SECURITIES

Securities available for sale at June 30, 2011 and December 31, 2010 were as follows:


	June 30, 2011									December 31, 2010
	Amortized Cost		Unrealized					Fair Value		Amortized Cost		Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value		Amortized Cost		Gains		Losses			Fair Value
U.S. Treasury	$	11,113	$	88	$	—		$	11,201	$	8,139	$	66	$	—		$	8,205
U.S. Gov't sponsored entities		88,953		2,950		(54	)		91,849		104,328		2,016		(403	)		105,941
State & political subdivisions		118,912		3,324		(302	)		121,934		117,928		1,011		(2,528	)		116,411
Residential mortgage & asset backed		264,114		6,403		(187	)		270,330		221,304		2,364		(1,249	)		222,419
Commercial mortgage & asset backed		2,082		—		(11	)		2,071		—		—		—			—
Corporate notes & bonds		14,348		—		(2,036	)		12,312		14,347		—		(3,596	)		10,751
Pooled trust preferred		1,792		—		(430	)		1,362		2,190		12		(910	)		1,292
Pooled SBA		34,763		665		(37	)		35,391		33,788		266		(92	)		33,962
Other securities		1,670		44		—			1,714		1,670		26		—			1,696

Total	$	537,747	$	13,474	$	(3,057	)	$	548,164	$	503,694	$	5,761	$	(8,778	)	$	500,677

At June 30, 2011, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders' equity.

Trading securities accounted for under the fair value option at June 30, 2011 and December 31, 2010 are as follows:


	June 30, 2011		December 31, 2010
Corporate equity securities	$	1,022	$	952
International mutual funds		346		430
U.S. Government sponsored entities		176		147
Large cap growth mutual funds		166		139
Certificates of deposit		156		208
Money market mutual funds		151		75
Real estate investment trust mutual funds		127		—
Large cap value mutual funds		113		247
Corporate notes and bonds		99		96
Small cap mutual funds		43		29
Mid cap mutual funds		42		28

Total	$	2,441	$	2,351

Securities with unrealized losses at June 30, 2011 and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands):


June 30, 2011	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury	$	—	$	—		$	—	$	—		$	—	$	—
U.S. Gov't sponsored entities		5,769		(54	)		—		—			5,769		(54	)
State & political subdivisions		17,749		(292	)		1,554		(10	)		19,303		(302	)
Residential mortgage & asset backed		30,548		(172	)		2,689		(15	)		33,237		(187	)
Commercial mortgage & asset backed		2,071		(11	)		—		—			2,071		(11	)
Corporate notes & bonds		—		—			12,312		(2,036	)		12,312		(2,036	)
Pooled trust preferred		982		(10	)		380		(420	)		1,362		(430	)
Pooled SBA		9,290		(37	)		—		—			9,290		(37	)
Other securities		—		—			—		—			—		—

	$	66,409	$	(576	)	$	16,935	$	(2,481	)	$	83,344	$	(3,057	)


	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
December 31, 2010
U.S. Treasury	$	—	$	—		$	—	$	—		$	—	$	—
U.S. Gov't sponsored entities		11,077		(403	)		—		—			11,077		(403	)
State & political subdivisions		61,312		(2,440	)		3,904		(88	)		65,216		(2,528	)
Residential mortgage & asset backed		69,576		(1,228	)		5,770		(21	)		75,346		(1,249	)
Corporate notes & bonds		992		(3	)		9,770		(3,593	)		10,762		(3,596	)
Pooled trust preferred		—		—			288		(910	)		288		(910	)
Pooled SBA		12,147		(92	)		—		—			12,147		(92	)
Other securities		—		—			—		—			—		—

	$	155,104	$	(4,166	)	$	19,732	$	(4,612	)	$	174,836	$	(8,778	)

The Corporation evaluates securities for other-than-temporary impairment on a quarterly basis, or more frequently when economic or market conditions warrant such an evaluation.

At June 30, 2011, management evaluated the structured pooled trust preferred securities for other-than-temporary impairment by estimating the cash flows expected to be received from each security within the collateral pool, taking into account future estimated levels of deferrals and defaults by the underlying issuers, and discounting those cash flows at the appropriate accounting yield. Management also assumed that all issuers in deferral will default prior to their next payment date. Trust preferred collateral is deeply subordinated within issuers' capital structures, so large recoveries are unlikely. Accordingly, management assumed 10% recoveries on bank collateral and none on collateral issued by other companies. Due to the current crisis in the U.S. economy, management also added a baseline default rate of 2% annually for the next two years to our default projections for specific issuers. This percentage represents the peak, post-war bank default rate that occurred at the height of the savings and loan crisis, which we believe is an accurate proxy for the current environment. Management expects that credit markets will begin to normalize and that banks with the financial strength to survive will default at a .36% average annual rate, which represents Moody's idealized default probability for BBB corporate credits, and is in line with historical bank failure rates. In addition, management expects prepayments to occur at a rate of approximately 5% over a five year period, with the exception of certain large institutions that are expected to begin calling their collateral in 2011 and 2012 as a result of the elimination of the Tier I capital treatment of trust preferred securities for institutions with greater than $15 billion in assets beginning in 2013.

Using this methodology, five of the Corporation's structured pooled trust preferred securities are deemed to be other-than-temporarily impaired. An impairment loss for the entire cost basis of two of these securities was recognized in earnings prior to 2010, and impairment losses for the remaining securities were recognized in earnings during 2011 as disclosed in the table below. The Corporation separated the other-than-temporary impairment related to these structured pooled trust preferred securities into (a) the amount of the total impairment related to credit loss, which is recognized in the income statement, and (b) the amount of the total impairment related to all other factors, which is recognized in other comprehensive income. The Corporation measured the credit loss component of other-than-temporary impairment based on the difference between the cost basis and the present value of cash flows expected to be collected.

The following table provides detailed information related to the Corporation's structured pooled trust preferred securities as of and for the three months ended June 30, 2011:


	Adjusted Amortized Cost		Unrealized Gain (Loss)			Fair Value		Credit Losses Realized in Earnings Three Months Ended June 30, 2011		Credit Losses Realized in Earnings Six Months Ended June 30, 2011
ALESCO Preferred Funding V, Ltd.	$	800	$	(420	)	$	380	$	—	$	—
ALESCO Preferred Funding XII, Ltd.		—		—			—		—		280
ALESCO Preferred Funding XVII, Ltd.		—		—			—		—		—
Preferred Term Securities XVI, Ltd.		—		—			—		—		118
US Capital Funding VI, Ltd.		—		—			—		—		—
MM Community Funding II, Ltd.		992		(10	)		982		—		—

Total	$	1,792	$	(430	)	$	1,362	$	—	$	398

A roll-forward of the other-than-temporary impairment amount related to credit losses for the three months ended June 30, 2011 is as follows:


Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, beginning of period	$	4,054
Additional credit loss for which other-than-temporary impairment was not previously recognized		—
Additional credit loss for which other-than-temporary impairment was previously recognized		—

Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, end of period	$	4,054

A roll-forward of the other-than-temporary impairment amount related to credit losses for the six months ended June 30, 2011 is as follows:


Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, beginning of period	$	3,656
Additional credit loss for which other-than-temporary impairment was not previously recognized		—
Additional credit loss for which other-than-temporary impairment was previously recognized		398

Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, end of period	$	4,054

A roll-forward of the other-than-temporary impairment amount related to credit losses for the three months ended June 30, 2010 is as follows:


Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, beginning of period	$	2,199
Additional credit loss for which other-than-temporary impairment was not previously recognized		318

Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, end of period	$	2,517

A roll-forward of the other-than-temporary impairment amount related to credit losses for the six months ended June 30, 2010 is as follows:


Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, beginning of period	$	1,415
Additional credit loss for which other-than-temporary impairment was not previously recognized		1,102

Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, end of period	$	2,517

At June 30, 2011, approximately 14% of the total unrealized losses relate to structured pooled trust preferred securities, primarily from issuers in the financial services industry, which are not currently trading in an active, open market with readily observable prices. As a result, these securities were classified within Level 3 of the valuation hierarchy. The fair values of these securities have been calculated using a discounted cash flow model and market liquidity premium. With the current market conditions, the assumptions used to determine the fair value of Level 3 securities has greater subjectivity due to the lack of observable market transactions. The fair values of these securities have declined due to the fact that subsequent offerings of similar securities pay a higher market rate of return. This higher rate of return reflects the increased credit and liquidity risks in the marketplace. Except as described above, based on management's evaluation of the structured pooled trust preferred securities, the present value of the projected cash flows is sufficient for full repayment of the amortized cost of the securities and, therefore, it is believed that the decline in fair value is temporary due to current market conditions. However, without recovery of these securities, other-than-temporary impairments may occur in future periods.

For all of the securities that comprise corporate notes and bonds and states and political subdivisions, management monitors publicly available financial information such as filings with the Securities and Exchange Commission in order to evaluate the securities for other-than-temporary impairment. For financial institution issuers, management also monitors information from quarterly "call" report filings that are used to generate Uniform Bank Performance Reports. When reviewing this information, management considers the financial condition and near term prospects of the issuer and whether downgrades by bond rating agencies have occurred. Management also considers the length of time and extent to which fair value has been less than cost and the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

As of June 30, 2011 and December 31, 2010, management concluded that the previously mentioned securities were not other-than-temporarily impaired for the following reasons:

•

There is no indication of any significant deterioration of the creditworthiness of the institutions that issued the securities.

•

The unrealized losses are predominantly attributable to liquidity disruptions within the credit markets and the generally stressed condition of the financial services industry.

•

All contractual interest payments on the securities have been received as scheduled, and no information has come to management's attention through the processes previously described which would lead to a conclusion that future contractual payments will not be received timely.

The Corporation does not intend to sell and it is not more likely than not that it will be required to sell the securities in an unrealized loss position before recovery of its amortized cost basis.

Information pertaining to security sales is as follows:


	Proceeds		Gross Gains		Gross Losses
Three months ended June 30, 2011	$	—	$	—	$	—
Six months ended June 30, 2011		23,610		146		(72	)
Three months ended June 30, 2010		11,095		141		( -	)
Six months ended June 30, 2010		38,065		587		(14	)

The following is a schedule of the contractual maturity of securities available for sale, excluding equity securities, at June 30, 2011 and December 31, 2010:


	June 30, 2011				December 31, 2010
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
1 year or less	$	18,580	$	18,665	$	30,210	$	30,184
1 year – 5 years		61,681		63,109		54,476		55,030
5 years – 10 years		96,905		100,146		105,057		105,145
After 10 years		92,715		92,129		90,977		86,203

		269,881		274,049		280,720		276,562
Residential mortgage & asset backed securities		264,114		270,330		221,304		222,419
Commercial mortgage & asset backed securities		2,082		2,071		—		—

Total debt securities	$	536,077	$	546,450	$	502,024	$	498,981

Mortgage and asset backed securities are not due at a single date; periodic payments are received based on the payment patterns of the underlying collateral.

On June 30, 2011 and December 31, 2010, securities carried at $170,202 and $127,364, respectively, were pledged to secure public deposits and for other purposes as provided by law.