Note 3. Securities

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



	2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
U.S. government agencies and corporations	$	12,644	$	371	$	(12	)	$	13,003
State and political subdivisions	50,172		2,398		(53		)	52,517
Collateralized mortgage obligations ⁽¹⁾	173,438		2,301		(241		)	175,498
Mortgage-backed securities ⁽¹⁾	34,967		706		(37		)	35,636
Trust preferred securities	6,105		—		(4,094		)	2,011
Corporate notes and other investments	4,764		—		(284		)	4,480
	$	282,090	$	5,776	$	(4,721	)	$	283,145



	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
Collateralized mortgage obligations ⁽¹⁾	122,369		604		(356		)	122,617
Mortgage-backed securities ⁽¹⁾	18,330		301		(28		)	18,603
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 collateralized mortgage obligations and 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 approximately $96,062 and $168,066 as of December 31, 2011 and 2010, respectively, were pledged as collateral for the securities sold under agreements to repurchase, Treasury, Tax, and Loan Option Notes, and for other purposes as required or permitted by law or regulation. Securities sold under agreements to repurchase are held in safekeeping on behalf of the Company.

The amortized cost and fair value of securities available for sale as of December 31, 2011, by contractual maturity are shown below. Certain securities have call features which allow the issuer to call the securities prior to maturity. Expected maturities may differ from contractual maturities for collateralized mortgage obligations and mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, collateralized mortgage obligations and mortgage-backed securities are not included in the maturity categories in the following maturity summary.



	2011
	Amortized Cost		Fair Value
Due in one year or less	$	1,150	$	1,154
Due after one year through five years	21,969		21,799
Due after five years through ten years	21,765		23,121
Due after ten years	28,801		25,937
	73,685		72,011
Collateralized mortgage obligations and mortgage-backed securities	208,405		211,134
	$	282,090	$	283,145

The details of the sales of securities for the years ended December 31, 2011, 2010, and 2009 are summarized in the following table.



	2011		2010		2009
Proceeds from sales	$	—	$	78,704	$	155,064
Gross gains on sales	—		411		2,726
Gross losses on sales	—		371		842

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 December 31, 2011 and 2010.



	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	$	4,988	$	(12	)	$	—	$	—		$	4,988	$	(12	)
State and political subdivisions	—		—			3,090		(53		)	3,090		(53		)
Collateralized mortgage obligations	38,175		(241		)	—		—			38,175		(241		)
Mortgage-backed securities	17,898		(37		)	—		—			17,898		(37		)
Trust preferred securities	—		—			2,011		(4,094		)	2,011		(4,094		)
Corporate notes and other investments	—		—			3,708		(284		)	3,708		(284		)
	$	61,061	$	(290	)	$	8,809	$	(4,431	)	$	69,870	$	(4,721	)



	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		)
Collateralized mortgage obligations	38,185		(356		)	—		—			38,185		(356		)
Mortgage-backed securities	9,104		(28		)	—		—			9,104		(28		)
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 December 31, 2011, the available for sale investment portfolio included two municipal securities, two TPS, and one corporate note with unrealized losses that have existed for longer than one year.

All of the Company's municipal obligations are with Iowa communities, except for two in Nebraska, and all are considered to have acceptable credit risks. The Company believes the unrealized losses on investments in state and political subdivisions, collateralized mortgage obligations, mortgage-backed securities, 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 December 31, 2011.

The Company believes the unrealized loss of $965 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 December 31, 2011.

As of December 31, 2011, the Company had one pooled TPS, ALESCO Preferred Funding X, Ltd., it considered to have 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 $1,245 at December 31, 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 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 TPS 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, most importantly, to reflect idiosyncratic credit performance differences (both actual and projected) between these products and the underlying collateral in the specific TPS 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 the three-month LIBOR plus 15 percent (a lifetime average all-in discount rate of approximately 18 percent) was used for determination of fair value as of December 31, 2011, and an all-in discount rate of approximately 17 percent was used as of December 31, 2010. For purposes of determining any credit loss, projected cash flows were discounted at the original rate of three-month LIBOR plus 1.25 percent.

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 TPS 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 a larger amount of issuer defaults during the next two or three years than that which had been experienced historically, and a gradual leveling off of defaults thereafter.

Based on the valuation work performed, credit losses of $99, $117, and $310 were recognized for the years ended December 31, 2011, 2010, and 2009, respectively. As of December 31, 2011, the unrealized loss of $3,129 is reflected in accumulated other comprehensive income, net of taxes of $1,189. The Company will continue to periodically estimate the present value of cash flows expected to be collected over the life of the security.

During the third quarter of 2010, a single-issuer TPS, which was issued by Old Second Bancorp, Inc., was sold with a realized loss of $304. A previously announced exchange offer for this security was withdrawn by the issuer during the third quarter of 2010. Management made the decision to eliminate future potential losses on this security by selling West Bank's entire investment. The security had been considered to be OTTI and an impairment loss of $188 was recognized during the second quarter of 2010.

The following tables detail information for each individual and pooled TPS owned as of December 31, 2011 and 2010.



As of December 31, 2011:
	Single-issuer or pooled	Class	Book value		Fair value		Unrealized 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	$	4,374	$	1,245	$	(3,129	)	Ca	48	9.0	%	16.9	%	0.0%
Heartland Financial Statutory Trust VII 144A	Single	N/A	1,731		766		(965		)	NR	N/A	N/A		N/A		N/A



As of December 31, 2010:
	Single-issuer or pooled	Class	Book value		Fair value		Unrealized 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, N/A - Not applicable


(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 (approximately 11.6% of the original collateral) for the pooled issue was sold to another party during 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 may mean any additional deferrals or defaults could 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 trust preferred security for which a portion of OTTI has been recognized in other comprehensive income (loss) for the years ended December 31, 2011 and 2010.



	2011		2010
Balance at beginning of period	$	427	$	310
Current period credit loss recognized in earnings	99		117
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	$	526	$	427