3. INVESTMENT SECURITIES

Securities available for sale:

The gross amortized cost and fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:

	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
June 30, 2013 (in thousands)	Cost		Gains		Losses			Value

U.S. Treasury securities and U.S. Government agencies	$	45,180	$	451	$	(115	)	$	45,516
Private label mortgage backed security	5,216		425		—			5,641
Mortgage backed securities - residential	144,733		5,331		(9		)	150,055
Collateralized mortgage obligations	204,093		1,678		(1,623		)	204,148
Corporate bonds	15,017		—		(46		)	14,971
Total securities available for sale	$	414,239	$	7,885	$	(1,793	)	$	420,331

	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2012 (in thousands)	Cost		Gains		Losses			Value

U.S. Treasury securities and U.S. Government agencies	$	38,931	$	547	$	(6	)	$	39,472
Private label mortgage backed security	5,684		3		—			5,687
Mortgage backed securities - residential	190,569		6,641		—			197,210
Collateralized mortgage obligations	194,427		1,580		(130		)	195,877
Total securities available for sale	$	429,611	$	8,771	$	(136	)	$	438,246

Securities to be held to maturity:

The carrying value, gross unrecognized gains and losses, and fair value of securities to be held to maturity were as follows:

			Gross		Gross
	Carrying		Unrecognized		Unrecognized			Fair
June 30, 2013 (in thousands)	Value		Gains		Losses			Value

U.S. Treasury securities and U.S. Government agencies	$	2,348	$	6	$	(17	)	$	2,337
Mortgage backed securities - residential	524		43		—			567
Collateralized mortgage obligations	47,297		634		(23		)	47,908
Corporate bonds	5,000		—		(108		)	4,892
Total securities to be held to maturity	$	55,169	$	683	$	(148	)	$	55,704

			Gross		Gross
	Carrying		Unrecognized		Unrecognized		Fair
December 31, 2012 (in thousands)	Value		Gains		Losses		Value

U.S. Treasury securities and U.S. Government agencies	$	4,388	$	27	$	—	$	4,415
Mortgage backed securities - residential	827		63		—		890
Collateralized mortgage obligations	40,795		316		—		41,111
Total securities to be held to maturity	$	46,010	$	406	$	—	$	46,416

During the three and six months ended June 30, 2013, there were no sales or calls of securities available for sale.

During the six months ended June 30, 2012, the Bank recognized net securities gains in earnings for securities available for sale as follows:

· The Bank sold six available for sale securities acquired in the TCB acquisition with an amortized cost of $35 million, resulting in a pre-tax gain of $53,000 during the first quarter of 2012.

· The Bank realized $3,000 in pre-tax gains related to unamortized discount accretion on $10 million of callable U.S. Government agencies that were called during the first quarter of 2012 before their maturity.

The tax provision related to the Bank’s realized gains totaled $0 and $20,000 for the three and six months ended June 30, 2012, respectively.

The amortized cost and fair value of the investment securities portfolio by contractual maturity at June 30, 2013 follows. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations whether or not there are associated call or prepayment penalties. Securities not due at a single maturity date are detailed separately.

	Securities				Securities
	available for sale				held to maturity
	Amortized		Fair		Carrying		Fair
June 30, 2013 (in thousands)	Cost		Value		Value		Value

Due in one year or less	$	1,007	$	1,007	$	—	$	—
Due from one year to five years	46,666		46,981		2,348		2,337
Due from five years to ten years	12,524		12,499		5,000		4,892
Due beyond ten years	—		—		—		—
Private label mortgage backed security	5,216		5,641		—		—
Mortgage backed securities - residential	144,733		150,055		524		567
Collateralized mortgage obligations	204,093		204,148		47,297		47,908
Total securities	$	414,239	$	420,331	$	55,169	$	55,704

Corporate Bonds

During the quarter ended June 30, 2013, the Bank purchased $20 million in floating rate corporate bonds with an initial weighted average yield of 1.36%. The bonds, which have a weighted average life of 7 years, were rated “investment grade” by accredited rating agencies as of their respective purchase dates. The total fair value of the Bank’s corporate bonds represented 4% of the Bank’s investment portfolio as of June 30, 2013.

Mortgage backed Securities

At June 30, 2013, with the exception of the $5.6 million private label mortgage backed security, all other mortgage backed securities held by the Bank were issued by U.S. government-sponsored entities and agencies, primarily Freddie Mac (“FHLMC”) and Fannie Mae (“FNMA”), institutions that the government has affirmed its commitment to support. At June 30, 2013 and December 31, 2012, there were gross unrealized/unrecognized losses of $1.6 million and $130,000 related to available for sale mortgage backed securities. Because the decline in fair value of these mortgage backed securities is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Bank does not have the intent to sell these mortgage backed securities, and it is likely that it will not be required to sell the securities before their anticipated recovery, management does not consider these securities to be other-than-temporarily impaired.

At June 30, 2013 and December 31, 2012, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

Market Loss Analysis

Securities with unrealized losses at June 30, 2013 and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	Less than 12 months					12 months or more				Total
June 30, 2013 (in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

Available for sale
U.S. Treasury securities and U.S. Government agencies	$	21,791	$	(115	)	$	—	$	—	$	21,791	$	(115	)
Mortgage backed securities - residential	1,150		(9		)	—		—		1,150		(9		)
Collateralized mortgage obligations	62,643		(1,623		)	—		—		62,643		(1,623		)
Corporate bonds	14,971		(46		)	—		—		14,971		(46		)

Total available for sale	$	100,555	$	(1,793	)	$	—	$	—	$	100,555	$	(1,793	)

	Less than 12 months					12 months or more				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Held to maturity
U.S. Treasury securities and U.S. Government agencies	$	1,814	$	(17	)	$	—	$	—	$	1,814	$	(17	)
Collateralized mortgage obligations	9,870		(23		)	—		—		9,870		(23		)
Corporate bonds	4,892		(108		)	—		—		4,892		(108		)

Total held to maturity	$	16,576	$	(148	)	$	—	$	—	$	16,576	$	(148	)

	Less than 12 months					12 months or more				Total
December 31, 2012 (in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

Available for sale
U.S. Treasury securities and U.S. Government agencies	$	3,588	$	(6	)	$	—	$	—	$	3,588	$	(6	)
Collateralized mortgage obligations	20,508		(130		)	—		—		20,508		(130		)

Total available for sale	$	24,096	$	(136	)	$	—	$	—	$	24,096	$	(136	)

At June 30, 2013, the Bank’s security portfolio consisted of 157 securities, 24 of which were in an unrealized loss position. At December 31, 2012, the Bank’s security portfolio consisted of 153 securities, seven of which were in an unrealized loss position.

Other-than-temporary impairment (“OTTI”)

Unrealized losses for all investment securities are reviewed to determine whether the losses are “other-than-temporary.” Investment securities are evaluated for OTTI on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value below amortized cost is other-than-temporary. In conducting this assessment, the Bank evaluates a number of factors including, but not limited to:

· The length of time and the extent to which fair value has been less than the amortized cost basis;

· The Bank’s intent to hold until maturity or sell the debt security prior to maturity;

· An analysis of whether it is more likely than not that the Bank will be required to sell the debt security before its anticipated recovery;

· Adverse conditions specifically related to the security, an industry, or a geographic area;

· The historical and implied volatility of the fair value of the security;

· The payment structure of the security and the likelihood of the issuer being able to make payments;

· Failure of the issuer to make scheduled interest or principal payments;

· Any rating changes by a rating agency; and

· Recoveries or additional decline in fair value subsequent to the balance sheet date.

The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized for the anticipated credit losses.

The Bank owns one private label mortgage backed security with a total carrying value of $5.6 million at June 30, 2013. This security, with an average remaining life currently estimated at four years, is mostly backed by “Alternative A” first lien mortgage loans, but also has an insurance “wrap” or guarantee as an added layer of protection to the security holder. This asset is illiquid, and as such, the Bank determined it to be a Level 3 security in accordance with ASC Topic 820, Fair Value Measurements and Disclosures. Based on this determination, the Bank utilized an income valuation model (“present value model”) approach, in determining the fair value of the security. This approach is beneficial for positions that are not traded in active markets or are subject to transfer restrictions, and/or where valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support for this investment.

See additional discussion regarding the Bank’s private label mortgage backed security under Footnote 7 “Fair Value” in this section of the filing.

Pledged Investment Securities

Investment securities pledged to secure public deposits, securities sold under agreements to repurchase and securities held for other purposes, as required or permitted by law are as follows:

(in thousands)	June 30, 2013		December 31, 2012

Carrying amount	$	184,001	$	334,560
Fair value	184,480		334,843