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Investment Securities

9 Months Ended

Sep. 30, 2011

Investment Securities

Investment Securities

Note 6 - Investment Securities

The Company classifies debt and equity securities into one of three categories:  held-to maturity, available-for-sale, or trading.  Such securities are reassessed for appropriate classification at each reporting date.  Securities classified as “held-to-maturity” are carried at amortized cost for financial statement reporting, while securities classified as “available-for-sale” and “trading” are carried at their fair value.  Unrealized holding gains and losses are included in net income for those securities classified as “trading”, while unrealized holding gains and losses related to those securities classified as “available-for-sale” are excluded from net income and reported net of tax as other comprehensive income (loss) and accumulated other comprehensive income (loss) until realized, or in the case of losses, when deemed other than temporary.

The amortized cost and estimated fair value by type of investment security at September 30, 2011 are as follows:

		Held to Maturity
		Amortized cost			Gross unrealized gains		Gross unrealized losses		Estimated fair value			Carrying value
		(Dollars in Thousands)
Other securities		$	2,575		—		—		$	2,575		$	2,575
Total investment securities		$	2,575		—		—		$	2,575		$	2,575

		Available for Sale
		Amortized cost			Gross unrealized gains			Gross unrealized losses			Estimated fair value			Carrying value (1)
		(Dollars in Thousands)
Residential mortgage-backed securities		$	4,616,720		$	144,020		$	(11,159	)	$	4,749,581		$	4,749,581
Obligations of states and political subdivisions		210,178			15,257			(920		)	224,515			224,515
Equity securities		13,825			1,031			(39		)	14,817			14,817
Total investment securities		$	4,840,723		$	160,308		$	(12,118	)	$	4,988,913		$	4,988,913

(1) Included in the carrying value of residential mortgage-backed securities are $2,958,000  of mortgage-backed securities issued by Ginnie Mae, $1,751,104 of mortgage-backed securities issued by Fannie Mae and Freddie Mac and $40,477  issued by non-government entities

The amortized cost and estimated fair value by type of investment security at December 31, 2010 are as follows:

		Held to Maturity
		Amortized cost			Gross unrealized gains			Gross unrealized losses			Estimated fair value			Carrying value
		(Dollars in Thousands)
Other securities		$	2,450		$	—		$	—		$	2,450		$	2,450
Total investment securities		$	2,450		$	—		$	—		$	2,450		$	2,450

		Available for Sale
		Amortized cost			Gross unrealized gains			Gross unrealized losses			Estimated fair value			Carrying value (1)
		(Dollars in Thousands)
U.S. Treasury securities		$	1,327		$	—		$	—		$	1,327		$	1,327
Residential mortgage-backed securities		4,876,573			77,741			(29,846		)	4,924,468			4,924,468
Obligations of states and political subdivisions		150,122			636			(4,761		)	145,997			145,997
Equity securities		13,825			864			(24		)	14,665			14,665
Total investment securities		$	5,041,847		$	79,241		$	(34,631	)	$	5,086,457		$	5,086,457

(1) Included in the carrying value of residential mortgage-backed securities are $2,326,378 of mortgage-backed securities issued by Ginnie Mae, $2,552,062 of mortgage-backed securities issued by Fannie Mae and Freddie Mac and $46,028 issued by non-government entities

The amortized cost and estimated fair value of investment securities at September 30, 2011, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.

		Held to Maturity						Available for Sale
		Amortized Cost			Estimated fair value			Amortized Cost			Estimated fair value
		(Dollars in Thousands)
Due in one year or less		$	1,250		$	1,250		$	—		$	—
Due after one year through five years		1,325			1,325			—			—
Due after five years through ten years		—			—			4,795			4,882
Due after ten years		—			—			205,383			219,633
Residential mortgage-backed securities		—			—			4,616,720			4,749,581
Equity securities		—			—			13,825			14,817
Total investment securities		$	2,575		$	2,575		$	4,840,723		$	4,988,913

Residential mortgage-backed securities are securities issued by Freddie Mac, Fannie Mae, Ginnie Mae or non-government entities.  Investments in residential mortgage-backed securities issued by Ginnie Mae are fully guaranteed by the U.S. Government.  Investments in mortgage-backed securities issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S. Government, however, the Company believes that the quality of the bonds is similar to other AAA rated bonds with limited credit risk, particularly given the placement of Fannie Mae and Freddie Mac into conservatorship by the federal government in early September 2008.

The amortized cost and fair value of available for sale investment securities pledged to qualify for fiduciary powers, to secure public monies as required by law, repurchase agreements and short-term fixed borrowings was $2,575,377,000 and $2,672,065,000 at September 30, 2011.

Proceeds from the sale of securities available-for-sale were $152,013,000 and $926,869,000 for the three and nine months ended September 30, 2011, which included $150,325,000 and $920,569,000 of mortgage-backed securities. Gross gains of $6,588,000 and $9,481,000 and gross losses of $(1,000) and $(33,000) were realized on the sales for the three and nine months ended September 30, 2011, respectively.  Proceeds from the sale of securities available-for-sale were $17,001,000 and $1,068,184,000 for the three and nine months ended September 30, 2010, which included $15,137,000 and $1,057,815,000 of mortgage-backed securities. Gross gains of $14,000 and $30,857,000 and gross losses of $(1,000) and $(7,000) were realized on the sales for the three and nine months ended September 30, 2010, respectively.

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2011, were as follows:

		Less than 12 months						12 months or more						Total
		Fair Value			Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
		(Dollars in Thousands)
Available for sale:
Residential mortgage-backed securities		$	—		$	—		$	40,477		$	(11,159	)	$	40,477		$	(11,159	)
Obligations of states and political subdivisions		5,519			(202		)	3,208			(718		)	8,727			(920		)
Other equity securities		—			—			37			(39		)	37			(39		)
		$	5,519		$	(202	)	$	43,722		$	(11,916	)	$	49,241		$	(12,118	)

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2010 were as follows:

		Less than 12 months						12 months or more						Total
		Fair Value			Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
		(Dollars in Thousands)
Available for sale:
Residential mortgage-backed securities		$	1,166,720		$	(19,192	)	$	46,028		$	(10,654	)	$	1,212,748		$	(29,846	)
Obligations of states and political subdivisions		97,701			(4,666		)	355			(95		)	98,056			(4,761		)
Equity securities		4,988			(12		)	63			(12		)	5,051			(24		)
		$	1,269,409		$	(23,870	)	$	46,446		$	(10,761	)	$	1,315,855		$	(34,631	)

The unrealized losses on investments in residential mortgage-backed securities are primarily caused by changes in market interest rates.  Residential mortgage-backed securities are primarily securities issued by Freddie Mac, Fannie Mae and Ginnie Mae.  Investments in mortgage-backed securities issued by Ginnie Mae are fully guaranteed by the U.S. Government.  Investments in mortgage-backed securities issued by Freddie Mac and Fannie Mae are not fully guaranteed by the U.S. Government; however, the Company believes the quality of the bonds is similar to other AAA rated bonds with limited credit risk, particularly given the placement of Fannie Mae and Freddie Mac into conservatorship by the federal government in early September 2008.  The decrease in fair value on residential mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae is due to market interest rates.  The Company has no intent to sell and will more than likely not be required to sell before a market price recovery or maturity of the securities; therefore, it is the conclusion of the Company that the investments in residential mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae are not considered other-than-temporarily impaired.  In addition, the Company has a small investment in non-agency residential mortgage-backed securities that have strong credit backgrounds and include additional credit enhancements to protect the Company from losses arising from high foreclosure rates.  These securities have additional market volatility beyond economically induced interest rate events.  It is the conclusion of the Company that the investments in non-agency residential mortgage-backed securities are other-than-temporarily impaired due to both credit and other than credit issues.  Impairment charges of $286,000 ($185,900, after tax) and $701,000 ($455,650, after tax) were recorded for the three and nine months ended September 30, 2011. Impairment charges of $531,000 ($345,150, after tax) and $7,992,000 ($5,194,800, after tax) were recorded for the three and nine months ended September 30, 2010. The impairment charge represents the credit related impairment on the securities.

The unrealized losses on investments in other securities are caused by fluctuations in market interest rates.  The underlying cash obligations of the securities are guaranteed by the entity underwriting the debt instrument.  It is the belief of the Company that the entity issuing the debt will honor its interest payment schedule, as well as the full debt at maturity.  The securities are purchased by the Company for their economic value.  The decrease in fair value is primarily due to market interest rates and not other factors, and because the Company has no intent to sell and will more than likely not be required to sell before a market price recovery or maturity of the securities, it is the conclusion of the Company that the investments are not considered other-than-temporarily impaired.

The following table presents a reconciliation of credit-related impairment charges on available-for-sale investments recognized in earnings for the three months ended September 30, 2011 (Dollars in Thousands):

Balance at June 30, 2011		$	8,831
Impairment charges recognized during period		286
Balance at September 30, 2011		$	9,117

The following table presents a reconciliation of credit-related impairment charges on available-for-sale investments recognized in earnings for the nine months ended September 30, 2011 (Dollars in Thousands):

Balance at December 31, 2010		$	8,416
Impairment charges recognized during period		701
Balance at September 30, 2011		$	9,117

The following table presents a reconciliation of credit-related impairment charges on available-for-sale investment recognized in earnings for the three months ended September 30, 2010 (Dollars in Thousands):

Balance at June 30, 2010		$	7,461
Impairment charges recognized during period		531
Balance at September 30, 2010		$	7,992

The following table presents a reconciliation of credit-related impairment charges on available-for-sale investment recognized in earnings for the nine months ended September 30, 2010 (Dollars in Thousands):

Balance at December 31, 2009		$	—
Impairment charges recognized during period		7,992
Balance at September 30, 2010		$	7,992

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- Definition

Tabular disclosure of investments in certain debt and equity securities (and certain other trading assets) which include all debt and equity securities (other than those equity securities accounted for under the equity or cost methods of accounting) with readily determinable fair values. Other trading assets include assets that are carried on the balance sheet at fair value and held for trading purposes. A debt security represents a creditor relationship with an enterprise that is in the form of a security. Debt securities include, among other items, US Treasury securities, US government securities, municipal securities, corporate bonds, convertible debt, commercial paper, and all securitized debt instruments. An equity security represents an ownership interest in an enterprise or the right to acquire or dispose of an ownership interest in an enterprise at fixed or determinable prices. Equity securities include, among other things, common stock, certain preferred stock, warrant rights, call options, and put options, but do not include convertible debt. An entity may opt to provide the reader with additional narrative text to better understand the nature of investments in debt and equity securities (and other trading assets).

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