3.SECURITIES

Available for Sale

The amortized cost, gross unrealized gains and losses, and estimated fair values of securities available for sale as of September 30, 2015 and December 31, 2014 are summarized as follows (dollars in thousands):

 

 

 

 

The following table shows the gross unrealized losses and fair value (in thousands) of the Company’s available for sale investments with unrealized losses that are not deemed to be other-than-temporarily impaired.  These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

 

 

As of September 30, 2015,  there were $52.5 million, or 22 issues, of individual available for sale securities that had been in a continuous loss position for more than 12 months.  Additionally, these securities had an unrealized loss of $1.1 million and consisted of municipal obligations, mortgage-backed securities, and corporate bonds.  As of December 31, 2014, there were $96.4 million, or 60 issues, of individual securities that had been in a continuous loss position for more than 12 months.  Additionally, these securities had an unrealized loss of $1.1 million and consisted of municipal obligations, mortgage-backed securities, corporate bonds, and other securities.  The Company has determined that these securities are temporarily impaired as of September 30, 2015 and December 31, 2014 for the reasons set out below:

 

U.S. Government agencies and corporations.  The unrealized losses in this category of investments were caused by interest rate fluctuations. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment.  Because the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of these investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.

 

Mortgage-backed securities.  This category’s unrealized losses are primarily the result of interest rate fluctuations.  Since the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not intend to sell the investments, and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired.  Also, the majority of the Company’s mortgage-backed securities are agency-backed securities, which have a government guarantee.

 

State and political subdivisions.  This category’s unrealized losses are primarily the result of interest rate fluctuations and also a certain few ratings downgrades brought about by the impact of the economic downturn on states and political subdivisions.  The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment.  Because the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.  As discussed below, one security was identified as containing credit-related OTTI.

 

Corporate debt securities.  The Company’s unrealized losses in corporate debt securities are related to both interest rate fluctuations and ratings downgrades for a limited number of securities.  The majority of the securities remain investment grade and the Company’s analysis did not indicate the existence of a credit loss.  The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment.  Because the Company does not intend to sell any of the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.

 

The following table presents the amortized cost and estimated fair value of available for sale securities as of September 30, 2015 and December 31, 2014, by contractual maturity (dollars in thousands).  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

The following table presents available for sale securities which were pledged to secure public deposits, repurchase agreements, and for other purposes as permitted or required by law as of September 30, 2015 and December 31, 2014 (dollars in thousands):

 

 

 

Held to Maturity

During the second quarter of 2015, the Company transferred securities, which it intends and has the ability to hold until maturity, with a fair value of $201.8 million on the date of transfer, from securities available for sale to securities held to maturity.  The Company transferred these securities to held to maturity to reduce the impact of price volatility on capital and in consideration of changes to the regulatory environment.  The securities included net pre-tax unrealized gains of $8.1 million at the date of transfer with a remaining balance of $7.3 million as of September 30, 2015.

 

The Company reports securities held to maturity on the Consolidated Balance Sheets at carrying value.  Carrying value is amortized cost which includes any unamortized unrealized gains and losses recognized in accumulated other comprehensive income prior to reclassifying the securities from securities available for sale to securities held to maturity.  Investment securities transferred into the held to maturity category from the available for sale category are recorded at fair value at the date of transfer.  The unrealized holding gain or loss at the date of transfer is retained in accumulated other comprehensive income and in the carrying value of the securities held to maturity.  Such unrealized gains/(losses) are accreted over the remaining life of the security with no impact on future net income.

 

The carrying value, gross unrealized gains and losses, and estimated fair values of securities held to maturity as of September 30, 2015 are summarized as follows (dollars in thousands):

 

 

The following table shows the gross unrealized losses and fair value (in thousands) of the Company’s held to maturity securities with unrealized losses that are not deemed to be other-than-temporarily impaired.  These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

 

 

The following table presents the amortized cost and estimated fair value of held to maturity securities as of September 30, 2015, by contractual maturity (dollars in thousands).  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

The following table presents held to maturity securities which were pledged to secure public deposits as permitted or required by law as of September 30, 2015 (dollars in thousands):

 

 

Restricted Stock, at cost

Due to restrictions placed upon the Bank’s common stock investment in the Federal Reserve Bank and FHLB, these securities have been classified as restricted equity securities and carried at cost.  These restricted securities are not subject to the investment security classifications and are included as a separate line item on the Company’s Consolidated Balance Sheets.  At September 30, 2015, the FHLB required the Bank to maintain stock in an amount equal to 4.25% of outstanding borrowings and a specific percentage of the Bank’s total assets.  At December 31, 2014, the FHLB required the Bank to maintain stock in an amount equal to 4.5% of outstanding borrowings and a specific percentage of the Bank’s total assets.  The Federal Reserve Bank required the Bank to maintain stock with a par value equal to 6% of its outstanding capital at both September 30, 2015 and December 31, 2014.  Restricted equity securities consist of Federal Reserve Bank stock in the amount of $23.8 million for both September 30, 2015 and December 31, 2014 and FHLB stock in the amount of $28.9 million and $31.0 million as of September 30, 2015 and December 31, 2014, respectively.

 

Other-Than-Temporary-Impairment

During each quarter, the Company conducts an assessment of the securities portfolio for OTTI consideration.  The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance, and relevant industry research and analysis.  An impairment is other-than-temporary if any of the following conditions exist: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell).  If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss.  Based on the assessment for the quarter ended September 30, 2015 and in accordance with the guidance, the Company determined that a municipal security in the available for sale portfolio incurred credit-related OTTI of $300,000, which was recognized in earnings for the quarter ended September 30, 2015.

 

Realized Gains and Losses

The following table presents the gross realized gains and losses on the sale of securities available for sale and the proceeds from the sale of securities during the three and nine months ended September 30, 2015 (dollars in thousands).  The Company did not sell any investment securities that are held to maturity.

 

 

The following table presents the gross realized gains and losses on the sale of securities available for sale and the proceeds from the sale of securities during the three and nine months ended September 30, 2014 (dollars in thousands).