment of the portfolio. This change resulted in a reduction to required reserves of $529,234. Adjustments were made to the commercial & industrial and commercial real estate qualitative factors to adjust for the impact of the change in methodology, principally in the area of loan growth, loan policy, and delinquency factors. The commercial & industrial and commercial real estate factors were each increased a total of 10 basis points, amounting to increases of $171,000 and $70,000, respectively.

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 term 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 estimated 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.  While unallocated reserves have increased, they are considered by management to be appropriate in light of the Company’s continued growth strategy and shift in the portfolio from residential loans to commercial and commercial real estate loans and the risk associated with the relatively new, unseasoned loans in those portfolios.

The following tables summarize changes in the allowance for loan losses and select loan information, by portfolio segment, for the periods indicated:

As of or for the three months ended June 30, 2015
						Residential			Residential
	Commercial		Commercial			Real Estate			Real Estate
	& Industrial		Real Estate			1st Lien			Jr Lien		Consumer			Unallocated		Total
Allowance for loan losses
Beginning balance	$	750,491	$	2,325,111		$	1,322,017		$	321,407	$	86,084		$	197,939	$	5,003,049
Charge-offs		0		0			(78,700	)		0		(22,816	)		0		(101,516	)
Recoveries		37,306		0			0			60		6,313			0		43,679
Provision (credit)		93,297		(340,552	)		115,187			30,658		(5,768	)		257,178		150,000
Ending balance	$	881,094	$	1,984,559		$	1,358,504		$	352,125	$	63,813		$	455,117	$	5,095,212

As of or for the six months ended June 30, 2015
							Residential			Residential
	Commercial			Commercial			Real Estate			Real Estate
	& Industrial			Real Estate			1st Lien			Jr Lien			Consumer			Unallocated		Total
Allowance for loan losses
Beginning balance	$	646,719		$	2,311,936		$	1,270,766		$	321,099		$	118,819		$	236,535	$	4,905,874
Charge-offs		(35,059	)		0			(94,575	)		(20,199	)		(28,105	)		0		(177,938	)
Recoveries		42,913			0			6,042			120			18,201			0		67,276
Provision (credit)		226,521			(327,377	)		176,271			51,105			(45,102	)		218,582		300,000
Ending balance	$	881,094		$	1,984,559		$	1,358,504		$	352,125		$	63,813		$	455,117	$	5,095,212
Allowance for loan losses
Evaluated for impairment
Individually	$	70,000		$	0		$	71,800		$	47,500		$	0		$	0	$	189,300
Collectively		811,094			1,984,559			1,286,704			304,625			63,813			455,117		4,905,912
Total	$	881,094		$	1,984,559		$	1,358,504		$	352,125		$	63,813		$	455,117	$	5,095,212
Loans evaluated for impairment
Individually	$	594,176		$	1,845,751		$	1,345,820		$	238,623		$	0				$	4,024,370
Collectively		72,966,949			170,719,470			160,764,096			43,577,929			7,429,236					455,457,680
Total	$	73,561,125		$	172,565,221		$	162,109,916		$	43,816,552		$	7,429,236				$	459,482,050

As of or for the year ended December 31, 2014
							Residential			Residential
	Commercial			Commercial			Real Estate			Real Estate
	& Industrial			Real Estate			1st Lien			Jr Lien			Consumer			Unallocated			Total
Allowance for loan losses
Beginning balance	$	516,382		$	2,143,398		$	1,452,184		$	366,471		$	105,279		$	271,201		$	4,854,915
Charge-offs		(153,329	)		(167,841	)		(58,904	)		(51,389	)		(112,376	)		0			(543,839	)
Recoveries		6,249			0			14,543			240			33,766			0			54,798
Provision (credit)		277,417			336,379			(137,057	)		5,777			92,150			(34,666	)		540,000
Ending balance	$	646,719		$	2,311,936		$	1,270,766		$	321,099		$	118,819		$	236,535		$	4,905,874
Allowance for loan losses
Evaluated for impairment
Individually	$	0		$	34,400		$	43,400		$	0		$	0		$	0		$	77,800
Collectively		646,719			2,277,536			1,227,366			321,099			118,819			236,535			4,828,074
Total	$	646,719		$	2,311,936		$	1,270,766		$	321,099		$	118,819		$	236,535		$	4,905,874
Loans evaluated for impairment
Individually	$	390,605		$	1,930,993		$	721,241		$	328,889		$	0					$	3,371,728
Collectively		63,999,615			164,680,837			163,244,883			44,472,594			8,035,298						444,433,227
Total	$	64,390,220		$	166,611,830		$	163,966,124		$	44,801,483		$	8,035,298					$	447,804,955

As of or for the three months ended June 30, 2014
							Residential			Residential
	Commercial			Commercial			Real Estate			Real Estate
	& Industrial			Real Estate			1st Lien			Jr Lien			Consumer			Unallocated		Total
Allowance for loan losses
Beginning balance	$	556,223		$	2,172,678		$	1,396,934		$	348,738		$	100,386		$	262,619	$	4,837,578
Charge-offs		(70,534	)		(30,819	)		0			0			(14,241	)		0		(115,594	)
Recoveries		2,124			0			1,725			60			15,923			0		19,832
Provision (credit)		199,603			13,879			(61,648	)		(54,184	)		(17,953	)		55,303		135,000
Ending balance	$	687,416		$	2,155,738		$	1,337,011		$	294,614		$	84,115		$	317,922	$	4,876,816

As of or for the six months ended June 30, 2014
							Residential			Residential
	Commercial			Commercial			Real Estate			Real Estate
	& Industrial			Real Estate			1st Lien			Jr Lien			Consumer			Unallocated		Total
Allowance for loan losses
Beginning balance	$	516,382		$	2,143,398		$	1,452,184		$	366,471		$	105,279		$	271,201	$	4,854,915
Charge-offs		(87,214	)		(130,819	)		0			0			(65,769	)		0		(283,802	)
Recoveries		2,236			0			11,098			120			22,249			0		35,703
Provision (credit)		256,012			143,159			(126,271	)		(71,977	)		22,356			46,721		270,000
Ending balance	$	687,416		$	2,155,738		$	1,337,011		$	294,614		$	84,115		$	317,922	$	4,876,816
Allowance for loan losses
Evaluated for impairment
Individually	$	99,300		$	18,900		$	100,600		$	13,100		$	0		$	0	$	231,900
Collectively		588,116			2,136,838			1,236,411			281,514			84,115			317,922		4,644,916
Total	$	687,416		$	2,155,738		$	1,337,011		$	294,614		$	84,115		$	317,922	$	4,876,816
Loans evaluated for impairment
Individually	$	1,233,885		$	1,558,186		$	1,374,851		$	370,775		$	0				$	4,537,697
Collectively		63,241,499			162,744,657			167,992,858			44,193,251			7,883,342					446,055,607
Total	$	64,475,384		$	164,302,843		$	169,367,709		$	44,564,026		$	7,883,342				$	450,593,304

Impaired loans, by portfolio segment, were as follows:

	As of June 30, 2015
			Unpaid				Average		Average
	Recorded		Principal		Related		Recorded		Recorded
	Investment		Balance		Allowance		Investment(1)		Investment(2)
With no related allowance recorded
Commercial & industrial	$	502,237	$	560,173	$	0	$	555,057	$	300,144
Commercial real estate		1,845,751		1,856,008		0		1,976,769		1,136,004
Residential real estate - 1st lien		1,095,830		1,470,050		0		780,255		433,329
Residential real estate - Jr lien		0		0		0		120,465		113,964
	$	3,443,818	$	3,886,231	$	0	$	3,432,546	$	1,983,441
With an allowance recorded
Commercial & industrial	$	91,940	$	94,826	$	70,000	$	93,398	$	37,359
Commercial real estate		0		0		0		0		40,902
Residential real estate - 1st lien		249,989		284,200		71,800		302,937		144,196
Residential real estate - Jr lien		238,623		284,202		47,500		152,865		61,146
	$	580,552	$	663,228	$	189,300	$	549,200	$	283,603
Total	$	4,024,370	$	4,549,459	$	189,300	$	3,981,746	$	2,267,044
(1) For the three months ended June 30, 2015
(2) For the six months ended June 30, 2015

	As of December 31, 2014						2014
			Unpaid				Average
	Recorded		Principal		Related		Recorded
	Investment		Balance		Allowance		Investment
With no related allowance recorded
Commercial & industrial	$	390,605	$	424,598	$	0	$	507,232
Commercial real estate		1,726,482		1,689,772		0		1,294,710
Residential real estate - 1st lien		606,133		875,841		0		971,542
Residential real estate - Jr lien		328,889		390,260		0		238,826
	$	3,052,109	$	3,380,471	$	0	$	3,012,310
With an allowance recorded
Commercial & industrial	$	0	$	0	$	0	$	158,690
Commercial real estate		204,511		220,981		34,400		280,104
Residential real estate - 1st lien		115,108		144,708		43,400		294,807
Residential real estate - Jr lien		0		0		0		149,772
	$	319,619	$	365,689	$	77,800	$	883,373
Total	$	3,371,728	$	3,746,160	$	77,800	$	3,895,683

	As of June 30, 2014
			Unpaid				Average		Average
	Recorded		Principal		Related		Recorded		Recorded
	Investment		Balance		Allowance		Investment(1)		Investment(2)
With no related allowance recorded
Commercial & industrial	$	819,016	$	884,377	$	0	$	552,178	$	472,955
Commercial real estate		1,337,570		1,431,199		0		1,248,510		1,147,288
Residential real estate - 1st lien		832,008		905,092		0		1,042,268		1,146,323
Residential real estate - Jr lien		269,912		316,506		0		183,089		176,772
	$	3,258,506	$	3,537,174	$	0	$	3,026,045	$	2,943,338
With an allowance recorded
Commercial & industrial		414,869		415,759		99,300		238,953		179,031
Commercial real estate		220,616		231,221		18,900		165,405		257,481
Residential real estate - 1st lien		542,843		579,363		100,600		394,924		408,070
Residential real estate - Jr lien		100,863		109,217		13,100		176,875		249,621
	$	1,279,191	$	1,335,560	$	231,900	$	976,157	$	1,094,203
Total	$	4,537,697	$	4,872,734	$	231,900	$	4,002,202	$	4,037,541
(1) For the three months ended June 30, 2014
(2) For the six months ended June 30, 2014

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

For all loan 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 considered by management to be 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 segment, as of the balance sheet dates were as follows:

As of June 30, 2015
					Residential		Residential
	Commercial		Commercial		Real Estate		Real Estate
	& Industrial		Real Estate		1st Lien		Jr Lien		Consumer		Total
Group A	$	70,152,385	$	162,191,020	$	158,224,270	$	43,196,452	$	7,420,249	$	441,184,376
Group B		2,451,677		4,819,930		231,391		228,892		0		7,731,890
Group C		957,063		5,554,271		3,654,255		391,208		8,987		10,565,784
Total	$	73,561,125	$	172,565,221	$	162,109,916	$	43,816,552	$	7,429,236	$	459,482,050

As of December 31, 2014
					Residential		Residential
	Commercial		Commercial		Real Estate		Real Estate
	& Industrial		Real Estate		1st Lien		Jr Lien		Consumer		Total
Group A	$	61,201,586	$	157,767,641	$	160,912,689	$	44,018,956	$	8,035,298	$	431,936,170
Group B		2,316,908		3,280,904		228,148		251,822		0		6,077,782
Group C		871,726		5,563,285		2,825,287		530,705		0		9,791,003
Total	$	64,390,220	$	166,611,830	$	163,966,124	$	44,801,483	$	8,035,298	$	447,804,955

As of June 30, 2014
					Residential		Residential
	Commercial		Commercial		Real Estate		Real Estate
	& Industrial		Real Estate		1st Lien		Jr Lien		Consumer		Total
Group A	$	60,373,539	$	155,124,213	$	166,345,054	$	43,883,107	$	7,865,415	$	433,591,328
Group B		2,730,275		3,586,566		598,381		147,531		0		7,062,753
Group C		1,371,570		5,592,064		2,424,274		533,388		17,927		9,939,223
Total	$	64,475,384	$	164,302,843	$	169,367,709	$	44,564,026	$	7,883,342	$	450,593,304

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. Management’s 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.

TDRs, by portfolio segment, for the periods presented were as follows:

	Three months ended June 30, 2015						Six months ended June 30, 2015
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment
Commercial & industrial		3	$	198,999	$	198,829		3	$	198,999	$	198,829
Residential real estate
- 1st lien		3		618,317		660,196		8		962,646		1,021,102
- Jr lien		0		0		0		2		117,745		121,672
Total		6	$	817,316	$	859,025		13	$	1,279,390	$	1,341,603

	Year ended December 31, 2014
			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Commercial real estate		1	$	301,823	$	301,823
Residential real estate - 1st lien		11		1,294,709		1,332,336
Total		12	$	1,596,532	$	1,634,159

	Three months ended June 30, 2014			Six months ended June 30, 2014
		Pre-	Post-		Pre-	Post-
		Modification	Modification		Modification	Modification
		Outstanding	Outstanding		Outstanding	Outstanding
	Number of	Recorded	Recorded	Number of	Recorded	Recorded
	Contracts	Investment	Investment	Contracts	Investment	Investment
Residential real estate
- 1st lien	3	$218,330	$237,090	6	$480,899	$510,737

The TDR’s for which there was a payment default during the twelve month periods presented were as follows:

Twelve months ended June 30, 2015
	Number of		Recorded
	Contracts		Investment
Commercial		1	$	82,336
Residential real estate - 1st lien		3		258,568
Total		4	$	340,904

Year ended December 31, 2014
	Number of		Recorded
	Contracts		Investment
Residential real estate - 1st lien		2	$	137,830

Twelve months ended June 30, 2014
	Number of		Recorded
	Contracts		Investment
Residential real estate – 1st lien		5	$	441,679

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, 2015 and 2014, the specific allocation related to TDRs was approximately $104,600 and $88,300, respectively.  There was no specific allowance related to TDRs at December 31, 2014.

As of June 30, 2015, the Company is contractually committed to lend up to $450,000 in additional funds to one debtor with an impaired SBA guaranteed cap line of credit; that debtor’s loan relationship is expected to strengthen as a result of a prior troubled debt restructuring.  With this exception, as of the balance sheet dates, the Company was not contractually committed to lend additional funds to debtors with impaired, non-accrual or modified loans.