Note 2 - Investment Securities

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

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

(2) Investment Securities

Debt securities purchased in which Bancorp has the intent and ability to hold to their maturity are classified as HTM securities. All other investment securities are classified as AFS securities.

AFS Debt Securities

The following table summarizes the amortized cost, unrealized gains and losses, and fair value of Bancorp’s AFS debt securities portfolio:

(in thousands)	Amortized		Unrealized					Fair
September 30, 2023	cost		Gains		Losses			value
U.S. Treasury and other U.S. Government obligations	$	123,500	$	-	$	(5,491	)	$	118,009
Government sponsored enterprise obligations		115,862		184		(6,813	)		109,233
Mortgage backed securities - government agencies		814,224		-		(141,558	)		672,666
Obligations of states and political subdivisions		138,279		-		(21,388	)		116,891
Other		3,856		-		(407	)		3,449
Total available for sale debt securities	$	1,195,721	$	184	$	(175,657	)	$	1,020,248
December 31, 2022
U.S. Treasury and other U.S. Government obligations	$	122,966	$	-	$	(7,927	)	$	115,039
Government sponsored enterprise obligations		149,773		290		(6,437	)		143,626
Mortgage backed securities - government agencies		874,265		58		(121,585	)		752,738
Obligations of states and political subdivisions		145,016		1		(17,418	)		127,599
Other		5,957		-		(342	)		5,615
Total available for sale debt securities	$	1,297,977	$	349	$	(153,709	)	$	1,144,617

HTM Debt Securities

The following table summarizes the amortized cost, unrecognized gains and losses, and fair value of Bancorp’s HTM debt securities portfolio:

(in thousands)	Carrying		Unrecognized					Fair
September 30, 2023	value		Gains		Losses			value
U.S. Treasury and other U.S. Government obligations	$	204,139	$	-	$	(7,645	)	$	196,494
Government sponsored enterprise obligations		26,972		-		(3,536	)		23,436
Mortgage backed securities - government agencies		214,094		-		(36,606	)		177,488
Total held to maturity debt securities	$	445,205	$	-	$	(47,787	)	$	397,418
December 31, 2022
U.S. Treasury and other U.S. Government obligations	$	217,794	$	-	$	(9,166	)	$	208,628
Government sponsored enterprise obligations		27,507		-		(2,559	)		24,948
Mortgage backed securities - government agencies		227,916		-		(29,659	)		198,257
Total held to maturity debt securities	$	473,217	$	-	$	(41,384	)	$	431,833

All investment securities classified as HTM by Bancorp as of September 30, 2023 are obligations of the U.S. Government and/or are issued by U.S. Government-sponsored agencies and have an implicit or explicit government guarantee. Therefore, no ACL has been recorded for Bancorp’s HTM securities as of September 30, 2023. Further, as of September 30, 2023, none of Bancorp’s HTM securities were in non-accrual or past due status.

Debt Securities by Contractual Maturity

A summary of AFS and HTM debt securities by contractual maturity as of September 30, 2023 follows:

	AFS Debt Securities				HTM Debt Securities
(in thousands)	Amortized cost		Fair value		Carrying value		Fair value
Due within one year	$	117,105	$	112,410	$	51,077	$	50,188
Due after one year but within five years		54,505		50,972		153,800		147,004
Due after five years but within 10 years		79,708		66,296		25,660		22,176
Due after 10 years		130,179		117,904		574		562
Mortgage backed securities - government agencies		814,224		672,666		214,094		177,488
Total	$	1,195,721	$	1,020,248	$	445,205	$	397,418

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.

At September 30, 2023 and December 31, 2022, 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 the AFS and HTM securities portfolios totaled $4 million and $1 million at September 30, 2023, respectively. Accrued interest on the AFS and HTM securities portfolios totaled $4 million and $2 million at December 31, 2022, respectively. Accrued interest on the AFS and HTM securities portfolios are included in the condensed consolidated balance sheets.

AFS debt securities totaling $247 million were acquired on March 7, 2022, as a result of the CB acquisition, a portion of which were classified as HTM at acquisition. Shortly after acquisition, three securities with a total fair value of $2 million were sold, resulting in a loss on the sale of $92,000, which was recorded as a fair value adjustment through goodwill during the first quarter of 2022.

Securities with a carrying value of $688 million and $1.1 billion were pledged at September 30, 2023 and December 31, 2022, respectively, to secure accounts of commercial depositors in cash management accounts, public deposits and uninsured cash balances for WM&T accounts. The decrease between December 31, 2022 and September 30, 2023 is largely the result of seasonal public funds deposit runoff.

Based on an evaluation of available information including security type, counterparty credit quality, past events, current conditions, and reasonable and supportable forecasts that are relevant to collectability, Bancorp has concluded that it expects to receive all contractual cash flows from each security held in its AFS and HTM debt securities portfolio. As such, no allowance or impairment was recorded with respect to investment securities as of September 30, 2023.

Unrealized and Unrecognized Loss Analysis on Debt Securities

Debt securities with unrealized and unrecognized losses at September 30, 2023 and December 31, 2022, aggregated by investment category and length of time securities have been in a continuous unrealized loss position follows:

	AFS Debt Securities
	Less than 12 months					12 months or more					Total
(in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
September 30, 2023	value		losses			value		losses			value		losses
U.S. Treasury and other U.S. Government obligations	$	-	$	-		$	118,009	$	(5,491	)	$	118,009	$	(5,491	)
Government sponsored enterprise obligations		10,262		(42	)		83,081		(6,771	)		93,343		(6,813	)
Mortgage-backed securities - government agencies		29,149		(1,633	)		643,517		(139,925	)		672,666		(141,558	)
Obligations of states and political subdivisions		13,482		(929	)		103,094		(20,459	)		116,576		(21,388	)
Other		-		-			3,449		(407	)		3,449		(407	)
Total AFS debt securities	$	52,893	$	(2,604	)	$	951,150	$	(173,053	)	$	1,004,043	$	(175,657	)
December 31, 2022
U.S. Treasury and other U.S. Government obligations	$	3,025	$	(57	)	$	111,966	$	(7,870	)	$	114,991	$	(7,927	)
Government sponsored enterprise obligations		99,785		(3,553	)		22,484		(2,884	)		122,269		(6,437	)
Mortgage-backed securities - government agencies		180,263		(11,114	)		567,988		(110,471	)		748,251		(121,585	)
Obligations of states and political subdivisions		64,165		(3,763	)		56,864		(13,655	)		121,029		(17,418	)
Other		4,865		(213	)		749		(129	)		5,614		(342	)
Total AFS debt securities	$	352,103	$	(18,700	)	$	760,051	$	(135,009	)	$	1,112,154	$	(153,709	)

	HTM Debt Securities
	Less than 12 months					12 months or more					Total
(in thousands)	Fair		Unrecognized			Fair		Unrecognized			Fair		Unrecognized
September 30, 2023	value		losses			value		losses			value		losses
U.S. Treasury and other U.S. Government obligations	$	-	$	-		$	196,494	$	(7,645	)	$	196,494	$	(7,645	)
Government sponsored enterprise obligations		1,415		(4	)		22,009		(3,532	)		23,424		(3,536	)
Mortgage-backed securities - government agencies		-		-			177,451		(36,606	)		177,451		(36,606	)
Total HTM debt securities	$	1,415	$	(4	)	$	395,954	$	(47,783	)	$	397,369	$	(47,787	)
December 31, 2022
U.S. Treasury and other U.S. Government obligations	$	208,628	$	(9,166	)	$	-	$	-		$	208,628	$	(9,166	)
Government sponsored enterprise obligations		24,948		(2,559	)		-		-			24,948		(2,559	)
Mortgage-backed securities - government agencies		198,257		(29,659	)		-		-			198,257		(29,659	)
Total HTM debt securities	$	431,833	$	(41,384	)	$	-	$	-		$	431,833	$	(41,384	)

Applicable dates for determining when securities are in unrealized and unrecognized loss positions are September 30, 2023 and December 31, 2022. 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 debt securities with unrealized and unrecognized loss positions, 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 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 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 debt securities in unrealized and unrecognized 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 and unrecognized 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 543 and 547 separate investment positions as of September 30, 2023 and December 31, 2022, respectively. By dollar value, approximately 99% and 98% of the debt securities portfolio was in a loss position as of September 30, 2023 and December 31, 2022, respectively. There were no credit related factors underlying unrealized and unrecognized losses on debt securities at September 30, 2023 and December 31, 2022.