3. Securities Available for Sale

For securities available for sale, the following tables show the amortized cost, unrealized gains and losses (pre-tax) included in accumulated other comprehensive income, and estimated fair value by security type as of June 30, 2011, and December 31, 2010.



	June 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
U.S. government agencies and corporations	$	47,658	$	386	$	—		$	48,044
State and political subdivisions	53,288		1,345		(103		)	54,530
Mortgage-backed securities ⁽¹⁾	145,555		3,108		—			148,663
Trust preferred securities	6,199		—		(4,019		)	2,180
Corporate notes and other investments	6,424		11		(52		)	6,383
	$	259,124	$	4,850	$	(4,174	)	$	259,800


	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
U.S. government agencies and corporations	$	47,685	$	274	$	(161	)	$	47,798
State and political subdivisions	59,512		464		(839		)	59,137
Mortgage-backed securities ⁽¹⁾	140,699		905		(384		)	141,220
Trust preferred securities	6,194		—		(4,218		)	1,976
Corporate notes and other investments	6,507		16		(328		)	6,195
	$	260,597	$	1,659	$	(5,930	)	$	256,326



(1)	All mortgage-backed securities consist of residential mortgage pass-through securities guaranteed by GNMA or issued by FNMA, and real estate mortgage investment conduits guaranteed by FHLMC or GNMA.

Securities with an amortized cost of $143,624 and $168,066 as of June 30, 2011, and December 31, 2010, respectively, were pledged as collateral on the Treasury, Tax, and Loan Option Notes, securities sold under agreements to repurchase, and for other purposes as required or permitted by law or regulation. Securities sold under agreements to repurchase are held in safekeeping at a correspondent bank on behalf of the Company.

The amortized cost and fair value of securities available for sale as of June 30, 2011, by contractual maturity are shown below. Certain securities have call features that allow the issuer to call the securities prior to maturity. Expected maturities may differ from contractual maturities in mortgage-backed securities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, mortgage-backed securities are not included in the maturity categories within the summary.



	June 30, 2011
	Amortized Cost		Fair Value
Due in one year or less	$	2,622	$	2,640
Due after one year through five years	57,847		58,028
Due after five years through ten years	21,916		22,632
Due after ten years	31,184		27,837
	113,569		111,137
Mortgage-backed securities	145,555		148,663
	$	259,124	$	259,800

The details of the sales of securities for the three and six months ended June 30, 2011 and 2010, are summarized in the following table.



	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010
Proceeds from sales	$	—	$	52,171		$	—	$	67,621
Gross gains on sales	—		40			—		86
Gross losses on sales	—		(49		)	—		(49		)

See Note 2 for a discussion of financial reporting for securities with unrealized losses.

The following tables show the fair value and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, as of June 30, 2011, and December 31, 2010. The tables include one trust preferred security (TPS) for which a portion of an OTTI has been recognized in other comprehensive income.



	June 30, 2011
	Less than 12 months					12 months or longer					Total
	Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)
U.S. government agencies
and corporations	$	—	$	—		$	—	$	—		$	—	$	—
State and political subdivisions	3,504		(51		)	1,055		(52		)	4,559		(103		)
Mortgage-backed securities	—		—			—		—			—		—
Trust preferred securities	—		—			2,180		(4,019		)	2,180		(4,019		)
Corporate notes and other investments	—		—			3,939		(52		)	3,939		(52		)
	$	3,504	$	(51	)	$	7,174	$	(4,123	)	$	10,678	$	(4,174	)


	December 31, 2010
	Less than 12 months					12 months or longer					Total
	Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)			Fair Value		Gross Unrealized (Losses)
U.S. government agencies
and corporations	$	19,853	$	(161	)	$	—	$	—		$	19,853	$	(161	)
State and political subdivisions	25,374		(700		)	2,003		(139		)	27,377		(839		)
Mortgage-backed securities	47,289		(384		)	—		—			47,289		(384		)
Trust preferred securities	—		—			1,976		(4,218		)	1,976		(4,218		)
Corporate notes and other investments	—		—			3,661		(328		)	3,661		(328		)
	$	92,516	$	(1,245	)	$	7,640	$	(4,685	)	$	100,156	$	(5,930	)

As of June 30, 2011, the available for sale investment portfolio included four municipal securities, two TPSs, and one corporate note with unrealized losses that have existed for longer than one year.

The Company believes the unrealized losses on investments in municipal obligations and corporate notes are due to market conditions, not reduced estimated cash flows. The Company does not have the intent to sell these securities, does not anticipate that these securities will be required to be sold before anticipated recovery, and expects full principal and interest to be collected. Therefore, the Company does not consider these investments to be OTTI at June 30, 2011.

The Company believes the unrealized loss of $1,128 on an investment in one single-issuer TPS issued by Heartland Financial, USA, Inc. is due to market conditions, not reduced estimated cash flows. The Company does not have the intent to sell this security, does not anticipate that this security will be required to be sold before anticipated recovery, and expects full principal and interest will be collected. Therefore, the Company does not consider this investment to be OTTI at June 30, 2011.

As of June 30, 2011, the Company had one pooled TPS, ALESCO Preferred Funding X, Ltd., it considered to be OTTI. The Company engaged an independent consulting firm to assist in the valuation of this security. Based on that valuation, management determined the security had an estimated fair value of $1,582 at June 30, 2011. The methodology for determining the appropriate discount rate for a TPS for purposes of determining fair value combines an evaluation of current market yields for comparable corporate and structured credit products with an evaluation of the risks associated with the TPS cash flows in question. More specifically, the market-based yield indicators are used as a baseline for determining appropriate discount rates, and then the resulting discount rates are adjusted on the basis of credit and structural analysis of specific TPS instruments. The primary focus is on the returns a fixed income investor would require in order to allocate capital on a risk-adjusted basis. However, due to the fact that there is currently no active market for this pooled TPS, the focus is on market yields for stand-alone TPSs issued by banks, thrifts, and insurance companies, and for which there are active and liquid markets. A series of adjustments are made to reflect the differences that nevertheless exist between these products (both credit and structural) and, more importantly, to reflect idiosyncratic credit performance differences (both actual and projected) between these products and the underlying collateral in the specific TPSs being valued. Importantly, as part of the analysis described above, consideration is given to the fact that structured instruments frequently exhibit leverage not present in stand-alone instruments, and adjustments are made as necessary to reflect this additional risk. As a result of this analysis and due to the fixed rate nature of the instrument's contractual interest cash flows, a discount rate of LIBOR + 13% (a lifetime average all-in discount rate of approximately 17%) was used for determination of fair value. For purposes of determining any credit loss, projected cash flows were discounted using a rate of LIBOR plus 1.25%.

The consulting firm first evaluates the credit quality of each underlying issuer within the TPS by reviewing a comprehensive database of financial information and/or publicly-filed financial statements. On the basis of this information and a review of historical industry default data and current and near-term operating conditions, default and recovery probabilities for each underlying issuer within the asset were estimated. For issuers who had already defaulted, no recovery was assumed. For deferring issuers, an assumption was made that the majority of deferring issuers will continue to defer and will eventually default. Each deferring issuer is reviewed on a case-by-case basis and, in some instances, a probability is assigned that the deferral will ultimately be cured. The issuer-specific assumptions are then aggregated into cumulative weighted-average default, recovery, and prepayment probabilities. The collateral prepayment assumptions were affected by the view that the terms and pricing of TPSs and subordinated debt issued by banks and insurance companies were so aggressive that it is unlikely that such financing will become available in the foreseeable future. Therefore, the assumption was made that no collateral will prepay over the life of the TPS. In light of generally weak collateral credit performance and a challenging U.S. credit and real estate environment, the assumptions generally imply more issuer defaults during the next two to three years than those that had been experienced historically, and a gradual leveling off of defaults thereafter.

Based on the valuation work performed, no additional credit loss was recognized in second quarter 2011 earnings. The unrealized loss of $2,891 is reflected in accumulated other comprehensive income, net of taxes of $1,099. The Company will continue to periodically estimate the present value of cash flows expected to be collected over the life of the security.

The following tables detail information for the individual and pooled TPSs owned as of June 30, 2011, and December 31, 2010.



As of June 30, 2011:
	Single- issuer or pooled	Class	Book value		Fair value		Unrealized gain/(loss)			Credit rating (1)	Number of entities currently performing (2)	Actual deferrals and defaults (3) (4)		Expected deferrals and defaults (5)		Excess subordination (5)
ALESCO Preferred Funding X, Ltd.	Pooled	C-2	$	4,473	$	1,582	$	(2,891	)	Ca	51	7.8	%	15.5	%	0.0%
Heartland Financial Statutory Trust VII 144A	Single	n/a	1,726		598		(1,128		)	NR	n/a	n/a		n/a		n/a



As of December 31, 2010:
	Single- issuer or pooled	Class	Book value		Fair value		Unrealized gain/(loss)			Credit rating (1)	Number of entities currently performing (2)	Actual deferrals and defaults (3)		Expected deferrals and defaults (5)		Excess subordination (5)
ALESCO Preferred Funding X, Ltd.	Pooled	C-2	$	4,473	$	1,339	$	(3,134	)	Ca	51	20.6	%	19.3	%	0.0%
Heartland Financial Statutory Trust VII 144A	Single	n/a	1,721		637		(1,084		)	NR	n/a	n/a		n/a		n/a

NR - Not rated



(1)	Lowest rating assigned
(2)	Pooled issue originally included 58 banks and 19 insurance companies
(3)	As a percentage of the original collateral
(4)	Approximately $100 million of defaulted collateral was sold to another party during the three months ended June 30, 2011, with a portion of any collateral recovered to be returned to the Fund. This sale is the reason for the reduction in this deferral and default percent compared to prior period disclosures.
(5)	As a percentage of the remaining performing collateral

Excess subordination represents the additional defaults in excess of both current and projected defaults that the pool can absorb before the bond experiences any credit impairment. There is no excess collateral to absorb any future defaults. With the excess subordination at zero percent, this means any additional deferrals or defaults will have a negative impact on the value of the pooled TPS.

The following table provides a roll forward of the amount of credit-related losses recognized in earnings for the pooled TPS for which a portion of OTTI has been recognized in other comprehensive income for the three and six months ended June 30, 2011 and 2010.



	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Balance at beginning of period	$	427	$	310	$	427	$	310
Current period credit loss recognized in earnings	—		—		—		—
Reductions for securities sold during the period	—		—		—		—
Reductions for securities where there is an intent to sell or
requirement to sell	—		—		—		—
Reductions for increases in cash flows expected to be collected	—		—		—		—
Balance at end of period	$	427	$	310	$	427	$	310