SECURITIES:

The fair value of securities available-for-sale and related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:



	December 31, 2013
	Amortized		Unrealized
(Dollar amounts in thousands)	Cost		Gains		Losses			Fair Value
U.S. Government entity mortgage-backed securities	$	1,623	$	10	$	—		$	1,633
Mortgage-backed securities, residential	191,995		7,761		(1,992		)	197,764
Mortgage-backed securities, commercial	4,642		1		(252		)	4,391
Collateralized mortgage obligations	521,148		1,492		(15,899		)	506,741
State and municipal obligations	190,521		6,388		(1,922		)	194,987
Collateralized debt obligations	10,968		4,695		(6,619		)	9,044
TOTAL	$	920,897	$	20,347	$	(26,684	)	$	914,560



	December 31, 2012
	Amortized		Unrealized
(Dollar amounts in thousands)	Cost		Gains		Losses			Fair Value
U.S. Government entity mortgage-backed securities	$	1,807	$	79	$	—		$	1,886
Mortgage-backed securities, residential	231,316		13,373		(13		)	244,676
Mortgage-backed securities, commercial	5,146		1		(16		)	5,131
Collateralized mortgage obligations	230,739		2,827		(246		)	233,320
State and municipal obligations	187,044		12,518		(77		)	199,485
Collateralized debt obligations	12,243		1,761		(7,882		)	6,122
Equity Securities	320		60		—			380
TOTAL	$	668,615	$	30,619	$	(8,234	)	$	691,000

As of December 31, 2013, the Corporation does not have any securities from any issuer, other than the U.S. Government, with an aggregate book or fair value that exceeds ten percent of shareholders' equity.

Securities with a carrying value of approximately $361.9 million and $333.1 million at December 31, 2013 and 2012, respectively, were pledged as collateral for short-term borrowings and for other purposes.

Below is a summary of the gross gains and losses realized by the Corporation on investment sales during the years ended December 31, 2013, 2012 and 2011, respectively.



(Dollar amounts in thousands)	2013		2012			2011
Proceeds	$	5,110	$	25,812		$	25
Gross gains	423		891			2
Gross losses	—		(5		)	—

Additional gains of $5 thousand and losses of $5 thousand in 2013 and $2 thousand and $4 thousand of gains, respectively in 2012 and 2011 resulted from redemption premiums on called securities.

Contractual maturities of debt securities at year-end 2013 were as follows. Securities not due at a single maturity or with no maturity date, primarily mortgage-backed and equity securities, are shown separately.



	Available-for-Sale
	Amortized		Fair
(Dollar amounts in thousands)	Cost		Value
Due in one year or less	$	10,478	$	10,612
Due after one but within five years	35,202		36,865
Due after five but within ten years	87,453		89,775
Due after ten years	591,127		575,153
	724,260		712,405
Mortgage-backed securities and equities	196,637		202,155
TOTAL	$	920,897	$	914,560

The following tables show the securities' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at December 31, 2013 and 2012.



	December 31, 2013
	Less Than 12 Months					More Than 12 Months					Total
			Unrealized					Unrealized					Unrealized
(Dollar amounts in thousands)	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Mortgage-backed securities, residential	$	52,524	$	(1,645	)	$	6,022	$	(347	)	$	58,546	$	(1,992	)
Mortgage-backed securities, commercial	—		—			4,357		(252		)	4,357		(252		)
Collateralized mortgage obligations	406,291		(13,979		)	29,588		(1,920		)	435,879		(15,899		)
State and municipal obligations	43,899		(1,746		)	2,305		(176		)	46,204		(1,922		)
Collateralized debt obligations	—		—			3,686		(6,619		)	3,686		(6,619		)
Total temporarily impaired securities	$	502,714	$	(17,370	)	$	45,958	$	(9,314	)	$	548,672	$	(26,684	)



	December 31, 2012
	Less Than 12 Months					More Than 12 Months					Total
			Unrealized					Unrealized					Unrealized
(Dollar amounts in thousands)	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Mortgage-backed securities, residential	$	7,245	$	(13	)	$	—	$	—		$	7,245	$	(13	)
Mortgage-backed securities, commercial	5,086		(16		)	—		—			5,086		(16		)
Collateralized mortgage obligations	46,121		(246		)	—		—			46,121		(246		)
State and municipal obligations	8,611		(77		)	—		—			8,611		(77		)
Collateralized debt obligations	—		—			4,032		(7,882		)	4,032		(7,882		)
Total temporarily impaired securities	$	67,063	$	(352	)	$	4,032	$	(7,882	)	$	71,095	$	(8,234	)

The Corporation held 221 investment securities with an amortized cost greater than fair value as of December 31, 2013. The unrealized losses on collateralized mortgage obligations, mortgage-backed securities and state and municipal obligations represent negative adjustments to market value relative to the rate of interest paid on the securities and not losses related to the creditworthiness of the issuer. Gross unrealized losses on investment securities were $26.7 million as of December 31, 2013 and $8.2 million as of December 31, 2012. Management does not intend to sell and it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery. Management believes the value will recover as the securities approach maturity or market rates change.

Management evaluates securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model.

Investment securities are generally evaluated for OTTI under FASB ASC 320, Investments—Debt and Equity Securities. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in FASB ASC 325-40, Beneficial Interests in Securitized Financial Assets.

In determining OTTI under the FASB ASC-320model, management considers many factors, including: (1)the length of time and the extent to which the fair value has been less than cost, (2)the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

The second segment of the portfolio uses the OTTI guidance provided by FASB ASC-325that is specific to purchase beneficial interests that, on the purchase date, were rated below AA. Under the FASB ASC-325model, the Corporation compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity 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, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. If an entity 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 less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total 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.

A significant portion of the total unrealized losses relates to collateralized debt obligations that were separately evaluated under FASB ASC 325-40, Beneficial Interests in Securitized Financial Assets. Based upon qualitative considerations, such as a downgrade in credit rating or further defaults of underlying issuers during the year, and an analysis of expected cash flows, we determined that three CDOs included in collateralized debt obligations were other-than-temporarily impaired. Those three CDO’s have a contractual balance of $25.8 million at December 31, 2013 which has been reduced to $8.5 million by $1.3 million of interest payments received, $14.1 million of cumulative OTTI charges recorded through earnings to date and $1.9 million recorded in other comprehensive income. The severity of the OTTI recorded varies by security, based on the analysis described below, and ranges, at December 31, 2013 from 28% to 93%. The temporary impairment recorded in other comprehensive income is due to factors other than credit loss, mainly current market illiquidity. These securities are collateralized by trust preferred securities issued primarily by bank holding companies, but certain pools do include a limited number of insurance companies. The market for these securities has become very illiquid, there are very few new issuances of trust preferred securities and the credit spreads implied by current prices have increased dramatically and remain very high, resulting in significant non-credit related impairment. The Corporation uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to determine if there are adverse changes in cash flows during the year. The OTTI model considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. Cash flows are projected using a forward rate LIBOR curve, as these CDOs are variable-rate instruments. An average rate is then computed using this same forward rate curve to determine an appropriate discount rate (3 month LIBOR plus margin ranging from 160 to 180 basis points). The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information, including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and treat all interest payment deferrals as defaults. In addition we use the model to “stress” each CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of the Corporation’s note class.

In the third quarter of 2013, the Corporation received a $1.3 million payment on a CDO that had a book value of $0.2 million. The payment in excess of book value is recognized as interest income. This CDO had the highest severity of recorded impairment and while a payment by the issuer was expected, such payment was not projected until maturity in the OTTI evaluation at June 30, 2013. The future payments, if any, on this CDO cannot be predicted with enough accuracy that such future payments will be recorded as interest income when received.

Collateralized debt obligations include one additional investment in a CDO consisting of pooled trust preferred securities in which the issuers are primarily banks. This CDO, with an amortized cost of $606 thousand and a fair value of $548 thousand, is currently rated BAA3 and is the senior tranche, is not in the scope of FASB ASC 325 as it was rated high investment grade at purchase, and is not considered to be other-than-temporarily impaired based on its credit quality. Its fair value is negatively impacted by the factors described above.

Management has consistently used Standard & Poors pricing to value these investments. There are a number of other pricing sources available to determine fair value for these investments. These sources utilize a variety of methods to determine fair value. The result is a wide range of estimates of fair value for these securities. The Standard & Poors pricing ranges from 20.92 to 90.43 while Moody’s Investor Service pricing ranges from 3.28 to 89.98, with others falling somewhere in between. We recognize that the Standard & Poors pricing utilized is likely a conservative estimate, but have been consistent in using this source and its estimate of fair value.

The table below presents a rollforward of the credit losses recognized in earnings for the year ended December 31, 2013:



(Dollar amounts in thousands)	2013			2012			2011
Beginning balance, January 1,	$	14,983		$	15,180		$	15,070
Amounts related to credit loss for which other-than-
temporary impairment was not previously recognized				11			110
Amounts realized for securities sold during the period				(208		)	—
Reductions for increase in cash flows expected to be collected
that are recognized over the remaining life of the security	(904		)	—			—
Increases to the amount related to the credit loss for which other-
than-temporary impairment was previously recognized	—			—			—
Ending balance, December 31,	$	14,079		$	14,983		$	15,180