Investment Securities

3 Months Ended

Mar. 31, 2022

Investments, Debt and Equity Securities [Abstract]

Our investment securities portfolio consists of U.S. Treasury securities, obligations of state and political subdivisions, U.S. federal government agencies such as Government National Mortgage Association ("GNMA") and Small Business Administration ("SBA"), U.S. government-sponsored enterprises ("GSEs"), such as Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Farm Credit Banks Funding Corporation and FHLB, U.S. Corporations and one asset-backed security collateralized by student loan pools. We also invest in residential and commercial mortgage-backed securities (“MBS”/"CMBS") and collateralized mortgage obligations (“CMOs”) issued or guaranteed by the GSEs, as reflected in the following table.

A summary of the amortized cost, fair value and allowance for credit losses related to securities held-to-maturity as of March 31, 2022 and December 31, 2021 is presented below.


Held-to-maturity:	Amortized Cost 1		Allowance for Credit Losses		Net Carrying Amount		Gross Unrealized				Fair Value
(in thousands)							Gains		(Losses)
March 31, 2022
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	339,149	$	—	$	339,149	$	148	$	(18,528)	$	320,769
CMOs issued by FHLMC	187,459		—		187,459		42		(11,811)		175,690
CMOs issued by FNMA	51,732		—		51,732		—		(1,000)		50,732
CMOs issued by GNMA	12,375		—		12,375		—		(431)		11,944
SBA-backed securities	3,245		—		3,245		—		(29)		3,216
Debentures of government-sponsored agencies	115,603		—		115,603		—		(9,477)		106,126
Obligations of state and political subdivisions	50,701		—		50,701		1		(4,667)		46,035
Corporate bonds	30,000				30,000		—		—		30,000
Total held-to-maturity	$	790,264	$	—	$	790,264	$	191	$	(45,943)	$	744,512
December 31, 2021

Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	126,990	$	—	$	126,990	$	2,110	$	(712)	$	128,388
CMOs issued by FHLMC	106,851		—		106,851		668		(1,045)		106,474
CMOs issued by FNMA	4,866		—		4,866		128		—		4,994

SBA-backed securities	4,840		—		4,840		198		—		5,038
Debentures of government-sponsored agencies	51,472		—		51,472		—		(901)		50,571
Obligations of state and political subdivisions	47,203		—		47,203		296		(209)		47,290
Total held-to-maturity	$	342,222	$	—	$	342,222	$	3,400	$	(2,867)	$	342,755
1 Amortized cost and fair values exclude accrued interest receivable of $1.8 million and $1.1 million at March 31, 2022 and December 31, 2021, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.

Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to MBSs and CMOs issued or guaranteed by the GSEs, and SBA-backed securities, we expect to receive all the contractual principal and interest on these securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and political subdivisions, management considers (i) issuer and/or guarantor credit ratings, (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity,(iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal credit review of the financial information, and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers. Based on the comprehensive analysis, no credit losses are expected.

The following table summarizes the amortized cost of our portfolio of held-to-maturity securities issued by states and political subdivisions and corporate bonds by Moody's and/or Standard & Poor's bond ratings as of March 31, 2022.


	Obligations of state and political subdivisions				Corporate bonds
(in thousands)	March 31, 2022		December 31, 2021		March 31, 2022		December 31, 2021
AAA / Aaa	$	37,735	$	34,229	$	—	$	—
AA / Aa	12,866		12,873		—		—
A2 / A	100		101		30,000		—
Total	$	50,701	$	47,203	$	30,000	$	—

A summary of the amortized cost, fair value and allowance for credit losses related to securities available-for-sale as of March 31, 2022 and December 31, 2021 is presented below.


Available-for-sale:	Amortized Cost 1		Gross Unrealized				Allowance for Credit Losses		Fair Value
(in thousands)			Gains		(Losses)
March 31, 2022
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	133,883	$	252	$	(5,486)	$	—	$	128,649
CMOs issued by FHLMC	390,501		103		(14,756)		—		375,848
CMOs issued by FNMA	43,750		9		(2,258)		—		41,501
CMOs issued by GNMA	40,948		3		(1,725)		—		39,226
SBA-backed securities	56,085		11		(1,444)		—		54,652
Debentures of government- sponsored agencies	150,091		3		(6,797)		—		143,297

U.S. Treasury securities	11,890		—		(917)		—		10,973
Obligations of state and political subdivisions	129,706		498		(5,514)		—		124,690
Corporate bonds	36,988		—		(2,128)		—		34,860
Asset-backed securities	1,795		—		(34)		—		1,761
Total available-for-sale	$	995,637	$	879	$	(41,059)	$	—	$	955,457
December 31, 2021
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	316,090	$	1,224	$	(2,784)	$	—	$	314,530
CMOs issued by FHLMC	343,047		3,209		(4,829)		—		341,427
CMOs issued by FNMA	48,187		152		(611)		—		47,728
CMOs issued by GNMA	56,345		99		(553)		—		55,891
SBA-backed securities	32,640		993		(155)		—		33,478
Debentures of government- sponsored agencies	191,449		25		(2,947)		—		188,527

U.S. Treasury securities	11,886		—		(256)				11,630
Obligations of state and political subdivisions	129,009		5,372		(381)		—		134,000
Corporate bonds	39,001		—		(506)		—		38,495
Asset-backed securities	1,866		—		(4)		—		1,862
Total available-for-sale	$	1,169,520	$	11,074	$	(13,026)	$	—	$	1,167,568
1 Amortized cost and fair value exclude accrued interest receivable of $3.3 million and $3.7 million at March 31, 2022 and December 31, 2021, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.

As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain securities issued by government sponsored agencies. In March 2022, we transferred $357.5 million of these securities from available-for-sale to held-to-maturity at fair value. We intend and have the ability to hold these securities to maturity. The net unrealized pre-tax loss of $14.8 million remained in accumulated other comprehensive loss and is accreted over the remaining lives of the securities.

The amortized cost and fair value of investment debt securities by contractual maturity at March 31, 2022 and December 31, 2021 are shown below. Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties.


	March 31, 2022								December 31, 2021
	Held-to-Maturity				Available-for-Sale				Held-to-Maturity				Available-for-Sale
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	101	$	102	$	5,605	$	5,618	$	101	$	103	$	10,785	$	10,841
After one but within five years	43,041		42,969		260,143		251,904		25,666		26,559		219,474		219,957
After five years through ten years	244,649		227,772		312,767		298,180		182,604		182,303		299,937		300,187
After ten years	502,473		473,669		417,122		399,755		133,851		133,790		639,324		636,583
Total	$	790,264	$	744,512	$	995,637	$	955,457	$	342,222	$	342,755	$	1,169,520	$	1,167,568

There were no sales of investment securities in the first quarter of 2022 or 2021.

Three months ended

Pledged investment securities are shown in the following table:


(in thousands)	March 31, 2022		December 31, 2021
Pledged to the State of California:
Secure public deposits in compliance with the Local Agency Security Program	$	208,406	$	213,861
Collateral for trust deposits	691		729
Collateral for Wealth Management and Trust Services checking account	583		614
Total investment securities pledged to the State of California	209,680		215,204
Bankruptcy trustee deposits pledged with Federal Reserve Bank	2,194		2,645
Total pledged investment securities	$	211,874	$	217,849

There were 354 and 217 securities in unrealized loss positions at March 31, 2022 and December 31, 2021, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:


March 31, 2022	< 12 continuous months				≥ 12 continuous months				Total securities in a loss position
(in thousands)	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss
Held-to-maturity:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	299,200	$	(18,528)	$	—	$	—	$	299,200	$	(18,528)
CMOs issued by FHLMC	165,101		(11,498)		4,328		(313)		169,429		(11,811)
CMOs issued by FNMA	25,350		(1,000)		—		—		25,350		(1,000)
CMOs issued by GNMA	11,944		(431)		—		—		11,944		(431)
SBA-backed securities	3,216		(29)		—		—		3,216		$	(29)
Debentures of government-sponsored agencies	65,826		(6,510)		40,300		(2,967)		106,126		$	(9,477)
Obligations of state and political subdivisions	42,348		(4,667)		—		—		42,348		(4,667)
Total held-to-maturity	612,985		(42,663)		44,628		(3,280)		657,613		(45,943)
Available-for-sale:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	108,982		(5,486)		—		—		108,982		(5,486)
CMOs issued by FHLMC	359,856		(14,357)		4,107		(399)		363,963		(14,756)
CMOs issued by FNMA	40,170		(2,258)		—		—		40,170		(2,258)
CMOs issued by GNMA	37,732		(1,725)		—		—		37,732		(1,725)
SBA-backed securities	43,665		(1,400)		1,124		(44)		44,789		(1,444)
Debentures of government- sponsored agencies	114,450		(5,673)		7,845		(1,124)		122,295		(6,797)
U.S. Treasury securities	10,973		(917)		—		—		10,973		(917)

Obligations of state and political subdivisions	102,115		(5,153)		2,243		(361)		104,358		(5,514)
Corporate bonds	29,421		(1,579)		5,440		(549)		34,861		(2,128)
Asset-backed securities	1,761		(34)		—		—		1,761		(34)
Total available-for-sale	849,125		(38,582)		20,759		(2,477)		869,884		(41,059)
Total securities at loss position	$	1,462,110	$	(81,245)	$	65,387	$	(5,757)	$	1,527,497	$	(87,002)


December 31, 2021	< 12 continuous months				≥ 12 continuous months				Total securities in a loss position
(in thousands)	Fair value		Unrealized loss		Fair value		Unrealized loss		Fair value		Unrealized loss
Held-to-maturity:
MBS pass-through securities issued by FHLMC and FNMA	$	76,619	$	(712)	$	—	$	—	76,619		$	(712)

CMOs issued by FHLMC	54,811		(1,045)		—		—		54,811		(1,045)
Obligations of state and political subdivisions	19,203		(209)		—		—		19,203		(209)
Debentures of government-sponsored agencies	50,571		(901)		—		—		50,571		(901)
Total held-to-maturity	201,204		(2,867)		—		—		201,204		(2,867)
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA	263,474		(2,784)		—		—		263,474		(2,784)
SBA-backed securities	7,478		(112)		1,209		(43)		8,687		(155)
CMOs issued by FHLMC	226,175		(4,677)		4,415		(152)		230,590		(4,829)
CMOs issued by GNMA	$	44,790	$	(553)	$	—	$	—	$	44,790	$	(553)
CMOs issued by FNMA	37,348		(611)		—		—		37,348		(611)
Debentures of government- sponsored agencies	148,979		(2,527)		8,549		(420)		157,528		(2,947)
U.S. Treasury securities	11,629		(256)		—		—		11,629		(256)
Obligations of state and political subdivisions	17,552		(381)		—		—		17,552		(381)
Corporate Bonds	38,495		(506)		—		—		38,495		(506)

Asset-backed securities	1,861		(4)		—		—		1,861		(4)
Total available-for-sale	797,781		(12,411)		14,173		(615)		811,954		(13,026)
Total securities at loss position	$	998,985	$	(15,278)	$	14,173	$	(615)	$	1,013,158	$	(15,893)

As of March 31, 2022, the investment portfolio included 17 investment securities that had been in a continuous loss position for twelve months or more and 337 investment securities that had been in a loss position for less than twelve months.

Securities issued by government-sponsored agencies, such as FNMA and FHLMC, usually have implicit credit support by the U.S. federal government. However, since 2008, FNMA and FHLMC have been under government conservatorship and, therefore, contractual cash flows for these investments carry explicit guarantees by the U.S. federal government. Securities issued by the SBA and GNMA have explicit credit guarantees by the U.S. federal government, which protects us from credit losses on the contractual cash flows of the securities.

Our investment in obligations of state and political subdivisions bonds are deemed credit worthy after our comprehensive analysis of the issuers' latest financial information, credit ratings by major credit agencies, and/or credit enhancements.

At March 31, 2022, management determined that it did not intend to sell any investment securities with unrealized losses, and it is more likely than not that we will not be required to sell securities with unrealized losses before recovery of their amortized cost. No allowances for credit losses have been recognized on available-for-sale securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality at March 31, 2022.

Non-Marketable Securities Included in Other Assets

FHLB Capital Stock

As a member of the FHLB, we are required to maintain a minimum investment in FHLB capital stock determined by the Board of Directors of the FHLB. The minimum investment requirements can increase in the event we increase our total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $100 per share par value. We held $16.7 million of FHLB stock included in other assets on the consolidated statements of condition at both March 31, 2022 and December 31, 2021. The carrying amounts of

these investments are reasonable estimates of fair value because the securities are restricted to member banks and they do not have a readily determinable market value. Based on our analysis of FHLB's financial condition and certain qualitative factors, we determined that the FHLB stock was not impaired at March 31, 2022 and December 31, 2021. On April 28, 2022, FHLB announced a cash dividend for the first quarter of 2022 at an annualized dividend rate of 6.00% to be distributed in mid-May 2022. Cash dividends paid on FHLB capital stock are recorded as non-interest income.

VISA Inc. Class B Common Stock

As a member bank of Visa U.S.A., we held 10,439 shares of Visa Inc. Class B common stock at March 31, 2022 and December 31, 2021. These shares have a carrying value of zero and are restricted from resale to non-member banks of Visa U.S.A. until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation escrow account. Because of the restriction and the uncertainty on the conversion rate to Class A shares, these shares lack a readily determinable fair value. When converting this Class B common stock to Class A common stock based on the estimated conversion rate of 1.6181 both at March 31, 2022 and December 31, 2021, and the closing stock price of Class A shares at those respective dates, the converted value of our shares of Class B common stock would have been $3.7 million at both March 31, 2022 and December 31, 2021. The conversion rate is subject to further adjustment upon the final settlement of the covered litigation against Visa Inc. and its member banks. As such, the fair value of these Class B shares can differ significantly from their converted values. For further information, refer to Note 8, Commitments and Contingencies.

Low Income Housing Tax Credits

We invest in low-income housing tax credit funds as a limited partner, which totaled $2.9 million and $3.0 million recorded in other assets as of March 31, 2022 and December 31, 2021, respectively. In the first three months of 2022, we recognized $159 thousand of low-income housing tax credits and other tax benefits, offset by $134 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of March 31, 2022, our unfunded commitments for these low-income housing tax credit funds totaled $419 thousand. We did not recognize any impairment losses on these low-income housing tax credit investments during the first three months of 2022 or 2021, as the value of the future tax benefits exceeds the carrying value of the investments.