INVESTMENT SECURITIES

9 Months Ended

Sep. 30, 2022

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
September 30, 2022 (in thousands)	Cost		Gains		Losses		Credit Losses		Value
U.S. Treasury securities and U.S. Government agencies	$	436,287	$	—	$	(25,852)	$	—	$	410,435
Private label mortgage-backed security		961		1,323		—		—		2,284
Mortgage-backed securities - residential		199,692		41		(19,329)		—		180,404
Collateralized mortgage obligations		23,663		39		(786)		—		22,916
Corporate bonds		10,000		—		(2)		—		9,998
Trust preferred security		3,726		184		—		—		3,910
Total available-for-sale debt securities	$	674,329	$	1,587	$	(45,969)	$	—	$	629,947

			Gross		Gross		Allowance
	Amortized		Unrealized		Unrealized		for		Fair
December 31, 2021 (in thousands)	Cost		Gains		Losses		Credit Losses		Value
U.S. Treasury securities and U.S. Government agencies	$	239,880	$	473	$	(2,894)	$	—	$	237,459
Private label mortgage-backed security		1,418		1,313		—		—		2,731
Mortgage-backed securities - residential		207,697		3,525		(473)		—		210,749
Collateralized mortgage obligations		29,947		377		(30)		—		30,294
Corporate bonds		10,000		46		—		—		10,046
Trust preferred security		3,684		163		—		—		3,847
Total available-for-sale debt securities	$	492,626	$	5,897	$	(3,397)	$	—	$	495,126

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
	Amortized		Unrecognized		Unrecognized		Fair		for
September 30, 2022 (in thousands)	Cost		Gains		Losses		Value		Credit Losses
Mortgage-backed securities - residential	$	28	$	—	$	—	$	28	$	—
Collateralized mortgage obligations		7,514		60		(18)		7,556		—
Corporate bonds		24,971		1		(58)		24,914		(10)
Obligations of state and political subdivisions		125		—		(2)		123		—
Total held-to-maturity debt securities	$	32,638	$	61	$	(78)	$	32,621	$	(10)

			Gross		Gross				Allowance
	Amortized		Unrecognized		Unrecognized		Fair		for
December 31, 2021 (in thousands)	Cost		Gains		Losses		Value		Credit Losses
Mortgage-backed securities - residential	$	46	$	—	$	—	$	46	$	—
Collateralized mortgage obligations		9,080		158		—		9,238		—
Corporate bonds		34,975		263		(6)		35,232		(47)
Obligations of state and political subdivisions		245		3		—		248		—
Total held-to-maturity debt securities	$	44,346	$	424	$	(6)	$	44,764	$	(47)

Sales of Available-for-Sale Debt Securities

During the three and nine months ended September 30, 2022 and 2021, there were no material 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 as of September 30, 2022 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		Amortized		Fair
September 30, 2022 (in thousands)	Cost		Value		Cost		Value
Due in one year or less	$	51,801	$	51,291	$	125	$	124
Due from one year to five years		394,486		369,142		24,971		24,913
Due from five years to ten years		—		—		—		—
Due beyond ten years		3,726		3,910		—		—
Private label mortgage-backed security		961		2,284		—		—
Mortgage-backed securities - residential		199,692		180,404		28		28
Collateralized mortgage obligations		23,663		22,916		7,514		7,556
Total debt securities	$	674,329	$	629,947	$	32,638	$	32,621

Unrealized-Loss Analysis on Debt Securities

The following tables summarize AFS debt securities in an unrealized loss position for which an ACLS had not been recorded as of September 30, 2022 and December 31, 2021, 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
September 30, 2022 (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	$	266,165	$	(10,276)	$	144,296	$	(15,576)	$	410,461	$	(25,852)
Mortgage-backed securities - residential		162,445		(16,808)		14,420		(2,521)		176,865		(19,329)
Collateralized mortgage obligations		18,645		(786)		—		—		18,645		(786)
Corporate bonds		9,998		(2)		—		—		9,998		(2)
Total available-for-sale debt securities	$	457,253	$	(27,872)	$	158,716	$	(18,097)	$	615,969	$	(45,969)

	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
December 31, 2021 (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	$	177,138	$	(2,622)	$	9,728	$	(272)	$	186,866	$	(2,894)
Mortgage-backed securities - residential		84,937		(473)		—		—		84,937		(473)
Collateralized mortgage obligations		4,495		(30)		—		—		4,495		(30)
Total available-for-sale debt securities	$	266,570	$	(3,125)	$	9,728	$	(272)	$	276,298	$	(3,397)

As of September 30, 2022, the Bank’s security portfolio consisted of 181 securities, 149 of which were in an unrealized loss position.

As of December 31, 2021, the Bank’s security portfolio consisted of 173 securities, 29 of which were in an unrealized loss position.

As of September 30, 2022 and December 31, 2021, 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.

Private Label Mortgage-Backed Security

The Bank owns one private label mortgage-backed security with a total carrying value of $2.3 million as of September 30, 2022. 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.

Mortgage-Backed Securities and Collateralized Mortgage Obligations

As of September 30, 2022, with the exception of the $2.3 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. As of September 30, 2022 and December 31, 2021, there were gross unrealized losses of $20.1 million and $503,000 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.

Rollforward of the Allowance for Credit Losses on Debt Securities

The table below presents a roll-forward for the three months ended September 30, 2022 and 2021 of the ACLS on AFS and HTM debt securities:

	ACLS Rollforward
	Three Months Ended September 30,
	2022										2021
	Beginning				Charge-				Ending			Beginning				Charge-				Ending
(in thousands)	Balance		Provision		offs		Recoveries		Balance			Balance		Provision		offs		Recoveries		Balance
Available-for-Sale Securities:
Corporate Bonds	$	30	$	(30)	$	—	$	—	$	—		$	—	$	—	$	—	$	—	$	—
Held-to-Maturity Securities:
Corporate Bonds		50		(40)		—		—		10			56		(2)		—		—		54
Total	$	80	$	(70)	$	—	$	—	$	10		$	56	$	(2)	$	—	$	—	$	54

	ACLS Rollforward
	Nine Months Ended September 30,
	2022										2021
	Beginning				Charge-				Ending		Beginning				Charge-				Ending
(in thousands)	Balance		Provision		offs		Recoveries		Balance		Balance		Provision		offs		Recoveries		Balance
Available-for-Sale Securities:
Corporate Bonds	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Held-to-Maturity Securities:
Corporate Bonds		47		(37)		—		—		10		178		(124)		—		—		54
Total	$	47	$	(37)	$	—	$	—	$	10	$	178	$	(124)	$	—	$	—	$	54

The Company decreased the ACLS on its AFS and HTM corporate bonds during the three and nine months ended September 30, 2022 based on decreased PD and LGD estimates on these bonds.

There were no HTM debt securities on nonaccrual or past due over 89 days as of September 30, 2022 and December 31, 2021. All of the Company’s HTM corporate bonds were rated investment grade as of September 30, 2022 and December 31, 2021.

There were no HTM debt securities considered collateral dependent as of September 30, 2022 and December 31, 2021.

Accrued interest on AFS debt securities is presented as a component of other assets on the Company’s balance sheet and is excluded from the ACLS. Accrued interest on AFS debt securities totaled $2 million and $1 million as of September 30, 2022 and December 31, 2021. Accrued interest receivable on HTM debt securities totaled $187,000 and $89,000 as of September 30, 2022 and December 31, 2021.

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, were as follows:

(in thousands)	September 30, 2022		December 31, 2021
Carrying amount	$	262,392	$	319,650
Fair value		262,392		319,808

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
September 30, 2022 (in thousands)	Cost		Gains		Losses		Value
Freddie Mac preferred stock	$	—	$	175	$	—	$	175
Total equity securities with readily determinable fair values	$	—	$	175	$	—	$	175

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2021 (in thousands)	Cost		Gains		Losses		Value
Freddie Mac preferred stock	$	—	$	170	$	—	$	170
Community Reinvestment Act mutual fund		2,500		—		(50)		2,450
Total equity securities with readily determinable fair values	$	2,500	$	170	$	(50)	$	2,620

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 September 30, 2022						Three Months Ended September 30, 2021
(in thousands)	Realized		Unrealized		Total		Realized		Unrealized		Total
Freddie Mac preferred stock	$	—	$	(14)	$	(14)	$	—	$	(13)	$	(13)
Community Reinvestment Act mutual fund		—		—		—		—		(9)		(9)
Total equity securities with readily determinable fair value	$	—	$	(14)	$	(14)	$	—	$	(22)	$	(22)

	Gains (Losses) Recognized on Equity Securities
	Nine Months Ended September 30, 2022						Nine Months Ended September 30, 2021
(in thousands)	Realized		Unrealized		Total		Realized		Unrealized		Total
Freddie Mac preferred stock	$	—	$	5	$	5	$	—	$	(458)	$	(458)
Community Reinvestment Act mutual fund		(209)		—		(209)		—		(47)		(47)
Total equity securities with readily determinable fair value	$	(209)	$	5	$	(204)	$	—	$	(505)	$	(505)