FAIR VALUE OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2013

Fair Value Disclosures [Abstract]

Fair Value Measurement Inputs [Text Block]

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value, as defined in ASC Topic 820, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for market activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

The Corporation utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Fair value is used on a recurring basis for Available for Sale Securities. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes. Examples of these non-recurring uses of fair value include certain loans held for sale accounted for on a lower of cost or market basis. Depending on the nature of the asset or liability, the Corporation uses various valuation techniques and assumptions when estimating fair value.

The Corporation applied the following fair value hierarchy:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. The Corporation’s mutual fund investments where quoted prices are available in an active market generally are classified within Level 1 of the fair value hierarchy.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. The Corporation’s borrowed funds and investments in U.S. government agency securities, government sponsored mortgage backed securities, and obligations of states and political subdivisions are generally classified in Level 2 of the fair value hierarchy. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Private equity investments and trust preferred collateralized debt obligations are classified within Level 3 of the fair value hierarchy. Fair values are initially valued based on transaction price and are adjusted to reflect exit values.

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2013 and December 31, 2012, and the valuation techniques used by the Company to determine those fair values.

									Total
	Carrying								Estimated
March 31, 2013	Value		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and due from banks	$	118,038	$	118,038	$	-	$	-	$	118,038
Securities - Held to Maturity
Obligations of States and Political Subdivisions		38,013		-		39,129		-		39,129
Corporate Debt Securities		500		-		500		-		500
Securities - Available for Sale
Obligations of U.S. Government Agencies		258,431		-		258,431		-		258,431
MBS issued by U.S. Government Agencies		120,885		-		120,885		-		120,885
Obligations of States and Political Subdivisions		16,951		-		16,951		-		16,951
Trust Preferred CDO Securities		5,402		-		-		5,402		5,402
Corporate Debt Securities		12,181		-		12,181		-		12,181
Other Securities		2,629		2,197		432		-		2,629
Federal Home Loan Bank Stock		10,605		-		10,605		-		10,605
Loans Held for Sale		2,047		-		-		2,047		2,047
Loans, net		596,859		-		-		611,801		611,801
Accrued Interest Receivable		3,923		-		3,923		-		3,923
Financial Liabilities:
Noninterest Bearing Deposits		186,220		186,220		-		-		186,220
Interest Bearings Deposits		876,245		-		881,699		-		881,699
Borrowed funds
FHLB Advances		107,000		-		107,321		-		107,321
Repurchase Agreements		15,000		-		16,964		-		16,964
Accrued Interest Payable		348		-		348		-		348

									Total
	Carrying								Estimated
December 31, 2012	Value		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and due from banks	$	112,507	$	112,507	$	-	$	-	$	112,507
Securities - Held to Maturity
Obligations of States and Political Subdivisions		38,286		-		40,130		-		40,130
Corporate Debt Securities		500		-		500		-		500
Securities - Available for Sale
Obligations of U.S. Government Agencies		225,451		-		225,451		-		225,451
MBS issued by U.S. Government Agencies		129,818		-		129,818		-		129,818
Obligations of States and Political Subdivisions		18,370		-		18,370		-		18,370
Trust Preferred CDO Securities		5,406		-		-		5,406		5,406
Corporate Debt Securities		12,077		-		12,077		-		12,077
Other Securities		2,645		2,213		432		-		2,645
Federal Home Loan Bank Stock		10,605		-		10,605		-		10,605
Loans Held for Sale		1,520		-		-		1,520		1,520
Loans, net		609,950		-		-		627,171		627,171
Accrued Interest Receivable		3,457		-		3,457		-		3,457
Financial Liabilities:
Noninterest Bearing Deposits		183,016		183,016		-		-		183,016
Interest Bearings Deposits		865,814		-		872,070		-		872,070
Borrowed funds
FHLB Advances		107,000		-		107,785		-		107,785
Repurchase Agreements		15,000		-		17,141		-		17,141
Accrued Interest Payable		353		-		353		-		353

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 level 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 asset.

The changes in Level 3 assets measured at fair value on a recurring basis were (000’s omitted):

Investment Securities - Available for Sale	2013			2012
Balance at January 1	$	5,406		$	5,467
Total realized and unrealized gains (losses) included in income		(4	)		(4	)
Total unrealized gains (losses) included in other comprehensive income		-			(235	)
Net purchases, sales, calls and maturities		-			-
Net transfers in/out of Level 3		-			-
Balance at March 31	$	5,402		$	5,228

The Company did not recognize any unrealized losses on its Level 3 Available for Sale investment securities in other comprehensive income in the consolidated statements of financial condition for the three months ended March 31, 2013. The Company did not have any sales or purchases of Level 3 available for sale securities during the period.

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets. As a result, the unrealized gains and losses for these assets presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.

The Company owns pooled Trust Preferred Securities (“TRUPs”) with a fair value of $5,402,000 as of March 31, 2013. Trading of these types of securities has increased recently but is primarily conducted on a distress sale or forced liquidation basis. As a result, the Company measures the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.

The Company also has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These assets include loans and Other Real Estate Owned. The Company estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.

Assets measured at fair value on a nonrecurring basis are as follows (000’s omitted):

	Balance at March 31, 2013		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	65,812	$	-	$	-	$	65,812
Other Real Estate Owned	$	15,118	$	-	$	-	$	15,118

	Balance at December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans	$	67,249	$	-	$	-	$	67,249
Other Real Estate Owned	$	14,262	$	-	$	-	$	14,262

Impaired loans categorized as Level 3 assets consist of non-homogenous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). Other Real Estate Owned (OREO) consists of property received in full or partial satisfaction of a receivable. The Company utilizes independent appraisals to estimate the fair value of OREO properties.