Investment Securities

Agency bonds and notes, agency mortgage-backed securities and agency collateralized mortgage obligations (“CMO”) include securities issued by the Government National Mortgage Association (“GNMA”), a U.S. government agency, and the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal Home Loan Bank (“FHLB”), which are U.S. government-sponsored enterprises. The Company also holds a pass-through asset-backed security guaranteed by the Small Business Administration (“SBA”) representing participating interests in pools of long-term debentures issued by state and local development companies certified by the SBA. Privately-issued CMO and asset-backed securities (“ABS”) are complex securities issued by non-government special-purpose entities that are collateralized by residential mortgage loans and residential home equity loans.

Investment securities have been classified according to management’s intent.

Trading Account Securities

On May 31, 2012, the Company invested in a managed brokerage account that invests in small and medium lot, investment grade municipal bonds. The brokerage account is managed by an investment advisory firm registered with the U.S. Securities and Exchange Commission. At June 30, 2013 and September 30, 2012, trading account securities recorded at fair value totaled $2.3 million and $3.6 million, respectively, comprised of investment grade municipal bonds. During the nine-months ended June 30, 2013, the Company reported net gains on trading account securities of $201,000, including net realized gains on the sale of securities of $242,000, partially offset by net unrealized losses on securities still held as of the balance sheet date of $41,000. During the three months ended June 30, 2013 the Company reported net losses on trading account securities of $30,000, including net realized losses on the sale of securities of $3,000 and net unrealized losses on securities still held as of the balance sheet date of $27,000. During the three and six months ended June 30, 2012 the Company reported net gains on trading account securities of $31,000, including net realized gains on the sale of securities of $22,000 and net unrealized gains on securities still held as of the balance sheet date of $9,000.

Securities Available for Sale and Held to Maturity

The amortized cost of securities available for sale and held to maturity and their approximate fair values are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In thousands)
June 30, 2013:
Securities available for sale:

Agency bonds and notes	$	15,885	$	13	$	553	$	15,345
Agency mortgage-backed		42,831		346		329		42,848
Agency CMO		24,730		195		295		24,630
Privately-issued CMO		4,020		682		-		4,702
Privately-issued ABS		5,894		2,229		1		8,122
SBA certificates		2,146		16		-		2,162
Municipal obligations		65,849		2,572		1,270		67,151
Subtotal – debt securities		161,355		6,053		2,448		164,960

Equity securities		-		91		-		91

Total securities available for sale	$	161,355	$	6,144	$	2,448	$	165,051

Securities held to maturity:

Agency mortgage-backed	$	873	$	63	$	-	$	936
Municipal obligations		5,899		6		46		5,859

Total securities held to maturity	$	6,772	$	69	$	46	$	6,795

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In thousands)
September 30, 2012:
Securities available for sale:

Agency bonds and notes	$	15,940	$	124	$	-	$	16,064
Agency mortgage-backed		42,255		1,165		-		43,420
Agency CMO		17,186		358		3		17,541
Privately-issued CMO		4,283		1,006		-		5,289
Privately-issued ABS		5,797		1,481		51		7,227
Municipal		58,135		4,838		40		62,933
Subtotal – debt securities		143,596		8,972		94		152,474

Equity securities		-		69		-		69

Total securities available for sale	$	143,596	$	9,041	$	94	$	152,543

Securities held to maturity:

Agency mortgage-backed	$	1,342	$	118	$	-	$	1,460
Municipal obligations		6,506		348		-		6,854

Total securities held to maturity	$	7,848	$	466	$	-	$	8,314

The amortized cost and fair value of investment securities as of June 30, 2013 by contractual maturity are shown below. Expected maturities of mortgage-backed securities, CMO and ABS may differ from contractual maturities because the mortgages underlying the obligations may be prepaid without penalty.

	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In thousands)

Due within one year	$	580	$	592	$	546	$	545
Due after one year through five years		5,004		5,049		2,286		2,277
Due after five years through ten years		16,908		16,951		1,759		1,743
Due after ten years		59,242		59,904		1,308		1,294
		81,734		82,496		5,899		5,859

Equity securities		-		91		-		-
CMO		28,750		29,332		-		-
ABS		5,894		8,122		-		-
SBA certificates		2,146		2,162		-		-
Mortgage-backed securities		42,831		42,848		873		936

	$	161,355	$	165,051	$	6,772	$	6,795

Information pertaining to investment securities with gross unrealized losses at June 30, 2013, aggregated by investment category and the length of time that individual securities have been in a continuous loss position, follows:

	Number				Gross
	of Investment		Fair		Unrealized
	Positions		Value		Losses
	(Dollars in thousands)
Securities available for sale:

Continuous loss position less than twelve months:
Agency bonds and notes		6	$	13,114	$	553
Agency mortgage-backed		13		22,254		329
Agency CMO		5		13,402		295
Municipal obligations		37		21,916		1,245

Total less than twelve months		61		70,686		2,422

Continuous loss position more than twelve months:
Privately-issued ABS		1		111		1
Municipal obligations		1		225		25

Total more than twelve months		2		336		26

Total securities available for sale		63	$	71,022	$	2,448

Securities held to maturity:

Continuous loss position less than twelve months:
Municipal obligations		3	$	4,556	$	46

Total securities held to maturity		3	$	4,556	$	46

At June 30, 2013, the Company did not have any securities held to maturity with an unrealized loss.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

The total investment securities in loss positions at June 30, 2013 had depreciated approximately 3.19% from the Company’s amortized cost basis and are fixed and variable rate securities with a weighted-average yield of 2.38% and a weighted-average coupon rate of 3.56% at June 30, 2013.

U.S. government agency bonds and notes, mortgage-backed securities, and CMOs, and municipal obligations in loss positions at June 30, 2013 had depreciated approximately 3.24% from the Company’s amortized cost basis as of June 30, 2013. All of the agency and municipal securities are issued by U.S. government agencies, U.S. government-sponsored enterprises and municipal governments, and are generally secured by first mortgage loans and municipal project revenues.

The Company evaluates the existence of a potential credit loss component related to the decline in fair value of the privately-issued CMO and ABS portfolios each quarter using an independent third party analysis. At June 30, 2013, the Company held twenty privately-issued CMO and ABS securities acquired in a 2009 bank acquisition with an aggregate carrying value of $3.0 million and fair value of $4.4 million that have been downgraded to a substandard regulatory classification due to a downgrade of the security’s credit quality rating by various rating agencies.

At June 30, 2013, the one privately-issued ABS security in a loss position had depreciated approximately 0.89% from the Company’s carrying value and was collateralized by residential mortgage loans. This security had a fair value of $111,000 and an unrealized loss of $1,000 at June 30, 2013, and was rated below investment grade by a nationally recognized statistical rating organization (“NRSRO”). Based on the independent third party analysis of the expected cash flows, management has determined that the decline in value for this security is temporary and, as a result, no other-than-temporary impairment has been recognized on the privately-issued CMO and ABS portfolios. While the Company did not recognize a credit-related impairment loss at June 30, 2013, additional deterioration in market and economic conditions may have an adverse impact on the credit quality in the future and therefore, require a credit-related impairment charge.

The unrealized losses on agency securities and municipal bonds relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government, its agencies, or other governments, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities to maturity, or for the foreseeable future if classified as available for sale, no declines are deemed to be other-than-temporary.

During the nine months ended June 30, 2013, the Company realized gross gains on sales of available for sale U.S. government agency notes of $1,000. During the three and nine months ended June 30, 2012, the Company realized gross gains on sales of available for sale U.S. government agency notes of $18,000.

Certain available for sale debt securities were pledged under repurchase agreements at June 30, 2013 and 2012, and may be pledged to secure federal funds borrowings and Federal Home Loan Bank (“FHLB”) borrowings.