Note 3 - Investment Securities

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]

(3) Investment Securities

Debt securities purchased in which Bancorp has the intent and ability to hold to their maturity are classified HTM securities. All other investment securities are classified as AFS securities.

AFS Debt Securities

The following table summarizes the amortized cost, unrealized gains and losses, and fair value of Bancorp’s AFS debt securities portfolio:

(in thousands)	Amortized		Unrealized
September 30, 2022	cost		Gains		Losses			Fair value
U.S. Treasury and other U.S. Government obligations	$	122,805	$	-	$	(8,379	)	$	114,426
Government sponsored enterprise obligations		157,598		370		(6,669	)		151,299
Mortgage backed securities - government agencies		883,386		2		(132,799	)		750,589
Obligations of states and political subdivisions		147,385		1		(20,171	)		127,215
Other		5,989		-		(345	)		5,644
Total available for sale debt securities	$	1,317,163	$	373	$	(168,363	)	$	1,149,173
December 31, 2021
U.S. Treasury and other U.S. Government obligations	$	123,753	$	-	$	(1,252	)	$	122,501
Government sponsored enterprise obligations		132,760		2,497		(236	)		135,021
Mortgage backed securities - government agencies		857,283		2,495		(13,154	)		846,624
Obligations of states and political subdivisions		75,488		289		(702	)		75,075
Other		1,095		-		(18	)		1,077
Total available for sale debt securities	$	1,190,379	$	5,281	$	(15,362	)	$	1,180,298

HTM Debt Securities

The following table summarizes the amortized cost, unrecognized gains and losses, and fair value of Bancorp’s HTM debt securities portfolio:

(in thousands)	Carrying		Unrecognized
September 30, 2022	value		Gains		Losses			Fair value
U.S. Treasury and other U.S. Government obligations	$	217,684	$	-	$	(9,673	)	$	208,011
Government sponsored enterprise obligations		27,666		2		(2,498	)		25,170
Mortgage backed securities - government agencies		232,775		-		(32,585	)		200,190
Total available for sale debt securities	$	478,125	$	2	$	(44,756	)	$	433,371

Bancorp elected to classify a portion of securities purchased and acquired during the first quarter of 2022 as HTM. This election was made in an effort to lessen the impact that the rising interest rate environment has on the valuation of the AFS debt securities portfolio, and ultimately its impact on capital through AOCI. No debt securities were classified as HTM at December 31, 2021.

All investment securities classified as HTM by Bancorp as of September 30, 2022 are obligations of the U.S. Government and/or are issued by U.S. Government-sponsored agencies and have an implicit or explicit government guarantee. Therefore, no ACL has been recorded for Bancorp’s HTM securities as of September 30, 2022. Further, as of September 30, 2022, none of Bancorp’s HTM securities were in non-accrual or past due status.

Debt Securities by Contractual Maturity

A summary of AFS and HTM debt securities by contractual maturity as of September 30, 2022 follows:

	AFS Debt Securities				HTM Debt Securities
(in thousands)	Amortized cost		Fair value		Carrying value		Fair value
Due within one year	$	34,464	$	34,211	$	14,078	$	13,804
Due after one year but within five years		157,245		147,011		203,124		193,712
Due after five years but within 10 years		69,127		59,766		26,333		23,887
Due after 10 years		172,941		157,596		1,815		1,778
Mortgage backed securities - government agencies		883,386		750,589		232,775		200,190
Total available for sale debt securities	$	1,317,163	$	1,149,173	$	478,125	$	433,371

Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without prepayment penalties. The investment portfolio includes MBS, which are guaranteed by agencies such as FHLMC, FNMA and GNMA. These securities differ from traditional debt securities primarily in that they may have uncertain principal payment dates and are priced based on estimated prepayment rates on the underlying collateral.

At 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.

Accrued interest on the AFS and HTM securities portfolios totaled $3 million and $731,000 at September 30, 2022, respectively, and was included in the consolidated balance sheets. Accrued interest on the AFS securities portfolio totaled $3 million at December 31, 2021, and was included in the consolidated balance sheets. There were no securities classified as HTM at December 31, 2021.

AFS debt securities totaling $247 million were acquired on March 7, 2022, as a result of the CB acquisition, a portion of which were classified as HTM at acquisition. Shortly after acquisition, three securities with a total fair value of $2 million were sold, resulting in a loss on the sale of $92,000, which was recorded as a fair value adjustment through goodwill.

Securities with a carrying value of $972 million and $879 million were pledged at September 30, 2022 and December 31, 2021, respectively, to secure accounts of commercial depositors in cash management accounts, public deposits and uninsured cash balances for WM&T accounts. The increase between December 31, 2021 and September 30, 2022 was the result of relationships added through the CB acquisition.

Based on an evaluation of available information including security type, counterparty credit quality, past events, current conditions, and reasonable and supportable forecasts that are relevant to collectability, Bancorp has concluded that it expects to receive all contractual cash flows from each security held in its AFS and HTM debt securities portfolio. As such, no allowance or impairment was recorded with respect to investment securities as of September 30, 2022.

Unrealized and Unrecognized Loss Analysis on Debt Securities

Debt securities with unrealized and unrecognized losses at September 30, 2022 and December 31, 2021, aggregated by investment category and length of time securities have been in a continuous unrealized loss position follows:

	AFS Debt Securities
	Less than 12 months					12 months or more					Total
(in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
September 30, 2022	value		losses			value		losses			value		losses
U.S. Treasury and other U.S. Government obligations	$	21,554	$	(1,391	)	$	92,872	$	(6,988	)	$	114,426	$	(8,379	)
Government sponsored enterprise obligations		96,995		(4,999	)		16,589		(1,670	)		113,584		(6,669	)
Mortgage-backed securities - government agencies		288,778		(33,664	)		461,306		(99,135	)		750,084		(132,799	)
Obligations of states and political subdivisions		98,599		(14,002	)		25,924		(6,169	)		124,523		(20,171	)
Other		4,880		(205	)		764		(140	)		5,644		(345	)
Total AFS debt securities	$	510,806	$	(54,261	)	$	597,455	$	(114,102	)	$	1,108,261	$	(168,363	)
December 31, 2021
U.S. Treasury and other U.S. Government obligations	$	122,501	$	(1,252	)	$	-	$	-		$	122,501	$	(1,252	)
Government sponsored enterprise obligations		23,789		(223	)		447		(13	)		24,236		(236	)
Mortgage-backed securities - government agencies		615,130		(10,027	)		102,637		(3,127	)		717,767		(13,154	)
Obligations of states and political subdivisions		46,493		(686	)		484		(16	)		46,977		(702	)
Other		957		(18	)		-		-			957		(18	)
Total AFS debt securities	$	808,870	$	(12,206	)	$	103,568	$	(3,156	)	$	912,438	$	(15,362	)

	HTM Debt Securities
	Less than 12 months					12 months or more				Total
(in thousands)	Fair		Unrecognized			Fair		Unrecognized		Fair		Unrecognized
September 30, 2022	value		losses			value		losses		value		losses
U.S. Treasury and other U.S. Government obligations	$	208,011	$	(9,673	)	$	-	$	-	$	208,011	$	(9,673	)
Government sponsored enterprise obligations		23,374		(2,498	)		-		-		23,374		(2,498	)
Mortgage-backed securities - government agencies		200,190		(32,585	)		-		-		200,190		(32,585	)
Total HTM debt securities	$	431,575	$	(44,756	)	$	-	$	-	$	431,575	$	(44,756	)

Applicable dates for determining when securities are in unrealized and unrecognized loss positions are September 30, 2022 and December 31, 2021. As such, it is possible that a security had a market value lower than its amortized cost on other days during the past 12 months, but is not in the “Less than 12 months” category above.

For debt securities with unrealized and unrecognized loss positions, Bancorp evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit-related is recognized in AOCI, net of tax. Credit-related impairment is recognized as an a ACL for debt securities on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Accrued interest receivable is excluded from the estimate of credit losses. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if Bancorp intends to sell an impaired debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.

In evaluating debt securities in unrealized and unrecognized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, Bancorp considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors. Unrealized and unrecognized losses on Bancorp’s investment securities portfolio have not been recognized as an expense because the securities are of high credit quality, and the decline in fair values is attributable to changes in the prevailing interest rate environment since the purchase date. Fair value is expected to recover as securities reach maturity and/or the interest rate environment returns to conditions similar to when these securities were purchased. These investments consisted of 553 and 227 separate investment positions as of September 30, 2022 and December 31, 2021, respectively. There were no credit related factors underlying unrealized and unrecognized losses on debt securities at September 30, 2022 and December 31, 2021.