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Investment Securities

9 Months Ended

Sep. 30, 2012

Note 3. Investment Securities

The following table presents amortized cost, gross unrealized gains and losses, and estimated fair value on investment securities.




	As of September 30, 2012								As of December 31, 2011

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

Securities available for sale
Obligations of the U.S. Government agencies and corporations	$	1,339	$	23	$	—	$	1,362	$	1,790	$	33	$	—	$	1,823
State and municipal obligations		6,535		37		—		6,572		450		38		—		488
Collateralized debt obligations		6,343		—		3,231		3,112		7,012		—		3,765		3,247
Mortgage-backed securities		49,061		2,308		6		51,363		80,696		3,719		16		84,399
Collateralized mortgage obligations		171,572		1,175		5,506		167,241		312,124		3,289		6,118		309,295
Other securities		5,548		1,087		237		6,398		5,582		56		340		5,298

Total securities available for sale	$	240,398	$	4,630	$	8,980	$	236,048	$	407,654	$	7,135	$	10,239	$	404,550


Securities held to maturity
State and municipal obligations	$	16,831	$	2,499	$	—	$	19,330	$	19,978	$	2,756	$	—	$	22,734
Certificates of deposit		500		—		—		500		508		—		—		508

Total securities held to maturity	$	17,331	$	2,499	$	—	$	19,830	$	20,486	$	2,756	$	—	$	23,242


Nonmarketable securities
Federal Home Loan Bank stock	$	19,043	$	—	$	—	$	19,043	$	32,694	$	—	$	—	$	32,694
Federal Reserve Bank stock		4,211		—		—		4,211		—		—		—		—

Total nonmarketable securities	$	23,254	$	—	$	—	$	23,254	$	32,694	$	—	$	—	$	32,694

Securities with a fair market value of $127.2 million at September 30, 2012 and $237.8 million at December 31, 2011 were pledged to secure public and certain customer deposits, repurchase agreements, and advances from FHLB and the Federal Reserve Bank of Richmond. During the three months ended June 30, 2012, mortgage-backed securities totaling $203.6 million with an average yield of 1.79% were sold as part of a balance sheet restructuring initiative, generating a $3.5 million gain ($2.2 million after-tax). All of the sold investment securities were classified as Level 2 fair value financial instruments and had not previously recorded an other-than-temporary impairment (“OTTI”) charge. As of September 30, 2012, the only investment position that exceeded 10% of shareholders’ equity was mortgage-backed securities issued by Bank of America, representing 15.4% of shareholders’ equity.

The amortized cost and estimated fair value of investment securities by contractual maturity are presented in the following table. Expected maturities may differ from contractual maturities, as borrowers have the right to call or prepay obligations with or without call or prepayment penalties.




	As of September 30, 2012

(in thousands)	Amortized Cost		Fair Value

Securities available for sale
Due within one year	$	—	$	—
Due after one year through five years		1,339		1,362
Due after five years through ten years		1,005		1,150
Due after ten years		14,874		11,444

		17,218		13,956
Mortgage-backed securities		49,061		51,363
Collateralized mortgage obligations		171,572		167,241
Other securities with no stated maturity		2,547		3,488

Total	$	240,398	$	236,048

Securities held to maturity
Due within one year	$	500	$	500
Due after one year through five years		—		—
Due after five years through ten years		1,990		2,084
Due after ten years		14,841		17,246

Total	$	17,331	$	19,830

The following table presents gross unrealized losses on investment securities and the fair value of the related securities, 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 Longer						Total

September 30, 2012 (dollars in thousands)	#		Fair Value		Unrealized Losses		#		Fair Value		Unrealized Losses		#		Fair Value		Unrealized Losses

Securities available for sale
Collateralized debt obligations		—	$	—	$	—		14	$	3,112	$	3,231		14	$	3,112	$	3,231
Mortgage-backed securities		—		—		—		1		452		6		1		452		6
Collateralized mortgage obligations		11		58,338		2,007		17		53,887		3,499		28		112,225		5,506
Other securities		—		—		—		2		1,759		237		2		1,759		237

Total		11	$	58,338	$	2,007		34	$	59,210	$	6,973		45	$	117,548	$	8,980


	Less than 12 Months						12 Months or Longer						Total

December 31, 2011 (dollars in thousands)	#		Fair Value		Unrealized Losses		#		Fair Value		Unrealized Losses		#		Fair Value		Unrealized Losses

Securities available for sale
Collateralized debt obligations		1	$	260	$	47		14	$	2,987	$	3,718		15	$	3,247	$	3,765
Mortgage-backed securities		—		—		—		1		577		16		1		577		16
Collateralized mortgage obligations		16		88,673		3,359		14		34,310		2,759		30		122,983		6,118
Other securities		2		1,977		29		1		685		311		3		2,662		340

Total		19	$	90,910	$	3,435		30	$	38,559	$	6,804		49	$	129,469	$	10,239

Other-Than-Temporary Impairment

Management evaluates securities for OTTI on at least a quarterly basis. In determining OTTI, investment securities are evaluated according to ASC 320-10 and management considers many factors including: (1) the length of time and extent to which the fair value has been less than 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 First Financial 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 OTTI exists involves a high degree of subjectivity and is based on information available to management on the assessment date. Evaluations are performed on a more frequent basis as the degree to which fair value is below carrying cost or the length of time that the fair value has been continuously below carrying cost increases.

At September 30, 2012, the majority of unrealized losses were related to trust preferred collateralized debt obligations (“CDOs”) and private-label collateralized mortgage obligations (“CMOs”) as discussed below. For the three and nine months ended September 30, 2012, credit-related OTTI of $145 thousand and $359 thousand, respectively, were recorded in “Other-than-temporary-impairment on investment securities” on the Consolidated Statements of Operations. The total carrying value of securities affected by credit-related OTTI represents 9.5% of the carrying value of First Financial’s investment portfolio at September 30, 2012, which does not materially impact First Financial’s current liquidity and capital positions.

Collateralized Debt Obligations

The CDO portfolio is collateralized primarily with trust preferred securities issued by other financial institutions in pooled issuances. To determine the fair value, cash flow models for trust preferred CDOs provided by a third-party pricing service are utilized. The models estimate default vectors for the underlying issuers within each CDO security, estimate expected bank failures across the entire banking system to determine the impact on each CDO, and assign a risk rating to each individual issuer in the collateral pool. The individual risk ratings for the underlying securities in the pools were determined by a number of factors including Tier 1 capital ratio, return on assets, percent of nonperforming loans, percent of commercial and construction loans, and level of broker deposits for each underlying issuer. The risk ratings were used to determine an expected default vector for each CDO. The models assign assumptions for constant default rate, loss severity, recovery lags, and prepayment assumptions, which were reviewed for reasonableness and consistency by management. The projected cash flows were compared to book value to determine the amount of OTTI, if any. If a security is rated below investment grade by a credit rating agency, a stress test is performed to determine if the security has any OTTI. See Note 8 to the Consolidated Financial Statements for additional information on fair value.

The following table provides information regarding the CDO portfolio characteristics and OTTI losses.

Collateralized Debt Obligations at September 30, 2012

(dollars in thousands)


									Nine Months Ended September 30, 2012 OTTI ¹

Name	Single/ Pooled	Class/ Tranche	Amortized Cost		Fair Value		Unrealized Loss		Credit Portion		Other		Total

ALESCO I	Pooled	B-1	$	526	$	293	$	233	$	—	$	—	$	—
ALESCO II	Pooled	B-1		356		286		70		—		—		—
MCAP III	Pooled	B		287		137		150		—		—		—
MCAP IX	Pooled	B-1		334		171		163		—		—		—
MCAP XVIII	Pooled	C-1		179		167		12		—		—		—
PRETZL XI	Pooled	B-1		842		308		534		—		—		—
PRETZL XIII	Pooled	B-1		325		128		197		—		—		—
PRETZL IV	Pooled	MEZ		116		54		62		—		—		—
PRETZL VII	Pooled	MEZ		321		277		44		—		—		—
PRETZL XII	Pooled	B-2		523		316		207		—		—		—
PRETZL XIV	Pooled	B-1		634		204		430		30		—		30
TRPREF II	Pooled	B		646		253		393		—		—		—
USCAP II	Pooled	B-1		952		284		668		11		—		11
USCAP III	Pooled	B-1		302		234		68		—		—		—

Total			$	6,343	$	3,112	$	3,231	$	41		—	$	41


		Dollar Basis

	Lowest Rating	% Performing		% Deferrals / Defaults²		Constant Default Rate		Discount Margin³

Name						High	Low

ALESCO I	C	83.72	%	16.28	%	0.97	0.26	11.70	%
ALESCO II	C	85.78		14.22		1.18	0.32	11.65
MCAP III	B	58.89		41.11		2.19	0.59	10.50
MCAP IX	CC	56.40		43.60		1.25	0.34	16.80
MCAP XVIII	C	68.70		31.30		0.79	0.25	11.05
PRETZL XI	C	67.68		32.32		0.45	0.25	11.60
PRETZL XIII	C	61.24		38.76		0.85	0.25	11.57
PRETZL IV	CCC	72.93		27.07		2.25	0.61	11.00
PRETZL VII	C	54.50		45.50		1.72	0.46	16.80
PRETZL XII	C	65.96		34.04		0.57	0.25	11.62
PRETZL XIV	C	59.66		40.34		0.25	0.25	11.57
TRPREF II	C	61.19		38.81		1.16	0.31	11.92
USCAP II	C	78.78		21.27		0.39	0.25	11.65
USCAP III	C	68.63		31.37		0.43	0.25	11.53

Total		66.88	%	33.12	%



¹	Recognized in other-than-temporary impairment on investment securities on the Consolidated Statements of Operations
²	Represents percentage of the underlying trust preferred collateral not currently making dividend payments or issued by financial institutions that have been placed into receivership by the FDIC
³	Fair market value discount margin to LIBOR

As of September 30, 2012, management does not intend to sell these securities, nor is it more likely than not that First Financial will be required to sell the securities before the amortized cost basis is recovered as First Financial has adequate other sources of liquidity.

Collateralized Mortgage Obligations

The CMO portfolio is mainly comprised of private-label, non-agency mortgage-backed securities. To determine the fair value, cash flow models provided by a third-party pricing service are utilized. The models incorporate recent transaction volumes, price quotations and related price variability, available broker information, and market liquidity. As a result, the models estimate each security’s cash flow and adjusted price based on coupon, credit rating, constant prepayment rate, and required yields or spreads. If a private label security is rated below investment grade by a credit rating agency, a stress test is performed to determine if the security has any OTTI. See Note 8 to the Consolidated Financial Statements for additional information on fair value.

The following table presents the investment grades assigned by the rating agencies and OTTI losses for the CMO securities which were in a loss position at September 30, 2012.




(in thousands)	As of September 30, 2012					Nine Months Ended September 30, 2012 OTTI ¹

Moody/S&P Ratings	#	Fair Value		Unrealized Loss		Credit Portion		Other		Total

AAA	1	$	1,655	$	45	$	—	$	—	$	—
AA	5		31,576		590		—		—		—
A	2		9,409		381		—		—		—
BBB	8		17,869		941		18		—		18
Below investment grade	12		51,716		3,549		300		—		300

Total	28	$	112,225	$	5,506	$	318	$	—	$	318



¹	Recognized in other-than-temporary impairment on investment securities on the Consolidated Statements of Operations

The OTTI in the table above was related to three securities with the following characteristics:




Description	2004 ARM Senior Support	2005 Fixed 5 Year Senior	2004-2005 ARM Super Senior

	As of September 30, 2012

Credit rating	C	CC	B
Rating agency	Moody’s	Standard & Poor’s	Fitch
Twelve-month average loss severity	45.96%	76.71%	38.06%
Twelve-month average default rate	9.31	2.37	3.67
60 day or more delinquency rate	25.19	19.71	13.09



	As of December 31, 2011

Credit rating	C	CC	B
Rating agency	Moody’s	Standard & Poor’s	Fitch
Twelve-month average loss severity	38.36%	76.71%	51.57%
Twelve-month average default rate	3.89	1.94	2.97
60 day or more delinquency rate	28.28	19.23	12.02

The credit ratings displayed in the above table reflect the lowest credit ratings by the major rating agencies. As of September 30, 2012, management does not intend to sell these securities, nor is it more likely than not that it will be required to sell these securities before the amortized cost basis is recovered as First Financial has adequate other sources of liquidity.

The following table presents the cumulative credit-related losses recognized in earnings.




	Three Months Ended September 30, 2012								Three Months Ended September 30, 2011

(in thousands)	CDOs		CMOs		Other Securities		Total		CDOs		CMOs		Other Securities		Total

Cumulative credit related losses recognized in earnings at beginning of period	$	5,823	$	1,682	$	1,100	$	8,605	$	5,587	$	1,355	$	1,100	$	8,042
Additions
Credit loss for which previous OTTI was recognized		—		145		—		145		169		—		—		169

Cumulative credit related losses recognized in earnings at end of period	$	5,823	$	1,827	$	1,100	$	8,750	$	5,756	$	1,355	$	1,100	$	8,211


	Nine Months Ended September 30, 2012								Nine Months Ended September 30, 2011

	CDOs		CMOs		Other Securities		Total		CDOs		CMOs		Other Securities		Total

Cumulative credit related losses recognized in earnings at beginning of period	$	5,782	$	1,509	$	1,100	$	8,391	$	5,411	$	1,355	$	1,100	$	7,866
Additions
Credit loss for which previous OTTI was recognized		41		318		—		359		345		—		—		345

Cumulative credit related losses recognized in earnings at end of period	$	5,823	$	1,827	$	1,100	$	8,750	$	5,756	$	1,355	$	1,100	$	8,211