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.

In 2014, investment securities with a fair value of $48 million and an 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, equal to the unrealized holding losses at the date of transfer, is being accreted to interest income over the remaining life of the security. The unrealized holding losses at the date of transfer remained in AOCI and are being amortized simultaneously against interest income. Those amounts 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 June 30, 2016 and December 31, 2015 were as follows (in thousands):

	June 30, 2016									December 31, 2015
	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	$	5,000	$	-	$	-		$	5,000	$	28,977	$	2	$	(463	)	$	28,516
Obligations of states and political subdivisions		81,396		4,000		-			85,396		100,215		4,467		-			104,682
Collateralized mortgage obligations		18,945		179		(15	)		19,109		15,795		2		(248	)		15,549
Mortgage-backed securities		94,702		2,189		-			96,891		93,719		39		(1,316	)		92,442
Corporate bonds		9,000		-		(285	)		8,715		6,000		-		(90	)		5,910
Total available for sale securities		209,043		6,368		(300	)		215,111		244,706		4,510		(2,117	)		247,099
Held to maturity:
U.S. Government agency securities		12,684		820		-			13,504		43,570		1,450		-			45,020
Obligations of states and political subdivisions		10,782		556		-			11,338		11,739		536		-			12,275
Corporate bonds		6,000		169		-			6,169		6,000		7		(30	)		5,977
Total held to maturity securities		29,466		1,545		-			31,011		61,309		1,993		(30	)		63,272
Total investment securities	$	238,509	$	7,913	$	(300	)	$	246,122	$	306,015	$	6,503	$	(2,147	)	$	310,371

At June 30, 2016 and December 31, 2015, investment securities carried at $215 million and $261 million, respectively, were pledged primarily 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 June 30, 2016 (in thousands) are presented in the table below. Collateralized mortgage obligations (“CMOs”) and mortgage-backed securities (“MBS”) assume maturity dates pursuant to average lives.

	June 30, 2016
	Amortized Cost		Fair Value
Securities available for sale:
Due in one year or less	$	21,694	$	21,979
Due from one to five years		134,731		139,477
Due from five to ten years		52,618		53,655
Total securities available for sale		209,043		215,111
Securities held to maturity:
Due in one year or less		2,586		2,699
Due from one to five years		1,624		1,693
Due from five to ten years		14,126		14,672
Due after ten years		11,130		11,947
Total securities held to maturity		29,466		31,011
Total investment securities	$	238,509	$	246,122

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2016		2015			2016		2015

Proceeds	$	-	$	6,472		$	-	$	7,003

Gross realized gains	$	18	$	175		$	24	$	201
Gross realized losses		-		(15	)		-		(15	)
Net realized gains	$	18	$	160		$	24	$	186

Information pertaining to securities with unrealized losses at June 30, 2016 and December 31, 2015, 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
June 30, 2016	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Collateralized mortgage obligations	$	-	$	-		$	1,999	$	(15	)	$	1,999	$	(15	)
Corporate bonds		2,955		(45	)		5,760		(240	)		8,715		(285	)
Total	$	2,955	$	(45	)	$	7,759	$	(255	)	$	10,714	$	(300	)

	Less than 12 months					12 months or longer					Total
December 31, 2015	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Government agency securities	$	16,744	$	(233	)	$	9,770	$	(230	)	$	26,514	$	(463	)
Collateralized mortgage obligations		1,831		(4	)		8,200		(244	)		10,031		(248	)
Mortgage-backed securities		66,804		(884	)		17,936		(432	)		84,740		(1,316	)
Corporate bonds		8,880		(120	)		-		-			8,880		(120	)
Total	$	94,259	$	(1,241	)	$	35,906	$	(906	)	$	130,165	$	(2,147	)

The CMOs with unrealized losses for twelve months or longer at June 30, 2016 are issued or guaranteed by U.S. Government agencies or sponsored enterprises. The corporate bonds with unrealized losses for twelve months or longer at June 30, 2016 carry investment grade ratings by all major credit rating agencies including Moody’s and Standard & Poor’s. In all cases, the unrealized losses on these bonds were a result of overall market conditions including the current interest rate environment and general market liquidity. The losses were not related to a deterioration of the quality of the issuer or any company-specific adverse events. 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 OTTI was present at June 30, 2016.

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.

In conjunction with the sale of Visa Class B shares in 2013, 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. The Company’s recorded liability representing the fair value of the derivative was $752 thousand at June 30, 2016 and December 31, 2015.

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 June 30, 2016 and 2015, $82 thousand and $71 thousand, respectively, in such carrying costs was expensed. For the six months ended June 30, 2016 and 2015, $156 thousand and $141 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 June 30, 2016 and December 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 June 30, 2016 and December 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.