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:

Available for Sale 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).

Equity Investments: Securities that are held to fund a deferred compensation plan and securities that have a readily determinable fair market value, are recorded at fair value with changes in fair value included in earnings. The fair values of equity investments 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).

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



			Fair Value Measurement at March 31, 2018 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	$	15,451	$	—	$	15,451	$	—
Mortgage-backed securities, residential	207,819		—		207,819		—
Obligations of states and political subdivisions	51,617		—		51,617		—
Corporate bonds and notes	249		—		249		—
SBA loan pools	3,848		—		3,848		—
Total available for sale securities	$	278,984	$	—	$	278,984	$	—

Equity investments	$	1,225	$	1,225	$	—	$	—
Derivative assets	1,820		—		1,820		—

Financial Liabilities:
Derivative liabilities	$	1,870	$	—	$	1,820	$	50

There were no transfers between Level 1 and Level 2 during the three-month period ended March 31, 2018.



			Fair Value Measurement at December 31, 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	$	15,491	$	—	$	15,491	$	—
Mortgage-backed securities, residential	219,909		—		219,909		—
Obligations of states and political subdivisions	53,132		—		53,132		—
Corporate bonds and notes	251		—		251		—
SBA loan pools	4,308		—		4,308		—
Total available for sale securities	$	293,091	$	—	$	293,091	$	—

Equity investments	$	1,192	$	1,192	$	—	$	—
Derivative assets	974		—		974		—

Financial Liabilities:
Derivative liabilities	$	1,049	$	—	$	974	$	75

There were no transfers between Level 1 and Level 2 during the twelve month period ended December 31, 2017.

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 March 31, 2018 and March 31, 2017 (in thousands):



	Assets (Liabilities)
	Corporate Bonds and Notes				Derivative Liabilities
	March 31, 2018		March 31, 2017		March 31, 2018			March 31, 2017
Balance of recurring Level 3 assets at January 1	$	—	$	250	$	(75	)	$	(68	)
Total gains or losses for the period:
Included in earnings - other non-interest income	—		—		25			3
Included in other comprehensive income	—		1		—			—
Balance of recurring Level 3 assets at March 31,	$	—	$	251	$	(50	)	$	(65	)

The following table presents information related to Level 3 recurring fair value measurements at March 31, 2018 and December 31, 2017 (in thousands):



Description	Fair Value at March 31, 2018		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at March 31, 2018
Derivative liabilities	$	50	Historical trend	Credit default rate	5.52% - 5.52% [5.52%]



Description	Fair Value at December 31, 2017		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at December 31, 2017
Derivative liabilities	$	75	Historical trend	Credit default rate	5.67% - 5.67% [5.67%]

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



			Fair Value Measurement at March 31, 2018 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)		Total Gains (Losses)
Impaired Loans:
Commercial and agricultural:
Commercial and industrial	$	12	$	—	$	—	$	12	$	—
Commercial mortgages:
Commercial mortgages	338		—		—		338		(59		)
Total impaired loans	$	350	$	—	$	—	$	350	$	(59	)
Other real estate owned:
Commercial mortgages:
Commercial mortgages	$	1,474	$	—	$	—	$	1,474	$	—
Residential mortgages	283		—		—		283		—
Consumer loans:
Home equity lines and loans	75		—		—		75		—
Total other real estate owned, net	$	1,832	$	—	$	—	$	1,832	$	—



			Fair Value Measurement at December 31, 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)		Total Gains (Losses)
Impaired Loans:
Commercial and agricultural:
Commercial and industrial	$	96	$	—	$	—	$	96	$	(70	)
Commercial mortgages:
Commercial mortgages	411		—		—		411		(105		)
Total impaired loans	$	507	$	—	$	—	$	507	$	(175	)
Other real estate owned:
Commercial mortgages:
Commercial mortgages	$	1,483	$	—	$	—	$	1,483	$	(43	)
Residential mortgages	382		—		—		382		—
Consumer loans:
Home equity lines and loans	75		—		—		75		—
Total other real estate owned, net	$	1,940	$	—	$	—	$	1,940	$	(43	)

The following tables presents information related to Level 3 non-recurring fair value measurement at March 31, 2018 and December 31, 2017 (in thousands):



Description	Fair Value at March 31, 2018		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at March 31, 2018
Impaired loans:
Commercial and agricultural:
Commercial and industrial	$	12	Sales comparison	Discount to appraised value	0.00% - 0.00% [0.00%]
Commercial mortgages:
Commercial mortgages	338		Sales comparison	Discount to appraised value	21.98% - 69.81% [55.51%]
	$	350

OREO:
Commercial mortgages:
Commercial mortgages	$	1,474	Sales comparison	Discount to appraised value	10.00% - 22.95% [19.79%]
Residential mortgages	283		Sales comparison	Discount to appraised value	17.28% - 39.78% [20.39%]
Consumer loans:
Home equity lines and loans	75		Sales comparison	Discount to appraised value	20.80% - 20.80% [20.80%]
	$	1,832



Description	Fair Value at December 31, 2017		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at December 31, 2017
Impaired loans:
Commercial and agricultural:
Commercial and industrial	$	96	Sales comparison	Discount to appraised value	0.00% - 36.07% [33.02%]
Commercial mortgages:
Commercial mortgages	411		Sales comparison	Discount to appraised value	10.00% - 89.98% [51.35%]
	$	507

OREO:
Commercial mortgages:
Commercial mortgages	$	1,483	Sales comparison	Discount to appraised value	10.00% - 22.95% [19.75%]
Residential mortgages	382		Sales comparison	Discount to appraised value	17.28% - 27.97% [20.77%]
Consumer loans:
Home equity lines and loans	75		Sales comparison	Discount to appraised value	20.80% - 20.80% [20.80%]
	$	1,940

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of other financial instruments, at March 31, 2018 and December 31, 2017, are as follows (in thousands):



	March 31, 2018
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	$	25,473	$	25,473	$	—	$	—	$	25,473
Interest-bearing deposits in other financial institutions	5,531		5,531		—		—		5,531
Equity investments	1,225		1,225		—		—		1,225
Securities available for sale	278,984		—		278,984		—		278,984
Securities held to maturity	3,640		—		1,822		1,085		2,907
FHLBNY and FRBNY stock	3,097		—		—		—		N/A
Loans, net and loans held for sale	1,298,711		—		—		1,272,169		1,272,169
Accrued interest receivable	4,624		—		1,006		3,618		4,624
Derivative assets	1,820		—		1,820		—		1,820

Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	1,401,753	$	1,401,753	$	—	$	—	$	1,401,753
Time deposits	116,447		—		116,677		—		116,677
Securities sold under agreements to repurchase	10,000		—		10,019		—		10,019
Accrued interest payable	119		24		95		—		119
Derivative liabilities	1,870		—		1,820		50		1,870

(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, 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	$	27,966	$	27,966	$	—	$	—	$	27,966
Interest-bearing deposits in other financial institutions	2,763		2,763		—		—		2,763
Equity investments	1,192		1,192		—		—		1,192
Securities available for sale	293,091		—		293,091		—		293,091
Securities held to maturity	3,781		—		1,830		1,946		3,776
FHLBNY and FRBNY stock	5,784		—		—		—		N/A
Loans, net	1,291,205		—		—		1,289,584		1,289,584
Loans held for sale	542		—		542		—		542
Accrued interest receivable	4,642		1		867		3,774		4,642
Derivative assets	974		—		974		—		974

Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	1,349,084	$	1,349,084	$	—	$	—	$	1,349,084
Time deposits	118,362		—		118,598		—		118,598
Securities sold under agreements to repurchase	10,000		—		10,058		—		10,058
FHLBNY overnight advances	57,700		—		57,700		—		57,700
FHLBNY term advances	2,000		—		2,001		—		2,001
Accrued interest payable	148		24		124		—		148
Derivative liabilities	1,049		—		974		75		1,049