Investment Securities

9 Months Ended

Sep. 30, 2020

Investment Securities

Investment Securities

2. Investment Securities

As of September 30, 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 September 30, 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 September 30, 2020 and December 31, 2019 were as follows:

	September 30, 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 and government agency debt securities	$	142,368	$	2,589	$	(1)	$	144,956	$	29,832	$	56	$	—	$	29,888
Government-sponsored enterprises debt securities		—		—		—		—		101,697		19		(277)		101,439
Mortgage-backed securities:
Residential - Government agency		188,797		5,151		—		193,948		290,131		2,224		(1,146)		291,209
Residential - Government-sponsored enterprises		417,286		14,706		(150)		431,842		395,039		6,126		(1,673)		399,492
Commercial - Government agency		737,891		16,875		(2,844)		751,922		—		—		—		—
Commercial - Government-sponsored enterprises		486,814		11,481		(22)		498,273		101,798		555		(634)		101,719
Collateralized mortgage obligations:
Government agency		2,047,556		38,722		(302)		2,085,976		2,390,143		7,483		(16,348)		2,381,278
Government-sponsored enterprises		1,563,844		22,181		(59)		1,585,966		772,023		2,505		(3,909)		770,619
Total available-for-sale securities	$	5,584,556	$	111,705	$	(3,378)	$	5,692,883	$	4,080,663	$	18,968	$	(23,987)	$	4,075,644

Proceeds from both calls and sales of investment securities were nil for the three months ended September 30, 2020, and $101.7 million and $543.0 million, respectively, for the nine months ended September 30, 2020. 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. The Company recorded gross realized gains of nil and gross realized losses of nil for the three months ended September 30, 2020 and gross realized gains of $0.6 million and gross realized losses of $0.7 million for the nine months ended September 30, 2020. 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 income tax benefit related to the Company’s net realized loss on the sale of investment securities was nil during both the three and nine months ended September 30, 2020. The income tax expense related to the net realized gains 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. Gains and losses realized on sales of securities are determined using the specific identification method.

Interest income from taxable investment securities was $20.2 million and $22.3 million, respectively, for the three months ended September 30, 2020 and 2019, and $59.0 million and $71.5 million, respectively, for the nine months ended September 30, 2020 and 2019. Interest income from non-taxable investment securities was $0.1 million and nil, respectively, during the three months ended September 30, 2020 and 2019, and $0.1 million and nil, respectively, for the nine months ended September 30, 2020 and 2019.

The amortized cost and fair value of debt securities issued by the U.S. Treasury and government agencies as of September 30, 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.

	September 30, 2020
	Amortized		Fair
(dollars in thousands)	Cost		Value
Due in one year or less	$	—	$	—
Due after one year through five years		38,268		38,863
Due after five years through ten years		3,277		3,280
Due after ten years		100,823		102,813
		142,368		144,956
Mortgage-backed securities:
Residential - Government agency		188,797		193,948
Residential - Government-sponsored enterprises		417,286		431,842
Commercial - Government agency		737,891		751,922
Commercial - Government-sponsored enterprises		486,814		498,273
Total mortgage-backed securities		1,830,788		1,875,985
Collateralized mortgage obligations:
Government agency		2,047,556		2,085,976
Government-sponsored enterprises		1,563,844		1,585,966
Total collateralized mortgage obligations		3,611,400		3,671,942
Total available-for-sale securities	$	5,584,556	$	5,692,883

At September 30, 2020, pledged securities totaled $2.4 billion, of which $2.2 billion was pledged to secure public deposits and $201.4 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 September 30, 2020 or 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 24 and 118 individual securities in each category have been in a continuous loss position as of September 30, 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 September 30, 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 September 30, 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
U.S. Treasury and government agency debt securities	$	(1)	$	4,976	$	—	$	—	$	(1)	$	4,976
Mortgage-backed securities:
Residential - Government-sponsored enterprises		(150)		51,125		—		—		(150)		51,125
Commercial - Government agency		(2,844)		188,392		—		—		(2,844)		188,392
Commercial - Government-sponsored enterprises		(22)		70,587		—		—		(22)		70,587
Collateralized mortgage obligations:
Government agency		(275)		101,340		(27)		7,475		(302)		108,815
Government-sponsored enterprises		(57)		52,077		(2)		8,100		(59)		60,177
Total available-for-sale securities with unrealized losses	$	(3,349)	$	468,497	$	(29)	$	15,575	$	(3,378)	$	484,072

	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 September 30, 2020 and December 31, 2019. These shares continued to be carried at $0 cost basis as of both September 30, 2020 and December 31, 2019.