NOTE 3 – SECURITIES

Securities available for sale consist of the following at December 31:

	Amortized Cost		Unrealized
	Amortized Cost		Gains		Losses		Fair Value
	(In thousands)
2018
U.S. agency	$	20,198	$	9	$	193	$	20,014
U.S. agency residential mortgage-backed		124,777		817		1,843		123,751
U.S. agency commercial mortgage-backed		5,909		1		184		5,726
Private label mortgage-backed		29,735		321		637		29,419
Other asset backed		83,481		86		248		83,319
Obligations of states and political subdivisions		130,244		257		2,946		127,555
Corporate		34,866		29		586		34,309
Trust preferred		1,964		-		145		1,819
Foreign government		2,050		-		36		2,014
Total	$	433,224	$	1,520	$	6,818	$	427,926

2017
U.S. Treasury	$	898	$	-	$	-	$	898
U.S. agency		25,667		82		67		25,682
U.S. agency residential mortgage-backed		137,785		1,116		983		137,918
U.S. agency commercial mortgage-backed		9,894		36		170		9,760
Private label mortgage-backed		29,011		428		330		29,109
Other asset backed		93,811		202		115		93,898

Obligations of states and political subdivisions		174,073		755		1,883		172,945
Corporate		47,365		578		90		47,853
Trust preferred		2,929		—		127		2,802
Foreign government		2,087		—		27		2,060
Total	$	523,520	$	3,197	$	3,792	$	522,925

Total OTTI recognized in accumulated other comprehensive loss for securities available for sale was zero at both December 31, 2018 and 2017, respectively.

Our investments’ gross unrealized losses and fair values aggregated by investment type and length of time that individual securities have been at a continuous unrealized loss position, at December 31 follows:

	Less Than Twelve Months				Twelve Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)

2018
U.S. agency	$	7,150	$	46	$	11,945	$	147	$	19,095	$	193
U.S. agency residential mortgage-backed		18,374		180		48,184		1,663		66,558		1,843
U.S. agency commercial mortgage-backed		566		3		5,094		181		5,660		184
Private label mortgage-backed		8,273		57		16,145		580		24,418		637
Other asset backed		53,043		160		10,235		88		63,278		248
Obligations of states and political subdivisions		25,423		262		80,701		2,684		106,124		2,946
Corporate		17,758		343		9,222		243		26,980		586
Trust preferred		939		61		880		84		1,819		145
Foreign government		-		-		2,014		36		2,014		36
Total	$	131,526	$	1,112	$	184,420	$	5,706	$	315,946	$	6,818

2017
U.S. agency	$	5,466	$	26	$	5,735	$	41	$	11,201	$	67
U.S. agency residential mortgage-backed		22,198		229		40,698		754		62,896		983
U.S. agency commercial mortgage-backed		2,181		34		3,994		136		6,175		170
Private label mortgage-backed		11,390		92		4,396		238		15,786		330
Other asset backed		20,352		40		16,648		75		37,000		115
Obligations of states and political subdivisions		76,574		936		28,246		947		104,820		1,883
Corporate		14,440		33		3,943		57		18,383		90
Trust preferred		-		-		2,802		127		2,802		127
Foreign government		489		10		1,571		17		2,060		27
Total	$	153,090	$	1,400	$	108,033	$	2,392	$	261,123	$	3,792

Our portfolio of securities available for sale is reviewed quarterly for impairment in value. In performing this review, management considers (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether we intend to sell, or it is more likely than not that we will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. For securities that do not meet the aforementioned recovery criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income (loss).

U.S. agency, U.S. agency residential mortgage-backed securities and U.S. agency commercial mortgage backed securities — at December 31, 2018, we had 48 U.S. agency, 127 U.S. agency residential mortgage-backed and 15 U.S. agency commercial mortgage-backed securities whose fair market value is less than amortized cost. The unrealized losses are largely attributed to increases in interest rates since acquisition and widening spreads to Treasury bonds. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Private label mortgage backed securities — at December 31, 2018, we had 33 of this type of security whose fair value is less than amortized cost. Unrealized losses are primarily due to credit spread widening and increases in interest rates since their acquisition.

Four private label mortgage-backed securities (including two of the three securities discussed further below) were reviewed for other than temporary impairment (“OTTI”) utilizing a cash flow projection. The cash flow analysis forecasts cash flow from the underlying loans in each transaction and then applies these cash flows to the bonds in the securitization. See further discussion below.

As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no other declines discussed above are deemed to be other than temporary.

Other asset backed — at December 31, 2018, we had 94 other asset backed securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening and increases in interest rates since acquisition. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Obligations of states and political subdivisions — at December 31, 2018, we had 339 municipal securities whose fair value is less than amortized cost. The unrealized losses are primarily due to wider benchmark pricing spreads and increases in interest rates since acquisition. Tax exempt securities have been negatively impacted by lower federal tax rates signed into law in December, 2017. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Corporate — at December 31, 2018, we had 37 corporate securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening and increases in interest rates since acquisition. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Trust preferred securities — at December 31, 2018, we had two trust preferred securities whose fair value is less than amortized cost. Both of our trust preferred securities are single issue securities issued by a trust subsidiary of a bank holding company. The pricing of trust preferred securities has suffered from credit spread widening. One of the securities is rated by a major rating agency as investment grade while the other one is non-rated. The non-rated issue is a relatively small bank and was never rated. The issuer of this non-rated trust preferred security, which had a total amortized cost of $1.0 million and total fair value of $0.94 million as of December 31, 2018, continues to have satisfactory credit metrics and make interest payments. As management does not intend to liquidate this security and it is more likely than not that we will not be required to sell this security prior to recovery of the unrealized loss, this decline is not deemed to be other than temporary.

Foreign government — at December 31, 2018, we had two foreign government securities whose fair value is less than amortized cost. The unrealized losses are primarily due to increases in interest rates since acquisition. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

We recorded zero credit related OTTI charges in the Consolidated Statements of Operations on securities available for sale during 2018, 2017, and 2016.

At December 31, 2018, three private label mortgage-backed securities had credit related OTTI and are summarized as follows:

	Senior Security		Super Senior Security		Senior Support Security		Total
	(In thousands)

As of December 31, 2018
Fair value	$	792	$	741	$	25	$	1,558
Amortized cost		664		578		-		1,242
Non-credit unrealized loss		-		-		-		-
Unrealized gain		128		163		25		316
Cumulative credit related OTTI		757		457		380		1,594

Each of these securities is receiving principal and interest payments similar to principal reductions in the underlying collateral. All three of these securities have unrealized gains at December 31, 2018. The original amortized cost (current amortized cost excluding cumulative credit related OTTI) for each of these securities has been permanently adjusted downward for previously recorded credit related OTTI. The unrealized loss (based on original amortized cost) for these securities is now less than previously recorded credit related OTTI amounts.

A roll forward of credit losses recognized in earnings on securities available for sale for the years ending December 31 follow:

	2018		2017		2016
	(In thousands)
Balance at beginning of year	$	1,594	$	1,594	$	1,594
Additions to credit losses on securities for which no previous OTTI was recognized		-		-		-
Increases to credit losses on securities for which OTTI was previously recognized		-		-		-
Decrease to credit losses on securities for which OTTI was previously recognized as a result of disposal		-		-		-
Total	$	1,594	$	1,594	$	1,594

The amortized cost and fair value of securities available for sale at December 31, 2018, by contractual maturity, follow:

	Amortized Cost		Fair Value
	(In thousands)
Maturing within one year	$	10,167	$	10,150
Maturing after one year but within five years		77,824		77,042
Maturing after five years but within ten years		57,654		56,301
Maturing after ten years		43,677		42,218
		189,322		185,711
U.S. agency residential mortgage-backed		124,777		123,751
U.S. agency commercial mortgage-backed		5,909		5,726
Private label mortgage-backed		29,735		29,419
Other asset backed		83,481		83,319
Total	$	433,224	$	427,926

The actual maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

A summary of proceeds from the sale of securities available for sale and gains and losses for the years ended December 31 follow:

	Proceeds		Realized Gains (1)		Losses
	(In thousands)
2018	$	48,736	$	192	$	136
2017		17,308		218		3
2016		64,103		354		53

(1)

2018 excludes a $0.144 million gain on the sale of 1,000 VISA Class B shares.

Certain preferred stocks have been classified as equity securities at fair value in our Consolidated Statement of Financial Condition beginning on January 1, 2018. Previously these preferred stocks were classified as trading securities. See note #1. During 2018, 2017 and 2016, we recognized gains (losses) on these preferred stocks of $(0.06) million, $0.05 million and $0.26 million, respectively, that are included in net gains on securities in the Consolidated Statements of Operations. All of these amounts relate to gains (losses) recognized on preferred stock still held at December 31, 2018 and 2017.

Securities available for sale with a book value of zero and $0.9 million at December 31, 2018 and 2017, respectively, were pledged to secure borrowings, derivatives, public deposits and for other purposes as required by law. There were no investment obligations of state and political subdivisions that were payable from or secured by the same source of revenue or taxing authority that exceeded 10% of consolidated shareholders’ equity at December 31, 2018 or 2017.