Investment Securities

The following is a summary of the amortized cost and fair value of securities available for sale at March 31, 2012 and December 31, 2011:



			Gross Unrealized
(Dollars in thousands)	Amortized Cost		Gains		Losses		Fair Value
March 31, 2012:
U.S. Government sponsored entities	$	76,215	$	187	$	277	$	76,125
Mortgage-backed investments	221,558		4,970		216		226,312
Obligations of states and political subdivisions	56,840		2,534		176		59,198
Collateralized debt obligations	3,137		—		2,265		872
Other debt securities	3,449		45		31		3,463
	$	361,199	$	7,736	$	2,965	$	365,970
December 31, 2011:
U.S. Government sponsored entities	$	58,714	$	174	$	96	$	58,792
Mortgage-backed investments	198,832		5,016		162		203,686
Obligations of states and political subdivisions	51,763		2,459		80		54,142
Collateralized debt obligations	3,137		—		2,318		819
Other debt securities	3,444		25		134		3,335
	$	315,890	$	7,674	$	2,790	$	320,774

Provided below is a summary of securities available for sale which were in an unrealized loss position and the length of time that individual securities have been in a continuous loss position at March 31, 2012 and December 31, 2011. Securities on which we have taken only credit-related other-than-temporary-impairment (OTTI) write-downs are categorized as being “less than 12 months” or “12 months or more” in a continuous loss position based on the point in time that the fair value declined to below the amortized cost basis and not the period of time since the OTTI write-down.



(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2012:
U.S. Government sponsored entities	$	38,552	$	277	$	—	$	—	$	38,552	$	277
Mortgage-backed investments	53,900		216		—		—		53,900		216
Obligations of states and political subdivisions	7,507		176		—		—		7,507		176
Collateralized debt obligations	—		—		872		2,265		872		2,265
Other debt securities	2,427		31		—		—		2,427		31
	$	102,386	$	700	$	872	$	2,265	$	103,258	$	2,965
December 31, 2011:
U.S. Government sponsored entities	$	23,734	$	96	$	—	$	—	$	23,734	$	96
Mortgage-backed investments	32,280		162		—		—		32,280		162
Obligations of states and political subdivisions	7,613		80		—		—		7,613		80
Collateralized debt obligations	—		—		819		2,318		819		2,318
Other debt securities	2,317		134		—		—		2,317		134
	$	65,944	$	472	$	819	$	2,318	$	66,763	$	2,790

Note 3: (Continued)

At March 31, 2012, there were 26 U.S. government sponsored entity securities with unrealized losses less than 12 months. There were 22 mortgage-backed securities with unrealized losses less than 12 months. There were 23 municipal securities with unrealized losses less than 12 months. There were 2 corporate securities with unrealized losses less than 12 months. The unrealized losses associated with the U.S. government sponsored entity, mortgage-backed and corporate securities were primarily driven by changes in market rates and not due to the credit quality of the securities. The municipal securities that were in unrealized loss positions for less than a year were in unrealized loss positions due primarily to fluctuations in interest rates and market liquidity. A review of the municipal securities portfolio did not indicate any credit deterioration.

There are five collateralized debt obligations that represent the majority of unrealized losses in the investment portfolio. These obligations are secured by commercial bank trust preferred securities. Management has evaluated these instruments for impairment as of each quarter end within the accounting guidelines for determining impairments for beneficial interests using the discounted cash flow approach prescribed, which required management to make assumptions concerning the estimates of the ultimate collectability of the contractual cash flows of the beneficial interests owned. Credit downgrades of the beneficial interests are also factored in when determining whether the impairments in these securities are other-than-temporary. The discounted cash flow estimates depend on the expected cash flows that the beneficial interest issuer will receive on its investments in the trust preferred securities (the CDO collateral) of the commercial bank investees. The ability of the banks that issued trust preferred securities to the beneficial interest issuer to pay their obligations is determined based on an analysis of the financial condition of the banks. Generally, the same factors that result in credit rating downgrades of the beneficial interests also result in negative adjustments to the expected cash flows of the underlying collateral. This analysis results in an estimate of the timing and amount of cash flows derived from a determination of how many would default on their obligations and how many would eventually pay off their obligations and the timing of those events. Those estimated cash flows would first pay off more senior beneficial interests if certain collateral coverage ratios are not maintained, with the remaining amounts eventually flowing through to the interests owned by the Company. Based on this type of analysis for each beneficial interest issuer, the cash flows of each of the five beneficial interests owned by the Company are projected and discounted to their present values and compared to the amortized cost book values of the interests. This analysis has resulted in other-than-temporary impairment (OTTI) conditions for all five of the securities since 2008. During the first quarter of 2011, three of the securities incurred other-than-temporary impairments that resulted in $296 thousand in credit-related losses being charged against earnings with the remaining non-credit-related losses being charged to other comprehensive income. During the first quarter of 2012, none of the securities incurred other-than-temporary impairments. Management believes that as the economy improves, the deferrals related to the CDO collateral will cure and provide enough cash flows to the CDOs for the Company to recover its adjusted book values.

Management does not intend to sell any investment securities that have unrealized losses before the time that those losses could be recovered. Management has evaluated the investment securities that have unrealized losses within the framework of the Company’s liquidity and capital needs as well as its ability to hold those securities over an extended recovery period. Management’s evaluation involved (1) assessing whether significant future cash outflows would occur that would require the liquidation of securities and (2) determining if the balance sheet would need to be managed or reduced in a way that would require the liquidation of securities to meet regulatory capital ratio requirements. This analysis was performed to determine if it was more likely than not that the investments would have to be sold before their anticipated recoveries. Management determined that it was not more likely than not that the investments would have to be disposed of prior to their anticipated recoveries. In estimating whether there are other-than-temporary impairment losses on debt securities management considers (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) historical cash flows and economic factors that could detrimentally affect those cash flows and (4) changes in credit ratings of the issuers.

The following table provides a roll forward of the cumulative activity related to credit losses on debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income.



	Three Months Ended
(Dollars in thousands)	March 31
	2012		2011
Beginning balance	$	1,863	$	1,232
OTTI credit losses on previously impaired securities	—		296
Ending balance	$	1,863	$	1,528

The fair values of our CDOs could decline in the future if the underlying performance of the collateral for the trust preferred CDOs deteriorates and credit enhancements in the form of seniority in the cash flow waterfalls do not provide sufficient protection to our contractual principal and interest. As a result, there is a risk that additional OTTI may occur in the future if the economy deteriorates.

Note 3: (Continued)

The following is a summary of gains and losses on securities available for sale:



	Three Months Ended
(Dollars in thousands)	March 31
	2012		2011
Proceeds from sales	$	33,982	$	41,421
Gross realized gains	682		1,358
Gross realized losses	91		9
Net gains from sales	$	591	$	1,349
Gross recognized losses related to the credit component of other-than-temporary impairments	$	—	$	296

Realized gains and losses on securities available for sale are determined using the specific amortized cost of the securities sold.

Securities with a carrying value totaling $237.991 million at March 31, 2012 and $211.988 million at December 31, 2011 were pledged to secure an interest rate swap, public deposits, short-term borrowings and for other purposes required or permitted by law.

The amortized cost and fair values of debt securities available for sale at March 31, 2012, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with, or without, call or prepayment penalties. Mortgage-backed securities receive monthly payments based on the cash flows of the underlying collateral. Therefore, their stated maturities do not represent the timing of principal amounts received and no maturity distributions are shown for these securities.



(Dollars in thousands)	Amortized Cost		Fair Value
One year or less	$	27,404	$	27,401
After one through five years	68,202		69,550
After five through ten years	29,887		30,930
After ten years	14,148		11,777
	139,641		139,658
Mortgage-backed investments	221,558		226,312
	$	361,199	$	365,970