2. INVESTMENT SECURITIES

Securities Available for Sale:

The gross amortized cost and fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
June 30, 2014 (in thousands)	Cost		Gains		Losses			Value

U.S. Treasury securities and U.S. Government agencies	$	144,821	$	640	$	(17	)	$	145,444
Private label mortgage backed security	4,347		1,114		—			5,461
Mortgage backed securities - residential	131,702		4,803		(87		)	136,418
Collateralized mortgage obligations	159,137		1,308		(912		)	159,533
Freddie Mac preferred stock	—		718		—			718
Mutual fund	1,000		11		—			1,011
Corporate bonds	15,013		52		(4		)	15,061
Total securities available for sale	$	456,020	$	8,646	$	(1,020	)	$	463,646

	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2013 (in thousands)	Cost		Gains		Losses			Value

U.S. Treasury securities and U.S. Government agencies	$	97,157	$	409	$	(101	)	$	97,465
Private label mortgage backed security	4,740		745		—			5,485
Mortgage backed securities - residential	146,087		4,288		(288		)	150,087
Collateralized mortgage obligations	164,264		1,228		(1,546		)	163,946
Mutual fund	1,000		—		(5		)	995
Corporate bonds	15,015		50		(150		)	14,915
Total securities available for sale	$	428,263	$	6,720	$	(2,090	)	$	432,893

Securities Held to Maturity:

The carrying value, gross unrecognized gains and losses, and fair value of securities held to maturity were as follows:

			Gross		Gross
	Carrying		Unrecognized		Unrecognized			Fair
June 30, 2014 (in thousands)	Value		Gains		Losses			Value

U.S. Treasury securities and U.S. Government agencies	$	2,275	$	5	$	(8	)	$	2,272
Mortgage backed securities - residential	412		53		—			465
Collateralized mortgage obligations	40,651		387		(52		)	40,986
Corporate bonds	5,000		—		(129		)	4,871
Total securities held to maturity	$	48,338	$	445	$	(189	)	$	48,594

			Gross		Gross
	Carrying		Unrecognized		Unrecognized			Fair
December 31, 2013 (in thousands)	Value		Gains		Losses			Value

U.S. Treasury securities and U.S. Government agencies	$	2,311	$	7	$	(13	)	$	2,305
Mortgage backed securities - residential	420		43		—			463
Collateralized mortgage obligations	42,913		387		(184		)	43,116
Corporate bonds	5,000		—		(116		)	4,884
Total securities held to maturity	$	50,644	$	437	$	(313	)	$	50,768

At June 30, 2014 and December 31, 2013, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

Sales of Securities Available for Sale

During the three and six months ended June 30, 2014 and 2013, there were no sales or calls of securities available for sale or applicable tax provisions for such transactions.

Investment Securities by Contractual Maturity

The amortized cost and fair value of the investment securities portfolio by contractual maturity at June 30, 2014 follows. Expected maturities may differ from contractual maturities if securities issuers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are detailed separately.

	Securities				Securities
	available for sale				held to maturity
	Amortized		Fair		Carrying		Fair
June 30, 2014 (in thousands)	Cost		Value		Value		Value

Due in one year or less	$	23,493	$	23,715	$	500	$	502
Due from one year to five years	126,341		126,794		1,775		1,771
Due from five years to ten years	10,000		9,996		5,000		4,870
Due beyond ten years	—		—		—		—
Private label mortgage backed security	4,347		5,461		—		—
Mortgage backed securities - residential	131,702		136,418		412		465
Collateralized mortgage obligations	159,137		159,533		40,651		40,986
Freddie Mac preferred stock	—		718		—		—
Mutual fund	1,000		1,011		—		—
Total securities	$	456,020	$	463,646	$	48,338	$	48,594

Freddie Mac Preferred Stock

During 2008, the U.S. Treasury, the Federal Reserve Board, and the Federal Housing Finance Agency (“FHFA”) announced that the FHFA was placing Freddie Mac under conservatorship and giving management control to the FHFA. The Bank contemporaneously determined that its 40,000 shares of Freddie Mac preferred stock were fully impaired and recorded an Other Than Temporary Impairment (“OTTI”) charge of $2.1 million for the shares. The OTTI charge brought the carrying value of the stock down to $0. During the second quarter of 2014, based on the active trading volume and price of Freddie Mac preferred stock, the Company determined it appropriate to record an unrealized gain to other comprehensive income (“OCI”) related to its Freddie Mac preferred stock holdings. Based on the stock’s market closing price as of June 30, 2014, the Company’s unrealized gain for its Freddie Mac preferred stock totaled $718,000.

Corporate Bonds

During 2013, the Bank purchased $20 million in floating rate corporate bonds with an initial weighted average yield of 1.36%. The bonds, which have a weighted average life of seven years, were rated “investment grade” by accredited rating agencies as of their respective purchase dates. The total fair value of the Bank’s corporate bonds represented 4% of the Bank’s investment portfolio as of both June 30, 2014 and December 31, 2013.

Mortgage Backed Securities

At June 30, 2014, with the exception of the $5.5 million private label mortgage backed security, all other mortgage backed securities held by the Bank were issued by U.S. government-sponsored entities and agencies, primarily Freddie Mac and the Federal National Mortgage Association (“Fannie Mae” or “FNMA”), institutions that the government has affirmed its commitment to support. At June 30, 2014 and December 31, 2013, there were gross unrealized/unrecognized losses of $999,000 and $1.8 million related to available for sale mortgage backed securities. Because the decline in fair value of these mortgage backed securities is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Bank does not have the intent to sell these mortgage backed securities, and it is likely that it will not be required to sell the securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired.

Market Loss Analysis

Securities with unrealized losses at June 30, 2014 and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	Less than 12 months					12 months or more					Total
June 30, 2014 (in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Securities available for sale:
U.S. Treasury securities and U.S. Government agencies	$	2,106	$	(17	)	$	—	$	—		$	2,106	$	(17	)
Mortgage backed securities - residential	8,312		(87		)	—		—			8,312		(87		)
Collateralized mortgage obligations	56,578		(778		)	7,567		(134		)	64,145		(912		)
Corporate bonds	9,996		(4		)	—		—			9,996		(4		)

Total securities available for sale	$	76,992	$	(886	)	$	7,567	$	(134	)	$	84,559	$	(1,020	)

	Less than 12 months					12 months or more				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities held to maturity:
U.S. Treasury securities and U.S. Government agencies	$	521	$	(8	)	$	—	$	—	$	521	$	(8	)
Collateralized mortgage obligations	18,274		(52		)	—		—		18,274		(52		)
Corporate bonds	4,871		(129		)	—		—		4,871		(129		)

Total securities held to maturity	$	23,666	$	(189	)	$	—	$	—	$	23,666	$	(189	)

	Less than 12 months					12 months or more				Total
December 31, 2013 (in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

Securities available for sale:
U.S. Treasury securities and U.S. Government agencies	$	44,041	$	(101	)	$	—	$	—	$	44,041	$	(101	)
Mortgage backed securities - residential	19,494		(288		)	—		—		19,494		(288		)
Collateralized mortgage obligations	55,927		(1,546		)	—		—		55,927		(1,546		)
Mutual fund	995		(5		)	—		—		995		(5		)
Corporate bonds	9,850		(150		)	—		—		9,850		(150		)

Total securities available for sale	$	130,307	$	(2,090	)	$	—	$	—	$	130,307	$	(2,090	)

	Less than 12 months					12 months or more				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities held to maturity:
U.S. Treasury securities and U.S. Government agencies	$	521	$	(13	)	$	—	$	—	$	521	$	(13	)
Collateralized mortgage obligations	18,686		(184		)	—		—		18,686		(184		)
Corporate bonds	4,884		(116		)	—		—		4,884		(116		)

Total securities held to maturity	$	24,091	$	(313	)	$	—	$	—	$	24,091	$	(313	)

At June 30, 2014, the Bank’s security portfolio consisted of 162 securities, 19 of which were in an unrealized loss position. At December 31, 2013, the Bank’s security portfolio consisted of 162 securities, 27 of which were in an unrealized loss position.

Other-than-temporary Impairment

Unrealized losses for all investment securities are reviewed to determine whether the losses are “other-than-temporary.” Investment securities are evaluated for OTTI on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in value below amortized cost is other-than-temporary. In conducting this assessment, the Bank evaluates a number of factors including, but not limited to:

· The length of time and the extent to which fair value has been less than the amortized cost basis;

· The Bank’s intent to hold until maturity or sell the debt security prior to maturity;

· An analysis of whether it is more likely than not that the Bank will be required to sell the debt security before its anticipated recovery;

· Adverse conditions specifically related to the security, an industry, or a geographic area;

· The historical and implied volatility of the fair value of the security;

· The payment structure of the security and the likelihood of the issuer being able to make payments;

· Failure of the issuer to make scheduled interest or principal payments;

· Any rating change by a rating agency; and

· Recoveries or additional decline in fair value subsequent to the balance sheet date.

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 are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized for the anticipated credit losses.

The Bank owns one private label mortgage backed security with a total carrying value of $5.5 million at June 30, 2014. This security, with an average remaining life currently estimated at four years, is mostly backed by “Alternative A” first lien mortgage loans, but also has an insurance “wrap” or guarantee as an added layer of protection to the security holder. This asset is illiquid, and as such, the Bank determined it to be a Level 3 security in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures. Based on this determination, the Bank utilized an income valuation model (“present value model”) approach, in determining the fair value of the security. This approach is beneficial for positions that are not traded in active markets or are subject to transfer restrictions, and/or where valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support for this investment.

See additional discussion regarding the Bank’s private label mortgage backed security under Footnote 6 “Fair Value” in this section of the filing.

Pledged Investment Securities

Investment securities pledged to secure public deposits, securities sold under agreements to repurchase and securities held for other purposes, as required or permitted by law are as follows:

(in thousands)	June 30, 2014		December 31, 2013

Carrying amount	$	249,532	$	224,693
Fair value	249,659		224,989