NOTE Q - FAIR VALUE MEASUREMENTS

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels defined by U.S. generally accepted accounting principles are as follows:

Level I:

Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:

Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

Level III:

Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires the use of observable market data when available.

The following table presents the assets reported on the Consolidated Balance Sheets at their fair value as of December 31, 2014, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

ASSETS REPORTED AT FAIR VALUE

(DOLLARS IN THOUSANDS)

	December 31, 2014

	Level I		Level II		Level III		Total
		$		$		$		$

U.S. government agencies		—		46,159		—		46,159
U.S. agency mortgage-backed securities		—		37,950		—		37,950
U. S. agency collateralized mortgage obligations		—		48,066		—		48,066
Corporate bonds		—		65,108		—		65,108
Obligations of states and political subdivisions		—		93,331		—		93,331
Marketable equity securities		5,208		-		—		5,208

Total securities		5,208		290,614		—		295,822

On December 31, 2014, the Corporation held no securities valued using level III inputs. All of the Corporation's debt instruments were valued using level II inputs, where quoted prices are available and observable but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation's CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of December 31, 2014, the CRA fund investments had a $5,000,000 book and market value and the bank stocks had a book value of $189,000 and a market value of $208,000.

Financial instruments are considered level III when their values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.

The following table presents the assets reported on the Consolidated Balance Sheets at their fair value as of December 31, 2013, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

ASSETS REPORTED AT FAIR VALUE

(DOLLARS IN THOUSANDS)

	December 31, 2013

	Level I		Level II			Level III			Total
		$			$			$			$

U.S. government agencies		—		39,667			—			39,667
U.S. agency mortgage-backed securities		—		51,923			—			51,923
U. S. agency collateralized mortgage obligations		—		41,688			—			41,688
Private collateralized mortgage obligations		—		4,041			—			4,041
Corporate bonds		—		56,194			—			56,194
Obligations of states and political subdivisions		—		101,644			—			101,644
Marketable equity securities		5,171		—			—			5,171

Total securities		5,171		295,157			—			300,328

On December 31, 2013, the Corporation held no securities valued using level III inputs. All of the Corporation's debt instruments were valued using level II inputs, where quoted prices are available and observable but not necessarily quotes on identical securities traded in active markets on a daily basis. The Corporation's CRA fund investments and bank stocks are fair valued utilizing level I inputs because the funds have their own quoted prices in an active market. As of December 31, 2013, the CRA fund investments had a $5,000,000 book and market value and the bank stocks had a book value of $151,000 and a market value of $171,000.

The following table presents the assets measured on a nonrecurring basis on the Consolidated Balance Sheets at their fair value as of December 31, 2014, and December 31, 2013, by level within the fair value hierarchy.

ASSETS MEASURED ON A NONRECURRING BASIS

(DOLLARS IN THOUSANDS)

	December 31, 2014
	Level I		Level II		Level III		Total
	$		$		$		$
Assets:
Impaired Loans		—		—		2,358		2,358
OREO		—		—		69		69
Total		—		—		2,427		2,427

	December 31, 2013
	Level I		Level II		Level III		Total
	$		$		$		$
Assets:
Impaired Loans		—		—		2,693		2,693
OREO		—		—		39		39
Total		—		—		2,732		2,732

The Corporation had a total of $2,359,000 of impaired loans as of December 31, 2014, with $1,000 of specifically allocated allowance against these loans. As of December 31, 2013, the Corporation had a total of $2,693,000 of impaired loans with no specific allocation against these loans.

Other real estate owned (OREO) is measured at fair value, less estimated costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management. The assets are carried at the lower of carrying amount or fair value, less estimated costs to sell. The Corporation's OREO balance as of December 31, 2014, consists of one residential property that was classified as OREO in the fourth quarter of 2014. Management has estimated the current value of the OREO property at $69,000 utilizing level III pricing. The Corporation's OREO balance as of December 31, 2013, consisted of one residential property that was classified as OREO in the fourth quarter of 2013. Management estimated the value of the OREO property at $39,000 utilizing level III pricing. This OREO property was sold in June of 2014. Income and expenses from operations and changes in valuation allowance are included in the net expenses from OREO.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Corporation has utilized level III inputs to determine fair value:

QUANTITATIVE INFORMATION ABOUT LEVEL III FAIR VALUE MEASUREMENTS

(DOLLARS IN THOUSANDS)

December 31, 2014

Fair Value

Valuation

Unobservable

Range

Estimate

Techniques

Input

(Weighted Avg)

Impaired loans

2,358

Appraisal of collateral (1)

Appraisal adjustments (2)

0% to -20% (-20%)

Liquidation expenses (2)

0% to -10% (-10%)

OREO

Appraisal of collateral (1) (3)

Appraisal adjustments (2)

-40%

Liquidation expenses (2)

-1%

December 31, 2013

Fair Value

Valuation

Unobservable

Range

Estimate

Techniques

Input

(Weighted Avg)

Impaired loans

2,693

Appraisal of collateral (1)

Appraisal adjustments (2)

0% to -20% (-20%)

Liquidation expenses (2)

0% to -10% (-10%)

OREO

Appraisal of collateral (1) (3)

Liquidation expenses (2)

-1%

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes various level III inputs which are not identifiable.

(2)

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.

(3)

Includes qualitative adjustments by management and estimated liquidation expenses.