Note 5 – Investments

The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments – Debt and Equity Securities.

The amortized cost of debt securities classified as available-for-sale is adjusted for the amortization of premiums to the first call date, if applicable, or to maturity, and for the accretion of discounts to maturity, or, in the case of mortgage-backed securities, over the estimated life of the security. Such amortization and accretion is included in interest income from investments. Interest and dividends are included in interest income from investments. Gains and losses on the sale of securities are recorded using the specific identification method.

On June 1, 2014, management reclassified an amortized cost basis of $107.6 million of available-for-sale securities to held to maturity. The unrealized loss of approximately $4.0 million, at the date of transfer, will continue to be reported in a separate component of shareholders’ equity as accumulated other comprehensive income and will be amortized over the remaining life of the securities as an adjustment of yield in a manner consistent with the amortization of any premium or discount.

The following table shows a comparison of amortized cost and fair values of investment securities at September 30, 2014 and December 31, 2013:



(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI
September 30, 2014
Available for Sale:
U.S. Treasuries	$	29,631	$	4	$	17	$	29,618	$	0
U.S. government agencies		39,088		82		411		38,759		0
Residential mortgage-backed agencies		46,573		276		726		46,123		0
Commercial mortgage-backed agencies		26,737		58		250		26,545		0
Collateralized mortgage obligations		9,286		89		7		9,368		0
Obligations of states and political subdivisions		46,784		1,466		234		48,016		0
Collateralized debt obligations		37,066		1,223		13,883		24,406		7,056
Total available for sale	$	235,165	$	3,198	$	15,528	$	222,835	$	7,056

Held to Maturity:
U.S. government agencies	$	24,476	$	31	$	109	$	24,398	$	0
Residential mortgage-backed agencies		55,572		93		263		55,402		0
Commercial mortgage-backed agencies		16,476		145		73		16,548		0
Collateralized mortgage obligations		7,712		0		110		7,602		0
Obligations of states and political subdivisions		2,725		0		249		2,476		0
Total held to maturity	$	106,961	$	269	$	804	$	106,426	$	0

December 31, 2013
Available for Sale:
U.S. government agencies	$	97,242	$	14	$	5,221	$	92,035	$	0
Residential mortgage-backed agencies		116,933		334		4,823		112,444		0
Commercial mortgage-backed agencies		31,025		14		1,134		29,905		0
Collateralized mortgage obligations		30,468		84		1,162		29,390		0
Obligations of states and political subdivisions		55,505		895		1,123		55,277		0
Collateralized debt obligations		37,146		778		20,386		17,538		12,703
Total available for sale	$	368,319	$	2,119	$	33,849	$	336,589	$	12,703
Held to Maturity:
Obligations of states and political subdivisions	$	3,900	$	249	$	559	$	3,590	$	0

Proceeds from sales of securities and the realized gains and losses are as follows:


	Nine Months Ended				Three Months Ended
	September 30,				September 30,
(in thousands)	2014		2013		2014		2013
Proceeds	$	56,838	$	50,169	$	616	$	15,033
Realized gains		1,527		447		222		35
Realized losses		434		323		75		138

The following table shows the Corporation’s securities with gross unrealized losses and fair values at September 30, 2014 and December 31, 2013, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:


	Less than 12 months				12 months or more
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2014
Available for Sale:
U.S. Treasuries	$	10,078	$	17	$	0	$	0
U.S. government agencies		0		0		18,664		411
Residential mortgage-backed agencies		9,974		1		23,786		725
Commercial mortgage-backed agencies		20,480		235		969		15
Collateralized mortgage obligations		2,174		7		0		0
Obligations of states and political subdivisions		0		0		12,450		234
Collateralized debt obligations		0		0		19,394		13,883
Total available for sale	$	42,706	$	260	$	75,263	$	15,268

Held to Maturity:
U.S. government agencies	$	14,945	$	109	$	0	$	0
Residential mortgage-backed agencies		47,209		263		0		0
Commercial mortgage-backed agencies		9,660		73		0		0
Collateralized mortgage obligations		7,602		110		0		0
Obligations of states and political subdivisions		0		0		2,476		249
Total held to maturity	$	79,416	$	555	$	2,476	$	249


December 31, 2013
Available for Sale:
U.S. government agencies	$	62,962	$	3,154	$	13,996	$	2,067
Residential mortgage-backed agencies		60,781		1,801		46,570		3,022
Commercial mortgage-backed agencies		21,889		1,134		0		0
Collateralized mortgage obligations		21,201		1,149		3,051		13
Obligations of states and political subdivisions		15,422		1,123		0		0
Collateralized debt obligations		0		0		16,434		20,386
Total available for sale	$	182,255	$	8,361	$	80,051	$	25,488
Held to Maturity:
Obligations of states and political subdivisions	$	0	$	0	$	2,301	$	559

Management systematically evaluates securities for impairment on a quarterly basis. Management assesses whether (a) the Corporation has the intent to sell a security being evaluated and (b) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery. If neither applies, then declines in the fair values of securities below their cost that are considered other-than-temporary declines are split into two components. The first is the loss attributable to declining credit quality. Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made. The second component consists of all other losses, which are recognized in other comprehensive loss. In estimating other-than-temporary impairment (“OTTI”) losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the fair value of the security, (4) changes in the rating of the security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest or principal payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future. Management also monitors cash flow projections for securities that are considered beneficial interests under the guidance of ASC Subtopic 325-40, Investments – Other – Beneficial Interests in Securitized Financial Assets, (ASC Section 325-40-35). Further discussion about the evaluation of securities for impairment can be found in Item 2 of Part I of this report under the heading “Investment Securities”.

Management believes that the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of the Corporation’s consolidated financial statements. Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for the Corporation’s collateralized debt obligation (“CDO”) portfolio consisting of pooled trust preferred securities. Based on management’s review of the assumptions and results of the third-party review, it does not believe that there were any material differences in the valuations between December 31, 2013 and September 30, 2014.

U.S. Government Treasuries – Available for Sale - One U.S. government treasury has been in an unrealized loss position for less than 12 months as of September 30, 2014. The security is of the highest investment grade and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell it before recovery of its amortized cost basis, which may be at maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at September 30, 2014. There were no U.S. government treasuries in an unrealized loss position for 12 months or more.

U.S. Government Agencies – Available for Sale – There were no U.S. government agencies in an unrealized loss position for less than 12 months as of September 30, 2014. There were three U.S. government agencies in an unrealized loss position for 12 months or more. The securities are of the highest investment grade and the Corporation does not intend to sell them, and it is not more likely than not that the Corporation will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at September 30, 2014.

Residential Mortgage-Backed Agencies – Available for Sale - There was one residential mortgage-backed agency in an unrealized loss position for less than 12 months as of September 30, 2014. There were four residential mortgage-backed agency securities in an unrealized loss position for 12 months or more. The securities are of the highest investment grade and the Corporation does not intend to sell them, and it is not more likely than not that the Corporation will be required to sell the securities before recovery of their amortized cost basis, which may be at maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at September 30, 2014.

Commercial Mortgage-Backed Agencies – Available for Sale – There were three commercial mortgage-backed agencies in an unrealized loss position for less than 12 months as of September 30, 2014. There was one commercial mortgage-backed agency security in an unrealized loss position for 12 months or more. The securities are of the highest investment grade and the Corporation does not intend to sell them, and it is not more likely than not that the Corporation will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at September 30, 2014.

Collateralized Mortgage-Obligations – Available for Sale – There was one collateralized mortgage-obligation security in an unrealized loss position for less than 12 months as of September 30, 2014. The security is of the highest investment grade and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell it before recovery of its amortized cost basis, which may be at maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at September 30, 2014. There were no collateralized mortgage-obligation securities in an unrealized loss position for 12 months or more.

Obligations of State and Political Subdivisions – Available for Sale - No obligations of state and political subdivisions securities have been in an unrealized loss position for less than 12 months at September 30, 2014. There were six securities that have been in an unrealized loss position for 12 months or more. These investments are of investment grade as determined by the major rating agencies and management reviews the ratings of the underlying issuers and performs an in-depth credit analysis on the securities. Management believes that this portfolio is well-diversified throughout the United States, and all bonds continue to perform according to their contractual terms. The Corporation does not intend to sell these investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at September 30, 2014.

Collateralized Debt Obligations – Available for Sale - The $13.9 million in unrealized losses greater than 12 months at September 30, 2014 relates to 14 pooled trust preferred securities that are included in the CDO portfolio. See Note 9 for a discussion of the methodology used by management to determine the fair values of these securities. Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that there were no securities that had credit-related non-cash OTTI charges during the first nine months of 2014. The unrealized losses on the remaining securities in the portfolio are primarily attributable to continued depression in market interest rates, marketability, liquidity and the current economic environment.

U.S. Government Agencies – Held to Maturity - Two U.S. government agencies have been in an unrealized loss position for less than 12 months as of September 30, 2014. The Corporation has the intent and ability to hold the investments to maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at September 30, 2014. There were no U.S. government agencies in an unrealized loss position for 12 months or more.

Residential Mortgage-Backed Agencies – Held to Maturity - Eighteen residential mortgage-backed agencies have been in an unrealized loss position for less than 12 months as of September 30, 2014. The Corporation has the intent and ability to hold the investments to maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at September 30, 2014. There were no residential mortgage-backed agencies in an unrealized loss position for 12 months or more.

Commercial Mortgage-Backed Agencies – Held to Maturity - One commercial mortgage-backed agency has been in an unrealized loss position for less than 12 months as of September 30, 2014. The Corporation has the intent and ability to hold this investment to maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at September 30, 2014. There were no commercial mortgage-backed agencies in an unrealized loss position for 12 months or more.

Collateralized Mortgage-Obligations – Held to Maturity - One collateralized mortgage obligation has been in an unrealized loss position for less than 12 months as of September 30, 2014. The Corporation has the intent and ability to hold the investment to maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at September 30, 2014. There were no collateralized mortgage obligations in an unrealized loss position for 12 months or more.

Obligations of State and Political Subdivisions – Held to Maturity – No obligations of state and political subdivisions securities have been in an unrealized loss position for less than 12 months at September 30, 2014. There was one obligations of state and political subdivisions security that has been in an unrealized loss position for 12 months or more. This bond is a Tax Increment Fund (TIF) bond. Management performs an in-depth credit analysis on this security. The Corporation has the intent and ability to hold the investment to maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at September 30, 2014.

The following tables present a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses which have been recognized in earnings for the trust preferred securities in the CDO portfolio held and not intended to be sold for the nine- and three-month periods ended September 30, 2014 and 2013:




	Nine Months Ended September 30,
(in thousands)	2014		2013
Balance of credit-related OTTI at January 1	$	13,422	$	13,959
Reduction for increases in cash flows expected to be collected		(501)		(404)
Balance of credit-related OTTI at September 30	$	12,921	$	13,555


	Three Months Ended September 30,
(in thousands)	2014		2013
Balance of credit-related OTTI at July 1	$	13,091	$	13,695
Reduction for increases in cash flows expected to be collected		(170)		(140)
Balance of credit-related OTTI at September 30	$	12,921	$	13,555

The amortized cost and estimated fair value of securities by contractual maturity at September 30, 2014 are shown in the following table. Actual maturities may 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, 2014
(in thousands)	Amortized Cost		Fair Value
Contractual Maturity
Available for sale:
Due in one year or less	$	19,536	$	19,540
Due after one year through five years		44,436	$	44,475
Due after five years through ten years		29,390		30,015
Due after ten years		59,207		46,769
		152,569		140,799

Residential mortgage-backed agencies		46,573		46,123
Commercial mortgage-backed agencies		26,737		26,545
Collateralized mortgage obligations		9,286		9,368
	$	235,165	$	222,835
Held to Maturity:
Due after five years through ten years	$	15,442	$	15,437
Due after ten years		11,759		11,437
		27,201		26,874

Residential mortgage-backed agencies		55,572		55,402
Commercial mortgage-backed agencies		16,476		16,548
Collateralized mortgage obligations		7,712		7,602
	$	106,961	$	106,426