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.



	September 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	$	91,237	$	86,962	$	—	$	(4,275	)	$	100,376	$	100,096	$	234	$	(514	)
SBA-backed securities	8,723		8,489		—		(234		)	—		—		—		—
CMOs issued by FNMA	11,646		11,254		—		(392		)	—		—		—		—
CMOs issued by FHLMC	34,169		32,868		—		(1,301		)	31,010		30,938		2		(74		)
CMOs issued by GNMA	3,734		3,694		—		(40		)	—		—		—		—
Obligations of state and political subdivisions	14,713		14,839		160		(34		)	19,646		19,998		383		(31		)
Total held-to-maturity	164,222		158,106		160		(6,276		)	151,032		151,032		619		(619		)
Available-for-sale:
Securities of U.S. government agencies:
MBS pass-through securities issued by FHLMC and FNMA	93,096		90,484		20		(2,632		)	65,559		65,262		126		(423		)
SBA-backed securities	41,074		40,181		—		(893		)	25,979		25,982		58		(55		)
CMOs issued by FNMA	19,914		19,356		4		(562		)	35,340		35,125		33		(248		)
CMOs issued by FHLMC	128,848		124,930		1		(3,919		)	70,514		69,889		3		(628		)
CMOs issued by GNMA	11,938		11,450		—		(488		)	17,953		17,785		26		(194		)
Debentures of government- sponsored agencies	43,470		42,914		—		(556		)	12,940		12,938		3		(5		)
Privately issued CMOs	367		370		3		—			1,432		1,431		1		(2		)
Obligations of state and political subdivisions	75,519		73,373		41		(2,187		)	98,027		97,491		298		(834		)
Corporate bonds	2,506		2,513		19		(12		)	6,541		6,564		26		(3		)
Total available-for-sale	416,732		405,571		88		(11,249		)	334,285		332,467		574		(2,392		)
Total investment securities	$	580,954	$	563,677	$	248	$	(17,525	)	$	485,317	$	483,499	$	1,193	$	(3,011	)

The amortized cost and fair value of investment debt securities by contractual maturity at September 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.



	September 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	$	2,677	$	2,697	$	10,111	$	10,031	$	2,151	$	2,172	$	10,268	$	10,272
After one but within five years	12,476		12,438		69,230		67,972		15,577		15,791		71,576		71,237
After five years through ten years	60,422		58,041		239,939		232,532		54,641		54,554		129,723		128,954
After ten years	88,647		84,930		97,452		95,036		78,663		78,515		122,718		122,004
Total	$	164,222	$	158,106	$	416,732	$	405,571	$	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					Nine months ended
(in thousands)	September 30, 2018			September 30, 2017		September 30, 2018			September 30, 2017
Available-for-sale:
Sales proceeds	$	11,966		$	—	$	16,972		$	1,321
Gross realized gains	—			—		27			13
Gross realized losses	(90		)	—		(106		)	(3		)

Pledged investment securities are shown in the following table.



(in thousands)	September 30, 2018		December 31, 2017
Pledged to the State of California:
Secure public deposits in compliance with the Local Agency Security Program	$	97,978	$	107,829
Collateral for trust deposits	740		761
Total investment securities pledged to the State of California	$	98,718	$	108,590
Collateral for Wealth Management and Trust Services checking account	$	2,005	$	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 $396 thousand and $299 thousand for the nine months ended September 30, 2018 and 2017, respectively.

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

There were 253 and 198 investment securities in unrealized loss positions at September 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:



September 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	$	6,602	$	(225	)	$	80,360	$	(4,050	)	$	86,962	$	(4,275	)
SBA-backed securities	8,489		(234		)	—		—			$	8,489	$	(234	)
CMOs issued by FNMA	11,254		(392		)	—		—			11,254		(392		)
CMOs issued by FHLMC	11,430		(400		)	21,438		(901		)	32,868		(1,301		)
CMOs issued by GNMA	—		—			3,694		(40		)	3,694		(40		)
Obligations of state and political subdivisions	3,792		(34		)	—		—			3,792		(34		)
Total held-to-maturity	41,567		(1,285		)	105,492		(4,991		)	147,059		(6,276		)
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA	52,821		(1,804		)	20,406		(828		)	73,227		(2,632		)
SBA-backed securities	23,162		(893		)	—		—			23,162		(893		)
CMOs issued by FNMA	13,230		(383		)	5,905		(179		)	19,135		(562		)
CMOs issued by FHLMC	87,017		(2,930		)	29,702		(989		)	116,719		(3,919		)
CMOs issued by GNMA	10,728		(485		)	485		(3		)	11,213		(488		)
Debentures of government- sponsored agencies	37,831		(556		)	—		—			37,831		(556		)
Obligations of state and political subdivisions	44,714		(785		)	21,543		(1,402		)	66,257		(2,187		)
Corporate bonds	1,010		(12		)	—		—			1,010		(12		)
Total available-for-sale	270,513		(7,848		)	78,041		(3,401		)	348,554		(11,249		)
Total temporarily impaired securities	$	312,080	$	(9,133	)	$	183,533	$	(8,392	)	$	495,613	$	(17,525	)



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 September 30, 2018, the investment portfolio included 83 investment securities that had been in a continuous unrealized loss position for twelve months or more and 170 investment securities that had been in a loss position for less than twelve months.

Securities issued by government-sponsored agencies, such as FNMA and FHLMC, have implicit credit support by the U.S. federal government. Securities issued by the SBA and GNMA have explicit credit guarantees by the U.S. federal government, which protects us from credit losses on the contractual cash flows of the securities.

Other temporarily impaired securities, including obligations of state and political subdivisions and corporate bonds, were deemed credit worthy after our internal analyses of the issuers’ latest financial information, credit ratings by major credit rating agencies, and/or credit enhancements.

Based on our comprehensive analyses, we determined that the decline in the fair values of these securities was primarily driven by factors other than credit, such as changes in market interest rates and liquidity spreads subsequent to purchase. At September 30, 2018, Management determined that it did not intend to sell investment securities with unrealized losses, and it is more likely than not that we are not required to sell any of the securities with unrealized losses before recovery of their amortized cost. Therefore, we do not consider these investment securities to be other-than-temporarily impaired at September 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 September 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 October 25, 2018, FHLB announced a cash dividend to be distributed in mid-November 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 to non-member banks of Visa U.S.A. until their conversion into Class A (voting) shares upon the termination of Visa Inc.'s Covered Litigation escrow account. Because of the restriction and the uncertainty on the conversation rate to Class A shares, these shares lack readily determinable fair value and are not classified as available-for-sale securities nor are they 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 September 30, 2018 and 1.6483 as of December 31, 2017, and the closing stock price of Class A shares at those respective dates, the converted value of our shares of Class B common stock would have been $4.1 million and $3.2 million at September 30, 2018 and December 31, 2017, respectively. The conversion rate is subject to further adjustment 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 converted values. For further information, refer to Note 8, Commitments and Contingencies.

On October 25, 2018, we entered into an agreement to sell 6,500 shares of our holdings of Visa Class B common stock to a member bank of Visa U.S.A. to be settled in the fourth quarter of 2018, and the estimated net pre-tax gain from the sale is $955 thousand.

We invest in low-income housing tax credit funds as a limited partner, which totaled $4.8 million and $2.1 million recorded in other assets as of September 30, 2018 and December 31, 2017, respectively. We recognized $173 thousand and $454 thousand of low-income housing tax credits and other tax benefits, net of $144 thousand and $381 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense in the three and nine months ended September 30, 2018, respectively. As of September 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 three and nine months ended September 30, 2018 or 2017, as the value of the future tax benefits exceeds the carrying value of the investments.