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 or trading.

Available-for-sale securities, other than regulatory stock, 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.

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 Federal Home Loan Bank (FHLB) of Cincinnati and the Federal Reserve Bank (FRB). The stock is bought from and sold to the correspondent institutions 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 September 30, 2016.

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.

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

	(Amounts in thousands)
September 30, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government agencies and corporations	$	2,341	$	19	$	—	$	2,360
Obligations of states and political subdivisions		63,620		1,771		140		65,251
U.S. Government-sponsored mortgage-backed securities		76,612		357		205		76,764
U.S. Government-sponsored collateralized mortgage obligations		6,870		33		—		6,903
U.S. Government-guaranteed small business administration pools		9,571		1		19		9,553
Trust preferred securities		1,625		—		899		726
Total debt securities		160,639		2,181		1,263		161,557
Federal Home Loan Bank (FHLB) stock		2,355		—		—		2,355
Federal Reserve Bank (FRB) stock		226		—		—		226
Total regulatory stock		2,581		—		—		2,581
Total investment securities available-for-sale	$	163,220	$	2,181	$	1,263	$	164,138

	(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

Trading securities historically have been an investment in obligations of states and political subdivisions, government and agency bonds, short-term government bonds and include cash equivalent investments for trading liquidity. In the second quarter of this calendar year management decided to cease its trading activities and liquidated the investments that were in the trading account. The current interest rate and economic environment mitigated the opportunities to generate revenues with a trading strategy. At September 30, 2016, the trading account was fully liquidated. At December 31, 2015, trading securities were $8.1 million. Both realized and unrealized gains and losses are included in the Consolidated Statements of Income as shown in the following table.

	(Amounts in thousands)
	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2016			2015		2016			2015
Unrealized gains	$	2		$	12	$	—		$	53
Unrealized losses		—			—		—			—
Net unrealized gains		2			12		—			53
Net realized (losses) gains		(2	)		38		(47	)		(33	)
Trading securities gains (losses), net	$	—		$	50	$	(47	)	$	20

The amortized cost and fair value of debt securities at September 30, 2016, 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		1,446		1,524
Due after five years through ten years		11,014		11,414
Due after ten years		64,697		64,952
Total		77,157		77,890
U.S. Government-sponsored mortgage-backed and related securities		83,482		83,667
Total debt securities	$	160,639	$	161,557

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				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Proceeds on securities sold	$	4,885	$	7,655	$	44,374	$	7,655
Gross realized gains		90		54		661		54
Gross realized losses		7		57		203		57

Investment securities with a carrying value of approximately $111.3 million at September 30, 2016 and $108.2 million at December 31, 2015 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 September 30, 2016:

	(Amounts in thousands)
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of states and political subdivisions	$	10,119	$	140	$	—	$	—	$	10,119	$	140
U.S. Government-sponsored mortgage-backed securities		27,017		107		7,803		98		34,820		205
U.S. Government-guaranteed small business administration pools		6,605		19		—		—		6,605		19
Trust preferred securities		—		—		726		899		726		899
Total	$	43,741	$	266	$	8,529	$	997	$	52,270	$	1,263

The above table comprises 40 investment securities where the fair value is less than the related amortized cost.

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 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 comprises 34 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 issued primarily by bank holding companies. The unrealized losses on the Company’s investment in obligations of states and political subdivisions, U.S. Government-sponsored-mortgage-backed securities and U.S. Government-guaranteed small business administration pools 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 September 30, 2016.

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 trust preferred 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) (net of tax). Through the impairment assessment process, there was no OTTI loss recognized in the three and nine months ended September 30, 2016 and 2015.

The following provides a cumulative rollforward of credit losses recognized in earnings for trust preferred securities held.

	(Amounts in thousands)
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Beginning balance	$	140	$	140	$	140	$	140
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		—		—		—		—
Ending balance	$	140	$	140	$	140	$	140

At September 30, 2016 and December 31, 2015, there were $726,000 and $778,000, respectively, of investment securities considered to be in non-accrual status. This balance is comprised of two trust preferred securities at September 30, 2016. 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.