1.	Investment Securities

The following table shows a comparison of amortized cost and fair values of investment securities at December 31, 2012 and 2011:



			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		OTTI in
(in thousands)	Cost		Gains		Losses		Value		AOCL
December 31, 2012
Available for Sale:
U.S. government agencies	$	40,334	$	97	$	111	$	40,320	$	0
Residential mortgage-backed agencies		43,596		703		191		44,108		0
Commercial mortgage-backed agencies		37,330		288		0		37,618		0
Collaterized mortgage obligations		31,836		188		293		31,731		0
Obligations of states and political subdivisions		55,212		2,842		0		58,054		0
Collateralized debt obligations		36,798		0		25,356		11,442		16,876
Total available for sale	$	245,106	$	4,118	$	25,951	$	223,273	$	16,876
Held to Maturity:
Obligations of states and political subdivisions	$	4,040	$	542	$	235	$	4,347	$	0

December 31, 2011
Available for Sale:
U.S. government agencies	$	25,490	$	107	$	17	$	25,580	$	0
Residential mortgage-backed agencies		43,630		1,059		137		44,552		0
Commercial mortgage-backed agencies		48,112		216		51		48,277		0
Collateralized mortgage obligations		48,120		436		205		48,351		0
Obligations of states and political subdivisions		65,424		3,400		8		68,816		0
Collateralized debt obligations		36,385		0		26,938		9,447		17,726
Total available for sale	$	267,161	$	5,218	$	27,356	$	245,023	$	17,726

Proceeds from sales of available-for-sale securities and the realized gains and losses are as follows:



(in thousands)	2012		2011
Proceeds	$	46,220	$	84,396
Realized gains		1,740		1,083
Realized losses		195		208

The following table shows the Corporation’s securities with gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized position, at December 31, 2012 and 2011:



	Less than 12 months				12 months or more
	Fair		Unrealized		Fair		Unrealized
(in thousands)	Value		Losses		Value		Losses
December 31, 2012
Available for Sale:
U.S. government agencies	$	18,220	$	111	$	0	$	0
Residential mortgage-backed agencies		22,407		191		0		0
Commercial mortgage-backed agencies		0		0		0		0
Collateralized mortgage obligations		16,576		293		450		0*
Obligations of states and political subdivisions		0		0		0		0
Collateralized debt obligations		0		0		11,442		25,356
Totals	$	57,203	$	595	$	11,892	$	25,356
Held to Maturity:
Obligations of states and political subdivisions	$	2,765	$	235	$	0	$	0

* - diminimus

December 31, 2011
Available for Sale:
U.S. government agencies	$	9,983	$	17	$	0	$	0
Residential mortgage-backed agencies		16,229		136		4,779		1
Commercial mortgage-backed agencies		20,320		51		0		0
Collateralized mortgage obligations		10,651		82		557		123
Obligations of states and political subdivisions		0		0		2,805		8
Collateralized debt obligations		0		0		9,447		26,938
Totals	$	57,183	$	286	$	17,588	$	27,070

Management systematically evaluates securities for impairment on a quarterly basis. Based upon application of accounting guidance for subsequent measurement in ASC Topic 320 (ASC Section 320-10-35), management assesses whether (i) it has the intent to sell a security being evaluated and (ii) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery. If neither applies, then declines in the fair values of securities below their cost that are considered other-than-temporary declines are split into two components. The first is the loss attributable to declining credit quality. Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made. The second component consists of all other losses, which are recognized in other comprehensive loss. In estimating OTTI losses, management considers (a) the length of time and the extent to which the fair value has been less than cost, (b) adverse conditions specifically related to the security, an industry, or a geographic area, (c) the historic and implied volatility of the fair value of the security, (d) changes in the rating of the security by a rating agency, (e) recoveries or additional declines in fair value subsequent to the balance sheet date, (f) failure of the issuer of the security to make scheduled interest or principal payments, and (g) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future. Management also monitors cash flow projections for securities that are considered beneficial interests under the guidance of ASC Subtopic 325-40, Investments – Other – Beneficial Interests in Securitized Financial Assets, (ASC Section 325-40-35).

Management believes that the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of its consolidated financial statements. Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for its collateralized debt obligation (“CDO “) portfolio consisting of pooled trust preferred securities. Based on management’s review of the third party evaluations, management believes that there were no material differences in the valuations between December 31, 2012 and December 31, 2011.

U.S. Government Agencies - Three U.S. government agencies have been in a slight unrealized loss position for less than 12 months as of December 31, 2012. These securities are of the highest investment grade and the Corporation does not intend to sell them, and it is not more likely than not that the Corporation will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Therefore, no OTTI existed at December 31, 2012. There were no agency securities for which the cost has been less than market value for a period longer than 12 months.

Residential Mortgage-Backed Agencies - Five residential mortgage-backed agencies have been in an unrealized loss position for less than 12 months as of December 31, 2012. All of these securities are of the highest investment grade and the Corporation does not intend to sell them, nor is it more likely than not that the Corporation will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Therefore, no OTTI existed at December 31, 2012.

Collateralized Mortgage Obligations – One collateralized mortgage obligation security at December 31, 2012 has been in an unrealized loss position for 12 months or more. Four collateralized mortgage obligation securities have been in a slight unrealized loss position for less than 12 months as of December 31, 2012. The Corporation does not intend to sell these securities and it is not more likely than not that the Corporation will be required to sell them before recovery of their amortized cost basis, which may be at maturity. Accordingly, management does not consider these investments to be other-than-temporarily impaired at December 31, 2012.

Obligations of State and Political Subdivisions – The Corporation owns two tax increment fund bonds in the held to maturity portfolio. One of these bonds has been in an unrealized loss position for less than 12 months. This bond is not rated by the rating agencies and was underwritten by the Corporation prior to purchase and is periodically reviewed for credit quality. Therefore, management does not consider this investment to be other-than-temporarily impaired at December 31, 2012.

Collateralized Debt Obligations - The $25.4 million in unrealized losses greater than 12 months at December 31, 2012 relates to 18 pooled trust preferred securities that comprise the CDO portfolio. See Note 24 for a discussion of the methodology used by management to determine the fair values of these securities. The Corporation recorded $19 thousand in credit-related non cash OTTI for the year ended 2011 and did not record any credit-related non-cash OTTI charges for the year ended December 31, 2012. The unrealized losses on the remaining securities in the portfolio are primarily attributable to continued depression in market interest rates, marketability, liquidity and the current economic environment.

The following table presents a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses which have been recognized in earnings for the trust preferred securities in the CDO portfolio held and not intended to be sold:



	For the year ended
(in thousands)	December 31, 2012		December 31, 2011
Balance of credit-related OTTI at January 1	$	14,424	$	14,653
Additional increases for credit-related OTTI previously recognized when there is no
intent to sell and no requirement to sell before recovery of amortized cost basis		0		19
Reduction for increases in cash flows expected to be collected		(465)		(248)
Balance of credit-related OTTI at December 31	$	13,959	$	14,424

The amortized cost and estimated fair value of securities by contractual maturity at December 31, 2012 are shown in the following table. Actual 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, 2012
	Amortized		Fair
(in thousands)	Cost		Value
Contractual Maturity
Available for sale:
Due after five years through ten years	$	43,613	$	44,935
Due after ten years		88,731		64,881
		132,344		109,816
Residential mortgage-backed agencies		43,596		44,108
Commercial mortgage-backed agencies		37,330		37,618
Collateralized mortgage obligations		31,836		31,731
	$	245,106	$	223,273
Held to Maturity:
Due after ten years	$	4,040	$	4,347

At December 31, 2012 and 2011, investment securities with a fair value of $157 million and $147 million, respectively, were pledged as permitted or required to secure public and trust deposits, for securities sold under agreements to repurchase as required or permitted by law and as collateral for borrowing capacity.