NOTE 5. SECURITIES

Information related to the fair value and amortized cost of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) is provided in the tables below.

			Gross		Gross
	Fair		Unrealized		Unrealized		Amortized
	Value		Gain		Losses		Cost
June 30, 2013
U.S. Treasury securities	$	1,027	$	26	$	0	$	1,001
U.S. government sponsored agencies		5,224		202		0		5,022
Agency residential mortgage-backed securities		366,418		5,790		(6,555)		367,183
Non-agency residential mortgage-backed securities		5,392		167		0		5,225
State and municipal securities		94,915		3,730		(1,566)		92,751
Total	$	472,976	$	9,915	$	(8,121)	$	471,182

December 31, 2012
U.S. Treasury securities	$	1,037	$	35	$	0	$	1,002
U.S. government sponsored agencies		5,304		278		0		5,026
Agency residential mortgage-backed securities		365,644		7,813		(1,495)		359,326
Non-agency residential mortgage-backed securities		6,453		242		0		6,211
State and municipal securities		88,583		5,509		(189)		83,263
Total	$	467,021	$	13,877	$	(1,684)	$	454,828

Information regarding the fair value and amortized cost of available for sale debt securities by maturity as of June 30, 2013 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without a prepayment penalty.

	Amortized		Fair
	Cost		Value
Due in one year or less	$	3,192	$	3,259
Due after one year through five years		26,030		27,527
Due after five years through ten years		39,306		40,700
Due after ten years		30,246		29,680
		98,774		101,166
Mortgage-backed securities		372,408		371,810
Total debt securities	$	471,182	$	472,976

There were no securities sales during the first six months of 2013 and 2012. All of the gains in 2013 and 2012 were from calls.

Purchase premiums or discounts are recognized in interest income using the interest method over the terms of the securities or over the estimated lives for mortgage-backed securities. Gains and losses on sales are based on the amortized cost of the security sold and recorded on the trade date.

Securities with carrying values of $171.9 million and $216.5 million were pledged as of June 30, 2013 and 2012, as collateral for deposits of public funds, securities sold under agreements to repurchase, borrowings from the Federal Home Loan Bank and for other purposes as permitted or required by law.

Information regarding securities with unrealized losses as of June 30, 2013 and December 31, 2012 is presented below. The tables divide the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more.

	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
June 30, 2013

Agency residential mortgage-backed securities	$	168,399	$	(6,118)	$	23,900	$	(437)	$	192,299	$	(6,555)
State and municipal securities		22,860		(1,566)		0		0		22,860		(1,566)
Total temporarily impaired	$	191,259	$	(7,684)	$	23,900	$	(437)	$	215,159	$	(8,121)

December 31, 2012

Agency residential mortgage-backed securities	$	92,974	$	(1,066)	$	20,422	$	(429)	$	113,396	$	(1,495)
State and municipal securities		10,791		(188)		50		(1)		10,841		(189)
Total temporarily impaired	$	103,765	$	(1,254)	$	20,472	$	(430)	$	124,237	$	(1,684)

The number of securities with unrealized losses as of June 30, 2013 and December 31, 2012 is presented below.

	Less than		12 months
	12 months		or more		Total
June 30, 2013

Agency residential mortgage-backed securities		43		10		53
State and municipal securities		49		0		49
Total temporarily impaired		92		10		102

	Less than		12 months
	12 months		or more		Total
December 31, 2012

Agency residential mortgage-backed securities		29		9		38
State and municipal securities		29		1		30
Total temporarily impaired		58		10		68

The following factors are considered to determine whether or not the impairment of these securities is other-than-temporary. Ninety-eight percent of the securities are backed by the U.S. government, government agencies, government sponsored agencies or are A- rated or better by Moody’s, S&P or Fitch, except for certain non-local or local municipal securities, which are not rated. Mortgage-backed securities, which are not issued by the U.S. government or government sponsored agencies (non-agency residential mortgage-backed securities), met specific criteria set by the Asset Liability Management Committee at their time of purchase, including having the highest rating available by either Moody’s, S&P or Fitch. None of the securities have call provisions (with the exception of the municipal securities) and all payments as originally agreed are being received on their original terms. For the government, government-sponsored agency and municipal securities, management did not have concerns of credit losses, and there was nothing to indicate that full principal will not be received. Management considered the unrealized losses on these securities to be primarily interest rate driven and does not expect material losses given current market conditions unless the securities are sold. However, at this time management does not have the intent to sell, and it is more likely than not that it will not be required to sell these securities before the recovery of their amortized cost basis.

As of June 30, 2013, the Company had $5.4 million of non-agency residential mortgage-backed securities which were not issued by the U.S. government or government sponsored agencies, but which were rated AAA by S&P or Fitch and/or Aaa by Moody’s at the time of purchase. As of December 31, 2012, the Company had $6.5 million of non-agency residential mortgage-backed securities which were not issued by the federal government or government sponsored agencies, but which were rated AAA by S&P and/or Aaa by Moody’s at the time of purchase. None of the four non-agency residential mortgage-backed securities were still rated AAA/Aaa as of June 30, 2013 by at least one of the rating agencies and one had been downgraded to below investment grade by at least one of those rating agencies.

For these non-agency residential mortgage-backed securities, additional analysis is performed to determine if any impairment is temporary or other-than-temporary, in which case impairment would need to be recorded for these securities. The Company performs an independent analysis of the cash flows of the individual securities based upon assumptions as to collateral defaults, prepayment speeds, expected losses and the severity of potential losses. Based upon the initial review, securities may be identified for further analysis by computing the net present value using an appropriate discount rate (the current accounting yield) and comparing it to the book value of the security to determine if there is any other-than-temporary impairment that must be recorded. Based on this analysis of the non-agency residential mortgage-backed securities, none of the four non-agency mortgage-backed securities had any unrealized losses or other-than-temporary impairment at June 30, 2013.

The following table provides information about debt securities for which only a credit loss was recognized in income and for which other losses are recorded in other comprehensive income. There were no securities with other than temporary impairment during the three and six months ended June 30, 2013. All securities with other than temporary impairment were sold during 2012. The table represents the three months and six months ended June 30, 2013 and 2012.

	Three Months Ended June 30,
	2013		2012
Balance April 1,	$	0	$	869
Additions related to other-than-temporary impairment losses not previously recognized		0		198
Additional increases to the amount of credit loss for which other-than-temporary impairment was previously recognized		0		251
Reductions for previous credit losses realized on securities sold during the year		0		0
Balance June 30,	$	0	$	1,318

	Six Months Ended June 30,
	2013		2012
Balance January 1,	$	0	$	359
Additions related to other-than-temporary impairment losses not previously recognized		0		747
Additional increases to the amount of credit loss for which other-than-temporary impairment was previously recognized		0		212
Reductions for previous credit losses realized on securities sold during the year		0		0
Balance June 30,	$	0	$	1,318

Information on securities with at least one rating below investment grade at June 30, 2013 is presented below.

6/30/2013

1-Month

3-Month

6-Month

Other Than

June 30, 2013

Lowest

Constant

Temporary

Par

Amortized

Fair

Unrealized

Credit

Default

Credit

Description

CUSIP

Impairment

Value

Cost

Value

Gain/(Loss)

Rating

Rate

Support

RALI 2004-QS7 A3

76110HTX7

2,567

2,551

2,591

BB+

2.97

3.30

3.21

9.99

This security is a super senior/senior tranche non-agency residential mortgage-backed security. The credit support is the credit support percentage for a tranche from other subordinated tranches, which is the amount of principal in the subordinated tranches expressed as a percentage of the remaining principal in the super senior/senior tranche. The super senior/senior tranches receive the prepayments and the subordinate tranches absorb the losses. The super senior/senior tranches do not absorb losses until the subordinate tranches are extinguished.

The Company does not have a history of actively trading securities but continues to hold securities available for sale should liquidity or other needs develop that would warrant the sale of securities. While these securities are held in the available for sale portfolio, it is management’s current intent to hold them until a recovery in fair value or maturity.