NOTE 3: INVESTMENT SECURITIES

 

Investments in securities are classified as available for sale or held to maturity as of December 31, 2013 and 2012. The amortized cost and fair values of the securities classified as available for sale and held to maturity as of December 31, 2013 are as follows:

 

 

 

 

 

The amortized cost and fair values of the securities classified as available for sale and held to maturity as of December 31, 2012 are as follows:

 

 

 

The contractual final maturity distribution of the debt securities classified as available for sale of December 31, 2013, are as follows:

 

 

The contractual final maturity distribution of the debt securities classified as held to maturity of December 31, 2013, are as follows:

 

 

Actual maturities will differ from contractual maturities because borrowers may have rights to call or prepay obligations. Maturities of Agency MBSs and Agency CMOs in the table above are based on final contractual maturities.

 

The following table presents the proceeds, gross gains and gross losses on available for sale securities.

 

 

 

Securities with a carrying value of $315.53 million and $357.52 million at December 31, 2013 and 2012, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes required by law.

 

Gross unrealized losses on investment securities available for sale and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at December 31, 2013, were as follows:

 

 

 

Gross unrecognized losses on investment securities held to maturity and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at December 31, 2013, were as follows:

 

Gross unrealized losses on investment securities available for sale and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at December 31, 2012, were as follows:

 

 

 

There were no securities held to maturity with unrealized losses as of December 31, 2012.

 

There were no securities classified as trading at December 31, 2013 and 2012.  

 

Unrealized losses on investment securities result from the cost basis of the security being higher than its current fair value. These discrepancies generally occur because of changes in interest rates since the time of purchase, or because the credit quality of the issuer has deteriorated. We perform a quarterly analysis of each security in our portfolio to determine if impairment exists, and if it does, whether that impairment is other-than-temporary.

 

At December 31, 2013, all of our MBSs and CMOs held were issued by U.S. government-sponsored entities and agencies, primarily FNMA and FHLMC, institutions which the government has affirmed its commitment to support.  Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is not likely that we will be required to sell the securities before their anticipated recovery, we do not consider these securities to be other-than-temporarily impaired at December 31, 2013.

 

We took an impairment charge totaling $166 thousand related to our $37.91 million CLO portfolio.  Under the recently finalized Volcker Rule, we may be required to divest some or all of our CLOs by July of 2015.  Subsequent to year end we sold $17.74 million of our CLOs for a small gain.

   

Agency MBSs and Agency CMOs consist of pools of residential mortgages which are guaranteed by FNMA, FHLMC, or Government National Mortgage Association (“GNMA”) with various origination dates and maturities.  Agency CMBS consists of bonds backed by commercial real estate which are guaranteed by FNMA and GNMA. CLOs are floating rate securities that consist primarily of pools of senior secured commercial loans structured to provide very strong over collateralization and subordination.  All of our CLOs are the senior AAA tranche and are the first bond to get paid down. Non-Agency CMOs are tracked individually with updates on the performance of the underlying collateral and stress testing performed and reviewed monthly. Additionally, we monitor individual bonds that experience greater levels prepayment or market volatility.

   

We use external pricing services to obtain fair market values for our investment portfolio.   We have obtained and reviewed the service providers’ pricing and reference data documentation. Evaluations are based on market data and vary by asset class and incorporate available trade, bid and other market information.  Because many fixed income securities do not trade on a daily basis, the service provider’s evaluated pricing applications apply available information as applicable through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations.  In addition, model processes, such as the Option Adjusted Spread model are used to assess interest rate impact and develop prepayment scenarios, with inputs determined based on knowledge of the market.  For CLOs, the issuer, structure, collateral type, performance and deal and class triggers are also reviewed.  We periodically test the values provided to us by the pricing service through a combination of back testing on actual sales of securities and by obtaining prices on all bonds from an alternative pricing source.

   

We do not intend to sell the investment securities that are in an unrealized loss position, and it is unlikely that we will be required to sell the investment securities before recovery of their amortized cost bases, which may be maturity.

   

During the third and fourth quarters of 2013, we transferred securities with a total amortized cost of  $152.89 million, and a corresponding fair value of $147.45 million, from available for sale to held to maturity.  The net unrealized loss, net of taxes, on these securities at the dates of the transfers were $3.53 million.  The unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income, net of tax and is amortized over the remaining lives of the securities as an adjustment of the yield.  The amortization of the unamortized holding loss reported in accumulated other comprehensive income will offset the effect on interest income of the discount for the transferred securities.  The remaining unamortized balance of the losses for the securities transferred from available for sale to held to maturity was $5.07 million, or $3.30 million, net of tax at December 31, 2013.