(6) Loans

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

	September 30,			December 31,
(In thousands)	2013			2012
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	165,363		$	173,955
Construction		1,694			2,655
Total residential mortgage loans		167,057			176,610

Commercial loans:
Real estate		94,078			82,329
Lines of credit		13,701			13,748
Other commercial and industrial		33,037			31,477
Municipal		4,968			3,588
Total commercial loans		145,784			131,142

Consumer loans:
Home equity and junior liens		20,917			22,073
Other consumer		4,009			3,469
Total consumer loans		24,926			25,542

Total loans		337,767			333,294
Net deferred loan costs		307			454
Less allowance for loan losses		(5,085	)		(4,501	)
Loans receivable, net	$	332,989		$	329,247

The Company originates residential mortgage, commercial, and consumer loans largely to customers throughout Oswego and Onondaga 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, 2013 and December 31, 2012, residential mortgage loans with a carrying value of $111.9 million and $58.6 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’s lending policies and procedures are presented in Note 5 to the consolidated financial statements included in the 2012 Annual Report filed on Form 10-K on March 18, 2013, 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 but with similar 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:

	As of September 30, 2013
			Special
(In thousands)	Pass		Mention		Substandard		Doubtful		Total
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	159,005	$	1,293	$	5,050	$	15	$	165,363
Construction		1,694		-		-		-		1,694
Total residential mortgage loans		160,699		1,293		5,050		15		167,057
Commercial loans:
Real estate		88,134		1,022		4,739		183		94,078
Lines of credit		12,154		476		1,071		-		13,701
Other commercial and industrial		31,348		432		982		275		33,037
Municipal		4,968		-		-		-		4,968
Total commercial loans		136,604		1,930		6,792		458		145,784
Consumer loans:
Home equity and junior liens		19,357		473		1,004		83		20,917
Other consumer		3,890		31		66		22		4,009
Total consumer loans		23,247		504		1,070		105		24,926
Total loans	$	320,550	$	3,727	$	12,912	$	578	$	337,767

	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

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 placed on nonaccrual when the contractual payment of principal and interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may be currently performing.

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, 2013 and December 31, 2012, are detailed in the following tables:

	As of September 30, 2013

	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	$	1,653	$	1,026	$	2,401	$	5,080	$	160,283	$	165,363
Construction		-		-		-		-		1,694		1,694
Total residential mortgage loans		1,653		1,026		2,401		5,080		161,977		167,057
Commercial loans:
Real estate		917		1,082		2,336		4,335		89,743		94,078
Lines of credit		237		-		260		497		13,204		13,701
Other commercial and industrial		2,563		1,027		464		4,054		28,983		33,037
Municipal		-		-		-		-		4,968		4,968
Total commercial loans		3,717		2,109		3,060		8,886		136,898		145,784
Consumer loans:
Home equity and junior liens		178		31		362		571		20,346		20,917
Other consumer		72		-		63		135		3,874		4,009
Total consumer loans		250		31		425		706		24,220		24,926
Total loans	$	5,620	$	3,166	$	5,886	$	14,672	$	323,095	$	337,767

	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

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

	September 30,		December 31,
(In thousands)	2013		2012
Residential mortgage loans:
1-4 family first-lien residential mortgages	$	2,401	$	2,046
		2,401		2,046
Commercial loans:
Real estate		2,336		1,794
Lines of credit		260		334
Other commercial and industrial		464		598
		3,060		2,726
Consumer loans:
Home equity and junior liens		362		730
Other consumer		63		46
		425		776
Total nonaccrual loans	$	5,886	$	5,548

There were no loans past due ninety days or more and still accruing interest at September 30, 2013 or December 31, 2012.

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 is required to disclose new TDRs for each reporting period for which an income statement is being presented. The Company has determined that there was a new TDR with a recorded investment of $404,000 in the nine month period ended September 30, 2013.

The modification made within the residential real estate loan class resulted in a pre-modification and post-modification recorded investment of $400,000 and $407,000, respectively. The post-modification recorded investment included late charges, accrued interest, and closing costs as a result of the restructuring. Economic concessions granted included a reduction in loan interest rate, extended payment terms, and an advance of additional monies for closing costs without an associated increase in collateral. The Company was required to establish a specific reserve against this loan of $61,000, which was a component of the provision for loan losses in the third quarter of 2013.

There are five loans that have been in payment default during the nine month period ended September 30, 2013 which were modified during the preceding twelve month period. Two of these loans are commercial real estate loans that total to the amount of $758,000, one is a commercial line of credit in the amount of $85,000, one is a commercial loan in the amount of $110,000 and another is a home equity loan in the amount of $39,000.

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 tables summarize impaired loan information by portfolio class at the indicated dates:

	September 30, 2013						December 31, 2012
			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	$	578	$	578	$	-	$	844	$	844	$	-
Commercial real estate		1,981		1,981		-		1,554		1,571		-
Commercial lines of credit		282		297		-		358		370		-
Other commercial and industrial		286		286		-		657		801		-
Home equity and junior liens		299		299		-		380		380		-
Other consumer		-		-		-		-		-		-
With an allowance recorded:
1-4 family first-lien residential mortgages		404		404		61		1,307		1,307		215
Commercial real estate		2,075		2,075		679		1,182		1,182		401
Commercial lines of credit		100		100		100		-		-		-
Other commercial and industrial		251		260		232		225		230		207
Home equity and junior liens		165		165		85		155		155		95
Other consumer		2		2		2		5		5		5
Total:
1-4 family first-lien residential mortgages		982		982		61		2,151		2,151		215
Commercial real estate		4,056		4,056		679		2,736		2,753		401
Commercial lines of credit		382		397		100		358		370		-
Other commercial and industrial		537		546		232		882		1,031		207
Home equity and junior liens		464		464		85		535		535		95
Other consumer		2		2		2		5		5		5
Totals	$	6,423	$	6,447	$	1,159	$	6,667	$	6,845	$	923

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

	For the three months ended				For the nine months ended
	September 30,				September 30,
(In thousands)	2013		2012		2013		2012
1-4 family first-lien residential mortgages	$	781	$	1,879	$	1,521	$	1,565
Commercial real estate		3,949		2,801		3,621		2,449
Commercial lines of credit		418		412		412		432
Other commercial and industrial		674		768		767		677
Home equity and junior liens		467		502		525		477
Other consumer		2		5		3		2
Total	$	6,291	$	6,367	$	6,849	$	5,602

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

	For the three months ended					For the nine months ended
	September 30,					September 30,
(In thousands)	2013		2012			2013		2012
1-4 family first-lien residential mortgages	$	10	$	34		$	23	$	80
Commercial real estate		79		-			151		60
Commercial lines of credit		2		(5	)		13		13
Other commercial and industrial		8		11			20		30
Home equity and junior liens		6		4			24		11
Other consumer		-		1			-		1
Total	$	105	$	45		$	231	$	195

Beginning with the second quarter of 2013, the Company categorized residential mortgage loans as impaired if the total related credit to the borrower exceeded the minimum threshold of $300,000. The prior threshold was $100,000.