Investments

9 Months Ended

Sep. 30, 2011

Investments [Abstract]

Investments

Note B –Investments

The aggregate carrying and approximate market values of securities follow.  Fair values are based on quoted market prices, where available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable financial instruments.

	September 30, 2011									December 31, 2010
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities available-for-sale:
US Government agencies	$	6,377	$	203	$	-		$	6,580	$	7,837	$	165	$	-		$	8,002
Obligations of states     and political subdivisions		56,198		1,589		(89	)		57,698		65,634		759		(467	)		65,926
Mortgage-backed securities:
US government agencies		238,206		8,398		(250	)		246,354		251,209		8,099		(493	)		258,815
Private label		5,647		50		(12	)		5,685		8,031		87		-			8,118
Trust preferred securities		48,958		680		(5,082	)		44,556		58,517		1,031		(4,938	)		54,610
Corporate securities		16,223		21		(1,443	)		14,801		16,214		63		(884	)		15,393
Total Debt Securities		371,609		10,941		(6,876	)		375,674		407,442		10,204		(6,782	)		410,864
Marketable equity securities		5,236		-		(1,128	)		4,108		5,207		8		(522	)		4,693
Non-marketable equity securities		11,709		-		-			11,709		12,553		-		-			12,553
Investment funds		1,724		46		-			1,770		1,617		-		(7	)		1,610
Total Securities Available-for-Sale	$	390,278	$	10,987	$	(8,004	)	$	393,261	$	426,819	$	10,212	$	(7,311	)	$	429,720

	September 30, 2011									December 31, 2010
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Securities held-to-maturity
Obligations of states and political subdivisions	$	309	$	1	$	-		$	310	$	438	$	5	$	-		$	443
Trust preferred securities		23,450		974		(1,184	)		23,240		23,427		-		(770	)		22,657
Total Securities Held-to-Maturity	$	23,759	$	975	$	(1,184	)	$	23,550	$	23,865	$	5	$	(770	)	$	23,100

Securities with limited marketability, such as stock in the Federal Reserve Bank ("FRB") or the Federal Home Loan Bank ("FHLB"), are carried at cost and are reported as non-marketable equity securities in the table above.

Certain investment securities owned by the Company were in an unrealized loss position (i.e., amortized cost basis exceeded the estimated fair value of the securities) as of September 30, 2011 and December 31, 2010.  The following table shows the gross unrealized losses and fair value of the Company's investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2011 and December 31, 2010.

	September 30, 2011
	Less Than Twelve Months				Twelve Months or Greater				Total
(In thousands)	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Securities available-for-sale:
Obligations of states and political subdivisions	$	1,781	$	75	$	236	$	14	$	2,017	$	89
Mortgage-backed securities:
US Government agencies		4,456		250		-		-		4,456		250
Private label		3,529		12		-		-		3,529		12
Trust preferred securities		6,162		428		5,314		4,655		11,476		5,083
Corporate securities		1,682		351		3,278		1,092		4,960		1,443
Marketable equity securities		2,836		795		1,230		332		4,066		1,127
Total	$	20,446	$	1,911	$	10,058	$	6,093	$	30,504	$	8,004
Securities held-to-maturity:
Trust preferred securities	$	4,614	$	423	$	7,954	$	761	$	12,568	$	1,184
	December 31, 2010
	Less Than Twelve Months				Twelve Months or Greater				Total
(In thousands)	Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss		Estimated Fair Value		Unrealized Loss
Securities available-for-sale:
Obligations of states and political subdivisions	$	16,242	$	253	$	2,141	$	214	$	18,383	$	467
Mortgage-backed securities:
US Government agencies		20,160		493		-		-		20,160		493
Trust preferred securities		6,910		686		6,831		4,252		13,741		4,938
Corporate securities		2,010		26		3,511		858		5,521		884
Marketable equity securities		1,038		221		1,260		301		2,298		522
Investment funds		1,493		7		-		-		1,493		7
Total	$	47,853	$	1,686	$	13,743	$	5,625	$	61,596	$	7,311
Securities held-to-maturity:
Trust preferred securities	$	6,623	$	198	$	7,889	$	572	$	14,512	$	770

Marketable equity securities consist of investments made by the Company in equity positions of various community banks.  Included within this portfolio are meaningful (2-5%) ownership positions in the following community bank holding companies: Community Financial Corporation; Eagle Financial Services, Inc.; First National Corporation; and First United Corporation.

During the first nine months of 2011, the Company recorded $0.4 million of credit-related net investment impairment losses.  The charges deemed to be other-than-temporary were related to pooled trust preferred securities, with a remaining book value of $7.5 million at September 30, 2011.  The credit-related net impairment charges were based on the Company's quarterly review of its investment securities for indications of losses considered to be other than temporary.  This loss was offset by realized investment gains of $3.8 million for the first nine months of 2011.  During the first quarter of 2010, the Company recognized a credit-related impairment charge of $0.6 million related to a single issuer bank trust preferred security (Cascade Capital Trust I issued by Cascade Financial Corporation of Everett, Washington).  In the second quarter of 2011, Cascade Financial Corporation ("Cascade") was acquired by Opus Bank.  In connection with this acquisition, Opus Bank called Cascade's trust preferred security, along with the accrued interest that had previously been deferred.  As a result of this repayment, the Company recognized an investment gain of $0.6 million during the three months ended September 30, 2011.

During 2010, the Company recorded $6.1 million of credit-related net investment impairment losses.  The charges deemed to be other-than-temporary were related to pooled bank trust preferred securities ($1.7 million credit-related net impairment losses for the full year) with a remaining book value of $7.8 million at December 31, 2010, single issuer bank trust preferred securities ($0.8 million credit-related net impairment losses for the full year) with a remaining book value of $1.2 million at December 31, 2010, and community bank and bank holding company equity positions ($3.6 million credit-related net impairment losses for the full year) with a remaining book value of $3.6 million at December 31, 2010.  The credit-related net impairment charges related to the pooled bank trust preferred securities (Cascade Capital Trust I issued by Cascade Financial Corporation of Everett, Washington) were based on the Company's quarterly reviews of its investment securities for indications of losses considered to be other than temporary.  Based on management's assessment of the securities the Company owns, the seniority position of the securities within the pools, the level of defaults and deferred payments within the pools, management concluded that credit-related impairment charges of $1.8 million and $0.7 million on the pooled bank trust preferred securities and single issuer bank trust preferred securities, respectively, were appropriate for the year ending December 31, 2010.  The $3.6 million of credit-related net impairment charges recognized on the community bank and bank holding equity positions was due to trends of poor financial performance over the last several quarters and the length of time and extent to which the market value of these securities have been below the Company's cost basis.  As a result of these factors, the Company did not expect the market value of these securities to recover in the near future.  These losses were partially offset by realized investment gains of $1.4 million as the Company sold certain single issuer trust preferred securities with a remaining book value of $75.3 million during the year ended December 31, 2010.

Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other-than-temporary would be reflected in earnings as realized losses.  In estimating other-than-temporary impairment losses, management considers, among other things (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition, capital strength, and near-term (12 months) prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; (iii) the historical volatility in the market value of the investment and/or the liquidity or illiquidity of the investment; (iv) adverse conditions specifically related to the security, an industry, or a geographic area; or (v) the intent to sell the investment security and if it's  more likely than not that the Company will not have to sell the security before recovery of its cost basis.  In addition, management also employs a continuous monitoring process in regards to its marketable equity securities, specifically its portfolio of regional community bank holdings.  Although the regional community bank stocks that are owned by the Company are publicly traded, the trading activity for these stocks is minimal, with average trading volumes of less than 0.1% of each respective company being traded on a daily basis.  Another factor influencing the market value of these equity securities is a depressed stock market, particularly in the smaller community bank financial sector.  As part of management's review process for these securities, management reviews the financial condition of each respective regional community bank for any indications of financial weakness.

Management has the ability and intent to hold the securities classified as held to maturity until they mature, at which time the Company will receive full value for the securities.  Furthermore, as of September 30, 2011, management does not intend to sell an impaired security and it is not more than likely that it will be required to sell the security before the recovery of its amortized cost basis.  The unrealized losses on debt securities are primarily the result of interest rate changes, credit spread widening on agency-issued mortgage related securities, general financial market uncertainty and unprecedented market volatility.  These conditions will not prohibit the Company from receiving its contractual principal and interest payments on its debt securities.  The fair value is expected to recover as the securities approach their maturity date or repricing date.   As of September 30, 2011, management believes the unrealized losses detailed in the table above are temporary and no impairment loss has been recognized in the Company's consolidated income statement.  Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period of the other-than-temporary impairment is identified, while any noncredit loss will be recognized in other comprehensive income.

At September 30, 2011, the book value of the Company's five pooled trust preferred securities totaled $7.5 million with an estimated fair value of $3.2 million.  All of these securities are mezzanine tranches.  Pooled trust preferred securities represent beneficial interests in securitized financial assets that the Company analyzes within the scope of FASB Topic ASC 320, Investments-Debt and Equity Securities, ("ASC 320") and are evaluated quarterly for other-than-temporary-impairment ("OTTI").  Management performs an analysis of OTTI utilizing its internal methodology as described below to estimate expected cash flows to be received in the future.  The Company reviews each of its pooled trust preferred securities to determine if an OTTI charge would be recognized in current earnings in accordance with ASC 320.  There is a risk that continued collateral deterioration could cause the Company to recognize additional OTTI charges in earnings in the future.

When evaluating debt securities for OTTI, the Company determines a credit related portion and a noncredit related portion, if any.  The credit related portion is recognized in earnings and represents the difference between the present value of expected future cash flows and the amortized cost basis of the security.  The noncredit related portion is recognized in other comprehensive income, and represents the difference between the book value and the fair value of the security less the amount of the credit related impairment.  The determination of whether it is probable that an adverse change in estimated cash flows has occurred is evaluated by comparing estimated cash flows to those previously projected as further described below.  The Company considers this process to be its primary evidence when determining whether credit related OTTI exists.  The results of these analyses are significantly affected by other variables such as the estimate of future cash flows, credit worthiness of the underlying issuers and determination of the likelihood of defaults of the underlying collateral.

The Company utilizes a third party model to compute the present value of expected cash flows which considers the structure and term of each of the five respective pooled trust preferred securities and the financial condition of the underlying issuers.  Specifically, the third party 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. 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. As in the past, for issuing banks that have defaulted, management generally assumes no recovery. For issuing banks that have deferred its interest payments, management excludes the collateral balance associated with these banks and assumes no recoveries of such collateral balance in the future. The exclusion of such issuing banks in a current deferral position is based on such bank experiencing a certain level of financial difficulty that raises doubt about its ability to satisfy its contractual debt obligation, and accordingly, the Company excludes the associated collateral balance from its estimate of expected cash flows. Other assumptions used in the estimate of expected cash flows include expected future default rates and prepayments. Specifically, the model assumes annual prepayments of 1.0% with 100% at maturity and assumes 150 basis points of additional annual defaults from banks that are currently not in default or deferral.  In addition, the model assumes no recoveries except for one trust preferred security which assumes that three of the banks currently deferring will cure such positions between December 2011 and July 2015.  Management compares the present value of expected cash flows to those previously projected to determine if an adverse change in cash flows has occurred. If an adverse change in cash flows has occurred, management determines the credit loss to be recognized in the current period and the portion related to noncredit factors to be recognized in other comprehensive income.

Based upon the analysis performed by management as of September 30, 2011, $0.4 million of credit-related OTTI charges were recognized during the three and nine months ended September 30, 2011.  During the three and nine months ended September 30, 2010, the Company recognized $0.7 million and $1.7 million, respectively, of credit-related OTTI charges.

The following table presents a progression of the credit loss component of OTTI on debt securities recognized in earnings.  The credit loss component represents the difference between the present value of expected future cash flows and the amortized cost basis of the security.  The credit component of OTTI recognized in earnings during a period is presented in two parts based upon whether the credit impairment in the current period is the first time the debt security was credit impaired (initial credit impairment) or if there is additional credit impairment on a debt security that was credit impaired in previous periods.

	For the nine months ended
(In thousands)	September 30, 2011			September 30, 2010
Balance, beginning of period	$	20,476		$	18,694
Additions:
Initial credit impairment		-			-
Additional credit impairment		355			2,358
Deductions:
Dispositions		(638	)		-
Balance, end of period	$	20,193		$	21,052

The amortized cost and estimated fair value of debt securities at September 30, 2011, by contractual maturity, are shown in the following table.  Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.  Mortgage-backed securities have been allocated to their respective maturity groupings based on their contractual maturity.

(In thousands)	Cost		Estimated Fair Value
Securities Available-for-Sale
Due in one year or less	$	8,613	$	8,668
Due after one year through five years		48,108		48,431
Due after five years through ten years		60,763		56,462
Due after ten years		254,125		262,113
	$	371,609	$	375,674
Securities Held-to-Maturity
Due in one year or less	$	-	$	-
Due after one year through five years		309		310
Due after five years through ten years		-		-
Due after ten years		23,450		23,240
	$	23,759	$	23,550

Gross gains and losses realized by the Company from investment security transactions are summarized in the table below:

	Three Months Ended September 30				Nine Months Ended September 30
	2011		2010		2011		2010
Gross realized gains	$	627	$	1,335	$	3,756	$	1,397
Gross realized losses		-		-		-		-
Gain (loss) on sale of investment securities	$	627	$	1,335	$	3,756	$	1,397

The specific identification method is used to determine the cost basis of securities sold.

The carrying value of securities pledged to secure public deposits and for other purposes as required or permitted by law approximated $219.1 million and $204.6 million at September 30, 2011 and December 31, 2010, respectively.

The following table presents additional information about the Company's trust preferred securities with a credit rating of below investment grade as of September 30, 2011:

(Dollars in thousands)

Deal Name			Type	Class	Original Cost		Amortized Cost		Fair Value		Difference (1)			Lowest Credit Rating	# of issuers currently performing		Actual deferrals/ defaults (as a % of original dollar)			Expected deferrals/ defaults (as a % of remaining of performing collateral)			Excess Subordination as a Percentage of Current Performing Collateral (4)
			Pooled trust preferred securities:
			Other-than-temporarily impaired
			Available for Sale:
	P1	(5)	Pooled	Mezz	$	1,175	$	505	$	197	$	(308	)	Ca		17		28.7	%		14.8	%(2)		17.0	%
	P2	(6)	Pooled	Mezz		3,944		1,197		840		(357	)	Ca		20		25.8	%		20.7	%(2)		14.7	%
	P3	(7)	Pooled	Mezz		2,962		1,431		376		(1,055	)	Caa3		26		24.5	%		22.5	%(2)		0.0	%
	P4	(8)	Pooled	Mezz		4,060		965		208		(757	)	Ca		13		25.4	%		0.0	%(3)		0.0	%
	P5	(9)	Pooled	Mezz		5,650		826		221		(605	)	Ca		16		35.6	%		22.7	%(2)		24.6	%
			Held to Maturity:
	P6	(10)	Pooled	Mezz		2,274		980		394		(586	)	Ca		17		28.7	%		14.8	%(2)		17.0	%
	P7	(6)	Pooled	Mezz		5,237		1,581		1,120		(461	)	Ca		20		25.8	%		20.7	%(2)		14.7	%
			Single issuer trust preferred securities
			Available for sale:
	S1		Single			1,149		1,040		1,040		-		Ba2		1		-			-
	S2		Single			5,119		5,080		4,700		(380	)	BB+		1		-			-
	S3		Single			535		511		465		(46	)	BB+		1		-			-
	S4	(11)	Single			261		235		90		(145	)	NR		1		-			-
	S5		Single			3,000		3,000		3,012		12		B2		1		-			-
	S6		Single			1,000		1,000		997		(3	)	Caa1		1		-			-
			Held to Maturity:
	S7		Single			4,000		4,000		4,000		-		NR		1		-			-
	S8		Single			3,360		3,112		2,610		(502	)	NR		1		-			-
	S9		Single			3,564		3,536		3,234		(302	)	NR		1		-			-
	S10		Single			4,321		4,136		4,110		(26	)	Ba1		1		-			-
		(1)	The differences noted consist of unrealized losses recorded at September 30, 2011 and noncredit other-than-temporary impairment losses recorded subsequent to April 1, 2009 that have not been reclassified as credit losses.
		(2)	Performing collateral is defined as total collateral minus all collateral that has been called, is currently deferring, or currently in default. This model for this security assumes that all collateral that is currently deferring will default with a zero recovery rate. The underlying issuers can cure, thus this bond could recover at a higher percentage upon default than zero.
		(3)	Performing collateral is defined as total collateral minus all collateral that has been called, is currently deferring, or currently in default. The model for this security assumes that three of the banks that are currently deferring will cure between December 2011 and July 2015. If additional underlying issuers cure, this bond could recover at a higher percentage.
		(4)	Excess subordination is defined as the additional defaults/deferrals necessary in the next reporting period to deplete the entire credit enhancement (excess interest and over-collateralization) beneath our tranche within each pool to the point that would cause a "break in yield." This amount assumes that all currently performing collateral continues to perform. A break in yield means that our security would not be expected to receive all the contractual cash flows (principal and interest) by maturity. The "percent of current performing collateral" is the ratio of the "excess subordination amount" to current performing collateral—a higher percent means there is more excess subordination to absorb additional defaults/deferrals, and the better our security is protected from loss.
		(5)	Other-than-temporary impairment losses of $370,000 were recognized during the year ended December 31, 2010. No other-than-temporary impairment losses were incurred during the nine month period ended September 30, 2011.
		(6)	No other-than-temporary impairment losses were incurred during the nine month period ended September 30, 2011 and the year ended December 31, 2010.
		(7)	Other-than-temporary impairment losses of $72,000 were recognized during the year ended December 31, 2010. Other-than-temporary impairment losses of $115,000 were recognized during the nine month period ended September 30, 2011.
		(8)	Other-than-temporary impairment losses of $619,000 were recognized during the year ended December 31, 2010. Other-than-temporary impairment losses of $240,000 were recognized during the nine month period ended September 30, 2011.
		(9)	Other-than-temporary impairment losses of $1,750,000 were recognized during the year ended December 31, 2010. No other-than-temporary impairment losses were incurred during the nine month period ended September 30, 2011.
		(10)	Other-than-temporary impairment losses of $706,000 were recognized during the year ended December 31, 2010. No other-than-temporary impairment losses were incurred during the nine month period ended September 30, 2011.
		(11)	Other-than-temporary impairment losses of $15,000 were recognized during the year ended December 31, 2010. No other-than-temporary impairment losses were incurred during the nine month period ended September 30, 2011.