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Investments
9 Months Ended
Sep. 30, 2013
Investments, Debt and Equity Securities [Abstract]  
Investments
Investments
 
The investment portfolio consists primarily of U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations, private label residential mortgage backed securities (PLRMBS), and obligations of states and political subdivisions securities, all of which are classified as available-for-sale.  As of September 30, 2013, $109,500,000 of these securities were held as collateral for borrowing arrangements, public funds, and for other purposes.
     The fair value of the available-for-sale investment portfolio reflected a net unrealized loss of $1,437,000 at September 30, 2013 compared to an unrealized gain of $12,891,000 at December 31, 2012.
     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, 2013
Available-for-Sale Securities
 
Amortized Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
 Fair Value
Debt securities:
 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
16,410

 
$
198

 
$
(29
)
 
$
16,579

Obligations of states and political subdivisions
 
186,818

 
4,598

 
(6,821
)
 
184,595

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
203,728

 
1,295

 
(1,662
)
 
203,361

Private label residential mortgage backed securities
 
4,718

 
954

 

 
5,672

Other equity securities
 
7,596

 
30

 

 
7,626

 
 
$
419,270

 
$
7,075

 
$
(8,512
)
 
$
417,833

 
 
 
December 31, 2012
Available-for-Sale Securities
 
Amortized Cost
 
Gross
Unrealized
 Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Debt securities:
 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
9,443

 
$
34

 
$
(23
)
 
$
9,454

Obligations of states and political subdivisions
 
151,312

 
10,751

 
(385
)
 
161,678

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
206,465

 
3,152

 
(1,107
)
 
208,510

Private label residential mortgage backed securities
 
6,258

 
323

 
(206
)
 
6,375

Other equity securities
 
7,596

 
352

 

 
7,948

 
 
$
381,074

 
$
14,612

 
$
(1,721
)
 
$
393,965



Proceeds and gross realized gains (losses) from the sales or calls of investment securities for the periods ended September 30, 2013 and 2012 are shown below (in thousands):
 
 
For the Three Months
Ended September 30,
 
For the Nine Months Ended September 30,
Available-for-Sale Securities
 
2013
 
2012
 
2013
 
2012
Proceeds from sales or calls
 
$
1,575

 
$
31,055

 
$
37,428

 
$
38,554

Gross realized gains from sales or calls
 

 
1,128

 
1,401

 
1,694

Gross realized losses from sales or calls
 

 
(285
)
 
(268
)
 
(407
)


The provision for income taxes includes $466,000 and $530,000 income tax impact from the reclassification of unrealized net gains on available-for-sale securities to realized net gains on available-for-sale securities for the nine months ended September 30, 2013 and 2012. The provision for income taxes includes $0 and $348,000 of income tax impact from the reclassification of unrealized net gains on available-for-sale securities to realized net gains on available-for-sale securities for the three months ended September 30, 2013 and 2012. respectively.
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, 2013
 
 
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:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
3,039

 
$
(29
)
 
$

 
$

 
$
3,039

 
$
(29
)
Obligations of states and political subdivisions
 
101,937

 
(6,510
)
 
2,597

 
(311
)
 
104,534

 
(6,821
)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
83,339

 
(1,339
)
 
21,806

 
(323
)
 
105,145

 
(1,662
)
 
 
$
188,315

 
$
(7,878
)

$
24,403

 
$
(634
)
 
$
212,718

 
$
(8,512
)

 
 
December 31, 2012
 
 
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:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government agencies
 
$
3,590

 
$
(23
)
 
$

 
$

 
$
3,590

 
$
(23
)
Obligations of states and political subdivisions
 
30,572

 
(385
)
 

 

 
30,572

 
(385
)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
76,764

 
(809
)
 
18,024

 
(298
)
 
94,788

 
(1,107
)
Private label residential mortgage backed securities
 

 

 
2,886

 
(206
)
 
2,886

 
(206
)
 
 
$
110,926

 
$
(1,217
)
 
$
20,910

 
$
(504
)
 
$
131,836

 
$
(1,721
)


     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.  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 original yield expected at time of purchase.
     As of September 30, 2013, 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, 2013 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at September 30, 2013 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. 
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 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 original 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, 2013.  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.
Based upon management’s assessment of the expected credit losses of these securities 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, 2013, the Company held six U.S. Government agency securities, of which two were in a loss position for less than 12 months and none were in a loss position nor had been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in direct obligations of U.S. government agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold 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, 2013.

Obligations of States and Political Subdivisions
 
At September 30, 2013, the Company held 213 obligations of states and political subdivision securities of which 76 were in a loss position for less than 12 months and two were in a loss position and had 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, 2013.
 
U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations
 
At September 30, 2013, the Company held 197 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 41 were in a loss position for less than 12 months and 21 have been in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed by an agency or sponsored entity 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, 2013.
 
Private Label Residential Mortgage Backed Securities
 
At September 30, 2013, the Company had a total of 21 PLRMBS with a remaining principal balance of $4,718,000 and a net unrealized gain of approximately $954,000None of these securities were recorded with an unrealized loss at September 30, 2013Eight of these PLRMBS with a remaining principal balance of $3,713,000 had credit ratings below investment grade.  The Company continues to perform extensive analyses on these securities.
     PLRMBS as of September 30, 2013 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
 
$
1,471

 
1,684

 
$
213

 
D
 
Fitch
 
14.18

 
20.07

 
51.00

 
97.25

 

CWALT 1
 
515

 
562

 
47

 
D
 
Fitch
 
15.68

 
22.85

 
46.29

 
100.73

 

CWALT 2
 
219

 
220

 
1

 
D
 
Fitch
 
17.67

 
22.34

 
46.93

 
101.38

 
(1.55
)
FHAMS
 
1,296

 
1,713

 
417

 
D
 
Fitch
 
15.84

 
20.18

 
40.88

 
95.00

 
(1.16
)
BAALT
 
2

 
20

 
18

 
C
 
Fitch
 
15.01

 
11.47

 
36.58

 
97.24

 
0.92

ABFS
 
124

 
262

 
138

 
D
 
S&P
 
7.41

 
40.10

 
46.75

 
97.46

 

CWALT 3
 
50

 
52

 
2

 
B1
 
Moodys
 
24.13

 
10.37

 
43.71

 
94.47

 
11.21

CONHE
 
36

 
57

 
21

 
B
 
S&P
 
3.65

 
8.26

 
46.75

 
86.39

 

 
 
$
3,713

 
$
4,570

 
$
857

 
 
 
 
 
 

 
 
 
 

 
 

 
 


 
The following tables provide a roll forward for the three and nine month periods ended September 30, 2013 and 2012 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.
 
 
 
For the Three Months
Ended September 30,
 
For the Nine Months Ended September 30,
(In thousands)
 
2013
 
2012
 
2013
 
2012
Beginning balance
 
$
800

 
$
783

 
$
783

 
$
783

Amounts related to credit loss for which an OTTI charge was not previously recognized
 

 

 
17

 

Increases to the amount related to credit loss for which OTTI was previously recognized
 

 

 

 

Realized losses for securities sold
 

 

 

 

Ending balance
 
$
800

 
$
783

 
$
800

 
$
783



The amortized cost and estimated fair value of investment securities at September 30, 2013 by contractual maturity is shown below (in thousands).  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, 2013
 
Amortized Cost
 
Estimated Fair
Value
Within one year
 
$
115

 
$
115

After one year through five years
 
12,804

 
13,658

After five years through ten years
 
24,758

 
25,645

After ten years
 
149,141

 
145,177

 
 
186,818

 
184,595

Investment securities not due at a single maturity date:
 
 

 
 

U.S. Government agencies
 
16,410

 
16,579

U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations
 
203,728

 
203,361

Private label residential mortgage backed securities
 
4,718

 
5,672

Other equity securities
 
7,596

 
7,626

 
 
$
419,270

 
$
417,833