INVESTMENT SECURITIES

The Bank utilizes mortgage-backed and other investment securities in its asset/liability management strategy. In making investment decisions, the Bank considers, among other things, its yield and interest rate objectives, its interest rate and credit risk position and its liquidity and cash flow.

Generally, the investment policy of the Bank is to invest funds among categories of investments and maturities based upon the Bank’s asset/liability management policies, investment quality, loan and deposit volume and collateral requirements, liquidity needs and performance objectives. ASC subtopic 320-942 requires that securities be classified into three categories: trading, held-to-maturity, and available-for-sale. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value with unrealized gains and losses included in earnings. Debt securities for which the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. All other securities not classified as trading or held-to-maturity are classified as available-for-sale and reported at fair value with unrealized gains and losses included, on an after-tax basis, in a separate component of stockholders’ equity. At June 30, 2011, the Bank had no securities classified as trading. At June 30, 2011, $57.1 million, or 80.5% of the Bank’s mortgage-backed and other investment securities, were classified as available-for-sale. The remaining $13.9 million or 19.5% were classified as held-to-maturity.

The following table sets forth the amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at June 30, 2011 (in thousands):



	Amortized		Gross Unrealized					Estimated
	Cost		Gains		Losses			Fair-Value
Available-for-Sale:
Mortgage-backed securities:
Government National Mortgage Association	$	29,228	$	222	$	(36	)	$	29,414
Federal Home Loan Mortgage Corporation	1,817		15		—			1,832
Federal National Mortgage Association	4,097		—		—			4,097
Other	45		—		—			45
Total mortgage-backed securities	35,187		237		(36		)	35,388
U.S. Government Agency Securities	19,039		4		(97		)	18,946
U.S. Government Securities	2,799		8		—			2,807
Total available-for-sale	57,025		249		(133		)	57,141
Held-to-Maturity:
Mortgage-backed securities:
Government National Mortgage Association	7,288		327		—			7,615
Federal Home Loan Mortgage Corporation	4,765		122		—			4,887
Federal National Mortgage Association	1,826		87		—			1,913
Total mortgage-backed securities	13,879		536		—			14,415
Other	—		—		—			—
Total held-to-maturity	13,879		536		—			14,415
Total securities	$	70,904	$	785	$	(133	)	$	71,556

The following table sets forth the amortized cost and estimated fair value of securities available-for-sale and held-to-maturity at March 31, 2011 (in thousands):



	Amortized		Gross Unrealized					Estimated
	Cost		Gains		Losses			Fair-Value
Available-for-Sale:
Mortgage-backed securities:
Government National Mortgage Association	$	30,162	$	150	$	(115	)	$	30,197
Federal Home Loan Mortgage Corporation	1,864		—		(13		)	1,851
Federal National Mortgage Association	4,286		—		(63		)	4,223
Other	45		—		—			45
Total mortgage-backed securities	36,357		150		(191		)	36,316
U.S. Government Agency Securities	14,968		—		(277		)	14,691
U.S. Government Securities	2,547		—		(3		)	2,544
Total available-for-sale	53,872		150		(471		)	53,551
Held-to-Maturity:
Mortgage-backed securities:
Government National Mortgage Association	7,598		206		—			7,804
Federal Home Loan Mortgage Corporation	8,210		131		—			8,341
Federal National Mortgage Association	1,889		90		—			1,979
Total mortgage-backed securities	17,697		427		—			18,124
Other	—		—		—			—
Total held-to-maturity	17,697		427		—			18,124
Total securities	$	71,569	$	577	$	(471	)	$	71,675

The following table sets forth the unrealized losses and fair value of securities at June 30, 2011 for less than 12 months and 12 months or longer (in thousands):



	Less than 12 months					12 months or longer				Total
	Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value
Available-for-Sale:
Mortgage-backed securities	$	(36	)	$	5,435	$	—	$	—	$	(36	)	$	5,435
Agencies	(97		)	13,023		—		—		$	(97	)	$	13,023
Total available-for-sale	$	(133	)	$	18,458	$	—	$	—	$	(133	)	$	18,458
Held-to-Maturity:
Mortgage-backed securities	$	—		$	334	$	—	$	—	$	—		$	334
Total held-to-maturity	$	—		$	334	$	—	$	—	$	—		$	334
Total securities	$	(133	)	$	18,792	$	—	$	—	$	(133	)	$	18,792

The following table sets forth the unrealized losses and fair value of securities at March 31, 2011 for less than 12 months and 12 months or longer (in thousands):



	Less than 12 months					12 months or longer				Total
	Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value
Available-for-Sale:
Mortgage-backed securities	$	(191	)	$	11,534	$	—	$	—	$	(191	)	$	11,534
Agencies	(280		)	17,235		—		—		(280		)	17,235
Total available-for-sale	$	(471	)	$	28,769	$	—	$	—	$	(471	)	$	28,769
Held-to-Maturity:
Mortgage-backed securities	—			345		—		—		—			345
Total held-to-maturity	$	—		$	345	$	—	$	—	$	—		$	345
Total securities	$	(471	)	$	29,114	$	—	$	—	$	(471	)	$	29,114

A total of ten available for sale securities had an unrealized loss at June 30, 2011 compared to sixteen at March 31, 2011, based on estimated fair value. There was one security in the held to maturity portfolio which had an insignificant unrealized loss in both periods. The majority of the securities in an unrealized loss position were mortgage backed securities and agency securities, which represented 29.4% and 70.6% of total securities which had an unrealized loss at June 30, 2011, respectively. The cause of the temporary impairment is directly related to changes in interest rates. In general, as interest rates decline, the fair value of securities will rise, and conversely as interest rates rise, the fair value of securities will decline. Management considers fluctuations in fair value as a result of interest rate changes to be temporary, which is consistent with the Bank's experience. The impairments are deemed temporary based on the direct relationship of the rise in fair value to movements in interest rates, the life of the investments and their high credit quality. Unrealized losses identified as other than temporary are recognized in earnings when there are losses on a debt security which management does not intend to sell, and for which it is more-likely-than-not that the entity will not be required to sell the security prior to the recovery of the non-credit impairment. In those situations, the portion of the total impairment that is attributable to the credit loss would be recognized in earnings, and the remaining difference between the debt security's amortized cost basis and its fair value would be included in other comprehensive income. At June 30, 2011, the Bank did not have any securities that would be classified as having other than temporary impairment in its investment portfolio.

The following is a summary of the carrying value (amortized cost) and fair value of securities at June 30, 2011, by remaining period to contractual maturity (ignoring earlier call dates, if any). Actual maturities may differ from contractual maturities because certain security issuers have the right to call or prepay their obligations. The table below does not consider the effects of possible prepayments or unscheduled repayments.



	Amortized Cost	Fair Value	Weighted Avg Rate
Available-for-Sale:
Less than one year	998	999	0.22	%
One through five years	12,971	12,970	1.04	%
Five through ten years	10,573	10,488	1.88	%
After ten years	32,438	32,639	2.79	%
	56,980	57,096	2.18	%

Held-to-maturity:
Five through ten years	271	284	4.31	%
After ten years	13,266	13,788	3.97	%
	13,537	14,072	3.98	%