

NOTE C – INVESTMENT SECURITIES

The following tables present the amortized cost and estimated fair values of investment securities, which were all classified as available for sale, as of December 31:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
2014
Equity securities	$	33,469	$	14,167	$	(13	)	$	47,623
U.S. Government securities	200		—		—			200
U.S. Government sponsored agency securities	209		5		—			214
State and municipal securities	238,250		7,231		(266		)	245,215
Corporate debt securities	99,016		5,126		(6,108		)	98,034
Collateralized mortgage obligations	917,395		5,705		(20,787		)	902,313
Mortgage-backed securities	914,797		16,978		(2,944		)	928,831
Auction rate securities	108,751		—		(7,810		)	100,941
	$	2,312,087	$	49,212	$	(37,928	)	$	2,323,371

2013
Equity securities	$	33,922	$	12,355	$	(76	)	$	46,201
U.S. Government securities	525		—		—			525
U.S. Government sponsored agency securities	720		7		(1		)	726
State and municipal securities	281,810		6,483		(3,444		)	284,849
Corporate debt securities	100,468		5,685		(7,404		)	98,749
Collateralized mortgage obligations	1,069,138		8,036		(44,776		)	1,032,398
Mortgage-backed securities	949,328		13,881		(17,497		)	945,712
Auction rate securities	172,299		234		(13,259		)	159,274
	$	2,608,210	$	46,681	$	(86,457	)	$	2,568,434

Securities carried at $1.7 billion as of December 31, 2014 and 2013 were pledged as collateral to secure public and trust deposits and customer repurchase agreements.

Equity securities include common stocks of financial institutions (estimated fair value of $41.8 million at December 31, 2014 and $40.6 million at December 31, 2013) and other equity investments (estimated fair value of $5.8 million at December 31, 2014 and $5.6 million at December 31, 2013).

As of December 31, 2014, the financial institutions stock portfolio had a cost basis of $27.7 million and an estimated fair value of $41.8 million, including an investment in a single financial institution with a cost basis of $20.0 million and an estimated fair value of $30.4 million. This investment accounted for 72.7% of the estimated fair value of the Corporation's investments in the common stocks of publicly traded financial institutions. No other investment in the financial institutions stock portfolio exceeded 5% of the portfolio's estimated fair value.

The amortized cost and estimated fair values of debt securities as of December 31, 2014, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Amortized Cost		Estimated Fair Value
	(in thousands)

Due in one year or less	$	16,698	$	16,851
Due from one year to five years	76,704		80,142
Due from five years to ten years	170,783		175,687
Due after ten years	182,241		171,924
	446,426		444,604
Collateralized mortgage obligations	917,395		902,313
Mortgage-backed securities	914,797		928,831
	$	2,278,618	$	2,275,748

The following table presents information related to gross gains and losses on the sales of equity and debt securities, and losses recognized for other-than-temporary impairment of investments:



	Gross Realized Gains		Gross Realized Losses			Other- than- temporary Impairment Losses			Net Gains
	(in thousands)
2014:
Equity securities	$	335	$	—		$	(12	)	$	323
Debt securities	2,058		(322		)	(18		)	1,718
Total	$	2,393	$	(322	)	$	(30	)	$	2,041
2013:
Equity securities	$	4,391	$	(28	)	$	(27	)	$	4,336
Debt securities	3,787		(22		)	(97		)	3,668
Total	$	8,178	$	(50	)	$	(124	)	$	8,004
2012:
Equity securities	$	2,620	$	—		$	(356	)	$	2,264
Debt securities	1,215		—			(453		)	762
Total	$	3,835	$	—		$	(809	)	$	3,026

The following table presents a summary of other-than-temporary impairment charges recorded as decreases to investment securities gains on the consolidated statements of income, by investment security type:



	2014		2013		2012
	(in thousands)
Equity securities - financial institution stocks	$	12	$	27	$	356
Pooled trust preferred securities	18		97		19
Auction rate securities	—		—		434
Total debt securities	18		97		453
Total other-than-temporary impairment charges	$	30	$	124	$	809

Other-than-temporary impairment charges related to investments in common stocks of financial institutions were due to the severity and duration of the declines in fair values of certain financial institution stocks, in conjunction with management’s assessment of the near-term prospects of each specific financial institution. The credit related other-than-temporary impairment charges for debt securities were determined based on expected cash flows models.

The following table presents a summary of the cumulative credit related other-than-temporary impairment charges, recognized as components of earnings, for debt securities held by the Corporation at December 31:



	2014			2013			2012
	(in thousands)
Balance of cumulative credit losses on debt securities, beginning of year	$	(20,691	)	$	(23,079	)	$	(22,781	)
Additions for credit losses recorded which were not previously recognized as components of earnings	(18		)	(97		)	(453		)
Reductions for securities sold during the period	4,460			2,468			—
Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security	7			17			155
Balance of cumulative credit losses on debt securities, end of year	$	(16,242	)	$	(20,691	)	$	(23,079	)

The following table presents the gross unrealized losses and estimated fair values of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2014:



	Less Than 12 months					12 Months or Longer					Total
	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses
	(in thousands)
State and municipal securities	3,282		(4		)	19,640		(262		)	22,922		(266		)
Corporate debt securities	4,952		(17		)	36,849		(6,091		)	41,801		(6,108		)
Collateralized mortgage obligations	46,121		(179		)	592,119		(20,608		)	638,240		(20,787		)
Mortgage-backed securities	36,791		(40		)	235,368		(2,904		)	272,159		(2,944		)
Auction rate securities	—		—			100,941		(7,810		)	100,941		(7,810		)
Total debt securities	91,146		(240		)	984,917		(37,675		)	1,076,063		(37,915		)
Equity securities	5		(1		)	77		(12		)	82		(13		)
	$	91,151	$	(241	)	$	984,994	$	(37,687	)	$	1,076,145	$	(37,928	)

The Corporation’s collateralized mortgage obligations and mortgage-backed securities have contractual terms that generally do not permit the issuer to settle the securities at a price less than the amortized cost of the investment. Because the decline in market value of these securities is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, the Corporation did not consider these investments to be other-than-temporarily impaired as of December 31, 2014.

The unrealized holding losses on student loan auction rate certificates (ARCs) are attributable to liquidity issues resulting from the failure of periodic auctions. The Corporation had previously purchased ARCs for investment management and trust customers as short-term investments with fair values that could be derived based on periodic auctions under normal market conditions. During 2008 and 2009, the Corporation purchased ARCs from these customers due to the failure of these periodic auctions, which made these previously short-term investments illiquid.

As of December 31, 2014, all of the ARCs were rated above investment grade, with approximately $5.4 million, or 5%, "AAA" rated and $95.5 million, or 95%, "AA" rated. All of the loans underlying the ARCs have principal payments which are guaranteed by the federal government.

During 2014, ARCs with a total book value of $51.2 million were redeemed at par and ARCs with a total book value of $11.9 million were sold with no gain or loss upon sale. As of December 31, 2014, all ARCs were current and making scheduled interest payments. Based on management’s evaluations, ARCs with a fair value of $100.9 million were not subject to any other-than-temporary impairment charges as of December 31, 2014. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.

For its investments in equity securities, particularly its investments in common stocks of financial institutions, management evaluates the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Corporation’s ability and intent to hold those investments for a reasonable period of time sufficient for a recovery of fair value, the Corporation does not consider those investments with unrealized holding losses as of December 31, 2014 to be other-than temporarily impaired.

The majority of the Corporation’s available for sale corporate debt securities are issued by financial institutions. The following table presents the amortized cost and estimated fair values of corporate debt securities as of December 31:



	2014				2013
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in thousands)
Single-issuer trust preferred securities	$	47,569	$	42,016	$	47,481	$	40,531
Subordinated debt	47,530		50,023		47,405		50,327
Pooled trust preferred securities	2,010		4,088		2,997		5,306
Corporate debt securities issued by financial institutions	97,109		96,127		97,883		96,164
Other corporate debt securities	1,907		1,907		2,585		2,585
Available for sale corporate debt securities	$	99,016	$	98,034	$	100,468	$	98,749

The Corporation’s investments in single-issuer trust preferred securities had an unrealized loss of $5.6 million as of December 31, 2014. The Corporation did not record any other-than-temporary impairment charges for single-issuer trust preferred securities in 2014, 2013 or 2012. Seven of the Corporation's 20 single-issuer trust preferred securities held were rated below investment grade by at least one ratings agency, with an amortized cost of $14.5 million and an estimated fair value of $12.4 million as of December 31, 2014. All of the single-issuer trust preferred securities rated below investment grade were rated "BB" or "Ba." Three single-issuer trust preferred securities with an amortized cost of $4.7 million and an estimated fair value of $3.8 million as of December 31, 2014 were not rated by any ratings agency.

During the year ended December 31, 2014, the Corporation sold three pooled trust preferred securities with a total amortized cost of $728,000, for a gain of $1.7 million. As of December 31, 2014, all five of the Corporation's pooled trust preferred securities, with an amortized cost of $2.0 million and an estimated fair value of $4.1 million, were rated below investment grade by at least one ratings agency, with ratings ranging from "C" to "Ca". The class of securities held by the Corporation was below the most senior tranche, with the Corporation’s interests being subordinate to other investors in the pool. The Corporation determines the fair value of pooled trust preferred securities based on quotes provided by third-party brokers.

The amortized cost of pooled trust preferred securities is the purchase price of the securities, net of cumulative credit related other-than-temporary impairment charges, determined using an expected cash flow model. The most significant input to the expected cash flows model is the expected payment deferral rate for each pooled trust preferred security. The Corporation evaluates the financial metrics, such as capital ratios and non-performing asset ratios, of the individual financial institution issuers that comprise each pooled trust preferred security to estimate its expected deferral rate.

Based on management's evaluations, corporate debt securities with a fair value of $98.0 million were not subject to any additional other-than-temporary impairment charges as of December 31, 2014. The Corporation does not have the intent to sell and does not believe it will more likely than not be required to sell any of these securities prior to a recovery of their fair value to amortized cost, which may be at maturity.

As mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), in December 2013, five regulatory bodies issued final rulings (the Final Rules) implementing certain prohibitions and restrictions on the ability of a banking entity and non-bank financial company supervised by the Federal Reserve Board to engage in proprietary trading and have certain ownership interests in, or relationships with, a "covered fund" (the so-called "Volcker Rule"). The Final Rules generally treat as a covered fund any entity that would be an investment company under the Investment Company Act of 1940 (1940 Act) but for the application of the exemptions from SEC registration set forth in Section 3(c)(1) (fewer than 100 beneficial owners) or Section 3(c)(7) (qualified purchasers) of the 1940 Act. The Final Rules also require regulated entities to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the Volcker Rule, which must include making regular reports about those activities to regulators. Although the Final Rules provide some tiering of compliance and reporting obligations based on size, the fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including the Corporation. Banking entities have until July 21, 2015 to conform their activities and investments to the requirements of the Final Rules. The Corporation does not engage in proprietary trading or in any other activities prohibited by the Final Rules. Based on the Corporation's evaluation of its investments, none fall within the definition of a "covered fund" and would need to be disposed of by July 21, 2015. Therefore, it does not currently expect that the Final Rules will have a material effect on its business, financial condition or results of operations.