According to the article in the Wall Street Journal (http://online.wsj.com/article/PR-CO-20131031-914742.html?dsk=y) published on October 31,2013 regarding third quarter results of Bank of Commerce Holdings, it was interesting to see how the company financials were effected by the available for sale securities (AFS). The AFS securities were utilized as a secondary source of liquidity. These resources were used for funding commercial and commercial real estate loan when required. Available-for-sale investment securities totaled $209.6 million at September 30, 2013, compared with $218.5 million at June 30, 2013. During the three months ended September 30, 2013 the Company’s securities purchases were centered in asset and mortgage backed securities.
At September 30, 2013, the Company’s net unrealized losses on available-for-sale securities were $4.3 million compared with $692 thousand net unrealized losses at June 30, 2013. The unfavorable change in net unrealized losses was primarily due to decreases in the fair values of the Company’s municipal bond and mortgaged backed security portfolios. The decreases in the fair values of these securities were primarily driven by changes in market interest rates and or widening of market spreads.
When I saw this increase in the unrealized losses, I was curious to know how banking industry was trending about MBS securities and municipal bond at this point in time. And I found another article (http://www.zerohedge.com/news/2013-09-02/unrealized-losses-commercial-bank-available-sale-securities-plunge-2009-levels) that reiterated that ongoing rates blow out on commercial banks “available for securities”, and quoted a drop of $24 billion in unrealized gains in a month, being the biggest monthly drop, while at this time interest rates surged by 100 bps. The article also stated that “as of August 21 the formerly net profit has turned into a net loss of ($16) billion. The is the most negative the AFS number for the commercial banks operating in the US, has been since late 2009.”
In conclusion, the future changes in the value of the Mortgage back securities depends on their rate of interest and market volatility. This in turn will effect how AFS securities are distributed among various forms of short-term investment.