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 on a recurring basis:

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).

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 September 30, 2017 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	$	15,584	$	—	$	15,584	$	—
Mortgage-backed securities, residential	236,661		—		236,661		—
Obligations of states and political subdivisions	54,728		—		54,728		—
Corporate bonds and notes	242		—		242		—
SBA loan pools	4,485		—		4,485		—
Corporate stocks	526		194		332		—
Total available for sale securities	$	312,226	$	194	$	312,032	$	—

Trading assets	$	909	$	909	$	—	$	—
Derivative assets	670		—		670		—

Financial Liabilities:
Derivative liabilities	$	741	$	—	$	670	$	71

During the three months ended September 30, 2017, the Corporation transferred corporate bonds with a fair market value of $242 thousand from Level 3 to Level 2 due to the availability of pricing in secondary markets.



			Fair Value Measurement at December 31, 2016 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	$	17,455	$	—	$	17,455	$	—
Mortgage-backed securities, residential	245,866		—		245,866		—
Obligations of states and political subdivisions	38,740		—		38,740		—
Corporate bonds and notes	250		—		—		250
SBA loan pools	570		—		570		—
Corporate stocks	521		170		351		—
Total available for sale securities	$	303,402	$	170	$	302,982	$	250

Trading assets	$	774	$	774	$	—	$	—
Derivative assets	693		—		693		—

Financial Liabilities:
Derivative liabilities	$	761	$	—	$	693	$	68

There were no transfers between Level 1 and Level 2 during the three and nine-month periods ended September 30, 2017. During the year ended December 31, 2016, the Corporation transferred corporate stocks with a fair market value of $158 thousand at the date of transfer (and $103 thousand at December 31, 2016) from Level 2 to Level 1 due to the corporation's stock becoming publicly listed.

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 three-month periods ended September 30, 2017 and September 30, 2016 (in thousands):



	Assets (Liabilities)
	Corporate Bonds and Notes						Derivative Liabilities
	2017			2016			2017			2016
Balance of recurring Level 3 assets at July 1	$	252		$	256		$	(71	)	$	(120	)
Derivative instruments entered into	—			—			—			—
Total gains or losses for the period:
Included in earnings - other non-interest income	—			—			—			26
Included in other comprehensive income	(10		)	(1		)	—			—
Transfers out of Level 3	(242		)	—			—			—
Balance of recurring Level 3 assets at September 30	$	—		$	255		$	(71	)	$	(94	)

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 nine month periods ended September 30, 2017 and September 30, 2016 (in thousands):



	Assets (Liabilities)
	Corporate Bonds and Notes					Derivative Liabilities
	2017			2016		2017			2016
Balance of recurring Level 3 assets at January 1	$	250		$	248	$	(68	)	$	(48	)
Derivative instruments entered into	—			—		(1		)	(25		)
Total gains or losses for the period:
Included in earnings - other non-interest income	—			—		(2		)	(21		)
Included in other comprehensive income	(8		)	7		—			—
Transfers out of Level 3	(242		)	—		—			—
Balance of recurring Level 3 assets at September 30	$	—		$	255	$	(71	)	$	(94	)

The following table presents information related to Level 3 recurring fair value measurements at September 30, 2017 and December 31, 2016 (in thousands):



Description	Fair Value at September 30, 2017		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at September 30, 2017
Derivative liabilities	$	71	Historical trend	Credit default rate	5.15% - 5.15% [5.15%]



Description	Fair Value at December 31, 2016		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at December 31, 2016
Corporate bonds and notes	$	250	Discounted cash flow	Credit spread	1.73% - 1.73% [1.73%]

Derivative liabilities	$	68	Historical trend	Credit default rate	4.92% - 4.92% [4.92%]

The Corporation used the following methods and significant assumptions to estimate fair value on a non-recurring basis:

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. Assets in which the Corporation has accepted a purchase offer are classified as Level 2.

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 non-recurring basis are summarized below (in thousands):



			Fair Value Measurement at September 30, 2017 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 and agricultural:
Commercial and industrial	$	85	$	—	$	—	$	85
Commercial mortgages:
Commercial mortgages, other	3,157		—		—		3,157
Total impaired loans	$	3,242	$	—	$	—	$	3,242
Other real estate owned:
Residential mortgages	$	179	$	—	$	—	$	179
Total other real estate owned, net	$	179	$	—	$	—	$	179



			Fair Value Measurement at December 31, 2016 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, other	$	2,631	$	—	$	—	$	2,631
Consumer loans:
Home equity lines and loans	219		—		—		219
Total impaired loans	$	2,850	$	—	$	—	$	2,850
Other real estate owned:
Residential mortgages	$	344	$	—	$	—	$	344
Total other real estate owned, net	$	344	$	—	$	—	$	344

The following tables presents information related to Level 3 non-recurring fair value measurement at September 30, 2017 and December 31, 2016 (in thousands):



Description	Fair Value at September 30, 2017		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at September 30, 2017
Impaired loans:
Commercial and agricultural:
Commercial and industrial	$	85	Sales comparison	Discount to appraised value	36.07%-36.07% [36.07%]
Commercial mortgages:
Commercial mortgages, other	707		Sales comparison	Discount to appraised value	10.00% - 44.52% [20.34%]
	2,450		Income approach	Capitalization rate	9.00% - 10.00% [9.52%]
	$	3,242

OREO:
Residential mortgages	$	179	Sales comparison	Discount to appraised value	17.28% - 27.97% [20.73%]
	$	179



Description	Fair Value at December 31, 2016		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at December 31, 2016
Impaired loans:
Commercial mortgages:
Commercial mortgages, other	$	2,631	Income approach	Capitalization rate	9.00% - 10.00% [9.52%]
Consumer loans:
Home equity lines and loans	219		Sales comparison	Discount to appraised value	22.98% - 22.98% [22.98%]
	$	2,850

OREO:
Residential mortgages	$	344	Sales comparison	Discount to appraised value	20.80% - 48.17% [30.50%]
	$	344

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instruments not already discussed:

Cash and Due From Financial Institutions 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.

Securities Held to Maturity

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).

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, Net

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 market and 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 Overnight Advances and 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.

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 September 30, 2017 and December 31, 2016, are as follows (in thousands):



	September 30, 2017
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	$	34,572	$	34,572	$	—	$	—	$	34,572
Interest-bearing deposits in other financial institutions	21,806		21,806		—		—		21,806
Trading assets	909		909		—		—		909
Securities available for sale	312,226		194		312,032		—		312,226
Securities held to maturity	3,865		—		1,831		2,030		3,861
FHLBNY and FRBNY stock	3,497		—		—		—		N/A
Loans, net	1,273,119		—		—		1,277,896		1,277,896
Loans held for sale	1,246		—		1,246		—		1,246
Accrued interest receivable	4,516		2		1,050		3,464		4,516
Derivative assets	670		—		670		—		670

Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	1,410,836	$	1,410,836	$	—	$	—	$	1,410,836
Time deposits	126,182		—		126,445		—		126,445
Securities sold under agreements to repurchase	10,000		—		10,117		—		10,117
FHLBNY term advances	9,009		—		9,030		—		9,030
Accrued interest payable	184		21		163		—		184
Derivative liabilities	741		—		670		71		741

(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.



	December 31, 2016
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	$	28,205	$	28,205	$	—	$	—	$	28,205
Interest-bearing deposits in other financial institutions	45,957		45,957		—		—		45,957
Trading assets	774		774		—		—		774
Securities available for sale	303,402		170		302,982		250		303,402
Securities held to maturity	4,705		—		981		3,931		4,912
FHLBNY and FRBNY stock	4,041		—		—		—		N/A
Loans, net	1,186,037		—		—		1,205,814		1,205,814
Loans held for sale	412		—		412		—		412
Accrued interest receivable	4,000		9		784		3,207		4,000
Derivative assets	693		—		693		—		693

Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	1,312,237	$	1,312,237	$	—	$	—	$	1,312,237
Time deposits	144,106		—		144,460		—		144,460
Securities sold under agreements to repurchase	27,606		—		27,880		—		27,880
FHLBNY term advances	9,093		—		9,189		—		9,189
Accrued interest payable	210		25		185		—		210
Derivative liabilities	761		—		693		68		761