Investment Securities

9 Months Ended

Sep. 30, 2020

Investments, Debt and Equity Securities [Abstract]

Our investment securities portfolio consists of obligations of state and political subdivisions, 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:


	September 30, 2020								December 31, 2019
	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	$	69,797	$	73,884	$	4,087	$	—	$	80,451	$	81,325	$	1,018	$	(144)
SBA-backed securities	6,549		6,979		430		—		7,999		8,264		265		—
CMOs issued by FNMA	8,440		8,834		394		—		10,210		10,492		282		—
CMOs issued by FHLMC	29,657		31,331		1,674		—		31,477		32,157		685		(5)
CMOs issued by GNMA	1,230		1,235		5		—		3,763		3,816		53		—
Obligations of state and political subdivisions	1,677		1,720		43		—		3,513		3,588		75		—
Total held-to-maturity	117,350		123,983		6,633		—		137,413		139,642		2,378		(149)
Available-for-sale:
Securities of U.S. government-sponsored enterprises:
MBS pass-through securities issued by FHLMC and FNMA	56,679		59,482		2,803		—		98,502		100,071		1,617		(48)
SBA-backed securities	31,057		32,844		1,844		(57)		35,674		36,286		688		(76)
CMOs issued by FNMA	18,285		18,961		676		—		22,702		23,092		390		—
CMOs issued by FHLMC	144,600		153,255		8,656		(1)		139,398		143,226		3,892		(64)
CMOs issued by GNMA	9,064		9,491		427		—		11,719		11,755		42		(6)
Debentures of government- sponsored agencies	45,239		45,688		449		—		48,389		49,046		727		(70)

Obligations of state and political subdivisions	89,513		93,743		4,230		—		66,042		67,282		1,386		(146)
Corporate bonds	—		—		—		—		1,497		1,502		6		(1)
Total available-for-sale	394,437		413,464		19,085		(58)		423,923		432,260		8,748		(411)
Total investment securities	$	511,787	$	537,447	$	25,718	$	(58)	$	561,336	$	571,902	$	11,126	$	(560)

The amortized cost and fair value of investment debt securities by contractual maturity at September 30, 2020 and December 31, 2019 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.


	September 30, 2020								December 31, 2019
	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	$	247	$	252	$	14,235	$	14,452	$	1,807	$	1,811	$	6,699	$	6,706
After one but within five years	8,974		9,539		60,958		64,559		2,256		2,296		48,706		49,619
After five years through ten years	52,373		56,139		164,815		174,439		56,221		57,544		208,806		214,277
After ten years	55,756		58,053		154,429		160,014		77,129		77,991		159,712		161,658
Total	$	117,350	$	123,983	$	394,437	$	413,464	$	137,413	$	139,642	$	423,923	$	432,260

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, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Available-for-sale:
Sales proceeds	$	—	$	—	$	33,756	$	66,081
Gross realized gains	—		—		916		214
Gross realized losses	—		—		(1)		(159)

Pledged investment securities are shown in the following table:


(in thousands)	September 30, 2020		December 31, 2019
Pledged to the State of California:
Secure public deposits in compliance with the Local Agency Security Program	$	102,396	$	126,598
Collateral for trust deposits	752		742
Total investment securities pledged to the State of California	103,148		127,340
Collateral for Wealth Management and Trust Services checking account	629		622
Total pledged investment securities	$	103,777	$	127,962

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

There were 8 and 40 securities in unrealized loss positions at September 30, 2020 and December 31, 2019, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:


September 30, 2020	< 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








Available-for-sale:

SBA-backed securities	$	—	$	—	$	1,900	$	(57)	$	1,900	$	(57)

CMOs issued by FHLMC	2,014		(1)		—		—		2,014		(1)





Total available-for-sale	2,014		(1)		1,900		(57)		3,914		(58)
Total temporarily impaired securities	$	2,014	$	(1)	$	1,900	$	(57)	$	3,914	$	(58)


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)

As of September 30, 2020, the investment portfolio included 5 investment securities that had been in a continuous loss position for twelve months or more and 3 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.

We routinely perform internal analyses of latest financial information of the issuers of obligations of state and political subdivisions, their 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 obligations of state and political subdivisions and corporate bonds as of December 31, 2019 were primarily driven by factors other than credit, such as changes in market interest rates and liquidity spreads subsequent to purchase. At September 30, 2020, Management determined that it did not intend to sell any investment securities with unrealized losses, and it is more likely than not that we will not be required to sell 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, 2020.

Non-Marketable Securities Included in Other Assets

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 $11.9 million and $11.7 million of FHLB stock included in other assets on the consolidated statements of condition at September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019. On October 29, 2020, FHLB announced a cash dividend for the third quarter of 2020 at an annualized dividend rate of 5.00% to be distributed in mid-November 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 September 30, 2020 and December 31, 2019. 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 both at September 30, 2020 and December 31, 2019, 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 $3.4 million and $3.2 million at September 30, 2020 and December 31, 2019, 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 $3.7 million and $4.1 million recorded in other assets as of September 30, 2020 and December 31, 2019, respectively. In the first nine months of 2020, we recognized $490 thousand of low-income housing tax credits and other tax benefits, offset by $412 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of September 30, 2020, our unfunded commitments for these low-income housing tax credit funds totaled $886 thousand. We did not recognize any impairment losses on these low-income housing tax credit investments during the first nine months of 2020 or 2019, as the value of the future tax benefits exceeds the carrying value of the investments.