ACS Topic 820, “Fair Value Measurements,” defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also 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. In accordance with Topic 820, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 2

Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Following is a description of the inputs and valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Available-for-Sale Securities. The fair value of available-for-sale securities are determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. Level 1 securities include exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities include U.S. Treasury securities, obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, mortgage-backed securities, collateralized mortgage obligations and corporate bonds. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include subordinated tranches of collateralized mortgage obligations and investments in trust preferred securities.

The trust preferred securities are collateralized debt obligation securities that are backed by trust preferred securities issued by banks, thrifts, and insurance companies. The market for these securities at December 31, 2011 is not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which trust preferred securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive as no new trust preferred securities have been issued since 2007. There are currently very few market participants who are willing and or able to transact for these securities. The market values for these securities (and any securities other than those issued or guaranteed by the US Treasury) are very depressed relative to historical levels.

·	An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior measurement dates , and

			Fair Value Measurements Using
December 31, 2011	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	166,066	$	-	$	166,066	$	-
Obligations of states and political subdivisions		41,202		-		41,202		-
Mortgage-backed securities: GSE residential		261,833		-		261,755		58
Trust preferred securities		719		-		-		719
Other securities		9,096		29		9,067		-
Total available-for-sale securities	$	478,916	$	29	$	478,110	$	777

December 31, 2010
Available-for-sale securities:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	152,381	$	-	$	152,381	$	-
Obligations of states and political subdivisions		26,914		-		26,914		-
Mortgage-backed securities: GSE residential		160,931		-		160,863		68
Trust preferred securities		581		-		-		581
Other securities		2,009		31		1,978		-
Total available-for-sale securities	$	342,816	$	31	$	342,136	$	649

	Available-for-Sale Securities
December 31, 2011	Mortgaged-backed Securities			Trust Preferred Securities			Total
Beginning balance	$	68		$	581		$	649
Transfers into Level 3		-			-			-
Transfers out of Level 3		-			-			-
Total gains or losses
Included in net income		-			(886	)		(886	)
Included in other comprehensive income (loss)		-			1,108			1,108
Purchases, issuances, sales and settlements
Purchases		-			-			-
Issuances		-			-			-
Sales		-			-			-
Settlements		(10	)		(84	)		(94	)
Ending balance	$	58		$	719		$	777

Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	-		$	(886	)	$	(886	)

	Available-for-Sale Securities
December 31, 2010	Mortgaged-backed Securities			Trust Preferred Securities			Total
Beginning balance	$	75		$	3,155		$	3,230
Transfers into Level 3		-			-			-
Transfers out of Level 3		-			-			-
Total gains or losses
Included in net income		-			(1,418	)		(1,418	)
Included in other comprehensive income (loss)		1			(1,411	)		(1,410	)
Purchases, issuances, sales and settlements
Purchases		-			-			-
Issuances		-			-			-
Sales		-			-			-
Settlements		(8	)		255			247
Ending balance	$	68		$	581		$	649

Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets and liabilities still held at the reporting date	$	-		$	(1,418	)	$	(1,418	)

Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

Impaired Loans (Collateral Dependent). Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment and estimating fair value include using the fair value of the collateral for collateral dependent loans. If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value. Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Management establishes a specific reserve for loans that have an estimated fair value that is below the carrying value. The total carrying amount of loans for which a specific reserve has been established as of December 31, 2011 was $2,562,000 and a fair value of $2,282,000 resulting in specific loss exposures of $280,000. At December 31, 2010, the total carrying amount of loans for which a specific reserve had been established was $4,809,000. These loans had a fair value of $3,854,000 which resulted in specific loss exposures of $955,000.

When there is little prospect of collecting either principal or interest, loans, or portions of loans, may be charged-off to the allowance for loan losses. Losses are recognized in the period an obligation becomes uncollectible. The recognition of a loss does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though partial recovery may be effected in the future.

Foreclosed Assets Held For Sale. Other real estate owned acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. The adjustment at the time of foreclosure is recorded through the allowance for loan losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value declines subsequent to foreclosure, a valuation allowance is recorded through noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to other noninterest expense. The total carrying amount of other real estate owned as of December 31, 2011 was $4,606,000. Other real estate owned measured at fair value on a nonrecurring basis during the period amounted to $2,336,000. The total carrying amount of other real estate owned as of December 31, 2010 was $6,127,000. Other real estate owned measured at fair value on a nonrecurring basis during the period amounted to $940,000.

	Fair Value Measurements Using
December 31, 2011	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans (collateral dependent)	$	2,282	$	-	$	-	$	2,282
Foreclosed assets held for sale		2,336		-		-		2,336

For loans with floating interest rates, it is assumed that the estimated fair values generally approximate the carrying amount balances. Fixed rate loans have been valued using a discounted present value of projected cash flow. The discount rate used in these calculations is the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amount of accrued interest approximates its fair value.

Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount of these deposits approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

	December 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial Assets
Cash and due from banks	$	52,105	$	52,105	$	151,493	$	151.493
Federal funds sold		20,997		20,997		80,000		80,000
Certificates of deposit investments		13,231		13,225		10,000		9,996
Available-for-sale securities		478,916		478,916		342,816		342,816
Held-to-maturity securities		51		51		50		53
Loans held for sale		1,046		1,046		114		114
Loans net of allowance for loan losses		847,908		850,308		794,074		799,039
Interest receivable		7,052		7,052		6,390		6,390
Federal Reserve Bank stock		1,520		1,520		1,520		1,520
Federal Home Loan Bank stock		3,727		3,727		3,727		3,727
Financial Liabilities
Deposits	$	1,170,734	$	1,172,069	$	1,212,710	$	1,214,025
Securities sold under agreements to repurchase		132,380		132,383		94,057		94,058
Interest payable		510		510		701		701
Federal Home Loan Bank borrowings		19,750		20,619		22,750		23,953
Other borrowings		8,250		8,250		-		-
Junior subordinated debentures		20,620		11,969		20,620		11,438

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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