2. INVESTMENT SECURITIES

Available-for-Sale Debt Securities

The following tables present the gross amortized cost and fair value of available-for-sale debt securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (“AOCI”):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2018 (in thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities and U.S. Government agencies	$	238,418	$	—	$	(2,780)	$	235,638
Private label mortgage backed security		2,484		1,365		—		3,849
Mortgage backed securities - residential		117,129		970		(2,157)		115,942
Collateralized mortgage obligations		76,528		441		(1,604)		75,365
Corporate bonds		10,000		80		—		10,080
Trust preferred security		3,523		727		—		4,250
Total available-for-sale debt securities	$	448,082	$	3,583	$	(6,541)	$	445,124


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2017 (in thousands)	Cost		Gains		Losses		Value

U.S. Treasury securities and U.S. Government agencies	$	309,042	$	1	$	(1,451)	$	307,592
Private label mortgage backed security		3,065		1,384		—		4,449
Mortgage backed securities - residential		105,644		1,603		(873)		106,374
Collateralized mortgage obligations		87,867		371		(1,075)		87,163
Corporate bonds		15,001		124		—		15,125
Trust preferred security		3,493		107		—		3,600
Total available-for-sale debt securities	$	524,112	$	3,590	$	(3,399)	$	524,303

Held-to-Maturity Debt Securities

The following tables present the carrying value, gross unrecognized gains and losses, and fair value of held-to-maturity debt securities:


			Gross		Gross
	Carrying		Unrecognized		Unrecognized		Fair
September 30, 2018 (in thousands)	Value		Gains		Losses		Value

Mortgage backed securities - residential	$	146	$	9	$	—	$	155
Collateralized mortgage obligations		20,224		221		(29)		20,416
Corporate bonds		45,092		578		(23)		45,647
Obligations of state and political subdivisions		463		—		(14)		449
Total held-to-maturity debt securities	$	65,925	$	808	$	(66)	$	66,667


			Gross		Gross
	Carrying		Unrecognized		Unrecognized		Fair
December 31, 2017 (in thousands)	Value		Gains		Losses		Value

Mortgage backed securities - residential	$	151	$	10	$	—	$	161
Collateralized mortgage obligations		23,437		236		(17)		23,656
Corporate bonds		40,175		686		(3)		40,858
Obligations of state and political subdivisions		464		—		(6)		458
Total held-to-maturity debt securities	$	64,227	$	932	$	(26)	$	65,133

At September 30, 2018 and December 31, 2017, there were no holdings of debt 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 Available-for-Sale Debt Securities

During the three and nine months ended September 30, 2018 and 2017, there were no gains or losses on sales or calls of available-for-sale debt securities.

Debt Securities by Contractual Maturity

The amortized cost and fair value of debt securities by contractual maturity at September 30, 2018 follow. 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.


	Available-for-Sale				Held-to-Maturity
	Debt Securities				Debt Securities
	Amortized		Fair		Carrying		Fair
September 30, 2018 (in thousands)	Cost		Value		Value		Value

Due in one year or less	$	45,033	$	44,825	$	50	$	50
Due from one year to five years		203,385		200,893		10,386		10,441
Due from five years to ten years		—		—		35,119		35,605
Due beyond ten years		3,523		4,250		—		—
Private label mortgage backed security		2,484		3,849		—		—
Mortgage backed securities - residential		117,129		115,942		146		155
Collateralized mortgage obligations		76,528		75,365		20,224		20,416
Total debt securities	$	448,082	$	445,124	$	65,925	$	66,667

Corporate Bonds

The Bank’s floating rate 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 9% of the Bank’s investment portfolio as of September 30, 2018 and December 31, 2017.

Mortgage Backed Securities and Collateralized Mortgage Obligations

At September 30, 2018, with the exception of the $3.8 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, 2018 and December 31, 2017, there were gross unrealized losses of $3.8 million and $1.9 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 other-than-temporary impairment (“OTTI”).

Trust Preferred Security

During 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 on Debt Securities

Debt securities with unrealized losses at September 30, 2018 and December 31, 2017, aggregated by investment category and length of time that individual debt 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, 2018 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies	$	129,894	$	(1,414)	$	105,744	$	(1,366)	$	235,638	$	(2,780)
Mortgage backed securities - residential		56,862		(953)		33,654		(1,204)		90,516		(2,157)
Collateralized mortgage obligations		17,141		(779)		16,563		(825)		33,704		(1,604)
Total available-for-sale debt securities	$	203,897	$	(3,146)	$	155,961	$	(3,395)	$	359,858	$	(6,541)


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
December 31, 2017 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Available-for-sale debt securities:
U.S. Treasury securities and U.S. Government agencies	$	209,165	$	(499)	$	88,415	$	(952)	$	297,580	$	(1,451)
Mortgage backed securities - residential		61,348		(617)		10,192		(256)		71,540		(873)
Collateralized mortgage obligations		30,963		(642)		18,603		(433)		49,566		(1,075)
Total available-for-sale debt securities	$	301,476	$	(1,758)	$	117,210	$	(1,641)	$	418,686	$	(3,399)


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
September 30, 2018 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Held-to-maturity debt securities:
Collateralized mortgage obligations	$	—	$	—	$	5,765	$	(29)	$	5,765	$	(29)
Corporate bonds		4,915		(23)		—		—		4,915		(23)
Obligations of state and political subdivisions		105		(1)		345		(13)		450		(14)
Total held-to-maturity debt securities:	$	5,020	$	(24)	$	6,110	$	(42)	$	11,130	$	(66)


	Less than 12 months				12 months or more				Total
			Unrealized				Unrealized				Unrealized
December 31, 2017 (in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Held-to-maturity debt securities:
Collateralized mortgage obligations	$	—	$	—	$	6,390	$	(17)	$	6,390	$	(17)
Corporate bonds		4,997		(3)		—		—		4,997		(3)
Obligations of state and political subdivisions		458		(6)		—		—		458		(6)
Total held-to-maturity debt securities:	$	5,455	$	(9)	$	6,390	$	(17)	$	11,845	$	(26)

At September 30, 2018, the Bank’s security portfolio consisted of 186 securities, 68 of which were in an unrealized loss position.

At December 31, 2017, the Bank’s security portfolio consisted of 185 securities, 58 of which were in an unrealized loss position.

Other-than-temporary impairment

Unrealized losses for all debt securities are reviewed to determine whether the losses are “other-than-temporary.” Debt 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 $3.8 million at September 30, 2018. 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 Measurement. 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 9 “Fair Value” in this section of the filing.

Pledged Debt Securities

The following table presents debt securities pledged to secure public deposits, securities sold under agreements to repurchase and debt securities held for other purposes, as required or permitted by law:


(in thousands)	September 30, 2018		December 31, 2017

Carrying amount	$	258,670	$	262,679
Fair value		258,777		262,902

Equity Securities

On January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments. Among other things, ASU 2016-01 requires the Company recognize changes in the fair value of equity investments with a readily determinable fair value in net income unless those investments are accounted for under the equity method of accounting.

The following tables present the carrying value, gross unrealized gains and losses, and fair value of equity securities with readily determinable fair values:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2018 (in thousands)	Cost		Gains		Losses		Value

Freddie Mac preferred stock	$	—	$	332	$	—	$	332
Community Reinvestment Act mutual fund		2,500		—		(115)		2,385
Total equity securities with readily determinable fair values	$	2,500	$	332	$	(115)	$	2,717


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2017 (in thousands)	Cost		Gains		Losses		Value

Freddie Mac preferred stock	$	—	$	473	$	—	$	473
Community Reinvestment Act mutual fund		2,500		—		(45)		2,455
Total equity securities with readily determinable fair values	$	2,500	$	473	$	(45)	$	2,928

For equity securities with readily determinable fair values, the gross realized and unrealized gains and losses recognized in the Company’s consolidated statements of income were as follows:


	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
	Gains (Losses) Recognized on Equity Securities						Gains (Losses) Recognized on Equity Securities
(in thousands)	Realized		Unrealized		Total		Realized		Unrealized		Total

Freddie Mac preferred stock	$	—	$	(57)	$	(57)	$	—	$	(141)	$	(141)
Community Reinvestment Act mutual fund		—		(19)		(19)		—		(70)		(70)
Total equity securities with readily determinable fair value	$	—	$	(76)	$	(76)	$	—	$	(211)	$	(211)