NOTE 2 - Investment Securities

The amortized costs and fair value of investment securities available for sale and held to maturity are as follows:


		June 30, 2011
		Amortized	Gross Unrealized		Fair
(dollars in thousands)		Cost	Gains	Losses	Value
Available for sale
State and political subdivisions	$	14,299	256	19	14,536
Governmental agencies		2,500	-	17	2,483
Mortgage-backed securities:
FHLMC		27,952	89	177	27,864
FNMA		37,088	258	266	37,080
GNMA		659	62	-	721
Private-label collateralized mortgage obligations		2,661	-	355	2,306
Total mortgage-backed securities		68,360	409	798	67,971
Total investment securities available for sale	$	85,159	665	834	84,990


		December 31, 2010
		Amortized	Gross Unrealized		Fair
		Cost	Gains	Losses	Value
Available for sale
State and political subdivisions	$	11,331	12	177	11,166
Mortgage-backed securities:
FHLMC		17,985	-	288	17,697
FNMA		31,780	112	463	31,429
GNMA		888	88	-	976
Private-label collateralized mortgage obligations		2,865	-	350	2,515
Total mortgage-backed securities		53,518	200	1,101	52,617
Total investment securities available for sale	$	64,849	212	1,278	63,783

Other investments are comprised of the following and are recorded at cost which approximates fair value.



(dollars in thousands)		June 30, 2011	December 31, 2010
Federal Reserve Bank stock	$	1,485	1,485
Federal Home Loan Bank stock		6,138	6,333
Certificates of deposit with other banks		849	849
Investment in Trust Preferred securities		403	403
Total other investments	$	8,875	9,070

Contractual maturities and yields on our investments that are available for sale and are held to maturity at June 30, 2011 and December 31, 2010 are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. We had no securities with maturities less than one year at June 30, 2011 or December 31, 2010.



											June 30, 2011
		One to Five Years			Five to Ten Years			Over Ten Years			Total
(dollars in thousands)		Amount	Yield		Amount	Yield		Amount	Yield		Amount	Yield
Available for Sale
State and political subdivisions	$	209	3.01	%	8,891	2.88	%	5,436	3.65	%	14,536	3.17	%
Governmental agencies		-	-		2,483	2.37	%	-	-		2,483	2.37	%
Mortgage-backed securities		67	3.94	%	5,487	2.25	%	62,417	3.18	%	67,971	3.17	%
Total	$	276	3.23	%	16,861	2.60	%	67,853	3.21	%	84,990	3.09	%



											December 31, 2010
		One to Five Years			Five to Ten Years			Over Ten Years			Total
		Amount	Yield		Amount	Yield		Amount	Yield		Amount	Yield
Available for Sale
State and political subdivisions	$	-	-	%	5,719	3.10	%	5,447	3.66	%	11,166	3.37	%
Mortgage-backed securities		95	3.98	%	-	-	%	52,522	2.58	%	52,617	2.59	%
Total	$	95	3.98	%	5,719	3.10	%	57,969	2.71	%	63,783	2.74	%

The tables below summarize gross unrealized losses on investment securities and the fair market value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.



								June 30, 2011
	Less than 12 months				12 months or longer			Total
(dollars in thousands)	#		Fair value	Unrealized losses	#	Fair value	Unrealized losses	#	Fair value	Unrealized losses

Available for sale
State and political subdivisions	5	$	3,080	19	-	-	-	5	3,080	19
Governmental agencies	1		2,483	17	-	-	-	1	2,483	17
Mortgage-backed
FHLMC	6		15,983	177	-	-	-	6	15,983	177
FNMA	6		22,788	266	-	-	-	6	22,788	266
Collateral mortgage obligations	-		-	-	1	2,306	355	1	2,306	355
Total	18	$	44,334	479	1	2,306	355	19	46,640	834


									December 31, 2010
	Less than 12 months					12 months or longer			Total
	#		Fair value	Unrealized losses	#	Fair value	Unrealized losses	#	Fair value	Unrealized losses
Available for sale
State and political subdivisions	16	$	8,101	177	-	-	-	16	8,101	177
Mortgage-backed
FHLMC	5		17,697	288	-	-	-	5	17,697	288
FNMA	6		24,301	463	-	-	-	6	24,301	463
Collateral mortgage obligations	-		-	-	1	2,515	350	1	2,515	350
Total	27	$	50,099	928	1	2,515	350	28	52,614	1,278

Other-than-temporary impairment ("OTTI")

As prescribed by FASB ASC 320-10-35, the Company recognizes the credit component of OTTI on debt securities through earnings and the non-credit component in other comprehensive income ("OCI") for those securities in which the Company does not intend to sell the security and it is more-likely-than-not that the Company will not be required to sell the security in the foreseeable future.

At June 30, 2011, the Company had 18 individual investments that were in an unrealized loss position for less than 12 months. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. The majority of these securities are government or agency securities currently rated AA or AAA by Moody's or Standard and Poor's, and therefore, pose minimal credit risk. The Company considers the length of time and extent to which the fair value of available-for-sale debt securities have been less than cost to conclude whether such securities are other-than-temporarily impaired. We also consider other factors such as the financial condition of the issuer including credit ratings and specific events affecting the operations of the issuer, volatility of the security, underlying assets that collateralize the debt security, and other industry and macroeconomic conditions. As the Company has no intent to sell securities with unrealized losses and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of amortized cost, we have concluded that the securities are not impaired on an other-than-temporary basis.

At June 30, 2011, we held one private label collateralized mortgage obligation ("CMO") which has been in an unrealized loss position for 12 months or longer, with a book value of $2.7 million. A majority of "structured" investments within all credit markets have been impacted by volatility and credit concerns and economic stresses since 2008. The result has been that the market for these investments has become significantly less liquid and the spread as compared to alternative investments has widened dramatically.

The Company evaluates this security quarterly based on the methodology outlined below and, based on this evaluation, currently believes that it will receive substantially all of the principal and interest in accordance with the original contractual terms of the security. In addition, management has reviewed the independent assumptions utilized in evaluating the security for OTTI and based on its review, the Company recorded a $25,000 other-than-temporary impairment on this security during the second quarter of 2011. However, no assurance can be given that market conditions and certain characteristics of the security will continue to support this determination.

CMO Evaluation Methodology

The primary cause of mortgage delinquency and foreclosure is the loss of household income due to unemployment. Therefore, the change in unemployment rates is a predictor of the likelihood of mortgage loan delinquencies and foreclosures. Prime mortgage borrowers, with secure or steady employment tend to stay current on their mortgages, even if home prices drop significantly, as in a period of severe home price depreciation. Subprime borrowers, on the other hand, who only marginally sustained their initial home purchase, are more likely to become delinquent when home prices drop precipitously. There is evidence to support the premise that increases in unemployment rates and home price depreciation have a positive correlation with foreclosure rates.

In the non agency mortgage-backed securities ("MBS") sector, FICO scores that measure the credit worthiness of the mortgage borrower are a good indicator of future mortgage delinquency and foreclosure rates. In addition, the level of documentation that was obtained at the time the loan was originated is a strong indicator of future loan performance. Loans that have limited or reduced documentation have proven to result in higher delinquency and foreclosures. An additional indicator of the likelihood of delinquencies and foreclosures is the occupancy type. Generally speaking, loans on owner occupied properties tend to be less likely to default than loans on vacation or investment properties.

The company evaluates its private label CMO for other-than-temporary impairment quarterly based on a Bloomberg Default model which uses relevant assumptions such as prepayment rate, default rate and loss severity in determining the expected recovery of the contractual cash flows. Listed below is various historical data related to our private label CMO:



	June 30, 2011	March 31, 2011	December 31, 2010
Book value (in thousands)	$2,661	$2,803	$2,865
Other-than-temporary impairment	$25	$-	$-
Year of origination	2006	2006	2006
Original credit rating	Aaa	Aaa	Aaa
Current credit rating	Caa1	Caa1	Caa1
Deal Percentage of loans 60+ delinquent	28.3%	27.9%	26.3%
Group Percentage of loans 60+ delinquent	14.6%	13.7%	12.2%
12 month prepayment rate	17.8%	14.3%	17.6%
12 month default rate	4.7%	1.9%	1.9%
12 month severity rate	55.0%	72.4%	72.4%
Average prepayment rate	9.5%	6.5%	6.4%
Average default rate	1.5%	1.4%	1.5%
Average severity rate	41.0%	38.1%	38.1%
Weighted average:
Coupon	6.2%	6.2%	6.2%
Months remaining	297	301	302
Loan size	$299,000	$302,000	$301,000
Current loan to value	79.0%	79.0%	79.0%
FICO scores:
Original	736	736	736
Current	730	733	733
Current percentage of limited documents	44.0%	42.0%	41.0%
Current percentage - owner occupied	90.0%	90.0%	90.0%
Geographic concentration:
Highest percentage	GA 78.2%	GA 79.7%	GA 79.9%
Second highest percentage	FL 17.8%	FL 16.6%	FL 16.5%

Based on the independent calculations and assumptions, management currently anticipates receiving substantially all of the outstanding principal and the related interest for this CMO security. Management has reviewed the independent assumptions utilized, compared them to current actual results, and believes that they are reasonable. However, there is no precise method to predict if credit losses in the future periods will exceed our current predictions. If actual results significantly vary from the assumptions noted above, we may be required to recognize losses that are later deemed to not be only temporary in nature. The valuation change has been recorded as a change in the unrealized gain/loss recognized in other comprehensive income.