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INVESTMENT SECURITIES

12 Months Ended

Dec. 31, 2023

INVESTMENT SECURITIES

INVESTMENT SECURITIES

5. INVESTMENT SECURITIES

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

Investment securities available for sale:

DECEMBER 31, 2023

GROSS

GROSS

ALLOWANCE

UNREALIZED

UNREALIZED

FOR CREDIT

FAIR

COST BASIS

GAINS

LOSSES

LOSSES

VALUE

(IN THOUSANDS)

U.S. Agency

$

6,035

$

—

$

(696)

$

—

$

5,339

U.S. Agency mortgage-backed securities

104,820

179

(11,924)

—

93,075

Municipal

11,159

1

(800)

—

10,360

Corporate bonds

62,004

46

(4,187)

(926)

56,937

Total

$

184,018

$

226

$

(17,607)

$

(926)

$

165,711

Investment securities held to maturity:

DECEMBER 31, 2023

GROSS

GROSS

ALLOWANCE

UNREALIZED

UNREALIZED

FAIR

FOR CREDIT

COST BASIS

GAINS

LOSSES

VALUE

LOSSES

(IN THOUSANDS)

U.S. Agency

$

2,500

$

—

$

(379)

$

2,121

$

—

U.S. Agency mortgage-backed securities

24,222

49

(2,058)

22,213

—

Municipal

32,787

—

(2,797)

29,990

(2)

Corporate bonds and other securities

4,470

—

(173)

4,297

(35)

Total

$

63,979

$

49

$

(5,407)

$

58,621

$

(37)

Investment securities available for sale:


		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:


		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 and its subsidiaries, collectively, did not hold securities of any single issuer, excluding U.S. agencies, that exceeded 10% of shareholders’ equity at December 31, 2023. Management conducted a review of the investment securities portfolio in order to identify exposures to issuers within foreign countries experiencing significant economic, fiscal, and/or political strains. Given the instablity and continuing military conflict between Israel and Hamas, the nation of Israel has been identified by management as significantly strained. At December 31, 2023, the Company had State of Israel Jubilee bonds within the held to maturity portfolio with an amortized cost of $2.0 million and a fair value of $1.9 million. The 3-year bonds were purchased prior to the start of the conflict and are set to mature in September 2024 and August 2026.

The Company realized $5,000 of gross investment security gains and $927,000 of gross investment security losses in 2023, realized $5,000 of gross investment security gains and $5,000 of gross investment security losses in 2022, and realized $84,000 of gross investment security gains in 2021. On a net basis, the realized loss for 2023 was $729,000 after factoring in an income tax benefit of $193,000, the realized gain for 2022 was zero, and the realized gain for 2021 was $66,000 after factoring in income tax expense of $18,000. Proceeds from sales of investment securities available for sale were $16.8 million for 2023, $1.5 million for 2022, and $960,000 for 2021.

The carrying value of securities, both available for sale and held to maturity, pledged to secure public and trust deposits was $135,624,000 at December 31, 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 December 31, 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.

The Company’s consolidated investment securities portfolio had an effective duration of approximately 4.12 years. The weighted average expected maturity for available for sale securities at December 31, 2023 for U.S. agency, U.S. agency mortgage-backed, corporate bond, and municipal securities was 6.92, 7.46, 3.72, and 3.05 years, respectively. The weighted average expected maturity for held to maturity securities at December 31, 2023 for U.S. agency, U.S. agency mortgage-backed, corporate bond/other securities, and municipal securities was 6.72, 8.85, 3.36, and 4.69 years, respectively. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties. The following table sets forth the contractual maturity distribution of the investment securities, cost basis and fair market values as of December 31, 2023.

Investment securities available for sale:

AT DECEMBER 31, 2023

TOTAL

U.S. AGENCY

INVESTMENT

MORTGAGE-

SECURITIES

CORPORATE

BACKED

AVAILABLE

U. S. AGENCY

MUNICIPAL

BONDS

SECURITIES

FOR SALE

(IN THOUSANDS)

COST BASIS

Within 1 year

$

500

$

2,112

$

5,012

$

—

$

7,624

After 1 year but within 5 years

176

4,511

29,020

1,667

35,374

After 5 years but within 10 years

4,000

4,536

27,322

5,717

41,575

Over 10 years

1,359

—

650

97,436

99,445

Total

$

6,035

$

11,159

$

62,004

$

104,820

$

184,018

FAIR VALUE

Within 1 year

$

499

$

2,085

$

4,940

$

—

$

7,524

After 1 year but within 5 years

169

4,336

27,762

1,615

33,882

After 5 years but within 10 years

3,434

3,939

23,759

5,429

36,561

Over 10 years

1,237

—

476

86,031

87,744

Total

$

5,339

$

10,360

$

56,937

$

93,075

$

165,711

Investment securities held to maturity:

AT DECEMBER 31, 2023

TOTAL

U.S. AGENCY

INVESTMENT

CORPORATE

MORTGAGE-

SECURITIES

BONDS AND

BACKED

HELD TO

U.S. AGENCY

MUNICIPAL

OTHER

SECURITIES

MATURITY

(IN THOUSANDS)

COST BASIS

Within 1 year

$

—

$

1,211

$

1,000

$

971

$

3,182

After 1 year but within 5 years

—

13,108

2,002

—

15,110

After 5 years but within 10 years

2,500

17,174

488

1,322

21,484

Over 10 years

—

1,294

980

21,929

24,203

Total

$

2,500

$

32,787

$

4,470

$

24,222

$

63,979

FAIR VALUE

Within 1 year

$

—

$

1,195

$

969

$

964

$

3,128

After 1 year but within 5 years

—

12,580

1,860

—

14,440

After 5 years but within 10 years

2,121

15,143

488

1,280

19,032

Over 10 years

—

1,072

980

19,969

22,021

Total

$

2,121

$

29,990

$

4,297

$

22,213

$

58,621

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 December 31, 2023, aggregated by security type and length of time in a continuous loss position (in thousands):

DECEMBER 31, 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

$

—

$

—

$

5,339

$

(696)

$

5,339

$

(696)

U.S. Agency mortgage-backed securities

4,120

(20)

73,511

(11,904)

77,631

(11,924)

Municipal

—

—

10,109

(800)

10,109

(800)

Corporate bonds

8,885

(103)

42,659

(4,084)

51,544

(4,187)

Total

$

13,005

$

(123)

$

131,618

$

(17,484)

$

144,623

$

(17,607)

At December 31, 2023, within the available for sale debt securities portfolio, the Company had two U.S. Agency mortgage-backed securities and ten corporate bonds that have been in a gross unrealized loss position for less than 12 months with depreciation of 0.9% from its amortized cost basis. Additionally, at December 31, 2023, within the available for sale debt securities portfolio, the Company had seven U.S. Agency, 137 U.S. Agency mortgage-backed securities, 32 municipal, and 82 corporate bonds that have been in a gross unrealized loss position for greater than 12 months with depreciation of 11.7% 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 recorded a $926,000 provision for credit losses on available for sale debt securities during 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 table presents the activity in the allowance for credit losses on held to maturity debt securities by major security type for the year ended December 31, 2023 (in thousands).


		YEAR ENDED DECEMBER 31, 2023
		Balance at			Impact of Adopting			Charge-						Provision			Balance at
		December 31, 2022			ASU 2016-13			Offs			Recoveries			(Credit)			December 31, 2023
U.S. Agency		$	—		$	—		$	—		$	—		$	—		$	—
U.S. Agency mortgage-backed securities			—			—			—			—			—			—
Municipal			—			3			—			—			(1)			2
Corporate bonds and other securities			—			111			—			—			(76)			35
Total		$	—		$	114		$	—		$	—		$	(77)		$	37

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. Additionally, based on management judgment, certain qualitative adjustments, such as the Company’s historical loss experience and/or the issuer’s credit quality, may be applied.

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 Investors Service or Standard & Poor’s rating of A. The Company monitors the credit ratings of its debt securities on a quarterly basis. At December 31, 2023, 55.9% of the portfolio was rated AAA as compared to 52.5% at December 31, 2022. Approximately 15.1% of the portfolio was rated below A or unrated at December 31, 2023 compared to 14.7% at December 31, 2022.

Specifically, the following table summarizes the amortized cost of held to maturity debt securities at December 31, 2023, aggregated by credit quality indicator (in thousands).

DECEMBER 31, 2023

CREDIT RATING

AAA/AA/A

BBB/BB/B

UNRATED

TOTAL

U.S. Agency

$

2,500

$

—

$

—

$

2,500

U.S. Agency mortgage-backed securities

24,222

—

—

24,222

Municipal

32,787

—

—

32,787

Corporate bonds and other securities

3,002

—

1,468

4,470

Total

$

62,511

$

—

$

1,468

$

63,979

The Company had no held to maturity debt securities in non-accrual status or past due 90 days still accruing interest at December 31, 2023. The underlying issuers continue to make timely principal and interest payments on the securities.

As of December 31, 2023, 2022, and 2021, the Company reported $499,000, $502,000, and $526,000, respectively, of equity securities within other assets on the Consolidated Balance Sheets. These equity securities are held within a nonqualified deferred compensation plan in which a select group of executives of the Company can participate. An eligible executive can defer a certain percentage of their current salary to be placed into the plan and held within a rabbi trust. The assets of the rabbi trust are invested in various publicly listed mutual funds. The gain or loss on the equity securities (both realized and unrealized) is reported within other income on the Consolidated Statements of Operations. No gain or loss on the equity securities (both realized and unrealized) was recorded during 2023. The realized loss on equity securities was $9,000 during 2022 while the realized gain on equity securities was $36,000 during 2021. The unrealized loss was $13,000 in 2022 compared to an unrealized gain of $7,000 in 2021. Additionally, the Company has recognized a deferred compensation liability, which is equal to the balance of the equity securities and is reported within other liabilities on the Consolidated Balance Sheets.