Note 4. SECURITIES

Securities have been classified in the consolidated financial statements according to management’s intent. The amortized cost, gross unrealized gains and losses, and the fair value of the Company’s securities are as follows:

	December 31, 2012
			Gross		Gross
			unrealized		unrealized
	Amortized		holding		holding		Fair
(in thousands)	cost		gains		losses		value
Available-for-sale
Obligations of U.S. government agencies	$	1,821	$	70	$	—	$	1,891
Obligations of state and political subdivisions	95,312		8,922		733		103,501
Collateralized mortgage obligations:
Government-sponsored agency	8,805		311		13		9,103
Residential mortgage-backed securities:
Government-sponsored agency	67,765		1,920		229		69,456
Corporate debt securities	500		—		90		410
Equity securities	1,010		—		10		1,000
Total securities available-for-sale	$	175,213	$	11,223	$	1,075	$	185,361

Held-to-maturity
Obligations of state and political subdivisions	$	2,198	$	285	$	—	$	2,483

	December 31, 2011
			Gross		Gross
			unrealized		unrealized
	Amortized		holding		holding		Fair
(in thousands)	cost		gains		losses		value
Available-for-sale
Obligations of U.S. government agencies	$	7,893	$	155	$	—	$	8,048
Obligations of state and political subdivisions	96,392		3,767		3,998		96,161
Collateralized mortgage obligations:
Government-sponsored agency	8,093		380		5		8,468
Private label	36,607		13		364		36,256
Residential mortgage-backed securities:
Government-sponsored agency	30,426		967		—		31,393
Pooled trust preferred senior class	3,833		—		2,229		1,604
Pooled trust preferred mezzanine class	6,732		—		4,535		2,197
Corporate debt securities	500		—		158		342
Equity securities	1,010		—		4		1,006
Total securities available-for-sale	$	191,486	$	5,282	$	11,293	$	185,475

Held-to-maturity
Obligations of state and political subdivisions	$	2,094	$	151	$	—	$	2,245

At December 31, 2012 and 2011, securities with a carrying amount of $185.0 million and $150.8 million, respectively, were pledged as collateral to secure public deposits.

The following table shows the approximate fair value of the Company’s debt securities at December 31, 2012 using contractual maturities. Expected maturities will differ from contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Because collateralized mortgage obligations and mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.

	December 31, 2012
	Available-for-sale				Held-to-maturity
	Amortized		Fair		Amortized		Fair
(in thousands)	Cost		Value		Cost		Value
Amounts maturing in:
One Year or Less	$	—	$	—	$	—	$	—
One Year through Five Years	1,165		1,118		—		—
After Five Years through Ten Years	29,394		31,613		2,198		2,483
After Ten Years	67,074		73,071		—		—
Collateralized mortgage obligations	8,805		9,103		—		—
Mortgage-backed securities	67,765		69,456		—		—
Total	$	174,203	$	184,361	$	2,198	$	2,483

Gross proceeds from the sale of securities for the years ended December 31, 2012, 2011 and 2010 were $46.1 million, $122.6 million and $36.6 million, respectively, with the gross realized gains being $1.4 million, $5.1 million and $1.2 million, respectively, and gross realized losses being $3.1 million, $2 thousand and $2.9 million, respectively.

The tables below indicate the length of time that individual securities held-to-maturity and available-for-sale have been in a continuous unrealized loss position at December 31, 2012 and 2011:

	December 31, 2012
	Less than 12 Months				12 Months or Greater				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in thousands)	Value		Losses		Value		Losses		Value		Losses
Obligations of state and political subdivisions	$	8,649	$	398	$	4,139	$	335	$	12,788	$	733
Collateralized mortgage obligations:
Government-sponsored agency	1,485		13		2		—		1,487		13
Residential mortgage-backed securities:
Government-sponsored agency	12,899		229		—		—		12,899		229
Corporate debt securities	—		—		410		90		410		90
Equity Securities	990		10		—		—		990		10
Total	$	24,023	$	650	$	4,551	$	425	$	28,574	$	1,075

	December 31, 2011
	Less than 12 Months				12 Months or Greater				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in thousands)	Value		Losses		Value		Losses		Value		Losses
Obligations of state and political subdivisions	$	11,129	$	241	$	25,910	$	3,757	$	37,039	$	3,998
Collateralized mortgage obligations:
Government-sponsored agency	1,028		5		—		—		1,028		5
Private label	30,459		364		—		—		30,459		364
Pooled Trust Preferred Senior Class	—		—		1,604		2,229		1,604		2,229
Pooled Trust Preferred Mezzanine Class	—		—		2,197		4,535		2,197		4,535
Corporate debt securities	—		—		342		158		342		158
Equity Securities	996		4		—		—		996		4
Total	$	43,612	$	614	$	30,053	$	10,679	$	73,665	$	11,293

The majority of the Company’s securities portfolio is comprised of obligations of states and political subdivisions, residential mortgage-backed securities and collateralized mortgage obligations. The Company held 47 securities that were in an unrealized loss position at December 31, 2012. Substantially all of the unrealized losses relate to debt securities.

In determining whether unrealized losses are other-than-temporary, management considers the following factors:

· The causes of the decline in fair value, such as credit problems, interest rate fluctuations, or market volatility;

· The severity and duration of the decline;

· The Company’s ability and intent to hold the security to allow for recovery in fair value, as well as the likelihood of such a recovery in the near term;

· The Company’s intent to sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss.

Management performed a review of the fair values of all securities at December 31, 2012 and determined that movements in the values of the securities were consistent with the change in market interest rates. As a result of its review and considering the attributes of these debt securities, the Company concluded that OTTI did not exist at December 31, 2012. To date, the Company has received all scheduled principal and interest payments and expects to fully collect all future contractual principal and interest payments. The Company does not intend to sell the securities nor is it more likely than not that the Company will be required to sell the securities.

Management does not believe that any individual unrealized loss at December 31, 2012 represents OTTI. The unrealized losses reported for residential mortgage-backed securities and collateralized mortgage obligations relate entirely to securities issued by GNMA, FHLMC and FNMA that are currently rated AAA by Moody’s Investor Services or Aaa by Standard & Poor’s and are guaranteed by the U.S. government. The obligations of states and political subdivisions are comprised entirely of general-purpose debt obligations. The majority of these obligations have a credit quality rating of A or better and are secured by the unlimited taxing power of issuer. In addition, the Company utilized a third party to perform an independent credit analysis of its state and political subdivision bonds that were either nonrated or had a rating below A. There were two obligations of states and political subdivisions that were either nonrated or had a rating below A. According to this analysis, these two bonds were considered investment grade.

OTTI of Pooled Trust Preferred Collateralized Debt Obligations (“PreTSLs”):

At December 31, 2011, the Company’s PreTSLs were comprised of four securities that were collateralized by debt issued by bank holding companies and insurance companies. The Company divested its holdings of PreTSLs during 2012 and held no such securities at December 31, 2012. At December 31, 2011, the PreTSLs, which had an aggregate amortized cost of $10.6 million and an estimated fair value of $3.8 million, had depreciated 81.7% and 64.0% from their current face values and amortized cost, respectively. The Company held one senior tranche and three mezzanine tranches. All of the securities possessed credit ratings below investment grade. At the time of initial issue, no more than 5% of any pooled security consisted of a security issued by any one institution. As of December 31, 2011, three of these securities had no excess subordination and one had excess subordination equal to 12.09% of the current performing collateral. Excess subordination is the amount by which the underlying performing collateral exceeds the outstanding bonds in the current class plus all senior classes. It can also be referred to as credit enhancement. As deferrals and defaults of underlying issuers occur, the excess subordination is reduced or eliminated, increasing the risk of the security experiencing principal or interest shortfalls. Conversely, subordination can be increased as collateral transitions from non-performing to performing. The coverage ratio, or overcollateralization, of a specific security measures the rate of performing collateral to a given class of notes. It is calculated by dividing the performing collateral in a transaction by the current balance of the class of notes plus all classes senior to that class. At June 30, 2012, the Company had determined that the estimate of projected discounted cash flows it expected to receive on its PreTSLs was less than the securities’ carrying value, and as a result an additional credit-related impairment charge to earnings of $96 thousand was recorded, which was the total of such impairment charge recorded in 2012.

During the fourth quarter of 2012, the market for these securities began to improve as some of the bank holding companies and insurance companies that had previously deferred payments had cured. As a result, the Company’s unrealized loss position related to these securities improved. In an effort to reduce balance sheet risk and the levels of classified assets, management decided to sell all four PreTSLs in the Company’s portfolio. The Company realized gross gains of $848 thousand on the sale of PreTSLs IX and XI and gross losses of $3.0 million on the sale of PreTSLs XIX and XXVI. The $6.8 million that was identified as the non-credit portion of OTTI recorded for PreTSLs in prior years was included in the determination of net income and was reversed from accumulated other comprehensive income.

The table below provides a cumulative roll forward of OTTI credit losses recognized:

(in thousands)	2012			2011			2010
Beginning Balance, January 1	$	8,619		$	22,598		$	20,649
Credit losses on debt securities for which OTTI was not previously recognized	—			—			—
Additional credit losses on debt securities for which OTTI was previously recognized	96			798			4,271
Less: Sale of Private Label CMOs for which OTTI was previously recognized	—			—			(2,322		)
Less: Sale of PreTSLs for which OTTI was previously recognized	(8,715		)	(14,777		)	—
Ending Balance, December 31	$	—		$	8,619		$	22,598

Investments in FHLB and FRB stock, which have limited marketability, are carried at cost and totaled $7.3 million and $9.7 million at December 31, 2012 and 2011, respectively. Management noted no indicators of impairment for the FHLB of Pittsburgh and the FRB of Philadelphia during 2012.