NOTE 5 FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Corporation used the following methods and significant assumptions to estimate fair value:

Investment Securities: The fair values of securities available for sale are usually determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or matrix pricing, which is a mathematical technique widely used to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs).

Trading Assets: Securities that are held to fund a deferred compensation plan are recorded at fair value with changes in fair value included in earnings. The fair values of trading assets are determined by quoted market prices (Level 1 inputs).

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value have been partially charged-off or receive specific allocations as part of the allowance for loan loss accounting. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports, adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the client and client's business, typically resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

OREO: Assets acquired through or instead of loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (commercial properties) or certified residential appraisers (residential properties) whose qualifications and licenses have been reviewed and verified by the Corporation. Once received, appraisals are reviewed for reasonableness of assumptions, approaches utilized, Uniform Standards of Professional Appraisal Practice and other regulatory compliance, as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Appraisals are generally completed within the previous 12 month period prior to a property being placed into OREO. On impaired loans, appraisal values are adjusted based on the age of the appraisal, the position of the lien, the type of the property and its condition.

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

			Fair Value Measurement at March 31, 2015 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of U.S. Government and U.S.Government sponsored enterprises	$	170,447	$	31,266	$	139,181	$	-
Mortgage-backed securities, residential		59,182		-		59,182		-
Collateralized mortgage obligations		231		-		231		-
Obligations of states and political subdivisions		31,152		-		31,152		-
Corporate bonds and notes		1,528		-		1,528		-
SBA loan pools		1,260		-		1,260		-
Trust Preferred securities		2,024		-		2,024		-
Corporate stocks		483		55		428		-
Total available for sale securities	$	266,307	$	31,321	$	234,986	$	-

Trading assets	$	601	$	601	$	-	$	-

			Fair Value Measurement at December 31, 2014 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of U.S. Government and U.S.Government sponsored enterprises	$	181,673	$	31,115	$	150,558	$	-
Mortgage-backed securities, residential		61,660		-		61,660		-
Collateralized mortgage obligations		338		-		338		-
Obligations of states and political subdivisions		31,451		-		31,451		-
Corporate bonds and notes		1,533		-		1,533		-
SBA loan pools		1,304		-		1,304		-
Trust Preferred securities		2,028		-		2,028		-
Corporate stocks		520		104		416		-
Total available for sale securities	$	280,507	$	31,219	$	249,288	$	-

Trading assets	$	549	$	549	$	-	$	-

There were no transfers between Level 1 and Level 2 during the three-month period ending March 31, 2015 or the year ending December 31, 2014.

Assets and liabilities measured at fair value on a non-recurring basis are summarized below (in thousands):

			Fair Value Measurement at March 31, 2015 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:
Commercial mortgages:
Commercial mortgages	$	2,993	$	-	$	-	$	2,993
Total impaired loans	$	2,993	$	-	$	-	$	2,993

Other real estate owned:
Commercial mortgages:
Commercial mortgages	$	2,496	$	-	$	-	$	2,496
Residential mortgages		10		-		-		10
Total other real estate owned, net	$	2,506	$	-	$	-	$	2,506

			Fair Value Measurement at December 31, 2014 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:
Commercial mortgages:
Commercial mortgages	$	3,593	$	-	$	-	$	3,593
Consumer loans:
Home equity lines and loans		52		-		-		52
Total impaired loans	$	3,645	$	-	$	-	$	3,645

Other real estate owned:
Commercial mortgages:
Commercial mortgages	$	3,063	$	-	$	-	$	3,063
Consumer loans:
Home equity lines and loans		2		-		-		2
Total other real estate owned, net	$	3,065	$	-	$	-	$	3,065

The following table presents information related to Level 3 non-recurring fair value measurement at March 31, 2015 and December 31, 2014 (in thousands):

Description	Fair Value at March 31, 2015		Technique	Unobservable Inputs
Impaired loans	$	2,993	Third party appraisals		1	Management discount based on underlying collateral characteristics and market conditions

Other real estate owned	$	2,506	Third party appraisals		1	Estimated holding period
					2	Estimated closing costs

Description	Fair Value at December 31, 2014		Technique	Unobservable Inputs
Impaired loans	$	3,645	Third party appraisals		1	Management discount based on underlying collateral characteristics and market conditions

Other real estate owned	$	3,065	Third party appraisals		1	Estimated holding period
					2	Estimated closing costs

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $4.7 million with a valuation allowance of $1.6 million as of March 31, 2015, resulting in $653 thousand decrease in the provision for loan losses for the three-month period ended March 31, 2015. Impaired loans had a principal balance of $4.9 million, with a valuation allowance of $1.2 million as of December 31, 2014, resulting in an increase of $232 thousand in the provision for loan losses for the year ending December 31, 2014.

OREO, which is measured by the lower of cost or fair value less costs to sell, had a net carrying amount of $2.5 million with no valuation allowance at March 31, 2015. There were no write downs for the three–month period ending March 31, 2015. OREO had a net carrying amount of $3.1 million at December 31, 2014. The net carrying amount reflects the outstanding balance of $3.1 million, net of a valuation allowance of $2 thousand at December 31, 2014.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash, Due From and Interest-Bearing Deposits in Other Financial Institutions

For those short-term instruments that generally mature in 90 days or less, the carrying value approximates fair value of which non-interest-bearing deposits are classified as Level 1 and interest-bearing deposits with the FHLBNY and FRBNY are classified as Level 1.

FHLBNY and FRBNY Stock

It is not practicable to determine the fair value of FHLBNY and FRBNY stock due to restrictions placed on its transferability.

Loans Receivable

For variable-rate loans that reprice frequently, fair values approximate carrying values. The fair values for other loans are estimated through discounted cash flow analysis using interest rates currently being offered for loans with similar terms and credit quality. Loans are classified as Level 3. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Loans Held for Sale

Certain mortgage loans are originated with the intent to sell. Loans held for sale are recorded at the lower of cost or fair value in the aggregate. Loans held for sale are classified as Level 2.

Deposits

The fair values disclosed for demand deposits, savings accounts and money market accounts are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying values) and classified as Level 1.

The fair value of certificates of deposits is estimated using a discounted cash flow approach that applies interest rates currently being offered on certificates to a schedule of the weighted-average expected monthly maturities and classified as Level 2.

Securities Sold Under Agreements to Repurchase

These instruments bear both variable and fixed rates of interest. Therefore, the carrying value approximates fair value for the variable rate instruments and the fair value of fixed rate instruments is based on discounted cash flows to maturity. These are classified as Level 2.

FHLBNY Term Advances

These instruments bear a stated rate of interest to maturity and, therefore, the fair value is based on discounted cash flows to maturity and classified as Level 2.

Commitments to Extend Credit

The fair value of commitments to extend credit is based on fees currently charged to enter into similar agreements, the counter-party's credit standing and discounted cash flow analysis. The fair value of these commitments to extend credit approximates the recorded amounts of the related fees and is not material at March 31, 2015 and December 31, 2014.

Accrued Interest Receivable and Payable

For these short-term instruments, the carrying value approximates fair value resulting in a classification of Level 1, Level 2 or Level 3 depending upon the classification of the asset/liability they are associated with.

The carrying amounts and estimated fair values of other financial instruments, at March 31, 2015 and December 31, 2014, are as follows (in thousands):

	Fair Value Measurements at March 31, 2015 Using
Financial assets:	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value (1)
Cash and due from financial institutions	$	29,643	$	29,643	$	-	$	-	$	29,643
Interest-bearing deposits in other financial institutions		55,230		55,230		-		-		55,230
Trading assets		601		601		-		-		601
Securities available for sale		266,307		31,321		234,986		-		266,307
Securities held to maturity		5,693		-		6,076		-		6,076
FHLBNY and FRBNY stock		4,148		-		-		-		N/A
Loans, net		1,129,680		-		-		1,155,496		1,155,496
Loans held for sale		628		-		628		-		628
Accrued interest receivable		4,482		361		1,488		2,633		4,482
Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	1,180,179	$	1,180,179	$	-	$	-	$	1,180,179
Time deposits		187,951		-		188,436		-		188,436
Securities sold under agreements to repurchase		31,084		-		32,285		-		32,285
FHLBNY term advances		19,283		-		20,239		-		20,239
Accrued interest payable		225		17		208		-		225

(1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

	Fair Value Measurements at December 31, 2014 Using
Financial assets:	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value (1)
Cash and due from financial institutions	$	28,130	$	28,130	$	-	$	-	$	28,130
Interest-bearing deposits in other financial institutions		1,033		1,033		-		-		1,033
Trading assets		549		549		-		-		549
Securities available for sale		280,507		31,219		249,288		-		280,507
Securities held to maturity		5,831		-		6,197		-		6,197
FHLBNY and FRBNY stock		5,535		-		-		-		N/A
Loans, net		1,107,888		-		-		1,135,590		1,135,590
Loans held for sale		665		-		665		-		665
Accrued interest receivable		4,185		145		1,295		2,745		4,185
Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	1,068,171	$	1,068,171	$	-	$	-	$	1,068,171
Time deposits		211,843		-		212,397		-		212,397
Securities sold under agreements to repurchase		29,652		-		30,853		-		30,853
FHLBNY overnight advances		30,830		-		30,832		-		30,832
FHLBNY term advances		19,310		-		20,235		-		20,235
Accrued interest payable		237		15		222		-		237