Note 6 - Securities Available-for-Sale and Held-to-Maturity

3 Months Ended

Mar. 31, 2023

Notes to Financial Statements

Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]

Note 6. Securities Available-for-Sale and Held-to-Maturity

(in thousands)

The amortized cost and estimated fair value of securities available-for-sale and the corresponding amounts of gross unrealized gains and losses recognized were as follows:

			Gross		Gross
March 31, 2023	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities available-for-sale
Mortgage backed securities	$	104,478	$	6	$	8,948	$	95,536
State, County, Municipals		134,667		24		28,930		105,761
Other securities		500	$	-	$	57	$	443
Total	$	239,645	$	30	$	37,935	$	201,740

			Gross		Gross
December 31, 2022	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities available-for-sale
Mortgage backed securities	$	107,055	$	-	$	10,083	$	96,972
State, County, Municipals		134,906		-		30,993		103,913
Other securities		500		-		63		437
Total	$	242,461	$	-	$	41,139	$	201,322

The amortized cost and estimated fair value of securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses recognized were as follows:

			Gross		Gross
March 31, 2023	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities held-to-maturity
Obligations of U.S.
Government agencies	$	4,018	$	-	$	364	$	3,654
Mortgage backed securities		305,356		-		21,219		284,137
State, County, Municipals		92,863		-		4,702		88,161
Total	$	402,237	$	-	$	26,285	$	375,952

			Gross		Gross
December 31, 2022	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities held-to-maturity
Obligations of U.S.
Government agencies	$	4,002	$	-	$	367	$	3,635
Mortgage backed securities		309,748		-		24,654		285,094
State, County, Municipals		92,840		-		6,277		86,563
Total	$	406,590	$	-	$	31,298	$	375,292

During the third quarter of 2022, the Company reclassified $413,921 of securities available-for-sale to securities held-to-maturity. At the date of this transfer, the net unrealized holding loss on the transferred securities totaled approximately $71,319 ($53,525 net of tax).

The securities were transferred at fair value, which became the cost basis for the securities held-to-maturity. The net unrealized holding loss is amortized over the remaining life of the securities in a manner consistent with the amortization or accretion of the original purchase premium or discount on the associated security. There were no gains or losses recognized as a result of the transfer. At March 31, 2023, the net unamortized, unrealized loss on transferred securities included in accumulated other comprehensive income (loss) in the accompanying balance sheet totaled approximately $68,511 ($51,417, net of tax) compared to $69,612 ($52,244, net of tax) at December 31, 2022.

ACL on Securities

ASU 2016-13 applies to all financial instruments carried at amortized cost, including securities held-to-maturity, and makes targeted improvements to the accounting for credit losses on securities available-for-sale.

Under ASU 2016-13, the allowance for credit losses is an estimate measured using relevant information about past events, including historical credit loss experience on financial assets with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the financial assets.

In order to comply with ASU 2016-13, the Company conducted a review of its investment portfolio and determined that for certain classes of securities it would be appropriate to assume the expected credit loss to be zero. This zero-credit loss assumption applies to debt issuances of the U.S. Treasury and agencies and instrumentalities of the United States government. The reasons behind the adoption of the zero-credit loss assumption are as follows:

● High credit rating

● Long history with no credit losses

● Guaranteed by a sovereign entity

● Widely recognized as “risk-free rate”

● Can print its own currency

The Company will continuously monitor any changes in economic conditions, credit downgrades, changes to explicit or implicit guarantees granted to certain debt issuers, and any other relevant information that would indicate potential credit deterioration and prompt the Company to reconsider its zero-credit loss assumption.

At the date of adoption, the Company’s estimated allowance for credit losses on securities available-for-sale and held-to-maturity under ASU 2016-13 was deemed immaterial due to the composition of these portfolios. Both portfolios consist primarily of U.S. government agency guaranteed mortgage-backed securities for which the risk of loss is minimal. Therefore, the Company did not recognize a cumulative effect adjustment through retained earnings related to the available-for-sale or held-to-maturity securities.

Securities Available-for-Sale

ASU 2016-13 makes targeted improvements to the accounting for credit losses on securities available-for-sale. The concept of other-than-temporarily impaired has been replaced with the allowance for credit losses. Unlike securities held-to-maturity, securities available-for-sale are evaluated on an individual level and pooling of securities is not allowed.

Quarterly, the Company evaluates if any security has a fair value less than its amortized cost. Once these securities are identified, in order to determine whether a decline in fair value resulted from a credit loss or other factors, the Company performs further analysis to ensure that the changes in unrealized losses are, in fact, temporary in nature by correlating the changes to the yield curve movement.

Should it be determined that a credit loss exists, the credit portion of the allowance will be measured using a discounted cash flow (“DCF”) analysis using the effective interest rate as of the security’s purchase date. The amount of credit loss the Company records will be limited to the amount by which the amortized cost exceeds the fair value.

The DCF analysis utilizes contractual maturities, as well as third-party credit ratings and cumulative default rates published annually by Moody’s Investor Service.

At March 31, 2023, the results of the analysis did not identify any available-for-sale securities that violate the credit loss triggers; therefore, no DCF analysis was performed and no credit loss was recognized on any of the securities available-for-sale.

Securities Held-to-Maturity

ASU 2016-13 requires institutions to measure expected credit losses on financial assets carried at amortized cost on a collective or pool basis when similar risks exist. The Company uses several levels of segmentation in order to measure expected credit losses:

● The portfolio is segmented into agency and non-agency securities.

● The non-agency securities consists primarily of municipal securities.

Each individual segment is categorized by third-party credit ratings.

As discussed above, the Company has determined that for certain classes of securities it would be appropriate to assume the expected credit loss to be zero, which include debt issuances of the U.S. Treasury and agencies and instrumentalities of the United States government. This assumption will be reviewed and attested to quarterly. The Company is using an internally built model to verify the accuracy of third-party provided calculations.

At March 31, 2023, the Company’s securities held-to-maturity totaled $402,237. The potential credit loss exposure was $92,863 and consisted of municipal securities. After applying appropriate probability of default and loss given default assumptions, the total amount of current expected credit losses was deemed immaterial. Therefore, no reserve was recorded at March 31, 2023.

At March 31, 2023, the Company had no securities held-to-maturity that were past due 30 days or more as to principal or interest payments. The Company had no securities held-to-maturity classified as nonaccrual at March 31, 2023.

The Company monitors the credit quality of municipal securities held-to-maturity on a quarterly basis through credit ratings. The following table presents the amortized cost of the Company’s securities held-to-maturity by credit rating, as determined by Moody’s Investor Services, at March 31, 2023 and December 31, 2022:

	March 31, 2023		December 31, 2022
Aaa	$	16,791	$	18,096
Aa1 to Aa3		41,492		40,174
Not Rated (1)		34,580		34,570
	$	92,863	$	92,840

(1) Not rated securities were municipals that did not have a current Moody’s rating as of the dates reported above. However, all not rated securities are investment grade and are rated between AAA and AA- by Standard and Poor’s rating agency.

The tables below show the Company’s gross unrealized losses and fair value of available-for-sale and held-to-maturity investments for which an ACL has not been recorded, aggregated by investment category and length of impairment at March 31, 2023 and December 31, 2022.

March 31, 2023
Available-for-sale	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Mortgage backed securities	$	55,492	$	1,878	$	36,256	$	7,070	$	91,748	$	8,948
State, County, Municipal		16,842		466		87,008		28,464		103,850		28,930
Other securities		-		-		443		57		443		57
Total	$	72,334	$	2,344	$	123,707	$	35,591	$	196,041	$	37,935

Held-to-maturity	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government agencies	$	-	$	-	$	3,654	$	364	$	3,654	$	364
Mortgage backed securities		-		-		284,137		21,219		284,137		21,219
State, County, Municipal		-		-		88,161		4,702		88,161		4,702
Total	$	-	$	-	$	375,952	$	26,285	$	375,952	$	26,285

December 31, 2022
Available-for-sale	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Mortgage backed securities	$	70,652	$	3,838	$	26,320	$	6,245	$	96,972	$	10,083
State, County, Municipal		45,200		9,027		58,713		21,966		103,913		30,993
Other securities		-		-		437		63		437		63
Total	$	115,852	$	12,865	$	85,470	$	28,274	$	201,322	$	41,139

Held-to-maturity	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Losses		Value		Losses		Value		Losses
Obligations of U.S. government agencies	$	-	$	-	$	3,635	$	367	$	3,635	$	367
Mortgage backed securities		17,882		1,332		267,212		23,322		285,094		24,654
State, County, Municipal		15,059		781		71,504		5,496		86,563		6,277
Total	$	32,941	$	2,113	$	342,351	$	29,185	$	375,292	$	31,298

The unrealized losses shown above are due to increases in market rates over the yields available at the time of purchase of the underlying securities and not credit quality. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.

Contractual Maturities

The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2023 are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay certain obligations.

	Available-for-sale				Held-to-maturity
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	720	$	663	$	-	$	-
Due after one year through five years		3,155		3,076		-		-
Due after five years through ten years		5,275		5,008		-		-
Due after ten years		126,017		97,457		96,881		91,815
Residential mortgage backed securities		91,827		83,144		246,433		229,613
Commercial mortgage backed securities		12,651		12,392		58,923		54,524
Total	$	239,645	$	201,740	$	402,237	$	375,952

Securities Pledged

At March 31, 2023 and December 31, 2022, securities with a carrying value of $462,291 and $462,954, respectively, were pledged to secure government and public deposits and securities sold under agreement to repurchase.