INVESTMENT SECURITIES

The fair value of the available-for-sale investment portfolio reflected an unrealized gain of $4,012,000 at December 31, 2017 compared to an unrealized loss of $891,000 at December 31, 2016. The unrealized gain/(loss) recorded is net of $1,186,000 and $(375,000) in tax liabilities (benefits) as accumulated other comprehensive income within shareholders’ equity at December 31, 2017 and 2016, respectively.

The following tables set forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands):



	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale Securities
Debt Securities:
U.S. Government agencies	$	65,994	$	667	$	(74	)	$	66,587
Obligations of states and political subdivisions	136,955		6,240		(90		)	143,105
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	237,210		601		(2,903		)	234,908
Private label mortgage and asset backed securities	91,033		924		(1,276		)	90,681
Other equity securities	7,500		—		(77		)	7,423
	$	538,692	$	8,432	$	(4,420	)	$	542,704



	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale Securities
Debt Securities:
U.S. Government agencies	$	69,005	$	242	$	(277	)	$	68,970
Obligations of states and political subdivisions	288,543		6,109		(4,353		)	290,299
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	181,785		484		(4,048		)	178,221
Private label mortgage and asset backed securities	1,807		1,036		—			2,843
Other equity securities	7,500		—		(84		)	7,416
`	$	548,640	$	7,871	$	(8,762	)	$	547,749

During 2014, to better manage our interest rate risk, the Company transferred from available-for-sale to held-to-maturity selected municipal securities in our portfolio having a book value of approximately $31 million, a market value of approximately $32 million, and a net unrecognized gain of approximately $163,000. This transfer was completed after careful consideration of our intent and ability to hold these securities to maturity. During the first quarter of 2016, management sold certain investment securities of which management identified that five of the 13 securities sold were previously designated as held-to-maturity (HTM). Through an oversight during the portfolio restructuring analysis related to this transaction, management unintentionally sold these five HTM securities. The book value of the HTM securities sold was $8.5 million. The gain realized on the sale of the HTM securities was $696,000. As such, management was required to reclassify the remaining HTM securities with a fair value of $23.1 million to the AFS designation.

Proceeds and gross realized gains (losses) on investment securities for the years ended December 31, 2017, 2016, and 2015 are shown below (in thousands):



	Years Ended December 31,
	2017			2016			2015
Available-for-Sale Securities
Proceeds from sales or calls	$	228,405		$	167,163		$	93,167
Gross realized gains from sales or calls	$	4,701		$	2,223		$	1,715
Gross realized losses from sales or calls	$	(1,899	)	$	(999	)	$	(234	)
Held-to-Maturity Securities
Proceeds from sales and calls	$	—		$	9,257		$	810
Gross realized gains from sales or calls	$	—		$	696		$	14

Losses recognized in 2017, 2016, and 2015 were incurred in order to reposition the investment securities portfolio based on the current rate environment. The securities which were sold at a loss were acquired when the rate environment was not as volatile. The securities which were sold were primarily purchased several years ago to serve a purpose in the rate environment in which the securities were purchased. The Company addressed risks in the security portfolio by selling these securities and using the proceeds to purchase securities that fit with the Company’s current risk profile.

The provision (benefit) for income taxes includes $1,178,000, $515,000, and $615,000 income tax impact from the reclassification of unrealized net gains on available-for-sale securities to realized net gains on available-for-sale securities for the years ended December 31, 2017, 2016, and 2015, respectively.

Investment securities with unrealized losses at December 31, 2017 and 2016 are summarized and classified according to the duration of the loss period as follows (in thousands):



	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
Debt Securities:
U.S. Government agencies	$	8,201	$	(47	)	$	6,741	$	(27	)	$	14,942	$	(74	)
Obligations of states and political subdivisions	1,627		(3		)	3,357		(87		)	4,984		(90		)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	82,604		(822		)	64,488		(2,081		)	147,092		(2,903		)
Private label residential mortgage and asset backed securities	88,312		(1,276		)	—		—			88,312		(1,276		)
Other equity securities	7,423		(77		)	—		—			7,423		(77		)
	$	188,167	$	(2,225	)	$	74,586	$	(2,195	)	$	262,753	$	(4,420	)



	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
Debt Securities:
U.S. Government agencies	$	34,586	$	(198	)	$	10,438	$	(79	)	$	45,024	$	(277	)
Obligations of states and political subdivisions	122,522		(4,353		)	—		—			122,522		(4,353		)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	118,719		(3,866		)	7,666		(182		)	126,385		(4,048		)
Other equity securities	7,416		(84		)	—		—			7,416		(84		)
	$	283,243	$	(8,501	)	$	18,104	$	(261	)	$	301,347	$	(8,762	)

We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase.

As of December 31, 2017, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all investment securities with an unrealized loss at December 31, 2017, and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at December 31, 2017 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000. Management also analyzed any securities that may have been downgraded by credit rating agencies.

For those bonds that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds. For those bonds that were obligations of states and political subdivisions with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded during March 2016 that a $136,000 credit related impairment related to one security with a fair value of $2,995,000 and a pre-impairment amortized cost of $3,131,000 existed. The Company recorded an other-than-temporary impairment loss of $136,000 during the twelve months ended December 31, 2016. There were no OTTI losses recorded during the twelve months ended December 31, 2017.

U.S. Government Agencies - At December 31, 2017, the Company held 22 U.S. Government agency securities of which two were in a loss position for less than 12 months and two were in a loss position and had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in U.S. Government Agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2017.

Obligations of States and Political Subdivisions - At December 31, 2017, the Company held 91 obligations of states and political subdivision securities of which one was in a loss position for less than 12 months and one was in a loss position or had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2017.

U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations - At December 31, 2017, the Company held 150 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligation securities of which 42 were in a loss position for less than 12 months and 27 in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entity and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed or supported by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2017.

Private Label Mortgage and Asset Backed Securities - At December 31, 2017, the Company had a total of 30 PLMBS with a remaining principal balance of $91,033,000 and a gross and net unrealized loss of approximately $352,000. 17 of these securities had an unrealized loss at December 31, 2017. Ten of these PLMBS with a remaining principal balance of $1,359,000 had credit ratings below investment grade. The Company continues to monitor these securities for changes in credit ratings or other indications of credit deterioration.

The following table provides a rollforward for the years ended December 31, 2017 and 2016 of investment securities credit losses recorded in earnings (in thousands). The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods. Additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred on securities for which OTTI credit losses have been previously recognized.



	Years ended December 31,
	2017		2016
Beginning balance of credit losses recognized	$	874	$	747
Amounts related to credit loss for which an OTTI charge was not previously recognized	—		136
Realized losses for securities sold	—		(9		)
Ending balance of credit losses recognized	$	874	$	874

The amortized cost and estimated fair value of available-for-sale investment securities at December 31, 2017 and 2016 by contractual maturity are shown in the two tables below (in thousands). Expected maturities will 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.



	December 31, 2017				December 31, 2016
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Within one year	$	1,893	$	1,914	$	—	$	—
After one year through five years	7,149		7,316		15,145		15,484
After five years through ten years	22,043		22,696		35,667		35,614
After ten years	105,870		111,179		237,731		239,201
	136,955		143,105		288,543		290,299
Investment securities not due at a single maturity date:
U.S. Government agencies	65,994		66,587		69,005		68,970
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	237,210		234,908		181,785		178,221
Private label mortgage and asset backed securities	91,033		90,681		1,807		2,843
Other equity securities	7,500		7,423		7,500		7,416
	$	538,692	$	542,704	$	548,640	$	547,749

Investment securities with amortized costs totaling $88,930,000 and $86,418,000 and fair values totaling $90,541,000 and $88,903,000 were pledged as collateral for borrowing arrangements, public funds and for other purposes at December 31, 2017 and 2016, respectively.