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"), Small Business Administration ("SBA"), or Government National Mortgage Association ("GNMA"), debentures issued by government-sponsored agencies such as FNMA, Federal Farm Credit Bureau, FHLB and FHLMC, and privately issued CMOs, as reflected in the following table.



	June 30, 2018									December 31, 2017
	Amortized		Fair		Gross Unrealized					Amortized		Fair		Gross Unrealized
(in thousands)	Cost		Value		Gains		(Losses)			Cost		Value		Gains		(Losses)
Held-to-maturity:
Securities of U.S. government agencies:
MBS pass-through securities issued by FHLMC and FNMA	$	94,203	$	90,824	$	—	$	(3,379	)	$	100,376	$	100,096	$	234	$	(514	)
SBA-backed securities	8,882		8,743		—		(139		)	—		—		—		—
CMOs issued by FNMA	11,881		11,766		—		(115		)	—		—		—		—
CMOs issued by FHLMC	34,668		33,591		—		(1,077		)	31,010		30,938		2		(74		)
CMOs issued by GNMA	3,730		3,713		—		(17		)	—		—		—		—
Obligations of state and political subdivisions	17,288		17,490		235		(33		)	19,646		19,998		383		(31		)
Total held-to-maturity	170,652		166,127		235		(4,760		)	151,032		151,032		619		(619		)
Available-for-sale:
Securities of U.S. government agencies:
MBS pass-through securities issued by FHLMC and FNMA	90,082		87,590		17		(2,509		)	65,559		65,262		126		(423		)
SBA-backed securities	24,620		23,954		—		(666		)	25,979		25,982		58		(55		)
CMOs issued by FNMA	21,026		20,571		7		(462		)	35,340		35,125		33		(248		)
CMOs issued by FHLMC	123,359		120,411		1		(2,949		)	70,514		69,889		3		(628		)
CMOs issued by GNMA	12,641		12,222		2		(421		)	17,953		17,785		26		(194		)
Debentures of government- sponsored agencies	32,395		32,139		—		(256		)	12,940		12,938		3		(5		)
Privately issued CMOs	431		435		4		—			1,432		1,431		1		(2		)
Obligations of state and political subdivisions	89,699		87,788		77		(1,988		)	98,027		97,491		298		(834		)
Corporate bonds	3,015		3,027		24		(12		)	6,541		6,564		26		(3		)
Total available-for-sale	397,268		388,137		132		(9,263		)	334,285		332,467		574		(2,392		)
Total investment securities	$	567,920	$	554,264	$	367	$	(14,023	)	$	485,317	$	483,499	$	1,193	$	(3,011	)

The amortized cost and fair value of investment debt securities by contractual maturity at June 30, 2018 and December 31, 2017 are shown in the following table. 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.



	June 30, 2018								December 31, 2017
	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	$	2,859	$	2,882	$	8,272	$	8,263	$	2,151	$	2,172	$	10,268	$	10,272
After one but within five years	13,063		13,147		79,662		78,514		15,577		15,791		71,576		71,237
After five years through ten years	63,321		61,350		216,584		210,650		54,641		54,554		129,723		128,954
After ten years	91,409		88,748		92,750		90,710		78,663		78,515		122,718		122,004
Total	$	170,652	$	166,127	$	397,268	$	388,137	$	151,032	$	151,032	$	334,285	$	332,467

Sales of investment securities and gross gains and losses are shown in the following table.



	Three months ended						Six months ended
(in thousands)	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Available-for-sale:
Sales proceeds	$	5,006		$	1,321		$	5,006		$	1,321
Gross realized gains	27			13			27			13
Gross realized losses	(16		)	(3		)	(16		)	(3		)

Pledged investment securities are shown in the following table.



(in thousands)	June 30, 2018		December 31, 2017
Pledged to the State of California:
Secure public deposits in compliance with the Local Agency Security Program	$	103,097	$	107,829
Collateral for trust deposits	749		761
Total investment securities pledged to the State of California	$	103,846	$	108,590
Collateral for Wealth Management and Trust Services checking account	$	2,014	$	2,026

As part of our ongoing review of our investment securities portfolio, we reassessed the classification of certain securities issued by government sponsored agencies. During 2018 and 2017, we transferred $27.4 million and $129.0 million, respectively, of these securities from available-for-sale to held-to-maturity at fair value. We intend and have the ability to hold these securities to maturity. The net unrealized pre-tax loss of $278 thousand and $3.0 million, at the respective transfer dates, remained in accumulated other comprehensive income and are amortized over the remaining lives of the securities. Amortization of the net unrealized pre-tax losses totaled $268 thousand and $165 thousand for the six months ended June 30, 2018 and 2017, respectively.

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 June 30, 2018. 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 June 30, 2018 before recovery of the amortized cost basis.

There were 266 and 198 investment securities in unrealized loss positions at June 30, 2018 and December 31, 2017, respectively. Those securities are summarized and classified according to the duration of the loss period in the following tables:



June 30, 2018	< 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	$	22,100	$	(830	)	$	68,724	$	(2,549	)	$	90,824	$	(3,379	)
SBA-backed securities	8,742		(139		)	—		—			$	8,742	$	(139	)
CMOs issued by FNMA	11,766		(115		)	—		—			11,766		(115		)
CMOs issued by FHLMC	19,798		(564		)	13,793		(513		)	33,591		(1,077		)
CMOs issued by GNMA	—		—			3,713		(17		)	3,713		(17		)
Obligations of state and political subdivisions	3,816		(33		)	—		—			3,816		(33		)
Total held-to-maturity	66,222		(1,681		)	86,230		(3,079		)	152,452		(4,760		)
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA	68,906		(1,843		)	17,713		(666		)	86,619		(2,509		)
SBA-backed securities	23,954		(666		)	—		—			23,954		(666		)
CMOs issued by FNMA	15,687		(321		)	4,642		(141		)	20,329		(462		)
CMOs issued by FHLMC	115,370		(2,949		)	—		—			115,370		(2,949		)
CMOs issued by GNMA	11,297		(419		)	603		(2		)	11,900		(421		)
Debentures of government- sponsored agencies	32,139		(256		)	—		—			32,139		(256		)
Privately issued CMOs	—		—			—		—			—		—
Obligations of state and political subdivisions	57,217		(835		)	18,832		(1,153		)	76,049		(1,988		)
Corporate bonds	1,522		(12		)	—		—			1,522		(12		)
Total available-for-sale	326,092		(7,301		)	41,790		(1,962		)	367,882		(9,263		)
Total temporarily impaired securities	$	392,314	$	(8,982	)	$	128,020	$	(5,041	)	$	520,334	$	(14,023	)



December 31, 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:
Obligations of state and political subdivisions	$	3,648	$	(31	)	$	—	$	—		$	3,648	$	(31	)
MBS pass-through securities issued by FHLMC and FNMA	16,337		(143		)	46,845		(371		)	63,182		(514		)
CMOs issued by FHLMC	11,066		(31		)	13,824		(43		)	24,890		(74		)
Total held-to-maturity	31,051		(205		)	60,669		(414		)	91,720		(619		)
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA	32,189		(121		)	15,325		(302		)	47,514		(423		)
SBA-backed securities	11,028		(53		)	165		(2		)	11,193		(55		)
CMOs issued by FNMA	26,401		(171		)	5,440		(77		)	31,841		(248		)
CMOs issued by FHLMC	69,276		(628		)	—		—			69,276		(628		)
CMOs issued by GNMA	14,230		(194		)	—		—			14,230		(194		)
Debentures of government- sponsored agencies	2,984		(5		)	—		—			2,984		(5		)
Privately issued CMO's	1,310		(2		)	—		—			1,310		(2		)
Obligations of state and political subdivisions	52,197		(288		)	19,548		(546		)	71,745		(834		)
Corporate bonds	3,060		(3		)	—		—			3,060		(3		)
Total available-for-sale	212,675		(1,465		)	40,478		(927		)	253,153		(2,392		)
Total temporarily impaired securities	$	243,726	$	(1,670	)	$	101,147	$	(1,341	)	$	344,873	$	(3,011	)

As of June 30, 2018, sixty-four investment securities in our portfolio had been in a continuous loss position for twelve months or more. They consisted of five CMOs issued by FHLMC, three CMOs issued by FNMA, two CMOs issued by GNMA, twenty-two agency MBS securities and thirty-two obligations of U.S. state and political subdivisions securities. 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 June 30, 2018.

There were two hundred one investment securities in our portfolio that had been in temporary loss positions for less than twelve months as of June 30, 2018, and their temporary loss positions mainly arose from changes in interest rates since purchase. They consisted of eleven SBA-backed securities, eight debentures of a U.S. government-sponsored agency, ninety-eight obligations of U.S. state and political subdivisions, thirty-six MBS securities, forty-six CMOs issued by government-sponsored agencies, and three corporate bonds. 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 June 30, 2018.

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 $11.1 million of FHLB stock recorded at cost in other assets in the consolidated statements of condition at both June 30, 2018 and December 31, 2017. 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 July 26, 2018, FHLB announced a cash dividend to be distributed in mid-August 2018 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. Because 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 1.6298 as of June 30, 2018 and 1.6483 as of December 31, 2017, and the closing stock price of Class A shares, the value of our shares of Class B common stock would have been $3.7 million and $3.2 million at June 30, 2018 and December 31, 2017, respectively. The conversion rate is subject to further reduction upon the final settlement of the covered litigation against Visa Inc. and its member banks. As such, the fair value of these Class B shares can differ significantly from their if-converted values. For further information, refer to Note 8, Commitments and Contingencies.

We invest in low-income housing tax credit funds as a limited partner, which totaled $4.9 million and $2.1 million recorded in other assets as of June 30, 2018 and December 31, 2017, respectively. In the first six months of 2018, we recognized $282 thousand of low-income housing tax credits and other tax benefits, net of $237 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of June 30, 2018, our unfunded commitments for these low-income housing tax credit funds totaled $3.2 million. We did not recognize any impairment losses on these low-income housing tax credit investments during the six months ended June 30, 2018 or 2017, as the value of the future tax benefits exceeds the carrying value of the investments.