NOTE 3. Investment Securities

The amortized cost, gross unrealized gains, gross unrealized losses and approximate fair values of the investment securities at the dates indicated were:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at June 30, 2012
U.S. Government-sponsored agency securities	$	4,841	$	92			$	4,933
State and municipal		136,011		9,614	$	28		145,597
U.S. Government-sponsored mortgage-backed securities		371,971		11,644		53		383,562
Corporate obligations		16,947		419		5,737		11,629
Equity securities		1,830						1,830
Total available for sale		531,600		21,769		5,818		547,551
Held to maturity at June 30, 2012
State and municipal		119,222		4,250		1		123,471
U.S. Government-sponsored mortgage-backed securities		277,548		12,228				289,776
Total held to maturity		396,770		16,478		1		413,247
Total Investment Securities	$	928,370	$	38,247	$	5,819	$	960,798

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at December 31, 2011
U.S. Government-sponsored agency securities	$	99	$	18			$	117
State and municipal		136,857		10,496				147,353
U.S. Government-sponsored mortgage-backed securities		358,928		10,086	$	16		368,998
Corporate obligations		5,765				5,572		193
Equity securities		1,830						1,830
Total available for sale		503,479		20,600		5,588		518,491
Held to maturity at December 31, 2011
State and municipal		120,171		3,785				123,956
U.S. Government-sponsored mortgage-backed securities		307,738		10,775				318,513
Total held to maturity		427,909		14,560				442,469
Total Investment Securities	$	931,388	$	35,160	$	5,588	$	960,960

The amortized cost and fair value of available for sale securities and held to maturity securities at June 30, 2012, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturity Distribution at June 30, 2012:
Due in one year or less	$	5,513	$	5,574	$	3,345	$	3,345
Due after one through five years		19,028		19,909		2,953		2,979
Due after five through ten years		29,106		30,906		51,873		53,415
Due after ten years		104,152		105,770		61,051		63,732
	$	157,799	$	162,159	$	119,222	$	123,471

U.S. Government-sponsored mortgage-backed securities		371,971		383,562		277,548		289,776
Equity securities		1,830		1,830
Total Investment Securities	$	531,600	$	547,551	$	396,770	$	413,247

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $363,579,000 at June 30, 2012, and $299,478,000 at December 31, 2011.

The book value of securities sold under agreements to repurchase amounted to $145,705,000 at June 30, 2012, and $129,311,000 at December 31, 2011.

Gross gains and losses on the sales and redemptions of available for sale securities, and other-than-temporary impairment (“OTTI”) losses recognized for the three and six months ended June 30, 2012 and 2011 are shown below.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Sales and Redemptions of Available for Sale Securities:
Gross gains	$	502	$	825	$	1,291	$	1,288
Other-than-temporary impairment losses							$	400

The Corporation’s management has evaluated all securities with unrealized losses for OTTI as of June 30, 2012. The evaluations are based on the nature of the securities, the extent and duration of the loss and the intent and ability of the Corporation to hold these securities either to maturity or through the expected recovery period.

The current unrealized losses are primarily concentrated within trust preferred securities held by the Corporation. Such investments have an amortized cost of $5.9 million and a fair value of $168,000, which is less than 1 percent of the Corporation’s entire investment portfolio. On all but one small pool investment, the Corporation utilized Moody’s to determine their fair value.

In determining the fair value of the trust preferred securities, the Corporation utilizes a third party for portfolio accounting services, including market value input. The Corporation has obtained an understanding of what inputs are being used by the vendor in pricing the portfolio and how the vendor was classifying these securities based upon these inputs. From these discussions, the Corporation’s management is comfortable that the classifications are proper. The Corporation has gained trust in the data for two reasons: (a) independent spot testing of the data is conducted by the Corporation through obtaining market quotes from various brokers on a periodic basis and (b) actual gains or loss resulting from the sale of certain securities has proven the data to be accurate over time. Discount rates used in the cash flow analysis on these variable rate securities were those margins in effect at the inception of the security added to the appropriate three-month LIBOR spot rate obtained from the forward LIBOR curve used to project future principal and interest payments. These spreads ranged from .85 percent to 1.57 percent spread over LIBOR.

The following table shows the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2012, and December 31, 2011:

	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Temporarily Impaired Investment
Securities at June 30, 2012
State and municipal	$	4,545	$	(29	)						$	4,545	$	(29	)
U.S. Government-sponsored mortgage-backed securities		7,817		(53	)							7,817		(53	)
Corporate obligations						$	168	$	(5,737	)		168		(5,737	)
Total Temporarily Impaired Investment Securities	$	12,362	$	(82	)	$	168	$	(5,737	)	$	12,530	$	(5,819	)

	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Temporarily Impaired Investment
Securities at December 31, 2011
State and municipal
U.S. Government-sponsored mortgage-backed securities	$	6,176	$	(16	)						$	6,176	$	(16	)
Corporate obligations						$	163	$	(5,572	)		163		(5,572	)
Total Temporarily Impaired Investment Securities	$	6,176	$	(16	)	$	163	$	(5,572	)	$	6,339	$	(5,588	)

Certain investments in debt and equity securities are reported in the financial statements at an amount less than their historical cost as indicated in the table below.

	June 30, 2012			December 31, 2011
Investments reported at less than historical cost:
Historical cost	$	18,349		$	11,925
Fair value	$	12,530		$	6,339
Percent of the Corporation's available for sale and held to maturity portfolio		1.3	%		0.7	%

Except as discussed below, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the OTTI is identified.

U.S. Government-Sponsored Mortgage-Backed Securities

The unrealized losses on the Corporation’s investment in U.S. Government-sponsored mortgage-backed securities were a result of changes in interest rates. The Corporation expects to recover the amortized cost basis over the term of the securities as the decline in market value is attributable to changes in interest rates and not credit quality. The Corporation does not intend to sell the investment and it is not more likely than not that the Corporation will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity. The Corporation does not consider the investment securities to be other-than-temporarily impaired at June 30, 2012.

State and Municipal

The unrealized losses on the Corporation’s investments in securities of state and political subdivisions were caused by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Corporation does not intend to sell the investment and it is not more likely than not that the Corporation will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity. The Corporation does not consider the investment securities to be other-than-temporarily impaired at June 30, 2012.

Corporate Obligations

The Corporation’s unrealized losses on Corporate Obligations were due to the decline in value related to the pooled trust preferred securities, and is attributable to temporary illiquidity and the financial crisis affecting these markets, coupled with the potential credit loss resulting from the adverse change in expected cash flows. Due to the illiquidity in the market, it is unlikely that the Corporation would be able to recover its investment in these securities if the Corporation sold the securities at this time. Management has analyzed the cash flow characteristics of the securities and this analysis included utilizing the most recent trustee reports and any other relevant market information, including announcements of deferrals or defaults of trust preferred securities. The Corporation compared expected discounted cash flows, based on performance indicators of the underlying assets in the security, to the carrying value of the investment to determine if OTTI existed. The Corporation does not consider the remainder of the investment securities, which are classified as Level 3 inputs in the fair value hierarchy, to be other-than-temporarily impaired at June 30, 2012. The Corporation does not intend to sell the investment, and it is not more likely than not that the Corporation will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity.

Credit Losses Recognized on Investments

Certain debt securities have experienced fair value deterioration due to credit losses and other market factors. The following table provides information about debt securities for which only a credit loss was recognized in income and other losses were recorded in other comprehensive income.

	Accumulated Credit Losses in 2012		Accumulated Credit Losses in 2011
Credit losses on debt securities held:
Balance, January 1	$	11,355	$	10,955
Additions related to other-than-temporary losses not previously recognized				400
Balance, June 30	$	11,355	$	11,355