Note 5 – Investments

 

The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments – Debt and Equity Securities.

 

The amortized cost of debt securities classified as available-for-sale is adjusted for the amortization of premiums to the first call date, if applicable, or to maturity, and for the accretion of discounts to maturity, or, in the case of mortgage-backed securities, over the estimated life of the security.  Such amortization and accretion is included in interest income from investments.  Interest and dividends are included in interest income from investments.  Gains and losses on the sale of securities are recorded using the specific identification method. 

 

The following table shows a comparison of amortized cost and fair values of investment securities at September 30, 2012 and December 31, 2011:

 

 

Proceeds from sales of securities and the realized gains and losses are as follows:

 

 

The following table shows the Corporation’s securities with gross unrealized losses and fair values at September 30, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

 

 

 

 

 

Management systematically evaluates securities for impairment on a quarterly basis.  Management assesses whether (a) it has the intent to sell a security being evaluated and (b) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery.  If neither applies, then declines in the fair values of securities below their cost that are considered other-than-temporary declines are split into two components.  The first is the loss attributable to declining credit quality.  Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made.  The second component consists of all other losses, which are recognized in other comprehensive loss.  In estimating other-than-temporary impairment (“OTTI”) losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the fair value of the security, (4) changes in the rating of the security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest or principal payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future.  Management also monitors cash flow projections for securities that are considered beneficial interests under the guidance of ASC Subtopic 325-40, Investments – Other – Beneficial Interests in Securitized Financial Assets, (ASC Section 325-40-35). Further discussion about the evaluation of securities for impairment can be found in Item 2 of Part I of this report under the heading “Investment Securities”.

 

            Management believes that the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of its consolidated financial statements.  Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for its collateralized debt obligation (“CDO”) portfolio consisting of pooled trust preferred securities.  Based on management’s review of the assumptions and results of the third-party review, it does not believe that there were any material differences in the valuations between September 30, 2012 and December 31, 2011.

 

            U.S. Government Agencies - One U.S. government agency has been in a slight unrealized loss position for less than 12 months as of September 30, 2012.  There were no U.S. government agencies in an unrealized loss position for 12 months or more.  The security is of the highest investment grade and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell it before recovery of their amortized cost basis, which may be at maturity. Therefore, no OTTI exists at September 30, 2012.

 

Residential Mortgage-Backed Agencies - Three residential mortgage-backed agencies have been in a slight unrealized loss position for less than 12 months as of September 30, 2012.  There were two residential mortgage-backed agency securities in an unrealized loss position for 12 months or more.  The securities are of the highest investment grade and the Corporation does not intend to sell them, and it is not more likely than not that the Corporation will be required to sell the securities before recovery of their amortized cost basis, which may be at maturity. Therefore, no OTTI exists at September 30, 2012.

 

Commercial Mortgage-Backed Agencies - No commercial mortgage-backed agencies were in  an unrealized loss position for less than 12 months or more than 12 months as of September 30, 2012. Therefore, no OTTI exists at September 30, 2012

 

            Obligations of State and Political Subdivisions – The unrealized losses on the Corporation’s investments in state and political subdivisions were $1,055 at September 30, 2012.  One security has been in an unrealized loss position for less than 12 months.  There are no securities that have been in an unrealized loss position for 12 months or more.  This investment is of investment grade as determined by the major rating agencies and management reviews the ratings of the underlying issuers.  Management believes that this portfolio is well-diversified throughout the United States, and all bonds continue to perform according to their contractual terms.  The Corporation does not intend to sell this investment and it is not more likely than not that the Corporation will be required to sell the investment before recovery of its amortized cost basis, which may be at maturity.  Accordingly, management does not consider this investment to be other-than-temporarily impaired at September 30, 2012.

 

Collateralized Debt Obligations - The $26.6 million in unrealized losses greater than 12 months at September 30, 2012 relates to 18 pooled trust preferred securities that comprise the CDO portfolio.  See Note 8 for a discussion of the methodology used by management to determine the fair values of these securities.  Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that there were no securities that had credit-related non-cash OTTI charges during the first nine months of 2012.  The unrealized losses on the remaining securities in the portfolio are primarily attributable to continued depression in market interest rates, marketability, liquidity and the current economic environment.    

 

 

The following tables present a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses which have been recognized in earnings for the trust preferred securities in the CDO portfolio held and not intended to be sold for the three- and nine-month periods ended September 30, 2012 and 2011:

 

 

 

 

 

 

The amortized cost and estimated fair value of securities by contractual maturity at September 30, 2012 is shown in the following table.  Actual 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.