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 (“AOCI”) were as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2017 (in thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities and U.S. Government agencies	$	236,899	$	13	$	(653)	$	236,259
Private label mortgage backed security		3,245		1,330		—		4,575
Mortgage backed securities - residential		102,657		1,644		(299)		104,002
Collateralized mortgage obligations		92,348		425		(539)		92,234
Freddie Mac preferred stock		—		407		—		407
Community Reinvestment Act mutual fund		2,500		5		(24)		2,481
Corporate bonds		15,002		259		—		15,261
Trust preferred security		3,482		18		—		3,500
Total securities available for sale	$	456,133	$	4,101	$	(1,515)	$	458,719


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2016 (in thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities and U.S. Government agencies	$	295,425	$	226	$	(1,107)	$	294,544
Private label mortgage backed security		3,691		1,086		—		4,777
Mortgage backed securities - residential		71,197		2,027		(220)		73,004
Collateralized mortgage obligations		88,559		334		(1,239)		87,654
Freddie Mac preferred stock		—		483		—		483
Community Reinvestment Act mutual fund		2,500		—		(45)		2,455
Corporate bonds		15,004		154		—		15,158
Trust preferred security		3,449		—		(249)		3,200
Total securities available for sale	$	479,825	$	4,310	$	(2,860)	$	481,275

Securities Held to Maturity

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


			Gross		Gross
	Carrying		Unrecognized		Unrecognized		Fair
September 30, 2017 (in thousands)	Value		Gains		Losses		Value

Mortgage backed securities - residential	$	153	$	11	$	—	$	164
Collateralized mortgage obligations		24,378		239		(21)		24,596
Corporate bonds		40,182		541		—		40,723
Obligations of state and political subdivisions		464		2		—		466
Total securities held to maturity	$	65,177	$	793	$	(21)	$	65,949


			Gross		Gross
	Carrying		Unrecognized		Unrecognized		Fair
December 31, 2016 (in thousands)	Value		Gains		Losses		Value

U.S. Treasury securities and U.S. Government agencies	$	506	$	—	$	(2)	$	504
Mortgage backed securities - residential		158		12		—		170
Collateralized mortgage obligations		27,142		250		(124)		27,268
Corporate bonds		25,058		312		(63)		25,307
Total securities held to maturity	$	52,864	$	574	$	(189)	$	53,249

At September 30, 2017 and December 31, 2016, 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 the three and nine months ended September 30, 2017 there were no gains or losses on sales or calls of securities available for sale.

During the three and nine months ended September 30, 2016 there were no gains or losses on sales or calls of securities available for sale.

Investment Securities by Contractual Maturity

The amortized cost and fair value of the investment securities portfolio by contractual maturity at September 30, 2017 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				Securities
	Available for Sale				Held to Maturity
	Amortized		Fair		Carrying		Fair
September 30, 2017 (in thousands)	Cost		Value		Value		Value

Due in one year or less	$	85,073	$	85,055	$	—	$	—
Due from one year to five years		156,828		156,225		10,574		10,606
Due from five years to ten years		10,000		10,240		30,072		30,583
Due beyond ten years		3,482		3,500		—		—
Private label mortgage backed security		3,245		4,575		—		—
Mortgage backed securities - residential		102,657		104,002		153		164
Collateralized mortgage obligations		92,348		92,234		24,378		24,596
Freddie Mac preferred stock		—		407		—		—
Community Reinvestment Act mutual fund		2,500		2,481		—		—
Total securities	$	456,133	$	458,719	$	65,177	$	65,949

Freddie Mac Preferred Stock

During 2008, the U.S. Treasury, the Federal Reserve Board and the Federal Housing Finance Agency (“FHFA”) announced that the FHFA was placing Freddie Mac under conservatorship and giving management control to the FHFA. The Bank contemporaneously determined that its 40,000 shares of Freddie Mac preferred stock were fully impaired and recorded an other-than-temporary impairment (“OTTI”) charge of $2.1 million in 2008. The OTTI charge brought the carrying value of the stock to $0. In 2014, based on active trading volume of Freddie Mac preferred stock, the Company determined it appropriate to record an unrealized gain to AOCI related to its Freddie Mac preferred stock holdings. Based on the stock’s market closing price as of September 30, 2017, the Company’s unrealized gain for its Freddie Mac preferred stock totaled $407,000.

Corporate Bonds

The Company’s portfolio of corporate bonds 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 11% and 8% of the Bank’s investment portfolio as of September 30, 2017 and December 31, 2016.

Mortgage Backed Securities and Collateralized Mortgage Obligations

At September 30, 2017, with the exception of the $4.6 million private label mortgage backed security, all other mortgage backed securities and collateralized mortgage obligations (“CMOs”) held by the Bank were issued by U.S. government-sponsored entities and agencies, primarily Freddie Mac and the Fannie Mae. At September 30, 2017 and December 31, 2016, there were gross unrealized losses of $838,000 and $1.5 million related to available for sale mortgage backed securities and CMOs. Because these unrealized losses are attributable to changes in interest rates and illiquidity, and not credit quality, and because the Bank does not have the intent to sell these 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 have OTTI.

Trust Preferred Security

During the fourth quarter of 2015, the Parent Company purchased a $3 million floating rate trust preferred security (“TRUP”) at a price of 68% of par. The coupon on this security is based on the 3-month London Interbank Borrowing Rate (“LIBOR”) rate plus 159 basis points. The Company performed an initial analysis prior to acquisition and performs ongoing analysis of the credit risk of the underlying borrower in relation to its TRUP.

Unrealized-Loss Analysis

Securities with unrealized losses at September 30, 2017 and December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows:


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
September 30, 2017 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Securities available for sale:
U.S. Treasury securities and U.S. Government agencies	$	9,933	$	(67)	$	186,270	$	(586)	$	196,203	$	(653)
Mortgage backed securities - residential		—		—		48,738		(299)		48,738		(299)
Collateralized mortgage obligations		—		—		41,752		(539)		41,752		(539)
Community Reinvestment Act mutual fund		1,476		(24)		—		—		1,476		(24)
Total securities available for sale	$	11,409	$	(91)	$	276,760	$	(1,424)	$	288,169	$	(1,515)


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
December 31, 2016 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Securities available for sale:
U.S. Treasury securities and U.S. Government agencies	$	138,002	$	(1,107)	$	—	$	—	$	138,002	$	(1,107)
Mortgage backed securities - residential		9,427		(122)		4,211		(98)		13,638		(220)
Collateralized mortgage obligations		37,547		(690)		15,668		(549)		53,215		(1,239)
Community Reinvestment Act mutual fund		2,455		(45)		—		—		2,455		(45)
Trust preferred security		3,200		(249)		—		—		3,200		(249)
Total securities available for sale	$	190,631	$	(2,213)	$	19,879	$	(647)	$	210,510	$	(2,860)


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
September 30, 2017 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Securities held to maturity:
Collateralized mortgage obligations	$	—	$	—	$	6,602	$	(21)	$	6,602	$	(21)
Total securities held to maturity	$	—	$	—	$	6,602	$	(21)	$	6,602	$	(21)


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
December 31, 2016 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Securities held to maturity:
U.S. Treasury securities and U.S. Government agencies	$	506	$	(2)	$	—	$	—	$	506	$	(2)
Collateralized mortgage obligations		13,315		(124)		—		—		13,315		(124)
Corporate bonds		—		—		4,937		(63)		4,937		(63)
Total securities held to maturity	$	13,821	$	(126)	$	4,937	$	(63)	$	18,758	$	(189)

At September 30, 2017, the Bank’s security portfolio consisted of 185 securities, 45 of which were in an unrealized loss position.

At December 31, 2016, the Bank’s security portfolio consisted of 179 securities, 45 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 following:

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 $4.6 million at September 30, 2017. This security 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 Accounting Standards Codification (“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 under Footnote 10 “Fair Value” in this section of the filing.

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:


(in thousands)	September 30, 2017		December 31, 2016

Carrying amount	$	212,825	$	231,695
Fair value		213,048		231,891