NOTE 3: INVESTMENT SECURITIES

Investments in securities are classified as available for sale or held to maturity as of December 31, 2013 and 2012. The amortized cost and fair values of the securities classified as available for sale and held to maturity as of December 31, 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		0		0		0		0
U.S. Government Sponsored Enterprises ("U.S. GSEs")		0		0		0		0
Federal Home Loan Bank ("FHLB") Obligations		0		0		0		0
Residential Real Estate Mortgage-backed Securities ("Agency MBSs")		97,882		2,876		1,487		99,271
Agency Commercial Mortgage Backed Securities ("Agency CMBSs")		18,398		0		760		17,638
Agency Collateralized Mortgage Obligations ("Agency CMOs")		98,162		254		1,207		97,209
Non-agency Collateralized Mortgage Obligations ("Non-agency CMOs")		0		0		0		0
Collateralized Loan Obligations ("CLOs")		37,834		73		0		37,907
Asset Backed Securities ("ABSs")		357		31		0		388
Total Available for Sale	$	252,733	$	3,234	$	3,454	$	252,513



			Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair
	Cost		Gains		Losses		Value
Held to Maturity:
U.S. Agency Obligations	$	23,580	$	0	$	458	$	23,122
U.S. Government Sponsored Enterprises ("U.S. GSEs")		9,442		0		512		8,930
Federal Home Loan Bank ("FHLB") Obligations		4,684		0		191		4,493
Agency Collateralized Mortgage Obligations		94,105		0		2,426		91,679
Agency MBSs		9,015		25		177		8,863
Total Held to Maturity	$	140,826	$	25	$	3,764	$	137,087

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

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
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 of December 31, 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
Agency MBSs		143		4,383		14,989		79,756		99,271
Agency CMBSs		0		0		13,226		4,412		17,638
Agency CMOs		0		0		3,095		94,114		97,209
CLOs		0		0		28,022		9,885		37,907
ABSs		0		0		0		388		388
Total Available for Sale	$	243	$	4,383	$	59,332	$	188,555	$	252,513
Available for Sale (at amortized cost):
U.S. Treasury Obligations	$	100	$	0	$	0	$	0	$	100
Agency MBSs		135		4,123		14,200		79,424		97,882
Agency CMBSs		0		0		13,754		4,644		18,398
Agency CMOs		0		0		3,092		95,070		98,162
CLOs		0		0		27,949		9,885		37,834
ABSs		0		0		0		357		357
Total Available for Sale	$	235	$	4,123	$	58,995	$	189,380	$	252,733

The contractual final maturity distribution of the debt securities classified as held to maturity of December 31, 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
Held to Maturity (at fair value):
U.S. Agency Obligations	$	0	$	0	$	0	$	23,122	$	23,122
U.S. GSEs		0		0		8,930		0		8,930
FHLB Obligations		0		0		4,493		0		4,493
Agency MBSs		7		26		0		8,830		8,863
Agency CMOs		0		0		0		91,679		91,679
Total Held to Maturity	$	7	$	26	$	13,423	$	123,631	$	137,087
Held to Maturity (at amortized cost):
U.S. Agency Obligations	$	0	$	0	$	0	$	23,580	$	23,580
U.S. GSEs		0		0		9,442		0		9,442
FHLB Obligations		0		0		4,684		0		4,684
Agency MBSs		7		25		0		8,983		9,015
Agency CMOs		0		0		0		94,105		94,105
Total Held to Maturity	$	7	$	25	$	14,126	$	126,668	$	140,826

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)	2013		2012		2011
Proceeds	$	53,215	$	129,936	$	131,858
Gross gains		548		811		1,188
Gross losses		(560)		(304)		(139)
Net gains (losses)	$	(12)	$	507	$	1,049

Securities with a carrying value of $315.53 million and $357.52 million at December 31, 2013 and 2012, respectively, were pledged to secure 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, 2013, were as follows:



	Less Than 12 Months				12 Months or More				Total
(In thousands)	Fair Value		Loss		Fair Value		Loss			Fair Value	Loss
Agency MBSs	$	46,547	$	1,487	$	0	$	0	$	46,547	$	1,487
Agency CMBSs		12,778		578		4,860		182		17,638		760
Agency CMOs		57,904		977		3,557		230		61,461		1,207
Total	$	117,229	$	3,042	$	8,417	$	412	$	125,646	$	3,454

Gross unrecognized 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, at December 31, 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	$	13,722	$	307	$	9,400	$	151	$	23,122	$	458
U.S. GSEs		8,930		512		0		0		8,930		512
FHLB Obligations		4,493		191		0		0		4,493		191
Agency CMOs		66,203		1,410		25,476		1,016		91,679		2,426
Agency MBSs		8,569		177		0		0		8,569		177
Total	$	101,917	$	2,597	$	34,876	$	1,167	$	136,793	$	3,764



	Less Than 12 Months				12 Months or More				Total
(In thousands)	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
U.S. Treasury Obligations	$	0	$	0	$	0	$	0	$	0	$	0
U.S. Agency Obligations	$	10,897	$	59	$	0	$	0	$	10,897	$	59
U.S. GSEs		9,882		88		0		0		9,882		88
FHLB Obligations		0		0		0		0		0		0
Agency MBSs		0		0		0		0		0		0
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
ABSs		0		0		0		0		0		0
Total	$	89,382	$	764	$	3,041	$	2	$	92,423	$	766

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

There were no securities classified as trading at December 31, 2013 and 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.

At December 31, 2013, all of our MBSs and CMOs held were issued by U.S. government-sponsored entities and agencies, primarily FNMA and FHLMC, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because we do not have the intent to sell these securities and it is not likely that we will be required to sell the securities before their anticipated recovery, we do not consider these securities to be other-than-temporarily impaired at December 31, 2013.

We took an impairment charge totaling $166 thousand related to our $37.91 million CLO portfolio. Under the recently finalized Volcker Rule, we may be required to divest some or all of our CLOs by July of 2015. Subsequent to year end we sold $17.74 million of our CLOs for a small gain.

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 and GNMA. CLOs are floating rate securities that consist primarily of pools of senior secured 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 external pricing services to obtain fair market values for our investment portfolio. We have obtained and reviewed the service providers’ pricing and reference data documentation. 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, with inputs determined based on knowledge of the market. For CLOs, the issuer, structure, collateral type, performance and deal and class triggers are also reviewed. 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 the third and fourth quarters of 2013, we transferred securities with a total amortized cost of $152.89 million, and a corresponding fair value of $147.45 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 $3.53 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 $5.07 million, or $3.30 million, net of tax at December 31, 2013.