4.INVESTMENT SECURITIES

Agency – Government-sponsored enterprise (GSE) and MBS - GSE residential

Agency – GSE and MBS – GSE residential securities consist of short- to long-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), FNMA, FHLB and Government National Mortgage Association (GNMA). These securities have interest rates that are fixed and adjustable, have varying short to long-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government.

Obligations of states and political subdivisions

The municipal securities are bank qualified or bank eligible, general obligation and revenue bonds rated as investment grade by various credit rating agencies and have fixed rates of interest with mid- to long-term maturities. Fair values of these securities are highly driven by interest rates. Management performs ongoing credit quality reviews on these issues.

Amortized cost and fair value of investment securities as of the period indicated are as follows:



			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
December 31, 2018
Available-for-sale debt securities:
Agency - GSE	$	5,926	$	8	$	(17)	$	5,917
Obligations of states and political subdivisions		51,603		1,259		(287)		52,575
MBS - GSE residential		126,667		266		(2,615)		124,318

Total available-for-sale debt securities	$	184,196	$	1,533	$	(2,919)	$	182,810



			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
December 31, 2017
Available-for-sale securities:
Agency - GSE	$	9,120	$	3	$	(24)	$	9,099
Obligations of states and political subdivisions		42,300		2,036		(30)		44,306
MBS - GSE residential		103,386		519		(753)		103,152

Total debt securities		154,806		2,558		(807)		156,557

Equity securities - financial services		294		534		-		828

Total available-for-sale securities	$	155,100	$	3,092	$	(807)	$	157,385

The Company adopted ASU 2016-01, Financial Instruments – Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities effective January 1, 2018. The Company sold all of its equity securities during the first half of 2018.

Some of the Company’s debt securities are pledged to secure trust funds, public deposits, repurchase agreements, other short-term borrowings, FHLB advances, Federal Reserve Bank of Philadelphia Discount Window borrowings and certain other deposits as required by law.

The amortized cost and fair value of debt securities at December 31, 2018 by contractual maturity are shown below:



	Amortized		Fair
(dollars in thousands)	cost		value
Available-for-sale securities:
Debt securities:
Due in one year or less	$	9,287	$	9,339
Due after one year through five years		7,958		8,067
Due after five years through ten years		3,582		3,592
Due after ten years		36,702		37,494

MBS - GSE residential		126,667		124,318

Total available-for-sale debt securities	$	184,196	$	182,810

Actual maturities will differ from contractual maturities because issuers and borrowers may have the right to call or repay obligations with or without call or prepayment penalty. Agency – GSE and municipal securities are included based on their original stated maturity. MBS – GSE residential, which are based on weighted-average lives and subject to monthly principal pay-downs, are listed in total. Most of the securities have fixed rates or have predetermined scheduled rate changes and many have call features that allow the issuer to call the security at par before its stated maturity without penalty.

Gross realized gains and losses from sales, determined using specific identification, for the periods indicated were as follows:


	December 31,
(dollars in thousands)	2018		2017		2016

Gross realized gain	$	114	$	-	$	16
Gross realized loss		(60)		(147)		(7)
Net gain	$	54	$	(147)	$	9

The following table presents the fair value and gross unrealized losses of investments aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of the period indicated:



	Less than 12 months				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	value		losses		value		losses		value		losses

December 31, 2018
Agency - GSE	$	3,937	$	(17)	$		$	-	$	3,937	$	(17)
Obligations of states and political subdivisions		6,123		(91)		8,447		(196)		14,570		(287)
MBS - GSE residential		25,612		(353)		74,864		(2,262)		100,476		(2,615)
Total	$	35,672	$	(461)	$	83,311	$	(2,458)	$	118,983	$	(2,919)
Number of securities		31				69				100

December 31, 2017
Agency - GSE	$	6,020	$	(14)	$	1,008	$	(10)	$	7,028	$	(24)
Obligations of states and political subdivisions		425		(1)		2,109		(29)		2,534		(30)
MBS - GSE residential		61,349		(437)		15,309		(316)		76,658		(753)
Total	$	67,794	$	(452)	$	18,426	$	(355)	$	86,220	$	(807)
Number of securities		45				14				59

The Company had 100 debt securities in an unrealized loss position at December 31, 2018, including four agency securities, sixty-eight mortgage-backed securities and twenty-eight municipal securities. The severity of these unrealized losses based on their underlying cost basis was as follows at December 31, 2018: 0.44% for agencies; 2.54% for total MBS-GSE; and 1.93% for municipals. Of these securities, fifty-four mortgage-backed securities and fifteen municipal securities had been in an unrealized loss position in excess of 12 months. The changes in the prices on these securities in an unrealized loss position in excess of 12 months are the result of interest rate movement and management believes they are temporary in nature.

Management believes the cause of the unrealized losses is related to changes in interest rates, instability in the capital markets or the limited trading activity due to illiquid conditions in the debt market and is not directly related to credit quality. Quarterly, management conducts a formal review of investment securities for the presence of other than temporary impairment (OTTI). The accounting guidance related to OTTI requires the Company to assess whether OTTI is present when the fair value of a debt security is less than its amortized cost as of the balance sheet date. Under those circumstances, OTTI is considered to have occurred if: (1) the entity has the intent to sell the security; (2) more likely than not the entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost. The accounting guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on securities not expected to be sold be recognized in other comprehensive income (OCI). Non-credit-related OTTI is based on other factors affecting market value, including illiquidity.

The Company’s OTTI evaluation process also follows the guidance set forth in topics related to debt securities. The guidance set forth in the pronouncements require the Company to take into consideration current market conditions, fair value in relationship to cost, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, the ability and intent to hold investments until a recovery of fair value which may be to maturity and other factors when evaluating for the existence of OTTI. The guidance requires that credit-related OTTI be recognized as a realized loss through earnings when there has been an adverse change in the holder’s expected cash flows such that the full amount (principal and interest) will probably not be received. This requirement is consistent with the impairment model in the guidance for accounting for debt securities.

For all debt securities, as of December 31, 2018, the Company applied the criteria provided in the recognition and presentation guidance related to OTTI. That is, management has no intent to sell the securities and nor any conditions were identified by management that, more likely than not, would require the Company to sell the securities before recovery of their amortized cost basis. The results indicated there was no presence of OTTI in the Company’s security portfolio. In addition, management believes the change in fair value is attributable to changes in interest rates.