(4) LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio, net of deferred origination fees and cost, and unearned income is summarized as follows:

December 31,	2012		2011
Commercial, financial and agricultural	$	133,851,280	$	142,209,279
Commercial mortgages		320,197,426		264,589,013
Residential mortgages		200,475,097		193,599,853
Indirect consumer loans		130,573,200		97,165,447
Consumer loans		108,419,938		99,351,585
	$	893,516,941	$	796,915,177

Residential mortgages held for sale as of December 31, 2012 and 2011 totaling $1,057,309 and $395,427, respectively, are not included in the above table.

Residential mortgages totaling $142,278,166 at December 31, 2012 and $112,956,988 at December 31, 2011 were pledged under a blanket collateral agreement for the Corporation's line of credit with the FHLB.

The Corporation's concentrations of credit risk by loan type are reflected in the preceding table. The concentrations of credit risk with standby letters of credit, committed lines of credit and commitments to originate new loans generally follow the loan classifications in the table above.

The following table presents the activity in the allowance for loan losses by portfolio segment for the years ending December 31, 2012 and 2011. Loans originated by the Corporation are referred to as "Originated" loans and loans acquired in the merger with Fort Orange Financial Corp. ("FOFC"), which was completed on April 8, 2011, are referred to as "Acquired" loans. The allowance for loan losses on Acquired loans was established during the quarter ending March 31, 2012. Therefore, there was no activity related to Acquired loans in 2011.

Originated Loans	December 31, 2012
Allowance for loan losses	Commercial, Financial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Unallocated			Total
Beginning balance:	$	3,143,373		$	2,570,149		$	1,309,649		$	2,192,729		$	443,420		$	9,659,320
Charge Offs:		(35,696	)		(93,195	)		(82,442	)		(673,885	)		-			(885,218	)
Recoveries:		802,056			54,637			-			237,929			-			1,094,622
Net recoveries (charge offs)		766,360			(38,558	)		(82,442	)		(435,956	)		-			209,404
Provision		(2,316,864	)		1,060,975			338,364			948,866			(417,274	)		(385,933	)
Ending balance	$	1,592,869		$	3,592,566		$	1,565,571		$	2,705,639		$	26,146		$	9,482,791

Acquired Loans	December 31, 2012
Allowance for loan losses	Commercial, Financial and Agricultural			Commercial Mortgages			Residential Mortgages		Consumer Loans		Unallocated		Total
Beginning balance:	$	-		$	-		$	-	$	-	$	-	$	-
Reclassification of acquired loan Discount		73,229			50,331			-		-		-		123,560
Charge Offs:		(145,303	)		(241,898	)		-		-		-		(387,201	)
Recoveries:		-			-			-		-		-		-
Net charge-offs		(145,303	)		(241,898	)		-		-		-		(387,201	)
Provision		186,801			1,026,699			-		-		-		1,213,500
Ending balance	$	114,727		$	835,132		$	-	$	-	$	-	$	949,859

Originated Loans	December 31, 2011
Allowance for loan losses	Commercial, Financial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Unallocated			Total
Beginning balance:	$	2,118,299		$	2,575,058		$	1,301,780		$	2,727,022		$	775,972		$	9,498,131
Charge Offs:		(686,192	)		(19,206	)		(67,333	)		(725,826	)		-			(1,498,557	)
Recoveries:		423,422			40,717			44,953			192,321			-			701,413
Net (charge offs) recoveries		(262,770	)		21,511			(22,380	)		(533,505	)		-			(797,144	)
Provision		1,287,844			(26,420	)		30,249			(788	)		(332,552	)		958,333
Ending balance	$	3,143,373		$	2,570,149		$	1,309,649		$	2,192,729		$	443,420		$	9,659,320

Activity in the allowance for loan losses for the year ended December 31, 2010 was as follows:

	2010
Balances at January 1	$	9,967,223
Provision charged to operations		1,125,000
Loans charged-off		(2,211,179	)
Recoveries		617,087
Balances at December 31	$	9,498,131

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2012 and December 31, 2011:

	December 31, 2012
Allowance for loan losses	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Unallocated		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	133,437	$	59,201	$	-	$	-	$	-	$	192,638
Collectively evaluated for impairment		1,459,432		3,533,365		1,565,571		2,705,639		26,146		9,290,153
Acquired		114,727		835,132		-		-		-		949,859
Total ending allowance balance	$	1,707,596	$	4,427,698	$	1,565,571	$	2,705,639	$	26,146	$	10,432,650

	December 31, 2011
Allowance for loan losses	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Unallocated		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,528,651	$	413,555	$	-	$	-	$	-	$	1,942,206
Collectively evaluated for impairment		1,614,722		2,156,594		1,309,649		2,192,729		443,420		7,717,114
Total ending allowance balance	$	3,143,373	$	2,570,149	$	1,309,649	$	2,192,729	$	443,420	$	9,659,320

	December 31, 2012
Loans:	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Originated loans individually evaluated for impairment	$	1,831,095	$	5,715,324	$	131,909	$	-	$	7,678,328
Acquired loans individually evaluated for impairment		76,300		4,904,950		-		-		4,981,250
Originated loans collectively evaluated for impairment		120,828,451		253,918,786		188,117,526		234,760,260		797,625,023
Acquired loans collectively evaluated for impairment		10,331,884		48,088,509		12,505,074		4,929,195		75,854,662
Acquired loans with deteriorated credit quality		1,126,692		8,390,716		244,268		-		9,761,676
Total ending loans balance	$	134,194,422	$	321,018,285	$	200,998,777	$	239,689,455	$	895,900,939

	December 31, 2011
Loans:	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Originated loans individually evaluated for impairment	$	5,275,043	$	4,603,563	$	179,337	$	-	$	10,057,943
Originated loans collectively evaluated for impairment		111,532,413		169,658,759		175,405,950		190,904,630		647,501,752
Total ending loans balance	$	116,807,456	$	174,262,322	$	175,585,287	$	190,904,630	$	657,559,695

The following tables present loans individually evaluated for impairment recognized by class of loans as of December 31, 2012 and December 31, 2011, the average recorded investment and interest income recognized by class of loans as of the years ending December 31, 2012 and 2011:

	December 31, 2012						December 31, 2011
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance			Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial	$	2,059,027	$	1,462,157	$	-	$	3,512,860	$	2,914,776	$	-
Commercial mortgages:
Construction		261,102		261,903		-		10,454		10,454		-
Other		5,678,565		5,090,399		-		1,091,026		860,648		-
Residential mortgages		131,909		131,909		-		178,925		179,337		-
With an allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial		368,938		368,938		133,437		2,360,252		2,360,267		1,528,651
Commercial mortgages:
Construction		-		-		-		8,295		8,295		8,295
Other		364,423		363,022		59,201		4,098,627		3,724,166		405,260
Total	$	8,863,964	$	7,678,328	$	192,638	$	11,260,439	$	10,057,943	$	1,942,206

		December 31, 2012			December 31, 2011
		Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)
With no related allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial	$	480,755	$	632	$	3,029,611	$	28,796
Commercial mortgages:
Construction		73,316		870		20,578		-
Other		1,989,795		10,338		2,743,345		4,959
Residential mortgages		105,880		-		250,391		-
Consumer loans:
Home equity lines & loans		29,784		-		-		-
With an allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial		1,830,896		-		2,065,263		-
Commercial mortgages:
Construction		4,148		-		14,893		-
Other		872,292		-		1,521,828		-
Residential mortgages		64,003		-		-		-
Total	$	5,450,869	$	11,840	$	9,645,909	$	33,755
(1) Cash basis interest income approximates interest income recognized

The following table presents the recorded investment in non accrual and loans past due over 90 days still on accrual by class of loans as of the periods ending December 31, 2012 and December 31, 2011. This table includes Acquired loans except for those loans with evidence of credit deterioration at the time of the FOFC merger:

	December 31, 2012				December 31, 2011
	Non-Accrual		Loans Past Due Over 90 Days Still Accruing		Non-Accrual		Loans Past Due Over 90 Days Still Accruing
Commercial, financial and agricultural:
Commercial & industrial	$	666,912	$	-	$	5,611,805	$	-
Commercial mortgages:
Construction		434,338		4,481,067		18,749		7,295,104
Other		1,581,643		-		4,778,384		-
Residential mortgages		2,423,024		-		2,611,096		-
Consumer loans:
Credit cards		-		3,307		-		9,053
Home equity lines & loans		571,365		-		455,418		-
Indirect consumer loans		335,285		-		113,349		-
Other direct consumer loans		19,338		-		22,287		-
Total	$	6,031,905	$	4,484,374	$	13,611,088	$	7,304,157

The following tables present the aging of the recorded investment in loans past due (including non-accrual loans) by class of loans as of December 31, 2012 and December 31, 2011 and by Originated loans and Acquired loans:

	December 31, 2012
Originated Loans:	30-59 Days Past Due		60-89 Days Past Due		Greater than 89 Days Past Due		Total Past Due			Loans Acquired with deteriorated credit quality	Loans Not Past Due			Total
Commercial, financial and agricultural:
Commercial & industrial	$	157,903	$	-	$	154,969	$	312,872	$	-	$	121,648,222	$	121,961,094
Agricultural		-		-		-		-		-		698,452		698,452
Commercial mortgages:
Construction		-		-		10,454		10,454		-		36,988,238		36,998,692
Other		84,573		42,418		272,403		399,394		-		222,236,024		222,635.418
Residential mortgages		2,347,927		707,386		536,169		3,591,482		-		184,657,953		188,249,435
Consumer loans:
Credit cards		5,947		5,074		3,307		14,328		-		1,836,817		1,851,145
Home equity lines & loans		200,640		102,028		297,657		600,325		-		81,823,908		82,424,233
Indirect consumer loans		798,155		79,268		267,864		1,145,287		-		129,832,488		130,977,775
Other direct consumer loans		48,306		25,556		12,351		86,213		-		19,420,894		19,507,107
Total	$	3,643,451	$	961,730	$	1,555,174	$	6,160,355	$	-	$	799,142,996	$	805,303,351

	December 31, 2012
Acquired Loans:	30-59 Days Past Due		60-89 Days Past Due		Greater than 89 Days Past Due		Total Past Due			Loans Acquired with deteriorated credit quality	Loans Not Past Due			Total
Commercial, financial and agricultural:
Commercial & industrial	$	100,399	$	-	$	242,927	$	343,326	$	1,126,692	$	10,064,858	$	11,534,876
Commercial mortgages:
Construction		-		294,565		4,904,950		5,199,515		1,182,020		-		6,381,535
Other		1,046,302		647,701		-		1,694,003		7,208,696		46,099,941		55,002,640
Residential mortgages		1,348,203		329,502		467,748		2,145,453		244,268		10,359,621		12,749,342
Consumer loans:
Home equity lines & loans		-		-		-		-		-		4,845,652		4,845,652
Other direct consumer loans		-		-		-		-		-		83,543		83,543
Total	$	2,494,904	$	1,271,768	$	5,615,625	$	9,382,297	$	9,761,676	$	71,453,615	$	90,597,588

	December 31, 2011
Originated Loans:		30-59 Days Past Due		60-89 Days Past Due		Greater than 89 Days Past Due		Total Past Due			Loans Acquired with deteriorated credit quality	Loans Not Past Due			Total
Commercial, financial and agricultural:
Commercial & industrial		$	4,571	$	10,940	$	2,920,906	$	2,936,417	$	-	$	113,612,941	$	116,549,358
Agricultural			-		-		-		-		-		258,098		258,098
Commercial mortgages:
Construction			-		-		-		-		-		7,383,731		7,383,731
Other			82,986		-		2,977,010		3,059,996		-		163,818,595		166,878,591
Residential mortgages			1,418,234		293,337		1,221,056		2,932,627		-		172,652,660		175,585,287
Consumer loans:
Credit cards			3,660		8,031		9,053		20,744		-		1,934,471		1,955,215
Home equity lines & loans			368,556		27,717		212,573		608,846		-		76,280,502		76,889,348
Indirect consumer loans			597,180		75,817		85,763		758,760		-		96,781,480		97,540,240
Other direct consumer loans			21,876		10,243		9,644		41,763		-		14,478,064		14,519,827
Total		$	2,497,063	$	426,085	$	7,436,005	$	10,359,153	$	-	$	647,200,542	$	657,559,695

	December 31, 2011
Acquired Loans:		30-59 Days Past Due		60-89 Days Past Due		Greater than 89 Days Past Due		Total Past Due			Loans Acquired with deteriorated credit quality	Loans Not Past Due			Total
Commercial, financial and agricultural:
Commercial & industrial		$	275,121	$	82,677	$	195,687	$	553,485	$	1,499,141	$	25,335,874	$	27,388,500
Commercial mortgages:
Construction			-		418,518		7,295,104		7,713,622		2,022,149		2,715,270		12,451,041
Other			-		-		193,570		193,570		11,063,483		65,836,938		77,093,991
Residential mortgages			405,087		62,017		84,083		551,187		226,937		17,753,898		18,532,022
Consumer loans:
Home equity lines & loans			-		-		-		-		-		6,168,831		6,168,831
Other direct consumer loans			171		-		-		171		-		147,439		147,610
Total		$	680,379	$	563,212	$	7,768,444	$	9,012,035	$	14,811,710	$	117,958,250	$	141,781,995

Troubled Debt Restructurings:

As of December 31, 2012 and 2011, the Corporation has a recorded investment in troubled debt restructurings of $5,728,610 and $4,057,413, respectively. There were no specific reserves allocated for troubled debt restructurings at December 31, 2012. The Corporation allocated $217,866 of specific reserves for troubled debt restructurings at December 31, 2011. As of December 31, 2012, troubled debt restructurings totaling $5,363,712 were accruing interest under the modified terms and $364,898 were on non-accrual status. As of December 31, 2011, there were no troubled debt restructurings accruing interest and $4,057,413 on non-accrual status. The Corporation has not committed to lend any additional amounts as of December 31, 2012 or December 31, 2011 to customers with outstanding loans that are classified as troubled debt restructurings.

During the years ending December 31, 2012 and 2011, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: reduced scheduled payments for greater than 3 months or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.

The following table presents loans by class modified as troubled debt restructurings that occurred during the year ending December 31, 2012:

December 31, 2012	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial, financial and agricultural:
Commercial & industrial		4	$	1,307,188	$	1,307,188
Commercial mortgages:
Construction		1		251,448		251,448
Other		3		3,871,779		3,871,779
Total		8	$	5,430,415	$	5,430,415

The troubled debt restructurings described above did not increase the allowance for loan losses and resulted in no charge offs during the year ending December 31, 2012.

No loans were modified as troubled debt restructurings by the Corporation during the year ending December 31, 2011.

There were no payment defaults on any loans previously modified as troubled debt restructurings during the year ending December 31, 2012, within twelve months following the modification. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

Credit Quality Indicators

The Corporation establishes a risk rating at origination for all commercial loans. The main factors considered in assigning risk ratings include, but are not limited to: historic and future debt service coverage, collateral position, operating performance, liquidity, leverage, payment history, management ability, and the customer's industry. Commercial relationship managers monitor all loans in their respective portfolios for any changes in the borrower's ability to service their debt and affirm the risk ratings for the loans at least annually.

For the retail loans, which include lines of credit, installment, mortgage, and home equity loans, once a loan is properly approved and closed, the Corporation evaluates credit quality based upon loan repayment.

The Corporation uses the risk rating system to identify criticized and classified loans. Commercial relationships within the criticized and classified risk ratings are analyzed quarterly. The Corporation uses the following definitions for criticized and classified loans (which are consistent with regulatory guidelines):

Special Mention – Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution's credit position as some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capability of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be not rated loans. Based on the analysises performed as of December 31, 2012 and December 31, 2011, the risk category of the recorded investment of loans by class of loans is as follows:

	December 31, 2012
Originated Loans:	Not Rated		Pass		Special Mention		Substandard		Doubtful
Commercial, financial and agricultural:
Commercial & industrial	$	-	$	111,131,148	$	7,805,458	$	2,606,529	$	417,960
Agricultural		-		698,451		-		-		-
Commercial mortgages:
Construction		-		34,588,347		1,671,195		739,150		-
Other		-		202,157,249		10,651,788		9,826,381		-
Residential mortgages		186,084,001		-		-		2,165,434		-
Consumer loans:
Credit cards		1,851,145		-		-		-		-
Home equity lines & loans		81,796,116		-		-		628,117		-
Indirect consumer loans		130,642,490		-		-		335,285		-
Other direct consumer loans		19,487,769		-		-		19,338		-
Total	$	419,861,521	$	348,575,195	$	20,128,441	$	16,320,234	$	417,960

	December 31, 2012
Acquired Loans:		Not Rated		Pass		Loans Acquired with deteriorated credit quality		Special Mention		Substandard		Doubtful
Commercial, financial and agricultural:
Commercial & industrial		$	-	$	10,129,340	$	1,126,692	$	202,544	$	-	$	76,300
Commercial mortgages:
Construction			-		294,564		1,182,020		3,482,723		1,422,227		-
Other			-		46,471,017		7,208,696		1,322,928		-		-
Residential mortgages			12,252,640		-		244,268		-		252,434		-
Consumer loans
Home equity lines & loans			4,819,276		-		-		-		26,376		-
Other direct consumer loans			83,543		-		-		-		-		-
Total		$	17,155,459	$	56,894,921	$	9,761,676	$	5,008,195	$	1,701,037	$	76,300

	December 31, 2011
Originated Loans:	Not Rated		Pass		Special Mention		Substandard		Doubtful
Commercial, financial and agricultural:
Commercial & industrial	$	-	$	93,923,356	$	14,957,683	$	4,139,413	$	3,528,906
Agricultural		-		258,098		-		-		-
Commercial mortgages:
Construction		-		6,391,614		208,360		783,757		-
Other		-		152,435,884		6,503,087		7,423,514		516,106
Residential mortgages		173,120,292		-		-		2,464,995		-
Consumer loans:
Credit cards		1,955,215		-		-		-		-
Home equity lines & loans		76,432,196		-		-		457,152		-
Indirect consumer loans		97,426,891		-		-		113,349		-
Other direct consumer loans		14,497,795		-		-		22,032		-
Total	$	363,432,389	$	253,008,952	$	21,669,130	$	15,404,212	$	4,045,012

	December 31, 2011
Acquired Loans:	Not Rated		Pass		Loans Acquired with deteriorated credit quality		Special Mention		Substandard		Doubtful
Commercial, financial and agricultural:
Commercial & industrial	$	-	$	25,164,742	$	1,499,141	$	602,006	$	24,635	$	97,976
Commercial mortgages
Construction		-		1,790,731		2,022,149		7,447,661		1,190,500		-
Other		-		62,684,708		11,063,483		475,036		2,677,194		193,570
Residential mortgages		18,158,984		-		226,937		-		146,101		-
Consumer loans
Home equity lines & loans		6,168,831		-		-		-		-		-
Other direct consumer loans		147,610		-		-		-		-		-
Total	$	24,475,425	$	89,640,181	$	14,811,710	$	8,524,703	$	4,038,430	$	291,546

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of December 31, 2012 and December 31, 2011:

	December 31, 2012
			Consumer Loans
Originated Loans:	Residential Mortgages		Credit Card		Home Equity Lines & Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	186,078,845	$	1,847,838	$	81,879,244	$	130,642,490	$	19,487,769
Non-Performing		2,170,590		3,307		544,989		335,285		19,338
	$	188,249,435	$	1,851,145	$	82,424,233	$	130,977,775	$	19,507,107

Acquired Loans:
Performing	$	12,496,908	$	-	$	4,819,276	$	-	$	83,543
Non-Performing		252,434		-		26,376		-		-
Total	$	12,749,342	$	-	$	4,845,652	$	-	$	83,543

	December 31, 2011
			Consumer Loans
Originated Loans:	Residential Mortgages		Credit Card		Home Equity Lines & Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	173,120,292	$	1,946,162	$	76,432,196	$	97,426,891	$	14,497,878
Non-Performing		2,464,995		9,053		457,152		113,349		21,949
	$	175,585,287	$	1,955,215	$	76,889,348	$	97,540,240	$	14,519,827

Acquired Loans:
Performing	$	18,385,921	$	-	$	6,168,831	$	-	$	147,610
Non-Performing		146,101		-		-		-		-
Total	$	18,532,022	$	-	$	6,168,831	$	-	$	147,610

Acquired loans include loans acquired with deteriorated credit quality. The Corporation adjusted its estimates of future expected losses, cash flows, and renewal assumptions during the current year. These adjustments were made for changes in expected cash flows due to loans refinanced beyond original maturity dates, impairments recognized subsequent to the acquisition, advances made for taxes or insurance to protect collateral held and payments received in excess of amounts originally expected.

The tables below summarize the changes in total contractually required principal and interest cash payments, management's estimate of expected total cash payments and carrying value of the loans from January 1, 2012 to December 31, 2012:

	Balance at December 31, 2011			Income Accretion		All Other Adjustments			Balance at December 31, 2012
Contractually required principal and interest	$	21,317,659		$	-	$	(4,421,581	)	$	16,896,078
Contractual cash flows not expected to be collected (nonaccretable discount)		(4,662,346	)		-		56,988			(4,605,358	)
Cash flows expected to be collected		16,655,313			-		(4,364,593	)		12,290,720
Interest component of expected cash flows (accretable yield)		(1,843,603	)		1,668,699		(2,354,140	)		(2,529,044	)
Fair value of loans acquired with deteriorating credit quality	$	14,811,710		$	1,668,699	$	(6,718,733	)	$	9,761,676