SECURITIES

6 Months Ended

Jun. 30, 2022

SECURITIES

SECURITIES

5. SECURITIES

Equity Securities

Equity securities owned by the Company consist of common stock of various financial services providers. ASC Topic 321, Investments – Equity Securities requires all equity securities within its scope to be measured at fair value with changes in fair value recognized in net income. As of June 30, 2022, the Company had $1.0 million in equity securities recorded at fair value and $1.1 million in equity securities were recorded at fair value at December 31, 2021. The Company recorded net losses of $57,000 and $80,000 during the respective three and six months ended June 30, 2022, and net gains of $8,000 and $101,000 during the respective three and six months ended June 30, 2021, due to changes in the fair value of the Company’s portfolio of equity securities during the applicable periods.

Debt Securities Available for Sale

Debt securities classified as available for sale, which include marketable investment securities, are within the scope of ASC Topic 320, Investments – Debt Securities. Topic 320 requires all debt securities within its scope to be stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of other comprehensive income (loss). Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Interest and dividends are recognized as income when earned. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains or losses on the disposition of securities available for sale are based on the net proceeds and the adjusted carrying amount of the securities sold, determined on a specific identification basis.

The Company’s available for sale investment portfolio includes primarily bonds issued by U.S. Government sponsored enterprises (approximately 14% of the investment portfolio), mortgage-backed securities issued by Government-sponsored entities and backed by residential mortgages (approximately 76%), corporate debt securities (approximately 7%) and municipal bonds (approximately 3%) as of June 30, 2022. Most of the municipal bonds are general obligation bonds with maturities or pre-refunding dates within 5 years.

At each of June 30, 2022 and December 31, 2021, the Company had holdings of securities from two issuers in excess of 10% of stockholders’ equity, other than the U.S. Government and its agencies. Holdings in Federal Farm Credit Bank and Pennsylvania Housing Finance securities had fair values of $11.4 million and $6.7 million, respectively, as of June 30, 2022, and $12.4 million and $7.5 million, respectively, as of December 31, 2021.

The amortized cost and fair value of debt securities available for sale as of June 30, 2022 and December 31, 2021, by contractual maturity, are shown in the tables below. Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without prepayment penalties.

(Dollars in thousands)	June 30, 2022
					Gross		Gross
	Amortized		Fair		Unrealized		Unrealized
Debt Securities Available for Sale	Cost		Value		Gains		Losses
Type and Maturity
Obligations of U.S. Government sponsored enterprises
After one year but within five years	$	17,947	$	16,447	$	—	$	(1,500)
After five years but within ten years		28,912		25,400		—		(3,512)
		46,859		41,847		—		(5,012)
Obligations of state and political subdivisions
After one year but within five years		3,804		3,787		8		(25)
After five years but within ten years		3,871		3,281		—		(590)
After ten years		1,501		1,231		—		(270)
		9,176		8,299		8		(885)
Corporate debt securities
After one year but within five years		4,704		4,381		—		(323)
After five years but within ten years		19,516		18,188		14		(1,342)
		24,220		22,569		14		(1,665)
Mortgage-backed securities		262,163		230,912		6		(31,257)
Total	$	342,418	$	303,627	$	28	$	(38,819)

(Dollars in thousands)	December 31, 2021
					Gross		Gross
	Amortized		Fair		Unrealized		Unrealized
Debt Securities Available for Sale	Cost		Value		Gains		Losses
Type and Maturity
Obligations of U.S. Government sponsored enterprises
After one year but within five years	$	6,000	$	5,807	$	—	$	(193)
After five years but within ten years		35,881		34,719		—		(1,162)
		41,881		40,526		—		(1,355)
Obligations of state and political subdivisions
After one year but within five years		3,810		3,937		129		(2)
After five years but within ten years		1,246		1,221		—		(25)
After ten years		4,118		4,062		—		(56)
		9,174		9,220		129		(83)
Corporate debt securities
After one year but within five years		2,000		1,972		—		(28)
After five years but within ten years		32,408		33,024		805		(189)
		34,408		34,996		805		(217)
Mortgage-backed securities		254,762		250,682		812		(4,892)
Total	$	340,225	$	335,424	$	1,746	$	(6,547)

Certain obligations of the U.S. Government and state and political subdivisions, as well as mortgage-backed securities are pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law. The carrying value of the pledged assets was $87.6 million and $82.7 million on June 30, 2022 and December 31, 2021, respectively.

In addition to cash received from the scheduled maturities of investment securities, some securities available for sale are sold or called at current market values during normal operations.

The following table summarizes proceeds received from sales or calls of available for sale investment securities transactions and the resulting realized gains and losses during the six months ended June 30, 2022 and 2021.

(Dollars in thousands)	Six Months Ended
	June 30,
	2022		2021
Gross proceeds from sales and calls of securities	$	17,134	$	32,869
Securities available for sale:
Gross realized gains from sold and called securities	$	25	$	130
Gross realized losses from sold and called securities		(1,099)		(72)
Net gains (losses) from sales and calls of securities	$	(1,074)	$	58

The Bank sold $18.2 million, par value, of subordinated debt of unconsolidated financial institutions, classified as corporate debt securities, at a loss of $1.1 million during the second quarter of 2022. Management’s intent with respect to these securities changed in the second quarter due to the adverse regulatory impact of substantial (relative to capital) holdings of subordinated debt.

Topic 320 clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. Management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are taken before an assessment is made as to whether the entity will recover the cost basis of the investment. In instances when a determination is made that an other-than-temporary impairment exists and the entity does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, the other-than-temporary impairment is separated into 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 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.

The following tables show gross unrealized losses and fair values of debt securities available for sale, aggregated by category and length of time the individual securities have been in a continuous unrealized loss position at June 30, 2022 and December 31, 2021:

	Unrealized Losses at June 30, 2022
	Less Than 12 Months					12 Months or More					Total
(Dollars in thousands)	Number					Number					Number
	of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized
	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
Obligations of U.S. Government sponsored enterprises	2	$	7,237	$	(503)	7	$	34,610	$	(4,509)	9	$	41,847	$	(5,012)
Obligations of state and political subdivisions	8		5,758		(823)	1		472		(62)	9		6,230		(885)
Corporate debt securities	11		19,539		(1,665)	—		—		—	11		19,539		(1,665)
Mortgage-backed securities	61		145,673		(17,524)	21		80,244		(13,733)	82		225,917		(31,257)
Total temporarily impaired securities	82	$	178,207	$	(20,515)	29	$	115,326	$	(18,304)	111	$	293,533	$	(38,819)

	Unrealized Losses at December 31, 2021
	Less Than 12 Months					12 Months or More					Total
(Dollars in thousands)	Number					Number					Number
	of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized
	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
Obligations of U.S. Government sponsored enterprises	5	$	22,130	$	(752)	3	$	18,396	$	(603)	8	$	40,526	$	(1,355)
Obligations of state and political subdivisions	7		5,781		(83)	—		—		—	7		5,781		(83)
Corporate debt securities	6		10,144		(217)	—		—		—	6		10,144		(217)
Mortgage-backed securities	36		182,328		(3,504)	5		26,443		(1,388)	41		208,771		(4,892)
Total temporarily impaired securities	54	$	220,383	$	(4,556)	8	$	44,839	$	(1,991)	62	$	265,222	$	(6,547)

At June 30, 2022, nine obligations of U.S. Government sponsored enterprises, nine obligations of state and political subdivisions, eleven corporate debt securities, and eighty-two mortgage-backed securities had unrealized losses. Twenty-nine of these securities have been in a continuous loss position for twelve months or more. The mortgage-backed securities in the Company’s portfolio are government sponsored enterprise (“GSE”) pass-through instruments issued by the Federal National Mortgage Association (“FNMA”) or Federal Home Loan Mortgage Corporation (“FHLMC”), which guarantees the timely payment of principal on these investments.

The unrealized losses noted in the tables above are considered temporary impairments. The decline in the values of the debt securities is due only to interest rate fluctuations, rather than erosion of issuer credit quality. As a result, the payment of contractual cash flows, including principal repayment, is not at risk. Because the Company does not intend to sell the securities, does not believe the Company will be required to sell the securities before recovery and expects to recover the entire amortized cost basis, no debt securities were deemed to be other-than-temporarily impaired for the periods ended June 30, 2022 or December 31, 2021, respectively.