Note 5. Investments

The amortized cost and estimated fair value of investment securities available for sale as of September 30, 2015 and December 31, 2014 are as follows:



(Dollars in thousands)			Gross		Gross
	Amortized		unrealized		unrealized		Fair
September 30, 2015	cost		gains		losses		value
Equity securities	$	164	$	69	$	-	$	233
U.S. Government and Agency securities		15,820		243		(24)		16,039
Municipal securities		69,537		1,700		(246)		70,991
Trust preferred securities		5,953		-		(515)		5,438
Agency mortgage-backed securities		74,408		1,077		(154)		75,331
Private-label mortgage-backed securities		1,397		49		-		1,446
Asset-backed securities		40		-		(2)		38
	$	167,319	$	3,138	$	(941)	$	169,516



(Dollars in thousands)			Gross		Gross
	Amortized		unrealized		unrealized		Fair
December 31, 2014	cost		gains		losses		value
Equity securities	$	274	$	779	$	-	$	1,053
U.S. Government and Agency securities		15,854		173		(64)		15,963
Municipal securities		66,832		1,826		(292)		68,366
Trust preferred securities		5,940		-		(803)		5,137
Agency mortgage-backed securities		78,779		932		(217)		79,494
Private-label mortgage-backed securities		1,675		35		(15)		1,695
Asset-backed securities		45		-		(2)		43
	$	169,399	$	3,745	$	(1,393)	$	171,751

At September 30, 2015 and December 31, 2014, the fair value of investment securities pledged to secure public funds, trust balances, deposit and other obligations totaled $79.6 million and $91.6 million, respectively.

The amortized cost and estimated fair value of debt securities at September 30, 2015, by contractual maturity are shown below. Actual maturities may differ from contractual maturities because of prepayment or call options embedded in the securities.





(Dollars in thousands)	Amortized cost		Fair value
Due in one year or less	$	5,634	$	5,677
Due after one year through five years		11,690		11,959
Due after five years through ten years		29,254		30,048
Due after ten years		44,772		44,822
		91,350		92,506
Mortgage-backed securities		75,805		76,777
	$	167,155	$	169,283

The following table provides additional detail about trust preferred securities as of September 30, 2015:

Trust Preferred Securities


(Dollars in thousands)
Deal Name	Maturity	Single Issuer or Pooled	Class	Amortized Cost		Fair Value		Gross Unrealized Gain (Loss)		Lowest Credit Rating Assigned

BankAmerica Cap III	1/15/2027	Single	Preferred Stock	$	964	$	898	$	(66)	BB+
Wachovia Cap Trust II	1/15/2027	Single	Preferred Stock		278		257		(21)	BBB
Huntington Cap Trust	2/1/2027	Single	Preferred Stock		942		840		(102)	BB
Corestates Captl Tr II	2/15/2027	Single	Preferred Stock		938		856		(82)	BBB+
Huntington Cap Trust II	6/15/2028	Single	Preferred Stock		893		815		(78)	BB+
Chase Cap VI JPM	8/1/2028	Single	Preferred Stock		963		850		(113)	BBB-
Fleet Cap Tr V	12/18/2028	Single	Preferred Stock		975		922		(53)	BB+
				$	5,953	$	5,438	$	(515)

The following table provides additional detail about private label mortgage-backed securities as of September 30, 2015:

Private Label Mortgage Backed Securities


(Dollars in thousands)						Gross					Cumulative
	Origination	Amortized		Fair		Unrealized		Collateral	Lowest Credit	Credit	OTTI
Description	Date	Cost		Value		Gain (Loss)		Type	Rating Assigned	Support %	Charges
RALI 2004-QS4 A7	3/1/2004	$	17	$	17	$	-	ALT A	BBB+	11.85	$	-
MALT 2004-6 7A1	6/1/2004		362		370		8	ALT A	CCC	14.74		-
RALI 2005-QS2 A1	2/1/2005		215		229		14	ALT A	CC	5.35		10
RALI 2006-QS4 A2	4/1/2006		486		503		17	ALT A	D	-		313
GSR 2006-5F 2A1	5/1/2006		63		71		8	Prime	D	-		15
RALI 2006-QS8 A1	7/28/2006		254		256		2	ALT A	D	-		217
		$	1,397	$	1,446	$	49				$	555

Impairment:

The investment portfolio contained 72 securities with $45.6 million of temporarily impaired fair value and $941 thousand in unrealized losses at September 30, 2015. The total unrealized loss position has decreased from $1.4 million at year-end 2014.

For securities with an unrealized loss, Management applies a systematic methodology in order to perform an assessment of the potential for other-than-temporary impairment. In the case of debt securities, investments considered for other-than-temporary impairment: (1) had a specified maturity or repricing date; (2) were generally expected to be redeemed at par, and (3) were expected to achieve a recovery in market value within a reasonable period of time. In addition, the Bank considers whether it intends to sell these securities or whether it will be forced to sell these securities before the earlier of amortized cost recovery or maturity. Equity securities are assessed for other-than-temporary impairment based on the length of time of impairment, dollar amount of the impairment and general market and financial conditions relating to specific issues. The impairment identified on debt and equity securities and subject to assessment at September 30, 2015, was deemed to be temporary and required no further adjustments to the financial statements, unless otherwise noted.

The following table reflects temporary impairment in the investment portfolio (excluding restricted stock), aggregated by investment category, length of time that individual securities have been in a continuous unrealized loss position and the number of securities in each category as of September 30, 2015 and December 31, 2014:



	September 30, 2015
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count

U.S. Government and Agency securities	$	486	$	(1)	2	$	4,435	$	(23)	10	$	4,921	$	(24)	12
Municipal securities		9,802		(111)	15		4,845		(135)	7		14,647		(246)	22
Trust preferred securities		-		-	-		5,438		(515)	7		5,438		(515)	7
Agency mortgage-backed securities		15,603		(74)	22		4,989		(80)	8		20,592		(154)	30
Asset-backed securities		-		-	-		5		(2)	1		5		(2)	1
Total temporarily impaired securities	$	25,891	$	(186)	39	$	19,712	$	(755)	33	$	45,603	$	(941)	72



	December 31, 2014
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count

U.S. Government and Agency securities		4		-	1		7,207		(64)	14		7,211		(64)	15
Municipal securities		5,651		(33)	9		9,441		(259)	14		15,092		(292)	23
Trust preferred securities		-		-	-		5,137		(803)	7		5,137		(803)	7
Agency mortgage-backed securities		9,304		(60)	13		8,199		(157)	10		17,503		(217)	23
Private-label mortgage-backed securities		-		-	-		540		(15)	1		540		(15)	1
Asset-backed securities		-		-	-		5		(2)	1		5		(2)	1
Total temporarily impaired securities	$	14,959	$	(93)	23	$	30,529	$	(1,300)	47	$	45,488	$	(1,393)	70

The unrealized loss in the municipal bond portfolio decreased to $246 thousand from $604 thousand at June 30, 2015 as market prices improved during the quarter. The quarter end unrealized loss position in this sector is essentially unchanged from year-end 2014. There are 22 securities in this portfolio with an unrealized loss and the loss in this portfolio is deemed to be non-credit related and no other-than-temporary impairment charges have been recorded.

The trust preferred portfolio contains 7 securities with a fair value of $5.4 million and an unrealized loss of $515 thousand. The trust-preferred securities held by the Bank are single entity issues, not pooled trust preferred securities. Therefore, the impairment review of these securities is based only on the issuer and the security cannot be impaired by the performance of other issuers as if it was a pooled trust-preferred bond. All of the Bank’s trust preferred securities are single issue, variable rate notes with long maturities (2027 – 2028). None of these bonds have suspended or missed a dividend payment. At September 30, 2015, the Bank believes it will be able to collect all interest and principal due on these bonds and no other-than-temporary-impairment charges were recorded.

The private-label mortgage backed securities (PLMBS) sector shows a net unrealized gain $49 thousand with all bonds showing an unrealized gain. Even though there is no unrealized loss, due to the nature of these bonds, they are evaluated closely. These bonds were all rated AAA at time of purchase, but have since experienced rating declines. Some have experienced increased delinquencies and defaults, while others have seen the credit support increase as the bonds paid-down. The Bank monitors the performance of the PLMBS investments on a regular basis and reviews delinquencies, default rates, credit support levels and various cash flow stress test scenarios. In determining the credit related loss, Management considers all principal past due 60 days or more as a loss. If additional principal moves beyond 60 days past due, it will also be considered a loss. As a result of the analysis on PLMBS it was determined that a $20 thousand impairment charge was required at the end of the first quarter; however, no additional impairment charge was required at September 30, 2015. It is primarily a result of the cumulative OTTI charges that these bonds are showing an unrealized gain at quarter end. The Bank has recorded $555 thousand of cumulative impairment charges on this portfolio. Management continues to monitor these securities and it is possible that additional write-downs may occur if current loss trends continue. The Bank is currently participating in a class-action lawsuit against one PLMBS servicer that centers on defective warranties and representations made as part of the underwriting process. The following table represents the cumulative credit losses on securities recognized in earnings as of September 30, 2015 and 2014.



(Dollars in thousands)	Nine Months Ended
	2015		2014
Balance of cumulative credit-related OTTI at January 1	$	535	$	515
Additions for credit-related OTTI not previously recognized		20		-
Additional increases for credit-related OTTI previously recognized when there is no intent to sell
and no requirement to sell before recovery of amortized cost basis		-		-
Decreases for previously recognized credit-related OTTI because there was an intent to sell		-		-
Reduction for increases in cash flows expected to be collected		-		-
Balance of credit-related OTTI at September 30	$	555	$	515

The composition of the net realized securities gains (losses) for the three and nine month periods ended are as follows:


	For the Three Months Ended				For the Nine Months Ended
	September 30				September 30
(Dollars in thousands)	2015		2014		2015		2014
Gross gains realized	$	-	$	-	$	8	$	221
Gross losses realized		-		-		-		-
Conversion gain		-		-		728		-
Net gains realized	$	-	$	-	$	736	$	221

The Bank held $855 thousand of restricted stock at September 30, 2015. Except for $30 thousand, this investment represents stock in FHLB Pittsburgh. The Bank is required to hold this stock to be a member of FHLB and it is carried at cost of $100 per share. The level of FHLB stock held is determined by FHLB and is comprised of a minimum membership amount plus a variable activity amount. FHLB stock is evaluated for impairment primarily based on an assessment of the ultimate recoverability of its cost. As a government sponsored entity, FHLB has the ability to raise funding through the U.S. Treasury that can be used to support its operations. There is not a public market for FHLB stock and the benefits of FHLB membership (e.g., liquidity and low cost funding) add value to the stock beyond purely financial measures. Management intends to remain a member of the FHLB and believes that it will be able to fully recover the cost basis of this investment.