3. Investment Securities

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of investment securities at December 31, 2011 and 2010 are as follows:


	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Available for sale:
U.S. government sponsored agency securities	$	24,473	$	796	$	—		$	25,269
Residential mortgage-backed securities		834,383		26,285		(1,731	)		858,937
Commercial mortgage-backed securities		137,646		10,561		—			148,207
Collateralized mortgage obligations		68,598		2,022		—			70,620
State and municipal obligations		67,418		4,929		—			72,347

Total available for sale		1,132,518		44,593		(1,731	)		1,175,380

Held to maturity:
Residential mortgage-backed securities		81,901		6,042		—			87,943
Collateralized mortgage obligations		22,395		716		—			23,111

Total held to maturity		104,296		6,758		—			111,054

Total	$	1,236,814	$	51,351	$	(1,731	)	$	1,286,434


	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Available for sale:
U.S. government sponsored agency securities	$	22,994	$	—	$	(975	)	$	22,019
Residential mortgage-backed securities		863,353		2,100		(23,067	)		842,386
Commercial mortgage-backed securities		145,529		4,459		(266	)		149,722
Collateralized mortgage obligations		66,022		33		(4,153	)		61,902
State and municipal obligations		76,873		961		(376	)		77,458

Total available for sale		1,174,771		7,553		(28,837	)		1,153,487

Held to maturity:
Residential mortgage-backed securities		100,990		1,760		(999	)		101,751

Total held to maturity		100,990		1,760		(999	)		101,751

Total	$	1,275,761	$	9,313	$	(29,836	)	$	1,255,238

As of December 31, 2011, the Company had $1.19 billion (estimated fair value) of mortgage related investment securities which consisted of residential and commercial mortgage-backed securities and collateralized mortgage obligations. Residential mortgage-backed securities and collateralized mortgage obligations include securities collateralized by 1-4 family residential mortgage loans, while commercial mortgage-backed securities include securities collateralized by mortgage loans on multifamily properties. Of the total mortgage related investment securities, $1.18 billion (estimated fair value), or 99.6%, were issued by government sponsored enterprises, such as Ginnie Mae, Fannie Mae, and Freddie Mac, and the remaining $4.9 million were private-label mortgage related securities.

Investment securities with an approximate book value of $930 million at December 31, 2011 and $969 million at December 31, 2010, were pledged to collateralize certain deposits, securities sold under agreements to repurchase, Federal Home Loan Bank ("FHLB") advances, and for other purposes as required or permitted by law.

During 2011, the Company realized gross gains of $5.0 million and gross losses of $80,000 on the sale of available for sale investment securities. This compares to gross realized gains of $41.4 million and gross realized losses of $14,000 on the sales of available for sale investment securities during 2010 and gross realized gains of $17.6 million and gross realized losses of $10,000 on the sales of available for sale investment securities during 2009.

The following table summarizes, for investment securities with unrealized losses as of December 31, 2011 and 2010, the amount of the unrealized loss and the related fair value. The securities have been further segregated by those that have been in a continuous unrealized loss position for less than twelve months and those that have been in a continuous unrealized loss position for twelve or more months.


	December 31, 2011
	Length of Continuous Unrealized Loss Position
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
Available for sale:
Residential mortgage-backed securities	$	15,024	$	(66	)	$	4,939	$	(1,665	)	$	19,963	$	(1,731	)

Temporarily impaired securities – Available for sale	$	15,024	$	(66	)	$	4,939	$	(1,665	)	$	19,963	$	(1,731	)

Held to maturity:
Temporarily impaired securities: Held to maturity	$	—	$	—		$	—	$	—		$	—	$	—

Total temporarily impaired securities	$	15,024	$	(66	)	$	4,939	$	(1,665	)	$	19,963	$	(1,731	)


	December 31, 2010
	Length of Continuous Unrealized Loss Position
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(in thousands)
Available for sale:
U.S. government sponsored agency securities	$	22,019	$	(975	)	$	—	$	—		$	22,019	$	(975	)
Residential mortgage-backed securities		723,341		(21,330	)		6,541		(1,737	)		729,882		(23,067	)
Commercial mortgage-backed securities		10,542		(266	)		—		—			10,542		(266	)
Collateralized mortgage obligations		53,459		(4,153	)		—		—			53,459		(4,153	)
State and municipal obligations		18,845		(376	)		—		—			18,845		(376	)

Temporarily impaired securities – Available for sale	$	828,206	$	(27,100	)	$	6,541	$	(1,737	)	$	834,747	$	(28,837	)

Held to maturity:
Residential mortgage-backed securities	$	38,591	$	(999	)	$	—	$	—		$	38,591	$	(999	)

Temporarily impaired securities: Held to maturity		38,591		(999	)		—		—			38,591		(999	)

Total temporarily impaired securities	$	866,797	$	(28,099	)	$	6,541	$	(1,737	)	$	873,338	$	(29,836	)

At December 31, 2011, the Company had three securities in its investment portfolio that have been in an unrealized loss position for twelve or more months with a total unrealized loss of $1.7 million. The three securities were from the Company's portfolio of private-label residential mortgage-backed securities.

Of the three private-label residential mortgage related securities, one was in an unrealized loss position of less than 10% of amortized cost. As part of its normal process, the Company reviewed the security, considering the severity and duration of the loss and current credit ratings, and believes that the decline in fair value was not credit related but related to changes in interest rates and current illiquidity in the market for these types of securities. The other two private-label residential mortgage related securities had a total unrealized loss of $1.5 million, and were subject to further review for other-than-temporary impairment.

For any securities that have been in an unrealized loss position for more than 12 months that was greater than 10%, additional testing is performed to evaluate other-than-temporary impairment. For the two private-label residential mortgage-backed securities, the Company obtained fair value estimates from an independent source and performed a cash flow analysis, considering default rates, loss severities based upon the location of the collateral and estimated prepayments. Each of the private-label mortgage related securities had credit enhancements in the form of different investment tranches which impact how cash flows are distributed. The higher level tranches will receive cash flows first and as a result, the lower level tranches will absorb the losses, if any, from collateral shortfalls. The Company purchased the private-label securities that were either of the highest or one of the highest investment grades, as rated by nationally recognized credit rating agencies. The cash flow analysis takes into account the Company's tranche and the current level of support provided by the lower tranches. The Company believes that market illiquidity has impacted the values of these private-label securities because of the lack of active trading. Neither of these securities contains subprime mortgage loans, but do include Alt-A loans, adjustable rate mortgages with initial interest only periods, and loans that are secured by collateral in geographic areas adversely impacted by the housing downturn. If this analysis shows that the Company does not expect to recover its entire investment, an other-than-temporary impairment charge would be recorded for the amount of the credit loss. Previously, one of the two securities had other-than-temporary impairment recognized for the amount of the expected credit loss. The independent cash flow analysis performed at December 31, 2011 indicated that there was additional credit loss on this security and the Company recorded an additional $190,000 other-than-temporary-impairment charge in 2011. For the other private-label security reviewed, the independent cash flow analysis showed that the Company expects to recover its entire investment and, therefore, the decline in fair value was not due to credit, but was most likely caused by illiquidity in the market, and no other-than-temporary impairment charge was recorded.

One additional investment security was evaluated for other-than-temporary impairment at December 31, 2011. This security is in the Company's state and municipal obligation portfolio and was received in 2008 in a loan work out arrangement. Scheduled payments were received as agreed from 2008 until the May 2011 interest payment, which was not received. Since the Company now believes that it will not recover all the expected payments of principal and interest as specified in the bond agreement, the expected future annual cash flows were analyzed and an other-than-temporary impairment charge of $381,000 was recorded against earnings in 2011.

At December 31, 2010, the Company had three securities in its investment portfolio that have been in an unrealized loss position for twelve or more months with a total unrealized loss of $1.7 million. The three securities were from the Company's portfolio of private-label residential mortgage-backed securities.

The following table shows the contractual maturities of debt securities, categorized by amortized cost and estimated fair value, at December 31, 2011.


	Amortized Cost		Estimated Fair Value
	(in thousands)
Available for sale:
Due in one year or less	$	1,005	$	1,009
Due after one year through five years		745		798
Due after five years through ten years		51,725		55,224
Due after ten years		38,416		40,585
Residential mortgage-backed securities		834,383		858,937
Commercial mortgage-backed securities		137,646		148,207
Collateralized mortgage obligations		68,598		70,620

Total available for sale		1,132,518		1,175,380

Held to maturity:
Residential mortgage-backed securities		81,901		87,943
Collateralized mortgage obligations		22,395		23,111

Total Held to maturity		104,296		111,054

Total investment	$	1,236,814	$	1,286,434

Investment securities do not include the Bank's investment in Federal Home Loan Bank of Chicago ("FHLBC") and Federal Reserve Bank ("FRB") stock of $56.8 million at December 31, 2011 and $40.0 million at December 31, 2010. These investments are required for membership and are carried at cost.

The Bank must maintain a specified level of investment in FHLBC stock based upon the amount of its outstanding FHLB borrowings. At December 31, 2011, the Company had a $45.1 million investment in FHLBC stock, compared to $29.5 million at December 31, 2010. Since 2007, the FHLBC has been under a cease and desist order with its regulators that requires prior regulatory approval to declare dividends and to redeem member capital stock other than excess capital stock under limited circumstances. The stock of the FHLBC is viewed as a long-term asset and its value is based upon the ultimate recoverability of the par value. In determining the recoverability of this investment, the Company considers factors such as the severity and duration of declines in the market value of the FHLBC's net assets relative to its capital, its recent operating performance, its commitment to make required payments, the structure of the FHLB system which enables the regulator of the FHLBs to reallocate debt among the FHLB entities, the impact of legislative and regulatory changes on the FHLBC and its operations, and its ability to continue to provide liquidity and funding to its members.

As of December 31, 2011, after evaluating these factors and considering that transactions in FHLBC stock continued to be made at par value during 2011 and the FHLBC paid dividends in each quarter of 2011, the Company believes that it will ultimately recover the par value of the FHLBC stock.