Quarterly Report (10-q)

Date : 11/08/2019 @ 7:23PM
Source : Edgar (US Regulatory)
Stock : Bank of Marin Bancorp (BMRC)
Quote : 45.73  0.2 (0.44%) @ 8:59PM
Bank of Marin Bancorp share price Chart

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________
 
Commission File Number  001-33572
Bank of Marin Bancorp
(Exact name of Registrant as specified in its charter)
California
 
20-8859754
(State or other jurisdiction of incorporation)  
 
(IRS Employer Identification No.)
504 Redwood Blvd.
 Suite 100
Novato
CA
 
94947
(Address of principal executive office)
 
(Zip Code)
 
Registrant’s telephone number, including area code:  (415) 763-4520

Not Applicable
(Former name or former address, if changes since last report)
Securities registered pursuant to 12(b) of the Act:

Title of each class
Trading symbol
Name of each exchange on which registered
Common stock, no par value
BMRC
The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes                   No  
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes                   No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.   
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark if the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.
Yes       No   

As of October 31, 2019, there were 13,588,234 shares of common stock outstanding.



TABLE OF CONTENTS
 
 
 
 
PART I
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.
 
 
 
 




Page-2



PART I       FINANCIAL INFORMATION
 
ITEM 1.  Financial Statements
 
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CONDITION 
September 30, 2019 and December 31, 2018
(in thousands, except share data; unaudited)
September 30, 2019

December 31, 2018

Assets
 

 
Cash, cash equivalents and restricted cash
$
182,486

$
34,221

Investment securities
 

 
Held-to-maturity, at amortized cost
142,213

157,206

Available-for-sale, at fair value
358,724

462,464

Total investment securities
500,937

619,670

Loans, net of allowance for loan losses of $16,240 and $15,821 at
September 30, 2019 and December 31, 2018, respectively
1,782,450

1,748,043

Bank premises and equipment, net
6,474

7,376

Goodwill
30,140

30,140

Core deposit intangible
4,906

5,571

Operating lease right-of-use assets
11,934


Interest receivable and other assets
72,744

75,871

Total assets
$
2,592,071

$
2,520,892

 
 
 
Liabilities and Stockholders' Equity
 

 

Liabilities
 

 

Deposits
 

 

Non-interest bearing
$
1,101,288

$
1,066,051

Interest bearing
 

 
Transaction accounts
162,015

133,403

Savings accounts
170,007

178,429

Money market accounts
693,137

679,775

Time accounts
98,077

117,182

Total deposits
2,224,524

2,174,840

Borrowings and other obligations
255

7,000

Subordinated debentures
2,691

2,640

Operating lease liabilities
13,665


Interest payable and other liabilities
17,871

20,005

Total liabilities
2,259,006

2,204,485

 
 
 
Stockholders' Equity
 

 

Preferred stock, no par value,
Authorized - 5,000,000 shares, none issued


Common stock, no par value,
Authorized - 30,000,000 shares;
Issued and outstanding - 13,608,525 and 13,844,353 at
September 30, 2019 and December 31, 2018, respectively
130,220

140,565

Retained earnings
196,999

179,944

Accumulated other comprehensive income (loss), net of taxes
5,846

(4,102
)
Total stockholders' equity
333,065

316,407

Total liabilities and stockholders' equity
$
2,592,071

$
2,520,892


The accompanying notes are an integral part of these consolidated financial statements (unaudited).

Page-3



BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three months ended
 
Nine months ended
(in thousands, except per share amounts; unaudited)
September 30, 2019
September 30, 2018
 
September 30, 2019
September 30, 2018
Interest income
 
 

 
 
 
Interest and fees on loans
$
21,525

$
20,284

 
$
63,208

$
58,795

Interest on investment securities
3,382

3,524

 
11,242

10,180

Interest on federal funds sold and due from banks
425

400

 
754

1,088

Total interest income
25,332

24,208

 
75,204

70,063

Interest expense
 

 

 
 

 

Interest on interest-bearing transaction accounts
101

58

 
269

158

Interest on savings accounts
17

18

 
52

54

Interest on money market accounts
855

337

 
2,406

789

Interest on time accounts
147

130

 
441

426

Interest on borrowings and other obligations
4

1

 
75

2

Interest on subordinated debentures
57

125

 
175

362

Total interest expense
1,181

669

 
3,418

1,791

Net interest income
24,151

23,539

 
71,786

68,272

Provision for loan losses
400


 
400


Net interest income after provision for loan losses
23,751

23,539

 
71,386

68,272

Non-interest income
 

 
 
 

 

Service charges on deposit accounts
439

475

 
1,403

1,407

Wealth Management and Trust Services
495

490

 
1,406

1,493

Debit card interchange fees, net
406

402

 
1,200

1,158

Merchant interchange fees, net
79

99

 
253

297

Earnings on bank-owned life insurance, net
795

227

 
970

685

Dividends on FHLB stock
202

194

 
591

582

(Losses) gains on investment securities, net

(90
)
 
55

(79
)
Other income
305

439

 
888

1,173

Total non-interest income
2,721

2,236

 
6,766

6,716

Non-interest expense
 

 
 
 

 

Salaries and related benefits
8,412

8,069

 
26,426

25,402

Occupancy and equipment
1,507

1,444

 
4,616

4,462

Depreciation and amortization
573

532

 
1,701

1,625

Federal Deposit Insurance Corporation insurance
1

186

 
354

568

Data processing
923

950

 
2,942

3,354

Professional services
580

727

 
1,701

2,836

Directors' expense
189

173

 
555

530

Information technology
279

262

 
822

795

Amortization of core deposit intangible
222

230

 
665

691

Provision for losses on off-balance sheet commitments


 
129


Other expense
1,514

1,398

 
4,733

4,298

Total non-interest expense
14,200

13,971

 
44,644

44,561

Income before provision for income taxes
12,272

11,804

 
33,508

30,427

Provision for income taxes
2,824

3,124

 
8,346

7,467

Net income
$
9,448

$
8,680

 
$
25,162

$
22,960

Net income per common share:1
 

 
 
 

 
Basic
$
0.70

$
0.63

 
$
1.84

$
1.66

Diluted
$
0.69

$
0.62

 
$
1.82

$
1.64

Weighted average shares:1
 
 

 
 

 

Basic
13,571

13,900

 
13,654

13,872

Diluted
13,735

14,110

 
13,825

14,062

Comprehensive income:
 
 
 
 


Net income
$
9,448

$
8,680

 
$
25,162

$
22,960

Other comprehensive income (loss)




 




Change in net unrealized gains or losses on available-for-sale securities
936

(2,120
)
 
13,857

(9,421
)
Reclassification adjustment for losses (gains) on available-for-sale securities in net income

90

 
(55
)
79

Net unrealized losses on securities transferred from available-for-sale to held-to-maturity


 

(278
)
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity
123

128

 
328

396

Subtotal
1,059

(1,902
)
 
14,130

(9,224
)
Deferred tax expense (benefit)
313

(562
)
 
4,182

(2,730
)
Other comprehensive income (loss), net of tax
746

(1,340
)
 
9,948

(6,494
)
Comprehensive income
$
10,194

$
7,340

 
$
35,110

$
16,466

1 Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.
The accompanying notes are an integral part of these consolidated financial statements (unaudited).

Page-4



BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three and nine months ended September 30, 2019 and 2018
(in thousands, except share data; unaudited)
Common Stock
Retained
Earnings

Accumulated Other
Comprehensive Income (Loss) ("AOCI"),
Net of Taxes

 Total

Shares1

Amount

 
Three months ended September 30, 2019
Balance at July 1, 2019
13,659,143

$
132,151

$
190,416

$
5,100

$
327,667

Net income


9,448


9,448

Other comprehensive income



746

746

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings
3,452

101



101

Stock issued under employee stock purchase plan
265

10



10

Stock issued under employee stock ownership plan
7,600

311



311

Stock-based compensation - stock options

98



98

Stock-based compensation - restricted stock

142



142

Cash dividends paid on common stock ($0.21 per share)


(2,865
)

(2,865
)
Stock purchased by directors under director stock plan
392

16



16

Stock issued in payment of director fees
2,800

117



117

Stock repurchased, net of commissions
(65,127
)
(2,726
)


(2,726
)
Balance at September 30, 2019
13,608,525

$
130,220

$
196,999

$
5,846

$
333,065

 
Three months ended September 30, 2018
Balance at July 1, 2018
13,983,642

$
146,195

$
166,281

$
(8,278
)
$
304,198

Net income


8,680


8,680

Other comprehensive loss



(1,340
)
(1,340
)
Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings
3,502





Stock issued under employee stock purchase plan
242

9



9

Stock issued under employee stock ownership plan
6,800

297



297

Stock-based compensation - stock options

124



124

Stock-based compensation - restricted stock

176



176

Cash dividends paid on common stock ($0.155 per share1)


(2,238
)

(2,238
)
Stock purchased by directors under director stock plan
478

19



19

Stock issued in payment of director fees
2,784

113



113

Stock repurchased, net of commissions
(33,090
)
(1,435
)


(1,435
)
Balance at September 30, 2018
13,964,358

$
145,498

$
172,723

$
(9,618
)
$
308,603

1 Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.

The accompanying notes are an integral part of these consolidated financial statements (unaudited).
 
BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three and nine months ended September 30, 2019 and 2018
(in thousands, except share data; unaudited)
Common Stock
Retained
Earnings

Accumulated Other
Comprehensive Income (Loss) ("AOCI"),
Net of Taxes

 Total

Shares

Amount

 
Nine months ended September 30, 2019
Balance at January 1, 2019
13,844,353

$
140,565

$
179,944

$
(4,102
)
$
316,407

Net income


25,162


25,162

Other comprehensive income



9,948

9,948

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings
40,927

572



572

Stock issued under employee stock purchase plan
1,016

40



40

Stock issued under employee stock ownership plan
23,200

935



935

Restricted stock granted
29,110





Restricted stock surrendered for tax withholdings upon vesting
(5,240
)
(220
)


(220
)
Restricted stock forfeited / cancelled
(17,325
)




Stock-based compensation - stock options

437



437

Stock-based compensation - restricted stock

806



806

Cash dividends paid on common stock ($0.59 per share)


(8,107
)

(8,107
)
Stock purchased by directors under director stock plan
591

24



24

Stock issued in payment of director fees
5,544

231



231

Stock repurchased, net of commissions
(313,651
)
(13,170
)


(13,170
)
Balance at September 30, 2019
13,608,525

$
130,220

$
196,999

$
5,846

$
333,065

 
Nine months ended September 30, 2018
Balance at January 1, 2018
13,843,084

$
143,967

$
155,544

$
(2,486
)
$
297,025

Net income


22,960


22,960

Other comprehensive loss



(6,494
)
(6,494
)
Reclassification of stranded tax effects in AOCI


638

(638
)

Stock options exercised, net of shares surrendered for cashless exercises and tax withholdings
103,652

534



534

Stock issued under employee stock purchase plan
772

28



28

Stock issued under employee stock ownership plan
22,600

898



898

Restricted stock granted
37,040





Restricted stock surrendered for tax withholdings upon vesting
(1,316
)
(45
)


(45
)
Restricted stock forfeited / cancelled
(12,056
)




Stock-based compensation - stock options

566



566

Stock-based compensation - restricted stock

848



848

Cash dividends paid on common stock ($0.46 per share1)


(6,419
)

(6,419
)
Stock purchased by directors under director stock plan
998

37



37

Stock issued in payment of director fees
5,470

204



204

Stock repurchased, net of commissions
(35,886
)
(1,539
)


(1,539
)
Balance at September 30, 2018
13,964,358

145,498

172,723

(9,618
)
308,603

1 Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.

The accompanying notes are an integral part of these consolidated financial statements (unaudited).


Page-5



BANK OF MARIN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2019 and 2018
(in thousands; unaudited)
September 30, 2019
 
September 30, 2018
Cash Flows from Operating Activities:
 
 
 
Net income
$
25,162

 
$
22,960

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Provision for loan losses
400

 

Provision for losses on off-balance sheet commitments
129

 

Noncash contribution expense to employee stock ownership plan
935

 
898

Noncash director compensation expense
226

 
219

Stock-based compensation expense
1,243

 
1,414

Amortization of core deposit intangible
665

 
691

Amortization of investment security premiums, net of accretion of discounts
1,282

 
2,172

Accretion of discount on acquired loans
(208
)
 
(531
)
Accretion of discount on subordinated debentures
51

 
92

Net change in deferred loan origination costs/fees
(345
)
 
114

(Gain) loss on sale of investment securities
(55
)
 
79

Depreciation and amortization
1,701

 
1,625

Earnings on bank-owned life insurance policies
(970
)
 
(685
)
Net change in operating assets and liabilities:
 
 
 
Interest receivable and other assets
2,287

 
2,779

Interest payable and other liabilities
(1,302
)
 
(543
)
Total adjustments
6,039

 
8,324

Net cash provided by operating activities
31,201

 
31,284

Cash Flows from Investing Activities:
 

 
 

Purchase of held-to-maturity securities

 
(1,988
)
Purchase of available-for-sale securities
(18,892
)
 
(174,617
)
Proceeds from sale of available-for-sale securities
66,081

 
16,972

Proceeds from paydowns/maturities of held-to-maturity securities
14,736

 
15,947

Proceeds from paydowns/maturities of available-for-sale securities
69,711

 
45,917

Loans originated and principal collected, net
(32,895
)
 
(50,315
)
Purchase of bank-owned life insurance policies
(1,892
)
 

Purchase of premises and equipment
(419
)
 
(615
)
Purchase of Federal Home Loan Bank stock
(616
)
 

Cash paid for low-income housing tax credit investment
(339
)
 
(389
)
Net cash provided by (used in) investing activities
95,475

 
(149,088
)
Cash Flows from Financing Activities:
 

 
 

Net increase in deposits
49,684

 
64,176

Proceeds from stock options exercised
572

 
585

Payment of tax withholdings for stock options exercised and vesting of restricted stock
(220
)
 
(96
)
Proceeds from stock issued under employee and director stock purchase plans
64

 
65

Stock repurchased, net of commissions
(13,279
)
 
(1,334
)
Repayment of Federal Home Loan Bank borrowings
(7,000
)
 

Repayment of finance lease obligations
(125
)
 

Cash dividends paid on common stock
(8,107
)
 
(6,419
)
Net provided by financing activities
21,589

 
56,977

Net increase (decrease) in cash, cash equivalents and restricted cash
148,265

 
(60,827
)
Cash, cash equivalents and restricted cash at beginning of period
34,221

 
203,545

Cash, cash equivalents and restricted cash at end of period
$
182,486

 
$
142,718

Supplemental disclosure of cash flow information:
 
 
 
Cash paid in interest
$
3,351

 
$
1,737

Cash paid in income taxes
$
9,025

 
$
4,900

Supplemental disclosure of noncash investing and financing activities:
 

 
 

Change in net unrealized gain or loss on available-for-sale securities
$
13,857

 
$
(9,421
)
Securities transferred from available-for-sale to held-to-maturity
$

 
$
27,422

Amortization of net unrealized loss on available-for-sale securities transferred to held-to-maturity
$
328

 
$
396

Subscription in low-income housing tax credit investment
$

 
$
3,000

Stock issued to employee stock ownership plan
$
935

 
$
898

Stock issued in payment of director fees
$
231

 
$
204

Repurchase of stock not yet settled
$
34

 
$
205

Restricted cash:
 
 
 
Federal Reserve Bank reserve requirements included in cash, cash equivalents and restricted cash
$
10,015

 
$
7,345

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

Page-6



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
Note 1:  Basis of Presentation
 
The consolidated financial statements include the accounts of Bank of Marin Bancorp (“Bancorp”), a bank holding company, and its wholly-owned bank subsidiary, Bank of Marin (the “Bank”), a California state-chartered commercial bank. References to “we,” “our,” “us” mean Bancorp and the Bank that are consolidated for financial reporting purposes. The accompanying unaudited consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to those rules and regulations. Although we believe that the disclosures are adequate and the information presented is not misleading, we suggest that these interim financial statements be read in conjunction with the annual financial statements and the notes thereto included in our 2018 Annual Report on Form 10-K.  In the opinion of Management, the unaudited consolidated financial statements reflect all adjustments, which are necessary for a fair presentation of the consolidated financial position, the results of operations, changes in comprehensive income, changes in stockholders’ equity, and cash flows for the periods presented. All material intercompany transactions have been eliminated. The results of these interim periods may not be indicative of the results for the full year or for any other period.

The NorCal Community Bancorp Trusts I and II, respectively (the "Trusts") were formed for the sole purpose of issuing trust preferred securities. Bancorp is not considered the primary beneficiary of the Trusts (variable interest entities), therefore the Trusts are not consolidated in our consolidated financial statements, but rather the subordinated debentures are shown as a liability on our consolidated statements of condition. Bancorp's investment in the securities of the Trusts is accounted for under the equity method and is included in interest receivable and other assets on the consolidated statements of condition. Refer to Note 6, Borrowings, for detail on the early redemption on October 7, 2018 of one subordinated debenture due to NorCal Community Bancorp Trust I.
 
The following table shows: 1) weighted average basic shares, 2) potentially dilutive weighted average common shares related to stock options and unvested restricted stock awards, and 3) weighted average diluted shares. Basic earnings per share (“EPS”) are calculated by dividing net income by the weighted average number of common shares outstanding during each period, excluding unvested restricted stock awards. Diluted EPS are calculated using the weighted average number of potentially dilutive common shares. The number of potentially dilutive common shares included in the quarterly diluted EPS is computed using the average market prices during the three months included in the reporting period under the treasury stock method. The number of potentially dilutive common shares included in year-to-date diluted EPS is a year-to-date weighted average of potentially dilutive common shares included in each quarterly diluted EPS computation. In computing diluted EPS, we exclude anti-dilutive shares such as options whose exercise prices exceed the current common stock price, as they would not reduce EPS under the treasury method. We have two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings. Under the two-class method, the difference in EPS is nominal for these participating securities.
 
Three months ended
 
Nine months ended
(in thousands, except per share data)1
September 30, 2019
September 30, 2018
 
September 30, 2019
September 30, 2018
Weighted average basic shares outstanding
13,571

13,900

 
13,654

13,872

Potentially dilutive common shares related to:
 
 
 
 
 
Stock options
141

177

 
146

158

Unvested restricted stock awards
23

33

 
25

32

Weighted average diluted shares outstanding
13,735

14,110

 
13,825

14,062

Net income
$
9,448

$
8,680

 
$
25,162

$
22,960

Basic EPS
$
0.70

$
0.63

 
$
1.84

$
1.66

Diluted EPS
$
0.69

$
0.62

 
$
1.82

$
1.64

Weighted average anti-dilutive shares not included in the calculation of diluted EPS
39


 
34

2


1 Share and per share data have been adjusted to reflect the two-for-one stock split effective November 27, 2018.

Page-7



Note 2: Recently Adopted and Issued Accounting Standards

Accounting Standards Adopted in 2019

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) (the "new lease accounting standard"). The amendments in this ASU intend to increase transparency and comparability among organizations by recognizing an operating lease or finance lease right-of-use asset for the lease term, and a lease liability, which is a lessee's obligation to make lease payments, recorded based on discounting future lease payments under the lease terms. This ASU generally applies to leasing arrangements exceeding a twelve-month term. ASU 2016-02 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2018 and requires a modified retrospective method of adoption. In July 2018, the FASB issued two amendments to ASU 2016-02: ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which provided various corrections and clarifications to ASU 2016-02; and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which permitted optional transition methods and provided lessors with a practical expedient for separating lease and non-lease components of a lease. The ASU allowed entities to apply either a modified retrospective approach at the beginning of the earliest period presented or at the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings, which we adopted.

As a result of the adoption of the ASU on January 1, 2019, we recorded operating and finance lease right-of-use assets totaling $13.4 million, net of deferred rent and unaccreted lease incentives, operating and finance lease liabilities totaling $15.4 million, and no cumulative-effect adjustments to retained earnings. Under the standard's transition guidance, we elected the package of practical expedients, which allowed us to carry forward existing lease classifications and did not require us to reassess initial direct costs for any existing leases. In addition, we elected the hindsight practical expedient when determining the lease term (i.e., considering whether we are reasonably certain to exercise options to extend or terminate the lease). We made accounting policy elections not to separate non-lease components from lease components and to exclude short-term leases (i.e., lease term of 12 months or less at the commencement date) from right-of-use assets and lease liabilities for all lease classifications. See Note 8, Commitments and Contingencies for further information.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This update simplifies the accounting for share-based payment transactions for acquiring goods and services from nonemployees, applying some of the same requirements as employee share-based payment transactions. The ASU will not affect the accounting for share-based payment awards to nonemployee directors, which will continue to be treated as employee share-based transactions under the current standards. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We adopted the requirements of this ASU effective January 1, 2019, which did not impact our financial condition or results of operations, as it is not our practice to issue stock-based awards to pay for goods and services from nonemployees, other than nonemployee directors.

In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. This update adds an alternative fifth permissible U.S. benchmark rate to be used for hedge accounting purposes. As we have already adopted the amendments in ASU 2017-12, which changed both the designation and measurement guidance for qualifying hedging relationships, the amendments in ASU 2018-16 are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The amendments should be adopted on a prospective basis for qualifying new or re-designated hedging relationships entered into on or after the date of adoption. We adopted this ASU effective January 1, 2019, which did not impact our financial condition or results of operations, as we did not have new or re-designated hedging relationships since adoption.
Accounting Standards Not Yet Effective
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard will replace today's "incurred loss" model with a "current expected credit loss" ("CECL") model. The CECL model will apply to estimated credit losses on loans receivable, held-to-maturity debt securities, unfunded loan commitments, and certain other financial assets measured at amortized cost. The CECL model is based on lifetime expected losses, rather than incurred losses, and requires the recognition of credit loss expense in the consolidated statement of income and a related allowance for credit losses on the consolidated statement of condition at the time of origination or purchase of a loan receivable or held-to-maturity debt

Page-8



security. Likewise, subsequent changes in this estimate are recorded through credit loss expense and related allowance. In addition, CECL will modify the accounting for purchased loans and will require that an allowance for credit losses be established at the date of acquisition. However, for purchased financial assets with a more­-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through credit loss expense. The CECL model requires the use of not only relevant historical experience and current conditions, but reasonable and supportable forecasts of future events and circumstances, incorporating a broad range of information in developing credit loss estimates, which could result in significant changes to both the timing and amount of credit loss expense and allowance. Under ASU 2016-13, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost. Estimated credit losses are recorded through a credit loss expense and an allowance, rather than a write-down of the investment. Changes in fair value that are not credit-related will continue to be recorded in other comprehensive income. The ASU also expands the disclosure requirements regarding assumptions, models, and methods for estimating the allowance for loan losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

While we believe the change from an incurred loss model to a CECL model has the potential to increase the allowance for credit losses, which will result in a one-time cumulative-effect adjustment to retained earnings at the adoption date, the full impact to our financial condition or results of operations cannot be quantified at this time as we continue to evaluate the applicability and validity of our methodologies and assumptions. In addition, any estimate could be significantly influenced by the composition and risk characteristics of the loan portfolio as well as prevailing economic conditions and forecasts as of the adoption date. Our cross-functional team and our third-party CECL model vendor continue to make progress and we will be ready for adoption on January 1, 2020. Early implementation activities focused on, among other things, capturing and validating data, segmenting the loan portfolio, evaluating various credit loss estimation methodologies, sourcing tools to forecast future economic conditions, and running multiple loan loss driver analyses that correlate our credit loss experience with one or more economic factors. Based on these activities, we determined that our primary credit loss methodology will utilize a discounted cash flow approach that considers the probability of default and loss given default. Continuing implementation activities include refining estimated credit loss model assumptions, model validation, evaluating the qualitative factor framework and assumptions, drafting policies and disclosures, and evaluating, documenting and testing internal controls. In addition, we will continue to run parallel tests throughout 2019 to identify opportunities for enhancing our assumptions as the processes, internal controls and policies are finalized.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU remove, modify, and add disclosure requirements for the fair value reporting of assets and liabilities. The modifications and additions relate to Level 3 fair value measurements at the end of the reporting period. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities should disclose and describe the range and weighted-average of significant observable inputs used to develop Level 3 fair value measurements prospectively. Early adoption is permitted. Entities making this election are permitted to early adopt the eliminated or modified disclosure requirements and delay the adoption of all the new disclosure requirements until the ASU's effective date. As the ASU’s requirements only relate to disclosures, the amendments will not impact our financial condition or results of operations.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software, regardless of whether they convey a license to the hosted software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by this ASU. The amendments are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. An entity has the option to apply amendments in the ASU either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted, including adoption in an interim period. We do not expect that the ASU will have a material impact on our financial condition or results of operations.
In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements. This ASU addresses two lessor implementation issues and clarifies that lessees and lessors are exempt from certain interim

Page-9



disclosure requirements associated with adopting ASU 2016-02. The amendments related to the lessor implementation issues are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early application is permitted. As the ASU's amendments applicable to us only relate to disclosures, the adoption of ASU 2019-01 will not impact our financial condition or results of operations.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments that clarifies and improves areas of guidance related to recently issued standards on credit losses, hedging and recognition and measurement. The provisions of this ASU are effective January 1, 2020 and contain various methods of adoption. We do not expect that the ASU will have a material impact on our financial condition or results of operations.
In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. This ASU allows an option for entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible financial assets measured at amortized cost basis upon adoption of the credit loss standards. This amendment provides relief for those entities electing the fair value option on newly originated or purchased financial assets, while maintaining existing similar financial assets at amortized cost, avoiding the requirement to maintain dual measurement methods for similar assets. The fair value option does not apply to held-to-maturity debt securities. The effective date for this ASU is the same as for ASU 2016-13, as discussed above. We will evaluate this ASU in conjunction with ASU 2016-13 to determine its impact on our financial condition and results of operations.
Note 3:  Fair Value of Assets and Liabilities
 
Fair Value Hierarchy and Fair Value Measurement
 
We group our assets and liabilities that are measured at fair value in three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
 
Level 1: Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.
 
Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.
 
Level 3: Valuations are based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Values are determined using pricing models and discounted cash flow models and may include significant Management judgment and estimation.

Transfers between levels of the fair value hierarchy are recognized through our monthly and/or quarterly valuation process in the reporting period during which the event or circumstances that caused the transfer occurred. No such transfers occurred during the first nine months of 2019 or 2018.

The following table summarizes our assets and liabilities that were required to be recorded at fair value on a recurring basis.

Page-10



(in thousands)  
Description of Financial Instruments
Carrying Value

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs 
(Level 3)

Measurement Categories: Changes in Fair Value Recorded In1
September 30, 2019
 

 
 

 

 
Securities available-for-sale:
 
 
 
 
 
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies
$
245,603

$

$
245,603

$

OCI
SBA-backed securities
36,943


36,943


OCI
Debentures of government sponsored agencies
23,822


23,822


OCI
Privately-issued collateralized mortgage obligations
119


119


OCI
Obligations of state and political subdivisions
50,232


50,232


OCI
Corporate bonds
2,005


2,005


OCI
Derivative financial assets (interest rate contracts)




NI
Derivative financial liabilities (interest rate contracts)
1,603


1,603


NI
December 31, 2018
 

 
 

 

 
Securities available-for-sale:
 

 
 

 

 
Mortgage-backed securities and collateralized mortgage obligations issued by U.S. government-sponsored agencies
$
278,403

$

$
278,403

$

OCI
SBA-backed securities
50,781


50,781


OCI
Debentures of government sponsored agencies
53,018


53,018


OCI
Privately-issued collateralized mortgage obligations
297


297


OCI
Obligations of state and political subdivisions
77,960


77,960


OCI
Corporate bonds
2,005


2,005


OCI
Derivative financial assets (interest rate contracts)
161


161


NI
Derivative financial liabilities (interest rate contracts)
375


375


NI

 1 Other comprehensive income ("OCI") or net income ("NI").

Securities available-for-sale are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of securities available-for-sale. If quoted market prices are not available, we obtain pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity and credit spreads (Level 2).   Level 2 securities include obligations of state and political subdivisions, U.S. agencies or government-sponsored agencies' debt securities, mortgage-backed securities, government agency-issued, privately-issued collateralized mortgage obligations, and corporate bonds. As of September 30, 2019 and December 31, 2018, there were no Level 1 or Level 3 securities.

Securities held-to-maturity may be written down to fair value (determined using the same techniques discussed above for securities available-for-sale) as a result of other-than-temporary impairment, and we did not record any write-downs during the nine months ended September 30, 2019 or September 30, 2018.
 
On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date.  Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction.  Valuation adjustments may be made to reflect both our own credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. Level 2 inputs for the valuations are limited to observable market prices for London Interbank Offered Rate ("LIBOR") and Overnight Index Swap ("OIS") rates (for the very short term), quoted prices for LIBOR futures contracts, observable market prices for LIBOR and OIS swap rates, and one-month and three-month LIBOR basis spreads at commonly quoted intervals.  Mid-market pricing of the inputs is used as a practical expedient in the fair value measurements.  We project spot rates at reset days specified by each swap contract to determine future cash flows, then discount to present value using either LIBOR or OIS curves depending

Page-11



on whether the swap positions are fully collateralized as of the measurement date.  When the value of any collateral placed with counterparties is less than the interest rate derivative liability, a credit valuation adjustment ("CVA") is applied to reflect the credit risk we pose to counterparties.  We have used the spread between the Standard & Poor's BBB rated U.S. Bank Composite rate and LIBOR for the closest maturity term corresponding to the duration of the swaps to derive the CVA. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to us. For further discussion on our methodology in valuing our derivative financial instruments, refer to Note 9, Derivative Financial Instruments and Hedging Activities.

Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans that are collateral dependent and other real estate owned ("OREO"). As of September 30, 2019 and December 31, 2018, we did not carry any assets measured at fair value on a non-recurring basis.

Disclosures about Fair Value of Financial Instruments
 
The table below is a summary of fair value estimates for financial instruments as of September 30, 2019 and December 31, 2018, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note). The carrying amounts in the following table are recorded in the consolidated statements of condition under the indicated captions. Further, we have not disclosed the fair value of financial instruments specifically excluded from disclosure requirements such as bank-owned life insurance policies ("BOLI") and non-maturity deposit liabilities. Additionally, we hold shares of FHLB stock and Visa Inc. Class B common stock, both recorded at cost, as there was no impairment or changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer as of September 30, 2019 and December 31, 2018. The values are discussed in Note 4, Investment Securities.
 
September 30, 2019
 
December 31, 2018
(in thousands)
Carrying Amounts

Fair Value

Fair Value Hierarchy
 
Carrying Amounts

Fair Value

Fair Value Hierarchy
Financial assets (recorded at amortized cost)
 
 
 
 
 
 
Cash and cash equivalents
$
182,486

$
182,486

Level 1
 
$
34,221

$
34,221

Level 1
Investment securities held-to-maturity
142,213

145,118

Level 2
 
157,206

153,894

Level 2
Loans, net
1,782,450

1,792,192

Level 3
 
1,748,043

1,700,971

Level 3
Interest receivable
7,037

7,037

Level 2
 
8,292

8,292

Level 2
Financial liabilities (recorded at amortized cost)
 

 
 
 
 

 
Time deposits
98,077

97,150

Level 2
 
117,182

116,584

Level 2
Federal Home Loan Bank overnight borrowings


Level 2
 
7,000

7,000

Level 2
Subordinated debentures
2,691

3,094

Level 3
 
2,640

3,268

Level 3
Interest payable
120

120

Level 2
 
104

104

Level 2


Commitments - The value of unrecognized financial instruments is estimated based on the fee income associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value. The fair value of commitment fees was not material as of September 30, 2019 or December 31, 2018.

Note 4:  Investment Securities
 
Our investment securities portfolio consists of 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 enterprise securities ("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, and privately issued CMOs, as reflected in the following table:

Page-12



 
September 30, 2019
 
December 31, 2018
 
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
$
80,166

$
81,308

$
1,357

$
(215
)

$
88,606

$
85,804

$
7

$
(2,809
)
SBA-backed securities
8,001

8,360

359


 
8,720

8,757

37


CMOs issued by FNMA
10,679

10,981

302


 
11,447

11,327


(120
)
CMOs issued by FHLMC
32,568

33,524

966

(10
)
 
33,583

33,021

8

(570
)
CMOs issued by GNMA
3,757

3,810

53


 
3,739

3,769

30


Obligations of state and
political subdivisions
7,042

7,135

93


 
11,111

11,216

128

(23
)
Total held-to-maturity
142,213

145,118

3,130

(225
)

157,206

153,894

210

(3,522
)
Available-for-sale:
 
 
 
 
 
 
 
 
 
Securities of U.S. government-sponsored enterprises:
 
 
 
 
 
 
 
 
 
MBS pass-through securities issued by FHLMC and FNMA
62,654

64,290

1,683

(47
)

95,339

94,467

358

(1,230
)
SBA-backed securities
36,014

36,943

990

(61
)
 
50,722

50,781

465

(406
)
CMOs issued by FNMA
24,168

24,560

392



28,275

28,079

134

(330
)
CMOs issued by FHLMC
138,731

144,067

5,374

(38
)

145,979

144,836

454

(1,597
)
CMOs issued by GNMA
12,621

12,686

66

(1
)

11,294

11,021

1

(274
)
Debentures of government- sponsored agencies
23,069

23,822

753



52,956

53,018

185

(123
)
Privately issued CMOs
120

119


(1
)

295

297

2


Obligations of state and
political subdivisions
48,993

50,232

1,292

(53
)

79,046

77,960

134

(1,220
)
Corporate bonds
1,999

2,005

7

(1
)

2,004

2,005

15

(14
)
Total available-for-sale
348,369

358,724

10,557

(202
)

465,910

462,464

1,748

(5,194
)
Total investment securities
$
490,582

$
503,842

$
13,687

$
(427
)

$
623,116

$
616,358

$
1,958

$
(8,716
)


The amortized cost and fair value of investment debt securities by contractual maturity at September 30, 2019 and December 31, 2018 are shown in the following table 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, 2019
 
December 31, 2018
 
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
$
5,327

$
5,335

 
$
5,475

$
5,478

 
$
6,194

$
6,182

 
$
9,863

$
9,795

After one but within five years
2,269

2,318

 
57,102

58,144

 
5,481

5,492

 
84,871

84,435

After five years through ten years
56,183

58,018

 
188,601

195,869

 
59,231

58,120

 
252,274

250,055

After ten years
78,434

79,447

 
97,191

99,233

 
86,300

84,100

 
118,902

118,179

Total
$
142,213

$
145,118

 
$
348,369

$
358,724

 
$
157,206

$
153,894

 
$
465,910

$
462,464



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, 2019
September 30, 2018
 
September 30, 2019
September 30, 2018
Available-for-sale:
 
 
 
 
 
Sales proceeds
$

$
11,966

 
$
66,081

$
16,972

Gross realized gains


 
214

27

Gross realized losses

(90
)
 
(159
)
(106
)






Page-13




Pledged investment securities are shown in the following table.
(in thousands)
September 30, 2019
December 31, 2018
Pledged to the State of California:
 
 
Secure public deposits in compliance with the Local Agency Security Program
$
84,574

$
125,696

Collateral for trust deposits
745

734

Total investment securities pledged to the State of California
$
85,319

$
126,430

Collateral for Wealth Management and Trust Services checking account
$
625

$
2,000



Other-Than-Temporarily Impaired ("OTTI") Debt Securities
 
There were 37 and 229 securities in unrealized loss positions at September 30, 2019 and December 31, 2018, respectively. Those securities are summarized and classified according to the duration of the loss period in the tables below:
September 30, 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
$
9,063

$
(24
)
 
$
23,799

$
(191
)
 
$
32,862

$
(215
)
CMOs issued by FHLMC


 
1,866

(10
)
 
1,866

(10
)
Total held-to-maturity
9,063

(24
)
 
25,665

(201
)
 
34,728

(225
)
Available-for-sale:
 
 
 
 
 
 
 
 
MBS pass-through securities issued by FHLMC and FNMA
269

(1
)
 
7,628

(46
)
 
7,897

(47
)
SBA-backed securities


 
2,785

(61
)
 
2,785

(61
)
CMOs issued by FNMA


 


 


CMOs issued by FHLMC
7,735

(13
)
 
9,722

(25
)
 
17,457

(38
)
CMOs issued by GNMA


 
130

(1
)
 
130

(1
)
Privately issued CMOs
79

(1
)
 


 
79

(1
)
Obligations of state and political subdivisions
6,936

(49
)
 
966

(4
)
 
7,902

(53
)
Corporate bonds


 
504

(1
)
 
504

(1
)
Total available-for-sale
15,019

(64
)
 
21,735

(138
)
 
36,754

(202
)
Total temporarily impaired securities
$
24,082

$
(88
)
 
$
47,400

$
(339
)
 
$
71,482

$
(427
)

Page-14



December 31, 2018
< 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
$
198

$
(9
)
 
$
83,990

$
(2,800
)
 
$
84,188

$
(2,809
)
CMOs issued by FNMA


 
11,327

(120
)
 
11,327

(120
)
CMOs issued by FHLMC
2,880

(3
)
 
28,171

(567
)
 
31,051

(570
)
Obligations of state and political subdivisions


 
3,565

(23
)
 
3,565

(23
)
Total held-to-maturity
3,078

(12
)
 
127,053

(3,510
)
 
130,131

(3,522
)
Available-for-sale:




 




 




MBS pass-through securities issued by FHLMC and FNMA
19,971

(128
)
 
50,077

(1,102
)
 
70,048

(1,230
)
SBA-backed securities
13,175

(122
)
 
20,123

(284
)
 
33,298

(406
)
CMOs issued by FNMA
2,345

(8
)
 
16,138

(322
)
 
18,483

(330
)
CMOs issued by FHLMC
24,094

(330
)
 
74,243

(1,267
)
 
98,337

(1,597
)
CMOs issued by GNMA
1,666

(7
)
 
9,112

(267
)
 
10,778

(274
)
Debentures of government- sponsored agencies
4,992

(8
)
 
11,349

(115
)
 
16,341

(123
)
Obligations of state and political subdivisions
15,290

(54
)
 
52,804

(1,166
)
 
68,094

(1,220
)
Corporate Bonds


 
1,004

(14
)
 
1,004

(14
)
Total available-for-sale
81,533

(657
)
 
234,850

(4,537
)
 
316,383

(5,194
)
Total temporarily impaired securities
$
84,611

$
(669
)
 
$
361,903

$
(8,047
)
 
$
446,514

$
(8,716
)


As of September 30, 2019, the investment portfolio included 25 investment securities that had been in a continuous loss position for twelve months or more and 12 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.
Other temporarily impaired securities, including obligations of state and political subdivisions and corporate bonds, were deemed credit worthy after our internal analyses of the issuers’ latest financial information, 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 these securities was primarily driven by factors other than credit, such as changes in market interest rates and liquidity spreads subsequent to purchase. At September 30, 2019, Management determined that it did not intend to sell investment securities with unrealized losses, and it is more likely than not that we will not be required to sell any of the 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, 2019.
Non-Marketable Securities

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 $11.7 million and $11.1 million of FHLB stock included in other assets on the consolidated statements of condition at September 30, 2019 and December 31, 2018, 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, 2019 and December 31, 2018. On October 24, 2019, FHLB announced a cash dividend for the second quarter of 2019 at an annualized dividend rate of 7.00% to be distributed in mid-November 2019. Cash dividends paid on FHLB capital stock are recorded as non-interest income.

Page-15




As a member bank of Visa U.S.A., we held 10,439 shares of Visa Inc. Class B common stock at September 30, 2019 and December 31, 2018. 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 at September 30, 2019 and 1.6298 at December 31, 2018, 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 $2.9 million and $2.2 million at September 30, 2019 and December 31, 2018, 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 $4.2 million and $4.6 million recorded in other assets as of September 30, 2019 and December 31, 2018, respectively. In the first nine months of 2019, we recognized $480 thousand of low-income housing tax credits and other tax benefits, offset by $381 thousand of amortization expense of low-income housing tax credit investment, as a component of income tax expense. As of September 30, 2019, our unfunded commitments for these low-income housing tax credit funds totaled $2.8 million. We did not recognize any impairment losses on these low-income housing tax credit investments during the first nine months of 2019 or 2018, as the value of the future tax benefits exceeds the carrying value of the investments.

Note 5:  Loans and Allowance for Loan Losses

Credit Quality of Loans
 
The following table shows outstanding loans by class and payment aging as of September 30, 2019 and December 31, 2018.
Loan Aging Analysis by Class
(in thousands)
Commercial and industrial

Commercial real estate, owner-occupied

Commercial real estate, investor

Construction

Home equity

Other residential

Installment and other consumer

Total

September 30, 2019
 

 

 

 

 

 

 

 

 30-59 days past due
$

$

$

$

$
440

$

$
153

$
593

 60-89 days past due




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94