4. Securities

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


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Available for Sale:
December 31, 2013
U.S. government-sponsored entities	$	336,763	$	126	$	(5,904	)	$	330,985
Residential mortgage-backed securities:
Agency mortgage-backed securities		247,880		4,304		(1,303	)		250,881
Agency collateralized mortgage obligations		511,098		895		(20,794	)		491,199
Non-agency collateralized mortgage obligations		1,747		15		—			1,762
States of the U.S. and political subdivisions		16,842		410		(250	)		17,002
Collateralized debt obligations		37,203		4,507		(10,115	)		31,595
Other debt securities		16,505		524		(929	)		16,100

Total debt securities		1,168,038		10,781		(39,295	)		1,139,524
Equity securities		1,444		682		—			2,126

	$	1,169,482	$	11,463	$	(39,295	)	$	1,141,650

December 31, 2012
U.S. government-sponsored entities	$	352,910	$	1,676	$	(129	)	$	354,457
Residential mortgage-backed securities:
Agency mortgage-backed securities		267,575		7,575		—			275,150
Agency collateralized mortgage obligations		465,574		4,201		(228	)		469,547
Non-agency collateralized mortgage obligations		2,679		50		—			2,729
States of the U.S. and political subdivisions		23,592		1,232		—			24,824
Collateralized debt obligations		34,765		967		(13,276	)		22,456
Other debt securities		21,790		695		(972	)		21,513

Total debt securities		1,168,885		16,396		(14,605	)		1,170,676
Equity securities		1,554		462		(9	)		2,007

	$	1,170,439	$	16,858	$	(14,614	)	$	1,172,683

December 31, 2011
U.S. government-sponsored entities	$	231,187	$	642	$	—		$	231,829
Residential mortgage-backed securities:
Agency mortgage-backed securities		166,758		4,853		—			171,611
Agency collateralized mortgage obligations		181,493		2,236		—			183,729
Non-agency collateralized mortgage obligations		31		—		(1	)		30
States of the U.S. and political subdivisions		38,509		1,841		—			40,350
Collateralized debt obligations		19,224		—		(13,226	)		5,998
Other debt securities		6,863		—		(1,666	)		5,197

Total debt securities		644,065		9,572		(14,893	)		638,744
Equity securities		1,593		257		(23	)		1,827

	$	645,658	$	9,829	$	(14,916	)	$	640,571


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Held to Maturity:
December 31, 2013
U.S. Treasury	$	503	$	99	$	—		$	602
U.S. government-sponsored entities		43,322		180		(1,151	)		42,351
Residential mortgage-backed securities:
Agency mortgage-backed securities		628,681		12,281		(6,032	)		634,930
Agency collateralized mortgage obligations		385,408		764		(15,844	)		370,328
Non-agency collateralized mortgage obligations		6,852		44		(4	)		6,892
Commercial mortgage-backed securities		2,241		124		(37	)		2,328
States of the U.S. and political subdivisions		132,162		1,992		(2,022	)		132,132

	$	1,199,169	$	15,484	$	(25,090	)	$	1,189,563

December 31, 2012
U.S. Treasury	$	503	$	188	$	—		$	691
U.S. government-sponsored entities		28,731		280		(99	)		28,912
Residential mortgage-backed securities:
Agency mortgage-backed securities		780,022		28,783		(1	)		808,804
Agency collateralized mortgage obligations		133,976		1,266		—			135,242
Non-agency collateralized mortgage obligations		14,082		130		—			14,212
Commercial mortgage-backed securities		1,024		39		—			1,063
States of the U.S. and political subdivisions		147,713		6,099		—			153,812
Collateralized debt obligations		512		—		(35	)		477

	$	1,106,563	$	36,785	$	(135	)	$	1,143,213

December 31, 2011
U.S. Treasury	$	504	$	185	$	—		$	689
U.S. government-sponsored entities		4,019		175		—			4,194
Residential mortgage-backed securities:
Agency mortgage-backed securities		683,100		28,722		—			711,822
Agency collateralized mortgage obligations		54,319		573		(11	)		54,881
Non-agency collateralized mortgage obligations		24,348		143		(1,373	)		23,118
States of the U.S. and political subdivisions		147,748		6,877		—			154,625
Collateralized debt obligations		1,592		—		(314	)		1,278
Other debt securities		1,582		25		(181	)		1,426

	$	917,212	$	36,700	$	(1,879	)	$	952,033

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


Year Ended December 31	2013			2012			2011
Gross gains	$	1,200		$	1,154		$	3,848
Gross losses		(392	)		(849	)		(196	)

	$	808		$	305		$	3,652

The gross gains in the table above included $3,415 in 2011 relating to the sale of securities to better position the balance sheet. These sales included a $3,940 U.S. government agency security and $83,736 of mortgage backed securities.

As of December 31, 2013, 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	$	—	$	—	$	3,376	$	3,421
Due from one to five years		281,854		278,833		47,666		46,735
Due from five to ten years		79,155		77,071		51,161		51,798
Due after ten years		46,304		39,778		73,784		73,131

		407,313		395,682		175,987		175,085
Residential mortgage-backed securities:
Agency mortgage-backed securities		247,880		250,881		628,681		634,930
Agency collateralized mortgage obligations		511,098		491,199		385,408		370,328
Non-agency collateralized mortgage obligations		1,747		1,762		6,852		6,892
Commercial mortgage-backed securities		—		—		2,241		2,328
Equity securities		1,444		2,126		—		—

	$	1,169,482	$	1,141,650	$	1,199,169	$	1,189,563

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 residential mortgage-backed securities based on the payment patterns of the underlying collateral.

At December 31, 2013 and 2012, securities with a carrying value of $909,548 and $725,450, respectively, were pledged to secure public deposits, trust deposits and for other purposes as required by law. Securities with a carrying value of $860,279 and $795,812 at December 31, 2013 and 2012, 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:


	Less than 12 Months							Greater than 12 Months							Total
	#		Fair Value		Unrealized Losses			#		Fair Value		Unrealized Losses			#		Fair Value		Unrealized Losses
Securities Available for Sale:
December 31, 2013
U.S. government-sponsored entities		17	$	232,962	$	(5,904	)		—	$	—	$	—			17	$	232,962	$	(5,904	)
Residential mortgage-backed securities:
Agency mortgage-backed securities		9		108,284		(1,303	)		—		—		—			9		108,284		(1,303	)
Agency collateralized mortgage obligations		26		389,989		(18,644	)		2		34,229		(2,150	)		28		424,218		(20,794	)
States of the U.S. and political subdivisions		2		3,022		(250	)		—		—		—			2		3,022		(250	)
Collateralized debt obligations		—		—		—			8		7,965		(10,115	)		8		7,965		(10,115	)
Other debt securities		—		—		—			4		5,950		(929	)		4		5,950		(929	)

		54	$	734,257	$	(26,101	)		14	$	48,144	$	(13,194	)		68	$	782,401	$	(39,295	)

December 31, 2012
U.S. government-sponsored entities		3	$	44,868	$	(129	)		—	$	—	$	—			3	$	44,868	$	(129	)
Residential mortgage-backed securities:
Agency collateralized mortgage obligations		3		47,174		(228	)		—		—		—			3		47,174		(228	)
Collateralized debt obligations		7		8,708		(909	)		9		5,532		(12,367	)		16		14,240		(13,276	)
Other debt securities		—		—		—			4		5,899		(972	)		4		5,899		(972	)
Equity securities		1		654		(9	)		—		—		—			1		654		(9	)

		14	$	101,404	$	(1,275	)		13	$	11,431	$	(13,339	)		27	$	112,835	$	(14,614	)


	Less than 12 Months							Greater than 12 Months							Total
	#		Fair Value		Unrealized Losses			#		Fair Value		Unrealized Losses			#		Fair Value		Unrealized Losses
Securities Held to Maturity:
December 31, 2013
U.S. government-sponsored entities		2	$	24,513	$	(530	)		1	$	14,378	$	(621	)		3	$	38,891	$	(1,151	)
Residential mortgage-backed securities:
Agency mortgage-backed securities		24		308,864		(5,942	)		1		1,296		(90	)		25		310,160		(6,032	)
Agency collateralized mortgage obligations		21		301,312		(15,844	)		—		—		—			21		301,312		(15,844	)
Non-agency collateralized mortgage obligations		3		2,010		(4	)		—		—		—			3		2,010		(4	)
Commercial mortgage-backed securities		1		984		(37	)		—		—		—			1		984		(37	)
States of the U.S. and political subdivisions		27		31,537		(2,022	)		—		—		—			27		31,537		(2,022	)

		78	$	669,220	$	(24,379	)		2	$	15,674	$	(711	)		80	$	684,894	$	(25,090	)

December 31, 2012
U.S. government-sponsored entities		1	$	14,901	$	(99	)		—	$	—	$	—			1	$	14,901	$	(99	)
Residential mortgage-backed securities:
Agency mortgage-backed securities		1		1,424		(1	)		—		—		—			1		1,424		(1	)
Collateralized debt obligations		—		—		—			1		477		(35	)		1		477		(35	)

		2	$	16,325	$	(100	)		1	$	477	$	(35	)		3	$	16,802	$	(135	)

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 collateralized debt obligations (CDOs) relate to investments in 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 and are included in other debt securities. The pooled securities consist of securities issued primarily by banks and thrifts, with some of the pools including a limited number of insurance companies. One of the pooled securities is covered by the Volcker Rule and regulatory guidance issued in January 2014 requires its disposal by July 2015. This security was acquired in the Parkvale acquisition and valued at fair value and is not subject to OTTI. Investments in pooled securities are all in mezzanine tranches except for two investments in senior tranches, 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 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 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.

The Corporation invested in TPS issued by special purpose vehicles (SPVs) that 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 pooled TPS using Level 3 inputs in accordance with ASC 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 deferrals not curing and defaulting 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 TPS consists of 23 pooled issues, primarily obtained through acquisitions, and four single-issuer securities. Two of the pooled issues are senior tranches; the remaining 21 are mezzanine tranches. At December 31, 2013, the 23 pooled TPS had an estimated fair value of $31,595 while the single-issuer TPS had an estimated fair value of $5,950. The Corporation has concluded from the analysis performed at December 31, 2013 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.

At December 31, 2013, all four single-issuer TPS are current in regards to their principal and interest payments. Of the 23 pooled TPS, three are accruing interest based on the coupon rate, 18 are accreting income based on future expected cash flows and the remaining two are on non-accrual status. Income of $3,338 and $2,831 was recognized on pooled TPS for 2013 and 2012, respectively. Included in the amount for 2012 was $34 recognized on pooled TPS which were sold during 2012.

The Corporation recognized net impairment losses on securities of $27 and $212 for 2013 and 2012, respectively, due to the write-down of securities that the Corporation deemed to be other-than-temporarily impaired.

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:


	Collateralized Debt Obligations			Residential Non-Agency CMOs			Equities		Total
For the Year Ended December 31, 2013
Beginning balance	$	17,155		$	212		$	—	$	17,367
Loss where impairment was not previously recognized		—			—			27		27
Additional loss where impairment was previously recognized		—			—			—		—
Reduction due to credit impaired securities sold		—			(212	)		—		(212	)

Ending balance	$	17,155		$	—		$	27	$	17,182

For the Year Ended December 31, 2012
Beginning balance	$	18,369		$	29			—	$	18,398
Loss where impairment was not previously recognized		—			212			—		212
Additional loss where impairment was previously recognized		—			—			—		—
Reduction due to credit impaired securities sold		(1,214	)		(29	)		—		(1,243	)

Ending balance	$	17,155		$	212			—	$	17,367

TPS continue to experience price volatility as the secondary market for such securities remains limited to select non-regulated buyers. Write-downs, when required, are based on an individual security’s 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 TPS portfolio each quarter to determine if additional write-downs are warranted.

The following table provides information relating to the Corporation’s TPS as of December 31, 2013:


Security	Class	Current Par Value		Amortized Cost		Fair Value		Unrealized Gain (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)		Excess Subordination (as a percent of current collateral) (3)
Pooled TPS:
P1	C1	$	5,500	$	2,611	$	1,567	$	(1,044	)	C		42		22		7		41		17		0.00
P2	C1		4,889		3,133		1,326		(1,807	)	C		40		16		15		45		14		0.00
P3	C1		5,561		4,416		1,691		(2,725	)	C		46		13		9		34		16		0.00
P4	C1		3,994		3,169		1,196		(1,973	)	C		51		16		6		46		16		0.00
P5	B3		2,000		780		373		(407	)	C		14		29		10		48		11		0.00
P6	B1		3,028		2,539		1,016		(1,523	)	C		50		15		18		50		10		0.00
P7	C		5,048		864		1,453		589		C		38		14		19		38		13		0.00
P8	C		2,011		788		341		(447	)	C		44		16		11		36		17		0.32
P9	A4L		2,000		645		456		(189	)	C		25		16		10		37		11		0.00

Total OTTI			34,031		18,945		9,419		(9,526	)			350		17		11		42		15

P10	C1		5,219		1,109		1,487		378		C		42		22		7		41		17		0.00
P11	A2A		5,000		2,240		2,384		144		B+		40		16		15		45		14		51.83
P12	C1		4,781		1,371		1,454		83		C		46		13		9		34		16		0.00
P13	C1		5,260		1,336		1,574		238		C		51		16		6		46		16		0.00
P14	C1		5,190		1,108		1,357		249		C		57		15		12		28		17		0.00
P15	C1		3,206		429		616		187		C		41		21		6		23		17		0.00
P16	C		3,339		678		775		97		C		37		17		9		31		14		0.00
P17	B		2,069		694		763		69		Ca		33		14		17		40		14		21.87
P18	B2		5,000		2,243		3,096		853		CCC		19		0		8		90		14		38.10
P19	B		4,080		976		1,498		522		C		44		16		11		36		17		15.00
P20	A1		3,279		1,977		2,107		103		BB-		46		21		6		42		15		55.16
P21	B		5,000		1,327		1,331		4		C		16		18		5		49		11		0.00
P22	C1		5,531		1,440		1,954		514		C		25		15		7		40		10		0.00
P23	C1		5,606		1,330		1,780		450		C		24		16		8		42		10		0.00

Total Not OTTI			62,560		18,258		22,176		3,918				521		16		9		41		15

Total Pooled TPS		$	96,591	$	37,203	$	31,595	$	(5,608	)			871		16		10		41		15


Single Issuer TPS:
S1		$	2,000	$	1,955	$	1,580	$	(375	)	BB		1
S2			2,000		1,925		1,630		(295	)	BBB		1
S3			2,000		2,000		1,950		(50	)	B+		1
S4			1,000		999		790		(209	)	BB		1

Total Single Issuer TPS		$	7,000	$	6,879	$	5,950	$	(929	)			4


Total TPS		$	103,591	$	44,082	$	37,545	$	(6,537	)			875

(1)	Some current deferrals are expected to 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.

States of the U.S. and Political Subdivisions

The Corporation’s municipal bond portfolio of $149,164 as of December 31, 2013 is highly rated with an average entity-specific rating of AA and 99.2% of the portfolio rated A or better. General obligation bonds comprise 98.9% of the portfolio. Geographically, municipal bonds support the Corporation’s footprint as 79.0% of the securities are from municipalities located throughout Pennsylvania. The average holding size of the securities in the municipal bond portfolio is $1,001. In addition to the strong stand-alone ratings, 67.0% of the municipalities have purchased credit enhancement insurance to strengthen the creditworthiness of their issue. Management also reviews the credit profile of each issuer on a quarterly basis.