SECURITIES

9 Months Ended

Sep. 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
(Dollars in thousands)	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
Securities available-for-sale:
September 30, 2012:
U.S. Treasury and agencies	$	8,318	$	1	$	(49	)	$	8,270
Government-sponsored mortgage-backed residential		276,304		3,762		(352	)		279,714
State and municipal		11,420		1,414		-			12,834
Corporate bonds		20,370		238		-			20,608
Trust preferred securities		988		3		(710	)		281
Total	$	317,400	$	5,418	$	(1,111	)	$	321,707
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:
December 31, 2011:
Trust preferred securities	$	24	$	-	$	-	$	24
Total	$	24	$	-		-	$	24

The amortized cost and fair value of securities at September 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
	Amortized		Fair
(Dollars in thousands)	Cost		Value
Due after one year through five years	$	20,370	$	20,608
Due after ten years		20,726		21,385
Government-sponsored mortgage-backed residential		276,304		279,714
	$	317,400	$	321,707

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				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
(Dollars in thousands)
Proceeds from sales	$	127,569	$	40,092	$	214,830	$	128,289
Gross realized gains		2,054		92		3,363		323
Gross realized losses		350		-		653		38

Investment securities pledged to secure public deposits and FHLB advances had an amortized cost of $100.1 million and fair value of $102.3 million at September 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 September 30, 2012 and December 31, 2011 aggregated by major security type and length of time in a continuous unrealized loss position are as follows:

September 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
U.S. Treasury and agencies	$	3,233	$	(49	)	$	-	$	-		$	3,233	$	(49	)
Government-sponsored mortgage-backed residential		57,492		(352	)		-		-			57,492		(352	)
Trust preferred securities		-		-			156		(710	)		156		(710	)
Total temporarily impaired	$	60,725	$	(401	)	$	156	$	(710	)	$	60,881	$	(1,111	)

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 U.S. Treasury and agency securities and our government sponsored mortgage-backed residential securities 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 September 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 our trust preferred securities were other than temporarily impaired as of September 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 our current debt securities with other-than-temporary impairment at September 30, 2012:

			Moody's												% of Current
			Credit		Current								Current		Deferrals and
(Dollars in thousands)			Ratings		Moody's						Estimated		Deferrals		Defaults
			When		Credit		Par		Amortized		Fair		and		to Current
Security	Tranche		Purchased		Ratings		Value		Cost		Value		Defaults		Collateral
Preferred Term Securities IV		Mezzanine		A3		Ca	$	244	$	122	$	125	$	18,000		27	%
Preferred Term Securities XV B1		Mezzanine		A2		C		1,070		451		126		195,200		34	%
Preferred Term Securities XXI C2		Mezzanine		A3		C		1,161		415		30		209,890		29	%
Total							$	2,475	$	988	$	281

We recognized other-than-temporary impairment charges of $26,000 for the expected credit loss during the 2012 period and $2.1 million during the time we have held these securities on five trust preferred securities with an original cost basis of $3.0 million. The 2012 impairment charge was related to Preferred Term Security VI. 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. We sold Preferred Term Security XXII in the third quarter of 2012 receiving principal of $39,000 and recording a loss on sale of $52,000. All of our remaining trust preferred securities are currently rated below investment grade. One of the trust preferred securities continues to pay interest as scheduled through September 30, 2012, and is expected to continue paying interest as scheduled. The other two trust preferred securities are paying either partial or full interest in kind instead of full cash interest.   

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

(Dollars in thousands)	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012			2011		2012			2011
Beginning balance	$	2,104		$	2,014	$	2,078		$	1,910
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized		-			64		26			168
Sales/call of securities		(628	)		-		(628	)		-
Ending balance	$	1,476		$	2,078	$	1,476		$	2,078