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. 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 U.S. Government 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.

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 in value 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 available-for-sale 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 income (loss).

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

	(Amounts in thousands)
March 31, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury securities	$	105	$	4	$	—	$	109
U.S. Government agencies and corporations		8,599		5		159		8,445
Obligations of states and political subdivisions		48,041		861		717		48,185
U.S. Government-sponsored mortgage-backed securities		86,800		611		1,545		85,866
U.S. Government-sponsored collateralized mortgage obligations		16,168		65		105		16,128
Trust preferred securities		1,725		—		982		743
Total debt securities		161,438		1,546		3,508		159,476
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	$	164,487	$	1,546	$	3,508	$	162,525

December 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury securities	$	107	$	5	$	—	$	112
U.S. Government agencies and corporations		9,259		—		312		8,947
Obligations of states and political subdivisions		44,575		467		1,507		43,535
U.S. Government-sponsored mortgage-backed securities		79,255		644		1,877		78,022
U.S. Government-sponsored collateralized mortgage obligations		17,120		105		140		17,085
Trust preferred securities		11,854		—		1,718		10,136
Total debt securities		162,170		1,221		5,554		157,837
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	$	165,219	$	1,221	$	5,554	$	160,886

The regulatory stock is 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 of Cincinnati and the FRB.

The Bank is required to maintain a minimum investment in stock of the FHLB and FRB. The stock is bought from and sold based upon its par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated by management. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB and FRB as compared to the capital stock amount and the length of time this situation has persisted, (b) commitments by the FHLB and FRB to make payments required by law or regulation and the level of such payments in relation to the operating performance, (c) the impact of legislative and regulatory changes on the customer base of the FHLB and FRB and (d) the liquidity position of the FHLB and FRB.

At March 31, 2014, trading securities of $7.5 million are an investment in obligations of states and political subdivisions and include cash equivalent investments for trading liquidity. There were $7.2 million held at December 31, 2013. Unrealized gains and losses on trading securities at March 31, 2014 were $19,500 and $28,300, respectively, with none at December 31, 2013. Total net unrealized losses of $8,800 for the quarter ended March 31, 2014 and trading security income are included in the Consolidated Statement of Income.

The amortized cost and fair value of debt securities at March 31, 2014, 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	$	236	$	242
Due after one year through five years		2,404		2,439
Due after five years through ten years		15,778		15,760
Due after ten years		40,052		39,041
Total		58,470		57,482
U.S. Government-sponsored mortgage-backed and related securities		102,968		101,994
Total debt securities	$	161,438	$	159,476

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

	(Amounts in thousands)
	THREE MONTHS ENDED
	March 31,
	2014		2013
Proceeds on securities sold	$	10,237	$	—
Gross realized gains		637		—
Gross realized losses		444		—

Investment securities with a carrying value of approximately $113.3 million at March 31, 2014 and $108.5 million at December 31, 2013 were pledged to secure deposits and for other purposes. The remaining securities provide an adequate level of liquidity.

The following is a summary of the fair value of available for sale securities with unrealized losses and an aging of those unrealized losses at March 31, 2014:

	(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 agencies and corporations	$	4,026	$	17	$	1,844	$	142	$	5,870	$	159
Obligations of states and political subdivisions		10,986		508		2,035		209		13,021		717
U.S. Government-sponsored mortgage-backed and related securities		34,682		785		30,911		760		65,593		1,545
U.S. Government-sponsored collateralized mortgage obligations		7,114		103		310		2		7,424		105
Trust preferred securities		—		—		743		982		743		982
Total	$	56,808	$	1,413	$	35,843	$	2,095	$	92,651	$	3,508

The above table comprises 63 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, 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 agencies and corporations	$	7,144	$	129	$	1,803	$	183	$	8,947	$	312
Obligations of states and political subdivisions		19,785		1,142		1,883		365		21,668		1,507
U.S. Government-sponsored mortgage-backed and related securities		34,424		1,044		29,922		833		64,346		1,877
U.S. Government-sponsored collateralized mortgage obligations		6,575		126		2,095		14		8,670		140
Trust preferred securities		—		—		1,633		1,718		1,633		1,718
Total	$	67,928	$	2,441	$	37,336	$	3,113	$	105,264	$	5,554

The above table comprises 83 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. The unrealized losses on the Company’s investment in U.S. Government-sponsored-mortgage-backed securities, U.S. Government-sponsored collateralized mortgage obligations, obligations of states and political subdivisions and U.S. Government agencies and corporations were caused by changes in market rates and related spreads. 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, except for the securities described below, 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 March 31, 2014.

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 Consolidated Statement of Income.

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 other comprehensive income. The total other-than-temporary impairment is presented in the Consolidated Statement of Income with an offset for the amount of the total other-than-temporary impairment that is recognized in other comprehensive income.

As more fully disclosed in Note 9, the Company assessed the impairment of certain securities currently in an illiquid market. The Company records impairment credit losses in earnings (before tax) and non-credit impairment losses in other comprehensive income (loss) (before tax). Through the impairment assessment process, there was no impairment loss recognized in the three months ended March 31, 2014 or March 31, 2013.

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

	(Amounts in thousands)
	THREE MONTHS ENDED
	March 31,
	2014			2013
Beginning balance	$	2,305		$	351
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		—			—
Sale of debt securities		(2,165	)		—
Credit losses on debt securities for which other-than-temporary
Sale of debt securities		—			—
Ending balance	$	140		$	351

In January 2014, the Company determined that its portfolio of insurance trust preferred collateralized debt obligations, commonly known as iTruPS securities, are considered disallowed investments under the final rule implementing Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as the Volcker Rule, which was originally released jointly by five regulatory agencies on December 10, 2013, and further clarified with the release of the Interim Final Rule on January 14, 2014. The final rule requires banking entities to divest disallowed securities by July 21, 2015, unless, upon application, the Federal Reserve grants extensions to July 21, 2017.

With the release of the Interim Final Rule on January 14, 2014, the joint agencies granted relief by permitting financial institutions to retain their interests in certain collateralized debt obligations, but limited that provision to those collateralized by issuances prior to May 2010 from bank or thrift holding companies with less than $15 billion in consolidated assets. The Interim Final Rule did not contain a provision for issuances by insurance companies, which comprise the various iTruPS securities owned by the Company.

The disallowed iTruPS consisted of nine positions with an amortized cost of $10.5 million at December 31, 2013. Because the Company could no longer hold the securities until their anticipated recovery, an OTTI had to be recognized for the entire amount of unrealized loss as of December 31, 2013. The fair value of the iTruPS as determined by the discounted cash flow model used by the Company aggregated to $8.5 million. The resulting OTTI charge of approximately $2.0 million was included in the Consolidated Statements of Income in 2013.

In February 2014, the Company completed the sale of all nine of the disallowed investments along with one other permissible holding. Proceeds of $10.2 million were received on an amortized cost of $10.0 million resulting in a pre-tax gain of approximately $193,000.

At March 31, 2014 and December 31, 2013, there were $303,000 and $1.2 million, respectively, of investment securities considered to be in non-accrual status. This balance is comprised of one of its two investments in trust preferred securities at March 31, 2014. As a result of the delay in the collection of interest payments, management placed this security in non-accrual status. Current estimates indicate that the interest payment delays may exceed ten years. The remaining trust preferred security is in accrual status.