2.	Securities Available for Sale

The amortized cost and fair value of securities held at June 30, 2011, and December 31, 2010, are as follows:

			Gross		Gross
(DOLLARS IN THOUSANDS)	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	$		$		$			$
June 30, 2011
U.S. treasuries & government agencies		45,650		1,782		-			47,432
U.S. agency mortgage-backed securities		46,881		683		(6	)		47,558
U.S. agency collateralized mortgage obligations		56,962		869		(122	)		57,709
Private collateralized mortgage obligations		11,898		104		(1,195	)		10,807
Corporate bonds		17,765		312		(22	)		18,055
Obligations of states and political subdivisions		78,167		2,166		(207	)		80,126
Total debt securities		257,323		5,916		(1,552	)		261,687
Marketable equity securities		4,000		-		(50	)		3,950
Total securities available for sale		261,323		5,916		(1,602	)		265,637

December 31, 2010
U.S. treasuries & government agencies		46,701		1,310		(125	)		47,886
U.S. agency mortgage-backed securities		38,201		844		(207	)		38,838
U.S. agency collateralized mortgage obligations		64,713		886		(206	)		65,393
Private collateralized mortgage obligations		12,900		132		(1,220	)		11,812
Corporate bonds		11,749		234		(74	)		11,909
Obligations of states and political subdivisions		80,204		602		(1,405	)		79,401
Total debt securities		254,468		4,008		(3,237	)		255,239
Marketable equity securities		4,000		-		(101	)		3,899
Total securities available for sale		258,468		4,008		(3,338	)		259,138

The amortized cost and fair value of debt securities available for sale at June 30, 2011, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to certain call or prepayment provisions.

CONTRACTUAL MATURITY OF DEBT SECURITIES

(DOLLARS IN THOUSANDS)

	Amortized
	Cost		Fair Value
	$		$
Due in one year or less		27,004		27,332
Due after one year through five years		88,951		90,682
Due after five years through ten years		66,165		67,337
Due after ten years		75,203		76,336
Total debt securities		257,323		261,687

Securities available for sale with a par value of $70,609,000 and $66,801,000 at June 30, 2011, and December 31, 2010, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair value of these pledged securities was $75,315,000 at June 30, 2011, and $70,718,000 at December 31, 2010.

Proceeds from active sales of securities available for sale, along with the associated gross realized gains and gross realized losses, are shown below. Realized gains and losses are computed on the basis of specific identification.

PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)

	Six Months Ended June 30,
	2011		2010
	$		$
Proceeds from sales		45,988		24,689
Gross realized gains		1,252		591
Gross realized losses		175		33

SUMMARY OF GAINS AND LOSSES ON SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)

	Six Months Ended June 30,
	2011		2010
	$		$
Gross realized gains		1,252		591

Gross realized losses		175		33
Impairment on securities		219		104
Total gross realized losses		394		137

Net gains on securities		858		454

The bottom portion of the above chart shows the net gains on security transactions, including any impairment taken on securities held by the Corporation. Unlike the sale of a security, impairment is a write-down of the book value of the security which produces a loss and does not provide any proceeds. The net gain or loss from security transactions is also reflected on the Corporation's consolidated income statements and consolidated statements of cash flows.

Management evaluates all of the Corporation's securities for other than temporary impairment (OTTI) on a periodic basis. As of June 30, 2011, four private collateralized mortgage obligations (PCMO) were considered to be other-than-temporarily impaired, and the cash flow analysis on two of these four securities indicated a need to take additional impairment charges. Impairment charges of $72,000 were recorded on these two securities as of June 30, 2011. Impairment charges of $147,000 were recorded on the four PCMO securities considered to be other-than-temporarily impaired as of March 31, 2011, resulting in total impairment in 2011 of $219,000. As of December 31, 2010, the same four PCMOs were considered to be other-than-temporarily impaired. Of these four securities, only two had impairment taken during 2010 in the amount of $393,000. Cumulative impairment on the four PCMO securities deemed impaired as of June 30, 2011, was $951,000. Information pertaining to securities with gross unrealized losses at June 30, 2011, and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

TEMPORARY IMPAIRMENTS OF SECURITIES

(DOLLARS IN THOUSANDS)

	Less than 12 months					More than 12 months					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	$		$			$		$			$		$
As of June 30, 2011
U.S. treasuries & government agencies		-		-			-		-			-		-
U.S. agency mortgage-backed securities		3,084		(6	)		-		-			3,084		(6	)
U.S. agency collateralized mortgage obligations		7,181		(122	)		-		-			7,181		(122	)
Private collateralized mortgage obligations		-		-			6,719		(1,195	)		6,719		(1,195	)
Corporate bonds		3,500		(22	)		-		-			3,500		(22	)
Obligations of states & political subdivisions		10,238		(147	)		2,756		(60	)		12,994		(207	)

Total debt securities		24,003		(297	)		9,475		(1,255	)		33,478		(1,552	)

Marketable equity securities		-		-			950		(50	)		950		(50	)

Total temporarily impaired securities		24,003		(297	)		10,425		(1,305	)		34,428		(1,602	)

As of December 31, 2010
U.S. treasuries & government agencies		5,904		(125	)		-		-			5,904		(125	)
U.S. agency mortgage-backed securities		16,331		(207	)		-		-			16,331		(207	)
U.S. agency collateralized mortgage obligations		21,256		(206	)		-		-			21,256		(206	)
Private collateralized mortgage obligations		-		-			7,377		(1,220	)		7,377		(1,220	)
Corporate bonds		4,588		(74	)		-		-			4,588		(74	)
Obligations of states & polititcal subdivisions		42,453		(1,294	)		3,568		(111	)		46,021		(1,405	)

Total debt securities		90,532		(1,906	)		10,945		(1,331	)		101,477		(3,237	)

Marketable equity securities		-		-			1,899		(101	)		1,899		(101	)

Total temporarily impaired securities		90,532		(1,906	)		12,844		(1,432	)		103,376		(3,338	)

In the debt security portfolio, there are 40 positions that are considered temporarily impaired at June 30, 2011. Of those 40 positions, four PCMOs were the only instruments considered other-than-temporarily impaired at June 30, 2011.

The Corporation evaluates both equity and debt securities with fixed maturity positions for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic and market concerns warrant such an evaluation. The Corporation adopted a provision of U.S. generally accepted accounting principles which provides for the bifurcation of OTTI into two categories: (a) the amount of the total OTTI related to a decrease in cash flows expected to be collected from the debt security (the credit loss), which is recognized in earnings, and (b) the amount of total OTTI related to all other factors, which is recognized, net of taxes, as a component of accumulated other comprehensive income. The adoption of this provision was only applicable to the four PCMOs since these were the only instruments management deemed to be other-than-temporarily impaired.

The impairment on the PCMOs is a result of a deterioration of expected cash flows on these securities due to higher projected credit losses than the amount of credit protection carried by these securities. Specifically, the foreclosure and severity rates have been running at levels where expected principal losses are in excess of the remaining credit protection on these instruments. The projected principal losses are based on prepayment speeds that are equal to or slower than the actual last twelve month prepayment speeds the particular securities have experienced. Every quarter management evaluates third party reporting showing projected principal losses based on various prepayment speed and severity rate scenarios. Based on the assumption that all loans over 60 days delinquent will default and at a severity rate equal to or above that previously experienced, and based on historical and expected prepayment speeds, management determined that it was appropriate to take additional impairment on four PCMOs in the first half of 2011.

The following table summarizes the cumulative roll-forward of credit losses on the Corporation's other-than-temporarily impaired PCMOs recorded in earnings, for which a portion was also recognized as a component of other comprehensive income for the six months ended June 30, 2011, and June 30, 2010:

CREDIT LOSSES ON OTHER-THAN-TEMPORARILY IMPAIRED SECURITIES

(DOLLARS IN THOUSANDS)

	2011		2010
	$		$

Balance as of January 1		732		369

Additional credit losses on debt securities for which other-
than-temporary impairment was previously recognized		219		104

Balance as of June 30		951		473

The following table reflects the book value, market value, and unrealized loss as of June 30, 2011, on the four PCMO securities held which had impairment taken in 2011. The values shown are after the Corporation recorded year-to-date impairment charges of $219,000 through June 30, 2011. The $219,000 is deemed to be a credit loss and is the amount that management expects the principal loss will be by the time these four securities mature. The remaining $1,195,000 of unrealized losses is deemed to be a market value loss that is considered temporary. Prior to the impairment charge, these four securities had unrealized losses of $1,414,000.

SECURITY IMPAIRMENT CHARGES

(DOLLARS IN THOUSANDS)

	As of June 30, 2011							Year-to-Date 2011
	Book		Market		Unrealized			Impairment
	Value		Value		Loss			Charge
	$		$		$			$

Private collateralized mortgage obligations		7,914		6,719		(1,195	)		(219	)

Recent market conditions throughout the financial sector have made the evaluation regarding the possible impairment of PCMOs difficult to fully determine given the volatility of their pricing, based not only on interest rate changes, but collateral uncertainty as well. The Corporation's mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs) holdings are backed by the U.S. government, and therefore, experience significantly less volatility and uncertainty than the PCMO securities. The Corporation's PCMO holdings make up a minority of the total MBS, CMO, and PCMO securities held. As of June 30, 2011, on an amortized cost basis, PCMOs accounted for 10.3% of the Corporation's total MBS, CMO, and PCMO holdings, compared to 11.1% as of December 31, 2010. As of June 30, 2011, six PCMOs were held with one rated AAA by S&P and the remaining five securities rated below investment grade which is considered BBB- for S&P and Baa3 for Moody. On June 7, 2011, one PCMO was rated BB by Fitch but was still rated AAA by S&P. For purposes of reporting, management goes by the lowest grade and, in this case, the PCMO is considered below investment grade. Impairment charges, as detailed above, were taken on four of these securities during 2011.

Management conducts impairment analysis on a quarterly basis and currently has no plans to sell these securities as cash flow analysis performed under severe stress testing does not indicate a need to take further impairment on the bonds that are considered impaired and does not show principal losses on the two bonds that are not deemed as impaired.

The net unrealized loss position on all of the Corporation's PCMOs has remained nearly unchanged since December 31, 2010, with net unrealized losses of $1,091,000 as of June 30, 2011, compared to $1,088,000 as of December 31, 2010. The same two PCMOs which carried gains of $132,000 as of December 31, 2010, were carrying gains of $104,000 as of June 30, 2011. Due to the steady monthly principal payments that are occurring on all of the PCMO bonds, management anticipates that the net unrealized loss position on these bonds will also generally decline in proportion to the percentage decline in principal value. Management has concluded that, as of June 30, 2011, the unrealized losses outlined in the above table represent temporary declines. The Corporation does not intend to sell, and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity.

For U.S agencies, U.S. agency backed MBS and CMOs management analyzes these securities for impairment based on the amount of unrealized loss carried and the length of time the loss was carried. Due to the implied AAA rating and backing of the U.S. government the likelihood of a loss of principal on these bonds is remote. No unrealized losses existed on the Corporation's U.S. agencies as of June 30, 2011. The unrealized losses that existed on the U.S. agency MBS and U.S. agency CMOs were very low at $6,000 and $122,000 respectively and both existed for less than twelve months. Management performs the same impairment analysis for the Corporation's tax exempt municipal bond securities, but since these securities are not backed by the U.S. government, management evaluates the credit quality of the municipality by monitoring credit ratings and outlooks, insurance backing if applicable, and tracking all municipalities that have lost their rating or have unrealized losses in excess of 10%. Management has determined that these securities are not other than temporarily impaired but the unrealized losses are a result of interest rate changes.