3. Investment Securities

At September 30, 2011, the investment portfolio included approximately $33.9 million of GNMA collateralized mortgage obligations (“CMOs”) backed by commercial mortgages, compared with approximately $3.1 million at December 31, 2010. As a result of the increase in this type of investment, the CMO category has been subdivided into residential and commercial as of September 30, 2011 and December 31, 2010. With the exception of three private-label CMOs with a combined balance remaining of $148,000 at September 30, 2011, all of the Company's CMOs are government-sponsored enterprise (“GSE”) securities.

The portfolio of securities consisted of the following (in thousands):

	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
U.S. Government sponsored enterprises	$	81,133	$	843	$	-	$	81,976
Obligations of state and political subdivisions		91,987		5,984		-		97,971
GSE mortgage-backed securities		75,063		4,456		-		79,519
Collateralized mortgage obligations: residential		39,209		711		5		39,915
Collateralized mortgage obligations: commercial		25,662		693		-		26,355
	$	313,054	$	12,687	$	5	$	325,736

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:
U.S. Government sponsored enterprises	$	116,560	$	1,138	$	-	$	117,698
Obligations of state and political subdivisions		105,376		3,593		117		108,852
GSE mortgage-backed securities		10,642		830		-		11,472
Collateralized mortgage obligations: residential		21,849		882		43		22,688
Collateralized mortgage obligations: commercial		3,045		54		-		3,099
	$	257,472	$	6,497	$	160	$	263,809

	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:
Obligations of state and political subdivisions	$	340	$	3	$	-	$	343
GSE mortgage-backed securities		35,821		375		-		36,196
Collateralized mortgage obligations: commercial		7,575		-		-		7,575
	$	43,736	$	378	$	-	$	44,114

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:
Obligations of state and political subdivisions	$	1,588	$	20	$	-	$	1,608

The amortized cost and fair value of debt securities at September 30, 2011 by contractual maturity are shown in the following table (in thousands) with the exception of mortgage-backed securities and collateralized mortgage obligations. Expected maturities may differ from contractual maturities for mortgage-backed securities and collateralized mortgage obligations because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
Available-for-sale:
Due in one year or less	$	56,427	$	56,892
Due after one year through five years		73,917		76,940
Due after five years through ten years		36,150		39,132
Due after ten years		6,626		6,983
Mortgage-backed securities and collateralized mortgage obligations:
Residential		114,272		119,434
Commercial		25,662		26,355
	$	313,054	$	325,736

	Amortized Cost		Fair Value
Held-to-maturity:
Due in one year or less	$	140	$	142
Due after one year through five years		200		201
Mortgage-backed securities and collateralized mortgage obligations:
Residential		35,821		36,196
Commercial		7,575		7,575
	$	43,736	$	44,114

Details concerning investment securities with unrealized losses are as follows (in thousands):

	September 30, 2011
	Securities with losses under 12 months				Securities with losses over 12 months				Total
Available-for-sale:	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Collateralized mortgage obligations: residential	$	-	$	-	$	148	$	5	$	148	$	5
	$	-	$	-	$	148	$	5	$	148	$	5

	December 31, 2010
	Securities with losses under 12 months				Securities with losses over 12 months				Total
Available-for-sale:	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Obligations of state and political subdivisions	$	6,919	$	117	$	-	$	-	$	6,919	$	117
Collateralized mortgage obligations: residential		4,689		36		227		7		4,916		43
	$	11,608	$	153	$	227	$	7	$	11,835	$	160

Management evaluates each quarter whether unrealized losses on securities represent impairment that is other than temporary. For debt securities, the Company considers its intent to sell the securities or if it is more likely than not the Company will be required to sell the securities. If such impairment is identified, based upon the intent to sell or the more likely than not threshold, the carrying amount of the security is reduced to fair value with a charge to earnings. Upon the result of the aforementioned review, management then reviews for potential other than temporary impairment based upon other qualitative factors. In making this evaluation, management considers changes in market rates relative to those available when the security was acquired, changes in market expectations about the timing of cash flows from securities that can be prepaid, performance of the debt security, and changes in the market's perception of the issuer's financial health and the security's credit quality. If determined that a debt security has incurred other than temporary impairment, then the amount of the credit related impairment is determined. If a credit loss is evident, the amount of the credit loss is charged to earnings and the non-credit related impairment is recognized through other comprehensive income.

The unrealized losses on debt securities at September 30, 2011 resulted from changing market interest rates over the yields available at the time the underlying securities were purchased. Two of the 22 collateralized mortgage obligations contained unrealized losses at September 30, 2011. Management identified no impairment related to credit quality. At September 30, 2011, management had the intent and ability to hold impaired securities and no impairment was evaluated as other than temporary. As a result, no other than temporary impairment losses were recognized during the three months ended September 30, 2011.

During the nine months ended September 30, 2011, the Company sold five securities classified as available-for-sale and one security classified as held-to-maturity. Of the available-for-sale securities, four securities were sold with gains totaling $94,000 and one security was sold at a loss of $4,000 for a net gain of $90,000. The securities were sold as a result of an external review performed on the municipal securities portfolio. The decision to sell the one held to maturity security, which was sold at a gain of $9,000, was based on the inability to obtain current financial information on the municipality. The sale was consistent with action taken on other securities with a similar deficiency, as identified in the external review. The Company did not sell any investment securities during the nine month period ending September 30, 2010.

Securities with an aggregate carrying value of approximately $148.0 million and $150.6 million at September 30, 2011 and December 31, 2010, respectively, were pledged to secure public funds on deposit and for other purposes required or permitted by law.