Investment Securities

Our investment securities portfolio consists of obligations of state and political subdivisions, corporate bonds, U.S. government agency securities, including mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”) issued or guaranteed by Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), or Government National Mortgage Association ("GNMA"), debentures issued by government-sponsored agencies such as FNMA, Federal Farm Credit Bureau, FHLB and FHLMC, as well as privately issued CMOs, as reflected in the table below:



	September 30, 2015									December 31, 2014
	Amortized		Fair		Gross Unrealized					Amortized		Fair		Gross Unrealized
(in thousands)	Cost		Value		Gains		(Losses)			Cost		Value		Gains		(Losses)
Held-to-maturity
Obligations of state and political subdivisions	$	50,570	$	51,867	$	1,302	$	(5	)	$	63,425	$	65,121	$	1,736	$	(40	)
Corporate bonds	23,578		23,662		87		(3		)	40,257		40,448		216		(25		)
MBS pass-through securities issued by FHLMC and FNMA	12,323		12,575		259		(7		)	12,755		13,074		319		—
Total held-to-maturity	86,471		88,104		1,648		(15		)	116,437		118,643		2,271		(65		)

Available-for-sale
Securities of U.S. government agencies:
MBS pass-through securities issued by FHLMC and FNMA	116,513		117,963		1,488		(38		)	92,963		94,214		1,262		(11		)
CMOs issued by FNMA	16,211		16,385		208		(34		)	14,771		14,790		77		(58		)
CMOs issued by FHLMC	24,645		24,869		239		(15		)	31,238		31,260		109		(87		)
CMOs issued by GNMA	11,951		12,200		254		(5		)	17,573		17,855		298		(16		)
Debentures of government- sponsored agencies	101,987		102,165		229		(51		)	14,694		14,557		95		(232		)
Privately issued CMOs	4,700		4,891		193		(2		)	7,137		7,294		172		(15		)
Obligations of state and political subdivisions	50,073		50,377		345		(41		)	15,733		15,880		155		(8		)
Corporate bonds	4,944		5,006		62		—			4,936		4,998		66		(4		)
Total available-for-sale	331,024		333,856		3,018		(186		)	199,045		200,848		2,234		(431		)

Total investment securities	$	417,495	$	421,960	$	4,666	$	(201	)	$	315,482	$	319,491	$	4,505	$	(496	)

The amortized cost and fair value of investment debt securities by contractual maturity at September 30, 2015 are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.



	September 30, 2015								December 31, 2014
	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	$	34,325	$	34,459	$	11,955	$	12,019	$	39,778	$	39,913	$	2,378	$	2,388
After one year but within five years	31,072		31,821		127,221		127,607		50,983		51,953		43,866		43,919
After five years through ten years	9,876		10,352		51,686		51,885		11,679		12,426		9,644		9,749
After ten years	11,198		11,472		140,162		142,345		13,997		14,351		143,157		144,792
Total	$	86,471	$	88,104	$	331,024	$	333,856	$	116,437	$	118,643	$	199,045	$	200,848

Sales of investment securities and gross realized gains and losses are shown in the following table. The sales of the held-to-maturity securities were due to evidence of significant deterioration of the issuers' creditworthiness since purchase.



	Three months ended				Nine months ended
(in thousands)	September 30, 2015		September 30, 2014		September 30, 2015		September 30, 2014
Available-for-sale:
Sales proceeds	$	—	$	413	$	1,559	$	2,435
Gross realized gains	$	—	$	4	$	8	$	4
Gross realized (losses)	$	—	$	—	$	—	$	(15	)
Held-to-maturity:
Sales proceeds	$	1,015	$	—	$	1,015	$	2,146
Gross realized gains	$	72	$	—	$	72	$	104
Gross realized (losses)	$	—	$	—	$	—	$	—

Investment securities carried at $66.0 million and $74.7 million at September 30, 2015 and December 31, 2014, respectively, were pledged to the State of California: $65.2 million and $73.8 million to secure public deposits in compliance with the Local Agency Security Program at September 30, 2015 and December 31, 2014, respectively, and $844 thousand and $856 thousand to provide collateral for trust deposits at September 30, 2015 and December 31, 2014, respectively. In addition, investment securities carried at $1.1 million were pledged to collateralize a Wealth Management and Trust Services (“WMTS”) checking account at both September 30, 2015 and December 31, 2014.

Other-Than-Temporarily Impaired Debt Securities

We have evaluated the credit of our investment securities and their issuers and/or insurers. Based on our evaluation, Management has determined that no investment security in our investment portfolio is other-than-temporarily impaired as of September 30, 2015. We do not have the intent, and it is more likely than not that we will not have to sell securities temporarily impaired at September 30, 2015 before recovery of the cost basis.

Twenty-nine and twenty-eight investment securities were in unrealized loss positions at September 30, 2015 and December 31, 2014, respectively. Those securities are summarized and classified according to the duration of the loss period in the table below:



September 30, 2015	< 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
Obligations of state & political subdivisions	$	2,751	$	(5	)	$	—	$	—		$	2,751	$	(5	)
Corporate bonds	5,540		(3		)	—		—			5,540		(3		)
MBS pass-through securities issued by FHLMC and FNMA	2,344		(7		)	—		—			2,344		(7		)
Total held-to-maturity	10,635		(15		)	—		—			10,635		(15		)
Available-for-sale
MBS pass-through securities issued by FHLMC and FNMA	21,640		(38		)	—		—			21,640		(38		)
CMOs issued by FNMA	—		—			3,428		(34		)	3,428		(34		)
CMOs issued by FHLMC	—		—			2,089		(15		)	2,089		(15		)
CMOs issued by GNMA	2,570		(5		)	—		—			2,570		(5		)
Debentures of government- sponsored agencies	—		—			9,949		(51		)	9,949		(51		)
Privately issued CMOs	—		—			379		(2		)	379		(2		)
Obligations of state & political subdivisions	9,867		(39		)	582		(2		)	10,449		(41		)
Total available-for-sale	34,077		(82		)	16,427		(104		)	50,504		(186		)
Total temporarily impaired securities	$	44,712	$	(97	)	$	16,427	$	(104	)	$	61,139	$	(201	)



December 31, 2014	< 12 continuous months					≥ 12 continuous months					Total securities in a loss position
(dollars in thousands)	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
Held-to-maturity
Obligations of state & political subdivisions	$	5,830	$	(27	)	$	359	$	(13	)	$	6,189	$	(40	)
Corporate bonds	3,009		(1		)	3,533		(24		)	6,542		(25		)
Total held-to-maturity	8,839		(28		)	3,892		(37		)	12,731		(65		)
Available-for-sale
MBS pass-through securities issued by FHLMC and FNMA	1,960		(11		)	—		—			1,960		(11		)
CMOs issued by FNMA	—		—			4,115		(58		)	4,115		(58		)
CMOs issued by FHLMC	17,157		(44		)	2,291		(43		)	19,448		(87		)
CMOs issued by GNMA	3,262		(16		)	—		—			3,262		(16		)
Debentures of government- sponsored agencies	494		(1		)	9,769		(231		)	10,263		(232		)
Privately issued CMOs	817		(15		)	—		—			817		(15		)
Obligations of state & political subdivisions	2,695		(3		)	1,112		(5		)	3,807		(8		)
Corporate bonds	1,002		(1		)	990		(3		)	1,992		(4		)
Total available-for-sale	27,387		(91		)	18,277		(340		)	45,664		(431		)
Total temporarily impaired securities	$	36,226	$	(119	)	$	22,169	$	(377	)	$	58,395	$	(496	)

As of September 30, 2015, there were six investment positions that had been in a continuous loss position for twelve months or more. These securities consisted of government-sponsored agency debentures, obligations of U.S. state and political subdivisions, and CMOs. We have evaluated each of the bonds and believe that the decline in fair value is primarily driven by factors other than credit. It is probable that we will be able to collect all amounts due according to the contractual terms and no other-than-temporary impairment exists on these securities. The government-sponsored agency debentures and CMOs issued by FNMA and FHLMC are supported by the U.S. Federal Government to protect us from credit losses. The obligations of state and political subdivisions were deemed creditworthy based on our review of the issuers' recent financial information and their insurers, if any. Based upon our assessment of the credit fundamentals and the credit enhancements, we concluded that these securities were not other-than-temporarily impaired at September 30, 2015.

Twenty-three investment securities in our portfolio were in a temporary loss position for less than twelve months as of September 30, 2015. They consisted of U.S. agency CMO and MBS pass-through securities, obligations of U.S. state and political subdivisions, and corporate bonds. We determine that the strength of GNMA through the U.S. Federal Government guarantee is sufficient to protect us from credit losses. Other temporarily impaired securities are deemed creditworthy after internal analysis. Additionally, all are rated as investment grade by at least one major rating agency. As a result of this impairment analysis, we have concluded that these securities were not other-than-temporarily impaired at September 30, 2015.

Non-Marketable Securities

As a member of the FHLB, we are required to maintain a minimum investment in the 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 $8.4 million and $8.2 million of FHLB stock recorded at cost in other assets on the consolidated statements of condition at September 30, 2015 and December 31, 2014, respectively. 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. Management does not believe that the FHLB stock is other-than-temporarily-impaired, as we expect to be able to redeem this stock at cost.

On October 28, 2015, FHLB announced a cash dividend for the third quarter of 2015 at an annualized dividend rate of 8.79% to be distributed in mid November. Cash dividends paid on FHLB capital stock are recorded as non-interest income.

As a member bank of Visa U.S.A., we hold 16,939 shares of Visa Inc. Class B common stock with a carrying value of zero, which is equal to our cost basis. These shares are restricted from resale until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s covered litigation escrow account. As a result of the restriction, these shares are not considered available-for-sale and are not carried at fair value. When converting this Class B common stock to Class A common stock under the current conversion rate of 1.6483 and the closing stock price of Class A shares, the value of our shares of Class B common stock would have been $1.9 million at September 30, 2015 and $1.8 million at December 31, 2014. The conversion rate is subject to further reduction upon the final settlement of the covered litigation against Visa Inc. and its member banks. See Note 8 herein.

We invest in low income housing tax credit funds as a limited partner, which totaled $2.7 million and $1.8 million recorded in other assets as of September 30, 2015 and December 31, 2014, respectively. In the first nine months of 2015, we recognized $169 thousand of low income housing tax credits and other tax benefits, net of $131 thousand of amortization expense of low income housing tax credit investment, as a component of income tax expense. As of September 30, 2015, our unfunded commitments for these low income housing tax credit funds totaled $1.8 million. We did not recognize any impairment losses on these low income housing tax credit investments during the first nine months of 2015, or the year ended December 31, 2014.