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Investments
 12 Months Ended
Dec. 31, 2017
Investments [Abstract]  
Investments

Note 4. Investments



The investment portfolio serves as a mechanism to invest funds if funding sources out pace lending activity, to provide liquidity for lending and operations, and provide collateral for deposits and borrowings. The mix of securities and investing decisions are made as a component of balance sheet management. Debt securities include U.S. Government Agencies, U.S. Government Agency mortgage-backed securities, non-agency mortgage-backed securities, state and municipal government bonds, and trust preferred securities.  The equity portfolio consists of one community bank stock.  The average life of the portfolio is 3.5 years and $84.1 million (fair value) is pledged as collateral for deposits. The Bank has no investments in a single issuer that exceeds 10% of shareholders equity.  All securities are classified as available for sale and all investment balances refer to fair value, unless noted otherwise.



The amortized cost and estimated fair value of investment securities available for sale as of December 31, 2017 and 2016 is as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

December 31, 2017

 

cost

 

gains

 

losses

 

value

Equity securities

 

$

 164 

 

$

 201 

 

$

 —

 

$

 365 

U.S. Government and Agency securities

 

 

 11,451 

 

 

 64 

 

 

 (43)

 

 

 11,472 

Municipal securities

 

 

 57,374 

 

 

 650 

 

 

 (252)

 

 

 57,772 

Trust preferred securities

 

 

 6,000 

 

 

 —

 

 

 (183)

 

 

 5,817 

Agency mortgage-backed securities

 

 

 51,307 

 

 

 197 

 

 

 (567)

 

 

 50,937 

Private-label mortgage-backed securities

 

 

 858 

 

 

 88 

 

 

 —

 

 

 946 

Asset-backed securities

 

 

 28 

 

 

 —

 

 

 (1)

 

 

 27 

Total

 

$

 127,182 

 

$

 1,200 

 

$

 (1,046)

 

$

 127,336 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

unrealized

 

unrealized

 

Fair

December 31, 2016

 

cost

 

gains

 

losses

 

value

Equity securities

 

$

 164 

 

$

 126 

 

$

 —

 

$

 290 

U.S. Government and Agency securities

 

 

 12,598 

 

 

 148 

 

 

 (26)

 

 

 12,720 

Municipal securities

 

 

 62,763 

 

 

 793 

 

 

 (571)

 

 

 62,985 

Trust preferred securities

 

 

 5,979 

 

 

 —

 

 

 (518)

 

 

 5,461 

Agency mortgage-backed securities

 

 

 61,305 

 

 

 431 

 

 

 (452)

 

 

 61,284 

Private-label mortgage-backed securities

 

 

 1,053 

 

 

 56 

 

 

 (5)

 

 

 1,104 

Asset-backed securities

 

 

 33 

 

 

 —

 

 

 (2)

 

 

 31 

Total

 

$

 143,895 

 

$

 1,554 

 

$

 (1,574)

 

$

 143,875 

 



At December 31, 2017 and 2016, the fair value of investment securities pledged to secure public fund and trust deposit totaled $84.1 million and $79.1 million, respectively.



The amortized cost and estimated fair value of debt securities at December 31, 2017, 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

 

 

 

 

$

 19 

 

$

 19 

Due after one year through five years

 

 

 

 

 

 13,784 

 

 

 13,920 

Due after five years through ten years

 

 

 

 

 

 33,748 

 

 

 33,770 

Due after ten years

 

 

 

 

 

 27,302 

 

 

 27,379 



 

 

 

 

 

 74,853 

 

 

 75,088 

Mortgage-backed securities

 

 

 

 

 

 52,165 

 

 

 51,883 

Total

 

 

 

 

$

 127,018 

 

$

 126,971 



The composition of the net realized securities gains for the years ended December 31 is as follows:







 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

2017

 

2016

 

2015

Gross gains realized (including gain on conversion)

 

$

 3 

 

$

 22 

 

$

 736 

Gross losses realized

 

 

 —

 

 

 —

 

 

 —

Net gains realized

 

$

 3 

 

$

 22 

 

$

 736 

 



The 2017 and 2016 gains were generated from calls on bonds.  A gain on conversion of an investment security of $728 thousand was recorded in 2015 when one bank equity stock owned by the Bank was acquired by another bank. The remaining security gains were generated by the sale of equity securities.



Impairment:



The following table reflects the temporary impairment in the investment portfolio, 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 December 31, 2017 and 2016.



The condition of the portfolio at year-end 2017, as measured by the dollar amount of temporarily impaired securities is better since year-end 2016. The Agency Mortgage-backed sector recorded the largest unrealized loss and the greatest number of securities with an unrealized loss.



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 December 31, 2017, was deemed to be temporary and required no further adjustments to the financial statements, unless otherwise noted.  The following tables present the temporary impairment in the security portfolio for the years presented:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



December 31, 2017



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

$

 2,315 

 

$

 (11)

 

 5 

 

$

 3,528 

 

$

 (32)

 

 10 

 

$

 5,843 

 

$

 (43)

 

 15 

Municipal securities

 

 13,767 

 

 

 (89)

 

 22 

 

 

 7,507 

 

 

 (163)

 

 14 

 

 

 21,274 

 

 

 (252)

 

 36 

Trust preferred securities

 

 1,216 

 

 

 (12)

 

 2 

 

 

 4,601 

 

 

 (171)

 

 5 

 

 

 5,817 

 

 

 (183)

 

 7 

Agency mortgage-backed securities

 

 16,287 

 

 

 (129)

 

 29 

 

 

 20,563 

 

 

 (438)

 

 39 

 

 

 36,850 

 

 

 (567)

 

 68 

Private-label mortgage-backed securities

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 —

Asset-backed securities

 

 —

 

 

 —

 

 —

 

 

 4 

 

 

 (1)

 

 1 

 

 

 4 

 

 

 (1)

 

 1 

Total temporarily impaired securities

$

 33,585 

 

$

 (241)

 

 58 

 

$

 36,203 

 

$

 (805)

 

 69 

 

$

 69,788 

 

$

 (1,046)

 

 127 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



December 31, 2016



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

$

 789 

 

$

 (9)

 

 1 

 

$

 3,413 

 

$

 (17)

 

 10 

 

$

 4,202 

 

$

 (26)

 

 11 

Municipal securities

 

 23,407 

 

 

 (417)

 

 43 

 

 

 1,598 

 

 

 (154)

 

 2 

 

 

 25,005 

 

 

 (571)

 

 45 

Trust preferred securities

 

 —

 

 

 —

 

 —

 

 

 5,461 

 

 

 (518)

 

 7 

 

 

 5,461 

 

 

 (518)

 

 7 

Agency mortgage-backed securities

 

 26,995 

 

 

 (359)

 

 39 

 

 

 4,656 

 

 

 (93)

 

 11 

 

 

 31,651 

 

 

 (452)

 

 50 

Private-label mortgage-backed securities

 

 281 

 

 

 (5)

 

 1 

 

 

 —

 

 

 —

 

 —

 

 

 281 

 

 

 (5)

 

 1 

Asset-backed securities

 

 —

 

 

 —

 

 —

 

 

 4 

 

 

 (2)

 

 1 

 

 

 4 

 

 

 (2)

 

 1 

Total temporarily impaired securities

$

 51,472 

 

$

 (790)

 

 84 

 

$

 15,132 

 

$

 (784)

 

 31 

 

$

 66,604 

 

$

 (1,574)

 

 115 

 



The following table represents the cumulative credit losses on debt securities recognized in earnings as of December 31:   





 

 

 

 

 

 



 

 

 

 

 

 

(Dollars in thousands)

 

Twelve Months Ended



 

2017

 

2016

Balance of cumulative credit-related OTTI at January 1

 

$

 595 

 

$

 555 

Additions for credit-related OTTI not previously recognized

 

 

 —

 

 

 40 

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 December 31

 

$

 595 

 

$

 595 

 



The Bank held $456 thousand of restricted stock at the end of 2017 of which $426 thousand is stock in the Federal Home Loan Bank of Pittsburgh (FHLB). FHLB stock is carried at a cost of $100 per share. 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 it 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. If FHLB stock were deemed to be impaired, the write-down for the Bank could be significant. 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.