Note 2. Investment Securities

The amortized cost and estimated fair value of available-for-sale securities, including gross unrealized gains and losses, at September 30, 2013, and December 31, 2012, were as follows:


	September 30, 2013
	Amortized		Unrealized		Unrealized			Fair		OTTI in
	Cost		Gains		Losses			Value		AOCI⁽¹⁾
(Amounts in thousands)
U.S. Treasury securities	$	9,701	$	—	$	(435	)	$	9,266	$	—
Municipal securities		152,965		2,760		(3,923	)		151,802		—
Single issue trust preferred securities		55,750		—		(9,811	)		45,939		—
Corporate securities		5,000		—		(67	)		4,933		—
Mortgage-backed securities:
Agency		321,486		3,416		(6,637	)		318,265		—
Non-Agency Alt-A residential		13,242		—		(3,219	)		10,023		(3,219	)

Total mortgage-backed securities		334,728		3,416		(9,856	)		328,288		(3,219	)
Equity securities		5,315		187		(54	)		5,448		—

Total	$	563,459	$	6,363	$	(24,146	)	$	545,676	$	(3,219	)


	December 31, 2012
	Amortized		Unrealized		Unrealized			Fair		OTTI in
	Cost		Gains		Losses			Value		AOCI⁽¹⁾
(Amounts in thousands)
Municipal securities	$	151,119	$	8,195	$	(97	)	$	159,217	$	—
Single issue trust preferred securities		55,707		—		(11,061	)		44,646		—
Mortgage-backed securities:
Agency		310,323		6,023		(449	)		315,897		—
Non-Agency Alt-A residential		14,215		—		(3,148	)		11,067		(3,148	)

Total mortgage-backed securities		324,538		6,023		(3,597	)		326,964		(3,148	)
Equity securities		3,446		190		(105	)		3,531		—

Total	$	534,810	$	14,408	$	(14,860	)	$	534,358	$	(3,148	)

(1)	Other-than-temporary impairment in accumulated other comprehensive income

The amortized cost and estimated fair value of held-to-maturity securities, including gross unrealized gains and losses, at September 30, 2013, and December 31, 2012, were as follows:


	September 30, 2013
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
(Amounts in thousands)
Municipal securities	$	567	$	5	$	—	$	572

Total	$	567	$	5	$	—	$	572


	December 31, 2012
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
(Amounts in thousands)
Municipal securities	$	816	$	16	$	—	$	832

Total	$	816	$	16	$	—	$	832

The amortized cost and estimated fair value of available-for-sale and held-to-maturity securities by contractual maturity at September 30, 2013, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized
(Amounts in thousands)	Cost		Fair Value
Available-for-sale securities
Due within one year	$	727	$	735
Due after one year but within five years		17,725		18,101
Due after five years but within ten years		35,742		35,808
Due after ten years		169,222		157,296

		223,416		211,940
Mortgage-backed securities		334,728		328,288
Equity securities		5,315		5,448

Total	$	563,459	$	545,676

Held-to-maturity securities
Due within one year	$	—	$	—
Due after one year but within five years		567		572
Due after five years but within ten years		—		—
Due after ten years		—		—

Total	$	567	$	572

Available-for-sale securities in a continuous unrealized loss position for less than 12 months and for 12 months or longer at September 30, 2013, and December 31, 2012, were as follows:


	September 30, 2013
	Less than 12 Months					12 Months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
(Amounts in thousands)
U.S. Treasury securities	$	9,266	$	(435	)	$	—	$	—		$	9,266	$	(435	)
Municipal securities		43,722		(3,923	)		—		—			43,722		(3,923	)
Single issue trust preferred securities		—		—			45,939		(9,811	)		45,939		(9,811	)
Corporate securities		4,933		(67	)		—		—			4,933		(67	)
Mortgage-backed securities:
Agency		147,950		(5,869	)		16,006		(768	)		163,956		(6,637	)
Non-Agency Alt-A residential		—		—			10,023		(3,219	)		10,023		(3,219	)

Total mortgage-backed securities		147,950		(5,869	)		26,029		(3,987	)		173,979		(9,856	)
Equity securities		4,981		(19	)		153		(35	)		5,134		(54	)

Total	$	210,852	$	(10,313	)	$	72,121	$	(13,833	)	$	282,973	$	(24,146	)


	December 31, 2012
	Less than 12 Months					12 Months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
(Amounts in thousands)
Municipal securities	$	6,436	$	(97	)	$	—	$	—		$	6,436	$	(97	)
Single issue trust preferred securities		—		—			44,646		(11,061	)		44,646		(11,061	)
Mortgage-backed securities:
Agency		74,197		(449	)		15		—			74,212		(449	)
Non-Agency Alt-A residential		—		—			11,066		(3,148	)		11,066		(3,148	)

Total mortgage-backed securities		74,197		(449	)		11,081		(3,148	)		85,278		(3,597	)
Equity securities		3,106		(25	)		108		(80	)		3,214		(105	)

Total	$	83,739	$	(571	)	$	55,835	$	(14,289	)	$	139,574	$	(14,860	)

There were no held-to-maturity securities in a continuous unrealized loss position at September 30, 2013, or December 31, 2012. At September 30, 2013, the combined depreciation in value of the 171 individual securities in an unrealized loss position was 4.43% of the combined reported value of the aggregate securities portfolio. At December 31, 2012, the combined depreciation in value of the 57 individual securities in an unrealized loss position was 2.78% of the combined reported value of the aggregate securities portfolio.

The following table details the Company’s gross gains and gross losses realized from the sale of securities for the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
(Amounts in thousands)
Gross realized gains	$	—		$	315		$	307		$	434
Gross realized losses		(39	)		(87	)		(116	)		(164	)

Net gain (loss) on sale of securities	$	(39	)	$	228		$	191		$	270

The carrying value of securities pledged to secure public deposits and for other purposes was $279.88 million at September 30, 2013, and $292.88 million at December 31, 2012.

The Company reviews its investment portfolio on a quarterly basis for indications of other-than-temporary impairment (“OTTI”). The analysis differs depending upon the type of investment security being analyzed. For debt securities, the Company has determined that it does not intend to sell securities that are impaired and has asserted that it is not more likely than not that the Company will have to sell impaired securities before recovery of the impairment occurs. This determination is based upon the Company’s investment strategy for the particular type of debt security and its cash flow needs, liquidity position, capital adequacy, and interest rate risk position.

For nonbeneficial interest debt securities, the Company analyzes several qualitative factors such as the severity and duration of the impairment, adverse conditions within the issuing industry, prospects for the issuer, performance of the security, changes in rating by rating agencies, and other qualitative factors to determine if the impairment will be recovered. Nonbeneficial interest debt securities consist of U.S. Treasury securities, municipal securities, and single issue trust preferred securities. If it is determined that there is evidence that the impairment will not be recovered, the Company performs a present value calculation to determine the amount of impairment and records any credit-related OTTI through earnings and noncredit-related OTTI through other comprehensive income (“OCI”). During the three and nine months ended September 30, 2013 and 2012, the Company incurred no OTTI charges related to nonbeneficial interest debt securities. Temporary impairment on these securities is primarily related to changes in interest rates, certain disruptions in credit markets, destabilization in the Eurozone, and other current economic factors.

For beneficial interest debt securities, the Company reviews cash flow analyses on each applicable security to determine if an adverse change in cash flows expected to be collected has occurred. Beneficial interest debt securities consist of corporate securities and mortgage-backed securities (“MBS”). An adverse change in cash flows expected to be collected has occurred if the present value of cash flows previously projected is greater than the present value of cash flows projected at the current reporting date and less than the current book value. If an adverse change in cash flows is deemed to have occurred, then an OTTI has occurred. The Company then compares the present value of cash flows using the current yield for the current reporting period to the reference amount, or current net book value, to determine the credit-related OTTI. The credit-related OTTI is then recorded through earnings and the noncredit-related OTTI is accounted for in OCI. During the three and nine months ended September 30, 2013, the Company incurred no credit-related OTTI charges associated with beneficial interest debt securities. During the three and nine months ended September 30, 2012, the Company incurred credit-related OTTI charges on beneficial interest debt securities of $942 thousand. These charges were related to a non-Agency MBS. Temporary impairment on the Agency MBS is primarily related to changes in interest rates.

For the non-Agency Alt-A residential MBS, the Company uses a discounted cash flow model with the following assumptions: constant prepayment rate of 9.7%, a customized constant default rate scenario that assumes approximately 12% of the remaining underlying mortgages will default within three years, and a customized loss severity rate scenario that ramps the loss rate down from 66% to 15% over the course of approximately six years.

The following table provides a cumulative roll forward of credit losses recognized in earnings for debt securities for which a portion of the OTTI is recognized in OCI:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
(Amounts in thousands)
Beginning balance ⁽¹⁾	$	7,478	$	6,536	$	7,478	$	6,536
Additions for credit losses on securities not previously recognized		—		—		—		—
Additions for credit losses on securities previously recognized		—		942		—		942
Reduction for increases in cash flows		—		—		—		—
Reduction for securities management no longer intends to hold to recovery		—		—		—		—
Reduction for securities sold/realized losses		—		—		—		—

Ending balance	$	7,478	$	7,478	$	7,478	$	7,478

(1)	The beginning balance includes credit related losses included in OTTI charges recognized on debt securities in prior periods.

For equity securities, the Company reviews for OTTI based upon the prospects of the underlying companies, analysts’ expectations, and certain other qualitative factors to determine if impairment is recoverable over a foreseeable period of time. During the three and nine months ended September 30, 2013 and 2012, the Company recognized no OTTI charges on equity securities.