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Investment Securities

6 Months Ended

Jun. 30, 2023

Investment Securities

Investment Securities

7. Investment Securities

Securities are classified at the time of purchase as investment securities held to maturity if it is management’s intent and the Company has the ability to hold the securities until maturity. These held to maturity securities are carried on the Company’s books at cost, adjusted for amortization of premium and accretion of discount which is computed using the level yield method which approximates the effective interest method. Alternatively, securities are classified as available for sale if it is management’s intent at the time of purchase to hold the securities for an indefinite period of time and/or to use the securities as part of the Company’s asset/liability management strategy. Securities classified as available for sale include securities which may be sold to effectively manage interest rate risk exposure, prepayment risk, and other factors (such as liquidity requirements). These available for sale securities are reported at fair value with unrealized aggregate appreciation/depreciation excluded from income and credited/charged to accumulated other comprehensive income (loss) within shareholders’ equity on a net of tax basis. Realized gains or losses on securities sold are computed upon the adjusted cost of the specific securities sold. Additionally, the Company holds equity securities which are comprised of mutual funds held within a rabbi trust for the executive deferred compensation plan. Such securities are reported at fair value within other assets on the Consolidated Balance Sheets. Unrealized holding gains and losses on equity securities are included in earnings.

Allowance for Credit Losses – Held to Maturity Securities

The Company measures expected credit losses on held to maturity debt securities, which are comprised of U.S. government agency and mortgage-backed securities as well as taxable municipal, corporate, and other bonds. The Company’s agency and mortgage-backed securities are issued by U.S. government entities and agencies and are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. As such, no allowance for credit losses has been established for these securities. The allowance for credit losses on the taxable municipal, corporate, and other bonds within the held to maturity securities portfolio is calculated using the probability of default/loss given default (PD/LGD) method. The calculation is completed on a quarterly basis using the default studies provided by an industry leading source. At June 30, 2023, the allowance for credit losses on the held to maturity securities portfolio totaled $109,000.

The allowance for credit losses on held to maturity debt securities is included within investment securities held to maturity on the Consolidated Balance Sheets. Changes in the allowance for credit losses are recorded within provision (credit) for credit losses on the Consolidated Statements of Operations.

Accrued interest receivable on held to maturity debt securities totaled $363,000 at June 30, 2023 and is included within accrued interest income receivable on the Consolidated Balance Sheets. This amount is excluded from the estimate of expected credit losses. Held to maturity debt securities are typically classified as non-accrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When held to maturity debt securities are placed on non-accrual status, unpaid interest credited to income is reversed. The Company had no held to maturity debt securities in non-accrual status at June 30, 2023.

Allowance for Credit Losses – Available for Sale Securities

The Company measures expected credit losses on available for sale debt securities when the Company does not intend to sell, or when it is not more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available for sale debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this evaluation indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost, a credit loss exists and an allowance for credit losses is recorded for the credit loss, equal to the amount that the fair value is less than the amortized cost basis. At June 30, 2023, the allowance for credit losses on the available for sale securities portfolio totaled $926,000.

The allowance for credit losses on available for sale debt securities is included within investment securities available for sale on the Consolidated Balance Sheets. Changes in the allowance for credit losses are recorded within provision (credit) for credit losses on the Consolidated Statements of Operations. Losses are charged against the allowance when the Company believes the collectability of an available for sale security is in jeopardy or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on available for sale debt securities totaled $968,000 at June 30, 2023 and is included within accrued interest income receivable on the Consolidated Balance Sheets. This amount is excluded from the estimate of expected credit losses. Available for sale debt securities are typically classified as non-accrual when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about the further collectability of principal or interest. When available for sale debt securities are placed on non-accrual status, unpaid interest credited to income is reversed. It should be noted that the Company had one available for sale debt security in non-accrual status at June 30, 2023 totaling $926,000 with an associated allowance for credit losses of $926,000.

Credit Losses on Investment Securities – Prior to adopting ASU 2016-13

The Company adopted ASU 2016-13 effective January 1, 2023. Financial statement amounts related to investment securities recorded as of December 31, 2022 and for the period ending June 30, 2022 are presented in accordance with the accounting policies described in the following paragraphs.

Available for sale and held to maturity securities are reviewed quarterly for possible other than temporary impairment. The review includes an analysis of the facts and circumstances of each individual investment such as the expectation for that security’s performance, the creditworthiness of the issuer, and the Company’s intent and ability to hold the security to recovery. The term other than temporary is not intended to indicate that the decline is permanent but indicates that the prospects for a near-term recovery of value are not necessarily favorable or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.

Declines in the fair value of securities below their cost that are deemed to be other than temporary are separated into (a) the amount of the total other than temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other than temporary impairment related to all other factors. The amount of the total other than temporary impairment related to the credit loss is recognized in earnings. The amount of the total other than temporary impairment related to all other factors is recognized in other comprehensive income (loss).

At December 31, 2022, the Company believes the unrealized losses on certain securities within the investments portfolio are primarily a result of increases in market yields from the time of purchase. 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.

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

Investment securities available for sale (AFS):

June 30, 2023

GROSS

GROSS

ALLOWANCE

UNREALIZED

UNREALIZED

FOR CREDIT

FAIR

COST BASIS

GAINS

LOSSES

LOSSES

VALUE

(IN THOUSANDS)

U.S. Agency

$

11,655

$

—

$

(1,266)

$

—

$

10,389

U.S. Agency mortgage-backed securities

99,945

17

(13,126)

—

86,836

Municipal

20,672

—

(1,678)

—

18,994

Corporate bonds

60,663

4

(5,533)

(926)

54,208

Total

$

192,935

$

21

$

(21,603)

$

(926)

$

170,427

Investment securities held to maturity (HTM):

June 30, 2023

GROSS

GROSS

ALLOWANCE

UNREALIZED

UNREALIZED

FAIR

FOR CREDIT

COST BASIS

GAINS

LOSSES

VALUE

LOSSES

(IN THOUSANDS)

U.S. Agency

$

2,500

$

—

$

(444)

$

2,056

$

—

U.S. Agency mortgage-backed securities

19,957

3

(2,317)

17,643

—

Municipal

33,975

—

(3,533)

30,442

(2)

Corporate bonds and other securities

5,400

—

(112)

5,288

(107)

Total

$

61,832

$

3

$

(6,406)

$

55,429

$

(109)

Investment securities available for sale (AFS):


		December 31, 2022
					GROSS			GROSS
					UNREALIZED			UNREALIZED			FAIR
		COST BASIS			GAINS			LOSSES			VALUE

		(IN THOUSANDS)
U.S. Agency		$	11,797		$	1		$	(1,265)		$	10,533
U.S. Agency mortgage-backed securities			102,631			64			(12,710)			89,985
Municipal			20,837			—			(1,799)			19,038
Corporate bonds			63,152			30			(3,230)			59,952
Total		$	198,417		$	95		$	(19,004)		$	179,508

Investment securities held to maturity (HTM):


		December 31, 2022
					GROSS			GROSS
					UNREALIZED			UNREALIZED			FAIR
		COST BASIS			GAINS			LOSSES			VALUE

		(IN THOUSANDS)
U.S. Agency		$	2,500		$	—		$	(432)		$	2,068
U.S. Agency mortgage-backed securities			18,877			8			(2,212)			16,673
Municipal			33,993			2			(3,880)			30,115
Corporate bonds and other securities			6,508			—			(172)			6,336
Total		$	61,878		$	10		$	(6,696)		$	55,192

The Company sold no AFS securities during the second quarter or first six months of 2023 and 2022.

The carrying value of securities, both available for sale and held to maturity, pledged to secure public and trust deposits was $133,639,000 at June 30, 2023 and $134,002,000 at December 31, 2022.

The interest rate environment and market yields can 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 June 30, 2023, the Company had low premium risk as the book value of our mortgage-backed securities purchased at a premium was only 100.8% of the par value.

Contractual maturities of securities at June 30, 2023 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 June 30, 2023 is 54.7 months and is shorter than the duration at December 31, 2022 which was 56.0 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:

June 30, 2023

Available for sale

Held to maturity

Cost Basis

Fair Value

Cost Basis

Fair Value

Within 1 year

$

4,220

$

4,174

$

3,413

$

3,376

After 1 year but within 5 years

48,377

45,721

11,926

11,330

After 5 years but within 10 years

46,387

39,518

25,497

22,364

Over 10 years

93,951

81,014

20,996

18,359

Total

$

192,935

$

170,427

$

61,832

$

55,429

The following table summarizes the available for sale debt securities in an unrealized loss position for which an allowance for credit losses has not been recorded as of June 30, 2023, aggregated by security type and length of time in a continuous loss position (in thousands):

June 30, 2023

LESS THAN 12 MONTHS

12 MONTHS OR LONGER

TOTAL

FAIR

UNREALIZED

FAIR

UNREALIZED

FAIR

UNREALIZED

VALUE

LOSSES

VALUE

LOSSES

VALUE

LOSSES

U.S. Agency

$

1,955

$

(42)

$

8,434

$

(1,224)

$

10,389

$

(1,266)

U.S. Agency mortgage-backed securities

25,108

(1,316)

57,621

(11,810)

82,729

(13,126)

Municipal

3,766

(132)

14,728

(1,546)

18,494

(1,678)

Corporate bonds

24,229

(1,723)

26,477

(3,810)

50,706

(5,533)

Total

$

55,058

$

(3,213)

$

107,260

$

(18,390)

$

162,318

$

(21,603)

At June 30, 2023, within the available for sale debt securities portfolio, the Company had three U.S. Agency, 40 U.S. Agency mortgage-backed securities, 11 municipal, and 39 corporate bonds that have been in a gross unrealized loss position for less than 12 months with depreciation of 5.5% from its amortized cost basis. Additionally, at June 30, 2023, within the available for sale debt securities portfolio, the Company had 11 U.S. Agency, 112 U.S. Agency mortgage-backed securities, 47 municipal, and 54 corporate bonds that have been in a gross unrealized loss position for greater than 12 months with depreciation of 14.6% from its amortized cost basis.

These 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 decrease, the fair value of securities will increase. Management generally views changes in fair value caused by changes in interest rates as temporary; therefore, no provision for credit losses has been recorded for these securities. 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 Company did not record a provision for credit losses on available for sale debt securities during the second quarter of 2023 while a $926,000 provision for credit losses on available for sale debt securities was recorded during the first six months of 2023. The recognition of the loss resulted from a subordinated debt investment issued by Signature Bank which was closed by banking regulators on March 12, 2023. In a press release issued by the Federal Deposit Insurance Corporation (FDIC), it was disclosed that unsecured debt holders of the institution will not be protected. Management reviewed the Form 10-K for the year ended December 31, 2022 filed by Signature Bank, which was filed on March 1, 2023, and determined that no circumstances existed to indicate that the debt security held by the Company was impaired as of December 31, 2022. Specifically, as of December 31, 2022, Signature Bank had total assets of $110.4 billion, net income of $1.3 billion for the year then ended, and demonstrated strong regulatory capital ratios. The corporate security has been placed in non-accrual status and approximately $17,000 of unpaid interest previously credited to income was reversed.

The following tables present the activity in the allowance for credit losses on held to maturity debt securities by major security type for the three and six months ended June 30, 2023 (in thousands).


		Three months ended June 30, 2023
		Balance at			Charge-						Provision			Balance at
		March 31, 2023			Offs			Recoveries			(Credit)			June 30, 2023
U.S. Agency		$	—		$	—		$	—		$	—		$	—
U.S. Agency mortgage-backed securities			—			—			—			—			—
Municipal			3			—			—			(1)			2
Corporate bonds and other securities			80			—			—			27			107
Total		$	83		$	—		$	—		$	26		$	109


		Six months ended June 30, 2023
		Balance at			Impact of Adopting			Charge-						Provision			Balance at
		December 31, 2022			ASU 2016-13			Offs			Recoveries			(Credit)			June 30, 2023
U.S. Agency		$	—		$	—		$	—		$	—		$	—		$	—
U.S. Agency mortgage-backed securities			—			—			—			—			—			—
Municipal			—			3			—			—			(1)			2
Corporate bonds and other securities			—			111			—			—			(4)			107
Total		$	—		$	114		$	—		$	—		$	(5)		$	109

As stated previously, the Company’s agency and mortgage-backed securities are issued by U.S. government entities and agencies and are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. As such, no allowance for credit losses has been established for these securities. The allowance for credit losses on the taxable municipal, corporate, and other bonds within the held to maturity securities portfolio is calculated using the PD/LGD method. The calculation is completed on a quarterly basis using the default studies provided by an industry leading source.

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. The Company monitors the credit ratings of its debt securities on a quarterly basis. At June 30, 2023, 53.0% of the total investment securities portfolio was rated AAA as compared to 52.5% at December 31, 2022. Approximately 14.2% of the total investment securities portfolio was either rated below A or unrated at June 30, 2023 as compared to 14.7% at December 31, 2022.

Specifically, the following table summarizes the amortized cost of held to maturity debt securities at June 30, 2023, aggregated by credit quality indicator (in thousands).

June 30, 2023

Credit Rating

AAA/AA/A

BBB/BB/B

Unrated

Total

U.S. Agency

$

2,500

$

—

$

—

$

2,500

U.S. Agency mortgage-backed securities

19,957

—

—

19,957

Municipal

33,975

—

—

33,975

Corporate bonds and other securities

4,007

—

1,393

5,400

Total

$

60,439

$

—

$

1,393

$

61,832

The Company had no held to maturity debt securities in non-accrual status or past due 90 days still accruing interest at June 30, 2023. The underlying issuers continue to make timely principal and interest payments on the securities.