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, 2013, December 31, 2012 and September 30, 2012:



	Investment Securities Available-for-Sale
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
	(In thousands)
September 30, 2013
Government sponsored agencies	$	86,065	$	264	$	404	$	85,925
State and political subdivisions	44,191		1,386		5		45,572
Residential mortgage-backed securities	310,550		1,144		3,534		308,160
Collateralized mortgage obligations	200,407		199		2,148		198,458
Corporate bonds	65,053		583		202		65,434
Preferred stock	1,389		208		—		1,597
Total	$	707,655	$	3,784	$	6,293	$	705,146
December 31, 2012
Government sponsored agencies	$	97,529	$	241	$	213	$	97,557
State and political subdivisions	47,663		2,302		—		49,965
Residential mortgage-backed securities	96,320		3,100		9		99,411
Collateralized mortgage obligations	262,790		984		182		263,592
Corporate bonds	69,788		546		539		69,795
Preferred stock	6,144		345		—		6,489
Total	$	580,234	$	7,518	$	943	$	586,809
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



	Investment Securities Held-to-Maturity
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
	(In thousands)
September 30, 2013
State and political subdivisions	$	272,079	$	5,978	$	8,441	$	269,616
Trust preferred securities	10,500		—		4,250		6,250
Total	$	282,579	$	5,978	$	12,691	$	275,866
December 31, 2012
State and political subdivisions	$	219,477	$	8,087	$	3,367	$	224,197
Trust preferred securities	10,500		—		4,775		5,725
Total	$	229,977	$	8,087	$	8,142	$	229,922
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

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).

During the second quarter of 2013, the Corporation sold a $4.8 million preferred stock investment security, which was carried at cost, and recognized a gross gain on the sale of $0.2 million.

At September 30, 2013, 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 small 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 small non-public bank holding company located in Michigan that was categorized as well-capitalized under regulatory guidelines at September 30, 2013.

At September 30, 2013, 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 Corporation obtained pricing information for its trust preferred investment securities from an independent third-party pricing source. The pricing information was based on both observable inputs and appropriate risk adjustments that market participants would make for possible nonperformance, illiquidity and issuer specifics such as size, leverage position and location. The observable inputs were 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. Based on the information obtained from the independent third-party pricing source, the Corporation calculated a fair value at September 30, 2013 of $6.0 million on its $10.0 million trust preferred investment security and $0.2 million on its $0.5 million trust preferred investment security, resulting in a combined unrealized loss of $4.3 million at that date. At September 30, 2013, the Corporation concluded that the $4.3 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, 2013, 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, 2013
	Amortized Cost		Fair Value
	(In thousands)
Investment Securities Available-for-Sale:
Due in one year or less	$	91,500	$	91,946
Due after one year through five years	117,337		118,555
Due after five years through ten years	426,031		422,118
Due after ten years	71,398		70,930
Preferred stock	1,389		1,597
Total	$	707,655	$	705,146
Investment Securities Held-to-Maturity:
Due in one year or less	$	42,112	$	42,179
Due after one year through five years	114,020		115,646
Due after five years through ten years	74,316		74,353
Due after ten years	52,131		43,688
Total	$	282,579	$	275,866

The following schedule summarizes information for both available-for-sale and held-to-maturity investment securities with gross unrealized losses at September 30, 2013, December 31, 2012 and September 30, 2012, 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, 2013
Government sponsored agencies	$	43,816	$	223	$	14,395	$	181	$	58,211	$	404
State and political subdivisions	120,232		6,918		30,915		1,528		151,147		8,446
Residential mortgage-backed securities	267,495		3,532		40		2		267,535		3,534
Collateralized mortgage obligations	129,049		1,617		15,302		531		144,351		2,148
Corporate bonds	9,926		85		19,883		117		29,809		202
Trust preferred securities	—		—		6,250		4,250		6,250		4,250
Total	$	570,518	$	12,375	$	86,785	$	6,609	$	657,303	$	18,984
December 31, 2012
Government sponsored agencies	$	46,103	$	213	$	—	$	—	$	46,103	$	213
State and political subdivisions	70,675		2,257		8,046		1,110		78,721		3,367
Residential mortgage-backed securities	273		1		1,305		8		1,578		9
Collateralized mortgage obligations	19,331		10		36,835		172		56,166		182
Corporate bonds	4,747		253		34,707		286		39,454		539
Trust preferred securities	—		—		5,725		4,775		5,725		4,775
Total	$	141,129	$	2,734	$	86,618	$	6,351	$	227,747	$	9,085
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

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, 2013, represented an other-than-temporary impairment (OTTI). Management believed that the unrealized losses on investment securities at September 30, 2013 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 $4.3 million in the trust preferred securities portfolio, related to trust preferred securities of two well-capitalized bank holding companies in Michigan, were attributable to the illiquidity in financial markets for these types of investments. The Corporation performed an analysis of the creditworthiness of these issuers and concluded that, at September 30, 2013, the Corporation expected to recover the entire amortized cost basis of these investment securities.

At September 30, 2013, 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, 2013, 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.