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Investment Securities

3 Months Ended

Mar. 31, 2023

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, 2023 and December 31, 2022 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, 2023
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	322,691	$	—	$	322,691	$	—	$	(45,007)	$	277,684
CMOs issued by FHLMC	233,796		—		233,796		139		(24,973)		208,962
CMOs issued by FNMA	109,694		—		109,694		176		(3,729)		106,141
CMOs issued by GNMA	52,120		—		52,120		164		(3,020)		49,264
SBA-backed securities	1,977		—		1,977		—		(99)		1,878
Debentures of government-sponsored agencies	145,898		—		145,898		—		(22,149)		123,749
Obligations of state and political subdivisions	62,384		—		62,384		24		(8,728)		53,680
Corporate bonds	30,000		—		30,000		—		(1,233)		28,767
Total held-to-maturity	$	958,560	$	—	$	958,560	$	503	$	(108,938)	$	850,125
December 31, 2022

Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	331,281	$	—	$	331,281	$	—	$	(50,147)	$	281,134
CMOs issued by FHLMC	235,971		—		235,971		59		(29,503)		206,527
CMOs issued by FNMA	111,904		—		111,904		—		(5,419)		106,485
CMOs issued by GNMA	52,356		—		52,356		11		(3,076)		49,291
SBA-backed securities	2,372		—		2,372		—		(133)		2,239
Debentures of government-sponsored agencies	145,823		—		145,823		—		(26,467)		119,356
Obligations of state and political subdivisions	62,500		—		62,500		—		(10,741)		51,759
Corporate bonds	30,000		—		30,000		—		(1,552)		28,448
Total held-to-maturity	$	972,207	$	—	$	972,207	$	70	$	(127,038)	$	845,239
1 Amortized cost and fair values exclude accrued interest receivable of $2.6 million and $3.7 million at March 31, 2023 and December 31, 2022, 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 collectively 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 and corporate bonds, 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, 2023.


	Obligations of state and political subdivisions				Corporate bonds
(in thousands)	March 31, 2023		December 31, 2022		March 31, 2023		December 31, 2022
AAA / Aaa	$	42,884	$	42,986	$	—	$	—
AA / Aa	19,500		19,514		—		—
A2 / A	—		—		30,000		30,000
Total	$	62,384	$	62,500	$	30,000	$	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, 2023 and December 31, 2022 is presented below.


Available-for-sale:	Amortized Cost 1		Gross Unrealized				Allowance for Credit Losses		Fair Value
(in thousands)			Gains		(Losses)
March 31, 2023
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	106,151	$	4	$	(10,423)	$	—	$	95,732
CMOs issued by FHLMC	340,647		—		(27,514)		—		313,133
CMOs issued by FNMA	34,782		—		(3,182)		—		31,600
CMOs issued by GNMA	33,714		22		(2,743)		—		30,993
SBA-backed securities	40,547		2		(2,578)		—		37,971
Debentures of government- sponsored agencies	149,121		—		(12,000)		—		137,121

U.S. Treasury securities	11,909		—		(1,385)		—		10,524
Obligations of state and political subdivisions	116,549		84		(11,497)		—		105,136
Corporate bonds	36,990		—		(3,029)		—		33,961
Asset-backed securities	1,419		—		(57)		—		1,362
Total available-for-sale	$	871,829	$	112	$	(74,408)	$	—	$	797,533
December 31, 2022
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	$	109,736	$	3	$	(12,133)	$	—	$	97,606
CMOs issued by FHLMC	347,437		—		(33,682)		—		313,755
CMOs issued by FNMA	36,172		—		(3,852)		—		32,320
CMOs issued by GNMA	35,120		—		(3,296)		—		31,824
SBA-backed securities	47,724		2		(3,371)		—		44,355
Debentures of government- sponsored agencies	149,114		—		(14,008)		—		135,106

U.S. Treasury securities	11,904		—		(1,635)				10,269
Obligations of state and political subdivisions	116,855		29		(14,761)		—		102,123
Corporate bonds	36,990		—		(3,714)		—		33,276
Asset-backed securities	1,553		—		(91)		—		1,462
Total available-for-sale	$	892,605	$	34	$	(90,543)	$	—	$	802,096
1 Amortized cost and fair value exclude accrued interest receivable of $3.1 million and $3.2 million at March 31, 2023 and December 31, 2022, 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 that remained and the related accumulated other comprehensive loss are accreted to interest income over the remaining lives of the securities. Because these entries offset each other, there is no impact to net income.

The amortized cost and fair value of investment debt securities by contractual maturity at March 31, 2023 and December 31, 2022 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, 2023								December 31, 2022
	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	$	52	$	51	$	1,132	$	1,124	$	450	$	446	$	1,254	$	1,239
After one but within five years	85,323		82,266		362,588		336,054		87,418		83,663		335,813		307,843
After five years through ten years	268,433		232,936		154,572		141,260		262,072		222,280		185,997		166,273
After ten years	604,752		534,872		353,537		319,095		622,267		538,850		369,541		326,741
Total	$	958,560	$	850,125	$	871,829	$	797,533	$	972,207	$	845,239	$	892,605	$	802,096

There were no sales of investment securities in the first quarter of 2023 or 2022.

Three months ended

The carrying values of pledged investment securities are shown in the following table:


(in thousands)	March 31, 2023		December 31, 2022
Pledged to the State of California:
Secure public deposits in compliance with the Local Agency Security Program	$	228,970	$	235,587
Collateral for trust deposits	674		677
Collateral for Wealth Management and Trust Services checking account	567		569
Total investment securities pledged to the State of California	230,211		236,833
Bankruptcy trustee deposits pledged with Federal Reserve Bank	1,700		1,737
Pledged to FHLB Securities-Backed Credit Program	395,780		—
Pledged to the Federal Reserve Bank Term Funding Program ("BTFP")	278,638		—
Total pledged investment securities	$	906,329	$	238,570

There were 397 and 407 securities in unrealized loss positions at March 31, 2023 and December 31, 2022, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:


March 31, 2023	< 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	$	9,107	$	(316)	$	268,577	$	(44,691)	$	277,684	$	(45,007)
CMOs issued by FHLMC	44,217		(1,091)		150,466		(23,882)		194,683		(24,973)
CMOs issued by FNMA	37,106		(353)		41,538		(3,376)		78,644		(3,729)
CMOs issued by GNMA	27,285		(1,802)		10,467		(1,218)		37,752		(3,020)
SBA-backed securities	—		—		1,878		(99)		1,878		(99)
Debentures of government-sponsored agencies	29,433		(561)		94,316		(21,588)		123,749		(22,149)
Obligations of state and political subdivisions	9,000		(74)		41,565		(8,654)		50,565		(8,728)
Corporate bonds	—		—		28,767		(1,233)		28,767		(1,233)
Total held-to-maturity	156,148		(4,197)		637,574		(104,741)		793,722		(108,938)
Available-for-sale:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	7,729		(233)		87,173		(10,190)		94,902		(10,423)
CMOs issued by FHLMC	13,194		(263)		299,939		(27,251)		313,133		(27,514)
CMOs issued by FNMA	279		(4)		31,321		(3,178)		31,600		(3,182)
CMOs issued by GNMA	71		(1)		27,014		(2,742)		27,085		(2,743)
SBA-backed securities	30		—		37,580		(2,578)		37,610		(2,578)
Debentures of government- sponsored agencies	—		—		137,121		(12,000)		137,121		(12,000)
U.S. Treasury securities	—		—		10,523		(1,385)		10,523		(1,385)

Obligations of state and political subdivisions	4,486		(11)		92,776		(11,486)		97,262		(11,497)
Corporate bonds	—		—		33,962		(3,029)		33,962		(3,029)
Asset-backed securities	—		—		1,361		(57)		1,361		(57)
Total available-for-sale	25,789		(512)		758,770		(73,896)		784,559		(74,408)
Total securities at loss position	$	181,937	$	(4,709)	$	1,396,344	$	(178,637)	$	1,578,281	$	(183,346)


December 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	$	62,627	$	(5,960)	$	218,507	$	(44,187)	$	281,134	$	(50,147)
CMOs issued by FHLMC	78,144		(5,874)		113,796		(23,629)		191,940		(29,503)
CMOs issued by FNMA	106,485		(5,419)		—		—		106,485		(5,419)
CMOs issued by GNMA	27,570		(1,676)		10,331		(1,400)		37,901		(3,076)
SBA-backed securities	2,239		(133)		—		—		2,239		(133)
Debentures of government- sponsored agencies	38,645		(2,530)		80,711		(23,937)		119,356		(26,467)
Obligations of state and political subdivisions	15,155		(589)		36,603		(10,152)		51,758		(10,741)
Corporate Bonds	28,448		(1,552)		—		—		28,448		(1,552)
Total held-to-maturity	359,313		(23,733)		459,948		(103,305)		819,261		(127,038)
Available-for-sale:
MBS pass-through securities issued by FHLMC, FNMA and GNMA	44,630		(4,501)		52,235		(7,632)		96,865		(12,133)
CMOs issued by FHLMC	169,760		(15,144)		143,995		(18,538)		313,755		(33,682)
CMOs issued by FNMA	4,790		(235)		27,529		(3,617)		32,319		(3,852)
CMOs issued by GNMA	8,214		(374)		23,612		(2,922)		31,826		(3,296)
SBA-backed securities	37,845		(3,228)		6,133		(143)		43,978		(3,371)
Debentures of government- sponsored agencies	19,054		(946)		116,052		(13,062)		135,106		(14,008)
U.S. Treasury securities	—		—		10,269		(1,635)		10,269		(1,635)
Obligations of state and political subdivisions	70,402		(9,459)		28,711		(5,302)		99,113		(14,761)
Corporate Bonds	—		—		33,276		(3,714)		33,276		(3,714)

Asset-backed securities	—		—		1,462		(91)		1,462		(91)
Total available-for-sale	354,695		(33,887)		443,274		(56,656)		797,969		(90,543)
Total securities at loss position	$	714,008	$	(57,620)	$	903,222	$	(159,961)	$	1,617,230	$	(217,581)

As of March 31, 2023, the investment portfolio included 353 investment securities that had been in a continuous loss position for twelve months or more and 44 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, 2023, 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, 2023.

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, 2023 and December 31, 2022. 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, 2023 and December 31, 2022. On April 27, 2023, FHLB announced a cash dividend for the first quarter of 2023 at an annualized dividend rate of 7.00% to be distributed on May 11, 2023. 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, 2023 and December 31, 2022. 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 1.5991 at March 31, 2023 and December 31, 2022, 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 $3.8 million and $3.5 million at March 31, 2023 and December 31, 2022, respectively. 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 $2.4 million and $2.5 million recorded in other assets as of March 31, 2023 and December 31, 2022, respectively. In the first three months of 2023, we recognized $151 thousand of low-income housing tax credits and other tax benefits, offset by $127 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of March 31, 2023, our unfunded commitments for these low-income housing tax credit funds totaled $347 thousand. We did not recognize any impairment losses on these low-income housing tax credit investments during the first three months of 2023 or 2022, as the value of the future tax benefits exceeds the carrying value of the investments.