NOTE 2 - INVESTMENT SECURITIES

9 Months Ended

Sep. 30, 2020

Notes to Financial Statements

INVESTMENT SECURITIES

NOTE 2– INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of September 30, 2020 and December 31, 2019 are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		(Losses)		Value
	(dollars in thousands)
September 30, 2020:
Securities HTM:
Municipal securities	$	433,842	$	26,292	$	(984)	$	459,150
Other securities		1,050		—		(1)		1,049
	$	434,892	$	26,292	$	(985)	$	460,199
Securities AFS:
U.S. govt. sponsored agency securities	$	17,791	$	667	$	(21)	$	18,437
Residential mortgage-backed and related securities		128,281		6,158		(292)		134,147
Municipal securities		132,545		3,497		(809)		135,233
Asset-backed securities		39,696		1,108		(139)		40,665
Other securities		18,550		164		—		18,714
	$	336,863	$	11,594	$	(1,261)	$	347,196

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		(Losses)		Value
	(dollars in thousands)
December 31, 2019:
Securities HTM:
Municipal securities	$	399,596	$	26,042	$	(143)	$	425,495
Other securities		1,050		—		—		1,050
	$	400,646	$	26,042	$	(143)	$	426,545
Securities AFS:
U.S. govt. sponsored agency securities	$	19,872	$	283	$	(77)	$	20,078
Residential mortgage-backed and related securities		118,724		2,045		(182)		120,587
Municipal securities		46,659		1,602		(4)		48,257
Asset-backed securities		16,958		—		(71)		16,887
Other securities		4,749		138		(1)		4,886
	$	206,962	$	4,068	$	(335)	$	210,695

The Company's HTM municipal securities consist largely of private issues of municipal debt. The large majority of the municipalities are located within the Midwest. The municipal debt investments are underwritten using specific guidelines with ongoing monitoring.

The Company's residential mortgage-backed and related securities portfolio consists entirely of government sponsored or government guaranteed securities. The Company has not invested in private mortgage-backed securities or pooled trust preferred securities.

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2020 and December 31, 2019, are summarized as follows:

	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(dollars in thousands)
September 30, 2020:
Securities HTM:
Municipal securities	$	33,252	$	(984)	$	—	$	—	$	33,252	$	(984)
Other securities		1,049		(1)		—		—		1,049		(1)
	$	34,301	$	(985)	$	—	$	—	$	34,301	$	(985)
Securities AFS:
U.S. govt. sponsored agency securities	$	3,243	$	(21)	$	—	$	—	$	3,243	$	(21)
Residential mortgage-backed and related securities		31,124		(292)		—		—		31,124		(292)
Municipal securities		27,277		(809)		—		—		27,277		(809)
Asset-backed securities		16,796		(139)		—		—		16,796		(139)
Other securities		—		—		—		—		—		—
	$	78,440	$	(1,261)	$	—	$	—	$	78,440	$	(1,261)

	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(dollars in thousands)
December 31, 2019:
Securities HTM:
Municipal securities	$	509	$	(1)	$	10,047	$	(142)	$	10,556	$	(143)
Other securities		550		—		—		—		550		—
	$	1,059	$	(1)	$	10,047	$	(142)	$	11,106	$	(143)
Securities AFS:
U.S. govt. sponsored agency securities	$	1,431	$	(21)	$	2,117	$	(56)	$	3,548	$	(77)
Residential mortgage-backed and related securities		2,263		(17)		17,862		(165)		20,125		(182)
Municipal securities		—		—		724		(4)		724		(4)
Asset-backed securities		16,886		(71)		—		—		16,886		(71)
Other securities		249		(1)		—		—		249		(1)
	$	20,829	$	(110)	$	20,703	$	(225)	$	41,532	$	(335)

At September 30, 2020, the investment portfolio included 647 securities. Of this number, 73 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.3% of the total amortized cost of the portfolio. Of these 73 securities, there were no securities that had an unrealized loss for twelve months or more. Asset-backed securities are comprised of collateralized loan obligations, which are debt securities backed by pools of senior secured commercial loans to a diverse group of companies across a broad spectrum of industries. At September 30, 2020, the Company only owned collateralized loan obligations that were AAA rated. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery.

The Company did not recognize OTTI on any investment securities for the three or nine months ended September 30, 2020 and 2019.

All sales of securities for the three and nine months ended September 30, 2020 and 2019 were securities identified as AFS.

	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
		(dollars in thousands)
Proceeds from sales of securities	$	22,252	$	23,364	$	28,579	$	28,025
Gross gains from sales of securities		1,802		143		1,936		150
Gross losses from sales of securities		—		(146)		(69)		(206)

The amortized cost and fair value of securities as of September 30, 2020 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities and asset-backed securities may differ from contractual maturities because the residential mortgages underlying the securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.

	Amortized Cost		Fair Value
	(dollars in thousands)
Securities HTM:
Due in one year or less	$	3,509	$	3,525
Due after one year through five years		32,354		32,909
Due after five years		399,029		423,765
	$	434,892	$	460,199
Securities AFS:
Due in one year or less	$	7,795	$	7,810
Due after one year through five years		14,010		14,423
Due after five years		147,081		150,151
		168,886		172,384
Residential mortgage-backed and related securities		128,281		134,147
Asset-backed securities		39,696		40,665
	$	336,863	$	347,196

Portions of the U.S. government sponsored agency securities, municipal securities and other securities contain call options, which, at the discretion of the issuer, terminate the security at par and at predetermined dates prior to the stated maturity. These callable securities are summarized as follows:

	Amortized Cost		Fair Value
	(dollars in thousands)
Securities HTM:
Municipal securities	$	204	$	203
Securities AFS:
Municipal securities		118,030		120,371
Other securities		4,500		4,664
	$	122,530	$	125,035

As of September 30, 2020, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 114 issuers with fair values totaling $110.3 million and revenue bonds issued by 182 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $484.1 million. The Company also held investments in general obligation bonds in 21 states, including nine states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 24 states, including 13 states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2019, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 93 issuers with fair values totaling $77.2 million and revenue bonds issued by 154 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $396.6 million. The Company also held investments in general obligation bonds in 22 states, including six states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 17 states, including nine states in which the aggregate fair value exceeded $5.0 million.

Both general obligation and revenue bonds are diversified across many issuers. As of September 30, 2020 the Company did not hold any revenue bonds of one single issuer of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. As of December 31, 2019, the Company held revenue bonds of one single issuer, located in Ohio, of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. The issuer’s financial condition is strong and the source of repayment is diversified. The Company monitors the investment and concentration closely. Of the general obligation and revenue bonds in the Company's portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.

The Company's municipal securities are owned by the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. The investments of each charter are monitored individually, and as of September 30, 2020, all were within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital.

As of September 30, 2020, the Company's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.