Investments Securities

12 Months Ended

Dec. 31, 2020

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7. Investment Securities

The following table shows a comparison of amortized cost and fair values of investment securities at December 31, 2020 and 2019:



(in thousands)	Amortized ‎Cost		Gross ‎Unrealized ‎Gains		Gross ‎Unrealized ‎Losses		Fair ‎Value		OTTI ‎in AOCL
December 31, 2020
Available for Sale:
U.S. government agencies	$	75,856	$	899	$	322	$	76,433	$	—
Residential mortgage-backed agencies		22,999		—		100		22,899		—
Commercial mortgage-backed agencies		32,549		529		36		33,042		—
Collateralized mortgage obligations		70,372		266		1		70,637		—
Obligations of states and political subdivisions		10,144		470		—		10,614		—
Collateralized debt obligations		18,544		—		5,284		13,260		(3,839)
Total available for sale	$	230,464	$	2,164	$	5,743	$	226,885	$	(3,839)
Held to Maturity:
Residential mortgage-backed agencies	$	34,597	$	1,173	$	38	$	35,732	$	—
Commercial mortgage-backed agencies		11,716		587		—		12,303		—
Collateralized mortgage obligations		1,348		58		—		1,406		—
Obligations of states and political subdivisions		20,602		7,569		—		28,171		—
Total held to maturity	$	68,263	$	9,387	$	38	$	77,612	$	—



December 31, 2019
Available for Sale:
U.S. government agencies	$	39,987	$	—	$	93	$	39,894	$	—
Commercial mortgage-backed agencies		27,634		222		92		27,764		—
Collateralized mortgage obligations		29,903		129		109		29,923		—
Obligations of states and political subdivisions		14,124		346		—		14,470		—
Collateralized debt obligations		18,443		—		4,089		14,354		(2,835)
Total available for sale	$	135,008	$	697	$	4,400	$	131,305	$	(2,835)
Held to Maturity:
U.S. government agencies	$	16,164	$	659	$	—	$	16,823	$	—
Residential mortgage-backed agencies		42,939		469		155		43,253		—
Commercial mortgage-backed agencies		15,521		344		—		15,865		—
Collateralized mortgage obligations		3,140		3		—		3,143		—
Obligations of states and political subdivisions		16,215		5,357		—		21,572		—
Total held to maturity	$	93,979	$	6,832	$	155	$	100,656	$	—

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Proceeds from sales of available-for-sale securities and the realized gains and losses for the years ended December 31, 2020 and 2019 are as follows:

The following table shows the Corporation’s securities with gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized position, at December 31, 2020 and 2019:



	Less than 12 months					12 months or more
(in thousands)	Fair ‎Value		Unrealized ‎Losses		Number of ‎Investments	Fair ‎Value		Unrealized ‎Losses		Number of ‎Investments
December 31, 2020
Available for Sale:
U.S. government agencies	$	39,611	$	322	7	$	—	$	—	—
Residential mortgage-backed agencies		22,899		100	2		—		—	—
Commercial mortgage-backed agencies		16,034		36	1		—		—	—
Collateralized mortgage obligations		39,628		1	4		—		—	—
Collateralized debt obligations		—		—	—		13,260		5,284	9
Total available for sale	$	118,172	$	459	14	$	13,260	$	5,284	9
Held to Maturity:
Residential mortgage-backed agencies	$	2,973	$	38	1	$	—	$	—	—
Total held to maturity	$	2,973	$	38	1	$	—	$	—	—
December 31, 2019
Available for Sale:
U.S. government agencies	$	24,907	$	80	3	$	14,987	$	13	3
Residential mortgage-backed agencies		4,900		17	1		—		—	—
Commercial mortgage-backed agencies		4,623		37	2		5,793		55	3
Collateralized mortgage obligations		—		—	—		35,472		109	1
Obligations of states and political subdivisions		—		—	—		—		—	—
Collateralized debt obligations		—		—	—		14,353		4,089	9
Total available for sale	$	34,430	$	134	6	$	70,605	$	4,266	16
Held to Maturity:
Residential mortgage-backed agencies	$	2,722	$	6	3	$	9,486	$	149	12
Total held to maturity	$	2,722	$	6	3	$	9,486	$	149	12

Management systematically evaluates securities for impairment on a quarterly basis. Based upon application of accounting guidance for subsequent measurement in ASC Topic 320 (ASC Section 320-10-35), management assesses whether (i) the Corporation has the intent to sell a security being evaluated and (ii) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery. If neither applies, then declines in the fair values of securities below their cost that are considered other-than-temporary declines are split into two components. The first is the loss attributable to declining credit quality. Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made. The second component consists of all other losses, which are recognized in other comprehensive loss. In estimating OTTI losses, management considers (a) the length of time and the extent to which the fair value has been less than cost, (b) adverse conditions specifically related to the security, an industry, or a geographic area, (c) the historic and implied volatility of the fair value of the security, (d) changes in the rating of the security by a rating agency, (e) recoveries or additional declines in fair value subsequent to the balance sheet date, (f) failure of the issuer of the security to make scheduled interest or principal payments, and (g) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future. Management also monitors cash flow projections for securities that are considered beneficial interests under the guidance of ASC Subtopic 325-40, Investments – Other – Beneficial Interests in Securitized Financial Assets, (ASC Section 325-40-35).

Management believes that the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of its consolidated financial statements. Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for its collateralized debt obligation (“CDO“) portfolio consisting of pooled trust preferred securities. Management performs due diligence on the third-party processes and believes that it has an adequate understanding of the analysis, assumptions and methodology used by the third party to prepare the fair value determination and the OTTI evaluation.

Management reviews the qualifications of the third party and believes they are qualified to provide the analysis and pricing determinations. Quarterly, management reviews the third party’s detailed assumptions and analyzes its projected discounted present value results for reasonableness and consistency with the trend of prior projections. Annually, management performs stress tests of the assumptions used in the third party models and performs back tests of the assumptions and prepayment projections to validate the impairment model results. As a result of its due diligence process, management believes that the fair value presented and the OTTI recognized are appropriate. A total of $3.0 million in impairment losses was realized during the time period 2009 through 2011 on the CDO portfolio remaining at December 31, 2020. Due to the prior credit impairment, the securities in this portfolio have continued to be evaluated to determine whether any additional OTTI has occurred. Based on management’s review of the third-party evaluations, management believes that there were no material differences in the relative valuations between December 31, 2020 and December 31, 2019.

Due to the duration and market value decline in the pooled trust preferred securities held in our portfolio, we performed more extensive testing on these securities for purposes of evaluating whether or not OTTI has occurred.

The market for these securities as of December 31, 2020 is not active and markets for similar securities are also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive, as no new CDOs have been issued since 2007. There are currently very few market participants who are willing to effect transactions in these securities. The market values for these securities are very depressed relative to historical levels. Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue. Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at December 31, 2020, (b) an income valuation approach technique (i.e. present value) that maximizes the use of relevant unobservable inputs and minimizes the use of observable inputs will be equally or more representative of fair value than a market approach, and (c) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.

Management utilizes an independent third party to prepare both the evaluations of OTTI and the fair value determinations for the CDO portfolio. Management does not believe that there were any material differences in the OTTI evaluations and pricing between December 31, 2019 and December 31, 2020.

The approach used by the third party to determine fair value involved several steps, which included detailed credit and structural evaluation of each piece of collateral in each bond, projection of default, recovery and prepayment/amortization probabilities for each piece of collateral in the bond, and discounted cash flow modeling. The discount rate methodology used by the third party combines a baseline current market yield for comparable corporate and structured credit products with adjustments based on evaluations of the differences found in structure and risks associated with actual and projected credit performance of each CDO being valued. Currently, the only active and liquid trading market that exists is for stand-alone trust preferred securities, with a limited market for highly-rated CDO securities that are more senior in the capital structure than the securities in the CDO portfolio. Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments.

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The following table presents a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses which have been recognized in earnings for the trust preferred securities in the CDO portfolio held and not intended to be sold for the years ended December 31, 2020 and 2019:



(in thousands)	2020		2019
Balance of credit-related OTTI at January 1	$	2,446	$	2,646
Reduction for increases in cash flows expected to be collected		(202)		(200)
Balance of credit-related OTTI at December 31	$	2,244	$	2,446

The amortized cost and estimated fair value of securities by contractual maturity at December 31, 2020 are shown in the following table. Actual 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.



(in thousands)	Amortized ‎Cost		Fair ‎Value
Contractual Maturity
Available for sale:
Due after one year through five years		4,426		4,535
Due after five years through ten years		24,814		25,710
Due after ten years		75,304		70,062
		104,544		100,307
Residential mortgage-backed agencies		22,999		22,899
Commercial mortgage-backed agencies		32,549		33,042
Collateralized mortgage obligations		70,372		70,637
Total available for sale	$	230,464	$	226,885
Held to Maturity:
Due after ten years	$	20,602	$	28,171
		20,602		28,171
Residential mortgage-backed agencies		34,597		35,732
Commercial mortgage-backed agencies		11,716		12,303
Collateralized mortgage obligations		1,348		1,406
Total held to maturity	$	68,263	$	77,612

At December 31, 2020 and 2019, investment securities with a value of $137.1 million and $136.6 million, respectively, were pledged as permitted or required to secure public deposits, for securities sold under agreements to repurchase as required or permitted by law and as collateral for borrowing capacity.

(in thousands)

Realized gains

Realized losses