Note 3. Securities

Amortized costs and fair values of securities available for sale at March 31, 2012 are summarized as follows:

	March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Available for Sale
U.S. government agencies	$	9,103	$	281	$	(25	)	$	9,359
Obligations of states and
political subdivisions	67,667		2,486		(36		)	70,117
Mortgage-backed securities:
Agency	184,733		5,655		(245		)	190,143
Non-agency	43,747		191		(482		)	43,456
Corporate preferred stock	68		-		(22		)	46
Corporate securities	10,613		9		(399		)	10,223
Trust-preferred securities	475		-		(235		)	240
Total	$	316,406	$	8,622	$	(1,444	)	$	323,584

Amortized costs and fair values of securities available for sale at December 31, 2011 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

The amortized cost and fair value of securities available for sale as of March 31, 2012, 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.

	March 31, 2012
	Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	4,724	$	4,760
Due after one year through
five years	15,713		15,902
Due after five years through
ten years	36,678		37,846
Due after ten years	30,267		31,191
Mortgage-backed securities	228,481		233,599
Corporate preferred stock	68		46
Trust preferred securities	475		240
Total	$	316,406	$	323,584

Proceeds from the sale of securities during the three months ended March 31, 2012 were $3.1 million and net gains of $140,000 were realized on those sales. The tax expense applicable to the net realized gains amounted to $47,600. Additionally, no loss on securities with other than temporary impairment was recognized during the three months ended March 31, 2012.

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 $116.0 million at March 31, 2012.

At March 31, 2012, investments in an unrealized loss position that were temporarily impaired are as follows:

	March 31, 2012
						(In thousands)
	Less than Twelve Months					Twelve Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. government agencies	$	1,943	$	(25	)	$	25	$	-		$	1,968	$	(25	)
Obligations of states and
political subdivisions	7,078		(36		)	-		-			7,078		(36		)
Mortgage backed securities:
Agency	12,185		(245		)	-		-			12,185		(245		)
Non-agency	16,679		(210		)	8,825		(272		)	25,504		(482		)
Corporate preferred stock	-		-			17		(22		)	17		(22		)
Corporate securities	7,661		(340		)	2,412		(59		)	10,073		(399		)
Trust-preferred securities	-		-			240		(235		)	240		(235		)
Total	$	45,546	$	(856	)	$	11,519	$	(588	)	$	57,065	$	(1,444	)

At December 31, 2011, investments in an unrealized loss position that were temporarily impaired are as follows:

	December 31, 2011
						(In thousands)
	Less than Twelve Months					Twelve Months or Greater					Total
	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	$	(2,634	)	$	10,595	$	(1,258	)	$	58,571	$	(2,177	)

A total of 57 securities have been identified by the Company as temporarily impaired at March 31, 2012. Of the 57 securities, 54 are investment grade and 3 are speculative grade. Agency, non-agency mortgage-backed securities, and corporate debt securities make up the majority of temporarily impaired securities at March 31, 2012. 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 March 31, 2012. Investment decisions reflect the strategic asset/liability objectives of the Company.

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 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 March 31, 2012, 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.

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 three months ended March 31, 2012, no credit related impairment losses were recognized on these securities compared to $1,000 recognized for the three months ended March 31, 2011.

The following table provides further information on the Company's trust preferred securities that are considered other-than-temporarily impaired as of March 31, 2012 (in thousands):

Security	Class	Current Moody's Rating	Par Value		Book Value		Fair Value		Cumulative Other Compre-hensive 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	$	183	$	162	$	120	$	42	$	24	157.91	%	7	25.32	%	1.50	%	15	%	2
Trust Preferred XXII	D	C	1,979		-		-		-		1,979		(33.74	)%	59	30.40	%	0.75	%	15	%	2
Trust Preferred V	Mez	Caa3	304		69		6		63		367		(728.48	)%	-	100.00	%	-	%	15	%	2
			$	2,466	$	231	$	126	$	105	$	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 March 31, 2012 (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	$114	$130	4	19.44%	27.10%	0.50%	15%	2
			$244	$244	$114	$130

(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, 2011	$	2,370
Additions related to intial impairments	-
Additions related to subsequent impairments	-
Net impairment losses recognized in earnings through March 31, 2012	$	2,370

At March 31, 2012, 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 March 31, 2012. However, there is a risk that the Company's continuing reviews could result in recognition of other-than-temporary impairment charges in the future.