Note 3. Investment Securities

The carrying value and fair value of investment securities AFS at June 30, 2011 are as follows:

			Included in Accumulated Other Comprehensive Income (AOCI)
					Gross unrealized losses
(In thousands)	Amortized cost		Gross unrealized gains		Non-OTTI in AOCI			Non-credit related OTTI in AOCI			Fair value
Mortgage-backed securities-residential	$	7,909	$	240	$	-		$	-		$	8,149
U.S. government agencies		35,481		41		(430	)		-			35,092
Common stocks		333		138		-			-			471
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		229,966		2,685		(1,168	)		-			231,483
Non-agency		5,624		149		(3	)		-			5,770
Corporate bonds		10,462		10		(81	)		-			10,391
Municipal bonds		985		12		-			-			997
Trust preferred securities		15,548		2,788		-			(121	)		18,215
Other securities		7,510		626		(15	)		-			8,121
Total available for sale	$	313,818	$	6,689	$	(1,697	)	$	(121	)	$	318,689

The carrying value and fair value of investment securities AFS at December 31, 2010 are as follows:

			Included in Accumulated Other Comprehensive Income (AOCI)
					Gross unrealized losses
(In thousands)	Amortized cost		Gross unrealized gains		Non-OTTI in AOCI			Non-credit related OTTI in AOCI			Fair value
Mortgage-backed securities-residential	$	8,492	$	348	$	-		$	-		$	8,840
U.S. government agencies		30,492		-		(755	)		-			29,737
Common stocks		381		152		(50	)		-			483
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		231,717		3,640		(704	)		-			234,653
Non-agency		7,026		114		(3	)		-			7,137
Corporate bonds		9,483		-		(197	)		-			9,286
Trust preferred securities		16,566		2,135		-			(87	)		18,614
Other securities		7,974		431		-			-			8,405
Total available for sale	$	312,131	$	6,820	$	(1,709	)	$	(87	)	$	317,155

The amortized cost and fair value of investment securities at June 30, 2011, by contractual maturity, 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.

	As of June 30, 2011
(In thousands)	Amortized cost		Fair value
Within 1 year	$	100	$	100
After 1 but within 5 years		12,805		12,754
After 5 but within 10 years		14,978		14,846
After 10 years		34,593		36,995
Mortgage-backed securities-residential		7,909		8,149
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		229,966		231,483
Non-agency		5,624		5,770
Total available for sale debt securities		305,975		310,097
No contractual maturity		7,843		8,592
Total available for sale securities	$	313,818	$	318,689

Proceeds from the sales of investments AFS during the three months ended June 30, 2011 and 2010 were $26.9 million and $57.1 million, respectively. Proceeds from the sales of investments AFS for the six months ended June 30, 2011 and 2010 were $70.5 million and $113.3 million, respectively. The following table summarizes gross realized gains and losses realized on the sale of securities recognized in earnings in the periods indicated:

	For the three months ended June 30,						For the six months ended June 30,
(In thousands)	2011			2010			2011			2010
Gross realized gains	$	1,140		$	604		$	1,727		$	857
Gross realized losses		(47	)		(182	)		(626	)		(269	)
Net realized gains	$	1,093		$	422		$	1,101		$	588

The Company evaluates securities for OTTI at least on a quarterly basis. The Company assesses whether OTTI is present when the fair value of a security is less than its amortized cost. All investment securities are evaluated for OTTI under FASB ASC Topic 320, “Investments-Debt & Equity Securities” (“ASC Topic 320”). The non-agency collateralized mortgage obligations that are rated below AA are evaluated under FASB ASC Topic 320 Subtopic 40, “Beneficial Interests in Securitized Financial Assets” under FASB ASC Topic 325, “Investments-Other”. In determining whether OTTI exists, management considers numerous factors, including but not limited to: (1) the length of time and the extent to which the fair value is less than the amortized cost, (2) the Company's intent to hold or sell the security, (3) the financial condition and results of the issuer including changes in capital, (4) the credit rating of the issuer, (5) analysts earnings estimate, (6) industry trends specific to the security, and (7) timing of debt maturity and status of debt payments.

Under ASC Topic 320, OTTI is considered to have occurred with respect to debt securities (1) if an entity intends to sell the security; (2) if it is more likely than not an entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. In addition, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell or will more likely than not be required to sell the security. If an entity intends to sell the security or will be required to sell the security, the OTTI shall be recognized in earnings equal to the entire difference between the fair value and the amortized cost basis at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before the recovery of its amortized cost basis, the OTTI shall be separated into two amounts, the credit-related loss and the noncredit-related loss. The credit-related loss is based on the present value of the expected cash flows and is recognized in earnings. The noncredit-related loss is based on other factors such as illiquidity and is recognized in other comprehensive income.

The following table summarizes OTTI losses on securities recognized in earnings in the periods indicated:

	For the three months ended June 30,				For the six months ended June 30,
(In thousands)	2011		2010		2011		2010
Preferred stocks	$	-	$	165	$	-	$	165
Common stocks		47		-		47		-
Corporate bonds		-		-		-		58
Trust preferred securities		334		-		334		55
Other securities		-		-		-		63
Total OTTI	$	381	$	165	$	381	$	341

The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at June 30, 2011 and 2010 for which a portion of OTTI was recognized in other comprehensive income:

(In thousands)	2011		2010
Balance at January 1,	$	924	$	1,896
Additional credit-related impairment loss on debt securities for which an other-than-temporary impairment was previously recognized		334		-
Reductions for securities sold during the period (realized)		-		(573	)
Reductions for securities for which the amount previously recognized in other comprehensive income was recognized in earnings because the Company intends to sell the security		-		(113	)
Balance at June 30,	$	1,258	$	1,210

The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at June 30, 2011 and December 31, 2010:

June 30, 2011	Less than 12 months					12 months or longer					Total
(In thousands)	Fair value		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value		Gross unrealized losses
U.S. government agencies	$	23,051	$	(430	)	$	-	$	-		$	23,051	$	(430	)
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		80,196		(1,168	)		-		-			80,196		(1,168	)
Non-agency		-		-			788		(3	)		788		(3	)
Corporate bonds		9,081		(81	)		-		-			9,081		(81	)
Trust preferred securities		-		-			1,294		(121	)		1,294		(121	)
Other securities		414		(15	)		-		-			414		(15	)
Total available for sale	$	112,742	$	(1,694	)	$	2,082	$	(124	)	$	114,824	$	(1,818	)

December 31, 2010	Less than 12 months					12 months or longer					Total
(In thousands)	Fair value		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value		Gross unrealized losses
U.S. government agencies	$	29,737	$	(755	)	$	-	$	-			29,737		(755	)
Common stocks		96		(50	)		-		-			96		(50	)
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		73,169		(687	)		4,429		(17	)		77,598		(704	)
Non-agency		918		(3	)		-		-			918		(3	)
Corporate bonds		8,986		(197	)		-		-			8,986		(197	)
Trust preferred securities		-		-			1,662		(87	)		1,662		(87	)
Total available for sale	$	112,906	$	(1,692	)	$	6,091	$	(104	)	$	118,997	$	(1,796	)

The AFS portfolio had gross unrealized losses of $1.8 million at June 30, 2011 and December 31, 2010. For the three and six months ended June 30, 2011, the Company recorded $502,000 in OTTI, of which $121,000 was the non-credit related loss on a trust preferred security and was recognized in other comprehensive income. In determining the Company's intent not to sell and that it is more likely than not that the Company will not be required to sell the investments before recovery of its amortized cost basis, management considers the following factors: current liquidity and availability of other non-pledged assets that permits the investment to be held for an extended period of time but not necessarily until maturity, capital planning, and any specific investment committee goals or guidelines related to the disposition of specific investments.

Common stocks: During the second quarter of 2011, the Company recorded an OTTI charge to earnings of $47,000 related to one common stock which represented 33.0% of its cost basis. The stock had been in an unrealized loss position for a year.

For all debt security types discussed below the fair value is based on prices provided by brokers and safekeeping custodians with the exception of trust preferred securities which are described below.

U.S. government-sponsored agencies (“U.S. Agencies”): As of June 30, 2011, the Company had six U.S. Agencies with a fair value of $23.1 million and gross unrealized losses of $430,000, or 1.8%, of their aggregate cost. All of these U.S. Agencies have been in an unrealized loss position for seven months or less. Management believes that the unrealized losses on these debt securities are a function of changes in investment spreads. Management expects to recover the entire amortized cost basis of these securities. The Company does not intend to sell these securities before recovery of their cost basis and will not more likely than not be required to sell these securities before recovery of their cost basis. Therefore, management has determined that these securities are not other-than-temporarily impaired at June 30, 2011.

U.S. government issued or sponsored collateralized mortgage obligations (“Agency CMOs”): As of June 30, 2011, the Company had 19 Agency CMOs with a fair value of $80.2 million and gross unrealized losses of $1.2 million, or 1.4% of their aggregate cost. All of these Agency CMOs have been in an unrealized loss position for less than twelve months. The unrealized loss is attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on its assessment of these factors, management believes that the unrealized losses on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. The Company does not intend to sell these securities before recovery of their cost basis and will not more likely than not be required to sell these securities before recovery of their cost basis. Therefore, management has determined that these securities are not other-than-temporarily impaired at June 30, 2011.

Non-agency collateralized mortgage obligations (“Non-agency CMOs”): As of June 30, 2011, the Company had one non-agency CMO with a fair value of $788,000 and a gross unrealized loss of $3,000, or 0.3% of the aggregate cost. The non-agency CMO bond has been in an unrealized loss position for more than twelve months and was rated AAA. The Company does not intend to sell the non-agency CMO and it is not more likely than not that the Company will be required to sell the investment before recovery of the amortized cost basis. Therefore, the Company does not consider the bond to be other-than–temporarily impaired as of June 30, 2011. The total gross unrealized loss of $3,000 was recognized in comprehensive income.

Corporate bonds: As of June 30, 2011, the Company had nine corporate bonds with a fair value of $9.1 million and gross unrealized losses of $81,000, or 0.9% of the aggregate cost. All nine bonds have been in an unrealized loss position for seven months and are above investment grade. The Company's unrealized losses in investments in corporate bonds represent interest rate risk and not credit risk of the underlying issuers. As previously mentioned management also considered (1) the length of time and the extent to which the fair value is less than the amortized cost, (2) the Company's intent to hold or sell the security, (3) the financial condition and results of the issuer including changes in capital, (4) the credit rating of the issuer, (5) analysts earnings estimate, (6) industry trends specific to the security, and (7) timing of debt maturity and status of debt payments. Management utilized discounted cash flow analysis based upon the credit ratings of the securities, liquidity risk premiums, and the recent corporate spreads for similar securities as required under ASC Topic 320 to determine the credit risk component of the corporate bonds. Based on these analyses, there was no credit-related loss on the nine bonds. Because the Company does not intend to sell the corporate bonds and it is not more likely than not that the Company will be required to sell the bonds before recovery of their amortized cost basis, which may be maturity, the Company does not consider the nine bonds to be other-than-temporarily impaired at June 30, 2011.

Trust preferred securities: At June 30, 2011, the Company had seven trust preferred securities issued by five individual name companies (reflecting, where applicable the impact of mergers and acquisitions of issuers subsequent to original purchase) in the financial services/banking industry. The valuations of trust preferred securities were based upon the fair market values of active trades for one of the securities and ASC Topic 320 using cash flow analysis for the remaining six securities. Contractual cash flows and a market rate of return were used to derive fair value for each of these securities. Factors that affected the market rate of return included (1) any uncertainty about the amount and timing of the cash flows, (2) the credit risk, (3) liquidity of the instrument, and (4) observable yields from trading data and bid/ask indications. Credit risk spreads and liquidity premiums were analyzed to derive the appropriate discount rate. As of June 30, 2011, the Company had one trust preferred security with a fair value of $1.3 million. This trust preferred security has been in an unrealized loss position for longer than twelve months, is not rated, and was deemed other-than-temporarily impaired at June 30, 2009. The unrealized loss on the trust preferred security reflects the credit concerns related to the financial institution that issued this long term financial obligation. The recent financial losses and reductions of capital coupled with bank failures and the overall market uncertainty within the financial services industry has resulted in a lower value. Management applied a discounted cash flow analysis based upon the liquidity risk premiums and the recent corporate spreads for similar securities to arrive at the credit risk component of the unrealized loss as required by ASC Topic 320. The resulting credit-related loss recognized in earnings was $334,000 and the remaining noncredit-related loss of $121,000 was recognized in other comprehensive income at June 30, 2011.

Other securities: As of June 30, 2011, the Company had eight investments in real estate and SBA funds. As of June 30, 2011, one of the private equity real estate funds has a fair value of $414,000 and an unrealized loss of $15,000. During the first quarter of 2010, management concluded that the fund was other-than-temporarily impaired and recorded an impairment charge of $63,000. After reviewing the fund's financials, asset values, and its near-term projections, management concluded that there was no additional impairment during the second quarter of 2011.

The Company will continue to monitor these investments to determine if the discounted cash flow analysis, continued negative trends, market valuations or credit defaults result in impairment that is other than temporary.