INVESTMENT SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and approximate fair values of the investment securities at the dates indicated were:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at June 30, 2013
U.S. Government-sponsored agency securities	$	4,022	$	40			$	4,062
State and municipal	184,912		5,351		$	3,169	187,094
U.S. Government-sponsored mortgage-backed securities	390,114		5,357		4,488		390,983
Corporate obligations	6,267				5,519		748
Equity securities	1,706						1,706
Total available for sale	587,021		10,748		13,176		584,593
Held to maturity at June 30, 2013
State and municipal	115,943		552		11		116,484
U.S. Government-sponsored mortgage-backed securities	208,456		7,046		221		215,281
Total held to maturity	324,399		7,598		232		331,765
Total Investment Securities	$	911,420	$	18,346	$	13,408	$	916,358



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for sale at December 31, 2012
U.S. Government-sponsored agency securities	$	4,475	$	165			$	4,640
State and municipal	148,187		10,025		$	18	158,194
U.S. Government-sponsored mortgage-backed securities	337,631		10,994		46		348,579
Corporate obligations	6,105				5,881		224
Equity securities	1,706						1,706
Total available for sale	498,104		21,184		5,945		513,343
Held to maturity at December 31, 2012
State and municipal	117,227		5,489		1		122,715
U.S. Government-sponsored mortgage-backed securities	243,793		11,681		15		255,459
Total held to maturity	361,020		17,170		16		378,174
Total Investment Securities	$	859,124	$	38,354	$	5,961	$	891,517

The amortized cost and fair value of available for sale securities and held to maturity securities at June 30, 2013, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Maturity Distribution at June 30, 2013:
Due in one year or less	$	6,554	$	6,735	$	1,755	$	1,757
Due after one through five years	13,272		13,763		9,429		9,692
Due after five through ten years	56,466		57,995		58,321		58,326
Due after ten years	118,909		113,411		46,438		46,709
	$	195,201	$	191,904	$	115,943	$	116,484
U.S. Government-sponsored mortgage-backed securities	390,114		390,983		208,456		215,281
Equity securities	1,706		1,706
Total Investment Securities	$	587,021	$	584,593	$	324,399	$	331,765

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $317,638,000 at June 30, 2013, and $335,775,000 at December 31, 2012.

The book value of securities sold under agreements to repurchase amounted to $150,396,000 at June 30, 2013, and $128,094,000 at December 31, 2012.

Gross gains and losses on the sales and redemptions of available for sale securities, and other-than-temporary impairment (“OTTI”) losses recognized for the three and six months ended June 30, 2013 and 2012 are shown below.



	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Sales and Redemptions of Available for Sale Securities:
Gross gains	$	239	$	502	$	487	$	1,291
Gross losses	—		—		—		—
Other-than-temporary impairment losses	—		—		—		$	—

The following table shows the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2013, and December 31, 2012:



	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Temporarily Impaired Investment
Securities at June 30, 2013
State and municipal	$	66,388	$	3,180					$	66,388	$	3,180
U.S. Government-sponsored mortgage-backed securities	183,941		4,709						183,941		4,709
Corporate obligations					$	717	$	5,519	717		5,519
Total Temporarily Impaired Investment Securities	$	250,329	$	7,889	$	717	$	5,519	$	251,046	$	13,408



	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Temporarily Impaired Investment
Securities at December 31, 2012
State and municipal	$	4,524	$	19					$	4,524	$	19
U.S. Government-sponsored mortgage-backed securities	12,320		61						12,320		61
Corporate obligations					$	194	$	5,881	194		5,881
Total Temporarily Impaired Investment Securities	$	16,844	$	80	$	194	$	5,881	$	17,038	$	5,961

Certain investments in debt and equity securities are reported in the financial statements at an amount less than their historical cost as indicated in the table below.



	June 30, 2013			December 31, 2012
Investments reported at less than historical cost:
Historical cost	$	264,454		$	22,999
Fair value	$	251,046		$	17,038
Percent of the Corporation's available for sale and held to maturity portfolio	27.6		%	1.9		%

The Corporation’s management has evaluated all securities with unrealized losses for other-than-temporary impairment ("OTTI") as of June 30, 2013. The evaluations are based on the nature of the securities, the extent and duration of the loss and the intent and ability of the Corporation to hold these securities either to maturity or through the expected recovery period.

The current unrealized losses are primarily concentrated within trust preferred securities held by the Corporation. Such investments have an amortized cost of $6.3 million and a fair value of $717,000, which is less than 1 percent of the Corporation’s entire investment portfolio. On all but one small pool investment, the Corporation utilized Moody’s to determine their fair value.

In determining the fair value of the trust preferred securities, the Corporation utilizes a third party for portfolio accounting services, including market value input. The Corporation has obtained an understanding of what inputs are being used by the vendor in pricing the portfolio and how the vendor was classifying these securities based upon these inputs. From these discussions, the Corporation’s management is comfortable that the classifications are proper. The Corporation has gained trust in the data for two reasons: (a) independent spot testing of the data is conducted by the Corporation through obtaining market quotes from various brokers on a periodic basis and (b) actual gains or loss resulting from the sale of certain securities has proven the data to be accurate over time.

Discount rates used in the OTTI cash flow analysis on these variable rate securities were those margins in effect at the inception of the security added to the appropriate three-month LIBOR spot rate obtained from the forward LIBOR curve used to project future principal and interest payments. These spreads ranged from .85 percent to 1.57 percent spread over LIBOR.

Management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the OTTI is identified.

U.S. Government-Sponsored Mortgage-Backed Securities

The unrealized losses on the Corporation’s investment in U.S. Government-sponsored mortgage-backed securities were a result of changes in interest rates. The Corporation expects to recover the amortized cost basis over the term of the securities as the decline in market value is attributable to changes in interest rates and not credit quality. The Corporation does not intend to sell the investment and it is not more likely than not that the Corporation will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity. The Corporation does not consider the investment securities to be other-than-temporarily impaired at June 30, 2013.

State and Municipal

The unrealized losses on the Corporation’s investments in securities of state and political subdivisions were caused by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Corporation does not intend to sell the investment and it is not more likely than not that the Corporation will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity. The Corporation does not consider the investment securities to be other-than-temporarily impaired at June 30, 2013.

Corporate Obligations

The Corporation’s unrealized losses on Corporate Obligations were due to the decline in value related to the pooled trust preferred securities, and is attributable to temporary illiquidity and the financial crisis affecting these markets, coupled with the potential credit loss resulting from the adverse change in expected cash flows. Due to the illiquidity in the market, it is unlikely that the Corporation would be able to recover its investment in these securities if the Corporation sold the securities at this time. Management has analyzed the cash flow characteristics of the securities and this analysis included utilizing the most recent trustee reports and any other relevant market information, including announcements of deferrals or defaults of trust preferred securities. The Corporation compared expected discounted cash flows, based on performance indicators of the underlying assets in the security, to the carrying value of the investment to determine if OTTI existed. The Corporation does not intend to sell the investment, and it is not more likely than not that the Corporation will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity. The Corporation does not consider the remainder of the investment securities, which are classified as Level 3 inputs in the fair value hierarchy, to be other-than-temporarily impaired at June 30, 2013.

Credit Losses Recognized on Investments

Certain debt securities have experienced fair value deterioration due to credit losses and other market factors. The following table provides information about debt securities for which only a credit loss was recognized in income and other losses were recorded in other comprehensive income.



	Accumulated Credit Losses in 2013		Accumulated Credit Losses in 2012
Credit losses on debt securities held:
Balance, January 1	$	11,355	$	11,355
Additions related to other-than-temporary losses not previously recognized
Balance, June 30	$	11,355	$	11,355