Note 3 - Securities

9 Months Ended

Sep. 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 accumulated other comprehensive loss. Securities classified as held-to-maturity are securities that management has the positive intent and ability to hold to maturity and are stated at cost. Trading securities are reported at fair value. Trading (losses) gains, net, represent changes in the fair value of the trading securities portfolio and are included as a component of other noninterest income in the Condensed Consolidated Statements of Income.

Securities Portfolio

(Dollar amounts in thousands)

	September 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	$	5,091		$	22		$	(10	)		$	5,103		$	18,000		$	7		$	(121	)		$	17,886
Collateralized residential mortgage obligations (“CMOs”)		334,942			3,831			(1,325	)			337,448			377,692			4,261			(2,364	)			379,589
Other residential mortgage-backed securities		91,926			6,514			(53	)			98,387			100,780			5,732			(61	)			106,451
Municipal securities		467,213			18,422			(685	)			484,950			512,063			4,728			(12,800	)			503,991
Collateralized debt obligations (“CDOs”)		49,518			-			(35,301	)			14,217			49,695			-			(34,837	)			14,858
Corporate debt securities		25,336			2,330			-				27,666			29,936			2,409			-				32,345
Equity securities:
Hedge fund investment		1,231			389			-				1,620			1,245			438			-				1,683
Other equity securities		903			136			-				1,039			889			110			-				999
Total equity securities		2,134			525			-				2,659			2,134			548			-				2,682
Total	$	976,160		$	31,644		$	(37,374	)		$	970,430		$	1,090,300		$	17,685		$	(50,183	)		$	1,057,802
Securities Held-to-Maturity
Municipal securities	$	74,375		$	4,577		$	-			$	78,952		$	81,320		$	1,205		$	-			$	82,525
Trading Securities (1)											$	13,308												$	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)

	September 30, 2011
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
One year or less	$	9,435	$	9,173	$	7,415	$	7,871
One year to five years		303,639		295,192		20,560		21,825
Five years to ten years		119,758		116,426		14,526		15,421
After ten years		114,326		111,145		31,874		33,835
CMOs		334,942		337,448		-		-
Other residential mortgage-backed securities		91,926		98,387		-		-
Equity securities		2,134		2,659		-		-
Total	$	976,160	$	970,430	$	74,375	$	78,952

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 $692.3 million at September 30, 2011 and $808.3 million at December 31, 2010. No securities held-to-maturity were pledged as of September 30, 2011 or December 31, 2010.

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 Condensed 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 September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Proceeds from sales	$	80,126		$	142,788		$	177,456		$	290,389
Gains (losses) on sales of securities:
Gross realized gains	$	671		$	7,660		$	3,453		$	15,847
Gross realized losses		(45	)		(320	)		(756	)		(432	)
Net realized gains on securities sales		626			7,340			2,697			15,415
Non-cash impairment charges:
Other-than-temporary securities impairment		(641	)		(964	)		(641	)		(5,308	)
Portion of other-than-temporary impairment recognized in other comprehensive income		464			-			464			447
Net non-cash impairment charges		(177	)		(964	)		(177	)		(4,861	)
Net realized gains	$	449		$	6,376		$	2,520		$	10,554
Income tax expense on net realized gains	$	184		$	2,487		$	1,031		$	4,116
Trading (losses) gains, net (1)	$	(2,352	)	$	1,121		$	(1,610	)	$	560

(1) All trading (losses) gains, net relate to trading securities still held as of September 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 1,300 basis points to LIBOR plus 1,400 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 income.

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

Changes in Credit Losses Recognized in Earnings

(Dollar amounts in thousands)

	Quarter Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Cumulative amount recognized at beginning of period	$	35,589	$	34,736	$	35,589	$	30,839
Credit losses included in earnings (1):
Losses recognized on securities that previously had credit losses		177		853		177		4,421
Losses recognized on securities that did not previously have credit losses		-		-		-		329
Cumulative amount recognized at end of period	$	35,766	$	35,589	$	35,766	$	35,589

(1) Included in securities gains, net in the Condensed 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 September 30, 2011
U.S. agency security		1	$	-	$	-	$	3,046	$	10	$	3,046	$	10
CMOs		18		97,951		818		6,421		507		104,372		1,325
Other residential mortgage-backed securities		4		4,670		32		474		21		5,144		53
Municipal securities		35		3,878		272		10,988		413		14,866		685
CDOs		6		-		-		14,217		35,301		14,217		35,301
Total		64	$	106,499	$	1,122	$	35,146	$	36,252	$	141,645	$	37,374
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 the Company’s 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 September 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 September 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 September 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 11, “Fair Value.”

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

(Dollar amounts in thousands)

Number	Class	Original Par		Amortized Cost		Fair Value				Number of Banks/ Insurers	% of Banks/ Insurers Currently Performing	Actual Deferrals and Defaults as a % of the Original Collateral (1)	Expected Deferrals and Defaults as a % of the Remaining Performing Collateral (1)	Excess Subordination as a % of  the Remaining Performing Collateral (2)
								Lowest Credit Rating Assigned to the Security
								Moody’s	Fitch
1	C-1	$	17,500	$	7,140	$	2,977	Ca	C	46	73.9%	15.8%	20.6%	0.0%
2	C-1		15,000		7,657		1,992	Ca	C	57	82.5%	12.8%	19.9%	0.0%
3	C-1		15,000		13,303		3,291	Ca	C	63	79.4%	8.3%	16.7%	8.2%
4	B1		15,000		13,922		4,123	Ca	C	63	58.7%	35.0%	28.9%	0.0%
5	C		10,000		1,317		147	C	C	56	57.1%	46.2%	29.3%	0.0%
6	C		6,500		6,179		1,687	Ca	C	79	68.4%	24.3%	13.8%	9.3%
7 (3)	A-3L		6,750		-		-	N/A	N/A	N/A	N/A	N/A	N/A	N/A
		$	85,750	$	49,518	$	14,217

(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 September 30, 2011.

Credit-Related CDO Impairment Losses

(Dollar amounts in thousands)

	Quarters Ended September 30,				Nine Months Ended September 30,
Number	2011		2010		2011		2010		Life-to-Date
1	$	-	$	-	$	-	$	-	$	10,360
2		-		-		-		794		7,343
3		177		142		177		142		1,336
4		-		-		-		684		1,078
5		-		711		-		2,801		8,570
6		-		-		-		243		243
7		-		-		-		-		6,750
	$	177	$	853	$	177	$	4,664	$	35,680