Note 3 - Available for Sale Debt Securities

9 Months Ended

Sep. 30, 2020

Notes to Financial Statements

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

(3) Available for Sale Debt Securities

All of Bancorp’s debt securities are classified as AFS. Amortized cost, unrealized gains and losses and fair value of securities follow:

(in thousands)			Unrealized					Allowance
September 30, 2020	Amortized cost		Gains		Losses			for Credit Losses		Fair value
U.S. Treasury and other U.S. Government obligations	$	—	$	—	$	—		$	—	$	—
Government sponsored enterprise obligations		136,965		5,294		(378	)		—		141,881
Mortgage backed securities - government agencies		272,145		7,396		(89	)		—		279,452
Obligations of states and political subdivisions		7,657		194		—			—		7,851
Total available for sale debt securities	$	416,767	$	12,884	$	(467	)	$	—	$	429,184
December 31, 2019
U.S. Treasury and other U.S. Government obligations	$	49,887	$	10	$	—		$	—	$	49,897
Government sponsored enterprise obligations		208,933		1,189		(178	)		—		209,944
Mortgage backed securities - government agencies		193,574		1,243		(956	)		—		193,861
Obligations of states and political subdivisions		16,919		117		—			—		17,036
Total available for sale debt securities	$	469,313	$	2,559	$	(1,134	)	$	—	$	470,738

At September 30, 2020 and December 31, 2019, there were no holdings of debt securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.

There were no gains or losses on sales or calls of securities for the three-month and nine-month periods ending September 30, 2020 and 2019. Securities acquired in the May 1, 2019 acquisition totaling $12 million, were sold immediately following the acquisition with no gain or loss realized in the income statement.

Accrued interest on AFS debt securities totaled $1.4 million and $1.6 million at September 30, 2020 and December 31, 2019, respectively, and was included in the consolidated balance sheets.

A summary of AFS debt securities by contractual maturity as of September 30, 2020 follows:

(in thousands)	Amortized cost		Fair value
Due within 1 year	$	2,449	$	2,456
Due after 1 year but within 5 years		33,197		33,860
Due after 5 years but within 10 years		1,456		1,531
Due after 10 years		107,520		111,885
Mortgage backed securities - government agencies		272,145		279,452
Total securities available for sale	$	416,767	$	429,184

Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without prepayment penalties. The investment portfolio includes MBS’s, which are guaranteed by agencies such as FHLMC, FNMA and GNMA. These securities differ from traditional debt securities primarily in that they may have uncertain principal payment dates and are priced based on estimated prepayment rates on the underlying collateral.

Securities with a carrying value of $369 million and $403 million were pledged at September 30, 2020 and December 31, 2019, respectively, to secure accounts of commercial depositors in cash management accounts, public funds and uninsured cash balances for WM&T accounts.

AFS debt securities with unrealized loss position for which an ACL has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous loss position follow:

	Less than 12 months					12 months or more					Total
(in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
September 30, 2020	value		losses			value		losses			value		losses
Government sponsored enterprise obligations	$	29,892	$	(314	)	$	5,289	$	(64	)	$	35,181	$	(378	)
Mortgage-backed securities - government agencies		34,099		(87	)		994		(2	)		35,093		(89	)
Total	$	63,991	$	(401	)	$	6,283	$	(66	)	$	70,274	$	(467	)
December 31, 2019
Government sponsored enterprise obligations	$	16,503	$	(107	)	$	11,492	$	(71	)	$	27,995	$	(178	)
Mortgage-backed securities - government agencies		81,664		(496	)		32,453		(460	)		114,117		(956	)
Total	$	98,167	$	(603	)	$	43,945	$	(531	)	$	142,112	$	(1,134	)

Applicable dates for determining when securities are in an unrealized loss position are September 30, 2020 and December 31, 2019. As such, it is possible that a security had a market value lower than its amortized cost on other days during the past 12 months, but is not in the “Less than 12 months” category above.

For AFS debt securities in an unrealized loss position, Bancorp evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit-related is recognized in AOCI, net of tax. Credit-related impairment is recognized as an a ACL on AFS debt securities on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Accrued interest receivable is excluded from the estimate of credit losses. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if Bancorp intends to sell an impaired AFS debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.

In evaluating AFS debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, Bancorp considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors. Unrealized losses on Bancorp’s investment securities portfolio have not been recognized as an expense because the securities are of high credit quality, and the decline in fair values is attributable to changes in the prevailing interest rate environment since the purchase date. Fair value is expected to recover as securities reach maturity and/or the interest rate environment returns to conditions similar to when these securities were purchased. These investments consisted of 14 and 54 separate investment positions as of September 30, 2020 and December 31, 2019, respectively. There were no credit related factors underlying unrealized losses on AFS debt securities at September 30, 2020 and December 31, 2019.

FHLB stock represents an investment held by Bancorp that is not readily marketable and is carried at cost adjusted for identified impairment, if any. Impairment is evaluated on an annual basis in the fourth quarter and more often if market conditions warrant. Bancorp has never recorded FHLB stock impairment. Holdings of FHLB stock are required for access to FHLB advances.