Note 4 - Investment Securities

3 Months Ended

Mar. 31, 2023

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 Company did not record any allowance for credit losses on its available-for-sale or held-to-maturity securities. The amortized cost and fair value of investment securities at  March 31, 2023 and December 31, 2022 are summarized as follows:

			Gross		Gross
	Amortized		unrealized		unrealized			Fair
(dollars in thousands)	cost		gains		losses			value
March 31, 2023
Held-to-maturity securities:
Agency - GSE	$	80,572	$	-	$	(7,726	)	$	72,846
Obligations of states and political subdivisions		142,540		-		(21,135	)		121,405
Total held-to-maturity securities	$	223,112	$	-	$	(28,861	)	$	194,251
Available-for-sale debt securities:
Agency - GSE	$	31,108	$	-	$	(3,958	)	$	27,150
Obligations of states and political subdivisions		174,418		5		(20,634	)		153,789
MBS - GSE residential		243,942		-		(33,467	)		210,475
Total available-for-sale debt securities	$	449,468	$	5	$	(58,059	)	$	391,414

			Gross		Gross
	Amortized		unrealized		unrealized			Fair
(dollars in thousands)	cost		gains		losses			value
December 31, 2022
Held-to-maturity securities:
Agency - GSE	$	80,306	$	-	$	(9,243	)	$	71,063
Obligations of states and political subdivisions		142,438		-		(26,221	)		116,217
Total held-to-maturity securities	$	222,744	$	-	$	(35,464	)	$	187,280
Available-for-sale debt securities:
Agency - GSE	$	36,076	$	-	$	(4,543	)	$	31,533
Obligations of states and political subdivisions		197,935		501		(26,542	)		171,894
MBS - GSE residential		254,730		-		(37,295	)		217,435
Total available-for-sale debt securities	$	488,741	$	501	$	(68,380	)	$	420,862

The amortized cost and fair value of debt securities at  March 31, 2023 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		9,818		9,182
Due after five years through ten years		74,339		66,907
Due after ten years		138,955		118,162
Total held-to-maturity securities	$	223,112	$	194,251
Available-for-sale securities:
Debt securities:
Due in one year or less	$	-	$	-
Due after one year through five years		20,963		18,959
Due after five years through ten years		37,944		32,248
Due after ten years		146,619		129,732
MBS - GSE residential		243,942		210,475
Total available-for-sale debt securities	$	449,468	$	391,414

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.

Securities pledged at March 31, 2023 had a carrying amount of $409.7 million and were pledged to secure public deposits and trust client deposits.

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  March 31, 2023 and December 31, 2022:

	Less than 12 months					More than 12 months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(dollars in thousands)	value		losses			value		losses			value		losses
March 31, 2023
Agency - GSE	$	-	$	-		$	99,996	$	(11,684	)	$	99,996	$	(11,684	)
Obligations of states and political subdivisions		19,043		(1,317	)		254,498		(40,452	)		273,541		(41,769	)
MBS - GSE residential		7,208		(380	)		203,267		(33,087	)		210,475		(33,467	)
Total	$	26,251	$	(1,697	)	$	557,761	$	(85,223	)	$	584,012	$	(86,920	)
Number of securities		45					390					435
December 31, 2022
Agency - GSE	$	9,285	$	(377	)	$	93,312	$	(13,409	)	$	102,597	$	(13,786	)
Obligations of states and political subdivisions		170,484		(26,928	)		112,353		(25,835	)		282,837		(52,763	)
MBS - GSE residential		61,803		(6,018	)		155,632		(31,277	)		217,435		(37,295	)
Total	$	241,572	$	(33,323	)	$	361,297	$	(70,521	)	$	602,869	$	(103,844	)
Number of securities		272					213					485

The Company had 435 debt securities in an unrealized loss position at  March 31, 2023, including 46 agency-GSE securities, 136 MBS – GSE residential securities and 253 municipal securities. The severity of these unrealized losses based on their underlying cost basis was as follows at  March 31, 2023: 10.46% for agency - GSE, 13.72% for total MBS-GSE residential; and 13.25% for municipals. Management has no intent to sell any securities in an unrealized loss position as of  March 31, 2023.

The Company reassessed classification of certain investments and effective April 1, 2022, the Company transferred agency and municipal investment securities with a book value of $245.5 million from available-for-sale to held-to-maturity. The securities were transferred at their amortized cost basis, net of any remaining unrealized gain or loss reported in accumulated other comprehensive income. The market value of the securities on the date of the transfer was $221.7 million, after netting unrealized losses totaling $18.9 million. The $18.9 million, net of deferred taxes, will be accreted into other comprehensive income over the life of the bonds. The allowance for credit losses on these securities was evaluated under the accounting policy for HTM debt securities.

Unrealized losses on available-for-sale securities have not been recognized into income because 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 to assess whether the fair value of a debt security is less than its amortized cost as of the balance sheet date. An allowance for credit losses has not been recognized on these securities in an unrealized loss position because: (1) the entity does not intend to sell the security; (2) more likely than not the entity will not be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is sufficient to recover the entire amortized cost. The issuer(s) continues to make timely principal and interest payments on the bonds. The fair value is expected to recover as the bond(s) approach maturity.

The Company has U.S. agency bonds and municipal securities classified as held-to-maturity. Management estimated no credit loss reserve will be necessary for agency bonds HTM given the strong credit history of GSE and other U.S. agency issued bonds and the involvement of the U.S. government. For municipal securities HTM, the Company utilized a third-party model to analyze whether a credit loss reserve is needed for these bonds. The amount of credit loss reserve calculated using this model was immaterial to the Company's financial statements, therefore no reserve was recorded, but the Company will continue to evaluate these securities on a quarterly basis.

The Company’s other than temporary impairment (OTTI)/credit impairment 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 if OTTI exists, a contra-asset is recorded for the OTTI on both HTM and AFS securities, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

For all debt securities, as of  March 31, 2023, 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.