(4) Investment Securities

The amortized cost and estimated fair value of investment securities are summarized as follows:

	September 30, 2013
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
Available-for-Sale Portfolio
Debt investment securities:
US Treasury, agencies and GSEs	$	16,941	$	2	$	(330	)	$	16,613
State and political subdivisions		6,319		142		(7	)		6,454
Corporate		15,061		190		-			15,251
Residential mortgage-backed - US agency		41,208		630		(572	)		41,266
Total		79,529		964		(909	)		79,584
Equity investment securities:
Mutual funds:
Ultra short mortgage fund		1,286		12		-			1,298
Large cap equity fund		905		363		-			1,268
Other mutual funds		183		156		-			339
Common stock - financial services industry		402		17		-			419
Total		2,776		548		-			3,324
Total available-for-sale	$	82,305	$	1,512	$	(909	)	$	82,908

Held-to-Maturity Portfolio
Debt investment securities US Treasury, agencies and GSEs	$	1,868	$	-	$	-		$	1,868
State and political subdivisions		20,370		-		-			20,370
Corporate		3,747		-		-			3,747
Residential mortgage-backed - US agency		6,510		-		-			6,510
Total held-to-maturity	$	32,495	$	-	$	-		$	32,495

Available-for-Sale Portfolio	December 31, 2012
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value
Debt investment securities:
US Treasury, agencies and GSEs	$	6,175	$	16	$	(8	)	$	6,183
State and political subdivisions		26,413		1,065		(7	)		27,471
Corporate		22,942		468		(404	)		23,006
Residential mortgage-backed - US agency		47,113		1,139		(1	)		48,251
Residential mortgage-backed - private label		296		9		-			305
Total		102,939		2,697		(420	)		105,216
Equity investment securities:
Mutual funds:
Ultra short mortgage fund		1,286		5		-			1,291
Large cap equity fund		905		176		-			1,081
Other mutual funds		183		136		-			319
Common stock - financial services industry		420		12		-			432
Total		2,794		329		-			3,123
Total investment securities	$	105,733	$	3,026	$	(420	)	$	108,339

The Company elected to transfer 55 available-for-sale (“AFS”) securities with an aggregate fair value of $32.5 million to a classification of held-to-maturity (“HTM”) on September 30, 2013. In accordance with FASB ASC 320-10-55-24, the transfer from AFS to HTM must be recorded at the fair value of the AFS securities at the time of transfer. The net unrealized holding loss of $799,000, net of tax, at the date of transfer was retained in accumulated other comprehensive loss, with the associated pretax amount retained in the carrying value of the HTM securities. Such amounts will be amortized to interest income over the remaining life of the securities. The fair value of the transferred AFS securities became the book value of the HTM securities at September 30, 2013, with no unrealized gain or loss at this date. Future reporting periods, with potential changes in market value for these securities, would likely record an unrealized gain or loss for disclosure purposes.

The amortized cost and estimated fair value of debt investments at September 30, 2013 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

	Available-for-Sale				Held-to-Maturity
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
(In thousands)
Due in one year or less	$	6,935	$	6,963	$	-	$	-
Due after one year through five years		26,696		26,827		-		-
Due after five years through ten years		4,517		4,355		11,171		11,171
Due after ten years		173		173		14,814		14,814
Sub-total		38,321		38,318		25,985		25,985
Residential mortgage-backed - US agency		41,208		41,266		6,510		6,510
Totals	$	79,529	$	79,584	$	32,495	$	32,495

The Company’s investment securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	September 30, 2013
	Less than Twelve Months							Twelve Months or More							Total
	Number of							Number of							Number of
	Individual		Unrealized			Fair		Individual		Unrealized			Fair		Individual		Unrealized			Fair
	Securities		Losses			Value		Securities		Losses			Value		Securities		Losses			Value
(Dollars in thousands)
Available-for-Sale
US Treasury, agencies and GSE's		13	$	(330	)	$	14,588		-	$	-		$	-		13	$	(330	)	$	14,588
State and political subdivisions		10		(7	)		1,660		-		-			-		10		(7	)		1,660
Corporate		-		-			-		-		-			-		-		-			-
Residential mortgage-backed - US agency		24		(572	)		22,963		-		-			-		24		(572	)		22,963
Totals		47	$	(909	)	$	39,211		-	$	-		$	-		47	$	(909	)	$	39,211
Held-to-Maturity
US Treasury, agencies and GSE's		-	$	-		$	-		-	$	-		$	-		-	$	-		$	-
State and political subdivisions		-		-			-		-		-			-		-		-			-
Corporate		-		-			-		-		-			-		-		-			-
Residential mortgage-backed - US agency		-		-			-		-		-			-		-		-			-
Totals		-	$	-		$	-		-	$	-		$	-		-	$	-		$	-


	December 31, 2012
	Less than Twelve Months							Twelve Months or More							Total
	Number of							Number of							Number of
	Individual		Unrealized			Fair		Individual		Unrealized			Fair		Individual		Unrealized			Fair
Available-for-Sale	Securities		Losses			Value		Securities		Losses			Value		Securities		Losses			Value
(Dollars in thousands)
US Treasury, agencies and GSE's		1	$	(8	)	$	992		-	$	-		$	-		1	$	(8	)	$	992
State and political subdivisions		8		(7	)		2,008		-		-			-		8		(7	)		2,008
Corporate		2		(14	)		974		2		(390	)		1,580		4		(404	)		2,554
Residential mortgage-backed - US agency		2		(1	)		1,411		-		-			-		2		(1	)		1,411
Totals		13	$	(30	)	$	5,385		2	$	(390	)	$	1,580		15	$	(420	)	$	6,965

The Company conducts a formal review of investment securities on a quarterly basis for the presence of other-than-temporary impairment (“OTTI”). The Company assesses whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the statement of condition date. Under these circumstances, OTTI is considered to have occurred (1) if we intend to sell the security; (2) if it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not anticipated to be sufficient to recover the entire amortized cost basis. The guidance requires that credit-related OTTI is recognized in earnings while non-credit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (“OCI”). Non-credit-related OTTI is based on other factors, including illiquidity and changes in the general interest rate environment. Presentation of OTTI is made in the consolidated statement of income on a gross basis, including both the portion recognized in earnings as well as the portion recorded in OCI. The gross OTTI would then be offset by the amount of non-credit-related OTTI, showing the net as the impact on earnings.

The Company’s investment securities portfolio includes two corporate securities representing trust preferred issuances from large money center financial institutions. The securities have been in an unrealized loss position for more than 12 months. The securities are both floating rate notes that adjust quarterly to LIBOR (“London Interbank Offered Rate”). These securities are reflecting a net unrealized loss due to current similar offerings being originated at higher spreads to LIBOR, as the market currently demands a greater pricing premium for the associated risk. Management has performed a detailed credit analysis on the underlying companies and has concluded that neither issue is credit impaired. Due to the fact that each security has approximately 14 years until final maturity, and management has determined that there is no related credit impairment, the associated pricing risk is managed similar to long-term, low yielding, 15 and 30-year fixed rate residential mortgages carried in the Company’s loan portfolio. The risk is managed through the Company’s interest rate risk management procedures. The Company expects the present value of expected cash flows will be sufficient to recover the amortized cost basis. Thus, the securities are not deemed to be other-than-temporarily impaired.

Management does not believe any individual unrealized loss in other securities within the portfolio as of September 30, 2013 represents OTTI. All related securities are rated A2 or better by Moody’s and have been in an unrealized loss position for eight months or less with the exception of 2 municipal securities and 1 mortgage-backed security that have been in unrealized loss positions for 11 months and 10 months, respectively. The unrealized losses in the portfolio are primarily attributable to changes in interest rates. The Company does not intend to sell these securities, nor is it more likely than not that the Company will be required to sell these securities prior to the recovery of the amortized cost.

In determining whether OTTI has occurred for equity securities, the Company considers the applicable factors described above and the length of time the equity security’s fair value has been below the carrying amount. All of the Company’s equity securities had a fair value greater than the book value at September 30, 2013.

Gross realized gains on sales of securities for the indicated periods are detailed below:

	For the three months					For the nine months
	ended September 30,					ended September 30,
(In thousands)	2013		2012			2013			2012
Realized gains	$	17	$	30		$	121		$	191
Realized losses		-		(12	)		(5	)		(12	)
	$	17	$	18		$	116		$	179

As of September 30, 2013 and December 31, 2012, securities with a fair value of $57.4 million and $46.0 million, respectively, were pledged to collateralize certain municipal deposit relationships. As of the same dates, securities with a fair value of $23.2 million and $37.8 million were pledged against certain borrowing arrangements. Total borrowings of $0 and $5.0 million were outstanding relating to the above noted collateralized borrowing arrangements as of September 30, 2013 and December 31, 2012, respectively.

Management has reviewed its loan and mortgage-backed securities portfolios and determined that, to the best of its knowledge, little or no exposure exists to sub-prime or other high-risk residential mortgages. The Company is not in the practice of investing in, or originating, these types of investments or loans.