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:



	December 31, 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	$	42,919	$	44,146	$	1,246	$	(19	)	$	63,425	$	65,121	$	1,736	$	(40	)
Corporate bonds	15,072		15,098		42		(16		)	40,257		40,448		216		(25		)
MBS pass-through securities issued by FHLMC and FNMA	11,646		11,810		171		(7		)	12,755		13,074		319		—
Total held-to-maturity	69,637		71,054		1,459		(42		)	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	138,222		138,462		694		(454		)	92,963		94,214		1,262		(11		)
CMOs issued by FNMA	18,266		18,219		97		(144		)	14,771		14,790		77		(58		)
CMOs issued by FHLMC	22,889		22,932		82		(39		)	31,238		31,260		109		(87		)
CMOs issued by GNMA	10,326		10,480		169		(15		)	17,573		17,855		298		(16		)
Debentures of government- sponsored agencies	161,690		160,892		28		(826		)	14,694		14,557		95		(232		)
Privately issued CMOs	3,960		4,150		190		—			7,137		7,294		172		(15		)
Obligations of state and political subdivisions	57,110		57,673		580		(17		)	15,733		15,880		155		(8		)
Corporate bonds	4,947		4,979		43		(11		)	4,936		4,998		66		(4		)
Total available-for-sale	417,410		417,787		1,883		(1,506		)	199,045		200,848		2,234		(431		)

Total investment securities	$	487,047	$	488,841	$	3,342	$	(1,548	)	$	315,482	$	319,491	$	4,505	$	(496	)

The amortized cost and fair value of investment debt securities by contractual maturity at December 31, 2015 and 2014 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.



	December 31, 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	$	18,853	$	18,920	$	12,135	$	12,176	$	39,778	$	39,913	$	2,378	$	2,388
After one but within five years	31,677		32,360		188,007		187,326		50,983		51,953		43,866		43,919
After five years through ten years	8,580		8,969		64,899		64,999		11,679		12,426		9,644		9,749
After ten years	10,527		10,805		152,369		153,286		13,997		14,351		143,157		144,792
Total	$	69,637	$	71,054	$	417,410	$	417,787	$	116,437	$	118,643	$	199,045	$	200,848

Sales of investment securities and gross 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.



(in thousands)	2015			2014			2013
Available-for-sale:
Sales proceeds	$	2,099		$	2,436		$	7,973
Gross gains	$	7		$	4		$	86
Gross losses, including OTTI	$	(1	)	$	(28	)	$	(104	)
Held-to-maturity:
Sales proceeds	$	1,015		$	2,146		$	6,442
Gross gains	$	73		$	104		$	67
Gross losses	$	—		$	—		$	(50	)

Investment securities carried at $87.9 million and $74.7 million at December 31, 2015 and 2014, respectively, were pledged with the State of California: $87.1 million and $73.8 million to secure public deposits in compliance with the Local Agency Security Program, and $840 thousand and $856 thousand to provide collateral for trust deposits. In addition, investment securities carried at $1.1 million were pledged to collateralize an internal Wealth Management and Trust Services (“WMTS”) checking account at both December 31, 2015 and 2014.

Other-Than-Temporarily Impaired ("OTTI") Debt Securities

We have evaluated the credit ratings 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 December 31, 2015. We do not have the intent, and it is more likely than not that we will not have to sell the remaining securities temporarily impaired at December 31, 2015 before recovery of the amortized cost basis.

Fifty-four and twenty-eight investment securities were in unrealized loss positions at December 31, 2015 and 2014, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:



December 31, 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:
MBS pass-through securities issued by FHLMC and FNMA	$	2,332	$	(7	)	$	—	$	—		$	2,332	$	(7	)
Obligations of state & political subdivisions	$	8,297	$	(19	)	$	—	$	—		$	8,297	$	(19	)
Corporate bonds	3,523		(15		)	1,999		(1		)	5,522		(16		)
Total held-to-maturity	14,152		(41		)	1,999		(1		)	16,151		(42		)
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA	68,809		(454		)	—		—			68,809		(454		)
CMOs issued by FNMA	9,277		(80		)	3,158		(64		)	12,435		(144		)
CMOs issued by FHLMC	—		—			1,989		(39		)	1,989		(39		)
CMOs issued by GNMA	164		—			2,374		(15		)	2,538		(15		)
Debentures of government- sponsored agencies	136,064		(713		)	9,887		(113		)	145,951		(826		)
Obligations of state & political subdivisions	4,557		(15		)	579		(2		)	5,136		(17		)
Corporate bonds	2,986		(11		)	—		—			2,986		(11		)
Total available-for-sale	221,857		(1,273		)	17,987		(233		)	239,844		(1,506		)
Total temporarily impaired securities	$	236,009	$	(1,314	)	$	19,986	$	(234	)	$	255,995	$	(1,548	)



December 31, 2014	< 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	$	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 December 31, 2015, there were six investment positions that had been in a continuous loss position for 12 months or more. These securities consisted of a debenture of government-sponsored agency, an obligation of U.S. state and political subdivisions, one corporate bond and three CMOs. We have evaluated each of the securities 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 CMOs issued by FNMA, FHLMC and GNMA are supported by the U.S. Federal Government to protect us from credit losses. Additionally, the obligation of state and political subdivisions was deemed creditworthy based on our review of the issuer's recent financial information. The corporate bond subsequently matured and paid off in February 2016.

Forty-eight investment securities in our portfolio were in a temporary loss position for less than twelve months as of December 31, 2015. They consisted of obligations of U.S. state and political subdivisions, corporate bonds, MBS, CMOs, and debentures of government-sponsored agencies. We determine that the strengths of GNMA and FNMA through guarantee or support from the U.S. Federal Government are sufficient to protect us from credit losses. Other temporarily impaired securities are deemed creditworthy after credit analysis. Additionally, all are rated as investment grade by at least one major rating agency. We concluded that these securities were not other-than-temporarily impaired at December 31, 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. Investment requirements can increase in the event we increase our borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at $100 per share par value. We held $8.4 million and $8.2 million of FHLB stock recorded at cost in other assets at December 31, 2015 and 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 it at cost. On February 18, 2016, the FHLB announced a cash dividend for the fourth quarter of 2015 at an annualized dividend rate of 7.99% to be distributed in mid-March 2016.

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. Converting this Class B common stock to Class A common stock at a conversion rate of 1.6483, the value would be $2.2 million and $1.8 million at December 31, 2015 and 2014, respectively. 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 13 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 December 31, 2015 and 2014, respectively. Beginning 2014, we have elected to account for all low income housing investments using the proportional amortization method instead of the cost method. In 2015, we recognized $225 thousand of low income housing tax credits and other tax benefits, net of $174 thousand of amortization expense of low income housing tax credit investment, as a component of income tax expense for 2015. As of December 31, 2015, our unfunded commitments for these low income housing tax credit funds totaled $1.7 million. We did not recognize any impairment losses on these low income housing tax credit investments during 2015, 2014 or 2013.