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 reflected in accumulated other comprehensive income (loss) 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. Amortized cost is adjusted to the fair value of the security upon transfer to held-to-maturity. 

Amortized Cost and Estimated Fair Value

(dollars in thousands, unaudited)

An unrealized loss of $21.9 million and $24.2 million on securities transferred from the available-for-sale to held-to-maturity categorization, remains as of  September 30, 2026, and  December 31, 2025, respectively, and is included in accumulated other comprehensive loss, net of tax. The remaining unrealized loss on the securities transferred from available-for-sale to held-to-maturity will be accreted over the remaining term of the securities, with the amortized-cost basis of these securities and accumulated comprehensive income (loss) each increasing over time.

The Company elected the practical expedient available under the current expected credit losses (“CECL”) accounting standard to exclude accrued interest receivable from the amortized cost basis of all categorizations of investment securities, and resultingly did not estimate reserves on accrued interest receivable balances, as any past due interest income is reversed no later than 90 days past due. Accrued interest receivable is included in other assets on the Company’s consolidated balance sheet and as of  September 30, 2026, measured at $4.3 million and $1.6 million for available-for-sale securities and held-to-maturity securities, respectively. Accrued interest receivable as of  December 31, 2025, on these same classes of investment securities measured at $4.8 million and $2.4 million, respectively. During the nine-month periods ending  September 30, 2026 and 2025, no interest receivable on available-for-sale or held-to-maturity securities was reversed against interest income and the Company did not have any held-to-maturity debt securities past due.

A discounted cash-flow reserve calculation is performed on securities designated as held-to-maturity on a quarterly basis. As of  September 30, 2026, and  December 31, 2025, an allowance for credit losses of $14 thousand and $15 thousand, respectively had been established on the Company’s held-to-maturity portfolio. Because of the implicit and explicit guarantees of the U.S. government on the agency and mortgage-backed securities there is no expectation of future losses and no allowance for credit losses has been established for these securities.

The following table summarizes the amortized cost of held-to-maturity municipal bonds aggregated by nationally recognized statistical rating organizations (“NRSRO”) credit rating:

Held-To-Maturity by Credit Rating

(dollars in thousands, unaudited)

For available-for-sale debt securities in an unrealized loss position for which Management has an intent to sell the security or considers it more likely-than-not that the security in question will be sold prior to a recovery of its amortized cost basis, the security will be written down to fair value through a direct charge to income. For the remainder of available-for-sale debt securities in an unrealized loss position, which do not meet the previously outlined criteria, Management evaluates whether the decline in fair value is due to credit deterioration or other factors. In performing this evaluation, Management considers the extent to which fair value has fallen below amortized cost, changes in ratings by rating agencies, and other information indicating a deterioration in repayment capacity of either the underlying issuer or the borrowers providing repayment capacity in a securitization. If Management’s evaluation indicates that a credit loss exists, then a present value of the expected cash flows is calculated and compared to the amortized cost basis of the security in question. To the degree that the amortized cost basis exceeds the present value, an ACL is established, with the caveat that the maximum amount of the reserve on any individual security is the difference between the fair value and amortized cost balance of the security in question. Any unrealized loss that has not been recorded through an ACL is recognized in other comprehensive income (loss).

The following table summarizes available-for-sale debt securities in an unrealized loss position for which an ACL has not been recorded:

Investment Portfolio - Unrealized Losses

(dollars in thousands, unaudited)

Investment Portfolio - Realized Gains/(Losses)

(dollars in thousands, unaudited)

The amortized cost and estimated fair value of investment securities available-for-sale and held-to-maturity at  September 30, 2026, and  December 31, 2025 (dollars in thousands), 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.

Variable Interest Entities

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 allocated to the limited partners for tax purposes.

The Company currently has investments in nine different LIHTC fund limited partnerships made in 2014, 2015, two in 2022, one in 2023, three in 2024, and one in 2026, all of which were California-focused funds that help the Company meet its obligations under the Community Reinvestment Act. The Company utilized the cost method of accounting for LIHTC fund investments, which were initially recorded on the consolidated balance sheet as an asset representing 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 income tax provision, while the initial book value of the investment is amortized on the proportional amortization method as a “below the line” expense, over the time period in which the tax credits and tax benefits are expected to be received.

As of  September 30, 2026, the Company’s total LIHTC investment book balance was $25.4 million, which is included in “Other Assets” on the consolidated balance sheet. This investment is partially offset by $8.1 million in remaining commitments for additional capital contributions, which is included in “Other Liabilities” on the consolidated balance sheet. There were approximately $2.3 million in tax credits derived from the Company’s LIHTC investments that were recognized during the nine months ended September 30, 2026, and “below the line” amortization expense of $2.2 million associated with those investments was recorded for the same time period. LIHTC investments are evaluated annually for potential impairment, and the Company concluded the carrying value of the investments is stated fairly and is not impaired.

As of  December 31, 2025, the Company’s total LIHTC investment book balance was $22.6 million, which included $6.6 million in remaining commitments for additional capital contributions. There were $2.9 million in tax credits derived from LIHTC investments recognized during the year ended  December 31, 2025; “below the line” amortization expense of $3.0 million associated with those investments was netted against pre-tax noninterest income for the same time period.

During the third quarter of 2026, the Company made an investment in a renewable energy tax equity project designed to generate federal income tax credits and other tax benefits over the expected life of the project. The investment is included in other assets within the Consolidated Balance Sheets.

The Company accounts for the investment using the proportional amortization method and amortizes the carrying amount of the investment in proportion to the income tax credits and other income tax benefits received. The amortization of the investment and the related tax benefits are recognized as a component of income tax expense.

For the nine months ended September 30, 2026, the Company recognized approximately $4.9 million of income tax credits and $0.8 million in other tax benefits associated with the investment and recorded approximately $5.1 million of investment amortization, resulting in a net income tax benefit of approximately $0.6 million.

The Company’s investments in qualified affordable housing projects, small business investment companies, and renewable energy tax equity investments meet the definition of a variable interest entity, as the entities are structured such that the limited partner investors lack substantive voting rights. Pursuant to the FASB standard on the consolidation of variable interest entities, these investments are not reflected on a consolidated basis in the Company’s financial statements.