Investment Securities

9 Months Ended

Sep. 30, 2019

Investment Securities

Investment Securities

2. Investment Securities

As of September 30, 2019 and December 31, 2018, 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 agencies and government-sponsored enterprises.

Mortgage-backed securities – includes securities backed by notes or receivables secured by mortgage 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.

Debt securities issued by states and political subdivisions – includes general obligation bonds issued by state and local governments.

As of September 30, 2019 and December 31, 2018, all of the Company’s investment securities were classified as available-for-sale. Amortized cost and fair value of securities as of September 30, 2019 and December 31, 2018 were as follows:

	September 30, 2019								December 31, 2018
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
U.S. Treasury securities	$	29,653	$	85	$	—	$	29,738	$	389,470	$	—	$	—	$	389,470
Government agency debt securities		24,387		85		—		24,472		—		—		—		—
Government-sponsored enterprises debt securities		126,696		28		(75)		126,649		248,372		—		(6,778)		241,594
Government agency mortgage-backed securities		342,326		2,738		(1,159)		343,905		426,710		—		(15,174)		411,536
Government-sponsored enterprises mortgage-backed securities		366,346		6,831		(1,228)		371,949		156,056		85		(5,294)		150,847
Collateralized mortgage obligations:
Government agency		2,479,961		13,900		(7,337)		2,486,524		2,779,620		—		(97,171)		2,682,449
Government-sponsored enterprises		773,755		3,964		(3,874)		773,845		620,337		—		(17,745)		602,592
Debt securities issued by states and political subdivisions		—		—		—		—		19,854		—		—		19,854
Total available-for-sale securities	$	4,143,124	$	27,631	$	(13,673)	$	4,157,082	$	4,640,419	$	85	$	(142,162)	$	4,498,342

Proceeds from calls and sales of investment securities were $38.0 million and nil, respectively, for the three months ended September 30, 2019 and $38.0 million and $905.6 million, respectively, for the nine months ended September 30, 2019. Proceeds from both calls and sales of investment securities were nil for both the three and nine months ended September 30, 2018. The Company recorded no gross realized gains and no gross realized losses for the three months ended September 30, 2019 and gross realized gains of $0.1 million and gross realized losses of $2.7 million

for the nine months ended September 30, 2019. The Company recorded no gross realized gains and no gross realized losses for the three and nine months ended September 30, 2018. The income tax expense related to the Company’s net realized gain on the sale of investment securities was nil for the three months ended September 30, 2019. The income tax benefit related to the Company’s net realized loss on the sale of investment securities was $0.7 million for the nine months ended September 30, 2019. No provision for income taxes related to net realized gains on the sale of investment securities was recorded for the three and nine months ended September 30, 2018. Gains and losses realized on sales of securities are determined using the specific identification method.

Interest income from taxable investment securities was $22.3 million and $25.1 million for the three months ended September 30, 2019 and 2018, respectively, and $71.5 million and $81.2 million for the nine months ended September 30, 2019 and 2018, respectively. Interest income from non-taxable investment securities was nil and $0.1 million for the three months ended September 30, 2019 and 2018, respectively, and nil and $0.4 million for the nine months ended September 30, 2019 and 2018, respectively.

The amortized cost and fair value of debt securities issued by the U.S. Treasury and government-sponsored enterprises as of September 30, 2019, by contractual maturity, are shown below. Debt securities issued by government agencies, mortgage-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.

	September 30, 2019
	Amortized		Fair
(dollars in thousands)	Cost		Value
Due in one year or less	$	29,653	$	29,738
Due after one year through five years		126,696		126,649
Due after five years through ten years		—		—
Due after ten years		—		—
		156,349		156,387
Government agency debt securities		24,387		24,472
Government agency mortgage-backed securities		342,326		343,905
Government-sponsored enterprises mortgage-backed securities		366,346		371,949
Collateralized mortgage obligations:
Government agency		2,479,961		2,486,524
Government-sponsored enterprises		773,755		773,845
Total collateralized mortgage obligations		3,253,716		3,260,369
Total available-for-sale securities	$	4,143,124	$	4,157,082

At September 30, 2019, pledged securities totaled $2.0 billion, of which $1.8 billion was pledged to secure public deposits and $239.1 million was pledged to secure other financial transactions. At December 31, 2018, pledged securities totaled $2.0 billion, of which $1.7 billion was pledged to secure public deposits and $232.7 million was pledged to secure other financial transactions.

The Company held no securities of any single issuer, other than debt securities issued by the U.S. government, government agencies and government-sponsored enterprises, taken in the aggregate, which were in excess of 10% of stockholders’ equity as of September 30, 2019 and December 31, 2018.

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 90 and 154 individual securities in each category have been in a continuous loss position as of September 30, 2019 and December 31, 2018, respectively. The unrealized losses on investment securities were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.

	Time in Continuous Loss as of September 30, 2019
	Less Than 12 Months				12 Months or More				Total
	Unrealized				Unrealized				Unrealized
(dollars in thousands)	Losses		Fair Value		Losses		Fair Value		Losses		Fair Value
Government-sponsored enterprises debt securities	$	(75)	$	24,917	$	—	$	—	$	(75)	$	24,917
Government agency mortgage-backed securities		—		—		(1,159)		115,069		(1,159)		115,069
Government-sponsored enterprises mortgage-backed securities		—		—		(1,228)		115,456		(1,228)		115,456
Collateralized mortgage obligations:
Government agency		(820)		407,961		(6,517)		652,211		(7,337)		1,060,172
Government-sponsored enterprises		(161)		107,250		(3,713)		226,823		(3,874)		334,073
Total available-for-sale securities with unrealized losses	$	(1,056)	$	540,128	$	(12,617)	$	1,109,559	$	(13,673)	$	1,649,687

	Time in Continuous Loss as of December 31, 2018
	Less Than 12 Months				12 Months or More				Total
	Unrealized				Unrealized				Unrealized
(dollars in thousands)	Losses		Fair Value		Losses		Fair Value		Losses		Fair Value
Government-sponsored enterprises debt securities	$	—	$	—	$	(6,778)	$	157,939	$	(6,778)	$	157,939
Government agency mortgage-backed securities		—		—		(15,174)		373,891		(15,174)		373,891
Government-sponsored enterprises mortgage-backed securities		(1)		172		(5,293)		125,869		(5,294)		126,041
Collateralized mortgage obligations:
Government agency		—		—		(97,171)		2,475,532		(97,171)		2,475,532
Government-sponsored enterprises		—		—		(17,745)		486,175		(17,745)		486,175
Total available-for-sale securities with unrealized losses	$	(1)	$	172	$	(142,161)	$	3,619,406	$	(142,162)	$	3,619,578

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 September 30, 2019, 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, 2018, the Company had the intent to sell 48 securities with an aggregated amortized cost basis of $898.2 million. As a result, the Company recorded an OTTI write-down of $24.1 million in December 2018. The OTTI write-down represented the difference between the amortized cost basis and the fair value of the securities as of December 31, 2018. In January 2019, the Company completed its sale of the 48 securities and recorded an additional loss of $2.6 million.

Visa Class B Restricted Shares

In 2008, the Company received 394,000 Visa Class B restricted shares as part of Visa’s IPO. 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 certain litigation which are 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.

In 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 rate to unrestricted Class A common shares. On June 28, 2018, Visa additionally funded its litigation escrow account, thereby reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on July 5, 2018, Visa announced a decrease in conversion rate from 1.6483 to 1.6298, effective June 28, 2018. In July 2018, the Company made a payment of approximately $0.7 million to the buyer as a result of the reduction in the Visa Class B conversion rate.  On September 27, 2019, Visa additionally funded its litigation escrow account, thereby further reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on September 30, 2019, Visa announced a decrease in conversion rate from 1.6298 to 1.6228, effective September 27, 2019. As of September 30, 2019, the Company recorded an estimated $0.3 million liability to be paid to the buyer as a result of the reduction in the Visa Class B conversion rate. See “Note 12. Derivative Financial Instruments” for more information.

The Company held approximately 120,000 Visa Class B restricted shares as of both September 30, 2019 and December 31, 2018. These shares continued to be carried at $0 cost basis during each of the respective periods.