Note 3. Securities

The following table summarizes the Company’s portfolio of securities available for sale at September 30, 2012:


	September 30, 2012
(in thousands)	Amortized Cost			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE ⁽¹⁾ certificates		$	93,764		$	8,270		$	6		$	102,028
GSE CMOs ⁽²⁾			80,472			5,945			--			86,417
Private label CMOs			18,426			--			325			18,101

Total mortgage-related securities		$	192,662		$	14,215		$	331		$	206,546

Other Securities:
GSE debentures		$	11,000		$	68		$	--		$	11,068
State, county, and municipal			1,195			131			--			1,326
Capital trust notes			35,228			2,352			4,009			33,571
Preferred stock			77,913			5,093			--			83,006
Common stock			42,917			1,273			1,193			42,997

Total other securities		$	168,253		$	8,917		$	5,202		$	171,968

Total securities available for sale ⁽³⁾		$	360,915		$	23,132		$	5,533		$	378,514

(1)	Government-sponsored enterprises

(2)	Collateralized mortgage obligations

(3)	The non-credit portion of OTTI recorded in accumulated other comprehensive loss (“AOCL”) was $570,000 (before taxes).

As of September 30, 2012, the fair value of marketable equity securities included common stock of $43.0 million, corporate preferred stock of $82.9 million, and Freddie Mac preferred stock of $105,000. 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, 2011:


	December 31, 2011
(in thousands)	Amortized Cost			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE certificates		$	97,642		$	5,013		$	10		$	102,645
GSE CMOs			62,373			2,903			--			65,276
Private label CMOs			25,306			--			1,265			24,041

Total mortgage-related securities		$	185,321		$	7,916		$	1,275		$	191,962

Other Securities:
GSE debentures		$	456,969		$	1,797		$	--		$	458,766
State, county, and municipal			1,188			97			--			1,285
Capital trust notes			36,754			141			4,692			32,203
Preferred stock			--			195			--			195
Common stock			42,863			1,604			4,216			40,251

Total other securities		$	537,774		$	3,834		$	8,908		$	532,700

Total securities available for sale ⁽¹⁾		$	723,095		$	11,750		$	10,183		$	724,662

(1)	The non-credit portion of OTTI recorded in AOCL was $570,000 (before taxes).

The following tables summarize the Company’s portfolio of securities held to maturity at September 30, 2012 and December 31, 2011:


	September 30, 2012
(in thousands)	Amortized Cost			Carrying Amount			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE certificates		$	1,266,523		$	1,266,523		$	102,160		$	--		$	1,368,683
GSE CMOs			2,087,968			2,087,968			110,349			--			2,198,317
Other mortgage-related securities			3,263			3,263			--			--			3,263

Total mortgage-related securities		$	3,357,754		$	3,357,754		$	212,509		$	--		$	3,570,263

Other Securities:
GSE debentures		$	1,203,313		$	1,203,313		$	17,121		$	26		$	1,220,408
Corporate bonds			77,407			77,407			9,715			--			87,122
Municipal bonds			17,326			17,326			347			--			17,673
Capital trust notes			131,507			109,894			14,804			15,767			108,931

Total other securities		$	1,429,553		$	1,407,940		$	41,987		$	15,793		$	1,434,134

Total securities held to maturity⁽¹⁾		$	4,787,307		$	4,765,694		$	254,496		$	15,793		$	5,004,397

(1)	Held-to-maturity securities are reported at a carrying amount equal to amortized cost less the non-credit portion of OTTI recorded in AOCL. The non-credit portion of OTTI recorded in AOCL was $21.6 million (before taxes).


	December 31, 2011
(in thousands)	Amortized Cost			Carrying Amount			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE certificates		$	660,945		$	660,945		$	47,064		$	--		$	708,009
GSE CMOs			2,331,916			2,331,916			93,216			--			2,425,132
Other mortgage-related securities			3,379			3,379			--			--			3,379

Total mortgage-related securities		$	2,996,240		$	2,996,240		$	140,280		$	--		$	3,136,520

Other Securities:
GSE debentures		$	633,258		$	633,258		$	14,878		$	146		$	647,990
Corporate bonds			54,759			54,759			2,826			12			57,573
Capital trust notes			153,334			131,597			12,362			19,857			124,102

Total other securities		$	841,351		$	819,614		$	30,066		$	20,015		$	829,665

Total securities held to maturity ⁽¹⁾		$	3,837,591		$	3,815,854		$	170,346		$	20,015		$	3,966,185

(1)	The non-credit portion of OTTI recorded in AOCL was $21.7 million (before taxes).

The Company had $473.6 million and $490.2 million of Federal Home Loan Bank (“FHLB”) stock, at cost, at September 30, 2012 and December 31, 2011, 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, 2012 and 2011:


	For the Nine Months Ended September 30,
(in thousands)	2012			2011
Gross proceeds		$	561,369		$	740,738
Gross realized gains			1,369			26,977
Gross realized losses			--			11

In addition, during the nine months ended September 30, 2011, the Company sold held-to-maturity securities with gross proceeds of $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 issuers’ creditworthiness.

The $142.5 million market value of the capital trust note portfolio at September 30, 2012 included 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, 2012:


	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			$491
Fair value		17,095			281			728
Unrealized gain (loss)		2,131			(272	)		237
Lowest credit rating assigned to security		CCC			C			C
Number of banks/insurance companies currently performing		24			58			24
Actual deferrals and defaults as a percentage of original collateral		8	%		18	%		34	%
Expected deferrals and defaults as a percentage of remaining performing collateral		22			25			19
Expected recoveries as a percentage of remaining performing collateral		--			--			2
Excess subordination as a percentage of remaining performing collateral		17			--			--

As of September 30, 2012, 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 17%. 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.

As the following table indicates, there was no activity from December 31, 2011 through September 30, 2012 in 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, 2012. 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, 2012
Beginning credit loss amount as of December 31, 2011		$	219,978
Add: Initial other-than-temporary credit losses			--
Subsequent other-than-temporary credit losses			--
Amount previously recognized in AOCL			--
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, 2012		$	219,978

The following table summarizes the carrying amounts and estimated fair values of held-to-maturity debt securities, and the amortized costs and estimated fair values of available-for-sale debt securities, at September 30, 2012, 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, 2012
(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		$	--		--%		$	--		--%		$	--		--%		$	--		--%		$	--
Due from one to five years			--		--			--		--			1,791		2.96			46,588		4.04			49,836
Due from five to ten years			1,715,778		3.20			60,682		4.17			--		--			--		--			1,925,888
Due after ten years			1,641,976		3.73			1,142,631		2.60			15,535		3.90			140,713		6.55			3,028,673

Total debt securities held to maturity		$	3,357,754		3.46%		$	1,203,313		2.68%		$	17,326		3.80%		$	187,301		5.93%		$	5,004,397


Available-for-Sale Securities: ⁽³⁾
Due within one year		$	--		--%		$	--		--%		$	125		5.63%		$	--		--%		$	126
Due from one to five years			7,936		7.22			--		--			512		6.21			--		--			9,011
Due from five to ten years			78,396		3.48			11,000		3.25			558		6.56			--		--			98,119
Due after ten years			106,330		3.71			--		--			--		--			35,228		6.06			145,255

Total debt securities available for sale		$	192,662		3.76%		$	11,000		3.25%		$	1,195		6.31%		$	35,228		6.06%		$	252,511

(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 $491,000 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.

At September 30, 2012, the Company had commitments to purchase $310.3 million of securities, all of which were GSE securities.

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, 2012:


At September 30, 2012	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		$ 14,956		$ 26		$ --		$ --		$ 14,956		$ 26
Corporate bonds		--		--		--		--		--		--
Municipal bonds		--		--		--		--		--		--
Capital trust notes		--		--		55,373		15,767		55,373		15,767

Total temporarily impaired held-to-maturity debt securities		$ 14,956		$ 26		$55,373		$ 15,767		$ 70,329		$ 15,793


Temporarily Impaired Available-for-Sale Securities:
Debt Securities:
GSE certificates		$ 371		$ 6		$ --		$ --		$ 371		$ 6
Private label CMOs		18,101		325		--		--		18,101		325
Capital trust notes		--		--		6,518		4,009		6,518		4,009

Total temporarily impaired available-for-sale debt securities		$ 18,472		$331		$ 6,518		$ 4,009		$ 24,990		$ 4,340
Equity securities		--		--		29,667		1,193⁽¹⁾		29,667		1,193

Total temporarily impaired available-for-sale securities		$ 18,472		$331		$36,185		$ 5,202		$ 54,657		$ 5,533

(1)

The twelve months or longer unrealized losses on equity securities of $1.2 million at September 30, 2012 relate to available-for-sale equity securities that consisted of a large cap equity fund and investments in certain financial institutions at that date. The principal balance of the large cap equity fund was $29.1 million and the twelve months or longer unrealized loss was $556,000. The principal balance of investments in financial institutions totaled $1.7 million and the twelve months or longer unrealized loss was $623,000.


At December 31, 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		$	62,601		$	146		$	--		$	--		$	62,601		$	146
GSE certificates			--			--			--			--			--			--
GSE CMOs			--			--			--			--			--			--
Corporate bonds			4,987			12			--			--			4,987			12
Capital trust notes			971			43			68,570			19,814			69,541			19,857

Total temporarily impaired held-to-maturity debt securities		$	68,559		$	201		$	68,570		$	19,814		$	137,129		$	20,015


Temporarily Impaired Available-for-Sale Securities:
Debt Securities:
GSE certificates		$	181		$	9		$	13		$	1		$	194		$	10
Private label CMOs			24,041			1,265			--			--			24,041			1,265
Corporate bonds			--			--			--			--			--			--
State, county, and municipal			--			--			--			--			--			--
Capital trust notes			15,154			363			9,810			4,329			24,964			4,692

Total temporarily impaired available-for-sale debt securities		$	39,376		$	1,637		$	9,823		$	4,330		$	49,199		$	5,967
Equity securities			784			40			26,651			4,176			27,435			4,216

Total temporarily impaired available-for-sale securities		$	40,160		$	1,677		$	36,474		$	8,506		$	76,634		$	10,183

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, 2012, 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, 2012.

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 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, 2012. 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 the fair values of 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.

At September 30, 2012, the Company’s equity securities portfolio consisted of perpetual preferred and common stock, and mutual funds. The Company considers a decline in the 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. The unrealized losses on the Company’s equity securities were primarily caused by market volatility. 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 period of time reasonably 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, 2012. 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 potentially record 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, 2012 consisted of eight capital trust notes and four equity securities. At December 31, 2011, the investment securities designated as having a continuous loss position for twelve months or more consisted of one mortgage-related security, eleven capital trust notes, and six equity securities. At September 30, 2012 and December 31, 2011, the combined market value of the respective securities represented unrealized losses of $21.0 million and $28.3 million. At September 30, 2012, the fair value of securities having a continuous loss position for twelve months or more was 18.7% below the collective amortized cost of $112.0 million. At December 31, 2011, the fair value of such securities was 21.2% below the collective amortized cost of $133.4 million.