Investment Securities

12 Months Ended

Dec. 31, 2023

Investment Securities

Investment Securities

NOTE 5 Investment Securities

The following tables present amortized cost, gross unrealized gains and losses, allowance for credit losses, and fair value of the AFS investment securities and HTM investment securities as of December 31, 2023 and 2022:

	December 31, 2023
	Amortized		Unrealized		Unrealized		Allowance for		Fair
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	1,119	$	4	$	(3)	$	—	$	1,120
Mortgage backed securities
Residential agency		524,140		1		(88,547)		—		435,594
Commercial		1,476		—		(123)		—		1,353
Asset backed securities		26		—		(1)		—		25
Corporate bonds		57,993		—		(9,349)		—		48,644
Total available-for-sale investment securities		584,754		5		(98,023)		—		486,736
Held-to-maturity
Obligations of state and political agencies		129,603		—		(12,613)		114		116,990
Mortgage backed securities
Residential agency		170,125		—		(28,498)		99		141,627
Total held-to-maturity investment securities		299,728		—		(41,111)		213		258,617
Total investment securities	$	884,482	$	5	$	(139,134)	$	213	$	745,353

	December 31, 2022
	Amortized		Unrealized		Unrealized		Allowance for		Fair
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Value
Available-for-sale
U.S. Treasury and agencies	$	3,518	$	19	$	(17)		N/A	$	3,520
Mortgage backed securities
Residential agency		705,845		2		(118,168)		N/A		587,679
Commercial		70,669		—		(7,111)		N/A		63,558
Asset backed securities		34		—		—		N/A		34
Corporate bonds		69,501		—		(6,968)		N/A		62,533
Total available-for-sale investment securities		849,567		21		(132,264)		N/A		717,324
Held-to-maturity
Obligations of state and political agencies		137,787		—		(17,736)		N/A		120,051
Mortgage backed securities
Residential agency		184,115		—		(33,254)		N/A		150,861
Total held-to-maturity investment securities		321,902		—		(50,990)		N/A		270,912
Total investment securities	$	1,171,469	$	21	$	(183,254)		N/A	$	988,236

The adequacy of the ACL on investment securities is assessed at the end of each quarter. The Company does not believe that the AFS debt securities that were in an unrealized loss position as of December 31, 2023 represent a credit loss impairment. As of December 31, 2023 and 2022, the gross unrealized loss positions were primarily related to mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Additionally, there were corporate bonds in gross unrealized loss positions; however, all bonds had an investment grade rating as of December 31, 2023 and 2022. Total gross unrealized losses were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.

The ACL on HTM debt securities is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable supportable forecasts. Using a probability of default and loss given default analysis an allowance for credit losses was established in the amount of $213 thousand as of December 31, 2023.

Accrued interest receivable on AFS investment securities and HTM investment securities is recorded in accrued interest receivable and is excluded from the estimate of credit losses. As of December 31, 2023, the accrued interest receivable on AFS investment securities and HTM investment securities totaled $1.5 million and $1.4 million, respectively. As of December 31, 2022, the accrued interest receivable on AFS investment securities and HTM investment securities totaled $1.9 million and $1.5 million, respectively.

On April 1, 2021, the Company transferred its state and political agencies debt securities portfolio, with a fair value of $149.2 million and a net unrealized gain of $1.3 million, from AFS to HTM. At December 31, 2023 and 2022, the net unrealized gains on the transferred securities were $108 thousand and $272 thousand, net of a deferred tax of $55 thousand and $137 thousand, respectively.

Proceeds from the sale of AFS securities for the years ended December 31, 2023, 2022, and 2021 are displayed in the table below:

	Year ended
	December 31,
(dollars in thousands)	2023		2022		2021
Proceeds	$	171,758	$	—	$	13,189
Realized gains		—		—		114
Realized losses		(24,643)		—		—

Proceeds from the call of HTM securities for the years ended December 31, 2023, 2022 and 2021 are displayed in the table below:

	Year ended
	December 31,
(dollars in thousands)	2023		2022		2021
Proceeds	$	242	$	963	$	1,772
Realized gains		—		—		11
Realized losses		—		—		—

During the years ended December 31, 2023 and 2022, there were no sales of HTM securities. During the year ended December 31, 2021, the company sold one held-to-maturity security with an amortized cost of $330 thousand. Proceeds from the sale totaled $348 thousand, resulting in realized gains of $11 thousand. For this sale of a held-to-maturity security, the Company received evidence of a significant deterioration of the issuer’s creditworthiness.

The following table presents investment securities with gross unrealized losses, for which an ACL has not been recorded at December 31, 2023 and 2022, aggregated by investment category and length of time that individual investment securities have been in a continuous loss position:

		December 31, 2023
		Less than 12 Months				Over 12 Months				Total
	Number of	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(dollars in thousands)	Holdings	Losses		Value		Losses		Value		Losses		Value
Available-for-sale
U.S. Treasury and agencies	1	$	(3)	$	489	$	—	$	—	$	(3)	$	489
Mortgage backed securities
Residential agency	112		—		43		(88,547)		435,505		(88,547)		435,548
Commercial	1		—		—		(123)		1,353		(123)		1,353
Asset backed securities	3		—		—		(1)		25		(1)		25
Corporate bonds	12		—		—		(9,349)		48,644		(9,349)		48,644
Total available-for-sale investment securities	129	$	(3)	$	532	$	(98,020)	$	485,527	$	(98,023)	$	486,059

		December 31, 2022
		Less than 12 Months				Over 12 Months				Total
	Number of	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(dollars in thousands)	Holdings	Losses		Value		Losses		Value		Losses		Value
Available-for-sale
U.S. Treasury and agencies	1	$	(17)	$	509	$	—	$	—	$	(17)	$	509
Mortgage backed securities
Residential agency	145		(10,457)		79,693		(107,711)		507,418		(118,168)		587,111
Commercial	17		(4,835)		50,437		(2,276)		13,120		(7,111)		63,557
Asset backed securities	3		—		32		—		2		—		34
Corporate bonds	17		(4,452)		48,048		(2,516)		14,484		(6,968)		62,532
Total available-for-sale investment securities	183		(19,761)		178,719		(112,503)		535,024		(132,264)		713,743
Held-to-maturity
Obligations of state and political agencies	181		(3,336)		18,788		(14,400)		98,762		(17,736)		117,550
Mortgage backed securities
Residential agency	27		—		—		(33,254)		150,861		(33,254)		150,861
Total held-to-maturity investment securities	208		(3,336)		18,788		(47,654)		249,623		(50,990)		268,411
Total investment securities	391	$	(23,097)	$	197,507	$	(160,157)	$	784,647	$	(183,254)	$	982,154

As of December 31, 2023 and 2022, the unrealized losses on the Company’s AFS debt securities have not been recognized into income because management does not intend to sell and it is not more-likely-than-not that the Company will be required to sell any of the debt securities before recovery of its amortized cost basis. Furthermore, the unrealized losses were due to changes in interest rates and other market conditions, were not reflective of credit events and the issuers continue to make timely principal and interest payments on the bonds. Agency-backed and government-sponsored enterprise securities have a long 40-year history with no credit losses, including during times of severe stress. The principal and interest payments on agency-guaranteed debt is backed by the U.S. government. Government-sponsored enterprises similarly guarantee principal and interest payments and carry an implicit guarantee from the U.S. Department of the Treasury. Additionally, government-sponsored enterprise securities are exceptionally liquid, readily marketable, and provide a substantial amount of price transparency and price parity, indicating a perception of zero credit losses. Subordinate corporate bonds are primarily comprised of investment grade senior notes and senior subordinated notes on other financial institutions. HTM municipal debt holdings are comprised solely of high credit quality state and municipal obligations. High credit quality state and municipal obligations have a history of zero to near-zero credit loss.

The Company determined that the expected credit loss on its HTM portfolio was $213 thousand as of December 31, 2023. The Company determined that the expected credit loss on its HTM portfolio was immaterial, and therefore, an allowance was not carried on its HTM debt securities at December 31, 2022.

As of December 31, 2023 and 2022, none of the Company’s HTM debt securities were past due or on non-accrual status. The Company did not recognize any interest income on non-accrual HTM debt securities during years ended December 31, 2023, 2022 and 2021.

The following table presents amortized cost and fair value of AFS investment securities and the carrying value and fair value of HTM investment securities at December 31, 2023, by contractual maturity:

	Held-to-maturity				Available-for-sale
	Carrying		Fair		Amortized		Fair
(dollars in thousands)	Value		Value		Cost		Value
Due within one year or less	$	8,588	$	8,474	$	—	$	—
Due after one year through five years		47,995		44,557		524		521
Due after five years through ten years		60,289		52,729		59,477		50,004
Due after 10 years		12,731		11,230		613		617
		129,603		116,990		60,614		51,142
Mortgage-backed securities
Residential agency		170,125		141,627		524,140		435,594
Total investment securities	$	299,728	$	258,617	$	584,754	$	486,736

Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Investment securities with a total carrying value of $250.0 million and $260.7 million, were pledged at December 31, 2023 and 2022, respectively, to secure public deposits and for other purposes required or permitted by law.

As of December 31, 2023 and 2022, the carrying value of the Company’s Federal Reserve Bank stock and Federal Home Loan Bank of Des Moines, or FHLB, stock was as follows:

	December 31,		December 31,
(dollars in thousands)	2023		2022
Federal Reserve	$	4,623	$	4,595
FHLB		16,566		19,362

These securities can only be redeemed or sold at their par value and only to the respective issuing institution or to another member institution. The Company records these non-marketable equity securities as a component of other assets and periodically evaluates these securities for impairment. Management considers these non-marketable equity securities to be long-term investments. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value.

Visa Class B Restricted Shares

In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares. This conversion will not occur until the settlement of certain litigation which will be indemnified by Visa members, including the Company. Visa funded an escrow account from its initial public offering to settle these litigation claims. Should this escrow account be insufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank’s Class B conversion ratio to unrestricted Class A shares. As of December 31, 2023, the conversion ratio was 1.5991. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the 6,924 Class B shares (11,702 Class A equivalents) that the Company owned as of December 31, 2023 and 2022, were carried at a zero cost basis.