Investments

9 Months Ended

Sep. 30, 2011

Investments

Investments

Note 5 – Investments

The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments – Debt and Equity Securities.

The following table shows a comparison of amortized cost and fair values of investment securities available-for-sale at September 30, 2011 and December 31, 2010:

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCI
September 30, 2011
U.S. treasuries	$	8,000	$	0	$	0	$	8,000	$	0
U.S. government agencies		35,057		307		216		35,148		0
Residential mortgage-backed agencies		152,553		1,898		300		154,151		0
Collateralized mortgage obligations		683		0		117		566		0
Obligations of states and political subdivisions		68,042		2,557		17		70,582		0
Collateralized debt obligations		36,280		0		26,908		9,372		17,928
Totals	$	300,615	$	4,762	$	27,558	$	277,819	$	17,928
December 31, 2010
U.S. government agencies	$	24,813	$	101	$	64	$	24,850	$	0
Residential mortgage-backed agencies		98,109		1,703		199		99,613		0
Collateralized mortgage obligations		763		0		101		662		0
Obligations of states and political subdivisions		94,250		1,011		537		94,724		0
Collateralized debt obligations		36,533		0		26,695		9,838		18,151
Totals	$	254,468	$	2,815	$	27,596	$	229,687	$	18,151

Proceeds from sales of securities and the realized gains and losses are as follows:

	Nine Months Ended September 30,				Three Months Ended September 30,
(in thousands)	2011		2010		2011		2010
Proceeds	$	62,833	$	12,297	$	33,719	$	10,029
Realized gains		773		262		406		0
Realized losses		197		170		96		170

The following table shows the Corporation's available-for-sale securities with gross unrealized losses and fair values at September 30, 2011 and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

	Less than 12 months					12 months or more
(in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2011
U.S. treasuries	$	8,000	$	0	*	$	0	$	0
U.S. government agencies		18,584		216			0		0
Residential mortgage-backed agencies		54,465		280			5,062		20
Collateralized mortgage obligations		0		0			566		117
Obligations of states and political subdivisions		2,466		14			2,812		3
Collateralized debt obligations		0		0			9,372		26,908
Totals	$	83,515	$	510		$	17,812	$	27,048

*Not meaningful

December 31, 2010
U.S. government agencies	$	13,044	$	64	$	0	$	0
Residential mortgage-backed agencies		19,453		199		0		0
Collateralized mortgage obligations		0		0		662		101
Obligations of states and political subdivisions		26,887		537		0		0
Collateralized debt obligations		0		0		9,838		26,695
Totals	$	59,384	$	800	$	10,500	$	26,796

Management systematically evaluates securities for impairment on a quarterly basis.  Management assesses whether (a) it has the intent to sell a security being evaluated and (b) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery.  If neither applies, then declines in the fair values of securities below their cost that are considered other-than-temporary declines are split into two components.  The first is the loss attributable to declining credit quality.  Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made.  The second component consists of all other losses, which are recognized in other comprehensive loss.  In estimating other-than-temporary impairment ("OTTI") losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the fair value of the security, (4) changes in the rating of the security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest or principal payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future.  Management also monitors cash flow projections for securities that are considered beneficial interests under the guidance of ASC Subtopic 325-40, Investments – Other – Beneficial Interests in Securitized Financial Assets, (ASC Section 325-40-35). Further discussion about the evaluation of securities for impairment can be found in Item 2 of Part I of this report under the heading "Investment Securities".

Management believes that the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of its consolidated financial statements.  Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for its collateralized debt obligation ("CDO") portfolio consisting of pooled trust preferred securities.  Management reviews the assumptions and results and does not believe that there were any material differences in the valuations between September 30, 2011 and December 31, 2010.

U.S. Treasuries - One U.S. treasury  bond was in a slight unrealized loss position for less than 12 months as of September 30, 2011.  This bond is of the highest investment grade.  The bond is very short-term in nature and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell it before recovery of its amortized cost basis, which may be at maturity. Therefore, no OTTI exists at September 30, 2011.

U.S. Government Agencies - Two U.S. government agencies have been in a slight unrealized loss position for less than 12 months as of September 30, 2011.  The securities are of the highest investment grade and the Corporation does not intend to sell them, and it is not more likely than not that the Corporation will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Therefore, no OTTI exists at September 30, 2011.

Residential Mortgage-Backed Agencies - Eight residential mortgage-backed agencies have been in a slight unrealized loss position for less than 12 months as of September 30, 2011.  One residential mortgage-backed agency has been in slight unrealized loss position for 12 months or more.  The security is of the highest investment grade and the Corporation does not intend to sell it, and it is not more likely than not that the Corporation will be required to sell it before recovery of their amortized cost basis, which may be at maturity. Therefore, no OTTI exists at September 30, 2011.

Collateralized Mortgage Obligations – The collateralized mortgage obligation portfolio, consisting of one security at September 30, 2011, has been in an unrealized loss position for 12 months or more.  This security is a private label residential mortgage-backed security and is reviewed for factors such as loan to value ratio, credit support levels, borrower FICO scores, geographic concentration, prepayment speeds, delinquencies, coverage ratios and credit ratings.  Management believes that this security continues to demonstrate collateral coverage ratios that are adequate to support the Corporation's investment.  At the time of purchase, this security was of the highest investment grade and was purchased at a discount relative to its face amount.  As of September 30, 2011, this security remains at investment grade and continues to perform as expected at the time of purchase.  The Corporation does not intend to sell this security and it is not more likely than not that the Corporation will be required to sell the investment before recovery of its amortized cost basis, which may be at maturity.  Accordingly, management does not consider this investment to be other-than-temporarily impaired at September 30, 2011.

Obligations of State and Political Subdivisions – The unrealized losses on the Corporation's investments in state and political subdivisions were $18,000 at September 30, 2011.  Two securities have been in an unrealized loss position for less than 12 months.  Two additional securities have been in a slight unrealized loss position for 12 months or more.  All of these investments are of investment grade as determined by the major rating agencies and management reviews the ratings of the underlying issuers.  Management believes that this portfolio is well-diversified throughout the United States, and all bonds continue to perform according to their contractual terms.  The Corporation does not intend to sell these investments and it is not more likely than not that the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity.  Accordingly, management does not consider these investments to be other-than-temporarily impaired at September 30, 2011.

Collateralized Debt Obligations - The $26.9 million in unrealized losses greater than 12 months at September 30, 2011 relates to 18 pooled trust preferred securities that comprise the CDO portfolio.  See Note 8 for a discussion of the methodology used by management to determine the fair values of these securities.  Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that there were no securities that had credit-related non-cash OTTI charges during the third quarter of 2011.  The Corporation has recorded $19,000 in credit-related non-cash OTTI charges for the nine-months ended September 30, 2011.  The unrealized losses on the remaining securities in the portfolio are primarily attributable to continued depression in market interest rates, marketability, liquidity and the current economic environment.

The following tables present a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses which have been recognized in earnings for the trust preferred securities in the CDO portfolio held and not intended to be sold for the nine- and three-month periods ended September 30, 2011 and 2010:

	Nine months ended
(in thousands)	September 30, 2011			September 30, 2010
Balance of credit-related OTTI at January 1	$	14,653		$	10,765
Additions for credit-related OTTI not previously recognized		0			1,402
Additional increases for credit-related OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis		19			6,873
Decreases for previously recognized credit-related OTTI because there was an intent to sell		0			(4,369	)
Reduction for increases in cash flows expected to be collected		(159	)		(33	)
Balance of credit-related OTTI at September 30	$	14,513		$	14,638

	Three months ended
(in thousands)	September 30, 2011			September 30, 2010
Balance of credit-related OTTI at July 1	$	14,571		$	14,461
Additions for credit-related OTTI not previously recognized		0			0
Additional increases for credit-related OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis		0			210
Decreases for previously recognized credit-related OTTI because there was an intent to sell		0			0
Reduction for increases in cash flows expected to be collected		(58	)		(33	)
Balance of credit-related OTTI at September 30	$	14,513		$	14,638

The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at September 30, 2011 and December 31, 2010 are shown in the following table.  Actual 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, 2011				December 31, 2010
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Contractual Maturity
Due in one year or less	$	9,700	$	9,723	$	2,500	$	2,421
Due after one year through five years		5,000		5,219		16,470		16,573
Due after five years through ten years		49,048		49,492		19,293		19,492
Due after ten years		83,631		58,668		117,333		90,926
		147,379		123,102		155,596		129,412
Residential mortgage-backed agencies		152,553		154,151		98,109		99,613
Collateralized mortgage obligations		683		566		763		662
	$	300,615	$	277,819	$	254,468	$	229,687