Debt Securities

9 Months Ended

Sep. 30, 2023

(5) Debt Securities

Debt securities are classified as available-for-sale when they might be sold before maturity. Securities available-for-sale are valued at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

The following table summarizes the amortized cost, allowance for credit losses, and fair value of debt securities available-for-sale at September 30, 2023 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:



	Amortized		Gross		Gross			Allowance
	Cost		Unrealized		Unrealized			for Credit	Fair
(In thousands)	Basis		Gains		Losses			Losses	Value
September 30, 2023
State and municipal securities	$	11,813	$	2	$	1,028	$	—	$	10,787
Asset-backed securities		6,609		—		954		—		5,655
Government mortgage-backed securities		10,858		—		1,121		—		9,737
Total debt securities available-for-sale	$	29,280	$	2	$	3,103	$	—	$	26,179

The following table summarizes the amortized cost and fair value of securities available-for-sale at December 31, 2022 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:


	Amortized		Gross		Gross
	Cost		Unrealized		Unrealized		Fair
(In thousands)	Basis		Gains		Losses		Value
December 31, 2022
State and municipal securities	$	11,894	$	2	$	825	$	11,071
Asset-backed securities		7,197		—		923		6,274
Government mortgage-backed securities		12,366		—		1,111		11,255
Total debt securities available-for-sale	$	31,457	$	2	$	2,859	$	28,600

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are generally amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated.

Premiums on callable debt securities are amortized to their earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

There were no realized gains or losses on sales and calls of securities during the three or nine months ended September 30, 2023 or September 30, 2022.

Securities with carrying amounts of $8.4 million and $9.8 million were pledged to secure available borrowings with the Federal Home Loan Bank at September 30, 2023 and December 31, 2022, respectively.

The scheduled maturities of debt securities at September 30, 2023 are summarized in the table below. Actual maturities of asset and mortgage-backed securities may differ from contractual maturities because the assets and mortgages underlying the securities may be repaid without any penalties. Because asset- and mortgage-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.



	Available-for-Sale
	Amortized		Fair
(In thousands)	Cost		Value
Due after one year through five years	$	860	$	843
Due after five years through ten years		1,466		1,433
Due after ten years		9,487		8,511
Government mortgage-backed securities		10,858		9,737
Asset-backed securities		6,609		5,655
	$	29,280	$	26,179

A debt security is placed on non-accrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Interest accrued but not received for a security placed on non-accrual is reversed against interest income. There were no debt securities on non-accrual status and therefore there was no accrued interest related to debt securities reversed against interest income for the nine months ended September 30, 2023 or September 30, 2022.

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or longer are as follows at September 30, 2023 and December 31, 2022:



	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Losses		Value		Losses		Value		Losses
September 30, 2023
Temporarily impaired securities:
State and municipal securities	$	808	$	24	$	9,379	$	1,004	$	10,187	$	1,028
Asset-backed securities		—		—		5,655		954		5,655		954
Government mortgage-backed securities		—		—		9,737		1,121		9,737		1,121
Total temporarily impaired debt securities	$	808	$	24	$	24,771	$	3,079	$	25,579	$	3,103

December 31, 2022
Temporarily impaired securities:
State and municipal	$	8,174	$	183	$	2,297	$	642	$	10,471	$	825
Asset-backed securities		2,322		182		3,951		741		6,273		923
Government mortgage-backed securities		7,428		474		3,827		637		11,255		1,111
Total temporarily impaired debt securities	$	17,924	$	839	$	10,075	$	2,020	$	27,999	$	2,859

The Company expects to recover its amortized cost basis on all debt securities. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell these securities in an unrealized loss position as of September 30, 2023, prior to this

recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.

The following summarizes, by investment security type, the basis for the conclusion that the debt securities in an unrealized loss position were not other-than-temporarily impaired at September 30, 2023:

State and municipal securities: At September 30, 2023, 17 of the 19 securities in the Company’s portfolio of state and municipal securities were in unrealized loss positions. Aggregate unrealized losses represented 8.7% of the amortized cost of state and municipal securities. The Company continually monitors the state and municipal securities sector of the market carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company believes the securities in this portfolio carry minimal risk of default and the Company is appropriately compensated for that risk. There were no material underlying downgrades during the quarter. All securities are performing.

Asset-backed securities: At September 30, 2023, all four of the securities in the Company’s portfolio of asset-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 14.4% of the amortized cost of asset-backed securities. The U.S. Small Business Administration (“SBA”) guarantees the contractual cash flows of all of the Company’s asset-backed securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

Government mortgage-backed securities: At September 30, 2023, all 33 of the securities in the Company’s portfolio of government mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 10.3% of the amortized cost of government mortgage-backed securities. The Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), and Government National Mortgage Association (“GNMA”) guarantee the contractual cash flows of all of the Company’s mortgage-backed securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

Allowance for Credit Losses – Available-For-Sale Securities:

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through a provision for credit losses charged to earnings. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as credit loss expense (or reversal). Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on available-for-sale debt securities totaled $165,000 at September 30, 2023 and is excluded from the estimate of credit losses.