NOTE 5. SECURITIES

The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at March 31, 2012, December 31, 2011, and March 31, 2011 are summarized as follows:


				March 31, 2012
		Amortized		Unrealized				Estimated
Dollars in thousands		Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities:
U. S. Government agencies
and corporations	$	9,721	$	475	$	16	$	10,180
Residential mortgage-backed securities:
Government-sponsored agencies		161,928		3,435		525		164,838
Nongovernment-sponsored agencies		32,028		627		715		31,940
State and political subdivisions		5,661		-		37		5,624
Corporate debt securities		1,947		12		97		1,862
Total taxable debt securities		211,285		4,549		1,390		214,444
Tax-exempt debt securities:
State and political subdivisions		70,913		3,837		306		74,444
Residential mortgage-backed securities:
Government-sponsored agencies		3,037		-		-		3,037
Total tax-exempt debt securities		73,950		3,837		306		77,481
Equity securities		77		-		-		77
Total available for sale securities	$	285,312	$	8,386	$	1,696	$	292,002


				December 31, 2011
		Amortized		Unrealized				Estimated
Dollars in thousands		Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities
U. S. Government agencies
and corporations	$	8,262	$	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


				March 31, 2011
		Amortized		Unrealized				Estimated
Dollars in thousands		Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities:
U. S. Government agencies
and corporations	$	31,530	$	217	$	358	$	31,389
Residential mortgage-backed securities:
Government-sponsored agencies		143,883		2,751		408		146,226
Nongovernment-sponsored agencies		52,516		1,890		1,866		52,540
State and political subdivisions		23,324		21		1,177		22,168
Corporate debt securities		999		-		34		965
Total taxable debt securities		252,252		4,879		3,843		253,288
Tax-exempt debt securities:
State and political subdivisions		40,238		273		636		39,875
Total tax-exempt debt securities		40,238		273		636		39,875
Equity securities		77		-		-		77
Total available for sale securities	$	292,567	$	5,152	$	4,479	$	293,240

The maturities, amortized cost and estimated fair values of securities at March 31, 2012, are summarized as follows:


		Available for Sale
		Amortized		Estimated
Dollars in thousands		Cost		Fair Value
Due in one year or less	$	71,605	$	72,852
Due from one to five years		91,493		93,316
Due from five to ten years		19,918		20,136
Due after ten years		102,219		105,621
Equity securities		77		77
	$	285,312	$	292,002

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 three months ended March 31, 2012 are as follows:


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

Securities available for sale	$	25,632	$	803	$	14,501	$	1,166	$	1

During the three months ended March 31, 2012 and 2011, we recorded other-than-temporary impairment losses on residential mortgage-backed nongovernment sponsored entity securities as follows:


		Three Months Ended March 31,
Dollars in thousands		2012			2011
March 31, 2012
Total other-than-temporary impairment losses	$	(511	)	$	(1,828	)
Portion of loss recognized in
other comprehensive income		282			600
Net impairment losses recognized in earnings	$	(229	)	$	(1,228	)

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 months ended March 31, 2012 is as follows:


		Three Months Ended
		March 31, 2012

Dollars in thousands		Total
Beginning Balance	$	(6,355	)
Additions for the credit component on debt securities in which
other-than-temporary impairment was not previously recognized		(229	)
Securities sold during the period		-
Ending Balance	$	(6,584	)

At March 31, 2012, 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 models. 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 March 31, 2012:


	Weighted		Range
	Average		Minimum		Maximum
Constant voluntary prepayment rates	8.1	%	2.7	%	21.2	%
Constant default rates	5.7	%	3.9	%	7.7	%
Loss severities	48.0	%	40.0	%	52.0	%

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 March 31, 2012 and December 31, 2011, including debt securities for which a portion of other-than-temporary impairment has been recognized in other comprehensive income.


							March 31, 2012
		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	$	2,717	$	(16	)	$	117	$	-		$	2,834	$	(16	)
Residential mortgage-backed securities:
Government-sponsored agencies		61,078		(525	)		-		-			61,078		(525	)
Nongovernment-sponsored entities		3,619		(103	)		1,468		(121	)		5,087		(224	)
State and political subdivisions		2,238		(33	)		386		(4	)		2,624		(37	)
Corporate debt securities		-		-			902		(97	)		902		(97	)
Tax-exempt debt securities
State and political subdivisions		11,324		(306	)		-		-			11,324		(306	)
Total temporarily impaired securities		80,976		(983	)		2,873		(222	)		83,849		(1,205	)
Other-than-temporarily impaired securities
Taxable debt securities
Residential mortgage-backed securities:
Nongovernment-sponsored entities		218		(67	)		6,473		(424	)		6,691		(491	)
Total other-than-temporarily
impaired securities		218		(67	)		6,473		(424	)		6,691		(491	)
Total	$	81,194	$	(1,050	)	$	9,346	$	(646	)	$	90,540	$	(1,696	)


							December 31, 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	$	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	)

We held 80 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 March 31, 2012. 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 March 31, 2012, we had $715,000 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.