3. INVESTMENT SECURITIES

Securities available for sale:

The gross amortized cost and fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

Gross

Amortized

Unrealized

Fair

December 31, 2013 (in thousands)

Cost

Gains

Losses

Value

U.S. Treasury securities and U.S. Government agencies

97,157

409

(101

)

97,465

Private label mortgage backed security

4,740

745

—

5,485

Mortgage backed securities - residential

146,087

4,288

(288

)

150,087

Collateralized mortgage obligations

164,264

1,228

(1,546

)

163,946

Mutual fund

1,000

—

)

995

Corporate bonds

15,015

(150

)

14,915

Total securities available for sale

428,263

6,720

(2,090

)

432,893

	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2012 (in thousands)	Cost		Gains		Losses			Value

U.S. Treasury securities and U.S. Government agencies	$	38,931	$	547	$	(6	)	$	39,472
Private label mortgage backed security	5,684		3		—			5,687
Mortgage backed securities - residential	190,569		6,641		—			197,210
Collateralized mortgage obligations	194,427		1,580		(130		)	195,877
Total securities available for sale	$	429,611	$	8,771	$	(136	)	$	438,246

Securities held to maturity:

The carrying value, gross unrecognized gains and losses, and fair value of securities held to maturity were as follows:

Gross

Carrying

Unrecognized

Fair

December 31, 2013 (in thousands)

Value

Gains

Losses

Value

U.S. Treasury securities and U.S. Government agencies

2,311

(13

)

2,305

Mortgage backed securities - residential

420

—

463

Collateralized mortgage obligations

42,913

387

(184

)

43,116

Corporate bonds

5,000

—

(116

)

4,884

Total securities held to maturity

50,644

437

(313

)

50,768

			Gross		Gross
	Carrying		Unrecognized		Unrecognized		Fair
December 31, 2012 (in thousands)	Value		Gains		Losses		Value

U.S. Treasury securities and U.S. Government agencies	$	4,388	$	27	$	—	$	4,415
Mortgage backed securities - residential	827		63		—		890
Collateralized mortgage obligations	40,795		316		—		41,111
Total securities to be held to maturity	$	46,010	$	406	$	—	$	46,416

At December 31, 2013 and December 31, 2012, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

Sales of Securities Available for Sale

During 2013, there were no sales of securities available for sale.

During 2012, the Bank recognized gross gains of $56,000 and gross losses of $0 in earnings for sales of securities available for sale. Gross gains were recognized as follows in 2012:

· The Bank sold six available for sale securities acquired in the TCB acquisition with an amortized cost of $35 million, resulting in a pre-tax gain of $53,000 during the first quarter of 2012.

· The Bank realized $3,000 in pre-tax gains related to unamortized discount accretion on $10 million of callable U.S. Government agencies that were called during the first quarter of 2012 before their maturity.

· There were no sales of securities available for sale during the second, third and fourth quarters of 2012.

See additional discussion regarding securities acquired in connection with the TCB acquisition in this section of the filing under Footnote 2 “2012 FDIC-Assisted Acquisitions.”

During 2011, the Bank recognized gross gains of $2.3 million and gross losses of $0 in earnings for sales of securities available for sale. Gross gains were recognized as follows in 2011:

· There were no sales of securities available for sale during the first quarter of 2011.

· During the second quarter of 2011, the Bank sold available for sale mortgage backed securities with an amortized cost of $132 million, resulting in a pre-tax gain of $1.9 million.

· During the third quarter of 2011, the Bank realized $188,000 in pre-tax gains related to unamortized discount accretion on $24 million of callable U.S. Government agencies that were called during the third quarter of 2011 before their maturity.

· Also, during the third quarter of 2011, the Bank sold available for sale mortgage backed securities with an amortized cost of $2 million, resulting in a pre-tax gain of $112,000.

· Finally, during the fourth quarter of 2011, the Bank sold available for sale mortgage backed securities with an amortized cost of $1.5 million, resulting in a pre-tax gain of $77,000.

The tax provision related to the Bank’s realized gains totaled $0, $20,000 and $800,000 for the years ended December 31, 2013, 2012 and 2011.

The amortized cost and fair value of the investment securities portfolio by contractual maturity at December 31, 2013 follows. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are detailed separately.

Securities

available for sale

held to maturity

Amortized

Fair

Carrying

Fair

December 31, 2013 (in thousands)

Cost

Value

Due in one year or less

24,395

24,760

508

512

Due from one year to five years

70,259

70,237

1,803

1,793

Due from five years to ten years

17,518

17,383

5,000

4,884

Due beyond ten years

—

Private label mortgage backed security

4,740

5,485

—

Mortgage backed securities - residential

146,087

150,087

420

463

Collateralized mortgage obligations

164,264

163,946

42,913

43,116

Mutual fund

1,000

995

—

Total securities

428,263

432,893

50,644

50,768

Corporate Bonds

During 2013, the Bank purchased $20 million in floating rate corporate bonds with an initial weighted average yield of 1.36%. The bonds, which have a weighted average life of seven years, were rated “investment grade” by accredited rating agencies as of their respective purchase dates. The total fair value of the Bank’s corporate bonds represented 4% of the Bank’s investment portfolio as of December 31, 2013.

Mortgage backed Securities

At December 31, 2013, with the exception of the $5.5 million private label mortgage backed security, all other mortgage backed securities held by the Bank were issued by U.S. government-sponsored entities and agencies, primarily Freddie Mac and Fannie Mae (“FNMA”), institutions that the government has affirmed its commitment to support. At December 31, 2013 and December 31, 2012, there were gross unrealized/unrecognized losses of $1.8 million and $130,000 related to available for sale mortgage backed securities. Because the decline in fair value of these mortgage backed securities is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Bank does not have the intent to sell these mortgage backed securities, and it is likely that it will not be required to sell the securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired.

Market Loss Analysis

Securities with unrealized losses at December 31, 2013 and 2012, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	Less than 12 months					12 months or more				Total
December 31, 2013 (in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

Securities available for sale:
U.S. Treasury securities and U.S. Government agencies	$	44,041	$	(101	)	$	—	$	—	$	44,041	$	(101	)
Mortgage backed securities - residential	19,494		(288		)	—		—		19,494		(288		)
Collateralized mortgage obligations	55,927		(1,546		)	—		—		55,927		(1,546		)
Mutual fund	995		(5		)	—		—		995		(5		)
Corporate bonds	9,850		(150		)	—		—		9,850		(150		)

Total securities available for sale	$	130,307	$	(2,090	)	$	—	$	—	$	130,307	$	(2,090	)

Less than 12 months

12 months or more

Total

Fair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

Securities held to maturity:

U.S. Treasury securities and U.S. Government agencies

521

(13

)

—

521

(13

)

Collateralized mortgage obligations

18,686

(184

)

—

18,686

(184

)

Corporate bonds

4,884

(116

)

—

4,884

(116

)

Total securities held to maturity

24,091

(313

)

—

24,091

(313

)

	Less than 12 months					12 months or more				Total
December 31, 2012 (in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

Securities available for sale
U.S. Treasury securities and U.S. Government agencies	$	3,588	$	(6	)	$	—	$	—	$	3,588	$	(6	)
Collateralized mortgage obligations	20,508		(130		)	—		—		20,508		(130		)

Total securities available for sale	$	24,096	$	(136	)	$	—	$	—	$	24,096	$	(136	)

At December 31, 2013, the Bank’s security portfolio consisted of 147 securities, 27 of which were in an unrealized loss position.

At December 31, 2012, the Bank’s security portfolio consisted of 153 securities, seven of which were in an unrealized loss position.

Other-than-temporary impairment (“OTTI”)

Unrealized losses for all investment securities are reviewed to determine whether the losses are “other-than-temporary.” Investment securities are evaluated for OTTI on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in value below amortized cost is other-than-temporary. In conducting this assessment, the Bank evaluates a number of factors including, but not limited to:

· The length of time and the extent to which fair value has been less than the amortized cost basis;

· The Bank’s intent to hold until maturity or sell the debt security prior to maturity;

· An analysis of whether it is more likely than not that the Bank will be required to sell the debt security before its anticipated recovery;

· Adverse conditions specifically related to the security, an industry, or a geographic area;

· The historical and implied volatility of the fair value of the security;

· The payment structure of the security and the likelihood of the issuer being able to make payments;

· Failure of the issuer to make scheduled interest or principal payments;

· Any rating changes by a rating agency; and

· Recoveries or additional decline in fair value subsequent to the balance sheet date.

The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized for the anticipated credit losses.

The Bank owns one private label mortgage backed security with a total carrying value of $5.5 million at December 31, 2013. This security, with an average remaining life currently estimated at four years, is mostly backed by “Alternative A” first lien mortgage loans, but also has an insurance “wrap” or guarantee as an added layer of protection to the security holder. This asset is illiquid, and as such, the Bank determined it to be a Level 3 security in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. Based on this determination, the Bank utilized an income valuation model (“present value model”) approach, in determining the fair value of the security. This approach is beneficial for positions that are not traded in active markets or are subject to transfer restrictions, and/or where valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support for this investment.

See additional discussion regarding the Bank’s private label mortgage backed security in this section of the filing under Footnote 5 “Fair Value.”

The following table presents a rollforward of the Bank’s private label mortgage backed security credit losses recognized in earnings:

Year ended December 31, (in thousands)	2013			2012			2011

Balance, beginning of year	$	2,142		$	3,455		$	9,757
Reversal of interest reserve	—			—			(169		)
Recovery of losses previously recorded	(201		)	—			—
Realized pass through of actual losses	—			(1,313		)	(6,412		)
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized	—			—			279
Balance, end of year	$	1,941		$	2,142		$	3,455

Further deterioration in economic conditions could cause the Bank to record an additional impairment charge related to credit losses of up to $4.7 million, which is the current gross amortized cost of the Bank’s remaining private label mortgage backed security.

Pledged Investment Securities

Investment securities pledged to secure public deposits, securities sold under agreements to repurchase and securities held for other purposes, as required or permitted by law are as follows:

December 31, (in thousands)	2013		2012

Carrying amount	$	224,693	$	334,560
Fair value	224,989		334,843