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Note 3. Investment Securities

12 Months Ended

Dec. 31, 2023

Note 3. Investment Securities

The amortized cost and fair value of HTM and AFS investment securities as of December 31, 2023 and 2022 are summarized as follows:


			Allowance		Gross		Gross
	Amortized		for Credit		Unrealized		Unrealized		Fair
	Cost		(Losses)		Gains		(Losses)		Value

	(dollars in thousands)
December 31, 2023:
Securities HTM:
Municipal securities	$	682,657	$	(202)	$	33,385	$	(36,639)	$	679,201
Other securities		1,050		(1)		44		(15)		1,078
	$	683,707	$	(203)	$	33,429	$	(36,654)	$	680,279

Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	17,399	$	—	$	12	$	(2,438)	$	14,973
Residential mortgage-backed and related securities		65,168		—		—		(5,972)		59,196
Municipal securities		206,566		—		11		(35,590)		170,987
Asset-backed securities		15,261		—		167		(5)		15,423
Other securities		44,239		(989)		—		(4,174)		39,076
	$	348,633	$	(989)	$	190	$	(48,179)	$	299,655

* HTM securities shown on the balance sheet of $683.5 million represent amortized cost of $683.7 million, net of allowance for credit losses of $203 thousand as of December 31, 2023.


			Allowance		Gross		Gross
	Amortized		for Credit		Unrealized		Unrealized		Fair
	Cost		(Losses)		Gains		(Losses)		Value

	(dollars in thousands)
December 31, 2022:
Securities HTM:
Municipal securities	$	586,272	$	(180)	$	5,292	$	(56,798)	$	534,586
Other securities		1,050		—		—		—		1,050
	$	587,322	$	(180)	$	5,292	$	(56,798)	$	535,636

Securities AFS:
U.S. govt. sponsored agency securities	$	19,745	$	—	$	19	$	(2,783)	$	16,981
Residential mortgage-backed and related securities		73,438		—		—		(7,223)		66,215
Municipal securities		239,812		—		66		(46,700)		193,178
Asset-backed securities		18,885		—		48		(205)		18,728
Other securities		48,631		—		27		(2,800)		45,858
	$	400,511	$	—	$	160	$	(59,711)	$	340,960

* HTM securities shown on the balance sheet of $587.1 million represent amortized cost of $587.3 million, net of allowance for credit losses of $180 thousand as of December 31, 2022.

The Company’s HTM municipal securities consist largely of private issues of municipal debt. The municipalities are located primarily within the Greater 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 HTM and AFS investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2023 and 2022, are summarized in the tables below. Securities AFS, for which an allowance for credit losses has been provided, are not included in these disclosures as there are no unrealized losses remaining after consideration of the ACL.


	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, 2023:
Securities HTM:
Municipal securities	$	1,320	$	(11)	$	289,891	$	(36,628)	$	291,211	$	(36,639)
Other securities		535		(15)		—		—		535		(15)
	$	1,855	$	(26)	$	289,891	$	(36,628)	$	291,746	$	(36,654)

Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	—	$	—	$	14,018	$	(2,438)	$	14,018	$	(2,438)
Residential mortgage-backed and related securities		—		—		59,118		(5,972)		59,118		(5,972)
Municipal securities		283		(2)		169,876		(35,588)		170,159		(35,590)
Asset-backed securities		—		—		3,804		(5)		3,804		(5)
Other securities		3,805		(393)		35,271		(3,781)		39,076		(4,174)
	$	4,088	$	(395)	$	282,087	$	(47,784)	$	286,175	$	(48,179)


	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, 2022:
Securities HTM:
Municipal securities	$	347,651	$	(56,798)	$	—	$	—	$	347,651	$	(56,798)

Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	5,138	$	(326)	$	10,591	$	(2,457)	$	15,729	$	(2,783)
Residential mortgage-backed and related securities		48,469		(3,327)		17,690		(3,896)		66,159		(7,223)
Municipal securities		178,172		(42,661)		9,809		(4,039)		187,981		(46,700)
Asset-backed securities		13,684		(205)		—		—		13,684		(205)
Other securities		35,206		(2,404)		4,122		(396)		39,328		(2,800)
	$	280,669	$	(48,923)	$	42,212	$	(10,788)	$	322,881	$	(59,711)

At December 31, 2023, the investment portfolio included 657 securities. Of this number, 493 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 8.22% of the total aggregate amortized cost. Of these 493 securities, 475 securities had an unrealized loss for 12 months or more. Management has concluded unrealized losses are temporary due to changing interest rates.

In the first quarter of 2023, the Company’s impairment evaluation determined that one publicly traded debt security experienced a decline in fair value due to credit quality, rather than market factors. As a result, the Company recognized a credit loss expense of $989 thousand and established an ACL on the related AFS security. There has been no change to the ACL on the related AFS security during the last three quarters of 2023.

Note 3. Investment Securities (continued)

The following table presents the activity in the allowance for credit losses for HTM and AFS securities by major security type for the years ended December 31, 2023 and 2022.


	Year Ended December 31, 2023								Year Ended December 31, 2022
	Securities HTM						Securities AFS		Securities HTM		Securities AFS
	Municipal		Other				Corporate		Municipal		Corporate
	securities		securities		Total		securities		securities		securities

Allowance for credit losses:
Beginning balance	$	180	$	—	$	180	$	—	$	198	$	—
Provision for credit loss expense		22		1		23		989		(18)		—
Balance, ending	$	202	$	1	$	203	$	989	$	180	$	—

Trading securities had a fair value of $22.4 million as of December 31, 2023 and consist of retained beneficial interests acquired in conjunction with Freddie Mac securitizations completed by the Company in 2023. See also Note 5 to the Consolidated Financial Statements for the details of these securitizations.

There were no transfers of securities between classifications during the years ended December 31, 2023, 2022 and 2021.

All sales of securities for the years ended December 31, 2023, 2022 and 2021, 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:


	2023		2022		2021

	(dollars in thousands)

Proceeds from sales of securities	$	30,568	$	111,375	$	23,874
Gross gains from sales of securities		56		—		—
Gross losses from sales of securities		(507)		—		(88)

Subsequent to the closing of the GFED acquisition, the Company sold $111.4 million of the acquired securities portfolio to improve the efficiency of the combined balance sheets. These were the only securities sales for the year ended December 31, 2022.

The amortized cost and fair value of HTM and AFS securities as of December 31, 2023, 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	$	1,876	$	1,867
Due after one year through five years		27,293		29,060
Due after five years		654,538		649,352
	$	683,707	$	680,279
Securities AFS:
Due in one year or less	$	968	$	964
Due after one year through five years		16,819		14,815
Due after five years		250,417		209,257
		268,204		225,036
Residential mortgage-backed and related securities		65,168		59,196
Asset-backed securities		15,261		15,423
	$	348,633	$	299,655

Note 3. Investment Securities (continued)

Portions of the U.S. government sponsored agency securities and municipal 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, summarized as follows:


	Amortized Cost		Fair Value

	(dollars in thousands)
Securities HTM:
Municipal securities	$	261,340	$	257,714

Securities AFS:
Municipal securities		205,165		169,604
Other securities		43,283		38,133
	$	248,448	$	207,737

As of December 31, 2023 and 2022, HTM and AFS investment securities with a carrying value of $117.8 million and $47.0 million, respectively, were pledged on public deposits, FHLB advances, derivative liabilities, in connection with the Federal Reserve’s Bank Term Funding program, and in connection with a Goldman Sachs cash management program. Additionally, trading securities with a carrying value of $16.2 million are pledged to provide first loss support to Freddie Mac in conjunction with loan securitizations.

As of December 31, 2023, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 82 issuers with fair values totaling $99.4 million and revenue bonds issued by 169 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $750.8 million. The Company held investments in general obligation bonds in 18 states, including eight states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 31 states, including 15 states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2022, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 118 issuers with fair values totaling $110.6 million and revenue bonds issued by 181 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $617.2 million. The Company held investments in general obligation bonds in 22 states, including seven states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 29 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, 2023 and 2022, 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, such as water, sewer, education and 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. The investments of each charter are monitored individually, and as of December 31, 2023, all were within policy limitations approved by the Company’s board of directors. Policy limits are calculated as a percentage of each charter’s total risk-based capital.

As of December 31, 2023, 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.