12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

For the Company, as for most financial institutions, approximately 90% of its assets and liabilities are considered financial instruments. Many of the Company's financial instruments, however, lack an available trading market characterized by a willing buyer and willing seller engaging in an exchange transaction. Therefore, significant estimates and present value calculations were used by the Company for the purpose of this disclosure.

Fair values have been determined by the Company using independent third party valuations that uses best available data (Level 2) and an estimation methodology (Level 3) the Company believes is suitable for each category of financial instruments. Management believes that cash and cash equivalents, and loans and deposits with floating interest rates have estimated fair values which approximate the recorded carrying values. The estimation methodologies used, the estimated fair values based on US GAAP measurements, and recorded carrying values at December 31, 2012 and 2011, were as follows:

2012

Carrying Value

Fair Value

(Level 1)

(Level 2)

(Level 3)

(IN THOUSANDS)

FINANCIAL ASSETS:

Cash and cash equivalents

26,820

Investment securities - AFS

151,538

Investment securities - HTM

13,723

14,266

11,321

2,945

Regulatory stock

6,304

Loans held for sale

10,576

10,722

Loans, net of allowance for loan loss and unearned income

708,594

716,756

Accrued income receivable

2,960

Bank owned life insurance

36,214

Fair value swap asset

164

FINANCIAL LIABILITIES:

Deposits with no stated maturities

520,002

Deposits with stated maturities

315,732

320,930

Short-term borrowings

15,660

All other borrowings

26,085

30,442

Accrued interest payable

2,083

Fair value swap liability

164


	2011
	FAIR VALUE		CARRYING VALUE
	(IN THOUSANDS)
FINANCIAL ASSETS:
Cash and cash equivalents	$	34,783	$	34,783
Investment securities - AFS		182,923		182,923
Investment securities - HTM		12,914		12,280
Regulatory stock		8,016		8,016
Loans held for sale		7,195		7,110
Loans, net of allowance for loan loss and unearned income		655,357		649,114
Accrued income receivable		3,216		3,216
Bank owned life insurance		35,351		35,351
Fair value swap asset		346		346
FINANCIAL LIABILITIES:
Deposits with no stated maturities	$	482,859	$	482,859
Deposits with stated maturities		338,683		333,561
Short-term borrowings		15,765		15,765
All other borrowings		23,606		19,085
Accrued interest payable		2,523		2,523
Fair value swap liability		346		346

The fair value of cash and cash equivalents, regulatory stock, accrued income receivable, short-term borrowings, and accrued interest payable are equal to the current carrying value.

The fair value of investment securities is equal to the available quoted market price for similar securities. The fair value measurements consider observable data that may include dealer quoted market spreads, cash flows, the US Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond's terms and conditions, among other things. The Level 3 securities are valued by discounted cash flows using the US Treasury rate for the remaining term of the securities.

Loans held for sale are priced individually at market rates on the day that the loan is locked for commitment with an investor. All loans in the held for sale account conform to Fannie Mae underwriting guidelines, with the specific intent of the loan being purchased by an investor at the predetermined rate structure. Loans in the held for sale account have specific delivery dates that must be executed to protect the pricing commitment (typically a 30, 45, or 60 day lock period).

The net loan portfolio has been valued using a present value discounted cash flow. The discount rate used in these calculations is based upon the treasury yield curve adjusted for non-interest operating costs, credit loss, current market prices and assumed prepayment risk.

The fair value of bank owned life insurance is based upon the cash surrender value of the underlying policies and matches the book value.

Deposits with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities. Deposits with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance.

The fair value of total borrowed funds is based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities.

The fair values of the swaps used for interest rate risk management represents the amount the Company would have expected to receive or pay to terminate such agreements.

Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company's remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary under historical cost accounting.