Investment Securities

Investment securities as shown in this report reflect revised categories as required by the Company’s adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”, on January 1, 2018. That new guidance refined the definition of equity securities and required their segregation from available for sale debt securities. For comparability purposes, prior period disclosures in this report have been revised to show the new categorization.



(In thousands)	June 30, 2018		December 31, 2017
Available for sale debt securities	$	8,412,376	$	8,725,442
Trading debt securities	31,156		18,269
Equity securities:
Readily determinable fair value	2,741		48,838
No readily determinable fair value	1,703		1,753
Other:
Federal Reserve Bank stock	33,369		33,253
Federal Home Loan Bank stock	10,000		10,000
Private equity investments	68,940		55,752
Total investment securities	$	8,560,285	$	8,893,307

While changes in the fair value of available for sale debt securities continue to be recorded in the equity category of accumulated other comprehensive income, the new guidance requires changes in the fair value of equity securities to be recorded in current earnings. As required by the new guidance, the unrealized gain in fair value on equity securities (recorded in accumulated other comprehensive income at December 31, 2017) was reclassified to retained earnings on January 1, 2018. The amount of the reclassification was $33.3 million, net of tax.

Equity securities include common and preferred stock with readily determinable fair values that totaled $2.5 million at cost and $2.7 million at fair value at June 30, 2018. The decline in these balances from prior periods was due to a third party merger transaction in June 2018, in which the majority of these securities were redeemed for cash of $39.9 million. During the first six months of 2018, unrealized net losses of $176 thousand were recognized in current earnings on equity securities still held at June 30, 2018.

Equity securities also include securities with a carrying value of $1.7 million that do not have readily determinable fair values. The Company has elected, under the ASU, to measure these at cost minus impairment, if any, plus or minus changes resulting from observable price changes for the identical or similar investment of the same issuer. The Company did not record any impairment or other adjustments to the carrying amount of these investments during the period.

Other investment securities whose accounting is not addressed in the ASU include Federal Reserve Bank (FRB) stock, Federal Home Loan Bank (FHLB) stock, and investments in portfolio concerns held by the Company's private equity subsidiaries. FRB stock and FHLB stock are held for debt and regulatory purposes. Investment in FRB stock is based on the capital structure of the investing bank, and investment in FHLB stock is tied to the level of borrowings from the FHLB. These holdings are carried at cost. The private equity investments, in the absence of readily ascertainable market values, are carried at estimated fair value.

The majority of the Company’s investment portfolio is comprised of available for sale debt securities, which are carried at fair value with changes in fair value reported in accumulated other comprehensive income (AOCI). A summary of the available for sale debt securities by maturity groupings as of June 30, 2018 is shown below. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as the FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by commercial and residential mortgages. Also included are certain other asset-backed securities, which are primarily collateralized by credit cards, automobiles, student loans, and commercial loans. These securities differ from traditional debt securities primarily in that they may have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying collateral.



(In thousands)	Amortized Cost		Fair Value
U.S. government and federal agency obligations:
Within 1 year	$	52,660	$	52,603
After 1 but within 5 years	645,431		634,819
After 5 but within 10 years	157,967		155,108
After 10 years	69,202		68,562
Total U.S. government and federal agency obligations	925,260		911,092
Government-sponsored enterprise obligations:
Within 1 year	117,562		117,444
After 1 but within 5 years	121,584		119,743
After 5 but within 10 years	34,984		33,946
After 10 years	42,852		40,228
Total government-sponsored enterprise obligations	316,982		311,361
State and municipal obligations:
Within 1 year	147,325		147,668
After 1 but within 5 years	598,663		600,688
After 5 but within 10 years	591,819		590,950
After 10 years	40,963		39,858
Total state and municipal obligations	1,378,770		1,379,164
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,194,764		3,131,025
Non-agency mortgage-backed securities	1,019,545		1,010,331
Asset-backed securities	1,351,461		1,338,542
Total mortgage and asset-backed securities	5,565,770		5,479,898
Other debt securities:
Within 1 year	9,003		8,971
After 1 but within 5 years	257,704		252,151
After 5 but within 10 years	73,283		69,739
Total other debt securities	339,990		330,861
Total available for sale debt securities	$	8,526,772	$	8,412,376

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $443.8 million, at fair value, at June 30, 2018. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. Included in state and municipal obligations are $15.1 million, at fair value, of auction rate securities, which were purchased from bank customers in 2008. Interest on these bonds is currently being paid at the maximum failed auction rates.

For debt securities classified as available for sale, the following table shows the unrealized gains and losses (pre-tax) in AOCI, by security type.



(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2018
U.S. government and federal agency obligations	$	925,260	$	503	$	(14,671	)	$	911,092
Government-sponsored enterprise obligations	316,982		—		(5,621		)	311,361
State and municipal obligations	1,378,770		8,105		(7,711		)	1,379,164
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,194,764		5,995		(69,734		)	3,131,025
Non-agency mortgage-backed securities	1,019,545		6,232		(15,446		)	1,010,331
Asset-backed securities	1,351,461		2,343		(15,262		)	1,338,542
Total mortgage and asset-backed securities	5,565,770		14,570		(100,442		)	5,479,898
Other debt securities	339,990		—		(9,129		)	330,861
Total	$	8,526,772	$	23,178	$	(137,574	)	$	8,412,376
December 31, 2017
U.S. government and federal agency obligations	$	917,494	$	4,096	$	(4,443	)	$	917,147
Government-sponsored enterprise obligations	408,266		26		(1,929		)	406,363
State and municipal obligations	1,592,707		21,413		(2,754		)	1,611,366
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,046,701		17,956		(23,744		)	3,040,913
Non-agency mortgage-backed securities	903,920		6,710		(4,837		)	905,793
Asset-backed securities	1,495,380		2,657		(5,237		)	1,492,800
Total mortgage and asset-backed securities	5,446,001		27,323		(33,818		)	5,439,506
Other debt securities	350,988		1,250		(1,178		)	351,060
Total	$	8,715,456	$	54,108	$	(44,122	)	$	8,725,442

The Company’s impairment policy requires a review of all securities for which fair value is less than amortized cost. Special emphasis and analysis is placed on securities whose credit rating has fallen below A3 (Moody's) or A- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or who have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, cash flow analyses are prepared. For more complex analyses, detailed cash flow models are prepared which use inputs specific to each security. Inputs to these models include factors such as cash flow received, contractual payments required, and various other information related to the underlying collateral (including current delinquencies), collateral loss severity rates (including loan to values), expected delinquency rates, credit support from other tranches, and prepayment speeds. Stress tests are performed at varying levels of delinquency rates, prepayment speeds and loss severities in order to gauge probable ranges of credit loss. At June 30, 2018, the fair value of securities on this watch list was $57.3 million compared to $68.0 million at December 31, 2017.

As of June 30, 2018, the Company had recorded other-than-temporary impairment (OTTI) on certain non-agency mortgage-backed securities, part of the watch list mentioned above, which had an aggregate fair value of $22.4 million. The cumulative credit-related portion of the impairment on these securities, which was recorded in earnings, totaled $14.2 million. The Company does not intend to sell these securities and believes it is not likely that it will be required to sell the securities before the recovery of their amortized cost.

The credit-related portion of the loss on these securities was based on the cash flows projected to be received over the estimated life of the securities, discounted to present value, and compared to the current amortized cost bases of the securities. Significant inputs to the cash flow models used to calculate the credit losses on these securities at June 30, 2018 included the following:



Significant Inputs	Range
Prepayment CPR	0%	-	25%
Projected cumulative default	13%	-	52%
Credit support	0%	-	20%
Loss severity	14%	-	63%

The following table presents a rollforward of the cumulative OTTI credit losses recognized in earnings on all available for sale debt securities.



	For the Six Months Ended June 30
(In thousands)	2018			2017
Cumulative OTTI credit losses at January 1	$	14,199		$	14,080
Credit losses on debt securities for which impairment was not previously recognized	58			46
Credit losses on debt securities for which impairment was previously recognized	10			274
Increase in expected cash flows that are recognized over remaining life of security	(104		)	(146		)
Cumulative OTTI credit losses at June 30	$	14,163		$	14,254

Debt securities with unrealized losses recorded in AOCI are shown in the table below, along with the length of the impairment period.



	Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2018
U.S. government and federal agency obligations	$	707,018	$	12,156	$	90,340	$	2,515	$	797,358	$	14,671
Government-sponsored enterprise obligations	261,378		5,605		49,983		16		311,361		5,621
State and municipal obligations	458,880		5,700		51,863		2,011		510,743		7,711
Mortgage and asset-backed securities:
Agency mortgage-backed securities	2,029,957		45,267		566,986		24,467		2,596,943		69,734
Non-agency mortgage-backed securities	773,890		12,076		134,679		3,370		908,569		15,446
Asset-backed securities	862,416		13,296		173,895		1,966		1,036,311		15,262
Total mortgage and asset-backed securities	3,666,263		70,639		875,560		29,803		4,541,823		100,442
Other debt securities	311,714		8,033		19,147		1,096		330,861		9,129
Total	$	5,405,253	$	102,133	$	1,086,893	$	35,441	$	6,492,146	$	137,574
December 31, 2017
U.S. government and federal agency obligations	$	618,617	$	4,443	$	—	$	—	$	618,617	$	4,443
Government-sponsored enterprise obligations	286,393		1,712		49,766		217		336,159		1,929
State and municipal obligations	282,843		1,752		49,339		1,002		332,182		2,754
Mortgage and asset-backed securities:
Agency mortgage-backed securities	1,320,689		9,433		619,300		14,311		1,939,989		23,744
Non-agency mortgage-backed securities	577,017		2,966		153,813		1,871		730,830		4,837
Asset-backed securities	786,048		3,168		264,295		2,069		1,050,343		5,237
Total mortgage and asset-backed securities	2,683,754		15,567		1,037,408		18,251		3,721,162		33,818
Other debt securities	144,090		727		20,202		451		164,292		1,178
Total	$	4,015,697	$	24,201	$	1,156,715	$	19,921	$	5,172,412	$	44,122

The available for sale debt portfolio included $6.5 billion of securities that were in a loss position at June 30, 2018, compared to $5.2 billion at December 31, 2017. The total amount of unrealized loss on these securities was $137.6 million at June 30, 2018, an increase of $93.5 million compared to the loss at December 31, 2017. This increase in losses was mainly due to a rising rate environment.

The following tables present proceeds from sales of securities and the components of investment securities gains and losses which have been recognized in earnings.



	For the Six Months Ended June 30
(In thousands)	2018			2017
Proceeds from sales of securities:
Available for sale debt securities	$	152,541		$	4,972
Equity securities	39,981			584
Other	—			996
Total proceeds	$	192,522		$	6,552

Investment securities gains (losses), net:
Available for sale debt securities:
Losses realized on called bonds	$	—		$	(254	)
Gains realized on sales	423			—
Losses realized on sales	—			(22		)
Other-than-temporary impairment recognized on debt securities	(68		)	(320		)
Equity securities:
Gains realized on donations of securities	—			4,315
Gains realized on sales	102			584
Losses realized on sales	(8,917		)	—
Fair value adjustments, net	2,699			—
Other:
Gains realized on sales	—			58
Losses realized on sales	—			(652		)
Fair value adjustments, net	8,096			(2,830		)
Total investment securities gains, net	$	2,335		$	879

Securities gains for the six months ended June 30, 2018 included gains in fair value of $8.1 million on private equity investments and $2.7 million on equity securities. These were offset by an $8.9 million adjustment to recognize dividend income on a equity security liquidated during the second quarter of 2018.

At June 30, 2018, securities totaling $3.8 billion in fair value were pledged to secure public fund deposits, securities sold under agreements to repurchase, trust funds, and borrowings at the FRB and FHLB. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $557.7 million, while the remaining securities were pledged under agreements pursuant to which the secured parties may not sell or re-pledge the collateral. Except for obligations of various government-sponsored enterprises such as FNMA, FHLB and FHLMC, no investment in a single issuer exceeded 10% of stockholders’ equity.