INVESTMENT SECURITIES

Investment securities are summarized below. Note 9 discusses the process to estimate fair value for investment securities.



	September 30, 2012
			Recognized in OCI ¹						Not recognized in OCI
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Carrying value		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Held-to-maturity
Municipal securities	$	511,354	$	—	$	—	$	511,354	$	13,674	$	922	$	524,106
Asset-backed securities:
Trust preferred securities – banks and insurance	262,078		—		52,997		209,081		231		90,575		118,737
Other	23,017		—		2,814		20,203		235		7,613		12,825
Other debt securities	100		—		—		100		—		—		100
	$	796,549	$	—	$	55,811	$	740,738	$	14,140	$	99,110	$	655,768
Available-for-sale
U.S. Treasury securities	$	4,405	$	237	$	—	$	4,642					$	4,642
U.S. Government agencies and corporations:
Agency securities	112,747		4,629		92		117,284						117,284
Agency guaranteed mortgage-backed securities	443,714		21,907		8		465,613						465,613
Small Business Administration loan-backed securities	1,152,178		24,107		1,003		1,175,282						1,175,282
Municipal securities	112,467		3,355		2,175		113,647						113,647
Asset-backed securities:
Trust preferred securities – banks and insurance	1,740,291		26,059		801,062		965,288						965,288
Trust preferred securities – real estate investment trusts	40,422		—		25,015		15,407						15,407
Auction rate securities	7,100		92		79		7,113						7,113
Other	51,519		838		6,982		45,375						45,375
	3,664,843		81,224		836,416		2,909,651						2,909,651
Mutual funds and other	216,721		820		—		217,541						217,541
	$	3,881,564	$	82,044	$	836,416	$	3,127,192					$	3,127,192



	December 31, 2011
			Recognized in OCI ¹						Not recognized in OCI
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Carrying value		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Held-to-maturity
Municipal securities	$	564,468	$	—	$	—	$	564,468	$	8,807	$	1,083	$	572,192
Asset-backed securities:
Trust preferred securities – banks and insurance	262,853		—		40,546		222,307		207		78,191		144,323
Other	24,310		—		3,381		20,929		303		7,868		13,364
Other debt securities	100		—		—		100		—		5		95
	$	851,731	$	—	$	43,927	$	807,804	$	9,317	$	87,147	$	729,974
Available-for-sale
U.S. Treasury securities	$	4,330	$	304	$	—	$	4,634					$	4,634
U.S. Government agencies and corporations:
Agency securities	153,179		5,423		122		158,480						158,480
Agency guaranteed mortgage-backed securities	535,228		18,211		102		553,337						553,337
Small Business Administration loan-backed securities	1,153,039		12,119		4,496		1,160,662						1,160,662
Municipal securities	120,677		3,191		1,700		122,168						122,168
Asset-backed securities:
Trust preferred securities – banks and insurance	1,794,427		15,792		880,509		929,710						929,710
Trust preferred securities – real estate investment trusts	40,259		—		21,614		18,645						18,645
Auction rate securities	71,338		164		1,482		70,020						70,020
Other	64,646		1,028		15,302		50,372						50,372
	3,937,123		56,232		925,327		3,068,028						3,068,028
Mutual funds and other	162,606		167		6		162,767						162,767
	$	4,099,729	$	56,399	$	925,333	$	3,230,795					$	3,230,795

¹The gross unrealized losses recognized in OCI on held-to-maturity (“HTM”) securities primarily resulted from a previous transfer of available-for-sale (“AFS”) securities to HTM.

The amortized cost and estimated fair value of investment debt securities are shown subsequently as of September 30, 2012 by expected maturity distribution for structured asset-backed collateralized debt obligations (“ABS CDOs”) and by contractual maturity distribution for other debt securities. Actual maturities may differ from expected or contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties:



	Held-to-maturity				Available-for-sale
(In thousands)	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
Due in one year or less	$	49,885	$	50,155	$	450,217	$	416,979
Due after one year through five years	201,851		196,829		1,032,915		958,822
Due after five years through ten years	170,597		148,633		690,633		597,124
Due after ten years	374,216		260,151		1,491,078		936,726
	$	796,549	$	655,768	$	3,664,843	$	2,909,651

The following is a summary of the amount of gross unrealized losses for debt securities and the estimated fair value by length of time the securities have been in an unrealized loss position:

	September 30, 2012
	Less than 12 months				12 months or more				Total
(In thousands)	Gross unrealized losses		Estimated fair value		Gross unrealized losses		Estimated fair value		Gross unrealized losses		Estimated fair value
Held-to-maturity
Municipal securities	$	875	$	22,211	$	47	$	4,979	$	922	$	27,190
Asset-backed securities:
Trust preferred securities – banks and insurance	—		—		143,572		118,439		143,572		118,439
Other	—		—		10,427		11,968		10,427		11,968
	$	875	$	22,211	$	154,046	$	135,386	$	154,921	$	157,597
Available-for-sale
U.S. Government agencies and corporations:
Agency securities	$	11	$	6,922	$	81	$	6,993	$	92	$	13,915
Agency guaranteed mortgage-backed securities	7		1,482		1		236		8		1,718
Small Business Administration loan-backed securities	194		42,067		809		72,357		1,003		114,424
Municipal securities	58		5,491		2,117		11,401		2,175		16,892
Asset-backed securities:
Trust preferred securities – banks and insurance	—		—		801,062		739,539		801,062		739,539
Trust preferred securities – real estate investment trusts	—		—		25,015		15,407		25,015		15,407
Auction rate securities	—		—		79		3,044		79		3,044
Other	112		24,888		6,870		15,337		6,982		40,225
	382		80,850		836,034		864,314		836,416		945,164
Mutual funds and other	—		—		—		—		—		—
	$	382	$	80,850	$	836,034	$	864,314	$	836,416	$	945,164



	December 31, 2011
	Less than 12 months				12 months or more				Total
(In thousands)	Gross unrealized losses		Estimated fair value		Gross unrealized losses		Estimated fair value		Gross unrealized losses		Estimated fair value


Held-to-maturity
Municipal securities	$	415	$	10,855	$	668	$	22,188	$	1,083	$	33,043
Asset-backed securities:
Trust preferred securities – banks and insurance	—		—		118,737		144,053		118,737		144,053
Other	—		—		11,249		13,364		11,249		13,364
Other debt securities	5		95		—		—		5		95
	$	420	$	10,950	$	130,654	$	179,605	$	131,074	$	190,555
Available-for-sale
U.S. Government agencies and corporations:
Agency securities	$	60	$	13,308	$	62	$	3,880	$	122	$	17,188
Agency guaranteed mortgage-backed securities	102		52,267		—		—		102		52,267
Small Business Administration loan-backed securities	1,783		260,865		2,713		191,339		4,496		452,204
Municipal securities	1,305		15,011		395		4,023		1,700		19,034
Asset-backed securities:
Trust preferred securities – banks and insurance	—		—		880,509		695,365		880,509		695,365
Trust preferred securities – real estate investment trusts	—		—		21,614		18,645		21,614		18,645
Auction rate securities	158		27,998		1,324		34,115		1,482		62,113
Other	—		—		15,302		18,585		15,302		18,585
	3,408		369,449		921,919		965,952		925,327		1,335,401
Mutual funds and other	6		167		—		—		6		167
	$	3,414	$	369,616	$	921,919	$	965,952	$	925,333	$	1,335,568

At September 30, 2012 and December 31, 2011, respectively, 95 and 72 HTM and 296 and 525 AFS investment securities were in an unrealized loss position.

Other-Than-Temporary Impairment

We conduct a formal review of investment securities on a quarterly basis for the presence of other-than-temporary impairment (“OTTI”). We assess whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the balance sheet date. Under these circumstances, OTTI is considered to have occurred if (1) we intend to sell the security; (2) it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis.

Credit-related OTTI is recognized in earnings while noncredit-related OTTI on securities not expected to be sold is recognized in OCI. Noncredit-related OTTI is based on other factors, including illiquidity. Presentation of OTTI is made in the statement of income on a gross basis with an offset for the amount of OTTI recognized in OCI. For securities classified as HTM, the amount of noncredit-related OTTI recognized in OCI is accreted using the effective interest rate method to the credit-adjusted expected cash flow amounts of the securities over future periods.

Our 2011 Annual Report on Form 10-K describes in more detail our OTTI evaluation process. The following summarizes the conclusions from our OTTI evaluation for those security types that have significant gross unrealized losses at September 30, 2012:

OTTI – Municipal Securities

The HTM securities are purchased directly from municipalities and are generally not rated by a credit rating agency. The AFS securities are rated as investment grade by various credit rating agencies. Both the HTM and AFS securities are at fixed and variable rates with maturities from one to 25 years. Fair value changes of these securities are largely driven by interest rates. We perform credit quality reviews on these securities at each reporting period. Because the decline in fair value is not attributable to credit quality, no OTTI for these securities was recorded for the three months ended September 30, 2012.

OTTI – Asset-Backed Securities

Trust preferred securities – banks and insurance: These CDO securities are interests in variable rate pools of trust preferred securities related to banks and insurance companies (“collateral issuers”). They are rated by one or more Nationally Recognized Statistical Rating Organizations (“NRSROs”), which are rating agencies registered with the Securities and Exchange Commission (“SEC”). They were purchased generally at par. The primary drivers that have given rise to the unrealized losses on CDOs with bank and insurance collateral are listed below:

Market yield requirements for bank CDO securities remain very high. The financial crisis and economic downturn resulted in significant utilization of both the unique five-year deferral option each collateral issuer maintains during the life of the CDO, and the ability of junior CDO bonds to defer the payment of current interest. The resulting increase in the rate of return demanded by the market for trust preferred CDOs remains dramatically higher than the effective interest rates. All structured product fair values, including bank CDOs, deteriorated significantly during the crisis, generally reaching a low in mid-2009. Prices for some structured products, other than bank CDOs, have since rebounded as the crucial unknowns related to value became resolved and as trading increased in these securities. Unlike these other structured products, CDO tranches backed by bank trust preferred securities continue to be characterized by considerable uncertainty surrounding collateral behavior, specifically including, but not limited to, the future number, size and timing of bank failures, and of allowed deferrals and subsequent resumption of payment of contractual interest.

Structural features of the collateral make these CDO tranches difficult for market participants to model. The first feature unique to bank CDOs is the interest deferral feature previously noted. During the crisis starting in 2008, certain banks within our CDO pools have exercised this prerogative. The extent to which these deferrals are likely to either transition to default or, alternatively, come current prior to the five-year deadline is extremely difficult for market participants to assess. Our CDO pools include a bank which first exercised this deferral option as early as the second quarter of 2008. At September 30, 2012, 63 banks in our CDO pools had come current after a period of deferral, while 204 were deferring, but remained within the allowed deferral period.

A second structural feature that is difficult to model is the payment in kind (“PIK”) feature, which provides that upon reaching certain levels of collateral default or deferral, certain junior CDO tranches will not receive current interest but will instead have the interest amount that is unpaid capitalized or deferred. The cash flow that would otherwise be paid to the junior CDO securities and the income notes is instead used to pay down the principal balance of the most senior CDO securities. If the current market yield required by market participants equaled the effective interest rate of a security, a market participant should be indifferent between receiving current interest and capitalizing and compounding interest for later payment. However, given the difference between current market rates and effective interest rates of the securities, market participants are not indifferent. The delay in payment caused by PIKing results in lower security fair values even if PIKing is projected to be fully cured. This feature is difficult to model and assess. It increases the risk premium the market applies to these securities.

Ratings are generally below-investment-grade for even some of the most senior tranches. Ratings on a number of CDO tranches vary significantly among rating agencies. The presence of a below-investment-grade rating by even a single rating agency will severely limit the pool of buyers, which causes greater illiquidity and therefore most likely a higher implicit discount rate/lower price with regard to that CDO tranche.


4)	There is a lack of consistent disclosure by each CDO’s trustee of the identity of collateral issuers; in addition, complex structures make projecting tranche return profiles difficult for non-specialists in the product.


5)	At purchase, the expectation of cash flow variability was limited. As a result of the crisis, we have seen extreme variability of collateral performance both compared to expectations and between different pools.

Our ongoing review of these securities determined that OTTI should be recorded for the three months ended September 30, 2012.

Trust preferred securities – real estate investment trusts (“REITs”): These CDO securities are variable rate pools of trust preferred securities primarily related to REITs, and are rated by one or more NRSROs. They were purchased generally at par. Unrealized losses were caused mainly by severe deterioration in mortgage REITs and homebuilder credit in addition to the same factors previously discussed for banks and insurance CDOs. Based on our review, no OTTI for these securities was recorded for the three months ended September 30, 2012.

Other asset-backed securities: Most of these CDO securities were purchased in 2009 from Lockhart Funding LLC at their carrying values and then adjusted to fair value. Certain of these CDOs consist of ABS CDOs (also known as diversified structured finance CDOs). Unrealized losses since acquisition were caused mainly by deterioration in collateral quality and widening of credit spreads for asset backed securities. Based on our review, OTTI for one security in this asset group was recorded for the three months ended September 30, 2012.

OTTI – U.S. Government Agencies and Corporations

Small Business Administration (“SBA”) Loan-Backed Securities: These securities were generally purchased at premiums with maturities from five to 25 years and have principal cash flows guaranteed by the SBA. Because the decline in fair value is not attributable to credit quality, no OTTI for these securities was recorded for the three months ended September 30, 2012.

The following is a tabular rollforward of the total amount of credit-related OTTI, including amounts recognized in earnings:

(In thousands)	Three Months Ended September 30, 2012									Nine Months Ended September 30, 2012
	HTM			AFS			Total			HTM			AFS			Total
Balance of credit-related OTTI at beginning of period	$	(6,467	)	$	(315,183	)	$	(321,650	)	$	(6,126	)	$	(314,860	)	$	(320,986	)
Additions recognized in earnings during the period:
Credit-related OTTI not previously recognized ¹	—			—			—			(341		)	—			(341		)
Credit-related OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis²	(657		)	(2,079		)	(2,736		)	(657		)	(19,255		)	(19,912		)
Subtotal of amounts recognized in earnings	(657		)	(2,079		)	(2,736		)	(998		)	(19,255		)	(20,253		)
Reductions for securities sold during the period				—			—						16,853			16,853
Balance of credit-related OTTI at end of period	$	(7,124	)	$	(317,262	)	$	(324,386	)	$	(7,124	)	$	(317,262	)	$	(324,386	)



(In thousands)	Three Months Ended September 30, 2011									Nine Months Ended September 30, 2011
	HTM			AFS			Total			HTM			AFS			Total
Balance of credit-related OTTI at beginning of period	$	(5,357	)	$	(290,209	)	$	(295,566	)	$	(5,357	)	$	(335,682	)	$	(341,039	)
Additions recognized in earnings during the period:
Credit-related OTTI not previously recognized ¹	(769		)	(3,007		)	(3,776		)	(769		)	(3,007		)	(3,776		)
Credit-related OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost basis²	—			(9,558		)	(9,558		)	—			(17,821		)	(17,821		)
Subtotal of amounts recognized in earnings	(769		)	(12,565		)	(13,334		)	(769		)	(20,828		)	(21,597		)
Reductions for securities sold during the period				—			—						53,736			53,736
Balance of credit-related OTTI at end of period	$	(6,126	)	$	(302,774	)	$	(308,900	)	$	(6,126	)	$	(302,774	)	$	(308,900	)

¹Relates to securities not previously impaired.

²Relates to additional impairment on securities previously impaired.

To determine the credit component of OTTI for all security types, we utilize projected cash flows as the best estimate of fair value. These cash flows are credit adjusted using, among other things, assumptions for default probability assigned to each portion of performing collateral. The credit-adjusted cash flows are discounted at a security specific coupon rate to identify any OTTI, and then at a market rate for valuation purposes.

For those securities with credit-related OTTI recognized in the statement of income, the amounts of pretax noncredit-related OTTI recognized in OCI were as follows:



(In thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
HTM	$	—	$	20,945	$	16,718	$	20,945
AFS	1,140		21,251		9,204		22,432
	$	1,140	$	42,196	$	25,922	$	43,377

During the three and nine months ended September 30, nontaxable interest income on securities was $4.2 million and $13.7 million in 2012, and $5.2 million and $16.4 million in 2011, respectively.

The following summarizes gains and losses, including OTTI, that were recognized in the statement of income:

		Three Months Ended										Nine Months Ended
		September 30, 2012					September 30, 2011					September 30, 2012					September 30, 2011
	(In thousands)	Gross gains		Gross losses			Gross gains		Gross losses			Gross gains		Gross losses			Gross gains		Gross losses
	(In thousands)	Gross gains		Gross losses			Gross gains		Gross losses			Gross gains		Gross losses			Gross gains		Gross losses
	Investment securities:
	Held-to-maturity	$	22	$	657		$	85	$	769		$	120	$	998		$	202	$	769
	Available-for-sale	3,026		2,081			12,950		12,565			14,955		25,045			20,532		30,982
	Other noninterest-bearing investments:
	Nonmarketable equity securities	3,230		547			5,482		193			22,951		11,016			6,550		2,000
		6,278		3,285			18,517		13,527			38,026		37,059			27,284		33,751
	Net gains (losses)			$	2,993				$	4,990				$	967				$	(6,467	)
	Statement of income information:
	Net impairment losses on investment securities			$	(2,736	)			$	(13,334	)			$	(20,253	)			$	(21,597	)
	Equity securities gains, net			2,683					5,289					11,935					4,550
	Fixed income securities gains, net			3,046					13,035					9,285					10,580
	Net gains (losses)			$	2,993				$	4,990				$	967				$	(6,467	)

Gains and losses on the sale of securities are recognized using the specific identification method and recorded in noninterest income.

Securities with a carrying value of $1.4 billion at September 30, 2012 and $1.5 billion at December 31, 2011 were pledged to secure public and trust deposits, advances, and for other purposes as required by law. Securities are also pledged as collateral for security repurchase agreements.