Note 2.

Securities

Amortized costs and fair values of securities available for sale as of December 31, 2011 and 2010, are summarized as follows:

	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Available for Sale
U.S. government agencies	$	9,068	$	293	$	(18	)	$	9,343
Obligations of states and political subdivisions	65,090		2,503		(51		)	67,542
Mortgage-backed securities:
Agency	181,797		5,482		(209		)	187,070
Non-agency	34,847		157		(1,002		)	34,002
Corporate preferred stock	68		-		(28		)	40
Corporate securities	10,612		5		(641		)	9,976
Trust-preferred securities	497		-		(228		)	269
Total	$	301,979	$	8,440	$	(2,177	)	$	308,242

	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair 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 December 31, 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.

	December 31, 2011
	Amortized Cost		Fair Value
	(In Thousands)
Due in one year or less	$	3,938	$	3,958
Due after one year through five years	13,905		14,061
Due after five years through ten years	36,517		37,873
Due after ten years	30,410		30,969
Mortgage-backed securities	216,644		221,072
Corporate preferred stock	68		40
Trust-preferred securities	497		269
Total	$	301,979	$	308,242

Proceeds from sales of securities during 2011, 2010, and 2009 were $37,564,000, $68,757,000, and $110,330,000, respectively. Gross gains of $476,000, $1,323,000, and $3,061,000, and gross losses of $16,000, $457,000, and $991,000, were realized on those sales, respectively. Additionally, $25,000, $1,103,000, and $1,072,000 in losses were recognized for impaired securities in 2011, 2010, and 2009, respectively. The tax expense (benefit) applicable to these net realized gains, losses, and impairment charges amounted to $148,000, $(81,000), and $339,000, respectively.

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 $116,221,000 and $83,224,000 at December 31, 2011 and 2010, respectively.

At December 31, 2011 and 2010, investments in an unrealized loss position that are temporarily impaired are as follows (in thousands):

	2011
	Less than Twelve Months					Twelve Months or Greater					Total
2011	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. government agencies	$	2,045	$	(18	)	$	26	$	-		$	2,071	$	(18	)
Obligations of states and political subdivisions	43		-			2,243		(51		)	2,286		(51		)
Mortgage backed securities:
Agency	22,768		(209		)	-		-			22,768		(209		)
Non-agency	15,345		(465		)	5,989		(537		)	21,334		(1,002		)
Corporate preferred stock	-		-			11		(28		)	11		(28		)
Corporate securities	7,775		(227		)	2,057		(414		)	9,832		(641		)
Trust-preferred securities	-		-			269		(228		)	269		(228		)
Total	$	47,976	$	(919	)	$	10,595	$	(1,258	)	$	58,571	$	(2,177	)
	2010
	Less than Twelve Months					Twelve Months or Greater					Total
2010	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. government agencies	$	3,408	$	(67	)	$	-	$	-		$	3,408	$	(67	)
Obligations of states and political subdivisions	40,579		(1,876		)	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 58 securities have been identified by the Company as temporarily impaired at December 31, 2011. Of the 58 securities, 53 are investment grade and 5 are speculative grade. Agency, non-agency mortgage-backed securities, and corporate securities make up the majority of temporarily impaired securities at December 31, 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 were anticipated or required as of December 31, 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 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 the 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 December 31, 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 default rate was 50 basis points, for Trust Preferred V, the default rate was 0 basis points, for Trust Preferred XXII, the default rate was 75 basis points and for MM Community Funding, the default rate was 150 basis points.

Using the evaluation procedures described above, the Company identified three other than temporarily impaired securities within its portfolio. During the year ended December 31, 2011, the Company recognized credit related impairment losses of $25,000 compared to $1.1 million for the year ended December 31, 2010.

The following table provides further information on the Company's trust preferred securities that are considered other than temporarily impaired as of December 31, 2011 (in thousands):

Security	Class	Current Moody's Rating	Par Value		Book Value		Fair Value		Cumulative Other Comprehensive (Income) Loss		Amount of OTTI Related to Credit Loss		(1) Excess Subord.		(2) Inst. Perf.	Deferrals/Defaults		Expected Default Rate		Expected Recovery		Lag Years
MM Community Funding LTD	A	B1	$	208	$	184	$	152	$	32	$	24	126.56	%	7	25.32	%	1.50	%	15	%	2
Trust Preferred XXII	D	C	1,979		-		-		-		1,979		(35.04	)%	59	30.80	%	0.75	%	15	%	2
Trust Preferred V	Mez	Ba3	304		69		6		63		367		(735.88	)%	-	100.00	%	0.00	%	15	%	2
			$	2,491	$	253	$	158	$	95	$	2,370

(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 December 31, 2011 (in thousands):

Security	Tranche Level	Current Moody's Rating	Par Value		Book Value		Fair Value		Cumulative Other Comprehensive Loss		Institutions Performing	(1) Excess Subord.		Deferrals/Defaults		Expected Default Rate		Expected Recovery		Lag Years
Trust Preferred IV	Mez	Ca	$	244	$	244	$	111	$	133	4	19.56	%	27.10	%	0.50	%	15	%	2
			$	244	$	244	$	111	$	133

(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 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 consider 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 initial impairments	-
Additions related to subsequent impairments	25
Deductions for bonds sold during period (1)	(1,526		)
Net impairment losses recognized in earnings through December 31, 2011	$	2,370

(1)

Two securities were sold during 2011 with a combined cumulative OTTI related to credit loss of $1,526,000. An additional $16,000 was recognized as a loss in earnings upon sale of these bonds.

At December 31, 2011, the Company concluded that no other adverse change in cash flows had occurred 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 December 31, 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.

The Company's investment in FHLB stock totaled $5.4 million at December 31, 2011. FHLB stock is generally viewed as a long-term investment and as a restricted security which is carried at cost because there is no market for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Company does not consider this investment to be other-than-temporarily impaired at December 31, 2011, and no impairment has been recognized. FHLB stock is shown in restricted securities on the balance sheet and is not part of the available-for-sale portfolio.