Investment Securities

6 Months Ended

Jun. 30, 2011

Note 3 -- Investment Securities

The amortized cost, gross unrealized gains and losses and estimated fair values for available-for-sale and held-to-maturity securities by major security type at June 30, 2011 and December 31, 2010 were as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
June 30, 2011
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations & agencies	$	175,817	$	1,761	$	(22	)	$	177,556
Obligations of states and political subdivisions		26,211		956		(53	)		27,114
Mortgage-backed securities: GSE residential		204,784		6,090		(28	)		210,846
Trust preferred securities		6,349		-		(5,428	)		921
Other securities		2,035		1		(2	)		2,034
Total available-for-sale	$	415,196	$	8,808	$	(5,533	)	$	418,471
Held-to-maturity:
Obligations of states and political subdivisions	$	50	$	1	$	-		$	51

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
December 31, 2010
Available-for-sale:
U.S. Treasury securities and obligations
of U.S. government corporations & agencies	$	152,086	$	1,319	$	(1,024	)	$	152,381
Obligations of states and political subdivisions		26,549		591		(226	)		26,914
Mortgage-backed securities: GSE residential		158,936		3,477		(1,482	)		160,931
Trust preferred securities		6,595		-		(6,014	)		581
Other securities		2,035		-		(26	)		2,009
Total available-for-sale	$	346,201	$	5,387	$	(8,772	)	$	342,816
Held-to-maturity:
Obligations of states and political subdivisions	$	50	$	3	$	-		$	53

The trust preferred securities are four trust preferred pooled securities issued by First Tennessee Financial (“FTN”). The unrealized losses of these securities, which have maturities ranging from four years to twenty-nine years, are primarily due to their long-term nature, a lack of demand or inactive market for these securities, and concerns regarding the underlying financial institutions that have issued the trust preferred securities. See the heading “Trust Preferred Securities” for further information regarding these securities.

Realized gains and losses resulting from sales of securities were as follows during the periods ended June 30, 2011 and 2010 and the year ended December 31, 2010 (in thousands):

	June 30,		June 30,		December 31,
	2011		2010		2010
Gross gains	$	377	$	246	$	543
Gross losses		-		-		-

The following table indicates the expected maturities of investment securities classified as available-for-sale and held-to-maturity, presented at fair value, at June 30, 2011 and the weighted average yield for each range of maturities (dollars in thousands).

	One year			After 1 through			After 5 through			After ten
	or less			5 years			10 years			years			Total
Available-for-sale:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies	$	157,453		$	16,973		$	3,130		$	-		$	177,556
Obligations of state and
political subdivisions		1,362			9,531			15,860			361			27,114
Mortgage-backed securities: GSE residential		3,379			150,352			57,115			-			210,846
Trust preferred securities		-			-			-			921			921
Other securities		-			1,998			-			36			2,034
Total investments	$	162,194		$	178,854		$	76,105		$	1,318		$	418,471

Weighted average yield		1.93	%		3.52	%		3.49	%		3.72	%		2.90	%
Full tax-equivalent yield		1.95	%		3.62	%		3.89	%		3.85	%		3.02	%

Held-to-maturity:
Obligations of state and
political subdivisions	$	-		$	51		$	-		$	-		$	51

Weighted average yield		-	%		4.75	%		-	%		-	%		4.75	%
Full tax-equivalent yield		-	%		6.58	%		-	%		-	%		6.58	%

The weighted average yields are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security. Tax-equivalent yields have been calculated using a 34% tax rate. With the exception of obligations of the U.S. Treasury and other U.S. government agencies and corporations, there were no investment securities of any single issuer, the book value of which exceeded 10% of stockholders' equity at June 30, 2011.

Investment securities carried at approximately $273,471,000 and $240,838,000 at June 30, 2011 and December 31, 2010, respectively, were pledged to secure public deposits and repurchase agreements and for other purposes as permitted or required by law.

The following table presents the aging of gross unrealized losses and fair value by investment category as of June 30, 2011 and December 31, 2010 (in thousands):

	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2011
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	4,977	$	(22	)	$	-	$	-		$	4,977	$	(22	)
Obligations of states and political subdivisions		2,143		(50	)		257		(3	)		2,400		(53	)
Mortgage-backed securities: GSE residential		9,900		(28	)		-		-			9,900		(28	)
Trust preferred securities		-		-			921		(5,428	)		921		(5,428	)
Other securities		1,998		(2	)		-		-			1,998		(2	)
Total	$	19,018	$	(102	)	$	1,178	$	(5,431	)	$	20,196	$	(5,533	)
December 31, 2010:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	58,782	$	(1,024	)	$	-	$	-		$	58,782	$	(1,024	)
Obligations of states and political subdivisions		7,263		(216	)		252		(10	)		7,515		(226	)
Mortgage-backed securities: GSE residential		62,171		(1,482	)		-		-			62,171		(1,482	)
Trust preferred securities		-		-			581		(6,014	)		581		(6,014	)
Other securities		2,009		(26	)		-		-			2,009		(26	)
Total	$	130,225	$	(2,748	)	$	833	$	(6,024	)	$	131,058	$	(8,772	)

Obligations of states and political subdivisions. At June 30, 2011, there was one obligation of states and political subdivisions issued by a municipality with a fair value of $257,000 and unrealized losses of $3,000 in a continuous unrealized loss position for twelve months or more. This position was due to yield on municipal securities increasing since the purchase of this securities resulting in the market value being lower than book value. The contractual term of this investment does not permit the issuer to settle the security at a price less than the amortized cost basis of the investment. Because the Company does not intend to sell these securities and it is not more-likely-than-not the Company will be required to sell this security before recovery of its amortized cost basis, which may be maturity, the Company does not consider this investment to be other than temporarily impaired at June 30, 2011.

Trust Preferred Securities. At June 30, 2011, there were four trust preferred securities with a fair value of $921,000 and unrealized losses of $5,428,000 in a continuous unrealized loss position for twelve months or more. These unrealized losses were primarily due to the long-term nature of the trust preferred securities, a lack of demand or inactive market for these securities, and concerns regarding the underlying financial institutions that have issued the trust preferred securities. Cash flow analysis for these securities indicated an other-than-temporary-impairment (OTTI) and the Company performed further analysis to determine the portion of the loss that was related to credit conditions of the underlying issuers. The credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. Based on this analysis, the Company recorded impairment charges of approximately $61,000 for the credit portion of the unrealized loss of these trust preferred securities during the quarter ended June 30, 2011. This loss established a new, lower amortized cost basis for these securities and reduced non-interest income as of June 30, 2011. Because the Company does not intend to sell these securities and it is not more-likely-than-not that the Company will be required to sell these securities before recovery of their new, lower amortized cost basis, which may be maturity, the Company does not consider the remainder of the investment in these securities to be other-than-temporarily impaired at June 30, 2011. However, future downgrades or additional deferrals and defaults in these securities, in particular the PreTSL XXVIII security which has the largest current book value, could result in additional OTTI and, consequently, have a material impact on future earnings.

Following are the details for each trust preferred security (in thousands):

	Book Value		Market Value		Unrealized Loss			Other-than- temporary Impairment Recorded To-date
PreTSL I	$	829	$	335	$	(494	)	$	691
PreTSL II		1,047		156		(891	)		2,167
PreTSL VI		200		87		(113	)		127
PreTSL XXVIII		4,273		343		(3,930	)		491
Total	$	6,349	$	921	$	(5,428	)	$	3,476

The Company does not believe any other individual unrealized loss as of June 30, 2011 represents OTTI. However, given the continued disruption in the financial markets, the Company may be required to recognize OTTI losses in future periods with respect to its available for sale investment securities portfolio. The amount and timing of any additional OTTI will depend on the decline in the underlying cash flows of the securities. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in the period the other-than-temporary impairment is identified.

Other-than-temporary Impairment. Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or will be evaluated for impairment under the accounting guidance for investments in debt and equity securities.

The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt securities within the scope of the guidance for investments in debt and equity securities. For securities where the security is a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model. For securities where the security is not a beneficial interest in securitized financial assets, the Company uses debt and equity securities impairment model.

The Company routinely conducts periodic reviews to identify and evaluate each investment security to determine whether OTTI has occurred. Economic models are used to determine whether OTTI has occurred on these securities. While all securities are considered, the securities primarily impacted by OTTI testing are pooled trust preferred securities. For each pooled trust preferred security in the investment portfolio (including but not limited to those whose fair value is less than their amortized cost basis), an extensive, regular review is conducted to determine if OTTI has occurred. Various inputs to the economic models are used to determine if an unrealized loss is other-than-temporary. The most significant inputs are the following:

·	Prepayments

Defaults

·	Loss severity

These pooled trust preferred securities relate to trust preferred securities issued by financial institutions. The pools typically consist of financial institutions throughout the United States. Other inputs to the economic models may include the actual collateral attributes, which include credit ratings and other performance indicators of the underlying financial institutions including profitability, capital ratios, and asset quality.

To determine if the unrealized losses for pooled trust preferred securities is other-than-temporary, the Company considers the impact of each of these inputs. The Company considers the likelihood that issuers will prepay their securities. During the third quarter of 2010, the Dodd-Frank Act eliminated Tier 1 capital treatment for trust preferred securities issued by holding companies with consolidated assets greater than $15 billon. As a result, issuers may prepay their securities which reduces the amount of expected cash flows. Additionally, the Company projects total estimated defaults of the underlying assets (financial institutions) and multiplies that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss. The Company also evaluates the current credit enhancement underlying the security to determine the impact on cash flows. If the Company determines that a given pooled trust preferred security position will be subject to a write-down or loss, the Company records the expected credit loss as a charge to earnings.

Credit Losses Recognized on Investments. As described above, some of the Company’s investments in trust preferred securities have experienced fair value deterioration due to credit losses but are not otherwise other-than-temporarily impaired. The following table provides information about those trust preferred securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income (loss) for the three months ended June 30, 2011 and 2010 (in thousands).

	Accumulated		Accumulated
	Credit Losses		Credit Losses
	June 30, 2011		June 30, 2010
Credit losses on trust preferred securities held
Beginning of period	$	3,230	$	1,812
Additions related to OTTI losses not previously recognized		-		-
Reductions due to sales		-		-
Reductions due to change in intent or likelihood of sale		-		-
Additions related to increases in previously recognized OTTI losses		246		978
Reductions due to increases in expected cash flows		-		-
End of period	$	3,476	$	2,790

- Definition

This item represents the entire disclosure related to 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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