NOTE 2. Investment Securities

The amortized cost and approximate fair values of securities are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at September 30, 2011
U.S. Government-sponsored agency securities	$	100	$	17			$	117
State and municipal		133,273		6,729	$	2		140,000
Mortgage-backed securities		342,083		12,415		33		354,465
Corporate obligations		5,675				5,479		196
Equity securities		1,830						1,830
Total available for sale		482,961		19,161		5,514		496,608
Held to maturity at September 30, 2011
State and municipal		117,346		113		111		117,348
Mortgage-backed securities		323,874		11,726				335,600
Total held to maturity		441,220		11,839		111		452,948
Total Investment Securities	$	924,181	$	31,000	$	5,625	$	949,556

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at December 31, 2010
U.S. Government-sponsored agency securities	$	600	$	16			$	616
State and municipal		233,622		7,108	$	740		239,990
Mortgage-backed securities		293,311		4,293		2,287		295,317
Corporate obligations		5,856				5,674		182
Equity securities		3,265						3,265
Total available for sale		536,654		11,417		8,701		539,370
Held to maturity at December 31, 2010
State and municipal		10,070		389		5		10,454
Mortgage-backed securities		277,357		2,064		3,605		275,816
Total held to maturity		287,427		2,453		3,610		286,270
Total Investment Securities	$	824,081	$	13,870	$	12,311	$	825,640

In August of 2011, the Corporation transferred selected state and municipal securities from available for sale to held to maturity. The cost basis of the securities was $97.3 million prior to the transfer and was increased by the $8.5 million in unrealized gains to $105.8 million.

The amortized cost and fair value of available for sale securities and held to maturity securities at September 30, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturity Distribution at September 30, 2011:
Due in one year or less	$	3,225	$	3,242	$	2,010	$	2,010
Due after one through five years		13,929		14,327		1,435		1,444
Due after five through ten years		26,874		28,345		37,177		37,041
Due after ten years		95,020		94,399		76,724		76,853
	$	139,048	$	140,313	$	117,346	$	117,348

Mortgage-backed securities		342,083		354,465		323,874		335,600
Equity securities		1,830		1,830

Total Investment Securities	$	482,961	$	496,608	$	441,220	$	452,948

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $272,560,000 at September 30, 2011, and $271,091,000 at December 31, 2010.

The book value of securities sold under agreements to repurchase amounted to $90,171,000 at September 30, 2011, and $84,965,000 at December 31, 2010.

For the three and nine months ended September 30, 2011, gross gains of $861,000 and $2,149,000 were realized from sales and redemptions of available for sale securities. For the three and nine months ended September 30, 2010, gross gains of $2,000 and $2,326,000 were realized from sales and redemptions of available for sale securities. There were no gross losses resulting from sales and redemptions of available for sale securities realized for the three and nine months ended September 30, 2011, and 2010. The Corporation did not recognized an other-than-temporary impairment (“OTTI”) loss in the three months ended September 30, 2011, but did recognize a loss of $656,000 in the three months ended September 30, 2010, equal to the credit loss, establishing a new, lower amortized cost basis. The Corporation has recognized OTTI losses of $400,000 and $1,544,000 in the nine months ended September 30, 2011, and 2010, equal to the credit loss, establishing a new, lower amortized cost basis.

Certain investments in debt and equity securities are reported in the financial statements at an amount less than their historical cost. The historical cost of these investments totaled $12,423,000 and $273,853,000 at September 30, 2011, and December 31, 2010, respectively. Total fair value of these investments at September 30, 2011, and December 31, 2010, was $6,909,000 and $261,542,000, which is approximately 0.7 percent and 31.6 percent of the Corporation’s available for sale and held to maturity investment portfolio at September 30, 2011, and December 31, 2010.

Except as discussed below, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the OTTI is identified.

The following table shows the Corporation’s investments’ 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 September 30, 2011, and December 31, 2010:

	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Temporarily Impaired Investment
Securities at September 30, 2011
State and municipal	$	1,548	$	(2	)						$	1,548	$	(2	)
Mortgage-backed securities		5,196		(33	)							5,196		(33	)
Corporate obligations						$	165	$	(5,479	)		165		(5,479	)
Total Temporarily Impaired Investment Securities	$	6,744	$	(35	)	$	165	$	(5,479	)	$	6,909	$	(5,514	)

	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Temporarily Impaired Investment
Securities at December 31, 2010
State and municipal	$	31,796	$	(745	)						$	31,796	$	(745	)
Mortgage-backed securities		229,441		(5,892	)	$	154					229,595		(5,892	)
Corporate obligations							151	$	(5,674	)		151		(5,674	)
Total Temporarily Impaired Investment Securities	$	261,237	$	(6,637	)	$	305	$	(5,674	)	$	261,542	$	(12,311	)

Mortgage-backed Securities

The unrealized losses of $33,000 on the Corporation’s investment in mortgage-backed securities were a result of changes in interest rates. The Corporation expects to recover the amortized cost basis over the term of the securities as the decline in market value is attributable to changes in interest rates and not credit quality. The Corporation does not intend to sell the investment and it is not more likely than not that the Corporation will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity. The Corporation does not consider the investment securities to be other-than-temporarily impaired at September 30, 2011.

State and Political Subdivisions

The unrealized losses of $2,000 on the Corporation’s investments in securities of state and political subdivisions were caused by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Corporation does not intend to sell the investment and it is not more likely than not that the Corporation will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity. The Corporation does not consider the investment securities to be other-than-temporarily impaired at September 30, 2011.

Corporate Obligations

The Corporation’s unrealized losses on Corporate Obligations, primarily pooled trust preferred securities, total $5.5 million on a book value of $5.7 million at September 30, 2011. All of the decline in value is related to the pooled trust preferred securities and is attributable to temporary illiquidity and the financial crisis affecting these markets coupled with the potential credit loss resulting from the adverse change in expected cash flows. Due to the illiquidity in the market, it is unlikely that the Corporation would be able to recover its investment in these securities if the Corporation sold the securities at this time. Management has analyzed the cash flow characteristics of the securities and this analysis included utilizing the most recent trustee reports and any other relevant market information including announcements of deferrals or defaults of trust preferred securities. The Corporation did not recognize an OTTI loss in the three months ended September 30, 2011. The Corporation did recognize and OTTI loss of $400,000 in the nine months ended September 30, 2011, equal to the credit loss, establishing a new, lower amortized cost basis. The credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. The Corporation does not intend to sell the investment and it is not more likely than not that the Corporation will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity. The Corporation does not consider the remainder of the investment securities, which are classified as Level 3 inputs in the fair value hierarchy, to be other-than-temporarily impaired at September 30, 2011.

Credit Losses Recognized on Investments

Certain debt securities have experienced fair value deterioration due to credit losses and other market factors. The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income.

	Accumulated Credit Losses in 2011		Accumulated Credit Losses in 2010
Credit losses on debt securities held:
Balance, January 1	$	10,955	$	9,411
Additions related to other-than-temporary losses not previously recognized		400		1,544
Balance, September 30	$	11,355	$	10,955