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Investment Securities | 9 Months Ended
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Sep. 30, 2017
Investments, Debt and Equity Securities [Abstract] |
Investment Securities | Investment Securities Our investment securities portfolio consists of obligations of state and political subdivisions, corporate bonds, U.S. government agency securities, including residential and commercial 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, 2017 |  | December 31, 2016
| 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 | $ | 20,213 |  | $ | 20,790 |  | $ | 577 |  | $ | — |  |  | $ | 30,856 |  | $ | 31,544 |  | $ | 694 |  | $ | (6 | )
Corporate bonds | — |  | — |  | — |  | — |  |  | 3,519 |  | 3,518 |  | — |  | (1 | )
MBS pass-through securities issued by FHLMC and FNMA | 103,624 |  | 103,904 |  | 425 |  | (145 | ) |  | 10,063 |  | 10,035 |  | 126 |  | (154 | )
CMOs issued by FHLMC | 31,285 |  | 31,455 |  | 173 |  | (3 | ) |  | — |  | — |  | — |  | — |
Total held-to-maturity | 155,122 |  | 156,149 |  | 1,175 |  | (148 | ) |  | 44,438 |  | 45,097 |  | 820 |  | (161 | )
Available-for-sale: |  |  |  |  |  |  |  |  |
Securities of U.S. government agencies: |  |  |  |  |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | 91,404 |  | 91,716 |  | 551 |  | (239 | ) |  | 193,998 |  | 190,566 |  | 145 |  | (3,577 | )
CMOs issued by FNMA | 11,504 |  | 11,529 |  | 68 |  | (43 | ) |  | 13,790 |  | 13,772 |  | 91 |  | (109 | )
CMOs issued by FHLMC | 35,317 |  | 35,360 |  | 56 |  | (13 | ) |  | 43,452 |  | 42,758 |  | 37 |  | (731 | )
CMOs issued by GNMA | 8,754 |  | 8,765 |  | 62 |  | (51 | ) |  | 6,844 |  | 6,945 |  | 102 |  | (1 | )
Debentures of government- sponsored agencies | 30,492 |  | 30,382 |  | — |  | (110 | ) |  | 35,486 |  | 35,403 |  | 7 |  | (90 | )
Privately issued CMOs | 127 |  | 128 |  | 1 |  | — |  |  | 419 |  | 419 |  | 1 |  | (1 | )
Obligations of state and political subdivisions | 74,903 |  | 75,181 |  | 675 |  | (397 | ) |  | 79,306 |  | 77,701 |  | 135 |  | (1,740 | )
Corporate bonds | 4,967 |  | 5,031 |  | 64 |  | — |  |  | 4,959 |  | 5,016 |  | 57 |  | — |
Total available-for-sale | 257,468 |  | 258,092 |  | 1,477 |  | (853 | ) |  | 378,254 |  | 372,580 |  | 575 |  | (6,249 | )
Total investment securities | $ | 412,590 |  | $ | 414,241 |  | $ | 2,652 |  | $ | (1,001 | ) |  | $ | 422,692 |  | $ | 417,677 |  | $ | 1,395 |  | $ | (6,410 | )
The amortized cost and fair value of investment debt securities by contractual maturity at September 30, 2017 are shown below. Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties.
| September 30, 2017 |  | December 31, 2016
| 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 | $ | 2,092 |  | $ | 2,132 |  |  | $ | 8,884 |  | $ | 8,893 |  |  | $ | 13,473 |  | $ | 13,506 |  |  | $ | 20,136 |  | $ | 20,109 |
After one but within five years | 15,206 |  | 15,565 |  |  | 67,085 |  | 67,065 |  |  | 16,706 |  | 17,150 |  |  | 58,334 |  | 58,267 |
After five years through ten years | 56,607 |  | 56,979 |  |  | 101,756 |  | 101,880 |  |  | 3,000 |  | 3,125 |  |  | 113,576 |  | 110,842 |
After ten years | 81,217 |  | 81,473 |  |  | 79,743 |  | 80,254 |  |  | 11,259 |  | 11,316 |  |  | 186,208 |  | 183,362 |
Total | $ | 155,122 |  | $ | 156,149 |  |  | $ | 257,468 |  | $ | 258,092 |  |  | $ | 44,438 |  | $ | 45,097 |  |  | $ | 378,254 |  | $ | 372,580 |
Sales of investment securities and gross gains and losses are shown in the following table.
| Three months ended |  | Nine months ended
(in thousands) | September 30, 2017 |  | September 30, 2016 |  | September 30, 2017 |  | September 30, 2016
Available-for-sale: |  |  |  |  |  |  |
Sales proceeds | $ | — |  |  | $ | — |  |  | $ | 1,321 |  |  | $ | 68,673 |
Gross realized gains | — |  |  | — |  |  | 13 |  |  | 458 |
Gross realized losses | — |  |  | — |  |  | (3 | ) |  | (64 | )
For the respective periods of September 30, 2017 and December 31, 2016, investment securities carried at $112.4 million and $109.1 million were pledged with the State of California: $111.6 million and $108.3 million to secure public deposits in compliance with the Local Agency Security Program, and $777 thousand and $822 thousand to provide collateral for trust deposits. In addition, investment securities carried at $2.0 million and $2.1 million were pledged to collateralize a Wealth Management and Trust Services (“WMTS”) checking account at September 30, 2017 and December 31, 2016, respectively. As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain MBS pass-through and CMOs securities issued by FHLMC and FNMA. Effective February 24, 2017, we transferred $129 million of these securities, which we intend and have the ability to hold to maturity, from available-for-sale securities to held-to-maturity at fair value. The unrealized pre-tax loss of $3.0 million at the date of transfer remained in accumulated other comprehensive income and is amortized over the remaining lives of the securities. Other-Than-Temporarily Impaired ("OTTI") 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, 2017. 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 September 30, 2017 before recovery of the amortized cost basis. There were 67 and 134 investment securities in unrealized loss positions at September 30, 2017 and December 31, 2016, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:
September 30, 2017 | < 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 | 17,764 |  | (115 | ) |  | 31,501 |  | (30 | ) |  | 49,265 |  | (145 | )
CMOs issued by FHLMC | — |  | — |  |  | 1,505 |  | (3 | ) |  | 1,505 |  | (3 | )
Total held-to-maturity | 17,764 |  | (115 | ) |  | 33,006 |  | (33 | ) |  | 50,770 |  | (148 | )
Available-for-sale: |  |  |  |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | 21,619 |  | (229 | ) |  | 2,321 |  | (10 | ) |  | 23,940 |  | (239 | )
CMOs issued by FNMA | 8,005 |  | (43 | ) |  | — |  | — |  |  | 8,005 |  | (43 | )
CMOs issued by FHLMC | 15,014 |  | (13 | ) |  | — |  | — |  |  | 15,014 |  | (13 | )
CMOs issued by GNMA | 4,807 |  | (51 | ) |  | — |  | — |  |  | 4,807 |  | (51 | )
Debentures of government- sponsored agencies | 19,929 |  | (64 | ) |  | 9,953 |  | (46 | ) |  | 29,882 |  | (110 | )
Obligations of state and political subdivisions | 6,129 |  | (38 | ) |  | 18,010 |  | (359 | ) |  | 24,139 |  | (397 | )
Total available-for-sale | 75,503 |  | (438 | ) |  | 30,284 |  | (415 | ) |  | 105,787 |  | (853 | )
Total temporarily impaired securities | $ | 93,267 |  | $ | (553 | ) |  | $ | 63,290 |  | $ | (448 | ) |  | $ | 156,557 |  | $ | (1,001 | )
December 31, 2016 | < 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 and political subdivisions | $ | 2,250 |  | $ | (154 | ) |  | $ | — |  | $ | — |  |  | $ | 2,250 |  | $ | (154 | )
Corporate bonds | 3,362 |  | (6 | ) |  | — |  | — |  |  | 3,362 |  | (6 | )
MBS pass-through securities issued by FHLMC and FNMA | 3,518 |  | (1 | ) |  | — |  | — |  |  | 3,518 |  | (1 | )
Total held-to-maturity | 9,130 |  | (161 | ) |  | — |  | — |  |  | 9,130 |  | (161 | )
Available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | 162,016 |  | (3,577 | ) |  | — |  | — |  |  | 162,016 |  | (3,577 | )
CMOs issued by FNMA | 9,498 |  | (109 | ) |  | — |  | — |  |  | 9,498 |  | (109 | )
CMOs issued by FHLMC | 31,545 |  | (731 | ) |  | — |  | — |  |  | 31,545 |  | (731 | )
CMOs issued by GNMA | 1,583 |  | (1 | ) |  | — |  | — |  |  | 1,583 |  | (1 | )
Debentures of government- sponsored agencies | 19,951 |  | (38 | ) |  | 9,946 |  | (52 | ) |  | 29,897 |  | (90 | )
Obligations of state and political subdivisions | 59,567 |  | (1,740 | ) |  | — |  | — |  |  | 59,567 |  | (1,740 | )
Corporate bonds | 154 |  | (1 | ) |  | — |  | — |  |  | 154 |  | (1 | )
Total available-for-sale | 284,314 |  | (6,197 | ) |  | 9,946 |  | (52 | ) |  | 294,260 |  | (6,249 | )
Total temporarily impaired securities | $ | 293,444 |  | $ | (6,358 | ) |  | $ | 9,946 |  | $ | (52 | ) |  | $ | 303,390 |  | $ | (6,410 | )
As of September 30, 2017, there was one debenture of government-sponsored agency security, one CMO issued by FHLMC, five MBS pass-through securities issued by FNMA and thirty obligations of U.S. state and political subdivisions securities that have been in a continuous loss position for twelve months or more. We have evaluated 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 debenture of government-sponsored agency security is supported by the U.S. Federal Government, which protects us from credit losses. Based upon our assessment of the credit fundamentals, we concluded that these securities were not other-than-temporarily impaired at September 30, 2017. There were thirty investment securities in our portfolio that had been in temporary loss positions for less than twelve months as of September 30, 2017, and their temporary loss positions mainly arose from changes in interest rates since purchase. They consisted of one debenture of a U.S. government-sponsored agency, eight obligations of U.S. state and political subdivisions, twelve MBS securities and nine CMOs issued by government-sponsored agencies. Securities of government-sponsored agencies are supported by the U.S. Federal Government, which protects us from credit losses. Other temporarily impaired securities are deemed creditworthy after internal analysis of the issuers' latest financial information and credit enhancement. Additionally, all are rated as investment grade by at least one major rating agency. As a result of this impairment analysis, we concluded that these securities were not other-than-temporarily impaired at September 30, 2017. Non-Marketable Securities As a member of the FHLB, we are required to maintain a minimum investment in 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 $10.2 million of FHLB stock recorded at cost in other assets on the consolidated statements of condition at both September 30, 2017 and December 31, 2016. 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, due to FHLB's current financial condition. On October 26, 2017, FHLB announced a cash dividend to be distributed in mid-November 2017 at an annualized dividend rate of 7.00%. 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 based on the 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 $2.9 million and $2.2 million at September 30, 2017 and December 31, 2016, respectively. The conversion rate is subject to further reduction upon the final settlement of the covered litigation against Visa Inc. and its member banks. For further information, see Note 8, Commitments and Contingencies. We invest in low-income housing tax credit funds as a limited partner, which totaled $2.3 million and $2.5 million recorded in other assets as of September 30, 2017 and December 31, 2016, respectively. In the first nine months of 2017, we recognized $249 thousand of low-income housing tax credits and other tax benefits, net of $199 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of September 30, 2017, our unfunded commitments for these low-income housing tax credit funds totaled $549 thousand. We did not recognize any impairment losses on these low-income housing tax credit investments during the first nine months of 2017 or 2016.

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