5. Securities

The Company’s investment portfolio includes primarily bonds issued by U.S. Government sponsored agencies (approximately 60%) and municipalities (approximately 37%) as of June 30, 2013. Most of the municipal bonds are general obligation bonds with maturities or pre-refunding dates within 5 years. The remaining 3% of the portfolio includes mortgage-backed securities issued by Government-sponsored agencies and backed by residential mortgages and a group of equity investments in other financial institutions.

The amortized cost and fair value of securities as of June 30, 2013 and December 31, 2012, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without prepayment penalties.


		June 30, 2013
Securities Available for Sale						Gross		Gross
		Amortized		Fair		Unrealized		Unrealized
Type and maturity		Cost		Value		Gains		Losses
Obligations of Government agencies and corporations
Within one year	$	5,509	$	5,545	$	36	$	-
After one year but within five years		40,225		40,132		224		(317)
After five years but within ten years		33,646		32,414		-		(1,232)
		79,380		78,091		260		(1,549)
Obligations of state and political subdivisions
Within one year		8,697		8,730		33		-
After one year but within five years		30,457		30,450		145		(152)
After five years but within ten years		7,775		7,783		118		(110)
After ten years		722		700		-		(22)
		47,651		47,663		296		(284)
Mortgage-backed securities		2,154		2,163		12		(3)
Equity securities		985		1,183		275		(77)
Total	$	130,170	$	129,100	$	843	$	(1,913)


		December 31, 2012
Securities Available for Sale						Gross		Gross
		Amortized		Fair		Unrealized		Unrealized
Type and maturity		Cost		Value		Gains		Losses
Obligations of Government agencies and corporations
Within one year	$	7,908	$	7,996	$	88	$	-
After one year but within five years		42,253		42,796		543		-
After five years but within ten years		22,004		22,025		53		(32)
		72,165		72,817		684		(32)
Obligations of state and political subdivisions
Within one year		10,448		10,505		57		-
After one year but within five years		29,595		29,809		246		(32)
After five years but within ten years		4,727		4,936		215		(6)
After ten years		731		726		-		(5)
		45,501		45,976		518		(43)
Mortgage-backed securities		2,502		2,526		24		-
Equity securities		985		1,019		145		(111)
Total	$	121,153	$	122,338	$	1,371	$	(186)

Certain obligations of the U.S. Government and state and political subdivisions are pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law. The carrying value of the pledged assets was $28,561,000 and $30,785,000 at June 30, 2013 and December 31, 2012, respectively.

In addition to cash received from the scheduled maturities of securities, some investment securities available for sale are sold at current market values during the course of normal operations. Following is a summary of proceeds received from all investment securities transactions and the resulting realized gains and losses (in thousands):


		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2013		2012		2013		2012
Gross proceeds from sales of securities	$	-	$	-	$	-	$	-
Securities available for sale:
Gross realized gains from called securities	$	-	$	2	$	1	$	2
Gross realized losses		-		-		-		-

Accounting Standards Codification (ASC) Topic 320, Investments – Debt and Equity Securities, clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. For equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses in assessing potential other-than-temporary impairment. More specifically, considerations used to determine other-than-temporary impairment status for individual equity holdings include the length of time the stock has remained in an unrealized loss position, the percentage of unrealized loss compared to the carrying cost of the stock, dividend reduction or suspension, market analyst reviews and expectations, and other pertinent developments that would affect expectations for recovery or further decline.

In instances when a determination is made that an other-than-temporary impairment exists and the entity does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, the other-than-temporary impairment is separated into the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive (loss) income.

The following table shows gross unrealized losses and fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2013 and December 31, 2012 (in thousands):



		Unrealized Losses at June 30, 2013

		Less Than 12 Months				12 Months or More				Total
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. Government
agencies and corporations	$	55,093	$	(1,549)	$	-	$	-	$	55,093	$	(1,549)
Obligations of state and political
subdivisions		23,848		(283)		41		(1)		23,889		(284)
Mortgage-backed securities		311		(3)		-		-		311		(3)
Debt securities		79,252		(1,835)		41		(1)		79,293		(1,836)

Equity securities		-		-		271		(77)		271		(77)

Total temporarily impaired securities	$	79,252	$	(1,835)	$	312	$	(78)	$	79,564	$	(1,913)


		Unrealized Losses at December 31, 2012

		Less Than 12 Months				12 Months or More				Total
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. Government
agencies and corporations	$	11,471	$	(32)	$	-	$	-	$	11,471	$	(32)
Obligations of state and political
subdivisions		13,040		(43)		-		-		13,040		(43)
Debt securities		24,511		(75)		-		-		24,511		(75)

Equity securities		249		(13)		251		(98)		500		(111)

Total temporarily impaired securities	$	24,760	$	(88)	$	251	$	(98)	$	25,011	$	(186)

There are 109 debt securities that were in an unrealized loss position on June 30, 2013, and one that had an unrealized loss for more than 12 months. These securities depreciated 2.3% from their amortized cost basis. The unrealized losses noted above are considered to be temporary impairments. The decline in the values of the debt securities is due only to interest rate fluctuations, rather than erosion of issuer credit quality. As a result, the payment of contractual cash flows, including principal repayment, is not at risk. As management does not intend to sell the securities, does not believe the Company will be required to sell the securities before recovery and expects to recover the entire amortized cost basis, none of the debt securities are deemed to be other-than-temporarily impaired.

Equity securities owned by the Company consist of common stock of various financial services providers (“Bank Stocks”) and are evaluated quarterly for evidence of other-than-temporary impairment. There were eight equity securities that were in an unrealized loss position on June 30, 2013, and have carried unrealized losses for 12 months or more. Individually, none of these eight equity securities have significant unrealized losses and each has increased in value during the first half of 2013. Management has identified no other-than-temporary impairment as of June 30, 2013 in the equity portfolio. Management continues to track the performance of each stock owned to determine if it is prudent to recognize any further other-than-temporary impairment charges. The Company has the ability and intent to hold its equity securities until recovery of unrealized losses.