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 June 30, 2016 and December 31, 2015:



(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI
June 30, 2016
Available for Sale:
U.S. government agencies	$	25,050	$	217		0	$	25,267	$	0
Commercial mortgage-backed agencies		57,091		1,331		0		58,422		0
Collateralized mortgage obligations		11,205		93		0		11,298		0
Obligations of states and political subdivisions		31,045		1,029		64		32,010		0
Collateralized debt obligations		25,402		0		5,172		20,230		(471)
Total available for sale	$	149,793	$	2,670	$	5,236	$	147,227	$	(471)

Held to Maturity:
U.S. government agencies	$	17,744	$	1,327	$	0	$	19,071	$	0
Residential mortgage-backed agencies		54,065		1,262		26		55,301		0
Commercial mortgage-backed agencies		17,938		1,140		0		19,078		0
Collateralized mortgage obligations		5,478		19		0		5,497		0
Obligations of states and political subdivisions		2,505		506		0		3,011		0
Total held to maturity	$	97,730	$	4,254	$	26	$	101,958	$	0

December 31, 2015
Available for Sale:
U.S. government agencies		34,079		14		129		33,964		0
Residential mortgage-backed agencies		14,285		105		220		14,170		0
Commercial mortgage-backed agencies		43,780		52		196		43,636		0
Collateralized mortgage obligations		9,690		43		123		9,610		0
Obligations of states and political subdivisions		45,949		915		223		46,641		0
Collateralized debt obligations		25,766		0		3,555		22,211		(799)
Total available for sale	$	173,549	$	1,129	$	4,446	$	170,232	$	(799)
Held to Maturity:
U.S. government agencies	$	24,704	$	634	$	0	$	25,338	$	0
Residential mortgage-backed agencies		53,734		276		98		53,912		0
Commercial mortgage-backed agencies		18,078		171		17		18,232		0
Collateralized mortgage obligations		6,419		0		122		6,297		0
Obligations of states and political subdivisions		2,625		338		0		2,963		0
Total held to maturity	$	105,560	$	1,419	$	237	$	106,742	$	0

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


	Six months ended				Three months ended
	June 30,				June 30,
(in thousands)	2016		2015		2016		2015
Proceeds	$	25,591	$	24,667	$	14,820	$	9,578
Realized gains		415		156		138		140
Realized losses		188		173		117		60

The following table shows the Corporation’s investment securities with gross unrealized losses and fair values at June 30, 2016 and December 31, 2015, 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
June 30, 2016
Available for Sale:
Obligations of states and political subdivisions		267		1		3,596		63
Collateralized debt obligations		12,886		1,289		7,344		3,883
Total available for sale	$	13,153	$	1,290	$	10,940	$	3,946

Held to Maturity:
Residential mortgage-backed agencies	$	3,505	$	21	$	1,919	$	5
Total held to maturity	$	3,505	$	21	$	1,919	$	5


December 31, 2015
Available for Sale:
U.S. government agencies		23,929	$	129	$	0	$	0
Residential mortgage-backed agencies		0		0		8,051		220
Commercial mortgage-backed agencies		25,858		196		0		0
Collateralized mortgage obligations		5,299		123		0		0
Obligations of states and political subdivisions		11,537		104		4,048		119
Collateralized debt obligations		0		0		7,688		3,555
Total available for sale	$	66,623	$	552	$	19,787	$	3,894
Held to Maturity:
Residential mortgage-backed agencies		11,085		98		0		0
Commercial mortgage-backed agencies		9,518		17		0		0
Collateralized mortgage obligations		6,297		122		0		0
Total held to maturity	$	26,900	$	237	$	0	$	0

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 June 30, 2016.

U.S. Government Agencies – Available for Sale – There were no U.S. government agencies in an unrealized loss position as of June 30, 2016.

Commercial Mortgage-Backed Agencies – Available for Sale – There were no commercial mortgage-backed agency in an unrealized loss position as of June 30, 2016.

Collateralized Mortgage Obligations – Available for Sale – There were no collateralized mortgage obligations in an unrealized loss position as of June 30, 2016.

Obligations of State and Political Subdivisions – Available for Sale – There was one obligation of state and political subdivisions that has been in an unrealized loss position for less than 12 months and one security that has been in an unrealized loss position for 12 months or more at June 30, 2016. 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 June 30, 2016.

Collateralized Debt Obligations – Available for Sale - The $3.9 million in unrealized losses greater than 12 months at June 30, 2016 relates to four pooled trust preferred securities that are included in the CDO portfolio. There were eight pooled trust preferred securities that have been in an unrealized loss position for less than 12 months at June 30, 2016. The eight investments in an unrealized loss for less than 12 months at June 30, 2016 are being held at First United Corporation. These investments had previously been held at the Bank, but, they were transferred to First United Corporation at their fair value during the fourth quarter of 2015. The transfer resulted in a loss of $3.5 million being recognized through earnings. 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 six months of 2016. 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 June 30, 2016.

Residential Mortgage-Backed Agencies – Held to Maturity - Two residential mortgage-backed agencies have been in an unrealized loss position for less than 12 months as of June 30, 2016. There were three residential mortgage-backed agencies in an unrealized loss position for 12 months or more. 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 June 30, 2016.

Commercial Mortgage-Backed Agencies – Held to Maturity - There were no commercial mortgage-backed agencies in the Held to Maturity portfolio as of June 30, 2016 in a loss position.

Collateralized Mortgage Obligations – Held to Maturity – There were no collateralized mortgage obligations in the Held to Maturity portfolio as of June 30, 2016 in a loss position.

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 June 30, 2016 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 six- and three-month periods ended June 30, 2016 and 2015:




	Six months ended June 30,
(in thousands)	2016		2015
Balance of credit-related OTTI at January 1	$	3,133	$	12,583
Decreases for previously recognized credit-related OTTI due to transfer		(3,045)		0
Additions for decreases in cash flows expected to be collected		33		0
Reduction for increases in cash flows expected to be collected		(5)		(340)
Balance of credit-related OTTI at June 30	$	116	$	12,243


	Three months ended June 30,
(in thousands)	2016		2015
Balance of credit-related OTTI at April 1	$	3,097	$	12,416
Decreases for previously recognized credit-related OTTI due to transfer		(3,045)		0
Additions for decreases in cash flows expected to be collected		66		0
Reduction for increases in cash flows expected to be collected		(2)		(173)
Balance of credit-related OTTI at June 30	$	116	$	12,243

The amortized cost and estimated fair value of securities by contractual maturity at June 30, 2016 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.


	June 30, 2016
(in thousands)	Amortized Cost		Fair Value
Contractual Maturity
Available for sale:
Due in one year or less	$	5,998	$	6,018
Due after one year through five years		19,921		20,134
Due after five years through ten years		6,201		6,390
Due after ten years		49,377		44,965
		81,497		77,507
Commercial mortgage-backed agencies		57,091		58,422
Collateralized mortgage obligations		11,205		11,298
Total available for sale	$	149,793	$	147,227
Held to Maturity:
Due after five years through ten years	$	15,670	$	16,799
Due after ten years		4,579		5,283
		20,249		22,082
Residential mortgage-backed agencies	$	54,065		55,301
Commercial mortgage-backed agencies		17,938		19,078
Collateralized mortgage obligations		5,478		5,497
Total held to maturity	$	97,730	$	101,958