Note 3 - Investment Securities

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Investment Securities

Note 3. Investment Securities

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost*		Gains		(Losses)		Value
	(dollars in thousands)
December 31, 2022:
Securities HTM:
Municipal securities	$	586,272	$	5,292	$	(56,978)	$	534,586
Other securities		1,050		—		—		1,050
	$	587,322	$	5,292	$	(56,978)	$	535,636
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	19,745	$	19	$	(2,783)	$	16,981
Residential mortgage-backed and related securities		73,438		—		(7,223)		66,215
Municipal securities		239,812		66		(46,700)		193,178
Asset-backed securities		18,885		48		(205)		18,728
Other securities		48,631		27		(2,800)		45,858
	$	400,511	$	160	$	(59,711)	$	340,960

* HTM securities shown on the balance sheet of $587.1 million represent amortized cost of $587.3 million, net of allowance for credit losses of $180 thousand as of December 31, 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 municipalities are located primarily within the Midwest. The municipal debt investments are underwritten using specific guidelines with ongoing monitoring.

Note 3. Investment Securities (continued)

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 commercial 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 December 31, 2022 and 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)
December 31, 2022:
Securities HTM:
Municipal securities	$	347,651	$	(56,978)	$	—	$	—	$	347,651	$	(56,978)
	$	347,651	$	(56,978)	$	—	$	—	$	347,651	$	(56,978)
Securities AFS:
U.S. treasuries and govt. sponsored agency securities	$	5,138	$	(326)	$	10,591	$	(2,457)	$	15,729	$	(2,783)
Residential mortgage-backed and related securities		48,469		(3,327)		17,690		(3,896)		66,159		(7,223)
Municipal securities		178,172		(42,661)		9,809		(4,039)		187,981		(46,700)
Asset-backed securities		13,684		(205)		—		—		13,684		(205)
Other securities		35,206		(2,404)		4,122		(396)		39,328		(2,800)
	$	280,669	$	(48,923)	$	42,212	$	(10,788)	$	322,881	$	(59,711)

	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 December 31, 2022, the investment portfolio included 695 securities. Of this number, 607 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 11.81% of the total aggregate amortized cost. Of these 607 securities, 39 securities had an unrealized loss for 12 months or more.

Note 3. Investment Securities (continued)

On January 1, 2021, the Company adopted ASU 2016-13, which replaced the legacy GAAP OTTI model with a credit loss model.  ASU 2016-13 requires an allowance on lifetime expected credit losses on held to maturity debt securities.  The following table presents the activity in the allowance for credit losses held to maturity securities by major security type for the years ended December 31, 2022 and 2021.

	Year Ended December 31, 2022						Year Ended December 31, 2021
	Municipal		Other				Municipal		Other
	securities		securities		Total		securities		securities		Total
	(dollars in thousands)
Allowance for credit losses:
Beginning balance	$	198	$	—	$	198	$	—	$	—	$	—
Impact of adopting ASU 2016-13		—		—		—		182		1		183
Provision for credit loss expense		(18)		—		(18)		16		(1)		15
Balance, ending	$	180	$	—	$	180	$	198	$	—	$	198

The credit loss model under ASU 2016-13, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired.  See Note 1 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies” included in this Form 10-K, for a discussion of the impact of the adoption of ASU 2016-13.

All sales of securities for the years ended December 31, 2022, 2021 and 2020, respectively, were from securities identified as AFS. Information on proceeds received, as well as the gains and losses from the sale of those securities are as follows:

	2022		2021		2020
	(dollars in thousands)
Proceeds from sales of securities	$	111,375	$	23,874	$	38,562
Gross gains from sales of securities		—		—		2,553
Gross losses from sales of securities		—		(88)		(69)

Subsequent to the closing of the GFED acquisition, the Company sold $111.4 million of the acquired securities portfolio to improve the efficiency of the combined balance sheets. These were the only securities sales for the year ended December 31, 2022.

The amortized cost and fair value of securities as of December 31, 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 mortgages underlying the securities may be called or 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	$	2,902	$	2,895
Due after one year through five years		18,998		19,359
Due after five years		565,422		513,382
	$	587,322	$	535,636
Securities AFS:
Due in one year or less	$	4,522	$	4,510
Due after one year through five years		4,159		4,135
Due after five years		299,507		247,372
		308,188		256,017
Residential mortgage-backed and related securities		73,438		66,215
Asset-backed securities		18,885		18,728
	$	400,511	$	340,960

Note 3. Investment Securities (continued)

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	$	330,576	$	296,851
Securities AFS:
Municipal securities		235,334		188,707
Other securities		47,681		44,923
	$	283,015	$	233,630

As of December 31, 2022 and 2021, investment securities with a carrying value of $47.0 million and $246.5 million, respectively, were pledged on public deposits, FHLB advances, derivative liabilities, and in connection with a Goldman Sachs cash management program.

As of December 31, 2022, the Company’s municipal securities portfolios were comprised of general obligation bonds issued by 118 issuers with fair values totaling $110.6 million and revenue bonds issued by 181 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $617.2 million. The Company held investments in general obligation bonds in 22 states, including seven states in which the aggregate fair value exceeded $5.0 million. The Company held investments 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 held investments in general obligation bonds in 20 states, including seven states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 25 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 December 31, 2022 and 2021, the Company held revenue bonds of two issuers, located in Ohio, the aggregate book or market value of which 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 investment 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 loan underwriting standards and have an average risk rating of 2, indicating very high quality. Additionally, many of these bonds are funding essential municipal services (water, sewer, education, medical facilities).

The Company’s municipal securities are owned by each of 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 December 31, 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 December 31, 2022, the Company’s standard monitoring of its municipal securities portfolio had not uncovered any facts or circumstances resulting in significantly different credits 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.