NOTE 5. SECURITIES

The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at June 30, 2012, December 31, 2011, and June 30, 2011 are summarized as follows:


				June 30, 2012
		Amortized		Unrealized				Estimated
Dollars in thousands		Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities:
U. S. Government agencies
and corporations	$	18,000	$	665	$	2	$	18,663
Residential mortgage-backed securities:
Government-sponsored agencies		157,618		3,846		297		161,167
Nongovernment-sponsored agencies		23,188		550		477		23,261
State and political subdivisions		8,672		27		43		8,656
Corporate debt securities		1,951		16		127		1,840
Total taxable debt securities		209,429		5,104		946		213,587
Tax-exempt debt securities:
State and political subdivisions		69,036		3,733		251		72,518
Residential mortgage-backed securities:
Government-sponsored agencies		2,969		-		-		2,969
Total tax-exempt debt securities		72,005		3,733		251		75,487
Equity securities		77		-		-		77
Total available for sale securities	$	281,511	$	8,837	$	1,197	$	289,151


				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


				June 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	$	14,749	$	303	$	102	$	14,950
Residential mortgage-backed securities:
Government-sponsored agencies		147,619		3,288		296		150,611
Nongovernment-sponsored agencies		44,101		1,459		1,523		44,037
State and political subdivisions		12,411		30		284		12,157
Corporate debt securities		999		-		53		946
Total taxable debt securities		219,879		5,080		2,258		222,701
Tax-exempt debt securities:
State and political subdivisions		72,439		1,151		562		73,028
Total tax-exempt debt securities		72,439		1,151		562		73,028
Equity securities		77		-		-		77
Total available for sale securities	$	292,395	$	6,231	$	2,820	$	295,806

The maturities, amortized cost and estimated fair values of securities at June 30, 2012, are summarized as follows:


		Available for Sale
		Amortized		Estimated
Dollars in thousands		Cost		Fair Value
Due in one year or less	$	75,249	$	76,316
Due from one to five years		99,177		101,506
Due from five to ten years		17,252		17,836
Due after ten years		89,756		93,416
Equity securities		77		77
	$	281,511	$	289,151

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 six months ended June 30, 2012 are as follows:


				Calls and		Principal
Dollars in thousands		Sales		Maturities		Payments		Gains		Losses

Securities available for sale	$	51,798	$	2,736	$	29,943	$	2,325	$	840

During the three and six months ended June 30, 2012 and 2011, we recorded other-than-temporary impairment losses on residential mortgage-backed nongovernment sponsored entity securities as follows:


		Three Months Ended June 30,						Six Months Ended
In thousands		2012			2011			2012			2011

Total other-than-temporary impairment losses	$	(370	)	$	(1,304	)	$	(882	)	$	(3,131	)
Portion of loss recognized in
other comprehensive income		264			771			547			1,370
Net impairment losses recognized in earnings	$	(106	)	$	(533	)	$	(335	)	$	(1,761	)

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 six months ended June 30, 2012 is as follows:


		Three Months Ended			Six Months Ended
		June 30, 2012			June 30, 2012

In thousands		Total			Total
Beginning Balance	$	(6,584	)	$	(6,355	)
Additions for the credit component on debt securities in which
other-than-temporary impairment was not previously recognized		(106	)		(335	)
Securities sold during the period		790			790
Ending Balance	$	(5,900	)	$	(5,900	)

At June 30, 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 June 30, 2012:


	Weighted		Range
	Average		Minimum		Maximum
Constant voluntary prepayment rates	8.4	%	1.6	%	11.1	%
Constant default rates	5.3	%	4.2	%	7.9	%
Loss severities	47.4	%	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 June 30, 2012 and December 31, 2011, including debt securities for which a portion of other-than-temporary impairment has been recognized in other comprehensive income.


							June 30, 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	$	1,012	$	(2	)	$	115	$	-		$	1,127	$	(2	)
Residential mortgage-backed securities:
Government-sponsored agencies		43,087		(233	)		3,081		(64	)		46,168		(297	)
Nongovernment-sponsored entities		3,377		(87	)		1,447		(70	)		4,824		(157	)
State and political subdivisions		2,424		(39	)		386		(4	)		2,810		(43	)
Corporate debt securities		-		-			872		(127	)		872		(127	)
Tax-exempt debt securities
State and political subdivisions		17,029		(251	)		-		-			17,029		(251	)
Total temporarily impaired securities		66,929		(612	)		5,901		(265	)		72,830		(877	)
Other-than-temporarily impaired securities
Taxable debt securities
Residential mortgage-backed securities:
Nongovernment-sponsored entities		111		(75	)		1,743		(245	)		1,854		(320	)
Total other-than-temporarily
impaired securities		111		(75	)		1,743		(245	)		1,854		(320	)
Total	$	67,040	$	(687	)	$	7,644	$	(510	)	$	74,684	$	(1,197	)


							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 70 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 June 30, 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 June 30, 2012, we had $477,000 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.