NOTE 5. SECURITIES

Securities are classified as available-for-sale if the Company intends and has the ability to hold those securities for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities designated as available-for-sale are carried at fair value. Unrealized holding gains or losses are included in other comprehensive income (OCI) as a separate component of shareholders’ equity, net of tax. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.

Debt securities are classified as held-to-maturity if the Company has both the intent and ability to hold those securities to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost, adjusted for amortization of premium and accretion of discount, computed by the effective interest method over their contractual lives.

Transfers of securities from available-for-sale to held-to-maturity are accounted for at fair value as of the date of the transfer. The difference between the fair value and the amortized cost at the date of transfer is considered a premium or discount and is accounted for accordingly. Any unrealized gain or loss at the date of the transfer is reported in OCI, and is amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount, and will offset or mitigate the effect on interest income of the amortization of the premium or discount for that held to maturity security.

During August of 2012, the Company transferred certain available-for-sale securities to the held-to-maturity category. Management determined they had the positive intent and ability to hold these securities for an indefinite period of time, due to their relatively higher yields, relatively lower coupons, longer maturities, and in some instances their community reinvestment act qualifications. The securities transferred had a total amortized cost of $18.0 million, fair value of $18.8 million, unrealized gross gains of $874 thousand and unrealized gross losses of $35 thousand at the time of transfer. The net unrealized gain of $839 thousand which was recorded in OCI net of tax will be amortized over the life of the securities as an adjustment to yield. The Company did not have any transfers in or out of the various securities classifications for the three and nine months ended September 30, 2013.

The following table presents the amortized costs, gross unrealized gains, gross unrealized losses and approximate fair values of investment securities at September 30, 2013, and December 31, 2012:


(Dollars in thousands)	As of September 30, 2013
	Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-sale securities
U.S. government & agencies	$	4,024	$	0	$	(306	)	$	3,718
Obligations of state and political subdivisions		63,118		658		(2,284	)		61,492
Residential mortgage backed securities and collateralized mortgage obligations		59,013		374		(1,453	)		57,934
Corporate securities		53,279		379		(1,106	)		52,552
Other asset backed securities		34,462		441		(957	)		33,946

Total	$	213,896	$	1,852	$	(6,106	)	$	209,642

Held-to-maturity securities
Obligations of state and political subdivisions	$	34,814	$	32	$	(2,944	)	$	31,902


(Dollars in thousands)	As of December 31, 2012
	Amortized Costs		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-sale securities
U.S. government & agencies	$	2,970	$	0	$	(24	)	$	2,946
Obligations of state and political subdivisions		56,802		1,797		(115	)		58,484
Residential mortgage backed securities and collateralized mortgage obligations		51,177		670		(317	)		51,530
Corporate securities		60,516		1,358		(318	)		61,556
Other asset backed securities		22,958		271		(391	)		22,838

Total	$	194,423	$	4,096	$	(1,165	)	$	197,354

Held-to-maturity securities
Obligations of state and political subdivisions	$	31,483	$	60	$	(50	)	$	31,493

The amortized cost and estimated fair value of available-for-sale and held-to-maturity securities as of September 30, 2013, are shown below.


(Dollars in thousands)	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
AMOUNTS MATURING IN:
One year or less	$	2,681	$	2,758	$	0	$	0
One year through five years		55,679		55,776		722		745
Five years through ten years		88,137		85,554		13,073		12,442
After ten years		67,399		65,554		21,019		18,715

	$	213,896	$	209,642	$	34,814	$	31,902

The amortized cost and fair value of collateralized mortgage obligations and mortgage backed securities are presented by their expected average life, rather than contractual maturity, in the preceding table. Expected maturities may differ from contractual.

The Company held $47.7 million in securities with safekeeping institutions for pledging purposes. Of this amount, $20.5 million were pledged as of September 30, 2013. The following table presents the fair market value of the securities held, segregated by purpose, as of September 30, 2013:


(Dollars in thousands)	Amount
Public funds collateral	$	20,935
Collateralized repurchase agreements		2,996
Federal Home Loan Bank borrowings		18,023
Interest rate swap contracts		5,767

Total securities held for pledging purposes	$	47,721

The following table presents the cash proceeds from sales of securities and their associated gross realized gains and gross realized losses that have been included in earnings for the three and nine months ended September 30, 2013 and 2012:


	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2013			2012			2013			2012
Proceeds from sales of securities	$	32,502		$	18,450		$	77,845		$	72,261

Gross realized gains on sales of securities:
Obligations of state and political subdivisions	$	35		$	399		$	212		$	1,276
Residential mortgage backed securities and collateralized mortgage obligations		135			77			240			260
Corporate securities		419			101			780			316
Other asset backed securities		0			2			52			14

Total gross realized gains on sales of securities		589			579			1,284			1,866
Gross realized losses on sales of securities
U.S. government and agencies		(73	)		0			(100	)		0
Obligations of state and political subdivisions		(108	)		0			(118	)		0
Residential mortgage backed securities and collateralized mortgage obligations		(13	)		(29	)		(63	)		(110	)
Corporate securities		(12	)		0			(25	)		(16	)
Other asset backed securities		(47	)		0			(47	)		(3	)

Total gross realized losses on sales of securities		(253	)		(29	)		(353	)		(129	)

Net gains on sales of securities	$	336		$	550		$	931		$	1,737

The following tables present the current fair value and associated unrealized losses on investments with unrealized losses at September 30, 2013, and December 31, 2012. The tables also illustrate whether these securities have had unrealized losses for less than 12 months or for 12 months or longer.


	As of September 30, 2013
(Dollars in thousands)	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-sale securities
U.S. government and agencies	$	3,718	$	(306	)	$	0	$	0		$	3,718	$	(306	)
Obligations of states and political subdivisions		37,918		(2,258	)		982		(26	)		38,900		(2,284	)
Residential mortgage backed securities and collateralized mortgage obligations		35,375		(1,410	)		2,468		(43	)		37,843		(1,453	)
Corporate securities		32,972		(1,021	)		1,911		(85	)		34,883		(1,106	)
Other asset backed securities		17,271		(783	)		1,442		(174	)		18,713		(957	)

Total temporarily impaired securities	$	127,254	$	(5,778	)	$	6,803	$	(328	)	$	134,057	$	(6,106	)

Held-to-maturity securities

Obligations of states and political subdivisions	$	30,128	$	(2,906	)	$	408	$	(38	)	$	30,536	$	(2,944	)


	As of December 31, 2012
(Dollars in thousands)	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-sale securities
U.S. government & agencies	$	2,947	$	(24	)	$	0	$	0		$	2,947	$	(24	)
Obligations of states and political subdivisions		8,443		(109	)		166		(6	)		8,609		(115	)
Residential mortgage backed securities and collateralized mortgage obligations		14,367		(288	)		1,662		(29	)		16,029		(317	)
Corporate securities		16,036		(85	)		6,762		(233	)		22,798		(318	)
Other asset backed securities		9,626		(242	)		1,419		(149	)		11,045		(391	)

Total temporarily impaired securities	$	51,419	$	(748	)	$	10,009	$	(417	)	$	61,428	$	(1,165	)

Held-to-maturity securities

Obligations of states and political subdivisions	$	11,154	$	(50	)	$	0	$	0		$	11,154	$	(50	)

At September 30, 2013 two hundred securities were in unrealized loss positions and at December 31, 2012, eighty-two securities were in unrealized loss positions.

The unrealized losses on obligations of political subdivisions and corporate securities were caused by changes in market interest rates and or the widening of market spreads subsequent to the initial purchase of these securities. Management monitors published credit ratings of these securities and there have been no adverse ratings changes below investment grade since the date of purchase. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Company does not intend to sell the securities in these classes, and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

The available-for-sale residential mortgage backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at September 30, 2013, were issued by both public and private agencies. The unrealized losses on residential mortgage backed securities and collateralized mortgage obligations were caused by changes in market interest rates and or the widening of market spreads subsequent to the initial purchase of these securities, and not by the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. Because the decline in fair value is attributable to changes in interest rates and or widening market spreads and not credit quality, and because the Company does not intend to sell the securities in this class, and it is more likely than not the Company will not be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

Management reviews investment securities on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”) or permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is more likely than not that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors. For debt securities, if we intend to sell the security or it is more likely than not we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend to sell the security and it is more likely than not we will not be required to sell the security, but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to OCI. Impairment losses related to all other factors are presented as separate categories within OCI. For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the OTTI amount recorded in OCI will increase the carrying value of the investment, and would not affect earnings. If there is an indication of additional credit losses the security is re-evaluated according to the procedures described above. For the three and nine months ended September 30, 2013 and the year ended December 31, 2012, the Company did not recognize impairment losses.