INVESTMENT SECURITIES

Investment securities are summarized below. Note 9 discusses the process to estimate fair value for investment securities.



	September 30, 2013
			Recognized in OCI						Not recognized in OCI
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Carrying value		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Held-to-maturity
Municipal securities	$	558,134	$	—	$	—	$	558,134	$	11,537	$	5,061	$	564,610
Asset-backed securities:
Trust preferred securities – banks and insurance	255,159		—		54,432		200,727		5,879		55,058		151,548
Other	21,061		—		2,173		18,888		900		8,138		11,650
Other debt securities	100		—		—		100		—		—		100
	834,454		—		56,605		777,849		18,316		68,257		727,908
Available-for-sale
U.S. Treasury securities	39,908		136		—		40,044						40,044
U.S. Government agencies and corporations:
Agency securities	440,170		2,120		197		442,093						442,093
Agency guaranteed mortgage-backed securities	308,964		11,619		609		319,974						319,974
Small Business Administration loan-backed securities	1,139,211		27,829		1,614		1,165,426						1,165,426
Municipal securities	64,694		1,509		1,034		65,169						65,169
Asset-backed securities:
Trust preferred securities – banks and insurance	1,521,628		14,391		534,123		1,001,896						1,001,896
Trust preferred securities – real estate investment trusts	39,391		—		19,874		19,517						19,517
Auction rate securities	6,506		135		16		6,625						6,625
Other	18,496		406		2,788		16,114						16,114
	3,578,968		58,145		560,255		3,076,858						3,076,858
Mutual funds and other	262,493		182		5,644		257,031						257,031
	3,841,461		58,327		565,899		3,333,889						3,333,889
Total	$	4,675,915	$	58,327	$	622,504	$	4,111,738					$	4,061,797



	December 31, 2012
			Recognized in OCI						Not recognized in OCI
(In thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Carrying value		Gross unrealized gains		Gross unrealized losses		Estimated fair value
Held-to-maturity
Municipal securities	$	524,738	$	—	$	—	$	524,738	$	12,837	$	709	$	536,866
Asset-backed securities:
Trust preferred securities – banks and insurance	255,647		—		42,964		212,683		114		86,596		126,201
Other	21,858		—		2,470		19,388		709		8,523		11,574
Other debt securities	100		—		—		100		—		—		100
	802,343		—		45,434		756,909		13,660		95,828		674,741
Available-for-sale
U.S. Treasury securities	104,313		211		—		104,524						104,524
U.S. Government agencies and corporations:
Agency securities	108,814		3,959		116		112,657						112,657
Agency guaranteed mortgage-backed securities	406,928		18,598		16		425,510						425,510
Small Business Administration loan-backed securities	1,124,322		29,245		639		1,152,928						1,152,928
Municipal securities	75,344		2,622		1,970		75,996						75,996
Asset-backed securities:
Trust preferred securities – banks and insurance	1,596,156		16,687		663,451		949,392						949,392
Trust preferred securities – real estate investment trusts	40,485		—		24,082		16,403						16,403
Auction rate securities	6,504		79		68		6,515						6,515
Other	25,614		701		6,941		19,374						19,374
	3,488,480		72,102		697,283		2,863,299						2,863,299
Mutual funds and other	228,469		194		652		228,011						228,011
	3,716,949		72,296		697,935		3,091,310						3,091,310
Total	$	4,519,292	$	72,296	$	743,369	$	3,848,219					$	3,766,051

The amortized cost and estimated fair value of investment debt securities are shown subsequently as of September 30, 2013 by expected maturity distribution for structured asset-backed collateralized debt obligations and by contractual maturity distribution for other debt securities. Actual maturities may differ from expected or contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties:



	Held-to-maturity				Available-for-sale
(In thousands)	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value

Due in one year or less	$	66,525	$	66,502	$	466,546	$	441,052
Due after one year through five years	200,748		198,494		1,112,538		1,050,208
Due after five years through ten years	213,234		179,794		640,232		597,543
Due after ten years	353,947		283,118		1,359,652		988,055
	$	834,454	$	727,908	$	3,578,968	$	3,076,858

The following is a summary of the amount of gross unrealized losses for investment securities and the estimated fair value by length of time the securities have been in an unrealized loss position:

	September 30, 2013
	Less than 12 months				12 months or more				Total
(In thousands)	Gross unrealized losses		Estimated fair value		Gross unrealized losses		Estimated fair value		Gross unrealized losses		Estimated fair value
Held-to-maturity
Municipal securities	$	4,247	$	91,497	$	814	$	10,915	$	5,061	$	102,412
Asset-backed securities:
Trust preferred securities – banks and insurance	—		—		109,490		151,350		109,490		151,350
Other	—		—		10,311		11,291		10,311		11,291
	4,247		91,497		120,615		173,556		124,862		265,053
Available-for-sale
U.S. Government agencies and corporations:
Agency securities	119		24,255		78		6,495		197		30,750
Agency guaranteed mortgage-backed securities	605		41,847		4		609		609		42,456
Small Business Administration loan-backed securities	784		76,868		830		39,855		1,614		116,723
Municipal securities	20		2,871		1,014		8,507		1,034		11,378
Asset-backed securities:
Trust preferred securities – banks and insurance	1,138		54,760		532,985		840,551		534,123		895,311
Trust preferred securities – real estate investment trusts	—		—		19,874		19,518		19,874		19,518
Auction rate securities	—		—		16		896		16		896
Other	—		—		2,788		13,514		2,788		13,514
	2,666		200,601		557,589		929,945		560,255		1,130,546
Mutual funds and other	5,644		124,448		—		—		5,644		124,448
	8,310		325,049		557,589		929,945		565,899		1,254,994
Total	$	12,557	$	416,546	$	678,204	$	1,103,501	$	690,761	$	1,520,047



	December 31, 2012
	Less than 12 months				12 months or more				Total
(In thousands)	Gross unrealized losses		Estimated fair value		Gross unrealized losses		Estimated fair value		Gross unrealized losses		Estimated fair value


Held-to-maturity
Municipal securities	$	630	$	42,613	$	79	$	5,910	$	709	$	48,523
Asset-backed securities:
Trust preferred securities – banks and insurance	—		—		129,560		126,019		129,560		126,019
Other	—		—		10,993		10,904		10,993		10,904
	630		42,613		140,632		142,833		141,262		185,446
Available-for-sale
U.S. Government agencies and corporations:
Agency securities	35		18,633		81		6,916		116		25,549
Agency guaranteed mortgage-backed securities	10		6,032		6		629		16		6,661
Small Business Administration loan-backed securities	91		15,199		548		69,011		639		84,210
Municipal securities	61		4,898		1,909		11,768		1,970		16,666
Asset-backed securities:
Trust preferred securities – banks and insurance	—		—		663,451		765,421		663,451		765,421
Trust preferred securities – real estate investment trusts	—		—		24,082		16,403		24,082		16,403
Auction rate securities	—		—		68		2,459		68		2,459
Other	—		—		6,941		15,234		6,941		15,234
	197		44,762		697,086		887,841		697,283		932,603
Mutual funds and other	652		112,324		—		—		652		112,324
	849		157,086		697,086		887,841		697,935		1,044,927
Total	$	1,479	$	199,699	$	837,718	$	1,030,674	$	839,197	$	1,230,373

At September 30, 2013 and December 31, 2012, respectively, 207 and 84 held-to-maturity (“HTM”) and 258 and 256 available -for-sale (“AFS”) investment securities were in an unrealized loss position.

Other-Than-Temporary Impairment

We conduct a formal review of investment securities on a quarterly basis for the presence of other-than-temporary impairment (“OTTI”). We assess whether OTTI is present when the fair value of a debt security is less than its amortized cost basis at the balance sheet date (the vast majority of the investment portfolio are debt securities). Under these circumstances, OTTI is considered to have occurred if (1) we intend to sell the security; (2) it is “more likely than not” we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis.

Credit-related OTTI is recognized in earnings while noncredit-related OTTI on securities not expected to be sold is recognized in other comprehensive income (“OCI”). Noncredit-related OTTI is based on other factors, including illiquidity. Presentation of OTTI is made in the statement of income on a gross basis with an offset for the amount of OTTI recognized in OCI. For securities classified as HTM, the amount of noncredit-related OTTI recognized in OCI is accreted using the effective interest rate method to the credit-adjusted expected cash flow amounts of the securities over future periods.

Our 2012 Annual Report on Form 10-K describes in more detail our OTTI evaluation process. The following summarizes the conclusions from our OTTI evaluation for those security types that have significant gross unrealized losses at September 30, 2013:

OTTI – Municipal Securities

The HTM securities are purchased directly from municipalities and are generally not rated by a credit rating agency. Most of the AFS securities are rated as investment grade by various credit rating agencies. Both the HTM and AFS securities are at fixed and variable rates with maturities from one to 25 years. We perform credit quality reviews on these securities at each reporting period. Because the decline in fair value is not attributable to credit quality, no OTTI for these securities was recorded for the three and nine months ended September 30, 2013.

OTTI – Asset-Backed Securities

Trust preferred securities – banks and insurance: These collateralized debt obligation (“CDO”) securities are interests in variable rate pools of trust preferred securities issued by trusts related to bank holding companies and insurance companies (“collateral issuers”). They are rated by one or more Nationally Recognized Statistical Rating Organizations (“NRSROs”), which are rating agencies registered with the Securities and Exchange Commission (“SEC”). The more junior securities were purchased generally at par, while the senior securities were purchased from Lockhart Funding LLC (“Lockhart”) at their carrying values (generally par) and then adjusted to their lower fair values. The primary drivers that have given rise to the unrealized losses on CDOs with bank and insurance collateral are listed below:

Market yield requirements for bank CDO securities remain high. The financial crisis and economic downturn resulted in significant utilization of both the unique five-year deferral option, which each collateral issuer maintains during the life of the CDO, and the payment in kind feature described subsequently. The resulting increase in the rate of return demanded by the market for trust preferred CDOs remains dramatically higher than the contractual interest rates. Virtually all structured asset-backed security (“ABS”) fair values, including bank CDOs, deteriorated significantly during the recent financial crisis, generally reaching a low in mid-2009. Prices for some structured products have since rebounded as the crucial unknowns related to value became resolved and as trading increased in these securities. Unlike these other structured products, CDO tranches backed by bank trust preferred securities continue to be characterized by considerable uncertainty surrounding collateral behavior, specifically including, but not limited to, prepayments; the future number, size and timing of bank failures; holding company bankruptcies; and allowed deferrals and subsequent resumption of payment or default due to nonpayment of contractual interest.

Structural features of the collateral make these CDO tranches difficult to model. The first feature unique to bank CDOs is the interest deferral feature previously noted. Throughout the financial crisis starting in 2008, certain banks within our CDO pools have exercised this prerogative. The extent to which these deferrals are likely to either transition to default or, alternatively, come current prior to the five-year deadline is extremely difficult for market participants to assess. Our CDO pools include an issuer that first exercised this deferral option during the second quarter of 2008 and failed to come current within the allowable 20 quarter deferral period causing default. At September 30, 2013, 107 banks underlying our CDO tranches had come current after a period of deferral, while 158 were deferring, but remained within the allowed deferral period.

A second structural feature that is difficult to model is the payment in kind (“PIK”) feature, which provides that upon reaching certain levels of collateral default or deferral, certain junior CDO tranches will not receive current interest but will instead have the interest amount that is unpaid capitalized or deferred. The cash flow that would otherwise be paid to the junior CDO securities is instead used to pay down the principal balance of the most senior CDO securities. The delay in payment caused by PIKing results in lower security fair values even if PIKing is projected to be fully cured. This feature is difficult to model and assess. It increases the risk premium the market applies to these securities.

Ratings are generally below investment grade for even some of the most senior tranches. Ratings on a number of CDO tranches vary significantly among rating agencies. The presence of a below-investment-grade rating by even a single rating agency will severely limit the pool of buyers, which causes greater illiquidity and therefore most likely a higher implicit discount rate/lower price with regard to that CDO tranche.


4)	There is a lack of consistent disclosure by each CDO’s trustee of the identity of collateral issuers; in addition, complex structures make projecting tranche return profiles difficult for nonspecialists in the product.


5)	At purchase, the expectation of cash flow variability was limited. As a result of the crisis, we have seen extreme variability of collateral performance both compared to expectations and between different pools.

Our ongoing review of these securities determined that OTTI should be recorded for the three and nine months ended September 30, 2013.

Trust preferred securities – real estate investment trusts (“REITs”): These CDO securities are variable rate pools of trust preferred securities primarily related to REITs, and are rated by one or more NRSROs. They were purchased generally at par. Unrealized losses were caused mainly by severe deterioration in mortgage REITs and homebuilder credit in addition to the same factors previously discussed for banks and insurance CDOs. Based on our review, OTTI for these securities was recorded for the three and nine months ended September 30, 2013.

Other asset-backed securities: Most of these CDO securities were purchased in 2009 from Lockhart at their carrying values and then adjusted to fair value. Certain of these CDOs consist of ABS CDOs (also known as diversified structured finance CDOs). Unrealized losses since acquisition were caused mainly by deterioration in collateral quality and widening of credit spreads for asset backed securities. Based on our review, OTTI for one of these securities was recorded for the three and nine months ended September 30, 2013.

OTTI – U.S. Government Agencies and Corporations

Small Business Administration (“SBA”) Loan-Backed Securities: These securities were generally purchased at premiums with maturities from five to 25 years and have principal cash flows guaranteed by the SBA. Because the decline in fair value is not attributable to credit quality, no OTTI for these securities was recorded for the three and nine months ended September 30, 2013.

OTTI – Mutual Funds and Other

A substantial portion of these securities is included in a mutual fund that consists primarily of fixed rate residential and agriculture mortgage-backed securities issued by the Government National Mortgage Association (“GNMA”). Contractual cash flows in the pool of mortgage loans are backed by the U.S. Government. Because the decline in fair value is not attributable to credit quality, no OTTI for these securities was recorded for the three and nine months ended September 30, 2013.

The following is a tabular rollforward of the total amount of credit-related OTTI:



(In thousands)	Three Months Ended September 30, 2013									Nine Months Ended September 30, 2013
(In thousands)	HTM			AFS			Total			HTM			AFS			Total
Balance of credit-related OTTI at beginning of period	$	(13,952	)	$	(406,577	)	$	(420,529	)	$	(13,549	)	$	(394,494	)	$	(408,043	)
Additions recognized in earnings during the period:
Credit-related OTTI on securities not previously impaired	—			(168		)	(168		)	(403		)	(168		)	(571		)
Additional credit-related OTTI on securities previously impaired	—			(8,899		)	(8,899		)	—			(22,830		)	(22,830		)
Subtotal of amounts recognized in earnings	—			(9,067		)	(9,067		)	(403		)	(22,998		)	(23,401		)
Reductions for securities sold or paid off during the period	—			—			—			—			1,848			1,848
Balance of credit-related OTTI at end of period	$	(13,952	)	$	(415,644	)	$	(429,596	)	$	(13,952	)	$	(415,644	)	$	(429,596	)



(In thousands)	Three Months Ended September 30, 2012									Nine Months Ended September 30, 2012
(In thousands)	HTM			AFS			Total			HTM			AFS			Total
Balance of credit-related OTTI at beginning of period	$	(6,467	)	$	(315,183	)	$	(321,650	)	$	(6,126	)	$	(314,860	)	$	(320,986	)
Additions recognized in earnings during the period:
Credit-related OTTI on securities not previously impaired	—			—			—			(341		)	—			(341		)
Additional credit-related OTTI on securities previously impaired	(657		)	(2,079		)	(2,736		)	(657		)	(19,255		)	(19,912		)
Subtotal of amounts recognized in earnings	(657		)	(2,079		)	(2,736		)	(998		)	(19,255		)	(20,253		)
Reductions for securities sold or paid off during the period	—			—			—			—			16,853			16,853
Balance of credit-related OTTI at end of period	$	(7,124	)	$	(317,262	)	$	(324,386	)	$	(7,124	)	$	(317,262	)	$	(324,386	)

To determine the credit component of OTTI for all security types, we utilize projected cash flows as the best estimate of fair value. These cash flows are credit adjusted using, among other things, assumptions for default probability assigned to each portion of performing and deferring collateral. The credit-adjusted cash flows are discounted at a security-specific coupon rate to identify any OTTI, and then at a market rate for valuation purposes.

For those securities with credit-related OTTI recognized in the statement of income, the amounts of pretax noncredit-related OTTI recognized in OCI were as follows:



(In thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2013		2012		2013		2012

HTM	$	—	$	—	$	16,114	$	16,718
AFS	1,403		1,140		7,358		9,204
	$	1,403	$	1,140	$	23,472	$	25,922

The following summarizes gains and losses, including OTTI, that were recognized in the statement of income:



	Three Months Ended										Nine Months Ended
	September 30, 2013					September 30, 2012					September 30, 2013					September 30, 2012
(In thousands)	Gross gains		Gross losses			Gross gains		Gross losses			Gross gains		Gross losses			Gross gains		Gross losses
(In thousands)	Gross gains		Gross losses			Gross gains		Gross losses			Gross gains		Gross losses			Gross gains		Gross losses
Investment securities:
Held-to-maturity	$	32	$	—		$	22	$	657		$	63	$	403		$	120	$	998
Available-for-sale	1,551		9,070			3,026		2,081			7,989		27,324			14,955		25,045
Other noninterest-bearing investments:
Nonmarketable equity securities	4,802		1,637			3,230		547			9,868		1,662			22,951		11,016
	6,385		10,707			6,278		3,285			17,920		29,389			38,026		37,059
Net gains (losses)			$	(4,322	)			$	2,993				$	(11,469	)			$	967

Statement of income information:
Net impairment losses on investment securities			$	(9,067	)			$	(2,736	)			$	(23,401	)			$	(20,253	)
Equity securities gains, net			3,165					2,683					8,206					11,935
Fixed income securities gains, net			1,580					3,046					3,726					9,285
Net gains (losses)			$	(4,322	)			$	2,993				$	(11,469	)			$	967

Gains and losses on the sale of securities are recognized using the specific identification method and recorded in noninterest income.

During the three and nine months ended September 30, nontaxable interest income on securities was $3.4 million and $10.1 million in 2013 and $4.2 million and $13.7 million in 2012.

Securities with a carrying value of $1.5 billion at September 30, 2013 and December 31, 2012 were pledged to secure public and trust deposits, advances, and for other purposes as required by law. Securities are also pledged as collateral for security repurchase agreements.