Note 3 - Investment Securities

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

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

3. Investment Securities

A summary of the amortized cost and market value of securities available for sale, securities held to maturity, and equity securities at December 31, 2020 and 2019 is as follows:

	At December 31, 2020
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale
U.S. Government agencies	$	32,312	$	-	$	(426	)	$	31,886
Collateralized mortgage obligations		218,232		3,584		(270	)		221,546
Agency mortgage-backed securities		149,325		1,204		(1	)		150,528
Municipal securities		8,201		24		-			8,225
Corporate bonds		119,118		595		(3,390	)		116,323
Investment securities available for sale	$	527,188	$	5,407	$	(4,087	)	$	528,508
Held to maturity
U.S. Government agencies	$	82,093	$	4,185	$	-		$	86,278
Collateralized mortgage obligations		363,363		12,687		(231	)		375,819
Agency mortgage-backed securities		369,480		5,640		(245	)		374,875
Investment securities held to maturity	$	814,936	$	22,512	$	(476	)	$	836,972
Equity securities (1)								$	9,039

(1) Equity securities consist of investments in non-cumulative preferred stock

	At December 31, 2019
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale
U.S. Government agencies	$	38,743	$	1	$	(439	)	$	38,305
Collateralized mortgage obligations		329,492		2,368		(422	)		331,438
Agency mortgage-backed securities		98,953		82		(98	)		98,937
Municipal securities		4,064		18		-			4,082
Corporate bonds		69,499		79		(3,298	)		66,280
Investment securities available for sale	$	540,751	$	2,548	$	(4,257	)	$	539,042
Held to maturity
U.S. Government agencies	$	94,913	$	482	$	(294	)	$	95,101
Collateralized mortgage obligations		416,177		7,603		(793	)		422,987
Agency mortgage-backed securities		133,752		1,782		(513	)		135,021
Investment securities held to maturity	$	644,842	$	9,867	$	(1,600	)	$	653,109
Equity securities								$	-

The following table presents investment securities by stated maturity at December 31, 2020. Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay and, therefore, these securities are classified separately with no specific maturity date.

	Available for Sale				Held to Maturity
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in 1 year or less	$	12,989	$	12,977	$	757	$	763
After 1 year to 5 years		77,313		76,426		73,504		77,214
After 5 years to 10 years		52,410		50,308		7,832		8,301
After 10 years		16,919		16,723		-		-
Collateralized mortgage obligations		218,232		221,546		363,363		375,819
Agency mortgage-backed securities		149,325		150,528		369,480		374,875
Total investment securities	$	527,188	$	528,508	$	814,936	$	836,972

Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.

The Company’s investment securities portfolio consists primarily of debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state governments, local municipalities, certain corporate entities. Equity securities consist of investments in non-cumulative preferred stock. At December 31, 2020, fair value gains on the equity securities were immaterial. There were no private label mortgage-backed securities (“MBS”) or collateralized mortgage obligations (“CMO”) held in the investment securities portfolio as of December 31, 2020 and December 31, 2019. There were also no MBS or CMO securities that were rated “Alt-A” or “sub-prime” as of those dates.

The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the available for sale portfolio are included in shareholders’ equity as a component of accumulated other comprehensive income or loss, net of tax. Securities classified as held to maturity are carried at amortized cost. An unrealized loss exists when the current fair value of an individual security is less than the amortized cost basis.

The Company regularly evaluates investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, the current interest rate environment and the rating of each security. An OTTI loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that it will be required to sell the security prior to recovery of the amortized cost basis. The amount of OTTI loss recognized is equal to the difference between the fair value and the amortized cost basis of the security that is attributed to credit deterioration. Accounting standards require the evaluation of the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, that amount must be recognized against income in the current period. The portion of the unrealized loss related to other factors, such as liquidity conditions in the market or the current interest rate environment, is recorded in accumulated other comprehensive income (loss) for investment securities classified available for sale. There were no impairment charges (credit losses) recorded during the years ended December 31, 2020, 2019, and 2018.

At December 31, 2020 and 2019, investment securities in the amount of approximately $1.2 billion and $847.1 million, respectively, were pledged as collateral for public deposits and certain other deposits as required by law.

The following table presents a roll-forward of the balance of credit-related impairment losses on securities held at December 31, 2020, 2019, and 2018 for which a portion of OTTI was recognized in other comprehensive income:

(dollars in thousands)	2020		2019		2018
Beginning Balance, January 1st	$	-	$	-	$	274
Reductions for securities sold during the period		-		-		(274	)
Ending Balance, December 31st	$	-	$	-	$	-

The following tables show the fair value and gross unrealized losses associated with the investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2020 and 2019:

	At December 31, 2020
	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government agencies	$	-	$	-	$	31,886	$	426	$	31,886	$	426
Collateralized mortgage obligations		99,497		270		-		-		99,497		270
Agency mortgage-backed securities		20,934		1		-		-		20,934		1
Municipal securities		-		-		-		-		-		-
Corporate bonds		4,559		39		54,649		3,351		59,208		3,390
Investment Securities Available for Sale	$	124,990	$	310	$	86,535	$	3,777	$	211,525	$	4,087

	At December 31, 2020
	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government agencies	$	-	$	-	$	-	$	-	$	-	$	-
Collateralized mortgage obligations		62,603		231		-		-		62,603		231
Agency mortgage-backed securities		54,537		245		-		-		54,537		245
Investment Securities Held to Maturity	$	117,140	$	476	$	-	$	-	$	117,140	$	476

	At December 31, 2019
	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government agencies	$	28,136	$	439	$	-	$	-	$	28,136	$	439
Collateralized mortgage obligations		63,384		328		6,164		94		69,548		422
Agency mortgage-backed securities		2,924		13		6,411		85		9,335		98
Municipal securities		-		-		-		-		-		-
Corporate bonds		2,820		180		51,882		3,118		54,702		3,298
Investment Securities Available for Sale	$	97,264	$	960	$	64,457	$	3,297	$	161,721	$	4,257

	At December 31, 2019
	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government agencies	$	33,092	$	220	$	3,703	$	74	$	36,795	$	294
Collateralized mortgage obligations		24,211		18		64,324		775		88,535		793
Agency mortgage-backed securities		14,044		33		52,132		480		66,176		513
Investment Securities Held to Maturity	$	71,347	$	271	$	120,159	$	1,329	$	191,506	$	1,600

Unrealized losses on securities in the investment portfolio amounted to $4.6 million with a total fair value of $328.7 million as of December 31, 2020 compared to unrealized losses of $5.9 million with a total fair value of $353.2 million as of December 31, 2019. The Company believes the unrealized losses presented in the tables above are temporary in nature and primarily related to market interest rates or limited trading activity in particular type of security rather than the underlying credit quality of the issuers. The Company does not believe that these losses are other than temporary and does not currently intend to sell or believe it will be required to sell securities in an unrealized loss position prior to maturity or recovery of the amortized cost bases.

The Company held four U.S. Government agency securities, fifteen collateralized mortgage obligations and six agency mortgage-backed securities that were in an unrealized loss position at December 31, 2020. Principal and interest payments of the underlying collateral for each of these securities carry minimal credit risk. Management found no evidence of OTTI on any of these securities and believes the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary as of December 31, 2020.

All municipal securities held in the investment portfolio are reviewed on least a quarterly basis for impairment. Each bond carries an investment grade rating by either Moody’s or Standard & Poor’s. In addition, the Company periodically conducts its own independent review on each issuer to ensure the financial stability of the municipal entity. The largest geographic concentration was in Pennsylvania and New Jersey and consisted of either general obligation or revenue bonds backed by the taxing power of the issuing municipality. At December 31, 2020, the investment portfolio had no municipal securities that were in an unrealized loss position.

At December 31, 2020, the investment portfolio included nine corporate bonds that were in an unrealized loss position. Management believes the unrealized losses on these securities were also driven by changes in market interest rates and not a result of credit deterioration. Eight of the nine corporate bonds are issued by five of the largest U.S. financial institutions. Each financial institution is well capitalized.

Proceeds associated with the sale of securities available for sale in 2020 were $125.2 million. Gross gains of $3.0 million and gross losses of $230,000 were realized on these sales. The tax provision applicable to the net gains of $2.8 million for the year ended December 31, 2020 amounted to $700,000. Proceeds associated with the sale of securities available for sale in 2019 were $54.7 million. Gross gains of $1.2 million and gross losses of $67,000 were realized on these sales. The tax provision applicable to the net gains of $1.1 million for the year ended December 31, 2019 amounted to $280,000.

Proceeds associated with the sale of securities available for sale in 2018 were $6.4 million. Gross losses of $67,000 were realized on these sales. The tax benefit applicable to the net losses for the year ended December 31, 2018 amounted to $18,000. Included in the 2018 sales activity was the sale of one CDO security. Proceeds from the sale of the CDO security totaled $660,000. A gross loss of $66,000 was realized on this sale. The tax benefit applicable to the net loss for the twelve months ended December 31, 2018 amounted to $17,000. Management had previously stated that it did not intend to sell the CDO security prior to its maturity or the recovery of its cost basis, nor would it be forced to sell this security prior to maturity or recovery of the cost basis. This statement was made over a period of several years where there was limited trading activity in the pooled trust preferred CDO market resulting in fair market value estimates well below the book values. During 2018, management received several inquiries regarding the availability of the remaining CDO security and noted an increased level of trading in this type of security. As a result of the increased activity and the level of bids received, management elected to sell the remaining CDO security resulting in a net loss of $66,000 during 2018.

In December 2018, twenty-three CMOs and two MBSs with a fair value of $230.1 million that were previously classified as available-for-sale were transferred to the held-to-maturity category. The securities were transferred at fair value. Unrealized losses of $9.4 million associated with the transferred securities will remain in other comprehensive income and be amortized as an adjustment to yield over the remaining life of the securities. At December 31, 2020, the total approximated unrealized loss of $5.1 million remaining to be amortized includes ten securities previously transferred in July 2014.