Note 4 - Investment Securities

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

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

4. INVESTMENT SECURITIES

Agency – Government-sponsored enterprise (GSE) and Mortgage-backed securities (MBS) - GSE residential

Agency – GSE and MBS – GSE residential securities consist of short- to long-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), FNMA, FHLB and Government National Mortgage Association (GNMA). These securities have interest rates that are fixed, have varying short to long-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government.

Obligations of states and political subdivisions (municipal)

The municipal securities are general obligation and revenue bonds rated as investment grade by various credit rating agencies and have fixed rates of interest with mid- to long-term maturities. Fair values of these securities are highly driven by interest rates. Management performs ongoing credit quality reviews on these issues.

Amortized cost and fair value of investment securities as of the period indicated are as follows:

			Gross		Gross
	Amortized		unrealized		unrealized			Fair
(dollars in thousands)	cost		gains		losses			value
December 31, 2022
Held-to-maturity securities:
Agency - GSE	$	80,306	$	-	$	(9,243	)	$	71,063
Obligations of states and political subdivisions		142,438		-		(26,221	)		116,217
Total held-to-maturity securities	$	222,744	$	-	$	(35,464	)	$	187,280
Available-for-sale debt securities:
Agency - GSE	$	36,076	$	-	$	(4,543	)	$	31,533
Obligations of states and political subdivisions		197,935		501		(26,542	)		171,894
MBS - GSE residential		254,730		-		(37,295	)		217,435
Total available-for-sale debt securities	$	488,741	$	501	$	(68,380	)	$	420,862

			Gross		Gross
	Amortized		unrealized		unrealized			Fair
(dollars in thousands)	cost		gains		losses			value
December 31, 2021
Available-for-sale debt securities:
Agency - GSE	$	119,399	$	204	$	(2,600	)	$	117,003
Obligations of states and political subdivisions		360,680		6,708		(2,678	)		364,710
MBS - GSE residential		258,674		1,654		(3,061	)		257,267
Total available-for-sale debt securities	$	738,753	$	8,566	$	(8,339	)	$	738,980

Some of the Company’s debt securities are pledged to secure trust funds, public deposits, short-term borrowings, FHLB advances, Federal Reserve Bank of Philadelphia Discount Window borrowings and certain other deposits as required by law.

The amortized cost and fair value of debt securities at December 31, 2022 by contractual maturity are shown below:

	Amortized		Fair
(dollars in thousands)	cost		value
Held-to-maturity securities:
Due in one year or less	$	-	$	-
Due after one year through five years		7,022		6,470
Due after five years through ten years		76,864		67,709
Due after ten years		138,858		113,101
Total held-to-maturity securities	$	222,744	$	187,280
Available-for-sale securities:
Debt securities:
Due in one year or less	$	3,997	$	3,951
Due after one year through five years		18,791		16,974
Due after five years through ten years		42,692		35,451
Due after ten years		168,531		147,051
MBS - GSE residential		254,730		217,435
Total available-for-sale debt securities	$	488,741	$	420,862

Actual maturities will differ from contractual maturities because issuers and borrowers may have the right to call or repay obligations with or without call or prepayment penalty. Agency – GSE and municipal securities are included based on their original stated maturity. MBS – GSE residential, which are based on weighted-average lives and subject to monthly principal pay-downs, are listed in total. Most of the securities have fixed rates or have predetermined scheduled rate changes and many have call features that allow the issuer to call the security at par before its stated maturity without penalty.

Gross realized gains and losses from sales, determined using specific identification, for the periods indicated were as follows:

	December 31,
(dollars in thousands)	2022			2021			2020
Gross realized gain	$	18		$	98		$	147
Gross realized loss		(14	)		(52	)		(32	)
Net gain	$	4		$	46		$	115

The following table presents the fair value and gross unrealized losses of investments aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of the period indicated:

	Less than 12 months					More than 12 months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(dollars in thousands)	value		losses			value		losses			value		losses
December 31, 2022
Agency - GSE	$	9,285	$	(377	)	$	93,312	$	(13,409	)	$	102,597	$	(13,786	)
Obligations of states and political subdivisions		170,484		(26,928	)		112,353		(25,835	)		282,837		(52,763	)
MBS - GSE residential		61,803		(6,018	)		155,632		(31,277	)		217,435		(37,295	)
Total	$	241,572	$	(33,323	)	$	361,297	$	(70,521	)	$	602,869	$	(103,844	)
Number of securities		272					213					485
December 31, 2021
Agency - GSE	$	84,308	$	(1,460	)	$	26,516	$	(1,140	)	$	110,824	$	(2,600	)
Obligations of states and political subdivisions		193,124		(2,662	)		12,796		(399	)		205,920		(3,061	)
MBS - GSE residential		137,495		(2,351	)		9,469		(327	)		146,964		(2,678	)
Total	$	414,927	$	(6,473	)	$	48,781	$	(1,866	)	$	463,708	$	(8,339	)
Number of securities		187					26					213

The Company had 485 debt securities in an unrealized loss position at  December 31, 2022, including 51 agency-GSE securities, 144 MBS – GSE residential securities and 290 municipal securities. The severity of these unrealized losses based on their underlying cost basis was as follows at December 31, 2022: 11.84% for agency - GSE, 14.64% for total MBS-GSE residential; and 15.72% for municipals. 213 of these securities had been in an unrealized loss position in excess of 12 months. Management has no intent to sell any securities in an unrealized loss position as of December 31, 2022.

During the second quarter of 2022, the Company transferred investment securities with a book value of $245.5 million from available-for-sale to held-to-maturity. The accounting for securities held-to-maturity on this transfer will mitigate the effect on the other comprehensive income (OCI) component of stockholders’ equity from the price risk of rising interest rates which will result in further future unrealized losses in the available-for-sale portfolio.

Management believes the cause of the unrealized losses is related to changes in interest rates and is not directly related to credit quality. Quarterly, management conducts a formal review of investment securities for the presence of other than temporary impairment (OTTI). The accounting guidance related to OTTI requires the Company to assess whether OTTI is present when the fair value of a debt security is less than its amortized cost as of the balance sheet date. Under those circumstances, OTTI is considered to have occurred if: (1) the entity has the intent to sell the security; (2) more likely than not the entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost. The accounting guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on securities not expected to be sold be recognized in OCI. Non-credit-related OTTI is based on other factors affecting market value, including illiquidity.

The Company’s OTTI evaluation process also follows the guidance set forth in topics related to debt securities. The guidance set forth in the pronouncements require the Company to take into consideration current market conditions, fair value in relationship to cost, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, the ability and intent to hold investments until a recovery of fair value which may be to maturity and other factors when evaluating for the existence of OTTI. The guidance requires that credit-related OTTI be recognized as a realized loss through earnings when there has been an adverse change in the holder’s expected cash flows such that the full amount (principal and interest) will probably not be received. This requirement is consistent with the impairment model in the guidance for accounting for debt securities.

For all debt securities, as of December 31, 2022, the Company applied the criteria provided in the recognition and presentation guidance related to OTTI. That is, management has no intent to sell the securities and nor any conditions were identified by management that, more likely than not, would require the Company to sell the securities before recovery of their amortized cost basis. The results indicated there was no presence of OTTI in the Company’s security portfolio. In addition, management believes the change in fair value is attributable to changes in interest rates.