Note 3: Investment Securities

Investments in securities are classified as available for sale or held to maturity as of June 30, 2012. The amortized cost and fair values of the securities classified as available for sale and held to maturity as of June 30, 2012 are as follows:



			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
Available for Sale:
U.S. Treasury Obligations	$	250	$	0	$	0	$	250
U.S. Agency Obligations		63,983		816		0		64,799
Federal Home Loan Bank ("FHLB") Obligations		4,581		68		0		4,649
Residential Real Estate Mortgage-backed Securities ("Agency MBSs")		166,709		6,930		0		173,639
Agency Collateralized Mortgage Obligations ("Agency CMOs")		243,819		2,591		73		246,337
Non-agency Collateralized Mortgage Obligations ("Non-agency CMOs")		4,899		0		170		4,729
Asset Backed Securities ("ABSs")		357		62		0		419
Total Available for Sale	$	484,598	$	10,467	$	243	$	494,822
Held to Maturity:
Agency MBSs	$	481	$	56	$	0	$	537
Total Held to Maturity	$	481	$	56	$	0	$	537

The amortized cost and fair values of the securities classified as available for sale and held to maturity as of December 31, 2011 are as follows:



			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
Available for Sale:
U.S. Treasury Obligations	$	250	$	0	$	0	$	250
U.S. Agency Obligations		89,597		828		6		90,419
FHLB Obligations		16,545		134		3		16,676
Agency MBSs		176,756		7,100		18		183,838
Agency CMOs		211,749		2,976		245		214,480
Non-agency CMOs		5,346		2		493		4,855
ABSs		1,172		61		0		1,233
Total Available for Sale	$	501,415	$	11,101	$	765	$	511,751
Held to Maturity:
Agency MBSs	$	558	$	66	$	0	$	624
Total Held to Maturity	$	558	$	66	$	0	$	624

The contractual final maturity distribution of the debt securities classified as available for sale and held to maturity as of June 30, 2012 are as follows:



			After One		After Five
	Within		But Within		But Within		After Ten
(In thousands)	One Year		Five Years		Ten Years		Years		Total
Available for Sale (at fair value):
U.S. Treasury Obligations	$	250	$	0	$	0	$	0	$	250
U.S. Agency Obligations		0		7,535		57,264		0		64,799
FHLB Obligations		0		0		4,649		0		4,649
Agency MBSs		213		4,162		28,682		140,582		173,639
Agency CMOs		0		0		6,427		239,910		246,337
Non-agency CMOs		0		0		0		4,729		4,729
ABSs		0		0		0		419		419
Total Available for Sale	$	463	$	11,697	$	97,022	$	385,640	$	494,822
Held to Maturity (at amortized cost):
Agency MBSs	$	5	$	114	$	0	$	362	$	481
Total Held to Maturity	$	5	$	114	$	0	$	362	$	481

The contractual final maturity distribution of the debt securities classified as available for sale and held to maturity as of December 31, 2011, are as follows:



			After One		After Five
	Within		But Within		But Within		After Ten
(In thousands)	One Year		Five Years		Ten Years		Years		Total
Available for Sale (at fair value):
U.S. Treasury Obligations	$	250	$	0	$	0	$	0	$	250
U.S. Agency Obligations		3,023		12,567		69,823		5,006		90,419
FHLB Obligations		3,389		0		13,287		0		16,676
Agency MBSs		20		6,118		32,897		144,803		183,838
Agency CMOs		0		0		3,056		211,424		214,480
Non-agency CMOs		0		0		50		4,805		4,855
ABSs		0		0		0		1,233		1,233
Total Available for Sale	$	6,682	$	18,685	$	119,113	$	367,271	$	511,751
Held to Maturity (at amortized cost):
Agency MBSs	$	0	$	158	$	0	$	400	$	558
Total Held to Maturity	$	0	$	158	$	0	$	400	$	558

Actual maturities will differ from contractual maturities because borrowers may have rights to call or prepay obligations. Maturities of Agency MBSs and Agency CMOs are based on final contractual maturities.

Proceeds from sales of available for sale debt securities were $27.03 million and $41.66 million for the three and six months ended June 30, 2012, respectively. Gross gains of $372 thousand and $494 thousand and gross losses of zero and $46 thousand were realized from these sales for the three and six months ended June 30, 2012. Proceeds from sales of available for sale debt securities were $54.54 million and $77.03 million during the three and six months ended June 30, 2011, respectively. Gross gains of $204 thousand and $218 thousand and gross losses of $67 thousand and $91 thousand were realized from these sales during the three and six months ended June 30, 2011, respectively.

Gross unrealized losses on investment securities available for sale and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at June 30, 2012 and December 31, 2011, were as follows:



	Less than 12 months				12 months or more				Total
(In thousands)	Fair Value		Loss		Fair Value		Loss			Fair Value	Loss
As of June 30, 2012
Agency CMOs	$	31,773	$	73	$	0	$	0	$	31,773	$	73
Non-agency CMOs		0		0		4,728		170		4,728		170
	$	31,773	$	73	$	4,728	$	170	$	36,501	$	243



	Less than 12 months				12 months or more				Total
(In thousands)	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
As of December 31, 2011
U.S. Agency Obligations	$	2,536	$	6	$	0	$	0	$	2,536	$	6
FHLB Obligations		5,047		3		0		0		5,047		3
Agency MBSs		10,452		18		0		0		10,452		18
Agency CMOs		43,708		205		2,861		40		46,569		245
Non-agency CMOs		0		0		4,805		493		4,805		493
	$	61,743	$	232	$	7,666	$	533	$	69,409	$	765

There were no securities held to maturity with unrealized losses as of June 30, 2012 and December 31, 2011.

Unrealized losses on investment securities result from the cost basis of the security being higher than its current fair value. These discrepancies generally occur because of changes in interest rates since the time of purchase, or because the credit quality of the issuer has deteriorated. We perform a quarterly analysis of each security in our portfolio to determine if impairment exists, and if it does, whether that impairment is other-than-temporary.

Agency MBSs and Agency CMOs consist of pools of residential mortgages which are guaranteed by the Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), or the Government National Mortgage Association (“GNMA”) with various origination dates and maturities. Non-Agency CMOs are tracked individually and their performance is tracked at least quarterly.

We use an external pricing service to obtain fair market values for our investment portfolio. We have obtained and reviewed the service provider’s pricing and reference data document. Evaluations are based on market data and vary by asset class and incorporate available trade, bid and other market information. Because many fixed income securities do not trade on a daily basis, the service provider’s evaluated pricing applications apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations. In addition, model processes, such as the Option Adjusted Spread model are used to assess interest rate impact and develop prepayment scenarios. We test the values provided to us by the pricing service through a combination of back testing on actual sales of securities and by obtaining prices on all bonds from an alternative pricing source.

Our investment portfolio consists almost entirely of U.S. Treasury and Agency obligations, or Agency-guaranteed mortgage securities. We have two non-agency CMOs with a current cost basis of $4.90 million. Management, with the help of outside experts, has performed impairment analyses on these bonds.

One of the non-Agency CMOs, with a cost basis of $3.27 million and a fair value of $3.17 million at June 30, 2012, is rated BBB by Fitch and Ba3 by Moody’s. Delinquencies have been fairly low and prepayments on the bond have led to increased credit support. We own a senior tranche in this bond. Although losses are expected in the bond overall, our position in the structure of the bond is expected to protect us from realizing losses. The second bond has a cost basis of $1.63 million and a fair value of $1.56 million. This bond is rated CCC by Fitch and S&P. We own a super senior tranche in this bond. Although losses are expected in the bond overall, our super senior position in the structure is expected to protect us from realizing a material loss.

We do not intend to sell the investment securities that are in an unrealized loss position, and it is unlikely that we will be required to sell the investment securities before recovery of their amortized cost bases, which may be maturity.

As a member of the FHLB system, we are required to invest in stock of the FHLB of Boston (the “FHLBB”) in an amount determined based on our borrowings from the FHLBB. At June 30, 2012, our investment in FHLBB stock totaled $8.15 million, a decrease of $485 thousand from our year end balance of $8.63 million. We received dividend income totaling $8 thousand and $25 thousand during the three and six months ended June 30, 2012, respectively. We received $6 thousand and $13 thousand for the three and six months ended June 30, 2011, respectively.