Note 5 – Investments

The amortized cost and fair value of our AFS securities and the corresponding amounts of gross unrealized gains and losses were as follows:

			Gross Unrealized								Estimated
	Amortized				Losses 1 Year			Losses Greater			Fair
	Cost		Gains		Or Less			Than 1 Year			Value
December 31, 2012	(in thousands)
Agency mortgage-backed securities	$	20,378	$	27	$	(278	)	$	-		$	20,127
Non-agency mortgage-backed securities	$	3,273		19		-			(519	)		2,773
Total	$	23,651	$	46	$	(278	)	$	(519	)	$	22,900

December 31, 2011	(in thousands)
Agency mortgage-backed securities	$	53	$	6	$	-		$	-		$	59
Non-agency mortgage-backed securities		3,939		-		-			(1,006	)		2,933
Total	$	3,992	$	6	$	-		$	(1,006	)	$	2,992

The amortized cost and fair value of mortgage-backed securities by contractual maturity, at December 31, 2012, are shown below. Expected maturities of mortgage-backed securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	December 31, 2012
	Amortized Cost		Fair Value
	(In thousands)
Due after ten years	$	23,651	$	22,900

Securities with an amortized cost of $49,000 and fair value of $55,000 at December 31, 2012 were pledged to secure Washington State Public Funds. Additionally, the Company has letters of credit with a notional amount of $31.5 million to secure public deposits.

Sales of available for sale securities were as follows:

	Twelve Months Ended December 31,
	2012		2011
	(in thousands)
Proceeds	$	-	$	1,118
Gross gains		-		3
Gross losses		-		(37	)

The following table summarizes the aggregate fair value and gross unrealized loss by length of time those investments have been continuously in an unrealized loss position:

	December 31, 2012
	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
December 31, 2012	(in thousands)
Agency mortgage-backed securities	$	17,685	$	(278	)	$	-	$	-		$	17,685	$	(278	)
Non-agency mortgage-backed securities	$	-	$	-		$	2,137		(519	)	$	2,137		(519	)
Total	$	17,685	$	(278	)	$	2,137	$	(519	)	$	19,822	$	(797	)

	December 31, 2011
	Less Than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
December 31, 2011	(in thousands)
Non-agency mortgage-backed securities	$	-	$	-		$	2,933	$	(1,006	)	$	2,933	$	(1,006	)
Total	$	-	$	-		$	2,933	$	(1,006	)	$	2,933	$	(1,006	)

The following table presents the cumulative roll forward of credit losses recognized in earnings relating to the Company's non-U.S. agency mortgage backed securities:

	Twelve Months Ended
	December 31,
	2012		2011
	(in thousands)
Estimated credit losses, beginning balance	$	256	$	160
Additions for credit losses not previously recognized		164		96
Reduction for increases in cash flows		-		-
Reduction for realized losses		-		-
Estimated credit losses, ending balance	$	420	$	256

As of December 31, 2012, our securities portfolio consisted of 17 U.S. agency and five non-U.S. agency mortgage backed securities with a fair value of $22.9 million. Four of the five non-U.S. agency securities and 13 of the 17 U.S. agency securities were in an unrealized loss position. The unrealized losses were caused by changes in interest rates and market illiquidity causing a decline in the fair value subsequent to the purchase. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than par. While management does not intend to sell the non-agency mortgage backed securities, and it is unlikely that the Company will be required to sell these securities before recovery of its amortized cost basis, management's impairment evaluation indicates that certain securities possess qualitative and quantitative factors that suggest an other-than-temporary impairment (OTTI). These factors include, but are not limited to: the length of time and extent of the fair value declines, ratings agency down grades, the potential for an increased level of actual defaults, and the extension in duration of the securities. In addition to the qualitative factors, management's evaluation includes an assessment of quantitative evidence that involves the use of cash flow modeling and present value calculations as determined by considering the applicable OTTI accounting guidance. The Company compares the present value of the current estimated cash flows to the present value of the previously estimated cash flows. Accordingly, if the present value of the current estimated cash flows is less than the present value of the previous period's present value, an adverse change is considered to exist and the security is considered OTTI. The associated "credit loss" is the amount by which the security's amortized cost exceeds the present value of the current estimated cash flows. Based upon the results of the cash flow modeling, four securities reflected OTTI during the year ended December 31, 2012. Estimating the expected cash flows and determining the present values of the cash flows involves the use of a variety of assumptions and complex modeling. In developing its assumptions, the Company considers all available information relevant to the collectability of the applicable security, including information about past events, current conditions, and reasonable and supportable forecasts. Furthermore, the Company asserts that the cash flows used in the determination of OTTI are its "best estimate" of cash flows.