NOTE 3: INVESTMENT SECURITIES

Investments in securities are classified as available for sale or held to maturity as of December 31, 2012 and 2011. The amortized cost and fair values of the securities classified as available for sale and held to maturity as of December 31, 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		10,956		0		59		10,897
U.S. Government Sponsored Enterprises (“U.S. GSEs”)		58,731		723		88		59,366
Federal Home Loan Bank ("FHLB") Obligations		24,546		39		0		24,585
Residential Real Estate Mortgage-backed Securities ("Agency MBSs")		142,441		6,326		0		148,767
Agency Commercial Mortgage Backed Securities ("Agency CMBSs")		5,087		0		58		5,029
Agency Collateralized Mortgage Obligations ("Agency CMOs")		227,815		2,922		338		230,399
Collateralized Loan Obligations ("CLOs")		24,748		0		221		24,527
Non-agency Collateralized Mortgage Obligations ("Non-Agency CMOs”) Agency CMOs")		4,589		6		2		4,593
Asset Backed Securities ("ABSs")		357		61		0		418
Total Available for Sale	$	499,370	$	10,077	$	766	$	508,681
Held to Maturity:
Agency MBSs	$	407	$	47	$	0	$	454
Total Held to Maturity	$	407	$	47	$	0	$	454

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. GSEs		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 December 31, 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		0		0		10,897		10,897
U.S. GSEs		0		10,025		49,341		0		59,366
FHLB Obligations		0		0		24,585		0		24,585
Agency MBSs		316		3,387		22,854		122,210		148,767
Agency CMBSs		0		0		5,029		0		5,029
Agency CMOs		0		0		4,139		226,260		230,399
CLOs		0		0		24,527		0		24,527
Non-Agency CMOs		0		0		0		4,593		4,593
ABSs		0		0		0		418		418
Total Available for Sale	$	316	$	13,512	$	130,475	$	364,378	$	508,681
Held to Maturity (at amortized cost):
Agency MBSs	$	11	$	73	$	0	$	323	$	407
Total Held to Maturity	$	11	$	73	$	0	$	323	$	407

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. GSEs		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 in the table above are based on final contractual maturities.

The following table presents the proceeds, gross gains and gross losses on available for sale securities.



(In thousands)	2012		2011		2010
Proceeds	$	129,936	$	131,858	$	58,477
Gross gains		811		1,188		2,122
Gross losses		(304)		(139)		(40)
Net gains	$	507	$	1,049	$	2,082

Securities with a book value of $349.52 million and $299.36 million at December 31, 2012 and 2011, respectively, were pledged to secure U.S. Treasury borrowings, public deposits, securities sold under agreements to repurchase, and for other purposes required by law.

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 December 31, 2012, 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 December 31, 2012
U.S. Agency Obligations	$	10,897	$	59	$	0	$	0	$	10,897	$	59
U.S. GSEs		9,882		88		0		0		9,882		88
Agency CMBSs		5,029		58		0		0		5,029		58
Agency CMOs		39,047		338		0		0		39,047		338
CLOs		24,527		221		0		0		24,527		221
Non-Agency CMOs		0		0		3,041		2		3,041		2
	$	89,382	$	764	$	3,041	$	2	$	92,423	$	766



	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. GSEs	$	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 December 31, 2012 or 2011.

There were no securities classified as trading at December 31, 2012 and 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 FNMA, FHLMC, or Government National Mortgage Association (“GNMA”) with various origination dates and maturities. Agency CMBS consists of bonds backed by commercial real estate which are guaranteed by FNMA. CLOs are floating rate securities that consist of pools of commercial loans structured to provide very strong over collateralization and subordination. All of our CLOs are the senior AAA tranche and are the first bond to get paid down. Non-Agency CMOs are tracked individually with updates on the performance of the underlying collateral and stress testing performed and reviewed monthly. Additionally, we monitor individual bonds that experience greater levels prepayment or market volatility.

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 as applicable 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 periodically 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.

We have two non-Agency CMOs with a current book value of $4.59 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 $3.04 million and a fair value of $3.04 million at December 31, 2012, is rated BB by Fitch and Ba2 by Moody’s. Delinquencies have been fairly low and prepayment speeds for the bond during 2012 have been rapid leading 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 $1.55 million and a fair value of $1.55 million. This bond is rated CC by Fitch and CCC by 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 losses.

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 FHLBB in an amount determined based on our borrowings from the FHLBB. At December 31, 2012, our investment in FHLBB stock totaled $8.15 million. We received and recorded dividend income totaling $45 thousand and $32 thousand during the 2012 and 2011, respectively. We received no dividend income on FHLBB stock during 2010.