NOTE R.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value Disclosures

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is based on the assumptions market participants would use when pricing the asset or liability. A fair value hierarchy has been established that prioritizes the inputs used to develop those assumptions and to measure fair value. The hierarchy requires companies to maximize the use of observable inputs and to minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 - Includes the most reliable sources, and includes quoted prices in active markets for identical assets or liabilities.

Level 2 - Includes observable inputs. Observable inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates) as well as inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).

Level 3 - Includes unobservable inputs and should be used only when observable inputs are unavailable.

Since the assumptions used in measuring fair value significantly affect fair value measurements, the fair value estimates may not be realized in an immediate settlement of the instrument. In addition, in accordance with generally accepted accounting principles, certain financial instruments and all non-financial instruments are excluded from these disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Short-Term Investments - For short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities - Fair value of securities is based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Investment securities also include equity securities that are not traded in an active market. The fair value of these securities equals their carrying value.

Loans - The fair value for loans is estimated using discounted cash flow analyses, with interest rates currently being offered for similar loans to borrowers with similar credit rates. Loans with similar classifications are aggregated for purposes of the calculations. The allowance for loan losses, which was used to measure the credit risk, is subtracted from loans.

Cash Surrender Value of Life Insurance – The fair value approximates its carrying value, which is based on cash surrender values indicated by insurance companies.

Deposits - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flow analyses, with interest rates currently offered for deposits of similar remaining maturities.

Borrowings - The fair value of FHLB advances is estimated using the rates currently offered for advances of similar maturities.

Securities Sold Under Repurchase Agreements – The fair value approximates its carrying value.

Commitments to Extend Credit and Standby Letters of Credit - The fair values of commitments to extend credit and standby letters of credit do not differ significantly from the commitment amount and are therefore omitted from this disclosure.

The estimated approximate fair values of the Bank's financial instruments as of December 31, 2011 and 2010 are as follows:

	2011				2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
			(dollars in Thousands)
Financial Assets:
Cash and due from banks	$	48,623	$	48,623	$	5,819	$	5,819
Federal funds sold		-		-		112		112
Investment securities:
Held-to-maturity		25,829		27,647		39,761		40,610
Available-for-sale		91,528		91,528		97,308		97,308
Equity securities		1,637		1,637		1,835		1,835
Cash surrender value of life insurance		1,189		1,189		1,145		1,145
Loans, net		182,768		187,359		214,219		218,739

Financial Liabilities:
Deposits		263,058		263,616		258,543		259,192
Short-term borrowings		2,000		2,000		8,457		8,456
Long-term borrowings		7,000		7,446		9,000		9,368
Securities sold under repurchase agreements:
Retail		8,485		8,484		11,366		11,364
Structured		40,000		42,965		40,000		43,506
Junior subordinated debentures		5,155		5,155		5,155		5,155

Recurring Basis

Fair values of investment securities available for sale were primarily measured using information from a third-party pricing service. This pricing service provides information by utilizing evaluated pricing models supported with market data information. Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and reference data from market research publications.

The following table presents the balance of assets measured on a recurring basis as of December 31, 2011 and 2010. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a recurring basis.

Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

December 31, 2011:
Mortgage Backed Securities	$	70,006,510	$	0.00	$	70,006,510	$	0.00
Obligation of State and Political Subdivision		9,381,230		0.00		9,381,230		0.00
Obligations of Other U.S. Government Sponsored Agencies		12,140,120		0.00		12,140,120		0.00
Total	$	91,527,860	$	0.00	$	91,527,860	$	0.00
December 31, 2010:
Mortgage Backed Securities	$	65,706,650	$	0.00	$	65,706,650	$	0.00
Obligation of State and Political Subdivision		7,172,490		0.00		7,172,490		0.00
Obligations of Other U.S. Government Sponsored Agencies		24,429,270		0.00		24,429,270		0.00
Total	$	97,308,410	$	0.00	$	97,308,410	$	0.00

Nonrecurring Basis

The Company has segregated all financial assets and liabilities that are measured at fair value on a nonrecurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine fair value at the measurement date in the table below. The Company did not record any liabilities at fair value for which measurement of the fair value was made on a non-recurring basis.

The fair value of impaired loans is measured at the fair value of the collateral for collateral-dependent loans. Impaired loans are Level 2 assets measured using appraisals from external parties of the collateral less any prior liens. Repossessed assets are initially recorded at fair value less estimated costs to sell. The fair value of repossessed assets is based on property appraisals and an analysis of similar properties available. As such, the Bank records repossessed assets as Level 2.

Description	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2011:
Assets:
Impaired Loans	$	6,347,194	$	0.00	$	6,347,194	$	0.00
Repossessed Assets		3,701,392		0.00		3,701,392		0.00
Total	$	10,048,586	$	0.00	$	10,048,586	$	0.00

December 31, 2010:
Assets:
Impaired Loans	$	6,438,122	$	0.00	$	6,438,122	$	0.00
Repossessed Assets		3,303,189		0.00		3,303,189		0.00
Total	$	9,741,311	$	0.00	$	9,741,311	$	0.00