Investment Securities

6 Months Ended

Jun. 30, 2012

Investment Securities [Abstract]

Investment Securities

(4) Investment Securities

The amortized cost, fair values and gross unrealized gains and losses of the Company’s investment securities available for sale and held to maturity at June 30, 2012 and December 31, 2011 were: (in thousands)

	June 30, 2012									December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available for sale:
U.S. government agency securities	$	5,043	$	—	$	(9	)	$	5,034	$	—	$	—	$	—		$	—
Obligations of states and political subdivisions		156,216		11,376		(3	)		167,589		156,663		15,329		—			171,992
Collateralized mortgage obligations		106,730		4,749		(665	)		110,814		122,155		5,768		(1,153	)		126,770
Mortgage-backed securities		16,908		21		(2	)		16,927		391		51		—			442
Corporate Bonds		7,308		49		(2	)		7,355		—		—		—			—
Balance at end of period		292,205		16,195		(681	)		307,719		279,209		21,148		(1,153	)		299,204
Held to maturity:
Obligations of states and political subdivisions		8,095		825		—			8,920		9,315		846		—			10,161
Total investment securities	$	300,300	$	17,020	$	(681	)	$	316,639	$	288,524	$	21,994	$	(1,153	)	$	309,365

Proceeds from the sale of securities available for sale were $42.5 million for the three and six months ended June 30, 2011, resulting in net gains of $1.6 million. There were no such sales for the three and six months ended June 30, 2012.

The amortized cost and approximate fair value of the Company’s investment securities at June 30, 2012 are shown below by expected maturity (in thousands). Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	June 30, 2012
	Amortized Cost		Fair Value
Securities Available for sale:
Due in one year or less	$	2,581	$	2,603
Due from one to five years		74,728		79,288
Due from five to ten years		90,611		97,388
Due after ten years		647		699
Subtotal		168,567		179,978
Collateralized mortgage obligations		106,730		110,814
Mortgage-backed securities		16,908		16,927
Total securities available for sale		292,205		307,719
Securities Held to maturity:
Due in one year or less		1,576		1,592
Due from one to five years		5,981		6,742
Due from five to ten years		538		586
Subtotal		8,095		8,920
Total investment securities	$	300,300	$	316,639

As a member of the Federal Reserve System, the Bank owns Federal Reserve Bank stock with a book value of $712,000. The stock has no maturity and there is no public market for the investment.

As a member of the Federal Home Loan Bank of New York (“FHLB”), the Bank owns 15,851 shares of FHLB stock with a book value of $1,585,000. The stock has no maturity and there is no public market for the investment. The stock continues to pay dividends and has not placed restrictions on redemptions and as such, was not deemed impaired as of June 30, 2012.

At June 30, 2012 and December 31, 2011, investment securities carried at $232,337,000 and $201,207,000, respectively, were pledged to secure trust deposits and public funds on deposit.

The table below indicates the length of time individual securities have been held in a continuous unrealized loss position at the date indicated: (in thousands)

			Less than 12 months				12 months or longer				Total
As of June 30, 2012 Type of securities	Number of Securities		Fair value		Unrealized Losses		Fair value		Unrealized Losses		Fair value		Unrealized Losses
U.S. government agency securities		1	$	5,034	$	9	$	—	$	—	$	5,034	$	9
Obligations of states and political subdivisions		4		652		3		—		—		652		3
Collateralized mortgage obligations		2		—		—		7,425		665		7,425		665
Mortgage-backed securities		1		5,186		2		—		—		5,186		2
Corporate Bonds		1		1,835		2		—		—		1,835		2
Total		9	$	12,707	$	16	$	7,425	$	665	$	20,132	$	681

			Less than 12 months				12 months or longer				Total
As of December 31, 2011 Type of securities	Number of Securities		Fair value		Unrealized Losses		Fair value		Unrealized Losses		Fair value		Unrealized Losses
Collateralized mortgage obligations		2	$	—	$	—	$	7,994	$	1,153	$	7,994	$	1,153
Total		2	$	—	$	—	$	7,994	$	1,153	$	7,994	$	1,153

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. All of the Company’s investment securities classified as available-for-sale or held-to-maturity are evaluated for OTTI under ASC 320, “Accounting for Certain Investments in Debt and Equity Securities.”

In determining OTTI under the ASC 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on information available to management at a point in time. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When an OTTI occurs under the model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable tax benefit. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The unrealized losses in the Company’s collateralized mortgage obligations at June 30, 2012 were caused by changes in interest rates, a significant widening of credit spreads across markets for these securities, and illiquidity in the financial markets for these instruments. These securities include two non-agency private label issues held at a continuous, unrealized loss for twelve months or longer and are either super-senior or senior in tranche structure. Each of these securities has some level of credit enhancement, and neither are collateralized by sub-prime loans. With the assistance of a third party, management reviews the characteristics of these securities periodically, including levels of delinquency and foreclosure, projected losses at various degrees of severity, and credit enhancement and coverage. Based on the aforementioned periodic analysis, it was determined that no securities had additional impairment at June 30, 2012 from that recorded at December 31, 2011.

The following tables summarize the two non-agency, private label collateralized mortgage obligation securities, by year of vintage with OTTI, credit ratings and related credit losses recognized in earnings at June 30, 2012 and December 31, 2011. Management determined the estimated fair values for each security based on discounted cash flow analyses using the Intex Desktop Valuation model. Management explicitly calculates the credit component utilizing conditional default and loss severity vectors with the Intex model. Management relies on FASB ASC paragraph 820-10-55-5 to provide guidance on the discount rates to be used when a market is not active. According to the standard, the discount rate should take into account all of the following factors:

• The time value of money (risk-free rate)

• Price for bearing the uncertainty in the cash flows (risk premium)

• Other case-specific factors that would be considered by market participants, including a liquidity adjustment.

Weighted average key assumptions utilized in the valuations for June 30, 2012 were as follows:

• Discount Rate – 10%

• Voluntary Prepayments – 14.2%

• Conditional Default Rates – 9.2% for the first 24 months, then trending downward in a linear fashion for the following 12 months, then to zero through approximately 17 years.

• Loss Severity – 55.1% trending downward to terminal loss severities of 23%, in a linear fashion, at 2.5% per year.

(in thousands)	Year of Vintage 2006		Total Fair Value		Total Amortized Cost		Total OTTI Related to Credit Loss at December 31, 2011		Additional OTTI During the Six Month Period Ended June 30, 2012		Total OTTI Related to Credit Loss at June 30, 2012
Rating:
Total Non-Agency
CMOs
CCC and Below	$	7,425	$	7,425	$	8,090	$	1,052	$	—	$	1,052
Total Non-Agency
CMO’s	$	7,425	$	7,425	$	8,090	$	1,052	$	—	$	1,052

Weighted average key assumptions utilized in the valuations for December 31, 2011 were as follows:

• Discount Rate – 11%

• Voluntary Prepayments – 16.2%

• Conditional Default Rates – 16.2% for the first 24 months, then trending downward in a linear fashion to 9.3% for the following 12 months, then to zero through approximately 17 years.

• Loss Severity – 55.5% trending downward to terminal loss severities of 23%, in a linear fashion, at 2.5% per year.

(in thousands)	Year of Vintage 2006		Total Fair Value		Total Amortized Cost		Total OTTI Related to Credit Loss at December 31, 2011
Rating:
Total Non-Agency
CMOs
CCC and Below	$	7,994	$	7,994	$	9,147	$	1,052
Total Non-Agency
CMO’s	$	7,994	$	7,994	$	9,147	$	1,052

The significant unobservable inputs used in the fair value measurements of the Company’s collateralized mortgage obligations are voluntary prepayment rates, conditional default rates and loss severity in the event of default. Significant increases or decreases in any of those inputs in isolation would result in a significantly higher or lower fair value measurement. Generally, a change in the assumption used for the conditional default rates is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for voluntary prepayment rates.