Note 3. Investment Securities

The carrying value and fair value of investment securities available for sale (“AFS”) at September 30, 2011 and December 31, 2010 are as follows:

			Included in Accumulated Other Comprehensive Income (AOCI)
September 30, 2011					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	$	17,900	$	319	$	(78	)	$	-	$	18,141
U.S. government agencies		25,975		102		(31	)		-		26,046
Common stocks		333		112		(9	)		-		436
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		219,984		3,032		(689	)		-		222,327
Non-agency		5,166		117		(1	)		-		5,282
Corporate bonds		13,453		31		(116	)		-		13,368
Municipal bonds		985		12		-			-		997
Trust preferred securities		13,671		2,283		-			-		15,954
Other securities		7,679		522		(15	)		-		8,186
Total available for sale	$	305,146	$	6,530	$	(939	)	$	-	$	310,737

			Included in Accumulated Other Comprehensive Income (AOCI)
December 31, 2010					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 September 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.

	At September 30, 2011
(In thousands)	Amortized cost		Fair value
Within 1 year	$	100	$	100
After 1 but within 5 years		10,453		10,478
After 5 but within 10 years		7,827		7,825
After 10 years		35,704		37,962
Mortgage-backed securities-residential		17,900		18,141
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		219,984		222,327
Non-agency		5,166		5,282
Total available for sale debt securities		297,134		302,115
No contractual maturity		8,012		8,622
Total available for sale securities	$	305,146	$	310,737

Proceeds from the sales of investments AFS during the three months ended September 30, 2011 and 2010 were $42.2 million and $46.4 million, respectively. Proceeds from the sales of investments AFS for the nine months ended September 30, 2011 and 2010 were $112.7 million and $159.7 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						For the nine months
	ended September 30,						ended September 30,
(In thousands)	2011			2010			2011			2010
Gross realized gains	$	637		$	787		$	2,364		$	1,637
Gross realized losses		(173	)		(149	)		(799	)		(418	)
Net realized gains	$	464		$	638		$	1,565		$	1,219

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				For the nine months
	ended September 30,				ended September 30,
(In thousands)	2011		2010		2011		2010
Preferred stocks	$	-	$	-	$	-	$	165
Common stocks		-		-		47		-
Corporate bonds		-		-		-		58
Trust preferred securities		1,415		138		1,749		193
Other securities		-		-		-		63
Total OTTI charges	$	1,415	$	138	$	1,796	$	479

The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at September 30, 2011 and 2010 for which a portion of other-than-temporary impairment 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 for which the amount previously recognized in other comprehensive income was recognized in earnings because the Company does not expect to recover the entire amortized cost		(1,085	)		-
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 September 30,	$	173		$	1,210

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

September 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
Mortgage-backed securities-residential	$	10,335	$	(78	)	$	-	$	-		$	10,335		(78	)
U.S. government agencies		-		-			3,969		(31	)		3,969		(31	)
Common stocks		36		(5	)		95		(4	)		131		(9	)
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		73,621		(689	)		-		-			73,621		(689	)
Non-agency		-		-			735		(1	)		735		(1	)
Corporate bonds		9,988		(116	)		-		-			9,988		(116	)
Other securities		502		(15	)		-		-			502		(15	)
Total available for sale	$	94,482	$	(903	)	$	4,799	$	(36	)	$	99,281	$	(939	)

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 $939,000 at September 30, 2011, which improved from gross unrealized losses of $1.8 million at December 31, 2010. The improvement in gross unrealized losses is related to the overall improvement in the fair values of the securities in the Company's investment portfolio. For the three and nine months ended September 30, 2011, the Company recorded OTTI charges of $1.4 million and $1.8 million, respectively. In determining the Company's intent not to sell and it is not more likely than not that the Company will be required to sell the investments before recovery of their 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: As of September 30, 2011, the Company held shares of common stock in three financial institutions with a total fair value of $131,000 and an unrealized loss of $9,000, or 6.5% of its aggregate cost. The Company recorded an OTTI charge to earnings of $47,000 related to one of these common stocks during the second quarter of 2011. 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.

Mortgage-backed securities issued by U.S. government agencies and U.S. government sponsored enterprises: As of September 30, 2011, the Company had two mortgage-backed securities with a fair value of $10.3 million and gross unrealized losses of $78,000, or 0.8% of their aggregate cost. The two mortgage-backed securities had been in an unrealized loss position for one month. 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 September 30, 2011.

U.S. government-sponsored agencies (“US Agencies”): As of September 30, 2011, the Company had one US Agency bond with a fair value of $4.0 million and gross unrealized losses of $31,000, or 0.8%, of its aggregate cost. This US Agency has been in an unrealized loss position for a year. Management believes that the unrealized loss on this debt security is a function of changes in investment spreads. Management expects to recover the entire amortized cost basis of this security. The Company does not intend to sell this security before recovery of the cost basis and will not more likely than not be required to sell this security before recovery of the cost basis. Therefore, management has determined that this security is not other-than-temporarily impaired at September 30, 2011.

U.S. government issued or sponsored collateralized mortgage obligations (“Agency CMOs”): As of September 30, 2011, the Company had 16 Agency CMOs with a fair value of $73.6 million and gross unrealized losses of $689,000, or 0.9% of their aggregate cost. All of these Agency CMOs have been in an unrealized loss position for ten months or less.

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 September 30, 2011.

Non-agency collateralized mortgage obligations (“Non-agency CMOs”): As of September 30, 2011, the Company had one Non-agency CMO with a fair value of $735,000 and gross unrealized losses of $1,000, or 0.2% of its 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 September 30, 2011.

Corporate bonds: As of September 30, 2011, the Company had eleven corporate bonds with a fair value of $10.0 million and gross unrealized losses of $116,000, or 1.2% of the aggregate cost. All eleven bonds have been in an unrealized loss position for ten 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 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 eleven bonds to be other-than-temporarily impaired at September 30, 2011.

Trust preferred securities: As of September 30, 2011, the Company had six 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 five 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. During the third quarter, the Company recorded an impairment charge to earnings of $1.4 million on one trust preferred security which was equal to the amortized cost. This trust preferred security had been in an unrealized loss position for longer than twelve months, is not rated, and was issued by a non-public company. The impairment reflects the credit concerns related to the financial institution that issued this long term financial obligation. Management does not believe the Company will recover the entire amortized cost of this security due to the issuer's financial losses and reductions of capital. During the second quarter of 2011, the Company had recorded an impairment charge of $334,000 on this security.

Other securities: As of September 30, 2011, the Company had eight investments in real estate and SBA funds. As of September 30, 2011, one of the private equity real estate funds had a fair value of $502,000 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 third 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.