4. Securities

12 Months Ended

Dec. 31, 2013

Available-for-sale Securities [Abstract]

Securities

We classify debt and equity securities as “held to maturity”, “available for sale” or “trading” according to management’s intent.  The appropriate classification is determined at the time of purchase of each security and re-evaluated at each reporting date.

Securities held to maturity – Certain debt securities for which we have the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts.  There are no securities classified as held to maturity in the accompanying financial statements.

Securities available for sale - Securities not classified as "held to maturity" or as "trading" are classified as "available for sale."  Securities classified as "available for sale" are those securities that we intend to hold for an indefinite period of time, but not necessarily to maturity.  "Available for sale" securities are reported at estimated fair value net of unrealized gains or losses, which are adjusted for applicable income taxes, and reported as a separate component of shareholders' equity.

Trading securities - There are no securities classified as "trading" in the accompanying financial statements.

Impairment assessment:  Impairment exists when the fair value of a security is less than its cost.  Cost includes adjustments made to the cost basis of a security for accretion, amortization and previous other-than-temporary impairments.  We perform a quarterly assessment of the debt and equity securities in our investment portfolio that have an unrealized loss to determine whether the decline in the fair value of these securities below their cost is other-than-temporary.  This determination requires significant judgment.  Impairment is considered other-than-temporary when it becomes probable that we will be unable to recover the cost of an investment.  This assessment takes into consideration factors such as the length of time and the extent to which the market values have been less than cost, the financial condition and near term prospects of the issuer including events specific to the issuer or industry, defaults or deferrals of scheduled interest, principal or dividend payments, external credit ratings and recent downgrades, and our intent and ability to hold the security for a period of time sufficient to allow for a recovery in fair value.  If a decline in fair value is judged to be other than temporary, the cost basis of the individual security is written down to fair value which then becomes the new cost basis.  The amount of the write down is included in other-than-temporary impairment of securities in the consolidated statements of income.  The new cost basis is not adjusted for subsequent recoveries in fair value, if any.

Realized gains and losses on sales of securities are recognized on the specific identification method.  Amortization of premiums and accretion of discounts are computed using the interest method.

The amortized cost, unrealized gains and losses, and estimated fair values of securities at December 31, 2013 and 2012, are summarized as follows:

	December 31, 2013
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities
U. S. Government agencies
and corporations	$	29,100	$	675	$	118	$	29,657
Residential mortgage-backed securities:
Government-sponsored agencies		155,270		2,019		1,573		155,716
Nongovernment-sponsored entities		11,519		321		21		11,819
State and political subdivisions
General obligations		9,317		-		475		8,842
Water and sewer revenues		3,229		-		114		3,115
Other revenues		4,051		4		142		3,913
Corporate debt securities		3,973		24		31		3,966
Total taxable debt securities		216,459		3,043		2,474		217,028
Tax-exempt debt securities
State and political subdivisions
General obligations		41,156		675		1,154		40,677
Water and sewer revenues		8,996		15		306		8,705
Lease revenues		7,956		-		391		7,565
Lottery/casino revenues		4,443		63		169		4,337
Other revenues		10,527		55		191		10,391
Residential mortgage-backed securities		-		-		-		-
Total tax-exempt debt securities		73,078		808		2,211		71,675
Equity securities		77		-		-		77
Total available for sale securities	$	289,614	$	3,851	$	4,685	$	288,780

	December 31, 2012
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities
U. S. Government agencies
and corporations	$	28,128	$	892	$	-	$	29,020
Residential mortgage-backed securities:
Government-sponsored agencies		133,812		3,250		492		136,570
Nongovernment-sponsored entities		15,380		509		144		15,745
State and political subdivisions:
General obligations		8,847		58		57		8,848
Water and sewer revenues		1,920		-		32		1,888
Other revenues		1,420		13		-		1,433
Corporate debt securities		1,959		29		38		1,950
Total taxable debt securities		191,466		4,751		763		195,454
Tax-exempt debt securities
State and political subdivisions:
General obligations		54,948		3,259		145		58,062
Water and sewer revenues		5,773		171		47		5,897
Lease revenues		6,910		159		13		7,056
Lottery/casino revenues		4,500		305		9		4,796
Other revenues		7,272		210		23		7,459
Residential mortgage-backed securities:
Government-sponsored agencies		2,738		-		-		2,738
Total tax-exempt debt securities		82,141		4,104		237		86,008
Equity securities		77		-		-		77
Total available for sale securities	$	273,684	$	8,855	$	1,000	$	281,539

The below information is relative to the five states where issuers with the highest volume of state and political subdivision securities held in our portfolio are located.  We own no such securities of any single issuer which we deem to be a concentration.

	December 31, 2013
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
West Virginia	$	15,277	$	78	$	285	$	15,070
California		9,177		86		249		9,014
Illinois		8,968		21		543		8,446
Texas		7,651		240		190		7,701
Washington		4,400		104		85		4,419

Management performs pre-purchase and ongoing analysis to confirm that all investment securities meet applicable credit quality standards.  Prior to July 1, 2013, we principally used credit ratings from Nationally Recognized Statistical Rating Organizations (“NRSROs”) to support analyses of our portfolio of securities issued by state and political subdivisions, as we generally do not purchase securities that are rated below the six highest NRSRO rating categories.  Beginning July 1, 2013, in addition to considering a security’s NRSRO rating, we now also assess or confirm through an internal review of an issuer’s financial information and other applicable information that:  1) the issuer’s risk of default is low; 2) the characteristics of the issuer’s demographics and economic environment are satisfactory; and 3) the issuer’s budgetary position and stability of tax or other revenue sources are sound.

The proceeds from sales, calls and maturities of securities, including principal payments received on available for sale mortgage-backed obligations and the related gross gains and losses realized are as follows:

Dollars in thousands	Proceeds from						Gross realized
			Calls and		Principal
Years ended December 31,	Sales		Maturities		Payments		Gains		Losses
2013	$	54,340	$	2,669	$	62,179	$	674	$	434
2012	$	72,056	$	4,618	$	66,377	$	3,253	$	905
2011	$	131,950	$	8,049	$	57,670	$	4,450	$	444

Residential mortgage-backed obligations having contractual maturities ranging from 1 to 50 years are reflected in the following maturity distribution schedules based on their anticipated average life to maturity, which ranges from 1 to 34 years.  Accordingly, discounts are accreted and premiums are amortized over the anticipated average life to maturity of the specific obligation.

The maturities, amortized cost and estimated fair values of securities at December 31, 2013, are summarized as follows:

	Amortized		Estimated
Dollars in thousands	Cost		Fair Value
Due in one year or less	$	61,493	$	61,994
Due from one to five years		103,138		103,532
Due from five to ten years		36,957		36,599
Due after ten years		87,949		86,578
Equity securities		77		77
Total	$	289,614	$	288,780

At December 31, 2013 and 2012, securities with estimated fair values of $120.0 million and $122.1 million respectively, were pledged to secure public deposits, and for other purposes required or permitted by law.

During 2013 and 2012 we recorded other-than-temporary impairment losses on residential mortgage-backed nongovernment sponsored entity securities as follows:

Dollars in thousands	2013			2012
Total other-than-temporary  impairment losses	$	(155	)	$	(1,308)
Portion of loss recognized in
other comprehensive income		37			857
Net impairment losses recognized in earnings	$	(118	)	$	(451)

Activity related to the credit component recognized on debt securities available for sale for which a portion of other-than-temporary impairment was recognized in other comprehensive income for the years ended December 31, 2013 and 2012 is as follows:

Dollars in thousands	2013			2012
Balance, January 1	$	(2,903	)	$	(6,355)
Additions for the credit component on debt securities in which
other-than-temporary impairment was not previously recognized		(118	)		(451)
Securities sold or deemed worthless during the period		-			3,903
Balance, December 31	$	(3,021	)	$	(2,903)

At December 31, 2013, our debt securities with other-than-temporary impairment in which only the amount of loss related to credit was recognized in earnings consisted solely of residential mortgage-backed securities issued by nongovernment-sponsored entities.  We utilize third party vendors to estimate the portion of loss attributable to credit using discounted cash flow models.  The vendors estimate cash flows of the underlying loan collateral of each mortgage-backed security using models that incorporate their best estimates of current key assumptions, such as default rates, loss severity and prepayment rates.  Assumptions utilized could vary widely from security to security, and are influenced by such factors as loan interest rate, geographical location of underlying borrowers, collateral type and other borrower characteristics.

Our vendors performing these valuations also analyze the structure of each mortgage-backed instrument in order to determine how the estimated cash flows of the underlying collateral will be distributed to each security issued from the structure.  Expected principal and interest cash flows on the impaired debt securities are discounted predominantly using unobservable discount rates which the vendors assume that market participants would utilize in pricing the specific security.  Based on the discounted expected cash flows derived from our vendors’ models, we expect to recover the remaining unrealized losses on residential mortgage-backed securities issued by nongovernment sponsored entities.

We held 134 available for sale securities having an unrealized loss at December 31, 2013.  We do not intend to sell these securities, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized bases.  We believe that this decline in value is primarily attributable to the lack of market liquidity and to changes in market interest rates and not due to credit quality.  Accordingly, no additional other-than-temporary impairment charge to earnings is warranted at this time.  Provided below is a summary of securities available for sale which were in an unrealized loss position at December 31, 2013 and 2012, including debt securities for which a portion of other-than-temporary impairment has been recognized in other comprehensive income.

	2013
	Less than 12 months					12 months or more					Total
	Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized
Dollars in thousands	Fair Value		Loss			Fair Value		Loss			Fair Value		Loss
Temporarily impaired securities
Taxable debt securities
U. S. Government agencies
and corporations	$	10,868	$	(118	)	$	-	$	-		$	10,868	$	(118)
Residential mortgage-backed securities:
Government-sponsored agencies		55,035		(1,385	)		13,249		(188	)		68,284		(1,573)
Nongovernment-sponsored entities		2,407		(12	)		565		(7	)		2,972		(19)
State and political subdivisions:
General obligations		4,505		(264	)		2,337		(211	)		6,842		(475)
Water and sewer revenues		1,309		(31	)		1,554		(83	)		2,863		(114)
Other revenues		3,142		(142	)		-		-			3,142		(142)
Corporate debt securities		2,968		(31	)		-		-			2,968		(31)
Tax-exempt debt securities
State and political subdivisions:
General obligations		19,603		(997	)		2,102		(157	)		21,705		(1,154)
Water and sewer revenues		5,643		(224	)		983		(82	)		6,626		(306)
Lease revenues		6,112		(349	)		958		(42	)		7,070		(391)
Lottery/casino revenues		2,720		(132	)		554		(37	)		3,274		(169)
Other revenues		8,815		(191	)		-		-			8,815		(191)
Total temporarily impaired securities		123,127		(3,876	)		22,302		(807	)		145,429		(4,683)
Other-than-temporarily impaired securities
Taxable debt securities
Residential mortgage-backed securities:
Nongovernment-sponsored entities		-		-			1		(2	)		1		(2)
Total other-than-temporarily
impaired securities		-		-			1		(2	)		1		(2)
Total	$	123,127	$	(3,876	)	$	22,303	$	(809	)	$	145,430	$	(4,685)

	2012
	Less than 12 months					12 months or more					Total
	Estimated		Unrealized			Estimated		Unrealized			Estimated		Unrealized
Dollars in thousands	Fair Value		Loss			Fair Value		Loss			Fair Value		Loss
Temporarily impaired securities
Taxable debt securities
U. S. Government agencies
and corporations	$	-	$	-		$	-	$	-		$	-	$	-
Residential mortgage-backed securities:
Government-sponsored agencies		36,498		(414	)		8,997		(78	)		45,495		(492)
Nongovernment-sponsored entities		-		(4	)		1,478		(14	)		1,478		(18)
State and political subdivisions:
General obligations		2,526		(57	)		-		-			2,526		(57)
Water and sewer revenues		1,240		(28	)		387		(4	)		1,627		(32)
Other revenues		-		-			-		-			-		-
Corporate debt securities		-		-			962		(38	)		962		(38)
Tax-exempt debt securities
State and political subdivisions:
General obligations		11,926		(145	)		-		-			11,926		(145)
Water and sewer revenues		2,534		(47	)		-		-			2,534		(47)
Lease revenues		1,013		(13	)		-		-			1,013		(13)
Lottery/casino revenues		1,777		(9	)		-		-			1,777		(9)
Other revenues		2,684		(23	)		-		-			2,684		(23)
Other equity securties		-		-			-		-			-		-
Total temporarily impaired securities		60,198		(740	)		11,824		(134	)		72,022		(874)
Other-than-temporarily impaired securities
Taxable debt securities
Residential mortgage-backed securities:
Nongovernment-sponsored entities		265		(6	)		593		(120	)		858		(126)
Total other-than-temporarily
impaired securities		265		(6	)		593		(120	)		858		(126)
Total	$	60,463	$	(746	)	$	12,417	$	(254	)	$	72,880	$	(1,000)