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 September 30, 2012
U.S. Government-sponsored agency securities	$	4,610	$	172			$	4,782
State and municipal		150,281		10,761	$	25		161,017
U.S. Government-sponsored mortgage-backed securities		370,800		13,142		30		383,912
Corporate obligations		6,008				5,806		202
Equity securities		1,706						1,706
Total available for sale		533,405		24,075		5,861		551,619
Held to maturity at September 30, 2012
State and municipal		116,966		5,698				122,664
U.S. Government-sponsored mortgage-backed securities		260,131		13,422				273,553
Total held to maturity		377,097		19,120				396,217
Total Investment Securities	$	910,502	$	43,195	$	5,861	$	947,836

	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 September 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 September 30, 2012:
Due in one year or less	$	4,802	$	4,846	$	2,425	$	2,431
Due after one through five years		14,559		15,277		2,208		2,233
Due after five through ten years		48,134		51,156		55,679		57,975
Due after ten years		93,404		94,722		56,654		60,025
		160,899		166,001		116,966		122,664
U.S. Government-sponsored mortgage-backed securities		370,800		383,912		260,131		273,553
Equity securities		1,706		1,706
Total Investment Securities	$	533,405	$	551,619	$	377,097	$	396,217

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $348,748,000 at September 30, 2012, and $299,478,000 at December 31, 2011.

The book value of securities sold under agreements to repurchase amounted to $148,486,000 at September 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 nine months ended September 30, 2012 and 2011 are shown below.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Sales and Redemptions of Available for Sale Securities:
Gross gains	$	843	$	861	$	2,134	$	2,149
Gross losses
Other-than-temporary impairment losses							$	400

The Corporation’s management has evaluated all securities with unrealized losses for OTTI as of September 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 $6.0 million and a fair value of $171,000, 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 OTTI 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 September 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 September 30, 2012
State and municipal	$	3,868	$	(25	)						$	3,868	$	(25	)
U.S. Government-sponsored mortgage-backed securities		6,463		(30	)							6,463		(30	)
Corporate obligations						$	171	$	(5,806	)		171		(5,806	)
Total Temporarily Impaired Investment Securities	$	10,331	$	(55	)	$	171	$	(5,806	)	$	10,502	$	(5,861	)

	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.

	September 30, 2012			December 31, 2011
Investments reported at less than historical cost:
Historical cost	$	16,364		$	11,925
Fair value	$	10,502		$	6,339
Percent of the Corporation's available for sale and held to maturity portfolio		1.1	%		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 September 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 September 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 September 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, September 30	$	11,355	$	11,355