INVESTMENTS |
Note 2 – Investments Investments available-for-sale The amortized cost and estimated fair values of investments available-for-sale at the dates indicated are presented in the following table: | | | | | March 31, 2015 | | December 31, 2014 | | | | | | | | | Gross | | Gross | | Estimated | | | | | Gross | | Gross | | Estimated | | | | | | Amortized | | Unrealized | | Unrealized | | Fair | | Amortized | | Unrealized | | Unrealized | | Fair | (In thousands) | | Cost | | Gains | | Losses | | Value | | Cost | | Gains | | Losses | | Value | U.S. government agencies | | $ | 144,519 | | $ | 253 | | $ | (877) | | $ | 143,895 | | $ | 144,497 | | $ | - | | $ | (2,818) | | $ | 141,679 | State and municipal | | | 155,964 | | | 9,822 | | | - | | | 165,786 | | | 157,603 | | | 9,453 | | | (4) | | | 167,052 | Mortgage-backed | | | 337,351 | | | 10,481 | | | (1,529) | | | 346,303 | | | 354,631 | | | 9,824 | | | (2,936) | | | 361,519 | Trust preferred | | | 1,111 | | | - | | | (109) | | | 1,002 | | | 1,348 | | | - | | | (112) | | | 1,236 | | Total debt securities | | | 638,945 | | | 20,556 | | | (2,515) | | | 656,986 | | | 658,079 | | | 19,277 | | | (5,870) | | | 671,486 | Marketable equity securities | | | 723 | | | - | | | - | | | 723 | | | 723 | | | - | | | - | | | 723 | | | Total investments available-for-sale | | $ | 639,668 | | $ | 20,556 | | $ | (2,515) | | $ | 657,709 | | $ | 658,802 | | $ | 19,277 | | $ | (5,870) | | $ | 672,209 |
Any unrealized losses in the U.S. government agencies, state and municipal, mortgage-backed or corporate debt investment securities at March 31, 2015 are not the result of credit related events but due to changes in interest rates. These declines are considered temporary in nature and are expected to decline over time and recover as these securities approach maturity. The mortgage-backed securities portfolio at March 31, 2015 is composed entirely of either the most senior tranches of GNMA, FNMA or FHLMC collateralized mortgage obligations ($160.8 million), or GNMA, FNMA or FHLMC mortgage-backed securities ($185.5 million). The Company does not intend to sell these securities and has sufficient liquidity to hold these securities for an adequate period of time, which may be maturity, to allow for any anticipated recovery in fair value. At March 31, 2015 the trust preferred portfolio consisted of one pooled trust preferred security. The pooled trust preferred security, which is backed by debt issued by banks and thrifts, totals $1.1 million with a fair value of $1.0 million. The fair value of this security was determined by management through the use of a third party valuation specialist due to the limited trading activity for this security. The income valuation approach technique (present value) used maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. The methodology and significant assumptions employed by the specialist to determine fair value included: - Evaluation of the structural terms as established in the indenture;
- Detailed credit and structural evaluation for each piece of issuer collateral in the pool;
- Overall default (.62%), recovery and prepayment (2%)/amortization probabilities by issuers in the pool;
- Identification of adverse conditions specifically related to the security, industry and geographical area;
- Projection of estimated cash flows that incorporate default expectations and loss severities;
- Review of historical and implied volatility of the fair value of the security;
- Evaluation of credit risk concentrations;
- Evaluation of the length of time and the extent to which the fair value has been less than the amortized cost; and
- A discount rate of 11.9% was established using credit adjusted financial institution spreads for comparably rated institutions and a liquidity adjustment that considered the previously noted characteristics.
As a result of this evaluation, it was determined that the pooled trust preferred security had not incurred any credit-related other-than-temporary impairment (“OTTI”) for the quarter ended March 31, 2015. Non-credit related OTTI on this security, which is not expected to be sold and which the Company has the ability to hold until maturity, was $0.1 million at March 31, 2015. This non-credit related OTTI was recognized in other comprehensive income (“OCI”) at March 31, 2015. The methodology and significant inputs used to measure the amount related to credit loss consisted of the following: - Default rates were developed based on the financial condition of the trust preferred issuers in the pool and the payment or deferral status. Conditional default rates were estimated based on the payment characteristics of the security and the financial condition of the issuers in the pool. Near term and future defaults are estimated using third party industry data in addition to a review of key financial ratios and other pertinent data on the financial stability of the underlying issuer;
- Loss severity is forecasted based on the type of impairment using research performed by third parties;
- The security contains one level of subordination below the senior tranche, with the senior tranche receiving the spread from the subordinate bonds. Given recent performance, it is not expected that the senior tranche will receive its full interest and principal at the bond’s maturity date;
- Credit ratings of the underlying issuers are reviewed in conjunction with the development of the default rates applied to determine the credit amounts related to the credit loss; and
- Potential prepayments are estimated based on terms and rates of the underlying trust preferred securities to determine the impact of excess spread on the credit enhancement, the removal of the strongest institutions from the underlying pool and any impact that prepayments might have on diversity and concentration.
The following table provides the activity of OTTI on investment securities due to credit losses recognized in earnings for the period indicated: (In thousands) | | | OTTI Losses | Cumulative credit losses on investment securities, through December 31, 2014 | | $ | 531 | | | | | Additions for credit losses not previously recognized | | | - | | | | | Cumulative credit losses on investment securities, through March 31, 2015 | | $ | 531 | | | | |
Gross unrealized losses and fair value by length of time that the individual available-for-sale securities have been in an unrealized loss position at the dates indicated are presented in the following table: | | | March 31, 2015 | | | | | | | | | | Continuous Unrealized | | | | | | | | | | | | Losses Existing for: | | | | | Number | | | | | | | | | | | Total | | | | of | | | | | Less than | | More than | | Unrealized | (Dollars in thousands) | | securities | | Fair Value | | 12 months | | 12 months | | Losses | U.S. government agencies | | | 9 | | $ | 94,083 | | $ | 244 | | $ | 633 | | $ | 877 | Mortgage-backed | | | 17 | | | 99,760 | | | 96 | | | 1,433 | | | 1,529 | Trust preferred | | | 1 | | | 1,002 | | | - | | | 109 | | | 109 | | Total | | | 27 | | $ | 194,845 | | $ | 340 | | $ | 2,175 | | $ | 2,515 |
| | | December 31, 2014 | | | | | | | | | | Continuous Unrealized | | | | | | | | | | | | Losses Existing for: | | | | | Number | | | | | | | | | | | Total | | | | of | | | | | Less than | | More than | | Unrealized | (Dollars in thousands) | | securities | | Fair Value | | 12 months | | 12 months | | Losses | U.S. government agencies | | | 14 | | $ | 141,679 | | $ | 60 | | $ | 2,758 | | $ | 2,818 | State and municipal | | | 2 | | | 1,409 | | | 4 | | | - | | | 4 | Mortgage-backed | | | 20 | | | 108,902 | | | 58 | | | 2,878 | | | 2,936 | Trust preferred | | | 1 | | | 1,236 | | | - | | | 112 | | | 112 | | Total | | | 37 | | $ | 253,226 | | $ | 122 | | $ | 5,748 | | $ | 5,870 |
The amortized cost and estimated fair values of debt securities available-for-sale by contractual maturity at the dates indicated are provided in the following table. The Company has allocated mortgage-backed securities into the four maturity groupings reflected in the following table using the expected average life of the individual securities based on statistics provided by independent third party industry sources. Expected maturities will differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment penalties. | | | March 31, 2015 | | December 31, 2014 | | | | | | | Estimated | | | | | Estimated | | | | Amortized | | Fair | | Amortized | | Fair | (In thousands) | | Cost | | Value | | Cost | | Value | Due in one year or less | | $ | 691 | | $ | 708 | | $ | 691 | | $ | 714 | Due after one year through five years | | | 73,069 | | | 75,408 | | | 47,900 | | | 49,385 | Due after five years through ten years | | | 304,330 | | | 314,650 | | | 332,841 | | | 340,852 | Due after ten years | | | 260,855 | | | 266,220 | | | 276,647 | | | 280,535 | | Total debt securities available for sale | | $ | 638,945 | | $ | 656,986 | | $ | 658,079 | | $ | 671,486 |
At March 31, 2015 and December 31, 2014, investments available-for-sale with a book value of $217.2 million and $212.9 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law. The outstanding balance of no single issuer, except for U.S. Agencies securities, exceeded ten percent of stockholders' equity at March 31, 2015 and December 31, 2014. Investments held-to-maturity The amortized cost and estimated fair values of investments held-to-maturity at the dates indicated are presented in the following table: | | | March 31, 2015 | | December 31, 2014 | | | | | | | Gross | | Gross | | Estimated | | | | | Gross | | Gross | | Estimated | | | | Amortized | | Unrealized | | Unrealized | | Fair | | Amortized | | Unrealized | | Unrealized | | Fair | (In thousands) | | Cost | | Gains | | Losses | | Value | | Cost | | Gains | | Losses | | Value | U.S. government agencies | | $ | 64,514 | | $ | 13 | | $ | (697) | | $ | 63,830 | | $ | 64,512 | | $ | - | | $ | (1,734) | | $ | 62,778 | State and municipal | | | 152,849 | | | 4,968 | | | (184) | | | 157,633 | | | 155,261 | | | 4,321 | | | (325) | | | 159,257 | Mortgage-backed | | | 194 | | | 30 | | | - | | | 224 | | | 200 | | | 25 | | | - | | | 225 | | Total investments held-to-maturity | | $ | 217,557 | | $ | 5,011 | | $ | (881) | | $ | 221,687 | | $ | 219,973 | | $ | 4,346 | | $ | (2,059) | | $ | 222,260 |
Gross unrealized losses and fair value by length of time that the individual held-to-maturity securities have been in a continuous unrealized loss position at the dates indicated are presented in the following tables: | | | March 31, 2015 | | | | | | | | | | Continuous Unrealized | | | | | | | | | | | | Losses Existing for: | | | | | Number | | | | | | | | | | | Total | | | | of | | | | | Less than | | More than | | Unrealized | (Dollars in thousands) | | securities | | Fair Value | | 12 months | | 12 months | | Losses | U.S. government agencies | | | 5 | | $ | 45,766 | | $ | 178 | | $ | 519 | | $ | 697 | State and municipal | | | 20 | | | 18,242 | | | 26 | | | 158 | | | 184 | | Total | | | 25 | | $ | 64,008 | | $ | 204 | | $ | 677 | | $ | 881 |
| | | December 31, 2014 | | | | | | | | | | Continuous Unrealized | | | | | | | | | | | | Losses Existing for: | | | | | Number | | | | | | | | | | | Total | | | | of | | | | | Less than | | More than | | Unrealized | (Dollars in thousands) | | securities | | Fair Value | | 12 months | | 12 months | | Losses | U.S. government agencies | | | 8 | | $ | 62,778 | | $ | - | | $ | 1,734 | | $ | 1,734 | State and municipal | | | 41 | | | 32,027 | | | 18 | | | 307 | | | 325 | | Total | | | 49 | | $ | 94,805 | | $ | 18 | | $ | 2,041 | | $ | 2,059 |
The Company intends to hold these securities until they reach maturity. The amortized cost and estimated fair values of debt securities held-to-maturity by contractual maturity at the dates indicated are reflected in the following table. Expected maturities will differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment penalties. | | | March 31, 2015 | | December 31, 2014 | | | | | | | Estimated | | | | | Estimated | | | | Amortized | | Fair | | Amortized | | Fair | (In thousands) | | Cost | | Value | | Cost | | Value | Due in one year or less | | $ | - | | $ | - | | $ | 1,690 | | $ | 1,694 | Due after one year through five years | | | 6,980 | | | 7,161 | | | 6,763 | | | 6,938 | Due after five years through ten years | | | 164,343 | | | 167,489 | | | 163,252 | | | 164,787 | Due after ten years | | | 46,234 | | | 47,037 | | | 48,268 | | | 48,841 | | Total debt securities held-to-maturity | | $ | 217,557 | | $ | 221,687 | | $ | 219,973 | | $ | 222,260 |
At March 31, 2015 and December 31, 2014, investments held-to-maturity with a book value of $188.7 million and $202.4 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law. The outstanding balance of no single issuer, except for U.S. Agency securities, exceeded ten percent of stockholders' equity at March 31, 2015 and December 31, 2014. Equity securities Other equity securities at the dates indicated are presented in the following table: (In thousands) | | March 31, 2015 | | December 31, 2014 | Federal Reserve Bank stock | | $ | 8,269 | | $ | 8,269 | Federal Home Loan Bank of Atlanta stock | | | 29,030 | | | 33,168 | | Total equity securities | | $ | 37,299 | | $ | 41,437 |
|