Note 4. Investments

Available for Sale (AFS) Securities

The investment portfolio serves as a mechanism to invest funds if funding sources out pace lending activity, to provide liquidity for lending and operations, and provide collateral for deposits and borrowings. The mix of securities and investing decisions are made as a component of balance sheet management. Debt securities include U.S. Government Agencies, U.S. Government Agency mortgage-backed securities, non-agency mortgage-backed securities, state and municipal government bonds, and trust preferred securities. The average life of the portfolio is 3.9 years and $84.6 million (fair value) is pledged as collateral for deposits. The Bank has no investments in a single issuer that exceeds 10% of shareholders equity. All securities are classified as available for sale, except equity, and all investment balances refer to fair value, unless noted otherwise.

The amortized cost and estimated fair value of investment securities available for sale as of December 31, 2018 and 2017 is as follows:



(Dollars in thousands)			Gross		Gross
	Amortized		unrealized		unrealized		Fair
December 31, 2018	cost		gains		losses		value
U.S. Government and Agency securities	$	9,120	$	21	$	(65)	$	9,076
Municipal securities		67,811		320		(484)		67,647
Trust preferred securities		4,074		—		(316)		3,758
Agency mortgage-backed securities		45,241		65		(648)		44,658
Private-label mortgage-backed securities		457		31		—		488
Asset-backed securities		5,869		—		(24)		5,845
Total	$	132,572	$	437	$	(1,537)	$	131,472



(Dollars in thousands)			Gross		Gross
	Amortized		unrealized		unrealized		Fair
December 31, 2017	cost		gains		losses		value
Equity securities	$	164	$	201	$	—	$	365
U.S. Government and Agency securities		11,451		64		(43)		11,472
Municipal securities		57,374		650		(252)		57,772
Trust preferred securities		6,000		—		(183)		5,817
Agency mortgage-backed securities		51,307		197		(567)		50,937
Private-label mortgage-backed securities		858		88		—		946
Asset-backed securities		28		—		(1)		27
Total	$	127,182	$	1,200	$	(1,046)	$	127,336

At December 31, 2018 and 2017, the fair value of investment securities pledged to secure public funds and trust deposits totaled $84.6 million and $84.1 million, respectively.

The amortized cost and estimated fair value of debt securities at December 31, 2018, by contractual maturity are shown below. Actual maturities may differ from contractual maturities because of prepayment or call options embedded in the securities.



(Dollars in thousands)	Amortized cost		Fair value
Due in one year or less	$	16,674	$	16,712
Due after one year through five years		32,672		32,691
Due after five years through ten years		37,085		36,497
Due after ten years		443		426
		86,874		86,326
Mortgage-backed securities		45,698		45,146
Total	$	132,572	$	131,472

The composition of the net realized securities gains for the years ended December 31 is as follows:


(Dollars in thousands)	2018		2017		2016
Gross gains realized	$	67	$	3	$	22
Gross losses realized		(11)		—		—
Net gains realized	$	56	$	3	$	22

The 2018 gains were generated by the sale of and calls on bonds. The 2017 and 2016 gains were generated from calls on bonds.

Impairment:

The following table reflects the temporary impairment in the investment portfolio, aggregated by investment category, length of time that individual securities have been in a continuous unrealized loss position and the number of securities in each category as of December 31, 2018 and 2017.

For securities with an unrealized loss, Management applies a systematic methodology in order to perform an assessment of the potential for other-than-temporary impairment. In the case of debt securities, investments considered for other-than-temporary impairment: (1) had a specified maturity or repricing date; (2) were generally expected to be redeemed at par, and (3) were expected to achieve a recovery in market value within a reasonable period of time. In addition, the Bank considers whether it intends to sell these securities or whether it will be forced to sell these securities before the earlier of amortized cost recovery or maturity. Equity securities are assessed for other-than-temporary impairment based on the length of time of impairment, dollar amount of the impairment and general market and financial conditions relating to specific issues. The impairment identified on debt and equity securities and subject to assessment at December 31, 2018, was deemed to be temporary and required no further adjustments to the financial statements, unless otherwise noted. The following tables present the temporary impairment in the security portfolio for the years presented:



	December 31, 2018
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count

U.S. Government and Agency securities	$	2,071	$	(6)	2	$	5,175	$	(59)	14	$	7,246	$	(65)	16
Municipal securities		5,832		(12)	10		25,091		(472)	42		30,923		(484)	52
Trust preferred securities		2,008		(159)	3		1,750		(157)	2		3,758		(316)	5
Agency mortgage-backed securities		7,687		(46)	16		30,511		(602)	74		38,198		(648)	90
Asset-backed securities		5,826		(22)	6		19		(2)	2		5,845		(24)	8
Total temporarily impaired securities	$	23,424	$	(245)	37	$	62,546	$	(1,292)	134	$	85,970	$	(1,537)	171



	December 31, 2017
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count

U.S. Government and Agency securities	$	2,315	$	(11)	5	$	3,528	$	(32)	10	$	5,843	$	(43)	15
Municipal securities		13,767		(89)	22		7,507		(163)	14		21,274		(252)	36
Trust preferred securities		1,216		(12)	2		4,601		(171)	5		5,817		(183)	7
Agency mortgage-backed securities		16,287		(129)	29		20,563		(438)	39		36,850		(567)	68
Asset-backed securities		—		—	—		4		(1)	1		4		(1)	1
Total temporarily impaired securities	$	33,585	$	(241)	58	$	36,203	$	(805)	69	$	69,788	$	(1,046)	127

The following table represents the cumulative credit losses on debt securities recognized in earnings as of December 31, 2018



(Dollars in thousands)	Twelve Months Ended
	2018		2017
Balance of cumulative credit-related OTTI at January 1	$	595	$	595
Additions for credit-related OTTI not previously recognized		—		—
Additional increases for credit-related OTTI previously recognized when there is
no intent to sell and no requirement to sell before recovery of amortized cost basis		—		—
Decreases for previously recognized credit-related OTTI because there was an intent to sell		(323)		—
Reduction for increases in cash flows expected to be collected		—		—
Balance of credit-related OTTI at December 31	$	272	$	595

Equity Securities at fair value

The Corporation owns one equity investment with a readily determinable fair value. At December 31, 2018, this investment was reported at fair value ($374 thousand) with changes in value reported through income. At December 31, 2017, this investment was reported at fair value with changes in value recorded through other comprehensive income and was included in the Available for Sale Securities table of this note.

Restricted Stock at Cost

The Bank held $452 thousand of restricted stock at the end of 2018 of which $422 thousand is stock in the Federal Home Loan Bank of Pittsburgh (FHLB). FHLB stock is carried at a cost of $100 per share. FHLB stock is evaluated for impairment primarily based on an assessment of the ultimate recoverability of its cost. As a government sponsored entity, FHLB has the ability to raise funding through the U.S. Treasury that can be used to support it operations. There is not a public market for FHLB stock and the benefits of FHLB membership (e.g., liquidity and low cost funding) add value to the stock beyond purely financial measures. If FHLB stock were deemed to be impaired, the write-down for the Bank could be significant. Management intends to remain a member of the FHLB and believes that it will be able to fully recover the cost basis of this investment.