SECURITIES

6 Months Ended

Jun. 30, 2012

Investments, Debt and Equity Securities [Abstract]

Investment [Text Block]

3. SECURITIES

The amortized cost basis and fair values of securities are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses			Fair Value
Securities available-for-sale:
June 30, 2012:
U.S. Treasury and agencies	$	12,994	$	32	$	-		$	13,026
Government-sponsored mortgage-backed residential		278,751		3,498		(401	)		281,848
State and municipal		12,575		1,391		-			13,966
Corporate bonds		8,196		-		(14	)		8,182
Trust preferred securities		1,071		-		(805	)		266
Total	$	313,587	$	4,921	$	(1,220	)	$	317,288
December 31, 2011:
U.S. Treasury and agencies	$	24,993	$	35	$	-		$	25,028
Government-sponsored mortgage-backed residential		261,506		3,389		(204	)		264,691
State and municipal		22,270		1,524		-			23,794
Trust preferred securities		1,048		-		(784	)		264
Total	$	309,817	$	4,948	$	(988	)	$	313,777

			Gross		Gross
	Amortized		Unrecognized		Unrecognized
	Cost		Gains		Losses		Fair Value
Securities held-to-maturity:
June 30, 2012:
Trust preferred securities	$	16	$	-	$	-	$	16
Total	$	16	$	-		-	$	16
December 31, 2011:
Trust preferred securities	$	24	$	-	$	-	$	24
Total	$	24	$	-		-	$	24

The amortized cost and fair value of securities at June 30, 2012, by contractual maturity, are shown below. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	Available for Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
Due after one year through five years	$	8,196	$	8,182	$	-	$	-
Due after ten years		26,640		27,258		16		16
Government-sponsored mortgage-backed residential		278,751		281,848		-		-
	$	313,587	$	317,288	$	16	$	16

The following schedule shows the proceeds from sales of available-for-sale securities and the gross realized gains and losses on those sales:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
(Dollars in thousands)
Proceeds from sales	$	57,733	$	72,018	$	87,454	$	88,289
Gross realized gains		598		162		1,309		231
Gross realized losses		303		38		303		38

Investment securities pledged to secure public deposits and FHLB advances had an amortized cost of $131.9 million and fair value of $134.3 million at June 30, 2012 and a $119.1 million amortized cost and fair value of $121.1 million at December 31, 2011.

Securities with unrealized losses at June 30, 2012 and December 31, 2011 aggregated by major security type and length of time in a continuous unrealized loss position are as follows:

June 30, 2012	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss
Government-sponsored mortgage-backed residential	$	83,877	$	(401	)	$	-	$	-		$	83,877	$	(401	)
Corporate bonds		8,182		(14	)		-		-			8,182		(14	)
Trust preferred securities		-		-			266		(805	)		266		(805	)
Total temporarily impaired	$	92,059	$	(415	)	$	266	$	(805	)	$	92,325	$	(1,220	)

December 31, 2011	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss
Government-sponsored mortgage-backed residential	$	43,911	$	(204	)	$	-	$	-		$	43,911	$	(204	)
Trust preferred securities		-		-			264		(784	)		264		(784	)
Total temporarily impaired	$	43,911	$	(204	)	$	264	$	(784	)	$	44,175	$	(988	)

We evaluate investment securities with significant declines in fair value on a quarterly basis to determine whether they should be considered other-than-temporarily impaired under current accounting guidance, which generally provides that if a security is in an unrealized loss position, whether due to general market conditions or industry or issuer-specific factors, the holder of the securities must assess whether the impairment is other-than-temporary.

Accounting guidance requires entities to split other than temporary impairment charges between credit losses (i.e., the loss based on the entity’s estimate of the decrease in cash flows, including those that result from expected voluntary prepayments), which are charged to earnings, and the remainder of the impairment charge (non-credit component) to accumulated other comprehensive income. This requirement pertains to both securities held to maturity and securities available for sale.

The unrealized losses on our government sponsored mortgage-backed residential securities and corporate bonds were a result of changes in interest rates for fixed-rate securities where the interest rate received is less than the current rate available for new offerings of similar securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because we do not intend to sell and it is more likely than not that we will not be required to sell these investments until recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at June 30, 2012.

As discussed in Note 9 - Fair Value, the fair value of our portfolio of trust preferred securities, is significantly below the amortized cost.  There is limited trading in trust preferred securities and the majority of holders of such instruments have elected not to participate in the market unless they are required to sell as a result of liquidation, bankruptcy, or other forced or distressed conditions.

To determine if the five trust preferred securities were other than temporarily impaired as of June 30, 2012, we used a discounted cash flow analysis.  The cash flow models were used to determine if the current present value of the cash flows expected on each security were still equivalent to the original cash flows projected on the security when purchased.   The cash flow analysis takes into consideration assumptions for prepayments, defaults and deferrals for the underlying pool of banks, insurance companies and REITs.

Management works with independent third parties to identify its best estimate of the cash flow expected to be collected. If this estimate results in a present value of expected cash flows that is less than the amortized cost basis of a security (that is, credit loss exists), an other than temporary impairment is considered to have occurred. If there is no credit loss, any impairment is considered temporary. The cash flow analysis we performed included the following general assumptions:

· We assume default rates on individual entities behind the pools based on Fitch ratings for financial institutions and A.M. Best ratings for insurance companies. These ratings are used to predict the default rates for the next several quarters. Two of the trust preferred securities hold a limited number of real estate investment trusts (REITs) in their pools. REITs are evaluated on an individual basis to predict future default rates.

· We assume that annual defaults for the remaining life of each security will be between 37.5 and 100 basis points.

· We assume a recovery rate of 40% on PreTSL IV and 15% on the remaining trust preferred securities on deferrals after two years.

· We assume 1% prepayments through the five year par call and then 1% per annum to account for the potential prepayments of large banks under the new Dodd Frank legislation.

· Our securities have been modeled using the above assumptions by FTN Financial using the forward LIBOR curve plus original spread to discount projected cash flows to present values.

Additionally, in making our determination, we considered all available market information that could be obtained without undue cost and effort, and considered the unique characteristics of each trust preferred security individually by assessing the available market information and the various risks associated with that security including:

· Valuation estimates provided by our investment broker;

· The amount of fair value decline;

· How long the decline in fair value has existed;

· Significant rating agency changes on the issuer;

· Level of interest rates and any movement in pricing for credit and other risks;

· Information about the performance of the underlying institutions that issued the debt instruments, such as net income, return on equity, capital adequacy, non-performing assets, Texas ratios, etc;

· Our intent to sell the security or whether it is more likely than not that we will be required to sell the security before its anticipated recovery; and

· Other relevant observable inputs.

The following table details the five debt securities with other-than-temporary impairment at June 30, 2012 and the related credit losses recognized in earnings during the six months ended June 30, 2012:

		Moody’s										% of Current
		Credit	Current							Current		Deferrals and
(Dollars in thousands)		Ratings	Moody’s					Estimated		Deferrals		Defaults			Year to Date
		When	Credit	Par		Amortized		Fair		and		to Current			OTTI
Security	Tranche	Purchased	Ratings	Value		Cost		Value		Defaults		Collateral			Recognized
Preferred Term Securities IV	Mezzanine	A3	Ca	$	244	$	122	$	111	$	18,000		27	%	$	-
Preferred Term Securities VI	Mezzanine	A1	Ca		208		16		16		30,000		74	%		26
Preferred Term Securities XV B1	Mezzanine	A2	C		1,065		445		125		195,200		34	%		-
Preferred Term Securities XXI C2	Mezzanine	A3	C		1,156		415		30		209,890		29	%		-
Preferred Term Securities XXII C1	Mezzanine	A3	Ca		527		89		-		388,000		30	%		-
Total				$	3,200	$	1,087	$	282						$	26

Preferred Term Security VI was called for early redemption in July 2012. We received principal and interest of $209,000 and recorded a gain on sale of $192,000.

The table below presents a roll-forward of the credit losses recognized in earnings since the acquisition of the above trust preferred securities:

(Dollars in thousands)	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Beginning balance	$	2,104	$	1,947	$	2,078	$	1,910
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized		-		67		26		104
Ending balance	$	2,104	$	2,014	$	2,104	$	2,014