Note 5: Investment Securities

The amortized costs and approximate fair values, together with gross unrealized gains and losses on securities, are as follows:


	December 31, 2019
			Gross		Gross
			Unrealized		Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Available for Sale Securities
Mortgage-backed securities	$	124,096	$	1,940	$	(235)	$	125,801
Collateralized mortgage obligations		91,013		562		(202)		91,373
Municipal obligations		156,845		9,417		(12)		166,250
Corporate obligations		2,991		-		(793)		2,198
Total investment securities	$	374,945	$	11,919	$	(1,242)	$	385,622


	December 31, 2018
			Gross		Gross
			Unrealized		Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Available for Sale Securities
Mortgage-backed securities	$	106,094	$	296	$	(2,047)	$	104,343
Collateralized mortgage obligations		110,994		157		(1,870)		109,281
Municipal obligations		153,976		2,008		(1,088)		154,896
Corporate obligations		2,998		-		(643)		2,355
Total investment securities	$	374,062	$	2,461	$	(5,648)	$	370,875

All mortgage-backed securities and collateralized-mortgage obligations held by the Company as of December 31, 2019 were in government-sponsored and federal agency securities.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2019 and 2018 was $64.4 million and $206.9 million, which is approximately 16.7% and 55.8% of the Company’s investment portfolio at those dates.

Based on our evaluation of available evidence, including recent changes in market interest rates, management believes the fair value for the securities at less than historical cost for the periods presented are temporary.

Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

During 2019 and 2018, the Bank determined that its security holdings had no other-than-temporary impairment.

The following tables show the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2019 and 2018:


	December 31, 2019
	Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Available for Sale Securities
Mortgage-backed securities	$	8,718	$	(28)	$	16,925	$	(207)	$	25,643	$	(235)
Collateralized mortgage obligations		16,708		(56)		17,296		(146)		34,004		(202)
Municipal obligations		2,555		(12)		-		-		2,555		(12)
Corporate obligations		-		-		2,198		(793)		2,198		(793)
Total temporarily impaired securities	$	27,981	$	(96)	$	36,419	$	(1,146)	$	64,400	$	(1,242)


	December 31, 2018
	Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Available for Sale Securities
Mortgage-backed securities	$	33,176	$	(348)	$	42,230	$	(1,699)	$	75,406	$	(2,047)
Collateralized mortgage obligations		15,139		(111)		64,495		(1,759)		79,634		(1,870)
Municipal obligations		35,501		(542)		14,018		(546)		49,519		(1,088)
Corporate obligations		-		-		2,355		(643)		2,355		(643)
Total temporarily impaired securities	$	83,816	$	(1,001)	$	123,098	$	(4,647)	$	206,914	$	(5,648)

Mortgage-Backed Securities (MBS) and Collateralized Mortgage Obligations (CMO)

The unrealized losses on the Company’s investment in CMOs and MBSs were caused by interest rate changes and illiquidity. The Company expects to recover the amortized cost basis over the term of the securities. Because (1) the decline in market value is attributable to changes in interest rates and illiquidity and not credit quality, (2) the Company does not intend to sell the investments and (3) it is more likely than not the Company will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2019.

Municipal Obligations

The unrealized losses on the Company’s investments in securities of state and political subdivisions were caused by changes in interest rates and illiquidity. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the par value of the investments. At December 31, 2019, the Company does not intend to sell the investments and it is not more likely than not that the Company will not be required to sell these investments. The Company does not consider any of these investment securities to be other-than-temporarily impaired at December 31, 2019.

Corporate Obligations

The Company’s unrealized loss on investments in corporate obligations primarily relates to an investment in a pooled trust preferred security. The unrealized losses were primarily due to illiquidity.

Other-Than-Temporary Impairment

Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or whether it will be evaluated for impairment under the accounting guidance for investments in debt and equity securities.

The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt securities within the scope of the guidance for investments in debt and equity securities. For securities that are a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model. For securities that are not a beneficial interest in securitized financial assets, the Company uses debt and equity securities impairment model.

The Company conducts periodic reviews to identify and evaluate each investment security to determine whether an other-than-temporary impairment has occurred. Economic models are used to determine whether an other-than-temporary impairment has occurred on these securities. While all securities are considered, the securities primarily impacted by other-than-temporary impairment testing are private-label mortgage-backed securities and trust preferred securities.

The Bank’s trust preferred securities valuation was prepared by an independent third party. Their approach to determining fair value involved several steps including:

Detailed credit and structural evaluation of each piece of collateral in the trust preferred securities;

Collateral performance projections for each piece of collateral in the trust preferred security;

Terms of the trust preferred structure, as laid out in the indenture; and

Discounted cash flow modeling.

The Company uses market-based yield indicators as a baseline for determining appropriate discount rates, and then adjusts the resulting discount rates on the basis of its credit and structural analysis of specific trust preferred securities. The primary focus is on the returns a fixed income investor would require in order to allocate capital on a risk adjusted basis. There is currently no active market for pooled trust preferred securities; however, the Company looks principally to market yields for stand-alone trust preferred securities issued by banks, thrifts and insurance companies for which there is an active and liquid market. The next step is to make a series of adjustments to reflect the differences that exist between these products (both credit and structural) and, most importantly, to reflect idiosyncratic credit performance differences (both actual and projected) between these products and the underlying collateral in the specific trust preferred security. Importantly, as part of the analysis described above, MutualFirst considers the fact that structured instruments frequently exhibit leverage not present in stand-alone instruments, and makes adjustments as necessary to reflect this additional risk.

The default and recovery probabilities for each piece of collateral were formed based on the evaluation of the collateral credit and a review of historical industry default data and current/near-term operating conditions. For collateral that has already defaulted, the Company assumed no recovery. For collateral that was in deferral, the Company assumed a recovery of 10% of par for banks, thrifts or other depository institutions and 15% of par for insurance companies. Although the Company conservatively assumed that the majority of the deferring collateral continues to defer and eventually defaults, we also recognize there is a possibility that some deferring collateral may become current at some point in the future.

The amortized cost and fair value of securities available for sale at December 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Available for Sale
Description of Securities	Amortized Cost		Fair Value
Security obligations due
Within one year	$	-	$	-
One to five years		952		1,002
Five to ten years		17,197		17,939
After ten years		141,687		149,507
		159,836		168,448
Mortgage-backed securities		124,096		125,801
Collateralized mortgage obligations		91,013		91,373
Totals	$	374,945	$	385,622

The carrying value of securities pledged as collateral, to secure swap position was $2.7 million as of December 31, 2019. The Company did not have securities pledged as collateral as of December 31, 2018.

Proceeds from sales of securities available for sale during 2019, 2018 and 2017 were $30.8 million, $67.0 million and $34.6 million, respectively. Gross gains of $1.0 million, $892,000 and $776,000 in 2019, 2018 and 2017 were recognized on those sales. Gross losses of $5,000, $88,000 and $68,000 were recognized on those sales in 2019, 2018 and 2017, respectively.