NOTE P - FAIR VALUE MEASUREMENTS AND DISCLOSURES:

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets at fair value on a non-recurring basis, such as impaired loans and ORE. These non-recurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets. Additionally, the Company is required to disclose, but not record, the fair value of other financial instruments.

Fair Value Hierarchy

The Company groups assets and liabilities 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 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 - Valuation is based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used to determine the fair value of financial assets and liabilities.

Cash and Due from Banks

The carrying amount shown as cash and due from banks approximates fair value.

Available for Sale Securities

The fair value of available for sale securities is based on quoted market prices. The Company’s available for sale securities are reported at their estimated fair value, which is determined utilizing several sources. The primary source is Interactive Data Corporation, which utilizes pricing models that vary based by asset class and include available trade, bid and other market information and whose methodology includes broker quotes, proprietary models and vast descriptive databases. The other source for determining fair value is matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark securities. All of the Company’s available for sale securities are Level 2 assets.

Held to Maturity Securities

The fair value of held to maturity securities is based on quoted market prices.

Other Investments

The carrying amount shown as other investments approximates fair value.

Federal Home Loan Bank Stock

The carrying amount shown as Federal Home Loan Bank Stock approximates fair value.

Loans

The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the remaining maturities. The cash flows considered in computing the fair value of such loans are segmented into categories relating to the nature of the contract and collateral based on contractual principal maturities. Appropriate adjustments are made to reflect probable credit losses. Cash flows have not been adjusted for such factors as prepayment risk or the effect of the maturity of balloon notes. The fair value of floating rate loans is estimated to be its carrying value. At each reporting period, the Company determines which loans are impaired. Accordingly, the Company’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan, which are generally collateral-dependent, is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans are non-recurring Level 3 assets.

Other Real Estate

In the course of lending operations, Management may determine that it is necessary to foreclose on the related collateral. Other real estate acquired through foreclosure is carried at fair value, less estimated costs to sell. The fair value of the collateral is based on appraisals performed by third-party valuation specialists. Factors including the assumptions and techniques utilized by the appraiser are considered by Management. If the current appraisal is more than one year old and/or the loan balance is more than $200,000, a new appraisal is obtained. Otherwise, the Bank’s in-house property evaluator and Management will determine the fair value of the collateral, based on comparable sales, market conditions, Management’s plans for disposition and other estimates of fair value obtained from principally independent sources, adjusted for estimated selling costs. Other real estate is a non-recurring Level 3 asset.

Cash Surrender Value of Life Insurance

The carrying amount of cash surrender value of bank-owned life insurance approximates fair value.

Deposits

The fair value of non-interest bearing demand and interest bearing savings and demand deposits is the amount reported in the financial statements. The fair value of time deposits is estimated by discounting the cash flows using current rates for time deposits with similar remaining maturities. The cash flows considered in computing the fair value of such deposits are based on contractual maturities, since approximately 98% of time deposits provide for automatic renewal at current interest rates.

Federal Funds Purchased and Securities Sold under Agreements to Repurchase

The carrying amount shown as federal funds purchased and securities sold under agreements to repurchase approximates fair value.

Borrowings from Federal Home Loan Bank

The fair value of FHLB fixed rate borrowings is estimated using discounted cash flows based on current incremental borrowing rates for similar types of borrowing arrangements. The fair value of FHLB variable rate borrowings is estimated to be its carrying value.

The balances of available for sale securities, which are the only assets measured at fair value on a recurring basis, by level within the fair value hierarchy and by investment type, as of December 31, 2014, 2013 and 2012, were as follows (in thousands):


			Fair Value Measurements Using

	Total		Level 1	Level 2		Level 3

December 31, 2014:
U.S. Treasuries	$	29,654	$	$	29,654	$
U.S. Government agencies		117,989			117,989
Mortgage-backed securities		35,817			35,817
States and political subdivisions		31,012			31,012
Equity securities		650			650

Total	$	215,122	$	$	215,122	$


December 31, 2013:
U.S. Treasuries	$	43,648	$	$	43,648	$
U.S. Government agencies		145,805			145,805
Mortgage-backed securities		50,326			50,326
States and political subdivisions		35,011			35,011
Equity securities		650			650

Total	$	275,440	$	$	275,440	$


December 31, 2012:
U.S. Treasuries	$	54,096	$	$	54,096	$
U.S. Government agencies		149,098			149,098
Mortgage-backed securities		17,441			17,441
States and political subdivisions		37,591			37,591
Equity securities		650			650

Total	$	258,876	$	$	258,876	$

Impaired loans, which are measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of December 31, 2014, 2013 and 2012 were as follows (in thousands):


			Fair Value Measurements Using
December 31:	Total		Level 1	Level 2	Level 3
2014	$	10,610	$	$	$	10,610
2013		18,831				18,831
2012		16,030				16,030

Other real estate, which is measured at fair value on a non-recurring basis, by level within the fair value hierarchy as of December 31, 2014, 2013 and 2012 are as follows (in thousands):


			Fair Value Measurements Using
December 31:	Total		Level 1	Level 2	Level 3
2014	$	7,646	$	$	$	7,646
2013		9,630				9,630
2012		7,008				7,008

The following table presents a summary of changes in the fair value of other real estate which is measured using Level 3 inputs (in thousands):


	2014		2013		2012
Balance, beginning of year	$	9,630	$	7,008	$	6,153

Loans transferred to ORE		1,345		4,537		2,576

Sales		(2,068)		(1,188)		(1,568)

Writedowns		(1,261)		(670)		(153)

Insurance proceeds from casualty loss				(57)


Balance, end of year	$	7,646	$	9,630	$	7,008

The carrying value and estimated fair value of assets and liabilities, by level within the fair value hierarchy, at December 31, 2014, 2013 and 2012, are as follows (in thousands):


	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
December 31, 2014:
Financial Assets:
Cash and due from banks	$	23,556	$	23,556	$		$		$	23,556
Available for sale securities		215,122				215,122				215,122
Held to maturity securities		17,784				17,859				17,859
Other investments		2,962		2,962						2,962
Federal Home Loan Bank stock		2,504				2,504				2,504
Loans, net		353,201						355,004		355,004
Other real estate		7,646						7,646		7,646
Cash surrender value of life insurance		18,145				18,145				18,145
Financial Liabilities:
Deposits:
Non-interest bearing		103,607		103,607						103,607
Interest bearing		289,107						289,466		289,466
Federal funds purchased and securities sold under agreements to repurchase		124,206		124,206						124,206
Borrowings from Federal Home Loan Bank		38,708				40,720				40,720


	Carrying		Fair Value Measurements Using
	Amount		Level 1		Level 2		Level 3		Total
December 31, 2013:
Financial Assets:
Cash and due from banks	$	36,264	$	36,264	$		$		$	36,264
Available for sale securities		275,440				275,440				275,440
Held to maturity securities		11,142				10,686				10,686
Other investments		3,262		3,262						3,262
Federal Home Loan Bank stock		3,834				3,834				3,834
Loans, net		366,415						369,117		369,117
Other real estate		9,630						9,630		9,630
Cash surrender value of life insurance		17,456				17,456				17,456
Financial Liabilities:
Deposits:
Non-interest bearing		107,117		107,117						107,117
Interest bearing		321,441						322,535		322,535
Federal funds purchased and securities sold under agreements to repurchase		139,639		139,639						139,639
Borrowings from Federal Home Loan Bank		77,684				79,051				79,051


December 31, 2012:
Financial Assets:
Cash and due from banks	$	54,020	$	54,020	$		$		$	54,020
Available for sale securities		258,876				258,876				258,876
Held to maturity securities		7,125				7,225				7,225
Other investments		3,450		3,450						3,450
Federal Home Loan Bank stock		2,380				2,380				2,380
Loans, net		422,226						425,627		425,627
Other real estate		7,008						7,008		7,008
Cash surrender value of life insurance		16,861				16,861				16,861
Financial Liabilities:
Deposits:
Non-interest bearing		102,609		102,609						102,609
Interest bearing		373,110						376,209		376,209
Federal funds purchased and securities sold under agreements to repurchase		194,234		194,234						194,234
Borrowings from Federal Home Loan Bank		7,912				10,271				10,271