NOTE 2 - INVESTMENT SECURITIES

6 Months Ended

Jun. 30, 2021

Notes to Financial Statements

INVESTMENT SECURITIES

NOTE 2– INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of June 30, 2021 and December 31, 2020 are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost*		Gains		(Losses)		Value
	(dollars in thousands)
June 30, 2021:
Securities HTM:
Municipal securities	$	472,283	$	50,129	$	(20)	$	522,392
Other securities		1,050		—		—		1,050
	$	473,333	$	50,129	$	(20)	$	523,442
Securities AFS:
U.S. govt. sponsored agency securities	$	14,310	$	504	$	(144)	$	14,670
Residential mortgage-backed and related securities		102,625		4,094		(581)		106,138
Municipal securities		163,607		5,861		(148)		169,320
Asset-backed securities		30,707		1,072		—		31,779
Other securities		15,139		250		(10)		15,379
	$	326,388	$	11,781	$	(883)	$	337,286

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		(Losses)		Value
	(dollars in thousands)
December 31, 2020:
Securities HTM:
Municipal securities	$	475,115	$	45,360	$	(248)	$	520,227
Other securities		1,050		—		—		1,050
	$	476,165	$	45,360	$	(248)	$	521,277
Securities AFS:
U.S. govt. sponsored agency securities	$	14,936	$	447	$	(47)	$	15,336
Residential mortgage-backed and related securities		127,670		5,510		(338)		132,842
Municipal securities		147,241		5,215		(48)		152,408
Asset-backed securities		39,663		1,111		(91)		40,683
Other securities		20,550		147		—		20,697
	$	350,060	$	12,430	$	(524)	$	361,966

*     HTM securities shown on the balance sheet of $473.2 million represents amortized cost of $473.3 million, net of allowance for credit losses of $174 thousand as of June 30, 2021.

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 June 30, 2021 and December 31, 2020, 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)
June 30, 2021:
Securities HTM:
Municipal securities	$	14,440	$	(20)	$	—	$	—	$	14,440	$	(20)
Securities AFS:
U.S. govt. sponsored agency securities	$	3,067	$	(144)	$	—	$	—	$	3,067	$	(144)
Residential mortgage-backed and related securities		26,967		(580)		153		(1)		27,120		(581)
Municipal securities		13,608		(148)		—		—		13,608		(148)
Other securities		4,207		(10)		—		—		4,207		(10)
	$	47,849	$	(882)	$	153	$	(1)	$	48,002	$	(883)

	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, 2020:
Securities HTM:
Municipal securities	$	8,407	$	(248)	$	—	$	—	$	8,407	$	(248)
Securities AFS:
U.S. govt. sponsored agency securities	$	3,199	$	(47)	$	—	$	—	$	3,199	$	(47)
Residential mortgage-backed and related securities		37,549		(338)		—		—		37,549		(338)
Municipal securities		10,110		(48)		—		—		10,110		(48)
Asset-backed securities		6,884		(52)		9,945		(39)		16,829		(91)
	$	57,742	$	(485)	$	9,945	$	(39)	$	67,687	$	(524)

At June 30, 2021, the investment portfolio included 630 securities. Of this number, 44 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.11% of the total amortized cost of the portfolio. Of these 44 securities, there were four 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 June 30, 2021, 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.  

On January 1, 2021, the Company adopted ASU 2016-13, which replaced the legacy GAAP OTTI model with a credit loss model. ASU 2016-13 requires an allowance on lifetime expected credit losses on held to maturity debt securities. The following table presents the activity in the allowance for credit losses for held to maturity securities by major security type for the six months ended June 30, 2021.

	Three Months Ended June 30, 2021						Six Months Ended June 30, 2021
	Municipal		Other				Municipal		Other
	securities		securities		Total		securities		securities		Total
Allowance for credit losses:
Beginning balance	$	173	$	1	$	174	$	—	$	—	$	—
Impact of adopting ASU 2016-13		—		—		—		182		1		183
Provision for credit loss expense		—		—		—		(9)		—		(9)
Balance, ending	$	173	$	1	$	174	$	173	$	1	$	174

The credit loss model under ASU 2016-13, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, “Summary of Significant  Accounting Policies” to the consolidated financial statement included in this Form 10-Q, for a discussion of the impact of the adoption of ASU 2016-13.

All sales of securities for the three and six months ended June 30, 2021 and June 30, 2020 were securities identified as AFS.

	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
		(dollars in thousands)
Proceeds from sales of securities	$	4,334	$	6,327	$	23,874	$	6,327
Gross gains from sales of securities		—		134		—		134
Gross losses from sales of securities		(88)		(69)		(88)		(69)

The amortized cost and fair value of securities as of June 30, 2021 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	$	2,882	$	2,910
Due after one year through five years		29,592		30,281
Due after five years		440,859		490,251
	$	473,333	$	523,442
Securities AFS:
Due in one year or less	$	1,471	$	1,492
Due after one year through five years		11,927		12,175
Due after five years		179,658		185,702
		193,056		199,369
Residential mortgage-backed and related securities		102,625		106,139
Asset-backed securities		30,707		31,778
	$	326,388	$	337,286

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	$	272,039	$	283,607
Securities AFS:
Municipal securities		158,149		163,595
Other securities		15,139		15,379
	$	173,288	$	178,974

As of June 30, 2021, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 117 issuers with fair values totaling $116.6 million and revenue bonds issued by 175 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $575.1 million. The Company also held investments in general obligation bonds in 21 states, including eight states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 25 states, including 13 states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2020, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 117 issuers with fair values totaling $116.7 million and revenue bonds issued by 191 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $555.9 million. The Company also held investments in general obligation bonds in 21 states, including eight states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 26 states, including 12 states in which the aggregate fair value exceeded $5.0 million.

Both general obligation and revenue bonds are diversified across many issuers. As of June 30, 2021 and as of December 31, 2020, the Company held revenue bonds of two issuers, 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 investments 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 June 30, 2021, 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 June 30, 2021, 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.