Investment Securities

3 Months Ended

Mar. 31, 2020

Investment Securities

Investment Securities

2. Investment Securities

As of March 31, 2020 and December 31, 2019, 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.

As of March 31, 2020 and December 31, 2019, all of the Company’s investment securities were classified as available-for-sale. Amortized cost and fair value of securities as of March 31, 2020 and December 31, 2019 were as follows:

	March 31, 2020								December 31, 2019
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
U.S. Treasury securities	$	30,483	$	444	$	—	$	30,927	$	29,832	$	56	$	—	$	29,888
Government-sponsored enterprises debt securities		26,705		16		—		26,721		101,697		19		(277)		101,439
Mortgage-backed securities:
Residential - Government agency		269,947		9,016		—		278,963		290,131		2,224		(1,146)		291,209
Residential - Government-sponsored enterprises		403,682		14,289		(304)		417,667		395,039		6,126		(1,673)		399,492
Commercial - Government-sponsored enterprises		184,635		3,345		(1,196)		186,784		101,798		555		(634)		101,719
Collateralized mortgage obligations:
Government agency		2,304,803		21,408		(5,333)		2,320,878		2,390,143		7,483		(16,348)		2,381,278
Government-sponsored enterprises		794,142		5,965		(3,590)		796,517		772,023		2,505		(3,909)		770,619
Total available-for-sale securities	$	4,014,397	$	54,483	$	(10,423)	$	4,058,457	$	4,080,663	$	18,968	$	(23,987)	$	4,075,644

Proceeds from calls and sales of investment securities were $75.0 million and $3.5 million, respectively, for the three months ended March 31, 2020, and nil and $863.1 million, respectively, for the three months ended March 31, 2019. The Company recorded gross realized gains of $0.1 million and gross realized losses of nil for the three months ended March 31, 2020. The Company recorded gross realized gains of nil and gross realized losses of $2.6 million for the three months ended March 31, 2019. The income tax benefit related to the Company’s net realized loss on the sale of investment securities was nil and $0.7 million for three months ended March 31, 2020 and 2019, respectively. The income tax expense related to the net realized gains on the sale of investment securities was nil during both the three months ended March 31, 2020 and 2019. Gains and losses realized on sales of securities are determined using the specific identification method.

Interest income from taxable investment securities was $21.2 million and $24.5 million for the three months ended March 31, 2020 and 2019, respectively. Interest income from non-taxable investment securities was nil during both the three months ended March 31, 2020 and 2019.

The amortized cost and fair value of debt securities issued by the U.S. Treasury and government-sponsored enterprises as of March 31, 2020, by contractual maturity, are shown below. 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.

	March 31, 2020
	Amortized		Fair
(dollars in thousands)	Cost		Value
Due in one year or less	$	—	$	—
Due after one year through five years		57,188		57,648
Due after five years through ten years		—		—
Due after ten years		—		—
		57,188		57,648
Mortgage-backed securities:
Residential - Government agency		269,947		278,963
Residential - Government-sponsored enterprises		403,682		417,667
Commercial - Government-sponsored enterprises		184,635		186,784
Total mortgage-backed securities		858,264		883,414
Collateralized mortgage obligations:
Government agency		2,304,803		2,320,878
Government-sponsored enterprises		794,142		796,517
Total collateralized mortgage obligations		3,098,945		3,117,395
Total available-for-sale securities	$	4,014,397	$	4,058,457

At March 31, 2020, pledged securities totaled $2.2 billion, of which $2.0 billion was pledged to secure public deposits and $246.8 million was pledged to secure other financial transactions. At December 31, 2019, pledged securities totaled $1.8 billion, of which $1.5 billion was pledged to secure public deposits and $242.3 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 March 31, 2020 and December 31, 2019.

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 55 and 118 individual securities in each category have been in a continuous loss position as of March 31, 2020 and December 31, 2019, 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. At March 31, 2020, the Company did not have any securities with 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.

	Time in Continuous Loss as of March 31, 2020
	Less Than 12 Months				12 Months or More				Total
	Unrealized				Unrealized				Unrealized
(dollars in thousands)	Losses		Fair Value		Losses		Fair Value		Losses		Fair Value
Mortgage-backed securities:
Residential - Government-sponsored enterprises	$	(211)	$	95,144	$	(93)	$	10,191	$	(304)	$	105,335
Commercial - Government-sponsored enterprises		(1,196)		95,097		—		—		(1,196)		95,097
Collateralized mortgage obligations:
Government agency		(3,979)		480,482		(1,354)		94,077		(5,333)		574,559
Government-sponsored enterprises		(1,242)		144,625		(2,348)		149,246		(3,590)		293,871
Total available-for-sale securities with unrealized losses	$	(6,628)	$	815,348	$	(3,795)	$	253,514	$	(10,423)	$	1,068,862

	Time in Continuous Loss as of December 31, 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	$	(277)	$	49,716	$	—	$	—	$	(277)	$	49,716
Mortgage-backed securities:
Residential - Government agency		—		—		(1,146)		109,614		(1,146)		109,614
Residential - Government-sponsored enterprises		(115)		76,481		(1,558)		109,025		(1,673)		185,506
Commercial - Government-sponsored enterprises		(634)		38,062		—		—		(634)		38,062
Collateralized mortgage obligations:
Government agency		(8,049)		969,762		(8,299)		565,764		(16,348)		1,535,526
Government-sponsored enterprises		(583)		180,785		(3,326)		209,752		(3,909)		390,537
Total available-for-sale securities with unrealized losses	$	(9,658)	$	1,314,806	$	(14,329)	$	994,155	$	(23,987)	$	2,308,961

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. In October 2019, the Company made a payment of approximately $0.3 million 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 March 31, 2020 and December 31, 2019. These shares continued to be carried at $0 cost basis during each of the respective periods.