Note 2. Securities

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." This ASU requires an entity, among other things, to measure equity investments at fair value through net income, with certain exceptions. The Company began measuring its equity investments at fair value through net income and reclassified $10,000 of Accumulated Other Comprehensive Income (“AOCI”) to retained earnings for the nine months ended September 30, 2018, with no effect on total shareholders' equity.

The amortized cost and fair value of securities available for sale, with unrealized gains and losses follows:

	September 30, 2018
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Obligations of U.S. Government corporations and agencies	$	59,228	$	17	$	(1,849	)	$	57,396
Obligations of states and political subdivisions		14,655		15		(287	)		14,383
Corporate bonds		674		176		-			850
	$	74,557	$	208	$	(2,136	)	$	72,629

	December 31, 2017
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
Obligations of U.S. Government corporations and agencies	$	52,872	$	113	$	(608	)	$	52,377
Obligations of states and political subdivisions		15,124		191		(60	)		15,255
Corporate bonds		3,816		476		(153	)		4,139
Mutual funds		386		-		(4	)		382
	$	72,198	$	780	$	(825	)	$	72,153

The amortized cost and fair value of securities available for sale, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

	September 30, 2018
(In thousands)	Amortized Cost		Fair Value
Due in one year or less	$	1,002	$	1,000
Due after one year through five years		7,017		6,843
Due after five years through ten years		23,675		22,932
Due after ten years		42,863		41,854
	$	74,557	$	72,629

During the nine months ended September 30, 2018, no securities were sold, proceeds from calls and principal repayments were $10.2 million and securities totaling $12.4 million were purchased. During the nine months ended September 30, 2017, no securities were sold, proceeds from calls and principal repayments were $10.9 million and securities totaling $26.8 million were purchased. There were no impairment losses on securities during the nine months ended September 30, 2018 and 2017, respectively.

The following table shows the Company’s securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2018 and December 31, 2017, respectively.

(In thousands)	Less than 12 Months					12 Months or More					Total
September 30, 2018	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)
Obligations of U.S. Government corporations and agencies	$	40,066	$	(1,047	)	$	15,829	$	(802	)	$	55,895	$	(1,849	)
Obligations of states and political subdivisions		10,613		(237	)		1,161		(50	)		11,774		(287	)
Total temporary impaired securities	$	50,679	$	(1,284	)	$	16,990	$	(852	)	$	67,669	$	(2,136	)

(In thousands)	Less than 12 Months					12 Months or More					Total
December 31, 2017	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)
Obligations of U.S. Government corporations and agencies	$	32,512	$	(330	)	$	10,008	$	(278	)	$	42,520	$	(608	)
Obligations of states and political subdivisions		4,172		(60	)		-		-			4,172		(60	)
Corporate bonds		-		-			1,540		(153	)		1,540		(153	)
Mutual funds		382		(4	)		-		-			382		(4	)
Total temporary impaired securities	$	37,066	$	(394	)	$	11,548	$	(431	)	$	48,614	$	(825	)

At September 30, 2018, there were approximately 95 securities that were in a loss position due to market conditions, primarily interest rates, and not due to credit concerns.

The nature of securities which were temporarily impaired at September 30, 2018 included one corporate bond with a cost basis net of other-than-temporary impairment (“OTTI”) totaling $674,000. The value of this bond is based on quoted market prices for similar assets and is a “Class B” or subordinated “mezzanine” tranche of pooled trust preferred securities. Trust preferred securities are collateralized by the interest and principal payments made on trust preferred capital offerings by a geographically diversified pool of several different financial institutions. This bond has an estimated maturity of 16 years and could have been called by the Company at par on the five year anniversary date of issuance, which has already passed. The bond reprices every three months at a fixed rate index above the three-month London Interbank Offered Rate (“LIBOR”) and has sufficient collateralization and cash flow projections to satisfy its valuation as of September 30, 2018. This bond is projected to repay the full outstanding interest and principal and is classified as performing. During the nine months ended September 30, 2018, two corporate bonds, previously held by the Company, went to auction and were settled at their par value of $4.0 million, resulting in gains of $838,000. During the three months ended September 30, 2018 and 2017, $18,000 and $55,000 of interest income was recorded, respectively. During the nine months ended September 30, 2018 and 2017, $97,000 and $158,000 of interest income was recorded, respectively.

Additional information regarding the pooled trust preferred security as of September 30, 2018 follows:

(Dollars in thousands)

Cost, net of OTTI

Fair Value ⁽¹⁾

Percent of Underlying Collateral Performing

Percent of Underlying Collateral in Deferral

Percent of Underlying Collateral in Default

Cumulative Amount of OTTI

Cumulative Other Comprehensive Income,

net of tax

674

850

88.3

4.6

7.1

326

(139

)

⁽¹⁾	Current Moody’s Ratings is B2.

The following roll forward reflects the amount related to credit losses recognized in earnings:

(In thousands)
Beginning balance as of December 31, 2017	$	1,201
Increases in cash flows expected to be collected that are recognized over the remaining life of the securities		(37	)
Reduction for securities called during the period		(838	)
Ending balance as of September 30, 2018	$	326

The carrying value of securities pledged to secure deposits and for other purposes amounted to $49.2 million and $47.6 million at September 30, 2018 and December 31, 2017, respectively.