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, 2012 and 2011, are summarized as follows:


				2012
		Amortized		Unrealized				Estimated
Dollars in thousands		Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities
U. S. Government agencies
and corporations	$	28,128	$	892	$	-	$	29,020
Residential mortgage-backed securities:
Government-sponsored agencies		133,812		3,250		492		136,570
Nongovernment-sponsored entities		15,380		509		144		15,745
State and political subdivisions		12,187		71		89		12,169
Corporate debt securities		1,959		29		38		1,950
Total taxable debt securities		191,466		4,751		763		195,454
Tax-exempt debt securities
State and political subdivisions		79,403		4,104		237		83,270
Residential mortgage-backed securities		2,738		-		-		2,738
Total tax-exempt debt securities		82,141		4,104		237		86,008
Equity securities		77		-		-		77

Total available for sale securities	$	273,684	$	8,855	$	1,000	$	281,539


				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

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
				Calls and		Principal
Years ended December 31,		Sales		Maturities		Payments		Gains	Losses
2012	$	72,056	$	4,618	$	66,377	$	3,253	$	905
2011	$	131,950	$	8,049	$	57,670	$	4,450	$	444
2010	$	50,893	$	60,972	$	57,444	$	2,061	$	10

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 35 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, 2012, are summarized as follows:


		Amortized		Estimated
Dollars in thousands		Cost		Fair Value

Due in one year or less	$	67,188	$	68,371
Due from one to five years		79,684		81,509
Due from five to ten years		14,775		15,146
Due after ten years		111,960		116,436
Equity securities		77		77
Total	$	273,684	$	281,539

At December 31, 2012 and 2011, securities with estimated fair values of $122.1 million and $153.5 million respectively, were pledged to secure public deposits, and for other purposes required or permitted by law.

During 2012 and 2011 we recorded other-than-temporary impairment losses on securities as follows:


				2012								2011
		Residential MBS								Residential MBS
		Nongovernment								Nongovernment
		- Sponsored		Equity						- Sponsored		Equity
Dollars in thousands		Entities		Securities			Total			Entities		Securities			Total

Total other-than-temporary
i mpairment losses	$	(1,308	)	$	-	$	(1,308	)	$	(6,279	)	$	-	$	(6,279	)
Portion of loss recogni zed in
other comprehensive income		857			-		857			3,633			-		3,633
Net impairment loss es recognized
i n earnings	$	(451	)	$	-	$	(451	)	$	(2,646	)	$	-	$	(2,646	)

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 year ended December 31, 2012 is as follows:


Dollars in thousands		Total
Balance, January 1, 2012	$	(6,355	)
Additions for the credit component on debt securities in which
other-than-temporary impairment was not previously recognized		(451	)
Securities sold or deemed worthless during the period		3,903
Balance, December 31, 2012	$	(2,903	)

At December 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 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 security to security, and are influenced by such factors as loan interest rate, 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 December 31, 2012:


	Weighted		Range
	Average		Minimum		Maximum
Constant prepayment rates	11.3	%	7.2	%	13.1	%
Constant default rates	5.3	%	5.1	%	6.9	%
Loss severities	48.2	%	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 vendors' models, we expect to recover the remaining unrealized losses on residential mortgage-backed securities issued by nongovernment sponsored entities.

We held 74 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 December 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 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. Provided below is a summary of securities available for sale which were in an unrealized loss position at December 31, 2012 and 2011.


							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	$	-	$	-		$	-	$	-		$	-	$	-
Residential mortgage-backed s ecurities :
Government-sponsored agencies		36,498		(414	)		8,997		(78	)		45,495		(492	)
Nongovernment-sponsored entities		-		(4	)		1,478		(14	)		1,478		(18	)
State a nd political subdivisions		3,766		(85	)		387		(4	)		4,153		(89	)
Corporate debt s ecurities		-		-			962		(38	)		962		(38	)
Tax-exempt debt securities
State a nd political subdivisions		19,934		(237	)		-		-			19,934		(237	)
Total temporarily impaired securities		60,198		(740	)		11,824		(134	)		72,022		(874	)
Other-than-temporarily impaired securities
Taxable debt securities
Residential mortgage-backed s ecurities :
Nongovernment-sponsored entities		265		(6	)		593		(120	)		858		(126	)
Total other-than-temporarily
impaired securities		265		(6	)		593		(120	)		858		(126	)
Total	$	60,463	$	(746	)	$	12,417	$	(254	)	$	72,880	$	(1,000	)


							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
a nd corporations	$	1,074	$	(10	)	$	120	$	-		$	1,194	$	(10	)
Residentia l mortga ge-backed s ecurities:
Government-sponsored a gencies		55,678		(770	)		-		-			55,678		(770	)
Nongovernment-s ponsored entities		5,558		(158	)		4,245		(239	)		9,803		(397	)
Sta te and political s ubdivisions		-		-			-		-			-		-
Corporate debt s ecurities		-		-			817		(182	)		817		(182	)
Tax-exempt debt securities
Sta te and political s ubdivisions		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
Residentia l mortga ge-backed s ecurities:
Nongovernment-s ponsored 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	)