Note 4 - Investment Securities

9 Months Ended

Sep. 30, 2024

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.

The Company did not record any allowance for credit losses on its available-for-sale or held-to-maturity securities. The Company excludes accrued interest receivable from the amortized cost basis of investment securities disclosed throughout this footnote. As of September 30, 2024 and December 31, 2023, accrued interest receivable for investment securities totaled $2.9 million and $3.4 million, respectively, and is included in accrued interest receivable line in the consolidated balance sheets. The amortized cost and fair value of investment securities at  September 30, 2024 and December 31, 2023 are summarized as follows:

			Gross		Gross
	Amortized		unrealized		unrealized			Fair
(dollars in thousands)	cost		gains		losses			value
September 30, 2024
Held-to-maturity securities:
Agency - GSE	$	82,205	$	-	$	(5,619	)	$	76,586
Obligations of states and political subdivisions		143,168		-		(16,532	)		126,636
Total held-to-maturity securities	$	225,373	$	-	$	(22,151	)	$	203,222
Available-for-sale debt securities:
Agency - GSE	$	31,248	$	-	$	(2,677	)	$	28,571
Obligations of states and political subdivisions		136,227		1		(13,446	)		122,782
MBS - GSE residential		210,178		-		(27,085	)		183,093
Total available-for-sale debt securities	$	377,653	$	1	$	(43,208	)	$	334,446

			Gross		Gross
	Amortized		unrealized		unrealized			Fair
(dollars in thousands)	cost		gains		losses			value
December 31, 2023
Held-to-maturity securities:
Agency - GSE	$	81,382	$	-	$	(7,561	)	$	73,821
Obligations of states and political subdivisions		142,851		-		(19,496	)		123,355
Total held-to-maturity securities	$	224,233	$	-	$	(27,057	)	$	197,176
Available-for-sale debt securities:
Agency - GSE	$	31,178	$	-	$	(3,633	)	$	27,545
Obligations of states and political subdivisions		138,217		1		(15,421	)		122,797
MBS - GSE residential		226,240		-		(32,542	)		193,698
Total available-for-sale debt securities	$	395,635	$	1	$	(51,596	)	$	344,040

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  September 30, 2024 by contractual maturity are summarized 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		32,984		31,510
Due after five years through ten years		76,736		70,178
Due after ten years		115,653		101,534
Total held-to-maturity securities	$	225,373	$	203,222
Available-for-sale securities:
Debt securities:
Due in one year or less	$	1,999	$	1,965
Due after one year through five years		40,999		37,821
Due after five years through ten years		14,608		12,891
Due after ten years		108,726		98,676
MBS - GSE residential		210,178		183,093
Total available-for-sale debt securities	$	376,510	$	334,446

There was a $1.1 million increase to the carrying value of municipal AFS securities resulting from the interest rate swap that was not included in the maturity table above.

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.

Securities pledged at September 30, 2024 had a carrying amount of $393.7 million and were pledged to secure public deposits, trust client deposits, borrowings and derivative instruments.

The following table presents the fair value and gross unrealized losses of debt securities aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of  September 30, 2024 and December 31, 2023:

	Less than 12 months					More than 12 months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(dollars in thousands)	value		losses			value		losses			value		losses
September 30, 2024
Agency - GSE	$	-	$	-		$	105,157	$	(8,296	)	$	105,157	$	(8,296	)
Obligations of states and political subdivisions		-		-			249,022		(28,835	)		249,022		(28,835	)
MBS - GSE residential		1,466		(24	)		181,627		(25,918	)		183,093		(25,942	)
Total	$	1,466	$	(24	)	$	535,806	$	(63,049	)	$	537,272	$	(63,073	)
Number of securities		1					416					417
December 31, 2023
Agency - GSE	$	-	$	-		$	101,366	$	(11,194	)	$	101,366	$	(11,194	)
Obligations of states and political subdivisions		781		(22	)		244,224		(33,814	)		245,005		(33,836	)
MBS - GSE residential		-		-			193,698		(31,462	)		193,698		(31,462	)
Total	$	781	$	(22	)	$	539,288	$	(76,470	)	$	540,069	$	(76,492	)
Number of securities		2					414					416

There were $2.3 million and $2.2 million increases to the carrying value of AFS securities resulting from the interest rate swap that increased the unrealized loss position at September 30, 2024 and December 31, 2023 that were not included in the table above.

The Company had 417 debt securities in an unrealized loss position at  September 30, 2024, including 46 agency-GSE securities, 136 MBS – GSE residential securities and 235 municipal securities. The severity of these unrealized losses based on their underlying cost basis was as follows at  September 30, 2024: 7.31% for agency - GSE, 12.41% for total MBS-GSE residential; and 10.38% for municipals. Management has no intent to sell any securities in an unrealized loss position as of September 30, 2024.

The Company reassessed classification of certain investments and effective April 1, 2022, the Company transferred agency and municipal investment securities with a book value of $245.5 million from available-for-sale to held-to-maturity. The securities were transferred at their fair value. The market value of the securities on the date of the transfer was $221.7 million, after netting unrealized losses totaling $18.9 million. The $18.9 million, net of deferred taxes, is being accreted into interest income from other comprehensive income over the life of the bonds. The allowance for credit losses on these securities was evaluated under the accounting policy for HTM debt securities.

Unrealized losses on available-for-sale securities have not been recognized into income because 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 to assess whether the fair value of a debt security is less than its amortized cost as of the balance sheet date. An allowance for credit losses has not been recognized on these securities in an unrealized loss position because: (1) the entity does not intend to sell the security; (2) more likely than not the entity will not be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is sufficient to recover the entire amortized cost. The issuer(s) continues to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bond(s) approach maturity.

The Company has U.S. agency bonds and municipal securities classified as held-to-maturity. Management estimated no credit loss reserve will be necessary for agency bonds HTM given the strong credit history of GSE and other U.S. agency issued bonds and the involvement of the U.S. government. For municipal securities HTM, the Company utilized a third-party model to analyze whether a credit loss reserve is needed for these bonds. The amount of credit loss reserve calculated using this model was immaterial to the Company's financial statements, therefore no reserve was recorded, but the Company will continue to evaluate these securities on a quarterly basis.