Investments

The investment portfolio consists primarily of U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations, private label residential mortgage backed securities (PLRMBS), and obligations of states and political subdivisions securities, all of which are classified available-for-sale. As of September 30, 2012, $91,534,000 of these securities were held as collateral for borrowing arrangements, public funds, and for other purposes.

The fair value of the available-for-sale investment portfolio reflected an unrealized gain of $13,771,000 at September 30, 2012 compared to an unrealized gain of $7,008,000 at December 31, 2011.

The following table sets forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands):



	September 30, 2012
Available-for-Sale Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
U.S. Government agencies	$	2,317	$	1	$	—		$	2,318
Obligations of states and political subdivisions	$	126,656	$	11,050	$	(69	)	$	137,637
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	207,740		3,108		(713		)	210,135
Private label residential mortgage backed securities	6,728		261		(311		)	6,678
Other equity securities	7,596		444		—			8,040
	$	351,037	$	14,864	$	(1,093	)	$	364,808



	December 31, 2011
Available-for-Sale Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
U.S. Government agencies	$	149	$	—	$	—		$	149
Obligations of states and political subdivisions	101,030		7,732		(331		)	108,431
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	204,222		1,402		(1,080		)	204,544
Private label residential mortgage backed securities	8,408		245		(1,255		)	7,398
Other equity securities	7,596		295		—			7,891
	$	321,405	$	9,674	$	(2,666	)	$	328,413

Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended September 30, 2012 and 2011 are shown below (in thousands):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
Available-for-Sale Securities	2012			2011			2012			2011
Proceeds from sales or calls	$	31,055		$	12,171		$	38,554		$	43,580
Gross realized gains from sales or calls	1,128			288			1,694			1,027
Gross realized losses from sales or calls	(285		)	(65		)	(407		)	(778		)

Investment securities with unrealized losses as of the dates indicated are summarized and classified according to the duration of the loss period as follows (in thousands):



	September 30, 2012
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Available-for-Sale Securities	Value		Losses			Value		Losses			Value		Losses
Debt securities:
Obligations of states and political subdivisions	$	5,216	$	(69	)	$	—	$	—		$	5,216	$	(69	)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	62,457		(487		)	14,855		(226		)	77,312		(713		)
Private label residential mortgage backed securities	—		—			3,023		(311		)	3,023		(311		)
	$	67,673	$	(556	)	$	17,878	$	(537	)	$	85,551	$	(1,093	)



	December 31, 2011
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Available-for-Sale Securities	Value		Losses			Value		Losses			Value		Losses
Debt securities:
Obligations of states and political subdivisions	$	1,194	$	(20	)	$	2,598	$	(311	)	$	3,792	$	(331	)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	105,902		(1,080		)	—		—			105,902		(1,080		)
Private label residential mortgage backed securities	32		(1		)	4,917		(1,254		)	4,949		(1,255		)
	$	107,128	$	(1,101	)	$	7,515	$	(1,565	)	$	114,643	$	(2,666	)

We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. Under ASC 320-10, the portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase.

As of September 30, 2012, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all available-for-sale investment securities with an unrealized loss at September 30, 2012 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at September 30, 2012 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000. Management also analyzed any securities that may have been downgraded by credit rating agencies. Management retained the services of a third party in May 2012 to provide independent valuation and OTTI analysis on certain private label residential mortgage backed securities (PLRMBS).

For those bonds that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those bonds. For those bonds that were municipal debt securities with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded that no credit related impairment existed.

The evaluation for PLRMBS includes estimating projected cash flows that the Company is likely to collect based on an assessment of all available information about the applicable security on an individual basis, the structure of the security, and certain assumptions, such as the remaining payment terms for the security, prepayment speeds, default rates, loss severity on the collateral supporting the security based on underlying loan-level borrower and loan characteristics, expected housing price changes, and interest rate assumptions, to determine whether the Company will recover the entire amortized cost basis of the security. In performing a detailed cash flow analysis, the Company identified the best estimate of the cash flows expected to be collected. If this estimate results in a present value of expected cash flows (discounted at the security’s original yield) that is less than the amortized cost basis of the security, an OTTI is considered to have occurred.

To assess whether it expects to recover the entire amortized cost basis of its PLRMBS, the Company performed a cash flow analysis for all of its PLRMBS as of September 30, 2012. In performing the cash flow analysis for each security, the Company uses a third-party model. The model considers borrower characteristics and the particular attributes of the loans underlying the Company’s securities, in conjunction with assumptions about future changes in home prices and other assumptions, to project prepayments, default rates, and loss severities.

The month-by-month projections of future loan performance are allocated to the various security classes in each securitization structure in accordance with the structure’s prescribed cash flow and loss allocation rules. When the credit enhancement for the senior securities in a securitization is derived from the presence of subordinated securities, losses are allocated first to the subordinated securities until their principal balance is reduced to zero. The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on the model approach described above reflects a best-estimate scenario.

At each quarter end, the Company compares the present value of the cash flows expected to be collected on its PLRMBS to the amortized cost basis of the securities to determine whether a credit loss exists.

The unrealized losses associated with PLRMBS are primarily driven by projected collateral losses, credit spreads, and changes in interest rates. The Company assesses for credit impairment using a discounted cash flow model. The key assumptions include default rates, severities, discount rates and prepayment rates. Losses are estimated by forecasting the performance of the underlying mortgage loans for each security. The forecasted loan performance is used to project cash flows to the various tranches in the structure. Based upon management’s assessment of the expected credit losses of these securities given the performance of the underlying collateral compared with our credit enhancement (which occurs as a result of credit loss protection provided by subordinated tranches), the Company expects to recover the entire amortized cost basis of these securities, with the exception of certain securities for which OTTI was previously recorded.

U.S. Government Agencies

At September 30, 2012, the Company held one U.S. Government agency security which was not in a loss position.

Obligations of States and Political Subdivisions

At September 30, 2012, the Company held 181 obligations of states and political subdivision securities of which five were in a loss position for less than 12 months and none were in a loss position and have been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2012.

U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations

At September 30, 2012, the Company held 194 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 38 were in a loss position for less than 12 months and 20 in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at September 30, 2012.

Private Label Residential Mortgage Backed Securities

At September 30, 2012, the Company had a total of 23 PLRMBS with a remaining principal balance of $6,728,000 and a net unrealized loss of approximately $50,000. Six of these securities account for the $311,000 of unrealized loss at September 30, 2012 offset by 17 of these securities with gains totaling $261,000. Seven of these PLRMBS with a remaining principal balance of $5,177,000 had credit ratings below investment grade. The Company continues to perform extensive analyses on these securities. No credit related OTTI charges related to PLRMBS were recorded during the nine month period ended September 30, 2012.

PLRMBS as of September 30, 2012 with credit ratings below investment grade are summarized in the table below (dollars in thousands):



Description	Book Value		Market Value		Unrealized Gain (Loss)			Rating	Agency	12 Month Historical Prepayment Rates %	Projected Default Rates %	Projected Severity Rates %	Original Purchase Price %	Current Credit Enhancement %
PHHAM	$	1,984	1,841		$	(143	)	D	Fitch	11.39	21.60	51.00	97.25	—
CWALT 1	690		648		(42		)	C	Fitch	12.77	26.80	58.20	100.73	3.23
CWALT 2	310		264		(46		)	D	Fitch	12.37	28.70	58.50	101.38	(0.58	)
FHAMS	1,799		1,873		74			D	Fitch	12.46	17.80	47.80	95.00	(0.43	)
BAALT	93		60		(33		)	CC	Fitch	11.09	11.70	51.00	97.24	3.14
ABFS	255		208		(47		)	D	S&P	8.28	8.85	65.00	97.46	—
CONHE	46		70		24			B3	Moodys	13.00	6.12	67.33	86.39	—
TOTALS	$	5,177	$	4,964	$	(213	)

The following tables provide a roll forward for the three and nine month periods ended September 30, 2012 and 2011 of investment securities credit losses recorded in earnings. The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods. Additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred on securities for which OTTI credit losses have been previously recognized.



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(In thousands)	2012		2011		2012		2011
Beginning balance	$	783	$	767	$	783	$	1,387
Amounts related to credit loss for which an OTTI charge was not previously recognized	—		—		—		31
Increases to the amount related to credit loss for which OTTI was previously recognized	—		—		—		—
Realized losses for securities sold	—		16		—		(635		)
Ending balance	$	783	$	783	$	783	$	783

The amortized cost and estimated fair value of investment securities at September 30, 2012 by contractual maturity is shown below (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.



September 30, 2012	Amortized Cost		Estimated Fair Value
Within one year	$	150	$	151
After one year through five years	10,362		11,365
After five years through ten years	16,868		18,755
After ten years	99,276		107,366
	126,656		137,637
Investment securities not due at a single maturity date:
U.S. Government agencies	2,317		2,318
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	207,740		210,135
Private label residential mortgage backed securities	6,728		6,678
Other equity securities	7,596		8,040
	$	351,037	$	364,808