NOTE 3: INVESTMENT SECURITIES

Investments in securities are classified as available for sale or held to maturity as of September 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 September 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		8,463		0		609		7,854
Residential Real Estate Mortgage-backed Securities ("Agency MBSs")		102,822		3,350		930		105,242
Agency Commercial Mortgage Backed Securities ("Agency CMBSs")		18,533		0		534		17,999
Agency Collateralized Mortgage Obligations ("CMOs")		98,570		593		812		98,351
Collateralized Loan Obligations ("CLOs")		39,877		0		143		39,734
Asset Backed Securities ("ABSs")		357		39		0		396
Total Available for Sale	$	268,722	$	3,982	$	3,028	$	269,676
Held to Maturity:
U.S. Agency Obligations	$	15,826	$	0	$	268	$	15,558
U.S. Government Sponsored Enterprises ("U.S. GSEs")		9,428		0		575		8,853
Federal Home Loan Bank ("FHLB") Obligations		4,675		0		46		4,629
Agency CMOs		96,852		12		988		95,876
Agency MBSs		9,236		27		61		9,202
Total Held to Maturity	$	136,017	$	39	$	1,938	$	134,118

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 September 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	$	100	$	0	$	0	$	0	$	100
U.S. Agency Obligations		0		0		0		7,854		7,854
Agency MBSs		201		4,553		16,619		83,869		105,242
Agency CMBSs		0		0		13,453		4,546		17,999
Agency CMOs		0		0		3,317		95,034		98,351
CLOs		0		0		29,766		9,968		39,734
ABSs		0		0		0		396		396
Total Available for Sale	$	301	$	4,553	$	63,155	$	201,667	$	269,676
Held to Maturity (at amortized cost):
U.S. Agency Obligations	$	0	$	0	$	0	$	15,826	$	15,826
U.S. GSEs		0		0		9,428		0		9,428
FHLB Obligations		0		0		4,675		0		4,675
Agency CMOs		0		0		0		96,852		96,852
Agency MBSs		12		27		0		9,197		9,236
Total Held to Maturity	$	12	$	27	$	14,103	$	121,875	$	136,017

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 tables 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 nine months ended September 30, 2013 and 2012.



	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2013		2012		2013		2012
Proceeds	$	2,001	$	22,672	$	53,215	$	64,336
Gross gains		1		36		548		530
Gross losses		0		(62)		(560)		(108)
Net gains (losses)	$	1	$	(26)	$	(12)	$	422

Securities with a carrying amount of $264.35 million and $349.52 million at September 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 September 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	$	7,854	$	609	$	0	$	0	$	7,854	$	609
Agency MBSs		36,587		930		0		0		36,587		930
Agency CMBSs		13,037		427		4,962		107		17,999		534
Agency CMOs		27,682		635		3,800		177		31,482		812
CLOs		39,734		143		0		0		39,734		143
Total	$	124,894	$	2,744	$	8,762	$	284	$	133,656	$	3,028

Gross unrealized losses on investment securities held to maturity 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 over our entire holding period, at September 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	$	15,559	$	268	$	0	$	0	$	15,559	$	268
U.S. GSEs		8,853		575		0		0		8,853		575
FHLB Obligations		4,629		46		0		0		4,629		46
Agency CMOs		82,408		927		4,460		61		86,868		988
Agency MBSs		8,883		61		0		0		8,883		61
Total	$	120,332	$	1,877	$	4,460	$	61	$	124,792	$	1,938



	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 classified as held to maturity as of December 31, 2012 with unrealized losses. There were no securities classified as trading at September 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 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 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 the third quarter of 2013, we transferred securities with a total amortized cost of $144.43 million with a corresponding fair value of $139.57 million from available for sale to held to maturity. The net unrealized loss, net of taxes, on these securities at the dates of the transfers were $3.16 million. The unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income, net of tax and is amortized over the remaining lives of the securities as an adjustment of the yield. The amortization of the unamortized holding loss reported in accumulated other comprehensive income will offset the effect on interest income of the discount for the transferred securities. The remaining unamortized balance of the losses for the securities transferred from available for sale to held to maturity was $3.03 million at September 30, 2013.

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 September 30, 2013, our investment in FHLBB stock totaled $7.50 million. We received and recorded dividend income totaling $7 thousand and $20 thousand during the three and nine months ended September 30, 2013, respectively, compared to $11 thousand and $36 thousand during the three and nine months ended September 30, 2012, respectively.