SECURITIES

The following table presents a summary of the amortized cost, gross unrealized holding gains and losses, other-than-temporary impairment recorded in other comprehensive income and fair value of securities available for sale and securities held to maturity for the periods below:



	June 30, 2013												December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Unrealized Losses Other			Other-Than- Temporary (Impairment)/Recovery			Fair Value		Amortized Cost		Gross Unrealized Gains		Unrealized Losses Other			Other-Than- Temporary (Impairment)/Recovery			Fair Value
	(Dollars in thousands)
Available for sale securities
U.S. Government agency securities	$	20,050	$	—	$	(457	)	$	—		$	19,593	$	20,053	$	769	$	—		$	—		$	20,822
Agency mortgage-backed securities	193,741		7,425		(2,865		)	—			198,301		209,381		12,158		(114		)	—			221,425
Agency collateralized mortgage obligations	66,087		612		(603		)	—			66,096		67,412		1,001		(37		)	—			68,376
Private mortgage-backed securities	2,820		—		—			216			3,036		3,227		—		—			305			3,532
Single issuer trust preferred securities issued by banks	2,233		11		—			—			2,244		2,255		—		(15		)	—			2,240
Pooled trust preferred securities issued by banks and insurers	8,158		—		(2,044		)	(2,497		)	3,617		8,353		—		(2,415		)	(2,957		)	2,981
Marketable securities	10,771		464		(267		)	—			10,968		9,875		92		(57		)	—			9,910
Total available for sale securities	$	303,860	$	8,512	$	(6,236	)	$	(2,281	)	$	303,855	$	320,556	$	14,020	$	(2,638	)	$	(2,652	)	$	329,286
Held to maturity securities
U.S. Treasury securities	$	1,012	$	62	$	—		$	—		$	1,074	$	1,013	$	121	$	—		$	—		$	1,134
Agency mortgage-backed securities	56,889		1,980		—			—			58,869		72,360		4,233		—			—			76,593
Agency collateralized mortgage obligations	159,945		1,632		(3,366		)	—			158,211		97,507		2,875		(2		)	—			100,380
State, county, and municipal securities	916		10		—			—			926		915		11		—			—			926
Single issuer trust preferred securities issued by banks	1,510		20		—			—			1,530		1,516		10		—			—			1,526
Corporate debt securities	5,006		235		—			—			5,241		5,007		258		—			—			5,265
Total held to maturity securities	$	225,278	$	3,939	$	(3,366	)	$	—		$	225,851	$	178,318	$	7,508	$	(2	)	$	—		$	185,824
Total	$	529,138	$	12,451	$	(9,602	)	$	(2,281	)	$	529,706	$	498,874	$	21,528	$	(2,640	)	$	(2,652	)	$	515,110

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. The Company realized a gain of $4,000 and a net loss of $4,000 of marketable securities classified as available for sale during the three and six month periods ended June 30, 2013.

The actual maturities of certain securities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. A schedule of the contractual maturities of securities available for sale and securities held to maturity as of June 30, 2013 is presented below:



	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	63	$	65	$	240	$	241
Due after one year to five years	10,495		11,038		6,318		6,597
Due after five years to ten years	81,294		80,377		1,012		1,074
Due after ten years	201,237		201,407		217,708		217,939
Total debt securities	$	293,089	$	292,887	$	225,278	$	225,851
Marketable securities	$	10,771	$	10,968	$	—	$	—
Total	$	303,860	$	303,855	$	225,278	$	225,851

The securities portfolio includes $8.0 million and $7.7 million, respectively, of callable securities in the Company’s investment portfolio at June 30, 2013 and December 31, 2012.

At June 30, 2013 and December 31, 2012, investment securities carried at $353.4 million and $365.8 million, respectively, were pledged to secure public deposits, assets sold under repurchase agreements, letters of credit, and for other purposes.

At June 30, 2013 and December 31, 2012, the Company had no investments in obligations of individual states, counties, or municipalities, which exceeded 10% of Stockholders’ Equity.

Other-Than-Temporary Impairment ("OTTI")

The Company continually reviews investment securities for the existence of OTTI, taking into consideration current market conditions, the extent and nature of changes in fair value, issuer rating changes and trends, the credit worthiness of the obligor of the security, volatility of earnings, current analysts’ evaluations, the Company’s intent to sell the security, or whether it is more likely than not that the Company will be required to sell the debt security before its anticipated recovery, as well as other qualitative factors. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment.

The following tables show the gross unrealized losses and fair value of the Company’s investments in an unrealized loss position, which the Company has not deemed to be OTTI, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:



	June 30, 2013
		Less than 12 months					12 months or longer					Total
	# of holdings	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
U.S. Government agency securities	2	19,593		(457		)	—		—			19,593		(457		)
Agency mortgage-backed securities	33	$	76,840	$	(2,865	)	$	—	$	—		$	76,840	$	(2,865	)
Agency collateralized mortgage obligations	13	132,729		(3,969		)	—		—			132,729		(3,969		)
Pooled trust preferred securities issued by banks and insurers	2	—		—			2,244		(2,044		)	2,244		(2,044		)
Marketable securities	26	$	6,258	$	(267	)	$	—	$	—		$	6,258	$	(267	)
Total temporarily impaired securities	76	$	235,420	$	(7,558	)	$	2,244	$	(2,044	)	$	237,664	$	(9,602	)



	December 31, 2012
		Less than 12 months					12 months or longer					Total
	# of holdings	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
Agency mortgage-backed securities	17	$	23,814	$	(114	)	$	—	$	—		$	23,814	$	(114	)
Agency collateralized mortgage obligations	2	17,677		(39		)	—		—			17,677		(39		)
Single issuer trust preferred securities issued by banks and insurers	2	$	2,240	$	(15	)	$	—	$	—		$	2,240	$	(15	)
Pooled trust preferred securities issued by banks and insurers	2	$	—	$	—		$	2,069	$	(2,415	)	$	2,069	$	(2,415	)
Marketable securities	15	$	6,613	$	(57	)	$	—	$	—		$	6,613	$	(57	)
Total temporarily impaired securities	38	$	50,344	$	(225	)	$	2,069	$	(2,415	)	$	52,413	$	(2,640	)

The Company does not intend to sell these investments and has determined based upon available evidence that it is more likely than not that the Company will not be required to sell the security before the recovery of its amortized cost basis. As a result, the Company does not consider these investments to be OTTI. The Company made this determination by reviewing various qualitative and quantitative factors regarding each investment category, such as current market conditions, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, and current analysts’ evaluations.

As a result of the Company’s review of these qualitative and quantitative factors, the causes of the impairments listed in the table above by category are as follows at June 30, 2013:

•

U.S. Government Agency Securities: Government Agency bonds have historically been considered to be of high credit quality. The bonds in the bank's portfolio consist of debt obligations of the Federal Home Loan Bank and the Federal Farm Credit Banks. Because these firms are owned by shareholders and not part of the federal government, these bonds are not backed by the government's “full faith and credit” guarantee and are therefore subject to credit and default risk. The risk of default on these entities are considered low and the credit quality is currently well above investment grade. As such, the decline in market value of these securities is attributable to changes in interest rates and not credit quality.

•

Agency Mortgage-Backed Securities and Collateralized Mortgage Obligations: This portfolio has contractual terms that generally do not permit the issuer to settle the securities at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. Government or one of its agencies.


•	Single Issuer Trust Preferred Securities: This portfolio consist of two securities, both of which are below investment grade. The unrealized loss on these securities is attributable to the illiquid nature of the trust preferred market in the current economic environment. Management evaluates various financial metrics for each of the issuers, including regulatory capital ratios of issuers.

•

Pooled Trust Preferred Securities: This portfolio consists of two securities, both of which are below investment grade. The unrealized loss on these securities is attributable to the illiquid nature of the trust preferred market and the significant risk premiums required in the current economic environment. Management evaluates collateral credit and instrument structure, including current and expected deferral and default rates and timing. In addition, discount rates are determined by evaluating comparable spreads observed currently in the market for similar instruments.

•

Marketable Securities: This portfolio consists of mutual funds and other equity investments. During some periods, the mutual funds in the Company’s investment portfolio may have unrealized losses resulting from market fluctuations as well as the risk premium associated with that particular asset class. For example, emerging market equities tend to trade at a higher risk premium than U.S. government bonds and thus, will fluctuate to a greater degree on both the upside and the downside. In the context of a well-diversified portfolio, however, the correlation amongst the various asset classes represented by the funds serves to minimize downside risk. The Company evaluates each mutual fund in the portfolio regularly and measures performance on both an absolute and relative basis. A reasonable recovery period for positions with an unrealized loss is based on management’s assessment of general economic data, trends within a particular asset class, valuations, earnings forecasts and bond durations.

Management monitors the following issuances closely for impairment due to the history of OTTI losses recorded within these classes of securities. Management has determined that these securities possess characteristics which in the current economic environment could lead to further credit related OTTI charges. The following tables summarize pertinent information as of June 30, 2013, that was considered by management in determining if OTTI existed:



	Class	Amortized Cost (1)		Gross Unrealized Gain/(Loss)			Non-Credit Related Other- Than-Temporary (Impairment)/Recovery			Fair Value		Total Cumulative Credit Related Other-Than- Temporary Impairment			Total Cumulative Other-Than- Temporary (Impairment)/Recovery to Date
	(Dollars in thousands)
Pooled trust preferred securities
Pooled trust preferred security A	C1	$	1,283	$	—		$	(851	)	$	432	$	(3,676	)	$	(4,527	)
Pooled trust preferred security B	D	—		—			—			—		(3,481		)	(3,481		)
Pooled trust preferred security C	C1	506		—			(319		)	187		(482		)	(801		)
Pooled trust preferred security D	D	—		—			—			—		(990		)	(990		)
Pooled trust preferred security E	C1	2,081		—			(1,327		)	754		(1,368		)	(2,695		)
Pooled trust preferred security F	B	1,878		(1,082		)	—			796		—			—
Pooled trust preferred security G	A1	2,410		(962		)	—			1,448		—			—
Total pooled trust preferred securities		$	8,158	$	(2,044	)	$	(2,497	)	$	3,617	$	(9,997	)	$	(12,494	)
Private mortgage-backed securities
Private mortgage-backed securities-one	2A1	$	1,974	$	—		$	125		$	2,099	$	(766	)	$	(641	)
Private mortgage-backed securities-two	A19	846		—			91			937		(85		)	6
Total private mortgage-backed securities		$	2,820	$	—		$	216		$	3,036	$	(851	)	$	(635	)
Total		$	10,978	$	(2,044	)	$	(2,281	)	$	6,653	$	(10,848	)	$	(13,129	)


(1)	The amortized cost reflects previously recorded OTTI charges recognized in earnings for the applicable securities.



	Class	Number of Performing Banks and Insurance Cos. in Issuances (Unique)	Current Deferrals/ Defaults/Losses (As a % of Original Collateral)	Total Projected Defaults/Losses (as a % of Performing Collateral)	Excess Subordination (After Taking into Account Best Estimate of Future Deferrals/ Defaults/Losses) (1)	Lowest credit Ratings to date (2)
Pooled trust preferred securities
Trust preferred security A	C1	56	33.08%	20.64%	—%	C (Fitch & Moody's)
Trust preferred security B	D	56	33.08%	20.64%	—%	C (Fitch)
Trust preferred security C	C1	47	29.29%	15.20%	—%	C (Fitch & Moody's)
Trust preferred security D	D	47	29.29%	15.20%	—%	C (Fitch)
Trust preferred security E	C1	46	26.86%	16.73%	0.66%	C (Fitch & Moody's)
Trust preferred security F	B	32	25.08%	18.83%	30.90%	CC (Fitch)
Trust preferred security G	A1	32	25.08%	18.83%	55.89%	CCC+ (S&P)
Private mortgage-backed securities
Private mortgage-backed securities-one	2A1	N/A	6.53%	13.12%	—%	D (Fitch)
Private mortgage-backed securities-two	A19	N/A	4.18%	7.32%	—%	C (Fitch)


(1)	Excess subordination represents the additional default/losses in excess of both current and projected defaults/losses that the security can absorb before the security experiences any credit impairment.


(2)	The Company reviewed credit ratings provided by S&P, Moody’s and Fitch in its evaluation of issuers.

Per review of the factors outlined above, seven of the securities shown in the table above were deemed to be OTTI. The remaining securities were not deemed to be OTTI as the Company does not intend to sell these investments and has determined, based upon available evidence, that it is more likely than not that the Company will not be required to sell the security before the recovery of its amortized cost basis.

The following table shows the total OTTI that the Company recorded for the periods indicated:



	Three Months Ended						Six Months Ended
	June 30						June 30
	2013			2012			2013			2012
	(Dollars in thousands)
Gross change in OTTI recorded on certain investments (gain/(losses))	$	90		$	(106	)	$	371		$	168
Portion of OTTI gains (losses) recognized in OCI	(90		)	30			(371		)	(244		)
Total credit related OTTI losses recognized in earnings	$	—		$	(76	)	—			$	(76	)

The following table shows the cumulative credit related component of OTTI for the periods indicated:



	Three Months Ended						Six Months Ended
	June 30						June 30
	2013			2012			2013			2012
	(Dollars in thousands)
Balance at beginning of period	$	(10,847	)	$	(10,771	)	$	(10,847	)	$	(10,771	)
Add
Incurred on securities not previously impaired	—			—			—			—
Incurred on securities previously impaired	—			(76		)	—			(76		)
Less
Realized gain/loss on sale of securities	—			—			—			—
Reclassification due to changes in Company’s intent	—			—			—			—
Increases in cash flow expected to be collected	—			—			—			—
Balance at end of period	$	(10,847	)	$	(10,847	)	$	(10,847	)	$	(10,847	)