NOTE 6: INVESTMENT SECURITIES

The amortized cost and approximate fair values of securities as of June 30, 2013 and December 31, 2012 are as follows:

	June 30, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Unaudited; In Thousands)
Available-for-sale Securities
Federal agencies	$	45,536	$	392	$	(988	)	$	44,940
State and municipal		34,920		829		(1,363	)		34,386
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		44,809		405		(950	)		44,264
Corporate		3,163		2		(447	)		2,718
Total investment securities	$	128,428	$	1,628	$	(3,748	)	$	126,308

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
Available-for-sale Securities
Federal agencies	$	42,581	$	849	$	(21	)	$	43,409
State and municipal		29,331		1,865		(34	)		31,162
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		35,258		774		(10	)		36,022
Corporate		3,652		47		(522	)		3,177
Total investment securities	$	110,822	$	3,535	$	(587	)	$	113,770

The amortized cost and fair value of available-for-sale securities June 30, 2013, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale
	Amortized Cost		Fair Value
	(Unaudited; In Thousands)

Within one year	$	5,713	$	5,772
One to five years		21,900		22,160
Five to ten years		34,161		33,421
After ten years		21,845		20,691
		83,619		82,044
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		44,809		44,264
Totals	$	128,428	$	126,308

No securities were pledged at June 30, 2013 or at December 31, 2012 to secure FHLB advances. Securities with a carrying value of $16,205,000 and $18,826,000 were pledged at June 30, 2013 and December 31, 2012 to secure public deposits and for other purposes as permitted or required by law.

Proceeds from sales of securities available for sale during the six-month periods ended June 30, 2013 and June 30, 2012 were $7,817,000 and $4,821,000. Gross gains of $210,000 and $331,000 resulting from sales and calls of available-for-sale securities were realized for the six-month periods ended June 30, 2013 and June 30, 2012, respectively. Gross losses of $17,000 were realized for the six-month period ended June 30, 2013, and there were no losses for the period ended June 30, 2012.

Proceeds from sales of securities available for sale during the three-month periods ended June 30, 2013 and June 30, 2012 were $5,761,000 and $2,863,000. Gross gains of $131,000 and $197,000 resulting from sales and calls of available-for-sale securities were realized for the three-month periods ended June 30, 2013 and June 30, 2012, respectively. Gross losses of $17,000 were realized for the three-month period ended June 30, 2013, and there were no losses for the period ended June 30, 2012.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at June 30, 2013 was $78,159,000, which is approximately 61.9% of the Corporation’s investment portfolio. The fair value of these investments at December 31, 2012 was $11,879,000, which represented approximately 10.4% of the Corporation’s investment portfolio. Management has the ability and intent to hold securities with unrealized losses to recovery, which may be maturity. Based on evaluation of available evidence, including recent changes in market interest rates, management believes that any declines in fair values for these securities are temporary.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting credit portion of the loss recognized in net income and the noncredit portion of the loss would be recognized in accumulated other comprehensive income in the period the other-than-temporary impairment is identified.

The following tables show the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012:

	June 30, 2013
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Unaudited; In Thousands)

Federal agencies	$	28,492	$	(988	)	$	-	$	-		$	28,492	$	(988	)
State and municipal		16,107		(1,363	)		-		-			16,107		(1,363	)
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		31,344		(950	)		-		-			31,344		(950	)
Corporate		995		(4	)		1,221		(443	)		2,216		(447	)

Total temporarily impaired securities	$	76,938	$	(3,305	)	$	1,221	$	(443	)	$	78,159	$	(3,748	)


	December 31, 2012
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In Thousands)

Federal agencies	$	3,979	$	(21	)	$	-	$	-		$	3,979	$	(21	)
State and municipal		3,856		(34	)		-		-			3,856		(34	)
Government-sponsored enterprise (GSE) residential mortgage-backed and other asset-backed agency securities		2,847		(10	)		-		-			2,847		(10	)
Corporate		-		-			1,197		(522	)		1,197		(522	)

Total temporarily impaired securities	$	10,682	$	(65	)	$	1,197	$	(522	)	$	11,879	$	(587	)

Federal Agencies

The unrealized losses on the Corporation’s investments in direct obligations of U.S. government agencies were primarily caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at June 30, 2013.

State and Municipal

The unrealized losses on the Corporation’s investments in securities of state and political subdivisions were primarily caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at June 30, 2013.

Government-Sponsored Enterprise (GSE) Residential Mortgage-Backed and Other Asset-Backed Agency Securities

The unrealized losses on the Corporation’s investment in residential mortgage-backed agency securities were primarily caused by interest rate changes. The Corporation expects to recover the amortized cost bases over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at June 30, 2013.

Corporate Securities

The unrealized losses on the Corporation’s investment in corporate securities were due primarily to losses on two pooled trust preferred issues held by the Corporation. The two, ALESCO 9A and PRETSL XXVII, had unrealized losses at June 30, 2013 of $395,000 and $48,000, respectively. At December 31, 2012, the unrealized losses on these two investments were $465,000 and $56,000, respectively. These two securities are both “A” tranche investments (A2A and A-1 respectively) and have performed as agreed since purchase. The two are rated Ba2 and A2, respectively, by Moody’s indicating these securities are considered low medium-grade to below investment grade quality and credit risk. Both provide good collateral coverage at those tranche levels, providing protection for the Corporation. The Corporation has reviewed the pricing reports for these investments and has determined that the decline in the market price is not other than temporary and indicates thin trading activity rather than a true decline in the value of the investment. Factors considered in reaching this determination included the class or “tranche” held by the Corporation, the collateral coverage position of the tranches, the number of deferrals and defaults on the issues, projected and actual cash flows and the credit ratings. These two investments represent 1.3% of the book value of the Corporation’s investment portfolio and approximately 1.0% of market value. The Corporation does not intend to sell the investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, and the Corporation expects to receive all contractual cash flows related to these investments. Based upon these factors, the Corporation has determined these securities are not other-than-temporarily impaired at June 30, 2013.