NOTE 6 — Investment Securities

Investments in securities are classified in two categories and accounted for as follows:

Securities Held-to-Maturity – Bonds, notes, debentures and mortgage-backed securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts computed on the straight-line basis, which approximates the interest method, over the remaining period to maturity.

Securities Available-for-Sale – Bonds, notes, debentures, mortgage-backed securities not classified as securities to be held to maturity and certain equity securities are classified as available-for-sale and carried at fair value with unrealized holding gains and losses, net of tax, reported as a net amount in a separate component of stockholders’ equity until realized.

The amortization of premiums on mortgage-backed securities is done based on management’s estimate of the lives of the securities, adjusted, when necessary, for advanced prepayments in excess of those estimates.

Realized gains and losses on the sale of securities available-for-sale are determined using the specific identification method and are reported as a separate component of other income in the Statements of Income. Unrealized gains and losses are included as a separate item in computing comprehensive income.

Investment securities are evaluated periodically to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

The amortized cost and fair value of investment securities at June 30, 2013 and December 31, 2012 are as follows:

Available-for-Sale


June 30, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Agency securities	$	81,804	$	422	$	459	$	81,767
Mortgage-backed securities		13,572		587		—		14,159
States & political subdivisions		52,974		2,686		17		55,643

Total Debt Securities		148,350		3,695		476		151,569
Equity securities		651		291		—		942

Total Available-for-Sale	$	149,001	$	3,986	$	476	$	152,511

Available-for-Sale


December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Agency securities	$	83,927	$	757	$	2	$	84,682
Mortgage-backed securities		15,962		839		—		16,801
States & political subdivisions		53,846		4,991		—		58,837

Total Debt Securities		153,735		6,587		2		160,320
Equity securities		801		281		11		1,071

Total Available-for-Sale	$	154,536	$	6,868	$	13	$	161,391

Held-to-Maturity


June 30, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage-backed securities	$	11,965	$	525	$	—	$	12,490
States & political subdivisions		7,742		14		709		7,047

Total Held-to-Maturity	$	19,707	$	539	$	709	$	19,537

Held-to-Maturity


December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage-backed securities	$	14,819	$	856	$	—	$	15,675
States & political subdivisions		1,083		16		—		1,099

Total Held-to-Maturity	$	15,902	$	872	$	—	$	16,774

Equity securities at June 30, 2013 and December 31, 2012 consisted primarily of common stock of companies in the financial services industry.

There were no proceeds involving available-for-sale debt securities for the six months ended June 30, 2013 and 2012.

The amortized cost and fair value of debt securities at June 30, 2013 by contractual maturity are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


June 30, 2013	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less:
U.S. Agency securities	$	13,990	$	14,055	$	—	$	—
States & political subdivisions		10		11		—		—
After one year through five years:
U.S. Agency securities		67,814		67,712		—		—
States & political subdivisions		130		131		—		—
After five years through ten years:
States & political subdivisions		2,122		2,277		869		882
After ten years:
States & political subdivisions		50,712		53,224		6,873		6,165

Subtotal		134,778		137,410		7,742		7,047
Mortgage-backed securities		13,572		14,159		11,965		12,490

Total Debt Securities	$	148,350	$	151,569	$	19,707	$	19,537

The gross fair value and unrealized losses of the Company’s investments 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 are as follows:


	Less than twelve months				Twelve months or more				Totals
June 30, 2013	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Agency securities	$	41,214	$	439	$	3,125	$	20	$	44,339	$	459
States & political subdivisions		8,362		726		—		—		8,362		726
Equities		—		—		—		—		—		—

Total	$	49,576	$	1,165	$	3,125	$	20	$	52,701	$	1,185


	Less than twelve months				Twelve months or more				Totals
December 31, 2012	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Agency securities	$	3,169	$	2	$	—	$	—	$	3,169	$	2
States & political subdivisions		—		—		—		—		—		—
Equities		141		9		48		2		189		11

Total	$	3,310	$	11	$	48	$	2	$	3,358	$	13

At June 30, 2013, twenty-four securities had unrealized losses for less than twelve months and one security had been in an unrealized loss position for twelve or more months. At December 31, 2012, four securities had unrealized losses for less than twelve months and one security had been in an unrealized loss position for twelve or more months.

U.S. Agency Securities

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

States and Political Subdivisions

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

Marketable Equity Securities

The unrealized losses on the Company’s investments in marketable equity securities were caused by interest rate fluctuations and general market conditions. The Company’s investments in marketable equity securities consist primarily of investments in common stock of companies in the financial services industry. The Company has analyzed its equity portfolio and determined that the market value fluctuation in these equity securities is not a cause for recognition of a current loss. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their cost bases, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2013.