INVESTMENT SECURITIES

3 Months Ended

Mar. 31, 2013

Investment Securities

Investment Securities

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 deposits and federal funds sold in compliance with various restrictions in the policy. As of March 31, 2013 and December 31, 2012, all investment securities were classified as available-for-sale.

Our available-for-sale securities totaled $60.4 million and $60.8 million as of March 31, 2013 and December 31, 2012, respectively. Securities with a fair value of $1.1 million were pledged to the Federal Reserve Bank of Richmond (“Federal Reserve”) and an additional $4.5 million and $13.1 million in investments were pledged to public housing authorities in North Carolina and the North Carolina Department of State Treasurer as collateral for public deposits at March 31, 2013. Securities with a fair value of $1.1 million were pledged to the Federal Reserve and an additional $4.9 million and $2.6 million in investments were pledged to public housing authorities in North Carolina and the North Carolina Department of State Treasurer as collateral for public deposits at December 31, 2012. Our investment portfolio consists of the following securities:

· U.S. government agency securities ,

· U.S. government sponsored residential mortgage backed securities (“MBS”), and

· Municipal securities (“Municipals”)

The amortized cost, gross unrealized gains and losses and fair values of investment securities at March 31, 2013 and December 31, 2012 were:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(Unaudited)
March 31, 2013
US government agencies	$	2,000	$	1	$	(6	)	$	1,995
Government sponsored MBS
Residential		56,324		589		(50	)		56,863
Municipal securities
North Carolina		1,494		49		—			1,543
Total at March 31, 2013	$	59,818	$	639	$	(56	)	$	60,401
December 31, 2012
US government agencies	$	1,322	$	5		—		$	1,327
Government sponsored MBS
Residential		57,333		627		(29	)		57,931
Municipal securities
North Carolina		1,497		56		—			1,553
Total at December 31, 2012	$	60,152	$	688	$	(29	)	$	60,811

Sales and calls of securities available-for-sale for the three months ended March 31, resulted in aggregate gross realized gains of $54 thousand during 2012 compared to none during 2013. During the same three-month periods, the Company realized no gross losses.

The amortized cost and estimated market values of securities as of March 31, 2013 and December 31, 2012 by contractual maturities are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. MBS, which are not due at a single maturity date, are grouped based upon the final payment date. MBS may mature earlier because of principal prepayments.

(Dollars in thousands)	As of March 31, 2013
(Unaudited)	Fair Value		Amortized Cost
US government agencies
Due after five years through ten years	$	1,995	$	2,000
Total US government agencies	$	1,995	$	2,000
Government sponsored MBS
Residential
Due within one year	$	13,592	$	13,443
Due after one year through five years		26,384		26,133
Due after five years through ten years		10,282		10,204
Due after ten years		6,605		6,544
Total government sponsored MBS	$	56,863	$	56,324
Municipal bonds
North Carolina
Due after one year through five years	$	936	$	890
Due after five years through ten years		607		604
Total North Carolina municipal bonds	$	1,543	$	1,494

(Dollars in thousands)	As of December 31, 2012
	Fair Value		Amortized Cost
US government agencies
Due within one year	$	1,005	$	1,000
Due after one year through five years		322		322
Total US government agencies	$	1,327	$	1,322
Government sponsored MBS
Residential
Due after one year through five years	$	135	$	126
Due after five years through ten years		171		161
Due after ten years		57,625		57,046
Total government sponsored MBS	$	57,931	$	57,333
Municipal bonds
North Carolina
Due within one year	$	488	$	466
Due after one year through five years		458		425
Due after five years through ten years		607		606
Total North Carolina municipal bonds	$	1,553	$	1,497

All securities owned as of March 31, 2013 and December 31, 2012 are investment grade. The unrealized losses were attributable to changes in market interest rates. The Company evaluates securities for other than temporary impairment 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. Based on these evaluations, the Company did not deem any securities to be impaired during 2012 or the first three months of 2013.

As of March 31, 2013 and December 31, 2012, the Company held 14 and 11 investment positions, respectively, with unrealized losses of $56 thousand and $29 thousand, respectively. These investments were in U.S. government and Government sponsored MBS. 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 had determined that all declines in market values of available-for-sale securities are not other-than-temporary, and will not likely be required to sell.

As of March 31, 2013 and December 31, 2012, 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
(Unaudited)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2013
US government agencies	$	—	$	—		$	21	$	—	$	21	$	—
Government sponsored MBS
Residential		11,113		(56	)		—		—		11,113		(56	)
Total at March 31, 2013	$	11,113	$	(56	)	$	21	$	—	$	11,134	$	(56	)

(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, 2012
Government sponsored MBS
Residential	$	8,027	$	(29	)	$	21	$	—	$	8,048	$	(29	)
Total at December 31, 2012	$	8,027	$	(29	)	$	21	$	—	$	8,048	$	(29	)

The Company has stock in the Federal Home Loan Bank of Atlanta ("FHLB"), classified on the Consolidated Balance Sheets as Other invested assets, which is evaluated on a quarterly basis for other-than-temporary impairment. The FHLB has been issuing dividends and repurchasing excess stock on a pro-rata basis for several quarters. The Company believes that the investment in FHLB is not impaired.