3. Securities

Securities available-for-sale at December 31, 2011 and 2010 are as follows:


	December 31, 2011								December 31, 2010
	Amortized Cost		Unrealized				Fair Value		Amortized Cost		Unrealized					Fair Value
	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses			Fair Value
U.S. Treasury		$ 8,064		$ $66		$ —		$ 8,130		$ 8,139		$ 66	$	—			$ 8,205
U.S. Gov't sponsored entities		102,258		5,249		(15)		107,492		104,328		2,016		(403	)		105,941
State & political subdivisions		149,685		8,844		(92)		158,437		117,928		1,011		(2,528	)		116,411
Residential mortgage & asset backed		292,297		8,043		(214)		300,126		221,304		2,364		(1,249	)		222,419
Commercial mortgage & asset backed		2,077		45		-		2,122		-		-		-			-
Corporate notes & bonds		17,358		50		(3,548)		13,860		14,347		-		(3,596	)		10,751
Pooled trust preferred		800		-		(460)		340		2,190		12		(910	)		1,292
Pooled SBA		44,851		1,282		(77)		46,056		33,788		266		(92	)		33,962
Other securities		1,521		23		-		1,544		1,670		26		-			1,696

Total		$618,911		$23,602		$(4,406)		$638,107		$503,694		$5,761		$(8,778)			$500,677

At December 31, 2011 and 2010, there were no holdings of securities by any one issuer, other than U.S. Government sponsored entities, in an amount greater than 10% of shareholders' equity.

Trading securities accounted for under the fair value option at December 31, 2011 and 2010 are as follows:


	2011		2010

Corporate equity securities	$	1,959	$	952
International mutual funds		257		430
Certificates of deposit		255		208
Money market mutual funds		241		75
Large cap growth mutual funds		145		139
Large cap value mutual funds		105		247
Corporate notes and bonds		100		96
Real estate investment trust mutual funds		68		-
U.S. Government sponsored entities		55		147
Small cap mutual funds		25		29
Mid cap mutual funds		23		28

Total	$	3,233	$	2,351

Securities with unrealized losses at December 31, 2011 and 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:


December 31, 2011	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss


U.S. Treasury	$	-	$	-		$	-	$	-		$	-	$	-
U.S. Gov't sponsored entities		7,671		(15	)		-		-			7,671		(15	)
State & political subdivisions		5,314		(92	)		-		-			5,314		(92	)
Residential mortgage & asset backed		36,626		(162	)		9,485		(52	)		46,111		(214	)
Commercial mortgage & asset backed		-		-			-		-			-		-
Corporate notes & bonds		2,860		(139	)		8,841		(3,409	)		11,701		(3,548	)
Pooled trust preferred		-		-			340		(460	)		340		(460	)
Pooled SBA		8,139		(77	)		-		-			8,139		(77	)
Other securities		-		-			-		-			-		-

	$	60,610	$	(485	)	$	18,666	$	(3,921	)	$	79,276	$	(4,406	)


	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
December 31, 2010

U.S. Treasury	$	-	$	-		$	-	$	-		$	-	$	-
U.S. Gov't sponsored entities		11,077		(403	)		-		-			11,077		(403	)
State & political subdivisions		61,312		(2,440	)		3,904		(88	)		65,216		(2,528	)
Residential mortgage & asset backed		69,576		(1,228	)		5,770		(21	)		75,346		(1,249	)
Corporate notes & bonds		992		(3	)		9,770		(3,593	)		10,762		(3,596	)
Pooled trust preferred		-		-			288		(910	)		288		(910	)
Pooled SBA		12,147		(92	)		-		-			12,147		(92	)
Other securities		-		-			-		-			-		-

	$	155,104	$	(4,166	)	$	19,732	$	(4,612	)	$	174,836	$	(8,778	)

The Corporation evaluates securities for other-than-temporary impairment on a quarterly basis, or more frequently when economic or market conditions warrant such an evaluation.

At December 31, 2011, management evaluated the structured pooled trust preferred securities for other-than-temporary impairment by estimating the cash flows expected to be received from each security within the collateral pool, taking into account future estimated levels of deferrals and defaults by the underlying issuers, and discounting those cash flows at the appropriate accounting yield. Management also assumed that all issuers in deferral will default prior to their next payment date. Trust preferred collateral is deeply subordinated within issuers' capital structures, so large recoveries are unlikely. Accordingly, management assumed 10% recoveries on bank collateral and none on collateral issued by other companies. Due to the ongoing crisis in the U.S. economy, management also added a baseline default rate of 2% annually for the next two years to default projections for specific issuers. This percentage represents the peak, post-war bank default rate that occurred at the height of the savings and loan crisis, which we believe is an accurate proxy for the current environment. Management expects that credit markets will begin to normalize and that banks with the financial strength to survive will default at a .36% average annual rate, which represents Moody's idealized default probability for BBB corporate credits, and is in line with historical bank failure rates. In addition, management expects prepayments to occur at a rate of approximately 5% over a five year period, with the exception of certain large institutions that are expected to call their collateral in 2012 as a result of the elimination of the Tier I capital treatment of trust preferred securities for institutions with greater than $15 billion in assets beginning in 2013.

Using this methodology, five of the Corporation's structured pooled trust preferred securities are deemed to be other-than-temporarily impaired as disclosed in the table that follows. The Corporation separated the other-than-temporary impairment related to these structured pooled trust preferred securities into (a) the amount of the total impairment related to credit loss, which is recognized in the income statement, and (b) the amount of the total impairment related to all other factors, which is recognized in other comprehensive income. The Corporation measured the credit loss component of other-than-temporary impairment based on the difference between the cost basis and the present value of cash flows expected to be collected.

In addition, Standard & Poors downgraded one of Corporation's private label collateralized mortgage obligations from AAA to CCC during the third quarter of 2009 and, as a result, the Corporation evaluated this security for other-than-temporary impairment. The amount of other-than-temporary impairment recognized in income during the year ended December 31, 2009 was $28. Because of the continuing deterioration of fair value, as well as additional information about this security that was published in the fourth quarter of 2009, the security was sold in November 2009, resulting in a realized loss of $572.

The following table provides detailed information related to the Corporation's structured pooled trust preferred securities as of December 31, 2011 and for the years ended December 31, 2011, 2010, and 2009:


	As of December 31, 2011							Credit Losses Realizedin Earnings
	Adjusted Amortized		Unrealized Gain			Fair		Year Ended December 31 ,
	Cost		(Loss)			Value		2011		2010		2009
ALESCO Preferred Funding V, Ltd.	$	800	$	(460	)	$	340	$	-	$	440	$	760
ALESCO Preferred Funding XII, Ltd.		-		-			-		280		933		655
ALESCO Preferred Funding XVII, Ltd.		-		-			-		-		-		1,000
Preferred Term Securities XVI, Ltd.		-		-			-		118		868		-
US Capital Funding VI, Ltd.		-		-			-		-		-		-
Total	$	800	$	(460	)	$	340	$	398	$	2,241	$	2,415

A roll-forward of the other-than-temporary impairment amount related to credit losses for the year ended December 31, 2011 is as follows:


Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, beginning of period	$	3,656
Additional credit loss for which other-than-temporary impairment was not previously recognized		—
Additional credit loss for which other-than-temporary impairment was previously recognized		398

Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, end of period	$	4,054

A roll-forward of the other-than-temporary impairment amount related to credit losses for the year ended December 31, 2010 is as follows:


Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, beginning of period	$	1,415
Additional credit loss for which other-than-temporary impairment was not previously recognized		868
Additional credit loss for which other-than-temporary impairment was previously recognized		1,373

Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, end of period	$	3,656

At December 31, 2011, the Corporation held five structured pooled trust preferred securities, primarily from issuers in the financial services industry, which are not currently trading in an active, open market with readily observable prices. As a result, these securities were classified within Level 3 of the valuation hierarchy. The fair values of these securities have been calculated using a discounted cash flow model and market liquidity premium. With the current market conditions, the assumptions used to determine the fair value of Level 3 securities have greater subjectivity due to the lack of observable market transactions. The fair values of these securities have declined due to the fact that subsequent offerings of similar securities pay a higher market rate of return. This higher rate of return reflects the increased credit and liquidity risks in the marketplace. Except as described above, based on management's evaluation of the structured pooled trust preferred securities, the present value of the projected cash flows is sufficient for full repayment of the amortized cost of the securities and, therefore, it is believed that the decline in fair value is temporary due to current market conditions. However, without recovery of these securities, other-than-temporary impairments may occur in future periods.

For the securities that comprise corporate notes and bonds and the securities that comprise states and political subdivisions, management monitors publicly available financial information such as filings with the Securities and Exchange Commission in order to evaluate the securities for other-than-temporary impairment. For financial institution issuers, management also monitors information from quarterly "call" report filings that are used to generate Uniform Bank Performance Reports. When reviewing this information, management considers the financial condition and near term prospects of the issuer and whether downgrades by bond rating agencies have occurred. Management also considers the length of time and extent to which fair value has been less than cost and the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

As of December 31, 2011 and 2010, management concluded that the securities described in the previous paragraph were not other-than-temporarily impaired for the following reasons:

—

There is no indication of any significant deterioration of the creditworthiness of the institutions that issued the securities.

—

The unrealized losses are predominantly attributable to liquidity disruptions within the credit markets and the generally stressed condition of the financial services industry.

—

All contractual interest payments on the securities have been received as scheduled, and no information has come to management's attention through the processes previously described which would lead to a conclusion that future contractual payments will not be received timely.

The Corporation does not intend to sell and it is not more likely than not that it will be required to sell the securities in an unrealized loss position before recovery of its amortized cost basis.

On December 31, 2011 and 2010, securities carried at $264,166 and $127,364, respectively, were pledged to secure public deposits and for other purposes as provided by law.

The following is a schedule of the contractual maturity of securities available for sale, excluding equity securities, at December 31, 2011 and 2010:


	December 31, 2011
	Amortized Cost		Fair Value
1 year or less	$	23,053	$	23,175
1 year – 5 years		81,421		83,503
5 years – 10 years		118,393		126,928
After 10 years		100,149		100,709

		323,016		334,315
Residential mortgage & asset backed securities		292,297		300,126
Commercial mortgage & asset backed securities		2,077		2,122

Total debt securities	$	617,390	$	636,563

Mortgage and asset backed securities are not due at a single date; periodic payments are received based on the payment patterns of the underlying collateral.

Information pertaining to security sales is as follows:


Year ended December 31	Proceeds		Gross Gains		Gross Losses

2011	$	69,740	$	878	$	264
2010		95,381		1,677		17

2009		107,561		2,042		1,647

The tax provision related to these net realized gains was $215, $581, and $138, respectively.

During 2011 and 2010, the Corporation sold securities carried at fair value under the fair value option. Proceeds were $343 in 2011 and $34 in 2010, resulting in net gains (losses) of $30 in 2011 and ($68) in 2010.