Investment Securities

9 Months Ended

Sep. 30, 2022

Note 5. Investment Securities

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities classified as available-for-sale at September 30, 2022 and December 31, 2021 are summarized as follows (in thousands):



Available-for-sale	September 30, 2022
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
	cost		gains		losses		value
U.S. Government agency securities	$	25,872	$	14	$	(1,604)	$	24,282
Asset-backed securities *		354,690		—		(13,709)		340,981
Tax-exempt obligations of states and political subdivisions		3,559		—		(102)		3,457
Taxable obligations of states and political subdivisions		45,696		54		(1,718)		44,032
Residential mortgage-backed securities		154,920		120		(10,726)		144,314
Collateralized mortgage obligation securities		46,479		—		(1,717)		44,762
Commercial mortgage-backed securities		194,856		—		(12,890)		181,966
Corporate debt securities		10,000		—		(3,200)		6,800
	$	836,072	$	188	$	(45,666)	$	790,594


	September 30, 2022
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
* Asset-backed securities as shown above	cost		gains		losses		value
Federally insured student loan securities	$	18,692	$	—	$	(244)	$	18,448
Collateralized loan obligation securities		335,998		—		(13,465)		322,533
	$	354,690	$	—	$	(13,709)	$	340,981



Available-for-sale	December 31, 2021
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
	cost		gains		losses		value
U.S. Government agency securities	$	36,182	$	1,167	$	(47)	$	37,302
Asset-backed securities *		360,332		327		(241)		360,418
Tax-exempt obligations of states and political subdivisions		3,559		172		—		3,731
Taxable obligations of states and political subdivisions		45,984		2,422		—		48,406
Residential mortgage-backed securities		179,778		4,804		(281)		184,301
Collateralized mortgage obligation securities		60,778		1,083		—		61,861
Commercial mortgage-backed securities		248,599		4,106		(1,629)		251,076
Corporate debt securities		10,000		—		(3,386)		6,614
	$	945,212	$	14,081	$	(5,584)	$	953,709


	December 31, 2021
			Gross		Gross
	Amortized		unrealized		unrealized		Fair
* Asset-backed securities as shown above	cost		gains		losses		value
Federally insured student loan securities	$	22,518	$	13	$	(73)	$	22,458
Collateralized loan obligation securities		337,814		314		(168)		337,960
	$	360,332	$	327	$	(241)	$	360,418

Investments in Federal Home Loan Bank (“FHLB”), Atlantic Central Bankers Bank stock, and Federal Reserve Bank stock are recorded at cost and amounted to $12.6 million and $1.7 million at September 30, 2022 and December 31, 2021, respectively. The Bank’s conversion to a national charter required the purchase of $11.0 million of Federal Reserve Bank stock in September of 2022. The amount of FHLB stock required to be held is based on the amount of borrowings, and after repayment thereof, the stock may be redeemed.

The amortized cost and fair value of the Company’s investment securities at September 30, 2022, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.



	Available-for-sale
	Amortized		Fair
	cost		value
Due before one year	$	27,387	$	27,232
Due after one year through five years		144,209		137,727
Due after five years through ten years		229,430		219,888
Due after ten years		435,046		405,747
	$	836,072	$	790,594

At September 30, 2022 and December 31, 2021, no investment securities were encumbered through pledging or otherwise, as borrowings were collateralized with loans.

Fair values of available-for-sale securities are based on the fair market values supplied by a third-party market data provider, or where such third-party market data is not available, fair values are based on discounted cash flows. The third-party market data provider uses a pricing matrix which it creates daily, taking into consideration actual trade data, projected prepayments, and when relevant, projected credit defaults and losses.

The table below indicates the length of time individual securities had been in a continuous unrealized loss position at September 30, 2022 (dollars in thousands):



Available-for-sale		Less than 12 months				12 months or longer				Total
	Number of securities		Fair Value		Unrealized losses		Fair Value		Unrealized losses		Fair Value		Unrealized losses
Description of Securities
U.S. Government agency securities	12	$	20,101	$	(1,571)	$	2,409	$	(33)	$	22,510	$	(1,604)
Asset-backed securities	58		179,430		(5,571)		161,551		(8,138)		340,981		(13,709)
Tax-exempt obligations of states and
political subdivisions	4		3,457		(102)		—		—		3,457		(102)
Taxable obligations of states and
political subdivisions	26		39,727		(1,718)		—		—		39,727		(1,718)
Residential mortgage-backed securities	132		124,133		(9,413)		8,513		(1,313)		132,646		(10,726)
Collateralized mortgage obligation securities	22		44,762		(1,717)		—		—		44,762		(1,717)
Commercial mortgage-backed securities	43		143,893		(7,450)		38,073		(5,440)		181,966		(12,890)
Corporate debt securities	1		—		—		6,800		(3,200)		6,800		(3,200)
Total unrealized loss position
investment securities	298	$	555,503	$	(27,542)	$	217,346	$	(18,124)	$	772,849	$	(45,666)

The table below indicates the length of time individual securities had been in a continuous unrealized loss position at December 31, 2021 (dollars in thousands):



Available-for-sale		Less than 12 months				12 months or longer				Total
	Number of securities		Fair Value		Unrealized losses		Fair Value		Unrealized losses		Fair Value		Unrealized losses
Description of Securities
U.S. Government agency securities	2	$	—	$	—	$	2,700	$	(47)	$	2,700	$	(47)
Asset-backed securities	42		243,598		(235)		1,197		(6)		244,795		(241)
Residential mortgage-backed securities	30		21,640		(159)		5,160		(122)		26,800		(281)
Commercial mortgage-backed securities	12		3,334		(43)		91,355		(1,586)		94,689		(1,629)
Corporate debt securities	1		—		—		6,614		(3,386)		6,614		(3,386)
Total unrealized loss position
investment securities	87	$	268,572	$	(437)	$	107,026	$	(5,147)	$	375,598	$	(5,584)

The Company owns one single issuer trust preferred security issued by an insurance company. The security is not rated by any bond rating service. At September 30, 2022, it had a book value of $10.0 million and a fair value of $6.8 million. This security is presented in the corporate debt securities classification in the tables above.

The Company has evaluated the securities in the above tables as of September 30, 2022 and has concluded that none of these securities required an allowance for credit loss. The Company evaluates whether an allowance for credit loss is required by considering primarily the following factors: (a) the extent to which the fair value is less than the amortized cost of the security, (b) changes in the financial condition, credit rating and near-term prospects of the issuer, (c) whether the issuer is current on contractually obligated interest and principal payments, (d) changes in the financial condition of the security’s underlying collateral and (e) the payment structure of the security. The Company’s determination of the best estimate of expected future cash flows, which is used to determine the credit loss amount, is a quantitative and qualitative process that incorporates information received from third-party sources along with internal assumptions and judgments regarding the future performance of the security. The Company concluded that the securities that are in an unrealized loss position are in a loss position because of changes in market interest rates after the securities were purchased. The Company’s unrealized loss for other debt securities, which include one single issuer trust preferred security, is primarily related to general market conditions, including a lack of liquidity in the market. The severity of the impact of fair value in relation to the carrying amounts of the individual investments is consistent with market developments. The Company’s analysis of each investment is performed at the security level. As a result of its review, the Company concluded that an allowance was not required to recognize credit losses.