NOTE 3, Securities Portfolio

The amortized cost and fair value, with gross unrealized gains and losses, of securities held-to-maturity were:

December 31, 2014	Carrying Value		Unamortized Unrealized Transfer Losses		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)

Obligations of U.S. Government agencies	$	100	$	0	$	100	$	0	$	(3	)	$	97
Obligations of state and political subdivisions		29,529		0		29,529		449		(18	)		29,960
Mortgage-backed securities		60,460		5,131		65,591		0		(1,242	)		64,349
Total	$	90,089	$	5,131	$	95,220	$	449	$	(1,263	)	$	94,406

The Company had no held-to-maturity-securities at December 31, 2015 due to a decision in February of 2016 to transfer the portfolio to available-for-sale to allow for greater liquidity and flexibility in the future. Although the decision was made after December 31, 2015, the transfer was effective dated back to year-end as the primary difference between held-to-maturity and available-for-sale is management's intent to hold the securities to maturity. The transfer in 2016 demonstrated a change in management's intent as of year-end.

The mortgage-backed securities classified as held-to-maturity at December 31, 2014 were originally classified as available-for-sale when the Company purchased them. In 2013, due to fluctuations in interest rates following statements from the Federal Reserve that it was likely to begin slowing the pace of bond purchases under its quantitative easing program, the market value of the Company's available-for-sale securities portfolio declined. As part of a plan to minimize the risk to capital caused by these changes in market value, the Company transferred a portion of its mortgage-backed securities portfolio from available-for-sale to held-to-maturity. These mortgage-backed securities had an unrealized loss of $6.2 million at the date of transfer, which the Company has been amortizing since the transfer. At December 31, 2014, the unamortized balance remaining was $5.1 million, as seen in the table above. When these mortgage-backed securities were transferred back to available-for-sale, this unamortized loss was eliminated and the securities marked to their current fair market value, as required by accounting rules for available-for-sale securities.

Although the book value of the mortgage-backed securities transferred back to available-for-sale remains below their market value, resulting in an unrealized loss, this unrealized loss is smaller than the unrealized loss at the date they were originally transferred from available-for-sale to held-to-maturity in 2013. In addition, classifying the securities as available-for-sale gives management the flexibility to sell the securities as needed to fund loan growth or manage the interest-rate risk in the portfolio.

The Company's entire portfolio of held-to-maturity securities was transferred to available-for-sale. At December 31, 2015 when the securities were transferred, their carrying value was $81.4 million and the remaining unamortized loss on the mortgage-backed securities was $4.2 million. This unamortized loss was eliminated with the transfer. Its associated deferred tax asset and other comprehensive income accounts, which were $1.4 million and $2.8 million respectively, were also eliminated. As a result, equity and total assets increased by $2.8 million, while the carrying value of the securities portfolio increased $4.2 million. When the securities previously classified as held-to-maturity were marked to market, the Company recorded an unrealized loss of $781 thousand, which reduced other comprehensive income by $516 thousand.

The net effect of this transfer was to increase the carrying value of the securities portfolio by $3.4 million, reduce other assets by $1.2 million, and increase other comprehensive income by $2.3 million.

As a result of the decision to transfer securities from held-to-maturity to available-for-sale, management will not be able to classify any securities as held-to-maturity until 2018.

The amortized cost and fair value, with gross unrealized gains and losses, of securities available-for-sale were:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
December 31, 2015
U.S. Treasury securities	$	0	$	0	$	0		$	0
Obligations of U.S. Government agencies		24,353		1		(114	)		24,240
Obligations of state and political subdivisions		77,223		1,323		(113	)		78,433
Mortgage-backed securities		109,360		0		(1,964	)		107,396
Money market investments		631		0		0			631
Corporate bonds and other securities		3,397		4		(8	)		3,393
Other marketable equity securities		100		0		(1	)		99
Total	$	215,064	$	1,328	$	(2,200	)	$	214,192

December 31, 2014
U.S. Treasury securities	$	20,000	$	0	$	0		$	20,000
Obligations of U.S. Government agencies		4,768		2		(152	)		4,618
Obligations of state and political subdivisions		49,783		698		(235	)		50,246
Mortgage-backed securities		61,296		34		(442	)		60,888
Money market investments		719		0		0			719
Corporate bonds and other securities		2,798		3		(11	)		2,790
Other marketable equity securities		100		0		(15	)		85
Total	$	139,464	$	737	$	(855	)	$	139,346

Securities with a fair value of $119.8 million and $134.5 million at December 31, 2015 and 2014, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, FHLB advances and for other purposes required or permitted by law.

At December 31, 2015, the Company held no securities of any single issuer (excluding U.S. Government agencies) with a book value that exceeded 10 percent of stockholders' equity.

The amortized cost and fair value of securities by contractual maturity are shown below.

	December 31, 2015
	Available-for-Sale
	Amortized Cost			Fair Value
	(in thousands)

Due in one year or less		$	20,500		$	20,501
Due after one year through five years			17,853			18,074
Due after five years through ten years			23,505			23,936
Due after ten years			152,475			150,951
Total debt securities			214,333			213,462
Other securities without stated maturities			731			730

Total securities		$	215,064		$	214,192

The following table provides information about securities sold in the years ended December 31:

	2015			2014
	(in thousands)

Proceeds from sales		$	23,005		$	38,653

Gross realized gains		$	76		$	276

Gross realized losses		$	0		$	274

OTHER-THAN-TEMPORARILY IMPAIRED SECURITIES

Management assesses whether the Company intends to sell or it is more-likely-than-not that the Company will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the Company separates the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security's amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security's fair value and the present value of expected future cash flows is due to factors that are not credit related and is recognized in other comprehensive income.

The present value of expected future cash flows is determined using the best-estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best-estimate cash flows vary depending on the type of security. The asset-backed securities cash flow estimates are based on bond specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds, and structural support, including subordination and guarantees.

The Company has a process in place to identify debt securities that could potentially have a credit or interest-rate related impairment that is other than temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts, and cash flow projections as indicators of credit issues. On a quarterly basis, management reviews all securities to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. Management considers relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other-than-temporary. Relevant facts and circumstances considered include: (a) the extent and length of time the fair value has been below cost; (b) the reasons for the decline in value; (c) the financial position and access to capital of the issuer, including the current and future impact of any specific events and (d) for fixed maturity securities, the Company's intent to sell a security or whether it is more-likely-than-not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, the Company's ability and intent to hold the security for a period of time that allows for the recovery in value.

The Company has not recorded impairment charges on securities for the years ended December 31, 2015 and 2014.

The following table shows the number of securities with unrealized losses, the gross unrealized losses and fair value of the Company's investments with unrealized losses that are deemed to be temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of the dates indicated:

	December 31, 2015
	Less Than Twelve Months						More Than Twelve Months						Total
	Gross Unrealized Losses			Fair Value			Gross Unrealized Losses			Fair Value			Gross Unrealized Losses			Fair Value			Number of Securities
	(dollars in thousands)
Securities Available-for-Sale
Obligations of U.S. Government agencies		$	0		$	0		$	114		$	3,940		$	114		$	3,940		2
Obligations of state and political subdivisions			42			4,177			71			3,545			113			7,722		13
Mortgage-backed securities			848			62,698			1,116			44,698			1,964			107,396		13
Corporate bonds and other securities			6			2,091			2			198			8			2,289		16
Other marketable equity securities			1			99			0			0			1			99		1
Total securities available-for-sale		$	897		$	69,065		$	1,303		$	52,381		$	2,200		$	121,446		45

	December 31, 2014
	Less Than Twelve Months				More Than Twelve Months				Total
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Number of Securities
	(dollars in thousands)
Securities Available-for-Sale
Obligations of U. S. Government agencies	$	0	$	0	$	152	$	4,316	$	152	$	4,316		1
Obligations of state and political subdivisions		2		604		233		11,951		235		12,555		24
Mortgage-backed securities		62		16,589		380		32,104		442		48,693		6
Corporate bonds and other securities		3		1,096		8		792		11		1,888		14
Other marketable equity securities		15		85		0		0		15		85		1
Total securities available-for-sale	$	82	$	18,374	$	773	$	49,163	$	855	$	67,537		46

Securities Held-to-Maturity
Obligations of U. S. Government agencies	$	0	$	0	$	3	$	97	$	3	$	97		1
Obligations of state and political subdivisions		2		1,261		16		1,203		18		2,464		6
Mortgage-backed securities		0		0		1,242		64,349		1,242		64,349		6
Total securities held-to-maturity	$	2	$	1,261	$	1,261	$	65,649	$	1,263	$	66,910		13

Total	$	84	$	19,635	$	2,034	$	114,812	$	2,118	$	134,447		59

Certain investments within the Company's portfolio had unrealized losses at December 31, 2015 and December 31, 2014, as shown in the tables above. The unrealized losses were caused by increases in market interest rates. The Company purchases only highly-rated securities, including U.S. government agencies and mortgage-backed securities guaranteed by government-sponsored entities. The municipal securities portfolio is reviewed regularly to ensure that ratings of individual securities have not deteriorated below the threshold established by the Company's policy.

Because the Company does not intend to sell the investments and management believes it is unlikely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at December 31, 2015 or December 31, 2014.

Restricted Securities

The restricted security category is comprised of FHLB and Federal Reserve Bank stock. These stocks are classified as restricted securities because their ownership is restricted to certain types of entities and the securities lack a market. Therefore, FHLB and Federal Reserve Bank stock is carried at cost and evaluated for impairment. When evaluating these stocks for impairment, their value is determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Restricted stock is viewed as a long-term investment and management believes that the Company has the ability and the intent to hold this stock until its value is recovered.