Securities

9 Months Ended

Sep. 30, 2011

Securities

Note 3. Securities

The following table summarizes the Company’s portfolio of securities available for sale at September 30, 2011:

	September 30, 2011
(in thousands)	Amortized  Cost			Gross   Unrealized   Gain			Gross   Unrealized   Loss			Fair Value
Mortgage-Related Securities:
GSE(1) certificates		$	84,820		$	3,880		$	1		$	88,699
GSE CMOs(2)			15,929			845			--			16,774
Private label CMOs			26,988			--			1,063			25,925
Total mortgage-related securities		$	127,737		$	4,725		$	1,064		$	131,398
Other Securities:
GSE debentures		$	295,754		$	2,042		$	82		$	297,714
State, county, and municipal			1,310			64			--			1,374
Capital trust notes			36,754			141			6,270			30,625
Preferred stock			--			285			--			285
Common stock			42,154			1,683			6,168			37,669
Total other securities		$	375,972		$	4,215		$	12,520		$	367,667
Total securities available for sale(3)		$	503,709		$	8,940		$	13,584		$	499,065

(1) Government-sponsored enterprises

(2) Collateralized mortgage obligations

(3) The non-credit portion of OTTI was $570,000 (before taxes).

As of September 30, 2011, the fair value of marketable equity securities included common stock of $37.7 million and Freddie Mac preferred stock of $285,000. Common stock primarily consisted of an investment in a large cap equity fund and certain other funds that are Community Reinvestment Act (“CRA”) eligible. The Freddie Mac preferred stock was recognized by the Company as other-than-temporarily impaired in the fourth quarter of 2008.

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2010:

	December 31, 2010
(in thousands)	Amortized  Cost			Gross   Unrealized   Gain			Gross   Unrealized   Loss			Fair Value
Mortgage-Related Securities:
GSE certificates		$	203,480		$	8,067		$	32		$	211,515
GSE CMOs			213,839			8,464			--			222,303
Private label CMOs			51,657			110			405			51,362
Total mortgage-related securities		$	468,976		$	16,641		$	437		$	485,180
Other Securities:
U.S. Treasury obligations		$	57,859		$	694		$	--		$	58,553
GSE debentures			620			--			--			620
Corporate bonds			4,814			--			564			4,250
State, county, and municipal			1,304			41			11			1,334
Capital trust notes			38,843			8,550			5,389			42,004
Preferred stock			30,574			2,129			11,964			20,739
Common stock			42,044			3,786			5,554			40,276
Total other securities		$	176,058		$	15,200		$	23,482		$	167,776
Total securities available for sale(1)		$	645,034		$	31,841		$	23,919		$	652,956

(1) The non-credit portion of OTTI was $12.5 million (before taxes).

The following tables summarize the Company’s portfolio of securities held to maturity at September 30, 2011 and December 31, 2010:

	September 30, 2011
(in thousands)	Amortized  Cost			Carrying   Amount			Gross     Unrealized      Gain			Gross     Unrealized      Loss			Fair Value
Mortgage-Related Securities:
GSE certificates		$	670,899		$	670,899		$	41,498		$	--		$	712,397
GSE CMOs			2,460,494			2,460,494			99,459			--			2,559,953
Other mortgage-related securities			3,953			3,953			--			--			3,953
Total mortgage-related securities		$	3,135,346		$	3,135,346		$	140,957		$	--		$	3,276,303
Other Securities:
GSE debentures		$	1,298,132		$	1,298,132		$	16,674		$	--		$	1,314,806
Corporate bonds			83,516			83,516			6,757			49			90,224
Capital trust notes			153,331			131,557			7,096			25,613			113,040
Total other securities		$	1,534,979		$	1,513,205		$	30,527		$	25,662		$	1,518,070
Total securities held to maturity(1)		$	4,670,325		$	4,648,551		$	171,484		$	25,662		$	4,794,373
(1)       Held-to-maturity securities are reported at a carrying amount equal to amortized cost less the non-credit portion of OTTI recorded in accumulated other comprehensive loss, net of tax (“AOCL”). The non-credit portion of OTTI was $21.8 million (before taxes).
	December 31, 2010
(in thousands)	Amortized  Cost			Carrying   Amount			Gross     Unrealized      Gain			Gross     Unrealized      Loss			Fair Value
Mortgage-Related Securities:
GSE certificates		$	208,993		$	208,993		$	12,206		$	1,094		$	220,105
GSE CMOs			2,763,545			2,763,545			47,352			28,345			2,782,552
Other mortgage-related securities			6,777			6,777			--			--			6,777
Total mortgage-related securities		$	2,979,315		$	2,979,315		$	59,558		$	29,439		$	3,009,434
Other Securities:
GSE debentures		$	924,663		$	924,663		$	4,524		$	10,592		$	918,595
Corporate bonds			86,483			86,483			8,647			13			95,117
Capital trust notes			167,355			145,474			11,410			22,708			134,176
Total other securities		$	1,178,501		$	1,156,620		$	24,581		$	33,313		$	1,147,888
Total securities held to maturity(1)		$	4,157,816		$	4,135,935		$	84,139		$	62,752		$	4,157,322

(1) The non-credit portion of OTTI was $21.9 million (before taxes).

The Company had $442.6 million and $446.0 million of Federal Home Loan Bank (“FHLB”) stock, at cost, at September 30, 2011 and December 31, 2010, respectively. The Company is required to maintain this investment in order to have access to funding resources provided by the FHLB.

The following table summarizes the gross proceeds, gross realized gains, and gross realized losses from the sale of available-for-sale securities during the nine months ended September 30, 2011 and 2010:

	For the Nine Months      Ended September 30,
(in thousands)	2011		2010
Gross proceeds		$740,738		$660
Gross realized gains		26,977		--
Gross realized losses		11		8

In addition, during the nine months ended September 30, 2011, the Company sold held-to-maturity securities with gross proceeds totaling $284.4 million and gross realized gains of $8.5 million. These sales occurred because the Company had either collected a substantial portion (at least 85%) of the initial principal balance or because there was evidence of significant deterioration in the issuer’s creditworthiness.

Included in the capital trust note portfolio at September 30, 2011 were three pooled trust preferred securities. The following table details the pooled trust preferred securities that had at least one credit rating below investment grade as of September 30, 2011:

	INCAPS Funding I			Alesco Preferred Funding  VII Ltd.			Preferred Term Securities  II
(dollars in thousands)	Class B-2 Notes			Class C-1 Notes			Mezzanine Notes
Book value		$14,964			$ 553			$629
Fair value		13,368			266			688
Unrealized gain (loss)		(1,596	)		(287	)		59
Lowest credit rating assigned to security		CCC-			C			C
Number of banks/insurance companies currently performing		24			60			24
Actual deferrals and defaults as a percentage of original collateral		11	%		32	%		36	%
Expected deferrals and defaults as a percentage of remaining performing collateral		25			25			19
Expected recoveries as a percentage of remaining performing collateral		--			--			2
Excess subordination as a percentage of remaining performing collateral		11			--			--

As of September 30, 2011, after taking into account the Company’s best estimates of future deferrals, defaults, and recoveries, two of its pooled trust preferred securities had no excess subordination in the classes it owns and one had excess subordination of 11%. Excess subordination is calculated after taking into account the deferrals, defaults, and recoveries noted in the table above, and indicates whether there is sufficient additional collateral to cover the outstanding principal balance of the class owned, after taking into account these projected deferrals, defaults, and recoveries.

The following table presents a roll-forward, from December 31, 2010 through September 30, 2011, of the credit loss component of OTTI on debt securities for which a non-credit component of OTTI was recognized in AOCL. The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to January 1, 2011. For credit-impaired debt securities, OTTI recognized in earnings after that date is presented as an addition in two components, based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment) or is not the first time a debt security was credit-impaired (subsequent credit impairment).

(in thousands)	For the Nine Months Ended   September 30, 2011
Beginning credit loss amount as of December 31, 2010		$201,854
Add:   Initial other-than-temporary credit losses		--
Subsequent other-than-temporary credit losses		6,160
Amount previously recognized in AOCL		11,964
Less:  Realized losses for securities sold		--
Securities intended or required to be sold		--
Increases in expected cash flows on debt securities		--
Ending credit loss amount as of September 30, 2011		$219,978

OTTI losses on securities (consisting entirely of preferred stock) totaled $18.1 million in the nine months ended September 30, 2011. As this entire amount was related to credit, it was recognized in earnings. OTTI was determined based on the Company’s expectation that it would no longer receive any cash flows from the impaired security.

The following table summarizes the carrying amount and estimated fair value of held-to-maturity debt securities, and the amortized cost and estimated fair value of available-for-sale debt securities, at September 30, 2011 by contractual maturity. Mortgage-related securities held to maturity and available for sale, all of which have prepayment provisions, are distributed to a maturity category based on the ends of the estimated average lives of such securities. Principal and amortization prepayments are not shown in maturity categories as they occur, but are considered in the determination of estimated average life.

	Carrying Amount at September 30, 2011
(dollars in thousands)	Mortgage- Related Securities			Average Yield		U.S. Treasury   and GSE Obligations			Average Yield		State, County,  and Municipal			Average Yield(1)		Other Debt  Securities(2)			Average Yield		Fair Value
Held-to-Maturity Securities:
Due within one year		$	--		--%		$	--		--%		$	--		--%		$	8,750		7.79%		$	8,761
Due from one to five years			--		--			--		--			--		--			23,986		5.80			24,798
Due from five to ten years			868,209		3.76			1,298,132		3.92			--		--			20,023		5.98			2,256,407
Due after ten years			2,267,137		3.74			--		--			--		--			162,314		7.17			2,504,407
Total debt securities held to maturity		$	3,135,346		3.75%		$	1,298,132		3.92%		$	--		--%		$	215,073		6.94%		$	4,794,373
Available-for-Sale Securities:(3)
Due within one year		$	--		--%		$	--		--%		$	125		5.39%		$	--		--%		$	126
Due from one to five years			2,531		6.91			--		--			489		6.01			--		--			3,084
Due from five to ten years			64,734		4.11			295,160		3.77			696		6.52			--		--			365,628
Due after ten years			60,472		4.74			594		2.75			--		--			36,754		4.62			92,273
Total debt securities available for sale		$	127,737		4.46%		$	295,754		3.76%		$	1,310		6.23%		$	36,754		4.62%		$	461,111

(1) Not presented on a tax-equivalent basis.

(2) Includes corporate bonds and capital trust notes. Included in capital trust notes are $15.5 million and $629,000 of pooled trust preferred securities available for sale and held to maturity, respectively, all of which are due after ten years. The remaining capital trust notes consist of single-issue trust preferred securities.

(3) As equity securities have no contractual maturity, they have been excluded from this table.

The Company had no commitments to purchase securities at September 30, 2011.

The following tables present held-to-maturity and available-for-sale securities having a continuous unrealized loss position for less than twelve months and for twelve months or longer as of September 30, 2011:

At September 30, 2011	Less than Twelve Months						Twelve Months or Longer						Total
(in thousands)	Fair Value			Unrealized Loss			Fair Value			Unrealized Loss			Fair Value			Unrealized Loss
Temporarily Impaired Held-to-Maturity
Debt Securities:
GSE debentures		$	--		$	--		$	--		$	--		$	--		$	--
GSE certificates			--			--			--			--			--			--
GSE CMOs			--			--			--			--			--			--
Corporate bonds			4,951			49			--			--			4,951			49
Capital trust notes			920			93			62,867			25,520			63,787			25,613
Total temporarily impaired held-to-maturity debt securities		$	5,871		$	142		$	62,867		$	25,520		$	68,738		$	25,662
Temporarily Impaired Available-for-Sale Securities:
Debt Securities:
GSE certificates		$	--		$	--		$	14		$	1		$	14		$	1
Private label CMOs			25,925			1,063			--			--			25,925			1,063
GSE debentures			16,918			82			--			--			16,918			82
State, county, and municipal			--			--			--			--			--			--
Capital trust notes			13,633			1,883			9,751			4,387			23,384			6,270
Total temporarily impaired available-for-sale debt securities		$	56,476		$	3,028		$	9,765		$	4,388		$	66,241		$	7,416
Equity securities			40			--			23,998			6,168			24,038			6,168
Total temporarily impaired available-for-sale securities		$	56,516		$	3,028		$	33,763		$	10,556		$	90,279		$	13,584

The twelve months or longer unrealized losses of $6.2 million at September 30, 2011 relate to available-for-sale equity securities that primarily consisted of a large cap equity fund at that date. The twelve months or longer unrealized loss on this large cap equity fund was $5.4 million.

The following tables present held-to-maturity and available-for-sale securities having a continuous unrealized loss position for less than twelve months and for twelve months or longer as of December 31, 2010:

At December 31, 2010	Less than Twelve Months						Twelve Months or Longer						Total
(in thousands)	Fair Value			Unrealized Loss			Fair Value			Unrealized Loss			Fair Value			Unrealized Loss
Temporarily Impaired Held-to-Maturity
Debt Securities:
GSE debentures		$	569,361		$	10,592		$	--		$	--		$	569,361		$	10,592
GSE certificates			54,623			1,094			--			--			54,623			1,094
GSE CMOs			1,251,850			28,345			--			--			1,251,850			28,345
Corporate bonds			4,987			13			--			--			4,987			13
Capital trust notes			--			--			66,698			22,708			66,698			22,708
Total temporarily impaired held-to-maturity debt securities		$	1,880,821		$	40,044		$	66,698		$	22,708		$	1,947,519		$	62,752
Temporarily Impaired Available-for-Sale Securities:
Debt Securities:
GSE certificates		$	12,809		$	28		$	779		$	4		$	13,588		$	32
Private label CMOs			--			--			35,511			405			35,511			405
Corporate bonds			--			--			4,250			564			4,250			564
State, county, and municipal			399			11			--			--			399			11
Capital trust notes			1,988			102			8,848			5,287			10,836			5,389
Total temporarily impaired available-for-sale debt securities		$	15,196		$	141		$	49,388		$	6,260		$	64,584		$	6,401
Equity securities			79			11			25,339			17,507			25,418			17,518
Total temporarily impaired available-for-sale securities		$	15,275		$	152		$	74,727		$	23,767		$	90,002		$	23,919

An OTTI loss on impaired securities must be fully recognized in earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost. However, even if an investor does not expect to sell a debt security, it must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event that a credit loss occurs, only the amount of impairment associated with the credit loss is recognized in earnings. Amounts relating to factors other than credit losses are recorded in AOCL. Financial Accounting Standards Board (“FASB”) guidance also requires additional disclosures regarding the calculation of credit losses, as well as factors considered by the investor in reaching a conclusion that an investment is not other-than-temporarily impaired.

Available-for-sale securities in unrealized loss positions are analyzed as part of the Company’s ongoing assessment of OTTI. When the Company intends to sell such available-for-sale securities, the Company recognizes an impairment loss equal to the full difference between the amortized cost basis and the fair value of those securities. When the Company does not intend to sell available-for-sale equity or debt securities in an unrealized loss position, potential OTTI is considered based on a variety of factors, including the length of time and extent to which the fair value has been less than the cost; adverse conditions specifically related to the industry, the geographic area, or financial condition of the issuer, or the underlying collateral of a security; the payment structure of the security; changes to the rating of the security by a rating agency; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet date. For debt securities, the Company estimates cash flows over the remaining life of the underlying collateral to assess whether credit losses exist and, where applicable, to determine if any adverse changes in cash flows have occurred. The Company’s cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting period. As of September 30, 2011, the Company did not intend to sell the securities with an unrealized loss position in AOCL, and it was more likely than not that the Company would not be required to sell these securities before recovery of their amortized cost basis. The Company believes that the securities with an unrealized loss position in AOCL were not other-than- temporarily impaired as of September 30, 2011.

Other factors considered in determining whether a loss is temporary include the length of time and the extent to which fair value has been below cost; the severity of the impairment; the cause of the impairment; the financial condition and near-term prospects of the issuer; activity in the market of the issuer that may indicate adverse credit conditions; and the forecasted recovery period using current estimates of volatility in market interest rates (including liquidity and risk premiums).

Management’s assertion regarding its intent not to sell, or that it is not more likely than not that the Company will be required to sell the security before its anticipated recovery, is based on a number of factors, including a quantitative estimate of the expected recovery period (which may extend to maturity) and management’s intended strategy with respect to the identified security or portfolio. If management does have the intent to sell, or believes it is more likely than not that the Company will be required to sell the security before its anticipated recovery, the unrealized loss is charged directly to earnings in the Consolidated Statement of Income and Comprehensive Income.

The unrealized losses on the Company’s GSE debentures and GSE CMOs at September 30, 2011 were primarily caused by movements in market interest rates and spread volatility, rather than credit risk. The Company purchased these investments either at par or at a discount relative to their face amount, and the contractual cash flows of these investments are guaranteed by the GSEs. Accordingly, it is expected that these securities will not be settled at a price that is less than the amortized cost of the Company’s investment. Because the Company does not have the intent to sell the investments and it is not more likely than not that the Company will be required to sell the investments before anticipated recovery of fair value, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2011.

The Company reviews quarterly financial information related to its investments in capital trust notes as well as other information that is released by each financial institution to determine the continued creditworthiness of the issuer of the securities. The contractual terms of these investments do not permit settling the securities at prices that are less than the amortized costs of the investments; therefore, the Company expects that these investments will not be settled at prices that are less than their amortized costs. The Company continues to monitor these investments and currently estimates that the present value of expected cash flows is not less than the amortized cost of the securities. Because the Company does not have the intent to sell the investments and it is not more likely than not that the Company will be required to sell them before the anticipated recovery of fair value, which may be at maturity, it did not consider these investments to be other-than-temporarily impaired at September 30, 2011. It is possible that these securities will perform worse than is currently expected, which could lead to adverse changes in cash flows from these securities and potential OTTI losses in the future. Events that may occur in the future at the financial institutions that issued these securities could trigger material unrecoverable declines in fair values for the Company’s investments and therefore could result in future potential OTTI losses. Such events include, but are not limited to, government intervention, deteriorating asset quality and credit metrics, significantly higher levels of default and loan loss provisions, losses in value on the underlying collateral, deteriorating credit enhancement, net operating losses, and further illiquidity in the financial markets.

The unrealized losses on the Company’s private label CMOs were insignificant at September 30, 2011. Current characteristics of each security owned, such as delinquency and foreclosure levels, credit enhancement, and projected losses and coverage, are reviewed periodically by management. Accordingly, it is expected that the securities will not be settled at a price less than the amortized cost of the Company’s investment. Because the Company does not have the intent to sell the investments and it is not more likely than not that the Company will be required to sell the investments before anticipated recovery of fair value, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2011. It is possible that the underlying loan collateral of these securities will perform worse than is currently expected, which could lead to adverse changes in cash flows from these securities and potential OTTI losses in the future. Events that could trigger material unrecoverable declines in fair values, and therefore potential OTTI losses for these securities in the future, include, but are not limited to, deterioration of credit metrics, significantly higher levels of default, loss in value on the underlying collateral, deteriorating credit enhancement, and further illiquidity in the financial markets.

At September 30, 2011, the Company’s equity securities portfolio consisted of perpetual preferred and common stock, and mutual funds. The Company considers a decline in fair value of available-for-sale equity securities to be other than temporary if the Company does not expect to recover the entire amortized cost basis of the security. In analyzing its investments in perpetual preferred stock for OTTI, the Company uses an impairment model that is applied to debt securities, consistent with guidance provided by the SEC, provided that there has been no evidence of deterioration in the creditworthiness of the issuer. The unrealized losses on the Company’s equity securities were primarily caused by market volatility. In addition, perpetual preferred stock was impacted by widening interest rate spreads across market sectors related to the continued illiquidity and uncertainty in the marketplace. The Company evaluated the near-term prospects of a recovery of fair value for each security in the portfolio, together with the severity and duration of impairment to date. Based on this evaluation, and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient to realize a near-term forecasted recovery of fair value, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2011. Nonetheless, it is possible that these equity securities will perform worse than is currently expected, which could lead to adverse changes in their fair values or the failure of the securities to fully recover in value as presently forecasted by management, causing the Company to record potential OTTI losses in future periods. Events that could trigger material declines in the fair values of these securities include, but are not limited to, deterioration in the equity markets; a decline in the quality of the loan portfolios of the issuers in which the Company has invested; and the recording of higher loan loss provisions and net operating losses by such issuers.

The investment securities designated as having a continuous loss position for twelve months or more at September 30, 2011 consisted of 11 capital trust notes, five equity securities, and one mortgage-backed security. At December 31, 2010, the investment securities designated as having a continuous loss position for twelve months or more consisted of two mortgage-related securities, one corporate debt obligation, eleven capital trust notes, and seven equity securities. At September 30, 2011 and December 31, 2010, the combined market value of these securities represented unrealized losses of $36.0 million and $46.5 million, respectively. At September 30, 2011, the fair value of securities having a continuous loss position for twelve months or more was 27.3% below their collective amortized cost of $132.1 million. At December 31, 2010, the fair value of such securities was 24.0% below their collective amortized cost of $193.5 million.