3. Securities

Securities available for sale consist of the following:

	Amortized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In thousands)
June 30, 2014
U.S. agency	$	31,495	$	170	$	85	$	31,580
U.S. agency residential mortgage-backed		248,930		1,402		465		249,867
U.S. agency commercial mortgage-backed		17,731		71		44		17,758
Private label residential mortgage-backed		6,802		173		345		6,630
Other asset backed		37,530		58		58		37,530
Obligations of states and political subdivisions		153,488		945		2,088		152,345
Corporate		19,824		116		19		19,921
Trust preferred		2,906		-		411		2,495
Total	$	518,706	$	2,935	$	3,515	$	518,126

December 31, 2013
U.S. agency	$	32,106	$	44	$	342	$	31,808
U.S. agency residential mortgage-backed		202,649		1,343		532		203,460
Private label residential mortgage-backed		7,294		112		618		6,788
Other asset backed		45,369		10		194		45,185
Obligations of states and political subdivisions		157,966		496		4,784		153,678
Corporate		19,120		43		26		19,137
Trust preferred		2,902		-		477		2,425
Total	$	467,406	$	2,048	$	6,973	$	462,481

Our investments’ gross unrealized losses and fair values aggregated by investment type and length of time that individual securities have been at a continuous unrealized loss position follows:

	Less Than Twelve Months				Twelve Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(In thousands)

June 30, 2014
U.S. agency	$	6,079	$	10	$	8,044	$	75	$	14,123	$	85
U.S. agency residential mortgage-backed		91,491		318		20,514		147		112,005		465
U.S. agency commercial mortgage-backed		10,624		44		-		-		10,624		44
Private label residential mortgage-backed		-		-		4,491		345		4,491		345
Other asset backed		18,345		58		-		-		18,345		58
Obligations of states and political subdivisions		51,974		1,070		26,541		1,018		78,515		2,088
Corporate		2,740		19		-		-		2,740		19
Trust preferred		-		-		2,495		411		2,495		411
Total	$	181,253	$	1,519	$	62,085	$	1,996	$	243,338	$	3,515

December 31, 2013
U.S. agency	$	16,715	$	342	$	-	$	-	$	16,715	$	342
U.S. agency residential mortgage-backed		78,256		532		-		-		78,256		532
Private label residential mortgage-backed		407		6		4,602		612		5,009		618
Other asset backed		33,862		194		-		-		33,862		194
Obligations of states and political subdivisions		103,942		4,645		4,805		139		108,747		4,784
Corporate		7,105		26		-		-		7,105		26
Trust preferred		-		-		2,425		477		2,425		477
Total	$	240,287	$	5,745	$	11,832	$	1,228	$	252,119	$	6,973

Our portfolio of available-for-sale securities is reviewed quarterly for impairment in value. In performing this review management considers (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether we intend to sell, or it is more likely than not that we will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. For securities that do not meet the aforementioned recovery criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income or loss.

U.S. agency, U.S. agency residential mortgage-backed securities and U.S. agency commercial mortgage backed securities — at June 30, 2014 we had eight U.S. agency, 56 U.S. agency residential mortgage-backed securities and 11 U.S. agency commercial mortgage-backed whose fair market value is less than amortized cost. The unrealized losses are largely attributed to rises in term interest rates and widening spreads to Treasury bonds. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Private label residential mortgage backed securities — at June 30, 2014 we had five of this type of security, four of which had a fair value less than amortized cost. Two of the four issues are rated by a major rating agency as investment grade while the other two are below investment grade. Two of these bonds have impairment in excess of 10% and all four of these holdings have been impaired for more than 12 months.

The unrealized losses are largely attributable to credit spread widening on these securities since their acquisition. The underlying loans within these securities include Jumbo (68%) and Alt A (32%) at June 30, 2014.

	June 30, 2014					December 31, 2013
			Net					Net
	Fair		Unrealized			Fair		Unrealized
	Value		Gain (Loss)			Value		Loss
	(In thousands)

Private label residential mortgage-backed
Jumbo	$	4,520	$	(211	)	$	4,687	$	(441	)
Alt-A		2,110		39			2,101		(65	)

All of these securities are receiving principal and interest payments. Most of these transactions are pass-through structures, receiving pro rata principal and interest payments from a dedicated collateral pool for loans that are performing. The nonreceipt of interest cash flows is not expected and thus not presently considered in our discounted cash flow methodology discussed below.

All private label residential mortgage-backed securities are reviewed for OTTI utilizing a cash flow projection. The cash flow analysis forecasts cash flow from the underlying loans in each transaction and then applies these cash flows to the bonds in the securitization. The cash flows from the underlying loans consider contractual payment terms (scheduled amortization), prepayments, defaults and severity of loss given default. The analysis uses dynamic assumptions for prepayments, defaults and loss severity. Near term prepayment assumptions are based on recently observed prepayment rates. More weight is given to longer term historic performance (12 months). In some cases, recently observed prepayment rates are lower than historic norms due to a minimal amount of new jumbo loan issuances. This loan market is heavily dependent upon securitization for funding, and new securitization transactions have been minimal. Our model projections anticipate that prepayment rates gradually revert to historical levels. For seasoned ARM transactions, normalized prepayment rates range from 10% to 25% CPR. For fixed rate collateral (one transaction), the prepayment speeds are projected to remain stable.

Default assumptions are largely based on the volume of existing real estate owned, pending foreclosures and severe delinquencies. Other considerations include the quality of loan underwriting, recent default experience, realized loss performance and the volume of less severe delinquencies. Default levels generally are projected to remain elevated or increase for a period of time sufficient to address the level of distressed loans in the transaction. Our projections expect defaults to then decline, generally beginning in year three. Current loss severity assumptions are based on recent observations when meaningful data is available. Loss severity is expected to remain elevated for the next 12 months. Severity is expected to decline after this period due to improving overall economic conditions, improving real estate prices and a reduced inventory of foreclosed properties on the market. Except for three securities discussed in further detail below (all three are currently below investment grade), our cash flow analysis forecasts complete recovery of our cost basis for each reviewed security.

At June 30, 2014 three below investment grade private label residential mortgage-backed securities had credit related OTTI and are summarized as follows:

			Super		Senior
	Senior		Senior		Support
	Security		Security		Security		Total
	(In thousands)

As of June 30, 2014
Fair value	$	2,459	$	1,722	$	42	$	4,223
Amortized cost		2,548		1,592		-		4,140
Non-credit unrealized loss		89		-		-		89
Unrealized gain		-		130		42		172
Cumulative credit related OTTI		748		457		380		1,585

Credit related OTTI recognized in our Condensed Consolidated Statements of Operations
For the three months ended June 30,
2014	$	-	$	-	$	-	$	-
2013		26		-		-		26
For the six months ended June 30,
2014		-		-		-		-
2013		26		-		-		26

Each of these securities is receiving principal and interest payments similar to principal reductions in the underlying collateral. Two of these securities have unrealized gains and one has an unrealized loss at June 30, 2014. Prior to the second quarter of 2013 all three of these securities had an unrealized loss. The original amortized cost for each of these securities has been permanently adjusted downward for previously recorded credit related OTTI. The unrealized loss (based on original amortized cost) for two of these securities is now less than previously recorded credit related OTTI amounts. The remaining non-credit related unrealized loss in the senior security is attributed to other factors and is reflected in other comprehensive income during those same periods.

As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no other declines discussed above are deemed to be other than temporary.

Other asset backed — at June 30, 2014 we had 15 other asset backed securities whose fair value is less than amortized cost. The unrealized losses are primarily due to widening discount margins. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Obligations of states and political subdivisions — at June 30, 2014 we had 97 municipal securities whose fair value is less than amortized cost. The unrealized losses are primarily due to increases in interest rates since the securities acquisition. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Corporate — at June 30, 2014 we had three corporate securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening. As management does not intend to liquidate these securities and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses, no declines are deemed to be other than temporary.

Trust preferred securities — at June 30, 2014 we had three trust preferred securities whose fair value is less than amortized cost. All of our trust preferred securities are single issue securities issued by a trust subsidiary of a bank holding company. The pricing of trust preferred securities over the past several years has suffered from credit spread widening fueled by uncertainty regarding potential losses of financial companies and repricing of risk related to these hybrid capital securities.

One of the three securities is rated by two major rating agencies as investment grade, while one (a Bank of America issuance) is rated below investment grade by two major rating agencies and the other one is non-rated. The non-rated issue is a relatively small bank and was never rated. The issuer of this non-rated trust preferred security, which had a total amortized cost of $1.0 million and total fair value of $0.8 million as of June 30, 2014, continues to have satisfactory credit metrics and make interest payments.

The following table breaks out our trust preferred securities in further detail as of June 30, 2014 and December 31, 2013:

	June 30, 2014					December 31, 2013
			Net					Net
	Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss
	(In thousands)

Trust preferred securities
Rated issues	$	1,693	$	(213	)	$	1,600	$	(302	)
Unrated issues		802		(198	)		825		(175	)

We recorded no credit related OTTI charges in earnings on securities available for sale during the three and six month periods ended June 30, 2014. We recorded $0.026 million of credit related OTTI charges during both the three and six month periods ended June 30, 2013 (see discussion above).

A roll forward of credit losses recognized in earnings on securities available for sale for the three and six month periods ending June 30, follows:

	Three months ended				Six months ended
	June 30,				June 30,
	2014		2013		2014		2013
	(In thousands)
Balance at beginning of period	$	1,835	$	1,809	$	1,835	$	1,809
Additions to credit losses on securities for which no previous OTTI was recognized		-		-		-		-
Increases to credit losses on securities for which OTTI was previously recognized		-		26		-		26
Balance at end of period	$	1,835	$	1,835	$	1,835	$	1,835

The amortized cost and fair value of securities available for sale at June 30, 2014, by contractual maturity, follow:

	Amortized		Fair
	Cost		Value
	(In thousands)
Maturing within one year	$	18,937	$	18,994
Maturing after one year but within five years		72,390		72,741
Maturing after five years but within ten years		43,186		43,415
Maturing after ten years		73,200		71,191
		207,713		206,341
U.S. agency residential mortgage-backed		248,930		249,867
U.S. agency commercial mortgage-backed		17,731		17,758
Private label residential mortgage-backed		6,802		6,630
Other asset backed		37,530		37,530
Total	$	518,706	$	518,126

The actual maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Gains and losses realized on the sale of securities available for sale are determined using the specific identification method and are recognized on a trade-date basis. A summary of proceeds from the sale of securities available for sale and gains and losses for the six month periods ending June 30, follows:

			Realized
	Proceeds		Gains (1)		Losses (2)
	(In thousands)
2014	$	5,126	$	2	$	-
2013		2,940		15		7

(1) Gains in 2014 exclude $0.053 million of unrealized gain related to a U.S. Treasury short position.

(2) Losses in 2013 exclude $0.026 of credit related to OTTI recognized in earnings.

During 2014 and 2013 our trading securities consisted of various preferred stocks. During the first six months of 2014 and 2013 we recognized gains on trading securities of $0.111 million and $0.183 million, respectively that are included in net gains (losses) on securities in the Condensed Consolidated Statements of Operations. Both of these amounts relate to gains recognized on trading securities still held at each respective period end.