(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, 2013		December 31, 2012
Commercial and agricultural:
Commercial and industrial	$	144,786,585	$	133,154,615
Agricultural		575,670		696,666
Commercial mortgages:
Construction		27,440,372		43,269,303
Commercial mortgages		345,706,661		276,928,123
Residential mortgages		195,996,599		200,475,097
Consumer loans:
Credit cards		1,756,414		1,851,145
Home equity lines and loans		95,905,130		87,045,421
Indirect consumer loans		164,845,874		130,573,200
Direct consumer loans		18,852,459		19,523,371
Total loans, net of deferred origination fees and costs, and unearned income	$	995,865,764	$	893,516,941
Interest receivable on loans		2,597,301		2,383,998
Total recorded investment in loans	$	998,463,065	$	895,900,939

Residential mortgages held for sale as of December 31, 2013 and 2012 totaling $694,840 and $1,057,309, respectively, are not included in the above table.

Residential mortgages totaling $145,107,384 at December 31, 2013 and $142,278,166 at December 31, 2012 were pledged under a blanket collateral agreement for the Corporation's line of credit with the FHLBNY.

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 tables present the activity in the allowance for loan losses by portfolio segment for the years ending December 31, 2013, 2012 and 2011, respectively:

	December 31, 2013
Allowance for loan losses	Commercial, and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Unallocated			Total
Beginning balance:	$	1,707,596		$	4,427,698		$	1,565,571		$	2,705,639		$	26,146		$	10,432,650
Charge Offs:		(186,045	)		(44,049	)		(124,277	)		(1,139,061	)		-			(1,493,432	)
Recoveries:		537,476			97,953			65,180			381,015			-			1,081,624
Net recoveries (charge offs)		351,431			53,904			(59,097	)		(758,046	)		-			(411,808	)
Provision		(80,338	)		1,761,394			10,418			1,089,398			(26,146	)		2,754,726
Ending balance	$	1,978,689		$	6,242,996		$	1,516,892		$	3,036,991		$	-		$	12,775,568

	December 31, 2012
Allowance for loan losses	Commercial, 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
Reclassification of acquired loan discount		73,229			50,331			-			-			-			123,560
Charge Offs:		(180,999	)		(335,093	)		(82,442	)		(673,885	)		-			(1,272,419	)
Recoveries:		802,056			54,637			-			237,929			-			1,094,622
Net recoveries (charge offs)		621,057			(280,456	)		(82,442	)		(435,956	)		-			(177,797	)
Provision		(2,130,063	)		2,087,674			338,364			948,866			(417,274	)		827,567
Ending 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, 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

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, 2013 and December 31, 2012:

	December 31, 2013
Allowance for loan losses	Commercial, and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Unallocated		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	575,995	$	466,055	$	-	$	3,972	$	-	$	1,046,022
Collectively evaluated for impairment		1,402,694		4,407,377		1,497,214		3,033,019		-		10,340,304
Loans acquired with deteriorated credit quality		-		1,369,564		19,678		-		-		1,389,242
Total ending allowance balance	$	1,978,689	$	6,242,996	$	1,516,892	$	3,036,991	$	-	$	12,775,568

	December 31, 2012
Allowance for loan losses	Commercial, 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
Loans acquired with Deteriorated credit quality		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, 2013
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	2,945,524	$	10,702,816	$	117,278	$	130,929	$	13,896,547
Loans collectively evaluated for impairment		142,107,931		354,636,380		196,146,739		281,978,972		974,870,022
Loans acquired with deteriorated credit quality		678,383		8,756,562		261,551		-		9,696,496
Total ending loans balance	$	145,731,838	$	374,095,758	$	196,525,568	$	282,109,901	$	998,463,065

	December 31, 2012
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	1,907,395	$	10,620,274	$	131,909	$	-	$	12,659,578
Loans collectively evaluated for impairment		131,045,609		301,172,164		200,622,600		239,689,455		872,529,828
Loans acquired with deteriorated credit quality		1,241,418		9,225,847		244,268		-		10,711,533
Total ending loans balance	$	134,194,422	$	321,018,285	$	200,998,777	$	239,689,455	$	895,900,939

The following tables present loans individually evaluated for impairment recognized by class of loans as of December 31, 2013 and December 31, 2012, the average recorded investment and interest income recognized by class of loans as of the years ending December 31, 2013 and 2012:

	December 31, 2013						December 31, 2012
	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 and agricultural:
Commercial and industrial	$	1,905,782	$	1,909,412	$	-	$	2,059,027	$	1,462,157	$	-
Commercial mortgages:
Construction		2,329,223		2,318,729		-		5,168,353		5,166,853		-
Commercial mortgages other		7,406,355		7,439,358		-		5,678,565		5,090,399		-
Residential mortgages		117,278		117,278		-		131,909		131,909		-
Consumer loans:
Home equity lines and loans		70,970		72,730		-		-		-		-
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial		1,036,381		1,036,112		575,995		446,330		445,238		133,437
Commercial mortgages:
Commercial mortgages other		951,241		944,729		466,055		364,423		363,022		59,201
Consumer loans:
Home equity lines and loans		57,828		58,199		3,972		-		-		-
Total	$	13,875,058	$	13,896,547	$	1,046,022	$	13,848,607	$	12,659,578	$	192,638

	December 31, 2013				December 31, 2012					December 31, 2011
	Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)			Average Recorded Investment		Interest Income Recognized (1)
With no related allowance recorded:
Commercial and agricultural:
Commercial and industrial	$	1,604,773	$	71,088	$	480,755	$	632	$	3,029,611	$	28,796
Commercial mortgages:
Construction		3,364,173		95,235		73,316		870		20,578		-
Commercial mortgages other		5,990,852		249,459		1,989,795		10,338		2,743,345		4,959
Residential mortgages		124,896		-		105,880		-		250,391		-
Consumer loans:
Home equity lines & loans		47,472		2,043		29,784		-		-		-
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial		719,453		-		1,830,896		-		2,065,263		-
Commercial mortgages:
Construction		-		-		4,148		-		14,893		-
Commercial mortgages other		866,722		-		872,292		-		1,521,828		-
Residential mortgages		-		-		64,003		-		-		-
Consumer loans:
Home equity lines and loans		46,520		3,437		-		-
Direct consumer loans		3,050		-		-		-		-		-
Total	$	12,767,911	$	421,262	$	5,450,869	$	11,840	$	9,645,909	$	33,755

The following tables present the recorded investment in past due and non-accrual status by class of loans as of December 31, 2013 and December 31, 2012:


December 31, 2013	Current		30-89 Days Past Due		90 Days or more Past Due and accruing			Loans acquired with deteriorated credit quality	Non-Accrual (1)			Total
Commercial and agricultural:
Commercial and industrial	$	143,099,999	$	28,888	$	-	$	678,383	$	1,347,435	$	145,154,705
Agricultural		577,133		-		-		-		-		577,133
Commercial mortgages:
Construction		24,743,496		-		1,453,180		773,738		539,725		27,510,139
Commercial mortgages other		335,122,887		1,137,897		-		7,982,824		2,342,011		346,585,619
Residential mortgages		187,448,407		5,457,860		-		261,551		3,357,750		196,525,568
Consumer loans:
Credit cards		1,727,573		9,427		19,414		-		-		1,756,414
Home equity lines and loans		95,348,467		150,238		-		-		635,373		96,134,078
Indirect consumer loans		163,809,750		1,235,404		-		-		249,258		165,294,412
Direct consumer loans		18,830,404		49,155		-		-		45,438		18,924,997
Total	$	970,708,116	$	8,068,869	$	1,472,594	$	9,696,496	$	8,516,990	$	998,463,065

(1) Includes all loans on non-accrual status regardless of the number of days such loans were delinquent as of December 31, 2013.


December 31, 2012	Current		30-89 Days Past Due		90 Days or more Past Due and accruing				Loans acquired with deteriorated credit quality	Non-Accrual (1)			Total
Commercial and agricultural:
Commercial and industrial	$	131,404,371	$	183,269	$	-		$	1,241,418	$	666,912	$	133,495,970
Agricultural		698,452		-		-			-		-		698,452
Commercial mortgages:
Construction		36,988,222		294,565		4,481,066			1,182,037		434,338		43,380,228
Commercial mortgages other		266,261,798		1,750,806		-			8,043,810		1,581,643		277,638,057
Residential mortgages		194,185,617		4,145,868		-	`		244,268		2,423,024		200,998,777
Consumer loans:
Credit cards		1,847,837		-		3,308			-		-		1,851,145
Home equity lines and loans		86,486,781		211,739		-			-		571,365		87,269,885
Indirect consumer loans		129,789,672		852,818		-			-		335,285		130,977,775
Direct consumer loans		19,481,693		89,619		-			-		19,338		19,590,650
Total	$	867,144,443	$	7,528,684	$	4,484,374		$	10,711,533	$	6,031,905	$	895,900,939

(1) Includes all loans on non-accrual status regardless of the number of days such loans were delinquent as of December 31, 2012.

Troubled Debt Restructurings:

As of December 31, 2013 and 2012, the Corporation has a recorded investment in troubled debt restructurings of $7,891,734 and $5,728,610, respectively. There were specific reserves of $252,790 allocated for troubled debt restructurings at December 31, 2013 and no specific reserves allocated for troubled debt restructurings at December 31, 2012. As of December 31, 2013, troubled debt restructurings totaling $6,830,550 were accruing interest under the modified terms and $1,061,184 were on non-accrual status. 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. The Corporation has committed additional amounts totaling up to $165,000 and $130,000 as of December 31, 2013 and December 31, 2012, respectively, to customers with outstanding loans that are classified as troubled debt restructurings.

During the years ending December 31, 2013 and 2012, 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 years ending December 31, 2013 and 2012:

December 31, 2013	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial		5	$	1,342,690	$	1,342,690
Commercial mortgages:
Construction		1		325,957		325,957
Commercial mortgage other		1		133,000		133,000
Consumer loans:
Home equity lines and loans		3		134,225		134,255
Total		10	$	1,935,872	$	1,935,872

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

The troubled debt restructurings described above increased the allowance for loan losses by $107,727 and resulted in no charge offs during the year ended December 31, 2013. 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.

There were no payment defaults on any loans previously modified as troubled debt restructurings during the years ended December 31, 2013 or 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 analyses performed as of December 31, 2013 and December 31, 2012, the risk category of the recorded investment of loans by class of loans is as follows:

	December 31, 2013
		Not Rated		Pass		Loans acquired with deteriorated credit quality		Special Mention		Substandard		Doubtful
Commercial and agricultural:
Commercial and industrial		$	-	$	133,614,964	$	678,383	$	5,116,316	$	4,724,318	$	1,020,725
Agricultural			-		577,133		-		-		-		-
Commercial mortgages:
Construction			-		23,087,004		773,738		2,783,848		865,549		-
Commercial mortgage other			-		313,955,960		7,982,824		13,611,331		11,035,504		-
Residential mortgages			192,995,108		-		261,551		-		3,268,909		-
Consumer loans:
Credit cards			1,756,414		-		-		-		-		-
Home equity lines and loans			95,421,822		-		-		-		712,256		-
Indirect consumer loans			165,045,154		-		-		-		249,257		-
Direct consumer loans			18,879,559		-		-		-		45,438		-
Total		$	474,098,057	$	471,235,061	$	9,696,496	$	21,511,495	$	20,901,231	$	1,020,725

	December 31, 2012
		Not Rated		Pass		Loans acquired with deteriorated credit quality		Special Mention		Substandard		Doubtful
Commercial and agricultural:
Commercial and industrial		$	-	$	121,145,761	$	1,241,418	$	8,008,002	$	2,606,529	$	494,260
Agricultural			-		698,452		-		-		-		-
Commercial mortgages:
Construction			-		34,882,896		1,182,037		5,153,918		2,161,377		-
Commercial mortgage other			-		247,793,150		8,043,810		11,974,716		9,826,381		-
Residential mortgages			198,336,641		-		244,268		-		2,417,868		-
Consumer loans:
Credit cards			1,851,145		-		-		-		-		-
Home equity lines and loans			86,615,392		-		-		-		654,493		-
Indirect consumer loans			130,642,490		-		-		-		335,285		-
Direct consumer loans			19,571,312		-		-		-		19,338		-
Total		$	437,016,980	$	404,520,259	$	10,711,533	$	25,136,636	$	18,021,271	$	494,260

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, 2013 and December 31, 2012:

	December 31, 2013
			Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	193,167,818	$	1,737,000	$	95,498,705	$	165,045,154	$	18,879,559
Non-Performing		3,357,750		19,414		635,373		249,258		45,438
	$	196,525,568	$	1,756,414	$	96,134,078	$	165,294,412	$	18,924,997

	December 31, 2012
			Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	198,575,753	$	1,847,837	$	86,698,520	$	130,642,490	$	19,571,312
Non-Performing		2,423,024		3,308		571,365		335,285		19,338
	$	200,998,777	$	1,851,145	$	87,269,885	$	130,977,775	$	19,590,650

At the time of the merger with Fort Orange Financial Corp., the Corporation identified certain loans with evidence of deteriorated credit quality, and the probability that the Corporation would be unable to collect all contractually required payments from the borrower. These loans are classified as PCI loans. The Corporation adjusted its estimates of future expected losses, cash flows, and renewal assumptions on the PCI loans 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 table below summarizes the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the PCI loans from January 1, 2013 to December 31, 2013:

	Balance at December 31, 2012			Income Accretion		All Other Adjustments			Balance at December 31, 2013
Contractually required principal and interest	$	16,896,078		$	-	$	(5,665,656	)	$	11,230,422
Contractual cash flows not expected to be collected (nonaccretable discount)		(3,655,500	)		-		3,112,751			(542,749	)
Cash flows expected to be collected		13,240,578			-		(2,552,905	)		10,687,673
Interest component of expected cash flows (accretable yield)		(2,529,045	)		1,162,653		375,215			(991,177	)
Fair value of loans acquired with deteriorating credit quality	$	10,711,533		$	1,162,653	$	(2,177,690	)	$	9,696,496