5. INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities are summarized below. The majority of securities held are publicly traded, and the estimated fair values were obtained from an independent pricing service based upon market quotes.


	September 30, 2014
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss			Fair Value		Total Percent
	(Dollars in thousands)
Investment securities available-for-sale:
Government agency	$	342,560	$	2	$	(13,363	)	$	329,199		10.42	%
Residential mortgage-backed securities		1,901,645		22,056		(7,950	)		1,915,751		60.62	%
CMOs / REMICs - residential		315,298		7,300		(643	)		321,955		10.19	%
Municipal bonds		564,366		24,583		(936	)		588,013		18.61	%
Other securities		5,000		138		—			5,138		0.16	%

Total	$	3,128,869	$	54,079	$	(22,892	)	$	3,160,056		100.00	%


	December 31, 2013
	Amortized Cost		Gross Unrealized Holding Gain		Gross Unrealized Holding Loss			Fair Value		Total Percent
	(Dollars in thousands)
Investment securities available-for-sale:
Government agency	$	350,378	$	22	$	(23,875	)	$	326,525		12.26	%
Residential mortgage-backed securities		1,391,631		13,100		(24,788	)		1,379,943		51.81	%
CMOs / REMICs - residential		361,573		6,576		(1,974	)		366,175		13.75	%
Municipal bonds		571,145		18,839		(3,893	)		586,091		22.00	%
Other securities		5,000		—		(92	)		4,908		0.18	%

Total	$	2,679,727	$	38,537	$	(54,622	)	$	2,663,642		100.00	%

Approximately 81% of the available-for-sale portfolio at September 30, 2014 represents securities issued by the U.S government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest. All non-agency available-for-sale CMO/REMIC issues held are rated investment grade or better by either Standard & Poor’s or Moody’s, as of September 30, 2014 and December 31, 2013. The Bank has $388,000 in CMOs/REMICs backed by whole loans issued by private-label companies (nongovernment sponsored).

During the first quarter of 2013, management identified 13 securities with a par value of $94.2 million that were experiencing accelerated prepayment speeds that were causing deterioration in yield. These securities were sold, and the Company recognized a net pre-tax gain on sale of $2.1 million for the nine months ended September 30, 2013. There were no realized gains or losses for the three and nine months ended September 30, 2014.

The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2014 and December 31, 2013. Management has reviewed individual securities to determine whether a decline in fair value below the amortized cost basis is other-than-temporary.


	September 30, 2014
	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
	(Dollars in thousands)
Available-for-sale:
Government agency	$	17,979	$	37	$	306,211	$	13,326	$	324,190	$	13,363
Residential mortgage-backed securities		399,364		677		309,465		7,273		708,829		7,950
CMOs / REMICs - residential		28,420		76		42,092		567		70,512		643
Municipal bonds		6,409		53		35,731		883		42,140		936
Other securities		—		—		—		—		—		—

Total	$	452,172	$	843	$	693,499	$	22,049	$	1,145,671	$	22,892


	December 31, 2013
	Less Than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses		Fair Value		Gross Unrealized Holding Losses
	(Dollars in thousands)
Available-for-sale:
Government agency	$	267,936	$	20,514	$	38,563	$	3,361	$	306,499	$	23,875
Residential mortgage-backed securities		851,621		23,313		22,999		1,475		874,620		24,788
CMOs / REMICs - residential		104,322		1,780		17,747		194		122,069		1,974
Municipal bonds		47,116		3,359		10,338		534		57,454		3,893
Other securities		4,908		92		—		—		4,908		92

Total	$	1,275,903	$	49,058	$	89,647	$	5,564	$	1,365,550	$	54,622

The following summarizes our analysis of these securities and the unrealized losses. This assessment was based on the following factors: i) the length of the time and the extent to which the fair value has been less than amortized cost; ii) adverse condition specifically related to the security, an industry, or a geographic area and whether or not the Company expects to recover the entire amortized cost, iii) historical and implied volatility of the fair value of the security; iv) the payment structure of the security and the likelihood of the issuer being able to make payments in the future; v) failure of the issuer of the security to make scheduled interest or principal payments, vi) any changes to the rating of the security by a rating agency, and vii) recoveries or additional declines in fair value subsequent to the balance sheet date.

CMO Held-to-Maturity — The Company has one investment security classified as held-to-maturity. This security was issued by Countrywide Financial and is collateralized by Alt-A mortgages. The mortgages are primarily fixed-rate, 30-year loans, originated in early 2006 with average FICO scores of 715 and an average LTV of 71% at origination. The security was a senior security in the securitization, was rated triple AAA at origination and was supported by subordinate securities. This security is classified as held-to-maturity as the Bank has both the intent and ability to hold this debt security to maturity. The Bank acquired this security in February 2008 at a price of 98.25%. The significant decline in the fair value of the security first appeared in August 2008 at the time the financial crisis in the markets occurred and the market for securities collateralized by Alt-A mortgages diminished.

As of September 30, 2014, the unrealized loss on this security was zero and the current fair value on the security was 79.27% of the current par value. This Alt-A bond, with a book value of $1.6 million as of September 30, 2014, has had $1.9 million in net impairment losses to date. These losses have been recorded as a reduction to noninterest income. The security is rated non-investment grade. We evaluated the security for an other-than-temporary decline in fair value as of September 30, 2014. The key assumptions include default rates, loss severities and prepayment rates. There were no changes in credit related other-than temporary impairment recognized in earnings for the three and nine months ended September 30, 2014 and 2013.

Government Agency & Government-Sponsored Enterprise— The government agency bonds are backed by the full faith and credit of agencies of the U.S. Government. While the Government-Sponsored Enterprise bonds are not expressly guaranteed by the U.S. Government, they are currently being supported by the U.S. Government under a conservatorship arrangement. As of September 30, 2014, approximately $137.2 million in U.S. government agency bonds are callable. These securities are bullet securities, that is, they have a defined maturity date on which the principal is paid. The contractual term of these investments provides that the Company will receive the face value of the bond at maturity which will equal the amortized cost of the bond. Interest is received throughout the life of the security.

Mortgage-Backed Securities and CMOs/REMICs— Almost all of the Company’s available-for-sale mortgage-backed and CMOs/REMICs securities are issued by government agencies or government-sponsored enterprises such as Ginnie Mae, Fannie Mae and Freddie Mac. These securities are collateralized or backed by the underlying residential mortgages. All mortgage-backed securities are considered to be rated investment grade with a weighted average life of approximately 4.2 years. Of the total MBS/CMO, 99.98% have the implied guarantee of U.S. government-sponsored agencies and enterprises. The remaining 0.02% are issued by banks. Accordingly, it is expected the securities would not be settled at a price less than the amortized cost of the bonds.

Municipal Bonds—The majority of the Company’s municipal bonds are insured by the largest bond insurance companies with maturities of approximately 8.6 years. The Company diversifies its holdings by owning selections of securities from different issuers and by holding securities from geographically diversified municipal issuers, thus reducing the Company’s exposure to any single adverse event. The decline in fair value is attributable to the changes in interest rates and not credit quality. Since the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized costs, these investments are not considered other than temporarily impaired at September 30, 2014.

On an ongoing basis, we monitor the quality of our municipal bond portfolio in light of the current financial problems exhibited by certain monoline insurance companies. Many of the securities that would not be rated without insurance are pre-refunded and/or are general obligation bonds. We continue to monitor municipalities, which includes a review of the respective municipalities’ audited financial statements to determine whether there are any audit or performance issues. We use outside brokers to assist us in these analyses. Based on our monitoring of the municipal marketplace, to our knowledge, none of the municipalities are exhibiting financial problems that would lead us to believe that there is OTTI for any given security.

At September 30, 2014 and December 31, 2013, investment securities having a carrying value of approximately $3.13 billion and $2.60 billion, respectively, were pledged to secure public deposits, short and long-term borrowings, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities at September 30, 2014, by contractual maturity, are shown in the table below. Although mortgage-backed securities and CMOs/REMICs have contractual maturities through 2043, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed securities and CMOs/REMICs are included in maturity categories based upon estimated prepayment speeds.


	September 30, 2014
					Weighted-
	Amortized		Fair		Average
	Cost		Value		Yield
	(Dollars in thousands)
Available-for-sale:
Due in one year or less	$	130,897	$	133,756		3.51	%
Due after one year through five years		2,116,400		2,156,397		2.48	%
Due after five years through ten years		796,615		782,833		2.20	%
Due after ten years		84,957		87,070		2.72	%

Total	$	3,128,869	$	3,160,056		2.46	%

The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through September 30, 2014.