Note 3 - Available for Sale Debt Securities

9 Months Ended

Sep. 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
September 30, 2021	cost		Gains		Losses			Fair value
U.S. Treasury and other U.S. Government obligations	$	83,916	$	-	$	(204	)	$	83,712
Government sponsored enterprise obligations		142,802		3,553		(68	)		146,287
Mortgage backed securities - government agencies		777,636		3,784		(9,698	)		771,722
Obligations of states and political subdivisions		67,633		284		(493	)		67,424
Other		1,006		-		(3	)		1,003
Total available for sale debt securities	$	1,072,993	$	7,621	$	(10,466	)	$	1,070,148
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 September 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 $2.3 million and $1.6 million at September 30, 2021 and December 31, 2020, respectively, and was included in the consolidated balance sheets.

AFS debt securities totaling $396 million were acquired on May 31, 2021 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 during the second quarter of 2021.

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

(in thousands)	Amortized cost		Fair value
Due within one year	$	30,408	$	30,442
Due after one year but within five years		100,808		100,774
Due after five years but within 10 years		28,165		28,220
Due after 10 years		135,976		138,990
Mortgage backed securities - government agencies		777,636		771,722
Total available for sale debt securities	$	1,072,993	$	1,070,148

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, 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 $698 million and $505 million were pledged at September 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 for 2021 was driven by collateralized accounts added through the KB acquisition.

Securities with unrealized losses at September 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
September 30, 2021	value		losses			value		losses			value		losses
U.S. Treasury and other U.S.Government obligations	$	83,712	$	(204	)	$	-	$	-		$	83,712	$	(204	)
Government sponsored enterprise obligations		16,587		(68	)		-		-			16,587		(68	)
Mortgage-backed securities - government agencies		585,126		(9,698	)		-		-			585,126		(9,698	)
Obligations of states and political subdivisions		37,348		(493	)		-		-			37,348		(493	)
Other securities		1,003		(3	)		-		-			1,003		(3	)
Total	$	723,776	$	(10,466	)	$	-	$	-		$	723,776	$	(10,466	)
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 September 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 with 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 for 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 177 and 14 separate investment positions as of September 30, 2021 and December 31, 2020, respectively. There were no credit related factors underlying unrealized losses on AFS debt securities at September 30, 2021 and December 31, 2020.