NOTE 5. SECURITIES

Information related to the fair value and amortized cost of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) is provided in the tables below.

		Gross	Gross
	Fair	Unrealized	Unrealized	Amortized
	Value	Gain	Losses	Cost
June 30, 2012
U.S. Treasury securities	$ 1,046	$ 43	$ 0	$ 1,003
U.S. government sponsored agencies	5,298	269	0	5,029
Agency residential mortgage-backed securities	362,009	9,383	(1,138)	353,764
Non-agency residential mortgage-backed securities	28,207	373	(808)	28,642
State and municipal securities	81,880	5,536	(22)	76,366
Total	$ 478,440	$ 15,604	$ (1,968)	$ 464,804

December 31, 2011
U.S. Treasury securities	$ 1,055	$ 52	$ 0	$ 1,003
U.S. government sponsored agencies	5,277	244	0	5,033
Agency residential mortgage-backed securities	350,102	8,989	(923)	342,036
Non-agency residential mortgage-backed securities	32,207	191	(2,225)	34,241
State and municipal securities	78,750	5,292	(9)	73,467
Total	$ 467,391	$ 14,768	$ (3,157)	$ 455,780

Total other-than-temporary impairment recognized in accumulated other comprehensive income was $783,000 at June 30, 2012 and $213,000 at December 31, 2011.

Information regarding the fair value and amortized cost of available for sale debt securities by maturity as of June 30, 2012 is presented below. Maturity information is based on contractual maturity for all securities other than mortgage-backed securities. Actual maturities of securities may differ from contractual maturities because borrowers may have the right to prepay the obligation without prepayment penalty.

	Amortized	Fair
	Cost	Value
Due in one year or less	$ 1,793	$ 1,797
Due after one year through five years	23,236	24,847
Due after five years through ten years	34,263	36,820
Due after ten years	23,106	24,760
	82,398	88,224
Mortgage-backed securities	382,406	390,216
Total debt securities	$ 464,804	$ 478,440

Security proceeds, gross gains and gross losses are presented below.

	Six months ended June 30,
	2012	2011
Sales of securities available for sale
Proceeds	$ 0	$ 73,318
Gross gains	0	4,005
Gross losses	0	(4,171)

	Three months ended June 30,
	2012	2011
Sales of securities available for sale
Proceeds	$ 0	$ 4,471
Gross gains	0	76
Gross losses	0	(44)

There were no securities sales during the first six months of 2012. All of the gains in 2012 were from calls. The Company sold 36 securities with a total book value of $73.5 million and a total fair value of $73.3 million during the first six months of 2011. The sales were related to a strategic realignment of the securities portfolio, and included six of the seven non-agency residential mortgage backed securities on which the Company had previously recognized other-than-temporary impairment.

Purchase premiums or discounts are recognized in interest income using the interest method over the terms of the securities or over estimated lives for mortgage-backed securities. Gains and losses on sales are based on the amortized cost of the security sold and recorded on the trade date.

Securities with carrying values of $216.5 million and $259.3 million were pledged as of June 30, 2012 and 2011, as collateral for deposits of public funds, securities sold under agreements to repurchase, borrowings from the Federal Home Loan Bank and for other purposes as permitted or required by law.

Information regarding securities with unrealized losses as of June 30, 2012 and December 31, 2011 is presented below. The tables distribute the securities between those with unrealized losses for less than twelve months and those with unrealized losses for twelve months or more.

	Less than 12 months		12 months or more		Total
	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
	Value	Losses	Value	Losses	Value	Losses
June 30, 2012

Agency residential mortgage-backed
securities	$ 99,303	$ (903)	$ 11,689	$ (235)	$ 110,992	$ (1,138)
Non-agency residential mortgage-backed
securities	3,981	(96)	11,172	(712)	15,153	(808)
State and municipal securities	1,956	(22)			1,956	(22)
Total temporarily impaired	$ 105,240	$ (1,021)	$ 22,861	$ (947)	$ 128,101	$ (1,968)

	Less than 12 months		12 months or more		Total
	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
	Value	Losses	Value	Losses	Value	Losses
December 31, 2011

Agency residential mortgage-backed
securities	$ 74,463	$ (860)	$ 4,813	$ (63)	$ 79,276	$ (923)
Non-agency residential mortgage-backed
securities	3,379	(4)	23,885	(2,221)	27,264	(2,225)
State and municipal securities	341	(2)	1,003	(7)	1,344	(9)
Total temporarily impaired	$ 78,183	$ (866)	$ 29,701	$ (2,291)	$ 107,884	$ (3,157)

The number of securities with unrealized losses as of June 30, 2012 and December 31, 2011 is presented below.

	Less than	12 months
	12 months	or more	Total
June 30, 2012

Agency residential mortgage-backed securities	27	4	31
Non-agency residential mortgage-backed securities	1	5	6
State and municipal securities	11	0	11
Total temporarily impaired	39	9	48

	Less than	12 months
	12 months	or more	Total
December 31, 2011

Agency residential mortgage-backed securities	21	1	22
Non-agency residential mortgage-backed securities	2	9	11
State and municipal securities	3	2	5
Total temporarily impaired	26	12	38

All of the following are considered to determine whether or not the impairment of these securities is other-than-temporary. Ninety-four percent of the securities are backed by the U.S. government, government agencies, government sponsored agencies or are A rated or better, except for certain non-local municipal securities which are not rated. Mortgage-backed securities which are not issued by the U.S. government or government sponsored agencies (non-agency residential mortgage-backed securities) met specific criteria set by the Asset Liability Management Committee at their time of purchase, including having the highest rating available by either Moody's or S&P. None of the securities have call provisions (with the exception of the municipal securities) and all payments on the securities have been received on their original terms. For the government, government-sponsored agency and municipal securities, management was not concerned about the risk of credit losses, and there was nothing to indicate that full payment of the principal will not be received. Management considered the unrealized losses on these securities to be primarily interest rate driven and does not expect material losses given current market conditions unless the securities are sold. However, at this time management does not have the intent to sell and it is more likely than not that it will not be required to sell these securities before the recovery of their amortized cost basis.

As of June 30, 2012, the Company had $28.2 million of non-agency residential mortgage-backed securities which were not issued by the federal government or government sponsored agencies, but were rated AAA by S&P and/or Aaa by Moody's at the time of purchase. At December 31, 2011, the Company had $32.2 million of these non-agency residential mortgage-backed securities. Three of the 14 remaining non-agency residential mortgage backed securities were still rated AAA/Aaa as of June 30, 2012 by at least one of the rating agencies S&P, Moody's and Fitch, but the other eleven had been downgraded, including nine which had been downgraded to below investment grade by at least one of those rating agencies.

For these non-agency residential mortgage-backed securities, additional analysis is performed to determine if the impairment is temporary or other-than-temporary in which case impairment would need to be recorded for these securities. The Company performs an independent analysis of the cash flows of the individual securities based upon assumptions as to collateral defaults, prepayment speeds, expected losses and the severity of potential losses. Based upon the initial review, securities may be identified for further analysis by computing the net present value using an appropriate discount rate (the current accounting yield) and comparing it to the book value of the security to determine if there is any other-than-temporary impairment that must be recorded. Based on this analysis of the non-agency residential mortgage-backed securities, the Company recorded an other-than-temporary impairment of $449,000 and $959,000, respectively, relating to four securities in the three-months and six-months ended June 30, 2012, which is equal to the credit loss, establishing a new, lower amortized cost basis. Because management did not have the intent to sell these securities and did not believe that it was more likely than not they would be required to sell these securities before the recovery of their new, lower amortized cost basis, management did not consider the remaining unrealized losses of the investment securities to be other-than-temporarily impaired at June 30, 2012.

The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income. The table represents the three months and six months ended June 30, 2012 and 2011.

	Three Months Ended June 30,
	2012	2011
Balance April 1,	$ 869	$ 194
Additions related to other-than-temporary impairment losses
not previously recognized	198	0
Additional increases to the amount of credit loss for which
other-than-temporary impairment was previously recognized	251	0
Reductions for previous credit losses realized on
securities sold during the year	0	0
Balance June 30,	$ 1,318	$ 194



	Six Months Ended June 30,
	2012	2011
Balance January 1,	$ 359	$ 1,812
Additions related to other-than-temporary impairment losses
not previously recognized	747	0
Additional increases to the amount of credit loss for which
other-than-temporary impairment was previously recognized	212	121
Reductions for previous credit losses realized on
securities sold during the year	0	(1,739)
Balance June 30,	$ 1,318	$ 194

Information on securities with at least one rating below investment grade as of June 30, 2012 is presented below.

		Other Than
		Temporary					June 30, 2012	1-Month	3-Month	6-Month
		Impairment	June 30, 2012				Lowest	Constant	Constant	Constant
		Since	Par	Amortized	Fair	Unrealized	Credit	Default	Default	Default	Credit
Description	CUSIP	Purchase	Value	Cost	Value	Gain/(Loss)	Rating	Rate	Rate	Rate	Support

CWHL 2006-18 2A7	12543WAJ7	$ 202	$ 2,437	$ 2,188	$ 2,144	$ (44)	C	4.56	6.87	7.19	0.97
CWALT 2005-46CB A1	12667G6U2	254	3,237	2,833	2,712	(121)	C	5.95	5.35	5.45	1.38
CWALT 2005-J8 1A3	12667GJ20	348	4,620	4,083	3,987	(96)	CC	12.53	6.77	7.30	4.68
CHASE 2006-S3 1A5	16162XAE7	197	823	624	664	40	D	5.74	8.45	8.33	0.00
CMSI 2007-61A5	173103AE2	0	2,100	2,098	2,106	8	B	4.05	1.30	3.54	6.60
GSR 2006-10F 1A1	36266WAC6	0	3,194	2,971	2,821	(150)	C	0.00	0.00	0.00	0.67
MALT 2004-6 7 A1	576434SK1	0	2,791	2,773	2,804	31	B	0.00	0.00	0.00	11.84
MANA 2007-F1 1A1	59023YAA2	0	1,806	1,771	1,468	(303)	D	0.00	0.00	0.00	0.00
RFMSI 2006-S5 A14	74957EAP2	317	2,507	2,149	2,055	(94)	D	6.75	5.06	4.29	0.00

		$ 1,318	$ 23,515	$ 21,490	$ 20,761	$ (729)

All of these securities are super senior or senior tranche non-agency residential mortgage-backed securities. The credit support is the credit support percentage for a tranche from other subordinated tranches, which is the amount of principal in the subordinated tranches expressed as a percentage of the remaining principal in the super senior or senior tranche. The super senior or senior tranches receive the prepayments and the subordinate tranches absorb the losses. The super senior or senior tranches do not absorb losses until the subordinate tranches are gone.

The Company does not have a history of actively trading securities, but keeps the securities available for sale should liquidity or other needs develop that would warrant the sale of securities. While these securities are held in the available for sale portfolio, it is management's current intent and ability to hold them until a recovery in fair value or maturity.