NOTE 4 — INVESTMENT SECURITIES

The following is a summary of investment securities held to maturity:

The following is a summary of investment securities available for sale:

The amortized cost and estimated fair value of investment securities at September 30, 2012, by contractual maturity, are shown below. Although mortgage-backed securities and collateralized mortgage obligations have contractual maturities through 2042, expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

During the three months ended September 30, 2012, all held-to-maturity securities were reclassified to available-for-sale securities. The reclassified securities carried a fair value of $52.6 million and an amortized cost of $50.6 million at September 30, 2012. As more than 95% of the reclassified securities were municipal bonds, the Company decided to reclassify all held-to-maturity securities to available-for-sale securities to be more proactive under the current municipal market with a rising risk of default.

In accordance with FASB ASC 320, “Investments – Debt and Equity Securities,” which amended current other-than-temporary impairment (“OTTI”) guidance, we periodically evaluate our investments for OTTI. For the three and nine months ended September 30, 2012, we recorded $176,000 and $292,000, respectively, in OTTI charges in earnings on an available-for-sale security.

The Company had an equity security with a carrying value of $218,000 at September 30, 2012. During 2012, the issuer’s financial condition had deteriorated and it was determined that the value on the investment is other-than-temporarily impaired. Based on the closing price of the shares at September 30, 2012, we recorded an OTTI charge of $176,000 to write down the value of the investment security to its fair value. For the nine months ended September 30, 2012, the total OTTI charge on this equity security was $292,000.

We perform periodic reviews for impairment in accordance with FASB ASC 320. Gross unrealized losses on investment securities available for sale, the estimated fair value of the related securities and the number of securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows as of September 30, 2012 and December 31, 2011:

The impairment losses described previously are not included in the table above. All individual securities that have been in a continuous unrealized loss position for 12 months or longer as of September 30, 2012 and December 31, 2011 had investment grade ratings upon purchase. The issuers of these securities have not established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status as of September 30, 2012. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated.

FASB ASC 320 requires other-than-temporarily impaired investment securities to be written down when fair value is below amortized cost in circumstances where: (1) an entity has the intent to sell a security; (2) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income.

The Company does not intend to sell these securities and it is not more likely than not that we will be required to sell the investments before the recovery of its amortized cost bases. In addition, the unrealized losses on municipal and corporate bonds are not considered other-than-temporarily impaired as the bonds are rated investment grade and there are no credit quality concerns with the issuers. Interest payments have been made as scheduled, and management believes this will continue in the future and that the bonds will be repaid in full as scheduled. Therefore, in management’s opinion, all securities, other than the OTTI write-down related to an equity security, that have been in a continuous unrealized loss position for the past 12 months or longer as of September 30, 2012 and December 31, 2011 are not other-than-temporarily impaired, and therefore, no other impairment charges as of September 30, 2012 and December 31, 2011 are warranted.

Realized gains and losses on sales of investment securities, proceeds from sales of investment securities and the tax expense on sales of investment securities were as follows for the periods indicated:

For the three months ended September 30, 2012, $3.8 million of net unrealized gains arose during the period and was included in comprehensive income, and there was a $10,000 gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized gains of $4,000 in comprehensive income. Among the $3.8 million increase in net unrealized gains, a $2.0 million increase was driven from the net unrealized gains on newly reclassified available-for-sale securities from held-to-maturity securities. For the three months ended September 30, 2011, $584,000 of net unrealized gains arose during the period and was included in comprehensive income, and there was a $1.7 million gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized gains of $1.6 million in comprehensive income.

For the nine months ended September 30, 2012, $3.1 million of net unrealized gains arose during the period and were included in comprehensive income, and there was a $1.4 million gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized gains of $1.7 million in comprehensive income. Among the $3.1 million increase in net unrealized gains, a $2.0 million increase was driven from the net unrealized gains on newly reclassified available-for-sale securities from held-to-maturity securities. For the nine months ended September 30, 2011, $6.9 million of net unrealized gains arose during the period and was included in comprehensive income, and there was a $1.6 million gain in earnings resulting from the sale of investment securities that had previously recorded net unrealized losses of $249,000 million in comprehensive income.

Investment securities available for sale with carrying values of $19.4 million and $45.8 million as of September 30, 2012 and December 31, 2011, respectively, were pledged to secure FHLB advances, public deposits and for other purposes as required or permitted by law.