Note 2. Securities

The amortized cost and fair value of securities available for sale, with unrealized gains and losses follows:

	December 31, 2012
(In thousands)	Amortized		Gross Unrealized		Gross Unrealized
	Cost		Gains		(Losses)		Fair Value
Obligations of U.S. Government corporations and agencies	$	39,240	$	794	$	(20)	$	40,014
Obligations of states and political subdivisions		6,786		604		-		7,390
Corporate bonds		3,836		-		(3,511)		325
Mutual funds		346		17		-		363
	$	50,208	$	1,415	$	(3,531)	$	48,092

	December 31, 2011
(In thousands)	Amortized		Gross Unrealized		Gross Unrealized
	Cost		Gains		(Losses)			Fair Value
Obligations of U.S. Government corporations and agencies	$	38,812	$	762	$	(2	)	$	39,572
Obligations of states and political subdivisions		6,791		604		(2	)		7,393
Corporate bonds		3,794		-		(3,459	)		335
Mutual funds		337		12		-			349
	$	49,734	$	1,378	$	(3,463	)	$	47,649

The amortized cost and fair value of securities available for sale, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

(In thousands)	December 31, 2012
	Amortized Cost		Fair Value
Due in one year or less	$	-		-
Due after one year through five years		11,999		12,053
Due after five years through ten years		12,291		12,989
Due after ten years		25,572		22,687
Equity securities		346		363
	$	50,208		48,092

During 2012, seven securities with a fair value of $3.7 million were sold, resulting in a gain of $163,000. Eleven bonds with an amortized cost of $11.0 million were called in 2012 and a gain of $3,000 was recognized. U.S. Government corporation and agency bonds totaling $25.7 million were purchased in 2012. There were no OTTI losses on the investment in pooled trust preferred securities in 2012.

During 2011, the Company recognized an OTTI on its investment in pooled trust preferred securities of $189,000. The tax benefit applicable to this OTTI loss amounted to $39,000. There were three securities with a total amortized cost of $6.4 million sold in order to ensure the recognition of current value that had future exposure to prepayment risk and to extend the maturity. A gain of $74,000 was recognized. Additionally, the Bank sold 10,000 shares of Federal Home Loan Mortgage Corporation ("FHLMC") preferred stock at a gain of $22,000. Sixteen bonds with a total amortized cost of $17.0 million were called during 2011 and a gain of $6,000 was recognized. Securities totaling $32.2 million were purchased, primarily U.S. Government corporation and agency bonds.

During 2010, the Company recognized an OTTI on its investment in pooled trust preferred securities of $1.4 million and on its FHLMC preferred stock of $9,000. The tax benefit applicable to this OTTI loss amounted to $477,000. During 2010, nine securities with a total amortized cost of $9.9 million were sold at a gain of $541,000. Eight of these bonds were sold in order to ensure the recognition of current value that had future exposure to prepayment risk, and one bond was sold due to its relatively longer-term contractual duration and inherent extension risk of an additional two years duration if market rates were to increase in the future. The tax expense on these gains on sale totaled $184,000.

The following table shows the Company securities with gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2012 and 2011, respectively.

(In thousands)	Less than 12 Months					12 Months or More					Total
December 31, 2012	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)

Obligations of U.S. Government, corporations and agencies	$	2,165	$	(20)		$	-	$	-		$	2,165	$	(20)
Corporate bonds		-		-			325		(3,511	)		325		(3,511)
Total temporary impaired securities	$	2,165	$	(20	)	$	325	$	(3,511	)	$	2,490	$	(3,531)

(In thousands)	Less than 12 Months					12 Months or More					Total
December 31, 2011	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)

Obligations of U.S. Government, corporations and agencies	$	1,997	$	(2	)	$	-	$	-		$	1,997	$	(2	)
Obligations of states and political subdivisions		515		(2	)		-		-			515		(2	)
Corporate bonds		-		-			335		(3,459	)		335		(3,459	)
Total temporary impaired securities	$	2,512	$	(4	)	$	335	$	(3,459	)	$	2,847	$	(3,463	)

The nature of securities which were temporarily impaired for a continuous 12 month period or more at December 31, 2012 consisted of four corporate bonds with a cost basis net of OTTI losses totaling $3.8 million and a temporary loss of approximately $3.5 million. The method for valuing these four corporate bonds came from Moody's Analytics. Moody's Analytics employs a two-step discounted cash-flow valuation process. The first step is to evaluate the financial condition of the individual creditors in order to estimate the credit quality of the collateral pool and the structural supports. Step two is to apply a discount rate to the cash flows to calculate a value. These four corporate bonds are the "Class B" or subordinated "mezzanine" tranche of pooled trust preferred securities. The trust preferred securities are collateralized by the interest and principal payments made on trust preferred capital offerings by a geographically diversified pool of approximately 60 different financial institutions per bond. They have an estimated average maturity of 21 years. These bonds could have been called at par on the five year anniversary date of issuance, which has already passed for all four bonds. The bonds reprice every three months at a fixed rate index above the three-month London Interbank Offered Rate ("LIBOR"). These bonds have sufficient collateralization and cash flow projections to satisfy their valuation based on the cash flow portion of the OTTI test under authoritative accounting guidance as of December 31, 2012. All four bonds totaling $325,000 at fair value, are greater than 90 days past due, and are classified as nonperforming corporate bond investments in the nonperforming asset table in Note 3. During 2012, the Company received $49,000 of partial repayment of principal on two of the four bonds.

Additional information regarding each of the pooled trust preferred securities as of December 31, 2012 follows:

(Dollars in thousands)

Cost, net of OTTI loss		Fair Value		Percent of Underlying Collateral Performing			Percent of Underlying Collateral in Deferral			Percent of Underlying Collateral in Default			Estimated incremental defaults required to break yield (1)	Current Moody's Rating	Cumulative Amount of OTTI Loss		Cumulative Other Comprehensive Loss, net of tax benefit

$	372	$	34		59.5	%		13.3	%		27.2	%	broken	Ca	$	605	$	223
	1,612		244		67.7	%		15.9	%		16.4	%	broken	C		362		903
	1,295		25		59.9	%		32.3	%		7.8	%	broken	Ca		705		838
	557		22		66.2	%		23.1	%		10.7	%	broken	Ca		443		353
$	3,836	$	325												$	2,115	$	2,317

(1)

A break in yield for a given tranche investment means that defaults and/or deferrals have reached such a level that the specific tranche would not receive all of the contractual principal and interest cash flow by its maturity, resulting in not a temporary shortfall, but an actual loss. This column represents the percentage of additional defaults among the currently performing collateral that would result in other-than-temporary loss.

The Company monitors these pooled trust preferred securities in its portfolio as to collateral, issuer defaults and deferrals, which as a general rule; indicate that additional impairment may have occurred. Due to the continued stress on banks in general, and the issuer banks in particular, as a result of overall economic conditions, the Company acknowledges that it may have to recognize additional impairment in future periods; however the extent, timing, and probability of any additional impairment cannot be reasonably estimated at this time.

The following roll forward reflects the amount related to credit losses recognized in earnings (in accordance with FASB ASC 320-10-35-34D:

(In thousands) Beginning balance as of December 31, 2011	$	2,206
Add: Amount related to the credit loss for which an other-than-temporary impairment was not previously recognized		-
Add: Increases to the amount related to the credit loss for which an other-than temporary impairment was previously recognized		-
Less: Realized losses for securities sold		-
Less: Securities for which the amount previously recognized in other comprehensive income was recognized in earnings because the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis.		-
Less: Increases in cash flows expected to be collected that are recognized over the remaining life of the security (FASB ASC 320-10-35-35)		91
Ending balance as of December 31, 2012	$	2,115

The carrying value of securities pledged to secure deposits and for other purposes amounted to $41.5 million and $37.3 million at December 31, 2012 and 2011, respectively.