3. INVESTMENT SECURITIES

At the time of purchase of a security, the Company designates the security as either available for sale, trading or held to maturity, depending upon investment objectives, liquidity needs and intent.

During 2014, investment securities with fair value of $48 million and unrealized loss of $3.2 million were transferred from available for sale to held to maturity. In accordance with U.S. GAAP, the securities were transferred at fair value, which became the amortized cost. The discount will be accreted to interest income over the remaining life of the security. The unrealized holding losses at the date of transfer remained in AOCI and will be amortized simultaneously against interest income. Those entries will offset or mitigate each other.

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, 2014 and 2013 were as follows (in thousands):

	December 31, 2014									December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available for sale:
U.S. Government agency securities	$	42,474	$	-	$	(897	)	$	41,577	$	109,315	$	-	$	(9,220	)	$	100,095
Obligations of states and political subdivisions		131,300		6,469		-			137,769		148,664		8,499		-			157,163
Collateralized mortgage obligations		22,105		423		(531	)		21,997		30,335		557		(788	)		30,104
Mortgage-backed securities		92,095		88		(1,264	)		90,919		103,332		19		(5,584	)		97,767
Corporate bonds		6,336		90		(18	)		6,408		15,565		264		(178	)		15,651
Total available for sale securities		294,310		7,070		(2,710	)		298,670		407,211		9,339		(15,770	)		400,780
Held to maturity:
U.S. Government agency securities		48,365		1,717		-			50,082		-		-		-			-
Obligations of states and political subdivisions		13,905		809		-			14,714		11,666		655		(87	)		12,234
Total held to maturity securities		62,270		2,526		-			64,796		11,666		655		(87	)		12,234
Total investment securities	$	356,580	$	9,596	$	(2,710	)	$	363,466	$	418,877	$	9,994	$	(15,857	)	$	413,014

The amortized cost, contractual maturities and estimated fair value of the Company’s investment securities at December 31, 2014 (in thousands) are presented in the table below. Collateralized mortgage obligations (“CMOs”) and mortgage-backed securities (“MBS”) assume maturity dates pursuant to average lives.

	December 31, 2014
	Amortized Cost		Estimated Fair Value
Securities available for sale:
Due in one year or less	$	14,746	$	14,976
Due from one to five years		151,319		155,608
Due from five to ten years		128,245		128,086
Total securities available for sale		294,310		298,670
Securities held to maturity:
Due in one year or less		1,667		1,696
Due from one to five years		5,473		5,910
Due from five to ten years		32,030		32,714
Due after ten years		23,100		24,476
Total securities held to maturity		62,270		64,796
Total investment securities	$	356,580	$	363,466

As a member of the Federal Reserve Bank (‘FRB”) and the Federal Home Loan Bank (“FHLB”), the Bank owns FRB and FHLB stock with a book value of $1.4 million and $7.2 million, respectively, at December 31, 2014. At December 31, 2013, the Bank owned FRB and FHLB stock with a book value of $1.4 million and $1.5 million, respectively. There is no public market for these shares. The last dividends paid were 6.00% on FRB stock in December 2014 and 4.05% on FHLB stock in November 2014.

At December 31, 2014 and 2013, investment securities carried at $245 million and $292 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 realized gains and losses are shown below for the years indicated (in thousands). Realized gains are also inclusive of gains on called securities.

	2014			2013		2012

Proceeds	$	20,604		$	13,427	$	7,457

Gross realized gains	$	271		$	403	$	-
Gross realized losses		(252	)		-		(217	)
Net realized gains (losses)	$	19		$	403	$	(217	)

Information pertaining to securities with unrealized losses at December 31, 2014 and 2013, 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
December 31, 2014	Estimated Fair value		Unrealized Losses		Estimated Fair value		Unrealized Losses		Estimated Fair value		Unrealized Losses
U.S. Government agency securities	$	-	$	-	$	41,577	$	897	$	41,577	$	897
Collateralized mortgage obligations		-		-		8,417		531		8,417		531
Mortgage-backed securities		-		-		81,510		1,264		81,510		1,264
Corporate bonds		-		-		2,982		18		2,982		18
Total	$	-	$	-	$	134,486	$	2,710	$	134,486	$	2,710

	Less than 12 months				12 months or longer				Total
December 31, 2013	Estimated Fair value		Unrealized Losses		Estimated Fair value		Unrealized Losses		Estimated Fair value		Unrealized 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

The corporate bonds at unrealized losses for twelve months or longer at December 31, 2014 in the table above carry investment grade ratings by all major credit rating agencies including both Moody’s and Standard & Poor’s. The unrealized losses on these bonds were a result of the current interest rate environment and the corresponding shape of the yield curve. The losses were not related to a deterioration of the quality of the issuer or any company-specific adverse events. All other securities at unrealized losses for twelve months or longer at December 31, 2014 are issued or guaranteed by U.S. Government agencies or sponsored enterprises and the related unrealized losses resulted solely from the current interest rate environment and the corresponding shape of the yield curve. The Company does not intend to sell and it is not more likely than not that the Company will be required to sell these securities prior to their recovery to a level equal to or greater than amortized cost. As such, the Company does not consider these securities to be OTTI at December 31, 2014.

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 conversion ratio 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.

During the third and fourth quarters of 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 conversion ratio of Visa Class B shares into Visa Class A shares. As such, as of December 31, 2013, the Company recorded a liability of $932 thousand, representing the fair value of this derivative.

In October 2014, the Bank received notification of a change in the conversion ratio of Visa Class B shares into Visa Class A shares. As a result of this change, in the fourth quarter of 2014 the Bank was required to make a payment of $180 thousand to the purchaser of the Visa Class B shares it sold in 2013. This payment reduced the Company’s previously recorded $932 thousand estimate of the derivative liability to $752 thousand at December 31, 2014.

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 years ended December 31, 2014 and 2013, $239 thousand and $57 thousand, respectively, in such carrying costs was expensed. The Company has pledged U.S. Government agency securities held in its available for sale portfolio, with a market value of approximately $3 million at December 31, 2014, as collateral for the derivative swap contracts.

Subjectivity has been used in estimating the fair value of both the derivative liability and the associated fees, but management believes that these fair value estimates are adequate based on available information. However, future developments in the litigation could require potentially significant changes to these estimates.

At December 31, 2014, the Company still owned 38,638 Visa Class B shares subsequent to the sales described here. 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.