Note 3-Securities

A summary of securities available-for-sale at September 30, 2013 and December 31, 2012 is provided below. The securities available-for-sale portfolio is generally comprised of high quality debt instruments, principally obligations of the United States government or agencies thereof. Also included in the portfolio are investments in the obligations of states and municipalities. With the exception of an approximately $8 million portfolio (fair value) of Texas municipal utility district bonds, which has its own criteria for investment (e.g., maximum debt to assessed valuation, minimum assessed valuation and district size, proximity to employment, etc.), the remaining municipal bonds were all rated A or above by a national rating service at September 30, 2013. The majority of municipal bonds in the portfolio are general obligation bonds, which can draw upon multiple sources of revenue, including taxes, for payment. Only a few bonds are revenue bonds, which are dependent upon a single revenue stream for payment, but they are for critical services such as water and sewer. In many cases, municipal debt issues are insured or, in the case of school districts of selected states, backed by specific loss reserves. At September 30, 2013, the fair value of the municipal bond portfolio was concentrated in the states of Pennsylvania at 43 percent and Texas at 17 percent.



		Amortized		Gross Unrealized				Fair
(dollars in thousands)		Cost		Gains		Losses		Value

September 30, 2013
Debt securities:
U.S. Treasury notes	$	1,500	$	5	$	0	$	1,505
U.S. agency		52,416		817		(374)		52,859
U.S. agency mortgage-backed, residential		89,582		1,907		(168)		91,321
State and municipal		91,136		2,499		(191)		93,444
Total debt securities	$	234,634	$	5,228	$	(733)	$	239,129

December 31, 2012
Debt securities:
U.S. Treasury notes	$	5,001	$	31	$	0	$	5,032
U.S. agency		37,000		1,083		(25)		38,058
U.S. agency mortgage-backed, residential		84,630		3,603		0		88,233
State and municipal		98,744		4,053		(58)		102,739
Total debt securities	$	225,375	$	8,770	$	(83)	$	234,062

The amortized cost and estimated fair value of debt securities at September 30, 2013 by contractual maturity are shown below. Actual maturities may differ from contractual maturities if call options on select debt issues are exercised in the future. Mortgage-backed securities are included in the maturity categories based on average expected life.



		Available-for-sale
		Amortized		Fair
(dollars in thousands)		Cost		Value
Due in one year or less	$	13,813	$	13,924
Due after one year through five years		176,254		180,152
Due after five years through ten years		40,747		41,103
Due after ten years		3,820		3,950
Total debt securities	$	234,634	$	239,129

Gross realized gains and losses on sales of securities available-for-sale are shown below. Realized gains and losses are computed on the basis of specific identification of the adjusted cost of each security and are shown net as a separate line item in the income statement.



		Three months ended				Nine months ended
		September 30,				September 30,
(dollars in thousands)		2013		2012		2013		2012
Realized gains	$	0	$	382	$	44	$	431
Realized losses		0		0		0		0
Net gains	$	0	$	382	$	44	$	431

Securities, issued by agencies of the federal government, with a carrying value of $142,557,000 and $135,348,000 on September 30, 2013 and December 31, 2012, respectively, were pledged to secure public and trust deposits, repurchase agreements and other short-term borrowings.

The table below shows gross unrealized losses and fair value, aggregated by investment category and length of time, for securities that have been in a continuous unrealized loss position, at September 30, 2013 and December 31, 2012.



	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Value		Losses		Value		Losses		Value		Losses
September 30, 2013
Debt securities:
U.S. agency	$	29,897	$	(374)	$	0	$	0	$	29,897	$	(374)
U.S. agency mortgage-backed, residential		23,140		(168)		0		0		23,140		(168)
State and municipal		17,408		(191)		0		0		17,408		(191)
Total temporarily impaired debt
securities, available for sale	$	70,445	$	(733)	$	0	$	0	$	70,445	$	(733)

December 31, 2012
Debt securities:
U.S. agency	$	8,251	$	(25)	$	0	$	0	$	8,251	$	(25)
State and municipal		11,565		(58)		0		0		11,565		(58)
Total temporarily impaired debt
securities, available for sale	$	19,816	$	(83)	$	0	$	0	$	19,816	$	(83)

The unrealized losses of $733,000 at September 30, 2013 within the less than 12 months category were attributable to nine U.S. agency securities, eight U.S. agency mortgage-backed securities, and forty-one state and municipal securities, all rated A or above by a national rating service.

Securities available-for-sale are analyzed quarterly for possible other-than-temporary impairment. The analysis considers, among other factors: 1) whether the Corporation has the intent to sell its securities prior to market recovery or maturity; 2) whether it is more likely than not that the Corporation will be required to sell its securities prior to market recovery or maturity; 3) default rates/history by security type; 4) third-party securities ratings; 5) third-party guarantees; 6) subordination; 7) payment delinquencies; 8) nature of the issuer; and 9) current financial news.

The Corporation believes that unrealized losses at September 30, 2013 were primarily the result of changes in market interest rates and that it has the ability to hold these investments for a time necessary to recover the amortized cost. Through September 30, 2013 the Corporation has collected all interest and principal on its investment securities as scheduled. The Corporation believes that collection of the contractual principal and interest is probable and, therefore, all impairment is considered to be temporary.