Note 3 – Investments

Investments available-for-sale

The amortized cost and estimated fair values of investments available-for-sale at the dates indicated are presented in the following table:

	At June 30, 2012									At December 31, 2011
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
U.S. government agencies	$	120,027	$	1,593	$	-		$	121,620	$	197,816	$	2,436	$	-		$	200,252
State and municipal		159,144		12,575		(13	)		171,706		160,657		12,456		(2	)		173,111
Mortgage-backed		488,647		20,924		(37	)		509,534		551,518		18,639		(13	)		570,144
Corporate debt		2,000		-		(5	)		1,995		2,000		-		(22	)		1,978
Trust preferred		3,554		164		(415	)		3,303		5,936		260		(480	)		5,716
Total debt securities		773,372		35,256		(470	)		808,158		917,927		33,791		(517	)		951,201
Marketable equity securities		723		-		-			723		100		-		-			100
Total investments available-for-sale	$	774,095	$	35,256	$	(470	)	$	808,881	$	918,027	$	33,791	$	(517	)	$	951,301

Any unrealized losses in the U.S. government agencies, state and municipal, mortgage-backed or corporate debt investment securities at June 30, 2012 are the result of changes in interest rates and are not considered credit related. These declines are considered temporary in nature and will decline over time and recover as these securities approach maturity.

The mortgage-backed portfolio at June 30, 2012 is composed entirely of either the most senior tranches of GNMA collateralized mortgage obligations ($208.5 million), or GNMA, FNMA or FHLMC mortgage-backed securities ($301.0 million). The Company does not intend to sell these securities and has sufficient liquidity to hold these securities for an adequate period of time, which may be maturity, to allow for any anticipated recovery in fair value.

At June 30, 2012, the trust preferred portfolio consisted of one security backed by a single financial institution issuer and one pooled trust preferred security. The fair value of the single issue security was $1.5 million as determined using broker quotations. The pooled trust preferred security is backed by debt issued by banks and thrifts, which totals $2.2 million, with a fair value of $1.8 million. The fair value of this security was determined by a third party valuation specialist due to the limited trading activity for this security in the marketplace.

The specialist used an income valuation approach technique (present value) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. The methodology and significant assumptions employed by the specialist to determine fair value included:

Evaluation of the structural terms as established in the indenture;

Detailed credit and structural evaluation for each piece of issuer collateral in the pool;

Overall default (.30%), recovery and prepayment (2%)/amortization probabilities by issuers in the pool;

Identification of adverse conditions specifically related to the security, industry and geographical area;

Projection of estimated cash flows that incorporate default expectations and loss severities;

Review of historical and implied volatility of the fair value of the security;

Evaluation of credit risk concentrations;

Evaluation of the length of time and the extent to which the fair value has been less than the amortized cost; and

A discount rate of 12.6% was established using credit adjusted financial institution spreads for comparably rated institutions and a liquidity adjustment that considered the previously noted characteristics.

As a result of this evaluation, it was determined that the pooled trust preferred security incurred credit-related other-than-temporary impairment (“OTTI”) of $8 thousand, which was recognized in earnings for the quarter ended June 30, 2012. For the six months ended June 30, 2012 the OTTI recognized in earnings was $72 thousand. Non-credit related OTTI on this security, which is not expected to be sold and that the Company has the ability to hold until maturity, was $0.4 million at June 30, 2012. This non-credit related OTTI was recognized in other comprehensive income (“OCI”) at June 30, 2012.

The methodology and significant inputs used to measure the amount related to credit loss consisted of the following:

Default rates were developed based on the financial condition of the trust preferred issuers in the pool and the payment or deferral status. Conditional default rates were estimated based on the payment characteristics of the security and the financial condition of the issuers in the pool. Near term and future defaults are estimated using third party industry data in addition to a review of key financial ratios and other pertinent data on the financial stability of the underlying issuer;

Loss severity is forecasted based on the type of impairment using research performed by third parties;

The security contains one level of subordination below the senior tranche, with the senior tranche receiving the spread from the subordinate bonds. Given recent performance, it is not expected that the senior tranche will receive its full interest and principal at the bond’s maturity date;

Credit ratings of the underlying issuers are reviewed in conjunction with the development of the default rates applied to determine the credit amounts related to the credit loss; and

Potential prepayments are estimated based on terms and rates of the underlying trust preferred securities to determine the impact of excess spread on the credit enhancement, the removal of the strongest institutions from the underlying pool and any impact that prepayments might have on diversity and concentration.

The following table provides the activity of OTTI on investment securities due to credit losses recognized in earnings for the period indicated:

(In thousands)	OTTI Losses
Cumulative credit losses on investment securities, through January 1, 2012	$	422
Additions for credit losses not previously recognized		72
Cumulative credit losses on investment securities, through June 30, 2012	$	494

Gross unrealized losses and fair value by length of time that the individual available-for-sale securities have been in an unrealized loss position at the dates indicated are presented in the following table:

	At June 30, 2012
					Continuous Unrealized
					Losses Existing for:
	Number								Total
	of				Less than		More than		Unrealized
(Dollars in thousands)	securities		Fair Value		12 months		12 months		Losses
State and municipal		2	$	1,176	$	13	$	-	$	13
Mortgage-backed		2		7,073		37		-		37
Corporate debt		1		1,995		5		-		5
Trust preferred		1		1,817		-		415		415
Total		6	$	12,061	$	55	$	415	$	470

	At December 31, 2011
					Continuous Unrealized
					Losses Existing for:
	Number								Total
	of				Less than		More than		Unrealized
(Dollars in thousands)	securities		Fair Value		12 months		12 months		Losses
State and municipal		1	$	397	$	2	$	-	$	2
Mortgage-backed		3		5,081		13		-		13
Corporate debt		1		3,326		22		-		22
Trust preferred		1		2,467		-		480		480
Total		6	$	11,271	$	37	$	480	$	517

The amortized cost and estimated fair values of investment securities available-for-sale by contractual maturity at the dates indicated are provided in the following table. The Company has allocated mortgage-backed securities into the four maturity groupings reflected in the following table using the expected average life of the individual securities based on statistics provided by independent third party industry sources. Expected maturities will differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment penalties.

	At June 30, 2012				At December 31, 2011
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
Due in one year or less	$	20,284	$	20,381	$	65,569	$	65,972
Due after one year through five years		37,844		39,045		62,993		64,656
Due after five years through ten years		311,158		324,495		342,813		354,238
Due after ten years		404,086		424,237		446,552		466,335
Total debt securities available for sale	$	773,372	$	808,158	$	917,927	$	951,201

At June 30, 2012 and December 31, 2011, investments available-for-sale with a book value of $221.2 million and $255.4 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law. The outstanding balance of no single issuer, except for U.S. Agencies securities, exceeded ten percent of stockholders' equity at June 30, 2012 and December 31, 2011.

Investments held-to-maturity

The amortized cost and estimated fair values of investments held-to-maturity at the dates indicated are presented in the following table:

	At June 30, 2012									At December 31, 2011
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
U.S. government agencies	$	37,576	$	37	$	(140	)	$	37,473	$	54,983	$	406	$	-		$	55,389
State and municipal		126,904		4,883		(277	)		131,510		123,075		5,244		(1	)		128,318
Mortgage-backed		366		47		-			413		407		53		-			460
Total investments held-to-maturity	$	164,846	$	4,967	$	(417	)	$	169,396	$	178,465	$	5,703	$	(1	)	$	184,167

Gross unrealized losses and fair value by length of time that the individual held-to-maturity securities have been in a continuous unrealized loss position at the dates indicated are presented in the following tables:

	At June 30, 2012
					Continuous Unrealized
					Losses Existing for:
	Number								Total
	of				Less than		More than		Unrealized
(Dollars in thousands)	securities		Fair Value		12 months		12 months		Losses
U.S. government agencies		3	$	17,435	$	140	$	-	$	140
State and municipal		20		20,624		277		-		277
Total		23	$	38,059	$	417	$	-	$	417

	At December 31, 2011
					Continuous Unrealized
					Losses Existing for:
	Number								Total
	of				Less than		More than		Unrealized
(Dollars in thousands)	securities		Fair Value		12 months		12 months		Losses
State and municipal		1	$	541	$	1	$	-	$	1
Total		1	$	541	$	1	$	-	$	1

The Company does not intend to sell these securities and has sufficient liquidity to hold these securities for an adequate period of time, which may be maturity, to allow for any anticipated recovery in fair value, and substantiates that the unrealized losses in the held-to-maturity portfolio are considered temporary in nature.

The amortized cost and estimated fair values of debt securities held-to-maturity by contractual maturity at the dates indicated are reflected in the following table. Expected maturities will differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment penalties.

	At June 30, 2012				At December 31, 2011
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
Due in one year or less	$	11,939	$	12,168	$	18,860	$	19,203
Due after one year through five years		5,605		5,731		6,937		7,144
Due after five years through ten years		80,110		82,340		98,428		101,008
Due after ten years		67,192		69,157		54,240		56,812
Total debt securities held-to-maturity	$	164,846	$	169,396	$	178,465	$	184,167

At June 30, 2012 and December 31, 2011, investments held-to-maturity with a book value of $130.3 million and $58.7 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law. The outstanding balance of no single issuer, except for U.S. Agency securities, exceeded ten percent of stockholders' equity at June 30, 2012 and December 31, 2011.

Equity securities

Other equity securities at the dates indicated are presented in the following table:

(In thousands)	June 30, 2012		December 31, 2011
Federal Reserve Bank stock	$	8,292	$	7,530
Federal Home Loan Bank of Atlanta stock		24,724		27,328
Other equities		-		75
Total equity securities	$	33,016	$	34,933