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”\"CMBS") 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"), Small Business Administration ("SBA") backed securities, 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, 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	$	88,606	$	85,804	$	7	$	(2,809	)	$	100,376	$	100,096	$	234	$	(514	)
SBA-backed securities	8,720		8,757		37		—			—		—		—		—
CMOs issued by FNMA	11,447		11,327		—		(120		)	—		—		—		—
CMOs issued by FHLMC	33,583		33,021		8		(570		)	31,010		30,938		2		(74		)
CMOs issued by GNMA	3,739		3,769		30		—			—		—		—		—
Obligations of state and political subdivisions	11,111		11,216		128		(23		)	19,646		19,998		383		(31		)
Total held-to-maturity	157,206		153,894		210		(3,522		)	151,032		151,032		619		(619		)
Available-for-sale:
Securities of U.S. government agencies:
MBS pass-through securities issued by FHLMC and FNMA	95,339		94,467		358		(1,230		)	65,559		65,262		126		(423		)
SBA-backed securities	50,722		50,781		465		(406		)	25,979		25,982		58		(55		)
CMOs issued by FNMA	28,275		28,079		134		(330		)	35,340		35,125		33		(248		)
CMOs issued by FHLMC	145,979		144,836		454		(1,597		)	70,514		69,889		3		(628		)
CMOs issued by GNMA	11,294		11,021		1		(274		)	17,953		17,785		26		(194		)
Debentures of government- sponsored agencies	52,956		53,018		185		(123		)	12,940		12,938		3		(5		)
Privately issued CMOs	295		297		2		—			1,432		1,431		1		(2		)
Obligations of state and political subdivisions	79,046		77,960		134		(1,220		)	98,027		97,491		298		(834		)
Corporate bonds	2,004		2,005		15		(14		)	6,541		6,564		26		(3		)
Total available-for-sale	465,910		462,464		1,748		(5,194		)	334,285		332,467		574		(2,392		)
Total investment securities	$	623,116	$	616,358	$	1,958	$	(8,716	)	$	485,317	$	483,499	$	1,193	$	(3,011	)

The amortized cost and fair value of investment debt securities by contractual maturity at December 31, 2018 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.



	December 31, 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	$	6,194	$	6,182	$	9,863	$	9,795	$	2,151	$	2,172	$	10,268	$	10,272
After one but within five years	5,481		5,492		84,871		84,435		15,577		15,791		71,576		71,237
After five years through ten years	59,231		58,120		252,274		250,055		54,641		54,554		129,723		128,954
After ten years	86,300		84,100		118,902		118,179		78,663		78,515		122,718		122,004
Total	$	157,206	$	153,894	$	465,910	$	462,464	$	151,032	$	151,032	$	334,285	$	332,467

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



(in thousands)	2018			2017
Available-for-sale:
Sales proceeds	$	16,972		$	55,408
Gross realized gains	$	27		$	46
Gross realized losses	$	(106	)	$	(231	)

Pledged investment securities are shown in the following table:



(in thousands)	December 31, 2018		December 31, 2017
Pledged to the State of California:
Secure public deposits in compliance with the Local Agency Security Program	$	125,696	$	107,829
Collateral for trust deposits	734		761
Total investment securities pledged to the State of California	$	126,430	$	108,590
Collateral for Wealth Management and Trust Services ("WMTS') checking account	$	2,000	$	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 million, respectively, 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 $516 thousand in 2018 and $426 thousand in 2017.

There were 229 and 198 securities in unrealized loss positions at December 31, 2018 and 2017, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:



December 31, 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	$	198	$	(9	)	$	83,990	$	(2,800	)	$	84,188	$	(2,809	)
CMOs issued by FNMA	—		—			11,327		(120		)	11,327		(120		)
CMOs issued by FHLMC	2,880		(3		)	28,171		(567		)	31,051		(570		)
Obligations of state and political subdivisions	—		—			3,565		(23		)	3,565		(23		)
Total held-to-maturity	3,078		(12		)	127,053		(3,510		)	130,131		(3,522		)
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA	19,971		(128		)	50,077		(1,102		)	70,048		(1,230		)
SBA-backed securities	13,175		(122		)	20,123		(284		)	33,298		(406		)
CMOs issued by FNMA	2,345		(8		)	16,138		(322		)	18,483		(330		)
CMOs issued by FHLMC	24,094		(330		)	74,243		(1,267		)	98,337		(1,597		)
CMOs issued by GNMA	1,666		(7		)	9,112		(267		)	10,778		(274		)
Debentures of government-sponsored agencies	4,992		(8		)	11,349		(115		)	16,341		(123		)
Obligations of state and political subdivisions	15,290		(54		)	52,804		(1,166		)	68,094		(1,220		)
Corporate bonds	—		—			1,004		(14		)	1,004		(14		)
Privately issued CMO's											—		—
Total available-for-sale	81,533		(657		)	234,850		(4,537		)	316,383		(5,194		)
Total temporarily impaired securities	$	84,611	$	(669	)	$	361,903	$	(8,047	)	$	446,514	$	(8,716	)



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:
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		)
Obligations of state and political subdivisions	3,648		(31		)	—		—			3,648		(31		)
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		)
Obligations of state and political subdivisions	52,197		(288		)	19,548		(546		)	71,745		(834		)
Corporate bonds	3,060		(3		)						3,060		(3		)
Privately issued CMO's	1,310		(2		)	—		—			1,310		(2		)
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 December 31, 2018, 188 investment securities in our portfolio had been in a continuous loss position for twelve months or more and 41 investment securities had been in a loss position for less than twelve months.

Securities issued by government-sponsored agencies, such as FNMA and FHLMC, usually have implicit credit support by the U.S. federal government. However, since 2008, FNMA and FHLMC have been under government conservatorship and, therefore, contractual cash flows for these investments carry explicit guarantees 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 analysis of the issuers' latest financial information, credit ratings by major credit 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 December 31, 2018, Management determined that it did not intend to sell investment securities with unrealized losses, and it is more than likely than not that we will not have 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 December 31, 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 included in other assets on the consolidated statements of condition at both December 31, 2018 and 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. Based on our analysis of FHLB’s financial condition and certain qualitative factors, we determined that the FHLB stock was not impaired at December 31, 2018 and 2017. On February 21, 2019, FHLB announced a cash dividend for the fourth quarter of 2018 at an annualized dividend rate of 7.00% to be distributed in mid-March 2019. Cash dividends paid on FHLB capital stock are recorded as non-interest income.

As a member bank of Visa U.S.A., we held 10,439 and 16,939 shares of Visa Inc. Class B common stock at December 31, 2018 and 2017, respectively. These shares have a carrying value of zero and 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 conversion rate to Class A shares, these shares lack a readily determinable fair value. When converting this Class B common stock to Class A common stock based on the conversion rate of 1.6298, as of December 31, 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 $2.2 million and $3.2 million at December 31, 2018 and 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 12, Commitments and Contingencies.

In October 2018, we sold 6,500 shares of our holdings of Visa Inc. Class B common stock to a member bank of Visa U.S.A. The pre-tax gain from the sale, net of sales commission, was $956 thousand.

We invest in low income housing tax credit funds as a limited partner, which totaled $4.6 million and $2.1 million recorded in other assets as of December 31, 2018 and 2017, respectively. In 2018, we recognized $597 thousand of low income housing tax credits and other tax benefits, net of $507 thousand of amortization expense of low income housing tax credit investment, as a component of income tax expense. As of December 31, 2018, our unfunded commitments for these low income housing tax credit funds totaled $3.1 million. We did not recognize any impairment losses on these low income housing tax credit investments during 2018 or 2017, as the value of the future tax benefits exceeds the carrying value of the investments.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law, which reduced the federal corporate income tax rate from 35% to 21% for tax years beginning 2018. Due to the tax rate change, we revised the amortization schedule according to the proportional amortization method for the tax deduction benefits on these low income housing tax credit investments starting in 2018 using the 21% federal tax rate and recorded a catch-up amortization expense of $67 thousand in 2017 as a component of income tax expense.