NOTE 6 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).

The Corporation's investment in collateralized debt obligations consisting of pooled trust preferred securities

which are issued by financial institutions were historically priced using Level 2 inputs. The lack of observable

inputs and market activity in this class of investments has been significant and resulted in unreliable external

pricing. Broker pricing and bid/ask spreads, when available, have varied widely. The once active market has

become comparatively inactive. As a result, these investments are now priced using Level 3 inputs.

The Corporation utilizes an external model for pricing these securities. This is the same model used in

determining OTTI as further described in Note 4. Information such as historical and current performance of the

underlying collateral, deferral/default rates, collateral coverage ratios, break in yield calculations, cash flow

projections, liquidity and credit premiums required by a market participant, and financial trend analysis with

respect to the individual issuing financial institutions, are utilized in determining individual security valuations.

Discount rates were utilized along with the cash flow projections in order to calculate an appropriate fair value.

These discount rates were calculated based on industry index rates and adjusted for various credit and liquidity

factors. Due to current market conditions as well as the limited trading activity of these securities, the market

value of the securities is highly sensitive to assumption changes and market volatility.

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: 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 other real estate owned (“OREO”) are performed by

certified general appraisers (for commercial properties) or certified residential appraisers (for 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:

			Fair Value Measurement at September 30, 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	$	164,629,876	$	31,593,500	$	133,036,376	$	-
Mortgage-backed securities, residential		39,032,987		-		39,032,987		-
Obligations of states and political subdivisions		35,234,537		-		35,234,537		-
Collateralized mortgage obligations		1,500,701		-		1,500,701		-
Corporate bonds and notes		7,484,333		-		7,484,333		-
SBA loan pools		1,540,274		-		1,540,274		-
Trust Preferred securities		2,551,800		-		2,037,500		514,300
Corporate stocks		7,300,609		6,657,475		643,134		-
Total available for sale securities	$	259,275,117	$	38,250,975	$	220,509,842	$	514,300

Trading assets	$	313,021	$	313,021	$	-	$	-

			Fair Value Measurement at December 31, 2012 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	$	141,591,214	$	37,698,000	$	103,893,214	$	-
Mortgage-backed securities, residential		31,515,249		-		31,515,249		-
Obligations of states and political subdivisions		40,814,722		-		40,814,722		-
Collateralized mortgage obligations		3,543,360		-		3,543,360		-
Corporate bonds and notes		11,651,635		-		11,651,635		-
SBA loan pools		1,724,140		-		1,724,140		-
Trust Preferred securities		2,470,913		-		2,025,313		445,600
Corporate stocks		6,374,530		5,720,533		653,997		-
Total available for sale securities	$	239,685,763	$	43,418,533	$	195,821,630	$	445,600

Trading assets	$	348,241	$	348,241	$	-	$	-

There were no transfers between Level 1 and Level 2 during the nine-month period ending September 30, 2013

or the year ending December, 31, 2012.

The significant unobservable inputs used in the fair value measurement of the Corporation’s collateralized debt

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 three and nine-month periods ending September 30, 2013

and 2012:

	Fair Value Measurement for Nine-Months Ended September 30, 2013 Using Significant Unobservable Inputs (Level 3)		Fair Value Measurement for Nine-Months Ended September 30, 2012 Using Significant Unobservable Inputs (Level 3)
Trust Preferred Securities Available for Sale
Beginning balance December 31	$	445,600	$	294,910
Total gains/losses (realized/unrealized):
Included in earnings:
Income on securities		-		-
Impairment charge on investment securities		-		-
Included in other comprehensive income		68,700		150,690
Transfers in and/or out of Level 3		-		-
Ending balance September 30	$	514,300	$	445,600

	Fair Value Measurement for Three-Months Ended September 30, 2013 Using Significant Unobservable Inputs (Level 3)		Fair Value Measurement for Three-Months Ended September 30, 2012 Using Significant Unobservable Inputs (Level 3)
Trust Preferred Securities Available for Sale
Beginning balance June 30	$	514,300	$	343,035
Total gains/losses (realized/unrealized):
Included in earnings:
Income on securities		-		-
Impairment charge on investment securities		-		-
Included in other comprehensive income		-		102,565
Transfers in and/or out of Level 3		-		-
Ending balance September 30	$	514,300	$	445,600

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

			Fair Value Measurement at September 30, 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 &industrial	$	471,954	$	-	$	-	$	471,954
Commercial mortgages:				-		-
Other		1,071,283		-		-		1,071,283
Consumer loans:
Home equity lines & loans		53,856		-		-		53,856
Total Impaired Loans	$	1,597,093	$	-	$	-	$	1,597,093

Other real estate owned:
Commercial and agricultural:
Commercial and industrial	$	101,200	$	-	$	-	$	101,200
Commercial mortgages:
Other		265,702		-		-		265,702
Residential mortgages		129,939		-		-		129,939
Consumer loans:
Home equity lines & loans		66,959		-		-		66,959
Total Other real estate owned, net	$	563,800	$	-	$	-	$	563,800

			Fair Value Measurement at December 31, 2012 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 & industrial	$	235,501	$	-	$	-	$	235,501
Commercial mortgages:				-		-
Other		305,222		-		-		305,222
Total Impaired Loans	$	540,723	$	-	$	-	$	540,723

Other real estate owned:
Commercial and agricultural:
Commercial and industrial	$	101,200	$	-	$	-	$	101,200
Commercial mortgages:
Other		257,702		-		-		257,702
Residential mortgages		201,679		-		-		201,679
Consumer loans:
Home equity lines & loans		4,000		-		-		4,000
Total Other real estate owned, net	$	564,581	$	-	$	-	$	564,581

The following table presents information related to Level 3 non-recurring fair value measurement at September

30, 2013 and December 31, 2012:

Description	Fair Value at September 30, 2013		Technique	Unobservable Inputs
Impaired loans	$	1,597,093	Third party real estate and a 100% discount of personal property	1	Management discount based on underlying collateral characteristics and market conditions

Other real estate owned	$	563,800	Third party appraisals	1	Estimated holding period
				2	Estimated closing costs

Description	Fair Value at December 31, 2012		Technique	Unobservable Inputs
Impaired loans	$	540,723	Third party real estate and a 100% discount of personal property	1	Management discount based on underlying collateral characteristics and market conditions

Other real estate owned	$	564,581	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 $2,678,430 with a valuation allowance of $1,081,337 as of September 30, 2013,

resulting in $311,110 and $888,699 increase in the provision for loan losses for the three and nine-month periods

ended September 30, 2013, respectively. Impaired loans had a principal balance of $733,361, with a valuation

allowance of $192,638 as of December 31, 2012, resulting in no additional provision for loan losses for the year

ending December 31, 2012.

OREO, which is measured by the lower of carrying or fair value less costs to sell, had a net carrying amount of

$563,800 at September 30, 2013. The net carrying amount reflects the outstanding balance of $756,167, net of a

valuation allowance of $192,367, at September 30, 2013. There were no write downs for the three and nine-month periods

ending September 30, 2013. OREO had a net carrying amount of $564,581 at December 31, 2012. The

net carrying amount reflects the outstanding balance of $756,948, net of a valuation allowance of $192,367, at

December 31, 2012, which resulted in write downs of $116,840 for the year ending December 31, 2012.

The carrying amounts and estimated fair values of other financial instruments, at September 30, 2013 and

December 31, 2012, are as follows (dollars in thousands):

	Fair Value Measurements at September 30, 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	$	37,491	$	37,491	$	-	$	-	$	37,491
Interest-bearing deposits in other financial institutions		2,438		2,438		-		-		2,438
Trading assets		313		313		-		-		313
Securities available for sale		259,275		38,251		220,510		514		259,275
Securities held to maturity		6,544		-		7,047		-		7,047
Federal Home Loan and Federal Reserve Bank stock		6,725		-		-		-		N/A
Net loans		955,778		-		-		985,182		985,182
Loans held for sale		866		-		866		-		-
Accrued interest receivable		4,142		360		1,549		2,233		4,142


Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	866,507	$	866,507	$	-	$	-	$	866,507
Time deposits		221,938		-		222,944		-		222,944
Securities sold under agreements to repurchase		30,499		-		31,757		-		31,757
Federal Home Loan Bank term advances		26,046		-		27,207		-		27,207
Federal Home Loan Bank overnight advances		49,100		-		49,103		-		49,103
Accrued interest payable		339		13		174		152		339
(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, 2012
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	$	29,239	$	29,239	$	-	$	-	$	29,239
Interest-bearing deposits in other financial institutions		11,002		8,645		2,357		-		11,002
Trading assets		348		348		-		-		348
Securities available for sale		239,686		43,419		195,822		445		239,686
Securities held to maturity		5,748		-		6,421		-		6,421
Federal Home Loan and Federal Reserve Bank stock		4,710		-		-		-		N/A
Net loans		883,084		-		-		916,289		916,289
Loans held for sale		1,057		-		1,057		-		1,057
Accrued interest receivable		3,788		175		1,257		2,356		3,788
Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	808,044	$	808,044	$	-	$	-	$	808,044
Time deposits		236,690		-		238,245		-		238,245
Securities sold under agreements to repurchase		32,711		-		35,260		-		35,260
Federal Home Loan Bank advances		27,225		-		29,688		-		29,688
Accrued interest payable		453		12		279		162		453
(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.

The methods and assumptions used to estimate fair value are described as follows:

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

Federal Home Loan Bank of New York (“FHLB”) and Federal Reserve Bank of New York (“FRB”) are classified

as Level 1.

FHLB and FRB Stock

It is not practicable to determine the fair value of FHLB and FRB 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 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 (Repurchase Agreements)

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.

Federal Home Loan Bank 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.