Note 3 — Investment Securities

Investment securities consist of the following (dollars in thousands):

	September 30, 2013 – Securities Available for Sale
	Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value		Average Yield		Average Duration⁽¹⁾

U.S. government agency securities	$	49,093	$	-	$	(3,621)	$	45,472	2.07	%	7.86
Agency mortgage backed securities		15,336		1,392		-		16,728	5.27		2.21
Collateralized mortgage obligations		7,248		175		(7)		7,416	5.67		1.62
Commercial mortgage backed securities		38,597		1,256		(49)		39,804	3.32		3.54
Corporate bonds		105,771		3,685		(862)		108,594	3.81		4.36
Covered bonds		49,928		3,101		(210)		52,819	3.49		3.13
State and municipal obligations		16,297		142		(348)		16,091	6.53	⁽²⁾	7.14
Total debt securities		282,270		9,751		(5,097)		286,924	3.67	⁽²⁾	4.62
Federal Home Loan Bank stock		9,370		-		-		9,370
Other equity securities		7,672		759		(414)		8,017
Total	$	299,312	$	10,510	$	(5,511)	$	304,311

	December 31, 2012 – Securities Available for Sale
	Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value		Average Yield		Average Duration⁽¹⁾

U.S. Treasury securities	$	10,000	$	-	$	-	$	10,000	0.01	%	0.05
U.S. government agency securities		67,090		72		(125)		67,037	1.94		5.78
Agency mortgage backed securities		21,607		2,153		-		23,760	5.30		2.30
Collateralized mortgage obligations		10,417		254		(3)		10,668	5.54		2.78
Commercial mortgage backed securities		43,046		2,318		(82)		45,282	3.21		3.52
Corporate bonds		150,589		5,742		(844)		155,487	3.24		3.29
Covered bonds		44,924		3,694		-		48,618	3.68		3.49
State and municipal obligations		17,978		734		-		18,712	6.21	⁽²⁾	4.09
Total debt securities		365,651		14,967		(1,054)		379,564	3.30	⁽²⁾	3.68
Federal Home Loan Bank stock		7,685		-		-		7,685
Other equity securities		5,775		791		-		6,566
Total	$	379,111	$	15,758	$	(1,054)	$	393,815

	September 30, 2013 – Securities Held to Maturity
	Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value		Average Yield		Average Duration⁽¹⁾

U.S. government agency securities	$	27,763	$	25	$	(1,271)	$	26,517	2.11	%	6.97
Agency mortgage backed securities		19,314		503		-		19,817	2.62		6.76
Corporate bonds		5,000		-		-		5,000	7.63		9.86
State and municipal obligations		1,149		-		(82)		1,067	4.24	⁽²⁾	13.78
Total	$	53,226	$	528	$	(1,353)	$	52,401	2.85	⁽²⁾	7.31

(1) Average expected remaining duration to maturity, in years

(2) Fully taxable-equivalent basis

The following table shows the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, as of September 30, 2013 (in thousands):

	Less than 1 Year				1 Year or More				Total
	Market		Unrealized		Market		Unrealized		Market		Unrealized
	Value		Loss		Value		Loss		Value		Loss

U.S. government agency securities	$	69,079	$	(4,892)	$	-	$	-	$	69,079	$	(4,892)
Collateralized mortgage obligations		811		(7)		-		-		811		(7)
Commercial mortgage backed securities		3,191		(27)		1,924		(22)		5,115		(49)
Corporate bonds		19,440		(671)		13,296		(191)		32,736		(862)
Covered bonds		4,768		(210)		-		-		4,768		(210)
State and municipal obligations		9,477		(430)		-		-		9,477		(430)
Equity securities		1,483		(414)		-		-		1,483		(414)
Total securities	$	108,249	$	(6,651)	$	15,220	$	(213)	$	123,469	$	(6,864)

Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) 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, and (iii) the intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in cost.

There were 44 securities in an unrealized loss position at September 30, 2013. Management does not intend to sell any of the securities classified as available for sale which have unrealized losses and believes that it is not likely that we will have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased and are not the result of deteriorated credit quality. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe such securities are other-than-temporarily impaired due to reasons of credit quality.

Investment securities with an amortized cost of $108,340,000 and $94,612,000, as of September 30, 2013, and December 31, 2012, respectively, were pledged to secure public deposits and for other purposes. The Bank has $50,000,000 in letters of credit, which are used in lieu of securities to pledge against public deposits.

Investment securities with a book value of $64,975,000 were sold during the nine months ended September 30, 2013. The Company recognized a net gain of $736,000 on the sale of those securities. During the first nine months of 2012, the Company sold $6,721,000 of investment securities for a net gain of $3,000.