Investment Securities

9 Months Ended

Sep. 30, 2020

Investments Debt And Equity Securities [Abstract]

Investment Securities

Note 3.  Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of September 30, 2020, and December 31, 2019, were as follows:

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2020
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	182,605	$	245	$	(1,405	)	$	181,445
Debt Securities Issued by States and Political Subdivisions		45,313		1,491		(1	)		46,803
Debt Securities Issued by U.S. Government-Sponsored Enterprises		937		79		—			1,016
Debt Securities Issued by Corporations		221,935		4,273		(1,754	)		224,454
Mortgage-Backed Securities:
Residential - Government Agencies		1,483,465		37,344		(307	)		1,520,502
Residential - U.S. Government-Sponsored Enterprises		917,366		19,904		(202	)		937,068
Commercial - Government Agencies		267,225		11,863		(63	)		279,025
Total Mortgage-Backed Securities		2,668,056		69,111		(572	)		2,736,595
Total	$	3,118,846	$	75,199	$	(3,732	)	$	3,190,313
Held-to-Maturity:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	62,505	$	211	$	(2	)	$	62,714
Debt Securities Issued by States and Political Subdivisions		54,001		1,022		—			55,023
Debt Securities Issued by Corporations		12,770		279		—			13,049
Mortgage-Backed Securities:
Residential - Government Agencies		792,360		33,324		(19	)		825,665
Residential - U.S. Government-Sponsored Enterprises		2,184,472		52,270		(121	)		2,236,621
Commercial - Government Agencies		92,722		2,967		(93	)		95,596
Total Mortgage-Backed Securities		3,069,554		88,561		(233	)		3,157,882
Total	$	3,198,830	$	90,073	$	(235	)	$	3,288,668
December 31, 2019
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	222,365	$	213	$	(1,447	)	$	221,131
Debt Securities Issued by States and Political Subdivisions		54,480		631		(14	)		55,097
Debt Securities Issued by U.S. Government-Sponsored Enterprises		22,128		19		—			22,147
Debt Securities Issued by Corporations		335,553		1,401		(633	)		336,321
Mortgage-Backed Securities:
Residential - Government Agencies		1,164,466		11,627		(3,267	)		1,172,826
Residential - U.S. Government-Sponsored Enterprises		584,272		4,363		(1,874	)		586,761
Commercial - Government Agencies		224,372		2,889		(2,541	)		224,720
Total Mortgage-Backed Securities		1,973,110		18,879		(7,682	)		1,984,307
Total	$	2,607,636	$	21,143	$	(9,776	)	$	2,619,003
Held-to-Maturity:
Debt Securities Issued by the U.S. Treasury and Government Agencies	$	274,375	$	1,319	$	(31	)	$	275,663
Debt Securities Issued by States and Political Subdivisions		54,811		1,236		—			56,047
Debt Securities Issued by Corporations		14,975		—		(138	)		14,837
Mortgage-Backed Securities:
Residential - Government Agencies		1,067,416		13,247		(5,348	)		1,075,315
Residential - U.S. Government-Sponsored Enterprises		1,546,479		13,871		(2,478	)		1,557,872
Commercial - Government Agencies		84,238		317		(1,407	)		83,148
Total Mortgage-Backed Securities		2,698,133		27,435		(9,233	)		2,716,335
Total	$	3,042,294	$	29,990	$	(9,402	)	$	3,062,882

The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities disclosed throughout this footnote.  For available-for-sale (“AFS”) debt securities, AIR totaled $6.4 million and $7.5 million as of September 30, 2020, and December 31, 2019, respectively.  For held-to-maturity (“HTM”) debt securities, AIR totaled $8.2 million and $8.1 million as of September 30, 2020, and December 31, 2019, respectively.  AIR is included in the “accrued interest receivable” line item on the Company’s consolidated statements of condition.

The table below presents an analysis of the contractual maturities of the Company’s investment securities as of September 30, 2020.  Debt securities issued by government agencies (Small Business Administration securities) and mortgage-backed securities are disclosed separately in the table below as these investment securities may prepay prior to their scheduled contractual maturity dates.

(dollars in thousands)	Amortized Cost		Fair Value
Available-for-Sale:
Due in One Year or Less	$	61,913	$	61,802
Due After One Year Through Five Years		59,080		60,281
Due After Five Years Through Ten Years		148,282		151,301
Due After Ten Years		—		—
		269,275		273,384
Debt Securities Issued by Government Agencies		181,515		180,334
Mortgage-Backed Securities:
Residential - Government Agencies		1,483,465		1,520,502
Residential - U.S. Government-Sponsored Enterprises		917,366		937,068
Commercial - Government Agencies		267,225		279,025
Total Mortgage-Backed Securities		2,668,056		2,736,595
Total	$	3,118,846	$	3,190,313
Held-to-Maturity:
Due in One Year or Less		80,075		80,356
Due After One Year Through Five Years		49,201		50,430
		129,276		130,786
Mortgage-Backed Securities:
Residential - Government Agencies		792,360		825,665
Residential - U.S. Government-Sponsored Enterprises		2,184,472		2,236,621
Commercial - Government Agencies		92,722		95,596
Total Mortgage-Backed Securities		3,069,554		3,157,882
Total	$	3,198,830	$	3,288,668

Investment securities with carrying values of $3.8 billion and $2.6 billion as of September 30, 2020, and December 31, 2019, respectively, were pledged to secure deposits of governmental entities, securities sold under agreements to repurchase, and FRB discount window borrowing.

The table below presents the gains and losses from the sales of investment securities for the three and nine months ended September 30, 2020, and September 30, 2019:

	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2020			2019			2020			2019
Gross Gains on Sales of Investment Securities	$	—		$	38		$	14,257		$	7,701
Gross Losses on Sales of Investment Securities		(1,121	)		(1,507	)		(3,132	)		(10,781	)
Net Gains (Losses) on Sales of Investment Securities	$	(1,121	)	$	(1,469	)	$	11,125		$	(3,080	)

The losses on sales of investment securities during the three and nine months ended September 30, 2020, and September 30, 2019, were due to fees paid to the counterparties of the Company’s prior Visa Class B share sale transactions, which are expensed as incurred.  In addition, the gross gains and losses on sales of investment securities during the three and nine months ended September 30, 2019, included sales of municipal debt securities, mortgage-backed securities, and corporate debt securities as part of a portfolio repositioning.

The following table summarizes the Company’s AFS debt securities in an unrealized loss position for which an allowance for credit losses has not been recorded, aggregated by major security type and length of time in a continuous unrealized loss position:

	Less Than 12 Months					12 Months or Longer					Total
(dollars in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
September 30, 2020
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury    and Government Agencies	$	134,162	$	(1,363	)	$	24,886	$	(42	)	$	159,048	$	(1,405	)
Debt Securities Issued by States    and Political Subdivisions		26		(1	)		60		—			86		(1	)
Debt Securities Issued by Corporations		75,000		(642	)		65,000		(1,112	)		140,000		(1,754	)
Mortgage-Backed Securities:
Residential - Government Agencies		30,216		(223	)		136,396		(84	)		166,612		(307	)
Residential - U.S. Government-Sponsored    Enterprises		—		—			95,943		(202	)		95,943		(202	)
Commercial-Government Agencies		—		—			25,188		(63	)		25,188		(63	)
Total Mortgage-Backed Securities		30,216		(223	)		257,527		(349	)		287,743		(572	)
Total	$	239,404	$	(2,229	)	$	347,473	$	(1,503	)	$	586,877	$	(3,732	)
December 31, 2019
Available-for-Sale:
Debt Securities Issued by the U.S. Treasury    and Government Agencies	$	65,479	$	(188	)	$	101,761	$	(1,259	)	$	167,240	$	(1,447	)
Debt Securities Issued by States    and Political Subdivisions		6,788		(14	)		440		—			7,228		(14	)
Debt Securities Issued by Corporations		25,892		(326	)		74,693		(307	)		100,585		(633	)
Mortgage-Backed Securities:
Residential - Government Agencies		119,271		(526	)		170,805		(2,741	)		290,076		(3,267	)
Residential - U.S. Government-Sponsored Enterprises		187,861		(816	)		73,720		(1,058	)		261,581		(1,874	)
Commercial - Government Agencies		59,826		(319	)		52,965		(2,222	)		112,791		(2,541	)
Total Mortgage-Backed Securities		366,958		(1,661	)		297,490		(6,021	)		664,448		(7,682	)
Total	$	465,117	$	(2,189	)	$	474,384	$	(7,587	)	$	939,501	$	(9,776	)

The Company does not believe that the AFS debt securities that were in an unrealized loss position as of September 30, 2020, which were comprised of 84 individual securities, represent a credit loss impairment.  The gross unrealized losses in the Company’s corporate bond portfolio were related to debt securities issued by large multinational banks.  The unrealized losses primarily resulted from an increase in credit spreads due to the economic uncertainty related to COVID-19.  However, as of September 30, 2020, such credit spreads have tightened significantly from their widest levels experienced in the first quarter of 2020.  In addition, such banks have built up substantial capital buffers since the financial crisis of 2008 which mitigates the likelihood of credit losses.  As of September 30, 2020, there have been no payment defaults nor do we currently expect any future payment defaults.  Furthermore, the Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.

The remainder of the AFS debt securities in an unrealized loss position as of September 30, 2020, consisted of debt securities issued by U.S. government agencies or U.S. government-sponsored enterprises.  These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss.  Total gross unrealized losses were primarily 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.  The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.

Substantially all of the Company’s HTM debt securities are issued by U.S. government agencies or U.S. government-sponsored enterprises.  These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss.  Therefore, the Company did not record an allowance for credit losses for these securities as of September 30, 2020.

The Company also carries a limited portfolio of HTM municipal bonds.  As of September 30, 2020, the entire portfolio consisted of State of Hawaii bonds carrying a Moody’s rating of Aa2, with a portion of these bonds escrowed to maturity.  Utilizing the CECL approach, the Company determined that the expected credit loss on its municipal bond portfolio was de minimis, and therefore, an allowance for credit losses was not recorded as of September 30, 2020.

Interest income from taxable and non-taxable investment securities for the three and nine months ended September 30, 2020, and September 30, 2019, were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2020		2019		2020		2019
Taxable	$	30,027	$	35,584	$	96,150	$	102,912
Non-Taxable		498		724		1,637		5,970
Total Interest Income from Investment Securities	$	30,525	$	36,308	$	97,787	$	108,882

As of September 30, 2020, and December 31, 2019, the carrying value of the Company’s Federal Home Loan Bank of Des Moines stock and Federal Reserve Bank stock was as follows:

(dollars in thousands)	September 30, 2020		December 31, 2019
Federal Home Loan Bank Stock	$	15,174	$	13,000
Federal Reserve Bank Stock		18,123		21,093
Total	$	33,297	$	34,093

These securities can only be redeemed or sold at their par value and only to the respective issuing institution or to another member institution.  The Company records these non-marketable equity securities as a component of other assets and periodically evaluates these securities for impairment.  Management considers these non-marketable equity securities to be long-term investments.  Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value.

Visa Class B Restricted Shares

In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering.  These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares.  This conversion will not occur until the settlement of certain litigation which will be indemnified by Visa members, including the Company.  Visa funded an escrow account from its initial public offering to settle these litigation claims.  Should this escrow account be insufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank’s Class B conversion ratio to unrestricted Class A shares.  As of September 30, 2020, the conversion ratio was 1.6228.  See Note 12 Derivative Financial Instruments for more information.

The Company occasionally sells these Visa Class B shares to other financial institutions.  During the second quarter of 2020, the Company recorded a $14.2 million gain on sale of its remaining 80,214 Visa Class B Shares.  As a result of this sale, the Company no longer owns any Visa Class B shares.