Note 3: Investment Securities

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



			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(In thousands)	Cost		Gains		Losses		Value
Available for Sale:
U.S. Treasury Obligations	$	100	$	0	$	0	$	100
U.S. Agency Obligations		53,392		841		0		54,233
Federal Home Loan Bank ("FHLB") Obligations		4,563		55		0		4,618
Residential Real Estate Mortgage-backed Securities ("Agency MBSs")		175,353		8,351		0		183,704
Collateralized Mortgage Backed Securities ("Agency CMBSs")		5,090		0		66		5,024
Agency Collateralized Mortgage Obligations ("Agency CMOs")		270,792		2,825		198		273,419
Non-agency Collateralized Mortgage Obligations ("Non-agency CMOs")		4,749		9		20		4,738
Asset Backed Securities ("ABSs")		357		64		0		421
Total Available for Sale	$	514,396	$	12,145	$	284	$	526,257
Held to Maturity:
Agency MBSs	$	443	$	55	$	0	$	498
Total Held to Maturity	$	443	$	55	$	0	$	498

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 September 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	$	0	$	100	$	0	$	0	$	100
U.S. Agency Obligations		0		10,056		44,177		0		54,233
FHLB Obligations		0		0		4,618		0		4,618
Agency MBSs		398		3,573		28,335		151,398		183,704
Agency CMBs		0		0		5,024		0		5,024
Agency CMOs		0		11		5,752		267,656		273,419
Non-agency CMOs		0		0		0		4,738		4,738
ABSs		0		0		0		421		421
Total Available for Sale	$	398	$	13,740	$	87,906	$	424,213	$	526,257
Held to Maturity (at amortized cost):
Agency MBSs	$	16	$	84	$	0	$	343	$	443
Total Held to Maturity	$	16	$	84	$	0	$	343	$	443

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 $22.67 million and $64.34 million for the three and nine months ended September 30, 2012, respectively. Gross gains of $36 thousand and $530 thousand and gross losses of $62 thousand and $108 thousand were realized from these sales for the three and nine months ended September 30, 2012. Proceeds from sales of available for sale debt securities were $54.99 million and $132.02 million during the three and nine months ended September 30, 2011, respectively. Gross gains of $970 thousand and $1.19 million and gross losses of $50 thousand and $141 thousand were realized from these sales during the three and nine months ended September 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 a continuous unrealized loss position, at September 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 September 30, 2012
Agency CMBSs	$	5,024	$	66	$	0	$	0	$	5,024	$	66
Agency CMOs		34,511		198		0		0		34,511		198
Non-agency CMOs		0		0		3,126		20		3,126		20
	$	39,535	$	264	$	3,126	$	20	$	42,661	$	284



	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 September 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”), the 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 $4.75 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 $3.15 million and a fair value of $3.13 million at September 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 $1.60 million and a fair value of $1.61 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 September 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 $11 thousand and $36 thousand during the three and nine months ended September 30, 2012, respectively. We received $6 thousand and $19 thousand for the three and nine months ended September 30, 2011, respectively.