Investment Securities

3 Months Ended

Mar. 31, 2023

Investments, Debt and Equity Securities [Abstract]

Note 4: Investment Securities

The amortized cost and estimated fair value of investment securities are summarized as follows:


	March 31, 2023
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	44,212	$	353	$	(3,003	)	$	41,562
State and political subdivisions		35,264		23		(2,303	)		32,984
Corporate		11,542		581		(595	)		11,528
Asset backed securities		15,423		-		(585	)		14,838
Residential mortgage-backed - US agency		17,439		-		(1,267	)		16,172
Collateralized mortgage obligations - US agency		10,275		-		(1,015	)		9,260
Collateralized mortgage obligations - Private label		64,910		-		(4,475	)		60,435
Total		199,065		957		(13,243	)		186,779
Equity investment securities:
Common stock - financial services industry		206		-		-			206
Total		206		-		-			206
Total available-for-sale	$	199,271	$	957	$	(13,243	)	$	186,985

Held-to-Maturity Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	3,842	$	-	$	(265	)	$	3,577
State and political subdivisions		15,859		12		(1,865	)		14,006
Corporate		45,577		5		(2,703	)		42,879
Asset backed securities		18,667		-		(1,073	)		17,594
Residential mortgage-backed - US agency		7,416		3		(636	)		6,783
Collateralized mortgage obligations - US agency		14,843		-		(1,192	)		13,651
Collateralized mortgage obligations - Private label		95,462		7		(4,337	)		91,132
Total		201,666		27		(12,071	)		189,622
Less: Allowance for credit losses		450		-		-			-
Total held-to-maturity	$	201,216	$	27	$	(12,071	)	$	189,622


	December 31, 2022
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	32,533	$	37	$	(3,206	)	$	29,364
State and political subdivisions		48,002		384		(3,001	)		45,385
Corporate		11,803		676		(650	)		11,829
Asset backed securities		16,059		-		(659	)		15,400
Residential mortgage-backed - US agency		17,982		-		(1,582	)		16,400
Collateralized mortgage obligations - US agency		13,070		-		(1,362	)		11,708
Collateralized mortgage obligations - Private label		65,781		8		(4,355	)		61,434
Total		205,230		1,105		(14,815	)		191,520
Equity investment securities:
Common stock - financial services industry		206		-		-			206
Total		206		-		-			206
Total available-for-sale	$	205,436	$	1,105	$	(14,815	)	$	191,726

Held-to-Maturity Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	3,852	$	-	$	(280	)	$	3,572
State and political subdivisions		15,211		-		(2,340	)		12,871
Corporate		45,086		2		(2,586	)		42,502
Asset backed securities		19,158		-		(1,291	)		17,867
Residential mortgage-backed - US agency		7,489		-		(739	)		6,750
Collateralized mortgage obligations - US agency		15,109		-		(1,251	)		13,858
Collateralized mortgage obligations - Private label		88,497		4		(4,430	)		84,071
Total held-to-maturity	$	194,402	$	6	$	(12,917	)	$	181,491

The amortized cost and estimated fair value of debt investments at March 31, 2023 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.


	Available-for-Sale				Held-to-Maturity
	Amortized		Estimated		Amortized		Estimated
(In thousands)	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	7,059	$	7,636	$	1,131	$	1,114
Due after one year through five years		9,760		9,528		17,335		16,898
Due after five years through ten years		39,087		36,222		41,600		38,624
Due after ten years		50,535		47,526		23,879		21,420
Sub-total		106,441		100,912		83,945		78,056
Residential mortgage-backed - US agency		17,439		16,172		7,416		6,783
Collateralized mortgage obligations - US agency		10,275		9,260		14,843		13,651
Collateralized mortgage obligations - Private label		64,910		60,435		95,462		91,132
Totals	$	199,065	$	186,779	$	201,666	$	189,622

The Company’s investment securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:


	March 31, 2023
	Less than Twelve Months							Twelve Months or More							Total
	Number of							Number of							Number of
	Individual		Unrealized			Fair		Individual		Unrealized			Fair		Individual		Unrealized			Fair
(Dollars in thousands)	Securities		Losses			Value		Securities		Losses			Value		Securities		Losses			Value
Available-for-Sale Portfolio
US Treasury, agencies and GSEs		1	$	(1	)	$	1,998		3	$	(3,002	)	$	26,380		4	$	(3,003	)	$	28,378
State and political subdivisions		1		(9	)		512		23		(2,294	)		29,064		24		(2,303	)		29,576
Corporate		2		(3	)		1,697		6		(592	)		5,140		8		(595	)		6,837
Asset backed securities		2		(116	)		4,384		8		(469	)		10,454		10		(585	)		14,838
Residential mortgage-backed - US agency		4		(8	)		628		11		(1,259	)		15,544		15		(1,267	)		16,172
Collateralized mortgage obligations - US agency		2		(214	)		3,374		9		(801	)		5,886		11		(1,015	)		9,260
Collateralized mortgage obligations - Private label		6		(424	)		8,021		29		(4,051	)		48,666		35		(4,475	)		56,687
Totals		18	$	(775	)	$	20,614		89	$	(12,468	)	$	141,134		107	$	(13,243	)	$	161,748
Held-to-Maturity Portfolio
US Treasury, agencies and GSEs		2	$	(265	)	$	3,576		-	$	-		$	-		2	$	(265	)	$	3,576
State and political subdivisions		5		(131	)		2,557		12		(1,734	)		10,620		17		(1,865	)		13,177
Corporate		16		(696	)		13,045		25		(2,007	)		22,886		41		(2,703	)		35,931
Asset backed securities		4		(353	)		7,571		5		(720	)		5,651		9		(1,073	)		13,222
Residential mortgage-backed - US agency		5		(54	)		2,267		5		(582	)		3,606		10		(636	)		5,873
Collateralized mortgage obligations - US agency		4		(152	)		4,766		7		(1,040	)		8,885		11		(1,192	)		13,651
Collateralized mortgage obligations - Private label		22		(1,328	)		36,162		28		(3,009	)		39,587		50		(4,337	)		75,749
Totals		58	$	(2,979	)	$	69,944		82	$	(9,092	)	$	91,235		140	$	(12,071	)	$	161,179


	December 31, 2022
	Less than Twelve Months							Twelve Months or More							Total
	Number of							Number of							Number of
	Individual		Unrealized			Fair		Individual		Unrealized			Fair		Individual		Unrealized			Fair
(Dollars in thousands)	Securities		Losses			Value		Securities		Losses			Value		Securities		Losses			Value
Available-for-Sale Portfolio
US Treasury, agencies and GSEs		-	$	-		$	-		3	$	(3,206	)	$	26,167		3	$	(3,206	)	$	26,167
State and political subdivisions		10		(830	)		12,601		17		(2,171	)		20,128		27		(3,001	)		32,729
Corporate		7		(269	)		5,720		2		(381	)		1,319		9		(650	)		7,039
Asset backed securities		5		(148	)		5,473		5		(511	)		9,926		10		(659	)		15,399
Residential mortgage-backed - US agency		10		(131	)		2,747		5		(1,451	)		13,653		15		(1,582	)		16,400
Collateralized mortgage obligations - US agency		6		(238	)		4,009		6		(1,124	)		7,700		12		(1,362	)		11,709
Collateralized mortgage obligations - Private label		15		(1,684	)		20,429		19		(2,671	)		33,707		34		(4,355	)		54,136
Totals		53	$	(3,300	)	$	50,979		57	$	(11,515	)	$	112,600		110	$	(14,815	)	$	163,579
Held-to-Maturity Portfolio
US Treasury, agencies and GSE's		2	$	(280	)	$	3,573		-		-		$	-		2	$	(280	)	$	3,573
State and political subdivisions		7	$	(871	)	$	7,277		7	$	(1,469	)	$	5,077		14	$	(2,340	)	$	12,354
Corporate		31		(1,786	)		29,213		9		(800	)		6,803		40		(2,586	)		36,016
Asset backed securities		6		(625	)		9,742		3		(666	)		3,674		9		(1,291	)		13,416
Residential mortgage-backed - US agency		10		(736	)		6,577		1		(3	)		107		11		(739	)		6,684
Collateralized mortgage obligations - US agency		10		(1,236	)		12,965		1		(15	)		892		11		(1,251	)		13,857
Collateralized mortgage obligations - Private label		38		(2,719	)		58,061		8		(1,711	)		12,532		46		(4,430	)		70,593
Totals		104	$	(8,253	)	$	127,408		29	$	(4,664	)	$	29,085		133	$	(12,917	)	$	156,493

Excluding the effects of changes in the characteristics of individual debt securities that potentially give rise to credit losses, as described below, the fair market value of a debt security as of a particular measurement date is highly dependent upon prevailing market and economic environmental factors at the measurement date relative to the prevailing market and economic environmental factors present at the time the debt security was acquired. The most significant market and environmental factors include, but are not limited to (1) the general level of interest rates, (2) the relationship between shorter-term interest rates and longer-term interest rates (referred to as the “slope” or "shape" of the interest rate yield curve),

(3) general bond market liquidity, (4) the recent and expected near-term volume of new issuances of similar debt securities, and (5) changes in the market values of individual loan collateral underlying mortgage-backed an asset-backed debt securities. Changes in interest rates affect the fair market values of debt securities by influencing the discount rate applied to the securities’ future expected cash flows. The higher the discount rate, the lower the resultant security fair value at the measurement date. Conversely, the lower the discount rate, the higher the resultant security fair value at the measurement date. In addition, the cumulative amount and timing of undiscounted cash flows of debt securities may also be affected by changes in interest rates. For any given level of movement in the general market and economic environmental factors described above, the magnitude of any particular debt security’s price changes will also depend heavily upon security-specific factors such as (1) the duration of the security, (2) imbedded optionality contractually granted to the issuer of the security with respect to principal prepayments, and (3) changes in the level of market premiums demanded by investors for securities with imbedded credit risk (where applicable).

When the fair value of any individual security categorized as available-for-sale ("AFS") or held-to-maturity ("HTM") is less than its amortized cost basis, an assessment is made as to whether or not a charge to current earnings for credit loss is required. In assessing potential credit losses, management also makes a quantitative determination of potential credit loss for all HTM securities even if the risk of credit loss is considered remote and uses a best estimate threshold for securities categorized as AFS. The Company considers numerous factors when determining whether a potential credit loss exists. The principal factors considered are (1) the financial condition of the issue and (guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area, (2) failure of the issuer of the security to make scheduled interest or principal payments, (3) any changes to the rating of the security by a nationally recognized statistical rating organization (“NRSRO”), and (4) the presence of contractual credit enhancements, if any, including the guarantee of the federal government or any of its agencies.

The Company carries all of its AFS investments at fair value with any unrealized gains or losses reported, net of income tax effects, as an adjustment to shareholders' equity and included in accumulated other comprehensive income (loss), except for the credit-related portion of debt securities’ impairment losses, if any, which are charged to earnings. The Company's ability to fully realize the value of its investments in various securities, including corporate debt securities, is dependent on the underlying creditworthiness of the issuing organization. In evaluating the debt securities portfolio (both AFS and HTM) for credit losses, management considers (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) if the present value of expected cash flows is insufficient to recover the entire amortized cost basis.

The portion of the investment securities portfolio, categorized as AFS, with an aggregate amortized historical cost of $199.3 million, had an aggregate fair value that was less than its aggregate amortized historical cost by $13.2 million, or -6.7%, at March 31, 2023. The AFS securities portfolio, with an aggregate amortized historical cost of $205.4 million, had an aggregate fair value that was less than its aggregate amortized historical cost by $14.8 million, or -7.2%, at December 31, 2022. The resultant $1.6 million total improvement in the fair value of the AFS investment portfolio's aggregate fair value relative to its aggregate amortized historical cost, in the three months ended March 31, 2023, was primarily due to the modest decline in general interest rates that occurred in that period and did not represent any changes in credit loss estimations within the portfolio occurring during the three months ended March 31, 2023. Management evaluated the individual securities within the AFS securities portfolio and determined that there was no material credit loss in that portfolio at the adoption date of the CECL methodology on January 1, 2023 or at the reporting date of March 31, 2023. Accordingly, no transition adjustment related to the adoption of ASU 2016-13 was recorded on January 1, 2023 and no provision for credit losses was recorded for the AFS investment securities portfolio in the quarter ended March 31, 2023.

The portion of the investment securities portfolio, categorized as HTM, with an aggregate amortized historical cost of $201.7 million, had an aggregate fair value that was less than its aggregate amortized historical cost by $12.1 million, or -4.5%, at March 31, 2023. The resultant $846,000 total improvement in the aggregate fair value of the HTM investment portfolio, relative to its aggregate amortized historical cost, during the three months ended March 31, 2023, was primarily due to the modest decline in general interest rates that occurred in that period. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost.

As a result of the Company's adoption of ASU 2016-13, the Company established a reserve against the recorded aggregate value of the HTM investment securities portfolio in the amount of $450,000 at January 1, 2023. The reserve was determined using a discounted probability of default ("PD") - loss given default ("LGD") model consistent with the methodologies used to calculate the Company's ACL. Given that the securities classified as HTM that were subject to potential credit losses were substantially unchanged during the three months ended March 31, 2023, no provision for credit losses was recorded for the HTM investment securities portfolio in the quarter ended March 31, 2023.

The following table depicts a rollforward of the allowance for credit losses on investment securities classified as held-to-maturity for the three months ended March 31, 2023:


(dollars in thousands)	Government Issued and Government Sponsored Enterprise Securities		Mortgage and Asset-backed Securities		Securities Issued By State and Political Subdivisions		Corporate Securities
Balance, December 31, 2022	$	-	$	-	$	-	$	-
Adjustment for the adoption of ASU 2016-13		-		40		1		409
Provision for credit losses		-		-		-		-
Allowance on purchased financial assets with credit deterioration		-		-		-		-
Charge-offs of securities		-		-		-		-
Recoveries		-		-		-		-
Balance, March 31, 2023	$	-	$	40	$	1	$	409

The Company monitors the credit quality of the debt securities categorized as HTM primarily through the use of NRSRO credit ratings. These assessments are made on a quarterly basis. The following table summarizes the amortized cost of debt securities categorized as HTM at March 31, 2023, aggregated by credit quality indicators:


(dollars in thousands)
AAA or equivalent	$	38,247
AA or equivalent, including securities issued by the United States Government or Government Sponsored Enterprises		44,013
A or equivalent		23,823
BBB or equivalent		19,268
Unrated		76,315
Total	$	201,666

Gross realized gains (losses) on sales and redemptions of securities for the indicated periods are detailed below:


	For the three months
	ended March 31,
(In thousands)	2023			2022
Realized gains on investments	$	2,021		$	-
Realized losses on investments		(1,948	)		(6	)
	$	73		$	(6	)

As of March 31, 2023 and December 31, 2022, securities with a fair value of $134.6 million and $86.0 million, respectively, were pledged to collateralize certain municipal deposit relationships. As of the same dates, securities with a fair value of $75.5 million and $39.9 million, respectively, were pledged against certain borrowing arrangements.

Management has reviewed its loan and mortgage-backed securities portfolios and determined that, to the best of its knowledge, only minimal exposure exists to sub-prime or other high-risk residential mortgages. With limited exceptions in the Company’s investment portfolio involving the most senior tranches of securitized bonds, the Company is not in the practice of investing in, or originating, these types of investments or loans.