(16) 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).

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.

Other Real Estate Owned (“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 (amounts in thousands):

			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	$	-	$	-

			Fair Value Measurement at December 31, 2013 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	$	188,106	$	31,262	$	156,844	$	-
Mortgage-backed securities, residential		104,356		-		104,356		-
Collateralized mortgage obligations		1,015		-		1,015		-
Obligations of states and political subdivisions		38,376		-		38,376		-
Corporate bonds and notes		2,946		-		2,946		-
SBA loan pools		1,488		-		1,488		-
Trust Preferred securities		2,034		-		2,034		-
Corporate stocks		7,695		7,279		416		-
Total available for sale securities	$	346,016	$	38,541	$	307,475	$	-

Trading assets	$	366	$	366	$	-	$	-

There were no transfers between Level 1 and Level 2 during the years ended December 31, 2014 and December, 31, 2013.

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 tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2014 and 2013:

Trust Preferred Securities Available for Sale	Fair Value Measurement twelve-months ended December 31, 2014 Using Significant Unobservable Inputs (Level 3)		Fair Value Measurement twelve-months ended December 31, 2013 Using Significant Unobservable Inputs (Level 3)
Beginning balance	$	-	$	445,600
Total gains/losses (realized/unrealized):
Included in earnings:
Impairment charge on investment securities		-		(29,025	)
Included in other comprehensive income		-		183,425
Transfers in and/or out of Level 3		-		(600,000	)
Ending balance, December 31	$	-	$	-

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

			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	$	-	$	-	$	2,905
Consumer loans:
Home equity lines and loans		52		-		-		52
Total Impaired Loans	$	3,645	$	-	$	-	$	2,957

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

			Fair Value Measurement at December 31, 2013 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	$	460	$	-	$	-	$	460
Commercial mortgages:
Commercial mortgages		485		-		-		485
Consumer loans:
Home equity lines and loans		54		-		-		54
Total Impaired Loans	$	999	$	-	$	-	$	999

Other real estate owned:
Commercial and agricultural:
Commercial and industrial	$	101	$	-	$	-	$	101
Commercial mortgages:
Commercial mortgages		266		-		-		266
Residential mortgages		106		-		-		106
Consumer loans:
Home equity lines and loans		65		-		-		65
Total Other Real Estate Owned, net	$	538	$	-	$	-	$	538

The following table presents information related to Level 3 non-recurring fair value measurement at December 31, 2014 and December 31, 2013 (amounts in thousands):

Description	Fair Value at December 31, 2014		Technique	Unobservable Inputs
Impaired loans	$	3,645	Third party real estate and a 100% discount of personal property		1	Management discount based on underlying collateral characteristics and market conditions

OREO	$	3,065	Third party appraisals		1	Estimated holding period
					2	Estimated closing costs

Description	Fair Value at December 31, 2013		Technique	Unobservable Inputs
Impaired loans	$	999	Third party real estate and a 100% discount of personal property		1	Management discount based on underlying collateral characteristics and market conditions

OREO	$	538	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 $4.9 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. Impaired loans had a principal balance of $2.0 million with a valuation allowance of $1.0 million as of December 31, 2013, resulting in an increase of $853 thousand in the provision for loan losses for the year ending December 31, 2013.

OREO, which is measured by the lower of carrying or fair value less costs to sell, 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. OREO had a net carrying amount of $538 thousand at December 31, 2013. The net carrying amount reflects the outstanding balance of $732 thousand, net of a valuation allowance of $194 thousand at December 31, 2013, which resulted in a write down of $2 thousand for the year ended December 31, 2013.

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, 2014 and 2013.

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, 2014 and December 31, 2013, are as follows (amounts in thousands):

	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

(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, 2013 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	$	31,600	$	31,600	$	-	$	-	$	31,600
Interest-bearing deposits in other financial institutions		20,009		20,009		-		-		20,009
Trading assets		366		366		-		-		366
Securities available for sale		346,016		38,541		307,475		-		346,016
Securities held to maturity		6,495		-		6,930		-		6,930
FHLBNY and FRBNY stock		4,482		-		-		-		N/A
Loans, net		983,090		-		-		1,008,826		1,008,826
Loans held for sale		695		-		695		-		695
Accrued interest receivable		4,166		145		1,468		2,553		4,166

Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	1,021,764	$	1,021,764	$	-	$	-	$	1,021,764
Time deposits		244,492		-		245,482		-		245,482
Securities sold under agreements to repurchase		32,701		-		33,636		-		33,636
FHLBNY Advances		25,243		-		26,064		-		26,064
Accrued interest payable		336		15		170		151		336