Note 3 - Available for Sale Debt Securities

6 Months Ended

Jun. 30, 2021

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)	Amortized		Unrealized
June 30, 2021	cost		Gains		Losses			Fair value
U.S. Treasury and other U.S. Government obligations	$	9,078	$	-	$	(1	)	$	9,077
Government sponsored enterprise obligations		150,833		4,271		(124	)		154,980
Mortgage backed securities - government agencies		788,048		4,781		(6,118	)		786,711
Obligations of states and political subdivisions		54,906		355		(128	)		55,133
Other		1,006		1		-			1,007
Total available for sale debt securities	$	1,003,871	$	9,408	$	(6,371	)	$	1,006,908

December 31, 2020
Government sponsored enterprise obligations	$	133,436	$	5,003	$	(361	)	$	138,078
Mortgage backed securities - government agencies		430,198		7,555		(168	)		437,585
Obligations of states and political subdivisions		11,088		227		—			11,315
Total available for sale debt securities	$	574,722	$	12,785	$	(529	)	$	586,978

At June 30, 2021 and December 31, 2020, 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.

Accrued interest on AFS debt securities totaled $2.5 million and $1.6 million at June 30, 2021 and December 31, 2020, respectively, and was included in the consolidated balance sheets.

AFS debt securities totaling $396 million were acquired as a result of the KB acquisition. Shortly after acquisition, 86 securities with a total fair value of $91 million in the acquired AFS debt securities portfolio were sold, resulting in a loss on the sale $295,000, which was recorded a as fair value adjustment through goodwill.

A summary of AFS debt securities by contractual maturity as of June 30, 2021 follows:

(in thousands)	Amortized cost		Fair value
Due within one year	$	35,028	$	35,160
Due after one year but within five years		21,347		21,535
Due after five years but within 10 years		29,630		29,745
Due after 10 years		129,818		133,757
Mortgage backed securities - government agencies		788,048		786,711
Total available for sale debt securities	$	1,003,871	$	1,006,908

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 $676 million and $505 million were pledged at June 30, 2021 and December 31, 2020, respectively, to secure accounts of commercial depositors in cash management accounts, public deposits and uninsured cash balances for WM&T accounts. The large increase over the first six months of 2021 was driven by collateralized accounts added through the KB acquisition.

Securities with unrealized losses at June 30, 2021 and December 31, 2020, aggregated by investment category and length of time securities have been in a continuous unrealized loss position follows:

	Less than 12 months					12 months or more					Total
(in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
June 30, 2021	value		losses			value		losses			value		losses
U.S. Treasury and other U.S. Government obligations	$	9,077	$	(1	)	$	-	$	-		$	9,077	$	(1	)
Government sponsored enterprise obligations		26,808		(111	)		459		(13	)		27,267		(124	)
Mortgage-backed securities - government agencies		504,709		(6,085	)		1,946		(33	)		506,655		(6,118	)
Obligations of states and political subdivisions		19,345		(128	)		—		—			19,345		(128	)
Total	$	559,939	$	(6,325	)	$	2,405	$	(46	)	$	562,344	$	(6,371	)
December 31, 2020
Government sponsored enterprise obligations	$	10,404	$	(112	)	$	24,398	$	(249	)	$	34,802	$	(361	)
Mortgage-backed securities - government agencies		68,033		(167	)		921		(1	)		68,954		(168	)
Total	$	78,437	$	(279	)	$	25,319	$	(250	)	$	103,756	$	(529	)

Applicable dates for determining when securities are in an unrealized loss position are June 30, 2021 and December 31, 2020. 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 144 and 14 separate investment positions as of June 30, 2021 and December 31, 2020, respectively. There were no credit related factors underlying unrealized losses on AFS debt securities at June 30, 2021 and December 31, 2020.