FAIR VALUES OF FINANCIAL INSTRUMENTS:

Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) of 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 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 fair value of securities available-for-sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry 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 those securities that cannot be priced using quoted market prices or observable inputs, a Level 3 valuation is determined. These securities are primarily trust preferred securities, which are priced using Level 3 due to current market illiquidity, and state and municipal securities. The fair value of the trust preferred securities is obtained from a third party provider without adjustment. Management obtains values from other pricing sources to validate the Standard & Poors pricing that they currently utilize. The fair value of state and municipal obligations are derived by comparing the securities to current market rates plus an appropriate credit spread to determine an estimated value. Illiquidity spreads are then considered. Credit reviews are performed on each of the issuers. The significant unobservable inputs used in the fair value measurement of the Corporation’s state and municipal obligations are credit spreads related to specific issuers. Significantly higher credit spread assumptions would result in significantly lower fair value measurement. Conversely, significantly lower credit spreads would result in a significantly higher fair value measurement.

The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2 inputs).



	December 31, 2014 Fair Value Measurement Using
(Dollar amounts in thousands)	Level 1		Level 2			Level 3		Carrying Value
U.S. Government entity mortgage-backed securities	$	—	$	1,467		$	—	$	1,467
Mortgage-backed securities, residential	—		187,936			—		187,936
Mortgage-backed securities, commercial	—		17			—		17
Collateralized mortgage obligations	—		484,655			—		484,655
State and municipal obligations	—		201,775			5,900		207,675
Collateralized debt obligations	—		—			15,303		15,303
TOTAL	$	—	$	875,850		$	21,203	$	897,053
Derivative Assets			$	1,062
Derivative Liabilities			(1,062		)



	December 31, 2013 Fair Value Measurement Using
(Dollar amounts in thousands)	Level 1		Level 2			Level 3		Carrying Value
U.S. Government entity mortgage-backed securities	$	—	$	1,633		$	—	$	1,633
Mortgage-backed securities, residential	—		197,764			—		197,764
Mortgage-backed securities, commercial	—		4,391			—		4,391
Collateralized mortgage obligations	—		506,741			—		506,741
State and municipal obligations	—		190,462			4,525		194,987
Collateralized debt obligations	—		—			9,044		9,044
TOTAL	$	—	$	900,991		$	13,569	$	914,560
Derivative Assets			$	1,195
Derivative Liabilities			(1,195		)

There were no transfers between Level 1 and Level 2 during 2014 and 2013.

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the twelve months ended December 31, 2014 and 2013.



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) December 31, 2014
	State and municipal obligations			Collateralized debt obligations			Total
Beginning balance, January 1	$	4,525		$	9,044		$	13,569
Total realized/unrealized gains or losses
Included in earnings	—			—			—
Included in other comprehensive income	—			7,100			7,100
Purchases	4,000			—			4,000
Settlements	(2,625		)	(841		)	(3,466		)
Ending balance, December 31	$	5,900		$	15,303		$	21,203



	Fair Value Measurements Using SignificantUnobservable Inputs (Level 3) December 31, 2013
	State and municipal obligations			Collateralized debt obligations			Total
Beginning balance, January 1	$	9,911		$	6,122		$	16,033
Total realized/unrealized gains or losses
Included in earnings	—			904			904
Included in other comprehensive income	—			3,155			3,155
Transfers	(1,186		)	—			(1,186		)
Settlements	(4,200		)	(1,137		)	(5,337		)
Ending balance, December 31	$	4,525		$	9,044		$	13,569

There were no unrealized gains and losses recorded in earnings for the years ended December 31, 2014 or 2013.

Certain local municipal securities with a fair value of $4.0 million as of December 31, 2014 were purchased and added to Level 3 because we were unable to obtain observable market data from our provider for these investments. Certain local municipal securities with a fair value of $1.2 million as of December 31, 2013 were transferred from Level 3 to Level 2 because we were able to obtain observable market data from our provider for these investments that was not available the previous year.

Impaired loans disclosed in footnote 7, which are measured for impairment using the fair value of collateral, are valued at Level 3. They are carried at a fair value of $11.5 million, after a valuation allowance of $1.9 million at December 31, 2014 and at a fair value of $13.8 million, net of a valuation allowance of $3.1 million at December 31, 2013. The impact to the provision for loan losses for the twelve months ended December 31, 2014 and December 31, 2013 was a $1.2 million decrease and a $0.9 million decrease, respectively. Other real estate owned is valued at Level 3. Other real estate owned at December 31, 2014 with a value of $4.0 million was reduced $1.1 million for fair value adjustment. At December 31, 2014 other real estate owned was comprised of $3.0 million from commercial loans and $1.0 million from residential loans. Other real estate owned at December 31, 2013 with a value of $5.3 million was reduced $1.1 million for fair value adjustment. At December 31, 2013 other real estate owned was comprised of $3.9 million from commercial loans and $1.4 million from residential loans.

Fair value is measured based on the value of the collateral securing those loans, and is determined using several methods. Generally the fair value of real estate is determined based on appraisals by qualified licensed appraisers. Appraisals for real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the cost to replace current property. The market comparison evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and the investor’s required return. The final fair value is based on a reconciliation of these three approaches. If an appraisal is not available, the fair value may be determined by using a cash flow analysis, a broker’s opinion of value, the net present value of future cash flows, or an observable market price from an active market. Fair value of other real estate is based upon the current appraised values of the properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant market conditions. Appraisals are obtained annually and reductions in value are recorded as a valuation through a charge to expense. The primary unobservable input used by management in estimating fair value are additional discounts to the appraised value to consider market conditions and the age of the appraisal, which are based on management’s past experience in resolving these types of properties. These discounts range from 0% to 50%. Values for non-real estate collateral, such as business equipment, are based on appraisals performed by qualified licensed appraisers or the customers financial statements. Values for non real estate collateral use much higher discounts than real estate collateral. Other real estate and impaired loans carried at fair value are primarily comprised of smaller balance properties.

The following tables present quantitative information about recurring and non-recurring Level 3 fair value measurements at December 31, 2014 and 2013.



2014	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
State and municipal obligations	$	5,900	Discounted cash flow	Discount rate	3.05%-5.50%
				Probability of default	—	%
Other real estate	$	3,965	Sales comparison/income approach	Discount rate for age of appraisal and market conditions	5.00%-20.00%
Impaired Loans	$	11,477	Sales comparison/income approach	Discount rate for age of appraisal and market conditions	0.00%-50.00%



2013	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
State and municipal obligations	$	4,525	Discounted cash flow	Discount rate	3.05%-5.50%
				Probability of default	—	%
Other real estate	$	5,291	Sales comparison/income approach	Discount rate for age of appraisal and market conditions	5.00%-20.00%
Impaired Loans	$	13,765	Sales comparison/income approach	Discount rate for age of appraisal and market conditions	0.00%-50.00%

The following tables present impaired collateral dependent loans measured at fair value on a non-recurring basis by class of loans as of December 31, 2014 and 2013.



	December 31, 2014
(Dollar amounts in thousands)	Carrying Value		Allowance for Loan Losses Allocated		Fair Value
Commercial
Commercial & Industrial	$	5,874	$	1,056	$	4,818
Farmland	—		—		—
Non Farm, Non Residential	6,654		753		5,901
Agriculture	—		—		—
All Other Commercial	827		102		725
Residential
First Liens	33		—		33
Home Equity	—		—		—
Junior Liens	—		—		—
Multifamily	—		—		—
All Other Residential	—		—		—
Consumer
Motor Vehicle	—		—		—
All Other Consumer	—		—		—
TOTAL	$	13,388	$	1,911	$	11,477



	December 31, 2013
(Dollar amounts in thousands)	Carrying Value		Allowance for Loan Losses Allocated		Fair Value
Commercial
Commercial & Industrial	$	8,620	$	1,612	$	7,008
Farmland	—		—		—
Non Farm, Non Residential	7,204		1,500		5,704
Agriculture	—		—		—
All Other Commercial	1,062		46		1,016
Residential
First Liens	37		—		37
Home Equity	—		—		—
Junior Liens	—		—		—
Multifamily	—		—		—
All Other Residential	—		—		—
Consumer
Motor Vehicle	—		—		—
All Other Consumer	—		—		—
TOTAL	$	16,923	$	3,158	$	13,765

The carrying amounts and estimated fair values of financial instruments are shown below. Carrying amount is the estimated fair value for cash and due from banks, federal funds sold, accrued interest receivable and payable, demand deposits, short-term and certain other borrowings, and variable-rate loans or deposits that reprice frequently and fully. Security fair values are determined as previously described. It is not practicable to determine the fair value of restricted stock due to restrictions placed on their transferability. For the FDIC indemnification asset the carrying value is the estimated fair value as it represents amounts to be received from or paid to the FDIC in the near term. For fixed-rate loans or deposits, variable rate loans or deposits with infrequent repricing or repricing limits, and for longer-term borrowings, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is not considered material.

The carrying amount and estimated fair value of assets and liabilities are presented in the table below and were determined based on the above assumptions:



	December 31, 2014
	Carrying			Fair Value
(Dollar amounts in thousands)	Value			Level 1		Level 2			Level 3		Total
Cash and due from banks	$	78,102		$	22,597	$	55,505		$	—	$	78,102
Federal funds sold	8,000			—		8,000			—		8,000
Securities available-for-sale	897,053			—		875,850			21,203		897,053
Restricted stock	16,404			n/a		n/a			n/a		n/a
Loans, net	1,762,589			—		—			1,810,885		1,810,885
FDIC Indemnification Asset	(74		)	—		(74		)	—		(74		)
Accrued interest receivable	11,593			—		3,183			8,410		11,593
Deposits	(2,457,197		)	—		(2,459,703		)	—		(2,459,703		)
Short-term borrowings	(48,015		)	—		(48,015		)	—		(48,015		)
Federal Home Loan Bank advances	(12,886		)	—		(13,605		)	—		(13,605		)
Accrued interest payable	(456		)	—		(456		)	—		(456		)



	December 31, 2013
	Carrying			Fair Value
(Dollar amounts in thousands)	Value			Level 1		Level 2			Level 3		Total
Cash and due from banks	$	71,033		$	22,455	$	48,578		$	—	$	71,033
Federal funds sold	4,276			—		4,276			—		4,276
Securities available-for-sale	914,560			—		900,991			13,569		914,560
Restricted stock	21,057			n/a		n/a			n/a		n/a
Loans, net	1,771,360			—		—			1,816,726		1,816,726
FDIC Indemnification Asset	1,055			—		1,055			—		1,055
Accrued interest receivable	11,554			—		3,279			8,275		11,554
Deposits	(2,458,791		)	—		(2,463,330		)	—		(2,463,330		)
Short-term borrowings	(59,592		)	—		(59,592		)	—		(59,592		)
Federal Home Loan Bank advances	(58,288		)	—		(60,258		)	—		(60,258		)
Accrued interest payable	(750		)	—		(750		)	—		(750		)