Investment securities available for sale

The amortized cost and fair values of investment securities available for sale were as follows:



September 30, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
In thousands
U.S. Treasury securities and obligations of U.S. government agencies	$	3,101	$	135	$	—	$	3,236
Obligations of U.S. government sponsored entities	13,456		175		32		13,599
Obligations of state and political subdivisions	9,586		492		—		10,078
Mortgage-backed securities	57,147		3,319		—		60,466
Other debt securities	8,364		26		2,168		6,222
Equity securities:			—		—
Marketable securities	774		—		17		757
Nonmarketable securities	115		—		—		115
Federal Reserve Bank and Federal Home Loan Bank stock	1,870		—		—		1,870
Total	$	94,413	$	4,147	$	2,217	$	96,343



December 31, 2010	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
In thousands
U.S. Treasury securities and obligations of U.S. government agencies	$	3,389	$	64	$	24	$	3,429
Obligations of U.S. government sponsored entities	15,447		100		267		15,280
Obligations of state and political subdivisions	9,604		194		285		9,513
Mortgage-backed securities	66,037		1,892		24		67,905
Other debt securities	8,358		37		1,839		6,556
Equity securities:							0
Marketable securities	748		—		21		727
Nonmarketable securities	115		—		—		115
Federal Reserve Bank and Federal Home Loan Bank stock	1,895		—		—		1,895
Total	$	105,593	$	2,287	$	2,460	$	105,420

The amortized cost and the fair value of investment securities available for sale are distributed by contractual maturity without regard to normal amortization, including mortgage-backed securities, which will have shorter estimated lives as a result of prepayments of the underlying mortgages.



September 30, 2011	Amortized Cost		Fair Value
In thousands
Due after one year but within five years:
U.S. Treasury securities and obligations of U.S. government agencies	$	32	$	32
Obligations of state and political subdivisions	2,230		2,381
Obligations of U.S. government sponsored entities	493		496
Mortgage-backed securities	454		476
Other debt securities	1,000		946
Due after five years but within ten years:
U.S. Treasury securities and obligations of U.S. government agencies	84		84
Obligations of state and political subdivisions	3,916		4,105
Obligations of U.S. government sponsored entities	3,395		3,487
Mortgage-backed securities	334		350
Due after ten years:
U.S. Treasury securities and obligations of U.S. government agencies	2,985		3,120
Obligations of state and political subdivisions	3,440		3,592
Obligations of U.S. government sponsored entities	9,568		9,616
Mortgage-backed securities	56,359		59,640
Other debt securities	7,364		5,276
Total debt securities	91,654		93,601
Equity securities	2,759		2,742
Total	$	94,413	$	96,343

Investment securities available for sale which have had continuous unrealized losses as of September 30, 2011 and December 31, 2010 are set forth below.



	Less than 12 Months				12 Months or More				Total
September 30, 2011			Gross Unrealized Losses				Gross Unrealized Losses				Gross Unrealized Losses
In thousands	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
U.S. Treasury securities and obligations of U.S. government agencies	$	—	$	—	$	63	$	—	$	63	$	—
Obligations of U.S. government sponsored entities	1,584		17		1,918		15		3,502		32
Other debt securities	883		52		4,778		2,116		5,661		2,168
Marketable equity securities	—		—		774		17		774		17
Total	$	2,467	$	69	$	7,533	$	2,148	$	10,000	$	2,217



	Less than 12 Months				12 Months or More				Total
December 31, 2010			Gross Unrealized Losses				Gross Unrealized Losses				Gross Unrealized Losses
In thousands	Fair Value				Fair Value				Fair Value
U.S. Treasury securities and obligations of U.S. government agencies	$	1,054	$	23	$	162	$	1	$	1,216	$	24
Obligations of U.S. government sponsored entities	6,733		254		2,080		13		8,813		267
Mortgaged-backed securities	6,219		24		—		—		6,219		24
Obligations of state and political subdivisions	5,147		285		—		—		5,147		285
Other debt securities	—		—		5,050		1,839		5,050		1,839
Equity securities	—		—		727		21		727		21
Total	$	19,153	$	586	$	8,019	$	1,874	$	27,172	$	2,460

The decline in investment securities with continuing unrealized losses was a result of improved valuations in our U.S. government agency, mortgage-backed securities and obligations of state and political subdivision portfolios.

In April 2009, FASB amended the impairment model for debt securities. The impairment model for equity securities was not affected. Under the new guidance, an other-than-temporary impairment loss must be fully recognized in earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, it must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in earnings. Amounts relating to factors other than credit losses are recorded in accumulated other comprehensive income. The guidance also requires additional disclosures regarding the calculation of credit losses as well as factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired. The Corporation adopted the new guidance effective April 1, 2009. The Corporation recorded a $1 million pre-tax transition adjustment for the non-credit portion of other-than-temporarily impaired (“OTTI”) on securities held at April 1, 2009 that were previously considered other-than-temporarily impaired.

The following table presents a rollforward of the credit loss component of other-than-temporary impairment losses (“OTTI”) on debt securities for which a non-credit component of OTTI was recognized in other comprehensive income (loss). The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to April 1, 2009. OTTI recognized in earnings after that date for credit-impaired debt securities is presented as additions in two components, based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment) or is not the first time a debt security was credit impaired (subsequent credit impairment).

Changes in the credit loss component of credit-impaired debt securities were as follows:



	For the Nine Months Ended		For the Nine Months Ended
In thousands	September 30, 2011		September 30, 2010
Balance, beginning of period	$	—	$	2,489
Add: Initial credit impairments	—		—
Additional credit impairments	—		—
Less: Sale of investment securities	—		—
Balance, end of period	$	—	$	2,489

During the first nine months of 2011 and 2010, respectively, we recorded no OTTI charges.

The Bank owns a collateralized debt obligation (“CDO”) with a carrying value of $996,000 and market value of $408,000 on which no impairment losses have been recorded because it is expected that this security will perform in accordance with its original terms and that the carrying value is fully recoverable based on the investment's payment performance, higher market valuations and a third-party consultant's conclusion that the investment will continue to be fully performing and be fully recoverable in accordance with the terms of the agreement. Additional information is presented below.




In thousands	September 30, 2011
Par value	$	1,000
Carrying value	$	996
Fair value	$	408
Unrealized loss	$	588
Number of original issuers	50
Number of currently underlying banks in issuance	35
Number of defaulting and deferring banks	12
Percentage of remaining banks expected to default or defer payment (annually)	1.2		%
Subordination	29.20		%

The 29.2% subordination means that the tranche that we own has excess collateral providing additional collateral support to the tranche. Additionally, the Bank owns a portfolio of six single-issuer trust preferred securities with a carrying value of $4.5 million and a market value of $3.3 million, compared to a market value of $3.4 million at the end of 2010. Finally, the Bank also owns corporate securities with a carrying value of $1.9 million and a market value of $1.6 million that are rated below investment grade. None of these securities are considered impaired as they are all fully performing and are expected to continue performing.

Available for sale securities in unrealized loss positions are analyzed as part of the Corporation's ongoing assessment of OTTI. When the Corporation intends to sell available-for-sale securities, the Corporation recognizes an impairment loss equal to the full difference between the amortized cost basis and fair value of those securities. When the Corporation does not intend to sell available for sale securities in an unrealized loss position, potential OTTI is considered based on a variety of factors, including the length of time and extent to which the fair value has been less than cost; adverse conditions specifically related to the industry, the geographic area or financial condition of the issuer or the underlying collateral of a security; the payment structure of the security; changes to the rating of the security by rating agencies; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet date. For debt securities, the Corporation estimates cash flows over the remaining lives of the underlying collateral to assess whether credit losses exist and to determine if any adverse changes in cash flows have occurred. The Corporation's cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting period.

Other factors considered in determining whether a loss is temporary include the length of time and the extent to which fair value has been below cost; the severity of the impairment; the cause of the impairment; the financial condition and near-term prospects of the issuer; activity in the market of the issuer which may indicate adverse credit conditions; and the forecasted recovery period using current estimates of volatility in market interest rates (including liquidity and risk premiums).

Management's assertion regarding its intent not to sell or that it is not more likely than not that the Corporation will be required to sell the security before its anticipated recovery considers a number of factors, including a quantitative estimate of the expected recovery period (which may extend to maturity), and management's intended strategy with respect to the identified security or portfolio. If management does have the intent to sell or believes it is more likely than not that the Corporation will be required to sell the security before its anticipated recovery, the gross unrealized loss is charged directly to earnings in the Consolidated Statements of Operations.

As of September 30, 2011, the Corporation does not intend to sell the securities with an unrealized loss position in accumulated other comprehensive loss (“AOCL”), and it is not more likely than not that the Corporation will be required to sell these securities before recovery of their amortized cost basis. The Corporation believes that the securities with an unrealized loss in AOCL are not other than temporarily impaired as of September 30, 2011.