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:

•

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.

•

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 imput 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 2013 merger with Penseco Financial Services Corporation (“Penseco”), 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 2013 merger with Penseco 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 of 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 March 31, 2015 and December 31, 2014.

Assets and liabilities measured at fair value on a recurring basis at March 31, 2015 and December 31, 2014 are summarized as follows:


	Fair Value Measurement Using
March 31, 2015	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-sponsored enterprises	$	96,148	$	$	96,148	$
State and Municipals:
Taxable		17,495			17,495
Tax-exempt		87,649			87,649
Mortgage-backed securities:
U.S. Government agencies		35,400			35,400
U.S. Government-sponsored enterprises		43,608			43,608

Total	$	280,300	$	$	280,300	$


			Fair Value Measurement Using
December 31, 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. Treasury securities	$	48,550	$	48,550			$
U.S. Government-sponsored enterprises		96,245			$	96,245
State and Municipals:
Taxable		17,407				17,407
Tax-exempt		92,901				92,901
Corporate debt securities
Mortgage-backed securities:
U.S. Government agencies		37,476				37,476
U.S. Government-sponsored enterprises		47,007				47,007

Total	$	339,586	$	48,550	$	291,036	$

Assets and liabilities measured at fair value on a nonrecurring basis at March 31, 2015 and December 31, 2014 are summarized as follows:


			Fair Value Measurement Using
March 31, 2015	Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Impaired loans	$	4,862			$	4,862
Other real estate owned	$	159			$	159

			Fair Value Measurement Using
December 31, 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	$	4,414			$	4,414
Other real estate owned	$	218			$	218

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

March 31, 2015

Fair Value
Estimate

Valuation Techniques

Unobservable Input

Range
(Weighted Average)

Impaired loans

4,862

Appraisal of collateral

Appraisal adjustments

13.3% to 51.1% (23.0%

)

Liquidation expenses

3.0% to 6.0% (5.4%

)

Other real estate owned

159

Appraisal of collateral

Appraisal adjustments

19.7% to 77.9% (37.3%

)

Liquidation expenses

3.0% to 6.0% (5.0%

)

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2014

Fair Value
Estimate

Valuation Techniques

Unobservable Input

Range
(Weighted Average)

Impaired loans

4,414

Appraisal of collateral

Appraisal adjustments

2.6% to 61.1% (24.5%

)

Liquidation expenses

3.0% to 6.0% (5.5%

)

Other real estate owned

218

Appraisal of collateral

Appraisal adjustments

19.7% to 47.8% (30.5%

)

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 March 31, 2015 and December 31, 2014 and their placement within the fair value hierarchy are as follows:


					Fair Value Hierarchy
March 31, 2015	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	$	39,631	$	39,631	$	39,631
Investment securities:
Available-for-sale		280,300		280,300			$	280,300
Held-to-maturity		14,172		14,729				14,729
Loans held for sale		3,101		3,107				3,107
Net loans		1,226,365		1,238,915					$	1,238,915
Accrued interest receivable		4,922		4,922				4,922
Mortgage servicing rights		623		1,466				1,466
Restricted equity securities		2,132		2,132				2,132

Total	$	1,571,246	$	1,585,202

Financial liabilities:
Deposits	$	1,416,278	$	1,418,370				1,418,370
Long-term debt		32,318		34,133				34,133
Accrued interest payable		460		460			$	460

Total	$	1,449,056	$	1,452,963


					Fair Value Hierarchy
December 31, 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	$	31,426	$	31,426	$	31,426
Investment securities:
Available-for-sale		339,586		339,586	$	48,550	$	291,036
Held-to-maturity		14,665		15,215				15,215
Loans held for sale		3,486		3,492				3,492
Net loans		1,199,556		1,210,369					$	1,210,369
Accrued interest receivable		5,580		5,580				5,580
Mortgage servicing rights		676		1,466				1,466
Restricted equity securities		3,687		3,687				3,687

Total	$	1,598,662	$	1,610,821

Financial liabilities:
Deposits	$	1,425,558	$	1,427,081				1,427,081
Short-term borrowings		19,557		19,557				19,557
Long-term debt		33,140		34,772				34,772
Accrued interest payable		574		574			$	574

Total	$	1,478,829	$	1,481,984