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, 2017 and December 31, 2016:







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



The following table shows the Corporation’s investment securities with gross unrealized losses and fair values at September 30, 2017 and December 31, 2016, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:









Management systematically evaluates securities for impairment on a quarterly basis.  Based upon application of accounting guidance for subsequent measurement in ASC Topic 320 (ASC Section 320-10-35), 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, 2017.



U.S. Government Agencies – Available for Sale – There was one U.S. government agency in an unrealized loss position for less than 12 months as of September 30, 2017.  There were four U.S. government agency investments in an unrealized loss position for more than 12 months as of September 30, 2017.   The securities are of investment grade and the Corporation does not intend to sell them, and it is not more than 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, 2017.



Commercial Mortgage-Backed Agencies – Available for Sale – There were five commercial mortgage-backed agencies in an unrealized loss position for less than 12 months as of September 30, 2017.  There were three commercial mortgage-backed agencies in an unrealized loss position for more than 12 months as of September 30, 2017. 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, 2017.    



Collateralized Mortgage Obligations – Available for Sale – There were six collateralized mortgage obligations in an unrealized loss position for less than 12 months as of September 30, 2017.  There were two collateralized mortgage obligations in an unrealized loss position for more than 12 months as of September 30, 2017.  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, 2017. 



Obligations of State and Political Subdivisions – Available for Sale – There were two obligations of state and political subdivisions that have been in an unrealized loss position for less than 12 months and two securities that have been in an unrealized loss position for 12 months or more at September 30, 2017.  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, 2017.



Collateralized Debt Obligations – Available for Sale - The $5.0 million in unrealized losses greater than 12 months at September 30, 2017 relates to 10 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 2017.  The unrealized losses on the remaining securities in the portfolio are primarily attributable to continued depression in 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, 2017. 



Residential Mortgage-Backed Agencies – Held to Maturity - Eleven residential mortgage-backed agencies have been in an unrealized loss position for less than 12 months as of September 30, 2017.  There were six mortgage-backed agency investments in an unrealized loss position for more than 12 months as of September 30, 2017.  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, 2017. 



Commercial Mortgage-Backed Agencies – Held to Maturity - There were no collateralized mortgage-backed agency investments in an unrealized loss position as of September 30, 2017.



Collateralized Mortgage Obligations – Held to Maturity – There were no collateralized mortgage obligations in an unrealized loss position for less than 12 months as of September 30, 2017.  There was one collateralized mortgage obligation in a loss position for more than 12 months as of September 30, 2017.  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, 2017. 



Obligations of State and Political Subdivisions – Held to Maturity –There were no obligations of state and political subdivisions that has been in an unrealized loss for less than 12 months.  No obligations of state and political subdivisions securities have been in an unrealized loss position for more than 12 months as of September 30, 2017. 



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, 2017 and 2016:





The amortized cost and estimated fair value of securities by contractual maturity at September 30, 2017 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.