NOTE B - SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)

The amortized cost and fair value of securities held at December 31, 2014, and 2013, are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	$		$		$			$

December 31, 2014
U.S. government agencies		46,577		110		(528	)		46,159
U.S. agency mortgage-backed securities		37,946		138		(134	)		37,950
U.S. agency collateralized mortgage obligations		48,690		55		(679	)		48,066
Corporate bonds		65,274		145		(311	)		65,108
Obligations of states and political subdivisions		90,628		2,961		(258	)		93,331
Total debt securities		289,115		3,409		(1,910	)		290,614
Marketable equity securities		5,189		19		—			5,208
Total securities available for sale		294,304		3,428		(1,910	)		295,822

December 31, 2013
U.S. government agencies		41,671		148		(2,152	)		39,667
U.S. agency mortgage-backed securities		52,502		101		(680	)		51,923
U.S. agency collateralized mortgage obligations		42,465		161		(938	)		41,688
Private collateralized mortgage obligations		4,135		44		(138	)		4,041
Corporate bonds		56,437		430		(673	)		56,194
Obligations of states and political subdivisions		103,936		1,057		(3,349	)		101,644
Total debt securities		301,146		1,941		(7,930	)		295,157
Marketable equity securities		5,151		20		—			5,171
Total securities available for sale		306,297		1,961		(7,930	)		300,328

The amortized cost and fair value of debt securities available for sale at December 31, 2014, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities due to certain call or prepayment provisions.

CONTRACTUAL MATURITY OF DEBT SECURITIES

(DOLLARS IN THOUSANDS)


	Amortized
	Cost		Fair Value
	$		$
Due in one year or less		23,243		23,095
Due after one year through five years		92,687		92,375
Due after five years through ten years		89,574		89,262
Due after ten years		83,611		85,882
Total debt securities		289,115		290,614

Securities available for sale with a par value of $75,013,000 and $86,392,000 at December 31, 2014 and 2013, respectively, were pledged or restricted for public funds, borrowings, or other purposes as required by law. The fair market value of these pledged securities was $78,269,000 at December 31, 2014, and $86,993,000 at December 31, 2013.

Proceeds from active sales of debt securities available for sale, along with the associated gross realized gains and gross realized losses, are shown below. Realized gains and losses are computed on the basis of specific identification.

PROCEEDS FROM SALES OF SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)

	Securities Available for Sale
	2014		2013		2012
	$		$		$

Proceeds from sales		155,363		116,347		33,388
Gross realized gains		3,815		4,209		1,212
Gross realized losses		684		821		132

SUMMARY OF GAINS AND LOSSES ON SECURITIES AVAILABLE FOR SALE

(DOLLARS IN THOUSANDS)


	2014		2013		2012
	$		$		$
Gross realized gains		3,815		4,209		1,212

Gross realized losses		684		821		132
Impairment on securities		22		171		140
Total gross realized losses		706		992		272

Net gains on securities		3,109		3,217		940

The bottom portion of the above table shows the net gains on security transactions, including any impairment taken on securities held by the Corporation. The net gain or loss from security transactions is also reflected on the Corporation's Consolidated Statements of Income and Consolidated Statements of Cash Flows.

Management evaluates all of the Corporation's securities for other than temporary impairment (OTTI) on a periodic basis. Prior to June 30, 2014, the Corporation had a small number of private collateralized mortgage obligations (PCMOs) of which all but one had impairment recorded at some point in the past with total impairment of $22,000 recorded in 2014. During the second quarter of 2014, the three PCMOs remaining in the Corporation's securities portfolio were sold. No other securities in the portfolio had other-than-temporary impairment recorded in 2014. As of December 31, 2013, two private collateralized mortgage obligation (PCMO) securities were considered to be other than temporarily impaired. Impairment was taken on these securities in 2013, which amounted to $171,000.

As of December 31, 2014, all other securities carrying unrealized losses were determined not to be other than temporarily impaired. Information pertaining to securities with gross unrealized losses at December 31, 2014, and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

TEMPORARY IMPAIRMENTS OF SECURITIES

(DOLLARS IN THOUSANDS)

	Less than 12 months					More than 12 months					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	$		$			$		$				$		$
As of December 31, 2014
U.S. government agencies		9,676		(30	)		19,689		(498	)		29,365		(528	)
U.S. agency mortgage-backed securities		7,412		(18	)		5,412		(116	)		12,824		(134	)
U.S. agency collateralized mortgage obligations		25,314		(403	)		11,222		(276	)		36,536		(679	)
Corporate bonds		33,413		(227	)		9,855		(84	)		43,268		(311	)
Obligations of states & political subdivisions		2,710		(29	)		16,720		(229	)		19,430		(258	)

Total debt securities		78,525		(707	)		62,898		(1,203	)		141,423		(1,910	)

Marketable equity securities		—		—			—		—			—		—

Total temporarily impaired securities		78,525		(707	)		62,898		(1,203	)		141,423		(1,910	)

As of December 31, 2013
U.S. government agencies		33,043		(1,735	)		3,603		(417	)		36,646		(2,152	)
U.S. agency mortgage-backed securities		31,810		(659	)		4,938		(21	)		36,748		(680	)
U.S. agency collateralized mortgage obligations		28,138		(938	)		—		—			28,138		(938	)
Private collateralized mortgage obligations		1,384		(59			1,790		(79	)		3,174		(138	)
Corporate bonds		32,349		(664	)		2,010		(9	)		34,359		(673	)
Obligations of states & political subdivisions		58,920		(2,778	)		8,950		(571	)		67,870		(3,349	)

Total debt securities		185,644		(6,833	)		21,291		(1,097	)		206,935		(7,930	)

Marketable equity securities		—		—			—		—			—		—

Total temporarily impaired securities		185,644		(6,833	)		21,291		(1,097	)		206,935		(7,930	)

In the debt security portfolio, there are 95 positions carrying unrealized losses as of December 31, 2014. There were no instruments considered to be other-than-temporarily impaired at December 31, 2014.

The Corporation evaluates both equity and fixed maturity positions for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic and market concerns warrant such evaluation. U.S. generally accepted accounting principles provide for the bifurcation of OTTI into two categories: (a) the amount of the total OTTI related to a decrease in cash flows expected to be collected from the debt security (the credit loss), which is recognized in earnings, and (b) the amount of total OTTI related to all other factors, which is recognized, net of taxes, as a component of accumulated other comprehensive income (loss). This accounting treatment was only applicable to two of the Corporation's PCMOs in the first quarter of 2014, but both of those securities were sold in the second quarter of 2014, resulting in no further impairment charges.

The prior impairment on the PCMOs was a result of a deterioration of expected cash flows on those securities due to higher projected credit losses than the amount of credit protection carried by those securities. Specifically, the foreclosure and severity rates had been running at levels where expected principal losses were in excess of the remaining credit protection on those instruments. The projected principal losses were based on prepayment speeds that were equal to or slower than the actual last twelve-month prepayment speeds the particular securities had experienced. Every quarter prior to the second quarter of 2014, management evaluated third-party reporting that showed projected principal losses based on various prepayment speed and severity rate scenarios. Based on the assumption that all loans over 60 days delinquent would default and at a severity rate equal to or above that previously experienced, and based on historical and expected prepayment speeds, management determined that it was appropriate to take an additional $22,000 of impairment on one PCMO in the first quarter of 2014. Because all of the remaining PCMOs were sold in the second quarter of 2014, no further impairment was recorded on these bonds in 2014 and future impairment analysis will cease for this segment.

The following tables reflect the amortized cost, market value, and unrealized loss as of December 31, 2014 and 2013, on the PCMO securities held which had impairment taken in each respective year. In 2014, there was one PCMO that had impairment taken during the first quarter prior to the sale of the remaining PCMO portfolio. In 2013, there were three PCMOs that had impairment taken in the year. The values shown below are after the Corporation recorded year-to-date impairment charges of $22,000 through December 31, 2014, and $171,000 through December 31, 2013. The $22,000 and $171,000 were deemed to be credit losses and were the amounts that management expected the principal losses to be by the time these securities matured. The $138,000 of unrealized losses as of December 31, 2013, was deemed to be market value losses that were considered temporary. Because all of the remaining PCMO securities were sold during the second quarter of 2014, there are no temporary market value losses remaining at December 31, 2014.

SECURITY IMPAIRMENT CHARGES

December 31, 2014

(DOLLARS IN THOUSANDS)

	Amortized		Market		Unrealized		Impairment
	Cost		Value		Loss		Charge
	$		$		$		$

Private collateralized mortgage obligations		—		—		—		(22	)

SECURITY IMPAIRMENT CHARGES

December 31, 2013

(DOLLARS IN THOUSANDS)

	Amortized		Market		Unrealized			Impairment
	Cost		Value		Loss			Charge
	$		$		$			$

Private collateralized mortgage obligations		3,312		3,174		(138	)		(171	)

The following table provides a cumulative roll forward of credit losses recognized in earnings for debt securities held:

(DOLLARS IN THOUSANDS)

	For the year ended December 31,
	2014			2013		2012
	$			$		$

Beginning balance		1,148			977		1,057
Credit losses on debt securities for which other-than-temporary
impairment has not been previously recognized		—			—		—
Additional credit losses on debt securities for which other-than-
temporary impairment was previously recognized		22			171		86
Sale of debt securities with previously recognized impairment		(1,170	)		—		(166	)

Ending balance		—			1,148		977