Investment Securities

Investment securities as shown in this report reflect revised categories as required by the Company’s adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, on January 1, 2018. That new guidance refined the definition of equity securities and required their segregation from available for sale debt securities. For comparability purposes, prior period disclosures in this report have been revised to show the new categorization.



(In thousands)	September 30, 2018		December 31, 2017
Available for sale debt securities	$	8,674,986	$	8,725,442
Trading debt securities	19,676		18,269
Equity securities:
Readily determinable fair value	2,765		48,838
No readily determinable fair value	1,702		1,753
Other:
Federal Reserve Bank stock	33,498		33,253
Federal Home Loan Bank stock	10,000		10,000
Private equity investments	83,622		55,752
Total investment securities	$	8,826,249	$	8,893,307

While changes in the fair value of available for sale debt securities continue to be recorded in the equity category of accumulated other comprehensive income, the new guidance requires changes in the fair value of equity securities to be recorded in current earnings. As required by the new guidance, the unrealized gain in fair value on equity securities (recorded in accumulated other comprehensive income at December 31, 2017) was reclassified to retained earnings on January 1, 2018. The amount of the reclassification was $33.3 million, net of tax.

Equity securities include common and preferred stock with readily determinable fair values that totaled $2.5 million at cost and $2.8 million at fair value at September 30, 2018. The decline in these balances from prior periods was due to a third party merger transaction in June 2018, in which the majority of these securities were redeemed for cash of $39.9 million. During the first nine months of 2018, unrealized net losses of $151 thousand were recognized in current earnings on equity securities still held at September 30, 2018.

Equity securities also include securities with a carrying value of $1.7 million that do not have readily determinable fair values. The Company has elected, under the ASU, to measure these at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer. The Company did not record any impairment or other adjustments to the carrying amount of these investments during the period.

Other investment securities whose accounting is not addressed in the ASU include Federal Reserve Bank (FRB) stock, Federal Home Loan Bank (FHLB) stock, and investments in portfolio concerns held by the Company's private equity subsidiaries. FRB stock and FHLB stock are held for debt and regulatory purposes. Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. These holdings are carried at cost. The private equity investments, in the absence of readily ascertainable market values, are carried at estimated fair value.

The majority of the Company’s investment portfolio is comprised of available for sale debt securities, which are carried at fair value with changes in fair value reported in accumulated other comprehensive income (AOCI). A summary of the available for sale debt securities by maturity groupings as of September 30, 2018 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by commercial and residential mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.



(In thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
Within 1 year	$	23,624	$	23,532
After 1 but within 5 years	646,024		632,363
After 5 but within 10 years	183,500		177,790
After 10 years	69,283		67,430
Total U.S. government and federal agency obligations	922,431		901,115
Government-sponsored enterprise obligations:
Within 1 year	28,635		28,607
After 1 but within 5 years	121,588		119,494
After 5 but within 10 years	34,985		33,587
After 10 years	42,872		39,428
Total government-sponsored enterprise obligations	228,080		221,116
State and municipal obligations:
Within 1 year	124,946		125,248
After 1 but within 5 years	642,000		640,269
After 5 but within 10 years	551,184		545,707
After 10 years	79,516		77,674
Total state and municipal obligations	1,397,646		1,388,898
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,351,134		3,266,524
Non-agency mortgage-backed securities	1,103,357		1,091,382
Asset-backed securities	1,489,750		1,475,425
Total mortgage and asset-backed securities	5,944,241		5,833,331
Other debt securities:
Within 1 year	9,002		8,984
After 1 but within 5 years	257,635		251,880
After 5 but within 10 years	73,254		69,662
Total other debt securities	339,891		330,526
Total available for sale debt securities	$	8,832,289	$	8,674,986

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $436.2 million, at fair value, at September 30, 2018. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are $14.7 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Interest on these bonds is currently being paid at the maximum failed auction rates.

For debt securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in AOCI, by security type.



(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2018
U.S. government and federal agency obligations	$	922,431	$	41	$	(21,357	)	$	901,115
Government-sponsored enterprise obligations	228,080		—		(6,964		)	221,116
State and municipal obligations	1,397,646		3,541		(12,289		)	1,388,898
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,351,134		3,875		(88,485		)	3,266,524
Non-agency mortgage-backed securities	1,103,357		6,236		(18,211		)	1,091,382
Asset-backed securities	1,489,750		2,174		(16,499		)	1,475,425
Total mortgage and asset-backed securities	5,944,241		12,285		(123,195		)	5,833,331
Other debt securities	339,891		—		(9,365		)	330,526
Total	$	8,832,289	$	15,867	$	(173,170	)	$	8,674,986
December 31, 2017
U.S. government and federal agency obligations	$	917,494	$	4,096	$	(4,443	)	$	917,147
Government-sponsored enterprise obligations	408,266		26		(1,929		)	406,363
State and municipal obligations	1,592,707		21,413		(2,754		)	1,611,366
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,046,701		17,956		(23,744		)	3,040,913
Non-agency mortgage-backed securities	903,920		6,710		(4,837		)	905,793
Asset-backed securities	1,495,380		2,657		(5,237		)	1,492,800
Total mortgage and asset-backed securities	5,446,001		27,323		(33,818		)	5,439,506
Other debt securities	350,988		1,250		(1,178		)	351,060
Total	$	8,715,456	$	54,108	$	(44,122	)	$	8,725,442

The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3 (Moody's) or A- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or who have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, cash flow analyses are prepared. For more complex analyses, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At September 30, 2018, the fair value of securities on this watch list was $53.5 million compared to $68.0 million at December 31, 2017.

As of September 30, 2018, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of $20.4 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $14.1 million. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities at September 30, 2018 included the following:



Significant Inputs	Range
Prepayment CPR	0%	-	25%
Projected cumulative default	12%	-	51%
Credit support	0%	-	20%
Loss severity	14%	-	63%

The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings on all available for sale debt securities.



	For the Nine Months Ended September 30
(In thousands)	2018			2017
Cumulative OTTI credit losses at January 1	$	14,199		$	14,080
Credit losses on debt securities for which impairment was not previously recognized	58			98
Credit losses on debt securities for which impairment was previously recognized	10			274
Increase in expected cash flows that are recognized over remaining life of security	(138		)	(207		)
Cumulative OTTI credit losses at September 30	$	14,129		$	14,245

Debt securities with unrealized losses recorded in AOCI are shown in the table below, along with the length of the impairment period.



	Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2018
U.S. government and federal agency obligations	$	572,747	$	12,285	$	270,313	$	9,072	$	843,060	$	21,357
Government-sponsored enterprise obligations	139,520		3,909		81,596		3,055		221,116		6,964
State and municipal obligations	715,673		7,472		130,190		4,817		845,863		12,289
Mortgage and asset-backed securities:
Agency mortgage-backed securities	1,958,646		42,485		1,039,348		46,000		2,997,994		88,485
Non-agency mortgage-backed securities	680,691		9,372		374,601		8,839		1,055,292		18,211
Asset-backed securities	735,808		9,758		422,531		6,741		1,158,339		16,499
Total mortgage and asset-backed securities	3,375,145		61,615		1,836,480		61,580		5,211,625		123,195
Other debt securities	258,019		5,813		72,507		3,552		330,526		9,365
Total	$	5,061,104	$	91,094	$	2,391,086	$	82,076	$	7,452,190	$	173,170
December 31, 2017
U.S. government and federal agency obligations	$	618,617	$	4,443	$	—	$	—	$	618,617	$	4,443
Government-sponsored enterprise obligations	286,393		1,712		49,766		217		336,159		1,929
State and municipal obligations	282,843		1,752		49,339		1,002		332,182		2,754
Mortgage and asset-backed securities:
Agency mortgage-backed securities	1,320,689		9,433		619,300		14,311		1,939,989		23,744
Non-agency mortgage-backed securities	577,017		2,966		153,813		1,871		730,830		4,837
Asset-backed securities	786,048		3,168		264,295		2,069		1,050,343		5,237
Total mortgage and asset-backed securities	2,683,754		15,567		1,037,408		18,251		3,721,162		33,818
Other debt securities	144,090		727		20,202		451		164,292		1,178
Total	$	4,015,697	$	24,201	$	1,156,715	$	19,921	$	5,172,412	$	44,122

The available for sale debt portfolio included $7.5 billion of securities that were in a loss position at September 30, 2018, compared to $5.2 billion at December 31, 2017. The total amount of unrealized loss on these securities was $173.2 million at September 30, 2018, an increase of $129.0 million compared to the loss at December 31, 2017. This increase in losses was mainly due to a rising interest rate environment.

The following tables present proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.



	For the Nine Months Ended September 30
(In thousands)	2018			2017
Proceeds from sales of securities:
Available for sale debt securities	$	153,066		$	367,453
Equity securities	39,981			—
Other	—			1,583
Total proceeds	$	193,047		$	369,036

Investment securities gains (losses), net:
Available for sale debt securities:
Losses realized on called bonds	$	—		$	(254	)
Gains realized on sales	430			592
Losses realized on sales	—			(568		)
Other-than-temporary impairment recognized on debt securities	(68		)	(372		)
Equity securities:
Gains realized on donations of securities	—			6,707
Gains realized on sales	102			—
Losses realized on sales	(8,917		)	—
Fair value adjustments, net	2,723			—
Other:
Gains realized on sales	—			645
Losses realized on sales	—			(880		)
Fair value adjustments, net	12,371			(8,028		)
Total investment securities gains, net	$	6,641		$	(2,158	)

Securities gains for the nine months ended September 30, 2018 included gains in fair value of $12.4 million on private equity investments and $2.7 million on equity securities. These were offset by an $8.9 million adjustment to recognize dividend income on an equity security liquidated during the second quarter of 2018.

At September 30, 2018, securities totaling $3.9 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the FRB and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $553.2 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.