Investment Securities

9 Months Ended

Sep. 30, 2023

Investment Securities

Investment Securities

2. Investment Securities

As of September 30, 2023 and December 31, 2022, 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, 2023 and December 31, 2022, the Company’s investment securities were classified as either available-for-sale or held-to-maturity. Amortized cost, gross unrealized holding gains and losses and fair value of available-for-sale and held-to-maturity investment securities as of September 30, 2023 and December 31, 2022 were as follows:

	September 30, 2023								December 31, 2022
	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	$	126,264	$	—	$	(12,105)	$	114,159	$	163,309	$	—	$	(12,327)	$	150,982
Government-sponsored enterprises debt securities		20,000		—		(740)		19,260		45,000		—		(699)		44,301
Mortgage-backed securities:
Residential - Government agency		61,768		—		(9,406)		52,362		66,792		—		(7,069)		59,723
Residential - Government-sponsored enterprises		1,185,269		—		(179,487)		1,005,782		1,317,718		—		(157,263)		1,160,455
Commercial - Government agency		272,432		—		(60,535)		211,897		282,700		—		(44,847)		237,853
Commercial - Government-sponsored enterprises		94,021		—		(9,101)		84,920		130,612		—		(11,039)		119,573
Commercial - Non-agency		21,964		—		(362)		21,602		21,964		—		(493)		21,471
Collateralized mortgage obligations:
Government agency		661,207		—		(95,355)		565,852		738,524		—		(85,202)		653,322
Government-sponsored enterprises		479,217		—		(78,469)		400,748		533,103		—		(70,971)		462,132
Collateralized loan obligations		249,889		21		(3,788)		246,122		249,877		50		(8,606)		241,321
Total available-for-sale securities	$	3,172,031	$	21	$	(449,348)	$	2,722,704	$	3,549,599	$	50	$	(398,516)	$	3,151,133
Government agency debt securities	$	53,105	$	—	$	(7,901)	$	45,204	$	54,318	$	—	$	(5,674)	$	48,644
Mortgage-backed securities:
Residential - Government agency		44,379		—		(8,024)		36,355		46,302		—		(6,294)		40,008
Residential - Government-sponsored enterprises		100,905		—		(18,151)		82,754		106,534		—		(12,978)		93,556
Commercial - Government agency		30,733		—		(8,756)		21,977		30,544		—		(5,229)		25,315
Commercial - Government-sponsored enterprises		1,132,818		153		(194,471)		938,500		1,150,449		—		(138,451)		1,011,998
Collateralized mortgage obligations:
Government agency		1,010,551		—		(153,260)		857,291		1,080,492		—		(122,378)		958,114
Government-sponsored enterprises		1,677,519		—		(271,248)		1,406,271		1,798,178		—		(207,045)		1,591,133
Debt securities issued by states and political subdivisions		54,104		—		(9,427)		44,677		53,822		—		(7,768)		46,054
Total held-to-maturity securities	$	4,104,114	$	153	$	(671,238)	$	3,433,029	$	4,320,639	$	—	$	(505,817)	$	3,814,822

During the year ended December 31, 2022, the Company reclassified at fair value approximately $4.6 billion, 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 loss 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. There were no securities transferred from available-for-sale investment securities to the held-to-maturity category during the three and nine months ended September 30, 2023.

Accrued interest receivable related to available-for-sale investment securities was $8.7 million and $8.9 million as of September 30, 2023 and December 31, 2022, respectively. Accrued interest receivable related to held-to-maturity investment securities was $7.4 million and $7.5 million as of September 30, 2023 and December 31, 2022, 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 September 30, 2023, and $8.0 million and $25.2 million, respectively, for the nine months ended September 30, 2023. 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. The Company recorded gross realized gains of nil and gross realized losses of nil for the three and nine months ended September 30, 2023 and 2022. The income tax expense related to the Company’s net realized gain on the sale of investment securities was nil for the three and nine months ended September 30, 2023 and 2022. Gains and losses realized on sales of securities are determined using the specific identification method.

Interest income from taxable investment securities was $33.4 million and $33.8 million, respectively, for the three months ended September 30, 2023 and 2022, and $100.7 million and $94.5 million, respectively, for the nine months ended September 30, 2023 and 2022. Interest income from non-taxable investment securities was $3.3 million and $3.8 million, respectively, for the three months ended September 30, 2023 and 2022, and $10.0 million and $10.1 million, respectively, for the nine months ended September 30, 2023 and 2022.

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, 2023, 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, 2023
	Amortized		Fair
(dollars in thousands)	Cost		Value
Available-for-sale securities
Due in one year or less	$	19,884	$	19,534
Due after one year through five years		60,651		57,469
Due after five years through ten years		172,717		161,989
Due after ten years		164,865		162,151
		418,117		401,143
Mortgage-backed securities:
Residential - Government agency		61,768		52,362
Residential - Government-sponsored enterprises		1,185,269		1,005,782
Commercial - Government agency		272,432		211,897
Commercial - Government-sponsored enterprises		94,021		84,920
Total mortgage-backed securities		1,613,490		1,354,961
Collateralized mortgage obligations:
Government agency		661,207		565,852
Government-sponsored enterprises		479,217		400,748
Total collateralized mortgage obligations		1,140,424		966,600
Total available-for-sale securities	$	3,172,031	$	2,722,704
Held-to-maturity securities
Due in one year or less	$	—	$	—
Due after one year through five years		—		—
Due after five years through ten years		10,280		8,732
Due after ten years		96,929		81,149
		107,209		89,881
Mortgage-backed securities:
Residential - Government agency		44,379		36,355
Residential - Government-sponsored enterprises		100,905		82,754
Commercial - Government agency		30,733		21,977
Commercial - Government-sponsored enterprises		1,132,818		938,500
Total mortgage-backed securities		1,308,835		1,079,586
Collateralized mortgage obligations:
Government agency		1,010,551		857,291
Government-sponsored enterprises		1,677,519		1,406,271
Total collateralized mortgage obligations		2,688,070		2,263,562
Total held-to-maturity securities	$	4,104,114	$	3,433,029

At September 30, 2023, pledged securities totaled $6.3 billion, of which $3.5 billion was pledged to secure public deposits, $2.6 billion was pledged to secure borrowing capacity and $180.1 million was pledged to secure other financial transactions. At December 31, 2022, pledged securities totaled $3.2 billion, of which $3.0 billion was pledged to secure public deposits and $207.8 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, 2023 or December 31, 2022.

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 279 and 275 individual securities in each category have been in a continuous loss position as of September 30, 2023 and December 31, 2022, 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, 2023
	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	$	—	$	—	$	(12,105)	$	114,159	$	(12,105)	$	114,159
Government-sponsored enterprises debt securities		—		—		(740)		19,260		(740)		19,260
Mortgage-backed securities:
Residential - Government agency		—		—		(9,406)		52,362		(9,406)		52,362
Residential - Government-sponsored enterprises		—		—		(179,487)		1,005,782		(179,487)		1,005,782
Commercial - Government agency		—		—		(60,535)		211,897		(60,535)		211,897
Commercial - Government-sponsored enterprises		—		—		(9,101)		84,920		(9,101)		84,920
Commercial - Non-agency		—		—		(362)		21,602		(362)		21,602
Collateralized mortgage obligations:
Government agency		—		—		(95,355)		565,852		(95,355)		565,852
Government-sponsored enterprises		—		—		(78,469)		400,748		(78,469)		400,748
Collateralized loan obligations		(973)		75,258		(2,815)		169,131		(3,788)		244,389
Total available-for-sale securities with unrealized losses	$	(973)	$	75,258	$	(448,375)	$	2,645,713	$	(449,348)	$	2,720,971

	Time in Continuous Loss as of December 31, 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	$	(2,962)	$	83,870	$	(9,365)	$	67,112	$	(12,327)	$	150,982
Government-sponsored enterprises debt securities		(699)		44,301		—		—		(699)		44,301
Mortgage-backed securities:
Residential - Government agency		(7,069)		59,723		—		—		(7,069)		59,723
Residential - Government-sponsored enterprises		(73,954)		645,338		(83,309)		515,117		(157,263)		1,160,455
Commercial - Government agency		(15,852)		108,842		(28,995)		129,011		(44,847)		237,853
Commercial - Government-sponsored enterprises		(7,348)		94,657		(3,691)		24,916		(11,039)		119,573
Commercial - Non-agency		(493)		21,471		—		—		(493)		21,471
Collateralized mortgage obligations:
Government agency		(74,797)		596,907		(10,405)		56,415		(85,202)		653,322
Government-sponsored enterprises		(21,916)		198,108		(49,055)		264,024		(70,971)		462,132
Collateralized loan obligations:		(8,606)		170,042		—		—		(8,606)		170,042
Total available-for-sale securities with unrealized losses	$	(213,696)	$	2,023,259	$	(184,820)	$	1,056,595	$	(398,516)	$	3,079,854

At September 30, 2023 and December 31, 2022, the Company did not have any available-for-sale securities in an unrealized loss position 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, 2023 and December 31, 2022, 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, 2023 and December 31, 2022, 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, 2023 and for the year ended December 31, 2022.

As of September 30, 2023 and December 31, 2022, 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 5% 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, 2023 or December 31, 2022.

The Company held approximately 120,000 Visa Class B restricted shares as of both September 30, 2023 and December 31, 2022. These shares continued to be carried at $0 cost basis as of both September 30, 2023 and December 31, 2022.