FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

The Corporation measures certain assets at fair value. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. FASB ASC topic

820,

“Fair Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into

three

levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level

– Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.

Level

– Fair value is based on significant inputs, other than Level

inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level

inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets and other observable inputs.

Level

– Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level

classification include option pricing models, discounted cash flows and other similar techniques.

The Corporation monitors and evaluates available data relating to fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date of an event or change in circumstances that affects the valuation method chosen. Examples of such changes

may

include the market for a particular asset becoming active or inactive, changes in the availability of quoted prices, or changes in the availability of other market data.

December

31,

2016

and

2015,

assets measured at fair value and the valuation methods used are as follows:

			December 31, 2016
	Quoted Prices		Other
	in Active		Observable		Unobservable			Total
	Markets		Inputs		Inputs			Fair
(In Thousands)	(Level 1)		(Level 2)		(Level 3)			Value

Recurring fair value measurements
AVAILABLE-FOR-SALE SECURITIES:
Obligations of U.S. Government agencies	$	0	$	9,541	$	0		$	9,541
Obligations of states and political subdivisions:
Tax-exempt		0		119,037		0			119,037
Taxable		0		30,297		0			30,297
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		0		58,404		0			58,404
Residential collateralized mortgage obligations		0		146,608		0			146,608
Commercial mortgage-backed securities		0		30,219		0			30,219
Total debt securities		0		394,106		0			394,106
Marketable equity securities		971		0		0			971
Total available-for-sale securities		971		394,106		0			395,077
Servicing rights		0		0		1,262			1,262
Total recurring fair value measurements	$	971	$	394,106	$	1,262		$	396,339

Nonrecurring fair value measurements
Impaired loans with a valuation allowance	$	0	$	0	$	3,372		$	3,372
Valuation allowance		0		0		(674	)		(674	)
Impaired loans, net		0		0		2,698			2,698
Foreclosed assets held for sale		0		0		2,180			2,180
Total nonrecurring fair value measurements	$	0	$	0	$	4,878		$	4,878

			December 31, 2015
	Quoted Prices		Other
	in Active		Observable		Unobservable			Total
	Markets		Inputs		Inputs			Fair
(In Thousands)	(Level 1)		(Level 2)		(Level 3)			Value

Recurring fair value measurements
AVAILABLE-FOR-SALE SECURITIES:
Obligations of U.S. Government agencies	$	0	$	10,483	$	0		$	10,483
Obligations of states and political subdivisions:
Tax-exempt		0		107,757		0			107,757
Taxable		0		34,597		0			34,597
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		0		73,343		0			73,343
Residential collateralized mortgage obligations		0		191,715		0			191,715
Collateralized debt obligations		0		9		0			9
Total debt securities		0		417,904		0			417,904
Marketable equity securities		2,386		0		0			2,386
Total available-for-sale securities		2,386		417,904		0			420,290
Servicing rights		0		0		1,296			1,296
Total recurring fair value measurements	$	2,386	$	417,904	$	1,296		$	421,586

Nonrecurring fair value measurements
Impaired loans with a valuation allowance	$	0	$	0	$	1,933		$	1,933
Valuation allowance		0		0		(820	)		(820	)
Impaired loans, net		0		0		1,113			1,113
Foreclosed assets held for sale		0		0		1,260			1,260
Total nonrecurring fair value measurements	$	0	$	0	$	2,373		$	2,373

Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from

third

-party appraisals less estimated selling costs.

Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level

methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management. The following table shows quantitative information regarding significant techniques and inputs used at

December

31,

2016

and

2015

for servicing rights assets measured using unobservable inputs (Level

methodologies) on a recurring basis:

	Fair Value at
	12/31/16		Valuation	Unobservable	Method or Value As of
Asset	(In Thousands)		Technique	Input(s)	12/31/16
Servicing rights	$	1,262	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period
				Loan prepayment speeds		138.00	%	Weighted-average PSA
				Servicing fees		0.25	%	of loan balances
						4.00	%	of payments are late
						5.00	%	late fees assessed
					$	1.94		Miscellaneous fees per account per month
				Servicing costs	$	6.00		Monthly servicing cost per account
					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
						1.50	%	of loans more than 30 days delinquent
						3.00	%	annual increase in servicing costs

	Fair Value at
	12/31/15		Valuation	Unobservable	Method or Value As of
Asset	(In Thousands)		Technique	Input(s)	12/31/15
Servicing rights	$	1,296	Discounted cash flow	Discount rate		10.00	%	Rate used through modeling period
				Loan prepayment speeds		146.00	%	Weighted-average PSA
				Servicing fees		0.25	%	of loan balances
						4.00	%	of payments are late
						5.00	%	late fees assessed
					$	1.94		Miscellaneous fees per account per month
				Servicing costs	$	6.00		Monthly servicing cost per account
					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
						1.50	%	of loans more than 30 days delinquent
						3.00	%	annual increase in servicing costs

The fair value of servicing rights is affected by expected future interest rates. Increases (decreases) in future expected interest rates

tend

to increase (decrease) the fair value of the Corporation’s servicing rights because of changes in expected prepayment behavior by the borrowers on the underlying loans.

Following is a reconciliation of activity for Level

assets (servicing rights) measured at fair value on a recurring basis:

(In Thousands)	Years Ended December 31,
	2016			2015			2014
Balance, beginning of period	$	1,296		$	1,281		$	1,123
Issuances of servicing rights		248			177			185
Unrealized losses included in earnings		(282	)		(162	)		(27	)
Balance, end of period	$	1,262		$	1,296		$	1,281

third

-party appraisals. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

December

31,

2016

and

2015,

quantitative information regarding significant techniques and inputs used for nonrecurring fair value measurements using unobservable inputs (Level

methodologies) are as follows:

(In Thousands, Except									Value at
Percentages)			Valuation						12/31/16
	Balance at		Allowance at		Fair Value at		Valuation	Unobservable	(Weighted
Asset	12/31/16		12/31/16		12/31/16		Technique	Inputs	Average)

Impaired loans:
Commercial:
Commercial loans secured by real estate	$	2,773	$	528	$	2,245	Sales comparison	Discount to appraised value		7	%
Commercial and industrial		95		95		0	Sales comparison	Discount to appraised value		100	%
Loans secured by farmland		504		51		453	Sales comparison	Discount to appraised value		55	%
Total impaired loans	$	3,372	$	674	$	2,698
Foreclosed assets held for sale - real estate:
Residential (1-4 family)	$	1,102	$	0	$	1,102	Sales comparison	Discount to appraised value		35	%
Land		650		0		650	Sales comparison	Discount to appraised value		33	%
Commercial real estate		428		0		428	Sales comparison	Discount to appraised value		50	%
Total foreclosed assets held for sale	$	2,180	$	0	$	2,180

(In Thousands, Except									Value at
Percentages)			Valuation						12/31/15
	Balance at		Allowance at		Fair Value at		Valuation	Unobservable	(Weighted
Asset	12/31/15		12/31/15		12/31/15		Technique	Inputs	Average)

Impaired loans:
Residential mortgage loans - first liens	$	42	$	1	$	41	Sales comparison	Discount to appraised value		31	%
Commercial:
Commercial loans secured by real estate		317		97		220	Sales comparison	Discount to appraised value		46	%
Commercial and industrial		75		75		0	Sales comparison	Discount to appraised value		31	%
Loans secured by farmland		512		52		460	Sales comparison	Discount to appraised value		49	%
Multi-family (5 or more) residential		987		595		392	Sales comparison	Discount to appraised value		41	%
Total impaired loans	$	1,933	$	820	$	1,113
Foreclosed assets held for sale - real estate:
Residential (1-4 family)	$	556	$	0	$	556	Sales comparison	Discount to appraised value		32	%
Land		704		0		704	Sales comparison	Discount to appraised value		29	%
Total foreclosed assets held for sale	$	1,260	$	0	$	1,260

Certain of the Corporation’s financial instruments are not measured at fair value in the consolidated financial statements. 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. Accordingly, the fair value estimates

may

not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented

may

not represent the underlying fair value of the Corporation.

The Corporation used the following methods and assumptions in estimating fair value disclosures for financial instruments:

CASH AND CASH EQUIVALENTS -

The carrying amounts of cash and short-term instruments approximate fair values.

CERTIFICATES OF DEPOSIT -

Fair values for certificates of deposit, included in cash and due from banks in the consolidated balance sheets, are based on quoted market prices for certificates of similar remaining maturities.

SECURITIES -

Fair values for securities, excluding restricted equity securities, are based on quoted market prices or other methods as described above. The carrying value of restricted equity securities approximates fair value based on applicable redemption provisions.

LOANS HELD FOR SALE -

Fair values of loans held for sale are determined based on applicable sale prices available under the Federal Home Loan Banks’ MPF Original or Xtra program.

LOANS -

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage and other consumer. Each loan category is further segmented into fixed-rate and adjustable-rate interest terms and by performing and nonperforming categories. The fair value of performing loans is calculated by discounting contractual cash flows, adjusted for estimated prepayments based on historical experience, using estimated market discount rates that reflect the credit and interest rate risk inherent in the loans. Fair value of nonperforming loans is based on recent appraisals or estimates prepared by the Corporation’s lending officers.

SERVICING RIGHTS -

The fair value of servicing rights, included in other assets in the consolidated balance sheet, is determined through a discounted cash flow valuation. Significant inputs include expected net servicing income, the discount rate and the expected prepayment speeds of the underlying loans.

DEPOSITS -

The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market and interest checking accounts, is (by definition) equal to the amount payable at

December

31,

2016

and

2015.

The fair value of time deposits, such as certificates of deposit and Individual Retirement Accounts, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates of deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.

BORROWED FUNDS -

The fair value of borrowings is estimated using discounted cash flow analyses based on rates currently available to the Corporation for similar types of borrowing arrangements.

ACCRUED INTEREST -

The carrying amounts of accrued interest receivable and payable approximate fair values.

OFF-BALANCE SHEET COMMITMENTS -

The Corporation has commitments to extend credit and has issued standby letters of credit. Standby letters of credit are conditional guarantees of performance by a customer to a

third

party. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments are as follows:

(In Thousands)	Valuation	December 31, 2016				December 31, 2015
	Method(s)	Carrying		Fair		Carrying		Fair
	Used	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	Level 1	$	28,621	$	28,621	$	33,313	$	33,313
Certificates of deposit	Level 2		3,488		3,481		2,748		2,752
Available-for-sale securities	See Above		395,077		395,077		420,290		420,290
Restricted equity securities (included in Other Assets)	Level 2		4,426		4,426		4,657		4,657
Loans held for sale	Level 2		142		142		280		280
Loans, net	Level 3		743,362		725,787		696,991		685,552
Accrued interest receivable	Level 2		3,963		3,963		3,768		3,768
Servicing rights	Level 3		1,262		1,262		1,296		1,296

Financial liabilities:
Deposits with no stated maturity	Level 2		771,625		771,625		713,931		713,931
Time deposits	Level 2		212,218		212,274		221,684		221,891
Short-term borrowings	Level 2		26,175		26,024		53,496		53,398
Long-term borrowings	Level 2		38,454		39,062		38,767		40,166
Accrued interest payable	Level 2		65		65		70		70