Investments

The investment portfolio consists primarily of U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations, private label residential mortgage backed securities (PLRMBS), and obligations of states and political subdivisions securities. As of September 30, 2015, $126,238,000 of these securities were held as collateral for borrowing arrangements, public funds, and for other purposes.

The fair value of the available-for-sale investment portfolio reflected a net unrealized gain of $8,114,000 at September 30, 2015 compared to an unrealized gain of $8,896,000 at December 31, 2014. The unrealized gain recorded is net of $3,339,000 and $3,661,000 in tax liabilities as accumulated other comprehensive income within shareholders’ equity at September 30, 2015 and December 31, 2014, respectively.

The following table sets forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands):



	September 30, 2015
Available-for-Sale Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
U.S. Government agencies	$	51,679	$	377	$	(142	)	$	51,914
Obligations of states and political subdivisions	174,758		5,358		(1,117		)	178,999
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	208,318		2,633		(408		)	210,543
Private label residential mortgage backed securities	2,473		1,272		—			3,745
Other equity securities	7,500		141		—			7,641
Total available-for-sale	$	444,728	$	9,781	$	(1,667	)	$	452,842



	September 30, 2015
Held-to-Maturity Securities	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Estimated Fair Value
Debt securities:
Obligations of states and political subdivisions	$	32,367	$	2,900	$	(11	)	$	35,256



	December 31, 2014
Available-for-Sale Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
U.S. Government agencies	$	33,088	$	245	$	(243	)	$	33,090
Obligations of states and political subdivisions	143,343		6,266		(314		)	149,295
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	236,629		2,033		(790		)	237,872
Private label residential mortgage backed securities	3,079		1,614		—			4,693
Other equity securities	7,500		85		—			7,585
Total available-for-sale	$	423,639	$	10,243	$	(1,347	)	$	432,535



	December 31, 2014
Held-to-Maturity Securities	Amortized Cost	Gross Unrecognized Gains	Gross Unrecognized Losses		Estimated Fair Value
Debt securities:
Obligations of states and political subdivisions	31,964	3,138	(6	)	$	35,096

Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended September 30, 2015 and 2014 are shown below (in thousands):



	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
Available-for-Sale Securities	2015		2014			2015			2014
Proceeds from sales or calls	$	—	$	21,741		$	92,647		$	73,982
Gross realized gains from sales or calls	—		271			1,692			1,423
Gross realized losses from sales or calls	—		(31		)	(233		)	(850		)

Losses recognized in 2015 and 2014 were incurred in order to reposition the investment securities portfolio based on the current rate environment. The securities which were sold at a loss were acquired when the rate environment was not as volatile. The securities which were sold were primarily purchased several years ago to serve a purpose in the rate environment in which the securities were purchased. The Company is addressing risks in the security portfolio by selling these securities and using proceeds to purchase securities that fit with the Company’s current risk profile.

The provision for income taxes includes $601,000 and $236,000 income tax impact from the reclassification of unrealized net gains on available-for-sale securities to realized net gains on available-for-sale securities for the nine months ended September 30, 2015 and 2014, respectively. The provision for income taxes includes $0 and $99,000 income tax impact from the reclassification of unrealized net gains on available-for-sale securities to realized net gains on available-for-sale securities for the three months ended September 30, 2015 and 2014, respectively.

Investment securities, aggregated by investment category, with unrealized losses as of the dates indicated are summarized and classified according to the duration of the loss period as follows (in thousands):



	September 30, 2015
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Available-for-Sale Securities	Value		Losses			Value		Losses			Value		Losses
Debt securities:
U.S. Government agencies	$	14,470	$	(27	)	$	4,797	$	(115	)	$	19,267	$	(142	)
Obligations of states and political subdivisions	67,406		(1,117		)	—		—			67,406		(1,117		)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	24,951		(139		)	18,440		(269		)	43,391		(408		)
Total available-for-sale	$	106,827	$	(1,283	)	$	23,237	$	(384	)	$	130,064	$	(1,667	)



	September 30, 2015
	Less than 12 Months					12 Months or More				Total
	Fair		Unrecognized			Fair		Unrecognized		Fair		Unrecognized
Held-to-Maturity Securities	Value		Losses			Value		Losses		Value		Losses
Debt securities:
Obligations of states and political subdivisions	$	1,048	$	(11	)	$	—	$	—	$	1,048	$	(11	)



	December 31, 2014
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Available-for-Sale Securities	Value		Losses			Value		Losses			Value		Losses
Debt securities:
U.S. Government agencies	$	10,950	$	(193	)	$	1,737	$	(50	)	$	12,687	$	(243	)
Obligations of states and political subdivisions	16,776		(89		)	15,290		(225		)	32,066		(314		)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	52,905		(420		)	31,000		(370		)	83,905		(790		)
Total available-for-sale	$	80,631	$	(702	)	$	48,027	$	(645	)	$	128,658	$	(1,347	)



	December 31, 2014
	Less than 12 Months					12 Months or More				Total
	Fair		Unrecognized			Fair		Unrecognized		Fair		Unrecognized
Held-to-Maturity Securities	Value		Losses			Value		Losses		Value		Losses
Debt securities:
Obligations of states and political subdivisions	$	1,067	$	(6	)	$	—	$	—	$	1,067	$	(6	)

We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase.

As of September 30, 2015, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all individual available-for-sale investment securities with an unrealized loss at September 30, 2015 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at September 30, 2015 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000. Management also analyzed any securities that may have been downgraded by credit rating agencies.

For those bonds that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds. For those bonds that were municipal debt securities with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded that no credit related impairment existed.

U.S. Government Agencies

At September 30, 2015, the Company held 15 U.S. Government agency securities, of which four were in a loss position for less than 12 months and one was in a loss position or had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in direct obligations of U.S. government agencies 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 costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell, those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2015.

Obligations of States and Political Subdivisions

At September 30, 2015, the Company held 150 obligations of states and political subdivision securities of which 25 were in a loss position for less than 12 months and none were in a loss position or had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability to hold and does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2015.

U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations

At September 30, 2015, the Company held 180 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 15 were in a loss position for less than 12 months and 11 have been in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability to hold and does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2015.

Private Label Residential Mortgage Backed Securities

At September 30, 2015, the Company had a total of 17 PLRMBS with a remaining principal balance of $2,473,000 and a net unrealized gain of approximately $1,272,000. None of these securities was recorded with an unrealized loss at September 30, 2015. Nine of these PLRMBS with a remaining principal balance of $2,155,000 had credit ratings below investment grade. The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary.

Other Equity Securities

At September 30, 2015, the Company had one mutual fund equity investment. The equity investment was not recorded with an unrealized loss at September 30, 2015.

The following tables provide a roll forward for the three and nine month periods ended September 30, 2015 and 2014 of investment securities credit losses recorded in earnings. The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods. Additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred on securities for which OTTI credit losses have been previously recognized.



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(In thousands)	2015		2014		2015		2014
Beginning balance	$	747	$	800	$	747	$	800
Amounts related to credit loss for which an OTTI charge was not previously recognized	—		—		—		—
Increases to the amount related to credit loss for which OTTI was previously recognized	—		—		—		—
Realized losses for securities sold	—		—		—		—
Ending balance	$	747	$	800	$	747	$	800

The amortized cost and estimated fair value of available-for-sale and held-to-maturity investment securities at September 30, 2015 by contractual maturity is shown below (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.



	September 30, 2015
Available-for-Sale Securities	Amortized Cost		Estimated Fair Value
Within one year	$	—	$	—
After one year through five years	11,621		12,010
After five years through ten years	30,472		31,322
After ten years	132,665		135,667
	174,758		178,999
Investment securities not due at a single maturity date:
U.S. Government agencies	51,679		51,914
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	208,318		210,543
Private label residential mortgage backed securities	2,473		3,745
Other equity securities	7,500		7,641
Total available-for-sale	$	444,728	$	452,842



	September 30, 2015
Held-to-Maturity Securities	Amortized Cost		Estimated Fair Value
After ten years	$	32,367	$	35,256

During 2014, to better manage our interest rate risk, the Company transferred from available-for-sale to held-to-maturity selected municipal securities in our portfolio having a book value of approximately $31 million, a market value of approximately $32 million, and a net unrecognized gain of approximately $163,000. This transfer was completed after careful consideration of our intent and ability to hold these securities to maturity. There were no transfers or reclassifications of securities in or out of held-to-maturity during the three or nine months ended September 30, 2015. At September 30, 2015 and December 31, 2014 the remaining unaccreted balance of these securities included in accumulated other comprehensive income was $138,000 and $142,000, respectively.