Note 4 – 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 September 30, 2019 and December 31, 2018:



(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCL
September 30, 2019
Available for Sale:
U.S. government agencies	$	40,000	$	—	$	86	$	39,914	$	—
Commercial mortgage-backed agencies		34,475		421		43		34,853		—
Collateralized mortgage obligations		32,121		309		100		32,330		—
Obligations of states and political subdivisions		14,139		373		—		14,512		—
Collateralized debt obligations		18,415		—		4,948		13,467		(3,517)
Total available for sale	$	139,150	$	1,103	$	5,177	$	135,076	$	(3,517)
Held to Maturity:
U.S. government agencies	$	16,127	$	667	$	—	$	16,794	$	—
Residential mortgage-backed agencies		45,197		454		129		45,522		—
Commercial mortgage-backed agencies		15,597		528		—		16,125		—
Collateralized mortgage obligations		3,468		51		—		3,519		—
Obligations of states and political subdivisions		16,215		5,998		—		22,213		—
Total held to maturity	$	96,604	$	7,698	$	129	$	104,173	$	—
December 31, 2018
Available for Sale:
U.S. government agencies	$	30,000	$	—	$	974	$	29,026	$	—
Commercial mortgage-backed agencies		39,013		—		1,261		37,752		—
Collateralized mortgage obligations		36,669		—		965		35,704		—
Obligations of states and political subdivisions		20,083		132		333		19,882		—
Collateralized debt obligations		18,358		—		3,081		15,277		(1,966)
Total available for sale	$	144,123	$	132	$	6,614	$	137,641	$	(1,966)
Held to Maturity:
U.S. government agencies	$	16,017	$	120	$	—	$	16,137	$	—
Residential mortgage-backed agencies		46,491		6		1,287		45,210		—
Commercial mortgage-backed agencies		15,821		75		68		15,828		—
Collateralized mortgage obligations		3,761		—		156		3,605		—
Obligations of states and political subdivisions		11,920		1,156		96		12,980		—
Total held to maturity	$	94,010	$	1,357	$	1,607	$	93,760	$	—

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



	Nine Months Ended				Three Months Ended
	September 30,				September 30,
(in thousands)	2019		2018		2019		2018
Proceeds	$	12,337	$	2,005	$	6,669	$	2,005
Realized gains		74		151		1		6
Realized losses		73		35		—		16

The following table shows the Corporation’s investment securities with gross unrealized losses and fair values at September 30, 2019 and December 31, 2018, 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		Number of Investments	Fair Value		Unrealized Losses		Number of Investments
September 30, 2019
Available for Sale:
U.S. government agencies	$	9,971	$	29	1	$	29,943	$	57	5
Commercial mortgage-backed agencies		—		—	—		6,370		43	3
Collateralized mortgage obligations		28		1	1		7,389		99	1
Collateralized debt obligations		5,266		1,226	4		8,201		3,722	5
Total available for sale	$	15,265	$	1,256	6	$	51,903	$	3,921	14
Held to Maturity:
Residential mortgage-backed agencies	$	4,745	$	2	2	$	10,626	$	127	12
Total held to maturity	$	4,745	$	2	2	$	10,626	$	127	12
December 31, 2018
Available for Sale:
U.S. government agencies	$	—	$	—	—	$	29,026	$	974	5
Commercial mortgage-backed agencies		—		—	—		37,752		1,261	8
Collateralized mortgage obligations		232		1	1		35,472		964	8
Obligations of states and political subdivisions		3,310		48	5		11,068		285	8
Collateralized debt obligations		5,987		438	4		9,290		2,643	5
Total available for sale	$	9,529	$	487	10	$	122,608	$	6,127	34
Held to Maturity:
Residential mortgage-backed agencies	$	3,605	$	51	2	$	41,448	$	1,236	29
Commercial mortgage-backed agencies		—		—	—		7,656		68	1
Collateralized mortgage obligations		—		—	—		3,605		156	1
Obligations of states and political subdivisions		—		—	—		2,199		96	1
Total held to maturity	$	3,605	$	51	2	$	54,908	$	1,556	32

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 the anticipated recovery of any decline in fair value. If neither applies, then any decline in the fair value below the security’s cost that is considered an other-than-temporary decline is split into two components. The first component 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 the section of Item 2 of Part I of this report entitled “FINANCIAL CONDITION” 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. See Note 7 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 2019.

The Corporation does not believe that the investment securities that were in an unrealized loss position at September 30, 2019 represent other-than-temporary impairment. The Corporation does not intend to sell nor is it anticipated that it would be required to sell any of its impaired investment securities at a loss.

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, 2019 and 2018:



	Nine Months Ended
	September 30,
(in thousands)	2019		2018
Balance of credit-related OTTI at January 1	$	2,646	$	2,958
Reduction for increases in cash flows expected to be collected		(149)		(160)
Balance of credit-related OTTI at September 30	$	2,497	$	2,798



	Three Months Ended
	September 30,
(in thousands)	2019		2018
Balance of credit-related OTTI at July 1	$	2,547	$	2,851
Reduction for increases in cash flows expected to be collected		(50)		(53)
Balance of credit-related OTTI at September 30	$	2,497	$	2,798

The amortized cost and estimated fair value of securities by contractual maturity at September 30, 2019 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, 2019
(in thousands)	Amortized Cost		Fair Value
Contractual Maturity
Available for Sale:
Due after one year through five years		34,464		34,449
Due after five years through ten years		10,259		10,235
Due after ten years		27,831		23,209
		72,554		67,893
Commercial mortgage-backed agencies		34,475		34,853
Collateralized mortgage obligations		32,121		32,330
Total available for sale	$	139,150	$	135,076
Held to Maturity:
Due after one year through five years	$	16,127	$	16,794
Due after ten years		16,215		22,213
		32,342		39,007
Residential mortgage-backed agencies		45,197		45,522
Commercial mortgage-backed agencies		15,597		16,125
Collateralized mortgage obligations		3,468		3,519
Total held to maturity	$	96,604	$	104,173