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Investment Securities | 9 Months Ended
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Sep. 30, 2021
Investments, Debt and Equity Securities [Abstract] |
Investment Securities | Investment Securities Our investment securities portfolio consists of U.S. Treasury securities, 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. In addition, we hold an asset-backed security collateralized by student loan pools through the ARB acquisition. A summary of the amortized cost, fair value and allowance for credit losses related to securities held-to-maturity as of September 30, 2021 and December 31, 2020 is presented below.
Held-to-maturity: | Amortized Cost 1 | Allowance for Credit Losses | Net Carrying Amount | Gross Unrealized | Fair Value |
(in thousands) | Gains | (Losses) |
September 30, 2021 |  |  |  |  |  |  |
Securities of U.S. government-sponsored enterprises: |  |  |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | $ | 70,085 |  | $ | — |  | $ | 70,085 |  | $ | 2,828 |  | $ | (38) |  | $ | 72,875 |  |
CMOs issued by FHLMC | 42,275 |  | — |  | 42,275 |  | 1,114 |  | (95) |  | 43,294 |  |
CMOs issued by FNMA | 5,598 |  | — |  | 5,598 |  | 163 |  | — |  | 5,761 |  |
SBA-backed securities | 4,841 |  | — |  | 4,841 |  | 290 |  | — |  | 5,131 |  |
Debentures of government-sponsored agencies | 51,470 |  | — |  | 51,470 |  | — |  | — |  | 51,470 |  |
Obligations of state and political subdivisions | 22,532 |  | — |  | 22,532 |  | 20 |  | (31) |  | 22,521 |  |
Total held-to-maturity | $ | 196,801 |  | $ | — |  | $ | 196,801 |  | $ | 4,415 |  | $ | (164) |  | $ | 201,052 |  |
December 31, 2020 |  |  |  |  |  |  |
Securities of U.S. government-sponsored enterprises: |  |  |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | $ | 65,579 |  | $ | — |  | $ | 65,579 |  | $ | 3,924 |  | $ | — |  | $ | 69,503 |  |
CMOs issued by FHLMC | 27,201 |  | — |  | 27,201 |  | 1,441 |  | — |  | 28,642 |  |
CMOs issued by FNMA | 8,042 |  | — |  | 8,042 |  | 363 |  | — |  | 8,405 |  |
SBA-backed securities | 6,547 |  | — |  | 6,547 |  | 400 |  | — |  | 6,947 |  |
Obligations of state and political subdivisions | 1,667 |  | — |  | 1,667 |  | 21 |  | — |  | 1,688 |  |
Total held-to-maturity | $ | 109,036 |  | $ | — |  | $ | 109,036 |  | $ | 6,149 |  | $ | — |  | $ | 115,185 |  |
1 Amortized cost and fair values exclude accrued interest receivable of $451 thousand and $366 thousand at September 30, 2021 and December 31, 2020, respectively, which is included in interest receivable and other assets in the consolidated statements of condition. |
Management measures expected credit losses on held-to-maturity securities on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to MBSs and CMOs issued or guaranteed by the GSEs, and SBA-backed securities, we expect to receive all the contractual principal and interest on these securities as such securities are backed by the full faith and credit of and/or guaranteed by the U.S. government. Accordingly, no allowance for credit losses has been recorded for these securities. With regard to securities issued by states and political subdivisions, management considers (i) issuer and/or guarantor credit ratings, (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity,(iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal credit review of the financial information, and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers. Based on the comprehensive analysis, no credit losses are expected. The following table summarizes the amortized cost of our portfolio of held-to-maturity securities issued by states and political subdivisions by Moody's and/or Standard & Poor's bond ratings as of September 30, 2021.
| Obligations of state and political subdivisions |  |  |  |
(in thousands) | September 30, 2021 | December 31, 2020 |  |  |  |
AAA | $ | 7,455 |  | $ | — |  |  |  |  |
AA | 14,975 |  | 1,461 |  |  |  |  |
A | 102 |  | 206 |  |  |  |  |
Total | $ | 22,532 |  | $ | 1,667 |  |  |  |  |
A summary of the amortized cost, fair value and allowance for credit losses related to securities available-for-sale as of September 30, 2021 and December 31, 2020 is presented below.
Available-for-sale: | Amortized Cost 1 | Gross Unrealized | Allowance for Credit Losses | Fair Value
(in thousands) | Gains | (Losses)
September 30, 2021 |  |  |  |  |
Securities of U.S. government-sponsored enterprises: |  |  |  |  |
MBS pass-through securities issued by FHLMC, FNMA and GNMA | $ | 207,557 |  | $ | 1,925 |  | $ | (243) |  | $ | — |  | $ | 209,239 |
CMOs issued by FHLMC | 363,708 |  | 5,045 |  | (1,065) |  | — |  | 367,688 |
CMOs issued by FNMA | 55,178 |  | 244 |  | (211) |  | — |  | 55,211 |
CMOs issued by GNMA | 61,411 |  | 232 |  | (249) |  | — |  | 61,394 |
SBA-backed securities | 33,422 |  | 1,323 |  | (136) |  | — |  | 34,609 |
Debentures of government- sponsored agencies | 71,328 |  | 63 |  | (1,177) |  | — |  | 70,214 |
U.S. Treasury securities | 11,881 |  | — |  | (104) |  | — |  | 11,777 |
Obligations of state and political subdivisions | 131,865 |  | 5,519 |  | (169) |  | — |  | 137,215 |
Corporate bonds | 14,014 |  | — |  | (237) |  | — |  | 13,777 |
Asset-backed securities | 1,914 |  | — |  | (5) |  | — |  | 1,909 |
Total available-for-sale | $ | 952,278 |  | $ | 14,351 |  | $ | (3,596) |  | $ | — |  | $ | 963,033 |
December 31, 2020 |  |  |  |  |
Securities of U.S. government-sponsored enterprises: |  |  |  |  |
MBS pass-through securities issued by FHLMC and FNMA | $ | 50,686 |  | $ | 2,530 |  | $ | — |  | $ | — |  | $ | 53,216 |
CMOs issued by FHLMC | 143,267 |  | 7,925 |  | (1) |  | — |  | 151,191 |
CMOs issued by FNMA | 16,450 |  | 580 |  | — |  | — |  | 17,030 |
CMOs issued by GNMA | 6,863 |  | 351 |  | — |  | — |  | 7,214 |
SBA-backed securities | 30,941 |  | 1,976 |  | (55) |  | — |  | 32,862 |
Debentures of government- sponsored agencies | 19,944 |  | 266 |  | (24) |  | — |  | 20,186 |
Obligations of state and political subdivisions | 104,887 |  | 5,765 |  | — |  | — |  | 110,652 |
Total available-for-sale | $ | 373,038 |  | $ | 19,393 |  | $ | (80) |  | $ | — |  | $ | 392,351 |
1 Amortized cost and fair value exclude accrued interest receivable of $2.9 million and $1.9 million September 30, 2021 and December 31, 2020, which is included in interest receivable and other assets in the consolidated statements of condition.
The amortized cost a nd fair value of investment debt securities by contractual maturity at September 30, 2021 and December 31, 2020 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, 2021 |  | December 31, 2020
| 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 | $ | 102 |  | $ | 104 |  |  | $ | 11,700 |  | $ | 11,818 |  |  | $ | 246 |  | $ | 250 |  |  | $ | 11,530 |  | $ | 11,687 |
After one but within five years | 23,536 |  | 24,725 |  |  | 75,784 |  | 77,755 |  |  | 7,550 |  | 7,961 |  |  | 59,028 |  | 62,397 |
After five years through ten years | 51,125 |  | 53,105 |  |  | 314,110 |  | 318,801 |  |  | 52,113 |  | 55,872 |  |  | 144,908 |  | 154,089 |
After ten years | 122,038 |  | 123,118 |  |  | 550,684 |  | 554,659 |  |  | 49,127 |  | 51,102 |  |  | 157,572 |  | 164,178 |
Total | $ | 196,801 |  | $ | 201,052 |  |  | $ | 952,278 |  | $ | 963,033 |  |  | $ | 109,036 |  | $ | 115,185 |  |  | $ | 373,038 |  | $ | 392,351 |
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, 2021 | September 30, 2020 |  | September 30, 2021 | September 30, 2020
Available-for-sale: |  |  |  |  |
Sales proceeds | $ | 4,099 |  | $ | — |  |  | $ | 4,099 |  | $ | 33,756 |
Gross realized gains | 1 |  | — |  |  | 1 |  | 916 |
Gross realized losses | — |  | — |  |  | — |  | (1) |
Pledged investment securities are shown in the following table:
(in thousands) | September 30, 2021 | December 31, 2020
Pledged to the State of California: |  |
Secure public deposits in compliance with the Local Agency Security Program | $ | 234,390 |  | $ | 131,051 |
Collateral for trust deposits | 738 |  | 751 |
Collateral for Wealth Management and Trust Services checking account | 622 |  | 629 |
Total investment securities pledged to the State of California | 235,750 |  | 132,431 |
Bankruptcy trustee deposits pledged with Federal Reserve Bank | 2,845 |  | — |
Total pledged investment securities | $ | 238,595 |  | $ | 132,431 |
There were 165 and 10 securities in unrealized loss positions at September 30, 2021 and December 31, 2020, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:
September 30, 2021 | < 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 | $ | 17,074 |  | $ | (38) |  |  | $ | — |  | $ | — |  |  | $ | 17,074 |  | $ | (38) |
CMOs issued by FHLMC | 9,320 |  | (95) |  |  | — |  | — |  |  | 9,320 |  | (95) |
Obligations of state and political subdivisions | 10,194 |  | (31) |  |  | — |  | — |  |  | 10,194 |  | (31) |
Total held-to-maturity | 36,588 |  | (164) |  |  | — |  | — |  |  | 36,588 |  | (164) |
Available-for-sale: |  |  |  |  |  |  |  |
MBS pass-through securities issued by FHLMC, FNMA and GNMA | 63,171 |  | (243) |  |  | — |  | — |  |  | 63,171 |  | (243) |
CMOs issued by FHLMC | 142,557 |  | (1,065) |  |  | — |  | — |  |  | 142,557 |  | (1,065) |
CMOs issued by FNMA | 25,256 |  | (211) |  |  | — |  | — |  |  | 25,256 |  | (211) |
CMOs issued by GNMA | 25,879 |  | (249) |  |  | — |  | — |  |  | 25,879 |  | (249) |
SBA-backed securities | 8,115 |  | (93) |  |  | 1,307 |  | (43) |  |  | 9,422 |  | (136) |
Debentures of government- sponsored agencies | 50,344 |  | (1,021) |  |  | 3,812 |  | (156) |  |  | 54,156 |  | (1,177) |
U.S. Treasury securities | 11,777 |  | (104) |  |  | — |  | — |  |  | 11,777 |  | (104) |
Obligations of state and political subdivisions | 16,494 |  | (169) |  |  | — |  | — |  |  | 16,494 |  | (169) |
Corporate bonds | 13,778 |  | (237) |  |  | — |  | — |  |  | 13,778 |  | (237) |
Asset-backed securities | 1,909 |  | (5) |  |  | — |  | — |  |  | 1,909 |  | (5) |
Total available-for-sale | 359,280 |  | (3,397) |  |  | 5,119 |  | (199) |  |  | 364,399 |  | (3,596) |
Total securities at loss position | $ | 395,868 |  | $ | (3,561) |  |  | $ | 5,119 |  | $ | (199) |  |  | $ | 400,987 |  | $ | (3,760) |
December 31, 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: |  |  |  |  |  |  |  |
CMOs issued by FHLMC | $ | 5,975 |  | $ | (1) |  |  | $ | — |  | $ | — |  |  | $ | 5,975 |  | $ | (1) |
SBA-backed securities | — |  | — |  |  | 1,790 |  | (55) |  |  | 1,790 |  | (55) |
Debentures of government- sponsored agencies | 3,943 |  | (24) |  |  | — |  | — |  |  | 3,943 |  | (24) |
Total securities at loss position | $ | 9,918 |  | $ | (25) |  |  | $ | 1,790 |  | $ | (55) |  |  | $ | 11,708 |  | $ | (80) |
As of September 30, 2021, the investment portfolio included 6 investment securities that had been in a continuous loss position for twelve months or more and 159 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. Our investment in obligations of state and political subdivisions bonds are deemed credit worthy after our comprehensive analysis of the issuers' latest financial information, credit ratings by major credit agencies, and/or credit enhancements. At September 30, 2021, 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. No allowances for credit losses have been recognized on available-for-sale securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality at September 30, 2021. Non-Marketable Securities Included in Other Assets FHLB Capital Stock 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 $16.7 million and $11.9 million of FHLB stock included in other assets on the consolidated statements of condition at September 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020. On October 28, 2021, FHLB announced a cash dividend for the third quarter of 2021 at an annualized dividend rate of 6.00% to be distributed in mid-November 2021. Cash dividends paid on FHLB capital stock are recorded as non-interest income. VISA Inc. Class B Common Stock As a member bank of Visa U.S.A., we held 10,439 shares of Visa Inc. Class B common stock at September 30, 2021 and December 31, 2020. 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 estimated conversion rate of 1.6228 both at September 30, 2021 and December 31, 2020, 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 $3.8 million and $3.7 million at September 30, 2021 and December 31, 2020, 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. Low Income Housing Tax Credits We invest in low-income housing tax credit funds as a limited partner, which totaled $3.2 million and $3.5 million recorded in other assets as of September 30, 2021 and December 31, 2020, respectively. In the first nine months of 2021, we recognized $484 thousand of low-income housing tax credits and other tax benefits, offset by $406 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of September 30, 2021, our unfunded commitments for these low-income housing tax credit funds totaled $425 thousand. We did not recognize any impairment losses on these low-income housing tax credit investments during the first nine months of 2021 or 2020, as the value of the future tax benefits exceeds the carrying value of the investments.

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- Definition The entire disclosure for investments in certain debt and equity securities. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 320 -URI http://asc.fasb.org/subtopic&trid=2209399 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 946 -SubTopic 320 -URI http://asc.fasb.org/subtopic&trid=2324412 Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -URI http://asc.fasb.org/topic&trid=2196928 Reference 4: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 940 -SubTopic 320 -URI http://asc.fasb.org/subtopic&trid=2176304 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher SEC -Name Regulation S-K (SK) -Number 229 -Section 1403 -Paragraph (b) + Details
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