Investment Securities

6 Months Ended

Jun. 30, 2011

Investment Securities

Investment Securities

Note 2.  Investment Securities

The following table sets forth the amortized cost and fair values of the Company’s investment securities, all of which are reported as available for sale at June 30, 2011 and December 31, 2010:

(dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
As of June 30, 2011	Cost		Gains		Losses			Value
Obligations of U.S. government agencies	$	8,416	$	48	$	(131	)	$	8,333
Mortgage-backed securities
Agency	118,329		1,336		(87		)	119,578
Non-agency	13,509		532		(385		)	13,656
State and municipal securities	48,034		970		(324		)	48,680
Corporate debt securities	28,254		34		(105		)	28,183
Total	$	216,542	$	2,920	$	(1,032	)	$	218,430
As of December 31, 2010
Obligations of U.S. government agencies	$	6,684	$	-	$	(248	)	$	6,436
Mortgage-backed securities
Agency	159,448		1,653		(484		)	160,617
Non-agency	10,170		233		(1,344		)	9,059
State and municipal securities	49,459		242		(1,956		)	47,745
Total	$	225,761	$	2,128	$	(4,032	)	$	223,857

At June 30, 2011, the Company owned five Whole Loan Private Label Single Family Residential Mortgage Backed Securities (“PMBS”) with a remaining principal balance of approximately $4.8 million, which are included in Non-agency mortgage backed securities in the above table. PMBS do not carry a government guarantee (explicit or implicit) and require much more detailed due diligence in the form of pre and post purchase analysis.  All PMBS bonds were rated AAA by one or more of the major rating agencies at the time of purchase.  However, due to the severe and prolonged downturn in the economy, PMBS bonds along with other asset classes have seen deterioration in price, credit quality, and liquidity.  Rating agencies have been reassessing all ratings associated with bonds starting with lower tranche or subordinate pieces (which have increased loss exposure), then moving on to senior and super senior bonds, which are what the Company owns with the exception of one mezzanine bond (subordinate).  At June 30, 2011, one bond with an aggregate fair value of $0.3 million is deemed to be non-investment grade.

The Company’s evaluations of PMBS, with the assistance of an independent third party, compile relevant collateral details and performance statistics on a security-by-security basis.  These evaluations also include assumptions about prepayment rates, future delinquencies, and loss severities based on the underlying collateral characteristics and vintage.  Additionally, evaluations include consideration of actual recent collateral performance, the structuring of the security (including the Company’s position within that structure) and expectations of relevant market and economic data as of the end of the reporting period.  Assumptions made concerning the items listed above allow the Company to then derive an estimate for the net present value of each security’s expected future cash flows.  This amount is then compared to the amortized cost of each security to determine the amount of any possible credit loss.

As of June 30, 2011, net unrealized gains on PMBS within the Company’s investment portfolio totaled $0.1 million compared to net unrealized losses of $1.1 million reported at December 31, 2010.  Because the Company has the ability and intent to hold  those investments in an unrealized loss position until their anticipated recovery of fair value, which may be at maturity, the Company did not consider these investments to be other than temporarily impaired as of June 30, 2011.  However, it is possible that the underlying loan collateral of these securities will perform worse than is currently expected, which could lead to adverse changes in cash flows on these securities and future OTTI losses.  Events that could trigger material unrecoverable declines in fair values, and therefore potential OTTI losses for these securities in the future include, but are not limited to: further significantly weakened economic conditions; deterioration of credit metrics; significantly higher levels of default; loss in value on the underlying collateral; deteriorating credit enhancement; and further uncertainty and illiquidity in the financial markets.

Other than Temporary Impairment

As of June 30, 2011, the Company continues to hold two PMBS securities in which OTTI losses had been recognized.  These securities had an aggregate recorded fair value of $0.6 million ($1.1 million historical cost) at both June 30, 2011 and December 31, 2010.  The aggregate OTTI recorded as of both June 30, 2011 and December 31, 2010 was approximately $0.5 million, comprised of $0.1 million of OTTI associated with credit risk and $0.4 million associated with OTTI for all other factors.  In March 2011, the Company sold one of the three securities on which OTTI had previously been recognized.  The Company realized a loss of approximately $0.5 million on the sale of the security.  Although the Company continues to have the ability and intent to hold these securities for the foreseeable future, the results of the analysis performed on these securities indicated that the present value of the expected future cash flows was not sufficient to recover their entire amortized cost basis, thus indicating a credit loss had occurred. The Company will continue to engage an independent third party to review these securities on a quarterly basis for the foreseeable future.

As of June 30, 2011, the Company believes that unrealized losses on all other mortgage related securities such as agency securities, including those issued by the Federal Home Loan Mortgage Corporation (“FHLMC”), the Federal National Mortgage Association (“FNMA”) and the Government National Mortgage Association (“GNMA”) are not attributable to credit quality, but rather fluctuations in market prices for these types of investments.  Additionally, these securities have maturity dates that range from 1 to 30 years and have contractual cash flows guaranteed by agencies of the U.S. Government.  As of June 30, 2011, the Company does not believe unrealized losses related to these securities are other than temporary.

The following table provides a roll forward of the OTTI balances against the investment securities for both credit loss and all other factor components, for the six months ended June 30, 2011:

				OTTI Related
	OTTI Related			to All Other			Total
(dollars in thousands)	to Credit Loss			Factors			OTTI
Balance, beginning of the period	$	534		$	943		$	1,477
Less: losses related to OTTI securities sold	(425		)	(518		)	(943		)
Change in value attributable to other factors	-			(40		)	(40		)
Balance, end of the period	$	109		$	385		$	494

The following table provides additional information related to the OTTI losses the Company recognized during the year ended December 31, 2010:

				OTTI Related
	OTTI Related			to All Other			Total
(dollar amounts in thousands)	to Credit Loss			Factors			OTTI
Balance, beginning of the period	$	372		$	1,584		$	1,956
Additional charges on securities for which OTTI
was previously recognized	207			(571		)	(364		)
Less: losses related to OTTI securities sold	(45		)	(70		)	(115		)
Balance, end of the period	$	534		$	943		$	1,477

The following table provides a summary of investment securities in an unrealized loss position as of June 30, 2011 and December 31, 2010:

	Securities In A Loss Position
	Less Than Twelve Months						Twelve Months or More							Total
(dollars in thousands)		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
As of June 30, 2011		Value		Loss			Value		Loss			Value		Loss
Obligations of U.S. government agencies		$	4,191	$	(129	)	$	93	$	(2	)	$	4,284	$	(131	)
Mortgage-backed securities
Agency		22,980		(87		)	-		-			22,980		(87		)
Non-agency		-		-			597		(385		)	597		(385		)
State and municipal securities		14,082		(316		)	151		(8		)	14,233		(324		)
Corporate debt securities		15,688		(105		)	-		-			15,688		(105		)
Total		$	56,941	$	(637	)	$	841	$	(395	)	$	57,782	$	(1,032	)
As of December  31, 2010
Obligations of U.S. government agencies		$	6,339	$	(245	)	$	96	$	(3	)	$	6,435	$	(248	)
Mortgage backed securities
Agency		56,164		(469		)	2,094		(15		)	58,258		(484		)
Non-agency		-		-			4,780		(1,344		)	4,780		(1,344		)
State and municipal securities		38,731		(1,936		)	136		(20		)	38,867		(1,956		)
Total		$	101,234	$	(2,650	)	$	7,106	$	(1,382	)	$	108,340	$	(4,032	)

The following table summarizes earnings on both taxable and tax-exempt investment securities for the three and six months ended June 30, 2011 and 2010:

	For the three months				For the six months
	June 30,				June 30,
(dollar amounts in thousands)	2011		2010		2011		2010
Taxable Earnings on Investment Securities	$	1,223	$	1,434	$	2,412	$	2,457
Non-taxable Earnings on Investment Securities	376		287		754		544
Total	$	1,599	$	1,721	$	3,166	$	3,001