SECURITIES:

The fair value of securities available-for-sale and related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:



	December 31, 2017
	Amortized		Unrealized
(Dollar amounts in thousands)	Cost		Gains		Losses			Fair Value
U.S. Government entity mortgage-backed securities	$	13,989	$	24	$	(318	)	$	13,695
Mortgage-backed securities, residential	215,079		2,071		(1,812		)	215,338
Mortgage-backed securities, commercial	1		—		—			1
Collateralized mortgage obligations	346,005		370		(6,705		)	339,670
State and municipal obligations	227,651		4,671		(700		)	231,622
Collateralized debt obligations	8,644		5,961		—			14,605
TOTAL	$	811,369	$	13,097	$	(9,535	)	$	814,931



	December 31, 2016
	Amortized		Unrealized
(Dollar amounts in thousands)	Cost		Gains		Losses			Fair Value
U.S. Government entity mortgage-backed securities	$	13,594	$	32	$	(377	)	$	13,249
Mortgage-backed securities, residential	261,878		3,200		(4,073		)	261,005
Mortgage-backed securities, commercial	4		—		—			4
Collateralized mortgage obligations	353,499		1,021		(6,344		)	348,176
State and municipal obligations	217,365		3,954		(2,396		)	218,923
Collateralized debt obligations	9,181		4,411		(1,224		)	12,368
TOTAL	$	855,521	$	12,618	$	(14,414	)	$	853,725

As of December 31, 2017, the Corporation does not have any securities from any issuer, other than the U.S. Government, with an aggregate book or fair value that exceeds ten percent of shareholders' equity.

Securities with a carrying value of approximately $423.9 million and $391.1 million at December 31, 2017 and 2016, respectively, were pledged as collateral for short-term borrowings and for other purposes.

Below is a summary of the gross gains and losses realized by the Corporation on investment sales and calls during the years ended December 31, 2017, 2016 and 2015, respectively.



(Dollar amounts in thousands)	2017			2016			2015
Proceeds	$	15,348		$	8,160		$	3,735
Gross gains	185			39			23
Gross losses	(126		)	(5		)	(6		)

Gains of $185 thousand and losses of $126 thousand in 2017 and gains of $39 thousand and losses of $5 thousand in 2016 and gains of $23 thousand and losses of $6 thousand in 2015 resulted from redemption premiums on called and sold securities.

Contractual maturities of debt securities at year-end 2017 were as follows. Securities not due at a single maturity or with no maturity date, primarily mortgage-backed and collateralized mortgage obligations, are shown separately.



	Available-for-Sale
	Amortized		Fair
(Dollar amounts in thousands)	Cost		Value
Due in one year or less	$	4,683	$	4,701
Due after one but within five years	30,765		31,338
Due after five but within ten years	83,483		85,726
Due after ten years	131,353		138,157
	250,284		259,922
Mortgage-backed securities and collateralized mortgage obligations	561,085		555,009
TOTAL	$	811,369	$	814,931

The following tables show the securities' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at December 31, 2017 and 2016.



	December 31, 2017
	Less Than 12 Months					More Than 12 Months					Total
			Unrealized					Unrealized					Unrealized
(Dollar amounts in thousands)	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Government entity mortgage-backed securities	$	9,321	$	(86	)	3,538		(232		)	$	12,859	$	(318	)
Mortgage-backed securities, residential	79,918		(425		)	53,815		(1,387		)	133,733		(1,812		)
Collateralized mortgage obligations	150,182		(1,418		)	146,750		(5,287		)	296,932		(6,705		)
State and municipal obligations	27,347		(183		)	18,660		(517		)	46,007		(700		)
Total temporarily impaired securities	$	266,768	$	(2,112	)	$	222,763	$	(7,423	)	$	489,531	$	(9,535	)



	December 31, 2016
	Less Than 12 Months					More Than 12 Months					Total
			Unrealized					Unrealized					Unrealized
(Dollar amounts in thousands)	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Government entity mortgage-backed securities	$	12,224	$	(377	)	$	—	$	—		$	12,224	$	(377	)
Mortgage-backed securities, residential	202,248		(4,072		)	152		(1		)	202,400		(4,073		)
Collateralized mortgage obligations	169,717		(3,086		)	79,999		(3,258		)	249,716		(6,344		)
State and municipal obligations	72,852		(2,396		)	—		—			72,852		(2,396		)
Collateralized debt obligations	7,561		(1,224		)	—		—			7,561		(1,224		)
Total temporarily impaired securities	$	464,602	$	(11,155	)	$	80,151	$	(3,259	)	$	544,753	$	(14,414	)

The Corporation held 239 investment securities with an amortized cost greater than fair value as of December 31, 2017. The unrealized losses on collateralized mortgage obligations, all mortgage-backed securities and state and municipal obligations represent negative adjustments to fair value relative to the rate of interest paid on the securities and not losses related to the creditworthiness of the issuer. Gross unrealized losses on investment securities were $9.5 million as of December 31, 2017 and $14.4 million as of December 31, 2016. Management does not intend to sell and it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery. Management believes the value will recover as the securities approach maturity or market rates change.

Management evaluates securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model.

Investment securities are generally evaluated for OTTI under FASB ASC 320, Investments—Debt and Equity Securities. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in FASB ASC 325-40, Beneficial Interests in Securitized Financial Assets.

In determining OTTI under the FASB ASC-320 model, management considers many factors, including: (1)the length of time and the extent to which the fair value has been less than cost, (2)the financial condition and near-term prospects of the issuer, (3) whether the fair value decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

The second segment of the portfolio uses the OTTI guidance provided by FASB ASC-325 that is specific to purchase beneficial interests that, on the purchase date, were rated below AA. Under the FASB ASC-325 model, the Corporation compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

In prior years, a significant portion of the total unrealized losses relates to collateralized debt obligations that were separately evaluated under FASB ASC 325-40, Beneficial Interests in Securitized Financial Assets. Based upon qualitative considerations, such as a downgrade in credit rating or further defaults of underlying issuers during the year, and an analysis of expected cash flows, we determined that three CDOs included in collateralized debt obligations were other-than-temporarily impaired. One of the CDO's was called in first quarter 2017. The remaining two CDO’s have a contractual balance of $18.4 million at December 31, 2017 which has been reduced to $14.6 million by $2.6 million of interest payments received, $7.2 million of cumulative OTTI charges recorded through earnings to date and increased by $6.0 million recorded in other comprehensive income. The severity of the OTTI recorded varies by security, based on the analysis described below, and ranges, at December 31, 2017 from 28% to 80%. The temporary impairment recorded in other comprehensive income is due to factors other than credit loss, mainly current market illiquidity. These securities are collateralized by trust preferred securities issued primarily by bank holding companies, but certain pools do include a limited number of insurance companies. The Corporation uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to determine if there are adverse changes in cash flows during the year. The OTTI model considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. Cash flows are projected using a forward rate LIBOR curve, as these CDOs are variable-rate instruments. An average rate is then computed using this same forward rate curve to determine an appropriate discount rate (3 month LIBOR plus margin ranging from 160 to 180 basis points). The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information, including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and treat all interest payment deferrals as defaults. In addition we use the model to “stress” each CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of the Corporation’s note class. In the current year management determined there was no OTTI. There was no OTTI recorded in 2016 or 2015.

Collateralized debt obligations include one additional investment in a CDO consisting of pooled trust preferred securities in which the issuers are primarily banks. This CDO was paid in full in 2015. In the first quarter of 2017 a CDO with no remaining book value was called with the bank receiving $3.1 million, which is included in other non-interest income on the consolidated statements of income and comprehensive income.

Management has consistently used Standard & Poors pricing to value these investments. There are a number of other pricing sources available to determine fair value for these investments. These sources utilize a variety of methods to determine fair value. The result is a wide range of estimates of fair value for these securities. The Standard & Poors pricing ranges from 67.64 to 79.33 while Moody’s Investor Service pricing ranges from 19.53 to 49.45, with others falling somewhere in between. We recognize that the Standard & Poors pricing utilized is an estimate, but have been consistent in using this source and its estimate of fair value.

The table below presents a rollforward of the credit losses recognized in earnings for the years presented:



(Dollar amounts in thousands)	2017			2016			2015
Beginning balance, January 1,	$	13,974		$	13,995		$	14,050
Amounts related to credit loss for which other-than-
temporary impairment was not previously recognized	—			—			—
Reductions for securities called during the period	(6,842		)
Reductions for increase in cash flows expected to be collected
that are recognized over the remaining life of the security	—			(21		)	(55		)
Increases to the amount related to the credit loss for which other-
than-temporary impairment was previously recognized	—			—			—
Ending balance, December 31,	$	7,132		$	13,974		$	13,995