SECURITIES

The amortized cost, gross unrealized gains and losses and estimated fair values of securities available for sale as of December 31, 2012, and December 31, 2011, are summarized in the table below, in thousands:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2012
Securities available for sale:
U.S. government corporations and agencies	$	21,002	$	443	$	(1	)	$	21,444
Mortgage-backed securities	1,027,234		19,002		(10,035		)	1,036,201
Obligations of states and political subdivisions	403,077		23,560		(192		)	426,445
Corporate debt securities	—		—		—			—
Total debt securities	1,451,313		43,005		(10,228		)	1,484,090
Equity securities	21,252		733		—			21,985
Total	$	1,472,565	$	43,738	$	(10,228	)	$	1,506,075
December 31, 2011
Securities available for sale:
U.S. government corporations and agencies	$	104,719	$	2,428	$	—		$	107,147
Mortgage-backed securities	815,408		14,643		(4,997		)	825,054
Obligations of states and political subdivisions	272,660		14,983		(973		)	286,670
Corporate debt securities	26,284		29		(1,060		)	25,253
Total debt securities	1,219,071		32,083		(7,030		)	1,244,124
Equity securities	23,389		486		—			23,875
Total	$	1,242,460	$	32,569	$	(7,030	)	$	1,267,999

At December 31, 2012, the amortized cost of the available for sale securities is net of $184 thousand of credit related other-than-temporary impairment ("OTTI"). At December 31, 2011, no OTTI was recorded.

The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of December 31, 2012, and December 31, 2011, are summarized in the table below, in thousands:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2012
Securities held to maturity:
Mortgage-backed securities	$	7,040	$	492	$	(12	)	$	7,520
Obligations of states and political subdivisions	48,462		—		—			48,462
Total	$	55,502	$	492	$	(12	)	$	55,982
December 31, 2011
Securities held to maturity:
Mortgage-backed securities	$	9,131	$	40	$	(1,532	)	$	7,639
Obligations of states and political subdivisions	49,129		730		(12		)	49,847
Total	$	58,260	$	770	$	(1,544	)	$	57,486

At December 31, 2012, the amortized cost of the held to maturity securities is net of $797 thousand of credit related OTTI and $612 thousand of non-credit related OTTI. At December 31, 2011, no OTTI was recorded.

Approximately 80% of Heartland's mortgage-backed securities are issuances of government-sponsored enterprises.

Included in the equity securities at December 31, 2012 and 2011, were shares of stock in each Federal Home Loan Bank (the "FHLB") of Des Moines, Chicago, Dallas, San Francisco, Seattle and Topeka at an amortized cost of $11.6 million and $14.4 million, respectively. As a member of the Federal Reserve System, Heartland's Heritage Bank, N.A. subsidiary also had shares of stock in the Federal Reserve Bank (the "FRB") of San Francisco of $380 thousand. The Heartland banks are required to maintain FHLB stock and FRB stock as members of the various FHLB's and the Federal Reserve System in amounts as required by these institutions. These equity securities are "restricted" in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other marketable equity securities and their fair value approximates amortized cost. Heartland considers its FHLB and FRB stock as a long-term investment that provides access to competitive products and liquidity. Heartland evaluates impairment in these investments based on the ultimate recoverability of the par value and at December 31, 2012, did not consider the investments to be other than temporarily impaired.

The amortized cost and estimated fair value of debt securities available for sale at December 31, 2012, by contractual maturity are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.



	Amortized Cost		Estimated Fair Value
Securities available for sale:
Due in 1 year or less	$	4,266	$	4,320
Due in 1 to 5 years	44,947		46,912
Due in 5 to 10 years	55,943		59,506
Due after 10 years	318,923		337,151
Total debt securities	424,079		447,889
Mortgage-backed securities	1,027,234		1,036,201
Equity securities	21,252		21,985
Total investment securities	$	1,472,565	$	1,506,075

The amortized cost and estimated fair value of debt securities held to maturity at December 31, 2012, by contractual maturity are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.



	Amortized Cost		Estimated Fair Value
Securities held to maturity:
Due in 1 year or less	$	—	$	—
Due in 1 to 5 years	510		510
Due in 5 to 10 years	11,638		11,638
Due after 10 years	36,314		36,314
Total debt securities	48,462		48,462
Mortgage-backed securities	7,040		7,520
Total investment securities	$	55,502	$	55,982

As of December 31, 2012, securities with a fair value of $557.1 million were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required by law.

Gross gains and losses realized related to sales of securities for the years ended December 31, 2012, 2011, and 2010 are summarized as follows, in thousands:



	2012		2011		2010
Securities sold:
Proceeds from sales	$	580,775	$	493,167	$	399,901
Gross security gains	15,387		15,302		8,575
Gross security losses	1,389		2,198		1,741

The following tables summarize, in thousands, the amount of unrealized losses, defined as the amount by which cost or amortized cost exceeds fair value, and the related fair value of investments with unrealized losses in Heartland's securities portfolio as of December 31, 2012, and December 31, 2011. The investments were segregated into two categories: those that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 or more months. The reference point for determining how long an investment was in an unrealized loss position was December 31, 2012, and December 31, 2011, respectively. Securities for which Heartland has taken credit-related OTTI write-downs are categorized as being "less than 12 months" or "12 months or longer" in a continuous loss position based on the point in time that the fair value declined to below the cost basis and not the period of time since the credit-related OTTI write-down.



Securities available for sale
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2012
U.S. government corporations and agencies	$	1,517	$	(1	)	$	—	$	—		$	1,517	$	(1	)
Mortgage-backed securities	332,842		(9,121		)	24,489		(914		)	357,331		(10,035		)
Obligations of states and political subdivisions	22,503		(192		)	—		—			22,503		(192		)
Corporate debt securities	—		—			—		—			—		—
Total debt securities	356,862		(9,314		)	24,489		(914		)	381,351		(10,228		)
Equity securities	—		—			—		—			—		—
Total temporarily impaired securities	$	356,862	$	(9,314	)	$	24,489	$	(914	)	$	381,351	$	(10,228	)
December 31, 2011
U.S. government corporations and agencies	$	—	$	—		$	—	$	—		$	—	$	—
Mortgage-backed securities	133,538		(1,794		)	71,231		(3,203		)	204,769		(4,997		)
Obligations of states and political subdivisions	13,139		(284		)	4,010		(689		)	17,149		(973		)
Corporate debt securities	5,147		(243		)	15,346		(817		)	20,493		(1,060		)
Total debt securities	151,824		(2,321		)	90,587		(4,709		)	242,411		(7,030		)
Equity securities	—		—			—		—			—		—
Total temporarily impaired securities	$	151,824	$	(2,321	)	$	90,587	$	(4,709	)	$	242,411	$	(7,030	)



Securities held to maturity
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2012
Mortgage-backed securities	$	3,296	$	—		$	—	$	(12	)	$	3,296	$	(12	)
Obligations of states and political subdivisions	—		—			—		—			—		—
Total temporarily impaired securities	$	3,296	$	—		$	—	$	(12	)	$	3,296	$	(12	)
December 31, 2011
Mortgage-backed securities	$	2,350	$	(54	)	$	3,515	$	(1,478	)	$	5,865	$	(1,532	)
Obligations of states and political subdivisions	—		—			500		(12		)	500		(12		)
Total temporarily impaired securities	$	2,350	$	(54	)	$	4,015	$	(1,490	)	$	6,365	$	(1,544	)

Heartland reviews the investment securities portfolio on a quarterly basis to monitor its exposure to OTTI. A determination as to whether a security's decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors Heartland may consider in the OTTI analysis include the length of time the security has been in an unrealized loss position, changes in security ratings, financial condition of the issuer, as well as security and industry specific economic conditions. In addition, with regard to debt securities, Heartland may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds, and the value of any underlying collateral. For certain debt securities in unrealized loss positions, Heartland prepares cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. During the first quarter of 2012, Heartland experienced deterioration in the credit support on three private label mortgage-backed securities which resulted in a credit-related OTTI loss. The underlying collateral on these securities experienced an increased level of defaults and a slowing of voluntary prepayments causing the present value of the forward expected cash flows, using prepayment and default vectors, to be below the amortized cost basis of the securities. Based on Heartland's evaluation, a $981 thousand OTTI on three private label mortgage-backed securities attributable to credit-related losses was recorded in March 2012. The other-than-temporary credit-related losses were $797 thousand in the held to maturity category and $184 thousand in the available for sale category. Heartland had not previously recorded an OTTI loss on debt securities.

The remaining unrealized losses on Heartland's mortgage-backed securities are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities and not related to concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that the securities will not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, these investments are not considered other-than-temporarily impaired.

Unrealized losses on Heartland's obligations of states and political subdivisions are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. Management monitors the published credit ratings of these securities and the stability of the underlying municipalities. Because the decline in fair value is attributable to changes in interest rates or widening market spreads due to insurance company downgrades and not underlying credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, these investments are not considered other-than-temporarily impaired.

There were no gross realized gains or losses on the sale of available for sale securities with OTTI write-downs for the periods ended December 31, 2012 or December 31, 2011.

The following table shows the detail of total OTTI write-downs included in earnings, in thousands:



	For the Years Ended December 31,
	2012		2011		2010
OTTI write-downs included in earnings:
Available for sale debt securities:
Mortgage-backed securities	$	184	$	—	$	—
Held to maturity debt securities:
Mortgage-backed securities	797		—		—
Total debt security OTTI write-downs included in earnings	$	981	$	—	$	—

The following table shows the detail of OTTI write-downs on debt securities included in earnings and the related changes in other accumulated comprehensive income (AOCI) for the same securities, in thousands:



	For the Years Ended December 31,
	2012			2011		2010
OTTI on debt securities
Recorded as part of gross realized losses:
Credit related OTTI	$	981		$	—	$	—
Intent to sell OTTI	—			—		—
Total recorded as part of gross realized losses	981			—		—
Recorded directly to AOCI for non-credit related impairment:
Mortgage-backed securities	683			—		—
Accretion of non-credit related impairment	(71		)	—		—
Total recorded directly to AOCI for non-credit related impairment	612			—		—
Total OTTI losses recorded on debt securities	$	1,593		$	—	$	—

The following table presents a rollforward of the credit loss component of OTTI recognized in earnings for debt securities still owned by Heartland. The credit loss component of the amortized cost represents the difference between the present value of expected future cash flows discounted using the security's current effective interest rate and the amortized cost basis of the security prior to considering credit losses. OTTI recognized in earnings for credit impaired debt securities is presented as additions and is classified into one of two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or if the debt security was previously credit impaired (subsequent credit impairments). The credit loss component is reduced if Heartland sells, intends to sell, or if management believes they will be required to sell previously credit impaired debt securities. Additionally, the credit loss component is reduced if Heartland receives, expects to receive cash flows in excess of what was previously expected to be received over the remaining life of the credit impaired debt security, the security matures or is fully written down.

Changes in the credit loss component of the credit impaired debt securities that Heartland does not intend to sell were, in thousands:



	For the Years Ended December 31,
	2012		2011		2010
Credit loss component, beginning of period	$	—	$	—	$	—
Additions:
Initial credit impairments	981		—		—
Subsequent credit impairments	—		—		—
Total additions	981		—		—
Reductions:
For securities sold	—		—		—
Due to change in intent to sell or requirement to sell	—		—		—
For recoveries of previous credit impairments	—		—		—
Total reductions	—		—		—
Credit loss component, end of period	$	981	$	—	$	—