3.) Investment Securities:

Investments in debt 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 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.

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 June 30, 2018.

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 and regulatory stock:

	(Amounts in thousands)
June 30, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government agencies and corporations	$	9,235	$	—	$	283	$	8,952
Obligations of states and political subdivisions		53,452		19		1,690		51,781
U.S. Government-sponsored mortgage-backed securities		62,175		—		2,717		59,458
U.S. Government-sponsored collateralized mortgage obligations		13,119		—		236		12,883
U.S. Government-guaranteed small business administration pools		8,846		—		382		8,464
Total investment securities available-for-sale	$	146,827	$	19	$	5,308	$	141,538
Federal Home Loan Bank (FHLB) stock		2,355		—		—		2,355
Federal Reserve Bank (FRB) stock		226		—		—		226
Total regulatory stock	$	2,581	$	—	$	—	$	2,581

	(Amounts in thousands)
December 31, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. Government agencies and corporations	$	3,344	$	1	$	140	$	3,205
Obligations of states and political subdivisions		71,700		740		324		72,116
U.S. Government-sponsored mortgage-backed securities		69,066		6		1,404		67,668
U.S. Government-sponsored collateralized mortgage obligations		6,463		—		161		6,302
U.S. Government-guaranteed small business administration pools		9,911		—		256		9,655
Trust preferred securities		1,618		—		723		895
Total investment securities available-for-sale	$	162,102	$	747	$	3,008	$	159,841
Federal Home Loan Bank (FHLB) stock		2,355		—		—		2,355
Federal Reserve Bank (FRB) stock		226		—		—		226
Total regulatory stock	$	2,581	$	—	$	—	$	2,581

The amortized cost and fair value of debt securities at June 30, 2018, 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		543		553
Due after five years through ten years		12,034		11,606
Due after ten years		58,956		57,038
Total		71,533		69,197
U.S. Government-sponsored mortgage-backed and related securities		75,294		72,341
Total investment securities available-for-sale	$	146,827	$	141,538

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				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Proceeds on securities sold	$	1,577	$	12,402	$	21,418	$	28,127
Gross realized gains		—		232		123		378
Gross realized losses		41		210		144		347

Investment securities with a carrying value of approximately $64.3 million at June 30, 2018 and $105.0 million at December 31, 2017 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 June 30, 2018:

	(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	$	6,195	$	40	$	2,757	$	243	$	8,952	$	283
Obligations of states and political subdivisions		31,631		869		17,746		821		49,377		1,690
U.S. Government-sponsored mortgage-backed securities		21,594		746		37,864		1,971		59,458		2,717
U.S. Government-sponsored collateralized mortgage obligations		—		—		5,746		236		5,746		236
U.S. Government-guaranteed small business administration pools		—		—		8,464		382		8,464		382
Total	$	59,420	$	1,655	$	72,577	$	3,653	$	131,997	$	5,308

The above table comprises 123 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, 2017:

	(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	$	—	$	—	$	2,860	$	140	$	2,860	$	140
Obligations of states and political subdivisions		7,430		24		18,066		300		25,496		324
U.S. Government-sponsored mortgage-backed securities		24,888		241		40,968		1,163		65,856		1,404
U.S. Government-sponsored collateralized mortgage obligations		—		—		6,302		161		6,302		161
U.S. Government-guaranteed small business administration pools		2,532		38		7,123		218		9,655		256
Trust preferred securities		—		—		895		723		895		723
Total	$	34,850	$	303	$	76,214	$	2,705	$	111,064	$	3,008

The above table comprises 83 investment securities where the fair value is less than the related amortized cost.

The unrealized losses at June 30, 2018 on the Company’s investments were caused by changes in market rates and related spreads. The significant increase in unrealized losses beginning in 2018 is a direct result of the spike in interest rates immediately following the passage of the Tax Act. 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, 2018.

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 Statements 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 Statements 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) (before tax). Through the impairment assessment process, there was no OTTI loss recognized in the three and six months ended June 30, 2018 and 2017.

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

	(Amounts in thousands)
	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2018			2017		2018			2017
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		(140	)		—		(140	)		—
Ending balance	$	—		$	140	$	—		$	140

At December 31, 2017, there was $895,000 of investment securities considered to be in non-accrual status due to the delay in the collection of interest payments. This balance was comprised of two trust preferred securities which were disposed of in the current quarter.