NOTE 2 - INVESTMENT SECURITIES

9 Months Ended

Sep. 30, 2021

Notes to Financial Statements

INVESTMENT SECURITIES

NOTE 2– INVESTMENT SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost*		Gains		(Losses)		Value
	(dollars in thousands)
September 30, 2021:
Securities HTM:
Municipal securities	$	483,127	$	47,122	$	(20)	$	530,229
Other securities		1,050		—		—		1,050
	$	484,177	$	47,122	$	(20)	$	531,279
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	23,616	$	413	$	(340)	$	23,689
Residential mortgage-backed and related securities		97,762		3,627		(645)		100,744
Municipal securities		162,964		4,124		(729)		166,359
Asset-backed securities		29,622		985		—		30,607
Other securities		23,048		299		(30)		23,317
	$	337,012	$	9,448	$	(1,744)	$	344,716

			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 $484.0 million represents amortized cost of $484.2 million, net of allowance for credit losses of $174 thousand as of September 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 September 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)
September 30, 2021:
Securities HTM:
Municipal securities	$	14,880	$	(20)	$	—	$	—	$	14,880	$	(20)
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	9,809	$	(148)	$	3,001	$	(192)	$	12,810	$	(340)
Residential mortgage-backed and related securities		18,422		(593)		8,629		(52)		27,051		(645)
Municipal securities		50,754		(689)		966		(40)		51,720		(729)
Other securities		3,970		(30)		—		—		3,970		(30)
	$	82,955	$	(1,460)	$	12,596	$	(284)	$	95,551	$	(1,744)

	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 September 30, 2021, the investment portfolio included 629 securities. Of this number, 91 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.22% of the total amortized cost of the portfolio. Of these 91 securities, there were nine 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, 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 nine months ended September 30, 2021.

	Three Months Ended September 30, 2021						Nine Months Ended September 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 nine months ended September 30, 2021 and September 30, 2020 were securities identified as AFS.

	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
		(dollars in thousands)
Proceeds from sales of securities	$	—	$	22,252	$	23,874	$	28,579
Gross gains from sales of securities		—		1,802		—		1,936
Gross losses from sales of securities		—		—		(88)		(69)

The amortized cost and fair value of securities as of September 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	$	3,171	$	3,188
Due after one year through five years		26,563		27,189
Due after five years		454,443		500,902
	$	484,177	$	531,279
Securities AFS:
Due in one year or less	$	1,280	$	1,295
Due after one year through five years		12,409		12,694
Due after five years		195,939		199,376
		209,628		213,365
Residential mortgage-backed and related securities		97,762		100,744
Asset-backed securities		29,622		30,607
	$	337,012	$	344,716

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	$	285,608	$	297,413
Securities AFS:
Municipal securities		157,961		161,122
Other securities		23,048		23,317
	$	181,009	$	184,439

As of September 30, 2021, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 113 issuers with fair values totaling $115.0 million and revenue bonds issued by 168 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $581.6 million. The Company also held investments in general obligation bonds in 20 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 September 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 September 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 September 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.