NOTE 2 — Investment Securities

Amortized costs and fair values of the securities available for sale as are as follows for the periods ended,


September 30, 2012 (Unaudited) (Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
US Government Agencies	$	23,414	$	445	$	—		$	23,859
Mortgage Back Securities		13,456		368		(15	)		13,809
Collateralized Mortgage Obligations		7,872		76		—			7,948
Asset-Backed Debt Securities		2,578		—		(2,510	)		68
Municipal Securities		10,609		1,211		—			11,820

Total	$	57,929	$	2,100	$	(2,525	)	$	57,504


December 31, 2011 (Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
US Government Agencies	$	24,030	$	576	$	—		$	24,606
Mortgage Back Securities		12,932		258		(11	)		13,179
Collateralized Mortgage Obligations		7,823		69		—			7,892
Asset-Backed Debt Securities		2,548		—		(2,480	)		68
Municipal Securities		10,678		915		(2	)		11,591

Total	$	58,011	$	1,818	$	(2,493	)	$	57,336

At September 30, 2012, all U.S. Government Agencies are AA+ rated and any fluctuations in their fair value are caused by changes in interest rates and are not considered credit related as the contractual cash flows of these investments are either explicitly or implicitly backed by the full faith and credit of the U.S. government. The Company’s municipal bond portfolio is composed of highly rated issuances. At September 30, 2012, the municipal securities portfolio has a rating of A or higher and the Company believes it will receive all contractual cash flows due on this portfolio. The mortgage-backed securities portfolio at September 30, 2012, is composed entirely of the most senior tranches of GNMA collateralized mortgage obligations ($7.9 million), or “GNMA”, and FNMA or FHLMC mortgage-backed securities ($13.5 million). Any associated unrealized losses are caused by changes in interest rates and are not considered credit related. Unrealized losses that are related to the prevailing interest rate environment will decline over time and recover as these securities approach maturity.

The amortized cost and estimated fair value of securities available for sale as of September 30, 2012 and December 31, 2011 by contractual maturities are shown below. Actual maturities may differ from contractual maturities because the securities may be called or prepaid without any penalties.


	September 30, 2012				December 31, 2011
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
(Dollars in thousands)	(Unaudited)

US Government Agencies
< 1 year	$	10,058	$	10,127	$	5,011	$	5,050
1-5 years		12,356		12,732		17,845		18,346
5-10 years		1,000		1,000		1,174		1,210
> 10 years		—		—		—		—

Mortgage Back Securities
< 1 year		—		—		—		—
1-5 years		—		—		—		—
5-10 years		7,158		7,342		7,794		7,878
> 10 years		6,298		6,467		5,138		5,301

Collateralized Mortgage Obligations
< 1 year		—		—		—		—
1-5 years		326		328		480		481
5-10 years		415		424		651		659
> 10 years		7,131		7,196		6,692		6,752

Asset-backed
> 10 years		2,578		68		2,548		68

State and Municipal
< 1 year		—		—		—		—
1-5 years		2,934		3,138		2,174		2,305
5-10 years		7,675		8,682		7,850		8,585
> 10 years		—		—		654		701

Total	$	57,929	$	57,504	$	58,011	$	57,336

For the nine months ended September 30, 2012, $8.7 million in securities available for sale were either called, sold, paid down or matured resulting in no realized gains or loss. For the nine months ended September 30, 2011, $13.0 million in securities available for sale were either sold or called resulting in gross realized gains of $0.01 million.

The estimated fair value of securities pledged to secure public funds; securities sold under agreements to repurchase and for other purposes amounted to $27.5 million at September 30, 2012 and $26.0 million at December 31, 2011.

The following table sets forth the investment securities available for sale that have an unrealized loss position as of the dates indicated:


			Continuous Unrealized Losses
September 30, 2012 (Unaudited) (Dollars in thousands)	Fair Value		Total		Less Than 12 Months		More than 12 Months
US Government Agencies	$	—	$	—	$	—	$	—
Mortgage Back Securities		2,006		15		15		—
Asset-Backed Debt Securities		68		2,510		—		2,510
Municipal Securities		—		—		—		—

Total	$	2,074	$	2,525	$	15	$	2,510


			Continuous Unrealized Losses
December 31, 2011 (Dollars in thousands)	Fair Value		Total		Less Than 12 Months		More than 12 Months
US Government Agencies	$	—	$	—	$	—	$	—
Mortgage Back Securities		2,890		11		11		—
Asset-Backed Debt Securities		68		2,480		—		2,480
Municipal Securities		527		2		2		—

Total	$	3,485	$	2,493	$	13	$	2,480

The investment in asset-backed debt securities is reported in the financial statements at an amount less than its historical cost. The total fair value of these investments at September 30, 2012 and December 31, 2011 was $0.1 million and $0.1 million, respectively, which is approximately 0.1% and 0.1%, respectively, of the Company’s available for sale investment portfolios. An evaluation was performed as of September 30, 2012 and no additional other than temporary impairment write down was deemed necessary.

Management reviews the Company’s investment in Trapeza XIII Collateralized Debt Obligation, C-1 credit tranche (the “Trapeza CDO”), the asset backed securities reported in the financial statements, quarterly, and more frequently when economic or market conditions warrant such an evaluation, for possible other-than-temporary impairment (“OTTI”) based on guidance in ASC Topic 320 – Investments in Debt and Equity Instruments. In order to determine whether the Trapeza CDO may have suffered impairment, management of the Company first determines if the market (fair) value of the security is greater than its carrying cost. If the fair value is determined to be greater than cost, management completes its analysis for anecdotal information, but the investment would not considered for potential impairment. If the fair value is less than cost, management of the Company proceeds with its OTTI analysis to determine whether the variance between fair value and cost is a temporary variance that will be recouped over time or is OTTI.

To determine fair value of the Trapeza CDO, as of the end of each relevant reporting period, management of the Company reviews the monthly reports from the trustee of the Trapeza CDO, which contain information about the security, including collateralization and interest coverage by tranche, performing and non-performing portfolio securities within the CDO, payment data, and ratings data by tranche. The monthly trustee reports permit management of the Company to monitor collateralization, changes in deferred interest and cash flow from underlying issuers and periodic trustee notices on changes in interest deferrals and defaults.

As part of the fair value determination, management of the Company also prepares a separate analysis of the underlying issuers whose securities comprise the Trapeza CDO, using data obtained from SNL Financial. In addition to the portfolio balance, the report contains, for each such issuer, total assets, net income, return on average assets, return on average equity, risk based capital ratio, non-performing assets as a percentage of total assets, loan loss reserves as a percentage of gross loans, and the ratio of the sum of non-performing assets plus loans 90 days or more past due divided by the sum of tangible equity and loan loss reserve. Management of the Company reviews its report to ascertain trends in improvement or deterioration of the credit quality of each issuer compromising the Trapeza CDO (e.g., whether there has been an increase in the number of defaulting or deferring issuers, or whether trends are stable.)

Because the Trapeza CDO is not traded in a recognized market and is a complex structured security, in conducting the OTTI analysis with respect to the Trapeza CDO, management of the Company incorporates into its analysis an independent assessment by a third-party specialist. This specialist is retained at year-end and also retained quarterly when management determines, based on its analysis of changes in the credit quality of the issuers the securities of which comprise the Trapeza CDO, that deterioration in the credit quality of such issuers may have occurred. The estimated fair value of the Trapeza CDO is calculated by the third party specialist using an INTEX CDO Deal Model Library, as well as information from Bloomberg, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and SNL Financial. The report prepared by management referred to in the preceding paragraph serves as a preceding internal analysis of the valuation determined by the third party.

Based on these analyses, the Company has determined that the fair market value of the Trapeza CDO is less than its cost. As of September 30, 2012, the Trapeza CDO has an amortized cost basis of $2.2 million and is valued at $0.1 million.

In determining whether the Trapeza CDO’s impairment is a temporary impairment, management of the Company endeavors to consider all relevant qualitative and quantitative evidence prescribed by ASC Topic 320, including:

the length of time and the extent to which the fair value has been less than cost;

ii)

the financial condition and near-term prospects of the issuer;

iii)

whether the market decline was affected by macroeconomic conditions; and

iv)

whether the Company intends to sell, or more likely than not will be required to sell, the Trapeza CDO before its anticipated recovery.

In assessing the length of time and the extent to which the fair value has been less than cost, the Company monitors developments with respect to the Trapeza CDO and the securities comprising it, as well as the structure of the security. When evaluating the financial condition and near-term prospects of the issuer, the Company considers the financial strength of the issuers comprising the Trapeza CDO. In this regard, the following table provides certain summary information with respect to the Trapeza CDO and the underlying issuers within that security for the periods indicated:


	September 30, 2012	December 31, 2011
Current number of performing and non-performing issuers	Performing: 36 Deferring interest: 10 Defaulted: 9	Performing: 36 Deferring interest: 10 Defaulted: 9
Actual deferrals and defaults as a percentage of the original collateral	Deferral: 13.6% Defaults: 14.1%	Deferral: 15.4% Defaults: 12.9%
Expected deferrals and defaults as a percentage of the remaining performing collateral	Expected new deferrals: 0 Expected new defaults: 1.8%	Expected new deferrals: 0 Expected new defaults: 8.2%
Subordination level of the tranche held by the registrant as a percentage of the remaining performing collateral	11.20%	11.30%
Subordination level of the tranche held by the registrant plus all superior tranche levels as a percentage of the remaining performing collateral	112.60%	108.10%
External credit ratings (Moody’s / Fitch)	Ca / C	Ca / C

The default and deferral change in percentage is due to the outstanding balances of the asset-backed debt security declining from the prior period.

In considering the extent of the deficiency, the Company considers whether the deficiency has been affected by macroeconomic factors applicable to the class generally and not to the Trapeza CDO in particular. Finally, the Company considers whether it intends to sell, or more likely than not will be required to sell, the Trapeza CDO before its anticipated recovery. The Company has no intention to sell the Trapeza CDI before its anticipated recovery.

Based on the foregoing analysis by management of the Company, management believes the Trapeza CDO has temporary valuation differences due to market conditions and no additional OTTI was recorded during the periods ended September 30, 2012 and December 31, 2011.