NOTE 2 - INVESTMENT SECURITIES

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

	(Amounts in thousands)
December 31, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government agencies and corporations	$	12,555	$	136	$	68	$	12,623
Obligations of states and political subdivisions		50,139		1,386		120		51,405
U.S. Government-sponsored mortgage-backed securities		70,193		165		679		69,679
U.S. Government-sponsored collateralized mortgage obligations		13,665		—		135		13,530
U.S. Government-guaranteed small business administration pools		2,883		—		46		2,837
Trust preferred securities		1,640		—		862		778
Total debt securities		151,075		1,687		1,910		150,852
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	$	154,124	$	1,687	$	1,910	$	153,901

	(Amounts in thousands)
December 31, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Treasury securities	$	100	$	1	$	—	$	101
U.S. Government agencies and corporations		8,640		88		80		8,648
Obligations of states and political subdivisions		48,547		1,667		123		50,091
U.S. Government-sponsored mortgage-backed securities		85,675		353		441		85,587
U.S. Government-sponsored collateralized mortgage obligations		14,030		26		64		13,992
Trust preferred securities		1,662		—		883		779
Total debt securities		158,654		2,135		1,591		159,198
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	$	161,703	$	2,135	$	1,591	$	162,247

The regulatory stock is carried at cost (its redeemable value) 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 cannot be traded or sold in any market and as such is classified as restricted stock, carried at cost (its redeemable value) 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. The Company does not consider these investments to be other-than-temporarily impaired at December 31, 2015.

Trading securities are an investment in obligations of states and political subdivisions, short-term government bonds and include cash equivalent investments for trading liquidity. At December 31, 2015, trading securities were $8.1 million and at December 31, 2014 trading securities were $7.9 million. Both realized and unrealized gains and losses are included in the Consolidated Statement of Income.

	(Amounts in thousands)
	2015			2014			2013
Unrealized gains	$	7		$	39		$	52
Unrealized losses		(3	)		(4	)		(3	)
Net unrealized gains		4			35			49
Net realized (losses) gains		(15	)		292			136
Trading securities (losses) gains, net	$	(11	)	$	327		$	185

The amortized cost and fair value of debt securities at December 31, 2015, 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	$	—	$	—
Due after one year through five years		4,022		4,165
Due after five years through ten years		21,834		22,234
Due after ten years		41,361		41,244
Total		67,217		67,643
U.S. Government-sponsored mortgage-backed and related securities		83,858		83,209
Total debt securities	$	151,075	$	150,852

The following table sets forth the proceeds, gains and losses realized on securities sold or called for each of the years ended December 31:

	(Amounts in thousands)
	2015		2014		2013
Proceeds on securities sold	$	12,291	$	32,733	$	29,338
Gross realized gains		135		1,170		658
Gross realized losses		60		582		123

Investment securities with a carrying value of approximately $108.2 million at December 31, 2015 and $116.6 million at December 31, 2014 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 securities with unrealized losses and an aging of those unrealized losses at December 31, 2015:

	(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	$	1,974	$	25	$	1,947	$	43	$	3,921	$	68
Obligations of states and political subdivisions		5,439		61		2,125		59		7,564		120
U.S. Government-sponsored mortgage-backed securities		35,081		315		16,575		364		51,656		679
U.S. Government-sponsored collateralized mortgage obligations		13,530		135		—		—		13,530		135
U.S. Government-guaranteed small business administration pools		2,837		46		—		—		2,837		46
Trust preferred securities		—		—		778		862		778		862
Total	$	58,861	$	582	$	21,425	$	1,328	$	80,286	$	1,910

The above table represents 34 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, 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	$	335	$	2	$	1,910	$	78	$	2,245	$	80
Obligations of states and political subdivisions		2,456		18		4,159		105		6,615		123
U.S. Government-sponsored mortgage-backed securities		14,460		33		31,550		408		46,010		441
U.S. Government-sponsored collateralized mortgage obligations		2,273		30		3,145		34		5,418		64
Trust preferred securities		—		—		779		883		779		883
Total	$	19,524	$	83	$	41,543	$	1,508	$	61,067	$	1,591

The above table represents 37 investment securities where the current value is less than the related amortized cost.

The trust preferred securities with an unrealized loss represent pools of trust preferred debt issued primarily 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 December 31, 2015.

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 11, 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 (loss) income (before tax). Through the impairment assessment process, there was no impairment loss recognized in the years ended December 31, 2015 or 2014.

The Company recorded impairment credit losses in earnings (before tax) and non-credit impairment losses in other comprehensive (loss) income (before tax) as indicated in the following table:

	(Amounts in thousands)
	December 31,
	2015		2014		2013
Trust preferred securities:
Net impairment losses recognized in earnings (before tax)	$	—	$	—	$	1,954
Impairment losses recognized in other comprehensive income (before tax)	$	—	$	—	$	3,595

The following provides a cumulative roll forward of credit losses recognized in earnings for trust preferred securities held for the years ended:

	(Amounts in thousands)
	December 31,
	2015		2014			2013
Beginning balance	$	140	$	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		—		—			1,954
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized		—		—			—
Sale of debt securities				(2,165	)		—
Ending balance	$	140	$	140		$	2,305

In January 2014, the Company determined that its portfolio of insurance trust preferred collateralized debt obligations, commonly known as iTruPS securities, were 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 comprises 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.

At December 31, 2015 and December 31, 2014, there were $778,000 and $779,000, respectively, of investment securities considered to be in non-accrual status. This balance is comprised of two trust preferred securities at December 31, 2015. 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.