Note 5. Investments

The composition of the investment portfolio is virtually unchanged since year-end 2012. Municipal securities and U.S. Agency mortgage-backed securities continue to comprise the greatest portion of the portfolio at 45% and 38% of the portfolio respectively. The Bank invested $11.6 million during the first quarter divided almost equally between municipal and U.S. Agency mortgage-backed securities.

The investment portfolio had a net unrealized gain of $2.7 million at the end of the quarter. The municipal bond sector shows the largest net unrealized gain, while the trust-preferred sector has the largest net unrealized loss. The portfolio averaged $136.5 million for the year with a yield of 2.21% compared to an average of $126.9 million and a yield of 2.85% for the same period in 2012. The Bank expects the yield on the portfolio to continue to decline as higher yielding bonds pay-down or mature and reinvestment yields remain low.

The equity portfolio is comprised of bank stocks and the Bank and the Corporation each maintain separate equity portfolios. The municipal bond portfolio is well diversified geographically (issuers from within 27 states) and is comprised primarily of general obligation bonds (69%). Most municipal bonds have credit enhancements in the form of private bond insurance or other credit support. The largest geographic municipal bond exposure is to nineteen issuers in the state of Texas with a fair value of $9.8 million and eleven issuers in the state of Pennsylvania with a fair value of $6.5 million. The municipal bond portfolio contains $56.7 million of bonds rated A or higher, $637 thousand rated lower than A (but above noninvestment grade), and $2.9 million that are not rated by Moody’s rating agency. No municipal bonds are rated below investment grade. The Bank holds one variable rate corporate bond in the financial services sector and it is rated A3 by Moody’s.

The trust preferred investments are comprised of seven single issuer trust preferred securities with an amortized cost of $5.9 million and a fair value of $4.9 million. The Bank has six private-label mortgage backed securities (PLMBS) with an amortized cost of $2.4 million and a fair value of $2.4 million.

The amortized cost and estimated fair value of investment securities available for sale as of March 31, 2013 and December 31, 2012 is as follows:



(Dollars in thousands)			Gross		Gross
	Amortized		unrealized		unrealized		Fair
March 31, 2013	cost		gains		losses		value
Equity securities	$	2,104	$	217	$	(122)	$	2,199
U.S. Government agency securities		12,448		137		(10)		12,575
Municipal securities		57,647		2,833		(242)		60,238
Corporate debt securities		1,004		-		(5)		999
Trust preferred securities		5,911		-		(994)		4,917
Agency mortgage-backed securities		50,536		1,025		(101)		51,460
Private-label mortgage-backed securities		2,407		29		(37)		2,399
Asset-backed securities		55		-		(10)		45
	$	132,112	$	4,241	$	(1,521)	$	134,832



(Dollars in thousands)			Gross		Gross
	Amortized		unrealized		unrealized		Fair
December 31, 2012	cost		gains		losses		value
Equity securities	$	2,104	$	92	$	(255)	$	1,941
U.S. Government agency securities		12,657		156		(4)		12,809
Municipal securities		58,395		2,984		(163)		61,216
Corporate debt securities		1,005		-		(11)		994
Trust preferred securities		5,905		-		(1,075)		4,830
Agency mortgage-backed securities		48,121		1,029		(84)		49,066
Private-label mortgage-backed securities		2,539		10		(123)		2,426
Asset-backed securities		59		-		(13)		46
	$	130,785	$	4,271	$	(1,728)	$	133,328

At March 31, 2013 and December 31, 2012, the fair value of investment securities pledged to secure public funds, trust balances, repurchase agreements, deposit and other obligations totaled $129.0 million and $119.8 million, respectively.

The amortized cost and estimated fair value of debt securities at March 31, 2013, by contractual maturity are shown below. Actual maturities may differ from contractual maturities because of prepayment or call options embedded in the securities.





(Dollars in thousands)	Amorized cost		Fair value
Due in one year or less	$	2,435	$	2,450
Due after one year through five years		13,999		14,770
Due after five years through ten years		21,233		22,302
Due after ten years		39,398		39,252
		77,065		78,774
Mortgage-backed securities		52,943		53,859
	$	130,008	$	132,633

The following table provides additional detail about trust preferred securities as of March 31, 2013:

Trust Preferred Securities


(Dollars in thousands)
Deal Name	Single Issuer or Pooled	Class	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 a Percentage of Remaining Performing Collateral

Huntington Cap Trust	Single	Preferred Stock	$	934	$	735	$	(199)	BB	1	None	None
Huntington Cap Trust II	Single	Preferred Stock		881		721		(160)	BB	1	None	None
BankAmerica Cap III	Single	Preferred Stock		959		786		(173)	BB	1	None	None
Wachovia Cap Trust II	Single	Preferred Stock		275		247		(28)	BBB+	1	None	None
Corestates Captl Tr II	Single	Preferred Stock		930		821		(109)	BBB+	1	None	None
Chase Cap VI JPM	Single	Preferred Stock		959		825		(134)	BBB	1	None	None
Fleet Cap Tr V	Single	Preferred Stock		973		782		(191)	BB	1	None	None
			$	5,911	$	4,917	$	(994)

The following table provides additional detail about private label mortgage-backed securities as of March 31, 2013:

Private Label Mortgage Backed Securities


(Dollars in thousands)						Gross					Cumulative
	Origination	Amortized		Fair		Unrealized		Collateral	Lowest Credit	Credit	OTTI
Description	Date	Cost		Value		Gain (Loss)		Type	Rating Assigned	Support %	Charges
RALI 2004-QS4 A7	3/1/2004	$	287	$	285	$	(2)	ALT A	BBB+	11.92	$	-
MALT 2004-6 7A1	6/1/2004		517		525		8	ALT A	CCC	12.46		-
RALI 2005-QS2 A1	2/1/2005		420		433		13	ALT A	C	6.49		-
RALI 2006-QS4 A2	4/1/2006		682		647		(35)	ALT A	D	-		278
GSR 2006-5F 2A1	5/1/2006		132		132		-	Prime	D	-		15
RALI 2006-QS8 A1	7/28/2006		369		377		8	ALT A	D	-		197
		$	2,407	$	2,399	$	(8)				$	490

Impairment:

The investment portfolio contained 63 securities with $33.5 million of temporarily impaired fair value and $1.5 million in unrealized losses. The unrealized loss position is less than at year-end 2012, but the number of impaired securities is unchanged. The trust preferred sector continues to show the largest unrealized loss at $1.0 million on seven securities, a slight improvement from the prior-year end.

For securities with an unrealized loss, Management applies a systematic methodology in order to perform an assessment of the potential for other-than-temporary impairment. In the case of debt securities, investments considered for other-than-temporary impairment: (1) had a specified maturity or repricing date; (2) were generally expected to be redeemed at par, and (3) were expected to achieve a recovery in market value within a reasonable period of time. In addition, the Bank considers whether it intends to sell these securities or whether it will be forced to sell these securities before the earlier of amortized cost recovery or maturity. Equity securities are assessed for other-than-temporary impairment based on the length of time of impairment, dollar amount of the impairment and general market and financial conditions relating to specific issues. The impairment identified on debt and equity securities and subject to assessment at March 31, 2013, was deemed to be temporary and required no further adjustments to the financial statements, unless otherwise noted.

The following table reflects temporary impairment in the investment portfolio (excluding restricted stock), aggregated by investment category, length of time that individual securities have been in a continuous unrealized loss position and the number of securities in each category as of March 31, 2013 and December 31, 2012:



	March 31, 2013
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count

Equity securities	$	-	$	-	-	$	766	$	(122)	10	$	766	$	(122)	10
U.S. Government agency securities		2,956		(5)	3		3,293		(5)	6		6,249		(10)	9
Municipal securities		9,467		(242)	14		-		-	-		9,467		(242)	14
Corporate debt securities		-		-	-		999		(5)	1		999		(5)	1
Trust preferred securities		-		-	-		4,917		(994)	7		4,917		(994)	7
Agency mortgage-backed securities		9,127		(97)	13		969		(4)	4		10,096		(101)	17
Private-label mortgage-backed securities		-		-	-		932		(37)	2		932		(37)	2
Asset-backed securities		-		-	-		45		(10)	3		45		(10)	3
Total temporarily impaired securities	$	21,550	$	(344)	30	$	11,921	$	(1,177)	33	$	33,471	$	(1,521)	63



	December 31, 2012
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Value		Losses		Count	Value		Losses		Count	Value		Losses		Count

Equity securities	$	226	$	(20)	3	$	1,236	$	(235)	13	$	1,462	$	(255)	16
U.S. Government agency securities		938		(1)	1		3,346		(3)	6		4,284		(4)	7
Municipal securities		8,789		(163)	10		-		-	-		8,789		(163)	10
Corporate debt securities		-		-	-		994		(11)	1		994		(11)	1
Trust preferred securities		-		-	-		4,830		(1,075)	7		4,830		(1,075)	7
Agency mortgage-backed securities		6,869		(68)	8		2,664		(16)	6		9,533		(84)	14
Private-label mortgage-backed securities		-		-	-		1,875		(123)	5		1,875		(123)	5
Asset-backed securities		-		-	-		46		(13)	3		46		(13)	3
Total temporarily impaired securities	$	16,822	$	(252)	22	$	14,991	$	(1,476)	41	$	31,813	$	(1,728)	63

The trust preferred portfolio contains the largest unrealized loss in the portfolio. At March 31, 2013 this sector contained seven securities with a fair value of $4.9 million and an unrealized loss of $1.0 million, representing a slight improvement over year-end 2012. The trust-preferred securities held by the Bank are single entity issues, not pooled trust preferred securities. Therefore, the impairment review of these securities is based only on the issuer and the security cannot be impaired by the performance of other issuers as if it was a pooled trust-preferred bond. All of the Bank’s trust preferred securities are single issue, variable rate notes with long maturities (2027 – 2028). None of these bonds have suspended or missed a dividend payment. At March 31, 2013, the Bank believes it will be able to collect all interest and principal due on these bonds and no other-than-temporary-impairment charges were recorded. See the Trust Preferred Securities table for additional information.

The PLMBS sector shows a gross unrealized loss of $37 thousand, an improvement over the $123 thousand unrealized loss at December 31, 2012. These bonds were all rated AAA at time of purchase, but have since experienced rating declines. Some have experienced increased delinquencies and defaults, while others have seen the credit support increase as the bonds paid-down. The Bank monitors the performance of the PLMBS investments on a regular basis and reviews delinquencies, default rates, credit support levels and various cash flow stress test scenarios. In determining the credit related loss, Management considers all principal past due 60 days or more as a loss. If additional principal moves beyond 60 days past due, it will also be considered a loss. As a result of the analysis on PLMBS it was determined that no impairment charge was required at quarter end. The Bank has recorded $490 thousand of cumulative impairment charges on this portfolio. Management continues to monitor these securities and it is possible that additional write-downs may occur if current loss trends continue. The Bank is currently participating in a class-action lawsuit against one PLMBS servicer that centers on defective warranties and representations made as part of the underwriting process. See the PLMBS table above for additional information.

The Bank held $3.1 million of restricted stock at March 31, 2013. Except for $30 thousand, this investment represents stock in FHLB Pittsburgh. The Bank is required to hold this stock to be a member of FHLB and it is carried at cost of $100 per share. FHLB Pittsburgh has repurchased $521 thousand of its capital stock during the quarter. FHLB stock is evaluated for impairment primarily based on an assessment of the ultimate recoverability of its cost. As a government sponsored entity, FHLB has the ability to raise funding through the U.S. Treasury that can be used to support its operations. There is not a public market for FHLB stock and the benefits of FHLB membership (e.g., liquidity and low cost funding) add value to the stock beyond purely financial measures. Management intends to remain a member of the FHLB and believes that it will be able to fully recover the cost basis of this investment.