NOTE 5. SECURITIES

The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at September 30, 2011, December 31, 2010, and June 30, 2010 are summarized as follows:

	September 30, 2011
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities:
U. S. Government agencies
and corporations	$	8,351	$	494	$	-	$	8,845
Residential mortgage-backed securities:
Government-sponsored agencies		153,271		3,974		521		156,724
Nongovernment-sponsored agencies		40,946		1,072		1,738		40,280
State and political subdivisions		4,561		23		5		4,579
Corporate debt securities		999		-		152		847
Total taxable debt securities		208,128		5,563		2,416		211,275
Tax-exempt debt securities:
State and political subdivisions		78,179		3,102		191		81,090
Total tax-exempt debt securities		78,179		3,102		191		81,090
Equity securities		77		-		-		77
Total available for sale securities	$	286,384	$	8,665	$	2,607	$	292,442

	December 31, 2010
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities
U. S. Government agencies
and corporations	$	30,645	$	319	$	299	$	30,665
Residential mortgage-backed securities:
Government-sponsored agencies		119,608		3,642		213		123,037
Nongovernment-sponsored entities		60,257		2,528		3,518		59,267
State and political subdivisions		23,342		6		960		22,388
Corporate debt securities		999		-		50		949
Total taxable debt securities		234,851		6,495		5,040		236,306
Tax-exempt debt securities
State and political subdivisions		35,843		211		707		35,347
Total tax-exempt debt securities		35,843		211		707		35,347
Equity securities		77		-		-		77
Total available for sale securities	$	270,771	$	6,706	$	5,747	$	271,730

	September 30, 2010
	Amortized		Unrealized				Estimated
In thousands	Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities:
U. S. Government agencies
and corporations	$	46,008	$	944	$	15	$	46,937
Residential mortgage-backed securities:
Government-sponsored agencies		104,419		4,553		85		108,887
Nongovernment-sponsored agencies		66,272		1,212		5,024		62,460
State and political subdivisions		8,561		72		5		8,628
Corporate debt securities		999		-		16		983
Total taxable debt securities		226,259		6,781		5,145		227,895
Tax-exempt debt securities:
State and political subdivisions		38,547		1,423		86		39,884
Total tax-exempt debt securities		38,547		1,423		86		39,884
Equity securities		77		-		-		77
Total available for sale securities	$	264,883	$	8,204	$	5,231	$	267,856

The maturities, amortized cost and estimated fair values of securities at September 30, 2011, are summarized as follows:

	Available for Sale
	Amortized		Estimated
Dollars in thousands	Cost		Fair Value
Due in one year or less	$	73,784	$	74,352
Due from one to five years		93,258		96,403
Due from five to ten years		22,653		22,766
Due after ten years		96,612		98,844
Equity securities		77		77
Total	$	286,384	$	292,442

The proceeds from sales, calls and maturities of available for sale securities, including principal payments received on mortgage-backed obligations, and the related gross gains and losses realized, for the nine months ended September 30, 2011 are as follows:

	Proceeds from						Gross realized
			Calls and		Principal
Dollars in thousands	Sales		Maturities		Payments		Gains		Losses

Securities available for sale	$	97,826	$	6,985	$	43,385	$	3,805	$	342

During the three and nine months ended September 30, 2011, we recorded other-than-temporary impairment losses on securities as follows:

	Three Months Ended								Nine Months Ended
	Residential MBS								Residential MBS
	Nongovernment								Nongovernment
	- Sponsored			Equity					- Sponsored			Equity
In thousands	Entities			Securities		Total			Entities			Securities		Total
September 30, 2011
Total other-than-temporary impairment losses	$	(1,684	)	$	-	$	(1,684	)	$	(4,815	)	$	-	$	(4,815	)
Portion of loss recognized in
other comprehensive income		1,200			-		1,200			2,570			-		2,570
Net impairment losses recognized in earnings	$	(484	)	$	-	$	(484	)	$	(2,245	)	$	-	$	(2,245	)

September 30, 2010
Total other-than-temporary impairment losses	$	(184	)	$	-	$	(184	)	$	(638	)	$	-	$	(638	)
Portion of loss recognized in
other comprehensive income		75			-		75			500			-		500
Net impairment losses recognized in earnings	$	(109	)	$	-	$	(109	)	$	(138	)	$	-	$	(138	)

Activity related to the credit component recognized on debt securities available for sale for which a portion of other-than-temporary impairment was recognized in other comprehensive income for the three and nine months ended September 30, 2011 is as follows:

	Three Months Ended			Nine Months Ended
	September 30, 2011			September 30, 2011

In thousands	Total			Total
Beginning Balance	$	(5,470	)	$	(3,910	)
Additions for the credit component on debt securities in which
other-than-temporary impairment was not previously recognized		(484	)		(2,245	)
Securities sold during the period		-			201
Ending Balance	$	(5,954	)	$	(5,954	)

At September 30, 2011, our debt securities with other-than-temporary impairment in which only the amount of loss related to credit was recognized in earnings consisted solely of residential mortgage-backed securities issued by nongovernment-sponsored entities. We utilize third party vendors to estimate the portion of loss attributable to credit using a discounted cash flow model. The vendors estimate cash flows of the underlying collateral of each mortgage-backed security using models that incorporate their best estimates of current key assumptions, such as default rates, loss severity and prepayment rates. Assumptions utilized vary widely from security to security, and are influenced by such factors as underlying loan interest rates, geographical location of underlying borrowers, collateral type and other borrower characteristics. Specific such assumptions utilized by our vendors in their valuation of our other-than-temporarily impaired residential mortgage-backed securities issued by nongovernment-sponsored entities were as follows at September 30, 2011:

	Weighted			Range
	Average			Minimum			Maximum
Constant voluntary prepayment rates		8.2	%		0.8	%		22.4	%
Constant default rates		5.5	%		3.7	%		10.0	%
Loss severities		47.9	%		40.0	%		57.0	%

Our vendors performing these valuations also analyze the structure of each mortgage-backed instrument in order to determine how the estimated cash flows of the underlying collateral will be distributed to each security issued from the structure. Expected principal and interest cash flows on the impaired debt securities are discounted predominantly using unobservable discount rates which the vendors assume that market participants would utilize in pricing the specific security. Based on the discounted expected cash flows derived from our vendor's models, we expect to recover the remaining unrealized losses on residential mortgage-backed securities issued by nongovernment sponsored entities.

Provided below is a summary of securities available for sale which were in an unrealized loss position at September 30, 2011 and December 31, 2010, including debt securities for which a portion of other-than-temporary impairment has been recognized in other comprehensive income.

	September 30, 2011
	Less than 12 months					12 months or more					Total
	Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized
Dollars in thousands	Fair Value		Loss			Fair Value		Loss			Fair Value		Loss
Temporarily impaired securities
Taxable debt securities
U. S. Government agencies
and corporations	$	-	$	-		$	122	$	-		$	122	$	-
Residential mortgage-backed securities:
Government-sponsored agencies		34,336		(521	)		-		-			34,336		(521	)
Nongovernment-sponsored entities		6,217		(181	)		4,805		(305	)		11,022		(486	)
State and political subdivisions		-		-			386		(5	)		386		(5	)
Corporate debt securities		-		-			847		(152	)		847		(152	)
Tax-exempt debt securities
State and political subdivisions		12,342		(100	)		1,230		(91	)		13,572		(191	)
Total temporarily impaired securities		52,895		(802	)		7,390		(553	)		60,285		(1,355	)
Other-than-temporarily impaired securities
Taxable debt securities
Residential mortgage-backed securities:
Nongovernment-sponsored entities		563		(427	)		5,861		(825	)		6,424		(1,252	)
Total other-than-temporarily
impaired securities		563		(427	)		5,861		(825	)		6,424		(1,252	)
Total	$	53,458	$	(1,229	)	$	13,251	$	(1,378	)	$	66,709	$	(2,607	)

	December 31, 2010
	Less than 12 months					12 months or more					Total
	Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized
Dollars in thousands	Fair Value		Loss			Fair Value		Loss			Fair Value		Loss
Temporarily impaired securities
Taxable debt securities
U. S. Government agencies
and corporations	$	9,658	$	(284	)	$	1,272	$	(15	)	$	10,930	$	(299	)
Residential mortgage-backed securities:
Government-sponsored agencies		24,869		(213	)		-		-			24,869		(213	)
Nongovernment-sponsored entities		7,506		(459	)		12,695		(2,716	)		20,201		(3,175	)
State and political subdivisions		18,215		(955	)		385		(5	)		18,600		(960	)
Corporate debt securities		949		(50	)		-		-			949		(50	)
Tax-exempt debt securities
State and political subdivisions		17,523		(555	)		1,169		(152	)		18,692		(707	)
Total temporarily impaired securities		78,720		(2,516	)		15,521		(2,888	)		94,241		(5,404	)
Other-than-temporarily impaired securities
Taxable debt securities
Residential mortgage-backed securities:
Nongovernment-sponsored entities		71		(43	)		4,624		(300	)		4,695		(343	)
Total other-than-temporarily
impaired securities		71		(43	)		4,624		(300	)		4,695		(343	)
Total	$	78,791	$	(2,559	)	$	20,145	$	(3,188	)	$	98,936	$	(5,747	)

We held 55 available for sale securities, including debt securities with other-than-temporary impairment in which a portion of the impairment remains in other comprehensive income, having an unrealized loss at September 30, 2011. We do not intend to sell these securities, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost bases. We believe that this decline in value is primarily attributable to the lack of market liquidity and to changes in market interest rates and not due to credit quality. Accordingly, no additional other-than-temporary impairment charge to earnings is warranted at this time.

At September 30, 2011, we had $1.7 million in total unrealized losses related to residential mortgage-backed securities issued by nongovernment sponsored entities. We monitor the performance of the mortgages underlying these bonds. Although there has been some deterioration in their collateral performance, we primarily hold the senior tranches of each issue which provides protection against defaults. We attribute the unrealized loss on these mortgage-backed securities held largely to the current absence of liquidity in the markets for such securities. The mortgages in these asset pools have been made to borrowers with strong credit history and significant equity invested in their homes. Nonetheless, further weakening of economic fundamentals coupled with significant increases in unemployment and substantial deterioration in the value of high end residential properties could extend distress to this borrower population. This could increase default rates and put additional pressure on property values. Should these conditions occur, the value of these securities could decline further and result in the recognition of additional other-than-temporary impairment charges recognized in earnings.