INVESTMENT SECURITIES

The investment portfolio consists primarily of U.S. Government sponsored entities and agencies, mortgage backed securities, and obligations of states and political subdivisions all of which are classified as available-for-sale. As of December 31, 2011, $109,119,000 was held as collateral for borrowing arrangements, public funds, and for other purposes.

The fair value of the available-for-sale investment portfolio reflected an unrealized gain of $7,008,000 at December 31, 2011 compared to an unrealized gain of $1,643,000 at December 31, 2010.

The following table sets forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands):



	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale Securities
Debt Securities:
U.S. Government sponsored entities and agencies	$	149	$	—	$	—		$	149
Obligations of states and political subdivisions	101,030		7,732		(331		)	108,431
U.S. Government agencies collateralized by mortgage obligations	204,222		1,402		(1,080		)	204,544
Other collateralized mortgage obligations	8,408		245		(1,255		)	7,398
Other equity securities	7,596		295		—			7,891
	$	321,405	$	9,674	$	(2,666	)	$	328,413



	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale Securities
Debt Securities:
U.S. Government sponsored entities and agencies	$	190	$	5	$	—		$	195
Obligations of states and political subdivisions	74,598		1,884		(1,432		)	75,050
U.S. Government agencies collateralized by mortgage obligations	88,105		2,092		(120		)	90,077
Other collateralized mortgage obligations	18,661		506		(1,329		)	17,838
Corporate debt securities	500		4		—			504
Other equity securities	7,628		33		—			7,661
	$	189,682	$	4,524	$	(2,881	)	$	191,325

Investment securities with unrealized losses at December 31, 2011 and 2010 are summarized and classified according to the duration of the loss period as follows (in thousands):



	December 31, 2011
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available-for-Sale Securities
Debt Securities:
Obligations of states and political subdivisions	$	1,194	$	(20	)	$	2,598	$	(311	)	$	3,792	$	(331	)
U.S. Government agencies collateralized by mortgage obligations	105,902		(1,080		)	—		—			105,902		(1,080		)
Other collateralized mortgage obligations	32		(1		)	4,917		(1,254		)	4,949		(1,255		)
	$	107,128	$	(1,101	)	$	7,515	$	(1,565	)	$	114,643	$	(2,666	)



	December 31, 2010
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available-for-Sale Securities
Debt Securities:
Obligations of states and political subdivisions	$	24,782	$	(904	)	$	3,168	$	(528	)	$	27,950	$	(1,432	)
U.S. Government agencies collateralized by mortgage obligations	9,131		(120		)	—		—			9,131		(120		)
Other collateralized mortgage obligations	286		(2		)	10,136		(1,327		)	10,422		(1,329		)
	$	34,199	$	(1,026	)	$	13,304	$	(1,855	)	$	47,503	$	(2,881	)

We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. As of December 31, 2011, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Under ASC 320-10, the portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase.

As of December 31, 2011, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all available-for-sale investment securities with an unrealized loss at December 31, 2011, and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at December 31, 2011 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000. Management also analyzed any securities that may have been down graded by credit rating agencies. Management retained the services of a third party in November 2011 to provide independent valuation and OTTI analysis of private label residential mortgage backed securities (PLRMBS).

For those bonds that met the evaluation criteria management obtained and reviewed the most recently published national credit ratings for those bonds. For those bonds that were municipal debt securities with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded that no credit related impairment existed.

The evaluation for PLRMBS also includes estimating projected cash flows that the Company is likely to collect based on an assessment of all available information about the applicable security on an individual basis, the structure of the security, and certain assumptions, such as the remaining payment terms for the security, prepayment speeds, default rates, loss severity on the collateral supporting the security based on underlying loan-level borrower and loan characteristics, expected housing price changes, and interest rate assumptions, to determine whether the Company will recover the entire amortized cost basis of the security. In performing a detailed cash flow analysis, the Company identified the most likely estimate of the cash flows expected to be collected. If this estimate results in a present value of expected cash flows (discounted at the security’s original yield at time of purchase) that is less than the amortized cost basis of the security, an OTTI is considered to have occurred.

To assess whether it expects to recover the entire amortized cost basis of its PLRMBS, the Company performed a cash flow analysis for all of its PLRMBS as of December 31, 2011. In performing the cash flow analysis for each security, the Company uses a third-party model. The model considers borrower characteristics and the particular attributes of the loans underlying the Company’s securities, in conjunction with assumptions about future changes in home prices and other assumptions, to project prepayments, default rates, and loss severities.

The month-by-month projections of future loan performance are allocated to the various security classes in each securitization structure in accordance with the structure's prescribed cash flow and loss allocation rules. When the credit enhancement for the senior securities in a securitization is derived from the presence of subordinated securities, losses are allocated first to the subordinated securities until their principal balance is reduced to zero. The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on the model approach described above reflects a best-estimate scenario.

At each quarter end, the Company compares the present value of the cash flows expected to be collected on its PLRMBS to the amortized cost basis of the securities to determine whether a credit loss exists.

The unrealized losses associated with PLRMBS are primarily driven by higher projected collateral losses, wider credit spreads, and changes in interest rates. The Company assesses for credit impairment using a discounted cash flow model. The key assumptions include default rates, severities, discount rates and prepayment rates. Losses are estimated to a security by forecasting the underlying mortgage loans in each transaction. The forecasted loan performance is used to project cash flows to the various tranches in the structure. Based upon management’s assessment of the expected credit losses of the security given the performance of the underlying collateral compared with our credit enhancement (which occurs as a result of credit loss protection provided by subordinated tranches), the Company expects to recover the entire amortized cost basis of these securities, with the exception of certain securities for which OTTI was previously recorded.

U.S. Government Sponsored Entities and Agencies

At December 31, 2011, the Company held one U.S. Government sponsored entities and agencies security and it was not in a loss position.

Obligations of States and Political Subdivisions

At December 31, 2011, the Company held 178 obligations of states and political subdivision securities of which two were in a loss position for less than 12 months and four were in a loss position and have been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2011.

U.S. Government Agencies Collateralized by Mortgage Obligations

At December 31, 2011, the Company held 183 U.S. Government agency securities collateralized by mortgage obligation securities of which 54 were in a loss position for less than 12 months. The unrealized losses on the Company’s investments in U.S. government agencies collateralized by mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency 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 does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2011.

Other Collateralized Mortgage Obligations

At December 31, 2011, the Company had a total of 27 PLRMBS with a remaining principal balance of $8,408,000 and a net unrealized loss of approximately $1,010,000. Eight of these securities account for $1,255,000 of the unrealized loss at December 31, 2011 offset by 19 of these securities with gains totaling $245,000. Seven of these PLRMBS with a remaining principal balance of $6,224,000 had credit ratings below investment grade. The Company continues to perform extensive analyses on these securities as well as all whole loan CMOs. Several of these investment securities continue to demonstrate cash flows and credit support as expected and the expected cash flows of the security discounted at the security’s original yield at time of purchase are greater than the book value of the security, therefore management does not consider these securities to be other than temporarily impaired. No credit related OTTI charges related to PLRMBS were recorded during the year ended December 31, 2011.

Other Equity Securities

At December 31, 2011, the Company had a total of two mutual fund equity investments, one of which had been in an unrealized loss position for more than 12 months. Based on management’s evaluation of the nature of the decline in net asset value on this mutual fund, the Company recorded an OTTI charge of $31,000 during the year ended December 31, 2011.

Investment securities as of December 31, 2011 with credit ratings below investment grade are summarized in the table below (dollars in thousands):



Description	Book Value		Market Value		Unrealized Loss			Rating	Agency	12 Month Historical Prepayment Rates %	Projected CDR Rates %	Projected Severity Rates %	Original Purchase Price %	Current Credit Enhancement %
PHHAM	$	2,400	$	1,931	$	(469	)	D	Fitch	11.06	8.64	51	97.25	—
CWALT 1	781		583		(198		)	C	Fitch	10.11	6.40	63	100.73	3.02
CWALT 2	367		217		(150		)	C	Fitch	9.07	7.30	66	101.38	0.98
FHAMS	2,179		1,831		(348		)	D	Fitch	10.7	10.36	48	95	—
BAALT	141		123		(18		)	CCC	Fitch	7.66	4.79	56	97.24	4.7
ABFS	302		231		(71		)	D	S&P	4.7	13.00	80	97.46	—
CONHE	54		72		18			B3	Moody's	—	1.00	60	86.39	—
	$	6,224	$	4,988	$	(1,236	)

All securities in the above table are private label residential collateralized mortgage obligations.

Net unrealized gains on available-for-sale investment securities totaling $7,008,000 and $1,643,000 are recorded net of $2,884,000 and $676,000 in tax liabilities as accumulated other comprehensive income within shareholders’ equity at December 31, 2011 and 2010, respectively.

Proceeds and gross realized gains (losses) on investment securities for the years ended December 31, 2011, 2010 and 2009 are shown below.



	Years Ended December 31,
	2011			2010			2009
	(In thousands)
Available-for-Sale Securities
Proceeds from sales or calls	$	44,700		$	19,594		$	40,407
Gross realized gains from sales or calls	$	1,119		$	296		$	1,438
Gross realized losses from sales or calls	$	(821	)	$	(487	)	$	(496	)



	Years Ended December 31,
	2011		2010		2009
	(In thousands)
Held-to-Maturity
Proceeds from sales or calls	$	—	$	—	$	1,474
Gross realized losses from sales or calls	$	—	$	—	$	(176	)

In 2009, one security was transferred from held-to-maturity to available-for-sale at its fair value based on management’s intent to sell, and subsequent to the transfer, a $300,000 charge to earnings was recorded as OTTI expense. There were no sales or transfers of held-to-maturity investment securities for the years ended December 31, 2011 or 2010. The Company did not have any held-to-maturity securities at December 31, 2011 or 2010.

The following tables provide a roll forward for the years ended December 31, 2011 and 2010 of investment securities credit losses recorded in earnings. The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods. Additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred on securities for which OTTI credit losses have been previously recognized.



	For the years ended
(In thousands)	December 31, 2011			December 31, 2010
Beginning balance	$	1,387		$	300
Amounts related to credit loss for which an OTTI charge was not previously recognized	31			1,587
Increases to the amount related to credit loss for which OTTI was previously recognized	—			—
Realized losses for securities sold	(635		)	(500		)
Ending balance	$	783		$	1,387

The amortized cost and estimated fair value of investment securities at December 31, 2011 and 2010 by contractual maturity are shown below (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.



December 31, 2011	Amortized Cost		Estimated Fair Value
Within one year	$	569	$	574
After one year through five years	8,705		9,480
After five years through ten years	20,553		22,179
After ten years	71,352		76,347
	101,179		108,580
Investment securities not due at a single maturity date:
U.S. Government agencies collateralized by mortgage obligations	204,222		200,839
Other collateralized mortgage obligations	8,408		11,103
Other equity securities	7,596		7,891
	$	321,405	$	328,413



December 31, 2010	Amortized Cost		Estimated Fair Value
Within one year	$	500	$	504
After one year through five years	6,350		6,819
After five years through ten years	18,274		18,664
After ten years	50,164		49,762
	75,288		75,749
Investment securities not due at a single maturity date:
U.S. Government agencies collateralized by mortgage obligations	88,105		90,077
Other collateralized mortgage obligations	18,661		17,838
Other equity securities	7,628		7,661
Total	$	189,682	$	191,325

Investment securities with amortized costs totaling $102,527,000 and $127,293,000 and fair values totaling $109,119,000 and $129,968,000 were pledged to secure public deposits, other contractual obligations and short-term borrowings at December 31, 2011 and 2010, respectively.