SECURITIES

9 Months Ended

Sep. 30, 2023

SECURITIES

SECURITIES

5. SECURITIES

Equity Securities

Equity securities owned by the Company consist of common stock of various financial services providers. ASC Topic 321, Investments – Equity Securities requires all equity securities within its scope to be measured at fair value with changes in fair value recognized in net income. As of September 30, 2023, the Company had $978,000 in equity securities recorded at fair value and $1.1 million in equity securities were recorded at fair value at December 31, 2022. The Company recorded net losses of $14,000 and $78,000 during the three and nine months ended September 30, 2023 and net losses of $30,000 and $110,000 during the three and nine months ended September 30 2022, due to changes in the fair value of the Company’s portfolio of equity securities during the applicable periods.

Debt Securities

Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities that are not classified as held to maturity or trading are classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

The Company reassessed classification of certain investments and, effective October 1, 2022, transferred $28.4 million of obligations of U.S. Government sponsored enterprises and $183.9 million in mortgage-backed securities from the available for sale to the held to maturity security classification. The transfer occurred at fair value. The combined related unrealized loss of $46.8 million, included in other comprehensive income, remained in other comprehensive income following the transfer and is being 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. No gain or loss was recorded at the time of transfer.

The Company’s debt securities portfolio includes primarily bonds issued by U.S. Government sponsored enterprises (approximately 16% of the investment portfolio), mortgage-backed securities issued by Government-sponsored entities and backed by residential mortgages (approximately 76%), corporate debt securities (approximately 5%) and municipal bonds (approximately 3%) as of September 30, 2023. Most of the municipal bonds are general obligation bonds with maturities or pre-refunding dates within 5 years.

At each of September 30, 2023 and December 31, 2022, excluding securities of the U.S. Government and its agencies, the Company had holdings of securities from two issuers in excess of 10% of stockholders’ equity; holdings in Federal Farm Credit Bank and Pennsylvania Housing Finance securities had fair values of $10.8 million and $5.1 million, respectively, as of September 30, 2023, and $10.9 million and $6.1 million, respectively, as of December 31, 2022.

The amortized cost and fair value of debt securities as of September 30, 2023 and December 31, 2022, by contractual maturity, are shown in the tables below. Expected maturities may differ from contractual maturities because the securities may be called or prepaid, with or without prepayment penalties. Securities not due at a single maturity date are shown separately.

(Dollars in thousands)	September 30, 2023
					Gross		Gross
	Amortized		Fair		Unrealized		Unrealized
Debt Securities Available for Sale	Cost		Value		Gains		Losses
Obligations of U.S. Government sponsored enterprises
After one year but within five years	$	15,500	$	13,727	$	—	$	(1,773)
		15,500		13,727		—		(1,773)
Obligations of state and political subdivisions
Within one year		490		490		—		—
After one year but within five years		2,761		2,595		—		(166)
After five years but within ten years		4,613		3,628		—		(985)
		7,864		6,713		—		(1,151)
Corporate debt securities
After one year but within five years		4,625		3,962		—		(663)
After five years but within ten years		13,000		9,412		—		(3,588)
		17,625		13,374		—		(4,251)
Mortgage-backed securities		36,263		32,713		—		(3,550)
Total	$	77,252	$	66,527	$	—	$	(10,725)

(Dollars in thousands)	September 30, 2023
					Gross		Gross
	Amortized		Fair		Unrecognized		Unrecognized
Debt Securities Held to Maturity	Cost		Value		Gains		Losses
Obligations of U.S. Government sponsored enterprises
After one year but within five years	$	15,766	$	15,316	$	—	$	(450)
After five years but within ten years		13,517		12,949		—		(568)
		29,283		28,265		—		(1,018)
Mortgage-backed securities		173,363		160,956		—		(12,407)
Total	$	202,646	$	189,221	$	—	$	(13,425)

(Dollars in thousands)	December 31, 2022
					Gross		Gross
	Amortized		Fair		Unrealized		Unrealized
Debt Securities Available for Sale	Cost		Value		Gains		Losses
Obligations of U.S. Government sponsored enterprises
After one year but within five years	$	15,500	$	13,705	$	—	$	(1,795)
		15,500		13,705		—		(1,795)
Obligations of state and political subdivisions
After one year but within five years		4,076		3,924		—		(152)
After five years but within ten years		4,608		3,755		—		(853)
		8,684		7,679		—		(1,005)
Corporate debt securities
After one year but within five years		4,673		4,190		—		(483)
After five years but within ten years		13,000		11,151		—		(1,849)
		17,673		15,341		—		(2,332)
Mortgage-backed securities		39,479		36,811		—		(2,668)
Total	$	81,336	$	73,536	$	—	$	(7,800)

(Dollars in thousands)	December 31, 2022
					Gross		Gross
	Amortized		Fair		Unrecognized		Unrecognized
Debt Securities Held to Maturity	Cost		Value		Gains		Losses
Obligations of U.S. Government sponsored enterprises
After one year but within five years	$	13,039	$	13,067	$	28	$	—
After five years but within ten years		15,561		15,605		56		(12)
		28,600		28,672		84		(12)
Mortgage-backed securities		180,965		181,215		1,682		(1,432)
Total	$	209,565	$	209,887	$	1,766	$	(1,444)

Certain obligations of the U.S. Government and state and political subdivisions, as well as mortgage-backed securities are pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law. The carrying value of the pledged assets was $174.3 million and $102.3 million on September 30, 2023 and December 31, 2022, respectively.

In addition to cash received from the scheduled maturities of investment securities, some securities available for sale are sold or called at current market values during normal operations. The Bank sold $24.7 million, par value, of subordinated debt of unconsolidated financial institutions, classified as corporate debt securities, at a loss of $1.5 million during the nine months ended September 30, 2022 due to the adverse regulatory impact of substantial (relative to capital) holdings of subordinated debt.

There were no sales of securities during the three or nine months ended September 30, 2023. There was one called security during the three months ended September 30, 2023 and two called securities during the nine months ended September 30, 2023. The proceeds from these calls were immaterial to the financial statements. The following table summarizes proceeds received from sales or calls of available for sale investment securities transactions and the resulting realized gains and losses during the three and nine months ended September 30, 2022.

(Dollars in thousands)	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Gross proceeds from sales and calls of securities	$	—	$	6,137	$	—	$	23,271
Gross realized gains from sold and called securities	$	—	$	—		—		25
Gross realized losses from sold and called securities		—		(378)		—		(1,477)
Net gains (losses) from sales and calls of securities	$	—	$	(378)	$	—	$	(1,452)

The following tables summarize debt securities with unrealized and unrecognized losses at September 30, 2023 and December 31, 2022, aggregated by category and length of time in a continuous unrealized loss position.

	Unrealized Losses at September 30, 2023
	Less Than 12 Months					12 Months or More					Total
(Dollars in thousands)	Number					Number					Number
	of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized
	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
Securities available for sale
Obligations of U.S. Government sponsored enterprises	—	$	—	$	—	3	$	13,727	$	(1,773)	3	$	13,727	$	(1,773)
Obligations of state and political subdivisions	2		1,429		(48)	7		4,794		(1,103)	9		6,223		(1,151)
Corporate debt securities	—		—		—	9		13,374		(4,251)	9		13,374		(4,251)
Mortgage-backed securities	—		—		—	34		32,713		(3,550)	34		32,713		(3,550)
Total temporarily impaired securities available for sale	2	$	1,429	$	(48)	53	$	64,608	$	(10,677)	55	$	66,037	$	(10,725)
Securities held to maturity
Obligations of U.S. Government sponsored enterprises	7	$	28,265	$	(1,018)	—	$	—	$	—	7	$	28,265	$	(1,018)
Mortgage-backed securities	35		114,476		(5,763)	15		46,480		(6,644)	50		160,956		(12,407)
Total temporarily impaired securities held to maturity	42	$	142,741	$	(6,781)	15	$	46,480	$	(6,644)	57	$	189,221	$	(13,425)
Total	44	$	144,170	$	(6,829)	68	$	111,088	$	(17,321)	112	$	255,258	$	(24,150)

	Unrealized Losses at December 31, 2022
	Less Than 12 Months					12 Months or More					Total
(Dollars in thousands)	Number					Number					Number
	of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized
	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
Securities available for sale
Obligations of U.S. Government sponsored enterprises	1	$	2,456	$	(44)	2	$	11,248	$	(1,751)	3	$	13,704	$	(1,795)
Obligations of state and political subdivisions	4		2,781		(20)	7		4,898		(985)	11		7,679		(1,005)
Corporate debt securities	5		9,831		(1,669)	4		5,510		(663)	9		15,341		(2,332)
Mortgage-backed securities	33		36,493		(2,630)	1		319		(38)	34		36,812		(2,668)
Total temporarily impaired securities available for sale	43	$	51,561	$	(4,363)	14	$	21,975	$	(3,437)	57	$	73,536	$	(7,800)
Securities held to maturity
Obligations of U.S. Government sponsored enterprises	1	$	3,463	$	(12)	—	$	—	$	—	1	$	3,463	$	(12)
Mortgage-backed securities	9		21,643		(392)	12		48,788		(1,040)	21		70,431		(1,432)
Total temporarily impaired securities held to maturity	10	$	25,106	$	(404)	12	$	48,788	$	(1,040)	22	$	73,894	$	(1,444)
Total	53	$	76,667	$	(4,767)	26	$	70,763	$	(4,477)	79	$	147,430	$	(9,244)

At September 30, 2023, ten obligations of U.S. Government sponsored enterprises, nine obligations of state and political subdivisions, nine corporate debt securities, and eighty-four mortgage-backed securities had unrealized losses. Sixty-eight of these securities have been in a continuous loss position for twelve months or more. The mortgage-backed securities in the Company’s portfolio are government sponsored enterprise (“GSE”) pass-through instruments issued by the Federal National Mortgage Association (“FNMA”) or Federal Home Loan Mortgage Corporation (“FHLMC”), which guarantees the timely payment of principal on these investments.

ASC 326 made targeted improvements to the accounting for credit losses on securities available for sale. The concept of other-than-temporarily impaired securities has been replaced with the allowance for credit losses. Unlike held to maturity debt securities, available for sale securities are evaluated on an individual level and pooling of securities is not allowed.

For available for sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or if 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 the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available for sale that do not meet the criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as credit loss expense (or reversal). Losses are charged against the allowance when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. As of September 30, 2023, management determined that an immaterial credit loss existed because the decline in fair value of the available for sale debt securities was mostly attributable to changes in  interest rates and other market conditions, rather than erosion of issuer credit quality and, as a

result, timely payment of contractual cash flows, including principal and interest, has continued and is not considered at risk.

Included in corporate debt securities is $1.5 million par value of PacWest Bancorp (“PACW”) subordinated debt. In August 2022, Fitch Ratings downgraded PACW’s subordinated debt Viability Rating to BB+ from BBB-, and further downgraded the rating to BB in April 2023. Since early May 2023, PACW has taken steps to improve capital and liquidity. On July 25, 2023, PACW announced a merger with Banc of California, Inc. (“BANC”) and will operate under the BANC name and brand. The merger is an all-stock transaction. BANC also announced that it has entered into investment agreements to issue $400.0 million of equity securities in conjunction with the merger. Management believes that this capital infusion and planned repositioning of the balance sheet reduces credit risk associated with the $1.5 million PACW subordinated debt owned by the Company. These steps have led to a generally upward trend for PACW’s common stock. The Company monitors this situation and, at September 30, 2023, determined any credit loss associated with the PACW subordinated debt was immaterial.

Credit Quality Indicators

All the Company’s held to maturity debt securities are issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities are either explicitly or implicitly guaranteed by the U.S. government, except for the Federal Farm Credit Bank securities, but all are highly rated by major rating agencies and have a long history of no credit losses. Therefore, the Company did not record an allowance for credit losses for these securities as of September 30, 2023.

The Company monitors the credit quality of held to maturity debt securities using credit ratings. The credit ratings are sourced from nationally recognized rating agencies. All held to maturity debt securities were current in their payment of principal and interest as of September 30, 2023.

The following table summarizes the amortized cost of held to maturity debt securities aggregated by credit quality indicator based on the latest information available as of September 30, 2023.

(Dollars in thousands)
September 30, 2023	AAA		Total
Securities held to maturity
Obligations of U.S. Government sponsored enterprises	$	29,283	$	29,283
Mortgage-backed securities		173,363		173,363
	$	202,646	$	202,646