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Investments | 9 Months Ended
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Sep. 30, 2017
Investments, Debt and Equity Securities [Abstract] |
Investments | 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, 2017, $96,042,000 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 $7,600,000 at September 30, 2017 compared to an unrealized loss of $891,000 at December 31, 2016. The unrealized gain recorded is net of $3,195,000 and $(375,000) in tax liabilities (benefits) as accumulated other comprehensive income within shareholders’ equity at September 30, 2017 and December 31, 2016, 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, 2017
Available-for-Sale Securities |  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Estimated Fair Value
Debt securities: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government agencies |  | $ | 61,253 |  |  | $ | 598 |  |  | $ | (47 | ) |  | $ | 61,804 |
Obligations of states and political subdivisions |  | 204,841 |  |  | 8,660 |  |  | (516 | ) |  | 212,985 |
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations |  | 190,028 |  |  | 696 |  |  | (2,375 | ) |  | 188,349 |
Private label mortgage backed securities |  | 43,855 |  |  | 977 |  |  | (379 | ) |  | 44,453 |
Other equity securities |  | 7,500 |  |  | — |  |  | (14 | ) |  | 7,486 |
Total available-for-sale |  | $ | 507,477 |  |  | $ | 10,931 |  |  | $ | (3,331 | ) |  | $ | 515,077 |
|  | December 31, 2016
Available-for-Sale Securities |  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Estimated Fair Value
Debt securities: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government agencies |  | $ | 69,005 |  |  | $ | 242 |  |  | $ | (277 | ) |  | $ | 68,970 |
Obligations of states and political subdivisions |  | 288,543 |  |  | 6,109 |  |  | (4,353 | ) |  | 290,299 |
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations |  | 181,785 |  |  | 484 |  |  | (4,048 | ) |  | 178,221 |
Private label mortgage backed securities |  | 1,807 |  |  | 1,036 |  |  | — |  |  | 2,843 |
Other equity securities |  | 7,500 |  |  | — |  |  | (84 | ) |  | 7,416 |
Total available-for-sale |  | $ | 548,640 |  |  | $ | 7,871 |  |  | $ | (8,762 | ) |  | $ | 547,749 |
Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended September 30, 2017 and 2016 are shown below (in thousands):
|  | For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
Available-for-Sale Securities |  | 2017 |  | 2016 |  | 2017 |  | 2016
Proceeds from sales or calls |  | $ | 26,286 |  |  | $ | 21,239 |  |  | $ | 101,293 |  |  | $ | 84,283 |
Gross realized gains from sales or calls |  | 210 |  |  | 306 |  |  | 3,601 |  |  | 1,277 |
Gross realized losses from sales or calls |  | (41 | ) |  | (20 | ) |  | (793 | ) |  | (137 | )
|  | For the Three Months Ended September 30, |  | For the Nine Months Ended September 30,
Held-to-Maturity Securities |  | 2017 |  | 2016 |  | 2017 |  | 2016
Proceeds from sales or calls |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 9,257 |
Gross realized gains from sales or calls |  | — |  |  | — |  |  | — |  |  | 696 |
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. During the first quarter of 2016, the Company sold certain investment securities of which the Company identified that five of the 13 securities sold were previously designated as held-to-maturity (HTM). Through an oversight during the portfolio restructuring analysis related to this transaction, the Company unintentionally sold these five HTM securities. The book value of the HTM securities sold was $8.5 million. The gain realized on the sale of the HTM securities was $696,000. As such, the Company was required to reclassify the remaining HTM securities with a fair value of $23.1 million to the available-for-sale designation. Losses recognized in 2017 and 2016 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. As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using proceeds to purchase securities that fit with the Company’s current risk profile is appropriate and beneficial to the Company. The provision for income taxes includes $1,181,000 and $479,000 income tax impact from the reclassification of unrealized net gains on securities to realized net gains on securities for the nine months ended September 30, 2017 and 2016, respectively. The provision for income taxes includes $71,000 and $120,000 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, 2017 and 2016, 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, 2017
|  | 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 |  | $ | — |  |  | $ | — |  |  | $ | 7,272 |  |  | $ | (47 | ) |  | $ | 7,272 |  |  | $ | (47 | )
Obligations of states and political subdivisions |  | 8,239 |  |  | (65 | ) |  | 18,216 |  |  | (451 | ) |  | 26,455 |  |  | (516 | )
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations |  | 54,089 |  |  | (199 | ) |  | 66,868 |  |  | (2,176 | ) |  | 120,957 |  |  | (2,375 | )
Private label mortgage backed securities |  | 41,941 |  |  | (379 | ) |  | — |  |  | — |  |  | 41,941 |  |  | (379 | )
Other equity securities |  | 7,486 |  |  | (14 | ) |  | — |  |  | — |  |  | 7,486 |  |  | (14 | )
Total available-for-sale |  | $ | 111,755 |  |  | $ | (657 | ) |  | $ | 92,356 |  |  | $ | (2,674 | ) |  | $ | 204,111 |  |  | $ | (3,331 | )
|  | December 31, 2016
|  | 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 |  | $ | 34,586 |  |  | $ | (198 | ) |  | $ | 10,438 |  |  | $ | (79 | ) |  | $ | 45,024 |  |  | $ | (277 | )
Obligations of states and political subdivisions |  | 122,522 |  |  | (4,353 | ) |  | — |  |  | — |  |  | 122,522 |  |  | (4,353 | )
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations |  | 118,719 |  |  | (3,866 | ) |  | 7,666 |  |  | (182 | ) |  | 126,385 |  |  | (4,048 | )
Other equity securities |  | 7,416 |  |  | (84 | ) |  | — |  |  | — |  |  | 7,416 |  |  | (84 | )
Total available-for-sale |  | $ | 283,243 |  |  | $ | (8,501 | ) |  | $ | 18,104 |  |  | $ | (261 | ) |  | $ | 301,347 |  |  | $ | (8,762 | )
The Company periodically evaluates 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, 2017, 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). The Company evaluated all individual available-for-sale investment securities with an unrealized loss at September 30, 2017 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at September 30, 2017 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000. The Company 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 obligations of states and political subdivisions with an investment grade rating by the rating agencies, the Company also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded during March 2016 that a $136,000 credit related impairment related to one security with a fair value of $2,995,000 and a pre-impairment amortized cost of $3,131,000 existed. The Company recorded an other-than-temporary impairment loss of $136,000 during the nine months ended September 30, 2016. There were no OTTI losses recorded during the nine months ended September 30, 2017. There were no OTTI losses recorded during the three months ended September 30, 2016. U.S. Government Agencies At September 30, 2017, the Company held 21 U.S. Government agency securities, of which none were in a loss position for less than 12 months and two 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 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 the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2017. Obligations of States and Political Subdivisions At September 30, 2017, the Company held 122 obligations of states and political subdivision securities of which two were in a loss position for less than 12 months and six 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, 2017. U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations At September 30, 2017, the Company held 142 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 23 were in a loss position for less than 12 months and 26 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, 2017. Private Label Mortgage Backed Securities At September 30, 2017, the Company had a total of 22 PLMBS with a remaining principal balance of $43,855,000 and a net unrealized gain of approximately $599,000. Ten of these PLMBS with a remaining principal balance of $1,431,000 had credit ratings below investment grade. Eight of the PLMBS securities were in a loss position for less than 12 months at September 30, 2017. 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 the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2017. 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, 2017, the Company had one mutual fund equity investment which had an unrealized loss of $14,000 at September 30, 2017. The equity investment was in a loss position for less than 12 months at September 30, 2017. The following tables provide a roll forward for the nine month periods ended September 30, 2017 and 2016 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) |  | 2017 |  | 2016 |  | 2017 |  | 2016
Beginning balance |  | $ | 874 |  |  | $ | 883 |  |  | $ | 874 |  |  | $ | 747 |
Amounts related to credit loss for which an OTTI charge was not previously recognized |  | — |  |  | — |  |  | — |  |  | 136 |
Increases to the amount related to credit loss for which OTTI was previously recognized |  | — |  |  | — |  |  | — |  |  | — |
Realized gain for securities sold |  | — |  |  | (9 | ) |  | — |  |  | (9 | )
Ending balance |  | $ | 874 |  |  | $ | 874 |  |  | $ | 874 |  |  | $ | 874 |
The amortized cost and estimated fair value of available-for-sale investment securities at September 30, 2017 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, 2017
Available-for-Sale Securities |  | Amortized Cost |  | Estimated Fair Value
Within one year |  | $ | 1,532 |  |  | $ | 1,557 |
After one year through five years |  | 6,294 |  |  | 6,523 |
After five years through ten years |  | 31,333 |  |  | 32,336 |
After ten years |  | 165,682 |  |  | 172,569 |
|  | 204,841 |  |  | 212,985 |
Investment securities not due at a single maturity date: |  |  |  |  |  |
U.S. Government agencies |  | 61,253 |  |  | 61,804 |
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations |  | 190,028 |  |  | 188,349 |
Private label mortgage backed securities |  | 43,855 |  |  | 44,453 |
Other equity securities |  | 7,500 |  |  | 7,486 |
Total available-for-sale |  | $ | 507,477 |  |  | $ | 515,077 |

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