Investments

9 Months Ended

Sep. 30, 2020

Investments, Debt and Equity Securities [Abstract]

Investments

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, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government agencies	$	1,774	$	82	$	$—	$	1,856
Mortgage-backed securities		336,248		11,033		(74)		347,207
State and political subdivisions		214,419		13,796		—		228,215
Total securities	$	552,441	$	24,911	$	(74)	$	577,278

	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. government agencies	$	12,125	$	124	$	(104)	$	12,145
Mortgage-backed securities		398,353		3,354		(1,318)		400,389
State and political subdivisions		181,900		6,478		(113)		188,265
Total securities	$	592,378	$	9,956	$	(1,535)	$	600,799

At September 30, 2020 and December 31, 2019, the Company had 2 securities and 198 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, 2020
	Less than twelve months				Twelve months or more
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
U.S. government agencies	$	—	$	—	$	—	$	—
Mortgage-backed securities		(74)		3,011		—		403
State and political subdivisions		—		—		—		—
Total	$	(74)	$	3,011	$	—	$	403

	December 31, 2019
	Less than twelve months				Twelve months or more
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
U.S. government agencies	$	(32)	$	3,240	$	(72)	$	2,689
Mortgage-backed securities		(494)		100,518		(824)		78,538
State and political subdivisions		(113)		19,762		—		—
Total	$	(639)	$	123,520	$	(896)	$	81,227

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,
	2020		2019		2020		2019
Proceeds from sales, calls and maturities of securities available for sale	$	3,390	$	4,225	$	29,883	$	30,895
Gross gains on sales, calls and maturities of securities available for sale		—		—		433		128
Gross losses on sales, calls and maturities of securities available for sale		—		—		(43)		(99)
Net gains on sale of securities available for sale	$	—	$	—	$	390	$	29

The amortized cost and estimated fair value of investment securities available-for-sale at September 30, 2020 and December 31, 2019 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, 2020
	Amortized Cost		Fair Value
Maturing within one year	$	3,768	$	3,806
Maturing after one year through five years		8,643		8,918
Maturing after five years through ten years		28,337		29,781
Maturing after ten years		175,445		187,565
Securities not due at a single maturity date:
Mortgage-backed securities		170,820		176,426
Collateralized mortgage obligations		165,428		170,782
	$	552,441	$	577,278

	December 31, 2019
	Amortized Cost		Fair Value
Maturing within one year	$	7,155	$	7,244
Maturing after one year through five years		17,008		17,171
Maturing after five years through ten years		33,805		34,881
Maturing after ten years		136,057		141,114
Securities not due at a single maturity date:
Mortgage-backed securities		189,554		190,488
Collateralized mortgage obligations		208,799		209,901
	$	592,378	$	600,799

At September 30, 2020, the Company’s investment portfolio included 352 “muni” bonds issued by 298 different government municipalities and agencies located within 29 different states, with an aggregate fair value of $228.2 million. The largest exposure to any single municipality or agency was a combined $4.0 million (fair value) in general obligation bonds issued by the Charter Township of Washington County (MI).

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, 2020				December 31, 2019
	Amortized		Fair Market		Amortized		Fair Market
General obligation bonds	Cost		Value		Cost		Value
State of issuance
Texas	$	77,976	$	83,305	$	59,439	$	61,519
California		30,423		32,198		23,882		25,030
Washington		23,285		25,193		23,392		24,313
Other (21 & 24 states, respectively)		52,887		56,036		49,326		50,725
Total general obligation bonds		184,571		196,732		156,039		161,587
Revenue bonds
State of issuance
Texas		7,038		7,496		6,035		6,298
Washington		2,252		2,381		1,737		1,856
California		363		381		365		380
Other (15 & 13 states, respectively)		20,195		21,225		17,724		18,144
Total revenue bonds		29,848		31,483		25,861		26,678
Total obligations of states and political subdivisions	$	214,419	$	228,215	$	181,900	$	188,265

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, 2020				December 31, 2019
	Amortized		Fair Market		Amortized		Fair Market
Revenue bonds	Cost		Value		Cost		Value
Revenue source:
Water	$	10,017	$	10,536	$	7,515	$	7,775
Sewer		4,739		4,973		4,760		4,811
Lease		4,630		4,890		3,596		3,678
Sales tax		2,089		2,179		1,949		1,995
College and university		1,987		2,054		1,232		1,290
Other (8 and 8 sources, respectively)		6,386		6,851		6,809		7,129
Total revenue bonds	$	29,848	$	31,483	$	25,861	$	26,678

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, 2020, our total LIHTC investment book balance was $3.6 million, which includes $0.2 million in remaining commitments for additional capital contributions. There were $0.4 million in tax credits derived from our LIHTC investments that were recognized during the nine months ended September 30, 2020, and amortization expense of $0.5 million associated with those investments was netted against pre-tax noninterest income for the same time period. The Company also recognized a $0.8 million gain during the same period for the sale of a single fund property that was at the end of its tax credit life. 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.