INVESTMENT SECURITIES

The fair value of the available-for-sale investment portfolio reflected an unrealized loss of $3,884,000 at December 31, 2013 compared to an unrealized gain of $12,891,000 at December 31, 2012. The unrealized loss or gain recorded is net of $1,598,000 in tax benefits and $5,305,000 in tax liabilities as accumulated other comprehensive income within shareholders’ equity at December 31, 2013 and 2012, respectively. The Company did not have any held-to-maturity securities during the years ended December 31, 2013 or 2012.

The following two tables set forth the carrying values and estimated fair values of our investment securities portfolio at the dates indicated (in thousands):



	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale Securities
Debt Securities:
U.S. Government agencies	$	18,172	$	115	$	(84	)	$	18,203
Obligations of states and political subdivisions	162,018		2,906		(6,517		)	158,407
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	254,978		1,075		(2,344		)	253,709
Private label residential mortgage backed securities	4,344		1,047		—			5,391
Other equity securities	7,596		2		(84		)	7,514
	$	447,108	$	5,145	$	(9,029	)	$	443,224



	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-Sale Securities
Debt Securities:
U.S. Government agencies	$	9,443	$	34	$	(23	)	$	9,454
Obligations of states and political subdivisions	151,312		10,751		(385		)	161,678
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	206,465		3,152		(1,107		)	208,510
Private label residential mortgage backed securities	6,258		323		(206		)	6,375
Other equity securities	7,596		352		—			7,948
`	$	381,074	$	14,612	$	(1,721	)	$	393,965

Proceeds and gross realized gains (losses) on investment securities for the years ended December 31, 2013, 2012, and 2011 are shown below (in thousands):



	Years Ended December 31,
	2013			2012			2011
Available-for-Sale Securities
Proceeds from sales or calls	$	88,146		$	39,119		$	44,700
Gross realized gains from sales or calls	$	2,728		$	2,121		$	1,119
Gross realized losses from sales or calls	$	(1,463	)	$	(482	)	$	(821	)

The provision for income taxes includes $521,000, $674,000, and $110,000 income tax impact from the reclassification of unrealized net gains on available-for-sale securities to realized net gains on available-for-sale securities for the years ended December 31, 2013, 2012, and 2011, respectively.

Investment securities with unrealized losses at December 31, 2013 and 2012 are summarized and classified according to the duration of the loss period as follows (in thousands):



	December 31, 2013
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-Sale Securities
Debt Securities:
U.S. Government agencies	$	4,132	$	(75	)	$	968	$	(9	)	$	5,100	$	(84	)
Obligations of states and political subdivisions	89,556		(5,007		)	15,015		(1,510		)	104,571		(6,517		)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	148,853		(2,070		)	19,199		(274		)	168,052		(2,344		)
Other equity securities	7,416		(84		)	—		—			7,416		(84		)
	$	249,957	$	(7,236	)	$	35,182	$	(1,793	)	$	285,139	$	(9,029	)



	December 31, 2012
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-Sale Securities
Debt Securities:
U.S. Government agencies	$	3,590	$	(23	)	$	—	$	—		$	3,590	$	(23	)
Obligations of states and political subdivisions	$	30,572	$	(385	)	$	—	$	—		$	30,572	$	(385	)
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	76,764		(809		)	18,024		(298		)	94,788		(1,107		)
Private label residential mortgage backed securities	—		—			2,886		(206		)	2,886		(206		)
	$	110,926	$	(1,217	)	$	20,910	$	(504	)	$	131,836	$	(1,721	)

We periodically evaluate each investment security for other-than-temporary impairment, relying primarily on industry analyst reports, observation of market conditions and interest rate fluctuations. Under ASC 320-10, the portion of the impairment that is attributable to a shortage in the present value of expected future cash flows relative to the amortized cost should be recorded as a current period charge to earnings. The discount rate in this analysis is the original yield expected at time of purchase.

As of December 31, 2013, the Company performed an analysis of the investment portfolio to determine whether any of the investments held in the portfolio had an other-than-temporary impairment (OTTI). Management evaluated all available-for-sale investment securities with an unrealized loss at December 31, 2013, and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at December 31, 2013 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $10,000. Management also analyzed any securities that may have been down graded by credit rating agencies.

For those bonds that met the evaluation criteria management obtained and reviewed the most recently published national credit ratings for those bonds. For those bonds that were municipal debt securities with an investment grade rating by the rating agencies, management also evaluated the financial condition of the municipality and any applicable municipal bond insurance provider and concluded that no credit related impairment existed.

U.S. Government Agencies - At December 31, 2013, the Company held seven U.S. Government agency securities of which two were in a loss position for less than 12 months and one was in a loss position and has been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in U.S. Government Agencies were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2013.

Obligations of States and Political Subdivisions - At December 31, 2013, the Company held 162 obligations of states and political subdivision securities of which 66 were in a loss position for less than 12 months and 14 were in a loss position and have been in a loss position for 12 months or more. The unrealized losses on the Company’s investments in obligations of states and political subdivision securities were caused by interest rate changes. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2013.

U.S. Government Sponsored Entities and Agencies Collateralized by Residential Mortgage Obligations - At December 31, 2013, the Company held 209 U.S. Government sponsored entity and agency securities collateralized by residential mortgage obligation securities of which 65 were in a loss position for less than 12 months and 16 in a loss position for more than 12 months. The unrealized losses on the Company’s investments in U.S. Government sponsored entity and agencies collateralized by residential mortgage obligations were caused by interest rate changes. The contractual cash flows of those investments are guaranteed or supported by an agency or sponsored entity of the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2013.

Private Label Residential Mortgage Backed Securities - At December 31, 2013, the Company had a total of 21 PLRMBS with a remaining principal balance of $4,344,000 and a net unrealized gain of approximately $1,047,000. None of these securities had an unrealized loss at December 31, 2013. Eight of these PLRMBS with a remaining principal balance of $3,400,000 had credit ratings below investment grade, and the Company recorded an OTTI charge of $17,000 related to two of these securities. As of December 31, 2013, these two PLRMBS had an unrealized gain of $81,000. The Company continues to perform extensive analyses on all PLRMBS securities.

The following table provides a roll forward for the years ended December 31, 2013 and 2012 of investment securities credit losses recorded in earnings (in thousands). The beginning balance represents the credit loss component for which OTTI occurred on debt securities in prior periods. Additions represent the first time a debt security was credit impaired or when subsequent credit impairments have occurred on securities for which OTTI credit losses have been previously recognized.



	Years ended December 31,
	2013		2012
Beginning balance	$	783	783
Amounts related to credit loss for which an OTTI charge was not previously recognized	17		—
Increases to the amount related to credit loss for which OTTI was previously recognized	—		—
Realized losses for securities sold	—		—
Ending balance	$	800	$	783

The amortized cost and estimated fair value of investment securities at December 31, 2013 and 2012 by contractual maturity are shown in the two tables below (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.



December 31, 2013	Amortized Cost		Estimated Fair Value
Within one year	$	—	$	—
After one year through five years	1,769		1,939
After five years through ten years	22,099		22,687
After ten years	138,150		133,781
	162,018		158,407
Investment securities not due at a single maturity date:
U.S. Government agencies	18,172		18,203
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	254,978		253,709
Private label residential mortgage backed securities	4,344		5,391
Other equity securities	7,596		7,514
	$	447,108	$	443,224



December 31, 2012	Amortized Cost		Estimated Fair Value
Within one year	$	150	$	151
After one year through five years	10,355		11,250
After five years through ten years	20,256		22,176
After ten years	120,551		128,101
	151,312		161,678
Investment securities not due at a single maturity date:
U.S. Government agencies	9,443		9,454
U.S. Government sponsored entities and agencies collateralized by residential mortgage obligations	206,465		208,510
Private label residential mortgage backed securities	6,258		6,375
Other equity securities	7,596		7,948
Total	$	381,074	$	393,965

Investment securities with amortized costs totaling $98,701,000 and $81,245,000 and fair values totaling $99,209,000 and $89,343,000 were pledged as collateral for borrowing arrangements, public funds and for other purposes at December 31, 2013 and 2012, respectively.