2. INVESTMENT SECURITIES

The main objectives of our investment strategy are to provide a source of liquidity while managing our interest rate risk, and to generate an adequate level of interest income without taking undue risks. Our investment policy permits investments in various types of securities, certificates of deposit and federal funds sold in compliance with various restrictions in the policy. As of December 31, 2015 and 2014 all investment securities were classified as available for sale.

Our available-for-sale securities totaled $79.9 million and $69.7 million as of December 31, 2015 and 2014, respectively. In the normal course of business, the Company pledges securities to the FRB and to public housing authorities in NC and the NC Department of State Treasurer (“State Treasurer”) as collateral for public deposits. The following table shows the amounts pledged.

(Dollars in thousands)	December 31, 2015		December 31, 2014

Pledged to FRB	$	830	$	1,008
Pledged for public housing		2,886		3,816
Pledged to the NC State Treasurer		19,643		18,115

Our investment portfolio consists of the following securities:

•

U.S. Agencies

•

MBS, and

•

Municipals

The amortized cost, gross unrealized gains and losses and fair values of investment securities at December 31, 2015 and 2014 were:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

December 31, 2015
U.S. Agencies	$	30,681	$	2	$	(250	)	$	30,433
MBS
Residential		41,323		20		(409	)		40,934
Municipals
North Carolina		8,489		98		(13	)		8,574
Total	$	80,493	$	120	$	(672	)	$	79,941

December 31, 2014
U.S. Agencies	$	12,373	$	26	$	(60	)	$	12,339
MBS
Residential		56,350		281		(276	)		56,355
Municipals		1,009		9		(9	)		1,009
Total	$	69,732	$	316	$	(345	)	$	69,703

Sales and calls of securities available for sale for the year ended December 31, 2015 and December 31, 2014 resulted in aggregate gross realized gains of $205 thousand and none, respectively, and gross realized losses of $176 and none, respectively.

The amortized cost and estimated market values of securities as of December 31, 2015 and 2014 by contractual maturities with the exception of MBS, which reflects projected cash flow streams, are shown below. Actual maturities may differ, because borrowers may have the right to call or prepay MBS, collateralized mortgage obligations, agency securities, and municipal bonds with or without call or prepayment penalties. Certain mortgage-backed securities have adjustable interest rates and will reprice within the various maturity ranges. These repricing schedules are not reflected in the table below.

(Dollars in thousands)	As of December 31, 2015
	Fair Value		Amortized Cost
U.S. Agencies
Due within one year	$	3,481	$	3,500
Due after one year through five years		21,998		22,181
Due after five years through ten years		4,954		5,000
Total US government agencies	$	30,433	$	30,681

MBS
Residential
Due within one year	$	5,750	$	5,812
Due after one year through five years		15,526		15,672
Due after five years through ten years		11,387		11,480
Due after ten years		8,271		8,359
Total government sponsored MBS	$	40,934	$	41,323

Municipals
Due within one year	$	262	$	260
Due after one year through five years		738		738
Due after five years through ten years		7,169		7,091
Due after 10 years		405		400
Total municipal bonds	$	8,574	$	8,489

(Dollars in thousands)	As of December 31, 2014
	Fair Value		Amortized Cost
U.S. Agencies
Due withhin one year		2,498		2,499
Due after one year through five years	$	7,887	$	7,874
Due after five years through ten years		1,954		2,000
Total US government agencies	$	12,339	$	12,373

MBS
Residential
Due within one year	$	10,114	$	10,139
Due after one year through five years		24,003		24,018
Due after five years through ten years		13,803		13,771
Due after ten years		8,435		8,422
Total government sponsored MBS	$	56,355	$	56,350

Municipals
Due within one year	$	162	$	161
Due after one year through five years		268		260
Due after five years through ten years		579		588
Total municipal bonds	$	1,009	$	1,009

As of December 31, 2015 and December 31, 2014, the fair value of securities with gross unrealized losses by length of time that the individual securities have been in an unrealized loss position is as follows:

(Dollars in thousands)	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2015
U.S. Agencies	$	27,060	$	(237	)	$	987	$	(13	)	$	28,047	$	(250	)
MBS
Residential		24,369		(193	)		9,970		(216	)		34,339		(409	)
Municipals		1,405		(13	)		—		—			1,405		(13	)
Total	$	52,834	$	(443	)	$	10,957	$	(229	)	$	63,791	$	(672	)

(Dollars in thousands)	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2014
U.S. Agencies	$	5,982	$	(14	)	$	1,954	$	(46	)	$	7,936	$	(60	)
MBS
Residential		12,594		(73	)		13,476		(203	)		26,070		(276	)
Municipals		—		—			579		(9	)		579		(9	)
Total	$	18,576	$	(87	)	$	16,009	$	(258	)	$	34,585	$	(345	)

All securities owned as of December 31, 2015 and December 31, 2014 were investment grade. The Company evaluates securities for other-than- temporary impairment, at least on a quarterly basis. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and extent to which the fair value has been less than cost, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As of December 31, 2015 and 2014, the Company held 71 and 59 investment positions, respectively, with unrealized losses of $672 thousand and $345 thousand, respectively. These investments were in U.S. agencies, MBS and municipals. In analyzing an issuer's financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts' reports. Management has determined that all declines in the market value of available for sale securities are not other-than-temporary, and will not be likely required to sell.