Investment Securities

9 Months Ended

Sep. 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 September 30, 2012 and December 31, 2011 were: (in thousands)

	September 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	$	12,090	$	52	$	(6	)	$	12,136	$	—	$	—	$	—		$	—
Obligations of states and political subdivisions		155,883		14,528		—			170,411		156,663		15,329		—			171,992
Collateralized mortgage obligations		91,675		4,289		—			95,964		122,155		5,768		(1,153	)		126,770
Mortgage-backed securities		36,352		735		(31	)		37,056		391		51		—			442
Corporate Bonds		12,737		364		—			13,101		—		—		—			—
Balance at end of period		308,737		19,968		(37	)		328,668		279,209		21,148		(1,153	)		299,204
Held to maturity:
Obligations of states and political subdivisions		8,164		885		—			9,049		9,315		846		—			10,161
Total investment securities	$	316,901	$	20,853	$	(37	)	$	337,717	$	288,524	$	21,994	$	(1,153	)	$	309,365

Proceeds from the sale of securities available for sale were $3.6 million for the three and nine months ended September 30, 2012, resulting in a net loss of $162 thousand. For the three months ended September 30, 2011, there were no such sales. For the nine months ended September 30, 2011, such proceeds were $42.4 million, resulting in a net gain of $1.6 million.

The amortized cost and approximate fair value of the Company’s investment securities at September 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.

	September 30, 2012
	Amortized Cost		Fair Value
Securities Available for sale:
Due in one year or less	$	3,232	$	3,277
Due from one to five years		82,842		89,291
Due from five to ten years		87,431		95,843
Due after ten years		7,205		7,237
Subtotal		180,710		195,648
Collateralized mortgage obligations		91,675		95,964
Mortgage-backed securities		36,352		37,056
Total securities available for sale		308,737		328,668
Securities Held to maturity:
Due in one year or less		1,559		1,574
Due from one to five years		6,127		6,939
Due from five to ten years		478		536
Subtotal		8,164		9,049
Total investment securities	$	316,901	$	337,717

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 September 30, 2012.

At September 30, 2012 and December 31, 2011, investment securities carried at $224,736,000 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 September 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	$	4,036	$	6	$	—	$	—	$	4,036	$	6
Mortgage-backed securities		1		4,827		31		—		—		4,827		31
Total		2	$	8,863	$	37	$	—	$	—	$	8,863	$	37
			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.” Upon review of the considerations mentioned here during the third quarter of 2012, no OTTI was deemed to be warranted.

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 is 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 is 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.

During the third quarter of 2012, the Company sold two private label CMOs that had been in a continuous loss position for twelve months or longer as part of management’s efforts to reduce overall balance sheet risk. These securities had previously been written down by $1.1 million in the fourth quarter of 2011 due to other than temporary impairment evident at that time. The Company owns no other private label CMOs.

The following table summarizes the two non-agency, private label CMOs owned by the Company at December 31, 2011, by year of vintage with OTTI, credit ratings and related credit losses recognized in earnings. 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 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