3.) Investment Securities:

Investments in debt and equity securities are classified as held-to-maturity, available-for-sale or trading. Securities classified as held-to-maturity are those that management has the positive intent and ability to hold to maturity. Securities classified as available-for-sale are those that could be sold for liquidity, investment management, or similar reasons, even though management has no present intentions to do so. Securities classified as trading are those that management has bought principally for the purpose of selling in the near term. The Company currently has no securities classified as held-to-maturity.

Available-for-sale securities are carried at fair value with unrealized gains and losses recorded as a separate component of shareholders’ equity, net of tax effects. Realized gains or losses on dispositions are based on net proceeds and the adjusted carrying amount of securities sold, using the specific identification method. Interest income includes amortization of purchase premium or discount and is amortized on the level-yield method without anticipating payments, except for both U.S. Government and private-label mortgage-backed and related securities where twelve months of historical prepayments are taken into consideration. Trading securities are carried at fair value with valuation adjustments included in other non-interest income.

Available-for-sale securities are evaluated periodically to determine whether a decline in value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, along with 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, but indicates that the prospect for a near-term recovery of value is not necessarily favorable and that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Unrealized losses on investments have not been recognized into income. However, once a decline in value is determined to be other-than-temporary, the credit related other-than-temporary impairment (OTTI) is recognized in earnings while the non-credit related OTTI on securities not expected to be sold is recognized in other comprehensive loss.

The following table is a summary of investment securities available-for-sale:

	(Amounts in thousands)
June 30, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury securities	$	110	$	8	$	—	$	118
U.S. Government agencies and corporations		2,986		—		137		2,849
Obligations of states and political subdivisions		41,814		702		1,124		41,392
U.S. Government-sponsored mortgage-backed securities		87,882		1,280		1,865		87,297
U.S. Government-sponsored collateralized mortgage obligations		21,648		45		209		21,484
Trust preferred securities		13,887		—		4,201		9,686
Total debt securities		168,327		2,035		7,536		162,826
Federal Home Loan Bank (FHLB) stock		2,823		—		—		2,823
Federal Reserve Bank (FRB) stock		226		—		—		226
Total regulatory stock		3,049		—		—		3,049
Total investment securities available-for-sale	$	171,376	$	2,035	$	7,536	$	165,875

	(Amounts in thousands)
December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury securities	$	113	$	10	$	—	$	123
U.S. Government agencies and corporations		8,038		27		—		8,065
Obligations of states and political subdivisions		40,374		1,973		31		42,316
U.S. Government-sponsored mortgage-backed securities		90,858		2,071		590		92,339
0U.S. Government-sponsored collateralized mortgage obligations		30,917		300		75		31,142
Trust preferred securities		13,883		—		6,271		7,612
Total debt securities		184,183		4,381		6,967		181,597
Federal Home Loan Bank (FHLB) stock		2,823		—		—		2,823
Federal Reserve Bank (FRB) stock		226		—		—		226
Total regulatory stock		3,049		—		—		3,049
Total investment securities available-for-sale	$	187,232	$	4,381	$	6,967	$	184,646

FHLB and FRB stock are carried at cost and the Company is required to hold such investments as a condition of membership in order to transact business with the FHLB and the FRB. While the FHLBs have been negatively impacted by the recent economic conditions, the FHLB of Cincinnati has reported profits for 2012 and year-to-date 2013, remains in compliance with regulatory capital and liquidity requirements, continues to pay dividends on stock and makes redemptions at par value. With consideration given to these factors, management concluded that the stock was not impaired at June 30, 2013 or December 31, 2012.

Trading securities of $7.0 million are an investment in a pooled fund consisting of obligations of states and political subdivisions.

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

	(Amounts in thousands)
	Amortized Cost		Fair Value
Due in one year or less	$	172	$	175
Due after one year through five years		3,192		3,248
Due after five years through ten years		7,077		7,120
Due after ten years		48,357		43,503
Total		58,798		54,046
U.S. Government-sponsored mortgage-backed and related securities		109,529		108,780
Total debt securities	$	168,327	$	162,826

The table below sets forth the proceeds and gains or losses realized on securities sold or called for the periods presented:

	(Amounts in thousands)
	THREE MONTHS ENDED June 30,							SIX MONTHS ENDED June 30,
	2013				2012				2013				2012
Proceeds on securities called	$	2,000		$		160	$			7,000		$		2,406
Gross realized gains		177				—				177				7
Gross realized losses		(25	)			2				(25	)			2

Exchange on General Motors transaction:
Gross realized gains	$	—		$		30	$			—		$		30
Gross realized losses		—				—				—				—

Investment securities with a carrying value of approximately $99.4 million and $107.6 million were pledged to secure deposits and for other purposes at June 30, 2013 and December 31, 2012. The remaining securities provide an adequate level of liquidity.

The following is a summary of the fair value of securities with unrealized losses and an aging of those unrealized losses at June 30, 2013:

	(Amounts in thousands)
	Less than 12 Months				12 Months or More					Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value			Unrealized Losses
U.S. Government-sponsored mortgage-backed and related securities	$	22,075	$	814	$	36,949	$	1,051	$		59,024	$	1,865
U.S. Government-sponsored collateralized mortgage obligations		11,708		149		2,672		60			14,380		209
Obligations of states and political subdivisions		16,807		1,124		—		—			16,807		1,124
U.S. Government agencies and corporations…………		2,849		137		—		—			2,849		137
Trust preferred securities		—		—		9,686		4,201			9,686		4,201
Total	$	53,439	$	2,224	$	49,307	$	5,312	$		102,746	$	7,536

The above table comprises 79 investment securities where the fair value is less than the related amortized cost.

The following is a summary of the fair value of securities with unrealized losses and an aging of those unrealized losses at December 31, 2012:

	(Amounts in thousands)
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses		Fair Value			Unrealized Losses		Fair Value			Unrealized Losses
U.S. Government-sponsored mortgage-backed and related securities	$	—	$	—	$		47,358	$	590	$		47,358	$	590
U.S. Government-sponsored collateralized mortgage obligations		—		—			4,825		75			4,825		75
Obligations of states and political subdivisions		4,176		31			—		—			4,176		31
Trust preferred securities		—		—			7,612		6,271			7,612		6,271
Total	$	4,176	$	31	$		59,795	$	6,936	$		63,971	$	6,967

The above table comprises 46 investment securities where the fair value is less than the related amortized cost.

The trust preferred securities with an unrealized loss represent pools of trust preferred debt primarily issued by bank holding companies and insurance companies. The unrealized losses on the Company’s investment in U.S. Government-sponsored-mortgage-backed securities, U.S. Government-sponsored collateralized mortgage obligations and obligations of states and political subdivisions were caused by changes in market rates and related spreads, as well as reflecting current distressed conditions in the credit markets and the market’s on-going reassessment of appropriate liquidity and risk premiums. It is expected that the securities would not be settled at less than the amortized cost of the Company’s investment because the decline in fair value is attributable to changes in interest rates and relative spreads and not credit quality. Also, the Company does not intend to sell those investments and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of its amortized cost basis less any current period credit loss. The Company does not consider these investments to be other-than-temporarily impaired at June 30, 2013.

Securities Deemed to be Other-Than-Temporarily Impaired

The Company reviews investment debt securities on an ongoing basis for the presence of other-than-temporary impairment (OTTI) with formal reviews performed quarterly.

For debt securities in an unrealized loss position, management assesses whether (a) it has the intent to sell the debt security or (b) it is more-likely-than-not that it will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an OTTI on the security must be recognized.

In instances in which a determination is made that a credit loss (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis) exists but the entity does not intend to sell the debt security and it is not more-likely-than-not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (i.e., the amortized cost basis less any current-period credit loss), the Company presents the amount of the OTTI recognized in the income statement.

In these instances, the impairment is separated into (a) the amount of the total impairment related to the credit loss, and (b) the amount of the total impairment related to all other factors. The amount of the total OTTI related to the credit loss is recognized in earnings. The amount of the total impairment related to all other factors is recognized in comprehensive income. The total other-than-temporary impairment is presented in the income statement with an offset for the amount of the total other-than-temporary impairment that is recognized in comprehensive income.

As more fully disclosed in Note 9, the Company assessed the impairment of certain securities currently in an illiquid market. Through the impairment assessment process, the Company determined that the investments discussed in the following table were other-than-temporarily impaired at June 30, 2013 and 2012. No investments were determined to be other-than-temporarily impaired in the quarters ended June 30, 2013 and 2012. The Company records impairment credit losses in earnings (before tax) and non-credit impairment losses in other comprehensive income (before tax) as indicated in the following table:

	(Amounts in thousands)
	THREE MONTHS ENDED				SIX MONTHS ENDED
	June 30,				June 30,
	2013		2012		2013		2012
Trust preferred securities:
Net impairment losses recognized in earnings (before tax)	$	—	$	—	$	—	$	171
Impairment losses recognized in other comprehensive income (before tax)	$	—	$	—	$	—	$	136

The following provides a cumulative rollforward of credit losses recognized in earnings for trust preferred securities held for the three and six months ended:

	(Amounts in thousands)
	THREE MONTHS ENDED					SIX MONTHS ENDED
	June 30,					June 30,
	2013		2012		2013				2012
Beginning balance	$	351	$	10,845	$		351	$		10,674
Reduction for debt securities for which other-than-temporary impairment has been previously recognized and there is no related other comprehensive income		—		—			—			—
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		—		—			—			171
Sale of debt securities		—		—			—			—
Ending balance	$	351	$	10,845	$		351	$		10,845

During the third quarter of 2012, the Company was able to sell 19 of the 22 bank collateralized positions. All of these securities exhibited evidence of significant deterioration in issuers’ creditworthiness. The 3 remaining bank collateralized positions, as well as the 9 positions collateralized by insurance companies, have historically not exhibited material other-than-temporary impairment, thus were excluded from sale considerations. The Company continues to have both the intent and ability to hold these securities until recovery of their cost basis.

At June 30, 2013, there was $1,009,500 of investment securities considered to be in non-accrual status. This balance is comprised of 3 of its 12 investments in trust preferred securities. As a result of the delay in the collection of interest payments, management placed these securities in non-accrual status. Current estimates indicate that the interest payment delays may exceed ten years. All other trust preferred securities remain in accrual status.