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, 2018 and December 31, 2017:



(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCL
March 31, 2018
Available for Sale:
U.S. government agencies	$	30,000	$	0	$	1,139	$	28,861	$	0
Commercial mortgage-backed agencies		41,431		0		1,403		40,028		0
Collateralized mortgage obligations		40,229		1		1,341		38,889		0
Obligations of states and political subdivisions		21,915		181		247		21,849		0
Collateralized debt obligations		19,706		0		3,729		15,977		(2,506)
Total available for sale	$	153,281	$	182	$	7,859	$	145,604	$	(2,506)

Held to Maturity:
U.S. government agencies	$	15,911	$	116	$	0	$	16,027	$	0
Residential mortgage-backed agencies		46,312		12		1,216		45,108		0
Commercial mortgage-backed agencies		17,090		66		166		16,990		0
Collateralized mortgage obligations		4,055		0		187		3,868		0
Obligations of states and political subdivisions		8,510		923		91		9,342		0
Total held to maturity	$	91,878	$	1,117	$	1,660	$	91,335	$	0

December 31, 2017
Available for Sale:
U.S. government agencies	$	30,000	$	0	$	744	$	29,256	$	0
Commercial mortgage-backed agencies		41,771		0		880		40,891		0
Collateralized mortgage obligations		41,298		2		916		40,384		0
Obligations of states and political subdivisions		20,772		365		118		21,019		0
Collateralized debt obligations		19,711		0		4,791		14,920		(3,389)
Total available for sale	$	153,552	$	367	$	7,449	$	146,470	$	(3,389)
Held to Maturity:
U.S. government agencies	$	15,876	$	447	$	0	$	16,323	$	0
Residential mortgage-backed agencies		47,771		94		423		47,442		0
Commercial mortgage-backed agencies		17,288		236		6		17,518		0
Collateralized mortgage obligations		4,187		0		69		4,118		0
Obligations of states and political subdivisions		8,510		1,443		8		9,945		0
Total held to maturity	$	93,632	$	2,220	$	506	$	95,346	$	0

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


	Three months ended
	March 31,
(in thousands)	2018		2017
Proceeds	$	0	$	3,830
Realized gains		0		8
Realized losses		9		17

The following table shows the Corporation’s investment securities with gross unrealized losses and fair values at March 31, 2018 and December 31, 2017, 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, 2018
Available for Sale:
U.S. government agencies	$	4,865	$	136	$	23,996	$	1,003
Commercial mortgage-backed agencies		12,384		390		27,644		1,013
Collateralized mortgage obligations		16,982		538		21,438		803
Obligations of states and political subdivisions		10,403		151		2,581		96
Collateralized debt obligations		0		0		15,977		3,729
Total available for sale	$	44,634	$	1,215	$	91,636	$	6,644

Held to Maturity:
Residential mortgage-backed agencies	$	34,240	$	632	$	12,510	$	593
Commercial mortgage-backed agencies		8,717		158		0		0
Collateralized mortgage obligations		0		0		3,868		187
Obligations of states and political subdivisions		2,295		90		0		0
Total held to maturity	$	45,252	$	880	$	16,378	$	780


December 31, 2017
Available for Sale:
U.S. government agencies	$	4,931	$	69	$	24,325	$	675
Commercial mortgage-backed agencies		12,593		169		28,298		711
Collateralized mortgage obligations		27,387		472		12,447		443
Obligations of states and political subdivisions		2,683		44		2,747		75
Collateralized debt obligations		0		0		14,920		4,791
Total available for sale	$	47,594	$	754	$	82,737	$	6,695
Held to Maturity:
Residential mortgage-backed agencies	$	15,897	$	135	$	10,422	$	288
Commercial mortgage-backed agencies		9,028		6		0		0
Collateralized mortgage obligations		0		0		4,118		69
Obligations of states and political subdivisions		2,377		8		0		0
Total held to maturity	$	27,302	$	149	$	14,540	$	357

Management systematically evaluates securities for impairment on a quarterly basis. Based upon application of accounting guidance for subsequent measurement in ASC Topic 320 (ASC Section 320-10-35), 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, 2018.

U.S. Government Agencies – Available for Sale – There was one U.S. government agency in an unrealized loss position for less than 12 months as of March 31, 2018. There were four U.S. government agency investments in an unrealized loss position for more than 12 months as of March 31, 2018. The securities are of investment grade and the Corporation does not intend to sell them, and it is not more than 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 March 31, 2018.

Commercial Mortgage-Backed Agencies – Available for Sale – There were two commercial mortgage-backed agencies in an unrealized loss position for less than 12 months as of March 31, 2018. There were six commercial mortgage-backed agencies in an unrealized loss position for more than 12 months as of March 31, 2018. 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, 2018.

Collateralized Mortgage Obligations – Available for Sale – There were five collateralized mortgage obligations in an unrealized loss position for less than 12 months as of March 31, 2018. There were three collateralized mortgage obligations in an unrealized loss position for more than 12 months as of March 31, 2018. 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, 2018.

Obligations of State and Political Subdivisions – Available for Sale – There were nine obligations of state and political subdivisions that have been in an unrealized loss position for less than 12 months and two securities that have been in an unrealized loss position for 12 months or more at March 31, 2018. 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, 2018.

Collateralized Debt Obligations – Available for Sale - The $3.7 million in unrealized losses greater than 12 months at March 31, 2018 relates to 10 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 three months of 2018. The unrealized losses on the remaining securities in the portfolio are primarily attributable to continued depression in 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, 2018.

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 March 31, 2018. Thirteen residential mortgage-backed agency investments were in an unrealized loss position for more than 12 months as of March 31, 2018. 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, 2018.

Commercial Mortgage-Backed Agencies – Held to Maturity - There was one commercial mortgage-backed agency investments in an unrealized loss position for less than 12 months as of March 31, 2018. The security is of the highest investment grade and 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 March 31, 2018. There were no commercial mortgage-backed agencies in a loss position for more than 12 months as of March 31, 2018.

Collateralized Mortgage Obligations – Held to Maturity – There were no collateralized mortgage obligations in an unrealized loss position for less than 12 months as of March 31, 2018. There was one collateralized mortgage obligation in a loss position for more than 12 months as of March 31, 2018. The security is of the highest investment grade and 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 March 31, 2018.

Obligations of State and Political Subdivisions – Held to Maturity –There was one obligation of state and political subdivisions that has been in an unrealized loss for less than 12 months. The security is of the highest investment grade and 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 March 31, 2018. There were no obligations of state and political subdivisions securities in an unrealized loss position for more than 12 months as of March 31, 2018.

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, 2018 and 2017:




	Three months ended March 31,
(in thousands)	2018		2017
Balance of credit-related OTTI at January 1	$	2,958	$	3,124
Reduction for increases in cash flows expected to be collected		(55)		(2)
Balance of credit-related OTTI at March 31	$	2,903	$	3,122

The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2018 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, 2018
(in thousands)	Amortized Cost		Fair Value
Contractual Maturity
Available for sale:
Due after one year through five years	$	15,858	$	15,497
Due after five years through ten years		20,741		19,904
Due after ten years		35,022		31,286
		71,621		66,687
Commercial mortgage-backed agencies		41,431		40,028
Collateralized mortgage obligations		40,229		38,889
Total available for sale	$	153,281	$	145,604
Held to Maturity:
Due after five years through ten years	$	15,911	$	16,027
Due after ten years		8,510		9,342
		24,421		25,369
Residential mortgage-backed agencies	$	46,312	$	45,108
Commercial mortgage-backed agencies		17,090		16,990
Collateralized mortgage obligations		4,055		3,868
Total held to maturity	$	91,878	$	91,335