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Note 5 - Debt Securities
12 Months Ended
Dec. 31, 2022
Notes to Financial Statements  
Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]

NOTE 5.  DEBT SECURITIES

 

We classify debt securities as held to maturity, available for sale or trading according to management’s intent.  The appropriate classification is determined at the time of purchase of each security and re-evaluated at each reporting date.

 

Debt securities held to maturity: Certain debt securities for which we have the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts.

 

Debt securities available for sale: Debt securities not classified as "held to maturity" or as "trading" are classified as "available for sale."  Securities classified as "available for sale" are those securities that we intend to hold for an indefinite period of time, but not necessarily to maturity.  "Available for sale" securities are reported at estimated fair value net of unrealized gains or losses, which are adjusted for applicable income taxes and reported as a separate component of shareholders' equity.

 

Debt trading securities: There are no securities classified as "trading" in the accompanying financial statements.

 

Allowance for Credit Losses Debt Securities Available for Sale: For debt securities available for sale in an unrealized loss position, we first assess whether (i) we intend to sell or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, 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. Adjustments to the allowance are reported in our income statement as a component of the provision for credit losses. We have elected to exclude accrued interest receivable on available-for-sale securities from the estimate of credit losses. Debt securities available for sale are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible or when either of the aforementioned criteria regarding intent or requirement to sell is met.

 

Allowance for Credit Losses Debt Securities Held to Maturity: The allowance for credit losses on debt securities held to maturity is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of debt securities held to maturities to present our best estimate of the net amount expected to be collected. Debt securities held to maturity are charged-off against the allowance when deemed uncollectible. Adjustments to the allowance are reported in our income statement as a component of the provision for credit losses. We measure expected credit losses on debt securities held to maturity on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. We made the accounting policy election to exclude accrued interest receivable on debt securities held to maturity from the estimate of credit losses.

 

Prior to the adoption of ASC 326, declines in the fair value of debt securities held to maturity and available for sale below their cost that were deemed to be other than temporary were reflected in earnings as realized losses. In estimating other-than-temporary impairment losses prior to January 1, 2020, management considered, among other things, (i) the length of time and the extent to which the fair value had been less than cost, (ii) the financial condition and near-term prospects of the issuer and (iii) the intent and our ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

Realized gains and losses on sales of securities are recognized on the specific identification method.  Amortization of premiums and accretion of discounts are computed using the interest method.

 

Debt Securities Available for Sale

 

The amortized cost, unrealized gains, unrealized losses and estimated fair values of debt securities available for sale at December 31, 2022 and 2021, are summarized as follows:

 

  

December 31, 2022

 
      

Unrealized

     

Dollars in thousands

 

Amortized Cost

  

Gains

  

Losses

  

Fair Value

 

Debt Securities Available for Sale

                

Taxable debt securities

                

U.S. Government and agencies and corporations

 $20,446  $83  $310  $20,219 

Residential mortgage-backed securities:

                

Government-sponsored agencies

  55,184   80   3,808   51,456 

Nongovernment-sponsored entities

  65,860   48   4,291   61,617 

State and political subdivisions

                

General obligations

  82,410   9   19,924   62,495 

Various tax revenues

  10,699      2,591   8,108 

Other revenues

  29,044      6,580   22,464 

Corporate debt securities

  33,409   44   1,825   31,628 

Asset-backed securities

  20,009      533   19,476 

Total taxable debt securities

  317,061   264   39,862   277,463 

Tax-exempt debt securities

                

State and political subdivisions

                

General obligations

  93,910   281   6,719   87,472 

Water and sewer revenues

  17,560   120   1,154   16,526 

Lease revenues

  7,411   47   411   7,047 

Various tax revenues

  7,851      1,115   6,736 

Other revenues

  11,274   9   1,326   9,957 

Total tax-exempt debt securities

  138,006   457   10,725   127,738 

Total debt securities available for sale

 $455,067  $721  $50,587  $405,201 

 

  

December 31, 2021

 
      

Unrealized

     

Dollars in thousands

 

Amortized Cost

  

Gains

  

Losses

  

Fair Value

 

Debt Securities Available for Sale

                

Taxable debt securities

                

U.S. Government and agencies and corporations

 $36,820  $169  $360  $36,629 

Residential mortgage-backed securities:

                

Government-sponsored agencies

  61,646   1,153   588   62,211 

Nongovernment-sponsored entities

  26,839   26   279   26,586 

State and political subdivisions

                

General obligations

  78,627   377   1,323   77,681 

Water and sewer revenues

  9,839   294      10,133 

Lease revenues

  6,401   215   26   6,590 

Income tax revenues

  6,487   250   3   6,734 

Sales tax revenues

  6,909   19   99   6,829 

Various tax revenues

  13,031   218   203   13,046 

Utility revenues

  7,153   137   130   7,160 

Other revenues

  9,291   331   9   9,613 

Corporate debt securities

  30,524   78   324   30,278 

Asset-backed securities

  24,873   97   87   24,883 

Total taxable debt securities

  318,440   3,364   3,431   318,373 

Tax-exempt debt securities

                

State and political subdivisions

                

General obligations

  47,583   1,526   270   48,839 

Water and sewer revenues

  10,618   375   15   10,978 

Lease revenues

  7,974   553   31   8,496 

Other revenues

  14,028   405   16   14,417 

Total tax-exempt debt securities

  80,203   2,859   332   82,730 

Total debt securities available for sale

 $398,643  $6,223  $3,763  $401,103 

 

Accrued interest receivable on debt securities available for sale totaled $3.0 million and $2.3 million at December 31, 2022 and 2021, respectively and is included in accrued interest and fees receivable in the accompanying consolidated balance sheets.

 

The below information is relative to the five states where issuers with the highest volume of state and political subdivision securities held in our portfolio are located.  We own no such securities of any single issuer which we deem to be a concentration.

 

  

December 31, 2022

 
      

Unrealized

     

Dollars in thousands

 

Amortized Cost

  

Gains

  

Losses

  

Fair Value

 
                 

California

 $47,586  $  $11,020  $36,566 

Texas

  38,457   228   5,089   33,596 

Michigan

  23,956   55   2,489   21,522 

Washington

  20,655   11   1,784   18,882 

Oregon

  15,760      4,173   11,587 

 

Management performs pre-purchase and ongoing analysis to confirm that all investment securities meet applicable credit quality standards.  We principally use credit ratings from Nationally Recognized Statistical Rating Organizations (“NRSROs”) to support analyses of our portfolio of securities issued by state and political subdivisions, as we generally do not purchase securities that are rated below the six highest NRSRO rating categories.  In addition to considering a security’s NRSRO rating, we also assess or confirm through an internal review of an issuer’s financial information and other applicable information that:  1) the issuer’s risk of default is low; 2) the characteristics of the issuer’s demographics and economic environment are satisfactory; and 3) the issuer’s budgetary position and stability of tax or other revenue sources are sound.

 

The proceeds from sales, calls and maturities of available for sale securities, including principal payments received on mortgage-backed obligations, and the related gross gains and losses realized are as follows:

 

Dollars in thousands

 

Proceeds from

  

Gross realized

 
      

Calls and

  

Principal

         

Years ended December 31,

 

Sales

  

Maturities

  

Payments

  

Gains

  

Losses

 

2022

 $69,211  $1,875  $37,860  $288  $996 

2021

  64,932   8,070   29,869   1,210   785 

2020

  124,809   3,525   24,654   3,489   17 

 

Residential mortgage-backed obligations having contractual maturities ranging from 2 to 49 years are included in the following maturity distribution schedules based on their anticipated average life to maturity, which ranges from 6 months to 16 years.  Accordingly, discounts are accreted and premiums are amortized over the anticipated average life to maturity of the specific obligation.

 

The maturities, amortized cost and estimated fair values of securities available for sale at December 31, 2022, are summarized as follows:

 

Dollars in thousands

 

Amortized Cost

  

Fair Value

 

Due in one year or less

 $43,819  $42,123 

Due from one to five years

  85,057   80,169 

Due from five to ten years

  73,253   66,365 

Due after ten years

  252,938   216,544 

Total

 $455,067  $405,201 

 

At December 31, 2022 and 2021, securities with estimated carrying values of $238.6 million and $234.3 million respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

 

Provided below is a summary of debt securities available for sale which were in an unrealized loss position and for which an allowance for credit losses has not been recorded at December 31, 2022 and 2021.

 

  

2022

 
      

Less than 12 months

  

12 months or more

  

Total

 

Dollars in thousands

 

# of securities in loss position

  

Fair Value

  

Unrealized Loss

  

Fair Value

  

Unrealized Loss

  

Fair Value

  

Unrealized Loss

 

Taxable debt securities

                            

U.S. Government agencies and corporations

  28  $8,012  $99  $9,577  $211  $17,589  $310 

Residential mortgage-backed securities:

                            

Government-sponsored agencies

  58   21,831   1,104   19,459   2,704   41,290   3,808 

Nongovernment-sponsored entities

  27   35,727   2,974   10,041   1,317   45,768   4,291 

State and political subdivisions:

                            

General obligations

  56   11,258   1,476   49,858   18,448   61,116   19,924 

Various tax revenues

  7   1,352   276   6,756   2,315   8,108   2,591 

Other revenues

  23   6,361   1,040   16,103   5,540   22,464   6,580 

Corporate debt securities

  20   8,308   591   13,072   1,234   21,380   1,825 

Asset-backed securities

  13   11,680   277   7,796   256   19,476   533 

Tax-exempt debt securities

                            

State and political subdivisions:

                            

General obligations

  52   50,671   1,823   26,062   4,896   76,733   6,719 

Water and sewer revenues

  13   8,800   403   4,471   751   13,271   1,154 

Lease revenues

  2   3,330   11   1,985   400   5,315   411 

Various tax revenues

  4   3,597   439   3,139   676   6,736   1,115 

Other revenues

  7   2,900   393   4,812   933   7,712   1,326 

Total

  310  $173,827  $10,906  $173,131  $39,681  $346,958  $50,587 

 

  

2021

 
      

Less than 12 months

  

12 months or more

  

Total

 

Dollars in thousands

 

# of securities in loss position

  

Fair Value

  

Unrealized Loss

  

Fair Value

  

Unrealized Loss

  

Fair Value

  

Unrealized Loss

 

Taxable debt securities

                            

U.S. Government agencies and corporations

  41  $6,630  $23  $21,061  $337  $27,691  $360 

Residential mortgage-backed securities:

                            

Government-sponsored agencies

  19   19,828   376   6,886   212   26,714   588 

Nongovernment-sponsored entities

  6   4,345   61   7,591   218   11,936   279 

State and political subdivisions:

                            

General obligations

  41   62,543   1,286   1,055   37   63,598   1,323 

Lease revenues

  2   1,564   14   494   12   2,058   26 

Income tax revenues

  1   721   3         721   3 

Sales tax revenues

  2   6,052   99         6,052   99 

Various tax revenues

  5   8,389   203         8,389   203 

Utility revenues

  3   5,175   130         5,175   130 

Other revenues

  1   744   9         744   9 

Corporate debt securities

  10   10,534   314   990   10   11,524   324 

Asset-backed securities

  8   10,522   86   751   1   11,273   87 

Tax-exempt debt securities

                            

State and political subdivisions:

                            

General obligations

  13   25,555   261   853   9   26,408   270 

Water and sewer revenues

  1   904   15         904   15 

Lease revenues

  1   2,396   31         2,396   31 

Other revenues

  3   3,558   15   156   1   3,714   16 

Total

  157  $169,460  $2,926  $39,837  $837  $209,297  $3,763 

 

We do not intend to sell the above securities, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost bases.  We believe that this decline in value is primarily attributable to changes in market interest rates, and in some cases limited market liquidity and is not due to credit quality, as none of these securities are in default and all carry above investment grade ratings. Accordingly, no allowance for credit losses has been recognized relative to these securities.

 

Debt Securities Held to Maturity

 

The amortized cost, unrealized gains, unrealized losses and estimated fair values of debt securities held to maturity at December 31, 2022 and 2021 are summarized as follows:

 

  

December 31, 2022

 
  

Amortized

  

Unrealized

  

Estimated

 

Dollars in thousands

 

Cost

  

Gains

  

Losses

  

Fair Value

 

Debt Securities Held to Maturity

                

Tax-exempt debt securities

                

State and political subdivisions

                

General obligations

 $70,401  $  $6,480  $63,921 

Water and sewer revenues

  8,006      672   7,334 

Lease revenues

  4,234      534   3,700 

Sales tax revenues

  4,515      689   3,826 

Various tax revenues

  5,511      871   4,640 

Other revenues

  3,496      290   3,206 

Total Debt Securities Held to Maturity

 $96,163  $  $9,536  $86,627 

 

 

  

December 31, 2021

 
  

Amortized

  

Unrealized

  

Estimated

 

Dollars in thousands

 

Cost

  

Gains

  

Losses

  

Fair Value

 

Debt Securities Held to Maturity

                

Tax-exempt debt securities

                

State and political subdivisions

                

General obligations

 $71,807  $2,583  $  $74,390 

Water and sewer revenues

  8,192   210      8,402 

Lease revenues

  4,316   74      4,390 

Sales tax revenues

  4,582   106      4,688 

Other revenues

  9,163   214   5   9,372 

Total Debt Securities Held to Maturity

 $98,060  $3,187  $5  $101,242 

 

Accrued interest receivable on debt securities held to maturity totaled $1.1 million at December 31, 2022 and 2021 respectively, and is included in accrued interest and fees receivable in the accompanying consolidated balance sheets.

 

The below information is relative to the five states where issuers with the highest volume of state and political subdivision securities held in our held to maturity portfolio are located.  We own no such securities of any single issuer which we deem to be a concentration.

 

  

December 31, 2022

 
  

Amortized

  

Unrealized

  

Estimated

 

Dollars in thousands

 

Cost

  

Gains

  

Losses

  

Fair Value

 

Texas

 $15,101  $  $1,301  $13,800 

California

  9,665      759   8,906 

Pennsylvania

  8,479      726   7,753 

Florida

  7,465      1,020   6,445 

Michigan

  6,904      797   6,107 

 

The following table displays the amortized cost of held to maturity securities by credit rating at December 31, 2022 and 2021.

 

  

December 31, 2022

 

Dollars in thousands

 

AAA

  

AA

  

A

  

BBB

  

Below Investment Grade

 

Tax-exempt state and political subdivisions

 $12,846  $75,932  $7,385  $  $ 

 

  

December 31, 2021

 

Dollars in thousands

 

AAA

  

AA

  

A

  

BBB

  

Below Investment Grade

 

Tax-exempt state and political subdivisions

 $15,450  $75,119  $7,491  $  $ 

 

We owned no past due or nonaccrual held to maturity debt securities at December 31, 2022 or 2021.

 

The maturities, amortized cost and estimated fair values of debt securities held to maturity at December 31, 2022, are summarized as follows:

 

Dollars in thousands

 

Amortized Cost

  

Estimated Fair Value

 

Due in one year or less

 $  $ 

Due from one to five years

      

Due from five to ten years

  2,811   2,613 

Due after ten years

  93,352   84,014 

Total

 $96,163  $86,627 

 

There were no proceeds from the calls and maturities of debt securities held to maturity for the year ended December 31, 2022 or 2021. The proceeds from calls and maturities of debt securities held to maturity totaled $1.0 million for the year ended December 31, 2020.