Investment Securities

12 Months Ended

Dec. 31, 2011

Investment Securities [Abstract]

Investment Securities

Note 4 – Investment Securities

The amortized cost, gross unrealized gains and losses and estimated fair values of available-for-sale and held-to-maturity securities by major security type at December 31, 2011 and 2010 were as follows:

			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
2011
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
government corporations and Agencies	$	164,812	$	1,294	$	(40	)	$	166,066
Obligations of states and political subdivisions		38,828		2,374		-			41,202
Mortgage-backed securities: Government Sponsored
Enterprise (GSE)-Residential		254,930		6,940		(37	)		261,833
Trust preferred securities		5,625		-		(4,906	)		719
Other securities		9,561		-		(465	)		9,096
Total available-for-sale	$	473,756	$	10,608	$	(5,448	)	$	478,916
Held-to-maturity:
Obligations of states and political subdivisions	$	51	$	-	$	-		$	51

2010
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
government corporations and Agencies	$	152,086	$	1,319	$	(1,024	)	$	152,381
Obligations of states and political subdivisions		26,549		591		(226	)		26,914
Mortgage-backed securities: GSE-Residential		158,936		3,477		(1,482	)		160,931
Trust preferred securities		6,595		-		(6,014	)		581
Other securities		2,035		-		(26	)		2,009
Total available-for-sale	$	346,201	$	5,387	$	(8,772	)	$	342,816
Held-to-maturity:
Obligations of states and political subdivisions	$	50	$	3	$	-		$	53

The trust preferred securities are four trust preferred pooled securities issued by FTN Financial Securities Corp. (“FTN”). The unrealized losses of these securities, which have maturities ranging from nineteen years to twenty seven years, is primarily due to their long-term nature, a lack of demand or inactive market for these securities, and concerns regarding the underlying financial institutions that have issued the trust preferred securities. See the heading “Trust Preferred Securities” below for further information regarding these securities.  Except as discussed below, management believes the declines in fair value for these securities are temporary.

Proceeds from sales of investment securities, realized gains and losses and income tax expense and benefit were as follows during the years ended December 31, 2011, 2010 and 2009:

	2011		2010		2009
Proceeds from sales	$	18,891	$	10,936	$	38,275
Gross gains		486		543		637
Gross losses		-		-		-
Income tax expense		170		190		223

The following table indicates the expected maturities of investment securities classified as available-for-sale and held-to-maturity, presented at amortized cost, at December 31, 2011 (dollars in thousands) and the weighted average yield for each range of maturities.  Mortgage-backed securities are aged according to their weighted average life.  All other securities are shown at their contractual maturity.

	One			After 1			After 5			After
	year			through			through				10
	or less			5 years			10 years			years			Total
Available-for-sale:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies	$	118,988		$	45,824		$	-		$	-		$	164,812
Obligations of state and political subdivisions		463			16,371			20,968			1,026			38,828
Mortgage-backed securities: GSE residential		19,135			202,110			33,685			-			254,930
Trust preferred securities		-			-			-			5,625			5,625
Other securities		-			7,660			1,866			35			9,561
Total investments	$	138,586		$	271,965		$	56,519		$	6,686		$	473,756
Weighted average yield		2.34	%		2.98	%		3.03	%		3.77	%		2.94	%
Full tax-equivalent yield		2.35	%		3.10	%		3.72	%		3.88	%		3.09	%
Held-to-maturity:
Obligations of state and political subdivisions	$	-		$	51		$	-		$	-		$	51
Weighted average yield					4.75	%								4.75	%
Full tax-equivalent yield					6.58	%								6.58	%

The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Full tax-equivalent yields have been calculated using a 34% tax rate.  With the exception of obligations of the U.S. Treasury and other U.S. government agencies and corporations, there were no investment securities of any single issuer the book value of which exceeded 10% of stockholders’ equity at December 31, 2011.

Investment securities carried at approximately $286,568,000 and $240,838,000 at December 31, 2011 and 2010, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law.

The following table presents the aging of gross unrealized losses and fair value by investment category as of December 31, 2011 and 2010:

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2011:
U.S. Treasury securities and obligations of U.S.     government corporations and agencies	$	19,960	$	(40	)	$	-	$	-		$	19,960	$	(40	)
Obligations of states and political subdivisions		690		-			-		-			690		-
Mortgage-backed securities: GSE residential		15,231		(37	)		-		-			15,231		(37	)
Trust preferred securities		-		-			719		(4,906	)		719		(4,906	)
Corporate bonds		7,190		(372	)		1,907		(93	)		9,096		(465	)
Total	$	43,071	$	(449	)	$	2,625	$	(4,999	)	$	45,696	$	(5,448	)
December 31, 2010:
U.S. Treasury securities and obligations of U.S.     government corporations and agencies	$	58,782	$	(1,024	)	$	-	$	-		$	58,782	$	(1,024	)
Obligations of states and political subdivisions		7,263		(216	)		252		(10	)		7,515		(226	)
Mortgage-backed securities: GSE residential		62,171		(1,482	)		-		-			62,171		(1,482	)
Trust preferred securities		-		-			581		(6,014	)		581		(6,014	)
Corporate bonds		2,009		(26	)		-		-			2,009		(26	)
Total	$	130,225	$	(2,748	)	$	833	$	(6,024	)	$	131,058	$	(8,772	)

U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At December 31, 2011 and 2010, there were no U.S. Treasury securities and obligations of U.S. government corporations and agencies in a continuous unrealized loss position for twelve months or more.

Obligations of states and political subdivisions.  At December 31, 2010, there were one obligation of states and political subdivisions with a fair value of $252,000 and unrealized losses of $10,000 in a continuous unrealized loss position for twelve months or more. This position was due to municipal rates increasing since the purchase of the securities resulting in the market value being lower than book value. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.  Because the Company does not intend to sell these securities and it is not more-likely-than-not the Company will be required to sell these securities, before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other than temporarily impaired at December 31, 2011.

Mortgage-backed Securities: GSE Residential. At December 31, 2011 and 2010, there were no mortgage-backed securities issued by Federal Home Loan Mortgage Corporation in a continuous unrealized loss position for twelve months or more.

Trust Preferred Securities. At December 31, 2011, there were four trust preferred securities with a fair value of $719,000 and unrealized losses of $4,906,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2010, these trust preferred securities had a fair value of $581,000 and unrealized losses of $6,014,000 in a continuous unrealized loss position for twelve months or more. These unrealized losses were primarily due to the long-term nature of the trust preferred securities, a lack of demand or inactive market for these securities, and concerns regarding the underlying financial institutions that have issued the trust preferred securities. The Company recorded a total of $886,000 and $1,418,000 of OTTI for these securities during 2011 and 2010, respectively.  These losses established a new, lower amortized cost basis for these securities and reduced non-interest income as of December 31, 2011 and 2010. Because the Company does not intend to sell these securities and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of their new, lower amortized cost basis, which may be maturity, the Company does not consider the remainder of the investment in these securities to be other-than-temporarily impaired at December 31, 2011. However, future downgrades or additional deferrals and defaults in these securities, in particular PreTSL XXVIII, could result in additional OTTI and consequently, have a material impact on future earnings.

Following are the details for each trust preferred security (in thousands):

	Book Value (Amortized Cost) at December 31, 2011		Market Value		Unrealized Loss			Other-than-temporary Impairment Recorded prior to December 31, 2011
PreTSL I	$	746	$	314	$	(432	)	$	691
PreTSL II		1,027		185		(842	)		2,187
PreTSL VI		200		92		(108	)		127
PreTSL XXVIII		3,652		128		(3,524	)		1,111
Total	$	5,625	$	719	$	(4,906	)	$	4,116

Other securities. At December 31, 2011, there was one corporate bond with a fair value of $1,907,000 and unrealized losses of $93,000 in a continuous unrealized loss position for twelve months or more. The long-term nature of this security has led to increased supply, while demand has decreased, leading to devaluation of the security. Management has evaluated this security and believes the decline in market value is liquidity, and not credit, related. At December 31, 2010, there were no corporate bonds in a continuous unrealized loss position for twelve months or more.

The Company does not believe any other individual unrealized loss as of December 31, 2011 represents OTTI. However, given the continued disruption in the financial markets, the Company may be required to recognize OTTI losses in future periods with respect to its available for sale investment securities portfolio. The amount and timing of any additional OTTI will depend on the decline in the underlying cash flows of the securities. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in the period the other-than-temporary impairment is identified.

Other-than-temporary Impairment

Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or will be evaluated for impairment under the accounting guidance for investments in debt and equity securities.

The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt securities within the scope of the guidance for investments in debt and equity securities.  For securities where the security is a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model. For securities where the security is not a beneficial interest in securitized financial assets, the Company uses debt and equity securities impairment model.

The Company routinely conducts periodic reviews to identify and evaluate each investment security to determine whether OTTI has occurred. Economic models are used to determine whether OTTI has occurred on these securities. While all securities are considered, the securities primarily impacted by OTTI testing are pooled trust preferred securities. For each pooled trust preferred security in the investment portfolio (including but not limited to those whose fair value is less than their amortized cost basis), an extensive, regular review is conducted to determine if OTTI has occurred. Various inputs to the economic models are used to determine if an unrealized loss is other-than-temporary. The most significant inputs are the following:

·   Prepayments

·   Defaults

·   Loss severity

The pooled trust preferred securities relate to trust preferred securities issued by financial institutions. The pools typically consist of financial institutions throughout the United States. Other inputs may include the actual collateral attributes, which include credit ratings and other performance indicators of the underlying financial institutions including profitability, capital ratios, and asset quality.

To determine if the unrealized losses for pooled trust preferred securities is other-than-temporary, the Company considers the impact of each of these inputs. The Company considers the likelihood that issuers will prepay their securities.  During the third quarter of 2010, the Dodd-Frank Act eliminated Tier 1 capital treatment for trust preferred securities issued by holding companies with consolidated assets greater than $15 billon. As a result, issuers may prepay their securities which reduces the amount of expected cash flows. Additionally, the Company projects total estimated defaults of the underlying assets (the financial institutions) and multiplies that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss. The Company also evaluates the current credit enhancement underlying the security to determine the impact on cash flows. If the Company determines that a given pooled trust preferred security position will be subject to a write-down or loss, the Company records the expected credit loss as a charge to earnings.

Credit Losses Recognized on Investments

As described above, some of the Company’s investments in trust preferred securities have experienced fair value deterioration due to credit losses but are not otherwise other-than-temporarily impaired. The following table provides information about those trust preferred securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income (loss) for the years ended December 31, 2011, 2010 and 2009 (in thousands).

	Accumulated Credit Losses as of:
	December 31, 2011		December 31, 2010		December 31, 2009
Credit losses on trust preferred securities held
Beginning of year	$	3,230	$	1,812	$	-
Additions related to OTTI losses not previously recognized		-		-		1,812
Reductions due to sales		-		-		-
Reductions due to change in intent or likelihood of sale		-		-		-
Additions related to increases in previously recognized OTTI losses		886		1,418		-
End of year	$	4,116	$	3,230	$	1,812

Maturities of investment securities were as follows at December 31, 2011 (in thousands).  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Estimated
	Cost		Fair Value
Available-for-sale:
Due in one year or less	$	119,450	$	119,837
Due after one-five years		69,855		71,293
Due after five-ten years		22,835		24,115
Due after ten years		6,686		1,838
		218,826		217,083
Mortgage-backed securities: GSE residential		254,930		261,833
Total available-for-sale		473,756		478,916
Held-to-maturity:
Due in one year or less		-		-
Due after one-five years		51		51
Due after five-ten years		-		-
Due after ten-years		-		-
Total held-to-maturity		51		51
Total investment securities	$	473,807	$	478,967