FAIR VALUES

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). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3 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.

Derivatives: The fair values of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2 inputs). Derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices, and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The Corporation also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counter-party's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation has considered the impact of any applicable credit enhancements, such as collateral postings. Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize credit default rate assumptions (Level 3 inputs).

The fair values of credit risk participations are based on credit default rate assumptions (Level 3 inputs).

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



			Fair Value Measurement at December 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	$	100,166	$	14,784	$	85,382	$	—
Mortgage-backed securities, residential	198,366		—		198,366		—
Obligations of states and political subdivisions	44,426		—		44,426		—
Corporate bonds and notes	752		—		504		248
SBA loan pools	647		—		647		—
Corporate stocks	463		56		407		—
Total available for sale securities	$	344,820	$	14,840	$	329,732	$	248

Trading assets	$	701	$	701	$	—	$	—
Derivative assets	15		—		15		—

Financial Liabilities:
Derivative liabilities	$	63	$	—	$	15	$	48



			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	$	—	$	—

Financial Liabilities:
Derivative liabilities	$	18	$	—	$	—	$	18

There were no transfers between Level 1 and Level 2 during the years ended December 31, 2015 and December 31, 2014.

The significant unobservable inputs used in the fair value measurement of the Corporation’s collateralized mortgage obligations are probabilities of specific-issuer defaults and deferrals and specific-issuer recovery assumptions. Significant increases in specific-issuer default assumptions or decreases in specific-issuer recovery assumptions would result in a significantly lower fair value measurement. Conversely, decreases in specific-issuer default assumptions or increases in specific-issuer recovery assumptions would result in a higher fair value measurement. The Corporation treats all interest payment deferrals as defaults and assumes no recoveries on defaults.

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31:



	Assets (Liabilities)
	Corporate Bonds and Notes				Derivative Liabilities
(in thousands)	2015		2014		2015			2014
Balance of recurring Level 3 assets at January 1	$	—	$	—	$	(18	)	$	—
Derivative instruments entered into	—		—		(1		)	(18		)
Total gains or losses for the period:
Included in earnings - other non-interest income	—		—		(29		)	—
Included in other comprehensive income	—		—		—			—
Transfers into Level 3	248		—		—			—
Balance of recurring Level 3 assets at December 31	$	248	$	—	$	(48	)	$	(18	)

As of December 31, 2015, one corporate bond was transferred from Level 2 and into Level 3 because of a lack of observable market data for these investments due to a decrease in the market activity of these securities. The Corporation's valuations for the corporate bond was supported by an analysis prepared by an independent third party and approved by management.

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



Description	Fair Value at December 31, 2015		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at December 31, 2015
Corporate bonds and notes	$	248	Discounted cash flow	Credit spread	1.73% - 1.73% [1.73%]

Derivative liabilities	$	48	Historical trend	Credit default rate	5.83% - 5.83% [5.83%]



Description	Fair Value at December 31, 2014		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at December 31, 2014
Derivative liabilities	$	18	Historical trend	Credit default rate	6.24% - 6.24% [6.24%]

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



			Fair Value Measurement at December 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	$	2,629	$	—	$	—	$	2,629
Consumer loans:
Home equity lines and loans	287		—		—		287
Total impaired loans	$	2,916	$	—	$	—	$	2,916
Other real estate owned:
Commercial mortgages:
Commercial mortgages	$	1,491	$	—	$	1,491	$	—
Residential mortgages	39		—		—		39
Total other real estate owned, net	$	1,530	$	—	$	1,491	$	39



			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	$	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 December 31, 2015 and December 31, 2014 (in thousands):



Asset	Fair Value at December 31, 2015		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at December 31, 2015
Impaired loans:
Commercial mortgages:
Commercial mortgages	$	2,629	Sales comparison	Discount to appraised value	10.00% - 17.19% [16.06%]
Consumer loans:
Home equity lines and loans	287		Sales comparison	Discount to appraised value	18.04% - 18.04% [18.04%]
	$	2,916

OREO:
Residential mortgages	39		Sales comparison	Discount to appraised value	22.30% - 22.30% [22.30%]
	$	39



Asset	Fair Value at December 31, 2014		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at December 31, 2014
Impaired loans:
Commercial mortgages:
Commercial mortgages	$	3,593	Sales comparison	Discount to appraised value	10.00% - 53.92% [11.84%]
Consumer loans:
Home equity lines and loans	52		Sales comparison	Discount to appraised value	12.29% - 12.29% [12.29%]
	$	3,645

OREO:
Commercial mortgages:
Commercial mortgages	$	3,063	Sales comparison	Discount to appraised value	5.00% - 30.32% [7.73%]
Consumer loans:
Home equity lines and loans	2		Sales comparison	Discount to appraised value	20.00% - 20.00% [20.00%]
	$	3,065

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $5.2 million with a valuation allowance of $1.5 million as of December 31, 2015, resulting in an increase of $288 thousand in the provision for loan losses for the year ending December 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 carrying or fair value less costs to sell, had an outstanding balance of $1.8 million, before a valuation allowance of $270 thousand at December 31, 2015. For properties held as of December 31, 2015, expense associated with the valuation allowance was $390 thousand recognized for the year. OREO had an outstanding balance of $3.1 million, before a valuation allowance of $2 thousand at December 31, 2014. For properties held as of December 31, 2014, there was no expense associated with the valuation allowance recognized during the year.

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, and time deposits are classified as Level 2.

FHLB and FRB Stock

It is not practicable to determine the fair value of FHLBNY and FRBNY stock due to restrictions 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 are classified as Level 2.

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 December 31, 2015 and 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 December 31, 2015 and December 31, 2014, are as follows (in thousands):



			Fair Value Measurements at December 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	$	24,886	$	24,886	$	—	$	—	$	24,886
Interest-bearing deposits in other financial institutions	1,299		1,299		—		—		1,299
Trading assets	701		701		—		—		701
Securities available for sale	344,820		14,840		329,732		248		344,820
Securities held to maturity	4,566		—		—		4,822		4,822
FHLBNY and FRBNY stock	4,797		—		—		—		N/A
Loans, net	1,154,373		—		—		1,178,081		1,178,081
Loans held for sale	1,076		—		1,076		—		1,076
Accrued interest receivable	4,015		39		1,141		2,835		4,015
Derivative assets	15		—		15		—		15

Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	1,234,216	$	1,234,216	$	—	$	—	$	1,234,216
Time deposits	166,079		—		166,551		—		166,551
Securities sold under agreements to repurchase	28,453		—		29,128		—		29,128
FHLBNY overnight advances	13,900		—		13,901		—		13,901
FHLBNY term advances	19,203		—		19,658		—		19,658
Accrued interest payable	209		17		192		—		209
Derivative liabilities	63		—		15		48		63

(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
Derivative liabilities	18		—		—		18		18