Note 9 – 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 available-for-sale investment securities are as follows:

Amortized Cost And Estimated Fair Value

(dollars in thousands, unaudited)


	September 30, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government agencies	$	14,408	$	168	$	(131)	$	14,445
Mortgage-backed securities		409,922		3,483		(1,602)		411,803
State and political subdivisions		167,213		6,488		(43)		173,658
Total securities	$	591,543	$	10,139	$	(1,776)	$	599,906


	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government agencies	$	15,553	$	12	$	(353)	$	15,212
Mortgage-backed securities		414,208		398		(9,873)		404,733
State and political subdivisions		140,181		1,206		(853)		140,534
Total securities	$	569,942	$	1,616	$	(11,079)	$	560,479

At September 30, 2019 and December 31, 2018, the Company had 240 securities and 552 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)


	September 30, 2019
	Less than twelve months				Twelve months or more
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
U.S. government agencies	$	(25)	$	3,801	$	(106)	$	3,766
Mortgage-backed securities		(274)		63,536		(1,328)		115,855
State and political subdivisions		(39)		7,317		(4)		605
Total	$	(338)	$	74,654	$	(1,438)	$	120,226


	December 31, 2018
	Less than twelve months				Twelve months or more
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
U.S. government agencies	$	(54)	$	2,815	$	(299)	$	10,764
Mortgage-backed securities		(717)		69,686		(9,156)		273,230
State and political subdivisions		(249)		33,864		(604)		22,213
Total	$	(1,020)	$	106,365	$	(10,059)	$	306,207

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 September 30,					Nine months ended September 30,
	2019		2018		2019		2018
Proceeds from sales, calls and maturities of securities available for sale	$	4,255	$	11,137	$	30,895	$	13,447
Gross gains on sales, calls and maturities of securities available for sale		—		20		128		21
Gross losses on sales, calls and maturities of securities available for sale		—		(19)		(99)		(19)
Net gains on sale of securities available for sale	$	—	$	1	$	29	$	2

The amortized cost and estimated fair value of investment securities available-for-sale at September 30, 2019 and December 31, 2018 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)


	September 30, 2019
	Amortized Cost		Fair Value
Maturing within one year	$	6,385	$	6,512
Maturing after one year through five years		180,367		180,842
Maturing after five years through ten years		67,959		69,211
Maturing after ten years		117,752		122,836

Securities not due at a single maturity date:
U.S. government agencies collateralized by mortgage obligations		219,080		220,505
	$	591,543	$	599,906


	December 31, 2018
	Amortized Cost		Fair Value
Maturing within one year	$	7,726	$	7,789
Maturing after one year through five years		199,840		195,519
Maturing after five years through ten years		47,802		47,661
Maturing after ten years		83,606		83,444

Securities not due at a single maturity date:
U.S. government agencies collateralized by mortgage obligations		230,968		226,066
	$	569,942	$	560,479

At September 30, 2019, the Company’s investment portfolio included 336 “muni” bonds issued by 274 different government municipalities and agencies located within 29 different states, with an aggregate fair value of $174 million. The largest exposure to any single municipality or agency was a combined $2.2 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)


	September 30, 2019				December 31, 2018
	Amortized		Fair Market		Amortized		Fair Market
General obligation bonds	Cost		Value		Cost		Value
State of issuance
Texas	$	55,397	$	57,447	$	36,331	$	36,199
California		24,037		25,231		26,928		27,357
Washington		16,703		17,625		16,036		16,062
Illinois		7,908		8,234		6,827		6,838
Ohio		7,670		7,802		8,639		8,601
Other (22 and 22 states, respectively)		33,536		34,528		21,530		21,576
Total general obligation bonds		145,251		150,867		116,291		116,633

Revenue bonds
State of issuance
Texas		6,249		6,508		7,526		7,506
Utah		4,664		4,770		5,364		5,353
Indiana		3,141		3,293		2,641		2,654
Washington		1,741		1,864		1,751		1,780
Pennsylvania		1,697		1,738		—		—
Other (9 and 11 states, respectively)		4,470		4,618		6,608		6,608
Total revenue bonds		21,962		22,791		23,890		23,901
Total obligations of states and political subdivisions	$	167,213	$	173,658	$	140,181	$	140,534

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)


	September 30, 2019				December 31, 2018
	Amortized		Fair Market		Amortized		Fair Market
Revenue bonds	Cost		Value		Cost		Value
Revenue source:
Water	$	7,052	$	7,334	$	6,942	$	6,946
Sales Tax		3,954		4,123		2,932		2,901
College & University		3,007		3,134		2,583		2,604
Lease		1,888		1,917		2,053		2,068
Sewer		1,190		1,225		1,392		1,398
Other (13 sources)		4,871		5,058		7,988		7,984
Total revenue bonds	$	21,962	$	22,791	$	23,890	$	23,901

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 primary investment return comes from tax credits that flow through to investors. 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 for tax purposes.

The Company made investment commitments to 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 noninterest income, over the time period in which the tax credits and tax benefits are expected to be received.

As of September 30, 2019 our total LIHTC investment book balance was $4.6 million, which includes $1.4 million in remaining commitments for additional capital contributions. There were $404,000 in tax credits derived from our LIHTC investments that were recognized during the nine months ended September 30, 2019, and amortization expense of $1.351 million associated with those investments was netted against pre-tax noninterest 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.