3. INVESTMENT SECURITIES

At the time of purchase of a security, the Company designates the security as either available for sale or held to maturity, depending upon investment objectives, liquidity needs and intent. Securities held to maturity are stated at cost, adjusted for premium amortized or discount accreted, if any. The Company has the positive intent and ability to hold such securities to maturity. Securities available for sale are stated at estimated fair value. Unrealized gains and losses are excluded from income and reported net of tax in AOCI as a separate component of stockholders’ equity until realized. Changes in unrealized gains and losses are reported, net of tax, in the consolidated statements of comprehensive income. Interest earned on securities is included in interest income. Realized gains and losses on the sale of securities are reported in the consolidated statements of income and determined using the adjusted cost of the specific security sold.

During the full year of 2014, investment securities with a 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, fair value and gross unrealized gains and losses of the Company’s investment securities available for sale and held to maturity at March 31, 2015 and December 31, 2014 were as follows (in thousands):

	March 31, 2015									December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale:
U.S. Government agency securities	$	38,974	$	8	$	(273	)	$	38,709	$	42,474	$	-	$	(897	)	$	41,577
Obligations of states and political subdivisions		127,440		6,484		-			133,924		131,300		6,469		-			137,769
Collateralized mortgage obligations		21,470		273		(352	)		21,391		22,105		423		(531	)		21,997
Mortgage-backed securities		91,211		388		(515	)		91,084		92,095		88		(1,264	)		90,919
Corporate bonds		6,324		142		(17	)		6,449		6,336		90		(18	)		6,408
Total available for sale securities		285,419		7,295		(1,157	)		291,557		294,310		7,070		(2,710	)		298,670
Held to maturity:
U.S. Government agency securities		48,433		2,431		-			50,864		48,365		1,717		-			50,082
Obligations of states and political subdivisions		13,758		792		-			14,550		13,905		809		-			14,714
Total held to maturity securities		62,191		3,223		-			65,414		62,270		2,526		-			64,796
Total investment securities	$	347,610	$	10,518	$	(1,157	)	$	356,971	$	356,580	$	9,596	$	(2,710	)	$	363,466

At March 31, 2015 and December 31, 2014, investment securities carried at $246 million and $245 million, respectively, were pledged for public funds on deposit and as collateral for the Company’s derivative swap contracts.

The amortized cost, contractual maturities and fair value of the Company’s investment securities at March 31, 2015 (in thousands) are presented in the table below. Collateralized mortgage obligations (“CMOs”) and mortgage-backed securities (“MBS”) assume maturity dates pursuant to average lives.

	March 31, 2015
	Amortized Cost		Fair Value
Securities available for sale:
Due in one year or less	$	28,100	$	28,595
Due from one to five years		143,494		147,769
Due from five to ten years		113,825		115,193
Total securities available for sale		285,419		291,557
Securities held to maturity:
Due in one year or less		1,630		1,644
Due from one to five years		5,392		5,792
Due from five to ten years		32,073		33,256
Due after ten years		23,096		24,722
Total securities held to maturity		62,191		65,414
Total investment securities	$	347,610	$	356,971

The proceeds from sales of securities available for sale and the associated realized gains and losses are shown below for the periods indicated (in thousands). Realized gains are also inclusive of gains on called securities.

	Three Months Ended March 31,
	2015		2014

Proceeds	$	531	$	-

Gross realized gains	$	26	$	-
Gross realized losses		-		-
Net realized gains	$	26	$	-

Information pertaining to securities with unrealized losses at March 31, 2015 and December 31, 2014, 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
March 31, 2015	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Government agency securities	$	13,919	$	(60	)	$	19,787	$	(213	)	$	33,706	$	(273	)
Collateralized mortgage obligations		-		-			8,476		(352	)		8,476		(352	)
Mortgage-backed securities		20,712		(115	)		27,159		(400	)		47,871		(515	)
Corporate bonds		-		-			2,983		(17	)		2,983		(17	)
Total	$	34,631	$	(175	)	$	58,405	$	(982	)	$	93,036	$	(1,157	)

	Less than 12 months				12 months or longer					Total
December 31, 2014	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			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	)

The corporate bonds with unrealized losses for twelve months or longer at March 31, 2015 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 with unrealized losses for twelve months or longer at March 31, 2015 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. Management has determined that no other-than-temporary impairment (“OTTI”) was present at March 31, 2015.

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 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 income. 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.

In the fourth quarter of 2014, the Bank received notification of a change in the conversion ratio of Visa Class B shares into Visa Class A shares and was required to make a payment of $180 thousand to the purchaser of the Visa Class B shares it sold in 2013. The Company’s recorded liability representing the fair value of the derivative was $752 thousand at March 31, 2015 and 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 three months ended March 31, 2015 and 2014, $70 thousand and $59 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 March 31, 2015, 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 March 31, 2015, 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.