SECURITIES

3 Months Ended

Mar. 31, 2023

SECURITIES

SECURITIES

NOTE 3: SECURITIES

The following table provides a summary of the Company’s securities AFS portfolio as of:

	Amortized		Gross Unrealized				Allowance for		Estimated
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Fair Value
March 31, 2023:
Collateralized mortgage obligations	$	9,585	$	—	$	(1,074)	$	—	$	8,511
Agency mortgage-backed securities		7,627		—		(470)		—		7,157
Municipal bonds		50,093		1		(2,574)		—		47,520
SBA securities		16,947		2		(130)		—		16,819
Beneficial interests in FHLMC securitization		19,113		110		(105)		(11,315)		7,803
Corporate bonds		138,972		—		(15,729)		(973)		122,270
U.S. Treasury		1,298		3		(57)		—		1,244
Total	$	243,635	$	116	$	(20,139)	$	(12,288)	$	211,324
December 31, 2022:
Collateralized mortgage obligations	$	9,865	$	—	$	(1,250)	$	—	$	8,615
Agency mortgage-backed securities		8,161		—		(585)		—		7,576
Municipal bonds		50,232		—		(3,442)		—		46,790
SBA securities		19,090		3		(138)		—		18,955
Beneficial interests in FHLMC securitization		19,415		108		(103)		(11,439)		7,981
Corporate bonds		145,024		—		(10,011)		—		135,013
U.S. Treasury		1,298		1		(71)		—		1,228
Total	$	253,085	$	112	$	(15,600)	$	(11,439)	$	226,158

As of March 31, 2023, U.S. Treasury securities of $1.2 million included in the table above are pledged as collateral to the States of California and Florida to meet regulatory requirements related to the Bank’s trust operations, $231.9 million of agency mortgage-backed securities are pledged as collateral as support for the Bank’s obligations under loan sales and securitizations agreements entered into from 2018 and 2021.  A total of $184.2 million in securities consisting of SBA securities, collateralized mortgage obligations, agency mortgage-backed securities, and municipal bonds are pledged as collateral for repurchase agreements. A total of $841.6 million in agency mortgage-backed securities, corporate bonds, and loans are pledged as collateral to the Federal Reserve’s discount window from which the Bank may borrow.  

The following table provides a summary of the Company’s securities HTM portfolio as of:

	Amortized		Gross Unrecognized				Allowance for		Estimated
(dollars in thousands)	Cost		Gains		Losses		Credit Losses		Fair Value
March 31, 2023:
Agency mortgage-backed securities	$	847,036	$	—	$	(80,129)	$	—	$	766,907
Total	$	847,036	$	—	$	(80,129)	$	—	$	766,907
December 31, 2022:
Agency mortgage-backed securities	$	862,544	$	—	$	(89,483)	$	—	$	773,061
Total	$	862,544	$	—	$	(89,483)	$	—	$	773,061

In 2022, the Company transferred $917 million in securities AFS to securities HTM. 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 gain (or loss) of $0.6 million included in other comprehensive income remained in other comprehensive income to be amortized, with an offsetting entry to interest income as a yield adjustment

through earnings over the remaining term of the securities. Subsequent to transfer, the ACL on these securities was evaluated under the accounting policy for securities HTM. The securities HTM portfolio consists solely of agency-backed MBS securities in which the Company has reason to believe the credit loss exposure is remote, as these securities are guaranteed by a U.S. government sponsored entity (“GSE”).  As such, the ACL related to the securities HTM portfolio was zero at March 31, 2023 and December 31, 2022, respectively.

We monitor the credit quality of the securities in the investment portfolios by evaluating various quantitative attributes. The credit quality indicators the Company monitors include, but are not limited to, credit ratings of individual securities and the credit rating of government sponsored enterprises that guarantee the securities. Credit ratings express opinions about the credit quality of a security. Securities rated investment grade, that is, those with ratings similar to BBB-/Baa3 or above, as defined by NRSROs, are generally considered by the rating agencies and market participants to be low credit risk. As of March 31, 2023, all of the Company’s securities were either investment grade or were issued by a U.S. government agency or a U.S. government sponsored enterprise with an investment grade rating.

The tables below indicate the gross unrealized losses and fair values of our securities AFS portfolio, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

	Securities with Unrealized Loss at March 31, 2023
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Collateralized mortgage obligations	$	—	$	—	$	8,511	$	(1,074)	$	8,511	$	(1,074)
Agency mortgage-backed securities		1,407		(50)		5,750		(420)		7,157		(470)
Municipal bonds		1,796		(15)		42,108		(2,559)		43,904		(2,574)
SBA securities		14,823		(122)		912		(8)		15,735		(130)
Beneficial interests in FHLMC securitization		4,224		(105)		—		—		4,224		(105)
Corporate bonds		52,772		(1,228)		70,472		(14,501)		123,244		(15,729)
U.S. Treasury		—		—		841		(57)		841		(57)
Total temporarily impaired securities	$	75,022	$	(1,520)	$	128,594	$	(18,619)	$	203,616	$	(20,139)

	Securities with Unrealized Loss at December 31, 2022
	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Collateralized mortgage obligations	$	2	$	—	$	8,613	$	(1,250)	$	8,615	$	(1,250)
Agency mortgage-backed securities		6,882		(525)		696		(60)		7,578		(585)
Municipal bonds		44,971		(3,244)		1,819		(198)		46,790		(3,442)
SBA securities		17,237		(137)		121		(1)		17,358		(138)
Beneficial interests in FHLMC securitization		4,217		(103)		—		—		4,217		(103)
Corporate bonds		108,056		(6,476)		26,957		(3,535)		135,013		(10,011)
U.S. Treasury		376		(23)		451		(48)		827		(71)
Total temporarily impaired securities	$	181,741	$	(10,508)	$	38,657	$	(5,092)	$	220,398	$	(15,600)

Unrealized losses in agency mortgage backed securities, beneficial interests in FHLMC securitizations, and other securities have not been recognized into income because the issuer bonds are of high credit quality, management does not intend to sell, it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in discount rates and assumptions regarding future interest rates. The fair value is expected to recover as the bonds approach maturity.

The tables below indicate the gross unrecognized losses and fair values of our securities HTM portfolio, aggregated by investment category and length of time that the individual securities have been in a continuous unrecognized loss position.

	Securities with Unrecognized Loss at March 31, 2023
	Less than 12 months				12 months or more				Total
	Fair		Unrecognized		Fair		Unrecognized		Fair		Unrecognized
(dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Agency mortgage-backed securities	$	76,301	$	(6,768)	$	690,606	$	(73,361)	$	766,907	$	(80,129)
Total temporarily impaired securities	$	76,301	$	(6,768)	$	690,606	$	(73,361)	$	766,907	$	(80,129)

	Securities with Unrecognized Loss at December 31, 2022
	Less than 12 months				12 months or more				Total
	Fair		Unrecognized		Fair		Unrecognized		Fair		Unrecognized
(dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Agency mortgage-backed securities	$	394,619	$	(37,418)	$	378,442	$	(52,065)	$	773,061	$	(89,483)
Total temporarily impaired securities	$	394,619	$	(37,418)	$	378,442	$	(52,065)	$	773,061	$	(89,483)

The following is a rollforward of the Bank’s allowance for credit losses related to investments for the following periods:

(dollars in thousands)		Total
Three Months Ended March 31, 2023:
Beginning balance	$	11,439
Provision for credit losses		849
Balance: March 31, 2023	$	12,288
Three Months Ended March 31, 2022:
Beginning balance	$	10,399
Provision for credit losses		344
Balance: March 31, 2022	$	10,743

Provision for credit losses of $0.8 million and $0.3 million were recorded on the consolidated income statements for the three month periods ended March 31, 2023 and 2022, respectively.  

The ACL on investment securities is determined for both held-to-maturity and available-for-sale classifications of the investment portfolio in accordance with ASC 326, and is evaluated on a quarterly basis. The ACL for held-to-maturity investment securities is determined on a collective basis, based on shared risk characteristics, and is determined at the individual security level when the Company deems a security to no longer possess shared risk characteristics. Under ASC 326-20, for investment securities where the Company has reason to believe the credit loss exposure is remote, such as those guaranteed by the U.S. government or government sponsored entities, a zero loss expectation is applied and a company is not required to estimate and recognize an ACL.

For securities AFS in an unrealized loss position, the Company first evaluates whether it intends to sell, or whether it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of these criteria regarding intent or requirement to sell is met, the security amortized cost basis is written down to fair value through income. If neither criteria is met, the Company is required to assess whether the decline in fair value has resulted from credit losses or noncredit-related factors. In determining whether a security’s decline in fair value is credit related, the Company considers a number of factors including, but not limited to: (i) the extent to which the fair value of the investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii) downgrades

in credit ratings; (iv) payment structure of the security, and (v) the ability of the issuer of the security to make scheduled principal and interest payments. If, after considering these factors, the present value of expected cash flows to be collected is less than the amortized cost basis, a credit loss exists, and an allowance for credit loss is recorded through income as a component of provision for credit loss expense. If the assessment indicates that a credit loss does not exist, the Company records the decline in fair value through other comprehensive income, net of related income tax effects. The Company has made the election to exclude accrued interest receivable on securities from the estimate of credit losses and report accrued interest separately on the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of a security is confirmed or when either of the criteria regarding intent or requirement to sell is met.  In March 2023, the Company engaged with an independent third party to perform an analysis of expected credit losses for its municipal and corporate bond securities in order to supplement our own internal review.  The analysis concluded and the Company concurred that seven corporate bond securities were impacted by credit loss totaling $973 thousand, which was recorded against the allowance.

The scheduled maturities of securities AFS and the related weighted average yields were as follows for the periods indicated:

	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
March 31, 2023
Amortized Cost:
Collateralized mortgage obligations	$	—		$	—		$	569		$	9,016		$	9,585
Agency mortgage-backed securities		—			5,969			—			1,658			7,627
Municipal bonds		300			9,280			35,064			5,449			50,093
SBA securities		5			1,101			1,108			14,733			16,947
Beneficial interests in FHLMC securitization		—			9,537			—			9,576			19,113
Corporate bonds		—			28,985			104,456			5,531			138,972
U.S. Treasury		—			1,298			—			—			1,298
Total	$	305		$	56,170		$	141,197		$	45,963		$	243,635
Weighted average yield		0.29	%		4.11	%		3.43	%		4.17	%		3.72	%
Estimated Fair Value:
Collateralized mortgage obligations	$	—		$	—		$	521		$	7,990		$	8,511
Agency mortgage-backed securities		—			5,665			—			1,492			7,157
Municipal bonds		300			8,944			33,682			4,594			47,520
SBA securities		5			1,094			1,103			14,617			16,819
Beneficial interests in FHLMC securitization		—			9,537			—			9,581			19,118
Corporate bonds		—			27,970			90,758			4,515			123,243
U.S. Treasury		—			1,244			—			—			1,244
Total	$	305		$	54,454		$	126,064		$	42,789		$	223,612

	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
December 31, 2022
Amortized Cost:
Collateralized mortgage obligations	$	—		$	—		$	686		$	9,179		$	9,865
Agency mortgage-backed securities		—			4,384			2,107			1,670			8,161
Municipal bonds		301			8,002			34,501			7,428			50,232
SBA securities		14			1,402			1,278			16,396			19,090
Beneficial interests in FHLMC securitization		—			9,860			—			9,555			19,415
Corporate bonds		6,006			28,993			104,494			5,531			145,024
U.S. Treasury		—			1,298			—			—			1,298
Total	$	6,321		$	53,939		$	143,066		$	49,759		$	253,085
Weighted average yield		4.36	%		3.96	%		3.38	%		1.91	%		3.24	%
Estimated Fair Value:
Collateralized mortgage obligations	$	—		$	—		$	623		$	7,992		$	8,615
Agency mortgage-backed securities		—			4,133			1,960			1,483			7,576
Municipal bonds		299			7,565			32,690			6,236			46,790
SBA securities		14			1,395			1,272			16,274			18,955
Beneficial interests in FHLMC securitization		—			9,860			—			9,560			19,420
Corporate bonds		6,001			28,022			96,734			4,256			135,013
U.S. Treasury		—			1,228			—			—			1,228
Total	$	6,314		$	52,203		$	133,279		$	45,801		$	237,597

The scheduled maturities of securities HTM and the related weighted average yields were as follows for the periods indicated:

	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
March 31, 2023
Amortized Cost:
Agency mortgage-backed securities	$	—		$	574		$	18,925		$	827,537		$	847,036
Total	$	—		$	574		$	18,925		$	827,537		$	847,036
Weighted average yield		—	%		0.60	%		1.22	%		2.47	%		2.44	%
Estimated Fair Value:
Agency mortgage-backed securities	$	—		$	537		$	17,451		$	748,919		$	766,907
Total	$	—		$	537		$	17,451		$	748,919		$	766,907

	Less than			1 Through			5 Through			After
(dollars in thousands)	1 Year			5 years			10 Years			10 Years			Total
December 31, 2022
Amortized Cost:
Agency mortgage-backed securities	$	—		$	208		$	17,689		$	844,647		$	862,544
Total	$	—		$	208		$	17,689		$	844,647		$	862,544
Weighted average yield		—	%		0.36	%		1.12	%		2.31	%		2.28	%
Estimated Fair Value:
Agency mortgage-backed securities	$	—		$	192		$	16,148		$	756,721		$	773,061
Total	$	—		$	192		$	16,148		$	756,721		$	773,061