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. Investment securities, at fair value, consisted of the following at December 31, 2018 and 2017:



(In thousands)	2018		2017
Available for sale debt securities	$	8,538,041	$	8,725,442
Trading debt securities	27,059		18,269
Equity securities:
Readily determinable fair value	2,585		48,838
No readily determinable fair value	1,824		1,753
Other:
Federal Reserve Bank stock	33,498		33,253
Federal Home Loan Bank stock	10,000		10,000
Private equity investments	85,659		55,752
Total investment securities	$	8,698,666	$	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. Also, the unrealized gain of $33.3 million (net of tax) on fair value on equity securities, which was previously recorded in accumulated other comprehensive income at December 31, 2017, was reclassified to retained earnings on January 1, 2018.

Equity securities include common and preferred stock with readily determinable fair values that totaled $2.5 million at cost and $2.6 million at fair value at December 31, 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 year ended 2018, unrealized net losses of $332 thousand were recognized in current earnings on equity securities still held at December 31, 2018.

Equity securities also include securities with a carrying value of $1.8 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 December 31, 2018 is shown in the following table. The weighted average yield for each range of maturities was calculated using the yield on each security within that range weighted by the amortized cost of each security at December 31, 2018. Yields on tax exempt securities have not been adjusted for tax exempt status. The investment portfolio includes agency mortgage-backed securities, which are guaranteed by agencies such as FHLMC, FNMA, GNMA and FDIC, in addition to non-agency mortgage-backed securities, which have no guarantee but are collateralized by residential and commercial 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. The Company does not have exposure to subprime-originated mortgage-backed or collateralized debt obligation instruments, and does not hold any trust preferred securities.



(Dollars in thousands)	Amortized Cost		Fair Value		Weighted Average Yield
U.S. government and federal agency obligations:
Within 1 year	$	23,577	$	23,518	(.04	)*%
After 1 but within 5 years	434,973		435,690		1.90	*
After 5 but within 10 years	386,708		381,419		1.61	*
After 10 years	69,228		67,025		.64	*
Total U.S. government and federal agency obligations	914,486		907,652		1.63	*
Government-sponsored enterprise obligations:
Within 1 year	24,991		24,743		1.53
After 1 but within 5 years	96,601		95,619		2.03
After 5 but within 10 years	34,985		34,460		2.71
After 10 years	42,893		40,956		3.10
Total government-sponsored enterprise obligations	199,470		195,778		2.32
State and municipal obligations:
Within 1 year	98,429		98,675		2.45
After 1 but within 5 years	656,762		659,525		2.37
After 5 but within 10 years	493,994		496,997		2.58
After 10 years	73,600		72,842		3.22
Total state and municipal obligations	1,322,785		1,328,039		2.50
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,253,433		3,214,985		2.85
Non-agency mortgage-backed securities	1,053,854		1,047,716		2.85
Asset-backed securities	1,518,976		1,511,614		2.62
Total mortgage and asset-backed securities	5,826,263		5,774,315		2.79
Other debt securities:
Within 1 year	16,500		16,418
After 1 but within 5 years	249,870		245,319
After 5 but within 10 years	73,225		70,520
Total other debt securities	339,595		332,257
Total available for sale debt securities	$	8,602,599	$	8,538,041

* Rate does not reflect inflation adjustment on inflation-protected securities

Investments in U.S. government and federal agency obligations include U.S. Treasury inflation-protected securities, which totaled $434.4 million, at fair value, at December 31, 2018. Interest paid on these securities increases with inflation and decreases with deflation, as measured by the Consumer Price Index. At maturity, the principal paid is the greater of an inflation-adjusted principal or the original principal. Included in state and municipal obligations are $14.2 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 accumulated other comprehensive income, by security type.



(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2018
U.S. government and federal agency obligations	$	914,486	$	4,545	$	(11,379	)	$	907,652
Government-sponsored enterprise obligations	199,470		55		(3,747		)	195,778
State and municipal obligations	1,322,785		10,284		(5,030		)	1,328,039
Mortgage and asset-backed securities:
Agency mortgage-backed securities	3,253,433		9,820		(48,268		)	3,214,985
Non-agency mortgage-backed securities	1,053,854		6,641		(12,779		)	1,047,716
Asset-backed securities	1,518,976		3,849		(11,211		)	1,511,614
Total mortgage and asset-backed securities	5,826,263		20,310		(72,258		)	5,774,315
Other debt securities	339,595		72		(7,410		)	332,257
Total	$	8,602,599	$	35,266	$	(99,824	)	$	8,538,041
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 Baa3 (Moody's) or BBB- (Standard & Poor's), whose fair values have fallen more than 20% below purchase price for an extended period of time, or have been identified based on management’s judgment. These securities are placed on a watch list, and for all such securities, 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 December 31, 2018, the fair value of securities on this watch list was $57.7 million compared to $68.0 million at December 31, 2017.

As of December 31, 2018, the Company had recorded OTTI of $14.1 million on certain non-agency mortgage-backed securities with a current par value of $23.4 million. These securities, which are part of the watch list mentioned above, had an aggregate fair value of $18.4 million at December 31, 2018. 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 December 31, 2018 included the following:



Significant Inputs	Range
Prepayment CPR	0%	-	25%
Projected cumulative default	8%	-	52%
Credit support	0%	-	20%
Loss severity	13%	-	63%

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



(In thousands)	2018			2017			2016
Cumulative OTTI credit losses at January 1	$	14,199		$	14,080		$	14,129
Credit losses on debt securities for which impairment was not previously recognized	58			111			—
Credit losses on debt securities for which impairment was previously recognized	10			274			270
Increase in expected cash flows that are recognized over remaining life of security	(175		)	(266		)	(319		)
Cumulative OTTI credit losses at December 31	$	14,092		$	14,199		$	14,080

Debt securities with unrealized losses recorded in accumulated other comprehensive income 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
December 31, 2018
U.S. government and federal agency obligations	$	317,699	$	6,515	$	116,728	$	4,864	$	434,427	$	11,379
Government-sponsored enterprise obligations	—		—		188,846		3,747		188,846		3,747
State and municipal obligations	157,838		704		257,051		4,326		414,889		5,030
Mortgage and asset-backed securities:
Agency mortgage-backed securities	330,933		1,502		1,927,268		46,766		2,258,201		48,268
Non-agency mortgage-backed securities	207,506		1,085		657,685		11,694		865,191		12,779
Asset-backed securities	147,997		728		813,427		10,483		961,424		11,211
Total mortgage and asset-backed securities	686,436		3,315		3,398,380		68,943		4,084,816		72,258
Other debt securities	51,836		564		260,682		6,846		312,518		7,410
Total	$	1,213,809	$	11,098	$	4,221,687	$	88,726	$	5,435,496	$	99,824
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 $5.4 billion of securities that were in a loss position at December 31, 2018, compared to $5.2 billion at December 31, 2017. The total amount of unrealized loss on these securities was $99.8 million at December 31, 2018, an increase of $55.7 million compared to the loss at December 31, 2017. This increase in losses was mainly due to a rising rate environment.

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



	For the Year Ended December 31
(In thousands)	2018			2017			2016
Proceeds from sales of securities:
Available for sale debt securities	$	667,227		$	779,793		$	2,047
Equity securities	41,637			10,953			3,026
Other	—			1,634			19,307
Total proceeds	$	708,864		$	792,380		$	24,380

Investment securities gains (losses), net:
Available for sale debt securities:
Losses realized on called bonds	$	—		$	(254	)	$	—
Gains realized on sales	448			592			109
Losses realized on sales	(10,101		)	(10,287		)	—
Other-than-temporary impairment recognized on debt securities	(68		)	(385		)	(270		)
Equity securities:
Gains realized on donations of securities	—			31,074			—
Gains realized on sales	1,759			10,653			1,911
Losses realized on sales	(8,917		)	(10		)	(7		)
Fair value adjustments, net	2,542			—			—
Other:
Gains realized on sales	—			381			2,442
Losses realized on sales	—			(880		)	(499		)
Fair value adjustments, net	13,849			(5,833		)	(3,739		)
Total investment securities gains (losses), net	$	(488	)	$	25,051		$	(53	)

Investment securities with a fair value of $4.3 billion and $3.8 billion were pledged at December 31, 2018 and 2017, respectively, to secure public deposits, securities sold under repurchase agreements, trust funds, and borrowings at the Federal Reserve Bank. Securities pledged under agreements pursuant to which the collateral may be sold or re-pledged by the secured parties approximated $463.3 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 exceeds 10% of stockholders’ equity.