Investments

9 Months Ended

Sep. 30, 2022

Investments, Debt and Equity Securities [Abstract]

Investments

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)

	September 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
Available-for-sale
U.S. government agencies	$	4,000	$	—	$	(45)	$	—	$	3,955
Mortgage-backed securities		202,882		—		(11,860)		—		191,022
State and political subdivisions		363,790		53		(43,114)		—		320,729
Corporate bonds		59,768		—		(5,432)		—		54,336
Collateralized loan obligations		514,701		119		(15,428)		—		499,392
Total available-for-sale securities	$	1,145,141	$	172	$	(75,879)	$	—	$	1,069,434
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Estimated Fair Value		Allowance for Credit Losses
Held-to-maturity
U.S. government agencies	$	6,113	$	—	$	(669)	$	5,444	$	—
Mortgage-backed securities		100,792		—		(9,941)		90,851		—
State and political subdivisions		49,324		11		(6,946)		42,389		(18)
Total held-to-maturity securities	$	156,229	$	11	$	(17,556)	$	138,684	$	(18)

	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
Available-for-sale
U.S. government agencies	$	1,546	$	28	$	—	$	—	$	1,574
Mortgage-backed securities		303,912		4,772		(1,957)		—		306,727
State and political subdivisions		290,729		13,807		(268)		—		304,268
Corporate bonds		28,436		94		(1)		—		28,529
Collateralized loan obligations		332,836		68		(688)		—		332,216
Total securities	$	957,459	$	18,769	$	(2,914)	$	—	$	973,314

The Company reassessed classification of certain investments and effective April 1, 2022 the Company transferred $162.1 million of Agency, Mortgaged-Backed and Municipal securities from the available-for-sale designation to the held-to-maturity designation. The securities were transferred at their amortized cost basis, net of any remaining unrealized gain or loss reported in accumulated other comprehensive income. The related unrealized loss of $11.5 million included in other comprehensive income remained in other comprehensive income, to be amortized out of other comprehensive income with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. Upon transfer, a discounted-cash-flow reserve calculation was prepared for the securities transferred into the held-to-maturity designation and an allowance for credit losses of $0.02 million was recorded and charged to provision for credit loss expense. The Company did not have any securities classified as held-to-maturity as of December 31, 2021.

The Company did not record an ACL on the AFS portfolio at September 30, 2022 or upon the implementation of CECL on January 1, 2022.  As of both dates the Company considers the unrealized loss across the classes of major security-type to be related to fluctuations in market conditions, primarily interest rates, and not reflective of a deterioration in credit value. The Company maintains that it has intent and ability to hold these securities until the amortized cost basis of each security is recovered and likewise concluded as of both January 1, 2022 and September 30, 2022 that it was not more likely than not that any of the securities in an unrealized loss position would be required to be sold. The following bullets outline additional support for management’s conclusion that no amount of the unrealized loss of the securities in an unrealized loss position as of January 1, 2022 and September 30, 2022 was attributable to credit deterioration and a risk of loss, requiring an allowance for credit losses.

● US Government Agencies are supported by the full faith and credit-worthiness of the U.S. Federal Government and the management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either January 1, 2022 or September 30, 2022. 

● Mortgage-backed securities issued by government sponsored entities (“GSEs”) carry an implicit guarantee by the U.S. Federal Government, as the GSEs can draw funds from the U.S. Federal Government up to a limit, with an implied ability to draw funds beyond the limit.  Management did not consider a default, much less a loss on these securities to be a reasonable possibility as of either January 1, 2022 or September 30, 2022. 

● Management routinely monitors third party credit grades of the municipal issuers in the Company’s state and political subdivisions portfolio and as of both January 1, 2022 and September 30, 2022 noted that all municipal securities in an unrealized loss position were either investment grade rated or guaranteed.  On a quarterly basis management receives financial information from a third-party service in order to monitor the underlying issuer’s financial stability. In addition, management performs annual reviews of the underlying municipal issuers financial statements in order to evaluate stability and repayment capacity and has noted no concerns with any of the bonds in the Company’s State and Local portfolio.  As of both January 1, 2022 and September 30, 2022 management concluded that no allowance for credit losses was warranted on any of the Company’s municipal securities and the unrealized loss position of each of the securities reflected fluctuations in market conditions, primarily interest rates, since the time of purchase.

● The Company has invested in corporate debt issuances of other financial institutions.  Various financial metrics of each of the issuing financial institutions are reviewed by management quarterly, these metrics include credit quality, reserve adequacy, profitability and capital.  Following review of the financial metrics available for each

of the underlying institutions as of January 1, 2022 and September 30, 2022 management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest rates, from the date of purchase, and were not reflective of any credit concerns with the issuing financial institution. These bonds were subject to a credit review by the credit administration department prior to their purchase and are subject to ongoing quarterly reviews.

● The Company has invested exclusively in AA and AAA tranches of various collateralized loan obligations, which are securitizations of commercial loans. Each purchase is subject to a credit, concentration, and structure review by the credit administration department prior to their purchase and are subject to ongoing quarterly reviews. Management monitors the credit rating of these investments on a quarterly basis in addition to various performance metrics available through a third-party informational service. Following review of financial metrics as of both January 1, 2022 and September 30, 2022 management concluded that the unrealized loss position of these securities related exclusively to the fluctuation in market conditions, primarily interest rate spreads, from the date of purchase, and were not reflective of any credit concerns with the tranches comprising the Company’s investments.

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)

		September 30, 2022
		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	2	$	(45)	$	3,955	$	—	$	—	$	(45)	$	3,955
Mortgage-backed securities	371		(11,696)		189,031		(164)		1,924		(11,860)		190,955
State and political subdivisions	399		(38,127)		286,459		(4,987)		13,878		(43,114)		300,337
Corporate bonds	51		(5,432)		54,336		—		—		(5,432)		54,336
Collateralized loan obligations	58		(15,200)		447,465		(228)		8,071		(15,428)		455,536
Total available-for-sale	881	$	(70,500)	$	981,246	$	(5,379)	$	23,873	$	(75,879)	$	1,005,119

		December 31, 2021
		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	—	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities	46		(1,797)		107,026		(160)		2,808		(1,957)		109,834
State and political subdivisions	29		(268)		30,170		—		—		(268)		30,170
Corporate bonds	1		(1)		499		—		—		(1)		499
Collateralized loan obligations	22		(688)		175,581		—		—		(688)		175,581
Total available-for-sale	98	$	(2,754)	$	313,276	$	(160)	$	2,808	$	(2,914)	$	316,084

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 September 30,					Nine months ended September 30,
	2022		2021		2022		2021
Proceeds from sales, calls and maturities of securities available for sale	$	3,540	$	1,948	$	34,071	$	5,948
Gross gains on sales, calls and maturities of securities available for sale		—		11		1,032		11
Gross losses on sales, calls and maturities of securities available for sale		—		—		—		—
Net gains on sale of securities available for sale	$	—	$	11	$	1,032	$	11

The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at September 30, 2022 and December 31, 2021 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.

Estimated Fair Value of Contractual Maturities

(dollars in thousands, unaudited)

	September 30, 2022
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturing within one year	$	908	$	908	$	675	$	667
Maturing after one year through five years		14,313		14,132		2,133		2,091
Maturing after five years through ten years		81,497		75,441		18,729		16,869
Maturing after ten years		330,840		288,539		33,900		28,207
Securities not due at a single maturity date:
Mortgage-backed securities		202,882		191,022		100,792		90,850
Collateralized loan obligations		514,701		499,392		—		—
	$	1,145,141	$	1,069,434	$	156,229	$	138,684

	December 31, 2021
	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturing within one year	$	3,513	$	3,547	$	—	$	—
Maturing after one year through five years		26,422		26,718		—		—
Maturing after five years through ten years		36,840		38,314		—		—
Maturing after ten years		253,936		265,792		—		—
Securities not due at a single maturity date:						—		—
Mortgage-backed securities		303,912		306,727		—		—
Collateralized loan obligations		332,836		332,216		—		—
	$	957,459	$	973,314	$	—	$	—

At September 30, 2022, the Company’s investment portfolio included 503 “muni” bonds issued by 415 different government municipalities and agencies located within 37 different states, with an aggregate fair value of $363.1 million. The largest exposure to any single municipality or agency was a combined $5.0 million (fair value) in general obligation bonds issued by the City of New York (NY). In addition, the Company owned 46 subordinated debentures issued by bank holding companies totaling $54.3 million (fair value).

At December 31, 2021, the Company’s investment portfolio included 403 “muni” bonds issued by 335 different government municipalities and agencies located within 33 states, with an aggregate fair value of $304.3 million. The largest exposure to any single municipality or agency was $4.0 million (fair value) in three bonds issued by the Charter Township of Washington. In addition, the company owned 23 subordinated debentures issued by bank holding companies totaling $28.5 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)

	September 30, 2022				December 31, 2021
	Amortized		Fair Market		Amortized		Fair Market
General obligation bonds	Cost		Value		Cost		Value
State of issuance
Texas	$	159,391	$	139,498	$	85,045	$	89,225
California		67,310		58,161		64,092		67,066
Washington		22,417		20,670		23,858		24,812
Other (29 & 26 states, respectively)		107,784		95,355		75,037		78,579
Total general obligation bonds		356,902		313,684		248,032		259,682
Revenue bonds
State of issuance
Texas		9,496		8,460		7,038		7,377
California		3,994		3,613		1,349		1,392
Washington		4,093		3,387		4,334		4,602
Other (20 & 15 states, respectively)		38,629		33,974		29,976		31,215
Total revenue bonds		56,212		49,434		42,697		44,586
Total obligations of states and political subdivisions	$	413,114	$	363,118	$	290,729	$	304,268

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)

	September 30, 2022				December 31, 2021
	Amortized		Fair Market		Amortized		Fair Market
Revenue bonds	Cost		Value		Cost		Value
Revenue source:
Water	$	22,741	$	20,064	$	15,534	$	16,220
Lease		7,511		6,907		6,556		6,718
Sewer		7,091		6,144		3,932		4,165
Sales tax revenue		4,329		3,803		—		—
Intergovernmental agreement		2,836		2,600		—		—
Other (10 and 9 sources, respectively)		11,704		9,916		16,675		17,483
Total revenue bonds	$	56,212	$	49,434	$	42,697	$	44,586

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 four different LIHTC fund limited partnerships made in 2014, 2015, and two in 2022, 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 a straight-line basis as an offset to noninterest income, over the time period in which the tax credits and tax benefits are expected to be received.

As of September 30, 2022, our total LIHTC investment book balance was $10.2 million, which includes $7.5 million in remaining commitments for additional capital contributions. There were $0.4 million in tax credits derived from our LIHTC investments that were recognized during the nine months ended September 30, 2022, and amortization expense of $0.3 million associated with those investments was netted against pre-tax noninterest income 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, 2021, our total LIHTC investment book balance was $2.9 million, which includes $0.1 million in remaining commitments for additional capital contributions. There were $0.5 million in tax credits derived from our LIHTC investments that were recognized during the year ended December 31, 2022, and amortization expense of $0.5 million associated with those investments was netted against pre-tax noninterest income for the same time period.