NOTE 5: LOANS

Major classifications of loans are as follows:

	December 31,			December 31,
(In thousands)	2012			2011
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	173,955		$	158,384
Construction		2,655			3,935
Total residential mortgage loans		176,610			162,319

Commercial loans:
Real estate		82,329			73,420
Lines of credit		13,748			13,791
Other commercial and industrial		31,477			22,701
Municipal		3,588			3,619
Total commercial loans		131,142			113,531

Consumer loans:
Home equity and junior liens		22,073			24,171
Other consumer		3,469			4,140
Total consumer loans		25,542			28,311

Total loans		333,294			304,161
Net deferred loan costs		454			589
Less allowance for loan losses		(4,501	)		(3,980	)
Loans receivable, net	$	329,247		$	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 December 31, 2012 and December 31, 2011, residential mortgage loans with a carrying value of $58.6 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.

Loan Origination / Risk Management

The Company has lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management and the Board of Directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by frequently providing management with reports related to loan production, loan quality, loan delinquencies, non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Risk Characteristics of Portfolio Segments

Each portfolio segment generally carries its own unique risk characteristics.

The residential mortgage loan segment is impacted by general economic conditions, unemployment rates in the Bank's service area, real estate values and the forward expectation of improvement or deterioration in economic conditions.

The commercial loan segment is impacted by general economic conditions but, more specifically, the industry segment in which each borrower participates. Unique competitive changes within a borrower's specific industry, or geographic location could cause significant changes in the borrower's revenue stream, and therefore, impact its ability to repay its obligations. Commercial real estate is also subject to general economic conditions but changes within this segment typically lag changes seen within the consumer and commercial segment. Included within this portfolio are both owner occupied real estate, in which the borrower occupies the majority of the real estate property and upon which the majority of the sources of repayment of the obligation is dependent upon, and non-owner occupied real estate, in which several tenants comprise the repayment source for this portfolio segment. The composition and competitive position of the tenant structure may cause adverse changes in the repayment of debt obligations for the non-owner occupied class within this segment.

The consumer loan segment is impacted by general economic conditions, unemployment rates in the Company's service area, and the forward expectation of improvement or deterioration in economic conditions.

Real estate loans, including residential mortgages, commercial real estate loans and home equity, comprise 84% of the portfolio in 2012, approximately 1% less than the same composition in 2011. Loans secured by real estate provide the best collateral protection and thus significantly reduce the inherent risk in the portfolio.

Management has reviewed its loan portfolio and determined that, to the best of its knowledge, little or 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.

Description of Credit Quality Indicators

The Company utilizes an eight tier risk rating system to evaluate the quality of its loan portfolio. Loans that are risk rated "1" through "4" are considered "Pass" loans. In accordance with regulatory guidelines, loans rated "5" through "8" are termed "criticized" loans and loans rated "6" through "8" are termed "classified" loans. A description of the Company's credit quality indicators follows.

For Commercial Loans:

Prime: A loan that is fully secured by properly margined Pathfinder Bank deposit account(s) or an obligation of the US Government. It may also be unsecured if it is supported by a very strong financial condition and, in the case of a commercial loan, excellent management. There exists an unquestioned ability to repay the loan in accordance with its terms.

Strong: Desirable relationship of somewhat less stature than Prime grade. Possesses a sound documented repayment source, and back up, which will allow repayment within the terms of the loan. Individual loans backed by solid assets, character and integrity. Ability of individual or company management is good and well established. Probability of serious financial deterioration is unlikely.

Satisfactory: Stable financial condition with cash flow sufficient for debt service coverage. Satisfactory loans of average strength having some deficiency or vulnerability to changing economic or industry conditions but performing as agreed with documented evidence of repayment capacity. May be unsecured loans to borrowers with satisfactory credit and financial strength. Satisfactory provisions for management succession and a secondary source of repayment exists.

Satisfactory Watch: A four is not a criticized or classified credit. These credits do not display the characteristics of a criticized asset as defined by the regulatory definitions. A credit is given a Satisfactory Watch designation if there are matters or trends observed deserving attention somewhat beyond normal monitoring. Borrowing obligations may be handled according to agreement but could be adversely impacted by developing factors such as industry conditions, operating problems, litigation pending of a significant nature or declining collateral quality and adequacy.

Special Mention: A warning risk grade that portrays one or more weaknesses that may be tolerated in the short term. Assets in this category are currently protected but are potentially weak. This loan would not normally be booked as a new credit, but may have redeeming characteristics persuading the Bank to continue working with the borrower. Loans accorded this classification have potential weaknesses which may, if not checked or corrected, weaken the company's assets, inadequately protect the Bank's position or effect the orderly, scheduled reduction of the debt at some future time.

Substandard: The relationship is inadequately protected by the current net worth and cash flow capacity of the borrower, guarantor/endorser, or of the collateral pledged. Assets have a well-defined weakness or weaknesses that jeopardize the orderly liquidation of the debt. The relationship shows deteriorating trends or other deficient areas. The loan may be non-performing and expected to remain so for the foreseeable future. Relationship balances may be adequately secured by asset value; however a deteriorated financial condition may necessitate collateral liquidation to effect repayment. A relationship with an unacceptable financial condition requiring excessive attention of the officer due to the nature of the credit risk or lack of borrower cooperation. All loans on non-accrual or in a bankruptcy are not graded higher than Substandard.

Doubtful: The relationship has all the weaknesses inherent in a credit graded 5 with the added characteristic that the weaknesses make collection on the basis of currently existing facts, conditions and value, highly questionable or improbable. The possibility of some loss is extremely high, however its classification as an anticipated loss is deferred until a more exact determination of the extent of loss is determined. Loans in this category must be on non-accrual.

8.	Loss: Loans are considered uncollectible and of such little value that continuance as bankable assets is not warranted. It is not practicable or desirable to defer writing off this basically worthless asset even though partial recovery may be possible in the future.

For Residential Mortgage and Consumer Loans:

Residential mortgage and consumer loans are assigned a "Pass" rating unless the loan has demonstrated signs of weakness as indicated by the ratings below.

5.	Special Mention: All loans sixty days past due are classified Special Mention. The loan is not upgraded until it has been current for six consecutive months.

6.	Substandard: All loans 90 days past due are classified Substandard. The loan is not upgraded until it has been current for six consecutive months.

7.	Doubtful: The relationship has all the weaknesses inherent in a credit graded 5 with the added characteristic that the weaknesses make collection on the basis of currently existing facts, conditions and value, highly questionable or improbable. The possibility of some loss is extremely high.

The risk ratings for classified loans are evaluated at least quarterly for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial, residential mortgage or consumer loans. See further discussion of risk ratings in Note 1.

The following table presents the segments and classes of the loan portfolio summarized by the aggregate pass rating and the criticized and classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system:

	As of December 31, 2012
			Special
(In thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	166,801	$	1,323	$	5,831	$	-	$	173,955
Construction		2,655		-		-		-		2,655
Total residential mortgage loans		169,456		1,323		5,831		-		176,610
Commercial loans:
Real estate		76,719		1,685		3,925		-		82,329
Lines of credit		12,026		-		1,647		75		13,748
Other commercial and industrial		29,705		237		1,500		35		31,477
Municipal		3,588		-		-		-		3,588
Total commercial loans		122,038		1,922		7,072		110		131,142
Consumer loans:
Home equity and junior liens		20,078		145		1,801		49		22,073
Other consumer		3,199		133		111		26		3,469
Total consumer loans		23,277		278		1,912		75		25,542
Total loans	$	314,771	$	3,523	$	14,815	$	185	$	333,294

	As of 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
Total residential mortgage loans		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
Total commercial loans		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
Total consumer loans		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.

Non-accrual 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, exclusive of deferred costs, segregated by class of loans were as follows:

	As of December 31, 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	$	2,698	$	1,161	$	2,046	$	5,905	$	168,050	$	173,955
Construction		-		-		-		-		2,655		2,655
Total residential mortgage loans		2,698		1,161		2,046		5,905		170,705		176,610
Commercial loans:
Real estate		1,706		1,833		1,794		5,333		76,996		82,329
Lines of credit		496		153		334		983		12,765		13,748
Other commercial and industrial		1,279		85		598		1,962		29,515		31,477
Municipal		-		-		-		-		3,588		3,588
Total commercial loans		3,481		2,071		2,726		8,278		122,864		131,142
Consumer loans:
Home equity and junior liens		207		405		730		1,342		20,731		22,073
Other consumer		26		42		46		114		3,355		3,469
Total consumer loans		233		447		776		1,456		24,086		25,542
Total loans	$	6,412	$	3,679	$	5,548	$	15,639	$	317,655	$	333,294

	As of 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
Total residential mortgage loans		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
Total commercial loans		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
Total consumer loans		412		184		706		1,302		27,009		28,311
Total loans	$	5,990	$	1,589	$	4,728	$	12,307	$	291,854	$	304,161

Year-end non-accrual loans, segregated by class of loan, were as follows:

	December 31,		December 31,
(In thousands)	2012		2011
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	2,046	$	1,428
Construction		-		-
		2,046		1,428
Commercial loans:
Real estate		1,794		1,623
Lines of credit		334		467
Other commercial and industrial		598		504
Municipal		-		-
		2,726		2,594
Consumer loans:
Home equity and junior liens		730		550
Other consumer		46		156
		776		706
Total nonaccrual loans	$	5,548	$	4,728

There were no loans past due ninety days or more and still accruing interest at December 31, 2012 or 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 twelve month period ended December 31, 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 pre-modification and post-modification recorded investments 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 and junior liens loan class included two loans with pre-modification and post-modification recorded investments which were unchanged at $279,000. Economic concessions granted included interest only periods, extended payment terms and a reduction in loan interest rate. An additional provision was not required as a result of these modifications.

The first 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. The post-modification recorded investment included late charges, accrued interest, and closing costs as a result of the restructuring. Economic concessions granted included reduced principal amortization and an extended payment term. Management's review indicates adequate collateral coverage in support of this loan. An additional provision was not required as a result of this modification. The second modification made in this loan class resulted in a pre-modification and post-modification recorded investment of $84,000 and $18,000, respectively. Economic concessions granted included an advance of additional monies without an associated increase in collateral and a 12 month interest only period. The Company was required to increase the reserve against this loan by $90,000, which was a component of the provision for loan losses in the fourth quarter of 2012.

There were three loans under one relationship which were in payment default within the twelve month period ended December 31, 2012 for TDRs modified during the preceding twelve months. Two of these loans are Home Equity loans in the amount of $306,000 and one loan is a Commercial Real Estate loan in the amount of $337,000.

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, then impairment is recognized as a component of the provision for loan losses, an associated 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 table summarizes impaired loans information by portfolio class:

	December 31, 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	$	844	$	844	$	-	$	442	$	442	$	-
Residential construction mortgage		-		-		-		-		-		-
Commercial real estate		1,554		1,571		-		968		1,096		-
Commercial lines of credit		358		370		-		74		74		-
Other commercial and industrial		657		801		-		257		257		-
Municipal		-		-		-		-		-		-
Home equity and junior liens		380		380		-		312		312		-
Other consumer		-		-		-		-		-		-
With an allowance recorded:
1-4 family first-lien residential mortgages		1,307		1,307		215		856		856		149
Residential construction mortgage		-		-		-		-		-		-
Commercial real estate		1,182		1,182		401		735		735		109
Commercial lines of credit		-		-		-		378		378		178
Other commercial and industrial		225		230		207		122		122		122
Municipal		-		-		-		-		-		-
Home equity and junior liens		155		155		95		136		136		61
Other consumer		5		5		5		-		-		-
Total:
1-4 family first-lien residential mortgages		2,151		2,151		215		1,298		1,298		149
Residential construction mortgage		-		-		-		-		-		-
Commercial real estate		2,736		2,753		401		1,703		1,831		109
Commercial lines of credit		358		370		-		452		452		178
Other commercial and industrial		882		1,031		207		379		379		122
Municipal		-		-		-		-		-		-
Home equity and junior liens		535		535		95		448		448		61
Other consumer		5		5		5		-		-		-
Totals	$	6,667	$	6,845	$	923	$	4,280	$	4,408	$	619

The following table presents the average recorded investment in impaired loans for the years ended December 31:

(In thousands)	2012		2011
1-4 family first-lien residential mortgages	$	1,682	$	1,156
Commercial real estate		2,506		2,447
Commercial lines of credit		417		207
Other commercial and industrial		718		712
Home equity and junior liens		488		554
Other consumer		3		-
Total	$	5,814	$	5,076

The following table presents the interest income recognized on impaired loans for the years ended December 31:

(In thousands)	2012		2011
1-4 family first-lien residential mortgages	$	108	$	64
Commercial real estate		71		86
Commercial lines of credit		14		31
Other commercial and industrial		29		12
Home equity and junior liens		10		9
Other consumer		1		-
Total	$	233	$	202