Investment Securities

6 Months Ended

Jun. 30, 2022

Investment Securities

Investment Securities

2. Investment Securities

As of June 30, 2022 and December 31, 2021, 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 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.

Collateralized loan obligations – includes structured debt securities backed by a pool of loans, consisting of primarily non-investment grade broadly syndicated corporate loans with additional credit enhancement. These are floating rate securities that have an investment grade rating of AA or better.

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

As of June 30, 2022, the Company’s investment securities were classified as either available-for-sale or held-to-maturity. As of December 31, 2021, all of the Company’s investment securities were classified as available-for-sale. Amortized cost and fair value of securities as of June 30, 2022 and December 31, 2021 were as follows:

	June 30, 2022								December 31, 2021
	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	$	168,129	$	—	$	(8,964)	$	159,165	$	196,662	$	125	$	(4,224)	$	192,563
Government-sponsored enterprises debt securities		20,000		—		(37)		19,963		—		—		—		—
Mortgage-backed securities:
Residential - Government agency		72,027		—		(4,069)		67,958		135,764		1,791		(291)		137,264
Residential - Government-sponsored enterprises		1,444,461		24		(111,470)		1,333,015		1,496,605		6,914		(12,419)		1,491,100
Commercial - Government agency		297,271		—		(29,614)		267,657		392,443		1,741		(6,521)		387,663
Commercial - Government-sponsored enterprises		147,160		918		(6,242)		141,836		1,415,511		2,646		(48,714)		1,369,443
Commercial - Non-agency		21,957		—		(407)		21,550		—		—		—		—
Collateralized mortgage obligations:
Government agency		1,102,277		—		(76,938)		1,025,339		2,103,187		7,768		(31,432)		2,079,523
Government-sponsored enterprises		744,622		—		(60,062)		684,560		2,671,131		3,608		(53,695)		2,621,044
Collateralized loan obligations		249,905		45		(3,247)		246,703		105,245		2		—		105,247
Debt securities issued by states and political subdivisions		—		—		—		—		44,185		—		—		44,185
Total available-for-sale securities	$	4,267,809	$	987	$	(301,050)	$	3,967,746	$	8,560,733	$	24,595	$	(157,296)	$	8,428,032
Government agency debt securities	$	55,148	$	—	$	(2,405)	$	52,743	$	—	$	—	$	—	$	—
Mortgage-backed securities:
Residential - Government agency		47,309		—		(3,031)		44,278		—		—		—		—
Residential - Government-sponsored enterprises		93,458		—		(6,117)		87,341		—		—		—		—
Commercial - Government agency		30,497		—		(2,685)		27,812		—		—		—		—
Commercial - Government-sponsored enterprises		1,173,398		—		(63,627)		1,109,771		—		—		—		—
Collateralized mortgage obligations:
Government agency		879,010		—		(31,243)		847,767		—		—		—		—
Government-sponsored enterprises		1,760,755		—		(69,483)		1,691,272		—		—		—		—
Debt securities issued by states and political subdivisions		53,640		—		(3,844)		49,796		—		—		—		—
Total held-to-maturity securities	$	4,093,215	$	—	$	(182,435)	$	3,910,780	$	—	$	—	$	—	$	—

During the three and six months ended June 30, 2022, the Company reclassified at fair value approximately $4.1 billion in available-for-sale investment securities to the held-to-maturity category. The related unrealized after-tax losses of approximately $338.8 million remained in accumulated other comprehensive income to be amortized over the estimated remaining life of the securities as an adjustment of yield, offsetting the related accretion of the discount on the transferred securities. No gains or losses were recognized at the time of reclassification. Management considers the held-to-maturity classification of these investment securities to be appropriate as the Company has the positive intent and ability to hold these securities to maturity. As of June 30, 2022, the weighted average life of the transferred securities was approximately 8.0 years. Material changes in prepayment speeds may result in a significant impact to the estimated remaining life of these securities.

Accrued interest receivable related to available-for-sale investment securities was $8.7 million and $14.1 million as of June 30, 2022 and December 31, 2021, respectively. Accrued interest receivable related to held-to-maturity investment securities was $7.0 million and nil as of June 30, 2022 and December 31, 2021, respectively. Accrued interest receivable is recorded separately from the amortized cost basis of investment securities on the Company’s unaudited interim consolidated balance sheets.

Proceeds from calls and sales of investment securities were $0.2 million and nil, respectively, for the three months ended June 30, 2022, and $1.2 million and nil, respectively, for the six months ended June 30, 2022. Proceeds from calls and sales of investment securities were $0.2 million and $2.5 million, respectively, for the three months ended June 30, 2021, and $0.3 million and $2.5 million, respectively, for the six months ended June 30, 2021. The Company recorded gross realized gains of nil and gross realized losses of nil for the three and six months ended June 30, 2022. The Company recorded gross realized gains of $0.1 million and gross realized losses of nil during both the three and six months ended June 30, 2021. The income tax expense related to the Company’s net realized gains on the sale of investment securities was nil for the three and six months ended June 30, 2022. The income tax expense related to the Company’s net realized gains on the sale of investment securities was nil during both the three and six months ended June 30, 2021. Gains and losses realized on sales of securities are determined using the specific identification method.

Interest income from taxable investment securities was $31.6 million and $22.4 million, respectively, for the three months ended June 30, 2022 and 2021, and $60.7 million and $44.6 million, respectively, for the six months ended June 30, 2022 and 2021. Interest income from non-taxable investment securities was $3.3 million and $2.2 million, respectively, for the three months ended June 30, 2022 and 2021, and $6.3 million and $3.2 million, respectively, for the six months ended June 30, 2022 and 2021.

The amortized cost and fair value of debt securities issued by the U.S. Treasury, government agencies, government-sponsored enterprises and states and political subdivisions, non-agency mortgage-backed securities and collateralized loan obligations as of June 30, 2022, by contractual maturity, are shown below. Mortgage-backed securities and collateralized mortgage obligations issued by government agencies and government-sponsored enterprises are disclosed separately in the table below as remaining expected maturities will differ from contractual maturities as borrowers have the right to prepay obligations.

	June 30, 2022
	Amortized		Fair
(dollars in thousands)	Cost		Value
Due in one year or less	$	30,106	$	29,762
Due after one year through five years		79,915		77,983
Due after five years through ten years		177,556		170,656
Due after ten years		172,414		168,980
		459,991		447,381
Mortgage-backed securities:
Residential - Government agency		72,027		67,958
Residential - Government-sponsored enterprises		1,444,461		1,333,015
Commercial - Government agency		297,271		267,657
Commercial - Government-sponsored enterprises		147,160		141,836
Total mortgage-backed securities		1,960,919		1,810,466
Collateralized mortgage obligations:
Government agency		1,102,277		1,025,339
Government-sponsored enterprises		744,622		684,560
Total collateralized mortgage obligations		1,846,899		1,709,899
Total available-for-sale securities	$	4,267,809	$	3,967,746
Due in one year or less	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		—		—
Due after ten years		108,788		102,539
		108,788		102,539
Mortgage-backed securities:
Residential - Government agency		47,309		44,278
Residential - Government-sponsored enterprises		93,458		87,341
Commercial - Government agency		30,497		27,812
Commercial - Government-sponsored enterprises		1,173,398		1,109,771
Total mortgage-backed securities		1,344,662		1,269,202
Collateralized mortgage obligations:
Government agency		879,010		847,767
Government-sponsored enterprises		1,760,755		1,691,272
Total collateralized mortgage obligations		2,639,765		2,539,039
Total held-to-maturity securities	$	4,093,215	$	3,910,780

At June 30, 2022, pledged securities totaled $2.6 billion, of which $2.4 billion was pledged to secure public deposits and $191.3 million was pledged to secure other financial transactions. At December 31, 2021, pledged securities totaled $2.1 billion, of which $1.9 billion was pledged to secure public deposits and $193.2 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 June 30, 2022 or December 31, 2021.

The following tables present the unrealized gross losses and fair values of securities in the available-for-sale portfolio by length of time that the 296 and 318 individual securities in each category have been in a continuous loss position as of June 30, 2022 and December 31, 2021, respectively. The unrealized losses on available-for-sale 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 June 30, 2022
	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	$	(2,239)	$	87,782	$	(6,725)	$	71,383	$	(8,964)	$	159,165
Government-sponsored enterprises debt securities		(37)		19,964		—		—		(37)		19,964
Mortgage-backed securities:
Residential - Government agency		(4,069)		67,958		—		—		(4,069)		67,958
Residential - Government-sponsored enterprises		(110,301)		1,303,823		(1,169)		9,196		(111,470)		1,313,019
Commercial - Government agency		(12,813)		150,595		(16,801)		116,854		(29,614)		267,449
Commercial - Government-sponsored enterprises		(4,482)		77,564		(1,760)		18,478		(6,242)		96,042
Commercial - Non-agency		(407)		21,550		—		—		(407)		21,550
Collateralized mortgage obligations:
Government agency		(74,997)		988,818		(1,941)		16,549		(76,938)		1,005,367
Government-sponsored enterprises		(41,157)		517,636		(18,905)		166,924		(60,062)		684,560
Collateralized loan obligations:		(3,247)		170,425		—		—		(3,247)		170,425
Total available-for-sale securities with unrealized losses	$	(253,749)	$	3,406,115	$	(47,301)	$	399,384	$	(301,050)	$	3,805,499

	Time in Continuous Loss as of December 31, 2021
	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	$	(3,355)	$	134,468	$	(869)	$	16,642	$	(4,224)	$	151,110
Mortgage-backed securities:
Residential - Government agency		(291)		51,231		—		—		(291)		51,231
Residential - Government-sponsored enterprises		(10,876)		1,230,104		(1,543)		32,415		(12,419)		1,262,519
Commercial - Government agency		(5,239)		186,024		(1,282)		26,063		(6,521)		212,087
Commercial - Government-sponsored enterprises		(22,179)		744,819		(26,535)		397,123		(48,714)		1,141,942
Collateralized mortgage obligations:
Government agency		(31,432)		1,441,848		—		—		(31,432)		1,441,848
Government-sponsored enterprises		(52,551)		2,255,535		(1,144)		24,959		(53,695)		2,280,494
Total available-for-sale securities with unrealized losses	$	(125,923)	$	6,044,029	$	(31,373)	$	497,202	$	(157,296)	$	6,541,231

At June 30, 2022 and December 31, 2021, the Company did not have any available-for-sale securities with the intent to sell and determined it was more likely than not that the Company would not be required to sell these securities prior to recovery of the amortized cost basis. As the Company had the intent and ability to hold the remaining available-for-sale securities in an unrealized loss position as of June 30, 2022 and December 31, 2021, each security with an unrealized loss position in the above tables has been further assessed to determine if a credit loss exists. As of June 30, 2022 and December 31, 2021, the Company did not expect any credit losses in its available-for-sale debt securities and no credit losses were recognized on available-for-sale securities during the three and six months ended June 30, 2022 and for the year ended December 31, 2021.

As of June 30, 2022 and December 31, 2021, the Company’s investment securities were comprised primarily of debt securities, mortgage-backed securities and collateralized mortgage obligations issued by the U.S. Government, its agencies and government-sponsored enterprises, with under 4% of the investment securities comprised of collateralized loan obligations rated AA or better and obligations issued by local state and political subdivisions rated AA or better. For investment securities issued by the U.S. Government, its agencies and government-sponsored enterprises, management has concluded that the long history with no credit losses from these issuers indicates an expectation that nonpayment of the amortized cost basis is zero, and these securities are explicitly or implicitly fully guaranteed by the U.S. government. The U.S. government can print its own currency and its currency is routinely held by central banks and other major financial institutions. The dollar is used in international commerce, and commonly is viewed as a reserve currency, all of which qualitatively indicates that historical credit loss information should be minimally affected by current conditions and reasonable and supportable forecasts. For collateralized loan obligations and debt securities issued by local state and political subdivisions, these securities are investment grade and highly rated and carry either sufficient credit enhancement or days cash on hand to support timely payments of principal and interest. As a result, the Company does not expect any future payment defaults and has not recorded an allowance for credit losses for its available-for-sale and held-to-maturity debt securities as of June 30, 2022. Similarly, for the same reasons noted above, the Company did not record an allowance for credit losses for its available-for-sale debt securities as of December 31, 2021.

The Company holds approximately 120,000 Visa Class B restricted shares as of both June 30, 2022 and December 31, 2021. These shares continued to be carried at $0 cost basis as of both June 30, 2022 and December 31, 2021.