Note 3.

Investment Securities

The carrying value and fair value of investment securities AFS at June 30, 2013 are as follows:

			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	$	74,354		18		(3,200	)	$	-	$	71,172
Mortgage-backed securities-residential		33,271		375		(724	)		-		32,922
Collateralized mortgage obligations-residential		178,476		2,958		(925	)		-		180,509
Corporate bonds		9,785		37		(92	)		-		9,730
Municipal bonds		5,519		-		(188	)		-		5,331
Other securities		3,676		880		(149	)		-		4,407
Common stocks		33		13		-			-		46
Total available for sale	$	305,114	$	4,281	$	(5,278	)	$	-	$	304,117

The carrying value and fair value of investment securities AFS at December 31, 2012 are as follows:

			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
Other securities		3,752		520		(108	)		-		4,164
Common stocks		33		14		-			-		47
Total available for sale	$	343,879	$	6,270	$	(946	)	$	-	$	349,203

The amortized cost and fair value of investment securities at June 30, 2013, 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, 2013
(In thousands)	Amortized cost		Fair value
Within 1 year	$	15,906	$	15,301
After 1 but within 5 years		5,445		5,406
After 5 but within 10 years		35,874		34,413
After 10 years		32,433		31,113
Mortgage-backed securities-residential		33,271		32,922
Collateralized mortgage obligations-residential		178,476		180,509
Total available for sale debt securities		301,405		299,664
No contractual maturity		3,709		4,453
Total available for sale securities	$	305,114	$	304,117

Proceeds from the sales of investments AFS during the three months ended June 30, 2013 and 2012 were $8.3 million and $75,000, respectively. Proceeds from the sales of investments AFS for the six months ended June 30, 2013 and 2012 were $20.4 million and $11.9 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 six months
	ended June 30,						ended June 30,
(In thousands)	2013			2012			2013			2012
Gross realized gains	$	43		$	29		$	181		$	340
Gross realized losses		(18	)		(9	)		(111	)		(181	)
Net realized gains	$	25		$	20		$	70		$	159

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 six months
	ended June 30,				ended June 30,
(In thousands)	2013		2012		2013		2012
Other securities	$	-	$	859	$	-	$	859
Total OTTI charges	$	-	$	859	$	-	$	859

The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at June 30, 2013 and 2012 for which a portion of OTTI was recognized in other comprehensive income:

(In thousands)	2013			2012
Balance at January 1,	$	173		$	173
Reductions for securities sold during the period (realized)		(173	)		-
Balance at June 30,	$	-		$	173

The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012:

June 30, 2013	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	$	58,159	$	(3,200	)	$	-	$	-		$	58,159	$	(3,200	)
Mortgage-backed securities-residential		19,201		(724	)		-		-			19,201		(724	)
Collateralized mortgage obligations-residential		39,185		(920	)		2,642		(5	)		41,827		(925	)
Corporate bonds		4,035		(50	)		958		(42	)		4,993		(92	)
Municipal bonds		5,331		(188	)		-		-			5,331		(188	)
Other securities		270		(50	)		205		(99	)		475		(149	)
Total available-for-sale	$	126,181	$	(5,132	)	$	3,805	$	(146	)	$	129,986	$	(5,278	)

December 31, 2012	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	$	23,818	$	(78	)	$	-	$	-		$	23,818	$	(78	)
Mortgage-backed securities-residential		7,280		(47	)		-		-			7,280		(47	)
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		44,937		(592	)		3,975		(19	)		48,912		(611	)
Corporate bonds		2,165		(13	)		941		(59	)		3,106		(72	)
Municipal bonds		4,597		(21	)		882		(9	)		5,479		(30	)
Other securities		289		(38	)		255		(70	)		544		(108	)
Total available-for-sale	$	83,086	$	(789	)	$	6,053	$	(157	)	$	89,139	$	(946	)

The AFS portfolio had gross unrealized losses of $5.3 million and $946,000 at June 30, 2013 and December 31, 2012, respectively. The considerable increase in the gross unrealized loss was directly impacted by the $3.1 million increase in the gross unrealized loss on government agency debt securities. These securities carry lower coupons and their market value was negatively impacted by a 45% increase in the 10-year Treasury yield from 1.76% at December 31, 2012 to 2.55% at June 30, 2013. The Company did not record OTTI charges in 2013. For the three and six months ended June 30, 2012, the Company recorded $859,000 in OTTI on a private equity real estate fund due to the fund’s financial performance. 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 June 30, 2013, the Company had two common stocks of financial institutions with a total fair value of $46,000 and an unrealized gain of $13,000. During the first quarter of 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 are described below.

U.S. government-sponsored agencies (“U.S. Agencies”): As of June 30, 2013, the Company had 20 callable U.S. Agencies with a fair value of $58.2 million and gross unrealized losses of $3.2 million. All of these U.S. Agencies have been in an unrealized loss position for twelve months or less. 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, 2013.

Mortgage-backed securities issued by U.S. government agencies and U.S. government sponsored enterprises: As of June 30, 2013 the Company had seven mortgage-backed securities with a fair value of $19.2 million and gross unrealized losses of $724,000. All of these mortgage-backed securities have been in an unrealized loss position for twelve 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 June 30, 2013.

U.S. government issued or sponsored collateralized mortgage obligations (“Agency CMOs”): As of June 30, 2013, the Company had 14 Agency CMOs with a fair value of $41.8 million and gross unrealized losses of $925,000. Twelve of the Agency CMOs have been in an unrealized loss position for twelve months or less. The two Agency CMOs that have been in an unrealized loss position for more than twelve months have a fair market value of $2.6 million and an unrealized loss of $5,000 at June 30, 2013. 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, 2013.

Corporate bonds: As of June 30, 2013, the Company had five corporate bonds with a fair value of $5.0 million and gross unrealized losses of $92,000. Four bonds have been in an unrealized loss position for twelve months or less. The one bond that has been in an unrealized loss position for more than twelve months has a fair market value of $958,000 and an unrealized loss of $42,000 at June 30, 2013. All five 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 utilizes 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 these 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 these bonds to be other-than-temporarily impaired at June 30, 2013.

Municipal bonds: As of June 30, 2013, the Company had seven municipal bonds with a fair value of $5.3 million and gross unrealized losses of $188,000. The municipal bonds have been in an unrealized loss position for twelve months or less and are investment grade. 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 bonds before recovery of its amortized cost basis, which may be maturity, the Company does not consider the bonds to be other-than-temporarily impaired at June 30, 2013.

Other securities: As of June 30, 2013, 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 June 30, 2013, two of the private equity funds had a combined fair value of $475,000 and a gross unrealized loss of $149,000. OTTI charges were recorded in a prior period on these two funds. One of the private equity funds has been in an unrealized loss for more than twelve months. The Company receives capital distributions on this fund. Management concluded that there was no additional impairment on these two funds as of June 30, 2013.

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.