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, 2013 and December 31, 2012 were as follows (in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
June 30, 2013
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	213,347	$	229	$	(6,059	)	$	207,517
Obligations of states and political subdivisions	59,933		1,157		(1,697		)	59,393
Mortgage-backed securities: GSE residential	260,463		3,129		(3,545		)	260,047
Trust preferred securities	4,790		—		(3,955		)	835
Other securities	6,035		26		(18		)	6,043
Total available-for-sale	$	544,568	$	4,541	$	(15,274	)	$	533,835

December 31, 2012
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations & agencies	$	180,851	$	1,321	$	(3	)	$	182,169
Obligations of states and political subdivisions	53,064		3,163		(20		)	56,207
Mortgage-backed securities: GSE residential	252,310		7,162		(12		)	259,460
Trust preferred securities	4,974		—		(4,389		)	585
Other securities	9,663		225		—			9,888
Total available-for-sale	$	500,862	$	11,871	$	(4,424	)	$	508,309

The trust preferred securities are three trust preferred pooled securities issued by First Tennessee Financial (“FTN”). The unrealized losses of these securities, which have maturities ranging from seventeen years to twenty-four 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 six months ended June 30, 2013 and 2012 (in thousands):



	June 30, 2013		June 30, 2012
Gross gains	$	835	$	823
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, 2013 and the weighted average yield for each range of maturities (dollars in thousands):



	One year or less			After 1 through 5 years			After 5 through 10 years			After ten years			Total
Available-for-sale:
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	151,994		$	55,523		$	—		$	—		$	207,517
Obligations of state and political subdivisions	1,528			29,344			24,901			3,620			59,393
Mortgage-backed securities: GSE residential	2,457			167,575			90,015			—			260,047
Trust preferred securities	688			—			—			147			835
Other securities	2,008			—			3,982			53			6,043
Total investments	$	158,675		$	252,442		$	118,898		$	3,820		$	533,835
Weighted average yield	1.68		%	2.62		%	2.40		%	2.11		%	2.28		%
Full tax-equivalent yield	1.71		%	2.94		%	2.92		%	3.11		%	2.57		%

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 35% 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, 2013.

Investment securities carried at approximately $250 million and $267 million at June 30, 2013 and December 31, 2012, 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, 2013 and December 31, 2012 (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, 2013
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	184,589	$	(6,059	)	$	—	$	—		$	184,589	$	(6,059	)
Obligations of states and political subdivisions	27,264		(1,697		)	—		—			27,264		(1,697		)
Mortgage-backed securities: GSE residential	131,451		(3,545		)	—		—			131,451		(3,545		)
Trust preferred securities	—		—			835		(3,955		)	835		(3,955		)
Other securities	3,982		(18		)	—		—			3,982		(18		)
Total	$	347,286	$	(11,319	)	$	835	$	(3,955	)	$	348,121	$	(15,274	)
December 31, 2012
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	10,997	$	(3	)	$	—	$	—		$	10,997	$	(3	)
Obligations of states and political subdivisions	1,969		(20		)	—		—			1,969		(20		)
Mortgage-backed securities: GSE residential	697		(12		)	—		—			697		(12		)
Trust preferred securities	—		—			585		(4,389		)	585		(4,389		)
Other securities	—		—			—		—			—		—
Total	$	13,663	$	(35	)	$	585	$	(4,389	)	$	14,248	$	(4,424	)

U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies. At June 30, 2013 and December 31, 2012, there were no U.S. Treasury securities and obligations of U.S. government corporations and agencies in a continuous unrealized loss position for twelve months or more.

Obligations of states and political subdivisions. At June 30, 2013 and December 31, 2012, there were no obligations of states and political subdivisions in a continuous unrealized loss position for twelve months or more.

Mortgage-backed Securities: GSE Residential. At June 30, 2013 and December 31, 2012, there were no mortgage-backed securities in a continuous unrealized loss position for twelve months or more.

Trust Preferred Securities. At June 30, 2013, there were three trust preferred securities with a fair value of $835,000 and unrealized losses of $3,955,000 in a continuous unrealized loss position for twelve months or more. At December 31, 2012, there were three trust preferred securities with a fair value of $585,000 and unrealized losses of $4,389,000 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, the impending change to the regulatory treatment of these securities, and concerns regarding the underlying financial institutions that have issued the trust preferred securities. The Company recorded no other-than-temporary impairment (OTTI) for these securities during 2013 or 2012. Because 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, 2013. However, future downgrades or additional deferrals and defaults in these securities, in particular PreTSL XXVIII, could result in additional OTTI and consequently, have a material impact on future earnings.

Following are the details for each of the three currently impaired trust preferred securities (in thousands):



	Book Value		Market Value		Unrealized Gains (Losses)			Other-than- temporary Impairment Recorded To-date
PreTSL I	$	400	$	428	$	28		$	691
PreTSL II	738		260		(478		)	2,187
PreTSL XXVIII	3,652		147		(3,505		)	1,111
Total	$	4,790	$	835	$	(3,955	)	$	3,989

Other securities. At June 30, 2013 and December 31, 2012, there were no corporate bonds in a continuous unrealized loss position for twelve months or more.

The Company does not believe any other individual unrealized loss as of June 30, 2013 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, an extensive, regular review is conducted to determine if any additional 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 prepayments, defaults and 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 billion. 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 six months ended June 30, 2013 and 2012 (in thousands).



	Accumulated Credit Losses
	June 30, 2013		June 30, 2012
Credit losses on trust preferred securities held
Beginning of period	$	3,989	$	4,116
Additions related to OTTI losses not previously recognized	—		—
Reductions due to sales / (recoveries)	—		—
Reductions due to change in intent or likelihood of sale	—		—
Additions related to increases in previously recognized OTTI losses	—		—
Reductions due to increases in expected cash flows	—		—
End of period	$	3,989	$	4,116

Subsequently, on July 22, 2013, the Company sold two of its trust preferred securities (PreTSL I and PreTSL II). This sale resulted in recovery of all of the book value of these securities. The net proceeds exceeded the aggregate book value of these securities by approximately $1.4 million and this amount will be recorded as a security gain during the third quarter of 2013.