Investment Securities

9 Months Ended

Sep. 30, 2022

Investment Securities

Investment Securities

2. Investment Securities

As of September 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 September 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 September 30, 2022 and December 31, 2021 were as follows:

	September 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	$	165,713	$	—	$	(13,191)	$	152,522	$	196,662	$	125	$	(4,224)	$	192,563
Government-sponsored enterprises debt securities		45,000		—		(674)		44,326		—		—		—		—
Mortgage-backed securities:
Residential - Government agency		68,969		—		(7,335)		61,634		135,764		1,791		(291)		137,264
Residential - Government-sponsored enterprises		1,366,912		—		(169,071)		1,197,841		1,496,605		6,914		(12,419)		1,491,100
Commercial - Government agency		290,614		—		(39,949)		250,665		392,443		1,741		(6,521)		387,663
Commercial - Government-sponsored enterprises		142,053		—		(10,732)		131,321		1,415,511		2,646		(48,714)		1,369,443
Commercial - Non-agency		21,960		—		(290)		21,670		—		—		—		—
Collateralized mortgage obligations:
Government agency		769,161		—		(74,948)		694,213		2,103,187		7,768		(31,432)		2,079,523
Government-sponsored enterprises		553,090		—		(63,642)		489,448		2,671,131		3,608		(53,695)		2,621,044
Collateralized loan obligations		249,924		51		(4,455)		245,520		105,245		2		—		105,247
Debt securities issued by states and political subdivisions		—		—		—		—		44,185		—		—		44,185
Total available-for-sale securities	$	3,673,396	$	51	$	(384,287)	$	3,289,160	$	8,560,733	$	24,595	$	(157,296)	$	8,428,032
Government agency debt securities	$	55,069	$	—	$	(5,579)	$	49,490	$	—	$	—	$	—	$	—
Mortgage-backed securities:
Residential - Government agency		46,695		—		(5,228)		41,467		—		—		—		—
Residential - Government-sponsored enterprises		108,145		—		(11,927)		96,218		—		—		—		—
Commercial - Government agency		30,500		—		(4,784)		25,716		—		—		—		—
Commercial - Government-sponsored enterprises		1,159,512		—		(135,284)		1,024,228		—		—		—		—
Collateralized mortgage obligations:
Government agency		1,106,231		—		(97,089)		1,009,142		—		—		—		—
Government-sponsored enterprises		1,846,258		—		(178,011)		1,668,247		—		—		—		—
Debt securities issued by states and political subdivisions		53,733		—		(7,528)		46,205		—		—		—		—
Total held-to-maturity securities	$	4,406,143	$	—	$	(445,430)	$	3,960,713	$	—	$	—	$	—	$	—

During the three and nine months ended September 30, 2022, the Company reclassified at fair value approximately $417.4 million and $4.6 billion, respectively, in available-for-sale investment securities to the held-to-maturity category. The related total unrealized after-tax losses of approximately $372.4 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 September 30, 2022, the weighted average life of the transferred securities was approximately 8.1 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 $8.6 million and $14.1 million as of September 30, 2022 and December 31, 2021, respectively. Accrued interest receivable related to held-to-maturity investment securities was $7.9 million and nil as of September 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 $0.3 million and nil, respectively, for the three months ended September 30, 2022, and $1.5 million and nil, respectively, for the nine months ended September 30, 2022. Proceeds from calls and sales of investment securities were $0.7 million and nil, respectively, for the three months ended September 30, 2021, and $1.1 million and $2.5 million, respectively, for the nine months ended September 30, 2021. The Company recorded gross realized gains of nil and gross realized losses of nil for the three and nine months ended September 30, 2022. The Company recorded gross realized gains of nil and gross realized losses of nil for the three months ended September 30, 2021 and gross realized gains of $0.1 million and gross realized losses of nil for the nine months ended September 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 nine months ended September 30, 2022 and 2021. Gains and losses realized on sales of securities are determined using the specific identification method.

Interest income from taxable investment securities was $33.8 million and $22.9 million, respectively, for the three months ended September 30, 2022 and 2021, and $94.5 million and $67.5 million, respectively, for the nine months ended September 30, 2022 and 2021. Interest income from non-taxable investment securities was $3.8 million and $2.3 million, respectively, for the three months ended September 30, 2022 and 2021, and $10.1 million and $5.5 million, respectively, for the nine months ended September 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 September 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.

	September 30, 2022
	Amortized		Fair
(dollars in thousands)	Cost		Value
Available-for-sale securities
Due in one year or less	$	55,063	$	54,493
Due after one year through five years		80,038		76,346
Due after five years through ten years		182,578		172,565
Due after ten years		164,918		160,634
		482,597		464,038
Mortgage-backed securities:
Residential - Government agency		68,969		61,634
Residential - Government-sponsored enterprises		1,366,912		1,197,841
Commercial - Government agency		290,614		250,665
Commercial - Government-sponsored enterprises		142,053		131,321
Total mortgage-backed securities		1,868,548		1,641,461
Collateralized mortgage obligations:
Government agency		769,161		694,213
Government-sponsored enterprises		553,090		489,448
Total collateralized mortgage obligations		1,322,251		1,183,661
Total available-for-sale securities	$	3,673,396	$	3,289,160
Held-to-maturity securities
Due in one year or less	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		—		—
Due after ten years		108,802		95,695
		108,802		95,695
Mortgage-backed securities:
Residential - Government agency		46,695		41,467
Residential - Government-sponsored enterprises		108,145		96,218
Commercial - Government agency		30,500		25,716
Commercial - Government-sponsored enterprises		1,159,512		1,024,228
Total mortgage-backed securities		1,344,852		1,187,629
Collateralized mortgage obligations:
Government agency		1,106,231		1,009,142
Government-sponsored enterprises		1,846,258		1,668,247
Total collateralized mortgage obligations		2,952,489		2,677,389
Total held-to-maturity securities	$	4,406,143	$	3,960,713

At September 30, 2022, pledged securities totaled $2.5 billion, of which $2.3 billion was pledged to secure public deposits and $200.4 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 September 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 277 and 318 individual securities in each category have been in a continuous loss position as of September 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 September 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	$	(3,200)	$	83,558	$	(9,991)	$	68,964	$	(13,191)	$	152,522
Government-sponsored enterprises debt securities		(674)		44,326		—		—		(674)		44,326
Mortgage-backed securities:
Residential - Government agency		(7,335)		61,634		—		—		(7,335)		61,634
Residential - Government-sponsored enterprises		(134,845)		994,823		(34,226)		203,018		(169,071)		1,197,841
Commercial - Government agency		(13,928)		117,444		(26,021)		133,221		(39,949)		250,665
Commercial - Government-sponsored enterprises		(7,080)		106,268		(3,652)		25,053		(10,732)		131,321
Commercial - Non-agency		(290)		21,670		—		—		(290)		21,670
Collateralized mortgage obligations:
Government agency		(74,722)		691,942		(226)		2,271		(74,948)		694,213
Government-sponsored enterprises		(25,190)		258,825		(38,452)		230,623		(63,642)		489,448
Collateralized loan obligations:		(4,455)		169,242		—		—		(4,455)		169,242
Total available-for-sale securities with unrealized losses	$	(271,719)	$	2,549,732	$	(112,568)	$	663,150	$	(384,287)	$	3,212,882

	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 September 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 September 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 September 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 nine months ended September 30, 2022 and for the year ended December 31, 2021.

As of September 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 September 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 September 30, 2022 and December 31, 2021. These shares continued to be carried at $0 cost basis as of both September 30, 2022 and December 31, 2021.