Note 6. Investment Securities

The Corporation’s investment securities are classified as available-for-sale and held-to-maturity at September 30, 2013 and December 31, 2012. Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value at the balance sheet date. Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 8 of the Notes to Consolidated Financial Statements for a further discussion.

Transfers of debt securities from the available-for-sale category to the held-to-maturity category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer remains in accumulated other comprehensive income and in the carrying value of the held-to-maturity investment security. Premiums or discounts on investment securities are amortized or accreted using the effective interest method over the life of the security as an adjustment of yield. Unrealized holding gains or losses that remain in accumulated other comprehensive income are amortized or accreted over the remaining life of the security as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount.

The following tables present information related to the Corporation’s investment securities at September 30, 2013 and December 31, 2012.

	September 30, 2013
				Gross		Gross
		Amortized		Unrealized		Unrealized
		Cost		Gains		Losses		Fair Value
	(in thousands)
Investment Securities Available-for-Sale:
U.S. Treasury and agency securities		$	43,490	$	—	$	(1,795)	$	41,695
Federal agency obligations			20,939		110		(303)		20,746
Residential mortgage pass-through securities			50,070		1,022		(150)		50,942
Commercial mortgage pass-through securities			9,700		—		(182)		9,518
Obligations of U.S. states and political subdivisions			39,260		1,054		(37)		40,277
Trust preferred securities			20,635		125		(1,223)		19,537
Corporate bonds and notes			201,731		5,603		(2,099)		205,235
Asset-backed securities			16,019		209		—		16,228
Certificates of deposit			2,251		45		(1)		2,295
Equity securities			376		—		(89)		287
Mutual funds and money market funds			6,334		68		(15)		6,387
Total		$	410,805	$	8,236	$	(5,894)	$	413,147

Investment Securities Held-to-Maturity:
Federal agency obligations	$		10,892	$	284	$	—	$	11,176
Commercial mortgage pass-through securities			4,790		11		(46)		4,755
Obligations of U.S. states and political subdivisions			127,725		1,727		(3,561)		125,891
Corporate bonds and notes			10,079		128		(21)		10,186
Total	$		153,486	$	2,150	$	(3,628)	$	152,008

Total investment securities	$		564,291	$	10,386	$	(9,522)	$	565,155

	December 31, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(in thousands)
Investment Securities Available-for-Sale:
U.S. Treasury and agency securities	$	11,870	$	62	$	(23)	$	11,909
Federal agency obligations		20,207		333		(5)		20,535
Residential mortgage pass-through securities		52,400		1,385		(1)		53,784
Commercial mortgage pass-through securities		9,725		244		—		9,969
Obligations of U.S. states and political subdivisions		103,193		4,653		(132)		107,714
Trust preferred securities		22,279		144		(1,174)		21,249
Corporate bonds and notes		228,681		9,095		(371)		237,405
Collateralized mortgage obligations		2,120		—		—		2,120
Asset-backed securities		19,431		311		—		19,742
Certificates of deposit		2,854		21		(10)		2,865
Equity securities		535		—		(210)		325
Mutual funds and money market funds		9,145		68		(15)		9,198
Total	$	482,440	$	16,316	$	(1,941)	$	496,815
Investment Securities Held-to-Maturity:
Federal agency obligations	$	4,178	$	79	$	—	$	4,257
Commercial mortgage-backed securities		5,501		154		(5)		5,650
Obligations of U.S. states and political subdivisions		48,385		4,139		—		52,524
Total	$	58,064	$	4,372	$	(5)	$	62,431
Total investment securities	$	540,504	$	20,688	$	(1,946)	$	559,246

The following table presents information for investment securities available-for-sale at September 30, 2013, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer.

	September 30, 2013
	Amortized
	Cost		Fair Value
	(in thousands)
Investment Securities Available-for-Sale :
Due in one year or less	$	9,690	$	9,719
Due after one year through five years		79,871		82,131
Due after five years through ten years		180,124		179,657
Due after ten years		74,640		74,506
Residential mortgage pass-through securities		50,070		50,942
Commercial mortgage pass-through securities		9,700		9,518
Equity securities		376		287
Mutual funds and money market funds		6,334		6,387
Total	$	410,805	$	413,147
Investment Securities Held-to-Maturity :
Due after one year through five years	$	13,962	$	14,041
Due after five years through ten years		10,274		10,353
Due after ten years		124,460		122,859
Commercial mortgage pass-through securities		4,790		4,755
Total	$	153,486	$	152,008

Total investment securities	$	564,291	$	565,155

During the nine months ended September 30, 2013, the Corporation reclassified at fair value approximately $75.7 million in available-for-sale investment securities to the held-to-maturity category. The net unrealized gains at date of transfer amounted to $63,000, remained in accumulated other comprehensive income and will be discounted over the remaining life of the securities as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount on the transferred securities. No gains or losses were recognized at the time of reclassification. Management considers the held-to-maturity classification of these investment securities to be appropriate as the Corporation has the positive intent and ability to hold these securities to maturity.

For the nine months ended September 30, 2013, proceeds of available-for-sale investment securities sold amounted to approximately $90.8 million.

The varying amount of sales from the available-for-sale portfolio over the past few years, and the significant volume of such sales in 2011, reflect the significant volatility present in the market. Given the historic low interest rates prevalent in the market, it is necessary for the Corporation to protect itself from interest rate exposure. Securities that once appeared to be sound investments can, after changes in the market, become securities that the Corporation has the flexibility to sell to avoid losses and mismatches of interest-earning assets and interest-bearing liabilities at a later time.

Gross gains and losses from the sales of investment securities for the three and nine month periods ended September 30, 2013 and 2012 were as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2013		2012		2013		2012
Gross gains on sales of investment securities	$	343	$	897	$	1,375	$	2,545
Gross losses on sales of investment securities		—		—		89		—
Net gains on sales of investment securities	$	343	$	897	$	1,286	$	2,545

The following summarizes OTTI charges for the periods indicated.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2013		2012		2013		2012
Other than temporary impairment charges	$	—	$	32	$	—	$	60
Principal losses on a variable rate CMO		—		102		24		272
Total other-than-temporary impairment charges	$	—	$	134	$	24	$	332

The Corporation performs regular analysis on all its investment securities to determine whether a decline in fair value indicates that an investment is other-than-temporarily impaired in accordance with FASB ASC 320-10. FASB ASC 320-10 requires companies to record OTTI charges, through earnings, if they have the intent to sell, or if it is more likely than not that they will be required to sell, an impaired debt security before recovery of its amortized cost basis. If the Corporation intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI is recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its estimated fair value at the balance sheet date. If the Corporation does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, the OTTI is separated into the amount representing the credit loss and the amount related to all other factors. The amount of the OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The Corporation’s assessment of whether an impairment is other than temporary includes factors such as whether the issuer has defaulted on scheduled payments, announced a restructuring and/or filed for bankruptcy, has disclosed severe liquidity problems that cannot be resolved, disclosed a deteriorating financial condition or sustained significant losses. The Corporation maintains a watch list for the identification and monitoring of securities experiencing problems that require a heightened level of review. This could result from credit rating downgrades.

The following table presents detailed information for each trust preferred security held by the Corporation at September 30, 2013 which has at least one rating below investment grade.

Deal Name	Single Issuer or Pooled	Class/ Tranche	Amortized Cost		Fair Value		Gross Unrealized Gain (Loss)		Lowest Credit Rating Assigned	Number of Banks Currently Performing	Deferrals and Defaults as % of Original Collateral	Expected Deferral/Defaults as % of Remaining Performing Collateral
	(dollars in thousands)
Countrywide Capital IV	Single	—	$	1,771	$	1,769	$	(2 )	BB+	1	None	None
Countrywide Capital V	Single	—		2,747		2,775		28	BB+	1	None	None
Countrywide Capital V	Single	—		250		253		3	BB+	1	None	None
Citigroup Cap IX	Single	—		992		1,002		10	BB	1	None	None
Citigroup Cap IX	Single	—		1,906		1,934		28	BB	1	None	None
Citigroup Cap XI	Single	—		246		248		2	BB	1	None	None
Nationsbank Cap Trust III	Single	—		1,573		1,276		(297)	BB+	1	None	None
Morgan Stanley Cap Trust IV	Single	—		2,500		2,446		(54)	BB+	1	None	None
Morgan Stanley Cap Trust IV	Single	—		1,742		1,710		(32)	BB+	1	None	None
Saturns — GS 2004-04	Single	—		535		509		(26)	BB+	1	None	None
Goldman Sachs	Single	—		1,000		967		(33)	BB+	1	None	None
Stifel Financial	Single	—		4,500		4,554		54	BBB-	1	None	None
ALESCO Preferred Funding VII	Pooled	C1		873		94		(779)	Ca	47 of 61 ⁽¹⁾	34.9 %	33.5 %
Total			$	20,635	$	19,537	$	(1,098)

(1)

Includes banks and insurance companies.

The Corporation owns one pooled trust preferred security (“Pooled TRUP”), which consists of securities issued by financial institutions and insurances companies. The Corporation holds the mezzanine tranche of the Pooled TRUP. Senior tranches generally are protected from defaults by over-collateralization and cash flow default protection provided by subordinated tranches, with senior tranches having the greatest protection and mezzanine tranches subordinated to the senior tranches. The Corporation’s analysis of the Pooled TRUP falls within the scope of EITF 99-20, ASC 320-40 and uses a discounted cash flow model to determine the total OTTI loss. The model considers the structure, term and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers and the allocation of the payments to the note classes according to a priority of payments specified in the offering circular and indenture. The current estimate of expected cash flows is based on the most recent trustee reports and other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred security. Assumptions used in the model include defaults rates, default rate timing profiles and recovery rates. We assume no prepayments, as the Pooled TRUP was issued at comparatively tight spreads and as such, there is little incentive, if any, to prepay.

On September 25, 2013, the Pooled TRUP, ALESCO VII, incurred its sixteenth interruption of cash flow payments to date. Management reviewed the expected cash flow analysis and credit support to determine if it was probable that all principal and interest would be repaid, and recorded no other-than-temporary impairment charge for the nine months ended September 30, 2013 and September 30, 2012.

At September 30, 2013, excess subordination as a percentage of remaining performing collateral for the ALESCO Preferred Funding VII investments was -46.3 percent. Excess subordination is the amount of performing collateral above the amount of outstanding collateral underlying each class of the security. The excess subordination as a percent of remaining performing collateral reflects the difference between the performing collateral and the collateral underlying each security divided by the performing collateral. A negative number results when the paying collateral is less than the collateral underlying each class of the security. A low or negative number decreases the likelihood of full repayment of principal and interest according to original contractual terms.

Credit Loss Portion of OTTI Recognized in Earnings on Debt Securities

	Nine Months		Year
	Ended		Ended
	September 30,		December
	2013		31, 2012
	(in thousands)
Balance of credit-related OTTI at January 1,	$	4,450	$	6,539
Addition:
Credit losses on investment securities for which other-than-temporary impairment was not previously recognized		24		870
Reduction:
Credit losses on investment securities sold during the period		(2,114)		(2,959)
Balance of credit-related OTTI at period end	$	2,360	$	4,450

The Corporation did not record other-than-temporary impairment charges relating to equity holdings in bank stocks for the nine months ended September 30, 2013 and September 30, 2012.

Temporarily Impaired Investments

For all securities, the Corporation does not believe that the unrealized losses, which were comprised of 147 investment securities as of September 30, 2013, represent an other-than-temporary impairment. The gross unrealized losses of $8.3 million associated with federal agency obligations, mortgage-backed securities, corporate bonds and tax-exempt securities are not considered to be other than temporary because these unrealized losses are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or issuer.

Factors affecting the market price include credit risk, market risk, interest rates, economic cycles, and liquidity risk. The magnitude of any unrealized loss may be affected by the relative concentration of the Corporation’s investment in any one issuer or industry. The Corporation has established policies to reduce exposure through diversification of concentration of the investment portfolio including limits on concentrations to any one issuer. The Corporation believes the investment portfolio is prudently diversified.

The decline in value is related to a change in interest rates and subsequent change in credit spreads required for these issues affecting market price. All issues are performing and are expected to continue to perform in accordance with their respective contractual terms and conditions. Short to intermediate average durations and in certain cases monthly principal payments should reduce further market value exposure to increases in rates.

The Corporation evaluates all securities with unrealized losses quarterly to determine whether the loss is other than temporary. Unrealized losses in the collateralized mortgage obligations category consist primarily of private issue collateralized mortgage obligations. Unrealized losses in the corporate debt securities category consist of losses on single issuer corporate trust preferred securities, pooled trust preferred securities and corporate debt securities issued by large financial institutions, insurance companies and other corporate issuers. The unrealized loss in equity securities consists of losses on other bank equities. The decline in fair value of $1.2 million is due in large part to the lack of an active trading market for these securities, changes in market credit spreads and rating agency downgrades. For collateralized mortgage obligations, management reviewed expected cash flows and credit support to determine if it was probable that all principal and interest would be repaid. None of the corporate issuers have defaulted on interest payments. Management concluded that these securities, other than the previously mentioned Pooled TRUP, were not other-than-temporarily impaired at September 30, 2013. Future deterioration in the cash flow on collateralized mortgage obligations or the credit quality of these large financial institution issuers of TRUP debt securities could result in impairment charges in the future.

In determining that the securities giving rise to the previously mentioned unrealized losses were not other-than-temporary, the Corporation evaluated the factors cited above, which the Corporation considers when assessing whether a security is other-than-temporarily impaired. In making these evaluations the Corporation must exercise considerable judgment. Accordingly there can be no assurance that the actual results will not differ from the Corporation’s judgments and that such differences may not require the future recognition of other-than-temporary impairment charges that could have a material effect on the Corporation’s financial position and results of operations. In addition, the value of, and the realization of any loss on, an investment security are subject to numerous risks as cited above.

The following tables indicate gross unrealized losses not recognized in income and fair value, aggregated by investment category and the length of time individual securities have been in a continuous unrealized loss position at September 30, 2013 and December 31, 2012:

	September 30, 2013
	Total				Less than 12 Months				12 Months or Longer
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
Investment Securities Available-for-Sale:
U.S. Treasury and agency securities	$	41,695	$	(1,795)	$	41,695	$	(1,795)	$	—	$	—
Federal agency obligations		13,391		(303)		13,391		(303)		—		—
Residential mortgage pass-through securities		7,695		(150)		7,695		(150)		—		—
Commercial mortgage pass-through securities		9,519		(182)		9,519		(182)		—		—
Obligations of U.S. states and political subdivisions		2,209		(37)		2,209		(37)		—		—
Trust preferred securities		8,772		(1,223)		7,401		(147)		1,371		(1,076)
Corporate bonds and notes		44,427		(2,099)		42,463		(2,064)		1,964		(35)
Certificates of deposit		194		(1)		194		(1)		—		—
Equity securities		287		(89)		—		—		287		(89)
Mutual funds and money market funds		985		(15)		—		—		985		(15)
Total		129,174		(5,894)		124,567		(4,679)		4,607		(1,215)
Investment Securities Held-to-Maturity:
Commercial mortgage pass-through securities		1,762		(46)		1,428		(44)		334		(2)
Obligations of U.S. states and political subdivisions		63,559		(3,561)		63,559		(3,561)		—		—
Corporate bonds and notes		5,007		(21)		5,007		(21)		—		—
Total		70,328		(3,628)		69,994		(3,626)		334		(2)
Total Temporarily Impaired Securities	$	199,502	$	(9,522)	$	194,561	$	(8,305)	$	4,941	$	(1,217)

	December 31, 2012
	Total				Less than 12 Months				12 Months or Longer
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(in thousands)
Investment Securities Available-for-Sale:
U.S. Treasury and agency securities	$	4,460	$	(23)	$	4,460	$	(23)	$	—	$	—
Federal agency obligation		877		(5)		877		(5)		—		—
Residential mortgage pass-through securities		1,669		(1)		1,669		(1)		—		—
Obligations of U.S. states and political subdivisions		18,360		(132)		18,360		(132)		—		—
Trust preferred securities		11,740		(1,174)		10,494		(18)		1,246		(1,156)
Corporate bonds and notes		26,440		(371)		18,244		(134)		8,196		(237)
Certificates of deposit		388		(10)		388		(10)		—		—
Equity securities		325		(210)		—		—		325		(210)
Mutual funds and money market funds		985		(15)		—		—		985		(15)
Total		65,244		(1,941)		54,492		(323)		10,752		(1,618)
Investment Securities Held-to-Maturity:
Commercial mortgage-backed securities		932		(5)		932		(5)		—		—
Total		932		(5)		932		(5)		—		—
Total Temporarily Impaired Securities	$	66,176	$	(1,946)	$	55,424	$	(328)	$	10,752	$	(1,618)

Investment securities having a carrying value of approximately $102.8 million and $96.1 million at September 30, 2013 and December 31, 2012, respectively, were pledged to secure public deposits, borrowings, and Federal Home Loan Bank advances and for other purposes required or permitted by law.