SECURITIES

The amortized cost and fair value of securities are as follows:

Securities Available For Sale:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2011
U.S. Treasury and other U.S. government agencies and corporations	$	332,046	$	1,329	$	(91	)	$	333,284
Residential mortgage-backed securities:
Agency mortgage-backed securities		234,465		6,683		—			241,148
Agency collateralized mortgage obligations		184,665		2,320		—			186,985
Non-agency collateralized mortgage obligations		34		1		—			35
States of the U.S. and political subdivisions		43,910		1,048		(1	)		44,957
Collateralized debt obligations		19,288		—		(12,683	)		6,605
Other debt securities		6,859		—		(913	)		5,946

Total debt securities		821,267		11,381		(13,688	)		818,960
Equity securities		1,593		332		(38	)		1,887

	$	822,860	$	11,713	$	(13,726	)	$	820,847

December 31, 2010
U.S. Treasury and other U.S. government agencies and corporations	$	299,861	$	1,395	$	(688	)	$	300,568
Residential mortgage-backed securities:
Agency mortgage-backed securities		205,443		6,064		—			211,507
Agency collateralized mortgage obligations		146,977		1,081		(192	)		147,866
Non-agency collateralized mortgage obligations		37		1		—			38
States of the U.S. and political subdivisions		57,830		934		(26	)		58,738
Collateralized debt obligations		19,288		—		(13,314	)		5,974
Other debt securities		12,989		—		(1,744	)		11,245

Total debt securities		742,425		9,475		(15,964	)		735,936
Equity securities		1,867		381		(59	)		2,189

	$	744,292	$	9,856	$	(16,023	)	$	738,125

Securities Held To Maturity:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2011
U.S. Treasury and other U.S. government agencies and corporations	$	4,666	$	229	$	—		$	4,895
Residential mortgage-backed securities:
Agency mortgage-backed securities		758,325		26,724		(1,556	)		783,493
Agency collateralized mortgage obligations		62,673		609		(164	)		63,118
Non-agency collateralized mortgage obligations		28,347		243		(908	)		27,682
States of the U.S. and political subdivisions		152,574		3,383		(311	)		155,646
Collateralized debt obligations		2,502		—		(508	)		1,994
Other debt securities		1,585		25		(4	)		1,606

	$	1,010,672	$	31,213	$	(3,451	)	$	1,038,434

December 31, 2010
U.S. Treasury and other U.S. government agencies and corporations	$	4,925	$	212	$	—		$	5,137
Residential mortgage-backed securities:
Agency mortgage-backed securities		688,575		23,878		(3,079	)		709,374
Agency collateralized mortgage obligations		71,102		511		(889	)		70,724
Non-agency collateralized mortgage obligations		33,950		328		(1,331	)		32,947
States of the U.S. and political subdivisions		137,210		1,735		(1,630	)		137,315
Collateralized debt obligations		3,132		—		(778	)		2,354
Other debt securities		1,587		18		(42	)		1,563

	$	940,481	$	26,682	$	(7,749	)	$	959,414

The Corporation classifies securities as trading securities when management intends to sell such securities in the near term. Such securities are carried at fair value, with unrealized gains (losses) reflected through the consolidated statement of income. The Corporation acquired securities in conjunction with the CBI acquisition that the Corporation classified as trading securities. The Corporation both acquired and sold these trading securities during the first quarter of 2011. As of June 30, 2011 and December 31, 2010, the Corporation did not hold any trading securities.

Gross gains and gross losses were realized on sales of securities as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011			2010
Gross gains	$	38	$	47	$	288		$	2,437
Gross losses		—		—		(196	)		—

	$	38	$	47	$	92		$	2,437

The gross gains for the six months ended June 30, 2010 included a gain of $2,291 relating to the sale of a $6,016 U.S. government agency security and $52,625 of mortgage backed securities. These securities were sold to better position the balance sheet.

As of June 30, 2011, the amortized cost and fair value of securities, by contractual maturities, were as follows:


	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	40,243	$	40,720	$	6,339	$	6,438
Due from one to five years		289,370		290,091		16,728		17,443
Due from five to ten years		12,671		12,996		36,047		36,875
Due after ten years		59,819		46,985		102,213		103,385

		402,103		390,792		161,327		164,141
Residential mortgage-backed securities:
Agency mortgage-backed securities		234,465		241,148		758,325		783,493
Agency collateralized mortgage obligations		184,665		186,985		62,673		63,118
Non-agency collateralized mortgage obligations		34		35		28,347		27,682
Equity securities		1,593		1,887		—		—

	$	822,860	$	820,847	$	1,010,672	$	1,038,434

Maturities may differ from contractual terms because borrowers may have the right to call or prepay obligations with or without penalties. Periodic payments are received on mortgage-backed securities based on the payment patterns of the underlying collateral.

At June 30, 2011 and December 31, 2010, securities with a carrying value of $705,270 and $651,299, respectively, were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities with a carrying value of $576,986 and $676,083 at June 30, 2011 and December 31, 2010, respectively, were pledged as collateral for short-term borrowings.

Following are summaries of the fair values and unrealized losses of securities, segregated by length of impairment:

Securities available for sale:


	Less than 12 Months					Greater than 12 Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2011
U.S. Treasury and other U.S. government agencies and corporations	$	57,646	$	(91	)	$	—	$	—		$	57,646	$	(91	)
States of the U.S. and political subdivisions		1,193		(1	)		—		—			1,193		(1	)
Collateralized debt obligations		—		—			6,605		(12,683	)		6,605		(12,683	)
Other debt securities		—		—			5,946		(913	)		5,946		(913	)
Equity securities		28		(1	)		636		(37	)		664		(38	)

	$	58,867	$	(93	)	$	13,187	$	(13,633	)	$	72,054	$	(13,726	)


December 31, 2010
U.S. Treasury and other U.S. government agencies and corporations	$	117,140	$	(688	)	$	—	$	—		$	117,140	$	(688	)
Residential mortgage-backed securities:
Agency collateralized mortgage obligations		22,616		(192	)		—		—			22,616		(192	)
States of the U.S. and political subdivisions		3,322		(26	)		—		—			3,322		(26	)
Collateralized debt obligations		—		—			5,974		(13,314	)		5,974		(13,314	)
Other debt securities		4,024		(62	)		7,221		(1,682	)		11,245		(1,744	)
Equity securities		—		—			648		(59	)		648		(59	)

	$	147,102	$	(968	)	$	13,843	$	(15,055	)	$	160,945	$	(16,023	)

Securities held to maturity:


	Less than 12 Months					Greater than 12 Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2011
Residential mortgage-backed securities:
Agency mortgage-backed securities	$	180,079	$	(1,556	)	$	—	$	—		$	180,079	$	(1,556	)
Agency collateralized mortgage obligations		27,885		(164	)		—		—			27,885		(164	)
Non-agency collateralized mortgage obligations		—		—			9,395		(908	)		9,395		(908	)
States of the U.S. and political subdivisions		16,519		(311	)		—		—			16,519		(311	)
Collateralized debt obligations		—		—			1,994		(508	)		1,994		(508	)
Other debt securities		—		—			1,324		(4	)		1,324		(4	)

	$	224,483	$	(2,031	)	$	12,713	$	(1,420	)	$	237,196	$	(3,451	)


December 31, 2010
Residential mortgage-backed securities:
Agency mortgage-backed securities	$	156,544	$	(3,079	)	$	—	$	—		$	156,544	$	(3,079	)
Agency collateralized mortgage obligations		39,074		(889	)		—		—			39,074		(889	)
Non-agency collateralized mortgage obligations		2,551		(12	)		10,739		(1,319	)		13,290		(1,331	)
States of the U.S. and political subdivisions		47,125		(1,415	)		2,319		(215	)		49,444		(1,630	)
Collateralized debt obligations		—		—			2,354		(778	)		2,354		(778	)
Other debt securities		—		—			1,288		(42	)		1,288		(42	)

	$	245,294	$	(5,395	)	$	16,700	$	(2,354	)	$	261,994	$	(7,749	)

As of June 30, 2011, securities with unrealized losses for less than 12 months include 4 investments in U.S. Treasury and other U.S. government agencies and corporations, 17 investments in residential mortgage-backed securities (15 investments in agency mortgage-backed securities and 2 investments in agency collateralized mortgage obligations (CMOs)), 15 investments in states of the U.S. and political subdivisions and 1 investment in an equity security. Securities with unrealized losses of greater than 12 months include 2 investments in residential mortgage-backed securities (non-agency CMOs), 13 investments in collateralized debt obligations (CDOs), 5 investments in other debt securities and 2 investments in equity securities as of June 30, 2011. The Corporation does not intend to sell the debt securities and it is not more likely than not the Corporation will be required to sell the securities before recovery of their amortized cost basis.

The Corporation's unrealized losses on CDOs relate to investments in trust preferred securities (TPS). The Corporation's portfolio of TPS consists of single-issuer and pooled securities. The single-issuer securities are primarily from money-center and large regional banks. The pooled securities consist of securities issued primarily by banks and thrifts, with some of the pools including a limited number of insurance companies. Investments in pooled securities are all in mezzanine tranches except for one investment in a senior tranche, and are secured by over-collateralization or default protection provided by subordinated tranches. The non-credit portion of unrealized losses on investments in TPS is attributable to temporary illiquidity and the uncertainty affecting these markets, as well as changes in interest rates.

Other-Than-Temporary Impairment

The Corporation evaluates its investment securities portfolio for other-than-temporary impairment (OTTI) on a quarterly basis. Impairment is assessed at the individual security level. The Corporation considers an investment security impaired if the fair value of the security is less than its cost or amortized cost basis.

When impairment of an equity security is considered to be other-than-temporary, the security is written down to its fair value and an impairment loss is recorded as a loss within non-interest income in the consolidated statement of income. When impairment of a debt security is considered to be other-than-temporary, the amount of the OTTI recorded as a loss within non-interest income and thereby recognized in earnings depends on whether the Corporation intends to sell the security or whether it is more likely than not that the Corporation will be required to sell the security before recovery of its amortized cost basis.

If the Corporation intends to sell the debt security or more likely than not will be required to sell the security before recovery of its amortized cost basis, OTTI shall be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value.

If the Corporation does not intend to sell the debt security and it is not more likely than not the Corporation will be required to sell the security before recovery of its amortized cost basis, OTTI shall be separated into the amount representing credit loss and the amount related to all other market factors. The amount related to credit loss shall be recognized in earnings. The amount related to other market factors shall be recognized in other comprehensive income, net of applicable taxes.

The Corporation performs its OTTI evaluation process in a consistent and systematic manner and includes an evaluation of all available evidence. Documentation of the process is as extensive as necessary to support a conclusion as to whether a decline in fair value below cost or amortized cost is temporary or other-than-temporary and includes documentation supporting both observable and unobservable inputs and a rationale for conclusions reached. In making these determinations for pooled TPS, the Corporation consults with third-party advisory firms to provide additional valuation assistance.

This process considers factors such as the severity, length of time and anticipated recovery period of the impairment, recoveries or additional declines in fair value subsequent to the balance sheet date, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions in its industry, and the issuer's financial condition, repayment capacity, capital strength and near-term prospects.

For debt securities, the Corporation also considers the payment structure of the debt security, the likelihood of the issuer being able to make future payments, failure of the issuer of the security to make scheduled interest and principal payments, whether the Corporation has made a decision to sell the security and whether the Corporation's cash or working capital requirements or contractual or regulatory obligations indicate that the debt security will be required to be sold before a forecasted recovery occurs. For equity securities, the Corporation also considers its intent and ability to retain the security for a period of time sufficient to allow for a recovery in fair value. Among the factors that the Corporation considers in determining its intent and ability to retain the security is a review of its capital adequacy, interest rate risk position and liquidity. The assessment of a security's ability to recover any decline in fair value, the ability of the issuer to meet contractual obligations, the Corporation's intent and ability to retain the security, and whether it is more likely than not the Corporation will be required to sell the security before recovery of its amortized cost basis require considerable judgment.

Debt securities with credit ratings below AA at the time of purchase that are repayment-sensitive securities are evaluated using the guidance of ASC Topic 325, Investments – Other. All other securities are required to be evaluated under ASC Topic 320, Investments – Debt Securities.

The Corporation invested in TPS issued by special purpose vehicles (SPVs) which hold pools of collateral consisting of trust preferred and subordinated debt securities issued by banks, bank holding companies, thrifts and insurance companies. The securities issued by the SPVs are generally segregated into several classes known as tranches. Typically, the structure includes senior, mezzanine and equity tranches. The equity tranche represents the first loss position. The Corporation generally holds interests in mezzanine tranches. Interest and principal collected from the collateral held by the SPVs are distributed with a priority that provides the highest level of protection to the senior-most tranches. In order to provide a high level of protection to the senior tranches, cash flows are diverted to higher-level tranches if the principal and interest coverage tests are not met.

The Corporation prices its holdings of TPS using Level 3 inputs in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, and guidance issued by the SEC. In this regard, the Corporation evaluates current available information in estimating the future cash flows of these securities and determines whether there have been favorable or adverse changes in estimated cash flows from the cash flows previously projected. The Corporation considers the structure and term of the pool and the financial condition of the underlying issuers. Specifically, the evaluation incorporates factors such as over-collateralization and interest coverage tests, interest rates and appropriate risk premiums, the timing and amount of interest and principal payments and the allocation of payments to the various tranches. Current estimates of cash flows are based on the most recent trustee reports, announcements of deferrals or defaults, and assumptions regarding expected future default rates, prepayment and recovery rates and other relevant information. In constructing these assumptions, the Corporation considers the following:

•

that current defaults would have no recovery;

•

that some individually analyzed deferrals will cure at rates varying from 10% to 90% after the deferral period ends;

•

recent historical performance metrics, including profitability, capital ratios, loan charge-offs and loan reserve ratios, for the underlying institutions that would indicate a higher probability of default by the institution;

•

that institutions identified as possessing a higher probability of default would recover at a rate of 10% for banks and 15% for insurance companies;

•

that financial performance of the financial sector continues to be affected by the economic environment resulting in an expectation of additional deferrals and defaults in the future;

•

whether the security is currently deferring interest; and

•

the external rating of the security and recent changes to its external rating.

The primary evidence utilized by the Corporation is the level of current deferrals and defaults, the level of excess subordination that allows for receipt of full principal and interest, the credit rating for each security and the likelihood that future deferrals and defaults will occur at a level that will fully erode the excess subordination based on an assessment of the underlying collateral. The Corporation combines the results of these factors considered in estimating the future cash flows of these securities to determine whether there has been an adverse change in estimated cash flows from the cash flows previously projected.

The Corporation's portfolio of trust preferred CDOs consists of 13 pooled issues and five single issue securities. One of the pooled issues is a senior tranche; the remaining 12 are mezzanine tranches. At June 30, 2011, the 13 pooled TPS had an estimated fair value of $8,599 while the single-issuer TPS had an estimated fair value of $7,271. The Corporation has concluded from the analysis performed at June 30, 2011 that it is probable that the Corporation will collect all contractual principal and interest payments on all of its single-issuer and pooled TPS sufficient to recover the amortized cost basis of the securities.

The Corporation did not record any impairment losses on securities for the six months ended June 30, 2011. The Corporation recognized net impairment losses on securities of $2,288 for the six months ended June 30, 2010 due to the write-down of securities that the Corporation deemed to be other-than-temporarily impaired.

At June 30, 2011, all 12 of the pooled trust preferred security investments on which OTTI has been recognized are classified as non-performing investments.

The following table presents a summary of the cumulative credit-related OTTI charges recognized as components of earnings for securities for which a portion of an OTTI is recognized in other comprehensive income:


	June 30, 2011			December 31, 2010
Beginning balance of the amount related to credit loss for which a portion of OTTI was recognized in other comprehensive income	$	(18,332	)	$	(16,051	)
Additions related to credit loss for securities with previously recognized OTTI		—			(2,235	)
Additions related to credit loss for securities with initial OTTI		—			(46	)

Ending balance of the amount related to credit loss for which a portion of OTTI was recognized in other comprehensive income	$	(18,332	)	$	(18,332	)

TPS continue to experience price volatility as the secondary market for such securities remains limited. Write-downs in 2010 were based on the individual securities' credit performance and its ability to make its contractual principal and interest payments. Should credit quality deteriorate to a greater extent than projected, it is possible that additional write-downs may be required. The Corporation monitors actual deferrals and defaults as well as expected future deferrals and defaults to determine if there is a high probability for expected losses and contractual shortfalls of interest or principal, which could warrant further impairment. The Corporation evaluates its entire portfolio each quarter to determine if additional write-downs are warranted.

The following table provides information relating to the Corporation's TPS as of June 30, 2011:


Deal Name	Class	Current Par Value		Amortized Cost		Fair Value		Unrealized Loss			Lowest Credit Ratings	Number of Issuers Currently Performing		Actual Defaults (as a percent of original collateral)		Actual Deferrals (as a percent of original collateral)		Projected Recovery Rates on Current Deferrals (1)		Expected Defaults (%) (2)
Pooled TPS:
P1	C1	$	5,500	$	2,266	$	1,044	$	(1,222	)	C		42		20		19		37		10
P2	C1		4,889		2,746		780		(1,966	)	C		41		14		20		31		12
P3	C1		5,561		4,218		1,494		(2,724	)	C		51		12		6		18		14
P4	C1		3,994		2,852		860		(1,992	)	C		51		15		9		34		13
P5	MEZ		483		358		197		(161	)	C		16		19		13		63		11
P6	MEZ		1,909		1,087		589		(498	)	C		21		17		19		35		9
P7	B3		2,000		726		302		(424	)	C		21		29		9		34		9
P8	B1		3,028		2,386		816		(1,570	)	C		50		14		22		38		13
P9	C		5,048		756		154		(602	)	C		33		14		32		41		14
P10	C		507		461		84		(377	)	C		50		13		14		29		11
P11	C		2,010		787		114		(673	)	C		41		15		16		29		12
P12	A4L		2,000		645		171		(474	)	C		25		16		23		51		13

Total OTTI			36,929		19,288		6,605		(12,683	)			442		16		16		36		12


P13 (3)	SNR		2,384		2,502		1,994		(508	)	BBB		18		13		16		37		9

Total Not OTTI			2,384		2,502		1,994		(508	)			18		13		16		37		9

Total Pooled TPS		$	39,313	$	21,790	$	8,599	$	(13,191	)			460		16		16		36		12


Single Issuer TPS:
S1		$	2,000	$	1,948	$	1,612	$	(336	)	BB+		1
S2			2,000		1,912		1,641		(271	)	BBB+		1
S3			2,000		2,000		1,917		(83	)	B+		1
S4			1,000		999		777		(222	)	BB+		1
S5			1,300		1,328		1,324		(4	)	BB+		1

Total Single Issuer TPS		$	8,300	$	8,187	$	7,271	$	(916	)			5

Total TPS		$	47,613	$	29,977	$	15,870	$	(14,107	)			465

(1)	Some current deferrals will cure at rates varying from 10% to 90% after five years.

(2)	Expected future defaults as a percent of remaining performing collateral.

(3)	Excess subordination represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences any credit impairment. The P13 security had excess subordination as a percent of current collateral of 60.77% as of June 30, 2011.

States of the U.S. and Political Subdivisions

The Corporation's municipal bond portfolio of $197,531 as of June 30, 2011 is highly rated with an average rating of AA and 99.7% of the portfolio rated A or better. General obligation bonds comprise 100% of the portfolio. Geographically, these support the Corporation's footprint as 77.6% of the securities are from municipalities located throughout Pennsylvania. The average holding size of the securities in the municipal bond portfolio is $936. Finally, this portfolio is supported by underlying insurance as 83.6% of the securities have credit support.

Non-Agency CMOs

The Corporation purchased $161,151 of non-agency CMOs from 2003 through 2005. These securities, which are classified as held to maturity, have a book value of $28,347 at June 30, 2011. Paydowns during the first six months of 2011 amounted to $5,604, an annualized paydown rate of 33.0%. At the time of purchase, these securities were all rated AAA, with an original average loan-to-value (LTV) ratio of 66.1% and original credit score of 724. At origination, the credit support, or the amount of loss the collateral pool could absorb before the AAA securities would incur a credit loss, ranged from 2.0% to 7.0%. The current credit support range is now 3.2% to 20.1%, due to paydowns and good credit performance through the first half of 2008. Beginning in the second half of 2008, national delinquencies, an early warning sign of potential default, began to accelerate on the collateral pools. The slight upward trend of the rate of delinquencies throughout 2010 continued into the first quarter of 2011 and have leveled off during the second quarter. All CMO holdings are current with regards to principal and interest.

The rating agencies monitor the underlying collateral performance of these non-agency CMOs for delinquencies, foreclosures and defaults. They also factor in trends in bankruptcies and housing values to ultimately arrive at an expected loss for a given piece of defaulted collateral. Based on deteriorating performance of the collateral, many of these types of securities have been downgraded by the rating agencies. For the Corporation's portfolio, six of the ten non-agency CMOs have been downgraded with one being downgraded this quarter.

The Corporation determines its credit related losses by running scenario analysis on the underlying collateral. This analysis applies default assumptions to delinquencies already in the pipeline, projects future defaults based in part on the historical trends for the collateral, applies a rate of severity and estimates prepayment rates. Because of the limited historical trends for the collateral, multiple default scenarios were analyzed including scenarios that significantly elevate defaults over the next 12 – 18 months. Based on the results of the analysis, the Corporation's management has concluded that there are currently no credit-related losses in its non-agency CMO portfolio.

The following table provides information relating to the Corporation's non-agency CMOs as of June 30, 2011:


													Subordination Data
					Credit Rating				Credit Support %				Delinquency %
Security	Original Year		Book Value		S&P		Moody's		Original		Current		. 30 Day		60 Day		90 Day		% Foreclosure		% OREO		% Bankruptcy		% Total Delinquency		% LTV		Credit Score
1		2003	$	3,247		AAA		n/a		2.5		5.8		1.4		0.1		0.6		0.8		0.0		0.5		3.4		52.1		738
2		2003		2,265		AAA		n/a		4.3		16.3		2.0		1.2		5.0		2.6		0.3		1.2		12.2		56.0		710
3		2003		1,519		AAA		n/a		2.0		6.5		0.6		0.5		1.5		1.3		0.2		1.1		5.1		47.3		742
4		2003		1,522		AAA		n/a		2.7		18.2		0.8		0.0		1.6		2.2		0.0		1.1		5.7		50.4		n/a
5		2004		3,720		AAA		Baa2		7.0		20.1		0.9		1.2		2.0		7.0		1.2		0.8		13.0		55.8		689
6		2004		2,631		AA+		n/a		5.3		10.4		0.6		0.0		2.4		3.1		0.0		1.9		8.0		46.5		734
7		2004		1,260		n/a		A1-		2.5		8.5		0.0		1.1		0.0		4.8		0.0		0.0		5.9		56.0		736
8		2004		1,881		AAA		Baa2		4.4		9.3		1.3		0.5		0.5		2.6		0.5		1.1		6.5		55.1		733
9		2005		6,518		CCC		Caa1		5.1		5.0		3.6		2.1		12.2		5.4		0.5		2.5		26.2		65.5		706
10		2005		3,784		CCC		B3		4.7		3.2		3.5		2.2		3.8		9.1		1.2		1.6		21.4		65.8		726

			$	28,347						4.1		9.5																57.3		719