Note 3: Securities

Securities at September 30, 2013 and December 31, 2012 are as follows:

	September 30, 2013
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Securities available for sale
U.S. government-sponsored enterprises	$	58,077	$	529	$	(1,395)	$	57,211
Municipals		47,328		1,269		(897)		47,700
Mortgage-backed and asset-backed securities – government-sponsored enterprises		77,885		940		(1,215)		77,610
Mortgage-backed and asset-backed securities – private labeled		1,451		11		(93)		1,369
Other securities		34,479		108		(1,815)		32,772
Total available for sale	$	219,220	$	2,857	$	(5,415)	$	216,662

	December 31, 2012
	Amortized		Gross Unrealized				Fair
	Cost		Gains		Losses		Value
Securities available for sale
U.S. government-sponsored enterprises	$	18,666	$	953	$	(1)	$	19,618
Municipals		39,999		2,685		(144)		42,540
Mortgage-backed and asset-backed securities – government-sponsored enterprises		75,782		1,884		(177)		77,489
Mortgage-backed and asset-backed securities – private labeled		2,696		17		(260)		2,453
Other securities		16,753		105		(2,265)		14,593
Total available for sale	$	153,896	$	5,644	$	(2,847)	$	156,693

The carrying value of securities at September 30, 2013 is shown below by their contractual maturity date. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale
	Amortized Cost		Fair Value
Within one year	$	1,500	$	1,489
One to five years		35,958		35,853
Five to ten years		35,743		35,467
After ten years		66,683		64,874
		139,884		137,683
Mortgage-backed and asset-backed securities – government-sponsored enterprises		77,885		77,610
Mortgage-backed and asset-backed securities – private labeled		1,451		1,369
Totals	$	219,220	$	216,662

Gross gains of $104 and $0, and gross losses of $7 and $0 resulting from sales of available-for-sale securities were realized for three month period ended September 30, 2013 and 2012, respectively. In the nine month period ended September 30, 2013 and 2012, gross gains of $278 and $49 and gross losses of $347 and $0 were recognized, respectively.

Certain investments in debt securities are reported in the condensed consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at September 30, 2013 and December 31, 2012 was $115,264 and $41,986, which is approximately 53% and 27%, respectively, of the Company’s available-for-sale investment portfolio. These declines primarily resulted from increases in market interest rates after purchase.

Except as discussed below, management believes the declines in fair value for these securities are temporary.

Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period in which the other-than-temporary impairment (“OTTI”) is identified. The Company routinely conducts periodic reviews to identify and evaluate investment securities to determine whether an OTTI has occurred. For certain investments, economic models are used to determine whether an OTTI has occurred on these securities.

The following tables show the Company’s investments’ 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 at September 30, 2013 and December 31, 2012:

	September 30, 2013
	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities available for sale:
U.S.government-sponsored enterprises	$	43,706	$	(1,395)	$	17	$	—	$	43,723	$	(1,395)
Municipals		12,812		(751)		984		(146)		13,796		(897)
Mortgage-backed and asset- backed securities - government-sponsored enterprises		34,282		(1,215)		—		—		34,282		(1,215)
Mortgage-backed and asset- backed securities – private labeled		48		—		920		(93)		968		(93)
Other securities		18,896		(377)		3,599		(1,438)		22,495		(1,815)
	$	109,744	$	(3,738)	$	5,520	$	(1,677)	$	115,264	$	(5,415)

	December 31, 2012
	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities available for sale:
U.S. government-sponsored enterprises	$	—	$	—	$	119	$	(1)	$	119	$	(1)
Municipals		470		(4)		2,618		(140)		3,088		(144)
Mortgage-backed and asset- backed securities - government-sponsored enterprises		28,505		(177)		—		—		28,505		(177)
Mortgage-backed and asset- backed securities – private labeled		—		—		1,504		(260)		1,504		(260)
Other securities		5,947		(53)		2,823		(2,212)		8,770		(2,265)
	$	34,922	$	(234)	$	7,064	$	(2,613)	$	41,986	$	(2,847)

U.S. Government Sponsored Enterprise and Municipal Securities

The unrealized losses on the Company’s investments in securities issued by U.S. Government sponsored enterprises and municipal securities were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is unlikely the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2013.

Mortgage-Backed Securities

The unrealized losses on the Company’s investment in mortgage-backed securities were caused by interest rate changes. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments, and it is unlikely the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2013.

Other Securities

The Company’s unrealized loss on investments in other securities is primarily made up of two investments. The first investment is a $2,000 par investment in I-PreTSL I B-2 pooled trust security. The unrealized loss was primarily caused by a sector downgrade by several industry analysts. The Company currently expects to recover the entire amortized cost basis of the investment. The determination of no credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. Because the Company does not intend to sell the investment and it is unlikely the Company will be required to sell the investment before recovery of its amortized cost basis, which may be maturity, it does not consider the remainder of the investment to be other-than-temporarily impaired at September 30, 2013. The second investment is discussed in the next paragraph.

An OTTI has been recognized on a $2,000 par investment in ALESCO IV Series B2 pooled trust security. The unrealized loss was primarily caused by (a) a decrease in performance and (b) a sector downgrade by several industry analysts. The Company currently expects ALESCO IV to settle the security at a price less than the contractual amount of the investment (that is, the Company expects to recover less than the entire amortized cost basis of the security). The Company has recognized a loss equal to the credit loss, establishing a new, lower amortized cost basis. The credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. Because the Company does not intend to sell the investment and it is unlikely the Company will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity, it does not consider the remainder of the investment in ALESCO IV to be other-than-temporarily impaired at September 30, 2013.

For identified mortgage-backed securities in the investment portfolio, an extensive, quarterly review is conducted to determine if an OTTI has occurred. Various inputs to the economic models are used to determine if an unrealized loss is other-than-temporary. The most significant inputs are voluntary prepay rates, default rates, liquidation rates, and loss severity.

To determine if the unrealized loss for mortgage-backed securities is other-than-temporary, the Company projects total estimated defaults of the underlying assets (mortgages) and multiplies that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss. The Company also evaluates the current credit enhancement underlying the bond to determine the impact on cash flows. If the Company determines that a given mortgage-backed security position will be subject to a write-down or loss, the Company records the expected credit loss as a charge to earnings.

The credit losses recognized in earnings during the three and nine months ended September 30, 2013 and 2012 were as follows:

	Three Months Ended September 30,
	2013		2012
ALESCO IV Series B2	$	—	$	112
Mortgage-backed and asset-backed securities – private labeled		—		—
Total credit losses recognized in earnings	$	—	$	112

		Nine Months Ended September 30,
		2013		2012
ALESCO IV Series B2	$	—	$	112
Mortgage-backed and asset-backed securities – private labeled		49		92
Total credit losses recognized in earnings	$	49	$	204

Credit Losses Recognized on Investments

Certain debt securities have experienced fair value deterioration due to credit losses, as well as due to other market factors, but are not otherwise other-than-temporarily impaired.

The following tables provide information about debt securities for which only a credit loss was recognized in income and other losses are recorded in accumulated other comprehensive income (loss).

	Accumulated Credit Losses
Credit losses on debt securities held
July 1, 2013	$	1,342
Realized losses related to OTTI		(98)
Additions related to other-than-temporary losses not previously recognized		—
Additions related to increases in previously recognized other-than-temporary losses		—
September 30, 2013	$	1,244

	Accumulated Credit Losses
Credit losses on debt securities held
July 1, 2012	$	1,920
Realized losses related to OTTI		(163)
Additions related to other-than-temporary losses not previously recognized		—
Additions related to increases in previously recognized other-than-temporary losses		112
September 30, 2012	$	1,869

	Accumulated Credit Losses
Credit losses on debt securities held
January 1, 2013	$	1,737
Realized losses related to OTTI		(542)
Additions related to other-than-temporary losses not previously recognized		31
Additions related to increases in previously recognized other-than-temporary losses		18
September 30, 2013	$	1,244

	Accumulated Credit Losses
Credit losses on debt securities held
January 1, 2012	$	1,835
Realized losses related to OTTI		(170)
Additions related to other-than-temporary losses not previously recognized		43
Additions related to increases in previously recognized other-than-temporary losses		161
September 30, 2012	$	1,869

Amounts reclassified from Accumulated other comprehensive income (loss) and the affected line items in the Condensed Consolidated Statements of Income during the three and nine months ended September 30, 2013 and 2012, were as follows:

	Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) for the Three Months Ended September 30,				Affected Line Item in the
	2013		2012		Statements of Income
Securities available for sale
Gain (loss) realized in earnings	$	97	$	—	Gain (loss) on sale of securities
OTTI losses recognized in earnings		—		(112)	Other-than-temporary impairment loss recognized in net income
Total reclassified amount before tax		97		(112)	Income Before Income Taxes
Tax (expense) benefit		(34)		39	Income Tax Provision
Total reclassifications out of Accumulated Other Comprehensive Income (Loss)	$	63	$	(73)	Net Income

	Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) for the Nine Months Ended September 30,				Affected Line Item in the
	2013		2012		Statements of Income
Securities available for sale
Gain (loss) realized in earnings	$	(69)	$	49	Gain (loss) on sale of securities
OTTI losses recognized in earnings		(49)		(204)	Other-than-temporary impairment loss recognized in net income
Total reclassified amount before tax		(118)		(155)	Income Before Income Taxes
Tax (expense) benefit		41		54	Income Tax Provision
Total reclassifications out of Accumulated Other Comprehensive Income (Loss)	$	(77)	$	(101)	Net Income