(6) Loans

Major classifications of loans at the indicated dates are as follows:

	September 30,			December 31,
(In thousands)	2012			2011
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	169,062		$	158,384
Construction		2,587			3,935
		171,649			162,319

Commercial loans:
Real estate		79,770			73,420
Lines of credit		13,471			13,791
Other commercial and industrial		27,509			22,701
Municipal		5,063			3,619
		125,813			113,531

Consumer loans:
Home equity and junior liens		22,580			24,171
Other consumer		3,627			4,140
		26,207			28,311

Total loans		323,669			304,161
Net deferred loan costs		481			589
Less allowance for loan losses		(4,433	)		(3,980	)
Loans receivable, net	$	319,717		$	300,770

The Company originates residential mortgage, commercial and consumer loans largely to customers throughout Oswego, Onondaga, Jefferson, and Oneida counties. Although the Company has a diversified loan portfolio, a substantial portion of its borrowers' abilities to honor their contracts is dependent upon the counties' employment and economic conditions.

As of September 30, 2012 and December 31, 2011, residential mortgage loans with a carrying value of $62.3 million and $65.8 million, respectively, have been pledged by the Company to the Federal Home Loan Bank of New York ("FHLBNY") under a blanket collateral agreement to secure the Company's line of credit and term borrowings. Borrowings at the FHLBNY as of September 30, 2012 and December 31, 2011 were $29.0 million and $20.0 million, respectively.

Loan Origination / Risk Management

The Company's lending policies and procedures are presented in Note 5 to the consolidated financial statements included in the 2011 Annual Report filed on Form 10-K on March 29, 2012, and have not changed.

To develop and document a systematic methodology for determining the allowance for loan losses, the Company has divided the loan portfolio into three portfolio segments, each with different risk characteristics and methodologies for assessing risk. Each portfolio segment is broken down into loan classes where appropriate. Loan classes contain unique measurement attributes, risk characteristics and methods for monitoring and assessing risk that are necessary to develop the allowance for loan losses. Unique characteristics such as borrower type, loan type, collateral type, and risk characteristics define each class. The following table illustrates the portfolio segments and classes for the Company's loan portfolio:

Portfolio Segment	Class

Residential Mortgage Loans	1-4 family first-lien residential mortgages
	Construction

Commercial Loans	Real estate
	Lines of credit
	Other commercial and industrial
	Municipal

Consumer Loans	Home equity and junior liens
	Other consumer

The following tables present the classes of the loan portfolio, not including net deferred loan costs, summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of the dates indicated:

	September 30, 2012
			Special
(In thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	162,529	$	950	$	5,583	$	-	$	169,062
Construction		2,587		-		-		-		2,587
		165,116		950		5,583		-		171,649
Commercial loans:
Real estate		75,148		48		4,574		-		79,770
Lines of credit		12,325		-		1,071		75		13,471
Other commercial and industrial		26,346		-		1,157		6		27,509
Municipal		5,063		-		-		-		5,063
		118,882		48		6,802		81		125,813
Consumer loans:
Home equity and junior liens		20,614		165		1,752		49		22,580
Other consumer		3,349		191		59		28		3,627
		23,963		356		1,811		77		26,207
Total loans	$	307,961	$	1,354	$	14,196	$	158	$	323,669

	December 31, 2011
			Special
(In thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	153,049	$	1,050	$	4,285	$	-	$	158,384
Construction		3,935		-		-		-		3,935
		156,984		1,050		4,285		-		162,319
Commercial loans:
Real estate		69,737		212		3,471		-		73,420
Lines of credit		12,579		49		1,163		-		13,791
Other commercial and industrial		21,978		89		591		43		22,701
Municipal		3,619		-		-		-		3,619
		107,913		350		5,225		43		113,531
Consumer loans:
Home equity and junior liens		22,500		162		1,456		53		24,171
Other consumer		3,922		61		123		34		4,140
		26,422		223		1,579		87		28,311
Total loans	$	291,319	$	1,623	$	11,089	$	130	$	304,161

Management has reviewed its loan portfolio and determined that, to the best of its knowledge, no exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of originating these types of loans.

Nonaccrual and Past Due Loans

Loans are considered past due if the required principal and interest payments have not been received within thirty days of the payment due date.

An age analysis of past due loans, segregated by portfolio segment and class of loans, as of September 30, 2012 and December 31, 2011, are detailed in the following tables:

	September 30, 2012

	30-59 Days		60-89 Days		90 Days		Total				Total Loans
(In thousands)	Past Due		Past Due		and Over		Past Due		Current		Receivable
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	1,838	$	1,139	$	1,506	$	4,483	$	164,579	$	169,062
Construction		-		-		-		-		2,587		2,587
		1,838		1,139		1,506		4,483		167,166		171,649
Commercial loans:
Real estate		729		46		1,526		2,301		77,469		79,770
Lines of credit		137		500		238		875		12,596		13,471
Other commercial and industrial		272		62		578		912		26,597		27,509
Municipal		-		-		-		-		5,063		5,063
		1,138		608		2,342		4,088		121,725		125,813
Consumer loans:
Home equity and junior liens		334		313		737		1,384		21,196		22,580
Other consumer		43		48		38		129		3,498		3,627
		377		361		775		1,513		24,694		26,207
Total loans	$	3,353	$	2,108	$	4,623	$	10,084	$	313,585	$	323,669

	December 31, 2011
	30-59 Days		60-89 Days		90 Days		Total				Total Loans
(In thousands)	Past Due		Past Due		and Over		Past Due		Current		Receivable
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	2,870	$	934	$	1,428	$	5,232	$	153,152	$	158,384
Construction		-		-		-		-		3,935		3,935
		2,870		934		1,428		5,232		157,087		162,319
Commercial loans:
Real estate		2,015		4		1,623		3,642		69,778		73,420
Lines of credit		337		75		467		879		12,912		13,791
Other commercial and industrial		356		392		504		1,252		21,449		22,701
Municipal		-		-		-		-		3,619		3,619
		2,708		471		2,594		5,773		107,758		113,531
Consumer loans:
Home equity and junior liens		357		182		550		1,089		23,082		24,171
Other consumer		55		2		156		213		3,927		4,140
		412		184		706		1,302		27,009		28,311
Total loans	$	5,990	$	1,589	$	4,728	$	12,307	$	291,854	$	304,161

Nonaccrual loans, segregated by class of loan, were as follows:

	September 30,		December 31,
(In thousands)	2012		2011
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	1,506	$	1,428
Construction		-		-
		1,506		1,428
Commercial loans:
Real estate		1,526		1,623
Lines of credit		238		467
Other commercial and industrial		578		504
Municipal		-		-
		2,342		2,594
Consumer loans:
Home equity and junior liens		737		550
Other consumer		38		156
		775		706
Total nonaccrual loans	$	4,623	$	4,728

There were no loans past due ninety days or more and still accruing interest at September 30, 2012 or December 31, 2011.

The Company is required to disclose certain activities related to Troubled Debt Restructurings ("TDR"s) in accordance with accounting guidance. Certain loans have been modified in a TDR where economic concessions have been granted to a borrower who is experiencing, or expected to experience, financial difficulties. These economic concessions could include a reduction in the loan interest rate, extension of payment terms, reduction of principal amortization, or other actions that it would not otherwise consider for a new loan with similar risk characteristics. The Company has determined that there were $1.1 million of recorded investment in new TDRs in the three and nine month periods ended September 30, 2012. The following highlights the qualitative and quantitative information by loan class.

Modifications made within the commercial real estate loan class included two loans with a pre-modification and post-modification recorded investment of $564,000 and $358,000, respectively. Economic concessions granted included interest only periods, extended payment terms and a reduction in loan interest rate. The Company was required to increase the reserve against these two loans by $211,000 which was a component of the provision for loan losses in the third quarter of 2012.

Modifications made within the Home Equity Loan class included two loans with a pre-modification and post-modification recorded investment which was unchanged at $279,000. Economic concessions granted included interest only periods, extended payment terms and a reduction in loan interest rate. Additional provision was not required as a result of these modifications.

The modification made within the other commercial and industrial loan class included a consolidation of three credit facilities into a single loan with a pre-modification and post-modification recorded investment of $439,000 and $468,000, respectively. Economic concessions granted included reduced principal amortization and an extended payment term. Management's review indicates adequate collateral coverage in support of this loan. Additional provision was not required as a result of this modification.

There were no payment defaults within the three month and nine month periods ended September 30, 2012 for any TDRs modified during the preceding twelve months.

When the Company modifies a loan within a portfolio segment, a potential impairment is analyzed either based on the present value of the expected future cash flows discounted at the interest rate of the original loan terms or the fair value of the collateral less costs to sell. If it is determined that the value of the loan is less than its recorded investment, than impairment is recognized as a component of the provision for loan losses and an associated an increase to the allowance for loan losses, or as a charge-off to the allowance for loan losses in the current period.

Impaired Loans

The following tables summarize impaired loans information by portfolio class at the indicated dates:

	September 30, 2012						December 31, 2011
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(In thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
1-4 family first-lien residential mortgages	$	946	$	946	$	-	$	442	$	442	$	-
Residential construction mortgage		-		-		-		-		-		-
Commercial real estate		1,340		1,474		-		968		1,096		-
Commercial lines of credit		374		385		-		74		74		-
Other commercial and industrial		672		683		-		257		257		-
Municipal		-		-		-		-		-		-
Home equity and junior liens		346		346		-		312		312		-
Other consumer		-		-		-		-		-		-
With an allowance recorded:
1-4 family first-lien residential mortgages		1,188		1,188		208		856		856		149
Residential construction mortgage		-		-		-		-		-		-
Commercial real estate		1,456		1,456		489		735		735		109
Commercial lines of credit		-		-		-		378		378		178
Other commercial and industrial		296		296		269		122		122		122
Municipal		-		-		-		-		-		-
Home equity and junior liens		156		156		60		136		136		61
Other consumer		6		6		6		-		-		-
Total:
1-4 family first-lien residential mortgages		2,134		2,134		208		1,298		1,298		149
Residential construction mortgage		-		-		-		-		-		-
Commercial real estate		2,796		2,930		489		1,703		1,831		109
Commercial lines of credit		374		385		-		452		452		178
Other commercial and industrial		968		979		269		379		379		122
Municipal		-		-		-		-		-		-
Home equity and junior liens		502		502		60		448		448		61
Other consumer		6		6		6		-		-		-
Totals	$	6,780	$	6,936	$	1,032	$	4,280	$	4,408	$	619

The following table presents the average recorded investment in impaired loans for the periods indicated:

	For the three months ended September 30,				For the nine months ended September 30,
(In thousands)	2012		2011		2012		2011
1-4 family first-lien residential mortgages	$	1,879	$	1,004	$	1,565	$	1,109
Commercial real estate		2,801		2,056		2,449		2,695
Commercial lines of credit		412		37		432		125
Other commercial and industrial		768		930		677		823
Home equity and junior liens		502		568		477		590
Other consumer		5		-		2		-
	$	6,367	$	4,595	$	5,602	$	5,342

The following table presents the cash basis interest income recognized on impaired loans for the periods indicated:

	For the three months ended September 30,					For the nine months ended September 30,
(In thousands)	2012			2011		2012		2011
1-4 family first-lien residential mortgages	$	34		$	6	$	80	$	29
Commercial real estate		-			26		60		71
Commercial lines of credit		(5	)		-		13		-
Other commercial and industrial		11			5		30		18
Home equity and junior liens		4			3		11		14
Other consumer		1					1		-
	$	45		$	40	$	195	$	132