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 utilizes. 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, 2016 Fair Value Measurement Using
(Dollar amounts in thousands)	Level 1		Level 2			Level 3		Carrying Value
U.S. Government entity mortgage-backed securities	$	—	$	13,249		$	—	$	13,249
Mortgage-backed securities, residential	—		261,005			—		261,005
Mortgage-backed securities, commercial	—		4			—		4
Collateralized mortgage obligations	—		348,176			—		348,176
State and municipal obligations	—		214,713			4,210		218,923
Collateralized debt obligations	—		—			12,368		12,368
TOTAL	$	—	$	837,147		$	16,578	$	853,725
Derivative Assets			$	653
Derivative Liabilities			(653		)



	December 31, 2015 Fair Value Measurement Using
(Dollar amounts in thousands)	Level 1		Level 2			Level 3		Carrying Value
U.S. Government entity mortgage-backed securities	$	—	$	10,693		$	—	$	10,693
Mortgage-backed securities, residential	—		213,164			—		213,164
Mortgage-backed securities, commercial	—		9			—		9
Collateralized mortgage obligations	—		437,634			—		437,634
State and municipal obligations	—		209,982			4,725		214,707
Collateralized debt obligations	—		—			14,875		14,875
TOTAL	$	—	$	871,482		$	19,600	$	891,082
Derivative Assets			$	1,176
Derivative Liabilities			(1,176		)

There were no transfers between Level 1 and Level 2 during 2016 and 2015.

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, 2016 and 2015.



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) December 31, 2016
	State and municipal obligations			Collateralized debt obligations			Total
Beginning balance, January 1	$	4,725		$	14,875		$	19,600
Total realized/unrealized gains or losses
Included in earnings	—			—			—
Included in other comprehensive income	—			(2,066		)	(2,066		)
Purchases	—			—			—
Settlements	(515		)	(441		)	(956		)
Ending balance, December 31	$	4,210		$	12,368		$	16,578



	Fair Value Measurements Using SignificantUnobservable Inputs (Level 3) December 31, 2015
	State and municipal obligations			Collateralized debt obligations			Total
Beginning balance, January 1	$	5,900		$	15,303		$	21,203
Total realized/unrealized gains or losses
Included in earnings	—			—			—
Included in other comprehensive income	—			138			138
Transfers	—			—			—
Settlements	(1,175		)	(566		)	(1,741		)
Ending balance, December 31	$	4,725		$	14,875		$	19,600

There were no unrealized gains and losses recorded in earnings for the years ended December 31, 2016, 2015 or 2014.

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 $1.4 million, after a valuation allowance of $0.3 million at December 31, 2016 and at a fair value of $2.4 million, net of a valuation allowance of $1.2 million at December 31, 2015. The impact to the provision for loan losses for the twelve months ended December 31, 2016 and December 31, 2015 was a $523 thousand decrease and a $271 thousand decrease, respectively. Other real estate owned is valued at Level 3. Other real estate owned at December 31, 2016 with a value of $2.5 million was reduced $930 thousand for fair value adjustment. At December 31, 2016 other real estate owned was comprised of $2.0 million from commercial loans and $483 thousand from residential loans. Other real estate owned at December 31, 2015 with a value of $3.5 million was reduced $743 thousand for fair value adjustment. At December 31, 2015 other real estate owned was comprised of $2.8 million from commercial loans and $655 thousand 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, 2016 and 2015.



2016	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
State and municipal obligations	$	4,210	Discounted cash flow	Discount rate	3.05%-5.50%
				Probability of default	—	%
Other real estate	$	2,531	Sales comparison/income approach	Discount rate for age of appraisal and market conditions	5.00%-20.00%
Impaired Loans	$	1,387	Sales comparison/income approach	Discount rate for age of appraisal and market conditions	0.00%-50.00%



2015	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
State and municipal obligations	$	4,725	Discounted cash flow	Discount rate	3.05%-5.50%
				Probability of default	—	%
Other real estate	$	3,466	Sales comparison/income approach	Discount rate for age of appraisal and market conditions	5.00%-20.00%
Impaired Loans	$	2,352	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, 2016 and 2015.



	December 31, 2016
(Dollar amounts in thousands)	Carrying Value		Allowance for Loan Losses Allocated		Fair Value
Commercial
Commercial & Industrial	$	537	$	36	$	501
Farmland	—		—		—
Non Farm, Non Residential	657		206		451
Agriculture	—		—		—
All Other Commercial	—		—		—
Residential
First Liens	524		89		435
Home Equity	—		—		—
Junior Liens	—		—		—
Multifamily	—		—		—
All Other Residential	—		—		—
Consumer
Motor Vehicle	—		—		—
All Other Consumer	—		—		—
TOTAL	$	1,718	$	331	$	1,387



	December 31, 2015
(Dollar amounts in thousands)	Carrying Value		Allowance for Loan Losses Allocated		Fair Value
Commercial
Commercial & Industrial	$	998	$	212	$	786
Farmland	—		—		—
Non Farm, Non Residential	1,415		741		674
Agriculture	—		—		—
All Other Commercial	225		—		225
Residential
First Liens	873		206		667
Home Equity	—		—		—
Junior Liens	—		—		—
Multifamily	—		—		—
All Other Residential	—		—		—
Consumer
Motor Vehicle	—		—		—
All Other Consumer	—		—		—
TOTAL	$	3,511	$	1,159	$	2,352

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 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, 2016
	Carrying			Fair Value
(Dollar amounts in thousands)	Value			Level 1		Level 2			Level 3		Total
Cash and due from banks	$	75,012		$	21,047	$	53,965		$	—	$	75,012
Federal funds sold	6,952			—		6,952			—		6,952
Securities available-for-sale	853,725			—		837,147			16,578		853,725
Restricted stock	10,359			n/a		n/a			n/a		n/a
Loans, net	1,820,407			—		—			1,854,046		1,854,046
Accrued interest receivable	12,311			—		3,340			8,971		12,311
Deposits	(2,428,526		)	—		(2,414,555		)	—		(2,414,555		)
Short-term borrowings	(80,989		)	—		(80,989		)	—		(80,989		)
Federal Home Loan Bank advances	(132		)	—		(137		)	—		(137		)
Accrued interest payable	(363		)	—		(363		)	—		(363		)



	December 31, 2015
	Carrying			Fair Value
(Dollar amounts in thousands)	Value			Level 1		Level 2			Level 3		Total
Cash and due from banks	$	88,695		$	19,715	$	68,980		$	—	$	88,695
Federal funds sold	9,815			—		9,815			—		9,815
Securities available-for-sale	891,082			—		871,482			19,600		891,082
Restricted stock	10,838			n/a		n/a			n/a		n/a
Loans, net	1,743,862			—		—			1,789,938		1,789,938
Accrued interest receivable	11,733			—		3,366			8,367		11,733
Deposits	(2,442,369		)	—		(2,442,612		)	—		(2,442,612		)
Short-term borrowings	(33,831		)	—		(33,831		)	—		(33,831		)
Federal Home Loan Bank advances	(12,677		)	—		(12,971		)	—		(12,971		)
Accrued interest payable	(389		)	—		(389		)	—		(389		)