NOTE 3: INVESTMENT SECURITIES

Investments in securities are classified as available for sale or held to maturity as of March 31, 2014 and December 31, 2013. The amortized cost and fair values of the securities classified as available for sale and held to maturity as of March 31, 2014 are as follows:


		Gross	Gross
	Amortized	Unrealized	Unrealized	Fair
(In thousands)	Cost	Gains	Losses	Value
Available for Sale:
U.S. Treasury Obligations	$ 100	$ -	$ -	$ 100
Residential Real Estate Mortgage-backed Securities ("Agency MBSs")	96,952	2,715	1,010	98,657
Agency Commercial Mortgage Backed Securities ("Agency CMBSs")	18,261	-	635	17,626
Agency Collateralized Mortgage Obligations ("Agency CMOs")	78,738	241	518	78,461
Collateralized Loan Obligations ("CLOs")	19,688	34	-	19,722
Asset Backed Securities ("ABSs")	357	34	-	391
Total Available for Sale	$ 214,096	$ 3,024	$ 2,163	$ 214,957
		Gross	Gross
	Amortized	Unrecognized	Unrecognized	Fair
(In thousands)	Cost	Gains	Losses	Value
Held to Maturity:
U.S. Agency Obligations	$ 23,104	$ 23	$ 335	22,792
U.S. Government Sponsored Enterprises ("U.S. GSEs")	9,456	-	319	9,137
Federal Home Loan Bank ("FHLB") Obligations	4,693	-	75	4,618
Agency Collateralized Mortgage Obligations	104,321	4	2,147	102,178
Agency MBSs	8,808	24	77	8,755
Total Held to Maturity	$ 150,382	$ 51	$ 2,953	$ 147,480

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	$ -	$ -	$ 100
Agency MBSs	97,882	2,876	1,487	99,271
Agency CMBSs	18,398	-	760	17,638
Agency CMOs	98,162	254	1,207	97,209
CLOs	37,834	73	-	37,907
ABSs	357	31	-	388
Total Available for Sale	$ 252,733	$ 3,234	$ 3,454	$ 252,513
		Gross	Gross
	Amortized	Unrecognized	Unrecognized	Fair
(In thousands)	Cost	Gains	Losses	Value
Held to Maturity:
U.S. Agency Obligations	$ 23,580	$ -	$ 458	$ 23,122
U.S. GSEs	9,442	-	512	8,930
FHLB Obligations	4,684	-	191	4,493
Agency Collateralized Mortgage Obligations	94,105	-	2,426	91,679
Agency MBSs	9,015	25	177	8,863
Total Held to Maturity	$ 140,826	$ 25	$ 3,764	$ 137,087

The contractual final maturity distribution of the debt securities classified as available for sale as of March 31, 2014, 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	$ -	$ -	$ -	$ 100
Agency MBSs	50	3,842	18,853	75,912	98,657
Agency CMBSs	-	-	13,258	4,368	17,626
Agency CMOs	-	-	2,881	75,580	78,461
CLOs	-	-	9,834	9,888	19,722
ABSs	-	-	-	391	391
Total Available for Sale	$ 150	$ 3,842	$ 44,826	$ 166,139	$ 214,957
Available for Sale (at amortized cost):
U.S. Treasury Obligations	$ 100	$ -	$ -	$ -	$ 100
Agency MBSs	47	3,616	18,125	75,164	96,952
Agency CMBSs	-	-	13,696	4,565	18,261
Agency CMOs	-	-	2,877	75,861	78,738
CLOs	-	-	9,800	9,888	19,688
ABSs	-	-	-	357	357
Total Available for Sale	$ 147	$ 3,616	$ 44,498	$ 165,835	$ 214,096

The contractual final maturity distribution of the debt securities classified as held to maturity as of March 31, 2014, 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	$ -	$ -	$ -	$ 22,792	$ 22,792
U.S. GSEs	-	-	9,137	-	9,137
FHLB Obligations	-	-	4,618	-	4,618
Agency MBSs	3	23	59	8,670	8,755
Agency CMOs	-	-	-	102,178	102,178
Total Held to Maturity	$ 3	$ 23	$ 13,814	$ 133,640	$ 147,480
Held to Maturity (at amortized cost):
U.S. Agency Obligations	$ -	$ -	$ -	$ 23,104	$ 23,104
U.S. GSEs	-	-	9,456	-	9,456
FHLB Obligations	-	-	4,693	-	4,693
Agency MBSs	3	22	52	8,731	8,808
Agency CMOs	-	-	-	104,321	104,321
Total Held to Maturity	$ 3	$ 22	$ 14,201	$ 136,156	$ 150,382

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 months ended March 31, 2014 and 2013.


(In thousands)	2014	2013
Proceeds	$ 26,641	$ -
Gross gains	225	-
Gross losses	(99)	-
Net gains	$ 126	$ -

Securities with a carrying amount of $265.55 million and $315.53 million at March 31, 2014 and December 31, 2013, 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 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 March 31, 2014, were as follows:


	Less Than 12 Months		12 Months or More		Total
	Fair		Fair		Fair
(In thousands)	Value	Loss	Value	Loss	Value	Loss
Available for Sale:
Agency MBSs	$ 44,760	$ 1,010	$ -	$ -	$ 44,760	$ 1,010
Agency CMBSs	12,758	487	4,868	148	17,626	635
Agency CMOs	47,233	518	-	-	47,233	518
Total Available for Sale	$ 104,751	$ 2,015	$ 4,868	$ 148	$ 109,619	$ 2,163
Held to Maturity:
U.S. Agency Obligations	$ 4,468	$ 37	$ 15,172	$ 298	$ 19,640	$ 335
U.S. GSEs	9,137	319	-	-	9,137	319
FHLB Obligations	4,618	75	-	-	4,618	75
Agency CMOs	65,161	1,160	33,904	987	99,065	2,147
Agency MBSs	8,522	77	-	-	8,522	77
Total Held to Maturity	$ 91,906	$ 1,668	$ 49,076	$ 1,285	$ 140,982	$ 2,953


	Less Than 12 Months		12 Months or More		Total
	Fair		Fair		Fair
(In thousands)	Value	Loss	Value	Loss	Value	Loss
Available for Sale:
Agency MBSs	$ 46,547	$ 1,487	$ -	$ -	$ 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 Available for Sale	$ 117,229	$ 3,042	$ 8,417	$ 412	$ 125,646	$ 3,454
Held to Maturity:
U.S. Agency Obligations	$ 13,722	$ 307	$ 9,400	$ 151	$ 23,122	$ 458
U.S. GSEs	8,930	512	-	-	8,930	512
FHLB Obligations	4,493	191	-	-	4,493	191
Agency CMOs	66,203	1,410	25,476	1,016	91,679	2,426
Agency MBSs	8,569	177	-	-	8,569	177
Total Held to Maturity	$ 101,917	$ 2,597	$ 34,876	$ 1,167	$ 136,793	$ 3,764

There were no securities classified as trading at March 31, 2014 and December 31, 2013.

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 March 31, 2014, all of our MBSs and CMOs held were issued by U.S. government-sponsored entities and agencies, primarily Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corp (“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 March 31, 2014.

Under the Volcker Rule, we may be required to divest some or all of our CLOs by July of 2017. We took an impairment charge totaling $166 thousand related to our CLO portfolio during 2013 and have sold $17.52 million of our CLOs for a small gain during the first quarter of 2014.

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. 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 first quarter of 2014, we transferred securities with a total amortized cost of $12.63 million with a corresponding fair value of $12.64 million from available for sale to held to maturity. The net unrealized gain, net of taxes, on these securities at the dates of the transfers was $8.31 thousand. The unrealized holding gain 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 during 2013 and 2014 was $4.88 million, or $3.18 million, net of tax, at March 31, 2014.