NOTE 3: INVESTMENT SECURITIES

Investments in securities are classified as available for sale or held to maturity as of December 31, 2011 and 2010. The amortized cost and fair values of the securities classified as available for sale and held to maturity as of December 31, 2011 and 2010 are as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

(In thousands)
As of December 31, 2011
Available for sale:
U.S. Treasury Obligations	$	250	$	0	$	0	$	250
U.S. Agency Obligations		89,597		828		6		90,419
FHLB Obligations		16,545		134		3		16,676
Agency Residential Real Estate Mortgage-backed
Securities ("Agency MBSs")		176,756		7,100		18		183,838
Agency Collateralized Mortgage Obligations
("Agency CMOs")		211,749		2,976		245		214,480
Non-agency Collateralized Mortgage Obligations
("Non-agency CMOs")		5,346		2		493		4,855
Asset Backed Securities ("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


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

(In thousands)
As of December 31, 2010
Available for sale:
U.S. Treasury Obligations	$	250	$	0	$	0	$	250
U.S. Agency Obligations		47,717		287		216		47,788
FHLB Obligations		11,211		253		7		11,457
Agency MBSs		169,396		6,136		625		174,907
Agency CMOs		222,435		2,289		456		224,268
Non-agency CMOs		6,114		2		264		5,852
ABSs		1,492		0		52		1,440
Total available for sale	$	458,615	$	8,967	$	1,620	$	465,962
Held to maturity:
Agency MBSs	$	794	$	88	$	0	$	882
Total held to maturity	$	794	$	88	$	0	$	882

There were no securities classified as trading at December 31, 2011 and 2010.

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:

SECURITIES AVAILABLE FOR SALE (at fair value):


	Within One Year		After One But Within Five Years		After Five But Within Ten Years		After Ten Years		Total

(In thousands)
U.S. Treasury Obligations	$	250	$	0	$	0	$	0	$	250
U.S. Agency Obligations		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	$	6,682	$	18,685	$	119,113	$	367,271	$	511,751

SECURITIES HELD TO MATURITY (at amortized cost):


	Within One Year		After One But Within Five Years		After Five But Within Ten Years		After Ten Years		Total

(In thousands)
Agency MBSs	$	0	$	158	$	0	$	400	$	558
Total	$	0	$	158	$	0	$	400	$	558

Actual maturities will differ from contractual maturities because borrowers may have rights to call or prepay obligations. Maturities of MBSs and CMOs in the table above are based on final contractual maturities.

Proceeds from sales of available for sale debt securities were $131.86 million, $58.48 million, and $65.20 million during 2011, 2010 and 2009, respectively. Gross gains of $1.19 million, $2.12 million and $1.80 million, and gross losses of $139 thousand, $40 thousand and $576 thousand were realized from sales of securities in 2011, 2010 and 2009, respectively.

Securities with a book value of $299.36 million and $279.82 at December 31, 2011 and 2010, 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, 2011, were as follows:


	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Agency Obligations	$	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


	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Agency Obligations	$	16,173	$	216	$	0	$	0	$	16,173	$	216
FHLB Obligations		4,989		7		0		0		4,989		7
Agency MBSs		61,276		625		0		0		61,276		625
Agency CMOs		86,542		456		0		0		86,542		456
Non-Agency CMOs		96		2		5,684		262		5,780		264
ABSs		349		7		1,090		45		1,439		52
	$	169,425	$	1,313	$	6,774	$	307	$	176,199	$	1,620

There were no securities held to maturity with unrealized losses as of December 31, 2011 or 2010.

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.

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 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 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 selected bonds from an alternative pricing source.

Our investment portfolio consists almost entirely of U.S. Treasury and Agency obligations, or Agency-guaranteed mortgage securities. We have two non-agency CMOs with a current book value of $5.30 million and one non-agency ABS with a current book value of $816 thousand. We have performed extensive impairment analyses on all three of these bonds with the assistance of an additional outside expert that specializes in valuing these types of securities. The outside expert performed an in-depth analysis of the underlying collateral and, based on that analysis formulated collateral performance assumptions regarding the likely magnitude and timing of defaults, severities and prepayments. Those assumptions were fed into a model that incorporates all aspects of the deal structure and waterfall and produces a cash flow projection. Data provided by the trustee and the servicer was examined and consideration given to both performance to date characteristics and loan credit characteristics such as the loan to value ("LTV") ratio, FICO score, geographic location, modification status and vintage, among others. The collateral was divided into several distinct buckets and different default, recovery and prepayment assumptions were applied to each of the buckets. The collateral features weighted most heavily, because they are the most

determinative of future performance, were: original LTV, underlying property location, current loan status, and loan modification status. Different liquidation curves, default rates and loss severity assumptions were applied to each bucket.

One of the non-Agency CMOs, with a cost basis of $3.55 million and a fair value of $3.30 million at December 31, 2011, is rated BBB by Fitch and Baa3 by Moody's. Delinquencies have been fairly low and prepayment speeds for the bond during 2011 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 $1.75 million and a fair value of $1.51 million. This bond is rated CCC by Fitch and BBB-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. The third non-agency bond in our portfolio has an adjusted cost basis of $816 thousand and a fair value of $816 thousand. The bond has insurance backing from Ambac. However, because of Ambac's uncertain financial status, we place no reliance on the insurance wrap in our impairment analysis. The bond is rated CC by Standard & Poor's and Caa2 by Moody's. This is the only bond in our portfolio with subprime exposure and we expect that we will incur losses on this bond. As a result we have recorded a total of $177 thousand in impairment charges on this bond, the total amount of the principal write downs we expect to experience. We have taken charges of $55 thousand, $80 thousand and $42 thousand during 2011, 2010 and 2008, respectively.

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 FHLB of Boston (the "FHLBB") in an amount determined based on our borrowings from the FHLBB. At December 31, 2011, our investment in FHLBB stock totaled $8.63 million. We received and recorded dividend income totaling $32 thousand during the 2011. We received no dividend income on FHLBB stock during 2010.