NOTE 2 – SECURITIES

Available for Sale

The amortized cost and fair value of securities available for sale as of September 30, 2013 and December 31, 2012 are summarized as follows:



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

September 30, 2013
U.S. government agencies	$	5,517	$	24	$	(28)	$	5,513
State and political subdivisions		28,772		3		(2,660)		26,115
Mortgage-backed securities:
U.S. government-sponsored enterprises		63,814		320		(830)		63,304
Equity securities-financial services industry and other		408		55		(17)		446
	$	98,511	$	402	$	(3,535)	$	95,378

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

Securities with a carrying value of approximately $39.9 million and $26.1 million at September 30, 2013 and December 31, 2012, 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 September 30, 2013, 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		502		496
Due after five years through ten years		2,102		2,032
Due after ten years		26,168		23,587
Total bonds and obligations		28,772		26,115
U.S. government agencies		5,517		5,513
Mortgage-backed securities:
U.S. government-sponsored enterprises		63,814		63,304
Equity securities-financial services industry and other		408		446
Total available for sale securities	$	98,511	$	95,378

There were no gross realized gains on sales of securities available for sale for the three months ended September 30, 2013. Gross realized gains on sales of securities available for sale were $561 thousand for the three months ended September 30, 2012, and there were no gross realized losses for the three months ended September 30, 2013 and 2012. Gross realized gains on sales of securities available for sale were $407 thousand and $775 thousand for the nine months ended September 30, 2013 and 2012, respectively, and gross realized losses were $8 thousand and $20 thousand for the nine months ended September 30, 2013 and 2012, respectively. In addition, we realized gross gains of $8 thousand on debt securities that were called during the three and nine month period ended September 30, 2012.

Temporarily Impaired Securities

The following table shows gross unrealized losses and fair value of securities with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by category and length of time that individual available for sale securities have been in a continuous unrealized loss position at September 30, 2013 and December 31, 2012.



	Less Than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses

September 30, 2013
U.S. government agencies	$	3,303	$	(28)	$	-	$	-	$	3,303	$	(28)
State and political subdivisions		25,194		(2,603)		465		(57)		25,659		(2,660)
Mortgage-backed securities:								-
U.S. government-sponsored enterprises		33,977		(612)		8,102		(218)		42,079		(830)
Equity securities-financial services industry and other		-		-		126		(17)		126		(17)
Total temporarily impaired securities	$	62,474	$	(3,243)	$	8,693	$	(292)	$	71,167	$	(3,535)

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)

As of September 30, 2013, we reviewed our available for sale securities 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.

U.S. Government Agencies

At September 30, 2013, the decline in fair value and the unrealized losses for our U.S. government agencies securities were primarily due to changes in spreads and market conditions and not credit quality. At September 30, 2013, there were two securities with a fair value of $3.3 million that had an unrealized loss that amounted to $28 thousand. As of September 30, 2013, 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 the U.S. government agency securities at September 30, 2013, were deemed to be other-than-temporarily impaired.

State and Political Subdivisions

At September 30, 2013, the decline in fair value and the unrealized losses for our state and political subdivisions securities were caused by changes in interest rates and spreads and were not the result of credit quality. At September 30, 2013, there were 51 securities with a fair value of $25.7 million that had an unrealized loss that amounted to $2.7 million. The average loss amounts to 9.4% of amortized cost at September 30, 2013. 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 September 30, 2013, 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 September 30, 2013, were deemed to be other-than-temporarily-impaired.

At December 31, 2012, the decline in fair value and the related unrealized losses for our state and political subdivisions securities were caused by changes in interest rates and spreads and were not the result of credit quality. At December 31, 2012, there were 17 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 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.

Mortgage-Backed Securities

At September 30, 2013, the decline in fair value and the unrealized losses for our mortgaged-backed securities guaranteed by U.S. government-sponsored enterprises were primarily due to changes in spreads and market conditions and not credit quality. At September 30, 2013, there were 35 securities with a fair value of $42.1 million that had an unrealized loss that amounted to $830 thousand. As of September 30, 2013, 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 September 30, 2013, were deemed to be other-than-temporarily impaired.

At December 31, 2012, the decline in fair value and the unrealized losses for our mortgage-backed securities guaranteed 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 22 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.

Equity Securities

Our marketable equity securities portfolio consists primarily of one equity fund and common stock of entities in the financial services industry. At September 30, 2013, there was one security with a fair value of $126 thousand that had an unrealized loss of $17 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 expectation that these securities will recover within a reasonable period of time, we do not consider these investments to be other-than-temporarily impaired at September 30, 2013.

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 expectation that these investments will recover within a reasonable period of time, 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.

Held to Maturity Securities

The amortized cost and fair value of securities held to maturity as of September 30, 2013 and December 31, 2012, are summarized as follows:



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

September 30, 2013
State and political subdivisions	$	5,824	$	101	$	(69)	$	5,856

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

The amortized cost and carrying value of securities held to maturity at September 30, 2013, 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	$	1,860	$	1,860
Due after one year through five years		-		-
Due after five years through ten years		1,290		1,285
Due after ten years		2,674		2,711
Total held to maturity securities	$	5,824	$	5,856

Temporarily Impaired Securities

The following table shows gross unrealized losses and fair value of held to maturity securities with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by category and length of time that individual held to maturity securities have been in a continuous unrealized loss position at September 30, 2013 and December 31, 2012:



	Less Than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses		Value		Losses

September 30, 2013
State and political subdivisions	$	1,617	$	(58)	$	253	$	(11)	$	1,870	$	(69)

December 31, 2012
State and political subdivisions	$	830	$	(9)	$	-	$	-	$	830	$	(9)

As of September 30, 2013, we reviewed our held to maturity securities 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 September 30, 2013, the decline in fair value and the unrealized losses for our state and political subdivisions securities were caused by changes in interest rates and spreads and were not the result of credit quality. At September 30, 2013, there were four securities with a fair value of $1.9 million that had an unrealized loss that amounted to $69 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 September 30, 2013, 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 September 30, 2013, were deemed to be other-than-temporarily impaired.

At December 31, 2012, the decline in fair value and the unrealized losses for our state and political subdivisions securities 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.