Note 3. Securities

Amortized costs and fair values of securities available for sale at September 30, 2011 are summarized as follows:

	September 30, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
Available for Sale
U.S. government agencies	$	7,219	$	307	$	(2	)	$	7,524
Obligations of states and
political subdivisions		63,153		2,329		(78	)		65,404
Mortgage-backed securities:
Agency		184,456		6,024		(197	)		190,283
Non-agency		29,931		40		(693	)		29,278
Corporate preferred stock		68		-		(31	)		37
Corporate securities		10,612		10		(383	)		10,239
Trust-preferred securities		501		-		(252	)		249
Total	$	295,940	$	8,710	$	(1,636	)	$	303,014

Amortized costs and fair values of securities available for sale at December 31, 2010 are summarized as follows:

	December 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
Available for Sale
U.S. government agencies	$	4,699	$	17	$	(67	)	$	4,649
Obligations of states and
political subdivisions		61,187		174		(2,221	)		59,140
Mortgage-backed securities:
Agency		150,952		1,722		(370	)		152,304
Non-agency		26,168		150		(237	)		26,081
Corporate preferred stock		39		-		(26	)		13
Corporate securities		9,609		7		(84	)		9,532
Trust-preferred securities		998		-		(675	)		323
Total	$	253,652	$	2,070	$	(3,680	)	$	252,042

The amortized cost and fair value of securities available for sale as of September 30, 2011, by contractual maturity are shown below. Maturities may differ from contractual maturities in corporate and mortgage-backed securities because the securities and mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the following maturity summary.

	September 30, 2011
	Amortized		Fair
	Cost		Value

	(In thousands)
Due in one year or less	$	3,020	$	3,036
Due after one year through
five years		13,098		13,275
Due after five years through
ten years		34,525		35,945
Due after ten years		30,341		30,911
Mortgage-backed securities		214,387		219,561
Corporate preferred stock		68		37
Trust preferred securities		501		249
Total	$	295,940	$	303,014

Proceeds from the sale of securities during the nine months ended September 30, 2011 were $26.2 million and net gains of $263,000 were realized on those sales. The tax expense applicable to the net realized gains amounted to $89,000. Additionally, $22,000 in losses on securities with other than temporary impairment was recognized during the nine months ended September 30, 2011.

The carrying value of securities pledged to qualify for fiduciary powers, to secure public monies and for other purposes as required by law amounted to $124.4 million at September 30, 2011.

At September 30, 2011, investments in an unrealized loss position that were temporarily impaired are as follows:

	September 30, 2011 (In thousands)
	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
2011	Value		Losses			Value		Losses			Value		Losses

U.S. government agencies	$	390	$	(1	)	$	55	$	(1	)	$	445	$	(2	)
Obligations of states and
political subdivisions		42		-			2,217		(78	)		2,259		(78	)
Mortgage backed securities:
Agency		9,294		(197	)		-		-			9,294		(197	)
Non-agency		15,708		(175	)		4,804		(518	)		20,512		(693	)
Corporate preferred stock		-		-			8		(31	)		8		(31	)
Corporate securities		4,928		(72	)		2,159		(311	)		7,087		(383	)
Trust-preferred securities		-		-			249		(252	)		249		(252	)

Total	$	30,362	$	(445	)	$	9,492	$	(1,191	)	$	39,854	$	(1,636	)

At December 31, 2010, investments in an unrealized loss position that were temporarily impaired are as follows:

	December 31, 2010 (In thousands)
	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
2010	Value		Losses			Value		Losses			Value		Losses

U.S. government agencies	$	3,408	$	(67	)	$	-	$	-		$	3,408	$	(67	)
Obligations of states and
political subdivisions		40,579		(1,	)		4,266		(345	)		44,845		(2,221	)
Mortgage backed securities:
Agency		50,338		(370	)		-		-			50,338		(370	)
Non-agency		18,341		(237	)		-		-			18,341		(237	)
Corporate preferred stock		-		-			12		(26	)		12		(26	)
Corporate securities		9,385		(84	)		-		-			9,385		(84	)
Trust-preferred securities		-		-			323		(675	)		323		(675	)

Total	$	122,051	$	(2,634	)	$	4,601	$	(1,046	)	$	126,652	$	(3,680	)

A total of 50 securities have been identified by the Company as temporarily impaired at September 30, 2011. Of the 50 securities, 47 are investment grade and 3 are speculative grade. Agency, non-agency mortgage-backed securities, and municipal securities make up the majority of temporarily impaired securities at September 30, 2011. The speculative grade securities are asset backed securities that are collateralized by trust preferred issuances of financial institutions. Market prices change daily and are affected by conditions beyond the control of the Company. Although the Company has the ability to hold these securities until the temporary loss is recovered, decisions by management may necessitate a sale before the loss is fully recovered. No such sales are anticipated or required as of September 30, 2011. Investment decisions reflect the strategic asset/liability objectives of the Company. The investment portfolio is analyzed frequently by the Company and managed to provide an overall positive impact to the Company's income statement and balance sheet.

Trust preferred securities

Trust preferred securities were evaluated within the scope of EITF 99-20 (ASC 320 Investments – Debt and Equity Securities) for potential impairment. The Company reviews current available information in estimating the future cash flows of these securities and determines whether there have been favorable or adverse changes in estimated cash flows from the cash flows previously projected. The Company considers the structure and term of the pool and the financial condition of the underlying issuers. Specifically, the evaluation incorporates factors such as interest rates and appropriate risk premiums, the timing and amount of interest and principal payments and the allocation of payments to the various note classes. Current estimates of cash flows are based on the most recent trustee reports, announcements of deferrals or defaults, expected future default rates and other relevant market information. The Company analyzed the cash flow characteristics of these securities.

All of the pooled trust preferred securities in the Company's portfolio have floating rate coupons. In performing the present value analysis of expected cash flows, we incorporate expected deferral and default rates. The deferral/default assumptions for each pooled trust preferred security were developed by reviewing the underlying collateral or issuing banks. The present value of expected future cash flows is discounted at the effective purchase yield, which in the case of the floating rate securities is equal to the credit spread at time of purchase plus the current 3-month LIBOR rate. We then compare the present value to the current book value for purposes of determining if there is an other-than-temporary impairment (“OTTI”). The discount rate used to determine OTTI for all periods is the effective purchase yield or the credit spread at time of purchase plus the 3-month LIBOR rate.

The Company reviewed the list of issuers underlying each trust preferred security as of September 30, 2011, and ranked each bank in order of expectations for future defaults and deferrals. We reviewed data on each bank such as earnings, capital ratios, credit metrics and loan loss reserves. We then assigned a default rate to each ranking, then the default rates were applied to each bank that was performing as of the reporting date. Finally, we summed the defaults and divided by the total remaining performing collateral in each pool. For Trust Preferred IV, the expected default rate was 50 basis points, for Trust Preferred V, the expected default rate was 0 basis points, for Trust Preferred XXII, the expected default rate was 75 basis points, and for MM Community Funding Class A, the expected default rate was 150 basis points. MM Community Funding Class B was sold during the period and is not presented in the tables below.

In connection with the preparation of the financial statements included in this Form 10-Q and using the evaluation procedures described above, the Company identified three securities with other-than-temporary impairment within its portfolio. During the nine months ended September 30, 2011, the Company recognized credit related impairment losses of $22,000 compared to $974,000 for the nine months ended September 30, 2010 related to these securities. Additionally, two securities previously recognized as other than temporarily impaired were sold during the nine months ended September 30, 2011. These securities had a cumulative other-than-temporary impairment related to credit loss of $1.5 million. An additional $16,000 loss was recognized in earnings upon sale of these two securities.

The following table provides further information on the Company's trust preferred securities that are considered other-than-temporarily impaired as of September 30, 2011 (in thousands):

						Cumulative	Amount
		Current				Other	of OTTI	(1)	(2)		Expected
		Moody's	Par	Book	Fair	Comprehensive	Related to	Excess	Inst.	Deferrals/	Default	Expected	Lag
Security	Class	Rating	Value	Value	Value	Loss	Credit Loss	Subord.	Perf.	Defaults	Rate	Recovery	Years
MM Community Funding LTD	A	B1	208	188	125	$ 63	20	126.56%	7	25.32%	1.50%	15%	2
Trust Preferred XXII	D	C	1,979	-	-	-	1,979	-39.52%	57	32.70%	0.75%	15%	2
Trust Preferred V	Mez	Caa3	304	69	6	63	367	-760.20%	-	100.00%	0.00%	15%	2
			$ 2,491	$ 257	$ 131	$ 126	$ 2,366

(1) Excess subordination. See explanation in text below tables.
(2) Number of institutions in class performing.

The Company also has the following investment in a trust preferred security not considered other than-temporarily impaired as of September 30, 2011 (in thousands):

Cumulative

Current

Other

(1)

Expected

Tranche

Moody's

Par

Book

Fair

Comprehensive

Institutions

Excess

Deferrals/

Default

Expected

Lag

Security

Level

Rating

Value

Loss

Performing

Subord.

Defaults

Rate

Recovery

Years

Trust Preferred IV

Mez

$ 244

$ 118

$ 126

19.42%

27.10%

0.50%

15%

$ 244

$ 118

$ 126

(1) Excess subordination. See explanation in text below tables.

Both of the preceding tables present data on the excess subordination existing in each of the trust preferred issuances included in the Company's investment portfolio. Excess subordination is the difference between the remaining performing collateral and the amount of bonds outstanding that are pari passu and senior to the class owned by the Company. Negative excess subordination indicates that there is not enough performing collateral in the pool to cover the outstanding balance of all classes senior to the classes owned by the Company.

The credit deferral/default assumptions utilized in the Company's OTTI analysis methodology and included in the above tables considers specific collateral underlying each trust preferred security.

The following table presents a roll-forward of the credit loss component amount of OTTI recognized in earnings:

OTTI Credit Losses Recognized in Earnings
Rollforward

Amount recognized through December 31, 2010	$	3,871
Additions related to intial impairments		-
Additions related to subsequent impairments		22
Deductions for bonds sold during period (1)		(1,527	)

Net impairment losses recognized in earnings through September 30, 2011	$	2,366

(1)

Two securities were sold during March, 2011 with a combined cumulative OTTI related to credit loss of $1,527,000. An additional $16,000 was recognized as a loss in earnings upon sale of these bonds.

At September 30, 2011, the Company concluded that no other adverse change in cash flows occurred during the quarter and did not consider any other securities other-than-temporarily impaired. Based on this analysis and because the Company does not intend to sell these securities and it is more likely than not the Company will not be required to sell these securities before recovery of amortized cost basis, which may be at maturity; and, for debt securities related to corporate securities, determined that there was no other adverse change in the cash flows as viewed by a market participant, the Company does not consider the investments in these assets to be other than temporarily impaired at September 30, 2011. However, there is a risk that the Company's continuing reviews could result in recognition of other-than-temporary impairment charges in the future.