Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from Damon DelMonte – Keefe Bruyette & Woods, Inc.
Damon DelMonte – Keefe Bruyette & Woods, Inc.
I was just wondering if you could provide a little insight in to the way you guys go about valuing your trust preferreds? I know in the press release you made the comment of how a large portion of the pooled issuances were downgraded to below investment grade yet the impairments taken this quarter amounted to only $1.3 million.
John Dolan
I’ll let Ed get in a little more of those details.
Edward J. Lipkus, III
First of all I want to say that we have as we indicated last quarter, we hired an outside valuation expert to value the securities. As they were valuing them last quarter they were valuing them with current information prior to the downgrade so we feel that the pricing prior to the third quarter pretty much reflected the downgrade at that point.
So, the methodology that is used is a rather rigorous one where each one of the banks in the pools are examined by this firm. They look at their financial condition and they simply assign certain probabilities of default based on the strength of each bank. Then, we determine the expected cash flows and then model out whether or not we feel there’s going to be any short falls in the cash flows.
If there’s short falls then we feel that under the current accounting guidance we have to take an other than temporary impairment charge because obviously, if the cash flows are short we wouldn’t expect to get our contractual payments back and we record it on PreTSL VII last quarter to reflect that breakage and we recorded an additional impairment charge this quarter because of the additional price deterioration due to that PreTSL.
Damon DelMonte – Keefe Bruyette & Woods, Inc.
As far as the amount of deferrals or defaults by the underlying issuers, are you guys up high enough in the structure of the security that your cash flow testing is not showing future impairment?
Edward J. Lipkus, III
Damon, on PreTSL VII because there’s no junior tranche left we had one deferral and that resulted in the $1.3 million but, as of 12/31 we had enough subordination in all the other PreTSL to absorb any potential expected losses according to our model. So, to answer your questions, according to our modeling we have high enough – most of our tranches are Mezzanine and two of our tranches are senior.
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