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Investments

3 Months Ended

Mar. 31, 2024

Investments, Debt and Equity Securities [Abstract]

Note 9 – Investments

Investment Securities

Pursuant to FASB’s guidance on accounting for debt securities, available for sale securities are carried on the Company’s financial statements at their estimated fair market values, with monthly tax-effected “mark-to-market” adjustments made vis-à-vis accumulated other comprehensive income in shareholders’ equity. Held-to-maturity securities are carried on the Company’s financial statements at their amortized cost, net of the allowance for credit losses.

The amortized cost, estimated fair value, and allowance for credit losses of available-for-sale and held-to-maturity investment securities are as follows:

Amortized Cost and Estimated Fair Value

(dollars in thousands, unaudited)


		March 31, 2024
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Allowance for Credit Losses			Estimated Fair Value
Available-for-sale
U.S. government agencies		$	65,579		$	7		$	(149)		$	—		$	65,437
Mortgage-backed securities			14,181			18			(751)			—			13,448
State and political subdivisions			51,060			81			(6,466)			—			44,675
Corporate bonds			65,303			—			(10,644)			—			54,659
Collateralized loan obligations			563,099			1,478			(1,007)			—			563,570
Total available-for-sale securities		$	759,222		$	1,584		$	(19,017)		$	—		$	741,789

		Amortized Cost			Gross Unrecognized Gains			Gross Unrecognized Losses			Estimated Fair Value			Allowance for Credit Losses
Held-to-maturity
U.S. government agencies		$	5,033		$	—		$	(652)		$	4,381		$	—
Mortgage-backed securities			139,225			—			(12,585)			126,640			—
State and political subdivisions			172,164			2,971			—			175,135			(16)
Total held-to-maturity securities		$	316,422		$	2,971		$	(13,237)		$	306,156		$	(16)


		December 31, 2023
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Allowance for Credit Losses			Estimated Fair Value
Available-for-sale
U.S. government agencies		$	102,823		$	23		$	(97)		$	—		$	102,749
Mortgage-backed securities			100,745			21			(1,222)			—			99,544
State and political subdivisions			200,057			572			(6,423)			—			194,206
Corporate bonds			65,273			—			(13,233)			—			52,040
Collateralized loan obligations			573,027			1,113			(3,478)			—			570,662
Total available-for-sale securities		$	1,041,925		$	1,729		$	(24,453)		$	—		$	1,019,201

		Amortized Cost			Gross Unrecognized Gains			Gross Unrecognized Losses			Estimated Fair Value			Allowance for Credit Losses
Held-to-maturity
U.S. government agencies		$	5,522		$	—		$	(617)		$	4,905		$	—
Mortgage-backed securities			142,295			—			(10,441)			131,854			—
State and political subdivisions			172,256			5,909			—			178,165			(16)
Total held-to-maturity securities		$	320,073		$	5,909		$	(11,058)		$	314,924		$	(16)

An unrealized loss of $27.9 million, on securities transferred from the available-for-sale to held-to-maturity categorization, remains as of March 31, 2024, and is included in accumulated other comprehensive income, net of tax. The remaining unrealized loss on the securities transferred from available-for-sale to held-to-maturity, will be accreted over the remaining term of the securities, with the amortized-cost basis of these securities and accumulated comprehensive income each increasing over time.

Because of the implicit and explicit guarantees of the Federal Government on the Agency and Mortgage-Backed securities there is no expectation of future losses on any of these securities. The Bank’s municipal bonds moved to the held-to-maturity designation all have credit ratings considered investment grade or equivalent. A discounted-cash-flow reserve calculation was performed upon the transfer of these securities into the held-to-maturity designation and is updated on a quarterly basis.

The Company elected the practical expedient available under the current expected credit losses (“CECL”) accounting standard to exclude accrued interest receivable from the amortized cost basis of all categorizations of investment securities, and resultingly did not estimate reserves on accrued interest receivable balances, as any past due interest income is reversed on a timely basis. Accrued interest receivable is included in other assets on the Company’s balance sheet and as of March 31, 2024, measured at $9.6 million and $1.7 million for available-for-sale securities and held-to-maturity securities, respectively. Accrued interest receivable as of December 31, 2022, on these same classes of investment securities measured at $9.3 million and $2.7 million, respectively. During the first quarter of 2024, no interest receivable on available-for-sale or held-to-maturity securities was reversed against interest income and the Company did not have any held-to-maturity debt securities past due.

As of March 31, 2024, an allowance for credit losses of $0.02 million had been established on the Bank’s held-to-maturity portfolio, which is unchanged from the December 31, 2023, allowance for credit losses.

The following table summarizes the amortized cost of held-to-maturity municipal bonds aggregated by NRSRO credit rating:

Held-To-Maturity by Credit Rating

(dollars in thousands, unaudited)


		Held-To-Maturity
		March 31, 2024			December 31, 2023
State and political subdivisions
AAA/Aaa		$	57,781		$	57,792
AA/Aa			112,901			112,978
A/A2			540			542
Not rated			942			944
Total		$	172,164		$	172,256

For available-for-sale debt securities in an unrealized loss position for which management has an intent to sell the security or considers it more likely-than-not that the security in question will be sold prior to a recovery of its amortized cost basis, the security will be written down to fair value through a direct charge to income. For the remainder of available sale debt securities in an unrealized loss position, which don’t meet the previously outlined criteria, management evaluates whether the decline in fair value is a reflection of credit deterioration or other factors. In performing this evaluation, management considers the extent which fair value has fallen below amortized cost, changes in ratings by rating agencies, and other information indicating a deterioration in repayment capacity of either the underlying issuer or the borrowers providing repayment capacity in a securitization. If management’s evaluation indicates that a credit loss exists then a present value of the expected cash flows is calculated and compared to the amortized cost basis of the security in question and to the degree that the amortized cost basis exceeds the present value an allowance for credit loss (“ACL”) is established, with the caveat that the maximum amount of the reserve on any individual security is the difference between the fair value and amortized cost balance of the security in question. Any unrealized loss that has not been recorded through an ACL is recognized in other comprehensive income.

The following table summarizes available-for-sale debt securities that were in an unrealized loss position for which an ACL has not been recorded, based on the length of time the individual securities have been in an unrealized loss position, including the number of available-for-sale debt securities in an unrealized loss position, as of the dates indicated below.

Investment Portfolio - Unrealized Losses

(dollars in thousands, unaudited)


			March 31, 2024
			Less than twelve months						Twelve months or more						Total
	Number of Securities		Gross Unrealized Losses			Fair Value			Gross Unrealized Losses			Fair Value			Gross Unrealized Losses			Fair Value
Available-for-sale
U.S. government agencies	14		$	(62)		$	25,523		$	(87)		$	27,913		$	(149)		$	53,436
Mortgage-backed securities	39			—			—			(751)			9,578			(751)			9,578
State and political subdivisions	48			(1)			201			(6,465)			35,646			(6,466)			35,847
Corporate bonds	51			—			—			(10,644)			54,659			(10,644)			54,659
Collateralized loan obligations	29			(378)			133,658			(629)			126,235			(1,007)			259,893
Total available-for-sale	181		$	(441)		$	159,382		$	(18,576)		$	254,031		$	(19,017)		$	413,413


			December 31, 2023
			Less than twelve months						Twelve months or more						Total
	Number of Securities		Gross Unrealized Losses			Fair Value			Gross Unrealized Losses			Fair Value			Gross Unrealized Losses			Fair Value
Available-for-sale
U.S. government agencies	14		$	(97)		$	46,823		$	—		$	3,929		$	(97)		$	50,752
Mortgage-backed securities	321			—			20			(1,222)			94,505			(1,222)			94,525
State and political subdivisions	201			(33)			6,950			(6,390)			125,283			(6,423)			132,233
Corporate bonds	51			(118)			2,316			(13,115)			49,724			(13,233)			52,040
Collateralized loan obligations	47			—			—			(3,478)			393,258			(3,478)			393,258
Total available-for-sale	634		$	(248)		$	56,109		$	(24,205)		$	666,699		$	(24,453)		$	722,808

The table below summarizes the Company’s gross realized gains and losses as well as gross proceeds from the sales of securities, for the periods indicated:

Investment Portfolio - Realized Gains/(Losses)

(dollars in thousands, unaudited)


		Three months ended March 31,
		2024			2023
Proceeds from sales, calls and maturities of securities available for sale		$	266,900		$	36,213
Gross gains on sales, calls and maturities of securities available for sale			54			45
Gross losses on sales, calls and maturities of securities available for sale			(17,371)			—
Net (loss) gain on sale of securities available for sale		$	(17,317)		$	45

The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at March 31, 2024, and December 31, 2023 (dollars in thousands), are shown below, grouped by the remaining time to contractual maturity dates. The expected life of investment securities may not be consistent with contractual maturity dates since the issuers of the securities might have the right to call or prepay obligations with or without penalties.


		March 31, 2024
		Available-for-Sale						Held-to-Maturity
		Amortized Cost			Fair Value			Amortized Cost			Fair Value
Maturing within one year		$	2,200		$	2,202		$	145		$	145
Maturing after one year through five years			22,034			21,914			2,401			2,358
Maturing after five years through ten years			102,687			92,029			19,362			17,771
Maturing after ten years			55,021			48,626			155,289			159,242
Securities not due at a single maturity date:
Mortgage-backed securities			14,181			13,448			139,225			126,640
Collateralized loan obligations			563,099			563,570			—			—
Total		$	759,222		$	741,789		$	316,422		$	306,156


		December 31, 2023
		Available-for-Sale						Held-to-Maturity
		Amortized Cost			Fair Value			Amortized Cost			Fair Value
Maturing within one year		$	583		$	582		$	145		$	145
Maturing after one year through five years			40,187			39,916			2,413			2,384
Maturing after five years through ten years			156,541			143,516			19,895			18,350
Maturing after ten years			170,842			164,981			155,325			162,191
Securities not due at a single maturity date:
Mortgage-backed securities			100,745			99,544			142,295			131,854
Collateralized loan obligations			573,027			570,662			—			—
Total		$	1,041,925		$	1,019,201		$	320,073		$	314,924

At March 31, 2024, the Company’s investment portfolio included 227 municipal bonds issued by 191 different government municipalities and agencies located within 28 different states, with an aggregate fair value of $219.8 million. The largest exposure to any single municipality or agency was a combined $5.3 million (fair value) in general obligation bonds issued by the City of New York (NY). In addition, the Company owned 51 subordinated debentures issued by bank holding companies totaling $54.7 million (fair value).

At December 31, 2023, the Company’s investment portfolio included 485 municipal bonds issued by 398 different government municipalities and agencies located within 36 states, with an aggregate fair value of $372.4 million. The largest exposure to any single municipality or agency was a combined $5.3 million (fair value) in general obligation bonds issued by the City of New York (NY). In addition, the company owned 51 subordinated debentures issued by bank holding companies totaling $52.0 million (fair value).

The Company’s investments in bonds issued by corporations, states, municipalities and political subdivisions are evaluated in accordance with Financial Institution Letter 48-2012, issued by the FDIC, “Revised Standards of Creditworthiness for Investment Securities,” and other regulatory guidance. Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the third-party credit rating agencies.

The following table summarizes the amortized cost and fair values of general obligation and revenue bonds in the Company’s investment securities portfolio at the indicated dates, identifying the state in which the issuing municipality or agency operates for our largest geographic concentrations:

Revenue and General Obligation Bonds by Location

(dollars in thousands, unaudited)


		March 31, 2024						December 31, 2023
		Amortized			Fair Market			Amortized			Fair Market
General obligation bonds		Cost			Value			Cost			Value
State of issuance
Texas		$	83,196		$	82,208		$	146,215		$	146,589
California			51,523			49,174			63,316			61,048
Other (20 & 26 states, respectively)			63,033			63,238			115,148			117,006
Total general obligation bonds			197,752			194,620			324,679			324,643

Revenue bonds
State of issuance
Texas			5,438			5,393			8,850			8,899
California			3,571			3,496			3,794			3,735
Other (20 & 15 states, respectively)			16,463			16,301			34,990			35,094
Total revenue bonds			25,472			25,190			47,634			47,728
Total obligations of states and political subdivisions		$	223,224		$	219,810		$	372,313		$	372,371

The revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as utilities (water, sewer, and power), educational facilities, and general public and

economic improvements. The primary sources of revenue for these bonds are delineated in the table below, which shows the amortized cost and fair market values for the largest revenue concentrations as of the indicated dates.

Revenue Bonds by Type

(dollars in thousands, unaudited)


		March 31, 2024						December 31, 2023
		Amortized			Fair Market			Amortized			Fair Market
Revenue bonds		Cost			Value			Cost			Value
Revenue source:
Water		$	9,211		$	9,064		$	19,113		$	19,158
Lease			3,932			4,210			6,323			6,380
Sewer			3,607			3,760			6,070			6,312
Sales tax revenue			1,690			1,630			4,349			4,010
Local or GTD housing			1,032			852			—			—
Other (9 and 10 sources, respectively)			6,000			5,674			11,779			11,868
Total revenue bonds		$	25,472		$	25,190		$	47,634		$	47,728

Low-Income Housing Tax Credit (“LIHTC”) Fund Investments

The Company has the ability to invest in limited partnerships which own housing projects that qualify for federal and/or California state tax credits, by mandating a specified percentage of low-income tenants for each project. The primary investment return comes from tax credits that flow through to investors. Because rent levels are lower than standard market rents and the projects are generally highly leveraged, each project also typically generates tax-deductible operating losses that are allocated to the limited partners for tax purposes.

The Company currently has investments in five different LIHTC fund limited partnerships made in 2014, 2015, two in 2022, and one in 2023, all of which were California-focused funds that help the Company meet its obligations under the Community Reinvestment Act. We utilize the cost method of accounting for our LIHTC fund investments, under which we initially record on our balance sheet an asset that represents the total cash expected to be invested over the life of the partnership. Any commitments or contingent commitments for future investment are reflected as a liability. The income statement reflects tax credits and any other tax benefits from these investments “below the line” within our income tax provision, while the initial book value of the investment is amortized on the proportional amortization method as a “below the line” expense, over the time period in which the tax credits and tax benefits are expected to be received.

As of March 31, 2024, our total LIHTC investment book balance was $13.8 million, which includes $10.1 million in remaining commitments for additional capital contributions. There were approximately $0.3 million in tax credits derived from our LIHTC investments that were recognized during the three months ended March 31, 2024, and “below the line” amortization expense of $0.6 million associated with those investments was recorded for the same time period. Our LIHTC investments are evaluated annually for potential impairment, and we have concluded that the carrying value of the investments is stated fairly and is not impaired.

As of December 31, 2023, our total LIHTC investment book balance was $14.4 million, which includes $10.5 million in remaining commitments for additional capital contributions. There were $0.7 million in tax credits derived from our LIHTC investments that were recognized during the year ended December 31, 2023, and “below the line” amortization expense of $0.7 million associated with those investments was netted against pre-tax noninterest income for the same time period.

The Company’s investments in qualified affordable housing projects, and small business investment companies meet the definition of a variable interest entity as the entities are structured such that the limited partner investors lack substantive voting rights. Pursuant to the FAS standard on the consolidation of variable interest entities, these investments are not reflected on a consolidated basis in the Company’s financial statements.