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SECURITIES: | 12 Months Ended
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Dec. 31, 2011
SECURITIES: |
SECURITIES: |
4. SECURITIES: The fair value of securities available-for-sale and related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:
|  | December 31, 2011 |
|  | Amortized |  | Unrealized |  |  |
(Dollar amounts in thousands) |  | Cost |  | Gains |  | Losses |  | Fair Value |
U.S. Government entity mortgage-backed securities |  | $ | 3,979 |  | $ | 34 |  | $ | — |  | $ | 4,013 |
Mortgage-backed securities, residential |  | 296,646 |  | 15,142 |  | — |  | 311,788 |
Mortgage-backed securities, commercial |  | 98 |  | 3 |  | — |  | 101 |
Collateralized mortgage obligations |  | 144,850 |  | 3,097 |  | — |  | 147,947 |
State and municipal obligations |  | 183,854 |  | 11,738 |  | (11 | ) | 195,581 |
Collateralized debt obligations |  | 14,031 |  | 150 |  | (9,410 | ) | 4,771 |
Equity Securities |  | 1,596 |  | 490 |  | — |  | 2,086 |
TOTAL |  | $ | 645,054 |  | $ | 30,654 |  | $ | (9,421 | ) | $ | 666,287 |
|  | December 31, 2010 |
|  | Amortized |  | Unrealized |  |  |
(Dollar amounts in thousands) |  | Cost |  | Gains |  | Losses |  | Fair Value |
U.S. Government entity mortgage-backed securities |  | $ | 2,027 |  | $ | 46 |  | $ | — |  | $ | 2,073 |
Mortgage-backed securities, residential |  | 289,962 |  | 13,166 |  | (705 | ) | 302,423 |
Mortgage-backed securities, commercial |  | 136 |  | 3 |  | — |  | 139 |
Collateralized mortgage obligations |  | 92,803 |  | 2,248 |  | (594 | ) | 94,457 |
State and municipal obligations |  | 152,633 |  | 5,318 |  | (411 | ) | 157,540 |
Collateralized debt obligations |  | 15,084 |  | — |  | (12,894 | ) | 2,190 |
Equity Securities |  | 1,729 |  | 295 |  | — |  | 2,024 |
TOTAL |  | $ | 554,374 |  | $ | 21,076 |  | $ | (14,604 | ) | $ | 560,846 |
As of December 31, 2011, the Corporation does not have any securities from any issuer, other than the U.S. Government, with an aggregate book or fair value that exceeds ten percent of shareholders’ equity. Securities with a carrying value of approximately $264.0 million and $227.3 million at December 31, 2011 and 2010, respectively, were pledged as collateral for short-term borrowings and for other purposes. Below is a summary of the gross gains and losses realized by the Corporation on investment sales during the years ended December 31, 2011, 2010 and 2009, respectively.
(Dollar amounts in thousands) |  | 2011 |  | 2010 |  | 2009 |
Proceeds |  | $ | 25 |  | $ | 12,248 |  | $ | — |
Gross gains |  | 2 |  | 1,507 |  | — |
Gross losses |  | — |  | (213 | ) | — |
Additional gains of $4 thousand in 2011, $27 thousand in 2010 and $4 thousand in 2009 resulted from redemption premiums on called securities. Contractual maturities of debt securities at year-end 2011 were as follows. Securities not due at a single maturity or with no maturity date, primarily mortgage-backed and equity securities, are shown separately.
|  | Available-for-Sale |
|  | Amortized |  | Fair |
(Dollar amounts in thousands) |  | Cost |  | Value |
Due in one year or less |  | $ | 8,292 |  | $ | 8,465 |
Due after one but within five years |  | 44,808 |  | 46,708 |
Due after five but within ten years |  | 85,955 |  | 90,509 |
Due after ten years |  | 207,659 |  | 206,630 |
|  | 346,714 |  | 352,312 |
Mortgage-backed securities and equities |  | 298,340 |  | 313,975 |
TOTAL |  | $ | 645,054 |  | $ | 666,287 |
The following tables show the securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at December 31, 2011 and 2010.
|  | December 31, 2011 |
|  | Less Than 12 Months |  | More Than 12 Months |  | Total |
|  |  |  | Unrealized |  |  |  | Unrealized |  |  |  | Unrealized |
(Dollar amounts in thousands) |  | Fair Value |  | Losses |  | Fair Value |  | Losses |  | Fair Value |  | Losses |
State and municipal obligations |  | $ | 1,110 |  | $ | (11 | ) | $ | — |  | $ | — |  | $ | 1,110 |  | $ | (11 | )
Collateralized debt obligations |  | — |  | — |  | 3,603 |  | (9,410 | ) | 3,603 |  | (9,410 | )
Total temporarily impaired securities |  | $ | 1,110 |  | $ | (11 | ) | $ | 3,603 |  | $ | (9,410 | ) | $ | 4,713 |  | $ | (9,421 | )
|  | December 31, 2010 |
|  | Less Than 12 Months |  | More Than 12 Months |  | Total |
|  |  |  | Unrealized |  |  |  | Unrealized |  |  |  | Unrealized |
(Dollar amounts in thousands) |  | Fair Value |  | Losses |  | Fair Value |  | Losses |  | Fair Value |  | Losses |
Mortgage-backed securities, residential |  | $ | 35,024 |  | $ | (705 | ) | $ | — |  | $ | — |  | $ | 35,024 |  | $ | (705 | )
Collateralized mortgage obligations |  | 25,338 |  | (594 | ) | — |  | — |  | 25,338 |  | (594 | )
State and municipal obligations |  | 19,372 |  | (411 | ) | — |  | — |  | 19,372 |  | (411 | )
Collateralized debt obligations |  | — |  | — |  | 2,190 |  | (12,894 | ) | 2,190 |  | (12,894 | )
Total temporarily impaired securities |  | $ | 79,734 |  | $ | (1,710 | ) | $ | 2,190 |  | $ | (12,894 | ) | $ | 81,924 |  | $ | (14,604 | )
The Corporation held 14 investment securities with an amortized cost greater than fair value as of December 31, 2011. The unrealized losses on mortgage-backed and state and municipal obligations represent negative adjustments to market value relative to the rate of interest paid on the securities and not losses related to the creditworthiness of the issuer. Management does not intend to sell and it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery. Management believes the value will recover as the securities approach maturity or market rates change. Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under FASB ASC 320, Investments—Debt and Equity Securities. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in FASB ASC 325-40, Beneficial Interests in Securitized Financial Assets. In determining OTTI under the FASB ASC-320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. The second segment of the portfolio uses the OTTI guidance provided by FASB ASC-325 that is specific to purchase beneficial interests that, on the purchase date, were rated below AA. Under the FASB ASC-325 model, the Corporation compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows. When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value 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 recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. Gross unrealized losses on investment securities were $9.4 million as of December 31, 2011 and $14.6 million as of December 31, 2010. A majority of these losses represent negative adjustments to fair value relative to the illiquidity in the markets on the securities and not losses related to the creditworthiness of the issuer. A significant portion of the total unrealized losses relates to collateralized debt obligations that were separately evaluated under FASB ASC 325-40, Beneficial Interests in Securitized Financial Assets. Based upon qualitative considerations, such as a downgrade in credit rating or further defaults of underlying issuers during the year, and an analysis of expected cash flows, we determined that four CDOs included in collateralized debt obligations were other-than-temporarily impaired. Those four CDO’s have a contractual balance of $28.3 million at December 31, 2011 which has been reduced to $3.8 million by $0.5 million of interest payments received, $15.1 million of cumulative OTTI charges recorded through earnings to date and $8.9 million recorded in other comprehensive income. The severity of the OTTI recorded varies by security, based on the analysis described below, and ranges, at December 31, 2011 from 28% to 87%. The temporary impairment recorded in other comprehensive income is due to factors other than credit loss, mainly current market illiquidity. These securities are collateralized by trust preferred securities issued primarily by bank holding companies, but certain pools do include a limited number of insurance companies. The market for these securities has become very illiquid, there are very few new issuances of trust preferred securities and the credit spreads implied by current prices have increased dramatically and remain very high, resulting in significant non-credit related impairment. The Corporation uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to determine if there are adverse changes in cash flows during the year. The OTTI model considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. Cash flows are projected using a forward rate LIBOR curve, as these CDOs are variable-rate instruments. An average rate is then computed using this same forward rate curve to determine an appropriate discount rate (3 month LIBOR plus margin ranging from 160 to 180 basis points). The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information, including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and treat all interest payment deferrals as defaults. In addition we use the model to “stress” each CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of the Corporation’s note class. Collateralized debt obligations include one additional investment in a CDO consisting of pooled trust preferred securities in which the issuers are primarily banks. This CDO, with an amortized cost of $1.3 million and a fair value of $999 thousand, is currently rated BAA3 and is the senior tranche, is not in the scope of FASB ASC 325 as it was rated high investment grade at purchase, and is not considered to be other-than-temporarily impaired based on its credit quality. Its fair value is negatively impacted by the factors described above. Management has consistently used Standard & Poors pricing to value these investments. There are a number of other pricing sources available to determine fair value for these investments. These sources utilize a variety of methods to determine fair value. The result is a wide range of estimates of fair value for these securities. The Standard & Poors pricing ranges from 2.28 to 28.56 while Moody’s Investor Service pricing ranges from 0.50 to 87.11, with others falling somewhere in between. We recognize that the Standard & Poors pricing utilized is likely a conservative estimate, but have been consistent in using this source and its estimate of fair value. In 2010 the Corporation recognized $549 thousand of OTTI on stock held in Fifth Third Corporation prior to liquidation. In 2011 there was $110 thousand of OTTI recognized on the Corporation’s holding of a different financial institution equity security that is still held at December 31, 2011. The table below presents a rollforward of the credit losses recognized in earnings for the year ended December 31, 2011:
(Dollar amounts in thousands) |  | 2011 |  | 2010 |  | 2009 |
Beginning balance, January 1, |  | $ | 15,070 |  | $ | 11,359 |  | $ | 6,145 |
Amounts related to credit loss for which other-than-temporary impairment was not previously recognized |  | 110 |  | (549 | ) | 5,438 |
Amounts realized for securities sold during the period |  | — |  | — |  | — |
Reductions for increase in cash flows expected to be collected that are recognized over the remaining life of the security |  | — |  | — |  | — |
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized |  | — |  | 4,260 |  | 5,331 |
Adoption of new accounting guidance on OTTI |  | — |  | — |  | (5,555 | )
Ending balance, December 31, |  | $ | 15,180 |  | $ | 15,070 |  | $ | 11,359 |

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- Definition Tabular disclosure of available-for-sale securities which consist of all investments in certain debt and equity securities neither classified as trading or held-to-maturity securities. A debt security represents a creditor relationship with an enterprise. Debt securities include, among other items, US Treasury securities, US government securities, municipal securities, corporate bonds, convertible debt, commercial paper, and all securitized debt instruments. An equity security represents an ownership interest in an enterprise or the right to acquire or dispose of an ownership interest in an enterprise at fixed or determinable prices. Equity securities include, among other things, common stock, certain preferred stock, warrant rights, call options, and put options, but do not include convertible debt. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 320 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6957658&loc=d3e62557-112803 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name FASB Staff Position (FSP) -Number FAS115-1/124-1 -Paragraph 17 -Subparagraph a, b -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 320 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6957658&loc=d3e62586-112803 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 115 -Paragraph 19, 20, 21 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27290-111563 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Emerging Issues Task Force (EITF) -Number 03-1 -Paragraph 21 -Subparagraph a, b -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27357-111563 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27198-111563 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27337-111563 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27161-111563 + Details
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