INVESTMENT SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and approximate market value of the investment securities at the dates indicated were:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at December 31, 2013
U.S. Treasury	$	15,914	$	80	$	21	$	15,973
U.S. Government-sponsored agency securities	3,550		12		17		3,545
State and municipal	231,005		3,878		3,896		230,987
U.S. Government-sponsored mortgage-backed securities	279,299		3,926		1,973		281,252
Corporate obligations	6,374				3,636		2,738
Equity securities	1,706						1,706
Total available for sale	537,848		7,896		9,543		536,201
Held to maturity at December 31, 2013
State and municipal	145,941		62		91		145,912
U.S. Government-sponsored mortgage-backed securities	413,437		5,220		3,722		414,935
Total held to maturity	559,378		5,282		3,813		560,847
Total Investment Securities	$	1,097,226	$	13,178	$	13,356	$	1,097,048

Available for sale at December 31, 2012
U.S. Government-sponsored agency securities	$	4,475	$	165			$	4,640
State and municipal	148,187		10,025		$	18	158,194
U.S. Government-sponsored mortgage-backed securities	337,631		10,994		46		348,579
Corporate obligations	6,105				5,881		224
Equity securities	1,706						1,706
Total available for sale	498,104		21,184		5,945		513,343
Held to maturity at December 31, 2012
State and municipal	117,227		5,489		1		122,715
U.S. Government-sponsored mortgage-backed securities	243,793		11,681		15		255,459
Total held to maturity	361,020		17,170		16		378,174
Total Investment Securities	$	859,124	$	38,354	$	5,961	$	891,517

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. The historical cost of these investments totaled $490,488,000 and $22,999,000 at December 31, 2013 and 2012, respectively. Total fair value of these investments was $477,132,000 and $17,038,000, which is approximately 43.6 and 1.9 percent of the Corporation's available for sale and held to maturity investment portfolio at December 31, 2013 and 2012, respectively.

Except as discussed below, management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment (“OTTI”) is identified.

The Corporation’s management has evaluated all securities with unrealized losses for OTTI as of December 31, 2013. The evaluations are based on the nature of the securities, the extent and duration of the loss and the intent and ability of the Corporation to hold these securities either to maturity or through the expected recovery period.

In determining the fair value of the trust preferred securities, the Corporation utilizes a third party for portfolio accounting services, including market value input. The Corporation has obtained an understanding of what inputs are being used by the vendor in pricing the portfolio and how the vendor was classifying these securities based upon these inputs. From these discussions, the Corporation’s management is comfortable that the classifications are proper. The Corporation has gained trust in the data for two reasons: (a) independent spot testing of the data is conducted by the Corporation through obtaining market quotes from various brokers on a periodic basis and (b) actual gains or loss resulting from the sale of certain securities has proven the data to be accurate over time. Discount rates used in the cash flow analysis on these variable rate securities were those margins in effect at the inception of the security added to the appropriate three-month LIBOR spot rate obtained from the forward LIBOR curve used to project future principal and interest payments. These spreads ranged from .85 percent to 1.57 percent spread over LIBOR. On all but one small pool investment, the Corporation utilized Standard and Poor's to determine their fair value.

U.S. Treasury Securities

The unrealized losses on the Corporation's investment in U.S. Treasury securities were a result of interest rate changes. The Corporation expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not, the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at December 31, 2013. As noted in the table above, the U.S. Treasury securities portfolio contains unrealized losses of $21,000 on one security.

U.S. Government-Sponsored Agency Securities

The unrealized losses on the Corporation's investment in U.S. Government-Sponsored Agency securities were a result of interest rate changes. The Corporation expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not, the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at December 31, 2013. As noted in the table above, the U.S. Government-Sponsored Agency securities portfolio contains unrealized losses of $17,000 on three securities.

U.S. Government-Sponsored Mortgage-Backed Securities

The unrealized losses on the Corporation's investment in mortgage-backed securities were a result of interest rate changes. The Corporation expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Corporation does not intend to sell the investments and it is not more likely than not, the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at December 31, 2013. As noted in the table above, the mortgage-backed securities portfolio contains unrealized losses of $1,973,000 on twenty-six securities and $3,722,000 on forty-five securities in the available for sale and held to maturity portfolios, respectively. All these securities are issued by a government-sponsored entity.

State and Municipal Securities

The unrealized losses on the Corporation's investments in securities of state and political subdivisions were caused by interest rate increases. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Corporation does not intend to sell the investments and it is not more likely than not the Corporation will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Corporation does not consider those investments to be other-than-temporarily impaired at December 31, 2013. As noted in the table above, the state and political subdivision securities portfolio contains unrealized losses of $3,896,000 on 137 securities and $91,000 on forty-one securities in the available for sale and held to maturity portfolios respectively.

Corporate Obligations

The Corporation’s unrealized losses on trust preferred securities total $3.6 million on a book value of $6.4 million. On all but one small pool investment, the Corporation utilized Standard and Poor's to determine their fair value. The decline in value is attributable to temporary illiquidity and the financial crisis affecting these markets coupled with the potential credit loss resulting from the adverse change in expected cash flows. Due to the illiquidity in the market, it is unlikely that the Corporation would be able to recover its investment in these securities if the Corporation sold the securities at this time. Management has analyzed the cash flow characteristics of the securities and this analysis included utilizing the most recent trustee reports and any other relevant market information, including announcements of deferrals or defaults of trust preferred securities. The Corporation compared expected discounted cash flows, based on performance indicators of the underlying assets in the security, to the carrying value of the investment to determine if OTTI existed. The Corporation does not consider the remainder of the investment securities, which are classified as Level 3 inputs in the fair value hierarchy, to be other-than-temporarily impaired at December 31, 2013. The Corporation does not intend to sell the investment, and it is not more likely than not that the Corporation will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity.

Certain Losses Recognized on Investments

Certain debt securities have experienced fair value deterioration due to credit losses and other market factors. The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income.



	Accumulated Credit Losses in		Accumulated Credit Losses in
	2013		2012
Credit losses on debt securities held:
Balance, January 1	$	11,355	$	11,355
Additions related to other-than-temporary losses not previously recognized
Balance, December 31	$	11,355	$	11,355

The following table shows the Corporation’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2013 and 2012:



	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	Less than 12 Months				12 Months or Longer				Total
Temporarily Impaired Investment
Securities at December 31, 2013
U.S. Treasury	$	4,875	$	21					$	4,875	$	21
U.S. Government-sponsored Agency securities	3,433		17						3,433		17
State and municipal	129,109		3,931		$	767	$	56	129,876		3,987
U.S. Government-sponsored mortgage-backed securities	330,914		5,163		5,323		532		336,237		5,695
Corporate obligations					2,711		3,636		2,711		3,636
Total Temporarily Impaired Investment Securities	$	468,331	$	9,132	$	8,801	$	4,224	$	477,132	$	13,356

Temporarily Impaired Investment
Securities at December 31, 2012
State and municipal	$	4,524	$	19					$	4,524	$	19
U.S. Government-sponsored mortgage-backed securities	12,320		61						12,320		61
Corporate obligations					$	194	$	5,881	194		5,881
Total Temporarily Impaired Investment Securities	$	16,844	$	80	$	194	$	5,881	$	17,038	$	5,961

The amortized cost and fair value of securities available for sale and held to maturity at December 31, 2013 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturity Distribution at December 31, 2013
Due in one year or less	$	9,755	$	9,912	$	4,446	$	4,442
Due after one through five years	27,096		27,606		17,129		17,324
Due after five through ten years	50,169		50,739		77,012		76,860
Due after ten years	169,823		164,986		47,354		47,286
	$	256,843	$	253,243	$	145,941	$	145,912
U.S. Government-sponsored mortgage-backed securities	279,299		281,252		413,437		414,935
Equity securities	1,706		1,706
Total Investment Securities	$	537,848	$	536,201	$	559,378	$	560,847

Securities with a carrying value of approximately $373,533,000, $345,866,000 and $306,024,000 were pledged at December 31, 2013, 2012 and 2011, respectively, to secure certain deposits and securities sold under repurchase agreements, and for other purposes as permitted or required by law.

Gross gains of $487,000, $2,389,000 and $2,439,000 in 2013, 2012 and 2011, respectively, and there were no gross losses in 2013, 2012 and 2011, respectively, were realized on sales of available for sale securities.