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Securities | 3 Months Ended
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Mar. 31, 2012
Securities |
Securities |
3. Securities The amortized cost and fair value of the Corporation’s investments are shown below. All securities are classified as available-for-sale.
|  | (000’s) |
|  | March 31, 2012 |
|  | Amortized |  | Unrealized |  |  |
(Dollar amounts in thousands) |  | Cost |  | Gains |  | Losses |  | Fair Value |
U.S. Government sponsored entities and entity mortgage-backed securities |  | $ | 1,902 |  | $ | 35 |  | $ | — |  | $ | 1,937 |
Mortgage Backed Securities-residential |  | 292,696 |  | 15,347 |  | (179 | ) | 307,864 |
Mortgage Backed Securities-commercial |  | 53 |  | 1 |  | — |  | 54 |
Collateralized mortgage obligations |  | 148,522 |  | 3,608 |  | (58 | ) | 152,072 |
State and municipal |  | 184,866 |  | 11,467 |  | (239 | ) | 196,094 |
Collateralized debt obligations |  | 13,721 |  | 184 |  | (9,419 | ) | 4,486 |
Equities |  | 1,596 |  | 557 |  | — |  | 2,153 |
TOTAL |  | $ | 643,356 |  | $ | 31,199 |  | $ | (9,895 | ) | $ | 664,660 |
|  | December 31, 2011 |
|  | Amortized |  | Unrealized |  |  |
(Dollar amounts in thousands) |  | Cost |  | Gains |  | Losses |  | Fair Value |
U.S. Government sponsored entities and 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 |  | 183,854 |  | 11,738 |  | (11 | ) | 195,581 |
Collateralized debt obligations |  | 14,031 |  | 150 |  | (9,410 | ) | 4,771 |
Equities |  | 1,596 |  | 490 |  | — |  | 2,086 |
TOTAL |  | $ | 645,054 |  | $ | 30,654 |  | $ | (9,421 | ) | $ | 666,287 |
Contractual maturities of debt securities at March 31, 2012 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 |  | $ | 6,773 |  | $ | 6,889 |
Due after one but within five years |  | 42,223 |  | 44,190 |
Due after five but within ten years |  | 90,003 |  | 94,350 |
Due after ten years |  | 210,012 |  | 209,160 |
|  | 349,011 |  | 354,589 |
Mortgage-backed securities and equities |  | 294,345 |  | 310,071 |
TOTAL |  | $ | 643,356 |  | $ | 664,660 |
There were $4 thousand in losses and no gains realized by the Corporation on investment sales for the three months ended March 31, 2012. There were $3 thousand in gains and no losses realized by the Corporation on investment sales for the three months ended March 31, 2011. 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 March 31, 2012 and December 31, 2011.
|  | March 31, 2012 |
|  | 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 |  | $ | 22,472 |  | $ | (179 | ) | $ | — |  | $ | — |  | $ | 22,472 |  | $ | (179 | )
Collateralized mortgage obligations |  | 8,936.00 |  | (58 | ) | — |  | — |  | 8,936 |  | (58 | )
State and municipal obligations |  | 18,523 |  | (239 | ) | — |  | — |  | 18,523 |  | (239 | )
Collateralized Debt Obligations |  | — |  | — |  | 3,310 |  | (9,419 | ) | 3,310 |  | (9,419 | )
Total temporarily impaired securities |  | $ | 49,931 |  | $ | (476 | ) | $ | 3,310 |  | $ | (9,419 | ) | $ | 53,241 |  | $ | (9,895 | )
|  | 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 | )
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 purchased 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 $9.9 million as of March 31, 2012 and $9.4 million as of December 31, 2011. A majority of these losses represent negative adjustments to market value relative to the illiquidity in the markets on the securities and not losses related to the creditworthiness of the issuer. Based upon our review of the issuers, we do not believe these investments to be other than temporarily impaired. Management does not intend to sell these securities and it is not more likely than not that we will be required to sell them before their anticipated recovery. A significant portion of the total unrealized loss in investment securities 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 down grade in credit rating or further defaults of underlying issuers during the quarter, and an analysis of expected cash flows, we have determined that four of the CDO’s included in collateralized debt obligations were other-than-temporarily impaired, though no impairment was identified during the first quarter of 2012. Those four CDO’s have a contractual balance of $28.3 million at March 31, 2012 which has been reduced to $3.8 million by $0.6 million of interest payments received, $15.1 million of cumulative OTTI charges recorded through earnings to date, and $8.8 million recorded in other comprehensive income. The severity of the OTTI recorded varies by security, based on the analysis described below, and ranges at March 31, 2012 from 28% to 87%. The OTTI recorded in other comprehensive income represents OTTI due to factors other than credit loss, mainly current market illiquidity. The issuers in these securities are primarily banks, but some of the 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 ensure there are no adverse changes in cash flows during the quarter. 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 an investment in a CDO consisting of pooled trust preferred securities in which the issuers are primarily banks. This CDO with an amortized cost of $1.0 million and a fair value of $0.7 million is 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 11.03 to 30.65 while Moody Investor Service pricing ranges from 0.57 to 84.56, 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. The table below presents a rollforward of the credit losses recognized in earnings for the three month periods ended March 31, 2012 and 2011:
|  | Three Months Ended March 31, |
(Dollar amounts in thousands) |  | 2012 |  | 2011 |
Beginning balance |  | $ | 15,180 |  | $ | 15,070 |
Increases to the amount related to the credit loss for which other-than-temporary was previously recognized |  | — |  | 0 |
Ending balance |  | $ | 15,180 |  | $ | 15,070 |

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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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