NOTE 3 - INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and fair value of the Company's available-for-sale investment securities are summarized as follows:

As of December 31, 2012			Included in Accumulated Other Comprehensive Loss (AOCL)
					Gross unrealized losses
(In thousands)	Amortized cost		Gross unrealized gains		Non-OTTI in AOCL			Non-credit related OTTI in AOCL		Fair value
U.S. government agencies	$	66,371	$	151	$	(78	)	$	-	$	66,444
Mortgage-backed securities-residential		30,038		518		(47	)		-		30,509
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		229,556		5,031		(611	)		-		233,976
Non-agency		1,007		4		-			-		1,011
Corporate bonds		7,477		32		(72	)		-		7,437
Municipal bonds		5,645		-		(30	)		-		5,615
Common stocks		33		14		-			-		47
Other securities		3,752		520		(108	)		-		4,164
Total available for sale	$	343,879	$	6,270	$	(946	)	$	-	$	349,203

As of December 31, 2011			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
U.S. government agencies	$	35,966	$	122	$	(4	)	$	-	$	36,084
Mortgage-backed securities-residential		16,763	$	309	$	(67	)	$	-	$	17,005
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		231,262		3,315		(543	)		-		234,034
Non-agency		4,739		94		(1	)		-		4,832
Corporate bonds		13,342		104		(471	)		-		12,975
Municipal bonds		985		-		(20	)				965
Trust preferred securities		13,665		2,280		-			-		15,945
Common stocks		130		118		-			-		248
Other securities		6,586		347		(15	)		-		6,918
Total available for sale	$	323,438	$	6,689	$	(1,121	)	$	-	$	329,006

The investment portfolio grew $20.2 million from $329.0 million at December 31, 2011 to $349.2 million at December 31, 2012. The increase was primarily due to the reinvestment of cash flows from the loan and lease portfolio into government sponsored agency mortgage-backed securities and debt securities.

The amortized cost and fair value of investment securities at December 31, 2012, 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 December 31, 2012
(In thousands)	Amortized cost		Fair value
Within 1 year	$	7,935	$	7,984
After 1 but within 5 years		4,292		4,305
After 5 but within 10 years		27,843		27,706
After 10 years		39,423		39,501
Mortgage-backed securities-residential		30,038		30,509
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		229,556		233,976
Non-agency		1,007		1,011
Total available for sale debt securities		340,094		344,992
No contractual maturity		3,785		4,211
Total available for sale securities	$	343,879	$	349,203

Proceeds from the sales of investments available for sale during 2012, 2011 and 2010 were $28.2 million, $113.0 million, and $181.3 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 years ended December 31,
(In thousands)	2012			2011			2010
Gross realized gains	$	1,211		$	2,584		$	1,938
Gross realized losses		(181	)		(802	)		(648	)
Net realized gains	$	1,030		$	1,782		$	1,290

As of December 31, 2012, investment securities with a market value of $67.1 million were pledged as collateral to secure advances with the FHLB.

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 obligation that is rated below AA is evaluated under FASB ASC Topic 320 Subtopic 40, "Beneficial Interests in Securitized Financial Assets" or 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 tables below indicate the length of time individual securities have been in a continuous unrealized loss position at December 31, 2012:

As of December 31, 2012	Less than 12 months							12 months or longer							Total
(In thousands)	Fair value		Gross unrealized losses			Number of positions		Fair value		Gross unrealized losses			Number of positions		Fair value		Gross unrealized losses			Number of positions
Investment securities available for sale
U.S. government agencies	$	23,818	$	(78	)		8	$	-	$	-			-	$	23,818	$	(78	)		8
Mortgage-backed securities-residential		7,280		(47	)		2		-		-			-		7,280		(47	)		2
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		44,937		(592	)		15		3,975		(19	)		2		48,912		(611	)		17
Corporate bonds		2,165		(13	)		2		941		(59	)		1		3,106		(72	)		3
Municipal bonds		4,597		(21	)		5		882		(9	)		1		5,479		(30	)		6
Other securities		289		(38	)		1		255		(70	)		1		544		(108	)		2
Total available for sale	$	83,086	$	(789	)		33	$	6,053	$	(157	)		5	$	89,139	$	(946	)		38

The AFS portfolio had gross unrealized losses of $946,000 at December 31, 2012 compared to gross unrealized losses of $1.1 million at December 31, 2011. The slight improvement in gross unrealized losses of $175,000 is related to the overall improvement in the fair values of the securities in the Company's investment portfolio. 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 December 31, 2012, the Company had two common stocks of financial institutions with a total fair value of $47,000 and an unrealized gain of $14,000. During 2012 the Company sold one common stock investment and recorded a gain of $112,000.

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 is described below.

U.S. government-sponsored agencies ("US Agencies"): As of December 31, 2012, the Company had eight US Agency bonds with a fair value of $23.8 million and gross unrealized losses of $78,000. These eight US Agency bonds have been in an unrealized loss position for less than twelve months and are callable at par. Management believes that the unrealized loss on these debt securities is 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 the securities before recovery of the cost basis and will not more likely than not be required to sell these securities before recovery of the cost basis. Therefore, management has determined that these eight securities are not other-than-temporarily impaired at December 31, 2012.

Mortgage-backed securities issued by U.S. government agencies and U.S. government sponsored enterprises: As of December 31, 2012, the Company had two mortgage-backed securities with a fair value of $7.3 million and gross unrealized losses of $47,000. The two mortgage-backed securities had 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 December 31, 2012.

U.S. government issued or sponsored collateralized mortgage obligations ("Agency CMOs"): As of December 31, 2012, the Company had 17 Agency CMOs with a fair value of $48.9 million and gross unrealized losses of $611,000. Two of the Agency CMOs had been in an unrealized loss position for more than twelve months and the remaining 15 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 December 31, 2012.

Non-agency collateralized mortgage obligations ("Non-agency CMOs"): As of December 31, 2012, the Company had one non-agency CMO with a fair value of $1.0 million and a gross unrealized gain of $4,000. The non-agency CMO is rated CCC.

Corporate bonds: As of December 31, 2012, the Company had three corporate bonds with a fair value of $3.1 million and gross unrealized losses of $72,000. One of the corporate bonds had been in an unrealized loss position for more than twelve months and the remaining two bonds have been in an unrealized loss position for less than twelve months. All three bonds 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 three bonds to be other-than-temporarily impaired at December 31, 2012.

Municipal bonds: As of December 31, 2012, the Company had six municipal bonds with a fair value $5.5 million and an unrealized loss of $30,000. Five of the municipal bonds have been in an unrealized loss position for twelve months or less and one municipal bond has been in an unrealized position for more than twelve months. The one municipal bond that has been in an unrealized loss for more than twelve months was issued by the City of Chicago, has a fair value of $882,000 with a gross unrealized loss of $9,000 and is investment grade. The unrealized loss is attributable to a combination of factors, including Chicago's financial situation. During the fourth quarter of 2011, the three major ratings agencies gave Chicago's credit a stable outlook. Because the Company does not intend to sell the bonds and it is not more likely than not that the Company will be required to sell the bond before recovery of its amortized cost basis, which may be maturity, the Company does not consider the bond to be other-than-temporarily impaired at December 31, 2012.

Other securities: As of December 31, 2012, the Company had seven investments in private equity funds which were predominantly invested in real estate. In determining whether or not OTTI exists, the Company reviews the funds' financials, asset values, and its near-term projections. At December 31, 2012, two of the private equity funds had a combined fair value of $544,000 and an unrealized loss of $108,000. OTTI charges were recorded in a prior period on these two funds. Management concluded that there was no additional impairment on these two funds in 2012. During 2012 the Company recorded impairment charges on two other private equity funds. The impairment charges included the entire carrying value of one of the private equity funds in the amount of $1.5 million and a credit related impairment charge of $859,000 on another private equity fund.

The Company will continue to monitor all of the above 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.

The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at December 31, 2012 and 2011 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:

(In thousands)	2012		2011
Balance at January 1,	$	173	$	924
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		-		(751	)
Balance at December 31,	$	173	$	173

The following table summarizes other-than-temporary impairment losses on securities recognized in earnings in the periods indicated:

	For the years ended December 31,
(In thousands)	2012		2011		2010
Corporate bonds	$	-	$	-	$	58
Trust preferred securities		-		1,749		193
Common stocks		-		47		-
Preferred stocks		-		-		165
Other securities		2,359		-		63
Total OTTI recognized in earnings	$	2,359	$	1,796	$	479

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

As of December 31, 2011	Less than 12 months							12 months or longer							Total
(In thousands)	Fair value		Gross unrealized losses			Number of positions		Fair value		Gross unrealized losses			Number of positions		Fair value		Gross unrealized losses			Number of positions
Investment securities available for sale
U.S. government agencies	$	2,999	$	(1	)		1	$	3,996	$	(3	)		1	$	6,995	$	(4	)		2
Mortgage-backed securities-residential		9,588		(67	)		2		-		-			-		9,588		(67	)		2
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		35,511		(374	)		8		10,149		(169	)		3		45,660		(543	)		11
Non-agency		-		-			-		669		(1	)		1		669		(1	)		1
Corporate bonds		3,804		(197	)		5		3,751		(274	)		4		7,555		(471	)		9
Municipal bonds		965		(20	)		1		-		-			-		965		(20	)		1
Other securities		502		(15	)		1		-		-			-		502		(15	)		1
Total available for sale	$	53,369	$	(674	)		18	$	18,565	$	(447	)		9	$	71,934	$	(1,121	)		27

During 2011, the Company recorded a total impairment charge to earnings of $1.8 million related to trust preferred securities and common stocks. Management concluded that these investments were OTTI.