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Note 3 - Securities
6 Months Ended
Jun. 30, 2011
Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]
3.  SECURITIES

Securities available-for-sale are carried at fair value with unrealized gains and losses, net of related deferred income taxes, recorded in stockholders’ equity as a separate component of other comprehensive loss. Securities classified as held-to-maturity are securities management has the positive intent and ability to hold to maturity and are stated at cost. Trading securities are reported at fair value. Trading gains, net, represents changes in the fair value of the trading securities portfolio and are included as a component of noninterest income in the Consolidated Statements of Income.

Securities Portfolio

(Dollar amounts in thousands)

   
June 30, 2011
 
December 31, 2010
 
   
Amortized
 
Gross Unrealized
 
Fair
 
Amortized
 
Gross Unrealized
 
Fair
 
   
Cost
 
Gains
 
Losses
 
Value
 
Cost
 
Gains
 
Losses
 
Value
 
Securities Available-for-Sale
                           
U.S. agency securities
  $ 8,122     $ 23     $ (32 )   $ 8,113     $ 18,000     $ 7     $ (121 )   $ 17,886  
Collateralized residential mortgage obligations (“CMOs”)
    373,600       3,824       (722 )     376,702       377,692       4,261       (2,364 )     379,589  
Other residential mortgage-backed securities
    91,539       6,290       (24 )     97,805       100,780       5,732       (61 )     106,451  
Municipal securities
    471,617       10,487       (2,185 )     479,919       512,063       4,728       (12,800 )     503,991  
Collateralized debt obligations (“CDOs”)
    49,695       -       (33,208 )     16,487       49,695       -       (34,837 )     14,858  
Corporate debt securities
    25,325       2,597       -       27,922       29,936       2,409       -       32,345  
Equity securities:
                                                               
Hedge fund investment
    1,231       651       -       1,882       1,245       438       -       1,683  
Other equity securities
    927       117       (1 )     1,043       889       110       -       999  
                                                                 
Total equity securities
    2,158       768       ( 1 )     2,925       2,134       548       -       2,682  
                                                                 
Total
  $ 1,022,056     $ 23,989     $ (36,172 )   $ 1,009,873     $ 1,090,300     $ 17,685     $ (50,183 )   $ 1,057,802  
Securities Held-to-Maturity
                                                       
Municipal securities
  $ 76,142     $ 2,343     $ -     $ 78,485     $ 81,320     $ 1,205     $ -     $ 82,525  
Trading Securities (1)
                    $ 16,230                             $ 15,282  

(1)
Trading securities held by the Company represent diversified investment securities held in a grantor trust under deferred compensation arrangements in which plan participants may direct amounts earned to be invested in securities other than Company stock.

Remaining Contractual Maturity of Securities

(Dollar amounts in thousands)

   
June 30, 2011
 
   
Available-for-Sale
   
Held-to-Maturity
 
   
Amortized
Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
 
One year or less
  $ 8,301     $ 7,967     $ 7,010     $ 7,226  
One year to five years
    201,321       193,222       15,137       15,603  
Five years to ten years
    115,597       110,947       21,468       22,129  
After ten years
    229,540       220,305       32,527       33,527  
CMOs
    373,600       376,702       -       -  
Other residential mortgage-backed securities
    91,539       97,805       -       -  
Equity securities
    2,158       2,925       -       -  
        Total
  $ 1,022,056     $ 1,009,873     $ 76,142     $ 78,485  

Purchases and sales of securities are recognized on a trade date basis. Realized securities gains or losses are reported in securities gains, net in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method.

Securities Gains (Losses)

(Dollar amounts in thousands)

   
Quarters Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Proceeds from sales
  $ 53,118     $ 66,618     $ 97,330     $ 147,601  
Gains (losses) on sales of securities:
                               
Gross realized gains
  $ 1,974     $ 2,367     $ 2,782     $ 8,187  
Gross realized losses
    (443 )     (112 )     (711 )     (112 )
Net realized gains on securities sales
    1,531       2,255       2,071       8,075  
Non-cash impairment charges
                               
Other-than-temporary securities impairment
    -       (1,581 )     -       (4,344 )
Portion of other-than-temporary impairment recognized in other comprehensive income
    -       447       -       447  
Net non-cash impairment charges
    -       (1,134 )     -       (3,897 )
Net realized gains
  $ 1,531     $ 1,121     $ 2,071     $ 4,178  
Income tax expense on net realized gains
  $ 636     $ 437     $ 847     $ 1,629  
Trading gains (losses), net (1)
  $ (2 )   $ (1,022 )   $ 742     $ (561 )

(1)
All trading gains (losses) relate to trading securities still held as of June 30, 2011.

The non-cash impairment charges in the table above primarily relate to other-than-temporary (“OTTI”) charges on CDOs. Accounting guidance requires that only the credit portion of an OTTI charge be recognized through income. In deriving the credit component of the impairment on the CDOs, projected cash flows were discounted at the contractual rate ranging from the London Interbank Offered Rate (“LIBOR”) plus 125 basis points to LIBOR plus 160 basis points. Fair values are computed by discounting future projected cash flows at higher rates, ranging from LIBOR plus 1,200 basis points to LIBOR plus 1,300 basis points. The higher rates are used to account for other market factors such as liquidity. If a decline in fair value below carrying value is not attributable to credit loss and the Company does not intend to sell the security or believe it would not be more likely than not required to sell the security prior to recovery, the Company records the decline in fair value in other comprehensive loss.

Changes in the amount of credit losses recognized in earnings on CDOs and other securities are summarized in the following table.

Changes in Credit Losses Recognized in Earnings

(Dollar amounts in thousands)

   
Quarter Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Cumulative amount recognized at beginning of period
  $ 35,589     $ 33,709     $ 35,589     $ 30,946  
Credit losses included in earnings (1)
                               
Losses recognized on securities that previously had credit losses
    -       1,048       -       3,568  
Losses recognized on securities that did not previously have credit losses
    -       86       -       329  
Cumulative amount recognized at end of period
  $ 35,589     $ 34,843     $ 35,589     $ 34,843  

(1)
Included in securities gains, net in the Consolidated Statements of Income.

Securities in an Unrealized Loss Position

(Dollar amounts in thousands)

         
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Number of
Securities
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
As of June 30, 2011
                                         
U.S. agency security
    1     $ 3,045     $ 32     $ -     $ -     $ 3,045     $ 32  
CMOs
    10       50,412       323       9,698       399       60,110       722  
Other residential mortgage-backed securities
    2       317       18       159       6       476       24  
Municipal securities
    134       17,005       582       53,943       1,603       70,948       2,185  
CDOs
    6       -       -       16,487       33,208       16,487       33,208  
Equity security
    1       -       -       30       1       30       1  
    Total
    154     $ 70,779     $ 955     $ 80,317     $ 35,217     $ 151,096     $ 36,172  
                                                         
As of December 31, 2010
                                                       
U.S. agency securities
    4     $ 9,096     $ 120     $ -     $ 1     $ 9,096     $ 121  
CMOs
    19       131,056       1,727       7,843       637       138,899       2,364  
Other residential mortgage-backed securities
    5       6,084       51       159       10       6,243       61  
Municipal securities
    479       99,537       3,142       166,403       9,658       265,940       12,800  
CDOs
    6       -       -       14,858       34,837       14,858       34,837  
    Total
    513     $ 245,773     $ 5,040     $ 189,263     $ 45,143     $ 435,036     $ 50,183  

Approximately 98% of CMOs and other mortgage-backed securities are either backed by U.S. government-owned agencies or issued by U.S. government-sponsored enterprises. Municipal securities are issued by municipal authorities, and the majority is supported by third-party insurance or some other form of credit enhancement. Management does not believe any individual unrealized loss as of June 30, 2011 represents an other-than-temporary impairment. The unrealized losses associated with these securities are not believed to be attributed to credit quality, but rather to changes in interest rates and temporary market movements. In addition, the Company does not intend to sell the securities with unrealized losses, and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be at maturity.

The unrealized losses on CDOs as of June 30, 2011 reflect the market’s unfavorable view of structured investment vehicles given the current interest rate and liquidity environment. Management does not believe the unrealized losses on the CDOs represent an other-than-temporary impairment. In addition, the Company does not intend to sell the CDOs with unrealized losses, and the Company does not believe it is more likely than not that it will be required to sell them before recovery of their amortized cost basis, which may be at maturity.

Significant judgment is required to calculate the fair value of the CDOs, all of which are pooled. Generally, fair value determinations are based on several factors regarding current market and economic conditions relating to such securities and the underlying collateral. For these reasons and due to the illiquidity in the secondary market for these CDOs, the Company estimates the fair value of these securities using discounted cash flow analyses with the assistance of a structured credit valuation firm.

Prepayment assumptions are a key factor in estimating the cash flows. Prepayments may occur on the collateral underlying the Company’s CDOs based on call options or other factors. Most of the collateral underlying the CDOs have a 5-year call option (on the fifth anniversary of issuance, the issuer has the right to call the security at par). In addition, most underlying indentures trigger an issuer call right if a capital treatment event occurs, such as a regulatory change that affects its status as Tier 1 capital (as defined in federal regulations). The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) constituted such an event for certain holding companies. Specifically, companies with $15 billion or more in consolidated assets can no longer include hybrid capital instruments, such as trust-preferred securities, in Tier 1 capital beginning January 1, 2013. As of June 30, 2011, the Company has assumed a 15% prepayment rate for those banks with greater than $15 billion in assets in year 3 (the start of the phase out period for Tier 1 capital treatment), followed by an annual prepayment rate of 1%.

For additional discussion of the CDO valuation methodology, refer to Note 12, “Fair Value.”

Certain Characteristics and Metrics of the CDOs as of June 30, 2011

(Dollar amounts in thousands)

            Original     Amortized     Fair    
Lowest Credit Rating
Assigned to the Security
   
Number of Banks/
    % of Banks/ Insurers Currently     Actual Deferrals and Defaults as a % of the Original     Expected Deferrals and Defaults as a % of the Remaining Performing    
Excess Subordination as a % of the Remaining Performing
 
Number
   
Class
   
Par
   
Cost
   
Value
   
Moody’s
   
Fitch
   
Insurers
   
Performing
   
Collateral (1)
   
Collateral (1)
   
Collateral (2)
 
1       C-1     $ 17,500     $ 7,140     $ 3,353    
Ca
      C       46       73.9 %     15.8 %     20.7 %     0.0 %
2       C-1       15,000       7,657       2,477    
Ca
      C       57       84.2 %     12.1 %     18.8 %     0.0 %
3       C-1       15,000       13,480       4,016    
Ca
      C       63       81.0 %     7.8 %     15.5 %     6.0 %
4       B1       15,000       13,922       4,344    
Ca
      C       64       59.4 %     35.0 %     23.5 %     0.0 %
5       C       10,000       1,317       212     C       C       56       60.7 %     44.6 %     28.1 %     0.0 %
6       C       6,500       6,179       2,085    
Ca
      C       77       68.8 %     23.1 %     12.8 %     10.5 %
7(3)       A-3L       6,750       -       -       N/A       N/A       N/A       N/A       N/A       N/A       N/A  
              $ 85,750     $ 49,695     $ 16,487                                                          

(1)
Deferrals and defaults are provided net of recoveries. No recovery is assumed for collateral that has already defaulted. For deferring collateral, the Company assumes a recovery rate of 10% of par for banks, thrifts, and other depository institutions and 15% of par for insurance companies.
(2)
Excess subordination represents additional defaults in excess of current defaults that the CDO can absorb before the security experiences any credit impairment. The excess subordination percentage is calculated by dividing the amount of potential additional loss that can be absorbed (before the receipt of all expected future principal and interest payments is affected) by the total balance of performing collateral. Even with excess subordination, the CDO could experience an OTTI charge if future deterioration of underlying collateral in excess of current excess subordination is anticipated.
(3)
Characteristics and metrics are not reported for this CDO since the security had an amortized cost and fair value of zero as of June 30, 2011.

Credit-Related CDO Impairment Losses

(Dollar amounts in thousands)

     
Quarters Ended
June 30,
   
Six Months Ended
June 30,
       
Number
   
2011
   
2010
   
2011
   
2010
   
Life-to-Date
 
1     $ -     $ -     $ -     $ -     $ 10,360  
2       -       794       -       794       7,343  
3       -       -       -       -       1,159  
4       -       -       -       684       1,078  
5       -       254       -       2,091       8,570  
6       -       -       -       242       243  
7       -       -       -       -       6,750  
      $ -     $ 1,048     $ -     $ 3,811     $ 35,503  

For the equity security with an unrealized loss, the Company has evaluated the near-term prospects of the investment in relation to the severity and duration of the impairment and, based on that evaluation, believes it has the ability and intent to hold this investment until a recovery of fair value.

For additional details of the securities available-for-sale portfolio and the related impact of unrealized gains (losses) thereon, see Note 8, “Comprehensive Income.”

The carrying value of securities available-for-sale that were pledged to secure deposits and for other purposes as permitted or required by law totaled $768.7 million at June 30, 2011 and $808.3 million at December 31, 2010. No securities held-to-maturity were pledged as of June 30, 2011 or December 31, 2010.