6.	MORTGAGE-BACKED SECURITIES

Mortgage-backed securities ("MBS") include mortgage pass-through certificates ("PCs") and collateralized mortgage obligations ("CMOs"). With a pass-through security, investors own an undivided interest in the pool of mortgages that collateralize the PCs. Principal and interest is passed through to the investor as it is generated by the mortgages underlying the pool. PCs and CMOs may be insured or guaranteed by Freddie Mac ("FHLMC"), Fannie Mae ("FNMA") and the Government National Mortgage Association ("GNMA"). CMOs may also be privately issued with varying degrees of credit enhancements. A CMO reallocates mortgage pool cash flow to a series of bonds (called traunches) with varying stated maturities, estimated average lives, coupon rates and prepayment characteristics.

The Company's CMO portfolio is comprised of two segments: CMO's backed by U.S. Government Agencies ("Agency CMO's") and CMO's backed by single-family whole loans not guaranteed by a U.S. Government Agency ("Private-Label CMO's").

At September 30, 2012, the Company's Agency CMO's totaled $76.9 million as compared to $69.1 million at June 30, 2012. The Company's private-label CMO's totaled $7.8 million at September 30, 2012 as compared to $9.9 million at June 30, 2012. The $5.6 million increase in the CMO segment of our MBS portfolio was primarily due to purchases of U.S. Government Agency CMO's totaling $23.5 million which more than offset repayments on our Agency CMO's totaling $15.8 million and $2.3 million in repayments on our private-label CMO's. During the three months ended September 30, 2012, the Company received principal payments totaling $2.3 million on its private-label CMO's. At September 30, 2012, approximately $84.7 million or 100.0% (book value) of the Company's MBS portfolio, including CMO's, were comprised of adjustable or floating rate investments, as compared to $79.0 million or 100.0% at June 30, 2012. Substantially all of the Company's floating rate MBS adjust monthly based upon changes in the one month LIBOR. The Company has no investment in multi-family or commercial real estate based MBS.

Due to prepayments of the underlying loans, and the prepayment characteristics of the CMO traunches, the actual maturities of the Company's MBS are expected to be substantially less than the scheduled maturities.

The following table sets forth information with respect to the Company's private-label CMO portfolio as of September 30, 2012. At the time of purchase, all of our private-label CMO's were rated in the highest investment category by at least two ratings agencies.

At September 30, 2012

Rating

Book
Value

Fair
Value¹

Life to Date
Impairment
Recorded in
Earnings

Cusip #

Security Description

S&P

Moody's

Fitch

(Dollars in Thousands)

05949A2H2

BOAMS 2005-3 1A6

N/A

Ba2

136

135

05949A2H2

BOAMS 2005-3 1A6

N/A

Ba2

174

172

225458JZ2

CSFB 05-3 3A4

BBB

N/A

791

782

225458KE7

CSFB 2005-3 3A9

BBB

N/A

111

108

225458KE7

CSFB 2005-3 3A9

BBB

N/A

337

325

12669G3A7

CWHL 2005 16 A8

N/A

12669G3A7

CWHL 2005 16 A8

N/A

113

112

12669G3A7

CWHL 2005 16 A8

N/A

155

154

12669G3A7

CWHL 2005 16 A8

N/A

169

168

126694CP1

CWHL SER 21 A11

N/A

Caa2

3,295

3,841

201

126694KF4

CWHL SER 24 A15

N/A

488

563

126694KF4

CWHL SER 24 A15

N/A

976

1,125

16162WLW7

CHASE SER S2 A10

N/A

BBB

179

177

16162WLW7

CHASE SER S2 A10

N/A

BBB

251

248

126694MP0

CWHL SER 26 1A5

N/A

592

606

7,829

8,578

324

The Company retains an independent third party to assist it in the determination of a fair value for six of its private-label CMO's. This valuation is meant to be a "Level Three" valuation as defined by ASC Topic 820, Fair Value Measurements and Disclosures. The valuation does not represent the actual terms or prices at which any party could purchase the securities. There is currently no active secondary market for private-label CMO's and there can be no assurance that any secondary market for private-label CMO's will develop. Of the three private-label CMO's not evaluated by the independent third party, two had a balance of less than $500 thousand, and all have estimated remaining lives of less than twelve months. The Company decided that the possibility of an other-than-temporary impairment is remote. The private-label CMO portfolio had three previously recorded other-than-temporary impairments at September 30, 2012. During the three months ending September 30, 2012, the Company reversed $221 thousand of non-credit unrealized holding losses on three of its private-label CMO's with other than temporary impairment (OTTI) due to principal repayments. No additional other than temporary impairments were identified during the quarter ended September 30, 2012.

The Company believes that the data and assumptions used to determine the fair values are reasonable. The fair value calculations reflect relevant facts and market conditions. Events and conditions occurring after the valuation date could have a material effect on the private-label CMO segment's fair value.

For three other private-label CMO's, the Company used the fair value estimates provided by its independent third party investment accounting service. There was no OTTI associated with these three securities as of September 30, 2012 or in the past.

¹	Fair value estimate provided by the Company's independent third party valuation consultant, unless otherwise noted.

²	Fair value estimate provided by the Company's independent third party accounting service.

The amortized cost and fair values of mortgage-backed securities are as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in Thousands)
September 30, 2012
HELD TO MATURITY

Collateralized mortgage obligations:
Agency	$	76,870	$	127	$	(17	)	$	76,980
Private-label		7,829		784		(35	)		8,578


Total	$	84,699	$	911	$	(52	)	$	85,558


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in Thousands)
June 30, 2012
HELD TO MATURITY

Collateralized mortgage obligations:
Agency	$	69,146	$	99	$	(24	)	$	69,221
Private-label		9,940		740		(88	)		10,592


Total	$	79,086	$	839	$	(112	)	$	79,813

The amortized cost and fair value of mortgage-backed securities at September 30, 2012, by contractual maturity, are shown below. Expected maturities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Due in one year or less		Due after one through five years		Due after five through ten years		Due after ten years		Total
	(Dollars in Thousands)

HELD TO MATURITY
Amortized cost	$	-	$	-	$	-	$	84,699	$	84,699
Fair value	$	-	$	-	$	-	$	85,558	$	85,558

At September 30, 2012 and June 30, 2012, mortgage-backed securities with an amortized cost of $76.9 million and $67.0 million and fair values of $77.0 million and $67.0 million, were pledged to secure borrowings with the Federal Home Loan Bank and public deposits.