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.

The following table shows a comparison of amortized cost and fair values of investment securities at March 31, 2016 and December 31, 2015:



(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI
March 31, 2016
Available for Sale:
U.S. government agencies	$	29,063	$	150	$	0	$	29,213	$	0
Residential mortgage-backed agencies		7,769		0		60		7,709		0
Commercial mortgage-backed agencies		47,461		973		16		48,418		0
Collateralized mortgage obligations		13,460		101		25		13,536		0
Obligations of states and political subdivisions		36,173		712		50		36,835		0
Collateralized debt obligations		25,441		0		5,909		19,532		(2,332)
Total available for sale	$	159,367	$	1,936	$	6,060	$	155,243	$	(2,332)

Held to Maturity:
U.S. government agencies	$	22,738	$	1,502	$	0	$	24,240	$	0
Residential mortgage-backed agencies		52,311		916		23		53,204		0
Commercial mortgage-backed agencies		18,007		881		0		18,888		0
Collateralized mortgage obligations		5,840		21		0		5,861		0
Obligations of states and political subdivisions		2,625		393		0		3,018		0
Total held to maturity	$	101,521	$	3,713	$	23	$	105,211	$	0

December 31, 2015
Available for Sale:
U.S. government agencies		34,079		14		129		33,964		0
Residential mortgage-backed agencies		14,285		105		220		14,170		0
Commercial mortgage-backed agencies		43,780		52		196		43,636		0
Collateralized mortgage obligations		9,690		43		123		9,610		0
Obligations of states and political subdivisions		45,949		915		223		46,641		0
Collateralized debt obligations		25,766		0		3,555		22,211		(799)
Total available for sale	$	173,549	$	1,129	$	4,446	$	170,232	$	(799)
Held to Maturity:
U.S. government agencies	$	24,704	$	634	$	0	$	25,338	$	0
Residential mortgage-backed agencies		53,734		276		98		53,912		0
Commercial mortgage-backed agencies		18,078		171		17		18,232		0
Collateralized mortgage obligations		6,419		0		122		6,297		0
Obligations of states and political subdivisions		2,625		338		0		2,963		0
Total held to maturity	$	105,560	$	1,419	$	237	$	106,742	$	0

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


	Three months ended
	March 31,
(in thousands)	2016		2015
Proceeds	$	10,771	$	15,091
Realized gains		277		16
Realized losses		71		113

The following table shows the Corporation’s investment securities with gross unrealized losses and fair values at March 31, 2016 and December 31, 2015, 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
March 31, 2016
Available for Sale:
Residential mortgage-backed agencies	$	0	$	0	$	7,709		60
Commercial mortgage-backed agencies		3,087		16		0		0
Collateralized mortgage obligations		0		0		5,209		25
Obligations of states and political subdivisions		2,093		8		3,829		42
Collateralized debt obligations		12,243		1,962		7,289		3,947
Total available for sale	$	17,423	$	1,986	$	24,036	$	4,074

Held to Maturity:
Residential mortgage-backed agencies	$	4,332	$	15	$	1,224	$	8
Collateralized mortgage obligations		0		0		0		0
Total held to maturity	$	4,332	$	15	$	1,224	$	8


December 31, 2015
Available for Sale:
U.S. government agencies		23,929	$	129	$	0	$	0
Residential mortgage-backed agencies		0		0		8,051		220
Commercial mortgage-backed agencies		25,858		196		0		0
Collateralized mortgage obligations		5,299		123		0		0
Obligations of states and political subdivisions		11,537		104		4,048		119
Collateralized debt obligations		0		0		7,688		3,555
Total available for sale	$	66,623	$	552	$	19,787	$	3,894
Held to Maturity:
Residential mortgage-backed agencies		11,085		98		0		0
Commercial mortgage-backed agencies		9,518		17		0		0
Collateralized mortgage obligations		6,297		122		0		0
Total held to maturity	$	26,900	$	237	$	0	$	0

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 believes that the valuations are adequate at March 31, 2016.

U.S. Government Agencies – Available for Sale – There were no U.S. government agencies in an unrealized loss position as of March 31, 2016.

Residential Mortgage-Backed Agencies – Available for Sale - There were no residential mortgage-backed agencies in an unrealized loss position for less than 12 months as of March 31, 2016. There was one residential mortgage-backed agency security in an unrealized loss position for 12 months or more. 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 the security 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 March 31, 2016.

Commercial Mortgage-Backed Agencies – Available for Sale – There was one commercial mortgage-backed agency in an unrealized loss position for less than 12 months as of March 31, 2016. 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 these investments to be other-than-temporarily impaired at March 31, 2016. There were no commercial mortgage-backed agency securities in an unrealized loss position for 12 months or more.

Collateralized Mortgage Obligations – Available for Sale – There were no collateralized mortgage obligations in an unrealized loss position for less than 12 months as of March 31, 2016. There was one collateralized mortgage obligations in an unrealized loss position for 12 months or more. 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 March 31, 2016.

Obligations of State and Political Subdivisions – Available for Sale – There were two obligations of state and political subdivisions that have been in an unrealized loss position for less than 12 months at March 31, 2016. There was one security that has 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 March 31, 2016.

Collateralized Debt Obligations – Available for Sale - The $3.9 million in unrealized losses greater than 12 months at March 31, 2016 relates to four pooled trust preferred securities that are included in the CDO portfolio. There were eight pooled trust preferred securities that have been in an unrealized loss position for less than 12 months at March 31, 2016. The eight investments in an unrealized loss for less than 12 months at March 31, 2016 are being held at the Parent Company. These investments had previously been held at the Bank, but, during the fourth quarter of 2015, they were transferred to the Parent Company at their fair value. That move resulted in a loss of $3.5 million being recognized through earnings. 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 three months of 2016. 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 – There were no U.S. government agencies in an unrealized loss position as of March 31, 2016.

Residential Mortgage-Backed Agencies – Held to Maturity - Five residential mortgage-backed agencies have been in an unrealized loss position for less than 12 months as of March 31, 2016. There was one residential mortgage-backed agency in an unrealized loss position for 12 months or more. The securities are of the highest investment grade and 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 March 31, 2016.

Commercial Mortgage-Backed Agencies – Held to Maturity - There were no commercial mortgage-backed agencies in the Held to Maturity portfolio as of March 31, 2016 in a loss position.

Collateralized Mortgage Obligations – Held to Maturity – There were no collateralized mortgage obligations in the Held to Maturity portfolio as of March 31, 2016 in a loss position.

Obligations of State and Political Subdivisions – Held to Maturity – There were no obligations of state and political subdivisions in the Held to Maturity portfolio as of March 31, 2016 in a loss position.

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 three-month periods ended March 31, 2016 and 2015:




	Three months ended March 31,
(in thousands)	2016		2015
Balance of credit-related OTTI at January 1	$	3,133	$	12,583
Reduction for increases in cash flows expected to be collected		(36)		(167)
Balance of credit-related OTTI at March 31	$	3,097	$	12,416

The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2016 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.


	March 31, 2016
(in thousands)	Amortized Cost		Fair Value
Contractual Maturity
Available for sale:
Due in one year or less	$	10,008	$	10,030
Due after one year through five years		25,210		25,463
Due after five years through ten years		6,276		6,459
Due after ten years		49,183		43,628
		90,677		85,580
Residential mortgage-backed agencies	$	7,769	$	7,709
Commercial mortgage-backed agencies		47,461		48,418
Collateralized mortgage obligations		13,460		13,536
Total available for sale	$	159,367	$	155,243
Held to Maturity:
Due after five years through ten years	$	15,637	$	16,674
Due after ten years		9,726		10,584
		25,363		27,258
Residential mortgage-backed agencies	$	52,311	$	53,204
Commercial mortgage-backed agencies		18,007		18,888
Collateralized mortgage obligations		5,840		5,861
Total held to maturity	$	101,521	$	105,211