Note 5 Loans and Leases

Loans and Leases at December 31, were as follows:

(in thousands)	2011			2010
Commercial and industrial
Agriculture	$	67,566		$	65,918
Commercial and industrial other		417,128			409,432
Subtotal commercial and industrial		484,694			475,350
Commercial real estate
Construction		47,304			58,519
Agriculture		53,071			48,485
Commercial real estate other		665,859			619,458
Subtotal commercial real estate		766,234			726,462
Residential real estate
Home equity		161,278			164,765
Mortgages		500,034			462,032
Subtotal residential real estate		661,312			626,797
Consumer and other
Indirect		32,787			41,668
Consumer and other		30,961			31,757
Subtotal consumer and other		63,748			73,425
Leases		6,489			9,949
Total loans and leases		1,982,477			1,911,983
Less: unearned income and deferred costs and fees		(628	)		(1,625	)
Total loans and leases, net of unearned income and deferred costs and fees	$	1,981,849		$	1,910,358

The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. Management reviews these policies and procedures on a regular basis. The Company’s Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to the above listed policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. There have been no significant changes in the policies over the past several years. As such, these policies are reflective of new originations as well as those balances held at year-end. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.

Residential real estate loans

The Company’s policy is to underwrite residential real estate loans in accordance with secondary market guidelines in effect at the time of origination, including loan-to-value (“LTV”) and documentation requirements. LTV’s exceeding 80% for fixed rate loans and 85% for adjustable rate loans require private mortgage insurance to reduce the exposure to 78%. The Company verifies applicants’ income, obtains credit reports and independent real estate appraisals in the underwriting process to ensure adequate collateral coverage and that loans are extended to individuals with good credit and income sufficient to repay the loan. The Company originates both fixed rate and adjustable rate residential real estate loans. Over the past two years, the vast majority of residential loan originations have been fixed rate loans, most of which have been sold in the secondary market on a non-recourse basis with related servicing rights retained. Adjustable rate residential real estate loans may be underwritten based upon an initial rate which is below the fully indexed rate; however, the initial rate is generally less than 100 basis points below the fully indexed rate. As such, the Company does not believe that this practice creates any significant credit risk.

The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loan sales are subject to customary representations and warranties, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these general representations and warranties. While in the past in rare circumstances the Company agreed to sell residential real estate loans with recourse, the Company has not done so in the past several years and the amount of such loans is insignificant. The Company has never had to repurchase a loan sold with recourse.

Loans are generally sold to Federal Home Loan Mortgage Corporation (“FHLMC”) or State of New York Mortgage Agency (“SONYMA”). During 2011, 2010, and 2009, the Company sold residential mortgage loans totaling $26.6 million, $56.3 million, and $89.0 million, respectively, and realized net gains on these sales of $496,000, $955,000, and $1.4 million, respectively. These residential real estate loans are generally sold without recourse in accordance with standard secondary market loan sale agreement. When residential mortgage loans are sold, the Company typically retains all servicing rights, which provides the Company with a source of fee income. In connection with the sales in 2011, 2010, and 2009, the Company recorded mortgage-servicing assets of $176,000, $376,000, and $648,000, respectively.

Amortization of mortgage servicing assets amounted to $257,000 in 2011, $262,000 in 2010, and $245,000 in 2009. At December 31, 2011 and 2010, the Company serviced residential mortgage loans aggregating $213.1 million and $223.4 million, including loans securitized and held as available-for-sale securities. Mortgage servicing rights, at amortized basis, totaled $1.4 million at December 31, 2011 and $1.5 million at December 31, 2010. These mortgage servicing rights were evaluated for impairment at year end 2011 and 2010 and no impairment was recognized. Loans held for sale, which are included in residential real estate totaled $193,000 and $1.3 million at December 31, 2011 and 2010, respectively.

As members of the FHLB, the Company’s subsidiary banks may use unencumbered mortgage related assets to secure borrowings from the FHLB. At December 31, 2011 and 2010, the Company had $122.1 million and $145.6 million, respectively, of term advances from the FHLB that were secured by residential mortgage loans.

Commercial and industrial loans

The Company’s policy sets forth guidelines for debt service coverage ratios, LTV’s and documentation standards. Commercial and industrial loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral and personal or government guarantees. The Company’s policy establishes debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt. Commercial and industrial loans are generally secured by the assets being financed or other business assets such as accounts receivable or inventory. Many of the loans in the commercial portfolio have variable interest rates tied to Prime Rate, FHLBNY borrowing rates, or U.S. Treasury indices.

Commercial real estate

The Company’s policy sets forth guidelines for debt service coverage ratios, LTV’s and documentation standards. Commercial real estate loans are primarily made based on identified cash flows of the borrower with consideration given to underlying real estate collateral and personal or government guarantees. The Company’s policy establishes a maximum LTV of 75% and debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt. Commercial real estate loans may be fixed or variable rate loans with interest rates tied to Prime Rate, FHLBNY borrowing rates, or U.S. Treasury indices.

Agriculture loans

Agriculturally-related loans include loans to dairy farms and cash and vegetable crop farms. Agriculturally-related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment, or commodities/crops. The Company’s policy establishes a maximum LTV of 75% for real estate secured loans and debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt. The policy also establishes maximum LTV ratios for non-real estate collateral, such as livestock, commodities/crops, equipment and accounts receivable. Agriculturally-related loans may be fixed or variable rate loans with interest tied to Prime Rate, FHLBNY borrowing rates, or U.S. Treasury indices.

Consumer and other loans

The consumer loan portfolio includes personal installment loans, direct and indirect automobile financing, and overdraft lines of credit. The majority of the consumer portfolio consists of indirect and direct automobile loans. Consumer loans are generally short-term and have fixed rates of interest that are set giving consideration to current market interest rates, the financial strength of the borrower, and internal profitability targets. The policy establishes maximum debt to income ratios and includes guidelines for verification of applicants’ income and receipt of credit reports.

Leases

Leases are primarily made to commercial customers and the origination criteria typically includes the value of the underlying assets being financed, the useful life of the assets being financed, and identified cash flows of the borrower. Most leases carry a fixed rate of interest that is set giving consideration to current market interest rates, the financial strength of the borrower, and internal profitability targets.

Loan and Lease Customers

The Company’s loan and lease customers are located primarily in the upstate New York communities served by its three subsidiary banks. The Trust Company operates fourteen banking offices in the counties of Tompkins, Cayuga, Cortland, and Schuyler, New York. The Bank of Castile operates fourteen banking offices in towns situated in and around the areas commonly known as the Letchworth State Park area and the Genesee Valley region of New York State. Mahopac National Bank is located in Putnam County, New York, and operates five offices in that county, three offices in neighboring Dutchess County, New York, and six offices in Westchester County, New York. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower.

Directors and officers of the Company and its affiliated companies were customers of, and had other transactions with, the Company’s banking subsidiaries in the ordinary course of business. Such loans and commitments were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to the Company, and did not involve more than normal risk of collectability or present other unfavorable features.

Loan transactions with related parties at December 31 are summarized as follows:

(in thousands)	2011			2010
Balance at beginning of year	$	22,357		$	25,616
New Directors/Executive Officers		0			308
New loans and advancements		20,314			17,956
Loan Payments		(16,944	)		(21,523	)
Balance at end of year	$	25,727		$	22,357

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments are due. Loans are placed on nonaccrual status either due to the delinquency status of principal and/or interest (generally when past due 90 or more days) or a judgment by management that the full repayment of principal and interest is unlikely. When interest accrual is discontinued, all unpaid accrued interest is reversed. Payments received on loans on nonaccrual are generally applied to reduce the principal balance of the loan. Loans are generally returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

An age analysis of past due loans, segregated by class of loans, as of December 31, 2011 is provided below.

(in thousands)	30-89 days		90 days or more		Current Loans		Total Loans			90 days and accruing		Nonaccrual
Commercial and industrial
Agriculture	$	26	$	0	$	67,540	$	67,566		$	0	$	175
Commercial and industrial other		890		155		416,083		417,128			0		6,930
Subtotal commercial and industrial		916		155		483,623		484,694			0		7,105
Commercial real estate
Construction		102		7,761		39,441		47,304			0		12,958
Agriculture		186		211		52,674		53,071			0		346
Commercial real estate other		4,923		9,449		651,487		665,859			0		13,048
Subtotal commercial real estate		5,211		17,421		743,602		766,234			0		26,352
Residential real estate
Home equity		1,217		1,232		158,829		161,278			322		1,222
Mortgages		4,808		4,942		490,284		500,034			1,056		4,662
Subtotal residential real estate		6,025		6,174		649,113		661,312			1,378		5,884
Consumer and other
Indirect		1,009		228		31,550		32,787			2		237
Consumer and other		0		0		30,961		30,961			0		0
Subtotal consumer and other		1,009		228		62,511		63,748			2		237
Leases		10		0		6,479		6,489			0		10
Total loans and leases		13,171		23,978		1,945,328		1,982,477			1,380		39,587
Less: unearned income and deferred costs and fees		0		0		0		(628	)		0		0
Total loans and leases, net of unearned income and deferred costs and fees	$	13,171	$	23,978	$	1,945,328	$	1,981,849		$	1,380	$	39,587

December 31, 2010

(in thousands)	30-89 days		90 days or more		Current Loans		Total Loans			90 days and accruing		Nonaccrual
Commercial and industrial
Agriculture		50		118		65,750		65,918			0		165
Commercial and Industrial Other		3,131		1,443		404,858		409,432			842		7,106
Subtotal commercial and Industrial		3,181		1,561		470,608		475,350			842		7,271
Commercial real estate
Construction		8		176		58,335		58,519			0		13,003
Agriculture		189		0		48,296		48,485			0		0
Commercial real estate other		1,943		4,094		613,421		619,458			0		11,788
Subtotal commercial real estate		2,140		4,270		720,052		726,462			0		24,791
Residential real estate
Home equity		262		1,434		163,069		164,765			368		1,429
Mortgages		4,709		6,257		451,066		462,032			0		7,682
Subtotal residential real estate		4,971		7,691		614,135		626,797			368		9,111
Consumer and other
Indirect		926		311		40,431		41,668			7		309
Consumer and other		0		0		31,757		31,757			0		0
Subtotal consumer and other		926		311		72,188		73,425			7		309
Leases		0		0		9,949		9,949			0		19
Total loans and leases		11,218		13,833		1,886,932		1,911,983			1,217		41,501
Less: unearned income and deferred costs and fees		0		0		0		(1,625	)		0		0
Total loans and leases, net of unearned income and deferred costs and fees	$	11,218	$	13,833	$	1,886,932	$	1,910,358		$	1,217	$	41,501

The difference between the interest income that would have been recorded if nonaccrual loans and leases had paid in accordance with their original terms and the interest income that was recorded for the year ended December 31, 2011 and 2010 and 2009 was $2.7 million, $1.7 million and $699,000, respectively. The Company had no material commitments to make additional advances to borrowers with nonperforming loans.