FAIR VALUE OF FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2012

FAIR VALUE OF FINANCIAL INSTRUMENTS [Abstract]

FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE N – FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial Instruments Recorded at Fair Value.  

When measuring fair value, the Corporation uses a fair value hierarchy, which is designed to maximize the use of observable inputs and minimize the use of unobservable inputs. The hierarchy involves three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect the Corporation's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Corporation deems transfers between levels of the fair value hierarchy to have occurred on the date of the event or change in circumstance that caused the transfer. There were no transfers between levels of the fair value hierarchy in either 2012 or 2011.

The fair values of the Corporation's investment securities designated as available-for-sale at December 31, 2012 and 2011 are set forth in the tables that follow. These values are determined on a recurring basis using matrix pricing (Level 2 inputs). Matrix pricing, which is a mathematical technique widely used in the industry to value debt securities, does not rely exclusively on quoted prices for the specific securities but rather on the relationship of such securities to other benchmark quoted securities.

			Fair Value Measurements at December 31, 2012 Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Available-for-Sale Securities:	(in thousands)
State and municipals	$	332,513	$	-	$	332,513	$	-
Pass-through mortgage securities		84,956		-		84,956		-
Collateralized mortgage obligations		399,965		-		399,965		-
	$	817,434	$	-	$	817,434	$	-

			Fair Value Measurements at December 31, 2011 Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Available-for-Sale Securities:	(in thousands)
U.S. government agencies	$	5,113	$	-	$	5,113	$	-
State and municipals		313,195		-		313,195		-
Pass-through mortgage securities		73,786		-		73,786		-
Collateralized mortgage obligations		501,862		-		501,862		-
	$	893,956	$	-	$	893,956	$	-

Assets measured at fair value on a nonrecurring basis at December 31, 2012 and 2011, are set forth in the table that follows. Real estate appraisals utilized in measuring the fair value of impaired loans may employ a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. In arriving at fair value, the Corporation adjusts the value set forth in the appraisal by deducting costs to sell and a distressed sale adjustment. The adjustments made by the appraisers and the Corporation are deemed to be significant unobservable inputs and therefore result in a Level 3 classification of the inputs used for determining the fair value of impaired loans. Because the Corporation has a small amount of impaired loans measured at fair value, the impact of unobservable inputs on the Corporation's financial statements is not material.

			Fair Value Measurements Using:
			Quoted
			Prices in
			Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Impaired loans - December 31, 2012:
Residential mortgages - closed end	$	1,929	$	-	$	-	$	1,929
Impaired loans - December 31, 2011:
Commercial mortgages - multifamily	$	805	$	-	$	-	$	805
Residential mortgages - closed end		507		-		-		507
	$	1,312	$	-	$	-	$	1,312

The impaired loans set forth in the preceding table had principal balances of $2,248,000 and $1,651,000 at December 31, 2012 and 2011, respectively, and valuation allowances of $319,000 and $339,000, respectively. During the years ended December 31, 2012 and 2011, the Corporation recorded provisions for loan losses of $26,000 and $339,000, respectively, for impaired loans measured at fair value. There was no related provision for loan losses recorded in 2010.

Financial Instruments Not Recorded at Fair Value. Fair value estimates are made at a specific point in time. Such estimates are generally subjective in nature and dependent upon a number of significant assumptions associated with each financial instrument or group of similar financial instruments, including estimates of discount rates, risks associated with specific financial instruments, estimates of future cash flows, and relevant available market information. Changes in assumptions could significantly affect the estimates. In addition, fair value estimates do not reflect the value of anticipated future business, premiums or discounts that could result from offering for sale at one time the Corporation's entire holdings of a particular financial instrument, or the tax consequences of realizing gains or losses on the sale of financial instruments.

The following table sets forth the carrying amounts and estimated fair values of financial instruments that are not recorded at fair value in the Corporation's financial statements at December 31, 2012 and 2011.

	Level of	December 31, 2012				December 31, 2011
	Fair Value	Carrying				Carrying
	Hierarchy	Amount		Fair Value		Amount		Fair Value
		(in thousands)
Financial Assets:
Cash and cash equivalents	Level 1	$	42,191	$	42,191	$	29,495	$	29,495
Held-to-maturity securities	Level 2		43,362		46,153		60,970		64,962
Held-to-maturity securities	Level 3		805		805		1,115		1,115
Loans	Level 3		1,126,831		1,140,731		967,975		989,785
Restricted stock	Level 1		13,104		13,104		12,284		12,284
Accrued interest receivable:
Investment securities	Level 2		4,943		4,943		5,621		5,621
Loans	Level 3		3,332		3,332		3,401		3,401
Financial Liabilities:
Checking deposits	Level 1		528,940		528,940		435,517		435,517
Savings, NOW and money market deposits	Level 1		844,583		844,583		796,009		796,009
Time deposits	Level 2		259,553		268,907		271,342		280,791
Short-term borrowings	Level 1		103,634		103,634		102,227		102,227
Long-term debt	Level 2		145,000		154,050		207,500		223,731
Accrued interest payable:
Checking, savings, NOW and money market deposits	Level 1		740		740		507		507
Time deposits	Level 2		3,828		3,828		2,902		2,902
Short-term borrowings	Level 1		1		1		2		2
Long-term debt	Level 2		379		379		787		787

The following methods and assumptions are used by the Corporation in measuring the fair value of financial instruments disclosed in the preceding table.

Cash and cash equivalents. The recorded book value of cash and cash equivalents is their fair value.

Investment securities. Fair values are based on quoted prices for similar assets in active markets or derived principally from observable market data.

Loans. The total loan portfolio is divided into three segments: (1) residential mortgages; (2) commercial mortgages and commercial loans; and (3) and consumer loans. Each segment is further divided into pools of loans with similar financial characteristics (i.e. product type, fixed versus variable rate, time to rate reset, length of term, conforming versus nonconforming). Cash flows for each pool, including estimated prepayments if applicable, are discounted utilizing market or internal benchmarks which management believes are reflective of current market rates for similar loan products. The discounted value of the cash flows is reduced by the related allowance for loan losses to arrive at an estimate of fair value.

Restricted stock. The recorded book value of Federal Home Loan Bank stock and Federal Reserve Bank stock is its fair value because the stock is redeemable at cost.

Deposit liabilities. The fair value of deposits with no stated maturity, such as checking deposits, money market deposits, NOW accounts and savings deposits, is equal to their recorded book value. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate at which the Bank could currently replace these deposits with wholesale borrowings from the Federal Home Loan Bank.

Borrowed funds. For short-term borrowings maturing within ninety days, the recorded book value is a reasonable estimate of fair value. The fair value of long-term debt is based on the discounted value of contractual cash flows. The discount rate is equivalent to the rate at which the Bank could currently replace these borrowings with wholesale borrowings from the Federal Home Loan Bank.

Accrued interest receivable and payable. For these short-term instruments, the recorded book value is a reasonable estimate of fair value.

Off-balance-sheet Items. The fair value of off-balance sheet items is not considered to be material.