Investment Securities

6 Months Ended

Jun. 30, 2019

Investments, Debt and Equity Securities [Abstract]

Our investment securities portfolio consists of obligations of state and political subdivisions, U.S. corporations, U.S. federal government agencies such as Government National Mortgage Association ("GNMA") and Small Business Administration ("SBA"), U.S. government-sponsored enterprise securities ("GSEs"), such as Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Farm Credit Banks Funding Corporation and FHLB. We also invest in residential and commercial mortgage-backed securities (“MBS”/"CMBS") and collateralized mortgage obligations (“CMOs”) issued or guaranteed by the GSEs, and privately issued CMOs, as reflected in the following table:



	June 30, 2019									December 31, 2018
	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-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA	$	83,493	$	84,121	$	967	$	(339	)	$	88,606	$	85,804	$	7	$	(2,809	)
SBA-backed securities	8,401		8,779		378		—			8,720		8,757		37		—
CMOs issued by FNMA	10,972		11,250		278		—			11,447		11,327		—		(120		)
CMOs issued by FHLMC	33,095		33,880		805		(20		)	33,583		33,021		8		(570		)
CMOs issued by GNMA	3,750		3,810		60		—			3,739		3,769		30		—
Obligations of state and political subdivisions	9,168		9,278		110		—			11,111		11,216		128		(23		)
Total held-to-maturity	148,879		151,118		2,598		(359		)	157,206		153,894		210		(3,522		)
Available-for-sale:
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA	70,550		72,144		1,644		(50		)	95,339		94,467		358		(1,230		)
SBA-backed securities	38,363		39,805		1,498		(56		)	50,722		50,781		465		(406		)
CMOs issued by FNMA	25,832		26,175		352		(9		)	28,275		28,079		134		(330		)
CMOs issued by FHLMC	142,175		146,528		4,410		(57		)	145,979		144,836		454		(1,597		)
CMOs issued by GNMA	13,275		13,268		33		(40		)	11,294		11,021		1		(274		)
Debentures of government- sponsored agencies	28,035		28,784		749		—			52,956		53,018		185		(123		)
Privately issued CMOs	159		159		1		(1		)	295		297		2		—
Obligations of state and political subdivisions	48,323		49,259		1,012		(76		)	79,046		77,960		134		(1,220		)
Corporate bonds	2,000		2,009		10		(1		)	2,004		2,005		15		(14		)
Total available-for-sale	368,712		378,131		9,709		(290		)	465,910		462,464		1,748		(5,194		)
Total investment securities	$	517,591	$	529,249	$	12,307	$	(649	)	$	623,116	$	616,358	$	1,958	$	(8,716	)

The amortized cost and fair value of investment debt securities by contractual maturity at June 30, 2019 and December 31, 2018 are shown in the following table 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.



	June 30, 2019								December 31, 2018
	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	$	6,088	$	6,095	$	9,763	$	9,753	$	6,194	$	6,182	$	9,863	$	9,795
After one but within five years	3,637		3,694		64,474		65,498		5,481		5,492		84,871		84,435
After five years through ten years	57,679		59,303		195,243		201,925		59,231		58,120		252,274		250,055
After ten years	81,475		82,026		99,232		100,955		86,300		84,100		118,902		118,179
Total	$	148,879	$	151,118	$	368,712	$	378,131	$	157,206	$	153,894	$	465,910	$	462,464

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, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Available-for-sale:
Sales proceeds	$	61,852		$	5,006		$	66,081		$	5,006
Gross realized gains	211			27			214			27
Gross realized losses	(150		)	(16		)	(159		)	(16		)

Pledged investment securities are shown in the following table.



(in thousands)	June 30, 2019		December 31, 2018
Pledged to the State of California:
Secure public deposits in compliance with the Local Agency Security Program	$	97,974	$	125,696
Collateral for trust deposits	723		734
Total investment securities pledged to the State of California	$	98,697	$	126,430
Collateral for Wealth Management and Trust Services checking account	$	1,990	$	2,000

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

There were 56 and 229 securities in unrealized loss positions at June 30, 2019 and December 31, 2018, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:



June 30, 2019	< 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	$	343	$	(3	)	$	34,714	$	(336	)	$	35,057	$	(339	)
CMOs issued by FHLMC	—		—			3,205		(20		)	3,205		(20		)
Total held-to-maturity	343		(3		)	37,919		(356		)	38,262		(359		)
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA	—		—			13,537		(50		)	13,537		(50		)
SBA-backed securities	—		—			3,113		(56		)	3,113		(56		)
CMOs issued by FNMA	—		—			3,877		(9		)	3,877		(9		)
CMOs issued by FHLMC	8,153		(2		)	17,767		(55		)	25,920		(57		)
CMOs issued by GNMA	56		(1		)	7,948		(39		)	8,004		(40		)
Debentures of government- sponsored agencies	—		—			—		—			—		—
Privately issued CMOs	81		(1		)	—		—			81		(1		)
Obligations of state and political subdivisions	—		—			9,395		(76		)	9,395		(76		)
Corporate bonds	—		—			1,008		(1		)	1,008		(1		)
Total available-for-sale	8,290		(4		)	56,645		(286		)	64,935		(290		)
Total temporarily impaired securities	$	8,633	$	(7	)	$	94,564	$	(642	)	$	103,197	$	(649	)



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		)
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	)

As of June 30, 2019, the investment portfolio included 48 investment securities that had been in a continuous loss position for twelve months or more and 8 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, 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 analyses 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 June 30, 2019, Management determined that it did not intend to sell investment securities with unrealized losses, and it is more likely than not that we will not be 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 June 30, 2019.

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 $11.7 million and $11.1 million of FHLB stock included in other assets on the consolidated statements of condition at June 30, 2019 and December 31, 2018, 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. Based on our analysis of FHLB's financial condition and certain qualitative factors, we determined that the FHLB stock was not impaired at June 30, 2019 and December 31, 2018. On July 25, 2019, FHLB announced a cash dividend for the second quarter of 2019 at an annualized dividend rate of 7.00% to be distributed in mid-August 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 shares of Visa Inc. Class B common stock at June 30, 2019 and December 31, 2018. 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 both as of June 30, 2019 and December 31, 2018, 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 $3.0 million and $2.2 million at June 30, 2019 and December 31, 2018, 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.

We invest in low-income housing tax credit funds as a limited partner, which totaled $4.4 million and $4.6 million recorded in other assets as of June 30, 2019 and December 31, 2018, respectively. In the first six months of 2019, we recognized $305 thousand of low-income housing tax credits and other tax benefits, offset by $232 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of June 30, 2019, 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 the first six months of 2019 or 2018, as the value of the future tax benefits exceeds the carrying value of the investments.