INVESTMENT SECURITIES

6 Months Ended

Jun. 30, 2016

Investments, Debt and Equity Securities [Abstract]

Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]

NOTE 3 — INVESTMENT SECURITIES

The Corporation classifies its investment securities as either “Held-to-Maturity” or “Available-for-Sale” at the time of purchase. Investment securities are accounted for on a trade date basis. Debt securities are classified as Held-to-Maturity when the Corporation has the ability and positive intent to hold the securities to maturity. Investment securities classified as Held-to-Maturity are carried at cost adjusted for amortization of premium and accretion of discount to maturity.

Debt securities not classified as Held-to-Maturity and equity securities are included in the Available-for-Sale category and are carried at fair value. The amount of any unrealized gain or loss, net of the effect of deferred income taxes, is reported as accumulated other comprehensive income (loss) in the Consolidated Balance Sheets and Consolidated Statements of Changes in Stockholders’ Equity. Management’s decision to sell Available-for-Sale securities is based on changes in economic conditions, controlling the sources and applications of funds, terms, availability of and yield of alternative investments, interest rate risk and the need for liquidity.

The cost of debt securities classified as Held-to-Maturity or Available-for-Sale is adjusted for amortization of premiums and accretion of discounts to expected maturity. Such amortization and accretion, as well as interest and dividends, are included in interest and dividend income from investment securities. Realized gains and losses are included in net investment securities gains and losses. The cost of investment securities sold, redeemed or matured is based on the specific identification method.

The amortized cost, related estimated fair value, and unrealized gains and losses for investment securities classified as “Available-For-Sale” or “Held-to-Maturity” were as follows at June 30, 2016 and December 31, 2015:

	Available-for-Sale Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2016:	Cost		Gains		Losses		Value
U.S. Treasury securities	$	1,015	$	5	$	—	$	1,020
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		112,802		1,596		(194)		114,204
Other		11,541		74		(24)		11,591
Obligations of state and political subdivisions		201,749		10,828		—		212,577
Corporate debt securities		43,623		388		(342)		43,669
Marketable equity securities		1,194		834		—		2,028
Total	$	371,924	$	13,725	$	(560)	$	385,089

	Held-to-Maturity Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2016:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	20	$	1	$	—	$	21
Total	$	20	$	1	$	—	$	21

	Available-for-Sale Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2015:	Cost		Gains		Losses		Value
U.S. Treasury securities	$	1,022	$	—	$	(1)	$	1,021
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		113,847		37		(1,410)		112,474
Other		21,554		117		(79)		21,592
Obligations of state and political subdivisions		195,297		5,425		(408)		200,314
Corporate debt securities		49,162		10		(1,339)		47,833
Marketable equity securities		1,194		813		—		2,007
Total	$	382,076	$	6,402	$	(3,237)	$	385,241

	Held-to-Maturity Securities
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2015:	Cost		Gains		Losses		Value
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed	$	26	$	1	$	—	$	27
Total	$	26	$	1	$	—	$	27

Securities Available-for-Sale with an aggregate fair value of $255,220,000 at June 30, 2016 and $326,872,000 at December 31, 2015, and securities Held-to-Maturity with an aggregate book value of $20,000 at June 30, 2016 and $26,000 at December 31, 2015, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase, FHLB advances and other balances of $191,148,000 at June 30, 2016 and $219,576,000 at December 31, 2015.

The amortized cost, estimated fair value and weighted average yield of debt and equity securities, by contractual maturity, are shown below at June 30, 2016. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in thousands)

	June 30, 2016
	Available-For-Sale															Held-To-Maturity
				U.S. Government			Obligations									U.S. Government
				Corporations &			of State			Corporate			Marketable			Corporations &
	U.S. Treasury			Agencies			& Political			Debt			Equity			Agencies
	Securities			Obligations1			Subdivisions2			Securities			Securities3			Obligations1
Within 1 Year:
Amortized cost	$	—		$	—		$	902		$	—		$	—		$	—
Fair value		—			—			908			—			—			—
Weighted average yield		—			—			6.29	%		—			—			—
1 - 5 Years:
Amortized cost		1,015			30,977			42,696			12,639			—			20
Fair value		1,020			31,593			44,250			12,722			—			21
Weighted average yield		0.96	%		2.06	%		2.80	%		2.38	%		—			2.55	%
5 - 10 Years:
Amortized cost		—			16,821			72,677			30,984			—			—
Fair value		—			17,166			76,116			30,947			—			—
Weighted average yield		—			2.06	%		3.29	%		2.76	%		—			—
After 10 Years:
Amortized cost		—			76,545			85,474			—			1,194			—
Fair value		—			77,036			91,303			—			2,028			—
Weighted average yield		—			1.67	%		4.58	%		—			5.16	%		—
Total:
Amortized cost	$	1,015		$	124,343		$	201,749		$	43,623		$	1,194		$	20
Fair value		1,020			125,795			212,577			43,669			2,028			21
Weighted average yield		0.96	%		1.82	%		3.75	%		2.65	%		5.16	%		2.55	%

_______________________

¹Mortgage-backed securities are allocated for maturity reporting at their original maturity date.

²Average yields on tax-exempt obligations of state and political subdivisions have been computed on a tax-equivalent basis using a 34% tax rate.

³Marketable equity securities are not considered to have defined maturities and are included in the after ten year category.

There were no aggregate investments with a single issuer (excluding the U.S. Government and U.S. Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at June 30, 2016. The quality rating of the obligations of state and political subdivisions are generally investment grade, as rated by Moody’s, Standard and Poor’s or Fitch. The typical exceptions are local issues which are not rated, but are secured by the full faith and credit obligations of the communities that issued these securities.

Proceeds from sales of investments in Available-for-Sale debt and equity securities for the three months ended June 30, 2016 and 2015 were $20,374,000 and $31,966,000, respectively. Gross gains realized on these sales were $380,000 and $603,000, respectively. There were no losses realized on these sales for the three months ended June 30, 2016 and 2015. Impairment losses realized on Available-for-Sale equity securities for the three months ended June 30, 2016 and 2015 were $0 and $14,000, respectively.

 

Proceeds from sales of investments in Available-for-Sale debt and equity securities for the six months ended June 30, 2016 and 2015 were $27,408,000 and $79,740,000, respectively. Gross gains realized on these sales were $435,000 and $1,151,000, respectively. Gross losses on these sales were $41,000 and $56,000, respectively. Impairment losses realized on Available-for-Sale equity securities for the six months ended June 30, 2016 and 2015 were $0 and $14,000, respectively.

 

There were no proceeds from sales of investments in Held-to-Maturity debt equity securities during the three or six month periods ended June 30, 2016 or 2015. Therefore, there were no gains or losses realized during these periods.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under FASB ASC 320, Investments - Debt and Equity Securities. In determining OTTI under the FASB ASC 320 model, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When other-than-temporary impairment occurs on debt securities, the amount of the other-than-temporary impairment recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the other-than-temporary impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is determined based on the present value of cash flows expected to be collected, and the realized loss is recognized as impairment charges on securities on the Consolidated Statements of Income. The amount of the total other-than-temporary impairment related to the other factors shall be recognized in other comprehensive income (loss), net of applicable taxes. The previous amortized cost basis less the other-than-temporary impairment recognized in earnings becomes the new amortized cost basis of the investment.

The fair market value of the equity securities tends to fluctuate with the overall equity markets as well as the trends specific to each institution. The equity securities portfolio is reviewed in a similar manner as that of the debt securities with greater emphasis placed on the length of time the market value has been less than the carrying value and the financial sector outlook. The Corporation also reviews dividend payment activities, levels of non-performing assets and loan loss reserves. The starting point for the equity analysis is the length and severity of market value decline. The realized loss is recognized as impairment charges on securities on the Consolidated Statements of Income. The amount of the total other-than-temporary impairment is recognized in other comprehensive income (loss), net of applicable taxes. The previous cost basis less the other-than-temporary impairment recognized in earnings becomes the new cost basis of the investment.

The Corporation and its investment advisors monitor the entire portfolio monthly with particular attention given to securities in a continuous loss position of at least ten percent for over twelve months. As of June 30, 2015, we recognized other than temporary impairment on one equity security that was trading below cost basis. We have written down the value of the shares based upon market indications. In management’s opinion, the equity securities reflect a more accurate valuation of the shares after the impairment charge. Based on the factors described above, management did not consider any securities to be other-than-temporarily impaired at June 30, 2016 or December 31, 2015.

 

In accordance with disclosures required by FASB ASC 320-10-50, Investments - Debt and Equity Securities, the summary below shows the gross unrealized losses and fair value of the Corporation’s investments, aggregated by investment category, that individual securities have been in a continuous unrealized loss position for less than 12 months or 12 months or more as of June 30, 2016 and December 31, 2015:

June 30, 2016

(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
Available-for-Sale:
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		11,375		(78)		7,751		(116)		19,126		(194)
Other		3,676		(24)		—		—		3,676		(24)
Obligations of state and political subdivisions		—		—		—		—		—		—
Corporate debt securities		4,467		(30)		13,464		(312)		17,931		(342)
Marketable equity securities		—		—		—		—		—		—
	$	19,518	$	(132)	$	21,215	$	(428)	$	40,733	$	(560)

December 31, 2015

(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
Available-for-Sale:
U.S. Treasury securities	$	1,021	$	(1)	$	—	$	—	$	1,021	$	(1)
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		86,618		(1,177)		11,234		(233)		97,852		(1,410)
Other		12,962		(79)		—		—		12,962		(79)
Obligations of state and political subdivisions		26,163		(258)		8,105		(150)		34,268		(408)
Corporate debt securities		27,527		(531)		19,433		(808)		46,960		(1,339)
Marketable equity securities		—		—		—		—		—		—
	$	154,291	$	(2,046)	$	38,772	$	(1,191)	$	193,063	$	(3,237)

The Corporation invests in various forms of agency debt including mortgage-backed securities and callable debt. The mortgage-backed securities are issued by FHLMC (“Federal Home Loan Mortgage Corporation”), FNMA (“Federal National Mortgage Association”) or GNMA (“Government National Mortgage Association”). The municipal securities consist of general obligations and revenue bonds. The marketable equity securities consist of stocks in other bank holding companies. The fair market value of the above securities is influenced by market interest rates, prepayment speeds on mortgage securities, bid-offer spreads in the market place and credit premiums for various types of agency debt. These factors change continuously and therefore the market value of these securities may be higher or lower than the Corporation’s carrying value at any measurement date. Management does not believe any of their 8 securities with a one year or less unrealized loss position or any of their 10 securities with a greater than one year unrealized loss position as of June 30, 2016, represent an other-than-temporary impairment, as these unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.