Investments

6 Months Ended

Jun. 30, 2017

Investments, Debt and Equity Securities [Abstract]

Investments

Note 10 – Investments

Investment Securities

Although the Company currently has the intent and the ability to hold the securities in its investment portfolio to maturity, the securities are all marketable and are classified as “available for sale” to allow maximum flexibility with regard to interest rate risk and liquidity management. Pursuant to FASB’s guidance on accounting for debt and equity securities, available for sale securities are carried on the Company’s financial statements at their estimated fair market values, with monthly tax-effected “mark-to-market” adjustments made vis-à-vis accumulated other comprehensive income in shareholders’ equity.

The amortized cost and estimated fair value of investment securities available-for-sale are as follows:

Amortized Cost And Estimated Fair Value
(dollars in thousands, unaudited):
	June 30, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated Fair
	Cost		Gains		Losses		Value
US Government agencies	$	25,793	$	162	$	(238)	$	25,717
Mortgage-backed securities		414,065		1,641		(2,961)		412,745
State and political subdivisions		136,554		3,372		(294)		139,632
Equity securities		494		993		-		1,487
Total securities	$	576,906	$	6,168	$	(3,493)	$	579,581

	December 31, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated Fair
	Cost		Gains		Losses		Value
US Government agencies	$	26,926	$	48	$	(506)	$	26,468
Mortgage-backed securities		391,555		1,492		(5,171)		387,876
State and political subdivisons		114,140		1,519		(1,466)		114,193
Equity securities		500		1,046		-		1,546
Total securities	$	533,121	$	4,105	$	(7,143)	$	530,083

At June 30, 2017 and December 31, 2016, the Company had 296 securities and 431 securities, respectively, with gross unrealized losses. Management has evaluated those securities as of the respective dates, and does not believe that any of the unrealized losses are other than temporary. Gross unrealized losses on our investment securities as of the indicated dates are disclosed in the table below, categorized by investment type and by the duration of time that loss positions on individual securities have continuously existed (over or under twelve months).

Investment Portfolio - Unrealized Losses
(dollars in thousands, unaudited)	June 30, 2017
	Less than twelve months				Twelve months or more
	Gross				Gross
	Unrealized				Unrealized
	Losses		Fair Value		Losses		Fair Value
US Government agencies	$	(193)	$	11,451	$	(45)	$	1,454
Mortgage-backed securities		(2,086)		234,206		(875)		54,646
State and political subdivisions		(282)		17,465		(12)		696
Total	$	(2,561)	$	263,122	$	(932)	$	56,796

	December 31, 2016
	Less than twelve months				Twelve months or more
	Gross				Gross
	Unrealized				Unrealized
	Losses		Fair Value		Losses		Fair Value
US Government agencies	$	(500)	$	21,056	$	(6)	$	711
Mortgage-backed securities		(4,303)		271,276		(868)		43,570
State and political subdivisions		(1,466)		49,195		-		-
Total	$	(6,269)	$	341,527	$	(874)	$	44,281

The table below summarizes the Company’s gross realized gains and losses as well as gross proceeds from the sales of securities, for the periods indicated:

Investment Portfolio - Realized Gains/(Losses)
(dollars in thousands, unaudited)
	Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
Proceeds from sales, calls and maturities of securities available for sale	$	4,721	$	2,790	$	17,625	$	5,395
Gross gains on sales, calls and maturities of securities available for sale	$	63	$	146	$	106	$	160
Gross losses on sales, calls and maturities of securities available for sale		(5)		-		(40)		(38)
Net gains on sale of securities available for sale	$	58	$	146	$	66	$	122

The amortized cost and estimated fair value of investment securities available-for-sale at June 30, 2017 and December 31, 2016 are shown below, grouped by the remaining time to contractual maturity dates. The expected life of investment securities may not be consistent with contractual maturity dates, since the issuers of the securities might have the right to call or prepay obligations with or without penalties.

Estimated Fair Value of Contractual Maturities
(dollars in thousands, unaudited)	June 30, 2017
	Amortized Cost		Fair Value
Maturing within one year	$	8,552	$	8,600
Maturing after one year through five years		258,614		259,441
Maturing after five years through ten years		40,566		41,538
Maturing after ten years		74,654		75,778
Securities not due at a single maturity date:
US Government agencies collateralized by mortgage obligations		194,026		192,737
Other securities		494		1,487
	$	576,906	$	579,581

	December 31, 2016
	Amortized Cost		Fair Value
Maturing within one year	$	8,488	$	8,573
Maturing after one year through five years		260,387		259,535
Maturing after five years through ten years		50,823		50,687
Maturing after ten years		47,132		46,190
Securities not due at a single maturity date:
US Government agencies collateralized by mortgage obligations		165,791		163,552
Other securities		500		1,546
	$	533,121	$	530,083

At June 30, 2017, the Company’s investment portfolio was comprised of 337 bonds issued by government municipalities and agencies located within 32 states, with an aggregate fair value of $139.6 million. The largest exposure to any single municipality or agency was a combined $2.585 million (fair value) in general obligation bonds issued by the Lindsay (CA) Unified School District.

The Company’s investments in bonds issued by states, municipalities and political subdivisions are evaluated in accordance with Supervision and Regulation Letter 12-15 issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Organization Ratings,” and other regulatory guidance. Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly-rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the third party credit rating agencies.

The following table summarizes the amortized cost and fair values of general obligation and revenue bonds in the Company’s investment securities portfolio at the indicated dates, identifying the state in which the issuing municipality or agency operates for our largest geographic concentrations:

Revenue and General Obligation Bonds by Location
(dollars in thousands, unaudited)	June 30, 2017				December 31, 2016
	Amortized		Fair Market		Amortized		Fair Market
General obligation bonds	Cost		Value		Cost		Value
State of issuance
Texas	$	29,104	$	29,570	$	20,170	$	19,875
California		28,399		29,354		25,457		25,799
Washington		12,524		12,803		5,928		5,970
Ohio		9,374		9,502		9,412		9,324
Illinois		8,398		8,589		9,873		9,871
Utah		948		981		949		957
Other ( 20 states)		24,310		24,845		21,688		21,741
Total General Obligation Bonds		113,057		115,644		93,477		93,537
Revenue bonds
State of issuance
Texas		6,718		6,825		5,727		5,702
Utah		5,413		5,510		5,286		5,236
Washington		2,112		2,184		1,302		1,299
California		1,029		1,044		1,283		1,298
Ohio		260		261		261		261
Other states (12 states)		7,965		8,164		6,804		6,860
Total Revenue Bonds		23,497		23,988		20,663		20,656
Total Obligations of States   and Political Subdivisions	$	136,554	$	139,632	$	114,140	$	114,193

The revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as utilities (water, sewer, and power), educational facilities, and general public and economic improvements. The primary sources of revenue for these bonds are delineated in the table below, which shows the amortized cost and fair market values for the largest revenue concentrations as of the indicated dates.

Revenue Bonds by Type
(dollars in thousands, unaudited)	June 30, 2017				December 31, 2016
	Amortized		Fair Market		Amortized		Fair Market
Revenue bonds	Cost		Value		Cost		Value
Revenue source:
Water	$	7,409	$	7,483	$	4,788	$	4,722
Sales Tax		2,969		3,013		2,981		2,927
College & University		2,626		2,729		3,401		3,472
Lease		2,324		2,400		3,119		3,123
Local or GTD Housing		1,541		1,558		167		167
Other (15 sources)		6,628		6,805		9,326		9,368
Total Revenue Bonds	$	23,497	$	23,988	$	20,663	$	20,656

Low-Income Housing Tax Credit (“LIHTC”) Fund Investments

The Company has the ability to invest in limited partnerships which own housing projects that qualify for federal and/or California state tax credits, by mandating a specified percentage of low-income tenants for each project. The tax credits flow through to investors, supplementing any returns that might be derived from an increase in property values. Because rent levels are lower than standard market rents and the projects are generally highly leveraged, each project also typically generates tax-deductible operating losses that are allocated to the limited partners.

The Company invested in nine different LIHTC fund limited partnerships from 2001 through 2017, all of which were California-focused funds that help the Company meet its obligations under the Community Reinvestment Act. We utilize the cost method of accounting for our LIHTC fund investments, under which we initially record on our balance sheet an asset that represents the total cash expected to be invested over the life of the partnership. Any commitments or contingent commitments for future investment are reflected as a liability. The income statement reflects tax credits and any other tax benefits from these investments “below the line” within our income tax provision, while the initial book value of the investment is amortized on a straight-line basis as an offset to non-interest income, over the time period in which the tax credits and tax benefits are expected to be received.

As of June 30, 2017 our total LIHTC investment book balance was $9.3 million, which includes $4.2 million in remaining commitments for additional capital contributions. There were $343,000 in tax credits derived from our LIHTC investments that were recognized during the six months ended June 30, 2017, and amortization expense of $475,000 associated with those investments was included in pre-tax income for the same time period. Our LIHTC investments are evaluated annually for potential impairment, and we have concluded that the carrying value of the investments is stated fairly and is not impaired.