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INVESTMENT SECURITIES
12 Months Ended
Dec. 31, 2013
INVESTMENT SECURITIES [Abstract]  
INVESTMENT SECURITIES
3. INVESTMENT SECURITIES

The amortized cost, estimated fair value and gross unrealized gains and losses of the Company’s investment securities available for sale and held to maturity at December 31, 2013 and 2012 were as follows (in thousands):

 
 
December 31, 2013
  
December 31, 2012
 
 
 
  
Gross
  
Gross
  
Estimated
  
  
Gross
  
Gross
  
Estimated
 
 
 
Amortized
  
Unrealized
  
Unrealized
  
Fair
  
Amortized
  
Unrealized
  
Unrealized
  
Fair
 
 
 
Cost
  
Gains
  
Losses
  
Value
  
Cost
  
Gains
  
Losses
  
Value
 
Available for sale:
 
  
  
  
  
  
  
  
 
U.S. Treasury securities
 
$
-
  
$
-
  
$
-
  
$
-
  
$
500
  
$
-
  
$
-
  
$
500
 
U.S. Government agency securities
  
109,315
   
-
   
(9,220
)
  
100,095
   
65,085
   
70
   
(77
)
  
65,078
 
Obligations of states and political subdivisions
  
148,664
   
8,499
   
-
   
157,163
   
155,121
   
13,314
   
-
   
168,435
 
Collateralized mortgage obligations
  
30,335
   
557
   
(788
)
  
30,104
   
87,624
   
2,148
   
(80
)
  
89,692
 
Mortgage-backed securities
  
103,332
   
19
   
(5,584
)
  
97,767
   
61,750
   
766
   
(66
)
  
62,450
 
Corporate bonds
  
15,565
   
264
   
(178
)
  
15,651
   
15,701
   
497
   
-
   
16,198
 
Total available for sale securities
  
407,211
   
9,339
   
(15,770
)
  
400,780
   
385,781
   
16,795
   
(223
)
  
402,353
 
Held to maturity:
                                
Obligations of states and political subdivisions
  
11,666
   
655
   
(87
)
  
12,234
   
8,035
   
826
   
-
   
8,861
 
Total investment securities
 
$
418,877
  
$
9,994
  
$
(15,857
)
 
$
413,014
  
$
393,816
  
$
17,621
  
$
(223
)
 
$
411,214
 

The amortized cost, contractual maturities and estimated fair value of the Company’s investment securities at December 31, 2013 (in thousands) are presented in the table below. CMOs and MBS assume maturity dates pursuant to average lives.

 
 
December 31, 2013
 
 
 
Amortized
  
Estimated
 
 
 
Cost
  
Fair Value
 
Securities available for sale:
 
  
 
Due in one year or less
 
$
12,171
  
$
12,328
 
Due from one to five years
  
131,422
   
137,011
 
Due from five to ten years
  
240,768
   
231,083
 
Due after ten years
  
22,850
   
20,358
 
Total securities available for sale
  
407,211
   
400,780
 
Securities held to maturity:
        
Due in one year or less
  
824
   
833
 
Due from one to five years
  
6,618
   
7,251
 
Due from five to ten years
  
205
   
218
 
Due after ten years
  
4,019
   
3,932
 
Total securities held to maturity
  
11,666
   
12,234
 
Total investment securities
 
$
418,877
  
$
413,014
 
 
As a member of the Federal Reserve System and the FHLB, the Bank owns FRB and FHLB stock with a book value of $1.4 million and $1.5 million, respectively, at December 31, 2013. At December 31, 2012, the Bank owned FRB and FHLB stock with a book value of $1.4 million and $1.6 million, respectively. There is no public market for these shares. The last dividends paid were 6.00% on FRB stock in December 2013 and 4.00% on FHLB stock in November 2013.

At December 31, 2013 and 2012, investment securities carried at $292 million and $286 million, respectively, were pledged for trust deposits, public funds on deposit and as collateral for the derivative swap contracts.

The proceeds from sales of securities available for sale and the associated net realized gains (losses) are shown below for the years indicated (in thousands):

 
 
2013
  
2012
  
2011
 
 
 
  
  
 
Proceeds
 
$
13,427
  
$
7,457
  
$
44,142
 
 
            
Gross realized gains
 
$
403
  
$
-
  
$
1,701
 
Gross realized losses
  
-
   
217
   
53
 
Net realized gains (losses)
 
$
403
  
$
(217
)
 
$
1,648
 
 
Information pertaining to securities with unrealized losses at December 31, 2013 and 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (in thousands):

 
 
Less than 12 months
  
12 months or longer
  
Total
 
 
 
Estimated
  
Unrealized
  
Estimated
  
Unrealized
  
Estimated
  
Unrealized
 
December 31, 2013
 
Fair value
  
Losses
  
Fair value
  
Losses
  
Fair value
  
Losses
 
U.S. Government agency securities
 
$
86,590
  
$
7,726
  
$
13,505
  
$
1,494
  
$
100,095
  
$
9,220
 
Obligations of states and political subdivisions
  
3,932
   
87
   
-
   
-
   
3,932
   
87
 
Collateralized mortgage obligations
  
2,935
   
160
   
5,713
   
628
   
8,648
   
788
 
Mortgage-backed securities
  
84,869
   
4,850
   
12,637
   
734
   
97,506
   
5,584
 
Corporate bonds
  
8,681
   
178
   
-
   
-
   
8,681
   
178
 
Total
 
$
187,007
  
$
13,001
  
$
31,855
  
$
2,856
  
$
218,862
  
$
15,857
 

 
 
Less than 12 months
  
12 months or longer
  
Total
 
 
 
Estimated
  
Unrealized
  
Estimated
  
Unrealized
  
Estimated
  
Unrealized
 
December 31, 2012
 
Fair value
  
Losses
  
Fair value
  
Losses
  
Fair value
  
Losses
 
U.S. Government agency securities
 
$
28,958
  
$
77
  
$
-
  
$
-
  
$
28,958
  
$
77
 
Collateralized mortgage obligations
  
7,878
   
80
   
-
   
-
   
7,878
   
80
 
Mortgage-backed securities
  
14,098
   
66
   
-
   
-
   
14,098
   
66
 
Total
 
$
50,934
  
$
223
  
$
-
  
$
-
  
$
50,934
  
$
223
 

The Company’s management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. All of the Company’s investment securities classified as available-for-sale or held-to-maturity are evaluated for OTTI under FASB ASC 320, “Accounting for Certain Investments in Debt and Equity Securities.” In determining OTTI under ASC 320, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an OTTI decline exists involves a high degree of subjectivity and judgment and is based on information available to management at a point in time. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When an OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI is recognized in earnings equal to the entire difference between the investment’s amortized cost and its estimated fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost less any current-period loss, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable tax benefit. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The securities at unrealized losses for twelve months or longer in the table above are all issued or guaranteed by U.S. Government agencies or sponsored enterprises. The unrealized losses resulted solely from the negative impact of higher interest rates in 2013.

Upon review of the considerations mentioned here, no OTTI was deemed to be warranted at December 31, 2013.

The Bank was a member of the Visa USA payment network and was issued Class B shares upon Visa’s initial public offering in March 2008. The Visa Class B shares are transferable only under limited circumstances until they can be converted into shares of the publicly traded class of stock. This conversion cannot happen until the settlement of certain litigation, which is indemnified by Visa members. Since its initial public offering, Visa has funded a litigation reserve based upon a change in the ratio for conversion of Visa Class B shares into Visa Class A shares. At its discretion, Visa may continue to increase the conversion rate in connection with any settlements in excess of amounts then in escrow for that purpose and reduce the conversion rate to the extent that it adds any funds to the escrow in the future. Based on the existing transfer restriction and the uncertainty of the litigation, the Company has recorded its Visa Class B shares on its balance sheet at zero value.
In 2013, the Bank sold 100,000 Visa Class B shares to another Visa USA member financial institution at a gross pre-tax gain of approximately $7.8 million which was recorded in non-interest income in the Company’s statement of operations. In conjunction with the sale, the Company entered into derivative swap contracts with the purchaser of these Visa Class B shares which provide for settlements between the purchaser and the Company based upon a change in the ratio for conversion of Visa Class B shares into Visa Class A shares.

The Company has recorded $932 thousand in operating expenses and in other liabilities on the balance sheet, representing the estimate of the Company’s exposure to the settlement of the Visa litigation or the derivative liability. A relatively high degree of subjectivity is used in estimating the fair value of this derivative liability, but management believes that the estimate of its fair value is reasonable based on current information. The present value of estimated future fees to be paid to the derivative counterparty, or carrying costs, calculated by reference to the market price of the Visa Class A shares at a fixed rate of interest are expensed as incurred. For the year ended December 31, 2013, $57 thousand in such carrying costs was expensed.

Management believes that the estimate of the Company’s exposure to the Visa indemnification and fees associated with the derivatives are adequate based on current information. However, future developments in the litigation could require potentially significant changes to the estimate.

The Company has pledged U.S. Government agency securities held in its available for sale portfolio, with a market value of approximately $2.6 million at December 31, 2013, as collateral for the derivative swap contracts.

At December 31, 2013, the Company still owned 38,638 Visa Class B shares subsequent to the sales described here. Based on the existing transfer restriction and the uncertainty of the litigation, these Visa Class B shares continue to be carried on the Company’s balance sheet at zero value. Upon termination of the existing transfer restriction and settlement of the litigation, and to the extent that the Company continues to own such Visa Class B shares in the future, the Company expects to record its Visa Class B shares at fair value.