Note 4. Securities

The following table summarizes the Company’s portfolio of securities available for sale at September 30, 2013:


	September 30, 2013
(in thousands)	Amortized Cost			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE⁽¹⁾ certificates		$	25,345		$	1,378		$	3		$	26,720
GSE CMOs ⁽²⁾			62,122			772			691			62,203
Private label CMOs			12,317			--			62			12,255

Total mortgage-related securities		$	99,784		$	2,150		$	756		$	101,178

Other Securities:
Municipal bonds		$	1,079		$	86		$	--		$	1,165
Capital trust notes			32,275			5,530			2,003			35,802
Preferred stock			118,206			1,364			4,339			115,231
Common stock			49,744			3,332			749			52,327

Total other securities		$	201,304		$	10,312		$	7,091		$	204,525

Total securities available for sale ⁽³⁾		$	301,088		$	12,462		$	7,847		$	305,703

(1)	Government-sponsored enterprise

(2)	Collateralized mortgage obligations

(3)	At September 30, 2013, the non-credit portion of OTTI recorded in AOCL was $570,000 (before taxes).

As of September 30, 2013, the fair value of marketable equity securities included corporate preferred stock of $115.2 million and common stock of $52.3 million, with the latter primarily consisting of an investment in a large cap equity fund and certain other funds that are Community Reinvestment Act (“CRA”) eligible.

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2012:


	December 31, 2012
(in thousands)	Amortized Cost			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE certificates		$	85,488		$	7,197		$	6		$	92,679
GSE CMOs			62,236			4,924			--			67,160
Private label CMOs			17,276			140			--			17,416

Total mortgage-related securities		$	165,000		$	12,261		$	6		$	177,255

Other Securities:
Municipal bonds		$	46,288		$	128		$	120		$	46,296
Capital trust notes			35,231			7,363			4,159			38,435
Preferred stock			118,205			6,843			30			125,018
Common stock			43,984			1,191			2,913			42,262

Total other securities		$	243,708		$	15,525		$	7,222		$	252,011

Total securities available for sale ⁽¹⁾		$	408,708		$	27,786		$	7,228		$	429,266

(1)	At December 31, 2012, the non-credit portion of OTTI recorded in AOCL was $570,000 (before taxes).

The following tables summarize the Company’s portfolio of securities held to maturity at September 30, 2013 and December 31, 2012:


	September 30, 2013
(in thousands)	Amortized Cost			Carrying Amount			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE certificates		$	2,221,859		$	2,221,859		$	37,756		$	48,066		$	2,211,549
GSE CMOs			1,718,497			1,718,497			38,437			12,890			1,744,044
Other mortgage-related securities			3,016			3,016			--			--			3,016

Total mortgage-related securities		$	3,943,372		$	3,943,372		$	76,193		$	60,956		$	3,958,609

Other Securities:
GSE debentures		$	2,624,773		$	2,624,773		$	7,681		$	170,695		$	2,461,759
Corporate bonds			72,799			72,799			10,898			--			83,697
Municipal bonds			61,123			61,123			29			3,710			57,442
Capital trust notes			84,865			75,648			1,288			11,187			65,749

Total other securities		$	2,843,560		$	2,834,343		$	19,896		$	185,592		$	2,668,647

Total securities held to maturity ⁽¹⁾		$	6,786,932		$	6,777,715		$	96,089		$	246,548		$	6,627,256

(1)	Held-to-maturity securities are reported at a carrying amount equal to amortized cost less the non-credit portion of OTTI recorded in AOCL. At September 30, 2013, the non-credit portion of OTTI recorded in AOCL was $9.2 million (before taxes).


	December 31, 2012
(in thousands)	Amortized Cost			Carrying Amount			Gross Unrealized Gain			Gross Unrealized Loss			Fair Value
Mortgage-Related Securities:
GSE certificates		$	1,253,769		$	1,253,769		$	87,860		$	5		$	1,341,624
GSE CMOs			1,898,228			1,898,228			104,764			--			2,002,992
Other mortgage-related securities			3,220			3,220			--			--			3,220

Total mortgage-related securities		$	3,155,217		$	3,155,217		$	192,624		$	5		$	3,347,836

Other Securities:
GSE debentures		$	1,129,618		$	1,129,618		$	15,739		$	--		$	1,145,357
Corporate bonds			72,501			72,501			12,504			--			85,005
Municipal bonds			16,982			16,982			245			--			17,227
Capital trust notes			131,513			109,944			14,588			13,997			110,535

Total other securities		$	1,350,614		$	1,329,045		$	43,076		$	13,997		$	1,358,124

Total securities held to maturity ⁽¹⁾		$	4,505,831		$	4,484,262		$	235,700		$	14,002		$	4,705,960

(1)	At December 31, 2012, the non-credit portion of OTTI recorded in AOCL was $21.6 million (before taxes).

The Company had $552.8 million and $469.1 million of Federal Home Loan Bank (“FHLB”) stock, at cost, at September 30, 2013 and December 31, 2012, respectively. The Company is required to maintain this investment in order to have access to the funding resources provided by the FHLB.

The following table summarizes the gross proceeds, gross realized gains, and gross realized losses from the sale of available-for-sale securities during the nine months ended September 30, 2013 and 2012:


	For the Nine Months Ended September 30,
(in thousands)	2013		2012
Gross proceeds		$593,551		$561,369
Gross realized gains		6,212		1,369
Gross realized losses		--		--

In addition, during the nine months ended September 30, 2013, the Company sold held-to-maturity securities with gross proceeds of $191.1 million and gross realized gains of $11.6 million. These sales occurred because the Company had collected a substantial portion (at least 85%) of the initial principal balance.

The $101.6 million market value of the capital trust note portfolio at September 30, 2013 included three pooled trust preferred securities. The following table details the pooled trust preferred securities that had at least one credit rating below investment grade as of September 30, 2013:


	INCAPS Funding I				Alesco Preferred Funding VII Ltd.				Preferred Term Securities II
(dollars in thousands)	Class B-2 Notes				Class C-1 Notes				Mezzanine Notes
Book value		$	14,964			$	553			$	407
Fair value			19,977				1,005				953
Unrealized gain			5,013				452				546
Lowest credit rating assigned to security			CCC				C				C
Number of banks/insurance companies currently performing			19				54				10
Actual deferrals and defaults as a percentage of original collateral			9	%			12	%			26	%
Expected deferrals and defaults as a percentage of remaining performing collateral			22				25				46
Expected recoveries as a percentage of remaining performing collateral			--				--				--
Excess subordination as a percentage of remaining performing collateral			15				--				--

As of September 30, 2013, after taking into account the Company’s best estimates of future deferrals, defaults, and recoveries, two of its pooled trust preferred securities had no excess subordination in the classes it owns and one had excess subordination of 15%. Excess subordination is calculated after taking into account the projected deferrals, defaults, and recoveries noted in the table above, and indicates whether there is sufficient additional collateral to cover the outstanding principal balance of the class owned.

In the following table, the beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to January 1, 2013. For credit-impaired debt securities, OTTI recognized in earnings after that date is presented as an addition in two components, based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment) or is not the first time a debt security was credit-impaired (subsequent credit impairment).


(in thousands)	For the Nine Months Ended September 30, 2013
Beginning credit loss amount as of December 31, 2012		$219,978
Add: Initial other-than-temporary credit losses		--
Subsequent other-than-temporary credit losses		--
Amount previously recognized in AOCL		--
Less: Realized losses for securities sold		--
Securities intended or required to be sold		--
Increases in expected cash flows on debt securities		4,256

Ending credit loss amount as of September 30, 2013		$215,722

The following table summarizes the carrying amounts and estimated fair values of held-to-maturity debt securities, and the amortized costs and estimated fair values of available-for-sale debt securities, at September 30, 2013, by contractual maturity. Mortgage-related securities held to maturity and available for sale, all of which have prepayment provisions, are distributed to a maturity category based on the ends of the estimated average lives of such securities. Principal and amortization prepayments are not shown in maturity categories as they occur, but are considered in the determination of estimated average life.


	At September 30, 2013
(dollars in thousands)	Mortgage- Related Securities			Average Yield		U.S. Treasury and GSE Obligations			Average Yield		State, County, and Municipal			Average Yield ⁽¹⁾		Other Debt Securities ⁽²⁾			Average Yield		Fair Value
Held-to-Maturity Securities:
Due within one year		$	--		--%		$	--		--%		$	--		--%		$	--		--%		$	--
Due from one to five years			--		--			60,441		4.17			1,384		2.96			--		--			68,735
Due from five to ten years			2,705,808		3.22			2,048,292		2.63			--		--			46,913		3.15			4,666,410
Due after ten years			1,237,564		3.55			516,040		2.87			59,739		2.85			101,535		5.80			1,892,111

Total debt securities held to maturity		$	3,943,372		3.32%		$	2,624,773		2.72%		$	61,123		2.85%		$	148,448		4.97%		$	6,627,256

Available-for-Sale Securities: ⁽³⁾
Due within one year		$	31		2.26%		$	--		--%		$	125		5.90%		$	--		--%		$	157
Due from one to five years			6,863		6.90			--		--			534		6.36			--		--			7,860
Due from five to ten years			19,113		3.64			--		--			420		6.59			--		--			20,529
Due after ten years			73,777		3.83			--		--			--		--			32,275		4.23			109,598

Total debt securities available for sale		$	99,784		4.01%		$	--		--%		$	1,079		6.39%		$	32,275		4.23%		$	138,144

(1)	Not presented on a tax-equivalent basis.

(2)

Includes corporate bonds and capital trust notes. Included in capital trust notes are $15.5 million and $407,000 of pooled trust preferred securities available for sale and held to maturity, respectively, all of which are due after ten years. The remaining capital trust notes consist of single-issue trust preferred securities.

(3)	As equity securities have no contractual maturity, they have been excluded from this table.

At September 30, 2013, the Company had commitments to purchase $51.0 million of securities, all of which were GSE obligations.

The following tables present held-to-maturity and available-for-sale securities having a continuous unrealized loss position for less than twelve months and for twelve months or longer as of September 30, 2013:


At September 30, 2013 (in thousands)	Less than Twelve Months				Twelve Months or Longer					Total
At September 30, 2013 (in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Temporarily Impaired Held-to-Maturity Debt Securities:
GSE debentures		$2,344,708		$170,695		$ --		$ --			$2,344,708		$170,695
GSE Certificates		1,087,114		48,066		--		--			1,087,114		48,066
GSE CMOs		500,367		12,890		--		--			500,367		12,890
Municipal notes/bonds		56,029		3,710		--		--			56,029		3,710
Capital trust notes		24,581		419		35,393		10,768			59,974		11,187

Total temporarily impaired held-to-maturity debt securities		$4,012,799		$235,780		$35,393		$10,768			$4,048,192		$246,548

Temporarily Impaired Available-for-Sale Securities:
Debt Securities:
GSE certificates		$ --		$ --		$ 167		$ 3			$ 167		$ 3
Private label CMOs		12,255		62		--		--			12,255		62
GSE CMOs		45,883		691							45,883		691
Capital trust notes		1,966		33		5,446		1,970			7,412		2,003

Total temporarily impaired available-for-sale debt securities		$ 60,104		$ 786		$ 5,613		$ 1,973			$ 65,717		$ 2,759
Equity securities		75,517		4,458		1,046		630	⁽¹⁾		76,563		5,088

Total temporarily impaired available-for-sale securities		$ 135,621		$ 5,244		$ 6,659		$ 2,603			$ 142,280		$ 7,847

(1)	The twelve months or longer unrealized losses on equity securities of $630,000 at September 30, 2013 relate to an investment in a financial institution. The principal balance of the investment was $1.7 million at that date.


At December 31, 2012	Less than Twelve Months						Twelve Months or Longer							Total
(in thousands)	Fair Value			Unrealized Loss			Fair Value			Unrealized Loss				Fair Value			Unrealized Loss
Temporarily Impaired Held-to-Maturity Debt Securities:
GSE debentures		$	--		$	--		$	--		$	--			$	--		$	--
GSE certificates			2,238			5			--			--				2,238			5
GSE CMOs			--			--			--			--				--			--
Corporate bonds			--			--			--			--				--			--
Capital trust notes			--			--			32,148			13,997				32,148			13,997

Total temporarily impaired held-to-maturity debt securities		$	2,238		$	5		$	32,148		$	13,997			$	34,386		$	14,002

Temporarily Impaired Available-for-Sale Securities:
Debt Securities:
GSE certificates		$	297		$	5		$	53		$	1			$	350		$	6
Private label CMOs			--			--			--			--				--			--
Corporate bonds			--			--			--			--				--			--
State, county, and municipal			45,096			120			--			--				45,096			120
Capital trust notes			--			--			4,371			4,159				4,371			4,159

Total temporarily impaired available-for-sale debt securities		$	45,393		$	125		$	4,424		$	4,160			$	49,817		$	4,285
Equity securities			15,262			30			28,989			2,913	⁽¹⁾			44,251			2,943

Total temporarily impaired available-for-sale securities		$	60,655		$	155		$	33,413		$	7,073			$	94,068		$	7,228

(1)

The twelve months or longer unrealized losses on equity securities of $2.9 million at December 31, 2012 relate to available-for-sale equity securities that consisted of a large cap equity fund and investments in certain financial institutions. The principal balance of the large cap equity fund was $30.2 million and the twelve months or longer unrealized loss was $2.2 million at that date. The principal balance of investments in financial institutions totaled $1.7 million and the twelve months or longer unrealized loss was $709,000 at that date.

An OTTI loss on impaired securities must be fully recognized in earnings if an investor has the intent to sell the debt security, or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost. However, even if an investor does not expect to sell a debt security, it must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event that a credit loss occurs, only the amount of impairment associated with the credit loss is recognized in earnings. Amounts relating to factors other than credit losses are recorded in AOCL. Financial Accounting Standards Board (“FASB”) guidance also requires additional disclosures regarding the calculation of credit losses, as well as factors considered by the investor in reaching a conclusion that an investment is not other-than-temporarily impaired.

Securities in unrealized loss positions are analyzed as part of the Company’s ongoing assessment of OTTI. When the Company intends to sell such securities, the Company recognizes an impairment loss equal to the full difference between the amortized cost basis and the fair value of those securities. When the Company does not intend to sell equity or debt securities in an unrealized loss position, potential OTTI is considered based on a variety of factors, including the length of time and extent to which the fair value has been less than the cost; adverse conditions specifically related to the industry, the geographic area or financial condition of the issuer, or the underlying collateral of a security; the payment structure of the security; changes to the rating of the security by a rating agency; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet date. For debt securities, the Company estimates cash flows over the remaining life of the underlying collateral to assess whether credit losses exist and, where applicable, to determine if any adverse changes in cash flows have occurred. The Company’s cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting period. As of September 30, 2013, the Company did not intend to sell the securities with an unrealized loss position, and it was more likely than not that the Company would not be required to sell these securities before recovery of their amortized cost basis. The Company believes that the securities with an unrealized loss position were not other-than-temporarily impaired as of September 30, 2013.

Other factors considered in determining whether or not an impairment is temporary include the length of time and the extent to which fair value has been below cost; the severity of the impairment; the cause of the impairment; the financial condition and near-term prospects of the issuer; activity in the market of the issuer that may indicate adverse credit conditions; and the forecasted recovery period using current estimates of volatility in market interest rates (including liquidity and risk premiums).

Management’s assertion regarding its intent not to sell, or that it is not more likely than not that the Company will be required to sell a security before its anticipated recovery, is based on a number of factors, including a quantitative estimate of the expected recovery period (which may extend to maturity), and management’s intended strategy with respect to the identified security or portfolio. If management does have the intent to sell, or believes it is more likely than not that the Company will be required to sell the security before its anticipated recovery, the unrealized loss is charged directly to earnings in the Consolidated Statement of Income and Comprehensive Income.

The unrealized losses on the Company’s GSE mortgage-related securities and GSE debentures at September 30, 2013 were primarily caused by movements in market interest rates and spread volatility, rather than credit risk. The Company purchased these investments either at par or at a discount or premium relative to their face amount, and the contractual cash flows of these investments are guaranteed by the GSEs. Accordingly, it is expected that these securities will not be settled at a price that is less than the amortized cost of the Company’s investment. Because the Company does not have the intent to sell the investments, and it is not more likely than not that the Company will be required to sell them before the anticipated recovery of fair value, which may be at maturity, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2013.

The Company reviews quarterly financial information related to its investments in municipal bonds and capital trust notes, as well as other information that is released by each of the issuers of such bonds and notes, to determine their continued creditworthiness. The contractual terms of these investments do not permit settling the securities at prices that are less than the amortized costs of the investments; therefore, the Company expects that these investments will not be settled at prices that are less than their amortized costs. The Company continues to monitor these investments and currently estimates that the present value of expected cash flows is not less than the amortized cost of the securities. Because the Company does not have the intent to sell the investments, and it is not more likely than not that the Company will be required to sell them before the anticipated recovery of fair value, which may be at maturity, it did not consider these investments to be other-than-temporarily impaired at September 30, 2013. It is possible that these securities will perform worse than is currently expected, which could lead to adverse changes in cash flows from these securities and potential OTTI losses in the future. Future events that could trigger material unrecoverable declines in the fair values of the Company’s investments, and result in potential OTTI losses, include, but are not limited to, government intervention; deteriorating asset quality and credit metrics; significantly higher levels of default and loan loss provisions; losses in value on the underlying collateral; deteriorating credit enhancement; net operating losses; and further illiquidity in the financial markets.

At September 30, 2013, the Company’s equity securities portfolio consisted of perpetual preferred stock, common stock, and mutual funds. The Company considers a decline in the fair value of available-for-sale equity securities to be other than temporary if the Company does not expect to recover the entire amortized cost basis of the security. The unrealized losses on the Company’s equity securities at the end of September 2013 were primarily caused by market volatility. The Company evaluated the near-term prospects of a recovery of fair value for each security in the portfolio, together with the severity and duration of impairment to date. Based on this evaluation, and the Company’s ability and intent to hold these investments for a reasonably sufficient period of time to realize a near-term forecasted recovery of fair value, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2013. Nonetheless, it is possible that these equity securities will perform worse than is currently expected, which could lead to adverse changes in their fair values, or the failure of the securities to fully recover in value as presently forecasted by management. This would cause the Company to potentially record OTTI losses in future periods. Events that could trigger material declines in the fair values of these securities include, but are not limited to, deterioration in the equity markets; a decline in the quality of the loan portfolios of the issuers in which the Company has invested; and the recording of higher loan loss provisions and net operating losses by such issuers.

The investment securities designated as having a continuous loss position for twelve months or more at September 30, 2013 consisted of six capital trust notes, two mortgage-backed securities, and one equity security. At December 31, 2012, the investment securities designated as having a continuous loss position for twelve months or more consisted of seven capital trust notes, three equity securities, and one mortgage-backed security. At September 30, 2013 and December 31, 2012, the combined market value of the respective securities represented unrealized losses of $13.4 million and $21.1 million. At September 30, 2013, the fair value of securities having a continuous loss position for twelve months or more was 24.2% below the collective amortized cost of $55.4 million. At December 31, 2012, the fair value of such securities was 24.5% below the collective amortized cost of $86.1 million.