Investment Securities

9 Months Ended

Sep. 30, 2011

3.) Investment Securities:

Investments in debt and equity securities are classified as held-to-maturity, available-for-sale or trading. Securities classified as held-to-maturity are those that management has the positive intent and ability to hold to maturity. Securities classified as available-for-sale are those that could be sold for liquidity, investment management, or similar reasons, even though management has no present intentions to do so. The Company currently has no securities classified as held-to-maturity or trading.

As of March 31, 2011, in order to maintain maximum flexibility in managing the investment portfolio and to improve liquidity options, management opted to reclassify all investments in the held-to-maturity classification into the available-for-sale portfolio. The reclassification resulted in the recording of an unrealized gain of $522, an increase of $344 net of tax to other comprehensive income. Prior to the reclassification, held-to-maturity securities were stated at cost, adjusted for amortization of premiums and accretion of discounts, with such amortization or accretion included in interest income. Available-for-sale securities are carried at fair value with unrealized gains and losses recorded as a separate component of shareholders’ equity, net of tax effects. Realized gains or losses on dispositions are based on net proceeds and the adjusted carrying amount of securities sold, using the specific identification method. Interest income includes amortization of purchase premium or discount premiums. Discounts on securities are amortized on the level-yield method without anticipating payments, except for both U.S. Government and private-label mortgage-backed and related securities where prepayments are anticipated.

Securities are evaluated periodically to determine whether a decline in value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, along with the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable and that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Unrealized losses on investments have not been recognized into income. However, once a decline in value is determined to be other-than-temporary, the credit related other-than-temporary impairment (OTTI) is recognized in earnings while the non-credit related OTTI on securities not expected to be sold is recognized in other comprehensive loss.

The following is a summary of investment securities:


			Gross		Gross
			Unrealized		Unrealized		Estimated Fair
	Amortized Cost		Gains		Losses		Value
September 30, 2011
Investment securities available-for-sale
U.S. Treasury securities	$	120	$	15	$	—	$	135
U.S. Government agencies and corporations		21,852		358		—		22,210
Obligations of states and political subdivisions		34,889		1,014		26		35,877
U.S. Government-sponsored mortgage-backed and related securities		114,537		3,331		153		117,715
Private-label mortgage-backed and related securities		697		5		260		442
Trust preferred securities		17,925		26		9,023		8,928

Total debt securities		190,020		4,749		9,462		185,307
Regulatory stock		3,049		—		—		3,049
General Motors equity investments		621		—		265		356

Total available-for-sale	$	193,690	$	4,749	$	9,727	$	188,712


December 31, 2010
Investment securities available-for-sale
U.S. Government agencies and corporations	$	28,913	$	541	$	—	$	29,454
Obligations of states and political subdivisions		27,332		42		1,485		25,889
U.S. Government-sponsored mortgage-backed and related securities		93,956		2,752		222		96,486
Private-label mortgage-backed and related securities		208		6		—		214
Trust preferred securities		18,137		101		5,459		12,779
Corporate securities		287		—		—		287

Total debt securities		168,833		3,442		7,166		165,109
Regulatory stock		3,049		—		—		3,049

Total available-for-sale	$	171,882	$	3,442	$	7,166	$	168,158


Investment securities held-to-maturity
U.S. Treasury securities	$	124	$	15	$	—	$	139
U.S. Government agencies and corporations		1,993		107		—		2,100
Obligations of states and political subdivisions		12,607		385		10		12,982
U.S. Government-sponsored mortgage-backed and related securities		5,010		338		1		5,347
Private-label mortgage-backed and related securities		566		—		193		373

Total held-to-maturity	$	20,300	$	845	$	204	$	20,941

At September 30, 2011 and December 31, 2010, regulatory stock consisted of $2,823 in Federal Home Loan Bank (FHLB) stock and $226 in Federal Reserve Bank (FED) stock. Each investment is carried at cost, and the Company is required to hold such investments as a condition of membership in order to transact business with the FHLB and the FED.

While the Federal Home Loan Banks have been negatively impacted by the current economic conditions, the Federal Home Loan Bank of Cincinnati has reported profits for 2010 and year-to-date 2011, remains in compliance with regulatory capital and liquidity requirements, continues to pay dividends on stock and makes redemptions at par value. With consideration given to these factors, management concluded that the stock was not impaired at September 30, 2011 or December 31, 2010.

The amortized cost and fair value of debt securities at September 30, 2011, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


			Estimated Fair
	Amortized Cost		Value
Investment securities available-for-sale
Due in one year or less	$	263	$	273
Due after one year through five years		9,433		9,655
Due after five years through ten years		16,010		16,346
Due after ten years		49,080		40,876

Total investment securities available-for-sale		74,786		67,150
U.S. Government-sponsored mortgage-backed and related securities		114,537		117,715
Private-label mortgage-backed and related securities		697		442

Total investment securities	$	190,020	$	185,307

The table below sets forth the proceeds and gains or losses realized on securities sold or called for the period ended:


	THREE MONTHS ENDED				NINE MONTHS ENDED
	September 30,				September 30,
	2011		2010		2011		2010
Proceeds on securities sold	$	1,949	$	—	$	14,457	$	15,153
Gross realized gains		71		—		562		920
Gross realized losses		—		—		33		—

Proceeds on securities called	$	859	$	4,500	$	1,839	$	6,646
Gross realized gains		6		45		10		88
Gross realized losses		—		—		—		—

Exchange on General Motors transaction
Gross realized gains	$	15	$	—	$	334	$	—
Gross realized losses		—		—		—		—

Available-for-sale securities, carried at fair value, totaled $188,712 at September 30, 2011 and $168,158 at December 31, 2010. These securities represent 100.00% and 89.23% of all investment securities at September 30, 2011 and December 31, 2010, respectively. In management’s opinion, these levels provide an adequate level of liquidity.

Investment securities with a carrying value of approximately $107,021 at September 30, 2011 and $108,473 at December 31, 2010 were pledged to secure deposits and for other purposes.

The following is a summary of the fair value of securities with unrealized losses and an aging of those unrealized losses at September 30, 2011:

Less than 12 Months

12 Months or More

Total

Unrealized

Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

U.S. Government-sponsored mortgage-backed and related securities

19,637

137

2,099

21,736

153

Private-label mortgage-backed and related securities

—

271

260

271

260

Obligations of states and political subdivisions

762

1,046

1,808

Trust preferred securities

—

8,225

9,023

8,225

9,023

General Motors equity investments

356

265

—

356

265

Total

20,755

406

11,641

9,321

32,396

9,727

The above table comprises 44 investment securities where the fair value is less than the related amortized cost.

The following is a summary of the fair value of securities with unrealized losses and an aging of those unrealized losses at December 31, 2010:


	Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U.S. Government-sponsored mortgage-backed and related securities	$	26,538	$	222	$	33	$	1	$	26,571	$	223
Private-label mortgage-backed and related securities		—		—		373		193		373		193
Obligations of states and political subdivisions		20,075		1,351		4,290		144		24,365		1,495
Trust preferred securities		—		—		11,997		5,459		11,997		5,459

Total	$	46,613	$	1,573	$	16,693	$	5,797	$	63,306	$	7,370

The above table comprises 89 investment securities where the fair value is less than the related amortized cost.

The trust preferred securities with an unrealized loss represent pools of trust preferred debt primarily issued by bank holding companies and insurance companies. The unrealized loss on these securities at September 30, 2011 was $9,023 compared to a $5,459 loss at December 31, 2010.

The unrealized losses on the Company’s investment in obligations of states and political subdivisions, U.S. Government-sponsored mortgage-backed and related securities and private-label mortgage-backed and related securities were caused by changes in market rates and related spreads and are reflective of current distressed conditions in the credit markets and the on-going reassessment of appropriate liquidity and risk premiums. It is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment because the decline in fair value is attributable to changes in interest rates and relative spreads and not credit quality. Also, the Company does not intend to sell those investments and it is not more-likely-than-not that the Company will be required to sell the investments before recovery of its amortized cost basis less any current period credit loss. The Company does not consider those investments to be other-than-temporarily impaired at September 30, 2011.

Among the Company’s numerous mortgage-backed securities is one privately-issued variable rate collateralized mortgage obligation (CMO). The security was valued on September 30, 2011 at $0.51 on a dollar and is scheduled to reprice in February of 2012. The Company had the security tested by a third party for subprime mortgage containment and none was found. As government intervention takes hold and the market in general somewhat settles, the CMO market has begun a slow recovery. At March 31, 2009, this security priced at $0.39 on a dollar and at December 31, 2010 at $0.66 on a dollar. The sizable increase in the value since March 2009 provides evidence that the impairment is temporary. General market liquidity has been improving, even with the government phasing out of its many assistive programs. The security carries a credit rating of “A” indicating little probability of default. Also, as a variable rate security, interest resets have been bringing the rate down, thus reducing the value. As interest rates rise in the next rate cycle, and the rate resets higher, the price of the security should also recover relative to book value. The security’s underlying delinquency rate is 6.25%. A current analysis of this security indicates at the current delinquency and default rates, no loss is projected on this security through its maturity. The Company does not intend to sell this security and it is not more-likely-than-not that the Company will be required to sell the debt security before its anticipated recovery. As a result of all the facts presented, the Company does not consider this investment to be other-than-temporarily impaired.

Securities Deemed to be Other-Than-Temporarily Impaired

The Company reviews investment debt securities on an ongoing basis for the presence of other-than-temporary impairment (OTTI) with formal reviews performed quarterly. OTTI losses on individual investment securities were recognized during the first quarter of 2011 and not in the second and third quarters of 2011 in accordance with FASB ASC topic 320, Investments — Debt and Equity Securities.

For debt securities in an unrealized loss position, ASC topic 320 requires an entity to assess whether (a) it has the intent to sell the debt security or (b) it is more-likely-than-not that it will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an OTTI on the security must be recognized.

In instances in which a determination is made that a credit loss (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis) exists but the entity does not intend to sell the debt security and it is not more-likely-than-not that the entity will be required to sell the debt security before the anticipated recovery of its remaining amortized cost basis (i.e., the amortized cost basis less any current-period credit loss), ASC topic 320 defines the presentation and amount of the OTTI recognized in the income statement.

In these instances, the impairment is separated into (a) the amount of the total impairment related to the credit loss, and (b) the amount of the total impairment related to all other factors. The amount of the total OTTI related to the credit loss is recognized in earnings. The amount of the total impairment related to all other factors is recognized in other comprehensive income (loss). The total other-than-temporary impairment is presented in the income statement with an offset for the amount of the total other-than-temporary impairment that is recognized in other comprehensive income (loss).

The Company assessed the impairment of certain securities currently in an illiquid market. Through the impairment assessment process, the Company determined that the investments discussed in the following table were other-than-temporarily impaired at September 30, 2011 and 2010. The Company recorded impairment credit losses in earnings on available-for-sale securities of $0 and $1,464 for the quarters ended September 30, 2011 and 2010, respectively. The $0 and $(1,234) non-credit portion of impairment recognized during the quarters ended September 30, 2011 and 2010, respectively, was recorded in other comprehensive loss.


	THREE MONTHS ENDED				NINE MONTHS ENDED
	September 30,				September 30,
	2011		2010		2011		2010
Trust preferred securities	$	—	$	1,464	$	202	$	2,621

Total	$	—	$	1,464	$	202	$	2,621

In April 2011, as approved by the U.S. Bankruptcy court, unsecured bondholders of General Motors Corporation (“GM”) received partial distributions in accordance with the Amended Joint Chapter 11 Plan (the “Plan”). The Company owned $2,350 par value of unsecured bonds determined to be other than temporarily impaired in 2009 and written down to a value of $287. In accordance with the Plan, the Company received in exchange for the bonds 9,379 shares of GM common shares, 8,527 GM Class A Warrants exercisable at $10.00 per share, 8,527 GM Class B Warrants exercisable at $18.33 per share. The market value of the equity securities was $621, generating a recognizable gain of $334 over the fully written down value. The Company holds escrow stubs representing any remaining distributions from the bankruptcy trust. The fair value of the equity securities at September 30, 2011 was $356.

For the quarter ended September 30, 2011, the Company recognized no OTTI. For the quarter ended September 30, 2010, the Company recognized OTTI of $1,464 attributable to 10 trust preferred securities with a cost basis of $12,612. The impairment charges were recognized after determining the likely future cash flows of these securities had been adversely impacted.

At September 30, 2011, there was $1,626 of investment securities considered to be in non-accrual status. This balance is comprised of 18 of its 32 investments in trust preferred securities. The quarterly interest payments have been placed in “payment in kind” status, which results in a temporary delay in the payment of interest. As a result of the delay in the collection of interest payments, management placed these securities in non-accrual status. Current estimates indicate that the interest payment delays may exceed ten years. All other trust preferred securities remain in accrual status.