Note 5: Securities Available For Sale

The following tables summarize the securities available for sale portfolio as of September 30, 2012 and December 31, 2011:


September 30, 2012				Gross		Gross
		Amortized		Unrealized		Unrealized		Estimated
Available for Sale:		Cost		Gains		Losses		Fair Value

Obligations of US Government sponsored enterprises	$	1,000	$	7	$	---	$	1,007
US Treasury securities		101		1		--		102
Mortgage-backed securities:
US Government-sponsored enterprises		231,938		10,237		200		241,975
US Government agency		86,026		3,077		150		88,953
Private label		8,910		487		557		8,840
Obligations of states and political subdivisions thereof		77,306		4,075		432		80,949
Total	$	405,281	$	17,884	$	1,339	$	421,826


December 31, 2011				Gross		Gross
		Amortized		Unrealized		Unrealized		Estimated
Available for Sale:		Cost		Gains		Losses		Fair Value

Obligations of US Government sponsored enterprises	$	1,000	$	23	$	---	$	1,023
Mortgage-backed securities:
US Government-sponsored enterprises		225,962		9,414		127		235,249
US Government agency		72,585		2,932		23		75,494
Private label		13,504		201		1,492		12,213
Obligations of states and political subdivisions thereof		58,160		2,199		2,458		57,901
Total	$	371,211	$	14,769	$	4,100	$	381,880

Securities Maturity Distribution: The following table summarizes the maturity distribution of the amortized cost and estimated fair value of securities available for sale as of September 30, 2012. Actual maturities may differ from the final maturities noted below because issuers may have the right to prepay or call certain securities. In the case of mortgage-backed securities, actual maturities may also differ from expected maturities due to the amortizing nature of the underlying mortgage collateral, and the fact that borrowers have the right to prepay.


		Amortized		Estimated
Securities Available for Sale		Cost		Fair Value

Due one year or less	$	1,073	$	1,081
Due after one year through five years		1,706		1,667
Due after five years through ten years		25,052		26,209
Due after ten years		377,450		392,869
	$	405,281	$	421,826

Securities Impairment: As a part of the Company's ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired ("OTTI").

For the three and nine months ended September 30, 2012, the Company recorded total OTTI losses of $173 and $1,007, respectively, in the statement of income (before taxes), related to thirteen, available for sale, private-label mortgage-backed securities ("MBS"), all but one of which the Company had previously determined were other-than-temporarily impaired. Of the $1,007 in total year-to-date OTTI losses, $781 (before taxes) represented estimated credit losses on the collateral underlying the securities, while $226 (before taxes) represented unrealized losses for the same securities resulting from factors other than credit. The $781 in estimated credit losses were recorded in earnings (before taxes), with the $226 non-credit portion of the unrealized losses recorded within accumulated other comprehensive income. The

additional credit losses principally reflected an increase in the future loss severity and constant default rate estimates resulting from depressed and still declining real estate markets, extended foreclosure and collateral liquidation timelines, and depressed economic conditions that affected the expected performance of the mortgage loans underlying these securities.

The OTTI losses recognized in earnings during the three and nine months ended September 30, 2012 represented management's best estimate of credit losses inherent in the securities based on discounted, bond-specific future cash flow projections using assumptions about cash flows associated with the pools of mortgage loans underlying each security. In estimating those cash flows the Company takes a variety of factors into consideration including, but not limited to, loan level credit characteristics, current delinquency and non-performing loan rates, current levels of subordination and credit support, recent default rates and future constant default rate estimates, original and current loan to collateral value ratios, recent collateral loss severities and future collateral loss severity estimates, recent and historical conditional prepayment rates and future conditional prepayment rate assumptions, and other estimates of future collateral performance.

Despite some rising levels of delinquencies, defaults and losses in the underlying residential mortgage loan collateral, given credit enhancements resulting from the structures of the individual securities, the Company currently expects that as of September 30, 2012 it will recover the amortized cost basis of its private label mortgage-backed securities as depicted in the table below and has therefore concluded that such securities were not other-than-temporarily impaired as of that date. Nevertheless, given recent market conditions, it is possible that adverse changes in repayment performance and fair value could occur in future periods that could impact the Company's current best estimates.

The following table displays the beginning balance of OTTI related to historical credit losses on debt securities held by the Company at the beginning of the current reporting period, as well as changes in credit losses recognized in pre-tax earnings for the three and nine months ending September 30, 2012, and 2011.


		2012		2011

Estimated credit losses as of June 30,	$	4,958	$	4,527
Additions for credit losses for securities on which
OTTI has been previously recognized		101		503
Additions for credit losses for securities on which
OTTI has not been previously recognized	-	--		69
Reductions for securities paid off during the period	-	--	-	--
Estimated credit losses as of September 30,	$	5,059	$	5,099



Estimated credit losses as of prior year-end,	$	4,697	$	3,373
Additions for credit losses for securities on which
OTTI has been previously recognized		675		1,313
Additions for credit losses for securities on which
OTTI has not been previously recognized		106		413
Reductions for securities paid off during the period		419	-	--
Estimated credit losses as of September 30,	$	5,059	$	5,099

Upon initial impairment of a security, total OTTI losses represent the excess of the amortized cost over the fair value. For subsequent impairments of the same security, total OTTI losses represent additional credit losses and or declines in fair value subsequent to the previously recorded OTTI losses, if applicable. Unrealized OTTI losses recognized in accumulated other comprehensive income ("OCI") represent the non-credit component of OTTI losses on debt securities. Net impairment losses recognized in earnings represent the credit component of OTTI losses on debt securities.

As of September 30, 2012, the Company held fifteen private-label MBS (debt securities) with a total amortized cost (i.e. carrying value) of $4,046 for which OTTI losses have previously been recognized in pre-tax earnings (dating back to the fourth quarter of 2008). For eleven of these securities, the Company previously recognized credit losses in excess of the unrealized losses in accumulated OCI, creating an unrealized gain of $296, net of tax, as included in accumulated OCI as of September 30, 2012. For the remaining four securities, the total OTTI losses included in accumulated OCI amounted to $144, net of tax, as of September 30, 2012. As of September 30, 2012, the total net unrealized gains included in accumulated OCI for securities held where OTTI has been historically recognized in pre-tax earnings amounted to $152, net of tax, compared with net unrealized losses of $423, net of tax, at December 31, 2011.

As of September 30, 2012, based on a review of each of the remaining securities in the securities portfolio, the Company concluded that it expects to recover its amortized cost basis for such securities. This conclusion was based on the issuers' continued satisfaction of the securities obligations in accordance with their contractual terms and the expectation that they will continue to do so through the maturity of the security, the expectation that the Company will receive the entire amount of future contractual cash flows, as well as the evaluation of the fundamentals of the issuers' financial condition and other objective evidence. Accordingly, the Company concluded that the declines in the values of those securities were temporary and that any additional other-than-temporary impairment charges were not appropriate at September 30, 2012. As of that date, the Company did not intend to sell nor anticipated that it would more-likely-than-not be required to sell any of its impaired securities, that is, where fair value is less than the cost basis of the security.

The following table summarizes the fair value of securities with continuous unrealized losses for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or longer as of September 30, 2012 and December 31, 2011. All securities referenced are debt securities. At September 30, 2012, and December 31, 2011, the Company did not hold any common stock or other equity securities in its securities portfolio.


	Less than 12 months					12 months or longer					Total
		Estimated					Estimated					Estimated
		Fair	Number of		Unrealized		Fair	Number of		Unrealized		Fair	Number of		Unrealized
September 30, 2012		Value	Investments		Losses		Value	Investments		Losses		Value	Investments		Losses
Description of Securities:

Mortgage-backed securities:
US Government-
sponsored enterprises	$	17,306	16	$	200	$	---	---	$	---	$	17,306	16	$	200
US Government agency		8,409	10		150		6	1		---		8,415	11		150
Private label		1,122	3		35		3,717	18		522		4,839	21		557
Obligations of states and
political subdivisions
thereof		6,240	10		85		5,963	23		347		12,203	33		432
Total	$	33,077	39	$	470	$	9,686	42	$	869	$	42,763	81	$	1,339


	Less than 12 months					12 months or longer					Total
		Estimated					Estimated					Estimated
December 31, 2011		Fair	Number of		Unrealized		Fair	Number of		Unrealized		Fair	Number of		Unrealized
		Value	Investments		Losses		Value	Investments		Losses		Value	Investments		Losses
Description of Securities:

Mortgage-backed securities:
US Government-
sponsored enterprises	$	15,870	13	$	127	$	20	1	$	---	$	15,890	14	$	127
US Government agency		9,934	10		22		59	3		1		9,993	13		23
Private label		1,613	8		219		6,807	26		1,273		8,420	34		1,492
Obligations of states and
political subdivisions
thereof		703	4		25		14,770	61		2,433		15,473	65		2,458
Total	$	28,120	35	$	393	$	21,656	91	$	3,707	$	49,776	126	$	4,100

For securities with unrealized losses, the following information was considered in determining that the impairments were not other-than-temporary:

Mortgage-backed securities issued by U.S. Government-sponsored enterprises: As of September 30, 2012, the total unrealized losses on these securities amounted to $200, compared with $127 at December 31, 2011. All of these securities were credit rated "AA+" by the major credit rating agencies. Company management believes these securities have minimal credit risk, as these Government-sponsored enterprises play a vital role in the nation's financial markets.
Management's analysis indicates that the unrealized losses at September 30, 2012 were attributed to changes in current market yields and pricing spreads for similar securities since the date the underlying securities were purchased, and does not consider these securities to be other-than- temporarily impaired at September 30, 2012.
Mortgage-backed securities issued by U.S. Government agencies: As of September 30, 2012, the total unrealized losses on these securities amounted to $150, compared with $23 at December 31, 2011. All of these securities were credit rated "AA+" by the major credit rating agencies.
Management's analysis indicates that these securities bear little or no credit risk because they are backed by the full faith and credit of the United States. The Company attributes the unrealized losses at September 30, 2012 to changes in current market yields and pricing spreads for similar securities since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at September 30, 2012.
Private label mortgage-backed securities: As of September 30, 2012, the total unrealized losses on the Bank's private label mortgage-backed securities amounted to $557, compared with $1,492 at December 31, 2011. The Company attributes the unrealized losses at September 30, 2012 to the current illiquid market for non-agency mortgage-backed securities, a seriously depressed and un- stabilized housing market, significantly elevated levels of home foreclosures, risk-related market pricing discounts for non-agency mortgage-backed securities and credit rating downgrades on certain private label mortgage-backed securities owned by the Company. Based upon the foregoing considerations and the expectation that the Company will receive all of the future contractual cash flows related to amortized cost on these securities, the Company does not consider there to be any additional other-than-temporary impairment with respect to these securities at September 30, 2012.
Obligations of states of the U.S. and political subdivisions thereof: As of September 30, 2012, the total unrealized losses on the Bank's municipal securities amounted to $432, compared with $2,458 at December 31, 2011. The Bank's municipal securities primarily consist of general obligation bonds and to a lesser extent, revenue bonds. General obligation bonds carry less risk, as they are supported by the full faith, credit and taxing authority of the issuing government and in the cases of school districts, are additionally supported by state aid. Revenue bonds are generally backed by municipal revenue streams generated through user fees or lease payments associated with specific municipal projects that have been financed.

Municipal bonds are frequently supported with insurance, which guarantees that in the event the issuer experiences financial problems, the insurer will step in and assume payment of both principal and interest. Historically, insurance support has strengthened an issuer's underlying credit rating to AAA or AA status. Starting in 2008 and continuing through 2012, many of the insurance companies providing municipal bond insurance experienced financial difficulties and, accordingly, were downgraded by at least one of the major credit rating agencies. Consequently, since 2008 a portion of the Bank's municipal bond portfolio was downgraded by at least one of the major credit rating agencies. Notwithstanding the credit rating downgrades, at September 30, 2012, the Bank's municipal bond portfolio did not contain any below investment grade securities as reported by major credit rating agencies. In addition, at September 30, 2012 all municipal bond issuers were current on contractually obligated interest and principal payments.

The Company attributes the unrealized losses at September 30, 2012 to changes in credit ratings on certain securities and resulting changes in prevailing market yields and pricing spreads since the date the underlying securities were purchased. The Company also attributes the unrealized losses to ongoing media attention and market concerns about the prolonged recovery from the national economic recession and the impact it might have on the future financial stability of municipalities throughout the country. Accordingly, the Company does not consider these municipal securities to be other-than-temporarily impaired at September 30, 2012.

At September 30, 2012, the Company had no intent to sell nor believed it is more-likely-than-not that it would be required to sell any of its impaired securities as identified and discussed immediately above, and therefore did not consider these securities to be other-than-temporarily impaired as of that date.

Securities Gains and Losses: The following table summarizes realized gains and losses and other-than-temporary impairment losses on securities available for sale for the three and nine months ended September 30, 2012 and 2011.


		Proceeds						Other
		from Sale of						Than
		Securities						Temporary
		Available		Realized		Realized		Impairment
		for Sale		Gains		Losses		Losses		Net
Three months ended September 30,
2012	$	10,431	$	614	$	17	$	101	$	496
2011	$	17,984	$	993	$	---	$	572	$	421

Nine months ended September 30,
2012	$	34,664	$	1,857	$	23	$	781	$	1,053
2011	$	40,457	$	2,313	$	---	$	1,726	$	587