INVESTMENT SECURITIES

The fair value of the available-for-sale investment portfolio reflected an unrealized gain of $8,896,000 at December 31, 2014 compared to an unrealized loss of $3,884,000 at December 31, 2013. The unrealized gain or loss recorded is net of $3,661,000 in tax liabilities and $1,598,000 in tax benefits as accumulated other comprehensive income within shareholders’ equity at December 31, 2014 and 2013, respectively. The Company did not have any held-to-maturity securities during the year ended December 31, 2013.

The following two tables set forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands):



	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale Securities
Debt Securities:
U.S. Government agencies	$	33,088	$	245	$	(243	)	$	33,090
Obligations of states and political subdivisions	143,343		6,266		(314		)	149,295
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	236,629		2,033		(790		)	237,872
Private label residential mortgage backed securities	3,079		1,614		—			4,693
Other equity securities	7,500		85		—			7,585
	$	423,639	$	10,243	$	(1,347	)	$	432,535



	December 31, 2014
Held-to-Maturity Securities	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Debt securities:
Obligations of states and political subdivisions	$	31,964	$	3,138	$	(6	)	$	35,096



	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale Securities
Debt Securities:
U.S. Government agencies	$	18,172	$	115	$	(84	)	$	18,203
Obligations of states and political subdivisions	162,018		2,906		(6,517		)	158,407
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	254,978		1,075		(2,344		)	253,709
Private label residential mortgage backed securities	4,344		1,047		—			5,391
Other equity securities	7,596		2		(84		)	7,514
`	$	447,108	$	5,145	$	(9,029	)	$	443,224

During 2014, the Company transferred from available-for-sale to held-to-maturity selected municipal securities having a book value of $31,346,000, and a market value of $31,509,000, including a net unrealized gain of $163,000. During 2014, accretion of this unrealized gain totaling $21,000 was recorded as interest income and the remaining balance of unamortized unrealized gains of $142,000 is included as a component of accumulated other comprehensive income in shareholders’ equity.

Proceeds and gross realized gains (losses) on investment securities for the years ended December 31, 2014, 2013, and 2012 are shown below (in thousands):



	Years Ended December 31,
	2014			2013			2012
Available-for-Sale Securities
Proceeds from sales or calls	$	79,757		$	88,146		$	39,119
Gross realized gains from sales or calls	$	1,754		$	2,728		$	2,121
Gross realized losses from sales or calls	$	(850	)	$	(1,463	)	$	(482	)

The provision for income taxes includes $372,000, $521,000, and $674,000 income tax impact from the reclassification of unrealized net gains on available-for-sale securities to realized net gains on available-for-sale securities for the years ended December 31, 2014, 2013, and 2012, respectively.

Investment securities with unrealized losses at December 31, 2014 and 2013 are summarized and classified according to the duration of the loss period as follows (in thousands):



	December 31, 2014
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-Sale Securities
Debt Securities:
U.S. Government agencies	$	10,950	$	(193	)	$	1,737	$	(50	)	$	12,687	$	(243	)
Obligations of states and political subdivisions	16,776		(89		)	15,290		(225		)	32,066		(314		)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	52,905		(420		)	31,000		(370		)	83,905		(790		)
	$	80,631	$	(702	)	$	48,027	$	(645	)	$	128,658	$	(1,347	)



	December 31, 2014
	Less than 12 Months					12 Months or More				Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Held-to-Maturity Securities
Debt Securities:
Obligations of states and political subdivisions	$	1,067	$	(6	)	$	—	$	—	$	1,067	$	(6	)



	December 31, 2013
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-Sale Securities
Debt Securities:
U.S. Government agencies	$	4,132	$	(75	)	$	968	$	(9	)	$	5,100	$	(84	)
Obligations of states and political subdivisions	89,556		(5,007		)	15,015		(1,510		)	104,571		(6,517		)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	148,853		(2,070		)	19,199		(274		)	168,052		(2,344		)
Other equity securities	7,416		(84		)	—		—			7,416		(84		)
	$	249,957	$	(7,236	)	$	35,182	$	(1,793	)	$	285,139	$	(9,029	)

We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. The portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase.

As of December 31, 2014, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all investment securities with an unrealized loss at December 31, 2014, and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at December 31, 2014 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000. Management also analyzed any securities that may have been downgraded by credit rating agencies.

For those bonds that met the evaluation criteria management obtained and reviewed the most recently published national credit ratings for those bonds. For those bonds that were municipal debt securities with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded that no credit related impairment existed.

U.S. Government Agencies - At December 31, 2014, the Company held 10 U.S. Government agency securities of which two were in a loss position for less than 12 months and one was in a loss position and has been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in U.S. Government Agencies were caused by interest rate changes. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized costs of the investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2014.

Obligations of States and Political Subdivisions - At December 31, 2014, the Company held 148 obligations of states and political subdivision securities of which eight were in a loss position for less than 12 months and 10 were in a loss position and have been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2014.

U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations - At December 31, 2014, the Company held 203 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligation securities of which 32 were in a loss position for less than 12 months and 15 in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entity and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed or supported by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2014.

Private Label Residential Mortgage Backed Securities - At December 31, 2014, the Company had a total of 20 PLRMBS with a remaining principal balance of $3,079,000 and a gross and net unrealized gain of approximately $1,614,000. None of these securities had an unrealized loss at December 31, 2014. 10 of these PLRMBS with a remaining principal balance of $2,614,000 had credit ratings below investment grade. The Company continues to perform extensive analyses on these securities.

The following table provides a roll forward for the years ended December 31, 2014 and 2013 of investment securities credit losses recorded in earnings (in thousands). The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods. Additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred on securities for which OTTI credit losses have been previously recognized.



	Years ended December 31,
	2014			2013
Beginning balance of credit losses recognized	$	800		783
Amounts related to credit loss for which an OTTI charge was not previously recognized	—			17
Change in value attributable to other factors	(53		)	—
Ending balance of credit losses recognized	$	747		$	800

The amortized cost and estimated fair value of investment securities at December 31, 2014 and 2013 by contractual maturity are shown in the two tables below (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.



	December 31, 2014
Available-for-Sale Securities	Amortized Cost		Estimated Fair Value
Within one year	$	—	$	—
After one year through five years	2,904		3,167
After five years through ten years	17,592		18,457
After ten years	122,847		127,671
	143,343		149,295
Investment securities not due at a single maturity date:
U.S. Government agencies	33,088		33,090
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	236,629		237,872
Private label residential mortgage backed securities	3,079		4,693
Other equity securities	7,500		7,585
	$	423,639	$	432,535

Investment securities with amortized costs totaling $96,490,000 and $98,701,000 and fair values totaling $100,747,000 and $99,209,000 were pledged as collateral for borrowing arrangements, public funds and for other purposes at December 31, 2014 and 2013, respectively.

December 31, 2014

Held-to-Maturity Securities

Amortized
Cost

Estimated
Fair Value

After ten years