NOTE 3 - INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and fair value of the Company's available-for-sale investment securities are summarized as follows:

As of December 31, 2011			Included in Accumulated Other Comprehensive Income (AOCI)
					Gross unrealized losses
(In thousands)	Amortized cost		Gross unrealized gains		Non-OTTI in AOCI			Non-credit related OTTI in AOCI		Fair value
Investment securities available-for-sale
Mortgage-backed securities-residential	$	16,763	$	309	$	(67	)	$	-	$	17,005
U.S. government agencies		35,966		122		(4	)		-		36,084
Common stocks		130		118		-			-		248
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		231,262		3,315		(543	)		-		234,034
Non-agency		4,739		94		(1	)		-		4,832
Corporate bonds		13,342		104		(471	)		-		12,975
Municipal bonds		985		-		(20	)				965
Trust preferred securities		13,665		2,280		-			-		15,945
Other securities		6,586		347		(15	)		-		6,918
Total available for sale	$	323,438	$	6,689	$	(1,121	)	$	-	$	329,006

As of December 31, 2010			Included in Accumulated Other Comprehensive Income (AOCI)
					Gross unrealized losses
(In thousands)	Amortized cost		Gross unrealized gains		Non-OTTI in AOCL			Non-credit related OTTI in AOCI			Fair value
Investment securities available-for-sale
Mortgage-backed securities-residential	$	8,492	$	348	$	-		$	-		$	8,840
U.S. government agencies		30,492		-		(755	)		-			29,737
Common stocks		381		152		(50	)		-			483
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		231,717		3,640		(704	)		-			234,653
Non-agency		7,026		114		(3	)		-			7,137
Corporate bonds		9,483		-		(197	)		-			9,286
Trust preferred securities		16,566		2,135		-			(87	)		18,614
Other securities		6,436		431		-			-			6,867
Total available for sale	$	310,593	$	6,820	$	(1,709	)	$	(87	)	$	315,617

The investment portfolio grew $13.4 million from $315.6 million at December 31, 2010 to $329.0 million at December 31, 2011. The increase was primarily due to the reinvestment of cash flows from the loan and lease portfolio into government sponsored agency mortgage-backed securities and debt securities.

The amortized cost and fair value of investment securities at December 31, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	As of December 31, 2011
(In thousands)	Amortized cost		Fair value
Within 1 year	$	4,988	$	5,003
After 1 but within 5 years		11,496		11,544
After 5 but within 10 years		7,828		7,586
After 10 years		39,646		41,836
Mortgage-backed securities-residential		16,763		17,005
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		231,262		234,034
Non-agency		4,739		4,832
Total available for sale debt securities		316,722		321,840
No contractual maturity		6,716		7,166
Total available for sale securities	$	323,438	$	329,006

Proceeds from the sales of investments available for sale during 2011, 2010 and 2009 were $113.0 million, $181.3 million, and $184.2 million, respectively. The following table summarizes gross realized gains and losses realized on the sale of securities recognized in earnings in the periods indicated:

	For the years ended December 31,
(In thousands)	2011			2010			2009
Gross realized gains	$	2,584		$	1,938		$	4,077
Gross realized losses		(802	)		(648	)		(2,185	)
Net realized gains (losses)	$	1,782		$	1,290		$	1,892

As of December 31, 2011, investment securities with a market value of $93.7 million were pledged as collateral to secure advances with the FHLB.

The Company evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis. The Company assesses whether OTTI is present when the fair value of a security is less than its amortized cost. All investment securities are evaluated for OTTI under FASB ASC Topic 320, “Investments-Debt & Equity Securities” (“ASC Topic 320”). The non-agency collateralized mortgage obligations that are rated below AA are evaluated under FASB ASC Topic 320 Subtopic 40, “Beneficial Interests in Securitized Financial Assets” or under FASB ASC Topic 325, “Investments-Other”. In determining whether OTTI exists, management considers numerous factors, including but not limited to: (1) the length of time and the extent to which the fair value is less than the amortized cost, (2) the Company's intent to hold or sell the security, (3) the financial condition and results of the issuer including changes in capital, (4) the credit rating of the issuer, (5) analysts earnings estimate, (6) industry trends specific to the security, and (7) timing of debt maturity and status of debt payments.

Under ASC Topic 320, OTTI is considered to have occurred with respect to debt securities (1) if an entity intends to sell the security; (2) if it is more likely than not an entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. In addition, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell or will more likely than not be required to sell the security. If an entity intends to sell the security or will be required to sell the security, the OTTI shall be recognized in earnings equal to the entire difference between the fair value and the amortized cost basis at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before the recovery of its amortized cost basis, the OTTI shall be separated into two amounts, the credit-related loss and the noncredit-related loss. The credit-related loss is based on the present value of the expected cash flows and is recognized in earnings. The noncredit-related loss is based on other factors such as illiquidity and is recognized in other comprehensive income.

The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at December 31, 2011:

As of December 31, 2011	Less than 12 months							12 months or longer							Total
(In thousands)	Fair value		Gross unrealized losses			Number of positions		Fair value		Gross unrealized losses			Number of positions		Fair value		Gross unrealized losses			Number of positions
Investment securities available for sale
Mortgage-backed securities-residential	$	9,588	$	(67	)		2	$	-	$	-			-	$	9,588	$	(67	)		2
U.S. government agencies		2,999		(1	)		1		3,996	$	(3	)		1		6,995		(4	)		2
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		35,511		(374	)		8		10,149		(169	)		3		45,660		(543	)		11
Non-agency		-		-			-		669		(1	)		1		669		(1	)		1
Corporate bonds		3,804		(197	)		5		3,751		(274	)		4		7,555		(471	)		9
Municipal bonds		965		(20	)		1		-		-			-		965		(20	)		1
Other securities		502		(15	)		1		-		-			-		502		(15	)		1
Total available for sale	$	53,369	$	(674	)		18	$	18,565	$	(447	)		9	$	71,934	$	(1,121	)		27

The AFS portfolio had gross unrealized losses of $1.1 million at December 31, 2011, which improved from gross unrealized losses of $1.8 million at December 31, 2010. The slight improvement in gross unrealized losses of $675,000 is related to the overall improvement in the fair values of the securities in the Company's investment portfolio offset by $1.8 million in impairment charges, which includes $1.7 million on one trust preferred security. In determining the Company's intent not to sell and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, management considers the following factors: current liquidity and availability of other non-pledged assets that permits the investment to be held for an extended period of time but not necessarily until maturity, capital planning, and any specific investment committee goals or guidelines related to the disposition of specific investments.

Common stocks: As of December 31, 2011, the Company had three common stocks of financial institutions with a total fair value of $248,000 and an unrealized gain of $118,000. During 2011 the Company sold six investments in common stocks and recorded a gain of $106,000.

For all debt security types discussed below the fair value is based on prices provided by brokers and safekeeping custodians with the exception of trust preferred securities which is described below.

Mortgage-backed securities issued by U.S. government agencies and U.S. government sponsored enterprises: As of December 31, 2011, the Company had two mortgage-backed securities with a fair value of $9.6 million and gross unrealized losses of $67,000, or 0.7% of their aggregate cost. The two mortgage-backed securities had been in an unrealized loss position for less than six months. The unrealized loss is attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on its assessment of these factors, management believes that the unrealized losses on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. The Company does not intend to sell these securities before recovery of their cost basis and will not more likely than not be required to sell these securities before recovery of their cost basis. Therefore, management has determined that these securities are not other-than-temporarily impaired at December 31, 2011.

U.S. government-sponsored agencies (“U.S. Agencies”): As of December 31, 2011, the Company had two U.S. Agencies with a fair value of $7.0 million and gross unrealized losses of $4,000, or less than 0.1%, of their aggregate cost. One of these U.S. Agencies has been in an unrealized loss position for less than one year and the other one for more than one year. Management believes that the unrealized losses on these debt securities are a function of changes in investment spreads. Management expects to recover the entire amortized cost basis of these securities. The Company does not intend to sell these securities before recovery of their cost basis and will not more likely than not be required to sell these securities before recovery of their cost basis. Therefore, management has determined that these securities are not other-than-temporarily impaired at December 31, 2011.

U.S. government issued or sponsored collateralized mortgage obligations (“Agency CMOs”): As of December 31, 2011, the Company had eleven Agency CMOs with a fair value of $45.7 million and gross unrealized losses of $543,000, or 1.2% of their aggregate cost. Three of the Agency CMOs had been in an unrealized loss position for more than one year and the remaining eight have been in an unrealized loss position for six months or less. The unrealized loss is attributable to a combination of factors, including relative changes in interest rates since the time of purchase. The contractual cash flows for these securities are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Based on its assessment of these factors, management believes that the unrealized losses on these debt securities are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. The Company does not intend to sell these securities before recovery of their cost basis and will not more likely than not be required to sell these securities before recovery of their cost basis. Therefore, management has determined that these securities are not other-than-temporarily impaired at December 31, 2011.

Non-agency collateralized mortgage obligations (“Non-agency CMOs”): As of December 31, 2011, the Company had one non-agency CMO with a fair value of $669,000 with a gross unrealized loss of $1,000, or 0.2% of the aggregate cost. The non-agency CMO bond has been in an unrealized loss position for more than twelve months. The Company evaluated the impairment to determine if it could expect to recover the entire amortized cost basis of the non-agency CMO bond by considering numerous factors including credit default rates, conditional prepayment rates, current and expected loss severities, delinquency rates, and geographic concentrations. The bond is rated AAA. The Company does not intend to sell the non-agency CMO and it is not more likely than not that the Company will be required to sell the investment before recovery of the amortized cost basis. Therefore, the Company does not consider the bond to be other-than–temporarily impaired as of December 31, 2011.

Corporate bonds: As of December 31, 2011, the Company had nine corporate bonds with a fair value of $7.6 million and gross unrealized losses of $471,000, or 5.9% of the aggregate cost. Four of the corporate bonds had been in an unrealized loss position for more than one year and the remaining five have been in an unrealized loss position for three months. All nine bonds are above investment grade. The Company's unrealized losses in investments in corporate bonds represent interest rate risk and not credit risk of the underlying issuers. As previously mentioned management also considered (1) the length of time and the extent to which the fair value is less than the amortized cost, (2) the Company's intent to hold or sell the security, (3) the financial condition and results of the issuer including changes in capital, (4) the credit rating of the issuer, (5) analysts earnings estimate, (6) industry trends specific to the security, and (7) timing of debt maturity and status of debt payments. Management utilized discounted cash flow analysis based upon the credit ratings of the securities, liquidity risk premiums, and the recent corporate spreads for similar securities as required under ASC Topic 320 to determine the credit risk component of the corporate bonds. Based on these analyses, there was no credit-related loss on the bonds. Because the Company does not intend to sell the corporate bonds and it is not more likely than not that the Company will be required to sell the bonds before recovery of their amortized cost basis, which may be maturity, the Company does not consider the nine bonds to be other-than-temporarily impaired at December 31, 2011.

Municipal bonds: As of December 31, 2011, the Company had one municipal bond issued by the City of Chicago with a fair value of $965,000 with a gross unrealized loss of $20,000, or 2.0% of the aggregate cost. The municipal bond has been in an unrealized loss position for less than three months and is investment grade. The unrealized loss is attributable to a combination of factors, including Chicago's financial situation. During the fourth quarter, the three major ratings agencies gave Chicago's credit a stable outlook. Because the Company does not intend to sell the bonds and it is not more likely than not that the Company will be required to sell the bond before recovery of its amortized cost basis, which may be maturity, the Company does not consider the bond to be other-than-temporarily impaired at December 31, 2011.

Trust preferred securities: As of December 31, 2011, the Company had six trust preferred securities issued by four individual name companies (reflecting, where applicable the impact of mergers and acquisitions of issuers subsequent to original purchase) in the financial services/banking industry. The valuations of trust preferred securities were based upon the fair market values of active trades for one of the securities and ASC Topic 320 using cash flow analysis for the remaining five securities. Contractual cash flows and a market rate of return were used to derive fair value for each of these securities. Factors that affected the market rate of return included (1) any uncertainty about the amount and timing of the cash flows, (2) the credit risk, (3) liquidity of the instrument, and (4) observable yields from trading data and bid/ask indications. Credit risk spreads and liquidity premiums were analyzed to derive the appropriate discount rate. During 2011, the Company recorded an impairment charge to earnings of $1.7 million on one trust preferred security which was equal to the amortized cost. This trust preferred security had been in an unrealized loss position for longer than twelve months, is not rated, and was issued by a non-public company. The impairment reflects the credit concerns related to the financial institution that issued this long term financial obligation. Management does not believe the Company will recover the entire amortized cost of this security due to the issuer's financial losses and reductions of capital.

Other securities: As of December 31, 2011, the Company had seven investments in real estate funds. As of December 31, 2011, one of the private equity real estate funds had a fair value of $502,000 and an unrealized loss of $15,000 or 2.9% of the aggregate cost. During the first quarter of 2010, management concluded that the fund was other-than-temporarily impaired and recorded an impairment charge of $63,000. After reviewing the fund's financials, asset values, and its near-term projections, management concluded that there was no additional impairment in 2011.

The Company will continue to monitor all of the above investments to determine if the discounted cash flow analysis, continued negative trends, market valuations or credit defaults result in impairment that is other than temporary.

The following table presents a roll-forward of the balance of credit-related impairment losses on debt securities held at December 31, 2011 and 2010 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:

(In thousands)	2011			2010
Balance at January 1,	$	924		$	1,896
Reductions for securities sold during the period (realized)		-			(859	)
Reductions for securities for which the amount previously recognized in other comprehensive income was recognized in earnings because the Company does not expect to recover the entire amortized cost		(751	)		-
Reductions for securities for which the amount previously recognized in other comprehensive income was recognized in earnings because the Company intends to sell the security		-			(113	)
Balance at December 31,	$	173		$	924

The following table summarizes other-than-temporary impairment losses on securities recognized in earnings in the periods indicated:

	For the years ended December 31,
(In thousands)	2011		2010		2009
Non-agency collateralized mortgage obligations	$	-	$	-	$	459
Corporate bonds		-		58		1,353
Trust preferred securities		1,749		193		3,009
Common stocks		47		-		4,334
Preferred stocks		-		165		1,117
Other securities		-		63		769
Total OTTI recognized in earnings	$	1,796	$	479	$	11,041

The tables below indicate the length of time individual securities have been in a continuous unrealized loss position at December 31, 2010:

As of December 31, 2010	Less than 12 months							12 months or longer							Total
(In thousands)	Fair value		Gross Unrealized losses			Number of positions		Fair value		Gross Unrealized losses			Number of positions		Fair value		Gross Unrealized losses			Number of positions
Investment securities available for sale
U.S. government agencies	$	29,737	$	(755	)		8	$	-	$	-			-	$	29,737	$	(755	)		8
Common stocks		96		(50	)		2		-		-			-		96		(50	)		2
Collateralized mortgage obligations:
Issued or guaranteed by U.S. government agencies		73,169		(687	)		19		4,429		(17	)		1		77,598		(704	)		20
Non-agency		918		(3	)		1		-		-			-		918		(3	)		1
Corporate bonds		8,986		(197	)		9		-		-			-		8,986		(197	)		9
Trust preferred securities		-		-			-		1,662		(87	)		1		1,662		(87	)		1
Total available for sale	$	112,906	$	(1,692	)		39	$	6,091	$	(104	)		2	$	118,997	$	(1,796	)		41

During 2010, the Company recorded a total impairment charge to earnings of $479,000 related to preferred stocks, trust preferred securities, corporate bonds, and real estate investment funds. Management concluded that these investments were OTTI.