Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Debt securities not classified as held to maturity or trading are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, in other comprehensive income (loss). As of January 1, 2018, equity securities with readily determined fair values are recorded at fair value with changes in fair value recognized in net income. Prior to 2018, fair value changes were reported, net of tax, in other comprehensive income (loss).

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the security, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) if management does not expect to recover the entire amortized cost basis. In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Amortized cost and fair value of securities at September 30, 2018, and December 31, 2017, were as follows:



In thousands	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

SECURITIES AVAILABLE FOR SALE

SEPTEMBER 30, 2018
U.S. Government and agencies	$	125,594	$	—	$	3,518	$	122,076
Mortgage-backed securities, residential	31,676		107		692		31,091
State and municipal	9,819		54		83		9,790
	$	167,089	$	161	$	4,293	$	162,957

DECEMBER 31, 2017
U.S. Government and agencies	$	105,899	$	2	$	1,818	$	104,083
Mortgage-backed securities, residential	34,473		461		101		34,833
State and municipal	13,227		109		42		13,294
Corporate bonds	5,000		57		—		5,057
CRA mutual fund	1,044		—		9		1,035
Stock in other banks	647		102		—		749
	$	160,290	$	731	$	1,970	$	159,051

SECURITIES HELD TO MATURITY

SEPTEMBER 30, 2018
U.S. Government and agencies	$	12,000	$	—	$	117	$	11,883
Mortgage-backed securities, residential	21,517		—		633		20,884
	$	33,517	$	—	$	750	$	32,767
DECEMBER 31, 2017
U.S. Government and agencies	$	19,000	$	2	$	99	$	18,903
Mortgage-backed securities, residential	25,829		55		238		25,646
	$	44,829	$	57	$	337	$	44,549

The Corporation adopted ASU 2016-01, Financial Instruments—Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities effective January 1, 2018. The required fair value disclosures are as follows:



In thousands	Fair Value at January 1, 2018		Unrealized Gains		Unrealized Losses		Fair Value at September 30, 2018
SEPTEMBER 30, 2018
Equity securities with a readily determinable fair value	$	1,793	$	31	$	81	$	1,743

The following table shows the Corporation’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, 2018, and December 31, 2017:



	Less than 12 Months				12 Months or More				Total
In thousands	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

SECURITIES AVAILABLE FOR SALE

SEPTEMBER 30, 2018
U.S. Government and agencies	$	44,842	$	771	$	76,734	$	2,747	$	121,576	$	3,518
Mortgage-backed securities, residential	20,998		493		4,517		199		25,515		692
State and municipal	1,397		19		1,911		64		3,308		83
	$	67,237	$	1,283	$	83,162	$	3,010	$	150,399	$	4,293

DECEMBER 31, 2017
U.S. Government and agencies	$	42,775	$	445	$	58,279	$	1,373	$	101,054	$	1,818
Mortgage-backed securities, residential	7,228		56		2,845		45		10,073		101
State and municipal	1,042		8		1,950		34		2,992		42
CRA Mutual Fund	—		—		1,035		9		1,035		9
	$	51,045	$	509	$	64,109	$	1,461	$	115,154	$	1,970

SECURITIES HELD TO MATURITY

SEPTEMBER 30, 2018
U.S. Government and agencies	$	2,955	$	45	$	8,928	$	72	$	11,883	$	117
Mortgage-backed securities, residential	11,386		243		9,498		390		20,884		633
	$	14,341	$	288	$	18,426	$	462	$	32,767	$	750

DECEMBER 31, 2017
U.S. Government and agencies	$	4,985	$	15	$	10,916	$	84	$	15,901	$	99
Mortgage-backed securities, residential	4,946		29		11,070		209		16,016		238
	$	9,931	$	44	$	21,986	$	293	$	31,917	$	337

All mortgage-backed security investments are government sponsored enterprise (GSE) pass-through instruments issued by the Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA) or Federal Home Loan Mortgage Corporation (FHLMC), which guarantee the timely payment of principal on these investments.

At September 30, 2018, seventy-four available for sale U.S. Government and agency securities had unrealized losses that individually did not exceed 7% of amortized cost. Fifty of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

At September 30, 2018, thirty-eight available for sale residential mortgage-backed securities had unrealized losses that individually did not exceed 5% of amortized cost. Seven of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

At September 30, 2018, twelve available for sale state and municipal securities had unrealized losses that individually did not exceed 6% of amortized cost. Eight of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

At September 30, 2018, seven held to maturity U.S. Government and agency securities had unrealized losses that individually did not exceed 2% of amortized cost. Five of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

At September 30, 2018, thirty-four held to maturity residential mortgage-backed securities had unrealized losses that individually did not exceed 5% of amortized cost. Thirteen of these securities have been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

In analyzing the issuer’s financial condition, management considers industry analysts’ reports, financial performance, and projected target prices of investment analysts within a one-year time frame. Based on the above information, management has determined that none of these investments are other-than-temporarily impaired.

The fair values of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2) which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the security’s relationship to other benchmark quoted prices. The Corporation uses independent service providers to provide matrix pricing.

Management routinely sells securities from its available for sale portfolio in an effort to manage and allocate the portfolio. At September 30, 2018, management had not identified any securities with an unrealized loss that it intends to sell or will be required to sell. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the security, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) if management does not expect to recover the entire amortized cost basis. In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses.

Amortized cost and fair value at September 30, 2018, by contractual maturity, where applicable, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay with or without penalties.



	Available for Sale				Held to Maturity
In thousands	Amortized Cost		Fair Value		Amortized Cost		Fair Value

1 year or less	$	10,050	$	10,013	$	6,000	$	5,980
Over 1 year through 5 years	121,477		118,020		6,000		5,903
Over 5 years through 10 years	3,886		3,833		—		—
Over 10 years	—		—		—		—
Mortgage-backed securities, residential	31,676		31,091		21,517		20,884
	$	167,089	$	162,957	$	33,517	$	32,767

The Corporation realized $31,000 and $44,000 gross gains on sales of securities available for sale during the three and nine month periods ended September 30, 2018, respectively. The corporation did not realize any gross gains or losses on sales of securities during the three and nine month period ended September 30, 2017.

At September 30, 2018, and December 31, 2017, securities with a carrying value of $181,820,000 and $157,601,000, respectively, were pledged as collateral as required by law on public and trust deposits, repurchase agreements, and for other purposes.