Investment Securities

The following is a summary of the amortized cost and fair value of investment securities available-for-sale and investment securities held-to-maturity at September 30, 2012, December 31, 2011 and September 30, 2011:



	Investment Securities Available-for-Sale
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
	(In thousands)
September 30, 2012
Government sponsored agencies	$	101,576	$	182	$	266	$	101,492
State and political subdivisions	49,707		2,538		7		52,238
Residential mortgage-backed securities	101,709		3,543		16		105,236
Collateralized mortgage obligations	297,960		1,392		274		299,078
Corporate bonds	82,219		509		622		82,106
Preferred stock	6,144		284		—		6,428
Total	$	639,315	$	8,448	$	1,185	$	646,578
December 31, 2011
Government sponsored agencies	$	70,486	$	240	$	47	$	70,679
State and political subdivisions	42,881		2,354		—		45,235
Residential mortgage-backed securities	117,198		3,883		301		120,780
Collateralized mortgage obligations	332,632		600		832		332,400
Corporate bonds	97,558		45		835		96,768
Preferred stock	1,389		46		21		1,414
Total	$	662,144	$	7,168	$	2,036	$	667,276
September 30, 2011
Government sponsored agencies	$	74,381	$	241	$	61	$	74,561
State and political subdivisions	43,647		1,817		—		45,464
Residential mortgage-backed securities	125,400		3,910		446		128,864
Collateralized mortgage obligations	295,347		1,029		444		295,932
Corporate bonds	64,828		35		679		64,184
Preferred stock	1,389		99		—		1,488
Total	$	604,992	$	7,131	$	1,630	$	610,493



	Investment Securities Held-to-Maturity
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
	(In thousands)
September 30, 2012
State and political subdivisions	$	211,036	$	8,661	$	1,712	$	217,985
Trust preferred securities	10,500		—		5,300		5,200
Total	$	221,536	$	8,661	$	7,012	$	223,185
December 31, 2011
State and political subdivisions	$	172,839	$	6,807	$	342	$	179,304
Trust preferred securities	10,500		—		6,035		4,465
Total	$	183,339	$	6,807	$	6,377	$	183,769
September 30, 2011
State and political subdivisions	$	175,932	$	5,635	$	1,008	$	180,559
Trust preferred securities	10,500		—		6,035		4,465
Total	$	186,432	$	5,635	$	7,043	$	185,024

The majority of the Corporation’s residential mortgage-backed securities and collateralized mortgage obligations are backed by a U.S. government agency (Government National Mortgage Association) or a government sponsored enterprise (Federal Home Loan Mortgage Corporation or Federal National Mortgage Association).

At September 30, 2012, the Corporation held $10.5 million of trust preferred investment securities that were recorded as held-to-maturity, with $10.0 million of these securities representing a 100% interest in a trust preferred investment security of a non-public bank holding company in Michigan that has been assessed by the Corporation as financially strong. The remaining $0.5 million represents a 10% interest in another trust preferred investment security of a non-public bank holding company located in Michigan that was categorized as well-capitalized under regulatory guidelines.

At September 30, 2012, it was the Corporation’s opinion that the market for trust preferred investment securities was not active, and thus, in accordance with GAAP, when there is a significant decrease in the volume and activity for an asset or liability in relation to normal market activity, adjustments to transaction or quoted prices may be necessary or a change in valuation technique or multiple valuation techniques may be appropriate. The fair values of the trust preferred investment securities were based upon a calculation of discounted cash flows. The cash flows were discounted based upon both observable inputs and appropriate risk adjustments that market participants would make for nonperformance, illiquidity and issuer specifics. An independent third party provided the Corporation with observable inputs based on the existing market and insight into appropriate rate of return adjustments that market participants would require for the additional risk associated with a single issue investment security of this nature. Using a model that incorporated the average current yield of publicly traded performing trust preferred securities of large financial institutions with no known material financial difficulties at September 30, 2012, and adjusted for both illiquidity and the specific characteristics of the issuer, such as size, leverage position and location, the Corporation calculated an implied yield of 50% on its $10.0 million trust preferred investment security and 40% for its $0.5 million trust preferred investment security. Based upon these implied yields, the fair values of the trust preferred investment securities at September 30, 2012 were calculated by the Corporation at $5.0 million and $0.2 million, respectively, resulting in a combined unrealized loss of $5.3 million at that date. At September 30, 2012, the Corporation concluded that the $5.3 million of combined unrealized loss on the trust preferred investment securities was temporary in nature.

The following is a summary of the amortized cost and fair value of investment securities at September 30, 2012, by maturity, for both available-for-sale and held-to-maturity investment securities. The maturities of residential mortgage-backed securities and collateralized mortgage obligations are based on scheduled principal payments. The maturities of all other debt securities are based on final contractual maturity.



	September 30, 2012
	Amortized Cost		Fair Value
	(In thousands)
Investment Securities Available-for-Sale:
Due in one year or less	$	171,593	$	173,000
Due after one year through five years	326,357		328,800
Due after five years through ten years	66,831		69,093
Due after ten years	68,390		69,257
Preferred stock	6,144		6,428
Total	$	639,315	$	646,578
Investment Securities Held-to-Maturity:
Due in one year or less	$	38,910	$	41,225
Due after one year through five years	94,392		96,740
Due after five years through ten years	57,290		59,023
Due after ten years	30,944		26,197
Total	$	221,536	$	223,185

The following schedule summarizes information for both available-for-sale and held-to-maturity investment securities with gross unrealized losses at September 30, 2012, December 31, 2011 and September 30, 2011, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position.



	Less Than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(In thousands)
September 30, 2012
Government sponsored agencies	$	39,729	$	248	$	8,808	$	18	$	48,537	$	266
State and political subdivisions	69,841		1,711		1,533		8		71,374		1,719
Residential mortgage-backed securities	32		1		19,704		15		19,736		16
Collateralized mortgage obligations	12,036		45		47,066		229		59,102		274
Corporate bonds	19,469		531		24,900		91		44,369		622
Trust preferred securities	—		—		5,200		5,300		5,200		5,300
Total	$	141,107	$	2,536	$	107,211	$	5,661	$	248,318	$	8,197
December 31, 2011
Government sponsored agencies	$	9,883	$	36	$	9,632	$	11	$	19,515	$	47
State and political subdivisions	—		—		31,706		342		31,706		342
Residential mortgage-backed securities	27,367		152		19,018		149		46,385		301
Collateralized mortgage obligations	200,218		703		18,176		129		218,394		832
Corporate bonds	50,590		415		14,580		420		65,170		835
Trust preferred securities	—		—		4,465		6,035		4,465		6,035
Preferred stock	—		—		319		21		319		21
Total	$	288,058	$	1,306	$	97,896	$	7,107	$	385,954	$	8,413
September 30, 2011
Government sponsored agencies	$	28,763	$	59	$	2,753	$	2	$	31,516	$	61
State and political subdivisions	38,661		874		7,544		134		46,205		1,008
Residential mortgage-backed securities	29,560		343		19,206		103		48,766		446
Collateralized mortgage obligations	108,302		367		16,164		77		124,466		444
Corporate bonds	37,658		648		2,467		31		40,125		679
Trust preferred securities	—		—		4,465		6,035		4,465		6,035
Total	$	242,944	$	2,291	$	52,599	$	6,382	$	295,543	$	8,673

An assessment is performed quarterly by the Corporation to determine whether unrealized losses in its investment securities portfolio are temporary or other-than-temporary by carefully considering all available information. The Corporation reviews factors such as financial statements, credit ratings, news releases and other pertinent information of the underlying issuer or company to make its determination. Management did not believe any individual unrealized loss on any investment security, as of September 30, 2012, represented an other-than-temporary impairment (OTTI). Management believed that the unrealized losses on investment securities at September 30, 2012 were temporary in nature and due primarily to changes in interest rates, increased credit spreads and reduced market liquidity and not as a result of credit-related issues. Unrealized losses of $5.3 million in the trust preferred securities portfolio, related to trust preferred securities of two well-capitalized bank holding companies in Michigan, were attributable to illiquidity in certain financial markets. The Corporation performed an analysis of the creditworthiness of these issuers and concluded that, at September 30, 2012, the Corporation expected to recover the entire amortized cost basis of these investment securities.

At September 30, 2012, the Corporation did not have the intent to sell any of its impaired investment securities and believed that it was more-likely-than-not that the Corporation will not have to sell any such investment securities before a full recovery of amortized cost. Accordingly, at September 30, 2012, the Corporation believed the impairments in its investment securities portfolio were temporary in nature. However, there is no assurance that OTTI may not occur in the future.