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Investment Securities

9 Months Ended

Sep. 30, 2022

Investment Securities

Investment Securities

7. Investment Securities

The cost basis and fair values of investment securities are summarized as follows:

Investment securities available for sale (AFS):

September 30, 2022

GROSS

GROSS

UNREALIZED

UNREALIZED

FAIR

COST BASIS

GAINS

LOSSES

VALUE

(IN THOUSANDS)

U.S. Agency

$

11,349

$

—

$

(1,312)

$

10,037

U.S. Agency mortgage-backed securities

101,389

14

(13,377)

88,026

Municipal

21,438

—

(1,799)

19,639

Corporate bonds

59,284

36

(2,722)

56,598

Total

$

193,460

$

50

$

(19,210)

$

174,300

Investment securities held to maturity (HTM):

September 30, 2022

GROSS

GROSS

UNREALIZED

UNREALIZED

FAIR

COST BASIS

GAINS

LOSSES

VALUE

(IN THOUSANDS)

U.S. Agency

$

2,500

$

—

$

(439)

$

2,061

U.S. Agency mortgage-backed securities

19,354

11

(2,343)

17,022

Municipal

34,206

6

(3,818)

30,394

Corporate bonds and other securities

6,507

—

(196)

6,311

Total

$

62,567

$

17

$

(6,796)

$

55,788

Investment securities available for sale (AFS):


		December 31, 2021
					GROSS			GROSS
					UNREALIZED			UNREALIZED			FAIR
		COST BASIS			GAINS			LOSSES			VALUE

		(IN THOUSANDS)
U.S. Agency		$	7,371		$	86		$	(70)		$	7,387
U.S. Agency mortgage-backed securities			80,136			1,202			(1,171)			80,167
Municipal			20,066			851			(25)			20,892
Corporate bonds			53,843			1,028			(146)			54,725
Total		$	161,416		$	3,167		$	(1,412)		$	163,171

Investment securities held to maturity (HTM):


		December 31, 2021
					GROSS			GROSS
					UNREALIZED			UNREALIZED			FAIR
		COST BASIS			GAINS			LOSSES			VALUE

		(IN THOUSANDS)
U.S. Agency		$	2,500		$	—		$	(11)		$	2,489
U.S. Agency mortgage-backed securities			10,556			203			(115)			10,644
Municipal			33,188			1,734			(103)			34,819
Corporate bonds and other securities			7,507			64			(7)			7,564
Total		$	53,751		$	2,001		$	(236)		$	55,516

Maintaining investment quality is a primary objective of the Company’s investment policy which, subject to certain limited exceptions, prohibits the purchase of any investment security below a Moody’s Investor’s Service or Standard & Poor’s rating of “A.” At September 30, 2022, 52.9% of the portfolio was rated “AAA” as compared to 47.1% at December 31, 2021. Approximately 13.9% of the portfolio was either rated below “A” or unrated at September 30, 2022 as compared to 14.7% at December 31, 2021.

The Company sold $1.5 million AFS securities during the third quarter and first nine months of 2022 resulting in $5,000 of gross investment security gains and $5,000 of gross investment security losses. The Company sold no AFS securities during the third quarter of 2021. Total proceeds from the sale of AFS securities for the first nine months of 2021 were $960,000 resulting in $84,000 of gross investment security gains.

The carrying value of securities, both available for sale and held to maturity, pledged to secure public and trust deposits was $129,517,000 at September 30, 2022 and $122,574,000 at December 31, 2021.

The following tables present information concerning investments with unrealized losses as of September 30, 2022 and December 31, 2021 (in thousands):

Total investment securities:

September 30, 2022

LESS THAN 12 MONTHS

12 MONTHS OR LONGER

TOTAL

FAIR

UNREALIZED

FAIR

UNREALIZED

FAIR

UNREALIZED

VALUE

LOSSES

VALUE

LOSSES

VALUE

LOSSES

U.S. Agency

$

5,917

$

(432)

$

6,181

$

(1,319)

$

12,098

$

(1,751)

U.S. Agency mortgage-backed securities

65,965

(6,084)

37,261

(9,636)

103,226

(15,720)

Municipal

43,069

(4,327)

5,796

(1,290)

48,865

(5,617)

Corporate bonds and other securities

46,988

(2,416)

5,898

(502)

52,886

(2,918)

Total

$

161,939

$

(13,259)

$

55,136

$

(12,747)

$

217,075

$

(26,006)

Total investment securities:


		December 31, 2021
		LESS THAN 12 MONTHS						12 MONTHS OR LONGER						TOTAL
		FAIR			UNREALIZED			FAIR			UNREALIZED			FAIR			UNREALIZED
		VALUE			LOSSES			VALUE			LOSSES			VALUE			LOSSES
U.S. Agency		$	7,419		$	(81)		$	—		$	—		$	7,419		$	(81)
U.S. Agency mortgage-backed securities			45,422			(972)			6,691			(314)			52,113			(1,286)
Municipal			7,832			(128)			—			—			7,832			(128)
Corporate bonds and other securities			14,558			(92)			2,439			(61)			16,997			(153)
Total		$	75,231		$	(1,273)		$	9,130		$	(375)		$	84,361		$	(1,648)

The unrealized losses are primarily a result of increases in market yields from the time of purchase. In general, as market yields rise, the value of securities will decrease; as market yields fall, the fair value of securities will increase. There are 423 positions that are considered temporarily impaired at September 30, 2022. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, these securities have not been classified as other-than-temporarily impaired. Management has also concluded that based on current information we expect to continue to receive scheduled interest payments as well as the entire principal balance. Furthermore, management does not intend to sell these securities and does not believe it will be required to sell these securities before they recover in value or mature.

The interest rate environment and market yields can also have a significant impact on the yield earned on mortgage-backed securities (MBS). Prepayment speed assumptions are an important factor to consider when evaluating the returns on an MBS. Generally, as interest rates decline, borrowers have more incentive to refinance into a lower rate, so prepayments will rise. Conversely, as interest rates increase, prepayments will decline. When an MBS is purchased at a premium, the yield will decrease as prepayments increase and the yield will increase as prepayments decrease. As of September 30, 2022, the Company had low premium risk as the book value of our mortgage-backed securities purchased at a premium was only 100.9% of the par value.

Contractual maturities of securities at September 30, 2022 are shown below (in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties. The weighted average duration of the total investment securities portfolio at September 30, 2022 is 58.2 months and is higher than the duration at December 31, 2021 which was 41.5 months. The duration remains within our internally established guideline to not exceed 60 months which we believe is appropriate to maintain proper levels of liquidity, interest rate risk, market valuation sensitivity and profitability.

Total investment securities:

September 30, 2022

Available for sale

Held to maturity

Cost Basis

Fair Value

Cost Basis

Fair Value

Within 1 year

$

7,265

$

7,234

$

2,200

$

2,132

After 1 year but within 5 years

40,696

39,101

12,136

11,620

After 5 years but within 10 years

49,071

44,735

24,434

21,526

Over 10 years

96,428

83,230

23,797

20,510

Total

$

193,460

$

174,300

$

62,567

$

55,788