Securities

12 Months Ended

Dec. 31, 2011

Securities [Abstract]

Securities

NOTE 4. SECURITIES

     We classify debt and equity securities as "held to maturity", "available for sale" or "trading" according to management's intent. The appropriate classification is determined at the time of purchase of each security and re-evaluated at each reporting date.

     Securities held to maturity – Certain debt securities for which we have the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts. There are no securities classified as held to maturity in the accompanying financial statements.

     Securities available for sale - Securities not classified as "held to maturity" or as "trading" are classified as "available for sale." Securities classified as "available for sale" are those securities that we intend to hold for an indefinite period of time, but not necessarily to maturity. "Available for sale" securities are reported at estimated fair value net of unrealized gains or losses, which are adjusted for applicable income taxes, and reported as a separate component of shareholders' equity.

Trading securities - There are no securities classified as "trading" in the accompanying financial statements.

     Impairment assessment: Impairment exists when the fair value of a security is less than its cost. Cost includes adjustments made to the cost basis of a security for accretion, amortization and previous other-than-temporary impairments. We perform a quarterly assessment of the debt and equity securities in our investment portfolio that have an unrealized loss to determine whether the decline in the fair value of these securities below their cost is other-than-temporary. This determination requires significant judgment. Impairment is considered other-than-temporary when it becomes probable that we will be unable to recover the cost of an investment. This assessment takes into consideration factors such as the length of time and the extent to which the market values have been less than cost, the financial condition and near term prospects of the issuer including events specific to the issuer or industry, defaults or deferrals of scheduled interest, principal or dividend payments, external credit ratings and recent downgrades, and our intent and ability to hold the security for a period of time sufficient to allow for a recovery in fair value. If a decline in fair value is judged to be other than temporary, the cost basis of the individual security is written down to fair value which then becomes the new cost basis. The amount of the write down is included in other-than-temporary impairment of securities in the consolidated statements of income. The new cost basis is not adjusted for subsequent recoveries in fair value, if any.

     Realized gains and losses on sales of securities are recognized on the specific identification method. Amortization of premiums and accretion of discounts are computed using the interest method.

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

	2011
	Amortized Cost		Unrealized				Estimated Fair Value
Dollars in thousands			Gains		Losses
Available for Sale
Taxable debt securities
U. S. Government agencies and corporations	$	8,262	$	495	$	10	$	8,747
Residential mortgage-backed securities:
Government-sponsored agencies		152,815		3,460		770		155,505
Nongovernment-sponsored entities		35,246		742		1,560		34,428
State and political subdivisions		4,559		16		4		4,571
Corporate debt securities		999		-		182		817
Total taxable debt securities		201,881		4,713		2,526		204,068
Tax-exempt debt securities
State and political subdivisions		75,371		3,986		31		79,326
Residential mortgage-backed securities		3,109		19		-		3,128
Total tax-exempt debt securities		78,480		4,005		31		82,454
Equity securities		77		-		-		77
Total available for sale securities	$	280,438	$	8,718	$	2,557	$	286,599

	2010
	Amortized Cost		Unrealized				Estimated Fair Value
Dollars in thousands			Gains		Losses
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

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

Dollars in thousands	Proceeds from						Gross realized
	Sales		Calls and Maturities		Principal Payments		Gains		Losses
Years ended December 31,
2011	$	131,950	$	8,049	$	57,670	$	4,450	$	444
2010	$	50,893	$	60,972	$	57,444	$	2,061	$	10
2009	$	45,543	$	21,365	$	73,631	$	1,511	$	14

     Residential mortgage-backed obligations having contractual maturities ranging from 1 to 50 years are reflected in the following maturity distribution schedules based on their anticipated average life to maturity, which ranges from 1 to 26 years. Accordingly, discounts are accreted and premiums are amortized over the anticipated average life to maturity of the specific obligation.

The maturities, amortized cost and estimated fair values of securities at December 31, 2011, are summarized as follows:

	Amortized Cost		Estimated Fair Value
Dollars in thousands
Due in one year or less	$	75,161	$	76,262
Due from one to five years		97,599		99,081
Due from five to ten years		18,546		18,650
Due after ten years		89,055		92,529
Equity securities		77		77
Total	$	280,438	$	286,599

     At December 31, 2011 and 2010, securities with estimated fair values of $153,476,000 and $175,852,000 respectively, were pledged to secure public deposits, and for other purposes required or permitted by law.

During 2011 and 2010 we recorded other-than-temporary impairment losses on securities as follows:

	2011								2010
	Residential MBS Nongovernment - Sponsored Entities			Equity Securities		Total			Residential MBS Nongovernment - Sponsored Entities			Equity Securities		Total
Dollars in thousands
Total other-than-temporary impairment losses	$	(6,279	)	$	-	$	(6,279	)	$	(1,816	)	$	-	$	(1,816	)
Portion of loss recognized in other comprehensive income		3,633			-		3,633			828			-		828
Net impairment losses recognized in earnings	$	(2,646	)	$	-	$	(2,646	)	$	(988	)	$	-	$	(988	)

     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 year ended December 31, 2011 is as follows:

Dollars in thousands	Total
Balance, January 1, 2011	$	(3,910	)
Additions for the credit component on debt securities in which other-than-temporary impairment was not previously recognized		(2,646	)
Securities sold during the period		201
Balance, December 31, 2011	$	(6,355	)

     At December 31, 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 discounted cash flow models. The vendors estimate cash flows of the underlying loan 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 could vary widely from loan to loan, and are influenced by such factors as loan interest rate, geographical location of the borrower, collateral type and borrower characteristic. 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 December 31, 2011:

	Weighted Average		Range
			Minimum		Maximum
Constant prepayment rates	9.3	%	1.2	%	14.4	%
Constant default rates	5.5	%	3.1	%	10.4	%
Loss severities	46.9	%	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 vendors' models, we expect to recover the remaining unrealized losses on residential mortgage-backed securities issued by nongovernment sponsored entities.

     We held 67 available for sale securities having an unrealized loss at December 31, 2011. Provided below is a summary of securities available for sale which were in an unrealized loss position at December 31, 2011 and 2010. We have the ability and intent to hold these securities until such time as the value recovers or the securities mature. Further, we believe that the decline in value is attributable to changes in market interest rates and not credit quality of the issuer and no additional impairment is warranted at this time.

	2011
	Less than 12 months					12 months or more					Total
	Estimsated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss
Dollars in thousands
Temporarily impaired securities
Taxable debt securities
U. S. Government agencies and corporations	$	1,074	$	(10	)	$	120	$	-		$	1,194	$	(10	)
Residential mortgage-backed securities:
Government-sponsored agencies		55,678		(770	)		-		-			55,678		(770	)
Nongovernment-sponsored entities		5,558		(158	)		4,245		(239	)		9,803		(397	)
State and political subdivisions		-		-			-		-			-		-
Corporate debt securities		-		-			817		(182	)		817		(182	)
Tax-exempt debt securities
State and political subdivisions		1,418		(29	)		1,132		(6	)		2,550		(35	)
Total temporarily impaired securities		63,728		(967	)		6,314		(427	)		70,042		(1,394	)
Other-than-temporarily impaired securities
Taxable debt securities
Residential mortgage-backed securities:
Nongovernment-sponsored entities		466		(261	)		5,638		(902	)		6,104		(1,163	)
Total other-than-temporarily impaired securities		466		(261	)		5,638		(902	)		6,104		(1,163	)
Total	$	64,194	$	(1,228	)	$	11,952	$	(1,329	)	$	76,146	$	(2,557	)

	2010
	Less than 12 months					12 months or more					Total
	Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss
Dollars in thousands
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	)

     The largest component of the unrealized loss at December 31, 2011 was $1.6 million 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 largely due to their current absence of liquidity. We expect to receive all contractual principal and interest payments due on our debt securities and have the ability and intent to hold these investments until their fair value recovers or until maturity. The mortgages in these asset pools have been made to borrowers with strong credit history and significant equity invested in their homes. They are well diversified geographically. Nonetheless, significant further weakening of economic fundamentals coupled with significant increases in unemployment and substantial deterioration in the value of residential properties could extend distress to this borrower population. This could continue to increase default rates and put additional pressure on property values. Should these conditions persist, the value of these securities could decline further and trigger the recognition of additional other-than-temporary impairment charges.