Investment Securities

Investment securities, at fair value, consisted of the following at December 31, 2012 and 2011.



(In thousands)	2012		2011
Available for sale:
U.S. government and federal agency obligations	$	438,759	$	364,665
Government-sponsored enterprise obligations	471,574		315,698
State and municipal obligations	1,615,707		1,245,284
Agency mortgage-backed securities	3,380,955		4,106,059
Non-agency mortgage-backed securities	237,011		316,902
Asset-backed securities	3,167,394		2,693,143
Other debt securities	177,752		141,260
Equity securities	33,096		41,691
Total available for sale	9,522,248		9,224,702
Trading	28,837		17,853
Non-marketable	118,650		115,832
Total investment securities	$	9,669,735	$	9,358,387

Most of the Company’s investment securities are classified as available for sale, and this portfolio is discussed in more detail below. Securities which are classified as non-marketable include Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock held for borrowing and regulatory purposes, which totaled $45.4 million and $45.3 million at December 31, 2012 and December 31, 2011, respectively. Investment in Federal Reserve Bank stock is based on the capital structure of the investing bank, and investment in FHLB stock is mainly tied to the level of borrowings from the FHLB. These holdings are carried at cost. Non-marketable securities also include private equity investments, which amounted to $73.2 million and $70.5 million at December 31, 2012 and December 31, 2011, respectively. In the absence of readily ascertainable market values, these securities are carried at estimated fair value.

A summary of the available for sale investment securities by maturity groupings as of December 31, 2012 is shown in the following table. The weighted average yield for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of each security at December 31, 2012. Yields on tax exempt securities have not been adjusted for tax exempt status. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities which have no guarantee, but are collateralized by residential mortgages. Also included are certain other asset-backed securities, primarily collateralized by credit cards, automobiles and commercial loans. The Company does not have exposure to subprime originated mortgage-backed or collateralized debt obligation instruments.



(Dollars in thousands)	Amortized Cost		Fair Value		Weighted Average Yield
U.S. government and federal agency obligations:
After 1 but within 5 years	$	219,192	$	241,964	1.70	*%
After 5 but within 10 years	107,708		125,331		1.30*
After 10 years	73,071		71,464		(.30)*
Total U.S. government and federal agency obligations	399,971		438,759		1.23*
Government-sponsored enterprise obligations:
Within 1 year	7,473		7,543		1.13
After 1 but within 5 years	100,794		104,256		1.79
After 5 but within 10 years	171,805		171,861		1.59
After 10 years	186,991		187,914		1.90
Total government-sponsored enterprise obligations	467,063		471,574		1.75
State and municipal obligations:
Within 1 year	89,091		89,899		2.23
After 1 but within 5 years	681,954		708,271		2.71
After 5 but within 10 years	537,897		550,026		2.37
After 10 years	276,984		267,511		2.18
Total state and municipal obligations	1,585,926		1,615,707		2.47
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,248,007		3,380,955		2.82
Non-agency mortgage-backed securities	224,223		237,011		6.08
Asset-backed securities	3,152,913		3,167,394		.94
Total mortgage and asset-backed securities	6,625,143		6,785,360		2.04
Other debt securities:
Within 1 year	45,818		47,014
After 1 but within 5 years	41,499		43,121
After 5 but within 10 years	78,468		78,603
After 10 years	8,942		9,014
Total other debt securities	174,727		177,752
Equity securities	5,695		33,096
Total available for sale investment securities	$	9,258,525	$	9,522,248

* Rate does not reflect inflation adjustment on inflation-protected securities

Investments in U.S. government securities are comprised mainly of U.S. Treasury inflation-protected securities, which totaled $438.6 million, at fair value, at December 31, 2012. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. At maturity, the principal paid is the greater of an inflation-adjusted principal or the original principal. Included in state and municipal obligations are $126.4 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Interest on these bonds is currently being paid at the maximum failed auction rates. Equity securities are primarily comprised of investments in common stock held by the Parent, which totaled $30.7 million, at fair value, at December 31, 2012.

For securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in accumulated other comprehensive income, by security type.



(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2012
U.S. government and federal agency obligations	$	399,971	$	40,395	$	(1,607	)	$	438,759
Government-sponsored enterprise obligations	467,063		5,188		(677		)	471,574
State and municipal obligations	1,585,926		46,076		(16,295		)	1,615,707
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,248,007		132,953		(5		)	3,380,955
Non-agency mortgage-backed securities	224,223		12,906		(118		)	237,011
Asset-backed securities	3,152,913		15,848		(1,367		)	3,167,394
Total mortgage and asset-backed securities	6,625,143		161,707		(1,490		)	6,785,360
Other debt securities	174,727		3,127		(102		)	177,752
Equity securities	5,695		27,401		—			33,096
Total	$	9,258,525	$	283,894	$	(20,171	)	$	9,522,248
December 31, 2011
U.S. government and federal agency obligations	$	328,530	$	36,135	$	—		$	364,665
Government-sponsored enterprise obligations	311,529		4,169		—			315,698
State and municipal obligations	1,220,840		35,663		(11,219		)	1,245,284
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,989,464		117,088		(493		)	4,106,059
Non-agency mortgage-backed securities	315,752		8,962		(7,812		)	316,902
Asset-backed securities	2,692,436		7,083		(6,376		)	2,693,143
Total mortgage and asset-backed securities	6,997,652		133,133		(14,681		)	7,116,104
Other debt securities	135,190		6,070		—			141,260
Equity securities	18,354		23,337		—			41,691
Total	$	9,012,095	$	238,507	$	(25,900	)	$	9,224,702

The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3 (Moody's) or A- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At December 31, 2012, the fair value of securities on this watch list was $220.7 million compared to $220.9 million at December 31, 2011.

As of December 31, 2012, the Company had recorded OTTI on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of $101.7 million. The credit-related portion of the impairment initially recorded on these securities totaled $11.6 million and was recorded in earnings. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities included the following:



Significant Inputs	Range
Prepayment CPR	0%	-	25%
Projected cumulative default	17%	-	58%
Credit support	0%	-	16%
Loss severity	33%	-	70%

The following table shows changes in the credit losses recorded in current earnings, for which a portion of an OTTI was recognized in other comprehensive income.



(In thousands)	2012			2011			2010
Balance at January 1	$	9,931		$	7,542		$	2,473
Credit losses on debt securities for which impairment was not previously recognized	—			170			353
Credit losses on debt securities for which impairment was previously recognized	1,490			2,368			4,716
Increase in expected cash flows that are recognized over remaining life of security	(115		)	(149		)	—
Balance at December 31	$	11,306		$	9,931		$	7,542

Securities with unrealized losses recorded in accumulated other comprehensive income are shown in the table below, along with the length of the impairment period. The table includes securities for which a portion of an OTTI has been recognized in other comprehensive income.



	Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2012
U.S. government and federal agency obligations	$	71,464	$	1,607	$	—	$	—	$	71,464	$	1,607
Government-sponsored enterprise obligations	102,082		677		—		—		102,082		677
State and municipal obligations	173,600		2,107		80,530		14,188		254,130		16,295
Mortgage and asset-backed securities:
Agency mortgage-backed securities	5,874		5		—		—		5,874		5
Non-agency mortgage-backed securities	—		—		12,609		118		12,609		118
Asset-backed securities	338,007		976		78,684		391		416,691		1,367
Total mortgage and asset-backed securities	343,881		981		91,293		509		435,174		1,490
Other debt securities	39,032		102		—		—		39,032		102
Total	$	730,059	$	5,474	$	171,823	$	14,697	$	901,882	$	20,171
December 31, 2011
State and municipal obligations	$	65,962	$	712	$	110,807	$	10,507	$	176,769	$	11,219
Mortgage and asset-backed securities:
Agency mortgage-backed securities	72,019		493		—		—		72,019		493
Non-agency mortgage-backed securities	23,672		784		118,972		7,028		142,644		7,812
Asset-backed securities	1,236,526		4,982		87,224		1,394		1,323,750		6,376
Total mortgage and asset-backed securities	1,332,217		6,259		206,196		8,422		1,538,413		14,681
Total	$	1,398,179	$	6,971	$	317,003	$	18,929	$	1,715,182	$	25,900

The total available for sale portfolio consisted of approximately 1,700 individual securities at December 31, 2012. The portfolio included 144 securities, having an aggregate fair value of $901.9 million, that were in a loss position at December 31, 2012. Securities in a loss position for 12 months or longer included those with temporary impairment totaling $166.3 million, or 1.7% of the total portfolio value, and other securities identified as other-than-temporarily impaired totaling $5.5 million.

The Company’s holdings of state and municipal obligations included gross unrealized losses of $16.3 million at December 31, 2012. Of these losses, $14.2 million related to auction rate securities, which are discussed above, and $2.1 million related to other state and municipal obligations. This portfolio, excluding auction rate securities, totaled $1.5 billion at fair value, or 15.6% of total available for sale securities. The portfolio is diversified in order to reduce risk, and information about the top five largest holdings, by state and economic sector, is shown in the table below.



	% of Portfolio		Average Life (in years)	Average Rating (Moody’s)
At December 31, 2012
Texas	9.9	%	5.8	Aa1
Florida	9.4		5.1	Aa2
Ohio	6.0		5.8	Aa2
Washington	5.7		5.3	Aa2
New York	5.2		7.2	Aa2
General obligation	31.7	%	5.2	Aa2
Housing	18.2		7.2	Aa1
Lease	15.4		5.1	Aa2
Transportation	13.3		4.8	Aa3
Limited tax	5.0		5.9	Aa1

The credit ratings (Moody’s rating or equivalent) at December 31, 2012 in the state and municipal bond portfolio (excluding auction rate securities) are shown in the following table. The average credit quality of the portfolio is Aa2 as rated by Moody’s.



	% of Portfolio
Aaa	11.5	%
Aa	70.0
A	16.1
Baa	.7
Not rated	1.7
	100.0	%

The following table presents proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.



(In thousands)	2012			2011			2010
Proceeds from sales of available for sale securities	$	5,231		$	11,202		$	78,448
Proceeds from sales of non-marketable securities	11,644			8,631			192
Total proceeds	$	16,875		$	19,833		$	78,640
Available for sale:
Gains realized on sales	$	358		$	177		$	3,639
Losses realized on sales	—			—			(151		)
Other-than-temporary impairment recognized on debt securities	(1,490		)	(2,537		)	(5,069		)
Non-marketable:
Gains realized on sales	1,655			2,388			52
Losses realized on sales	(200		)	—			—
Fair value adjustments, net	4,505			10,784			(256		)
Investment securities gains (losses), net	$	4,828		$	10,812		$	(1,785	)

Investment securities totaling $4.3 billion in fair value were pledged at both December 31, 2012 and 2011 to secure public deposits, securities sold under repurchase agreements, trust funds, and borrowings at the Federal Reserve Bank. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $736.2 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeds 10% of stockholders’ equity.

During 2012, the Company entered into several agreements commonly known as collateral swaps. These agreements involve the exchange of collateral under simultaneous repurchase and resell agreements with the same financial institution counterparty. These repurchase and resell agreements have the same principal amounts, inception dates, and maturity dates and have been offset against each other in the balance sheet, as permitted under the netting provisions of ASC 210-20-45. At December 31, 2012, the Company had posted collateral consisting of $314.0 million in agency mortgage-backed securities and accepted $345.5 million in investment grade asset-backed, commercial mortgage-backed, and corporate bonds on collateral swaps of $300.0 million. The agreements mature in 2013 through 2015, and the Company will earn an average interest rate of approximately 86 basis points during their term.