Note 3 - Investment Securities

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Investment Securities

Note 3. Investment Securities

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost*		Gains		(Losses)		Value
	(dollars in thousands)
December 31, 2021:
Securities HTM:
Municipal securities	$	471,533	$	49,715	$	—	$	521,248
Other securities		1,050		—		(1)		1,049
	$	472,583	$	49,715	$	(1)	$	522,297
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	23,370	$	254	$	(296)	$	23,328
Residential mortgage-backed and related securities		92,431		2,672		(780)		94,323
Municipal securities		163,253		5,228		(215)		168,266
Asset-backed securities		26,372		752		—		27,124
Other securities		24,568		251		(30)		24,789
	$	329,994	$	9,157	$	(1,321)	$	337,830

* HTM securities shown on the balance sheet of $472.4 million represent amortized cost of $472.6 million, net of allowance for credit losses of $198 thousand as of December 31, 2021.

			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

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

Note 3. Investment Securities (continued)

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 commercial 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 December 31, 2021 and 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)
December 31, 2021:
Securities HTM:
Other securities	$	1,049	$	(1)	$	—	$	—	$	1,049	$	(1)
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	9,802	$	(156)	$	3,035	$	(140)	$	12,837	$	(296)
Residential mortgage-backed and related securities		5,363		(67)		19,406		(713)		24,769		(780)
Municipal securities		13,287		(211)		1,001		(4)		14,288		(215)
Other securities		4,528		(30)		—		—		4,528		(30)
	$	32,980	$	(464)	$	23,442	$	(857)	$	56,422	$	(1,321)

	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 December 31, 2021, the investment portfolio included 622 securities. Of this number, 42 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.17% of the total aggregate amortized cost. Of these 42 securities, 13 securities had an unrealized loss for 12 months or more.

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 held to maturity securities by major security type for the year ended December 31, 2021.

	Year Ended December 31, 2021
	Municipal		Other
	securities		securities		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning balance	$	—	$	—	$	—
Impact of adopting ASU 2016-13		182		1		183
Provision for credit loss expense		16		(1)		15
Balance, ending	$	198	$	—	$	198

Note 3. Investment Securities (continued)

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 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies” included in this Form 10-K, for a discussion of the impact of the adoption of ASU 2016-13.

All sales of securities for the years ended December 31, 2021, 2020 and 2019, respectively, were from securities identified as AFS. Information on proceeds received, as well as the gains and losses from the sale of those securities are as follows:

	2021		2020		2019
	(dollars in thousands)
Proceeds from sales of securities	$	23,874	$	38,562	$	30,055
Gross gains from sales of securities		—		2,553		176
Gross losses from sales of securities		(88)		(69)		(206)

The amortized cost and fair value of securities as of December 31, 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 mortgages underlying the securities may be called or 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	$	2,636	$	2,651
Due after one year through five years		23,246		23,800
Due after five years		446,701		495,846
	$	472,583	$	522,297
Securities AFS:
Due in one year or less	$	5,873	$	5,943
Due after one year through five years		5,600		5,764
Due after five years		199,718		204,676
		211,191		216,383
Residential mortgage-backed and related securities		92,431		94,323
Asset-backed securities		26,372		27,124
	$	329,994	$	337,830

Portions of the U.S. government sponsored agencies and municipal securities contain call options, at the discretion of the issuer, to terminate the security at predetermined dates prior to the stated maturity, summarized as follows:

	Amortized Cost		Fair Value
	(dollars in thousands)
Securities HTM:
Municipal securities	$	278,699	$	289,939
Securities AFS:
Municipal securities		158,262		163,070
Other securities		24,568		24,789
	$	182,830	$	187,859

As of December 31, 2021 and 2020, investment securities with a carrying value of $246.5 million and $212.8 million, respectively, were pledged on public deposits, FHLB advances, customer repurchase agreements, derivative liabilities, in connection with a Goldman Sachs cash management program and for other purposes as required or permitted by law.

Note 3. Investment Securities (continued)

As of December 31, 2021, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 113 issuers with fair values totaling $114.5 million and revenue bonds issued by 165 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $575.0 million. The Company held investments in general obligation bonds in 20 states, including seven states in which the aggregate fair value exceeded $5.0 million. The Company held investments 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 held investments in general obligation bonds in 21 states, including eight states in which the aggregate fair value exceeded $5.0 million. The Company held investments 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 December 31, 2021 and 2020, the Company held revenue bonds of two issuers, located in Ohio, the aggregate book or market value of which exceeded 5% of the Company’s stockholders’ equity.  The issuers’ 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 risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services (water, sewer, education, medical facilities).

The Company’s municipal securities are owned by each of the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually and as of December 31, 2021, all were within policy limitations approved by the charter’s board of directors. Policy limits are calculated as a percentage of total risk-based capital.

As of December 31, 2021, the Company’s standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credits 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.