Investment Securities |
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Investment Securities | 3. Investment Securities
As of December 31, 2016 and 2015, investment securities consisted predominantly of the following investment categories:
U.S. Treasury and debt securities – includes U.S. Treasury notes and debt securities issued by government-sponsored enterprises.
Mortgage and asset-backed securities – includes securities backed by notes or receivables secured by either mortgage or prime auto assets with cash flows based on actual or scheduled payments.
Collateralized mortgage obligations – includes securities backed by a pool of mortgages with cash flows distributed based on certain rules rather than pass through payments.
As of December 31, 2016 and 2015, all of the Company’s investment securities were classified as debt securities and available-for-sale. Amortized cost and fair value of securities as of December 31, 2016 and 2015 were as follows:
Proceeds from calls and sales of investment securities totaled $121.2 million and $825.4 million, respectively, for the year ended December 31, 2016. Proceeds from calls and sales of investment securities totaled $25.0 million and $2.5 billion, respectively, for the year ended December 31, 2015. Proceeds from sales of investment securities totaled $61.9 million for the year ended December 31, 2014. Including the 2016 sale of Visa Class B restricted shares described below, the Company recorded gross realized gains of $27.4 million, $18.8 million and $20.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. The Company recorded gross realized losses of $0.1 million, $6.5 million and nil for the years ended December 31, 2016, 2015 and 2014, respectively. The income tax expense related to the Company’s net realized gains on the sale of investment securities was $10.8 million, $4.9 million and $8.2 million for the years ended December 31, 2016, 2015 and 2014, respectively. Gains and losses realized on sales of securities are determined using the specific identification method.
Interest income from taxable investment securities was $83.0 million, $73.6 million and $64.1 million for the years ended December 31, 2016, 2015 and 2014, respectively. The Company did not own any non-taxable investment securities during the years ended December 31, 2016, 2015 and 2014.
The amortized cost and fair value of U.S. Treasury and government-sponsored enterprises debt securities as of December 31, 2016, by contractual maturity, are shown below. Mortgage-backed securities, asset-backed securities and collateralized mortgage obligations are disclosed separately in the table below as remaining expected maturities will differ from contractual maturities as borrowers have the right to prepay obligations.
At December 31, 2016, pledged securities totaled $2.7 billion, of which $2.5 billion was pledged to secure public deposits and repurchase agreements, and $209.1 million was pledged to secure other financial transactions. At December 31, 2015, pledged securities totaled $3.1 billion, of which $2.9 billion was pledged to secure public deposits and repurchase agreements, and $206.3 million was pledged to secure other financial transactions.
The Company held no securities of any single issuer, other than the U.S. government, government agency and government-sponsored enterprises, which were in excess of 10% of stockholders’ equity as of December 31, 2016 and 2015.
The following table presents the unrealized gross losses and fair values of securities in the available-for-sale portfolio by length of time that the 158 and 120 individual securities in each category have been in a continuous loss position as of December 31, 2016 and 2015, respectively. The unrealized losses on investment securities were attributable to market conditions.
Other-Than-Temporary Impairment (“OTTI”)
Unrealized losses for all investment securities are reviewed to determine whether the losses are other than temporary. Investment securities are evaluated for OTTI on at least a quarterly basis, and more frequently when economic and market conditions warrant such an evaluation, to determine whether the decline in fair value below amortized cost is other than temporary.
The term other than temporary is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. The decline in value is not related to any issuer- or industry-specific credit event. At December 31, 2016 and 2015, the Company did not have the intent to sell and determined it was more likely than not that the Company would not be required to sell the securities prior to recovery of the amortized cost basis. As the Company has the intent and ability to hold securities in an unrealized loss position, each security with an unrealized loss position in the above tables has been further assessed to determine if a credit loss exists. If it is probable that the Company will not collect all amounts due according to the contractual terms of an investment security, an OTTI is considered to have occurred. In determining whether a credit loss exists, the Company estimates the present value of future cash flows expected to be collected from the investment security. If the present value of future cash flows is less than the amortized cost basis of the security, an OTTI exists. As of December 31, 2016 and 2015, the Company did not expect any credit losses in its debt securities and no OTTI was recognized on securities during the years ended December 31, 2016 and 2015.
Visa Class B Restricted Shares
In 2008, the Company received 394,000 Visa Class B restricted shares as part of Visa’s initial public offering. Visa Class B restricted shares are not currently convertible to publicly traded Visa Class A common shares, and only transferable in limited circumstances, until the settlement of a certain litigation which is indemnified by Visa members, including the Company. As there are existing transfer restrictions and the outcome of the aforementioned litigation is uncertain, these shares were included in the consolidated balance sheets at their historical cost of $0.
During the year ended December 31, 2016, the Company recorded a $22.7 million net realized gain related to the sale of 274,000 Visa Class B restricted shares. Concurrent with the sale of the Visa Class B restricted shares, the Company entered into an agreement with the buyer that requires payment to the buyer in the event Visa reduces each member bank’s Class B conversion ratio to unrestricted Class A common shares. See “Note 17. Derivative Financial Instruments” for more information.
The Company held approximately 120,000 Visa Class B shares as of December 31, 2016 and 394,000 Visa Class B shares as of December 31, 2015. These shares continued to be carried at $0 cost basis during each of the respective periods. |