Investment Securities

As of December 31, 2018, the investment portfolio was primarily comprised of debt securities, with a small portion of the portfolio invested in equity securities. The Company had only debt securities at December 31, 2017, as the equity portfolio was liquidated during 2017 to reduce the potential impact on earnings from market fluctuations resulting from new accounting rules in effect January 1, 2018.

See also Item (e), "Investments," and Item (d), "Restricted Cash and Investments," contained in Note 1, "Summary of Significant Accounting Policies," to the Company's consolidated financial statements, contained above, for further information regarding the accounting for the Company's investments portfolio and FHLB Stock. See Note 15, "Fair Value Measurements," to the Company's consolidated financial statements, contained below, for further information regarding the Company's fair value measurements for investment securities.

Debt Securities

The amortized cost and fair values of debt securities at December 31, 2018 and 2017 are summarized as follows:



	2018
(Dollars in thousands)	Amortized cost		Unrealized gains		Unrealized losses		Fair Value
Federal agency obligations⁽¹⁾	$	7,994	$	—	$	19	$	7,975
Residential federal agency MBS⁽¹⁾	174,701		633		2,608		172,726
Commercial federal agency MBS⁽¹⁾	93,800		609		430		93,979
Municipal securities	141,747		1,122		826		142,043
Corporate bonds	13,967		24		185		13,806
CDs⁽²⁾	950		—		6		944
Total debt securities, at fair value	$	433,159	$	2,388	$	4,074	$	431,473



	2017
(Dollars in thousands)	Amortized cost		Unrealized gains		Unrealized losses		Fair Value
Federal agency obligations⁽¹⁾	$	51,769	$	30	$	82	$	51,717
Residential federal agency MBS⁽¹⁾	141,054		71		971		140,154
Commercial federal agency MBS⁽¹⁾	66,777		9		286		66,500
Municipal securities	132,603		2,097		354		134,346
Corporate bonds	11,546		63		67		11,542
CDs⁽²⁾	950		—		3		947
Total debt securities, at fair value	$	404,699	$	2,270	$	1,763	$	405,206


(1)	These categories may include investments issued or guaranteed by government sponsored enterprises such as Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), Federal Farm Credit Bank ("FFCB"), or one of several Federal Home Loan Banks, as well as, investments guaranteed by Ginnie Mae ("GNMA"), a wholly-owned government entity.


(2)	CDs represent term deposits issued by banks that are subject to FDIC insurance and purchased on the open market.

Included in the residential and commercial federal agency MBS categories were collateralized mortgage obligations ("CMOs") issued by U.S. agencies with fair values totaling $242.8 million and $171.7 million at December 31, 2018 and 2017, respectively.

As of the dates reflected in the tables above, all of the Company's debt securities were classified as available-for-sale and carried at fair value.

Net unrealized appreciation and depreciation on debt securities available-for-sale, net of applicable income taxes, are reflected as a component of accumulated other comprehensive income (loss). The net unrealized gain or loss in the Company's debt security portfolio fluctuates as market interest rates rise and fall. Due to the predominantly fixed rate nature of this portfolio, as market rates fall the value of the portfolio rises, and as market rates rise, the value of the portfolio declines. The unrealized gains or losses on debt securities will also decline as the securities approach maturity. Unrealized losses on debt securities that are deemed OTTI are generally charged to earnings, as described further in Note 1, "Summary of Significant Accounting Policies," under Item (e), "Investments." Gains or losses will be recognized in the income statement if the securities are sold.

The following tables summarize debt securities having temporary impairment, due to the fair values having declined below the amortized costs of the individual investments, and the period that the investments have been temporarily impaired at December 31, 2018 and 2017:



	2018
	Less than 12 months				12 months or longer				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		# of holdings
Federal agency obligations	$	997	$	1	$	6,978	$	18	$	7,975	$	19	3
Residential federal agency MBS	26,147		597		81,158		2,011		107,305		2,608		25
Commercial federal agency MBS	3,258		11		18,717		419		21,975		430		9
Municipal securities	15,036		108		41,265		718		56,301		826		83
Corporate bonds	5,277		36		5,653		149		10,930		185		63
CDs	—		—		944		6		944		6		4
Total temporarily impaired debt securities	$	50,715	$	753	$	154,715	$	3,321	$	205,430	$	4,074	187



	2017
	Less than 12 months				12 months or longer				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		# of holdings
Federal agency obligations	$	34,344	$	82	$	—	$	—	$	34,344	$	82	9
Residential federal agency MBS	109,308		882		2,015		89		111,323		971		30
Commercial federal agency MBS	35,859		205		5,190		81		41,049		286		11
Municipal securities	16,983		129		10,210		225		27,193		354		50
Corporate bonds	2,802		23		2,913		44		5,715		67		33
CDs	947		3		—		—		947		3		4
Total temporarily impaired debt securities	$	200,243	$	1,324	$	20,328	$	439	$	220,571	$	1,763	137

During the years ended December 31, 2018 and 2017, the Company did not record any fair value impairment charges (Other than temporary impairment or "OTTI") on its investments in debt securities. At December 31, 2018, management did not consider any debt securities to have OTTI and attributes the unrealized losses at year end to the impact of increases in market yields at December 31, 2018 compared to the yields at the time the investments were purchased by the Company, partially offset by a restructuring of the debt security portfolio in the fourth quarter of 2018, which resulted in sales of approximately 27% of the debt security portfolio and reinvestment at then current market rates. Management regularly reviews the portfolio for debt securities with unrealized losses that are other-than-temporarily impaired.

The process for assessing investments for OTTI may vary depending on the type of debt security. In assessing the Company's investments in federal agency mortgage-backed securities and federal agency obligations, the contractual cash flows of these investments are guaranteed by the respective government sponsored enterprise (FHLMC, FNMA, FFCB, or FHLB) or wholly-owned government corporation (GNMA). Accordingly, it is expected that the securities would not be settled at a price less than the par value of the Company's investments. Management's assessment of other debt securities within the portfolio includes reviews of market pricing, ongoing credit quality evaluations, assessment of the investments' materiality, and duration of the investments' unrealized loss position. In addition, the Company utilizes an outside registered investment adviser to manage the corporate and municipal bond portfolios, within prescribed guidelines set by management, and to provide assistance in assessing the credit risk of those portfolios. At December 31, 2018, the Company's corporate and municipal bond portfolios did not contain any securities below investment grade, as reported by major credit rating agencies.

As noted in the table above, a small portion of the portfolio was invested in CDs and was also in an unrealized loss position at December 31, 2018, due to market rates. The unrealized loss was not considered to be material and the securities are expected to mature at par value.

The contractual maturity distribution at December 31, 2018 of total debt securities was as follows:



(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	13,678	$	13,662
Due after one, but within five years	54,873		55,012
Due after five, but within ten years	160,316		160,735
Due after ten years	204,292		202,064
Total debt securities	$	433,159	$	431,473

Scheduled contractual maturities shown above may not reflect the actual maturities of the investments. The actual MBS/CMO cash flows likely will be faster than presented above due to prepayments and amortization. Similarly, included in the table above are callable securities, comprised of municipal securities and corporate bonds, with a fair value of $79.1 million, which can be redeemed by the issuers prior to the maturity presented above. Management considers these factors when evaluating the interest-rate risk in the Company's asset-liability management program.

From time to time the Company may pledge debt securities as collateral for deposit account balances of municipal customers, and for borrowing capacity with the FHLB and the FRB. The fair value of debt securities pledged as collateral for these purposes was $424.7 million and $383.1 million at December 31, 2018 and 2017, respectively.

Sales of debt securities, including pending trades based on trade date, if applicable, for the years ended December 31, 2018, 2017, and 2016 are summarized as follows:



(Dollars in thousands)	2018			2017			2016
Amortized cost of debt securities sold⁽¹⁾	$	122,652		$	133,812		$	2,245
Gross realized gains on sales	4			38			53
Gross realized losses on sales	(2,975		)	(2,588		)	(1		)
Total proceeds from sales of debt securities	$	119,681		$	131,262		$	2,297

(1) Amortized cost of investments sold is determined on a specific identification basis.

Tax-exempt interest earned on the municipal securities portfolio was $4.5 million for the year ended December 31, 2018, $4.0 million for the year ended December 31, 2017, and $3.6 million for the year ended December 31, 2016.

The average balance of tax-exempt investments was $119.2 million and $111.6 million for the years ended December 31, 2018 and December 31, 2017, respectively.

Equity Securities

As of December 31, 2018, the Company held equity securities with a fair value of $1.4 million, compared to no equity securities held at December 31, 2017. At December 31, 2018, the equity portfolio consisted primarily of investments in a diversified group of mutual funds, with a portion of the portfolio invested in individual common stock of entities in the financial services industry.

In the first quarter of 2018, the Company adopted ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," and as a result, changes in fair value of the equity securities are recognized in the Company's Consolidated Statement of Income in the "Other income" line item. For the year ended December 31, 2018, the Company's net fair value loss on equity securities was $204 thousand.

There were no sales on equity securities in the year ended December 31, 2018, however $21 thousand in capital gains distributions were realized from mutual funds. For the year ended December 31, 2017, the amortized cost of equity securities sold based on trade date, if applicable, amounted to $10.9 million, resulting in net realized gains of $3.3 million. For the year ended December 31, 2016, the amortized cost of equity securities sold based on trade date, if applicable, amounted to $2.1 million, resulting in net realized gains of $750 thousand. The amortized cost of equity securities sold is determined on a specific identification basis.