Note 7 - Fair Value Measurement

The table below shows information about the Company's securities that were measured at fair value and the valuation techniques used by the Company to determine fair values.

In general, fair values determined by Level 1 inputs use a quoted price in active markets for identical securities that the Company had the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar securities in active markets, and other input such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related securities.

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest input that is significant to the valuation. The Company's assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each security.

On an annual basis the Company validates the measurement of the fair values of its securities with an independent securities valuation firm. This independent securities valuation firm determines the fair values of the securities portfolio that is then compared to the fair value using the methods outlined. When this validation was last done on September 30, 2011, the difference between the fair value reported and the fair value determined by the independent securities valuation firm was considered immaterial.

Securities Available for Sale ($000's)			Fair Value Measurements at Reporting Date Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)

States and political subdivisions	$	2,984	$	0	$	2,167	$	817
Mortgage-backed securities		77,995		0		77,995		0
Equity securities		4,253		4,253		0		0
At March 31, 2012	$	85,232	$	4,253	$	80,162	$	817

States and political subdivisions	$	3,117	$	0	$	2,172	$	945
Mortgage-backed securities		79,762		0		79,762		0
Equity securities		4,261		4,261		0		0
At December 31, 2011	$	87,140	$	4,261	$	81,934	$	945

The Company's change in Level 3 securities measured at fair value on a recurring basis was as follows:

	Securities
	Available
	for Sale ($000's)
Balance at December 31, 2011	$	945
Total realized and unrealized gains (losses) included in income		0
Total unrealized gains (losses) included in other comprehensive income		0
Net purchase, sales, calls and maturities		(128	)
Net transfer into Level 3		0
Balance at March 31, 2012	$	817

	Securities
	Available
	for Sale ($000's)
Balance at December 31, 2010	$	20
Total realized and unrealized gains (losses) included in income		(163	)
Total unrealized gains (losses) included in other comprehensive income		143
Net purchase, sales, calls and maturities		0
Net transfer into Level 3		0
Balance at March 31, 2011	$	0

At year-end 2011, the Company had nonrated securities issued by a local municipality totaling $945,000 in which the fair value was determined using significant unobservable inputs, or Level 3, based on an outside investment broker's analysis of the financial condition of the municipality issuing the securities. During the three months ended March 31, 2012, $128,000 of these Level 3 securities matured.

The Company used accounting guidelines to determine other than temporary impairment losses on its Collateralized Debt Obligations ("CDOs") as the fair value of these securities was not readily determinable by the market. The impairment losses on the CDOs were due to defaults and deferrals of payments by the financial institutions and insurance companies that issued the debt underlying the securities. During the quarter ended March 31, 2011, the Company used cash flow analyses on its CDOs to determine other than temporary impairment losses of $134,000, fully writing off the remaining book value of these securities.

During the quarter ended March 31, 2011, the Company recognized other than temporary impairment losses on its equity securities consisting of preferred stock issued by the Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") of $29,000, fully writing off the remaining book value of these securities.

The Company also has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These assets are held to maturity loans or other real estate owned that are considered impaired per accounting principles. The Company has estimated the fair value of these impaired assets using Level 3 inputs, specifically discounted cash flow projections or fair value of collateral.

During the three months ended March 31, 2012 and 2011, the Company recorded adjustments to certain collateral dependent loans that were measured for impairment in accordance with accounting guidelines. In cases where the carrying value of the loans exceed the estimated fair value of the collateral less estimated costs to sell, an impairment loss was recognized. The Company also recorded adjustments to certain cash flow dependent loans consisting primarily of troubled debt restructured loans that were measured for impairment in accordance with accounting guidelines. In the case of cash flow dependent troubled debt restructured loans, impairment was determined by comparing the discounted cash flows with the Company's recorded investment. The Company made allocations for impaired loans totaling $1.6 million and $1.8 million for the three months ended March 31, 2012 and 2011, respectively.

Impaired Loans ($000's)			Fair Value Measurements at Reporting Date Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
At March 31, 2012	$	34,791	$	0	$	0	$	34,791

At December 31, 2011	$	40,744	$	0	$	0	$	40,744

Impaired Other Real Estate Owned ($000's)			Fair Value Measurements at Reporting Date Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
At March 31, 2012	$	16,699	$	0	$	0	$	16,699

At December 31, 2011	$	18,300	$	0	$	0	$	18,300

During the quarter ended March 31, 2012, the Company recorded adjustments of $1,972,000 to certain properties carried as other real estate owned as compared to adjustments of $673,000 for the same quarter of 2011. Such write-downs are generally based on the estimated underlying fair values of the properties less estimated costs to sell. In cases where the carrying value of the property exceeds the estimated fair value, an impairment loss is recognized.

The following methods and assumptions were used to estimate fair values for financial instruments. Securities fair values are based on quoted market prices or, if no quotes are available, on the rate and term of the security and/or information about the issuer. For loans, leases, deposits, securities sold under repurchase agreements and fixed-rate FHLB advances, the fair value is estimated by discounted cash flow analysis using market rates for the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. The fair value of off-balance sheet items is based on the fees or cost that would currently be charged to enter into or terminate such arrangements, and the amount is not considered material. Fair value for cash and cash equivalents, accrued interest receivable, advances from borrowers for taxes and insurance and accrued interest payable are estimated at carrying value. The estimated fair value for Federal Home Loan Bank stock is equal to the carrying value based on the restricted nature of the stock.

The estimated fair values of financial instruments at March 31, 2012 and December 31, 2011 were:

	Carrying			Estimated
March 31, 2012 ($000's)	Value			Fair Value
Financial assets:
Cash and cash equivalents	$	37,367		$	37,367
Securities available for sale		85,232			85,232
Loans and leases, net		297,807			307,365
Federal Home Loan Bank stock		1,434			1,434
Accrued interest receivable		1,481			1,481

Financial liabilities:
Deposits	$	(391,837	)	$	(391,947	)
Securities sold under repurchase agreements		(16,639	)		(16,603	)
Subordinated debentures		(10,310	)		(4,706	)
Advances from borrowers for taxes and insurance		(1,960	)		(1,960	)
Accrued interest payable		(1,083	)		(1,083	)

	Carrying			Estimated
December 31, 2011 ($000's)	Value			Fair Value
Financial assets:
Cash and cash equivalents	$	37,833		$	37,833
Securities available for sale		87,140			87,140
Loans and leases, net		303,729			313,338
Federal Home Loan Bank stock		1,801			1,801
Accrued interest receivable		1,401			1,401

Financial liabilities:
Deposits	$	(397,631	)	$	(397,885	)
Securities sold under repurchase agreements		(19,455	)		(19,417	)
Subordinated debentures		(10,310	)		(4,375	)
Advances from borrowers for taxes and insurance		(1,222	)		(1,222	)
Accrued interest payable		(1,127	)		(1,127	)