Pitney Bowes 2008 Annual Report Download - page 103

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PITNEY BOWES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular dollars in thousands, except per share data)
84
● U.S. Agency Issued Debt: U.S. Agency issued debt is based on active, high volume trades for identical or comparable securities.
Non-callable agency issued debt securities are generally valued using quoted market prices. To the extent that the securities are
actively traded, they are categorized in Level 1 of the fair value hierarchy. Callable agency issued debt securities are valued through
benchmarking model derived prices to quoted market prices and trade data for identical or comparable securities. Callable agency
issued debt securities are categorized in Level 2 of the fair value hierarchy.
● Corporate Notes and Bonds: The fair value of corporate securities is estimated using recently executed transactions, market
price quotations where observable, or bond spreads. The spread data used are for the same maturity as the security. These securities
are classified in Level 2 of the fair value hierarchy.
● Asset Backed Securities (“ABS”) and Mortgage-Backed Securities (“MBS”): These securities are generally valued based on
external pricing indices. When external index pricing is not observable, ABS and MBS are valued based on external price/spread
data. If neither pricing method is available, we then utilize broker quotes. At December 31, 2008, we had $6.4 million investments
valued using non-binding broker quotes. We verify that the unadjusted indices or broker quotes are reasonable by comparing prices
across multiple (three or more) dealers and we verify that current trades have occurred at these prices. When inputs are observable
and supported by an active market, asset backed securities and mortgage-backed securities are classified as Level 2 of the fair value
hierarchy.
Investment securities are primarily composed of investments by PBB. Our investments are all classified as “available-for-sale
securities”. PBB’s investments at December 31, 2008 were $196.9 million. We reported these investments in the Consolidated
Balance Sheet as cash and cash equivalents of $125.8 million, short-term investments of $18.3 million and long-term investments of
$52.8 million.
The fair value measurements of PBB’s investments are determined by third party service providers (Zions - Liquid Asset Management
and Utendahl Capital Management). To validate the accuracy of the portfolio valuation, we utilize independent third parties to
monthly price a minimum of 20% of the portfolio balance, ensuring our sample includes all types of securities held in the portfolio.
We review the results of the pricing sample to ensure that the initial fair value valuations are accurate. If the pricing can not be
validated reasonably (plus or minus 3% for each security and plus or minus 1% for the entire sample), we take action to investigate the
differences. We have not adjusted the initial values as variances have been within these tolerance limits. Additionally, we ensure that
the fair value measurements are in accordance with SFAS 157 and that we have properly classified our assets in the fair value
hierarchy.
We have no investments either directly or indirectly in the sub-prime mortgage market. We have not experienced any write-offs in
our investment portfolio. The majority of our mortgage-backed securities are either guaranteed or supported by the U.S. government.
The recent market events have not caused our money market funds to experience declines in their net asset value below $1.00 dollar
per share or to incur imposed limits on redemptions.
We have no investments in inactive markets which would warrant a possible change in our pricing methods or classification within the
fair value hierarchy. Further, we have no investments in auction rate securities.
Derivatives
In the normal course of business, we are exposed to the impact of interest rate changes and foreign currency fluctuations. The
company limits these risks by following established risk management policies and procedures, including the use of derivatives. We
use derivatives to manage the related cost of debt and to limit the effects of foreign exchange rate fluctuations on financial results. We
do not use derivatives for trading or speculative purposes.
As required by SFAS 157, we have incorporated counterparty risk into the fair value of our derivative assets and our credit risk into
the value of our derivative liabilities. We derive credit risk from observable data related to credit default swaps. In light of the current
market events, we have not seen a material change in the creditworthiness of those banks acting as derivative counterparties.