Note 4 - Investment Securities

6 Months Ended

Jun. 30, 2022

Notes to Financial Statements

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

4. Investment securities

Agency – Government-sponsored enterprise (GSE) and Mortgage-backed securities (MBS) - GSE residential

Agency – GSE and MBS – GSE residential securities consist of short- to long-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), FNMA, FHLB and Government National Mortgage Association (GNMA). These securities have interest rates that are fixed, have varying short to long-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government.

Obligations of states and political subdivisions (municipal)

The municipal securities are general obligation and revenue bonds rated as investment grade by various credit rating agencies and have fixed rates of interest with mid- to long-term maturities. Fair values of these securities are highly driven by interest rates. Management performs ongoing credit quality reviews on these issues.

The amortized cost and fair value of investment securities at  June 30, 2022 and December 31, 2021 are summarized as follows:

			Gross		Gross
	Amortized		unrealized		unrealized			Fair
(dollars in thousands)	cost		gains		losses			value
June 30, 2022
Held-to-maturity securities:
Agency - GSE	$	79,776	$	-	$	(4,101	)	$	75,675
Obligations of states and political subdivisions		142,235		-		(18,464	)		123,771
Total held-to-maturity securities	$	222,011	$	-	$	(22,565	)	$	199,446
Available-for-sale debt securities:
Agency - GSE	$	37,023	$	3	$	(3,270	)	$	33,756
Obligations of states and political subdivisions		201,566		571		(22,837	)		179,300
MBS - GSE residential		268,019		15		(28,268	)		239,766
Total available-for-sale debt securities	$	506,608	$	589	$	(54,375	)	$	452,822

			Gross		Gross
	Amortized		unrealized		unrealized			Fair
(dollars in thousands)	cost		gains		losses			value
December 31, 2021
Available-for-sale debt securities:
Agency - GSE	$	119,399	$	204	$	(2,600	)	$	117,003
Obligations of states and political subdivisions		360,680		6,708		(2,678	)		364,710
MBS - GSE residential		258,674		1,654		(3,061	)		257,267
Total available-for-sale debt securities	$	738,753	$	8,566	$	(8,339	)	$	738,980

The amortized cost and fair value of debt securities at  June 30, 2022 by contractual maturity are summarized below:

	Amortized		Fair
(dollars in thousands)	cost		value
Held-to-maturity securities:
Due in one year or less	$	-	$	-
Due after one year through five years		4,682		4,568
Due after five years through ten years		60,702		57,603
Due after ten years		156,627		137,275
Total held-to-maturity securities	$	222,011	$	199,446
Available-for-sale securities:
Debt securities:
Due in one year or less	$	1,997	$	1,999
Due after one year through five years		18,726		17,823
Due after five years through ten years		45,806		39,964
Due after ten years		172,060		153,270
MBS - GSE residential		268,019		239,766
Total available-for-sale debt securities	$	506,608	$	452,822

Actual maturities will differ from contractual maturities because issuers and borrowers may have the right to call or repay obligations with or without call or prepayment penalty. Agency – GSE and municipal securities are included based on their original stated maturity. MBS – GSE residential, which are based on weighted-average lives and subject to monthly principal pay-downs, are listed in total. Most of the securities have fixed rates or have predetermined scheduled rate changes and many have call features that allow the issuer to call the security at par before its stated maturity without penalty.

The following table presents the fair value and gross unrealized losses of debt securities aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of  June 30, 2022 and December 31, 2021:

	Less than 12 months					More than 12 months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(dollars in thousands)	value		losses			value		losses			value		losses
June 30, 2022
Agency - GSE	$	64,941	$	(3,522	)	$	44,490	$	(3,849	)	$	109,431	$	(7,371	)
Obligations of states and political subdivisions		260,199		(36,487	)		42,873		(4,814	)		303,072		(41,301	)
MBS - GSE residential		203,983		(22,712	)		35,783		(5,556	)		239,766		(28,268	)
Total	$	529,123	$	(62,721	)	$	123,146	$	(14,219	)	$	652,269	$	(76,940	)
Number of securities		410					60					470
December 31, 2021
Agency - GSE	$	84,308	$	(1,460	)	$	26,516	$	(1,140	)	$	110,824	$	(2,600	)
Obligations of states and political subdivisions		193,124		(2,662	)		12,796		(399	)		205,920		(3,061	)
MBS - GSE residential		137,495		(2,351	)		9,469		(327	)		146,964		(2,678	)
Total	$	414,927	$	(6,473	)	$	48,781	$	(1,866	)	$	463,708	$	(8,339	)
Number of securities		187					26					213

The Company had 470 debt securities in an unrealized loss position at  June 30, 2022, including 49 agency-GSE securities, 140 MBS – GSE residential securities and 281 municipal securities. The severity of these unrealized losses based on their underlying cost basis was as follows at  June 30, 2022: 6.31% for agency - GSE, 10.55% for total MBS-GSE residential; and 12.01% for municipals. Sixty of these securities had been in an unrealized loss position in excess of 12 months. Management has no intent to sell any securities in an unrealized loss position as of  June 30, 2022.

During the second quarter of 2022, the Company transferred investment securities with a book value of $245.5 million from available-for-sale to held-to-maturity. The accounting for securities held-to-maturity on this transfer will mitigate the effect on the other comprehensive income (OCI) component of stockholders’ equity from the price risk of rising interest rates which will result in further future unrealized losses in the available-for-sale portfolio.

Management believes the cause of the unrealized losses is related to changes in interest rates and is not directly related to credit quality. Quarterly, management conducts a formal review of investment securities for the presence of other than temporary impairment (OTTI). The accounting guidance related to OTTI requires the Company to assess whether OTTI is present when the fair value of a debt security is less than its amortized cost as of the balance sheet date. Under those circumstances, OTTI is considered to have occurred if: (1) the entity has the intent to sell the security; (2) more likely than not the entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost. The accounting guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on securities not expected to be sold be recognized in OCI. Non-credit-related OTTI is based on other factors affecting market value, including illiquidity.

The Company’s OTTI evaluation process also follows the guidance set forth in topics related to debt securities. The guidance set forth in the pronouncements require the Company to take into consideration current market conditions, fair value in relationship to cost, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, the ability and intent to hold investments until a recovery of fair value which may be to maturity and other factors when evaluating for the existence of OTTI. The guidance requires that credit-related OTTI be recognized as a realized loss through earnings when there has been an adverse change in the holder’s expected cash flows such that the full amount (principal and interest) will probably not be received. This requirement is consistent with the impairment model in the guidance for accounting for debt securities.

For all debt securities, as of  June 30, 2022, the Company applied the criteria provided in the recognition and presentation guidance related to OTTI. That is, management has no intent to sell the securities and nor any conditions were identified by management that, more likely than not, would require the Company to sell the securities before recovery of their amortized cost basis. The results indicated there was no presence of OTTI in the Company’s security portfolio. In addition, management believes the change in fair value is attributable to changes in interest rates.