NOTE 4 – SECURITIES

Available for Sale

The amortized cost and fair value of securities available for sale as of December 31, 2012 and 2011 are summarized as follows:



				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)		Cost		Gains		Losses		Value

December 31, 2012
State and political subdivisions	$	27,341	$	594	$	(194)	$	27,741
Mortgage-backed securities:
U.S. government-sponsored enterprises		90,487		671		(449)		90,709
Equity securities-financial services industry and other		460		16		(45)		431
	$	118,288	$	1,281	$	(688)	$	118,881

December 31, 2011
State and political subdivisions	$	19,706	$	883	$	(19)	$	20,570
Mortgage-backed securities:
U.S. government-sponsored enterprises		71,684		786		(472)		71,998
Private mortgage-backed securities		2,423		58		(4)		2,477
Equity securities-financial services industry and other		1,312		1		(34)		1,279
	$	95,125	$	1,728	$	(529)	$	96,324

Securities with a carrying value of approximately $26.1 million and $21.5 million at December 31, 2012 and 2011, respectively, were pledged to secure public deposits and for other purposes required or permitted by applicable laws and regulations.

The amortized cost and fair value of securities available for sale at December 31, 2012 are shown below by contractual maturity. Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Amortized		Fair
(Dollars in thousands)	Cost		Value

Due in one year or less	$	-	$	-
Due after one year through five years		-		-
Due after five years through ten years		1,837		1,895
Due after ten years		25,504		25,846
Total state and political subdivisions		27,341		27,741
Mortgage-backed securities:
U.S. government-sponsored enterprises		90,487		90,709
Equity securities-financial services industry and other		460		431
Total available for sale securities	$	118,288	$	118,881

Gross gains on sales of securities available for sale were $1.8 million and $685 thousand and gross losses were $20 thousand and $40 thousand for the years ended December 31, 2012 and 2011, respectively. In addition, we realized gross gains of $8 thousand on debt securities that were called during the year ended December 31, 2012.

Temporarily Impaired Securities

The following table shows our investments’ gross unrealized losses and fair value with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by investment category and length of time that individual available for sale securities have been in a continuous unrealized loss position, at December 31, 2012 and 2011.



	Less Than Twelve Months				Twelve Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses

December 31, 2012
State and political subdivisions	$	9,788	$	(194)	$	-	$	-	$	9,788	$	(194)
Mortgage-backed securities:
U.S. government-sponsored enterprises		31,901		(305)		4,658		(144)		36,559		(449)
Equity securities-financial services industry and other		106		(37)		109		(8)		215		(45)
Total temporarily impaired securities	$	41,795	$	(536)	$	4,767	$	(152)	$	46,562	$	(688)

December 31, 2011
State and political subdivisions	$	115	$	(2)	$	124	$	(17)	$	239	$	(19)
Mortgage-backed securities:
U.S. government-sponsored enterprises		34,576		(472)		-		-		34,576		(472)
Private mortgage-backed securities		518		(4)		-		-		518		(4)
Equity securities-financial services industry and other		-		-		1,025		(34)		1,025		(34)
Total temporarily impaired securities	$	35,209	$	(478)	$	1,149	$	(51)	$	36,358	$	(529)

As of December 31, 2012, we reviewed our investment portfolio for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and likelihood of selling the security. The intent and likelihood of sale of debt and equity securities is evaluated based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. For each security (including but not limited to those whose fair value is less than their amortized cost basis), a review is conducted to determine if an other-than-temporary impairment has occurred.

State and Political Subdivisions

At December 31, 2012, the decline in fair value and the related unrealized losses for the Company’s state and political subdivisions portfolio were caused by changes in interest rates and spreads and were not the result of credit quality. At December 31, 2012, there were seventeen securities with a fair value of $9.8 million that had an unrealized loss that amounted to $194 thousand. The average loss amounts to 1.9% of amortized cost at December 31, 2012. These securities typically have maturity dates greater than ten years and the fair values are more sensitive to changes in market interest rates. As of December 31, 2012, the Company did not intend to sell and it was not more-likely-than-not that the Company would be required to sell any of these securities before recovery of their amortized cost basis. Therefore none of the Company’s state and political subdivision securities at December 31, 2012 were deemed to be other than temporarily impaired.

At December 31, 2011, the improvement in market value and the unrealized losses for the Company’s state and political subdivisions portfolio were caused by changes in interest rates and spreads and were not the result of credit quality. At December 31, 2011, there were two securities with a fair value of $239 thousand that had an unrealized loss that amounted to $19 thousand. The average loss amounts to 7.2% of book value at December 31, 2011. These securities typically have maturity dates greater than ten years and the fair values are more sensitive to changes in market interest rates. As of December 31, 2011, the Company did not intend to sell and it was not more-likely-than-not that the Company would be required to sell any of these securities before recovery of their amortized cost basis. Therefore none of the Company’s state and political subdivision securities at December 31, 2011 were deemed to be other than temporarily impaired.

Mortgage-Backed Securities

At December 31, 2012, the decline in fair value and the unrealized losses for our mortgage-backed securities backed by U.S. government-sponsored enterprises were primarily due to changes in spreads and market conditions and not credit quality. At December 31, 2012, there were twenty-two securities with a fair value of $36.6 million that had an unrealized loss that amounted to $449 thousand. As of December 31, 2012, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of our mortgage-backed securities at December 31, 2012, were deemed to be other-than-temporarily impaired.

At December 31, 2011, the improvement in fair value and the unrealized losses for our mortgage-backed securities backed by U.S. government-sponsored enterprises were primarily due to changes in spreads and market conditions and not credit quality. At December 31, 2011, there were 17 securities with a fair value of $34.6 million that had an unrealized loss that amounted to $472 thousand. As of December 31, 2011, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of our mortgage-backed securities at December 31, 2011, were deemed to be other-than-temporarily impaired.

Equity Securities

Our investments in marketable equity securities consist primarily of one equity portfolio fund and common stock of entities in the financial services industry. At December 31, 2012, there were two securities with a fair value of $215 thousand that had an unrealized loss of $45 thousand. These securities have been adversely impacted by the effects of the current economic environment on the financial services industry. We evaluated each of the underlying banks for credit impairment based on its financial condition and performance. Based on our evaluation and our ability and intent to hold those investments for a reasonable period of time sufficient for a forecasted recovery of amortized cost, we do not consider these investments to be other-than-temporarily impaired at December 31, 2012. We continue to closely monitor the performance of the securities we own as well as the impact from any further deterioration in the economy or in the banking industry that may adversely affect these securities. We will continue to evaluate them for other-than-temporary impairment, which could result in a future non-cash charge to earnings.

At December 31, 2011 the Company’s investments in marketable equity securities consisted primarily of a mutual fund, one equity portfolio fund and common stock of entities in the financial services industry. At December 31, 2011, there were three securities that had an unrealized loss. These securities, other than the mutual fund which had a fair value of $849 thousand and an unrealized loss of $1 thousand at December 31, 2011, have been adversely impacted by the effects of the current economic environment on the financial services industry. We evaluated each of the underlying banks for credit impairment based on its financial condition and performance. Based on our evaluation and the Company’s ability and intent to hold those investments for a reasonable period of time sufficient for a forecasted recovery of amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2011. We continue to closely monitor the performance of the securities we own as well as the impact from any further deterioration in the economy or in the banking industry that may adversely affect these securities. The Company will continue to evaluate them for other-than-temporary impairment, which could result in a future non-cash charge to earnings.

During 2011, the Company recognized a $231 thousand pre-tax ($183 thousand after-tax, or $0.06 per share) non-cash other-than-temporarily impaired charge related to an equity portfolio fund and common stock. The Company recognized a $144 thousand charge on the equity portfolio fund comprised of common stocks of bank holding companies that had an amortized cost of $250 thousand and a termination date of December 2012. The additional $87 thousand impairment charge was recognized on a common stock that had an amortized cost of $230 thousand. The impairment was recognized because the market value of this security was below the Company’s amortized cost for an extended period of time along with credit deterioration in some of the underlying collateral and it was not believed the market value of this security would recover to the Company’s amortized cost.

Held to Maturity Securities

The amortized cost and fair value of securities held to maturity as of December 31, 2012 and 2011 are summarized as follows:



				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)		Cost		Gains		Losses		Value

December 31, 2012
State and political subdivisions	$	5,221	$	260	$	(9)	$	5,472

December 31, 2011
State and political subdivisions	$	4,220	$	125	$	-	$	4,345

There were two securities in the held to maturity portfolio on December 31, 2012 with unrealized losses and one security in the held to maturity portfolio on December 31, 2011 with unrealized losses.

The amortized cost and fair value of securities held to maturity at December 31, 2012 are shown below by contractual maturity. Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.



		Amortized		Fair
(Dollars in thousands)		Cost		Value

Due in one year or less	$	1,223	$	1,223
Due after one year through five years		-		-
Due after five years through ten years		1,307		1,331
Due after ten years		2,691		2,918
Total held to maturity securities	$	5,221	$	5,472

Temporarily Impaired Securities

The following table shows our held to maturity investments’ gross unrealized losses and fair value with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by investment category and length of time that individual held to maturity securities have been in a continuous unrealized loss position, at December 31, 2012. There were no held to maturity securities with unrealized losses at December 31, 2011.

Less Than Twelve Months

Twelve Months or More

Total

Gross

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

(Dollars in thousands)

Value

Losses

Value

Losses

Value

Losses

December 31, 2012

State and political subdivisions

830

(9)

830

(9)

As of December 31, 2012, we reviewed our held to maturity investment portfolio for indications of impairment. This review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and likelihood of selling the security. The intent and likelihood of sale of debt and equity securities is evaluated based upon our investment strategy for the particular type of security and our cash flow needs, liquidity position, capital adequacy and interest rate risk position. For each security whose fair value is less than their amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has occurred.

State and Political Subdivisions

At December 31, 2012, the decline in fair value and the unrealized losses for our state and political subdivisions portfolio were caused by changes in interest rates and spreads and were not the result of credit quality. At December 31, 2012, there were two securities with a fair value of $830 thousand that had an unrealized loss that amounted to $9 thousand. These securities typically have maturity dates greater than 10 years and the fair values are more sensitive to changes in market interest rates. As of December 31, 2012, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of our state and political subdivision securities at December 31, 2012, were deemed to be other-than-temporarily impaired.