4. Investment securities

Agency – Government-sponsored enterprise (GSE) and MBS - GSE residential

Agency – GSE and MBS – GSE residential securities consist of short- to long-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), Federal Home Loan Bank (FHLB) and Government National Mortgage Association (GNMA). These securities have interest rates that are fixed and adjustable, have varying short- to long-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government.

Obligations of states and political subdivisions

The municipal securities are bank qualified or bank eligible, general obligation and revenue bonds rated as investment grade by various credit rating agencies and have fixed rates of interest with mid- to long-term maturities. Fair values of these securities are highly driven by interest rates. Management performs ongoing credit quality reviews on these issues.

The amortized cost and fair value of investment securities at September 30, 2015 and December 31, 2014 are summarized as follows:



			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
September 30, 2015
Held-to-maturity securities:
MBS - GSE residential	$	-	$	-	$	-	$	-

Available-for-sale securities:
Agency - GSE	$	18,421	$	165	$	8	$	18,578
Obligations of states and political subdivisions		36,269		2,139		93		38,315
MBS - GSE residential		67,959		1,449		47		69,361

Total debt securities		122,649		3,753		148		126,254

Equity securities - financial services		294		234		-		528

Total available-for-sale securities	$	122,943	$	3,987	$	148	$	126,782



			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
December 31, 2014
Held-to-maturity securities:
MBS - GSE residential	$	-	$	-	$	-	$	-

Available-for-sale securities:
Agency - GSE	$	14,380	$	29	$	11	$	14,398
Obligations of states and political subdivisions		34,609		2,444		20		37,033
MBS - GSE residential		44,455		1,438		23		45,870

Total debt securities		93,444		3,911		54		97,301

Equity securities - financial services		295		300		-		595

Total available-for-sale securities	$	93,739	$	4,211	$	54	$	97,896

The amortized cost and fair value of debt securities at September 30, 2015 by contractual maturity are summarized below:



	Amortized		Fair
(dollars in thousands)	cost		value
Held-to-maturity securities:
MBS - GSE residential	$	-	$	-

Available-for-sale securities:
Debt securities:
Due in one year or less	$	4,302	$	4,312
Due after one year through five years		15,349		15,501
Due after five years through ten years		3,004		3,215
Due after ten years		32,035		33,865

Total debt securities		54,690		56,893

MBS - GSE residential		67,959		69,361

Total available-for-sale debt securities	$	122,649	$	126,254

Actual maturities will differ from contractual maturities because issuers and borrowers may have the right to call or repay obligations with or without a call or prepayment penalty. Agency – GSE and municipal securities are included based on their original stated maturity. MBS – GSE residential, which are based on weighted-average lives and subject to monthly principal pay-downs, are listed in total. Most of the securities have fixed rates or have predetermined scheduled rate changes and many have call features that allow the issuer to call the security at par before its stated maturity without penalty.

The following table presents the fair value and gross unrealized losses of investment securities aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of September 30, 2015 and December 31, 2014:



	Less than 12 months				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	value		losses		value		losses		value		losses

September 30, 2015
Agency - GSE	$	2,038	$	8	$	-	$	-	$	2,038	$	8
Obligations of states and political subdivisions		5,132		83		481		10		5,613		93
MBS - GSE residential		3,944		47		-		-		3,944		47
Total	$	11,114	$	138	$	481	$	10	$	11,595	$	148
Number of securities		11				1				12

December 31, 2014
Agency - GSE	$	4,100	$	11	$	1,024	$	-	$	5,124	$	11
Obligations of states and political subdivisions		1,767		11		670		9		2,437		20
MBS - GSE residential		3,761		23		-		-		3,761		23
Total	$	9,628	$	45	$	1,694	$	9	$	11,322	$	54
Number of securities		9				3				12

Management believes the cause of the unrealized losses is related to changes in interest rates, instability in the capital markets or the limited trading activity due to illiquid conditions in the debt market and is not directly related to credit quality. Quarterly, management conducts a formal review of investment securities for the presence of other-than-temporary impairment (OTTI). The accounting guidance related to OTTI requires the Company to assess whether OTTI is present when the fair value of a debt security is less than its amortized cost as of the balance sheet date. Under those circumstances, OTTI is considered to have occurred if: (1) the entity has intent to sell the security; (2) more likely than not the entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost. The accounting guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on securities not expected to be sold be recognized in other comprehensive income (loss) (OCI). Non-credit-related OTTI is based on other factors affecting market value, including illiquidity.

The Company’s OTTI evaluation process also follows the guidance set forth in topics related to debt and equity securities. The guidance set forth in the pronouncements require the Company to take into consideration current market conditions, fair value in relationship to cost, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, the ability and intent to hold investments until a recovery of fair value which may be to maturity and other factors when evaluating for the existence of OTTI. The guidance requires that credit-related OTTI be recognized as a realized loss through earnings when there has been an adverse change in the holder’s expected cash flows such that the full amount (principal and interest) will probably not be received. This requirement is consistent with the impairment model in the guidance for accounting for debt and equity securities.

For all security types, as of September 30, 2015, the Company applied the criteria provided in the recognition and presentation guidance related to OTTI. That is, management has no intent to sell the securities and no conditions were identified by management that more likely than not would require the Company to sell the securities before recovery of their amortized cost basis. The results indicated there was no presence of OTTI in the Company’s security portfolio. In addition, management believes the change in fair value is attributable to changes in interest rates.