Note 3 - INVESTMENT SECURITIES

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Investment Securities

NOTE 3– INVESTMENT SECURITIES

The amortized cost and fair value of investment securities as of September 30, 2022 and December 31, 2021 are summarized as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost*		Gains		(Losses)		Value
	(dollars in thousands)
September 30, 2022:
Securities HTM:
Municipal securities	$	538,861	$	1,564	$	(30,022)	$	510,403
Other securities		1,050		—		(6)		1,044
	$	539,911	$	1,564	$	(30,028)	$	511,447
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	23,389	$	22	$	(2,884)	$	20,527
Residential mortgage-backed and related securities		76,680		—		(7,836)		68,844
Municipal securities		241,292		23		(55,972)		185,343
Asset-backed securities		19,654		170		(194)		19,630
Other securities		47,700		—		(2,307)		45,393
	$	408,715	$	215	$	(69,193)	$	339,737

*     HTM securities shown on the balance sheet of $539.7 million represent amortized cost of $539.9 million, net of allowance for credit losses of $198 thousand as of September 30, 2022.

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		(Losses)		Value
	(dollars in thousands)
December 31, 2021:
Securities HTM:
Municipal securities	$	471,533	$	49,715	$	—	$	521,248
Other securities		1,050		—		(1)		1,049
	$	472,583	$	49,715	$	(1)	$	522,297
Securities AFS:
U.S. govt. sponsored agency securities	$	23,370	$	254	$	(296)	$	23,328
Residential mortgage-backed and related securities		92,431		2,672		(780)		94,323
Municipal securities		163,253		5,228		(215)		168,266
Asset-backed securities		26,372		752		—		27,124
Other securities		24,568		251		(30)		24,789
	$	329,994	$	9,157	$	(1,321)	$	337,830

*     HTM securities shown on the balance sheet of $472.4 million represent amortized cost of $472.6 million, net of allowance for credit losses of $198 thousand as of December 31, 2021.

The Company's HTM municipal securities consist largely of private issues of municipal debt. The large majority of the municipalities are located within the Midwest. The municipal debt investments are underwritten using specific guidelines with ongoing monitoring.

The Company's residential mortgage-backed and related securities portfolio consists entirely of government sponsored or government guaranteed securities. The Company has not invested in private mortgage-backed securities or pooled trust preferred securities.

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2022 and December 31, 2021, are summarized as follows:

	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(dollars in thousands)
September 30, 2022:
Securities HTM:
Municipal securities	$	385,027	$	(30,022)	$	—	$	—	$	385,027	$	(30,022)
Other securities		544		(6)		—		—		544		(6)
	$	385,571	$	(30,028)	$	—	$	—	$	385,571	$	(30,028)
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	8,705	$	(349)	$	10,530	$	(2,535)	$	19,235	$	(2,884)
Residential mortgage-backed and related securities		51,073		(3,671)		17,669		(4,165)		68,742		(7,836)
Municipal securities		175,686		(53,159)		6,536		(2,813)		182,222		(55,972)
Asset-backed securities		10,742		(194)		—		—		10,742		(194)
Other securities		39,900		(2,203)		896		(104)		40,796		(2,307)
	$	286,106	$	(59,576)	$	35,631	$	(9,617)	$	321,737	$	(69,193)

	Less than 12 Months				12 Months or More				Total
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(dollars in thousands)
December 31, 2021:
Securities HTM:
Other securities	$	1,049	$	(1)	$	—	$	—	$	1,049	$	(1)
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	9,802	$	(156)	$	3,035	$	(140)	$	12,837	$	(296)
Residential mortgage-backed and related securities		5,363		(67)		19,406		(713)		24,769		(780)
Municipal securities		13,287		(211)		1,001		(4)		14,288		(215)
Other securities		4,528		(30)		—		—		4,528		(30)
	$	32,980	$	(464)	$	23,442	$	(857)	$	56,422	$	(1,321)

At September 30, 2022, the investment portfolio included 701 securities. Of this number, 639 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 10.46% of the total amortized cost of the portfolio. Of these 639 securities, there were 30 securities that had an unrealized loss for twelve months or more.

The following table presents the activity in the allowance for credit losses for held to maturity securities by major security type for the three and nine months ended September 30, 2022 and 2021.

	Three Months Ended September 30, 2022						Three Months Ended September 30, 2021						Nine Months Ended September 30, 2022						Nine Months Ended September 30, 2021
	Municipal		Other				Municipal		Other				Municipal		Other				Municipal		Other
	securities		securities		Total		securities		securities		Total		securities		securities		Total		securities		securities		Total
Allowance for credit losses:
Beginning balance	$	198	$	—	$	198	$	173	$	1	$	174	$	198	$	—	$	198	$	—	$	—	$	—
Impact of adopting ASU 2016-13		—		—		—		—		—		—		—		—		—		182		1		183
Provision for credit loss expense		—		—		—		—		—		—		—		—		—		(9)		—		(9)
Balance, ending	$	198	$	—	$	198	$	173	$	1	$	174	$	198	$	—	$	198	$	173	$	1	$	174

There were no sales of securities for the three months ended September 30, 2022 and September 30, 2021. All sales of securities for the nine months ended September 30, 2022 and September 30, 2021 were securities identified as AFS.

	Nine Months Ended
	September 30, 2022		September 30, 2021
Proceeds from sales of securities	$	111,375	$	23,874
Gross gains from sales of securities		—		—
Gross losses from sales of securities		—		(88)

Upon the closing of the GFED acquisition, the Company sold a large portion of the acquired securities portfolio to improve the efficiency of the combined balance sheets.

The amortized cost and fair value of securities as of September 30, 2022 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities and asset-backed securities may differ from contractual maturities because the residential mortgages underlying the securities may be prepaid without any penalties. Therefore, these securities are not included in the maturity categories in the following table.

	Amortized Cost		Fair Value
	(dollars in thousands)
Securities HTM:
Due in one year or less	$	3,061	$	3,046
Due after one year through five years		15,199		14,862
Due after five years		521,651		493,539
	$	539,911	$	511,447
Securities AFS:
Due in one year or less	$	8,558	$	8,535
Due after one year through five years		3,760		3,705
Due after five years		300,063		239,023
		312,381		251,263
Residential mortgage-backed and related securities		76,680		68,844
Asset-backed securities		19,654		19,630
	$	408,715	$	339,737

Portions of the U.S. government sponsored agency securities and municipal securities contain call options, which, at the discretion of the issuer, terminate the security at par and at predetermined dates prior to the stated maturity, summarized as follows:

	Amortized Cost		Fair Value
	(dollars in thousands)
Securities HTM:
Municipal securities	$	305,743	$	295,096
Securities AFS:
Municipal securities		237,105		181,201
Other securities		46,277		44,017
	$	283,382	$	225,218

As of September 30, 2022, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 119 issuers with fair values totaling $107.1 million and revenue bonds issued by 182 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $588.6 million. The Company also held investments in general obligation bonds in 22 states, including eight states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 29 states, including 12 states in which the aggregate fair value exceeded $5.0 million.

As of December 31, 2021, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 113 issuers with fair values totaling $114.5 million and revenue bonds issued by 165 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $575.0 million. The Company also held

investments in general obligation bonds in 20 states, including seven states in which the aggregate fair value exceeded $5.0 million, and in revenue bonds in 28 states, including 13 states in which the aggregate fair value exceeded $5.0 million.

Both general obligation and revenue bonds are diversified across many issuers. As of September 30, 2022 and as of December 31, 2021, the Company held revenue bonds of two issuers, both located in Ohio, of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. The issuers’ financial condition is strong and the source of repayment is diversified. The Company monitors the investments and concentration closely. Of the general obligation and revenue bonds in the Company's portfolio, the majority are unrated bonds that represent small, private issuances. All unrated bonds were underwritten according to the Company’s loan underwriting standards and have an average loan risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services such as water, sewer, education, and medical facilities.

The Company's municipal securities are owned by the four charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. The investments of each charter are monitored individually, and as of September 30, 2022, all were within policy limitations approved by the Company’s board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital.

As of September 30, 2022, the Company's standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credit ratings than those assigned by a nationally recognized statistical rating organization, or in the case of unrated bonds, the rating assigned using the credit underwriting standards.