Note 4: I nvestment Securities

The amortized costs and approximate fair values, together with gross unrealized gains and losses on securities, are as follows:



	December 31, 2017
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for Sale Securities
Mortgage-backed securities	$	68,335	$	225	$	(762)	$	67,798
Collateralized mortgage obligations		88,488		58		(1,296)		87,250
Municipal obligations		107,060		3,709		(274)		110,495
Corporate obligations		12,966		69		(1,200)		11,835
Total investment securities	$	276,849	$	4,061	$	(3,532)	$	277,378



	December 31, 2016
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for Sale Securities
Mortgage-backed securities	$	92,871	$	802	$	(1,156)	$	92,517
Collateralized mortgage obligations		68,621		269		(843)		68,047
Municipal obligations		77,474		1,716		(1,508)		77,682
Corporate obligations		12,822		78		(1,233)		11,667
Total investment securities	$	251,788	$	2,865	$	(4,740)	$	249,913

All mortgage-backed securities and collateralized-mortgage obligations held by the Company as of December 31, 2017 were in government-sponsored and federal agency securities.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2017 and 2016 was

$142.9 million and $143.8 million, which is approximately 51.5% and 57.6% of the Company’s investment portfolio at those dates. While the federal funds rate increased fifty basis points in 2017, the longer end of the yield curve has remained relatively flat allowing for minimal change in the fair value of securities.

Based on our evaluation of available evidence, including recent changes in market interest rates, management believes the fair value for the securities at less than historical cost for the periods presented are temporary.

Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

During 2017 and 2016, the Bank determined that its security holdings had no other-than-temporary impairment.

The following tables show the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2017 and 2016:



	December 31, 2017
	Less than 12 Months				12 Months or More				Total
		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available for Sale Securities
Mortgage-backed securities	$	21,975	$	(127)	$	27,675	$	(635)	$	49,650	$	(762)
Collateralized mortgage obligations		47,153		(400)		28,887		(896)		76,040		(1,296)
Municipal obligations		4,479		(64)		10,041		(210)		14,520		(274)
Corporate obligations		-		-		2,722		(1,200)		2,722		(1,200)
Total temporarily impaired securities	$	73,607	$	(591)	$	69,325	$	(2,941)	$	142,932	$	(3,532)



	December 31, 2016
	Less than 12 Months				12 Months or More				Total
		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available for Sale Securities
Mortgage-backed securities	$	58,056	$	(1,156)	$	-	$	-	$	58,056	$	(1,156)
Collateralized mortgage obligations		41,769		(683)		4,688		(160)	$	46,457	$	(843)
Municipal obligations		31,907		(1,507)		337		(1)		32,244		(1,508)
Corporate obligations		-		-		7,076		(1,233)		7,076		(1,233)
Total temporarily impaired securities	$	131,732	$	(3,346)	$	12,101	$	(1,394)	$	143,833	$	(4,740)

Mortgage-Backed Securities (MBS) and Collateralized Mortgage Obligations (CMO)

The unrealized losses on the Company’s investment in CMOs and MBSs were caused by interest rate changes and illiquidity. The Company expects to recover the amortized cost basis over the term of the securities. Because (1) the decline in market value is attributable to changes in interest rates and illiquidity and not credit quality, (2) the Company does not intend to sell the investments and (3) it is more likely than not the Company will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2017.

Municipal Obligations

The unrealized losses on the Company’s investments in securities of state and political subdivisions were caused by changes in interest rates and illiquidity. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the par value of the investments. The Company does not intend to sell the investment and it is not more likely than not that the Company will not be required to sell these investments. The Company does not consider any of these investment securities to be other-than-temporarily impaired at December 31, 2017.

Corporate Obligations

The Company’s unrealized loss on investments in corporate obligations primarily relates to investments in pooled trust preferred securities. The unrealized losses were primarily caused by (1) a decrease in performance and regulatory capital resulting from exposure to subprime mortgages and (2) a sector downgrade by several industry analysts.

Other-Than-Temporary Impairment

Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or whether it will be evaluated for impairment under the accounting guidance for investments in debt and equity securities.

The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt securities within the scope of the guidance for investments in debt and equity securities. For securities that are a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model. For securities that are not a beneficial interest in securitized financial assets, the Company uses debt and equity securities impairment model.

The Company conducts periodic reviews to identify and evaluate each investment security to determine whether an other-than-temporary impairment has occurred. Economic models are used to determine whether an other-than-temporary impairment has occurred on these securities. While all securities are considered, the securities primarily impacted by other-than-temporary impairment testing are private-label mortgage-backed securities and trust preferred securities.

The Bank’s trust preferred securities valuation was prepared by an independent third party. Their approach to determining fair value involved several steps including:

Detailed credit and structural evaluation of each piece of collateral in the trust preferred securities;

Collateral performance projections for each piece of collateral in the trust preferred security;

Terms of the trust preferred structure, as laid out in the indenture; and

Discounted cash flow modeling.

The Company uses market-based yield indicators as a baseline for determining appropriate discount rates, and then adjusts the resulting discount rates on the basis of its credit and structural analysis of specific trust preferred securities. The primary focus is on the returns a fixed income investor would require in order to allocate capital on a risk adjusted basis. There is currently no active market for pooled trust preferred securities; however, the Company looks principally to market yields for stand-alone trust preferred securities issued by banks, thrifts and insurance companies for which there is an active and liquid market. The next step is to make a series of adjustments to reflect the differences that exist between these products (both credit and structural) and, most importantly, to reflect idiosyncratic credit performance differences (both actual and projected) between these products and the underlying collateral in the specific trust preferred security. Importantly, as part of the analysis described above, MutualFirst considers the fact that structured instruments frequently exhibit leverage not present in stand-alone instruments, and makes adjustments as necessary to reflect this additional risk.

The default and recovery probabilities for each piece of collateral were formed based on the evaluation of the collateral credit and a review of historical industry default data and current/near-term operating conditions. For collateral that has already defaulted, the Company assumed no recovery. For collateral that was in deferral, the Company assumed a recovery of 10% of par for banks, thrifts or other depository institutions and 15% of par for insurance companies. Although the Company conservatively assumed that the majority of the deferring collateral continues to defer and eventually defaults, we also recognize there is a possibility that some deferring collateral may become current at some point in the future.

Credit Losses Recognized on Investments

Certain debt securities have experienced fair value deterioration due to credit losses, as well as due to other market factors, but are not otherwise other-than-temporarily impaired.

The amortized cost and fair value of securities available for sale at December 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Available for Sale
Description of Securities	Amortized Cost		Fair Value
Security obligations due
Within one year	$	160	$	158
One to five years		5,001		5,034
Five to ten years		24,044		25,175
After ten years		90,821		91,963
		120,026		122,330
Mortgage-backed securities		68,335		67,798
Collateralized mortgage obligations		88,488		87,250
Totals	$	276,849	$	277,378

The Company did not have securities pledged as collateral, to secure public deposits or for other purposes as of December 31, 2017 or 2016.

Proceeds from sales of securities available for sale during 2017, 2016 and 2015 were $34.6 million, $57.0 million and $23.1 million, respectively. Gross gains of $776,000, $1.1 million and $436,000 in 2017, 2016 and 2015 were recognized on those sales. Gross losses of $68,000 and $71,000 in were recognized on those sales 2017 and 2016, respectively. There were no gross losses recognized on the sales of securities in 2015.