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Securities
9 Months Ended
Sep. 30, 2011
Investments debt and equity securities [Abstract] 
Investments In Debt And Marketable Equity Securities And Certain Trading Assets Disclosure Text Block

NOTE 5: SECURITIES

 

At September 30, 2011 and December 31, 2010, respectively, all securities within the scope of FASB ASC 320, Investments – Debt and Equity Securities were classified as available-for-sale. The fair value and amortized cost for securities available-for-sale by contractual maturity at September 30, 2011 and December 31, 2010, respectively, are presented below.

 

  September 30, 2011
   1 year1 to 55 to 10After 10Fair Gross Unrealized  Amortized
(Dollars in thousands) or lessyearsyearsyearsValue GainsLosses Cost
Available-for-sale:            
Agency obligations (a)$—    —     9,034 32,225 41,259  184 5 $ 41,080
Agency RMBS (a) —    —     10,039 147,021 157,060  2,507 38   154,591
State and political subdivisions  20 507 15,257 67,016 82,800  3,443 61   79,418
Trust preferred securities:            
 Pooled —    —    —     100 100 —     130   230
 Individual issuer —    —    —     1,851 1,851  162 255   1,944
 Total available-for-sale$ 20 507 34,330 248,213 283,070  6,296 489 $ 277,263
(a) Includes securities issued by U.S. government agencies or government sponsored entities.

  December 31, 2010
   1 year1 to 55 to 10After 10Fair Gross Unrealized  Amortized
(Dollars in thousands) or lessyearsyearsyearsValue GainsLosses Cost
Available-for-sale:            
Agency obligations (a)$—    —     37,821 52,650 90,471  95 1,017 $ 91,393
Agency RMBS (a) —    —     9,976 133,168 143,144  1,566 1,441   143,019
State and political subdivisions  21 856 13,547 62,342 76,766  472 2,801   79,095
Trust preferred securities:            
 Pooled —    —    —     20 20 —     210   230
 Individual issuer —    —    —     2,129 2,129 —     153   2,282
Corporate debt —     2,690—    —     2,690 —    —       2,690
 Total available-for-sale$ 21 3,546 61,344 250,309 315,220  2,133 5,622 $ 318,709
(a) Includes securities issued by U.S. government agencies or government sponsored entities.

Securities with aggregate fair values of $172.0 million and $171.1 million at September 30, 2011 and December 31, 2010, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, and for other purposes required or permitted by law.

 

Included in other assets are cost-method investments. The carrying amounts of cost-method investments were $5.2 and $5.8 million at September 30, 2011 and December 31, 2010, respectively. Cost-method investments primarily include non-marketable equity investments, such as FHLB of Atlanta stock and Federal Reserve Bank (“FRB”) stock.

Gross Unrealized Losses and Fair Value

The fair values and gross unrealized losses on securities at September 30, 2011 and December 31, 2010, respectively, segregated by those securities that have been in an unrealized loss position for less than twelve months and twelve months or more, are presented below.

    Less than 12 Months  12 Months or Longer  Total
    Fair  Unrealized  Fair  Unrealized  Fair  Unrealized
(Dollars in thousands) Value  Losses  Value  Losses  Value  Losses
September 30, 2011:                 
Agency obligations $ 12,100   5  —      —       12,100 $ 5
Agency RMBS  4,849   38  —      —       4,849   38
State and political subdivisions  1,415   21   714   40   2,129   61
Trust preferred securities:                 
 Pooled —      —       100   130   100   130
 Individual issuer —      —       745   255   745   255
  Total $ 18,364   64   1,559   425   19,923 $ 489

                    
December 31, 2010:                 
Agency obligations $45,351  1,017  —      —       45,351 $1,017
Agency RMBS 89,840  1,441  —      —       89,840  1,441
State and political subdivisions 49,176  2,323  3,207  478   52,383  2,801
Trust preferred securities:                 
 Pooled —      —      20  210   20  210
 Individual issuer —      —      847  153   847  153
  Total $184,367  4,781  4,074  841  188,441 $5,622

The applicable date for determining when securities are in an unrealized loss position is September 30, 2011. As such, it is possible that a security in an unrealized loss position at September 30, 2011 had a market value that exceeded its amortized cost on other days during the past twelve-month period.

For the securities in the previous table, the Company does not have the intent to sell and has determined it is not more likely than not that the Company will be required to sell the security before recovery of the amortized cost basis, which may be maturity. The Company assesses each security for credit impairment. For debt securities, the Company evaluates, where necessary, whether credit impairment exists by comparing the present value of the expected cash flows to the securities' amortized cost basis. For cost-method investments, the Company evaluates whether an event or change in circumstances has occurred during the reporting period that may have a significant adverse effect on the fair value of the investment.

 

In determining whether a loss is temporary, the Company considers all relevant information including:

 

  • the length of time and the extent to which the fair value has been less than the amortized cost basis;

     

  • adverse conditions specifically related to the security, an industry, or a geographic area (for example, changes in the financial condition of the issuer of the security, or in the case of an asset-backed debt security, in the financial condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security or changes in the quality of the credit enhancement);

     

  • the historical and implied volatility of the fair value of the security;

     

  • the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future;

     

  • failure of the issuer of the security to make scheduled interest or principal payments;

     

  • any changes to the rating of the security by a rating agency; and

     

  • recoveries or additional declines in fair value subsequent to the balance sheet date.

 

To the extent the Company estimates future expected cash flows, the Company considers all available information in developing those expected cash flows. For asset-backed securities such as pooled trust preferred securities, such information generally includes:

 

  • remaining payment terms of the security (including as applicable, terms that require underlying obligor payments to increase in the future);

     

  • current delinquencies and nonperforming assets of underlying collateral;

     

  • expected future default rates; and

     

  • subordination levels or other credit enhancements.

 

Agency obligations

The unrealized losses associated with agency obligations are primarily driven by changes in interest rates and not due to the credit quality of the securities. These securities are issued by U.S. government agencies or government-sponsored entities and do not have any credit losses given the explicit or implicit government guarantee.

Agency residential mortgage-backed securities (“RMBS”)

The unrealized losses associated with Agency RMBS are primarily driven by changes in interest rates and not due to the credit quality of the securities. These securities are issued by U.S. government agencies or government-sponsored entities and do not have any credit losses given the explicit or implicit government guarantee.

Securities of U.S. states and political subdivisions

The unrealized losses associated with securities of U.S. states and political subdivisions are primarily driven by changes in interest rates and are not due to the credit quality of the securities. These securities will continue to be monitored as part of the Company's quarterly impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond insurers. As a result, the Company expects to recover the entire amortized cost basis of these securities.

Pooled trust preferred securities

The unrealized losses associated with pooled trust preferred securities are primarily driven by wider credit spreads. Pooled trust preferred securities primarily consist of securities issued by community banks and thrifts. The Company assesses impairment for these securities using a cash flow model. The key assumptions include default probabilities of the underlying collateral and recoveries on collateral defaults. Based upon the Company's assessment of the expected credit losses for these securities, and given the performance of the underlying collateral compared to the Company's credit enhancement, the Company expects to recover the remaining amortized cost basis of these securities.

Individual issuer trust preferred securities

The unrealized losses associated with individual issuer trust preferred securities are primarily related to securities backed by individual issuer community banks. For individual issuers, management evaluates the financial performance of the issuer on a quarterly basis to determine if it is probable that the issuer can make all contractual principal and interest payments. Based upon its evaluation, the Company expects to recover the remaining amortized cost basis of these securities.

Cost-method investments

At September 30, 2011, cost-method investments with an aggregate cost of $5.2 million were not evaluated for impairment because the Company did not identify any events or changes in circumstances that may have a significant adverse effect on the fair value of these cost-method investments.

The carrying values of the Company's investment securities could decline in the future if the underlying performance of the collateral for pooled trust preferred securities, the financial condition of individual issuers of trust preferred securities, or the credit quality of other securities deteriorate and the Company determines it is probable that it will not recover the entire amortized cost basis for the security. As a result, there is a risk that significant other-than-temporary impairment charges may occur in the future.

 

The following tables show the applicable credit ratings, fair values, gross unrealized losses, and life-to-date impairment charges for pooled and individual issuer trust preferred securities at September 30, 2011 and December 31, 2010, respectively, segregated by those securities that have been in an unrealized loss position for less than twelve months and twelve months or more.

 

Trust Preferred Securities as ofSeptember 30, 2011
           Unrealized Losses  Life-to-date
    Credit Rating  Fair Less than 12 months    Impairment
(Dollars in thousands)Moody's Fitch  Value 12 months or Longer Total  Charges
Pooled:               
ALESCO Preferred Funding XVII Ltd (a)CCC $ 100  —      130  130 $ 1,770
Individual issuer (b):               
Carolina Financial Capital Trust In/an/a   193  —     —     —       257
Main Street Bank Statutory Trust I (c)n/an/a   383  —      117  117  —    
MNB Capital Trust In/an/a   55  —     —     —       445
PrimeSouth Capital Trust In/an/a   75  —     —     —       425
TCB Trustn/an/a   362  —      138  138  —    
United Community Capital Trustn/an/a   783  —     —     —       379
 Total individual issuer     1,851  —      255  255   1,506
Total trust preferred securities   $ 1,951  —      385  385 $ 3,276
n/a - not applicable securities not rated.
(a) Class B Deferrable Third Priority Secured Floating Rate Notes. The underlying collateral is primarily composed of
  trust preferred securities issued by community banks and thrifts.
(b) 144A Floating Rate Capital Securities. Underlying issuer is a community bank holding company. Securities have no
  excess subordination or overcollateralization.
(c) Now an obligation of BB&T Corporation.

Trust Preferred Securities as of December 31, 2010
           Unrealized Losses  Life-to-date
    Credit Rating  Fair Less than 12 months    Impairment
(Dollars in thousands)  Moody's Fitch  Value 12 months or Longer Total  Charges
Pooled:               
ALESCO Preferred Funding XVII Ltd (a)CaC $ 20  —      210  210 $ 1,770
Individual issuer (b):               
Carolina Financial Capital Trust In/an/a   312  —     —     —      138
Main Street Bank Statutory Trust I (c)n/an/a   438  —      62  62  —    
MNB Capital Trust In/an/a   152  —     —     —      348
PrimeSouth Capital Trust In/an/a   197  —     —     —      303
TCB Trustn/an/a   409  —     91 91  —    
United Community Capital Trustn/an/a   621  —     —     —      379
 Total individual issuer     2,129  —     153 153  1,168
Total trust preferred securities   $ 2,149  —     363 363 $2,938
n/a - not applicable securities not rated.
(a) Class B Deferrable Third Priority Secured Floating Rate Notes. The underlying collateral is primarily composed of
  trust preferred securities issued by community banks and thrifts.
(b) 144A Floating Rate Capital Securities. Underlying issuer is a community bank holding company. Securities have no
  excess subordination or overcollateralization.
(c) Now an obligation of BB&T Corporation.

For pooled trust preferred securities, the Company estimates expected future cash flows of the security by estimating the expected future cash flows of the underlying collateral and applying those collateral cash flows, together with any credit enhancements such as subordination interests owned by third parties, to the security. The expected future cash flows of the underlying collateral are determined using the remaining contractual cash flows adjusted for future expected credit losses (which consider default probabilities derived from issuer credit ratings for the underlying collateral). The probability-weighted expected future cash flows of the security are then discounted at the interest rate used to recognize income on the security to arrive at a present value amount.

 

Excess subordination is defined as the amount of performing collateral that is in excess of what is needed to pay-off a specified class of securities and all classes senior to the specified class. Performing collateral is defined as total collateral minus all collateral that is currently deferring or currently in default. This definition assumes that all collateral that is currently deferring will default with a zero recovery rate. The underlying issuers can cure the deferral, or some portion greater than zero could be recovered on default of an underlying issuer. Excess subordination, as defined previously, does not consider any excess interest spread that is built into the structure of the security, which provides another source of repayment for the bonds.

 

At September 30, 2011 and December 31, 2010, respectively, there was no excess subordination for the Class B notes of ALESCO Preferred Funding XVII, Ltd.

 

Other-Than-Temporarily Impaired Securities

 

On a quarterly basis, management makes an assessment to determine whether there have been events or economic circumstances to indicate that a security on which there is an unrealized loss is other-than-temporarily impaired. For equity securities with an unrealized loss, the Company considers many factors including the severity and duration of the impairment; the intent and ability of the Company to hold the security for a period of time sufficient for a recovery in value; and recent events specific to the issuer or industry. Equity securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss in securities gains (losses), net.

 

For debt securities with an unrealized loss, an other-than-temporary impairment write-down is triggered when (1) the Company has the intent to sell a debt security, (2) it is more likely than not that the Company will be required to sell the debt security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company has the intent to sell a debt security or if it is more-likely-than-not that it will be required to sell the debt security before recovery, the other-than-temporary write-down is equal to the entire difference between the debt security's amortized cost and its fair value. If the Company 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 other-than-temporary impairment write-down is separated into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings, as a realized loss in securities gains (losses), and is the difference between the security's amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security's fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income, net of applicable taxes.

The following table presents a roll-forward of the credit loss component of the amortized cost of debt securities that the Company has written down for other-than-temporary impairment and the credit component of the loss is recognized in earnings (referred to as “credit-impaired” debt securities). Other-than-temporary impairments recognized in earnings for the quarters and nine months ended September 30, 2011 and 2010 for credit-impaired debt securities are presented as additions in two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or is not the first time the debt security was credit-impaired (subsequent credit impairments). The credit loss component is reduced if the Company sells, intends to sell or believes it will be required to sell previously credit-impaired debt securities. Additionally, the credit loss component is reduced if the Company receives cash flows in excess of what it expected to receive over the remaining life of the credit-impaired debt security, the security matures or is fully written-down and deemed worthless. Changes in the credit loss component of credit-impaired debt securities were:

 

    Quarter ended September 30,  Nine months ended September 30,
(Dollars in thousands) 2011  2010  2011  2010
Balance, beginning of period$ 3,040 $ 4,620 $ 2,938 $ 4,570
 Additions:           
  Initial credit impairments —       340  —       340
  Subsequent credit impairments  236  —       338   50
 Reductions:           
  Securities sold —      —      —      —    
  Due to change in intent or requirement to sell —      —      —      —    
  Securities fully written down and deemed worthless —      —      —      —    
  Increases in expected cash flows  —      —      —      —    
Balance, end of period$ 3,276 $ 4,960 $ 3,276 $ 4,960

Other-Than-Temporary Impairment

 

The following table presents details of the other-than-temporary impairment related to securities, including equity securities carried at cost, for the nine months ended September 30, 2011 and 2010.

     Quarter ended September 30,  Nine months ended September 30,
(Dollars in thousands) 2011  2010  2011  2010
Other-than-temporary impairment charges            
 (included in earnings):           
 Debt securities:           
  Pooled trust preferred securities$—     $—     $—     $ 50
  Individual issuer trust preferred securities  236  340     338   340
   Total debt securities  236  340     338   390
 Cost-method investments —      —      —      —    
Total other-than-temporary impairment charges$ 236 $340   $ 338 $ 390
Other-than-temporary impairment on debt securities:          
 Recorded as part of gross realized losses:           
  Credit-related$ 236  340   $ 338 $ 340
  Securities with intent to sell —      —      —       50
 (Transferred from) recorded directly to other            
  comprehensive income for non-credit related           
  impairment (80)   —       130   210
Total other-than-temporary impairment on debt securities$ 156 $ 340 $ 468 $ 600

Realized Gains and Losses
               
  The following table presents the gross realized gains and losses on sales and other-than-temporary impairment charges
related to securities, including cost-method investments.
               
     Quarter ended September 30,  Nine months ended September 30,
(Dollars in thousands)  2011  2010  2011  2010
Gross realized gains $ 474 $ 475 $ 1,379 $ 3,045
Gross realized losses   (23)   (6)   (478)   (45)
Other-than-temporary impairment charges   (236)   (340)   (338)   (390)
  Realized gains, net $ 215 $ 129 $ 563 $ 2,610