– INVESTMENTS

The amortized cost and aggregate fair values of investments in securities are as follows:



	(Dollars in thousands)
	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale securities:
Corporate debt securities	$	19,949	$	1,261	$	167	$	21,043
Mortgage backed securities	7,921		341		35		8,227
Private label mortgage backed securities	10,533		142		75		10,600
Obligations of states and political subdivisions	18,543		947		92		19,398
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	12,308		547		2		12,853
Total fixed maturities	69,254		3,238		371		72,121
Equity securities	4,930		3,517		656		7,791

Total	$	74,184	$	6,755	$	1,027	$	79,912
Held-to-maturity securities:
Mortgage backed securities	$	2,176	$	153	$	—	$	2,329
Private label mortgage backed securities	67		1		—		68
Obligations of states and political subdivisions	993		45		—		1,038
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	270		21		—		291

Total	$	3,506	$	220	$	—	$	3,726



	(Dollars in thousands)
	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale securities:
Corporate debt securities	$	22,405	$	1,666	$	119	$	23,952
Mortgage backed securities	7,053		326		104		7,275
Private label mortgage backed securities	13,313		200		407		13,106
Obligations of states and political subdivisions	18,902		252		739		18,415
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	15,446		446		172		15,720
Total fixed maturities	77,119		2,890		1,541		78,468
Equity securities	5,478		4,014		445		9,047

Total	$	82,597	$	6,904	$	1,986	$	87,515
Held-to-maturity securities:
Mortgage backed securities	$	2,669	$	126	$	1	$	2,794
Private label mortgage backed securities	118		4		—		122
Obligations of states and political subdivisions	1,837		48		12		1,873
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	335		20		—		355

Total	$	4,959	$	198	$	13	$	5,144

THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)

The amortized cost and aggregate fair value of debt securities at September 30, 2011, by contractual maturity, are as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	(Dollars in Thousands)
	Amortized Cost		Fair Value
Available-for-sale securities:
Due in one year or less	$	760	$	780
Due after one year through five years	9,458		10,128
Due after five years through ten years	21,466		22,747
Due after ten years	37,570		38,466

Total	$	69,254	$	72,121
Held-to-maturity securities:
Due in one year or less	$	300	$	305
Due after one year through five years	516		550
Due after five years through ten years	700		748
Due after ten years	1,990		2,123

Total	$	3,506	$	3,726

A summary of securities available-for-sale with unrealized losses as of September 30, 2011 and December 31, 2010 along with the related fair value, aggregated by the length of time that investments have been in a continuous unrealized loss position, is as follows:



	(Dollars in thousands)								September 30, 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		Total Securities in a Loss Position
Fixed maturities
Corporate debt securities	$	4,928	$	89	$	922	$	78	$	5,850	$	167	14
Mortgage backed securities	—		—		251		35		251		35		1
Private label mortgage backed securities	1,852		9		1,522		66		3,374		75		12
Obligations of state and political subdivisions	282		16		2,526		76		2,808		92		8
U.S. Treasury securities and obligations of U.S. government corporations and agencies	760		2		—		—		760		2		2
Equity securities	836		95		783		561		1,619		656		8
	$	8,658	$	211	$	6,004	$	816	$	14,662	$	1,027	45

THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)



	(Dollars in thousands)								December 31, 2010
	Less than 12 months				12 months or longer				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Total Securities in a Loss Position
Fixed maturities:
Corporate debt securities	$	4,504	$	112	$	250	$	7	$	4,754	$	119	11
Mortgage backed securities	1,909		104		—		—		1,909		104		8
Private label mortgage backed securities	2,463		46		3,591		361		6,054		407		12
Obligations of state and political subdivisions	8,216		612		1,304		127		9,520		739		34
U.S. Treasury securities and obligations of U.S. government corporations and agencies	4,020		172		—		—		4,020		172		9
Equity securities	264		10		903		435		1,167		445		3
	$	21,376	$	1,056	$	6,048	$	930	$	27,424	$	1,986	77

There were no securities held-to-maturity with unrealized losses as of September 30, 2011. A summary securities held-to-maturity with unrealized losses as of December 31, 2010 along with the related fair value, aggregated by the length of time that investments have been in a continuous unrealized loss position, is as follows:



	(Dollars in thousands)								December 31, 2010
	Less than 12 months				12 months or longer				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Total Securities in a Loss Position
Fixed maturities:
Mortgage backed securities	$	331	$	1	$	—	$	—	$	331	$	1	$	1
Obligations of state and political subdivisions	161		12		—		—		161		12		1
	$	492	$	13	$	—	$	—	$	492	$	13	2

According to the most recent accounting guidance, for securities in an unrealized loss position, the Company is required to assess whether the Company has the intent to sell the security or more likely than not will be required to sell the security before the anticipated recovery. If either of these conditions is met, the Company is required to recognize an other-than-temporary impairment with the entire unrealized loss reported in earnings. For securities in an unrealized loss position that do not meet these conditions, the Company assesses whether the impairment of a security is other-than-temporary. If the impairment is determined to be other-than-temporary, the Company is required to separate the other-than-temporary impairments into two components: the amount representing the credit loss and the amount related to all other factors. The credit loss is the portion of the amortized book value in excess of the net present value of the projected future cash flows discounted at the effective interest rate implicit in the debt THE NATIONAL SECURITY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)

security prior to impairment. The credit loss component of other-than-temporary impairments is reported in earnings, whereas the amount relating to factors other than credit losses are recorded in other comprehensive income, net of taxes.

Management has evaluated each security in a significant unrealized loss position. For the three month and nine months ended September 30, 2011, the Company realized $143,000 in additional other-than-temporary impairments. The single largest accumulated loss at September 30, 2011, was in the equity portfolio and totaled $461,000. The second largest loss position was in the equity portfolio and totaled $67,000. The third largest loss position was in the bond portfolio and totaled $66,000. Most unrealized losses in the fixed income portfolio are interest rate driven as opposed to credit quality driven and management believes no ultimate loss will be realized. The Company has no material exposure to sub-prime mortgage loans and less than 3% of the fixed income investment portfolio is rated below investment grade. In evaluating whether or not the equity loss positions were other-than-temporary impairments, Management evaluated financial information on each company and where available reviewed analyst reports from at least two independent sources. Based on a review of the available financial information, the prospect for future earnings of each company and consideration of the Company’s intent and ability to hold the securities until market values recovered, it was determined that the remaining securities in an accumulated loss position in the portfolio were temporary impairments.

For the year ended December 31, 2010, the Company realized no other-than-temporary impairments. The single largest accumulated loss was in the equity portfolio and totaled $360,000. The second largest loss position was in the bond portfolio and totaled $185,000. The third largest loss position was in the equity portfolio and totaled $83,000. Most unrealized losses in the fixed income portfolio are interest rate driven as opposed to credit quality driven, and management believes no ultimate loss will be realized. The Company has no material exposure to sub-prime mortgage loans and less than 4% of the fixed income investment portfolio is rated below investment grade.

An analysis of the net change in unrealized appreciation on available-for-sale securities follows:



	(Dollars in thousands)
	September 30, 2011			December 31, 2010
	(unaudited)
Net change in unrealized appreciation on available-for-sale securities before deferred tax	$	810		$	1,261
Deferred income tax	(220		)	(414		)
Net change in unrealized appreciation on available-for-sale securities	$	590		$	847