3.	Securities

Securities available for sale consist of the following:

	Amortized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In thousands)
September 30, 2013
U.S. agency	$	23,794	$	3	$	405	$	23,392
U.S. agency residential mortgage-backed		198,424		1,062		1,147		198,339
Private label residential mortgage-backed		7,615		57		779		6,893
Other asset backed		26,877		8		55		26,830
Obligations of states and political subdivisions		143,957		422		3,440		140,939
Corporate		17,031		22		37		17,016
Trust preferred		2,901		-		425		2,476
Total	$	420,599	$	1,574	$	6,288	$	415,885

December 31, 2012
U.S. agency	$	30,620	$	70	$	23	$	30,667
U.S. agency residential mortgage-backed		126,151		1,264		3		127,412
Private label residential mortgage-backed		9,070		-		876		8,194
Obligations of states and political subdivisions		38,384		736		69		39,051
Trust preferred		4,704		-		1,615		3,089
Total	$	208,929	$	2,070	$	2,586	$	208,413

Our investments’ gross unrealized losses and fair values aggregated by investment type and length of time that individual securities have been at a continuous unrealized loss position follows:

	Less Than Twelve Months				Twelve Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)

September 30, 2013
U.S. agency	$	18,090	$	405	$	-	$	-	$	18,090	$	405
U.S. agency residential mortgage-backed		84,132		1,147		-		-		84,132		1,147
Private label residential mortgage-backed		2,150		14		4,684		765		6,834		779
Other asset backed		17,364		55		-		-		17,364		55
Obligations of states and political subdivisions		100,584		3,210		4,940		230		105,524		3,440
Corporate		10,980		37		-		-		10,980		37
Trust preferred		-		-		2,476		425		2,476		425
Total	$	233,300	$	4,868	$	12,100	$	1,420	$	245,400	$	6,288

December 31, 2012
U.S. agency	$	8,097	$	23	$	-	$	-	$	8,097	$	23
U.S. agency residential mortgage-backed		-		-		457		3		457		3
Private label residential mortgage-backed		-		-		8,192		876		8,192		876
Obligations of states and political subdivisions		7,384		69		-		-		7,384		69
Trust preferred		-		-		3,089		1,615		3,089		1,615
Total	$	15,481	$	92	$	11,738	$	2,494	$	27,219	$	2,586

Our portfolio of available-for-sale securities is reviewed quarterly for impairment in value. In performing this review management considers (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether we intend to sell, or it is more likely than not that we will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. For securities that do not meet the aforementioned recovery criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income or loss.

U.S. agency and U.S. agency residential mortgage-backed securities — at September 30, 2013 we had six U.S. Agency and 13 U.S. Agency residential mortgage-backed securities whose fair market value is less than amortized cost. The unrealized losses are largely attributed to rises in term interest rates and widening spreads to Treasury bonds. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Private label residential mortgage backed securities — at September 30, 2013 we had seven of this type of securities whose fair value is less than amortized cost. Two of the issues are rated by a major rating agency as investment grade while three are below investment grade and two are split rated. Three of these bonds have impairment in excess of 10% and four of these holdings have been impaired for more than 12 months.

The unrealized losses are largely attributable to credit spread widening on these securities since their acquisition. The underlying loans within these securities include Jumbo (70%) and Alt A (30%) at September 30, 2013.

	September 30, 2013					December 31, 2012
			Net					Net
	Fair		Unrealized			Fair		Unrealized
	Value		Gain (Loss)			Value		Gain (Loss)
	(In thousands)

Private label residential mortgage-backed
Jumbo	$	4,820	$	(566	)	$	6,041	$	(594	)
Alt-A		2,073		(156	)		2,153		(282	)

All of these securities are receiving some principal and interest payments. Most of these transactions are passthrough structures, receiving pro rata principal and interest payments from a dedicated collateral pool for loans that are performing. The nonreceipt of interest cash flows is not expected and thus not presently considered in our discounted cash flow methodology discussed below.

All private label residential mortgage-backed securities are reviewed for OTTI utilizing a cash flow projection. The cash flow analysis forecasts cash flow from the underlying loans in each transaction and then applies these cash flows to the bonds in the securitization. The cash flows from the underlying loans consider contractual payment terms (scheduled amortization), prepayments, defaults and severity of loss given default. The analysis uses dynamic assumptions for prepayments, defaults and loss severity. Near term prepayment assumptions are based on recently observed prepayment rates. More weight is given to longer term historic performance (12 months). In some cases, recently observed prepayment rates are lower than historic norms due to a minimal amount of new jumbo loan issuances. This loan market is heavily dependent upon securitization for funding, and new securitization transactions have been minimal. Our model projections anticipate that prepayment rates gradually revert to historical levels. For seasoned ARM transactions, normalized prepayment rates range from 12% to 16% CPR. For fixed rate collateral (one transaction), the prepayment speeds are projected to remain stable.

Default assumptions are largely based on the volume of existing real estate owned, pending foreclosures and severe delinquencies. Other considerations include the quality of loan underwriting, recent default experience, realized loss performance and the volume of less severe delinquencies. Default levels generally are projected to remain elevated or increase for a period of time sufficient to address the level of distressed loans in the transaction. Our projections expect defaults to then decline, generally beginning in year three. Current loss severity assumptions are based on recent observations when meaningful data is available. Loss severity is expected to remain elevated for the next 18 months. Severity is expected to decline after this period due to improving overall economic conditions, improving real estate prices and a reduced inventory of foreclosed properties on the market. Except for three securities discussed in further detail below (all three are currently below investment grade), our cash flow analysis forecasts complete recovery of our cost basis for each reviewed security.

At September 30, 2013 three below investment grade private label residential mortgage-backed securities had credit related OTTI and are summarized as follows:

			Super		Senior
	Senior		Senior		Support
	Security		Security		Security		Total
	(In thousands)

As of September 30, 2013
Fair value	$	2,584	$	1,717	$	57	$	4,358
Amortized cost		2,978		1,722		-		4,700
Non-credit unrealized loss		394		5		-		399
Unrealized gain		-		-		57		57
Cumulative credit related OTTI		748		457		380		1,585

Credit related OTTI recognized in our Condensed Consolidated Statements of Operations
For the three months ended September 30,
2013	$	-	$	-	$	-	$	-
2012		70		-		-		70
For the nine months ended September 30,
2013		26		-		-		26
2012		240		32		60		332

Each of these securities is receiving principal and interest payments similar to principal reductions in the underlying collateral. One of these securities has an unrealized gain and two have unrealized losses at September 30, 2013. Prior to the second quarter of 2013 all three of these securities had an unrealized loss. The original amortized cost for each of these securities has been permanently adjusted downward for previously recorded credit related OTTI. The unrealized loss (based on original amortized cost) for one of these securities is now less than previously recorded credit related OTTI amounts. The remaining non-credit related unrealized loss in the senior and super senior securities is attributed to other factors and is reflected in other comprehensive income during those same periods.

As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no other declines discussed above are deemed to be other than temporary.

Other asset backed — at September 30, 2013 we had five other asset backed securities whose fair value is less than amortized cost. The unrealized losses are primarily due to increases in interest rates. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Obligations of states and political subdivisions — at September 30, 2013 we had 137 municipal securities whose fair value is less than amortized cost. The increase in unrealized losses during 2013 is primarily due to increases in interest rates. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Corporate — at September 30, 2013 we had nine corporate securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Trust preferred securities — at September 30, 2013 we had three trust preferred securities whose fair value is less than amortized cost. All of our trust preferred securities are single issue securities issued by a trust subsidiary of a bank holding company. The pricing of trust preferred securities over the past several years has suffered from credit spread widening fueled by uncertainty regarding potential losses of financial companies and repricing of risk related to these hybrid capital securities.

One of the three securities is rated by two major rating agencies as investment grade, while one (a Bank of America issuance) is rated below investment grade by two major rating agencies and the other one is non-rated. The non-rated issue is a relatively small bank and was never rated. The issuer of this non-rated trust preferred security, which had a total amortized cost of $1.0 million and total fair value of $0.9 million as of September 30, 2013, continues to have satisfactory credit metrics and make interest payments.

The following table breaks out our trust preferred securities in further detail as of September 30, 2013 and December 31, 2012:

	September 30, 2013					December 31, 2012
			Net					Net
	Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss
	(In thousands)

Trust preferred securities
Rated issues	$	1,620	$	(281	)	$	1,581	$	(316	)
Unrated issues		856		(144	)		1,508		(1,299	)

We recorded credit related OTTI charges in earnings on securities available for sale of zero and $0.070 million during the three month periods ended September 30, 2013 and 2012, respectively and $0.026 million and $0.332 million during the nine month periods ended September 30, 2013 and 2012, respectively (see discussion above).

A roll forward of credit losses recognized in earnings on securities available for sale for the three and nine month periods ending September 30, follows:

	Three months ended				Nine months ended
	September 30,				September 30,
	2013		2012		2013		2012
	(In thousands)
Balance at beginning of period	$	1,835	$	1,732	$	1,809	$	1,470
Additions to credit losses on securities for which no previous OTTI was recognized		-		-		-		-
Increases to credit losses on securities for which OTTI was previously recognized		-		70		26		332
Balance at end of period	$	1,835	$	1,802	$	1,835	$	1,802

The amortized cost and fair value of securities available for sale at September 30, 2013, by contractual maturity, follow. The actual maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	Cost		Value
	(In thousands)
Maturing within one year	$	12,322	$	12,325
Maturing after one year but within five years		70,216		70,165
Maturing after five years but within ten years		29,982		29,545
Maturing after ten years		75,163		71,788
		187,683		183,823
U.S. agency residential mortgage-backed		198,424		198,339
Private label residential mortgage-backed		7,615		6,893
Other asset backed		26,877		26,830
Total	$	420,599	$	415,885

Gains and losses realized on the sale of securities available for sale are determined using the specific identification method and are recognized on a trade-date basis. A summary of proceeds from the sale of securities available for sale and gains and losses for the nine month periods ending September 30, follows:

			Realized
	Proceeds		Gains		Losses(1)
	(In thousands)
2013	$	2,940	$	15	$	7
2012		37,176		1,193		-

(1)	Losses in 2013 and 2012 exclude $0.026 million and $0.332 million, respectively of credit related OTTI recognized in earnings.

During 2013 and 2012 our trading securities consisted of various preferred stocks. During the first nine months of 2013 and 2012 we recognized gains (losses) on trading securities of $0.20 million and ($0.04) million, respectively, that are included in net gains (losses) on securities in the Condensed Consolidated Statements of Operations. Both of these amounts, relate to gains (losses) recognized on trading securities still held at each respective period end.