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NOTE 3 - INVESTMENT SECURITIES | 9 Months Ended
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Sep. 30, 2019
Notes to Financial Statements |
INVESTMENT SECURITIES | NOTE 3 – INVESTMENT SECURITIES The amortized cost and fair value of investment securities as of September 30, 2019 and December 31, 2018 are summarized as follows:
|  |  |  |  | Gross |  | Gross |  |  |
|  | Amortized |  | Unrealized |  | Unrealized |  | Fair
|  | Cost |  | Gains |  | (Losses) |  | Value
|  | (dollars in thousands)
September 30, 2019: |  |  |  |  |  |  |  |  |  |  |  |
Securities HTM: |  |  |  |  |  |  |  |  |  |  |  |
Municipal securities |  | $ | 342,427 |  | $ | 20,122 |  | $ | (119) |  | $ | 362,430
Other securities |  |  | 1,050 |  |  | — |  |  | (6) |  |  | 1,044
|  | $ | 343,477 |  | $ | 20,122 |  | $ | (125) |  | $ | 363,474
Securities AFS: |  |  |  |  |  |  |  |  |  |  |  |
U.S. govt. sponsored agency securities |  | $ | 20,861 |  | $ | 470 |  | $ | (63) |  | $ | 21,268
Residential mortgage-backed and related securities |  |  | 121,118 |  |  | 2,962 |  |  | (200) |  |  | 123,880
Municipal securities |  |  | 47,259 |  |  | 1,653 |  |  | (10) |  |  | 48,902
Other securities |  |  | 17,711 |  |  | 172 |  |  | (1) |  |  | 17,882
|  | $ | 206,949 |  | $ | 5,257 |  | $ | (274) |  | $ | 211,932
|  |  |  |  | Gross |  | Gross |  |  |
|  | Amortized |  | Unrealized |  | Unrealized |  | Fair
|  | Cost |  | Gains |  | (Losses) |  | Value
|  | (dollars in thousands)
December 31, 2018: |  |  |  |  |  |  |  |  |  |  |  |
Securities HTM: |  |  |  |  |  |  |  |  |  |  |  |
Municipal securities |  | $ | 400,863 |  | $ | 5,661 |  | $ | (6,803) |  | $ | 399,721
Other securities |  |  | 1,050 |  |  | — |  |  | (1) |  |  | 1,049
|  | $ | 401,913 |  | $ | 5,661 |  | $ | (6,804) |  | $ | 400,770
Securities AFS: |  |  |  |  |  |  |  |  |  |  |  |
U.S. govt. sponsored agency securities |  | $ | 37,150 |  | $ | 39 |  | $ | (778) |  | $ | 36,411
Residential mortgage-backed and related securities |  |  | 163,698 |  |  | 182 |  |  | (4,631) |  |  | 159,249
Municipal securities |  |  | 59,069 |  |  | 180 |  |  | (703) |  |  | 58,546
Other securities |  |  | 6,754 |  |  | 100 |  |  | (4) |  |  | 6,850
|  | $ | 266,671 |  | $ | 501 |  | $ | (6,116) |  | $ | 261,056
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, 2019 and December 31, 2018, 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, 2019: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities HTM: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal securities |  | $ | 1,037 |  | $ | (1) |  | $ | 7,839 |  | $ | (118) |  | $ | 8,876 |  | $ | (119)
Other securities |  |  | 1,044 |  |  | (6) |  |  | — |  |  | — |  |  | 1,044 |  |  | (6)
|  | $ | 2,081 |  | $ | (7) |  | $ | 7,839 |  | $ | (118) |  | $ | 9,920 |  | $ | (125)
Securities AFS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. govt. sponsored agency securities |  | $ | 1,618 |  | $ | (1) |  | $ | 2,318 |  | $ | (62) |  | $ | 3,936 |  | $ | (63)
Residential mortgage-backed and related securities |  |  | 1,194 |  |  | (1) |  |  | 20,376 |  |  | (199) |  |  | 21,570 |  |  | (200)
Municipal securities |  |  | 1,686 |  |  | (3) |  |  | 723 |  |  | (7) |  |  | 2,409 |  |  | (10)
Other securities |  |  | 248 |  |  | (1) |  |  | — |  |  | — |  |  | 248 |  |  | (1)
|  | $ | 4,746 |  | $ | (6) |  | $ | 23,417 |  | $ | (268) |  | $ | 28,163 |  | $ | (274)
|  | 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, 2018: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities HTM: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Municipal securities |  | $ | 114,201 |  | $ | (2,187) |  | $ | 69,412 |  | $ | (4,616) |  | $ | 183,613 |  | $ | (6,803)
Other securities |  |  | 549 |  |  | (1) |  |  | — |  |  | — |  |  | 549 |  |  | (1)
|  | $ | 114,750 |  | $ | (2,188) |  | $ | 69,412 |  | $ | (4,616) |  | $ | 184,162 |  | $ | (6,804)
Securities AFS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. govt. sponsored agency securities |  | $ | 1,565 |  | $ | (34) |  | $ | 29,605 |  | $ | (744) |  | $ | 31,170 |  | $ | (778)
Residential mortgage-backed and related securities |  |  | 12,810 |  |  | (148) |  |  | 133,535 |  |  | (4,483) |  |  | 146,345 |  |  | (4,631)
Municipal securities |  |  | 28,356 |  |  | (394) |  |  | 15,932 |  |  | (309) |  |  | 44,288 |  |  | (703)
Other securities |  |  | 4,249 |  |  | (4) |  |  | — |  |  | — |  |  | 4,249 |  |  | (4)
|  | $ | 46,980 |  | $ | (580) |  | $ | 179,072 |  | $ | (5,536) |  | $ | 226,052 |  | $ | (6,116)
At September 30, 2019, the investment portfolio included 510 securities. Of this number, 31 securities were in an unrealized loss position. The aggregate losses of these securities totaled approximately 0.1% of the total amortized cost of the portfolio. Of these 31 securities, 21 securities had an unrealized loss for twelve months or more. All of the debt securities in unrealized loss positions are considered acceptable credit risks. Based upon an evaluation of the available evidence, including the recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these debt securities are temporary. In addition, the Company lacks the intent to sell these securities and it is not more-likely-than-not that the Company will be required to sell these debt securities before their anticipated recovery. The Company did not recognize OTTI on any investment securities for the three or nine months ended September 30, 2019 and 2018. All sales of securities for the three and nine months ended September 30, 2019 and September 30, 2018 were securities identified as AFS. Information on proceeds received, as well as pre-tax gross gains and losses from sales on those securities are as follows:
|  |  |  |  | Three Months Ended |  | Nine Months Ended |
|  |  |  |  | September 30, 2019 |  | September 30, 2018 |  | September 30, 2019 |  | September 30, 2018 |
|  |  |  |  |  | (dollars in thousands) |
Proceeds from sales of securities |  |  |  |  | $ | 23,364 |  | $ | 1,938 |  | $ | 28,025 |  | $ | 1,938 |
Gross gains from sales of securities |  |  |  |  |  | 143 |  |  | — |  |  | 150 |  |  | — |
Gross losses from sales of securities |  |  |  |  |  | (146) |  |  | — |  |  | (206) |  |  | — |
The amortized cost and fair value of securities as of September 30, 2019 by contractual maturity are shown below. Expected maturities of residential mortgage-backed and related securities may differ from contractual maturities because the residential mortgages underlying the residential mortgage-backed and related 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 |  | $ | 2,946 |  | $ | 2,954
Due after one year through five years |  |  | 31,055 |  |  | 31,689
Due after five years |  |  | 309,476 |  |  | 328,831
|  | $ | 343,477 |  | $ | 363,474
Securities AFS: |  |  |  |  |  |
Due in one year or less |  | $ | 1,084 |  | $ | 1,088
Due after one year through five years |  |  | 17,157 |  |  | 17,384
Due after five years |  |  | 67,590 |  |  | 69,580
|  |  | 85,831 |  |  | 88,052
Residential mortgage-backed and related securities |  |  | 121,118 |  |  | 123,880
|  | $ | 206,949 |  | $ | 211,932
Portions of the U.S. government sponsored agency securities, municipal securities and other securities contain call options, at the discretion of the issuer, to terminate the security at par and at predetermined dates prior to the stated maturity. These callable securities are summarized as follows:
|  | Amortized Cost |  | Fair Value
|  | (dollars in thousands)
Securities HTM: |  |  |  |  |  |
Municipal securities |  | $ | 176,339 |  | $ | 181,785
Securities AFS: |  |  |  |  |  |
Municipal securities |  |  | 40,262 |  |  | 41,646
Other securities |  |  | 6,504 |  |  | 6,677
|  | $ | 46,766 |  | $ | 48,323
As of September 30, 2019, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 91 issuers with fair values totaling $76.1 million and revenue bonds issued by 148 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $335.2 million. The Company held investments in general obligation bonds in 23 states, including six states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 17 states, including seven states in which the aggregate fair value exceeded $5.0 million. As of December 31, 2018, the Company's municipal securities portfolios were comprised of general obligation bonds issued by 110 issuers with fair values totaling $86.4 million and revenue bonds issued by 160 issuers, primarily consisting of states, counties, towns, villages and school districts with fair values totaling $371.9 million. The Company held investments in general obligation bonds in 26 states, including six states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 19 states, including seven 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, 2019 and December 31, 2018 the Company held revenue bonds of one single issuer, located in Ohio, of which the aggregate book or market value exceeded 5% of the Company’s stockholders’ equity. The issuer’s 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 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 each of the four held for investment charters, whose investment policies set forth limits for various subcategories within the municipal securities portfolio. Each charter is monitored individually, and as of September 30, 2019, all were well within policy limitations approved by the board of directors. Policy limits are calculated as a percentage of each charter's total risk-based capital. As of September 30, 2019, 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.

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