2. Investment Securities

Carrying Values, Fair Values and Unrealized Gains and Losses

The amortized cost, fair values, and unrealized gains and losses of the securities available-for-sale are as follows

(in thousands):

	Amortized		Gross Unrealized				Fair/Book
September 30, 2012	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	46,655	$	316	$	-	$	46,971
Obligations of States and Political Subdivisions		5,704		-		-		5,704
Mortgage Backed Securities (1)		374,582		15,230		-		389,812
Corporate Bonds		14,641		223		-		14,864
Other		5,826		-		-		5,826
Total	$	447,408	$	15,769	$	-	$	463,177

	Amortized		Gross Unrealized				Fair/Book
December 31, 2011	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	82,195	$	413	$	13	$	82,595
Obligations of States and Political Subdivisions		5,782		-		-		5,782
Mortgage Backed Securities (1)		383,380		7,792		139		391,033
Other		410		-		-		410
Total	$	471,767	$	8,205	$	152	$	479,820

	Amortized		Gross Unrealized				Fair/Book
September 30, 2011	Cost		Gains		Losses		Value
Government Agency & Government-Sponsored Entities	$	162,115	$	635	$	-	$	162,750
Obligations of States and Political Subdivisions		5,813		-		-		5,813
Mortgage Backed Securities (1)		243,121		8,787		22		251,886
Other		360		-		-		360
Total	$	411,409	$	9,422	$	22	$	420,809

The book values, estimated fair values and unrealized gains and losses of investments classified as held-to-maturity are as follows (in thousands):

	Book		Gross Unrealized				Fair
September 30, 2012	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	66,098	$	2,623	$	-	$	68,721
Mortgage Backed Securities (1)		640		20		-		660
Other		2,222		-		-		2,222
Total	$	68,960	$	2,643	$	-	$	71,603

	Book		Gross Unrealized				Fair
December 31, 2011	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	59,640	$	2,736	$	-	$	62,376
Mortgage Backed Securities (1)		1,205		46		-		1,251
Other		2,247		-		-		2,247
Total	$	63,092	$	2,782	$	-	$	65,874

	Book		Gross Unrealized				Fair
September 30, 2011	Value		Gains		Losses		Value
Obligations of States and Political Subdivisions	$	60,130	$	2,437	$	-	$	62,567
Mortgage Backed Securities (1)		1,418		62		-		1,480
Other		2,255		-		-		2,255
Total	$	63,803	$	2,499	$	-	$	66,302

(1) All Mortgage Backed Securities consist of securities collateralized by residential real estate and were issued by an agency or government sponsored entity of the U.S. government.

Fair values are based on quoted market prices or dealer quotes. If a quoted market price or dealer quote is not available, fair value is estimated using quoted market prices for similar securities.

The amortized carrying amount of investment securities at September 30, 2012 by contractual maturity are shown in the following tables (in thousands):

			After 1		After 5				Total
Securities Available-for-Sale	Within		but		but		Over		Fair
September 30, 2012	1 Year		Within 5		Within 10		10 years		Value
Government Agency & Government-Sponsored Entities	$	10,006	$	35,751	$	1,214	$	-	$	46,971
Obligations of States and Political Subdivisions		-		-		219		5,485		5,704
Mortgage Backed Securities		-		-		119,019		270,793		389,812
Corporate Bonds		608		13,411		845		-		14,864
Other		5,826		-		-		-		5,826
Total	$	16,440	$	49,162	$	121,297	$	276,278	$	463,177

			After 1		After 5				Total
Securities Held-to-Maturity	Within		but		but		Over		Book
September 30, 2012	1 Year		Within 5		Within 10		10 years		Value
Obligations of States and Political Subdivisions	$	1,540	$	9,842	$	39,352	$	15,364	$	66,098
Mortgage Backed Securities		-		640		-		-		640
Other		-		5		2,217		-		2,222
Total	$	1,540	$	10,487	$	41,569	$	15,364	$	68,960

Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

The following tables show those investments with gross unrealized losses and their fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at the dates indicated (in thousands):

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2011	Value		Loss		Value		Loss		Value		Loss
Government Agency & Government-Sponsored Entities	$	4,987	$	13	$	-	$	-	$	4,987	$	13
Mortgage Backed Securities		85,090		139		-		-		85,090		139
Total	$	90,077	$	152	$	-	$	-	$	90,077	$	152

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2011	Value		Loss		Value		Loss		Value		Loss
Mortgage Backed Securities	$	10,130	$	22	$	-	$	-	$	10,130	$	22
Total	$	10,130	$	22	$	-	$	-	$	10,130	$	22

As of September 30, 2012, the Company held 360 investment securities and no securities were in an unrealized loss position. Management periodically evaluates each investment security for other-than-temporary impairment relying primarily on industry analyst reports and observations of market conditions and interest rate fluctuations. Management believes it will be able to collect all amounts due according to the contractual terms of the underlying investment securities.

The following information describes the Company's assumptions and conclusions regarding other-than-temporary impairment status:

Securities of U.S. Government Agency and Government Sponsored Entities - The unrealized losses on the Company's investments in securities of government agency and government sponsored entities were $0, $13,000, and $0 at September 30, 2012, December 31, 2011, and September 30, 2011, respectively. Management believes that any unrealized losses were caused by interest rate fluctuations. Repayment of these investments is guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company did not intend to sell the securities and it was more likely than not that the Company would not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2011.

Mortgage Backed Securities - The unrealized losses on the Company's investments in mortgage backed securities were $0, $139,000, and $22,000 at September 30, 2012, December 31, 2011, and September 30, 2011, respectively. The unrealized losses on the Company's investment in mortgage backed securities were caused by interest rate fluctuations. The contractual cash flows of these investments are guaranteed by an agency or government sponsored entity of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company did not intend to sell the securities and it was more likely than not that the Company would not have to sell the securities before recovery of their cost basis, the Company did not consider these investments to be other-than-temporarily impaired at December 31, 2011 and September 30, 2011.

Obligations of States and Political Subdivisions - The continuing financial problems being experienced by certain municipalities, along with the financial stresses exhibited by some of the large monoline bond insurers have increased the overall risk associated with bank-qualified municipal bonds. As of September 30, 2012, over ninety-three percent of the Company's bank-qualified municipal bond portfolio is rated at either the issue or issuer level, and all of these ratings are "investment grade." The Company monitors the status of that portion of the portfolio that is not rated and at the current time does not believe any of them to be exhibiting financial problems that could result in a loss in any individual security.

There was no unrealized loss on the Company's investment in obligations of states and political subdivisions at September 30, 2012, December 31, 2011, and September 30, 2011, respectively.

Corporate Bonds - There was no unrealized loss on the Company's investments in corporate bonds at September 30, 2012.

Sales/Calls of Securities

Proceeds from sales /calls of securities for the periods shown were as follows:

(in thousands)	Proceeds		Gains		Losses
Nine Months Ended September 30, 2012	$	44,296	$	149	$	-
Nine Months Ended September 30, 2011		55,000		-		-

Pledged Securities

As of September 30, 2012, securities carried at $307.2 million were pledged to secure public deposits, FHLB borrowings, and other government agency deposits as required by law. This amount at December 31, 2011 and September 30, 2011, was $373.2 million and $382.9 million, respectively.