(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,	2011		2010
Commercial, financial and agricultural	$	142,209,279	$	114,697,440
Commercial mortgages		264,589,013		133,070,484
Residential mortgages		193,599,853		173,467,806
Indirect consumer loans		97,165,447		98,940,854
Consumer loans		99,351,585		93,507,785

	$	796,915,177	$	613,684,369

Residential mortgages held for sale as of December 31, 2011 and 2010 totaling $395,427 and $486,997,

respectively, are not included in the above table.

Residential mortgages totaling $112,956,988 at December 31, 2011 and $97,036,042 at December 31, 2010 were

pledged under a blanket collateral agreement for the Corporation's line of credit with the FHLB.

The Corporation's market area encompasses the New York State counties of Albany, Broome, Chemung,

Saratoga, Schuyler, Steuben, Tioga, and Tompkins, as well as Bradford County in the northern tier of

Pennsylvania. Substantially all of the Corporation's outstanding loans are with borrowers living or doing business

within 25 miles of the Corporation's branches in these counties. 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.

Risk Characteristics

Commercial, financial and agricultural loans primarily consist of loans to small to mid-sized businesses in our

market area in a diverse range of industries. These loans are of higher risk and typically are made on the basis of

the borrower's ability to make repayment from the cash flow of the borrower's business. Further, the collateral

securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. The credit

risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on

a borrower's operations or on the value of underlying collateral, if any.

Commercial mortgage loans generally have larger balances and involve a greater degree of risk than residential

mortgage loans, inferring higher potential losses on an individual customer basis. Loan repayment is often

dependent on the successful operation and management of the properties and/or the businesses occupying the

properties, as well as on the collateral securing the loan. Economic events or conditions in the real estate market

could have an adverse impact on the cash flows generated by properties securing the Company's commercial real

estate loans and on the value of such properties.

Residential mortgage loans are generally made on the basis of the borrower's ability to make repayment from his

or her employment and other income, but are secured by real property whose value tends to be more easily

ascertainable. Credit risk for these types of loans is generally influenced by general economic conditions, the

characteristics of individual borrowers and the nature of the loan collateral.

The consumer loan segment includes home equity lines of credit and home equity loans, which exhibit many of

the same risk characteristics as residential mortgages. Indirect and other consumer loans may entail greater credit

risk than residential mortgage and home equity loans, particularly in the case of other consumer loans which are

unsecured or, in the case of indirect consumer loans, secured by depreciable assets, such as automobiles or boats.

In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of

repayment of the outstanding loan balance. In addition, consumer loan collections are dependent on the

borrower's continuing financial stability, thus are more likely to be affected by adverse personal circumstances

such as job loss, illness or personal bankruptcy. Furthermore, the application of various federal and state laws,

including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

No allowance for loan losses was recorded as of December 30, 2011 for loans acquired as part of the FOFC

merger. These loans were recorded at fair value at the time of the acquisition.

The following table presents the activity in the allowance for loan losses by portfolio segment for the year ending

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

Transactions in the allowance for loan losses for the years ended December 31, 2010 and 2009 were as follows:

	2010			2009
Balances at January 1	$	9,967,223		$	9,105,517
Provision charged to operations		1,125,000			2,450,000
Loans charged-off		(2,211,179	)		(1,840,899	)
Recoveries		617,087			252,605
Balances at December 31	$	9,498,131		$	9,967,223

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by

portfolio segment based on impairment method as of December 31, 2011 and 2010. The recorded investment

excludes loans acquired in the FOFC merger:

	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, 2010
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		$	23,524	$	216,234	$	-	$	-	$	-	$	239,758
Collectively evaluated for impairment			2,094,775		2,358,824		1,301,780		2,727,022		775,972		9,258,373
Total ending allowance balance		$	2,118,299	$	2,575,058	$	1,301,780	$	2,727,022	$	775,972	$	9,498,131

	December 31, 2011
Loans:	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	5,275,043	$	4,603,563	$	179,337	$	-	$	10,057,943
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

	December 31, 2010
Loans:	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	3,215,761	$	4,450,882	$	408,392	$	-	$	8,075,035
Loans collectively evaluated for impairment		111,778,238		128,963,664		173,465,831		193,098,341		607,306,074
Total ending loans balance	$	114,993,999	$	133,414,546	$	173,874,223	$	193,098,341	$	615,381,109

Purchased credit impaired loans had no allowance for loan losses allocation as of December 31, 2011.

The following tables present loans individually evaluated for impairment recognized by class of loans as of

December 31, 2011 and December 31, 2010, the average recorded investment and interest income recognized by

class of loans as of the periods ending December 31, 2011 and 2010:

	December 31, 2011
		Unpaid Principal Balance		Allowance for Loan Losses Allocated		Recorded Investment		Average Recorded Investment			Interest Income Recognized
With no related allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial		$	2,914,401	$	-	$	2,914,776	$	3,029,611	$	28,796
Commercial mortgages:
Construction			10,454		-		10,454		20,578		-
Other			862,815		-		860,648		2,743,345		4,959
Residential mortgages			178,925		-		179,337		250,391		-
With an allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial			2,360,252		1,528,651		2,360,267		2,065,263		-
Commercial mortgages:
Construction			8,295		8,295		8,295		14,893		-
Other			3,727,097		405,260		3,724,166		1,521,828		-
Total		$	10,062,239	$	1,942,206	$	10,057,943	$	9,645,909	$	33,755

	December 31, 2010
	Unpaid Principal Balance		Allowance for Loan Losses Allocated		Recorded Investment		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial	$	4,334,095	$	-	$	3,192,227	$	1,876,603	$	73,657
Commercial mortgages:
Construction		32,266		-		32,266		8,067		-
Other		4,148,423		-		3,549,686		3,374,678		63,061
Residential mortgages		407,105		-		408,392		309,537		21,324
With an allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial		23,524		23,524		23,534		1,393,995		386
Agricultural		-		-		-		6,211		453
Commercial mortgages:
Construction		50,939		43,514		50,939		215,901		-
Other		838,277		172,720		817,991		1,378,687		969
Residential mortgages		-		-		-		215,299		6,470
Total	$	9,834,629	$	239,758	$	8,075,035	$	8,778,978	$	166,320

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, 2011 and 2010. This table includes loans

acquired in the FOFC merger, except those loans with evidence of credit deterioration at the time of the merger.

	December 31, 2011				December 31, 2010
	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	$	5,611,805	$	-	$	2,938,174	$	-
Commercial mortgages		-		-		-		-
Construction		18,749		7,295,104		83,204		-
Other		4,778,384		-		4,230,701		-
Residential mortgages		2,611,096		-		2,558,534		-
Consumer loans
Credit cards		-		9,053		-		11,174
Home equity lines & loans		455,418		-		545,039		-
Indirect consumer loans		22,287		-		180,632		-
Other direct consumer loans		113,349		-		61,601		-
Total	$	13,611,088	$	7,304,157	$	10,597,886	$	11,174

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,

2011 and December 31, 2010 and by loans originated by the Corporation (referred to as “Legacy” loans) and loans acquired in the FOFC merger (referred

to as “Acquired” loans) which are further discussed in Note 22 Business Combinations:

	December 31, 2011
Legacy Loans:		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 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 90 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		2,715,149		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

	December 31, 2010
Legacy Loans:		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
Commercial, financial and agricultural
Commercial & industrial		$	33,434	$	17,351	$	2,914,640	$	2,965,425	$	111,202,073	$	114,167,498
Agricultural			-		-		-		-		826,501		826,501
Commercial mortgages
Construction			-		-		63,102		63,102		9,029,450		9,092,552
Other			116,432		-		2,913,525		3,029,957		121,292,041		124,321,998
Residential mortgages			1,851,412		277,276		1,404,067		3,532,755		170,341,467		173,874,222
Consumer loans
Credit cards			4,889		16,635		11,174		32,698		1,989,199		2,021,897
Home equity lines & loans			550,134		79,910		321,116		951,160		76,052,290		77,003,450
Indirect consumer loans			465,818		154,969		146,221		767,008		98,571,142		99,338,150
Other direct consumer loans			51,125		12,502		41,964		105,591		14,629,253		14,734,844
Total		$	3,073,244	$	558,643	$	7,815,809	$	11,447,696	$	603,933,416	$	615,381,112

Troubled Debt Restructurings:

The Corporation has $218 thousand of allocated specific reserves to customers whose loan terms have been

modified in troubled debt restructurings which are included in non-accrual loans as of December 31, 2011. There

were no specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of

December 31, 2010. The Corporation has not committed to lend any additional amounts as of December 31, 2011

or December 31, 2010 to customers with outstanding loans that are classified as trouble debt restructurings.

During the twelve months ended December 31, 2011, no loans were modified as troubled debt restructurings

by the Corporation. Additionally, there were no payment defaults on any loans previously modified as troubled debt

restructurings 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 categorizes loans into risk categories based on relevant information about the ability of

borrowers to service their debt such as: current financial information, historical payment experience, credit

documentation, public information, and current economic trends, among other factors. The Corporation analyzes

loans individually by classifying the loans as to credit risk. This analysis includes new consumer, mortgage and

home equity loans and lines with outstanding balances greater than $50 thousand, $250 thousand and $100

thousand, respectively, along with a sample of existing loans and non-homogeneous loans, such as commercial

and commercial real estate loans. The loans meeting these criteria are reviewed at least annually. The

Corporation uses the following definitions for risk rating:

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. Loans shown as not rated are monitored for credit quality primarily based on

payment status which is disclosed elsewhere. Based on the analysis's performed as of December 31, 2011 and

December 31, 2010, the risk category of the recorded investment of loans by class of loans is as follows:

	December 31, 2011
Legacy 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

	December 31, 2010
Legacy Loans:	Not Rated		Pass		Special Mention		Substandard		Doubtful
Commercial, financial and agricultural:
Commercial & industrial	$	-	$	90,887,538	$	16,946,891	$	4,770,276	$	1,562,794
Agricultural		-		824,882		1,619		-		-
Commercial mortgages:
Construction		-		7,497,488		672,136		922,928		-
Other		-		108,732,393		7,245,641		8,343,964		-
Residential mortgages		171,024,544		-		-		2,849,678		-
Consumer loans:
Credit cards		2,021,897		-		-		-		-
Home equity lines & loans		76,458,413		-		-		545,037		-
Indirect consumer loans		99,155,306		-		-		182,844		-
Other direct consumer loans		14,656,960		-		-		77,883		-
Total	$	363,317,120	$	207,942,301	$	24,866,287	$	17,692,610	$	1,562,794

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, 2011 and December

31, 2010:

	December 31, 2011
			Consumer Loans
Legacy 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

	December 31, 2010
			Consumer Loans
Legacy Loans:	Residential Mortgages		Credit Card		Home Equity Lines & Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	171,070,880	$	2,010,723	$	76,458,413	$	99,157,518	$	14,673,243
Non-Performing		2,803,342		11,174		545,037		180,632		61,601
Total	$	173,874,222	$	2,021,897	$	77,003,450	$	99,338,150	$	14,734,844

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. The table below summarizes

the changes in total contractually required principal and interest cash payments, management's estimates of

expected total cash payments and carrying value of the loans from April 8, 2011, the date of the acquisition, to

December 31, 2011 (in thousands of dollars):

	Balance at Acquisition April 8, 2011			Income Accretion		All Other Adjustments			Balance at December 31, 2011
Contractually required principal and interest	$	25,718		$	-	$	(4,457	)	$	21,261
Contractual cash flows not expected to be collected (nonaccretable discount)		(5,849	)		-		1,187			(4,662	)
Cash flows expected to be collected		19,869			-		(3,270	)		16,599
Interest component of expected cash flows (accretable yield)		(1,861	)		1,281		(1,264	)		(1,844	)
Fair value of loans acquired with deteriorating credit quality	$	18,008		$	1,281	$	(4,534	)	$	14,755