7. Investment Securities

The following is a summary of available-for-sale and held-to-maturity securities:


					Gross
	Amortized		Gross		Unrealized
	Cost		Unrealized Gains		Losses		Fair Value
At September 30, 2019	(In Thousands)
Available-for-Sale Securities:
Obligations of U.S. government corporations and agencies	$	2,519	$	12	$	—	$	2,531
Mortgage-backed securities – residential		80,965		1,233		(118)		82,080
REMICs		2,072		15		—		2,087
Collateralized mortgage obligations		89,802		997		(91)		90,708
Preferred stock		—		1		—		1
Corporate bonds		12,902		86		(18)		12,970
Obligations of state and political subdivisions		95,326		4,351		—		99,677
Total Available-for-Sale	$	283,586	$	6,695	$	(227)	$	290,054


			Gross		Gross
	Amortized		Unrecognized		Unrecognized
	Cost		Gains		Losses		Fair Value
	(In Thousands)
Held-to-Maturity Securities*:
FHLMC certificates	$	6	$	—	$	—	$	6
FNMA certificates		23		—		—		23
GNMA certificates		8		—		—		8
Obligations of state and political subdivisions		444		—		—		444
Total Held-to Maturity	$	481	$	—	$	—	$	481


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In Thousands)
At December 31, 2018
Available-for-sale
Obligations of U.S. government corporations and agencies	$	2,519	$	2	$	(18)	$	2,503
Mortgage-backed securities - residential		76,165		111		(1,566)		74,710
REMICs		2,712		4		(7)		2,709
Collateralized mortgage obligations - residential		103,026		124		(1,689)		101,461
Corporate bonds		12,910		44		(148)		12,806
Obligations of state and political subdivisions		99,349		1,258		(720)		99,887
Total Available-for-Sale	$	296,681	$	1,543	$	(4,148)	$	294,076


			Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair
	Cost		Gains		Losses		Value
	(In Thousands)
Held-to-Maturity
FHLMC certificates	$	8	$	—	$	—	$	8
FNMA certificates		31		—		—		31
GNMA certificates		12		—		—		12
Obligations of states and political subdivisions		475		—		—		475
Total Held-to-Maturity	$	526	$	—	$	—	$	526

* FHLMC, FNMA, and GNMA certificates are residential mortgage-backed securities.

The amortized cost and fair value of the investment securities portfolio at September 30, 2019, are shown below by contractual maturity. 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. For purposes of the maturity table, mortgage-backed securities (“MBS”), collateralized mortgage obligations (“CMO”) and REMICs, which are not due at a single maturity date, have not been allocated over the maturity groupings. These securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.


	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In Thousands)
Due in one year or less	$	5,091	$	5,097	$	—	$	—
Due after one year through five years		17,766		17,953		—		—
Due after five years through ten years		32,514		33,359		444		444
Due after ten years		55,376		58,770		—		—
MBS/CMO/REMIC		172,839		174,875		37		37
	$	283,586	$	290,054	$	481	$	481

Investment securities with a carrying amount of $160.9 million at September 30, 2019, were pledged as collateral on public deposits, securities sold under repurchase agreements and the Federal Reserve discount window.

As of September 30, 2019, the Company’s investment portfolio consisted of 432 securities, 37 of which were in an unrealized loss position.

The following tables summarize First Defiance’s securities that were in an unrealized loss position at September 30, 2019, and December 31, 2018:


	Duration of Unrealized Loss Position
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Losses
	(In Thousands)
At September 30, 2019
Available-for-sale securities:
Mortgage-backed securities-residential		3,407		(20)		10,162		(98)		13,569		(118)
Collateralized mortgage obligations		15,414		(42)		5,850		(49)		21,264		(91)
Corporate bonds		1,998		(2)		873		(16)		2,871		(18)
Total temporarily impaired securities	$	20,819	$	(64)	$	16,885	$	(163)	$	37,704	$	(227)


	Duration of Unrealized Loss Position
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Losses
	(In Thousands)
At December 31, 2018
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	—	$	—	$	500	$	(18)	$	500	$	(18)
Mortgage-backed securities-residential		11,589		(71)		48,665		(1,495)		60,254		(1,566)
REMIC's		—		—		857		(7)		857		(7)
Collateralized mortgage obligations		11,613		(53)		70,585		(1,636)		82,198		(1,689)
Corporate Bonds		5,752		(148)		—		—		5,752		(148)
Obligations of state and political subdivisions		11,974		(69)		16,492		(651)		28,466		(720)
Total temporarily impaired securities	$	40,928	$	(341)	$	137,099	$	(3,807)	$	178,027	$	(4,148)

There were net realized gains of $11,000 ($9,000 after tax) from the sales and calls of investment securities for the three and nine months ended September 30, 2019, while there were net realized gains of $76,000 ($60,000 after tax) for the three and nine months ended September 30, 2018.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least quarterly, and more frequently when economic or market conditions warrant such an evaluation. The investment portfolio is evaluated for OTTI by segregating the portfolio into two general segments. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under FASB ASC Topic 320, Investments-Debt and Equity Securities. Certain collateralized debt obligations (“CDOs”) are evaluated for OTTI under FASB ASC Topic 325, Investment – Other.

When OTTI occurs under either model, the amount of the OTTI 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 OTTI 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 OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected compared to the book value of the security and is recognized in earnings. The amount of OTTI related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.

With the exception of corporate bonds, the above securities all have fixed interest rates, and all securities have defined maturities. Their fair value is sensitive to movements in market interest rates. First Defiance has the ability and intent to hold these investments for a time necessary to recover the amortized cost without impacting its liquidity position and it is not more than likely that the Company will be required to sell the investments before anticipated recovery.

For the three and nine month period of 2019 and 2018, management determined there was no OTTI.