Note 2 — Investment Securities

The amortized cost, estimated fair value and gross unrealized gains and losses of the Company's investment securities available for sale and held to maturity at December 31, 2012 and 2011 were: (in thousands)

	December 31, 2012									December 31, 2011
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
Available for sale:
U.S. Treasury securities	$	500	$	-	$	-		$	500	$	-	$	-	$	-		$	-
U.S. government agency securities		65,085		70		(77	)		65,078		-		-		-			-
Obligations of states and political subdivisions		155,121		13,314		-			168,435		156,663		15,329		-			171,992
Collateralized mortgage obligations		87,624		2,148		(80	)		89,692		122,155		5,768		(1,153	)		126,770
Mortgage-backed securities		61,750		766		(66	)		62,450		391		51		-			442
Corporate bonds		15,701		497		-			16,198		-		-		-			-
Balance at end of period		385,781		16,795		(223	)		402,353		279,209		21,148		(1,153	)		299,204
Held to maturity:
Obligations of states and political subdivisions		8,035		826		-			8,861		9,315		846		-			10,161
Total investment securities	$	393,816	$	17,621	$	(223	)	$	411,214	$	288,524	$	21,994	$	(1,153	)	$	309,365

The amortized cost, contractual maturities and approximate fair value of the Company's investment securities at December 31, 2012 (in thousands) are presented in the table below. CMOs and MBS assume maturity dates pursuant to average lives.


	December 31, 2012
	Amortized		Fair
	Cost		Value
Securities available for sale:
Due in one year or less	$	68,312	$	69,887
Due from one to five years		111,534		118,665
Due from five to ten years		178,693		186,461
Due after ten years		27,242		27,340
Total securities available for sale		385,781		402,353
Securities held to maturity:
Due in one year or less		1,544		1,556
Due from one to five years		6,013		6,771
Due from five to ten years		478		534
Total securities held to maturity		8,035		8,861
Total investment securities	$	393,816	$	411,214

As a member of the Federal Reserve system, the Bank owns FRB stock with a book value of approximately $1 million at December 31, 2012. The stock has no maturity and there is no public market for the investment.

As a member of FHLB, the Bank owns 15,851 shares of FHLB stock with a book value of approximately $2 million at December 31, 2012. The stock has no maturity and there is no public market for the investment. The stock continues to pay dividends and has not placed restrictions on redemptions, and as such, was not deemed impaired as of December 31, 2012.

At December 31, 2012 and 2011, investment securities carried at approximately $286 million were pledged to secure trust deposits and public funds on deposit and were pledged at the FHLB for borrowing capacity.

The following table presents detail concerning proceeds from sales of securities available for sale and the associated realized securities gains and losses during the years indicated: (in thousands)

	2012			2011		2010
Proceeds	$	7,457		$	44,142	$	12,500
Gross realized gains	$	-		$	1,701	$	391
Gross realized losses		217			53		16
Net (losses) gains	$	(217	)	$	1,648	$	375

The table below indicates the length of time individual securities, both held to maturity and available for sale, have been held in a continuous unrealized loss position at the date indicated: (in thousands)

			Less than 12 months				12 months or longer				Total
As of December 31, 2012	Number of				Unrealized				Unrealized				Unrealized
Type of securities	Securities		Fair value		Losses		Fair value		Losses		Fair value		Losses
U.S. government agency securities		6	$	28,958	$	77	$	-	$	-	$	28,958	$	77
Collateralized mortgage obligations		2		7,878		80		-		-		7,878		80
Mortgage-backed securities		4		14,098		66		-		-		14,098		66
Total		12	$	50,934	$	223	$	-	$	-	$	50,934	$	223

			Less than 12 months				12 months or longer				Total
As of December 31, 2011	Number of				Unrealized				Unrealized				Unrealized
Type of securities	Securities		Fair value		Losses		Fair value		Losses		Fair value		Losses
Collateralized mortgage obligations		2	$	-	$	-	$	7,994	$	1,153	$	7,994	$	1,153
Total		2	$	-	$	-	$	7,994	$	1,153	$	7,994	$	1,153

Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. All of the Company's investment securities classified as available-for-sale or held-to-maturity are evaluated for OTTI under ASC 320, "Accounting for Certain Investments in Debt and Equity Securities." Upon review of the considerations mentioned here for the year ended December 31, 2012, no OTTI was deemed to be warranted.

In determining OTTI under the ASC 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on information available to management at a point in time. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When an OTTI occurs under the model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI is recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable tax benefit. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

During the third quarter of 2012, the Company sold two private label CMOs that had been in a continuous loss position for twelve months or longer as part of management's efforts to reduce overall balance sheet risk. These securities had previously been written down by $1.1 million in the fourth quarter of 2011 due to other than temporary impairment evident at that time. The Company owns no other private label CMOs.

The following table summarizes the two non-agency, private label CMOs owned by the Company at December 31, 2011, by year of vintage with OTTI, credit ratings and related credit losses recognized in earnings. Management determined the estimated fair values for each security based on discounted cash flow analyses using the Intex Desktop Valuation model. Management explicitly calculates the credit component utilizing conditional default and loss severity vectors with the Intex model. Management relies on ASC paragraph 820-10-55-5 to provide guidance on the discount rates to be used when a market is not active. According to the standard, the discount rate should take into account all of the following factors:

·	The time value of money (risk-free rate)

·	Price for bearing the uncertainty in the cash flows (risk premium)

·	Other case-specific factors that would be considered by market participants, including a liquidity adjustment.

Weighted average key assumptions utilized in the valuations for December 31, 2011 were as follows:

·	Discount Rate – 11%

·	Voluntary Prepayments – 16.2%

·	Conditional Default Rates – 16.2% for the first 24 months, then trending downward in a linear fashion to 9.3% for the following 12 months, then to zero through approximately 17 years.

·	Loss Severity – 55.5% trending downward to terminal loss severities of 23%, in a linear fashion, at 2.5% per year.


							Total OTTI
	Year of		Total		Total		Related to
	Vintage		Fair		Amortized		Credit Loss at
(in thousands)	2006		Value		Cost		December 31, 2011
Rating:
Total Non-Agency
CMOs
CCC and Below	$	7,994	$	7,994	$	9,147	$	1,052

Total Non-Agency
CMO's	$	7,994	$	7,994	$	9,147	$	1,052

The Company has no exposure to sovereign debt of other nations.

In 2008, the Company received proceeds in connection with shares redeemed as part of the Visa, Inc. initial public offering. The Bank was a member of the former Visa, Inc. payments organization and was issued shares when Visa, Inc. was organized. Approximately 39% of those shares were redeemed in connection with the public offering. The remaining shares are restricted because of unsettled litigation pending against Visa, Inc. At its discretion, Visa, Inc. may redeem additional shares in order to resolve pending litigation. The restriction expires upon resolution of the pending litigation. Accordingly, the Company has recorded these shares at zero in the accompanying statement of condition. Upon expiration of the restriction, the Company expects to record the fair value of the remaining shares.