7. Fair value estimates:

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. In many cases, these values cannot be realized in immediate settlement of the instrument.

Current fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction that is not a forced liquidation or distressed sale between participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

In accordance with GAAP, the Company groups its assets and liabilities generally measured at fair value into three levels based on market information or other fair value estimates in which the assets and liabilities are traded or valued and the reliability of the assumptions used to determine fair value. These levels include:

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Level 1: Unadjusted quoted prices 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 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.

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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.

An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value estimate.

The following methods and assumptions were used by the Company to calculate fair values and related carrying amounts of financial instruments:

Cash and cash equivalents: The carrying values of cash and cash equivalents as reported on the balance sheet approximate fair value.

Investment securities: The fair values of marketable equity securities are based on quoted market prices from active exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model.

Loans held for sale: The fair values of loans held for sale are based upon current delivery prices in the secondary mortgage market.

Net loans: For adjustable-rate loans that re-price frequently and with no significant credit risk, fair values are based on carrying values. The fair values of other non-impaired loans are estimated using discounted cash flow analysis, using interest rates currently offered in the market for loans with similar terms to borrowers of similar credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis determined by the loan review function or underlying collateral values, where applicable.

In conjunction with the Merger, the loans purchased were recorded at their acquisition date fair value. In order to record the loans at fair value, management made three different types of fair value adjustments. A market rate adjustment was made to adjust for the movement in market interest rates, irrespective of credit adjustments, compared to the stated rates of the acquired loans. A credit adjustment was made on pools of homogeneous loans representing the changes in credit quality of the underlying borrowers from the loan inception to the acquisition date. The credit adjustment on distressed loans represents the portion of the loan balance that has been deemed uncollectible based on the management’s expectations of future cash flows for each respective loan.

Mortgage servicing rights: To determine the fair value, the Company estimates the present value of future cash flows incorporating assumptions such as cost of servicing, discount rates, prepayment speeds and default rates.

Accrued interest receivable: The carrying value of accrued interest receivable as reported on the balance sheet approximates fair value.

Restricted equity securities: The carrying values of restricted equity securities approximate fair value, due to the lack of marketability for these securities.

Deposits: The fair values of noninterest-bearing deposits and savings, NOW and money market accounts are the amounts payable on demand at the reporting date. The fair value estimates do not include the benefit that results from such low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. The carrying values of adjustable-rate, fixed-term time deposits approximate their fair values at the reporting date. For fixed-rate time deposits, the present value of future cash flows is used to estimate fair values. The discount rates used are the current rates offered for time deposits with similar maturities.

The fair value assigned to the core deposit intangible asset represents the future economic benefit of the potential cost savings from acquiring core deposits in the Merger compared to the cost of obtaining alternative funding such as brokered deposits from market sources. Management utilized an income valuation approach to present value the estimated future cash savings in order to determine the fair value of the intangible asset.

Short-term borrowings: The carrying values of short-term borrowings approximate fair value.

Long-term debt: The fair value of fixed-rate long-term debt is based on the present value of future cash flows. The discount rate used is the current rate offered for long-term debt with the same maturity.

Accrued interest payable: The carrying value of accrued interest payable as reported on the balance sheet approximates fair value.

Off-balance sheet financial instruments:

The majority of commitments to extend credit, unused portions of lines of credit and standby letters of credit carry current market interest rates if converted to loans. Because such commitments are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower. None of the commitments are subject to undue credit risk. The estimated fair values of off-balance sheet financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of off-balance sheet financial instruments was not material at June 30, 2014 and December 31, 2013.

Assets and liabilities measured at fair value on a recurring basis at June 30, 2014 and December 31, 2013 are summarized as follows:


	Fair Value Measurement Using
June 30, 2014	Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government-agencies	$	189			$	189
U.S. Government-sponsored enterprises		107,794				107,794
State and Municipals:
Taxable		17,156				17,156
Tax-exempt		96,768				96,768
Corporate debt securities
Mortgage-backed securities:
U.S. Government agencies		35,070				35,070
U.S. Government-sponsored enterprises		54,805				54,805
Common equity securities		541	$	541

Total	$	312,323	$	541	$	311,782


	Fair Value Measurement Using
December 31, 2013	Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government-agencies	$	204			$	204
U.S. Government-sponsored enterprises		113,045				113,045
State and Municipals:
Taxable		16,698				16,698
Tax-exempt		98,081				98,081
Corporate debt securities		4,387				4,387
Mortgage-backed securities:
U.S. Government agencies		20,229				20,229
U.S. Government-sponsored enterprises		45,974				45,974
Common equity securities		1,097	$	1,097

Total	$	299,715	$	1,097	$	298,618

Assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2014 and December 31, 2013 are summarized as follows:


	Fair Value Measurement Using
June 30, 2014	Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Impaired loans	$	1,555			$	1,555
Other real estate owned	$	34			$	34


	Fair Value Measurement Using
December 31, 2013	Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Impaired loans	$	2,354			$	2,354
Other real estate owned	$	437			$	437

Fair values of impaired loans are based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

Quantitative Information about Level 3 Fair Value Measurements

June 30, 2014

Fair Value
Estimate

Valuation Techniques

Unobservable Input

Range
(Weighted Average)

Impaired loans

1,555

Appraisal of collateral

Appraisal adjustments

4.0% to 42.6% (19.1%)

Liquidation expenses

3.0% to 6.0% (5.5%)

Other real estate owned

Appraisal of collateral

Appraisal adjustments

6.0% to 10.0% (6.0%)

Liquidation expenses

20.0% to 30.0% (20.0%)

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2013

Fair Value
Estimate

Valuation Techniques

Unobservable Input

Range
(Weighted Average)

Impaired loans

2,354

Appraisal of collateral

Appraisal adjustments

11.0% to 33.7% (17.3%)

Liquidation expenses

3.0% to 6.0% (5.0%)

Other real estate owned

437

Appraisal of collateral

Appraisal adjustments

11.0% to 33.7% (17.3%)

Liquidation expenses

3.0% to 6.0% (5.0%)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 Inputs which are not identifiable.

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

The carrying and fair values of the Company’s financial instruments at June 30, 2014 and December 31, 2013 and their placement within the fair value hierarchy are as follows:


					Fair Value Hierarchy
June 30, 2014	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (level 1)		Significant Other Observable Inputs (level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	77,408	$	77,408	$	77,408
Investment securities:
Available-for-sale		312,323		312,323	$	541	$	311,782
Held-to-maturity		15,915		16,072				16,072
Loans held for sale		2,757		2,757				2,757
Net loans		1,170,225		1,182,629					$	1,182,629
Accrued interest receivable		5,576		5,576				5,576
Mortgage servicing rights		798		1,440				1,440
Restricted equity securities		3,952		3,952				3,952


Financial liabilities:
Deposits	$	1,422,802	$	1,425,363				1,425,363
Short-term borrowings		14,088		14,088				14,088
Long-term debt		34,925		36,791				36,791
Accrued interest payable		580		580				580


					Fair Value Hierarchy
December 31, 2013	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (level 1)		Significant Other Observable Inputs (level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	51,310	$	51,310	$	51,310
Investment securities:
Available-for-sale		299,715		299,715	$	1,097	$	298,618
Held-to-maturity		17,295		17,175				17,175
Loans held for sale		1,757		1,757				1,757
Net loans		1,167,966		1,180,387					$	1,180,387
Accrued interest receivable		5,866		5,866				5,866
Mortgage servicing rights		880		1,440				1,440
Restricted equity securities		4,102		4,102				4,102


Financial liabilities:
Deposits	$	1,379,507	$	1,381,946				1,381,946
Short-term borrowings		22,052		22,052				22,052
Long-term debt		36,743		37,468				37,468
Accrued interest payable		723		723				723