Note 2 - Securities

The amortized cost and fair value of securities are as follows:


	September 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollar amounts in thousands)

Securities Available-for-Sale:
U.S. government and agency obligations	$	39,228	$	574	$	8	$	39,794
Municipal obligations		30,086		1,745		3		31,828
Corporate obligations		3,985		75		845		3,215
Equity securities in financial institutions		2,468		46		1,013		1,501
Other equity securities		1,000		-		56		944
Mutual funds		2,697		51		11		2,737
Trust preferred securities		14,405		39		6,494		7,950
Mortgage-backed securities:
Agency		65,533		2,560		-		68,093
Collateralized mortgage obligations:
Agency		12,180		247		8		12,419
Private label		2,487		26		204		2,309


	$	174,069	$	5,363	$	8,642	$	170,790

Securities Held-to-Maturity:
U.S. government and agency obligations	$	17,533	$	95	$	13	$	17,615
Municipal obligations		10,896		360		-		11,256
Mortgage-backed securities:
Agency		8,708		311		49		8,970
Collateralized mortgage obligations:
Agency		41,206		904		12		42,098
Private label		2,080		36		19		2,097


	$	80,423	$	1,706	$	93	$	82,036


	September 30, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollar amounts in thousands)
Securities Available-for-Sale:
U.S. government and agency obligations	$	49,442	$	836	$	-	$	50,278
Municipal obligations		27,838		1,742		30		29,550
Corporate obligations		7,980		193		567		7,606
Equity securities in financial institutions		2,685		5		912		1,778
Other equity securities		1,000		-		68		932
Mutual funds		8,716		501		3		9,214
Trust preferred securities		16,695		29		5,784		10,940
Mortgage-backed securities:
Agency		43,778		1,602		3		45,377
Collateralized mortgage obligations:
Agency		15,332		329		6		15,655
Private label		3,483		17		130		3,370

	$	176,949	$	5,254	$	7,503	$	174,700


Securities Held-to-Maturity:
U.S. government and agency obligations	$	20,064	$	161	$	5	$	20,220
Municipal obligations		16,514		554		13		17,055
Mortgage-backed securities:
Agency		6,931		353		-		7,284
Collateralized mortgage obligations:
Agency		27,861		410		21		28,250
Private label		3,457		36		269		3,224

	$	74,827	$	1,514	$	308	$	76,033

The amortized cost and fair value of debt securities by contractual maturity are shown in the following table. Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2011
	Securities Available-for-Sale				Securities Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollar amounts in thousands)
Due in one year or less	$	4,994	$	5,026	$	2,033	$	2,059
Due after one year through five years		32,739		33,530		6,138		6,197
Due after five years through ten years		28,661		29,841		13,410		13,715
Due after ten years		101,510		97,211		58,842		60,065

	$	167,904	$	165,608	$	80,423	$	82,036

At September 30, 2011 investments with an amortized cost of $45.5 million and fair values of $47.0 million were pledged to secure short-term and long-term borrowings with the Federal Home Loan Bank and the Federal Reserve Bank.

The proceeds from the sale of securities for the year ended September 30, 2011 was $33.7 million. Gross gains of $809,000 and gross losses of $0 were realized on sales of securities in fiscal 2011. The proceeds from the sale of securities for the year ended September 30, 2010 were $16.7 million. Gross gains of $1.1 million and gross losses of $23,000 were realized on sales of securities in fiscal 2010.

The Company recognized other-than-temporary impairment losses on securities of $1.5 million and $3.6 million for the fiscal periods ended September 30, 2011 and 2010, respectively. The impairment charges for the fiscal period ended September 30, 2011 relate to six pooled trust preferred securities, a single issuer trust preferred security, a private label mortgage-backed security, and common stock of a local financial institution. The impairment charges for the fiscal period ended September 30, 2010 relate to six pooled trust preferred securities and one private label mortgage-backed security.

At September 30, 2011, the unrealized losses on the securities portfolio were primarily attributable to wider credit spreads reflecting market illiquidity. The Company does not intend to sell these securities and it is not more-likely-than-not that the Company will have to sell these securities.

The following tables show the aggregate related fair value of investments with a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for greater than twelve months.


	Less than 12 Months						12 Months or More						Total
	# of Securities		Fair Value		Unrealized Losses		# of Securities		Fair Value		Unrealized Losses		# of Securities		Fair Value		Unrealized Losses

As of September 30, 2011:
*(Dollar amounts in thousands)*
Available-for-sale:
U.S. government and agency obligations		1	$	2,081	$	8		-	$	-	$	-		1	$	2,081	$	8
Municipal obligations		1		509		3		-		-		-		1		509		3
Corporate obligations		-		-		-		2		1,150		845		2		1,150		845
Equity securities in financial institutions		1		264		12		5		1,145		1,001		6		1,409		1,013
Other equity securities		-		-		-		1		944		56		1		944		56
Mutual funds		1		1,388		11		-		-		-		1		1,388		11
Trust preferred securities		3		774		223		10		6,835		6,271		13		7,609		6,494
Collateralized mortgage obligations:
Agency		2		3,929		8		-		-		-		2		3,929		8
Private-label		-		-		-		2		1,318		204		2		1,318		204

Total temporarily impaired available-for-sale securities		9		8,945		265		20		11,392		8,377		29		20,337		8,642


Held-to-maturity:
U.S. government and agency obligations		1	$	1,987	$	13		-	$	-	$	-		1	$	1,987	$	13
Mortgage-backed securities:
Agency		2		2,045		49		-		-		-		2		2,045		49
Collateralized mortgage obligations:
Agency		3		3,835		8		1		789		4		4		4,624		12
Private-label		-		-		-		2		496		19		2		496		19

Total temporarily impaired held-to-maturity securities		6		7,867		70		3		1,285		23		9		9,152		93


Total temporarily impaired securities		15	$	16,812	$	335		23	$	12,677	$	8,400		38	$	29,489	$	8,735


	Less than 12 Months						12 Months or More						Total
	# of Securities		Fair Value		Unrealized Losses		# of Securities		Fair Value		Unrealized Losses		# of Securities		Fair Value		Unrealized Losses

As of September 30, 2010:
*(Dollar amounts in thousands)*
Available-for-sale:
Municipal obligations		1	$	998	$	7		1	$	478	$	23		2	$	1,476	$	30
Corporate obligations		-		-		-		2		1,428		567		2		1,428		567
Equity securities in financial institutions		-		-		-		6		1,367		912		6		1,367		912
Other equity securities		-		-		-		1		932		68		1		932		68
Mutual funds		1		1,332		3		-		-		-		1		1,332		3
Trust preferred securities		-		-		-		15		9,322		5,784		15		9,322		5,784
Mortgage-backed securities:
Agency		1		161		3		-		-		-		1		161		3
Collateralized mortgage obligations:
Agency		-		-		-		1		647		6		1		647		6
Private-label		-		-		-		3		2,663		130		3		2,663		130

Total temporarily impaired available-for-sale securities		3		2,491		13		29		16,837		7,490		32		19,328		7,503


Held-to-maturity:
U.S. government and agency obligations		1	$	2,995	$	5		-	$	-	$	-		1	$	2,995	$	5
Municipal obligations		-		-		-		1		607		13		1		607		13
Collateralized mortgage obligations:
Agency		1		1,653		1		1		1,295		20		2		2,948		21
Private-label		-		-		-		4		1,773		269		4		1,773		269

Total temporarily impaired held-to-maturity securities		2		4,648		6		6		3,675		302		8		8,323		308


Total temporarily impaired securities		5	$	7,139	$	19		35	$	20,512	$	7,792		40	$	27,651	$	7,811

The Company conducts periodic reviews to identify and evaluate each investment that has an unrealized loss. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in Accumulated Other Comprehensive Income (AOCI) for available-for-sale securities, while such losses related to held-to-maturity securities are not recorded, as these investments are carried at their amortized cost.

Regardless of the classification of the securities as available-for-sale or held-to-maturity, the Company has assessed each position for credit impairment.

Factors considered in determining whether a loss is temporary include:

•

the length of time and the extent to which fair value has been below cost;

•

the severity of the impairment;

•

the cause of the impairment and the financial condition and near-term prospects of the issuer;

•

activity in the market of the issuer which may indicate adverse credit conditions;

•

if the Company intends to sell the investment;

•

if it's more-likely-than-not the Company will be required to sell the investment before recovering its amortized cost basis; and

•

if the Company does not expect to recover the investment's entire amortized cost basis (even if the Company does not intend to sell the security).

The Company's review for impairment generally entails:

•

identification and evaluation of investments that have indications of possible impairment;

•

analysis of individual investments that have fair values less than amortized cost, including consideration of the length of time the investment has been in an unrealized loss position and the expected recovery period;

•

discussion of evidential matter, including an evaluation of factors or triggers that could cause individual investments to qualify as having other-than-temporary impairment and those that would not support other-than-temporary impairment; and

•

documentation of the results of these analyses, as required under business policies.

For debt securities that are not deemed to be credit impaired, management performs additional analysis to assess whether it intends to sell or would more-likely-than-not be required to sell the investment before the expected recovery of the amortized cost basis. Management has asserted that is has no intent to sell and that it believes it is more-likely-than-not that it will not be required to sell the investment before recovery of its amortized cost basis.

Similarly, for equity securities, management considers the various factors described above, including its intent and ability to hold the equity security for a period of time sufficient for recovery to amortized cost. Where management lacks that intent or ability, the security's decline in fair value is deemed to be other-than-temporary and is recorded in earnings.

For debt securities, a critical component of the evaluation for other-than-temporary impairment is the identification of credit impaired securities where management does not receive cash flows sufficient to recover the entire amortized cost basis of the security. The extent of the Company's analysis regarding credit quality and the stress on assumptions used in the analysis had been refined for securities where the current fair value or other characteristics of the security warrant. The paragraphs below describe the Company's process for identifying credit impairment in security types with the most significant unrealized losses as of September 30, 2011.

Trust Preferred Debt Securities

Included in debt securities in an unrealized loss position at September 30, 2011 were thirteen different trust preferred offerings with an aggregate fair value of $7.6 million, which had floating rates based on LIBOR. The unrealized losses on these debt securities amounted to $6.5 million at September 30, 2011. Due to dislocations in the credit markets broadly and the lack of trading and new issuances in pooled trust preferred securities, market price indications generally reflect the lack of liquidity in the market. Prices on pooled trust preferred securities were calculated by a third party valuation company. The valuation methodology is based on the premise that the fair value of the security's collateral should approximate the fair value of its liabilities. In general, the spreads for trust-preferred collateral have widened by over 500 basis points since 2007. To determine the decline in the collateral's value associated with this increase in credit spreads, the third party projected collateral cash flows for each pool using Intex, the industry standard modeling software for securities of this type. Once generated, the cash flows for each pool were discounted at the applicable rate to arrive at the fair value of the collateral. Any declines in the resulting fair value of the collateral below the par value represents the component of loss attributed to credit risk. The credit quality of each collateral pool was then analyzed for the purpose of projecting defaults and recoveries. Prepayment assumptions were also estimated. With these additional assumptions, cash flow projections for both the collateral and the debt obligation were modeled and valued. The fair value of each bond was then determined by discounting the projected cash flows by an adjusted discount rate (adjusted to capture the default risk). During the fiscal period ended September 30, 2011, the Company recognized in earnings impairment charges of $1.1 million on six investments in pooled trust preferred securities and $135,000 on a single issuer trust preferred security. The impairment charges on the pooled trust preferred securities resulted from several factors, including a downgrade on their credit ratings, failure to pass their principal coverage tests, indications of a break in yield, and the decline in the net present value of their projected cash flows. Management of the Company has deemed the impairment of these six trust preferred securities to be other-than-temporary based upon these factors and the duration and extent to which the market value has been less than cost, the inability to forecast a recovery in market value, and other factors concerning the issuers in the pooled security. The impairment charges on the single issuer trust preferred security resulted from the financial institution being put on regulatory order after several quarters of losses and it started deferring interest payments on both its trust preferred and its TARP preferred shares outstanding. During the fiscal period ended September 30, 2010, the Company recognized in earnings impairment charges of $3.5 million on six investments in pooled trust preferred securities resulting from several factors, including a downgrade on their credit ratings, failure to pass their principal coverage tests, indications of a break in yield, and the decline in the net present value of their projected cash flows. Management of the Company has deemed the impairment of these six trust preferred securities to be other-than-temporary based upon these factors and the duration and extent to which the market value has been less than cost, the inability to forecast a recovery in market value, and other factors concerning the issuers in the pooled security. Based on cash flow forecasts for the remaining securities, management expects to recover the remaining amortized cost of these securities. Furthermore, the Company does not intend to sell these securities and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of their cost basis, which may be at maturity.

Equity Securities in Financial Institutions

At September 30, 2011 the Company had $1.0 million of unrealized losses on equity securities in financial institutions. These securities represent investments in common equity offerings of six financial institutions with an aggregate fair value of $1.4 million. In addition to the general factors mentioned above for determining whether the decline in market value is other-than-temporary, the analysis of each of these securities includes a review of the profitability of each issuer and its capital adequacy, and all data available to determine the credit quality of each issuer. During the fiscal period ended September 30, 2011, the Company recognized in earnings impairment charges of $87,000 on one investment in common stock of a local financial institution resulting from the duration and extent to which the market value has been less than the cost and the performance of the financial institution over the past two years. There were no impairment charges taken on these securities for the fiscal period ended September 30, 2010. Based on the Company's detailed analysis and because the Company has the ability and intent to hold the investments until a recovery of its amortized cost basis, the Company does not consider these remaining assets to be other-than-temporarily impaired at September 30, 2011. However, continued price declines could result in a writedown of one or more of these equity investments.

Corporate Obligations

Included in corporate obligations in an unrealized loss position at September 30, 2011 were two different securities with an aggregate fair value of $1.2 million. The unrealized loss on these securities amounted to $845,000 at September 30, 2011. These two securities represent investments in corporate obligations issued by financial institutions and have floating rates which reset monthly based on LIBOR. In addition to the general factors mentioned above for determining whether the decline in market value is other-than-temporary, the analysis of each of these securities included a review of the profitability of each issuer and its capital adequacy, and all data available to determine the credit quality of each issuer. Both issuers are well-capitalized as of September 30, 2011 and the securities have an investment grade rating as rated by at least one nationally recognized credit rating agency. Both institutions had participated in the Treasury's TARP Capital Purchase Program and have subsequently repaid the TARP proceeds. Based on the Company's detailed analysis and because the Company has the ability and intent to hold these investments until a recovery of its amortized cost basis, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2011. There were no impairment charges taken on these securities for the fiscal periods ended September 30, 2011 and 2010.

Private-Label Collateralized Mortgage Obligations

Included in private-label collateralized mortgage obligations in an unrealized loss position at September 30, 2011 were four different securities with an aggregate fair value of $1.8 million. The unrealized loss on these securities amounted to $223,000 at September 30, 2011. A significant amount of the unrealized losses at September 30, 2011 represents one private label mortgage-backed security. For the fiscal periods ended September 30, 2011 and 2010 the Company recognized $204,000 and $57,000, respectively, of credit impairment losses relating to this security. The impairment losses were a result of a downgrade in its credit rating, as well as independent third-party analysis of the underlying collateral for the bond. Based on management's analysis of the remaining securities, management determined that the price declines are strictly market and spread related and management expects to recover the remaining amortized cost of these securities. Furthermore, the Company does not intend to sell these securities and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of their cost basis, which may be at maturity.

The following is a rollforward for the fiscal period ended September 30, 2011 of the amounts recognized in earnings related to credit losses on securities which the Company has recorded other-than-temporary impairment charges through earnings and other comprehensive income:


(Dollar amounts in thousands)
Credit component of OTTI as of October 1, 2010	$	3,586
Additions for credit-related OTTI charges on previously unimpaired securities		135
Additions for credit-related OTTI charges on previously impaired securities		1,280

Credit component of OTTI as of September 30, 2011	$	5,001