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NOTE 2.           SECURITIES AVAILABLE FOR SALE

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The following is a summary of available-for-sale debt securities (“AFS”):

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Credit Quality Information

We monitor the credit quality of available-for-sale debt securities through credit ratings from various rating agencies and substantial price changes. In an effort to make informed decisions, we utilize credit ratings that express opinions about the credit quality of a security. Securities are triggered for further review in the quarter if the security has significant fluctuations in ratings, significant pricing changes, or drops below investment-grade. For securities without credit ratings, we utilize other financial information indicating the financial health of the underlying municipality, agency, or organization associated with the underlying security.

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Management recorded an allowance for credit losses on two corporate notes where there was a change in future estimated cash flows during the year ended December 31, 2024. A discounted cash flow approach was used to determine the amount of the allowance. The cash flows expected to be collected, after considering expected prepayments, are discounted at the original effective interest rate. The amount of the allowance is limited to the difference between the amortized cost basis of the security and its estimated fair value. During the quarter ended June 30, 2025, management recognized impairment losses of $4.9 million on available-for-sale debt securities and other receivables. The losses were included in net gain (loss) on available-for-sale debt securities in the consolidated statements of income. The Company had determined that it no longer intended to hold the security until recovery of the amortized cost basis.

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The table below presents a rollforward by major security type for the quarter and year ended June 30, 2025 of the allowance for credit losses on available-for-sale debt securities held at period end:

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As of June 30, 2024, we carried no allowance on available-for-sale debt securities in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments.

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We have one nonaccrual corporate bond of $8.0 million written down by $5.6 million as of June 30, 2025, of which $4.4 million is included in losses on available-for-sale debt securities. The bond previously carried a $1.2 million allowance, which was charged-off through the allowance for credit losses on securities during the period ended June 30, 2025. At December 31, 2024 we had $9.0 million of corporate bonds that we allocated $568 thousand in related allowance for credit losses. In the first quarter of 2025, a $1.0 million nonaccrual security matured and was transferred to a financing receivable non-cash asset.

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The amortized cost and estimated fair value of available-for-sale debt securities segregated by contractual maturity at June 30, 2025 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities and collateralized mortgage obligations are shown in total, as their maturities are highly variable.

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The proceeds from sales, calls and maturities of available-for-sale debt securities, gross realized gains and losses for the three and six months ended June 30, 2025 and 2024 are as follows:

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Accrued interest receivable on available-for-sale debt securities totaled $3.2 million at June 30, 2025 and $3.3 million at December 31, 2024, which is reported in other assets on the consolidated balance sheets.

The following tables summarize available-for-sale debt securities in an unrealized loss position for which an allowance for credit losses has not been recorded at June 30, 2025 and December 31, 2024, aggregated by major security type and length of time in continuous unrealized loss position:

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The following summarizes, by investment security type, the impact of performing securities in an unrealized loss position at June 30, 2025:

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Obligations of US Government-sponsored enterprises

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6 out of the total 7 securities in our portfolio of AFS obligations of US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 3.04% of the amortized cost of securities in unrealized loss positions. The US Small Business Administration guarantees the contractual cash flows of all of our obligations of US Government-sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter.

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US Government-sponsored enterprises

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411 out of the total 482 securities in our portfolio of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 13.62% of the amortized cost of securities in unrealized loss positions. The Federal National Mortgage Association and Federal Home Loan Mortgage Corporation guarantee the contractual cash flows of all of our US Government-sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter.

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US Government agency

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135 out of the total 168 securities in our portfolio of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 8.58% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association guarantees the contractual cash flows of all of our US Government agency securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter.

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Private label

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14 of the total 20 securities in our portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 8.42% of the amortized cost of securities in unrealized loss positions. We expect to receive all of the future contractual cash flows related to the amortized cost on these securities.

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Obligations of states and political subdivisions thereof

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58 of the total 66 securities in our portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 19.18% of the amortized cost of securities in unrealized loss positions. We continually monitor the municipal bond sector of the market carefully and periodically evaluate the appropriate level of exposure to the market. At this time, we believe (i) the bonds in this portfolio carry minimal risk of default and (ii) we are appropriately compensated for the risk. There were no material underlying credit downgrades during the quarter.

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Corporate bonds

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25 out of the total 35 securities in our portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 5.49% of the amortized cost of bonds in unrealized loss positions. We review the financial strength of all of these bonds, and we have concluded that the amortized cost remains supported by the expected future cash flows of these securities. The most recent review includes all bond issuers and their current credit ratings, financial performance and capitalization.

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A summary of securities pledged as collateral for certain deposits and borrowing arrangements for the months ended June 30, 2025 and December 31, 2024 is as follows:

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