NOTE 4: INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities are summarized as follows:

	December 31, 2013
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	16,935	$	2	$	(340	)	$	16,597
State and political subdivisions		6,429		164		(6	)		6,587
Corporate		13,498		198		-			13,696
Residential mortgage-backed - US agency		42,378		496		(732	)		42,142
Total		79,240		860		(1,078	)		79,022
Equity investment securities:
Mutual funds:
Ultra short mortgage fund		643		5		-			648
Large cap equity fund		456		195		-			651
Other mutual funds		183		162		-			345
Common stock - financial services industry		271		22		-			293
Total		1,553		384		-			1,937
Total available-for-sale	$	80,793	$	1,244	$	(1,078	)	$	80,959

Held-to-Maturity Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	1,872	$	-	$	(25	)	$	1,847
State and political subdivisions		21,371		11		(118	)		21,264
Corporate		3,746		16		(44	)		3,718
Residential mortgage-backed - US agency		7,423		-		(30	)		7,393
Total held-to-maturity	$	34,412	$	27	$	(217	)	$	34,222



	December 31, 2012
			Gross		Gross			Estimated
Available-for-Sale Portfolio	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
Debt investment securities:
US Treasury, agencies and GSEs	$	6,175	$	16	$	(8	)	$	6,183
State and political subdivisions		26,413		1,065		(7	)		27,471
Corporate		22,942		468		(404	)		23,006
Residential mortgage-backed - US agency		47,113		1,139		(1	)		48,251
Residential mortgage-backed - private label		296		9		-			305
Total		102,939		2,697		(420	)		105,216
Equity investment securities:
Mutual funds:
Ultra short mortgage fund		1,286		5		-			1,291
Large cap equity fund		905		176		-			1,081
Other mutual funds		183		136		-			319
Common stock - financial services industry		420		12		-			432
Total		2,794		329		-			3,123
Total investment securities	$	105,733	$	3,026	$	(420	)	$	108,339

The Company’s investments in mortgage-backed securities include pass-through securities and collateralized mortgage obligations issued and guaranteed by Fannie Mae, Freddie Mac, and GNMA. As of December 31, 2013 and December 31, 2012, no private-label mortgage-backed securities or collateralized mortgage obligations were held in the securities portfolio. The Company’s investments in state and political obligation securities generally are municipal obligations that are general obligations supported by the general taxing authority of the issuer, and in some cases are insured. The obligations issued by school districts are supported by state aid. Primarily, these investments are issued by municipalities within New York State.

The Company elected to transfer 55 available-for-sale (“AFS”) securities with an aggregate fair value of $32.5 million to a classification of held-to-maturity (“HTM”) on September 30, 2013. In accordance with FASB ASC 320-10-55-24, the transfer from AFS to HTM must be recorded at the fair value of the AFS securities at the time of transfer. The net unrealized holding loss of $799,000, net of tax, at the date of transfer was retained in accumulated other comprehensive loss, with the associated pre-tax amount retained in the carrying value of the HTM securities. Such amounts will be amortized to interest income over the remaining life of the securities. The fair value of the transferred AFS securities became the book value of the HTM securities at September 30, 2013, with no unrealized gain or loss at this date. Future reporting periods, with potential changes in market value for these securities, would likely record an unrealized gain or loss for disclosure purposes.

The amortized cost and estimated fair value of debt investments at December 31, 2013 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

	Available-for-Sale				Held-to-Maturity
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
(In thousands)
Due in one year or less	$	6,419	$	6,438	$	186	$	186
Due after one year through five years		25,648		25,835		824		825
Due after five years through ten years		4,634		4,446		12,360		12,302
Due after ten years		161		161		13,619		13,516
Sub-total		36,862		36,880		26,989		26,829
Residential mortgage-backed - US agency		42,378		42,142		7,423		7,393
Totals	$	79,240	$	79,022	$	34,412	$	34,222

The Company’s investment securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, is as follows:

	December 31, 2013
	Less than Twelve Months							Twelve Months or More							Total
	Number of							Number of							Number of
	Individual		Unrealized			Fair		Individual		Unrealized			Fair		Individual		Unrealized			Fair
Available-for-Sale	Securities		Losses			Value		Securities		Losses			Value		Securities		Losses			Value
(Dollars in thousands)
US Treasury, agencies and GSE's		14	$	(340	)	$	15,573		-	$	-		$	-		14	$	(340	)	$	15,573
State and political subdivisions		1		(4	)		114		3		(2	)		397		4		(6	)		511
Corporate		-		-			-		-		-			-		-		-			-
Residential mortgage-backed - US agency		25		(682	)		23,442		1		(50	)		878		26		(732	)		24,320
Totals		40	$	(1,026	)	$	39,129		4	$	(52	)	$	1,275		44	$	(1,078	)	$	40,404
Held-to-Maturity
US Treasury, agencies and GSE's		2	$	(25	)	$	1,847		-	$	-		$	-		2	$	(25	)	$	1,847
State and political subdivisions		37		(118	)		17,814		-		-			-		37		(118	)		17,814
Corporate		4		(44	)		3,171		-		-			-		4		(44	)		3,171
Residential mortgage-backed - US agency		6		(30	)		5,526		-		-			-		6		(30	)		5,526
Totals		49	$	(217	)	$	28,358		-	$	-		$	-		49	$	(217	)	$	28,358


	December 31, 2012
	Less than Twelve Months							Twelve Months or More							Total
	Number of							Number of							Number of
	Individual		Unrealized			Fair		Individual		Unrealized			Fair		Individual		Unrealized			Fair
Available-for-Sale	Securities		Losses			Value		Securities		Losses			Value		Securities		Losses			Value
(Dollars in thousands)
US Treasury, agencies and GSE's		1	$	(8	)	$	992		-	$	-		$	-		1	$	(8	)	$	992
State and political subdivisions		8		(7	)		2,008		-		-			-		8		(7	)		2,008
Corporate		2		(14	)		974		2		(390	)		1,580		4		(404	)		2,554
Residential mortgage-backed - US agency		2		(1	)		1,411		-		-			-		2		(1	)		1,411
Totals		13	$	(30	)	$	5,385		2	$	(390	)	$	1,580		15	$	(420	)	$	6,965

The Company conducts a formal review of investment securities on a quarterly basis for the presence of other-than-temporary impairment (“OTTI”). The Company assesses whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the statement of condition date. Under these circumstances, OTTI is considered to have occurred (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not anticipated to be sufficient to recover the entire amortized cost basis. The guidance requires that credit-related OTTI is recognized in earnings while non-credit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (“OCI”). Non-credit-related OTTI is based on other factors, including illiquidity and changes in the general interest rate environment. Presentation of OTTI is made in the consolidated statement of income on a gross basis, including both the portion recognized in earnings as well as the portion recorded in OCI. The gross OTTI would then be offset by the amount of non-credit-related OTTI, showing the net as the impact on earnings.

Management does not believe any individual unrealized loss in other securities within the portfolio as of December 31, 2013 represents OTTI. One individual municipal security is rated below investment grade, yet the current unrealized loss is less than $1,000 and has only been in place for 1 month. All other related securities are rated A2 or better by Moody’s and have been in unrealized loss positions for 11 months or less, with the exception of 3 municipal securities and 1 mortgage-backed security. The 3 municipal securities are issuances from school districts located within the bank’s primary market area. The mortgage-backed security was issued by Fannie Mae. The unrealized losses in the portfolio are primarily attributable to changes in interest rates. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost.

In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above and the length of time the equity security’s fair value has been below the carrying amount. Management has determined that we have the intent and ability to retain the equity securities for a sufficient period of time to allow for recovery. All of the Company’s equity securities had a fair value greater than the book value at December 31, 2013.

Gross realized gains (losses) on sales and redemptions of securities for the years ended December 31 are detailed below:

(In thousands)	2013			2012
Realized gains	$	370		$	397
Realized losses		(5	)		(22	)
	$	365		$	375

As of December 31, 2013 and December 31, 2012, securities with a fair value of $58.6 million and $46.0 million, respectively, were pledged to collateralize certain municipal deposit relationships. As of the same dates, securities with a fair value of $21.6 million and $37.8 million were pledged against certain borrowing arrangements.

Management has reviewed its loan and mortgage-backed securities portfolios and determined that, to the best of its knowledge, little or no exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of investing in, or originating, these types of investments or loans.