INVESTMENT SECURITIES

6 Months Ended

Jun. 30, 2020

INVESTMENT SECURITIES

INVESTMENT SECURITIES

2. INVESTMENT SECURITIES

Available-for-Sale Debt Securities

The following tables summarize the amortized cost, fair value, and ACLS of AFS debt securities and the corresponding amounts of related gross unrealized gains and losses recognized in AOCI:

			Gross		Gross		Allowance
	Amortized		Unrealized		Unrealized		for		Fair
June 30, 2020 (in thousands)	Cost		Gains		Losses		Credit Losses		Value
U.S. Treasury securities and U.S. Government agencies	$	137,739	$	2,057	$	—	$	—	$	139,796
Private label mortgage backed security		1,845		1,178		—		—		3,023
Mortgage backed securities - residential		263,760		9,521		—		—		273,281
Collateralized mortgage obligations		57,030		678		(110)		—		57,598
Corporate bonds		10,000		—		(225)		(126)		9,649
Trust preferred security		3,597		—		(97)		—		3,500
Total available-for-sale debt securities	$	473,971	$	13,434	$	(432)	$	(126)	$	486,847

			Gross		Gross		Allowance
	Amortized		Unrealized		Unrealized		for		Fair
December 31, 2019 (in thousands)	Cost		Gains		Losses		Credit Losses		Value
U.S. Treasury securities and U.S. Government agencies	$	134,765	$	59	$	(184)		NA	$	134,640
Private label mortgage backed security		2,210		1,285		—		NA		3,495
Mortgage backed securities - residential		253,288		2,916		(357)		NA		255,847
Collateralized mortgage obligations		63,284		258		(171)		NA		63,371
Corporate bonds		10,000		2		—		NA		10,002
Trust preferred security		3,575		425		—		NA		4,000
Total available-for-sale debt securities	$	467,122	$	4,945	$	(712)		NA	$	471,355

Held-to-Maturity Debt Securities

The following tables summarize the amortized cost, fair value, and ACLS of HTM debt securities and the corresponding amounts of related gross unrecognized gains and losses:

			Gross		Gross				Allowance
	Carrying		Unrecognized		Unrecognized		Fair		for
June 30, 2020 (in thousands)	Value		Gains		Losses		Value		Credit Losses
Mortgage backed securities - residential	$	102	$	5	$	—	$	107	$	—
Collateralized mortgage obligations		15,338		132		(1)		15,469		—
Corporate bonds		39,991		250		(21)		40,220		(147)
Obligations of state and political subdivisions		461		9		—		470		—
Total held-to-maturity debt securities	$	55,892	$	396	$	(22)	$	56,266	$	(147)

			Gross		Gross				Allowance
	Carrying		Unrecognized		Unrecognized		Fair		for
December 31, 2019 (in thousands)	Value		Gains		Losses		Value		Credit Losses
Mortgage backed securities - residential	$	104	$	6	$	—	$	110		NA
Collateralized mortgage obligations		16,970		94		(21)		17,043		NA
Corporate bonds		44,995		544		—		45,539		NA
Obligations of state and political subdivisions		462		2		—		464		NA
Total held-to-maturity debt securities	$	62,531	$	646	$	(21)	$	63,156		NA

Sales of Available-for-Sale Debt Securities

During the three and six months ended June 30, 2020 and 2019, there were no gains or losses on sales or calls of AFS debt securities.

Debt Securities by Contractual Maturity

The amortized cost and fair value of debt securities by contractual maturity at June 30, 2020 follow. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are detailed separately.

	Available-for-Sale				Held-to-Maturity
	Debt Securities				Debt Securities
	Amortized		Fair		Carrying		Fair
June 30, 2020 (in thousands)	Cost		Value		Value		Value
Due in one year or less	$	—	$	—	$	105	$	105
Due from one year to five years		147,739		149,445		35,395		35,654
Due from five years to ten years		—		—		4,952		4,931
Due beyond ten years		3,597		3,500		—		—
Private label mortgage backed security		1,845		3,023		—		—
Mortgage backed securities - residential		263,760		273,281		102		107
Collateralized mortgage obligations		57,030		57,598		15,338		15,469
Total debt securities	$	473,971	$	486,847	$	55,892	$	56,266

Unrealized-Loss Analysis on Debt Securities

The following table summarizes AFS debt securities in an unrealized loss position for which an ACLS had not been recorded at June 30, 2020, aggregated by investment category and length of time in a continuous unrealized loss position:

	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
June 30, 2020 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Available-for-sale debt securities:
Collateralized mortgage obligations	$	8,258	$	(101)	$	2,971	$	(9)	$	11,229		(110)
Trust preferred security		3,500		(97)		—		—		3,500		(97)
Total available-for-sale debt securities	$	11,758	$	(198)	$	2,971	$	(9)	$	14,729	$	(207)

Debt securities with unrealized losses at December 31, 2019, aggregated by investment category and length of time in a continuous unrealized loss position, were as follows:

	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
December 31, 2019 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies	$	40,165	$	(176)	$	14,992	$	(8)	$	55,157	$	(184)
Mortgage backed securities - residential		65,630		(269)		16,633		(88)		82,263		(357)
Collateralized mortgage obligations		12,444		(36)		10,738		(135)		23,182		(171)
Total available-for-sale debt securities	$	118,239	$	(481)	$	42,363	$	(231)	$	160,602	$	(712)

	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
December 31, 2019 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Held-to-maturity debt securities:
Collateralized mortgage obligations	$	4	$	(2)	$	4,827	$	(19)	$	4,831	$	(21)
Total held-to-maturity debt securities:	$	4	$	(2)	$	4,827	$	(19)	$	4,831	$	(21)

At June 30, 2020, the Bank’s security portfolio consisted of 171 securities, 14 of which were in an unrealized loss position.

At December 31, 2019, the Bank’s security portfolio consisted of 173 securities, 34 of which were in an unrealized loss position.

At June 30, 2020 and December 31, 2019, there were no holdings of debt securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.

Mortgage Backed Securities and Collateralized Mortgage Obligations

At June 30, 2020, with the exception of the $3.0 million private label mortgage backed security, all other mortgage backed securities and CMOs held by the Bank were issued by U.S. government-sponsored entities and agencies, primarily the FHLMC and FNMA. At June 30, 2020 and December 31, 2019, there were gross unrealized losses of $110,000 and $528,000 related to AFS mortgage backed securities and CMOs. Because these unrealized losses are attributable to changes in interest rates and illiquidity, and not credit quality, and because the Bank does not have the intent to sell these securities, and it is likely that it will not be required to sell the securities before their anticipated recovery, management does not consider these securities to have OTTI.

Trust Preferred Security

During 2015, the Parent Company purchased a $3 million floating rate TRUP at a price of 68% of par. The coupon on this security is based on the 3-month LIBOR rate plus 159 basis points. The Company performed an initial analysis prior to acquisition and performs ongoing analysis of the credit risk of the underlying borrower in relation to its TRUP.

Private Label Mortgage Backed Security

The Bank owns one private label mortgage backed security with a total carrying value of $3.0 million as of June 30, 2020. This security is mostly backed by “Alternative A” first lien mortgage loans, but also has an insurance “wrap” or guarantee as an added layer of protection to the security holder. This asset is illiquid, and as such, the Bank determined it to be a Level 3 security in accordance with ASC Topic 820, Fair Value Measurement. Based on this determination, the Bank utilized an income valuation model (“present value model”) approach, in determining the fair value of the security. This approach is beneficial for positions that are not traded in active markets or are subject to transfer restrictions, and/or where valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support for this investment.

See additional discussion regarding the Bank’s private label mortgage backed security under Footnote 10 “Fair Value” in this section of the filing.

Rollforward of the Allowance for Credit Losses on Debt Securities

The tables below present a rollforward for the three and six months ended June 30, 2020 of the ACLS on AFS and HTM debt securities:

	ACLS Rollforward
	Three Months Ended June 30, 2020
	Beginning		ASC 326				Charge-				Ending
(in thousands)	Balance		Adoption		Provision		offs		Recoveries		Balance
Available-for-Sale Securities:
Corporate Bonds	$	126	$	—	$	—	$	—	$	—	$	126
Held-to-Maturity Securities:
Corporate Bonds		171		—		(24)		—		—		147
Total	$	297	$	—	$	(24)	$	—	$	—	$	273

The Company reduced the ACLS on its HTM corporate bonds during the three months ended June 30, 2020 due to the maturity of one $5 million bond.

	ACLS Rollforward
	Six Months Ended June 30, 2020
	Beginning		ASC 326				Charge-				Ending
(in thousands)	Balance		Adoption		Provision		offs		Recoveries		Balance
Available-for-Sale Securities:
Corporate Bonds	$	—	$	—	$	126	$	—	$	—	$	126
Held-to-Maturity Securities:
Corporate Bonds		—		51		96		—		—		147
Total	$	—	$	51	$	222	$	—	$	—	$	273

The Company increased the ACLS on its AFS and HTM corporate bonds during the six months ended June 30, 2020 based on higher PD and LGD estimates on these bonds resulting from economic concerns from the COVID-19 pandemic.

There were no HTM debt securities on nonaccrual or past due over 89 days as of June 30, 2020. All of the Company’s HTM corporate bonds were rated investment grade as of June 30, 2020.

There were no HTM debt securities considered collateral dependent as of June 30, 2020.

Pledged Debt Securities

Debt securities pledged to secure public deposits, securities sold under agreements to repurchase and debt securities held for other purposes, as required or permitted by law are as follows:

(in thousands)	June 30, 2020		December 31, 2019
Carrying amount	$	259,808	$	229,700
Fair value		259,812		229,706

Equity Securities

The carrying value, gross unrealized gains and losses, and fair value of equity securities with readily determinable fair values were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2020 (in thousands)	Cost		Gains		Losses		Value
Freddie Mac preferred stock	$	—	$	485	$	—	$	485
Community Reinvestment Act mutual fund		2,500		30		—		2,530
Total equity securities with readily determinable fair values	$	2,500	$	515	$	—	$	3,015

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2019 (in thousands)	Cost		Gains		Losses		Value
Freddie Mac preferred stock	$	—	$	714	$	—	$	714
Community Reinvestment Act mutual fund		2,500		—		(26)		2,474
Total equity securities with readily determinable fair values	$	2,500	$	714	$	(26)	$	3,188

For equity securities with readily determinable fair values, the gross realized and unrealized gains and losses recognized in the Company’s consolidated statements of income were as follows:

	Gains (Losses) Recognized on Equity Securities
	Three Months Ended June 30, 2020						Three Months Ended June 30, 2019
(in thousands)	Realized		Unrealized		Total		Realized		Unrealized		Total
Freddie Mac preferred stock	$	—	$	191	$	191	$	—	$	126	$	126
Community Reinvestment Act mutual fund		—		16		16		—		33		33
Total equity securities with readily determinable fair value	$	—	$	207	$	207	$	—	$	159	$	159

	Gains (Losses) Recognized on Equity Securities
	Six Months Ended June 30, 2020						Six Months Ended June 30, 2019
(in thousands)	Realized		Unrealized		Total		Realized		Unrealized		Total
Freddie Mac preferred stock	$	—	$	(229)	$	(229)	$	—	$	378	$	378
Community Reinvestment Act mutual fund		—		56		56		—		70		70
Total equity securities with readily determinable fair value	$	—	$	(173)	$	(173)	$	—	$	448	$	448