Note 4:

Investment Securities

The amortized costs and approximate fair values, together with gross unrealized gains and losses on securities, are as follows:

	2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for Sale Securities
Mortgage-backed securities
Government-sponsored agencies	$	198,039	$	4,813	$	(6	)	$	202,846
Collateralized mortgage obligations
Government-sponsored agencies		97,098		2,963		—			100,061
Federal agencies		2,000		2		—			2,002
Municipals		3,364		208		(14	)		3,558
Small Business Administration		12		—		—			12
Corporate obligations		27,488		—		(5,089	)		22,399

Total investment securities	$	328,001	$	7,986	$	(5,109	)	$	330,878

	2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for Sale Securities
Mortgage-backed securities
Government-sponsored agencies	$	119,017	$	1,076	$	(1,818	)	$	118,275
Collateralized mortgage obligations
Government-sponsored agencies		112,615		1,251		(1,642	)		112,224
Federal agencies		7,925		—		(104	)		7,821
Municipals		2,460		33		(11	)		2,482
Small Business Administration		16		—		—			16
Corporate obligations		6,888		—		(4,243	)		2,645
Marketable equity securities		1,723		—		(21	)		1,702

Total investment securities	$	250,644	$	2,360	$	(7,839	)	$	245,165

In September 2010, the Company transferred all held-to-maturity securities to the available for sale portfolio.

Marketable equity securities consist of shares in mutual funds that invest in government obligations and mortgage-backed securities. All mortgage-backed securities and collateralized-mortgage obligations held by the Company as of December 31, 2011 were in government-sponsored and federal agency securities.

Certain investments in debt and marketable equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2011 and 2010 was $28,458,000 and $141,266,000, which is approximately 9 percent and 58 percent of the Company’s investment portfolio at those dates. The Bank has continued to see an improvement in its investment portfolio since 2010 due to increased market values driven by lower market interest rates.

Based on our evaluation of available evidence, including recent changes in market interest rates, management believes the declines in fair value for these securities are temporary.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

During 2011, 2010 and 2009, the Bank determined its holdings in trust preferred securities were other than temporarily impaired. The amount of the impairment due to credit quality totaled $193,000, $841,000 and $2,555,000 in 2011, 2010 and 2009, respectively, and is reflected in the statement of income.

The following tables show the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2011 and 2010:

	2011
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available for Sale
Mortgage-backed securities
Government-sponsored agencies	$	5,076	$	(6	)	$	—	$	—		$	5,076	$	(6	)
Municipals		971		(14	)		—		—			971		(14	)
Corporate obligations		19,957		(790	)		2,454		(4,299	)		22,411		(5,089	)

Total temporarily impaired securities	$	26,004	$	(810	)	$	2,454	$	(4,299	)	$	28,458	$	(5,109	)

	2010
	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available for Sale
Mortgage-backed securities
Government-sponsored agencies	$	69,971	$	(1,818	)	$	—	$	—		$	69,971	$	(1,818	)
Collateralized mortgage obligations
Government-sponsored agencies		58,466		(1,642	)		—		—			58,466		(1,642	)
Federal agencies		7,821		(104	)		—		—			7,821		(104	)
Municipals		661		(11	)		—		—			661		(11	)
Corporate obligations		—		—			2,645		(4,243	)		2,645		(4,243	)
Marketable equity securities		—		—			1,702		(21	)		1,702		(21	)

Total temporarily impaired securities	$	136,919	$	(3,575	)	$	4,347	$	(4,264	)	$	141,266	$	(7,839	)

Mortgage-Backed Securities (MBS) and Collateralized Mortgage Obligations (CMO)

The unrealized losses on the Company’s investment in MBSs and CMOs were caused by interest rate changes. The Company expects to recover the amortized cost basis over the term of the securities. Because (1) the decline in market value is attributable to changes in interest rates and not credit quality, (2) the Company does not intend to sell the investments and (3) it is more likely than not the Company will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2011.

Corporate Obligations

The Company’s unrealized loss on investments in corporate obligations primarily relates to investments in pooled trust preferred securities. The unrealized losses were primarily caused by (1) a decrease in performance and regulatory capital resulting from exposure to subprime mortgages and (2) a sector downgrade by several industry analysts. The Company currently expects some of the securities to settle at a price less than the amortized cost basis of the investment (that is, the Company expects to recover less than the entire amortized cost basis of the security). The Company has recognized a loss equal to the credit loss for these securities, establishing a new, lower amortized cost basis. The credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. Because the Company does not intend to sell these investments and it is likely that the Company will not be required to sell the investments before recovery of its new, lower amortized cost basis, which may be at maturity, it does not consider the remainder of the investments to be other-than-temporarily impaired at December 31, 2011.

Other-Than-Temporary Impairment

Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or whether it will be evaluated for impairment under the accounting guidance for investments in debt and equity securities.

The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt securities within the scope of the guidance for investments in debt and equity securities. For securities that are a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model. For securities where the security is not a beneficial interest in securitized financial assets, the Company uses debt and equity securities impairment model.

The Company conducts periodic reviews to identify and evaluate each investment security to determine whether an other-than-temporary impairment has occurred. Economic models are used to determine whether an other-than-temporary impairment has occurred on these securities. While all securities are considered, the securities primarily impacted by other-than-temporary impairment testing are private-label mortgage-backed securities and trust preferred securities.

For each private-label mortgage-backed security in the investment portfolio (including but not limited to those whose fair value is less than their amortized cost basis), an extensive, regular review was conducted to determine if an other-than-temporary impairment had occurred. Various inputs to the economic models were used to determine if an unrealized loss was other-than-temporary. In September 2010, the Company transferred all held to maturity securities to the available for sale portfolio, including the private-label mortgage-backed securities. This portion of the investment portfolio was liquidated after the transfer.

The Bank’s trust preferred securities valuation was prepared by an independent third party. Their approach to determining fair value involved several steps including:

Detailed credit and structural evaluation of each piece of collateral in the trust preferred securities;

Collateral performance projections for each piece of collateral in the trust preferred security;

Terms of the trust preferred structure, as laid out in the indenture; and

Discounted cash flow modeling.

MutualFirst Financial uses market-based yield indicators as a baseline for determining appropriate discount rates, and then adjusts the resulting discount rates on the basis of its credit and structural analysis of specific trust preferred securities. The primary focus is on the returns a fixed income investor would require in order to allocate capital on a risk adjusted basis. There is currently no active market for pooled trust preferred securities; however, the Company looks principally to market yields for stand-alone trust preferred securities issued by banks, thrifts and insurance companies for which there is an active and liquid market. The next step is to make a series of adjustments to reflect the differences that 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 trust preferred security. Importantly, as part of the analysis described above, MutualFirst considers the fact that structured instruments frequently exhibit leverage not present in stand-alone instruments, and make adjustments as necessary to reflect this additional risk.

The default and recovery probabilities for each piece of collateral were formed based on the evaluation of the collateral credit and a review of historical industry default data and current/near-term operating conditions. For collateral that has already defaulted, the Company assumed no recovery. For collateral that was in deferral, the Company assumed a recovery of 10% of par for banks, thrifts or other depository institutions and 15% of par for insurance companies. Although the Company conservatively assumed that the majority of the deferring collateral continues to defer and eventually defaults, we also recognize there is a possibility that some deferring collateral may become current at some point in the future.

Credit Losses Recognized on Investments

Certain debt securities have experienced fair value deterioration due to credit losses, as well as due to other market factors, but are not otherwise other-than-temporarily impaired.

The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income.

	Accumulated Credit Losses
	2011			2010			2009

Credit losses on debt securities held
Beginning of year	$	(3,374	)	$	(2,957	)	$	(402	)
Additions related to increases in previously recognized other-than-temporary losses		(193	)		(417	)		(2,555	)

As of December 31	$	(3,567	)	$	(3,374	)	$	(2,957	)

The amortized cost and fair value of securities available for sale at December 31, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale
	Amortized		Fair
	Cost		Value

One to five years	$	16,612	$	15,897
Five to ten years		7,120		7,033
After ten years		9,120		5,029
		32,852		27,959
Mortgage-backed securities
Government-sponsored agencies		198,039		202,846
Collateralized mortgage obligations
Government-sponsored agencies		97,098		100,061
Small Business Administration		12		12

Totals	$	328,001	$	330,878

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $2,600,000 and $1,595,000 at December 31, 2011 and 2010.

Proceeds from sales of securities available for sale during 2011, 2010 and 2009 were $76,547,000, $85,585,000 and $11,167,000, respectively. Gross gains of $2,075,000, $2,872,000 and $542,000 in 2011, 2010 and 2009 were recognized on those sales. In 2009, the realized gain on sale of securities reported also reflects a gain on sale of subsidiary of $137,000 and the sale of MasterCard stock of $75,000. Gross losses of $27,000, $2,925,000 and $0 in 2011, 2010 and 2009 were recognized on those sales.