Securities |
(2) Securities
Trading Securities
The fair value and net unrealized gain (loss) included in Trading securities is as follows (in thousands):
| | December 31, 2011 | | | December 31, 2010 | | | | Fair Value | | | Net Unrealized Gain (Loss) | | | Fair Value | | | Net Unrealized Gain (Loss) | | Obligations of the U.S. Government | | $ | 22,203 | | | $ | 63 | | | $ | 3,873 | | | $ | (17 | ) | U.S. agency residential mortgage-backed securities | | | 12,379 | | | | 59 | | | | 27,271 | | | | 292 | | Municipal and other tax-exempt securities | | | 39,345 | | | | 652 | | | | 23,396 | | | | (214 | ) | Other trading securities | | | 2,873 | | | | 9 | | | | 927 | | | | (2 | ) | Total | | $ | 76,800 | | | $ | 783 | | | $ | 55,467 | | | $ | 59 | |
Investment Securities
The amortized cost and fair values of investment securities are as follows (in thousands):
| | December 31, 2011 | | | | Amortized | | | Carrying | | | Fair | | | Gross Unrealized2 | | | | Cost | | | Value1 | | | Value | | | Gain | | | Loss | | | | | | | | | | | | | | | | | | Municipal and other tax-exempt | | $ | 128,697 | | | $ | 128,697 | | | $ | 133,670 | | | $ | 4,975 | | | $ | (2 | ) | U.S. agency residential mortgage-backed securities – Other | | | 110,062 | | | | 121,704 | | | | 120,536 | | | | 602 | | | | (1,770 | ) | Other debt securities | | | 188,835 | | | | 188,835 | | | | 208,451 | | | | 19,616 | | | | – | | Total | | $ | 427,594 | | | $ | 439,236 | | | $ | 462,657 | | | $ | 25,193 | | | $ | (1,772 | ) |
| | December 31, 2010 | | | | Amortized | | | Fair | | | Gross Unrealized2 | | | | Cost | | | Value | | | Gain | | | Loss | | | | | | | | | | | | | | | Municipal and other tax-exempt | | $ | 184,898 | | | $ | 188,577 | | | $ | 3,912 | | | $ | (233 | ) | U.S. agency residential mortgage-backed securities – Other | | | – | | | | – | | | | – | | | | – | | Other debt securities | | | 154,655 | | | | 157,528 | | | | 4,505 | | | | (1,632 | ) | Total | | $ | 339,553 | | | $ | 346,105 | | | $ | 8,417 | | | $ | (1,865 | ) |
1 | Carrying value includes $12 million of unrealized gain, net of amortization, that remains in Accumulated other comprehensive income (“AOCI”) in the Consolidated Balance Sheets at December 31, 2011 related to certain securities transferred during 2011 from the Available for Sale securities portfolio to the Investment securities portfolio. The Company has the positive intent and ability to hold these securities to maturity. At the time of transfer, the fair value of these securities totaled $131 million, amortized cost totaled $118 million and the pre-tax unrealized gain totaled $13 million. No gain or loss was recognized in the Consolidated Statement of Earnings at the time of the transfer. |
2 | Gross unrealized gains and losses are not recognized in AOCI in the Consolidated Balance Sheets. |
The amortized cost and fair values of investment securities at December 31, 2011, by contractual maturity, are as shown in the following table (dollars in thousands):
| | | | | | | | | | | | | | | | | Weighted | | | | Less than | | | One to | | | Six to | | | Over | | | | | | Average | | | | One Year | | | Five Years | | | Ten Years | | | Ten Years | | | Total | | | Maturity² | | | | | | | | | | | | | | | | | | | | | Municipal and other tax-exempt: | | | | | | | | | | | | | | | | | | | Amortized cost | | $ | 34,623 | | | $ | 68,029 | | | $ | 21,848 | | | $ | 4,197 | | | $ | 128,697 | | | | 2.98 | | Fair value | | | 34,942 | | | | 70,682 | | | | 23,570 | | | | 4,476 | | | | 133,670 | | | | | | Nominal yield¹ | | | 4.59 | | | | 4.62 | | | | 5.50 | | | | 6.54 | | | | 4.83 | | | | | | Other debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | Amortized cost | | $ | 8,651 | | | $ | 28,713 | | | $ | 34,784 | | | $ | 116,687 | | | $ | 188,835 | | | | 10.00 | | Fair value | | | 8,660 | | | | 29,546 | | | | 36,962 | | | | 133,283 | | | | 208,451 | | | | | | Nominal yield | | | 3.78 | | | | 5.56 | | | | 5.58 | | | | 6.20 | | | | 5.88 | | | | | | Total fixed maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | Amortized cost | | $ | 43,274 | | | $ | 96,742 | | | $ | 56,632 | | | $ | 120,884 | | | $ | 317,532 | | | | 7.16 | | Fair value | | | 46,602 | | | | 100,228 | | | | 60,532 | | | | 137,759 | | | | 342,121 | | | | | | Nominal yield | | | 4.43 | | | | 4.90 | | | | 5.55 | | | | 6.21 | | | | 5.45 | | | | | | Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | Carrying value | | | | | | | | | | | | | | | | | | $ | 121,704 | | | | | 3 | Fair value | | | | | | | | | | | | | | | | | | | 120,536 | | | | | | Nominal yield4 | | | | | | | | | | | | | | | | | | | 2.17 | | | | | | Total investment securities: | | | | | | | | | | | | | | | | | | | | | | | | | Carrying value | | | | | | | | | | | | | | | | | | $ | 439,236 | | | | | | Fair value | | | | | | | | | | | | | | | | | | | 462,657 | | | | | | Nominal yield | | | | | | | | | | | | | | | | | | | 4.54 | | | | | |
¹ | Calculated on a taxable equivalent basis using a 39% effective tax rate. |
² | Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty. |
3 | The average expected lives of residential mortgage-backed securities were 2.1 years based upon current prepayment assumptions. |
4 | The nominal yield on residential mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. See Annual and Quarterly Financial Summary – Unaudited following for disclosure of current yields on investment securities portfolio. |
Available for Sale Securities The amortized cost and fair value of available for sale securities are as follows (in thousands):
| | December 31, 2011 | | | | Amortized | | | Fair | | | Gross Unrealized¹ | | | | | | | Cost | | | Value | | | Gain | | | Loss | | | OTTI² | | | | | | | | | | | | | | | | | | U.S. Treasury | | $ | 1,001 | | | $ | 1,006 | | | $ | 5 | | | $ | – | | | $ | – | | Municipal and other tax-exempt | | | 66,435 | | | | 68,837 | | | | 2,543 | | | | (141 | ) | | | – | | Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | U. S. agencies: | | | | | | | | | | | | | | | | | | | | | FNMA | | | 5,823,972 | | | | 5,987,287 | | | | 163,319 | | | | (4 | ) | | | – | | FHLMC | | | 2,756,180 | | | | 2,846,215 | | | | 90,035 | | | | – | | | | – | | GNMA | | | 647,569 | | | | 678,924 | | | | 31,358 | | | | (3 | ) | | | – | | Other | | | 69,668 | | | | 75,751 | | | | 6,083 | | | | – | | | | – | | Total U.S. agencies | | | 9,297,389 | | | | 9,588,177 | | | | 290,795 | | | | (7 | ) | | | – | | Privately issued: | | | | | | | | | | | | | | | | | | | | | Alt-A loans | | | 168,461 | | | | 132,242 | | | | – | | | | – | | | | (36,219 | ) | Jumbo-A loans | | | 334,607 | | | | 286,924 | | | | – | | | | (11,096 | ) | | | (36,587 | ) | Total privately issued | | | 503,068 | | | | 419,166 | | | | – | | | | (11,096 | ) | | | (72,806 | ) | Total residential mortgage-backed securities | | | 9,800,457 | | | | 10,007,343 | | | | 290,795 | | | | (11,103 | ) | | | (72,806 | ) | Other debt securities | | | 36,298 | | | | 36,495 | | | | 197 | | | | – | | | | – | | Perpetual preferred stock | | | 19,171 | | | | 18,446 | | | | 1,030 | | | | (1,755 | ) | | | – | | Equity securities and mutual funds | | | 33,843 | | | | 47,238 | | | | 13,727 | | | | (332 | ) | | | – | | Total | | $ | 9,957,205 | | | $ | 10,179,365 | | | $ | 308,297 | | | $ | (13,331 | ) | | $ | (72,806 | ) |
¹ | Gross unrealized gain/loss recognized AOCI in the consolidated balance sheet |
² | Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income. |
| | December 31, 2010 | | | | Amortized | | | Fair | | | Gross Unrealized¹ | | | | | | | Cost | | | Value | | | Gain | | | Loss | | | OTTI² | | | | | | | | | | | | | | | | | | Municipal and other tax-exempt | | $ | 72,190 | | | $ | 72,942 | | | $ | 1,172 | | | $ | (315 | ) | | $ | (105 | ) | Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | U. S. agencies: | | | | | | | | | | | | | | | | | | | | | FNMA | | | 4,791,438 | | | | 4,925,693 | | | | 147,024 | | | | (12,769 | ) | | | – | | FHLMC | | | 2,545,208 | | | | 2,620,066 | | | | 83,341 | | | | (8,483 | ) | | | – | | GNMA | | | 765,046 | | | | 801,993 | | | | 37,193 | | | | (246 | ) | | | – | | Other | | | 92,013 | | | | 99,157 | | | | 7,144 | | | | – | | | | – | | Total U.S. agencies | | | 8,193,705 | | | | 8,446,909 | | | | 274,702 | | | | (21,498 | ) | | | – | | Privately issued: | | | | | | | | | | | | | | | | | | | | | Alt-A loans | | | 220,332 | | | | 186,674 | | | | – | | | | (353 | ) | | | (33,305 | ) | Jumbo-A loans | | | 494,098 | | | | 457,535 | | | | 923 | | | | (14,067 | ) | | | (23,419 | ) | Total privately issued | | | 714,430 | | | | 644,209 | | | | 923 | | | | (14,420 | ) | | | (56,724 | ) | Total residential mortgage-backed securities | | | 8,908,135 | | | | 9,091,118 | | | | 275,625 | | | | (35,918 | ) | | | (56,724 | ) | Other debt securities | | | 6,401 | | | | 6,401 | | | | – | | | | – | | | | – | | Perpetual preferred stock | | | 19,511 | | | | 22,114 | | | | 2,603 | | | | – | | | | – | | Equity securities and mutual funds | | | 29,181 | | | | 43,046 | | | | 14,192 | | | | (327 | ) | | | – | | Total | | $ | 9,035,418 | | | $ | 9,235,621 | | | $ | 293,592 | | | $ | (36,560 | ) | | $ | (56,829 | ) |
¹ | Gross unrealized gain/loss recognized AOCI in the consolidated balance sheet |
² | Amounts represent unrealized loss that remains in AOCI after an other-than-temporary credit loss has been recognized in income. |
The amortized cost and fair values of available for sale securities at December 31, 2011, by contractual maturity, are as shown in the following table (dollars in thousands):
| | | | | | | | | | | | | | | | | Weighted | | | | Less than | | | One to | | | Six to | | | Over | | | | | | Average | | | | One Year | | | Five Years | | | Ten Years | | | Ten Years6 | | | Total | | | Maturity5 | | U.S. Treasury: | | | | | | | | | | | | | | | | | | | Amortized cost | | $ | – | | | $ | 1,001 | | | $ | – | | | $ | – | | | $ | 1,001 | | | | 1.37 | | Fair value | | | – | | | | 1,006 | | | | – | | | | – | | | | 1,006 | | | | | | Nominal yield¹ | | | – | | | | 0.55 | | | | – | | | | – | | | | 0.55 | | | | | | Municipal and other tax-exempt: | | | | | | | | | | | | | | | | | | | | | | | | | Amortized cost | | $ | 1,009 | | | $ | 8,454 | | | $ | 11,357 | | | $ | 45,615 | | | $ | 66,435 | | | | 18.98 | | Fair value | | | 1,021 | | | | 9,238 | | | | 12,812 | | | | 45,766 | | | | 68,837 | | | | | | Nominal yield¹ | | | 4.04 | | | | 4.16 | | | | 4.00 | | | | 2.69 | | | | 3.12 | | | | | | Other debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | Amortized cost | | $ | – | | | $ | 30,398 | | | $ | – | | | $ | 5,900 | | | $ | 36,298 | | | | 7.68 | | Fair value | | | – | | | | 30,595 | | | | – | | | | 5,900 | | | | 36,495 | | | | | | Nominal yield¹ | | | – | | | | 1.81 | | | | – | | | | 1.87 | | | | 1.82 | | | | | | Total fixed maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | Amortized cost | | $ | 1,009 | | | $ | 39,853 | | | $ | 11,357 | | | $ | 51,515 | | | $ | 103,734 | | | | 14.86 | | Fair value | | | 1,021 | | | | 40,839 | | | | 12,812 | | | | 51,666 | | | | 106,338 | | | | | | Nominal yield | | | 4.04 | | | | 2.27 | | | | 4.00 | | | | 2.60 | | | | 2.64 | | | | | | Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | Amortized cost | | | | | | | | | | | | | | | | | | $ | 9,800,457 | | | | ² | | Fair value | | | | | | | | | | | | | | | | | | | 10,007,343 | | | | | | Nominal yield4 | | | | | | | | | | | | | | | | | | | 3.33 | | | | | | Equity securities and mutual funds: | | | | | | | | | | | | | | | | | | | | | | | | | Amortized cost | | | | | | | | | | | | | | | | | | $ | 53,014 | | | | ³ | | Fair value | | | | | | | | | | | | | | | | | | | 65,684 | | | | | | Nominal yield | | | | | | | | | | | | | | | | | | | 0.74 | | | | | | Total available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | Amortized cost | | | | | | | | | | | | | | | | | | $ | 9,957,205 | | | | | | Fair value | | | | | | | | | | | | | | | | | | | 10,179,365 | | | | | | Nominal yield | | | | | | | | | | | | | | | | | | | 3.31 | | | | | |
¹ | Calculated on a taxable equivalent basis using a 39% effective tax rate. |
² | The average expected lives of residential mortgage-backed securities were 2.1 years based upon current prepayment assumptions. |
³ | Primarily restricted common stock of U.S. government agencies and preferred stock of corporate issuers with no stated maturity. |
4 | The nominal yield on residential mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. See Annual and Quarterly Financial Summary – Unaudited following for disclosure of current yields on available for sale securities portfolio. |
5 | Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty. |
6 | Nominal yield on municipal and other tax-exempt securities and other debt securities with contractual maturity dates over ten years are based on variable rates which generally are reset within 35 days. |
Sales of available for sale securities resulted in gains and losses as follows (in thousands):
| | Year ended December 31, | | | | 2011 | | | 2010 | | | 2009 | | | | | | | | | | | | Proceeds | | $ | 2,725,760 | | | $ | 2,013,620 | | | $ | 3,242,282 | | Gross realized gains | | | 41,284 | | | | 26,007 | | | | 60,710 | | Gross realized losses | | | 7,140 | | | | 4,125 | | | | 1,390 | | Related federal and state income tax expense | | | 13,282 | | | | 8,512 | | | | 23,075 | |
In addition to securities that have been reclassified as pledged to creditors, securities with an amortized cost of $4.4 billion and $5.3 billion at December 31, 2011 and 2010, respectively, have been pledged as collateral for repurchase agreements, public and trust funds on deposit and for other purposes, as required by law. The secured parties do not have the right to sell or re-pledge these securities. Temporarily Impaired Securities as of December 31, 2011 (In thousands) | | Number | | | Less Than 12 Months | | | 12 Months or Longer | | | Total | | | | of | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | | Securities | | | Value | | | Loss | | | Value | | | Loss | | | Value | | | Loss | | Investment: | | | | | | | | | | | | | | | | | | | | | | Municipal and other tax-exempt | | | 1 | | | $ | 479 | | | $ | 2 | | | $ | – | | | $ | – | | | $ | 479 | | | $ | 2 | | U.S. agency residential mortgage-backed securities – Other | | | 5 | | | | 92,571 | | | | 1,770 | | | | – | | | | – | | | | 92,571 | | | | 1,770 | | Total investment | | | 6 | | | | 93,050 | | | | 1,772 | | | | – | | | | – | | | | 93,050 | | | | 1,772 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Municipal and other tax-exempt | | | 26 | | | | 5,008 | | | | 7 | | | | 21,659 | | | | 134 | | | | 26,667 | | | | 141 | | Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U. S. agencies: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FNMA | | | 2 | | | | 68,657 | | | | 4 | | | | – | | | | – | | | | 68,657 | | | | 4 | | GNMA | | | 1 | | | | 2,072 | | | | 3 | | | | – | | | | – | | | | 2,072 | | | | 3 | | Total U.S. agencies | | | 3 | | | | 70,729 | | | | 7 | | | | – | | | | – | | | | 70,729 | | | | 7 | | Privately issued1: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Alt-A loans | | | 19 | | | | – | | | | – | | | | 132,242 | | | | 36,219 | | | | 132,242 | | | | 36,219 | | Jumbo-A loans | | | 48 | | | | 8,142 | | | | 842 | | | | 278,781 | | | | 46,841 | | | | 286,923 | | | | 47,683 | | Total privately issued | | | 67 | | | | 8,142 | | | | 842 | | | | 411,023 | | | | 83,060 | | | | 419,165 | | | | 83,902 | | Total residential mortgage-backed securities | | | 70 | | | | 78,871 | | | | 849 | | | | 411,023 | | | | 83,060 | | | | 489,894 | | | | 83,909 | | Perpetual preferred stocks | | | 6 | | | | 11,147 | | | | 1,755 | | | | – | | | | – | | | | 11,147 | | | | 1,755 | | Equity securities and mutual funds | | | 7 | | | | 221 | | | | 5 | | | | 2,551 | | | | 327 | | | | 2,772 | | | | 332 | | Total available for sale | | | 109 | | | $ | 95,247 | | | $ | 2,616 | | | $ | 435,233 | | | $ | 83,521 | | | $ | 530,480 | | | $ | 86,137 | |
¹ | Includes the following securities for which an unrealized loss remains in AOCI after an other-than-temporary credit loss has been recognized in income: |
Alt-A loans | | | 19 | | | $ | – | | | $ | – | | | $ | 132,242 | | | $ | 36,219 | | | $ | 132,242 | | | $ | 36,219 | | Jumbo-A loans | | | 36 | | | | 3,809 | | | | 256 | | | | 202,874 | | | | 36,331 | | | | 206,683 | | | | 36,587 | |
Temporarily Impaired Securities as of December 31, 2010 (In thousands) | | Number | | | Less Than 12 Months | | | 12 Months or Longer | | | Total | | | | of | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | Fair | | | Unrealized | | | | Securities | | | Value | | | Loss | | | Value | | | Loss | | | Value | | | Loss | | Investment: | | | | | | | | | | | | | | | | | | | | | | Municipal and other tax- exempt | | | 37 | | | $ | 12,482 | | | $ | 211 | | | $ | 786 | | | $ | 22 | | | $ | 13,268 | | | $ | 233 | | Other | | | 15 | | | | 80,698 | | | | 1,632 | | | | – | | | | – | | | | 80,698 | | | | 1,632 | | Total investment | | | 52 | | | | 93,180 | | | | 1,843 | | | | 786 | | | | 22 | | | | 93,966 | | | | 1,865 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Available for sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Municipal and other tax-exempt1 | | | 42 | | | | 22,271 | | | | 171 | | | | 25,235 | | | | 249 | | | | 47,506 | | | | 420 | | Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U. S. agencies: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FNMA | | | 26 | | | | 1,099,710 | | | | 12,769 | | | | – | | | | – | | | | 1,099,710 | | | | 12,769 | | FHLMC | | | 12 | | | | 491,776 | | | | 8,483 | | | | – | | | | – | | | | 491,776 | | | | 8,483 | | GNMA | | | 3 | | | | 5,681 | | | | 246 | | | | – | | | | – | | | | 5,681 | | | | 246 | | Total U.S. agencies | | | 41 | | | | 1,597,167 | | | | 21,498 | | | | – | | | | – | | | | 1,597,167 | | | | 21,498 | | Privately issued1: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Alt-A loans | | | 22 | | | | – | | | | – | | | | 186,675 | | | | 33,658 | | | | 186,675 | | | | 33,658 | | Jumbo-A loans | | | 53 | | | | – | | | | – | | | | 417,917 | | | | 37,486 | | | | 417,917 | | | | 37,486 | | Total privately issued | | | 75 | | | | – | | | | – | | | | 604,592 | | | | 71,144 | | | | 604,592 | | | | 71,144 | | Total residential mortgage-backed securities | | | 116 | | | | 1,597,167 | | | | 21,498 | | | | 604,592 | | | | 71,144 | | | | 2,201,759 | | | | 92,642 | | Equity securities and mutual funds | | | 2 | | | | – | | | | – | | | | 2,878 | | | | 327 | | | | 2,878 | | | | 327 | | Total available for sale | | | 160 | | | | 1,619,438 | | | | 21,669 | | | | 632,705 | | | | 71,720 | | | | 2,252,143 | | | | 93,389 | |
¹ | Includes the following securities for which an unrealized loss remains in OCI after an other-than-temporary credit loss has been recognized in income: |
Municipal and other tax-exempt | | | 11 | | | $ | 10,713 | | | $ | 103 | | | $ | – | | | $ | – | | | $ | 10,713 | | | $ | 105 | | Alt-A loans | | | 19 | | | | – | | | | – | | | | 172,153 | | | | 33,305 | | | | 172,153 | | | | 33,305 | | Jumbo-A loans | | | 25 | | | | – | | | | – | | | | 166,401 | | | | 23,419 | | | | 166,401 | | | | 23,419 | |
On a quarterly basis, the Company performs separate evaluations of impaired debt and equity securities to determine if the unrealized losses are temporary. For debt securities, management determines whether it intends to sell or if it is more-likely-than-not that it will be required to sell impaired securities. This determination considers current and forecasted liquidity requirements, regulatory and capital requirements and securities portfolio management. For 2011 and 2010, the Company did not intend to sell and it is more likely than not that the Company will not be required to sell impaired securities before fair value recovers to amortized cost, which may be maturity. During 2009, the Company recognized a $1.3 million other-than-temporary charge on $91 million of impaired debt securities that it intended to sell and that were subsequently sold during that year. At December 31, 2011 and 2010, the Company did not intend to sell and it is more-likely-than-not that the Company will not be required to sell impaired securities before fair value recovers to amortized cost, which may be maturity.
Impairment of debt securities rated investment grade by all nationally-recognized rating agencies are considered temporary unless specific contrary information is identified. None of the debt securities rated investment grade were considered to be other-than-temporarily impaired at December 31, 2011 or December 31, 2010.
As of December 31, 2011, the composition of the Company's investment and available for sale securities portfolios by the lowest current credit rating assigned by any of the three nationally-recognized rating agencies is as follows (in thousands):
| | U.S. Govt / GSE 1 | | | AAA - AA | | | A - BBB | | | Below Investment Grade | | | Not Rated | | | Total | | | | Amortized | | | Fair | | | Amortized | | | Fair | | | Amortized | | | Fair | | | Amortized | | | Fair | | | Amortized | | | Fair | | | Amortized | | | Fair | | | | Cost | | | Value | | | Cost | | | Value | | | Cost | | | Value | | | Cost | | | Value | | | Cost | | | Value | | | Cost | | | Value | | Investment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Municipal and other tax-exempt | | $ | – | | | $ | – | | | $ | 50,468 | | | $ | 52,224 | | | $ | 25,892 | | | $ | 26,729 | | | $ | – | | | $ | – | | | $ | 52,337 | | | $ | 54,717 | | | $ | 128,697 | | | $ | 133,670 | | Residential mortgage-backed securities – Other | | | 121,704 | | | | 120,536 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 121,704 | | | | 120,536 | | Other debt securities | | | – | | | | – | | | | 180,334 | | | | 199,830 | | | | 600 | | | | 600 | | | | – | | | | – | | | | 7,901 | | | | 8,021 | | | | 188,835 | | | | 208,451 | | Total | | $ | 121,704 | | | $ | 120,536 | | | $ | 230,802 | | | $ | 252,054 | | | $ | 26,492 | | | $ | 27,329 | | | $ | – | | | $ | – | | | $ | 60,238 | | | $ | 62,738 | | | $ | 439,236 | | | $ | 462,657 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Available for Sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Treasury | | $ | 1,001 | | | $ | 1,006 | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | 1,001 | | | $ | 1,006 | | Municipal and other tax-exempt | | | – | | | | – | | | | 40,419 | | | | 42,574 | | | | 11,579 | | | | 11,692 | | | | 13,026 | | | | 13,026 | | | | 1,411 | | | | 1,545 | | | | 66,435 | | | | 68,837 | | Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U. S. agencies: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FNMA | | | 5,823,972 | | | | 5,987,287 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 5,823,972 | | | | 5,987,287 | | FHLMC | | | 2,756,180 | | | | 2,846,215 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 2,756,180 | | | | 2,846,215 | | GNMA | | | 647,569 | | | | 678,924 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 647,569 | | | | 678,924 | | Other | | | 69,668 | | | | 75,751 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 69,668 | | | | 75,751 | | Total U.S. agencies | | | 9,297,389 | | | | 9,588,177 | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 9,297,389 | | | | 9,588,177 | | Privately issued: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Alt-A loans | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 168,461 | | | | 132,242 | | | | – | | | | – | | | | 168,461 | | | | 132,242 | | Jumbo-A loans | | | – | | | | – | | | | 23,221 | | | | 20,654 | | | | 19,390 | | | | 17,167 | | | | 291,996 | | | | 249,103 | | | | – | | | | – | | | | 334,607 | | | | 286,924 | | Total privately issued | | | – | | | | – | | | | 23,221 | | | | 20,654 | | | | 19,390 | | | | 17,167 | | | | 460,457 | | | | 381,345 | | | | – | | | | – | | | | 503,068 | | | | 419,166 | | Total residential mortgage-backed securities | | | 9,297,389 | | | | 9,588,177 | | | | 23,221 | | | | 20,654 | | | | 19,390 | | | | 17,167 | | | | 460,457 | | | | 381,345 | | | | – | | | | – | | | | 9,800,457 | | | | 10,007,343 | | Other debt securities | | | – | | | | – | | | | 5,900 | | | | 5,900 | | | | 30,398 | | | | 30,595 | | | | – | | | | – | | | | | | | | | | | | 36,298 | | | | 36,495 | | Perpetual preferred stock | | | – | | | | – | | | | – | | | | – | | | | 19,171 | | | | 18,446 | | | | – | | | | – | | | | – | | | | – | | | | 19,171 | | | | 18,446 | | Equity securities and mutual funds | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 33,843 | | | | 47,238 | | | | 33,843 | | | | 47,238 | | Total | | $ | 9,298,390 | | | $ | 9,589,183 | | | $ | 69,540 | | | $ | 69,128 | | | $ | 80,538 | | | $ | 77,900 | | | $ | 473,483 | | | $ | 394,371 | | | $ | 35,254 | | | $ | 48,783 | | | $ | 9,957,205 | | | $ | 10,179,365 | |
1 | U.S. government and government sponsored enterprises are not rated by the nationally-recognized rating agencies as these securities are guaranteed by agencies of the U.S. government or government-sponsored enterprises. |
At December 31, 2011, approximately $460 million of the portfolio of privately issued mortgage-backed securities (based on amortized cost after impairment charges) was rated below investment grade by at least one of the nationally-recognized rating agencies. The aggregate unrealized loss on these securities totaled $79 million. Ratings by the nationally recognized rating agencies are subjective in nature and accordingly ratings can vary significantly amongst the agencies. Limitations generally expressed by the rating agencies include statements that ratings do not predict the specific percentage default likelihood over any given period of time and that ratings do not opine on expected loss severity of an obligation should the issuer default. As such, the impairment of securities rated below investment grade by at least one of the nationally-recognized rating agencies was evaluated to determine if management expects not to recover the entire amortized cost basis of the security. This evaluation was based on projections of estimated cash flows based on individual loans underlying each security using current and anticipated increases in unemployment and default rates, decreases in housing prices and estimated liquidation costs at foreclosure. The primary assumptions used in this evaluation were:
· | Unemployment rates – increasing to 9.5% over the next 12 months, dropping to 8% over the following 21 months, and holding at 8% thereafter. At December 31, 2010, we assumed that unemployment rate would increase to 10% over the next 12 months, dropping to 8% over the following 21 months and holding at 8% thereafter. |
· | Housing price depreciation – starting with current depreciated housing prices based on information derived from the Federal Housing Finance Agency (“FHFA”) data, decreasing by an additional 8% over the next twelve months and growing at 2% per year thereafter. At December 31, 2010, we assumed that housing prices would decrease an additional 5% over the next twelve months and hold at that level thereafter. |
· | Estimated Liquidation Costs – reflect actual historical liquidation costs observed on Jumbo and Alt-A residential mortgage loans in the securities owned by the Company. At December 31, 2011, held constant at 25% to 30% for Jumbo-A loans and 35% to 38% for Alt-A loans of the then-current depreciated housing price at estimated foreclosure date. |
· | Discount rates – estimated cash flows were discounted at rates that range from 2.00% to 6.25% based on our current expected yields. At December 31, 2010, estimated cash flows were discounted at rates that range from 2.69% to 6.00% based on our current expected yields. |
We also consider the current loan-to-value ratio and remaining credit enhancement as part of the assessment of the cash flows available to recover the amortized cost of the debt securities. Each factor is considered in the evaluation.
The Company calculates the current loan-to-value ratio for each residential mortgage-backed security using loan-level data. Current loan-to-value ratio is the current outstanding loan amount divided by an estimate of the current home value. The current home value is derived from FHFA data. FHFA provides historical information on home price depreciation at both the Metropolitan Statistical Area and state level. This information is matched to each loan to estimate the home price depreciation. Data is accumulated from the loan level to determine the current loan-to-value ratio for the security as a whole.
Remaining credit enhancement is the amount of credit enhancement available to absorb current projected losses within the pool of loans that support the security. The Company acquires the benefit of credit enhancement by investing in super-senior tranches for many of our residential mortgage-backed securities. Subordinated tranches held by other investors are specifically designed to absorb losses before the super-senior tranches which effectively doubled the typical credit support for these types of bonds. Current projected losses consider depreciation of home prices based on FHFA data, estimated costs and additional losses to liquidate collateral and delinquency status of the individual loans underlying the security.
Credit loss impairment is recorded as a charge to earnings. Additional impairment based on the difference between the total unrealized losses and the estimated credit losses on these securities was charged against other comprehensive income, net of deferred taxes.
Based upon projected decline in expected cash flows from certain private-label residential mortgage-backed securities, the Company recognized $21.9 million of credit loss impairments in earnings during 2011. The Company recognized $26.5 million of credit loss impairment in earnings on certain private-label residential mortgage-backed securities during 2010.
A distribution of the amortized cost (after recognition of the other-than-temporary impairment) and fair value by credit rating for our private-label residential mortgage-backed securities is as follows (in thousands):
| | | | | | | | | | | Credit Losses Recognized | | | | | | | | | | | | | Year ended December 31, 2011 | | | Life-to-date | | | | Number of Securities | | | Amortized Cost | | | Fair Value | | | Number of Securities | | | Amount | | | Number of Securities | | | Amount | | Alt-A loans: | | | | | | | | | | | | | | | | | | | | | | Below Investment Grade | | | 19 | | | $ | 168,461 | | | $ | 132,242 | | | | 18 | | | $ | 8,209 | | | | 19 | | | $ | 49,931 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Jumbo-A loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | AAA – AA | | | 3 | | | | 23,221 | | | | 20,654 | | | | – | | | | – | | | | – | | | | – | | A – BBB | | | 2 | | | | 19,390 | | | | 17,167 | | | | – | | | | – | | | | – | | | | – | | Below Investment Grade | | | 43 | | | | 291,996 | | | | 249,103 | | | | 32 | | | | 13,740 | | | | 36 | | | | 23,623 | | Total Jumbo-A loans | | | 48 | | | | 334,607 | | | | 286,924 | | | | 32 | | | | 13,740 | | | | 36 | | | | 23,623 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 67 | | | $ | 503,068 | | | $ | 419,166 | | | | 50 | | | $ | 21,949 | | | | 55 | | | $ | 73,554 | |
In addition to the other-than-temporary impairment charges on private-label residential mortgage-backed securities, the Company recognized $1.6 million of credit loss impairments in earnings for certain below investment grade municipal securities based on an assessment of the issuer's on-going financial difficulties and bankruptcy filing in the fourth quarter of 2011. The Company recognized $1.0 million in impairment charges on these securities in 2010. See additional discussion regarding the development of the fair value of the bonds in Note 18.
Impaired equity securities, including perpetual preferred stocks, are evaluated based on management's ability and intent to hold the securities until fair value recovers over periods not to exceed three years. The assessment of the ability and intent to hold these securities focuses on liquidity needs, asset / liability management objectives and securities portfolio objectives. Factors considered when assessing recovery include forecasts of general economic conditions and specific performance of the issuer, analyst ratings and credit spreads for preferred stocks which have debt-like characteristics. 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 has ability and intent to hold these investments until a recovery fair value. Accordingly, all impairment of equity securities was considered temporary at December 31, 2011 and 2010. The following represents the composition of net impairment losses recognized in earnings (in thousands):
| | Year Ended December 31, | | | | 2011 | | | 2010 | | | 2009 | | OTTI related to perpetual preferred stocks | | $ | – | | | $ | – | | | $ | (8,008 | ) | OTTI related to equity securities and mutual funds | | | – | | | | (327 | ) | | | – | | OTTI on debt securities due to change in intent to sell | | | – | | | | – | | | | (1,263 | ) | Total OTTI on debt securities not intended for sale | | | (10,578 | ) | | | (29,633 | ) | | | (119,883 | ) | Portion of loss recognized in (reclassified from) other comprehensive income | | | (12,929 | ) | | | 2,151 | | | | 94,741 | | Net impairment losses recognized in earnings related to credit losses on debt securities not intended for sale | | | (23,507 | ) | | | (27,482 | ) | | | (25,142 | ) | Total impairment losses recognized in earnings | | $ | (23,507 | ) | | $ | (27,809 | ) | | $ | (34,413 | ) |
The following is a tabular roll forward of the amount of credit-related OTTI recognized on available-for-sale debt securities in earnings (in thousands):
| | Year Ended December 31, | | | | 2011 | | | 2010 | | Balance of credit-related OTTI recognized on available for sale debt securities, beginning of period | | $ | 52,624 | | | $ | 25,142 | | Additions for credit-related OTTI not previously recognized | | | 3,368 | | | | 3,514 | | Additions for increases in credit-related OTTI previously recognized when there is no intent to sell and no requirement to sell before recovery of amortized cost | | | 20,139 | | | | 23,968 | | Balance of credit-related OTTI recognized on available for sale debt securities, end of period | | $ | 76,131 | | | $ | 52,624 | |
Fair Value Option Securities Fair value option securities represent securities which the Company has elected to carry at fair value and separately identified on the Consolidated Balance Sheets with changes in fair value recognized in earnings as they occur. Certain residential mortgage-backed securities issued by U.S. government agencies and derivative contracts are held as an economic hedge of the mortgage servicing rights. In addition, certain corporate debt securities are economically hedged by derivative contracts to manage interest rate risk. Derivative contracts that have not been designated as hedging instruments effectively modify these fixed rate securities into variable rate securities.
The fair value and net unrealized gain (loss) included in Fair value option securities is as follows (in thousands):
| | December 31, 2011 | | | December 31, 2010 | | | | Fair Value | | | Net Unrealized Gain (Loss) | | | Fair Value | | | Net Unrealized Gain (Loss) | | U.S. agency residential mortgage-backed securities | | $ | 626,109 | | | $ | 19,233 | | | $ | 428,021 | | | $ | (5,641 | ) | Corporate debt securities | | | 25,117 | | | | 18 | | | | – | | | | – | | Total | | $ | 651,226 | | | $ | 19,251 | | | $ | 428,021 | | | $ | (5,641 | ) |
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