DEBT SECURITIES

We classify debt 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 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, unrealized losses and estimated fair values of securities at December 31, 2018 and 2017, are summarized as follows:



	December 31, 2018
	Amortized		Unrealized
Dollars in thousands	Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities
U.S. Government and agencies and corporations	$	26,303	$	203	$	366	$	26,140
Residential mortgage-backed securities:
Government-sponsored agencies	80,883		603		1,177		80,309
Nongovernment-sponsored entities	611		4		1		614
State and political subdivisions
General obligations	6,081		—		126		5,955
Other revenues	13,457		17		186		13,288
Corporate debt securities	14,807		9		304		14,512
Asset-backed securities	25,288		10		123		25,175
Total taxable debt securities	167,430		846		2,283		165,993
Tax-exempt debt securities
State and political subdivisions
General obligations	65,626		624		344		65,906
Water and sewer revenues	20,018		225		98		20,145
Lease revenues	10,980		135		7		11,108
Other revenues	30,197		77		279		29,995
Total tax-exempt debt securities	126,821		1,061		728		127,154
Total available for sale securities	$	294,251	$	1,907	$	3,011	$	293,147



	December 31, 2017
	Amortized		Unrealized
Dollars in thousands	Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities
U.S. Government and agencies and corporations	$	31,260	$	498	$	145	$	31,613
Residential mortgage-backed securities:
Government-sponsored agencies	120,948		1,276		903		121,321
Nongovernment-sponsored entities	2,045		39		7		2,077
State and political subdivisions
General obligations	6,090		—		55		6,035
Other revenues	11,657		47		62		11,642
Corporate debt securities	16,375		—		130		16,245
Total taxable debt securities	188,375		1,860		1,302		188,933
Tax-exempt debt securities
State and political subdivisions
General obligations	65,560		1,530		198		66,892
Water and sewer revenues	23,108		566		3		23,671
Lease revenues	13,024		451		2		13,473
Electric revenues	6,205		128		—		6,333
Sales tax revenues	4,126		140		—		4,266
University revenues	5,272		38		9		5,301
Other revenues	19,101		616		—		19,717
Total tax-exempt debt securities	136,396		3,469		212		139,653
Total available for sale securities	$	324,771	$	5,329	$	1,514	$	328,586

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, 2018
	Amortized		Unrealized
Dollars in thousands	Cost		Gains		Losses		Fair Value

California	$	17,858	$	208	$	86	$	17,980
Michigan	15,685		121		137		15,669
Texas	15,473		147		47		15,573
West Virginia	13,171		89		66		13,194
Illinois	12,342		94		114		12,322

Management performs pre-purchase and ongoing analysis to confirm that all investment securities meet applicable credit quality standards. We principally use 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. In addition to considering a security’s NRSRO rating, we 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 available for sale securities, including principal payments received on 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
2018	$	107,559	$	1,145	$	24,814	$	1,785	$	1,163
2017	152,882		2,700		31,902		685		699
2016	72,453		3,235		35,881		1,422		295

Residential mortgage-backed obligations having contractual maturities ranging from 1 to 50 years are included in the following maturity distribution schedules based on their anticipated average life to maturity, which ranges from 2 months 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, 2018, are summarized as follows:



Dollars in thousands	Amortized Cost		Fair Value
Due in one year or less	$	27,679	$	27,635
Due from one to five years	57,718		57,519
Due from five to ten years	48,085		47,205
Due after ten years	160,769		160,788
Total	$	294,251	$	293,147

At December 31, 2018 and 2017, securities with estimated fair values of $58.6 million and $113.1 million respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

We held 134 available for sale securities having an unrealized loss at December 31, 2018. 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 cost 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 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, 2018 and 2017.



	2018
		Less than 12 months				12 months or more				Total
Dollars in thousands	# of securities in loss position	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Temporarily impaired securities
Taxable debt securities
U.S. Government agencies and corporations	15	$	12,185	$	184	$	7,464	$	182	$	19,649	$	366
Residential mortgage-backed securities:
Government-sponsored agencies	37	23,277		241		24,472		936		47,749		1,177
Nongovernment-sponsored entities	1	—		—		436		1		436		1
State and political subdivisions:
General obligations	8	—		—		5,222		126		5,222		126
Other revenues	11	968		16		9,450		170		10,418		186
Corporate debt securities	7	2,759		109		4,587		195		7,346		304
Asset-backed securities	9	20,129		123		—		—		20,129		123
Tax-exempt debt securities
State and political subdivisions:
General obligations	25	7,273		50		16,830		294		24,103		344
Water and sewer revenues	7	989		6		4,311		92		5,300		98
Lease revenues	2	553		—		557		7		1,110		7
Other revenues	12	7,309		62		11,531		217		18,840		279
Total temporarily impaired securities	134	75,442		791		84,860		2,220		160,302		3,011



	2017
		Less than 12 months				12 months or more				Total
Dollars in thousands	# of securities in loss position	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Temporarily impaired securities
Taxable debt securities
U.S. Government agencies and corporations	9	$	10,864	$	91	$	2,394	$	54	$	13,258	$	145
Residential mortgage-backed securities:
Government-sponsored agencies	35	32,156		269		22,584		634		54,740		903
Nongovernment-sponsored entities	1	5		—		810		7		815		7
State and political subdivisions:
General obligations	9	6,035		55		—		—		6,035		55
Other revenues	9	7,532		62		—		—		7,532		62
Corporate debt securities	4	3,008		39		1,659		91		4,667		130
Tax-exempt debt securities
State and political subdivisions:
General obligations	12	2,999		20		9,937		178		12,936		198
Water and sewer revenues	1	282		3		—		—		282		3
Lease revenues	1	569		2		—		—		569		2
University revenues	1	1,749		9		—		—		1,749		9
Total temporarily impaired securities	82	65,199		550		37,384		964		102,583		1,514