Investment Securities

The Company’s investment policy is designed primarily to provide and maintain liquidity, generate a favorable return on assets without incurring undue interest rate and credit risk, and complement our Bank’s lending activities. Securities are classified as either available for sale or held to maturity when acquired.

(a) Securities by Type and Maturity

The amortized cost, gross unrealized gains and losses, and fair values of investment securities at the dates indicated were as follows:



Securities Available for Sale
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
September 30, 2013
U.S. Treasury and U.S. Government-sponsored agencies	$	6,116	$	4	$	(49	)	$	6,071
Municipal securities	51,157		883		(1,653		)	50,387
Mortgage backed securities and collateralized mortgage obligations-residential:
U.S. Government-sponsored agencies	110,618		1,065		(915		)	110,768
Total	$	167,891	$	1,952	$	(2,617	)	$	167,226
December 31, 2012
U.S. Treasury and U.S. Government-sponsored agencies	$	11,016	$	19	$	—		$	11,035
Municipal securities	45,537		1,943		(120		)	47,360
Mortgage backed securities and collateralized mortgage obligations-residential:
U.S. Government agencies	84,598		1,593		(293		)	85,898
Total	$	141,151	$	3,555	$	(413	)	$	144,293



Securities Held to Maturity
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
September 30, 2013
U.S. Treasury and U.S. Government-sponsored agencies	$	1,698	$	180	$	—		$	1,878
Municipal securities	25,521		215		(136		)	25,600
Mortgage backed securities and collateralized mortgage obligations-residential:
U.S. Government-sponsored agencies	6,814		177		(187		)	6,804
Private residential collateralized mortgage obligations	1,080		181		(34		)	1,227
Total	$	35,113	$	753	$	(357	)	$	35,509



Securities Held to Maturity
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
December 31, 2012
U.S. Treasury and U.S. Government-sponsored agencies	$	1,740	$	284	$	—		$	2,024
Municipal securities	2,946		212		—			3,158
Mortgage backed securities and collateralized mortgage obligations-residential:
U.S. Government-sponsored agencies	4,245		277		—			4,522
Private residential collateralized mortgage obligations	1,168		193		(55		)	1,306
Total	$	10,099	$	966	$	(55	)	$	11,010

There were no securities classified as trading at September 30, 2013 or December 31, 2012.

The amortized cost and fair value of securities at September 30, 2013, by contractual maturity, are set forth below. Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.



	Securities Available for Sale				Securities Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	2,865	$	2,869	$	1,939	$	1,941
Due after one year through three years	1,704		1,719		5,764		5,797
Due after three years through five years	7,736		7,853		3,974		4,001
Due after five years through ten years	50,004		50,031		13,050		13,330
Due after ten years	105,582		104,754		10,386		10,440
Total	$	167,891	$	167,226	$	35,113	$	35,509

(b) Unrealized Losses and Other-Than-Temporary Impairments

Available for sale investment securities with unrealized losses as of September 30, 2013 and December 31, 2012 were as follows:



	September 30, 2013
	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
U.S. Treasury and U.S. Government-sponsored agencies	$	2,042	$	(49	)	$	—	$	—		$	2,042	$	(49	)
Municipal securities	25,061		(1,653		)	—		—			25,061		(1,653		)
Mortgage backed securities and collateralized mortgage obligations-residential:
U.S. Government-sponsored agencies	36,222		(833		)	6,348		(82		)	42,570		(915		)
Total	$	63,325	$	(2,535	)	$	6,348	$	(82	)	$	69,673	$	(2,617	)



	December 31, 2012
	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
Municipal securities	$	7,843	$	(120	)	—		—			$	7,843	$	(120	)
Mortgage backed securities and collateralized mortgage obligations-residential:
U.S. Government-sponsored agencies	31,197		(248		)	3,779		(45		)	34,976		(293		)
Total	$	39,040	$	(368	)	$	3,779	$	(45	)	$	42,819	$	(413	)

Held to maturity investment securities with unrealized losses as of September 30, 2013 and December 31, 2012 were as follows:



	September 30, 2013
	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
Municipal securities	$	11,560	$	(136	)	$	—	$	—		$	11,560	$	(136	)
Mortgage backed securities and collateralized mortgage obligations-residential:
U.S. Government-sponsored agencies	2,366		(187		)	—		—			2,366		(187		)
Private residential collateralized mortgage obligations	229		(7		)	162		(27		)	391		(34		)
Total	$	14,155	$	(330	)	$	162	$	(27	)	$	14,317	$	(357	)



	December 31, 2012
	Less than 12 Months				12 Months or Longer					Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
Mortgage backed securities and collateralized mortgage obligations-residential:
Private residential collateralized mortgage obligations	$	—	$	—	$	317	$	(55	)	$	317	$	(55	)
Total	$	—	$	—	$	317	$	(55	)	$	317	$	(55	)

The Company has evaluated these securities and has determined that, other than certain private residential collateralized mortgage obligations discussed below, the decline in their value is temporary. The unrealized losses are primarily due to unusually large spreads in the market for mortgage-related products. The fair value of the mortgage backed securities and the collateralized mortgage obligations is expected to recover as the securities approach their maturity date and/or as the pricing spreads narrow on mortgage-related securities. The Company has the ability and intent to hold the investments until recovery of the market value which may be the maturity date of the securities.

For the private residential collateralized mortgage obligations, the Company estimated expected future cash flows of the securities by estimating the expected future cash flows of the underlying collateral and applying those collateral cash flows, together with any credit enhancements such as subordination interests owned by third parties, to the security. The expected future cash flows of the underlying collateral are determined using the remaining contractual cash flows adjusted for future expected credit losses (which considers current delinquencies and nonperforming assets, future expected default rates and collateral value by vintage and geographic region) and prepayments. The expected cash flows of the security are then discounted at the interest rate used to recognize interest income on the security to arrive at a present value amount. For the nine months ended September 30, 2013, there were six private residential collateralized mortgage obligations determined to be other-than-temporarily impaired. For the nine months ended September 30, 2012, there were six private residential collateralized mortgage obligations determined to be other-than-temporarily impaired. There were no impairment losses recognized during the three months ended September 30, 2013. The Company did not record losses through other comprehensive (loss) income for the nine months ended September 30, 2013 as all unrealized losses totaling $26,000 for the nine months ended September 30, 2013 were deemed to be credit related. The Company recorded $14,000 and $52,000 in impairments not related to credit losses through other comprehensive (loss) income for the three and nine months ended September 30, 2012, respectively. The Company recorded $0 and $60,000 in losses through earnings for the three and nine months ended September 30, 2012, respectively, due to credit losses. The average discount interest rates used in the valuations of the present value as of September 30, 2013 and 2012 were 6.43% and 7.42%, respectively, and the average prepayment rate for each period was 6.0%.

The following table summarizes activity for the nine months ended September 30, 2013 and 2012 related to the amount of other-than-temporary impairments related to credit losses on held to maturity securities:



	Life-to-Date Gross Other- Than-Temporary Impairments		Life-to-Date Other-Than- Temporary Impairments Included in Other Comprehensive (Loss) Income		Life-to-Date Net Other- Than- Temporary Impairments Included in Earnings
	(In thousands)
December 31, 2011	$	2,435	$	1,100	$	1,335
Subsequent impairments	112		52		60
September 30, 2012	$	2,547	$	1,152	$	1,395

December 31, 2012	$	2,565	$	1,152	$	1,413
Subsequent impairments	26		—		26
September 30, 2013	$	2,591	$	1,152	$	1,439

In May 2008, the Board of Trustees of the AMF Ultra Short Mortgage Fund (“Fund”) decided to activate the Fund’s redemption-in-kind provision because of the uncertainty in the mortgage backed securities market. Exiting participants in the Fund were allowed to redeem and receive up to $250,000 in cash per quarter or receive 100% of their investment in “like-kind” securities equal to their proportional ownership in the Fund. The Company elected to receive the like-kind securities.

Details of private residential collateralized mortgage obligation securities received from the redemption-in-kind election as of September 30, 2013 were as follows:



															Current Ratings
Type of Security	Par Value		Amortized Cost		Fair Value (2)		Aggregate Unrealized Gain (Loss)		Year-to- date Change in Unrealized Gain		Year-to- date Impairment Charge		Life-to- date Impairment Charge (1)		AAA		AA		A		BBB		Below Investment Grade
	(Dollars in thousands)
Alt-A	$	758	$	249	$	260	$	11	$	22	$	21	$	675	—	%	—	%	—	%	—	%	100	%
Prime	1,288		831		967		136		5		5		764		—	%	—	%	—	%	9	%	91	%
Totals	$	2,046	$	1,080	$	1,227	$	147	$	27	$	26	$	1,439	—	%	—	%	—	%	7	%	93	%


(1)	Life-to-date impairment charge represents impairment charges recognized in earnings subsequent to redemption of the Fund.


(2)	Level two valuation assumptions were used to determine the fair value of held to maturity securities in the Fund.

(d) Pledged Securities

The following table summarizes the amortized cost and fair value of available for sale and held to maturity securities that are pledged as collateral for the following obligations at September 30, 2013 and December 31, 2012:



	September 30, 2013				December 31, 2012
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Washington and Oregon state to secure public deposits	$	65,872	$	66,558	$	53,642	$	56,300
Federal Reserve Bank and FHLB to secure borrowing arrangements	—		—		6,231		6,245
Repurchase agreements	23,761		23,613		17,479		17,705
Total	$	89,633	$	90,171	$	77,352	$	80,250