Note 3.

Securities

Amortized costs and fair values of securities available for sale at June 30, 2012 are summarized as follows:

	June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Available for Sale
U.S. government agencies	$	8,764	$	374	$	-		$	9,138
Obligations of states and
political subdivisions	69,061		3,546		(4		)	72,603
Mortgage-backed securities:
Agency	168,363		5,728		(281		)	173,810
Non-agency	49,246		383		(534		)	49,095
Corporate preferred stock	68		-		(14		)	54
Corporate securities	10,611		8		(900		)	9,719
Trust-preferred securities	244		-		(133		)	111
Total	$	306,357	$	10,039	$	(1,866	)	$	314,530

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 June 30, 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.

	June 30, 2012
	Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	4,013	$	4,040
Due after one year through
five years	18,524		18,547
Due after five years through
ten years	34,031		35,696
Due after ten years	31,868		33,177
Mortgage-backed securities	217,609		222,905
Corporate preferred stock	68		54
Trust preferred securities	244		111
Total	$	306,357	$	314,530

Proceeds from the sale of securities during the six months ended June 30, 2012 were $16.0 million and net gains of $288,000 were realized on those sales. The tax expense applicable to the net realized gains amounted to $98,000. Additionally, no loss on securities with other than temporary impairment was recognized during the six months ended June 30, 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 $148.3 million at June 30, 2012.

At June 30, 2012, investments in an unrealized loss position that were temporarily impaired are as follows:

	June 30, 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	$	375	$	-		$	25	$	-		$	400	$	-
Obligations of states and
political subdivisions	1,937		(4		)	-		-			1,937		(4		)
Mortgage backed securities:
Agency	18,601		(281		)	-		-			18,601		(281		)
Non-agency	18,007		(264		)	8,374		(270		)	26,381		(534		)
Corporate preferred stock	-		-			25		(14		)	25		(14		)
Corporate securities	3,164		(336		)	6,407		(564		)	9,571		(900		)
Trust-preferred securities	-		-			111		(133		)	111		(133		)
Total	$	42,084	$	(885	)	$	14,942	$	(981	)	$	57,026	$	(1,866	)

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 51 securities have been identified by the Company as temporarily impaired at June 30, 2012. Of the 51 securities, 50 are investment grade and 1 is speculative grade. Agency, non-agency mortgage-backed securities, and corporate debt securities make up the majority of temporarily impaired securities at June 30, 2012. The speculative grade security is an asset backed security that is 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 June 30, 2012. Investment decisions reflect the strategic asset/liability objectives of the Company.

Trust preferred securities

As of June 30, 2012, the company holds one trust preferred security in its portfolio, Trust Preferred IV. This security was evaluated within the scope of ASC 320 Investments - Debt and Equity Securities for potential impairment. The Company reviewed currently available information in estimating the future cash flows of this security to determine whether there has 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 report, announcements of deferrals or defaults, expected future default rates and other relevant market information.

The trust preferred security in the Company's portfolio has a floating rate coupon. In performing the present value analysis of expected cash flows, we incorporate expected deferral and default rates. The deferral/default assumptions for this pooled trust preferred security was 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 is the effective purchase yield or the credit spread at the time of purchase plus the 3-month LIBOR rate.

The Company reviewed the list of issuers underlying the trust preferred security as of June 30, 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.

In connection with the preparation of the financial statements included in this Form 10-Q and using the evaluation procedures described above, the Company concluded that there were no securities with other-than-temporary impairment within its portfolio as of June 30, 2012. Accordingly, during the six months ended June 30, 2012, no credit related impairment losses were recognized by the Company compared to $1,000 recognized for the six months ended June 30, 2011.

The Company previously held trust preferred securities in its portfolio that were identified as other-than-temporarily impaired. These securities were sold during the quarter ended June 30, 2012 with a recognized net loss of approximately $142,000. Additionally, these securities incurred cumulative OTTI credit losses recognized in prior period earnings of approximately $2.4 million through December 31, 2011. No additional write-downs were necessary prior to the sale of the securities during the second quarter of 2012.

The following table provides further information on the Company's trust preferred security that is not considered other-than-temporarily impaired as of June 30, 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	$111	$133	4	19.71%	27.10%	0.50%	15%	2
			$244	$244	$111	$133

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

The preceding table presents data on the excess subordination existing in the trust preferred issuance 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 table considers specific collateral underlying each trust preferred security.

At June 30, 2012, the Company concluded that no adverse change in cash flows occurred during the quarter and did not consider any portfolio securities to be other-than-temporarily impaired. Based on this analysis and because the Company does not intend to sell securities prior to maturity and it is more likely than not the Company will not be required to sell any 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 June 30, 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.