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Investments | 9 Months Ended
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Sep. 30, 2011
Investments |
Investments |
Note 4. Investments The investment portfolio consists primarily of agency securities, mortgage backed securities, and municipal securities all of which are classified available-for-sale. As of September 30, 2011, $112,095,000 was 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 $7,914,000 at September 30, 2011 compared to an unrealized gain of $1,643,000 at December 31, 2010. 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, 2011 |
Available-for-Sale Securities |  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Estimated Fair Value |
Debt securities: |  |  |  |  |  |  |  |  |
U.S. Government agencies |  | $ | 159 |  | $ | 2 |  | $ | — |  | $ | 161 |
Obligations of states and political subdivisions |  | 86,950 |  | 7,567 |  | (356 | ) | 94,161 |
U.S. Government agencies collateralized by mortgage obligations |  | 147,029 |  | 1,747 |  | (494 | ) | 148,282 |
Other collateralized mortgage obligations |  | 12,402 |  | 258 |  | (1,162 | ) | 11,498 |
Other equity securities |  | 7,596 |  | 352 |  | — |  | 7,948 |
|  | $ | 254,136 |  | $ | 9,926 |  | $ | (2,012 | ) | $ | 262,050 |
|  | December 31, 2010 |
Available-for-Sale Securities |  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Estimated Fair Value |
Debt securities: |  |  |  |  |  |  |  |  |
U.S. Government agencies |  | $ | 190 |  | $ | 5 |  | $ | — |  | $ | 195 |
Obligations of states and political subdivisions |  | 74,598 |  | 1,884 |  | (1,432 | ) | 75,050 |
U.S. Government agencies collateralized by mortgage obligations |  | 88,105 |  | 2,092 |  | (120 | ) | 90,077 |
Other collateralized mortgage obligations |  | 18,661 |  | 506 |  | (1,329 | ) | 17,838 |
Corporate debt securities |  | 500 |  | 4 |  | — |  | 504 |
Other equity securities |  | 7,628 |  | 33 |  | — |  | 7,661 |
|  | $ | 189,682 |  | $ | 4,524 |  | $ | (2,881 | ) | $ | 191,325 |
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, 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 |  | $ | 60 |  | $ | (4 | ) | $ | 3,023 |  | $ | (352 | ) | $ | 3,083 |  | $ | (356 | )
U.S. Government agencies collateralized by mortgage obligations |  | 65,253 |  | (494 | ) | — |  | — |  | 65,253 |  | (494 | )
Other collateralized mortgage obligations |  | 1,450 |  | (13 | ) | 5,186 |  | (1,149 | ) | 6,636 |  | (1,162 | )
|  | $ | 66,763 |  | $ | (511 | ) | $ | 8,209 |  | $ | (1,501 | ) | $ | 74,972 |  | $ | (2,012 | )
|  | December 31, 2010 |
|  | 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 |  | $ | 24,782 |  | $ | (904 | ) | $ | 3,168 |  | $ | (528 | ) | $ | 27,950 |  | $ | (1,432 | )
U.S. Government agencies collateralized by mortgage obligations |  | 9,131 |  | (120 | ) | — |  | — |  | 9,131 |  | (120 | )
Other collateralized mortgage obligations |  | 286 |  | (2 | ) | 10,136 |  | (1,327 | ) | 10,422 |  | (1,329 | )
|  | $ | 34,199 |  | $ | (1,026 | ) | $ | 13,304 |  | $ | (1,855 | ) | $ | 47,503 |  | $ | (2,881 | )
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. As of September 30, 2011, 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). 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 coupon rate which approximates the current book yield. As of September 30, 2011, 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, 2011 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at September 30, 2011 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 2011 to provide independent valuation and OTTI analysis of 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 also 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 effective 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, 2011. 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 higher projected collateral losses, wider 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 to a security by forecasting the underlying mortgage loans in each transaction. 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 the security 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, 2011, the Company held one U.S. Government agency security and it was not in a loss position. Obligations of States and Political Subdivisions At September 30, 2011, the Company held 169 obligations of states and political subdivision securities of which one was in a loss position for less than 12 months and six 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, 2011. U.S. Government Agencies Collateralized by Mortgage Obligations At September 30, 2011, the Company held 162 U.S. Government agency securities collateralized by mortgage obligation securities of which 33 were in a loss position for less than 12 months. The unrealized losses on the Company’s investments in U.S. government agencies collateralized by mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency 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, 2011. Other Collateralized Mortgage Obligations At September 30, 2011, the Company had a total of 28 PLRMBS with a remaining principal balance of $12,402,000 and a net unrealized loss of approximately $904,000. Nine of these securities account for $1,162,000 of the unrealized loss at September 30, 2011 offset by 19 of these securities with gains totaling $258,000. Seven of these PLRMBS with a remaining principal balance of $6,396,000 had credit ratings below investment grade. The Company continues to perform extensive analyses on these securities as well as all whole loan CMOs. Several of these investment securities continue to demonstrate cash flows and credit support as expected and the expected cash flows of the security discounted at the security’s effective yield are greater than the book value of the security, therefore management does not consider these securities to be other than temporarily impaired. No credit related OTTI charges related to PLRMBS were recorded during the nine month period ended September 30, 2011. Other Equity Securities At September 30, 2011, the Company had a total of two mutual fund equity investments, one of which had been in an unrealized loss position for more than 12 months. Based on management’s evaluation of the nature of the decline in net asset value on this mutual fund, the Company recorded an OTTI charge of $31,000 during the nine month period ended September 30, 2011. Investment securities as of September 30, 2011 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 |  | $ | 2,451 |  | $ | 2,043 |  | $ | (408 | ) | C |  | Fitch |  | 13.70 |  | 23.42 |  | 51.00 |  | 97.25 |  | 0.12 |
CWALT 1 |  | 798 |  | 618 |  | (180 | ) | C |  | Fitch |  | 9.47 |  | 27.89 |  | 63.95 |  | 100.73 |  | 4.63 |
CWALT 2 |  | 371 |  | 261 |  | (110 | ) | C |  | Fitch |  | 8.80 |  | 30.84 |  | 55.77 |  | 101.38 |  | 2.70 |
FHAMS |  | 2,254 |  | 1,881 |  | (373 | ) | D |  | Fitch |  | 11.38 |  | 21.78 |  | 54.21 |  | 95.00 |  | (0.05 | )
BAALT |  | 151 |  | 132 |  | (19 | ) | CCC |  | Fitch |  | 8.36 |  | 10.95 |  | 57.41 |  | 97.24 |  | 4.89 |
ABFS |  | 310 |  | 253 |  | (57 | ) | D |  | S&P |  | 6.00 |  | 45.00 |  | 80.00 |  | 97.46 |  | 0.00 |
CONHE |  | 61 |  | 75 |  | 14 |  | B3 |  | Moodys |  | 0.10 |  | 10.00 |  | 60.00 |  | 86.39 |  | 0.072 |
TOTALS |  | $ | 6,396 |  | $ | 5,263 |  | $ | (1,133 | ) |  |  |  |  |  |  |  |  |  |  |  |  |  |
The following tables provide a roll forward for the three and nine month periods ended September 30, 2011 and 2010 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.
(Dollars in thousands) |  | For the three months ended September 30, 2011 |  | For the three months ended September 30, 2010 |  | For the nine months ended September 30, 2011 |  | For the nine months ended September 30, 2010 |
Beginning balance |  | $ | 767 |  | $ | 700 |  | $ | 1,387 |  | $ | 300 |
Amounts related to credit loss for which an OTTI charge was not previously recognized |  | — |  | — |  | 31 |  | 700 |
Increases to the amount related to credit loss for which OTTI was previously recognized |  | — |  | — |  | — |  | — |
Realized gains (losses) for securities sold |  | 16 |  | — |  | (635 | ) | (300 | )
Ending balance |  | $ | 783 |  | $ | 700 |  | $ | 783 |  | $ | 700 |
The amortized cost and estimated fair value of investment securities at September 30, 2011 and December 31, 2010 by contractual maturity are shown below. 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, 2011 (in thousands) |  | Amortized Cost |  | Estimated Fair Value |
Within one year |  | $ | 579 |  | $ | 587 |
After one year through five years |  | 7,946 |  | 8,705 |
After five years through ten years |  | 18,968 |  | 20,377 |
After ten years |  | 59,616 |  | 64,653 |
|  | 87,109 |  | 94,322 |
Investment securities not due at a single maturity date: |  |  |  |  |
U.S. Government agencies collateralized by mortgage obligations |  | 147,029 |  | 148,282 |
Other collateralized mortgage obligations |  | 12,402 |  | 11,498 |
Other equity securities |  | 7,596 |  | 7,948 |
|  | $ | 254,136 |  | $ | 262,050 |
December 31, 2010 |  | Amortized Cost |  | Estimated Fair Value |
Within one year |  | $ | 500 |  | $ | 504 |
After one year through five years |  | 6,350 |  | 6,819 |
After five years through ten years |  | 18,274 |  | 18,664 |
After ten years |  | 50,164 |  | 49,762 |
|  | 75,288 |  | 75,749 |
Investment securities not due at a single maturity date: |  |  |  |  |
U.S. Government agencies collateralized by mortgage obligations |  | 88,105 |  | 90,077 |
Other collateralized mortgage obligations |  | 18,661 |  | 17,838 |
Other equity securities |  | 7,628 |  | 7,661 |
Total |  | $ | 189,682 |  | $ | 191,325 |

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- Definition 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. + Details
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