NOTE 3: INVESTMENT SECURITIES

Investments in securities are classified as available for sale or held to maturity as of June 30, 2013 and December 31, 2012. The amortized cost and fair values of the securities classified as available for sale and held to maturity as of June 30, 2013 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		25,763		0		1,353		24,410
U.S. Government Sponsored Enterprises ("U.S. GSEs")		12,472		4		564		11,912
Federal Home Loan Bank ("FHLB") Obligations		7,510		7		331		7,186
Residential Real Estate Mortgage-backed Securities ("Agency MBSs")		120,425		3,302		1,241		122,486
Agency Commercial Mortgage Backed Securities ("Agency CMBSs")		18,652		0		609		18,043
Agency Collateralized Mortgage Obligations ("Agency CMOs")		209,093		842		3,188		206,747
Collateralized Loan Obligations ("CLOs")		36,894		0		108		36,786
Asset Backed Securities ("ABSs")		357		41		0		398
Total Available for Sale	$	431,266	$	4,196	$	7,394	$	428,068
Held to Maturity:
Agency MBSs	$	325	$	29	$	0	$	354
Total Held to Maturity	$	325	$	29	$	0	$	354

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. GSEs		58,731		723		88		59,366
FHLB Obligations		24,546		39		0		24,585
Agency MBSs		142,441		6,326		0		148,767
Agency CMBSs		5,087		0		58		5,029
Agency CMOs		227,815		2,922		338		230,399
Non-agency CMOs		4,589		6		2		4,593
CLOs		24,748		0		221		24,527
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 contractual final maturity distribution of the debt securities classified as available for sale and held to maturity as of June 30, 2013, 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		24,410		24,410
U.S. GSEs		0		2,504		9,408		0		11,912
FHLB Obligations		0		0		7,186		0		7,186
Agency MBSs		236		4,696		18,956		98,598		122,486
Agency CMBSs		0		0		13,430		4,613		18,043
Agency CMOs		0		0		3,605		203,142		206,747
CLOs		0		0		26,756		10,030		36,786
ABSs		0		0		0		398		398
Total Available for Sale	$	236	$	7,300	$	79,341	$	341,191	$	428,068
Held to Maturity (at amortized cost):
Agency MBSs	$	3	$	53	$	0	$	269	$	325
Total Held to Maturity	$	3	$	53	$	0	$	269	$	325

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
Non-agency CMOs		0		0		0		4,593		4,593
CLOs		0		0		24,527		0		24,527
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

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 for the three and six months ended June 30, 2013 and 2012.



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2013		2012		2013		2012
Proceeds	$	51,213	$	27,034	$	51,213	$	41,664
Gross gains		547		372		547		494
Gross losses		(560)		0		(560)		(46)
Net (losses) gains	$	(13)	$	372	$	(13)	$	448

Securities with a carrying amount of $250.75 million and $349.52 million at June 30, 2013 and December 31, 2012, 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 June 30, 2013, were as follows:



	Less Than 12 Months				12 Months or More				Total
(In thousands)	Fair Value		Loss		Fair Value		Loss			Fair Value	Loss
U.S. Agency Obligations	$	24,410	$	1,353	$	0	$	0	$	24,410	$	1,353
U.S. GSEs		9,408		564		0		0		9,408		564
FHLB Obligations		4,669		331		0		0		4,669		331
Agency MBSs		53,326		1,241		0		0		53,326		1,241
Agency CMBSs		18,043		609		0		0		18,043		609
Agency CMOs		122,330		3,188		0		0		122,330		3,188
CLOs		34,786		108		0		0		34,786		108
Total	$	266,972	$	7,394	$	0	$	0	$	266,972	$	7,394



	Less Than 12 Months				12 Months or More				Total
(In thousands)	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
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
Non-agency CMOs		0		0		3,041		2		3,041		2
CLOs		24,527		221		0		0		24,527		221
Total	$	89,382	$	764	$	3,041	$	2	$	92,423	$	766

There were no securities held to maturity with unrealized losses as of June 30, 2013 or December 31, 2012. There were no securities classified as trading at June 30, 2013 and December 31, 2012.

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. Both of our non-agency CMOs held at March 31, 2013 were sold in early April for small gains. 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 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.

During July 2013, we transferred securities with an amortized cost of $139.60 million from available-for-sale to held-to-maturity. The fair value and carrying value at the date of the transfer was $134.84 million. The net after tax loss of $3.10 million has been recorded in accumulated other comprehensive income (loss) and will be amortized over the estimated lives of the securities.

As a member of the FHLB system, we are required to invest in stock of the Federal Home Loan Bank of Boston (“FHLBB”) in an amount determined based on our borrowings from the FHLBB. At June 30, 2013, our investment in FHLBB stock totaled $7.50 million. We received and recorded dividend income totaling $8 thousand and $13 thousand during the three and six months ended June 30, 2013, respectively, compared to $8 thousand and $25 thousand during the three and six months ended June 30, 2012, respectively.