Securities

9 Months Ended

Sep. 30, 2020

Securities

Securities

Note 3 – Securities

Investment Portfolio Management

Our investment portfolio serves the liquidity needs and income objectives of the Company.  While the portfolio serves as an important component of the overall liquidity management at the Bank, portions of the portfolio also serve as income producing assets.  The size and composition of the portfolio reflects liquidity needs, loan demand and interest income objectives.  Portfolio size and composition will be adjusted from time to time.  While a significant portion of the portfolio consists of readily marketable securities to address liquidity, other parts of the portfolio may reflect funds invested pending future loan demand or to maximize interest income without undue interest rate risk.

Investments are comprised of debt securities and non-marketable equity investments.  Securities available-for-sale are carried at fair value.  Unrealized gains and losses, net of tax, on securities available-for-sale are reported as a separate component of equity.  This balance sheet component changes as interest rates and market conditions change.  Unrealized gains and losses are not included in the calculation of regulatory capital.  

Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank of Chicago (“FRBC”) stock are considered nonmarketable equity investments.  FHLBC stock was recorded at $3.7 million at September 30, 2020, and December 31, 2019.  FRBC stock was recorded at $6.2 million at September 30, 2020, and December 31, 2019.  

The following tables summarize the amortized cost and fair value of the securities portfolio at September 30, 2020, and December 31, 2019, and the corresponding amounts of gross unrealized gains and losses:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2020	Cost1		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,013	$	121	$	-	$	4,134
U.S. government agencies		7,169		-		(164)		7,005
U.S. government agencies mortgage-backed		17,056		1,165		(2)		18,219
States and political subdivisions		232,416		18,316		(955)		249,777
Collateralized mortgage obligations		54,597		2,839		(423)		57,013
Asset-backed securities		81,986		905		(1,306)		81,585
Collateralized loan obligations		31,202		19		(533)		30,688
Total securities available-for-sale	$	428,439	$	23,365	$	(3,383)	$	448,421

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2019	Cost1		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,010	$	26	$	-	$	4,036
U.S. government agencies		8,502		-		(165)		8,337
U.S. government agencies mortgage-backed		16,164		443		(19)		16,588
States and political subdivisions		240,399		11,207		(2,431)		249,175
Collateralized mortgage obligations		57,059		963		(38)		57,984
Asset-backed securities		82,114		617		(887)		81,844
Collateralized loan obligations		66,898		29		(243)		66,684
Total securities available-for-sale	$	475,146	$	13,285	$	(3,783)	$	484,648

¹ Excludes accrued interest receivable of $2.6 million and $3.2 million at September 30, 2020 and December 31, 2019, respectively, that is recorded in other assets on the consolidated balance sheet.

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2020, by contractual maturity, were as follows in the table below.  Securities not due at a single maturity date are shown separately.

			Weighted
	Amortized		Average		Fair
Securities available-for-sale	Cost		Yield		Value
Due in one year or less	$	413	2.01	%	$	415
Due after one year through five years		6,056	2.11			6,309
Due after five years through ten years		28,014	2.31			28,993
Due after ten years		209,115	3.03			225,199
		243,598	2.92			260,916
Mortgage-backed and collateralized mortgage obligations		71,653	3.08			75,232
Asset-backed securities		81,986	1.51			81,585
Collateralized loan obligations		31,202	2.12			30,688
Total securities available-for-sale	$	428,439	2.62	%	$	448,421

At September 30, 2020, the Company’s investments included $55.9 million of asset-backed securities that are backed by student loans originated under the Federal Family Education Loan program (“FFEL”).  Under the FFEL, private lenders made federally guaranteed student loans to parents and students. While the program was modified several times before elimination in 2010, FFEL securities are generally guaranteed by the U.S Department of Education (“DOE”) at not less than 97% of the outstanding principal amount of the loans.  The guarantee will reduce to 85% if the DOE receives reimbursement requests in excess of 5% of insured loans; reimbursement will drop

to 75% if reimbursement requests exceed 9% of insured loans.  In addition to the DOE guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $5.1 million, or 9.00% of outstanding principal.

At September 30, 2020, the Company had invested in securities issued from one originator that individually amounted to over 10% of the Company’s stockholders’ equity.  Information regarding this issuer and the value of the securities issued follows:

	September 30, 2020
	Amortized		Fair
Issuer	Cost		Value
Towd Point Mortgage Trust	$	33,242	$	35,477

Securities with unrealized losses with no corresponding allowance for credit losses at September 30, 2020 and December 31, 2019, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):

	Less than 12 months					12 months or more
September 30, 2020	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
Securities available-for-sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	-	$	-	$	-	4	$	164	$	7,005	4	$	164	$	7,005
U.S. government agencies mortgage-backed	1		2		260	-		-		-	1		2		260
States and political subdivisions	-		-		-	1		955		3,872	1		955		3,872
Collateralized mortgage obligations	4		421		8,027	1		2		279	5		423		8,306
Asset-backed securities	5		425		22,603	3		881		33,069	8		1,306		55,672
Collateralized loan obligations	1		123		7,376	4		410		21,245	5		533		28,621
Total securities available-for-sale	11	$	971	$	38,266	13	$	2,412	$	65,470	24	$	3,383	$	103,736

	Less than 12 months					12 months or more
December 31, 2019	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
Securities available-for-sale	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. government agencies	-	$	-	$	-	4	$	165	$	8,337	4	$	165	$	8,337
U.S. government agencies mortgage-backed	3		10		3,018	2		9		843	5		19		3,861
States and political subdivisions	6		1,665		41,043	2		766		6,593	8		2,431		47,636
Collateralized mortgage obligations	2		26		9,054	2		12		1,209	4		38		10,263
Asset-backed securities	4		839		54,540	1		48		3,238	5		887		57,778
Collateralized loan obligations	4		62		21,927	4		181		25,020	8		243		46,947
Total securities available-for-sale	19	$	2,602	$	129,582	15	$	1,181	$	45,240	34	$	3,783	$	174,822

As required upon the adoption of ASU 2016-13, we performed an analysis to determine if any of the unrealized losses on securities available-for-sale were comprised of credit losses as compared to unrealized losses due to market interest rate adjustments.  Our assessment included a review of the unrealized loss for each security issuance held; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades; and our ability and intent to hold the security for a period of time sufficient for a recovery in value.  The Company also considered the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies.  No credit losses were determined to be present as of the date of CECL adoption or as of the quarter ended September 30, 2020, as there was no credit quality deterioration noted.  Therefore, no provision for credit losses on securities was recognized for the third quarter end.

The following table presents net realized gains (losses) on securities available-for-sale for the three and nine months ended September 30, 2020 and 2019.  

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
Securities available-for-sale	2020			2019			2020			2019
Proceeds from sales of securities	$	-		$	57,228		$	18,006		$	177,824
Gross realized gains on securities	$	-		$	3,841		$	17		$	5,432
Gross realized losses on securities		(1)			(378)			(42)			(956)
Net realized (losses) gains	$	(1)		$	3,463		$	(25)		$	4,476
Income tax (expense) benefit on net realized gains (losses)	$	-		$	(973)		$	7		$	(1,257)
Effective tax rate applied		0.0	%		28.1	%		28.0	%		28.1	%

Securities valued at $353.2 million as of September 30, 2020, an increase from $320.8 million at year-end 2019, were pledged to secure deposits and borrowings, and for other purposes.