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 (loss) were as follows:

	Gross		Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
March 31, 2013 (in thousands)	Cost		Gains		Losses			Value

U.S. Treasury securities and
U.S. Government agencies	$	38,954	$	454	$	(4	)	$	39,404
Private label mortgage backed security		5,501		187		-			5,688
Mortgage backed securities - residential		171,021		6,186		-			177,207
Collateralized mortgage obligations		197,547		2,003		(406	)		199,144
Total securities available for sale	$	413,023	$	8,830	$	(410	)	$	421,443


	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

Mortgage backed Securities

At March 31, 2013, with the exception of the $5.7 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 and Fannie Mae (“FNMA”), institutions that the government has affirmed its commitment to support. At March 31, 2013 and December 31, 2012, there were gross unrealized/unrecognized losses of $406,000 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.

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
March 31, 2013 (in thousands)	Value		Gains		Losses		Value

U.S. Treasury securities and
U.S. Government agencies	$	2,366	$	16	$	-	$	2,382
Mortgage backed securities - residential		548		46		-		594
Collateralized mortgage obligations		49,369		413		-		49,782
Total securities to be held to maturity	$	52,283	$	475	$	-	$	52,758


			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 months ended March 31, 2013, there were no sales or calls of securities available for sale.

During the three months ended March 31, 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 ended March 31, 2013 and 2012, respectively.

The amortized cost and fair value of the investment securities portfolio by contractual maturity at March 31, 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
March 31, 2013 (in thousands)	Cost		Value		Value		Value

Due in one year or less	$	1,000	$	1,001	$	521	$	528
Due from one year to five years		35,419		35,869		1,845		1,854
Due from five years to ten years		2,535		2,534		-		-
Due beyond ten years		-		-		-		-
Private label mortgage backed security		5,501		5,688		-		-
Mortgage backed securities - residential		171,021		177,207		548		594
Collateralized mortgage obligations		197,547		199,144		49,369		49,782
Total securities	$	413,023	$	421,443	$	52,283	$	52,758

At March 31, 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 March 31, 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
March 31, 2013 (in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

U.S. Treasury securities and
U.S. Government agencies	$	2,007	$	(4	)	$	-	$	-	$	2,007	$	(4	)
Mortgage backed securities - residential,
including Collateralized mortgage obligations		33,559		(406	)		-		-		33,559		(406	)

Total	$	35,566	$	(410	)	$	-	$	-	$	35,566	$	(410	)

	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

U.S. Treasury securities and
U.S. Government agencies	$	3,588	$	(6	)	$	-	$	-	$	3,588	$	(6	)
Mortgage backed securities - residential,
including Collateralized mortgage obligations		20,508		(130	)		-		-		20,508		(130	)

Total	$	24,096	$	(136	)	$	-	$	-	$	24,096	$	(136	)

At March 31, 2013, the Bank’s security portfolio consisted of 155 securities, six 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.

Nationally, residential real estate values have declined significantly since 2007. These declines in value, coupled with the reduced ability of certain homeowners to refinance or repay their residential real estate obligations, have led to elevated delinquencies and losses in residential real estate loans. Many of these loans have previously been securitized and sold to investors as private label mortgage backed securities. The Bank owns one private label mortgage backed security with a total carrying value of $5.7 million at March 31, 2013. This security is mostly backed by “Alternative A” first lien mortgage loans and is backed with an insurance “wrap” or guarantee with an average life currently estimated at four years. Due to current market conditions, this asset remains extremely 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)	March 31, 2013		December 31, 2012

Carrying amount	$	260,494	$	334,560
Fair value		260,895		334,843