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 September 30, 2015 and December 31, 2014:



(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI
September 30, 2015
Available for Sale:
U.S. government agencies	$	34,096	$	125	$	0	$	34,221	$	0
Residential mortgage-backed agencies		14,495		162		163		14,494		0
Commercial mortgage-backed agencies		45,162		669		26		45,805		0
Collateralized mortgage obligations		10,172		92		47		10,217		0
Obligations of states and political subdivisions		48,065		1,081		292		48,854		0
Collateralized debt obligations		35,636		3,631		7,339		31,928		(60)
Total available for sale	$	187,626	$	5,760	$	7,867	$	185,519	$	(60)

Held to Maturity:
U.S. government agencies	$	24,658	$	784	$	0	$	25,442	$	0
Residential mortgage-backed agencies		54,869		689		83		55,475		0
Commercial mortgage-backed agencies		18,148		565		0		18,713		0
Collateralized mortgage obligations		6,432		0		34		6,398		0
Obligations of states and political subdivisions		2,625		106		0		2,731		0
Total held to maturity	$	106,732	$	2,144	$	117	$	108,759	$	0

December 31, 2014
Available for Sale:
U.S. treasuries	$	29,607	$	0	$	11	$	29,596	$	0
U.S. government agencies		39,077		117		253		38,941		0
Residential mortgage-backed agencies		45,175		510		412		45,273		0
Commercial mortgage-backed agencies		26,007		53		103		25,957		0
Collateralized mortgage obligations		8,611		96		0		8,707		0
Obligations of states and political subdivisions		46,151		1,413		260		47,304		0
Collateralized debt obligations		37,117		1,155		12,933		25,339		6,143
Total available for sale	$	231,745	$	3,344	$	13,972	$	221,117	$	6,143
Held to Maturity:
U.S. government agencies	$	24,520	$	514	$	0	$	25,034	$	0
Residential mortgage-backed agencies		58,400		613		5		59,008		0
Commercial mortgage-backed agencies		16,425		312		0		16,737		0
Collateralized mortgage obligations		7,379		5		0		7,384		0
Obligations of states and political subdivisions		2,725		0		117		2,608		0
Total held to maturity	$	109,449	$	1,444	$	122	$	110,771	$	0

Proceeds from sales 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)	2015		2014		2015		2014
Proceeds	$	52,672	$	56,838	$	28,005	$	616
Realized gains		373		1,527		217		222
Realized losses		311		434		138		75

The following table shows the Corporation’s investment securities with gross unrealized losses and fair values at September 30, 2015 and December 31, 2014, 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
September 30, 2015
Available for Sale:
Residential mortgage-backed agencies	$	0	$	0	$	8,110	$	163
Commercial mortgage-backed agencies		5,733		26		0		0
Collateralized mortgage obligations		5,560		47		0		0
Obligations of states and political subdivisions		18,168		151		4,320		141
Collateralized debt obligations		0		0		22,976		7,339
Total available for sale	$	29,461	$	224	$	35,406	$	7,643

Held to Maturity:
Residential mortgage-backed agencies	$	7,838	$	83	$	0	$	0
Collateralized mortgage obligations		6,398		34		0		0
Total held to maturity	$	14,236	$	117	$	0	$	0


December 31, 2014
Available for Sale:
U.S. treasuries	$	27,096	$	11	$	0	$	0
U.S. government agencies		0	$	0	$	18,819	$	253
Residential mortgage-backed agencies		0		0		17,918		412
Commercial mortgage-backed agencies		12,298		97		973		6
Obligations of states and political subdivisions		0		0		8,981		260
Collateralized debt obligations		0		0		20,290		12,933
Total available for sale	$	39,394	$	108	$	66,981	$	13,864
Held to Maturity:
Residential mortgage-backed agencies		3,850		5		0		0
Obligations of states and political subdivisions		0		0		2,608		117
Total held to maturity	$	3,850	$	5	$	2,608	$	117

Management systematically evaluates securities for impairment on a quarterly basis. 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 September 30, 2015.

U.S. Government Agencies – Available for Sale – There were no U.S. government agencies in an unrealized loss position as of September 30, 2015.

Residential Mortgage-Backed Agencies – Available for Sale - There were no residential mortgage-backed agencies in an unrealized loss position for less than 12 months as of September 30, 2015. There was one residential mortgage-backed agency security in an unrealized loss position for 12 months or more. The security is of the highest investment grade and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis, which may be at maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at September 30, 2015.

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 September 30, 2015. The securities are of the highest investment grade and the Corporation does not intend to sell them, and it is not more 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 September 30, 2015. There were no commercial mortgage-backed agency securities in an unrealized loss position for 12 months or more.

Collateralized Mortgage Obligations – Available for Sale – There was one collateralized mortgage obligation in an unrealized loss position for less than 12 months as of September 30, 2015. The security is of the highest investment grade and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell it before recovery of its amortized cost basis, which may be at maturity. Accordingly, management does not consider this investment to be other-than-temporarily impaired at September 30, 2015. There were no collateralized mortgage obligations in an unrealized loss position for 12 months or more.

Obligations of State and Political Subdivisions – Available for Sale – There were 10 obligations of state and political subdivisions that have been in an unrealized loss position for less than 12 months at September 30, 2015. There was one security that has been in an unrealized loss position for 12 months or more. 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 September 30, 2015.

Collateralized Debt Obligations – Available for Sale - The $7.3 million in unrealized losses greater than 12 months at September 30, 2015 relates to 12 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 nine months of 2015. The unrealized losses on the remaining securities in the portfolio are primarily attributable to continued depression in market interest rates, 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 September 30, 2015.

Residential Mortgage-Backed Agencies – Held to Maturity - Five residential mortgage-backed agencies have been in an unrealized loss position for less than 12 months as of September 30, 2015. 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 September 30, 2015. There were no residential mortgage-backed agencies in an unrealized loss position for 12 months or more.

Commercial Mortgage-Backed Agencies – Held to Maturity - There were no commercial mortgage-backed agencies in the Held to Maturity portfolio as of September 30, 2015 in a loss position.

Collateralized Mortgage Obligations – Held to Maturity – There was one collateralized mortgage obligations in an unrealized loss position for less than 12 months as of September 30, 2015. 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 September 30, 2015. There were no collateralized mortgage obligations in an unrealized loss position for 12 months or more.

Obligations of State and Political Subdivisions – Held to Maturity – There were no obligations of state and political subdivisions in the Held to Maturity portfolio as of September 30, 2015 in a loss position.

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, 2015 and 2014:




	Nine months ended September 30,
(in thousands)	2015		2014
Balance of credit-related OTTI at January 1	$	12,583	$	13,422
Reduction for increases in cash flows expected to be collected		(479)		(501)
Balance of credit-related OTTI at September 30	$	12,104	$	12,921


	Three months ended September 30,
(in thousands)	2015		2014
Balance of credit-related OTTI at July 1	$	12,243	$	13,091
Reduction for increases in cash flows expected to be collected		(139)		(170)
Balance of credit-related OTTI at September 30	$	12,104	$	12,921

The amortized cost and estimated fair value of securities by contractual maturity at September 30, 2015 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, 2015
(in thousands)	Amortized Cost		Fair Value
Contractual Maturity
Available for sale:
Due after one year through five years	$	37,604	$	37,899
Due after five years through ten years		14,765		15,355
Due after ten years		65,428		61,749
		117,797		115,003

Residential mortgage-backed agencies	$	14,495	$	14,494
Commercial mortgage-backed agencies		45,162		45,805
Collateralized mortgage obligations		10,172		10,217
	$	187,626	$	185,519
Held to Maturity:
Due after five years through ten years	$	15,571	$	16,100
Due after ten years		11,712		12,073
		27,283		28,173

Residential mortgage-backed agencies	$	54,869	$	55,475
Commercial mortgage-backed agencies		18,148		18,713
Collateralized mortgage obligations		6,432		6,398
	$	106,732	$	108,759