NOTE 5. SECURITIES

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


	September 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	$	25,857	$	1,009	$	4	$	26,862
Residential mortgage-backed securities:
Government-sponsored agencies		150,233		3,741		453		153,521
Nongovernment-sponsored agencies		21,199		712		290		21,621
State and political subdivisions		10,176		57		56		10,177
Corporate debt securities		1,955		29		74		1,910
Total taxable debt securities		209,420		5,548		877		214,091
Tax-exempt debt securities:
State and political subdivisions		70,678		4,358		70		74,966
Residential mortgage-backed securities:
Government-sponsored agencies		2,858		-		-		2,858
Total tax-exempt debt securities		73,536		4,358		70		77,824
Equity securities		77		-		-		77
Total available for sale securities	$	283,033	$	9,906	$	947	$	291,992


				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


				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

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


		Available for Sale
		Amortized		Estimated
Dollars in thousands		Cost		Fair Value
Due in one year or less	$	77,442	$	78,853
Due from one to five years		92,630		94,923
Due from five to ten years		13,905		14,539
Due after ten years		98,979		103,600
Equity securities		77		77
	$	283,033	$	291,992

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, 2012 are as follows:


				Calls and		Principal
Dollars in thousands		Sales		Maturities		Payments		Gains		Losses

Securities available for sale	$	64,567	$	4,056	$	47,584	$	3,085	$	840

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


		Three Months Ended						Nine Months Ended
In thousands		2012			2011			2012			2011

Total other-than-temporary impairment losses	$	(233	)	$	(1,684	)	$	(1,115	)	$	(4,815	)
Portion of loss recognized in
other comprehensive income		194			1,200			740			2,570
Net impairment losses recognized in earnings	$	(39	)	$	(484	)	$	(375	)	$	(2,245	)

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, 2012 is as follows:


		Three Months Ended			Nine Months Ended
		September 30, 2012			September 30, 2012

In thousands		Total			Total
Beginning Balance	$	(5,900	)	$	(6,355	)
Additions for the credit component on debt securities in which
other-than-temporary impairment was not previously recognized		(39	)		(375	)
Securities sold during the period		-			791
Ending Balance	$	(5,939	)	$	(5,939	)

At September 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 September 30, 2012:


	Weighted		Range
	Average		Minimum		Maximum
Constant voluntary prepayment rates	12.2	%	10.1	%	14.1	%
Constant default rates	4.9	%	4.6	%	5.2	%
Loss severities	45.5	%	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 September

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.


							September 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	$	1,413	$	(4	)	$	-		$	-		$	1,413	$	(4	)
Residential mortgage-backed securities:
Government-sponsored agencies		35,490		(395	)		7,256			(58	)		42,746		(453	)
Nongovernment-sponsored entities		1		(4	)		3,013			(67	)		3,014		(71	)
State and political subdivisions		3,370		(52	)		386			(4	)		3,756		(56	)
Corporate debt securities		-		-			925			(74	)		925		(74	)
Tax-exempt debt securities
State and political subdivisions		8,192		(70	)		-			-			8,192		(70	)
Total temporarily impaired securities		48,466		(525	)		11,580			(203	)		60,046		(728	)
Other-than-temporarily impaired securities
Taxable debt securities
Residential mortgage-backed securities:
Nongovernment-sponsored entities		-		-			703			(219	)		703		(219	)
Total other-than-temporarily
impaired securities		-		-			703			(219	)		703		(219	)
Total	$	48,466	$	(525	)	$	12,283	$		(422	)	$	60,749	$	(947	)


	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 59 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, 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 September 30, 2012, we had $290,000 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.