Investment Securities

12 Months Ended

Dec. 31, 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 enterprises ("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, as reflected in the following table:



	December 31, 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	$	80,451	$	81,325	$	1,018	$	(144	)	$	88,606	$	85,804	$	7	$	(2,809	)
SBA-backed securities	7,999		8,264		265		—			8,720		8,757		37		—
CMOs issued by FNMA	10,210		10,492		282		—			11,447		11,327		—		(120		)
CMOs issued by FHLMC	31,477		32,157		685		(5		)	33,583		33,021		8		(570		)
CMOs issued by GNMA	3,763		3,816		53		—			3,739		3,769		30		—
Obligations of state and political subdivisions	3,513		3,588		75		—			11,111		11,216		128		(23		)
Total held-to-maturity	137,413		139,642		2,378		(149		)	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	98,502		100,071		1,617		(48		)	95,339		94,467		358		(1,230		)
SBA-backed securities	35,674		36,286		688		(76		)	50,722		50,781		465		(406		)
CMOs issued by FNMA	22,702		23,092		390		—			28,275		28,079		134		(330		)
CMOs issued by FHLMC	139,398		143,226		3,892		(64		)	145,979		144,836		454		(1,597		)
CMOs issued by GNMA	11,719		11,755		42		(6		)	11,294		11,021		1		(274		)
Debentures of government- sponsored agencies	48,389		49,046		727		(70		)	52,956		53,018		185		(123		)
Privately issued CMOs	—		—		—		—			295		297		2		—
Obligations of state and political subdivisions	66,042		67,282		1,386		(146		)	79,046		77,960		134		(1,220		)
Corporate bonds	1,497		1,502		6		(1		)	2,004		2,005		15		(14		)
Total available-for-sale	423,923		432,260		8,748		(411		)	465,910		462,464		1,748		(5,194		)
Total investment securities	$	561,336	$	571,902	$	11,126	$	(560	)	$	623,116	$	616,358	$	1,958	$	(8,716	)

The amortized cost and fair value of investment debt securities by contractual maturity at December 31, 2019 and 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, 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	$	1,807	$	1,811	$	6,699	$	6,706	$	6,194	$	6,182	$	9,863	$	9,795
After one but within five years	2,256		2,296		48,706		49,619		5,481		5,492		84,871		84,435
After five years through ten years	56,221		57,544		208,806		214,277		59,231		58,120		252,274		250,055
After ten years	77,129		77,991		159,712		161,658		86,300		84,100		118,902		118,179
Total	$	137,413	$	139,642	$	423,923	$	432,260	$	157,206	$	153,894	$	465,910	$	462,464

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



(in thousands)	2019			2018
Available-for-sale:
Sales proceeds	$	66,081		$	16,972
Gross realized gains	$	214		$	27
Gross realized losses	$	(159	)	$	(106	)

Pledged investment securities are shown in the following table:



(in thousands)	December 31, 2019		December 31, 2018
Pledged to the State of California:
Secure public deposits in compliance with the Local Agency Security Program	$	126,598	$	125,696
Collateral for trust deposits	742		734
Total investment securities pledged to the State of California	$	127,340	$	126,430
Collateral for Wealth Management and Trust Services ("WMTS') checking account	$	622	$	2,000

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, we transferred $27.4 million, 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, remained in accumulated other comprehensive income and is amortized over the remaining life of the securities along with amortization of any prior transfers. Amortization of the net unrealized pre-tax loss totaled $445 thousand and $516 thousand in 2019 and 2018, respectively. There were no securities transferred from available-for-sale to held-to-maturity at fair value in 2019.

There were 40 and 229 securities in unrealized loss positions at December 31, 2019 and 2018, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:



December 31, 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	$	14,203	$	(60	)	$	6,073	$	(84	)	$	20,276	$	(144	)
CMOs issued by FHLMC	—		—			1,725		(5		)	1,725		(5		)
Total held-to-maturity	14,203		(60		)	7,798		(89		)	22,001		(149		)
Available-for-sale:
MBS pass-through securities issued by FHLMC and FNMA	4,367		(34		)	4,464		(14		)	8,831		(48		)
SBA-backed securities	9,227		(14		)	2,448		(62		)	11,675		(76		)
CMOs issued by FHLMC	14,918		(58		)	2,981		(6		)	17,899		(64		)
CMOs issued by GNMA	7,139		(6		)	—		—			7,139		(6		)
Debentures of government-sponsored agencies	25,228		(70		)	—		—			25,228		(70		)
Obligations of state and political subdivisions	20,579		(145		)	659		(1		)	21,238		(146		)
Corporate bonds	500		(1		)	—		—			500		(1		)
Total available-for-sale	81,958		(328		)	10,552		(83		)	92,510		(411		)
Total temporarily impaired securities	$	96,161	$	(388	)	$	18,350	$	(172	)	$	114,511	$	(560	)



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 December 31, 2019, the investment portfolio included 16 investment securities that had been in a continuous loss position for twelve months or more and 24 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, 2019, 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, 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 December 31, 2019 and 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 December 31, 2019 and 2018. On February 20, 2020, FHLB announced a cash dividend for the fourth quarter of 2019 at an annualized dividend rate of 7.00% to be distributed in mid-March 2020. 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 both December 31, 2019 and 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 1.6228, as of December 31, 2019 and 1.6298 as of 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 $3.2 million and $2.2 million at December 31, 2019 and 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 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 $4.1 million and $4.6 million recorded in other assets as of December 31, 2019 and 2018, respectively. In 2019, we recognized $603 thousand of low income housing tax credits and other tax benefits, net of $515 thousand of amortization expense of low income housing tax credit investment, as a component of income tax expense. As of December 31, 2019, our unfunded commitments for these low income housing tax credit funds totaled $2.2 million. We did not recognize any impairment losses on these low income housing tax credit investments during 2019 or 2018, as the value of the future tax benefits exceeds the carrying value of the investments.