Investment Securities

The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at March 31, 2018 and December 31, 2017 were as follows (in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
March 31, 2018
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	124,819	$	—	$	(3,734	)	$	121,085
Obligations of states and political subdivisions	161,424		1,029		(2,228		)	160,225
Mortgage-backed securities: GSE residential	290,477		75		(6,715		)	283,837
Trust preferred securities	2,849		—		(327		)	2,522
Other securities	2,038		155		—			2,193
Total available-for-sale	$	581,607	$	1,259	$	(13,004	)	$	569,862
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	69,358	$	8	$	(1,735	)	$	67,631

December 31, 2017
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	115,796	$	8	$	(2,034	)	$	113,770
Obligations of states and political subdivisions	165,037		2,254		(1,025		)	166,266
Mortgage-backed securities: GSE residential	295,778		493		(2,460		)	293,811
Trust preferred securities	2,893		—		(345		)	2,548
Other securities	2,039		145		—			2,184
Total available-for-sale	$	581,543	$	2,900	$	(5,864	)	$	578,579
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	69,332	$	103	$	(978	)	$	68,457

Trust preferred securities represents one trust preferred pooled security issued by First Tennessee Financial (“FTN”). The unrealized loss of this security, which has a remaining maturity of twenty years, is primarily due to its long-term nature, a lack of demand or inactive market for the security, and concerns regarding the underlying financial institutions that have issued the trust preferred security. See the heading “Trust Preferred Securities” for further information regarding this security.

Realized gains and losses resulting from sales of securities were as follows during the three months ended March 31, 2018 and 2017 (in thousands):



	Three months ended March 31,
	2018		2017
Gross gains	$	20	$	—
Gross losses	—		—

The following table indicates the expected maturities of investment securities classified as available-for-sale presented at fair value, and held-to-maturity presented at amortized cost, at March 31, 2018 and the weighted average yield for each range of maturities (dollars in thousands):



	One year or less			After 1 through 5 years			After 5 through 10 years			After ten years			Total
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	83,291		$	37,794		$	—		$	—		$	121,085
Obligations of state and political subdivisions	15,213			70,993			72,582			1,437			160,225
Mortgage-backed securities: GSE residential	8			108,417			—			175,412			283,837
Trust preferred securities	—			—			—			2,522			2,522
Other securities	—			2,001			—			192			2,193
Total available-for-sale investments	$	98,512		$	219,205		$	72,582		$	179,563		$	569,862
Weighted average yield	2.31		%	2.66		%	3.05		%	2.82		%	2.70		%
Full tax-equivalent yield	2.47		%	3.01		%	4.22		%	2.83		%	3.01		%
Held to Maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	39,994		$	29,364		$	—		$	—		$	69,358
Weighted average yield	1.76		%	2.08		%	—		%	—		%	1.90		%
Full tax-equivalent yield	1.76		%	2.08		%	—		%	—		%	1.90		%

The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Tax-equivalent yields have been calculated using a 21% tax rate. With the exception of obligations of the U.S. Treasury and other U.S. government agencies and corporations, there were no investment securities of any single issuer, the book value of which exceeded 10% of stockholders' equity at March 31, 2018.

Investment securities carried at approximately $496 million and $479 million at March 31, 2018 and December 31, 2017, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law.

The following table presents the aging of gross unrealized losses and fair value by investment category as of March 31, 2018 and December 31, 2017 (in thousands):



	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2018
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	68,712	$	(1,639	)	$	47,373	$	(2,095	)	$	116,085	$	(3,734	)
Obligations of states and political subdivisions	66,996		(1,346		)	14,901		(882		)	81,897		(2,228		)
Mortgage-backed securities: GSE residential	209,777		(3,924		)	66,119		(2,791		)	275,896		(6,715		)
Trust preferred securities	—		—			2,522		(327		)	2,522		(327		)
Other securities	—		—			—		—			—		—
Total	$	345,485	$	(6,909	)	$	130,915	$	(6,095	)	$	476,400	$	(13,004	)
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	24,554	$	(313	)	$	38,137	$	(1,422	)	$	62,691	$	(1,735	)
December 31, 2017
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	58,584	$	(540	)	$	47,972	$	(1,494	)	$	106,556	$	(2,034	)
Obligations of states and political subdivisions	42,618		(769		)	9,267		(256		)	51,885		(1,025		)
Mortgage-backed securities: GSE residential	187,949		(1,942		)	22,609		(518		)	210,558		(2,460		)
Trust preferred securities	—		—			2,548		(345		)	2,548		(345		)
Other securities	—		—			—		—			—		—
Total	$	289,151	$	(3,251	)	$	82,396	$	(2,613	)	$	371,547	$	(5,864	)
Held-to-maturity:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	34,101	$	(525	)	$	14,540	$	(453	)	$	48,641	$	(978	)

U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At March 31, 2018 there were eleven available-for sale U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $47,373,000 and unrealized losses of $2,095,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2017 , there were eleven available-for sale U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $47,972,000 and unrealized losses of $1,494,000 in a continuous unrealized loss position for twelve months or more. At March 31, 2018 there were seven held-to-maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $38,137,000 and unrealized losses of $1,422,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2017 there were seven held-to-maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies with a fair value of $14,540,000 and unrealized losses of $453,000 in a continuous unrealized loss position for twelve months or more.

Obligations of states and political subdivisions. At March 31, 2018 there were thirty-three obligations of states and political subdivisions with a fair value of $14,901,000 and unrealized losses of $882,000 in a continuous loss position for twelve months or more. At December 31, 2017, there were thirty-nine obligations of states and political subdivisions with a fair value of $9,267,000 and unrealized losses of $256,000 in a continuous unrealized loss position for twelve months or more.

Mortgage-backed Securities: GSE Residential. At March 31, 2018 there were twenty-seven mortgage-backed securities with a fair value of $66,119,000 and unrealized losses of $2,791,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2017, there were twenty-six mortgage-backed securities with a fair value of $22,609,000 and unrealized losses of $518,000 in a continuous unrealized loss position for twelve months or more.

Trust Preferred Securities. At March 31, 2018, there was one trust preferred security with a fair value of $2,522,000 and unrealized loss of $327,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2017, there was one trust preferred security with a fair value of $2,548,000 and unrealized loss of $345,000 in a continuous unrealized loss position for twelve months or more. The unrealized loss was primarily due to the long-term nature of the trust preferred security, a lack of demand or inactive market for the security, the impending change to the regulatory treatment of these securities, and concerns regarding the underlying financial institutions that have issued the trust preferred securities.

The Company recorded no other-than-temporary impairment (OTTI) for these securities during 2018 or 2017. Because it is not more-likely-than-not that the Company will be required to sell the remaining security before recovery of its new, lower amortized cost basis, which may be maturity, the Company does not consider the remainder of the investment to be other-than-temporarily impaired at March 31, 2018. However, future downgrades or additional deferrals and defaults in this security, could result in additional OTTI and consequently, have a material impact on future earnings.

Following are the details for the currently impaired trust preferred security (in thousands):



	Book Value		Fair Value		Unrealized Gains (Losses)			Other-than- temporary Impairment Recorded To-date
PreTSL XXVIII	$	2,849	$	2,522	$	(327	)	$	(1,111	)

Other securities. At March 31, 2018 and December 31, 2017, there were no other securities in a continuous unrealized loss position for twelve months or more.

The Company does not believe any other individual unrealized loss as of March 31, 2018 represents OTTI. However, given the continued disruption in the financial markets, the Company may be required to recognize OTTI losses in future periods with respect to its available for sale investment securities portfolio. The amount and timing of any additional OTTI will depend on the decline in the underlying cash flows of the securities. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in the period the other-than-temporary impairment is identified.

Other-than-temporary Impairment. Upon acquisition of a security, the Company determines whether it is within the scope of the accounting guidance for investments in debt and equity securities or whether it must be evaluated for impairment under the accounting guidance for beneficial interests in securitized financial assets.

The Company conducts periodic reviews to evaluate its investment securities to determine whether OTTI has occurred. While all securities are considered, the securities primarily impacted by OTTI evaluation are pooled trust preferred securities. For the pooled trust preferred security currently in the investment portfolio, an extensive review is conducted to determine if any additional OTTI has occurred. The Company utilizes an independent third-party to perform the OTTI evaluation. The Company's management reviews the assumption inputs and methodology with the third-party to obtain an understanding of them and determine if they are appropriate for the evaluation. Economic models are used to project future cash flows for the security based on current assumptions for discount rate, prepayments, default and deferral rates and recoveries. These assumptions are determined based on the structure of the issuance, the specific collateral underlying the security, historical performance of trust preferred securities and general state of the economy. The OTTI test compares the present value of the cash flows from quarter to quarter to determine if there has been an adverse change which could indicate additional OTTI.

The discount rate assumption used in the cash flow model is equal to the current yield used to accrete the beneficial interest. The Company’s current trust preferred security investment has a floating rate coupon of 3-month LIBOR plus 90 basis points. Since the estimate of 3-month LIBOR is based on the forward curve on the measurement date, and is therefore variable, the discount assumption for this security is a range of projected coupons over the expected life of the security.

The Company considers the likelihood that issuers will prepay their securities which changes the amount of expected cash flows. Factors such as the coupon rates of collateral, economic conditions and regulatory changes, such as the Dodd-Frank Act and Basel III, are considered.

The trust preferred security includes collateral issued by financial institutions and insurance companies. To identify bank issuers with a high risk of near term default or deferral, a credit model developed by the third-party is utilized that scores each bank issuer based on 29 different ratios covering capital adequacy, asset quality, earnings, liquidity, the Texas Ratio, and sensitivity to interest rates. To account for longer term bank default risk not captured by the credit model, it is assumed that banks will default at a rate of 2% annually for the first two years of the cash flow projection, and 36 basis points in each year thereafter. To project defaults for insurance issuers, each issuer’s credit rating is mapped to its idealized default rate, which is AM Best’s estimate of the historical default rate for insurance companies with that rating.

Lastly, it is assumed that trust preferred securities issued by banks that have already failed will have no recoveries, and that banks projected to default will have recoveries of 10%. Additionally, the 10% recovery assumption, incorporates the potential for cures by banks that are currently in deferral.

If the Company determines that a given pooled trust preferred security position will be subject to a write-down or loss, the Company records the expected credit loss as a charge to earnings.

Credit Losses Recognized on Investments. As described above, the Company’s investment in trust preferred security has experienced fair value deterioration due to credit losses but is not otherwise other-than-temporarily impaired. The following table provides information about the trust preferred security for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income (loss) for the three months ended March 31, 2018 and 2017 (in thousands).



	Accumulated Credit Losses
	March 31, 2018		March 31, 2017
Credit losses on trust preferred securities held
Beginning of period	$	1,111	$	1,111
Additions related to OTTI losses not previously recognized	—		—
Reductions due to sales / (recoveries)	—		—
Reductions due to change in intent or likelihood of sale	—		—
Additions related to increases in previously recognized OTTI losses	—		—
Reductions due to increases in expected cash flows	—		—
End of period	$	1,111	$	1,111