Securities

3 Months Ended

Mar. 31, 2023

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 $15.3 million at March 31, 2023, and $5.6 million at December 31, 2022.  FRBC stock was recorded at $14.9 million at March 31, 2023 and December 31, 2022.  

The following tables summarize the amortized cost and fair value of the securities portfolio at March 31, 2023, and December 31, 2022, and the corresponding amounts of gross unrealized gains and losses:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2023	Cost1		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	224,195	$	-	$	(9,461)	$	214,734
U.S. government agencies		60,952		-		(4,249)		56,703
U.S. government agencies mortgage-backed		135,504		-		(13,566)		121,938
States and political subdivisions		243,131		1,329		(10,954)		233,506
Corporate bonds		10,000		-		(238)		9,762
Collateralized mortgage obligations		510,992		-		(56,886)		454,106
Asset-backed securities		196,966		4		(7,217)		189,753
Collateralized loan obligations		178,903		-		(4,337)		174,566
Total securities available-for-sale	$	1,560,643	$	1,333	$	(106,908)	$	1,455,068

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2022	Cost1		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	224,054	$	-	$	(11,925)	$	212,129
U.S. government agencies		61,178		-		(5,130)		56,048
U.S. government agencies mortgage-backed		140,588		-		(15,598)		124,990
States and political subdivisions		239,999		363		(14,234)		226,128
Corporate bonds		10,000		-		(378)		9,622
Collateralized mortgage obligations		596,336		1		(62,569)		533,768
Asset-backed securities		210,388		6		(8,466)		201,928
Collateralized loan obligations		180,276		-		(5,530)		174,746
Total securities available-for-sale	$	1,662,819	$	370	$	(123,830)	$	1,539,359

¹ Excludes accrued interest receivable of $7.2 million and $6.8 million at March 31, 2023 and December 31, 2022, respectively, that is recorded in other assets on the consolidated balance sheets.

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2023, by contractual maturity, are listed 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	$	64,076	0.72	%	$	62,639
Due after one year through five years		245,837	1.14			233,060
Due after five years through ten years		48,750	3.02			45,537
Due after ten years		179,615	3.06			173,469
		538,278	1.90			514,705
Mortgage-backed and collateralized mortgage obligations		646,496	2.41			576,044
Asset-backed securities		196,966	5.12			189,753
Collateralized loan obligations		178,903	6.45			174,566
Total securities available-for-sale	$	1,560,643	3.04	%	$	1,455,068

At March 31, 2023, the Company’s investments included $148.9 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 $20.3 million, or 9.29%, of outstanding principal.

At March 31, 2023, the Company had no securities issued from any one originator, other than the U.S. Government and its agencies, which individually amounted to over 10% of the Company’s stockholders’ equity.

Securities with unrealized losses with no corresponding allowance for credit losses at March 31, 2023 and December 31, 2022, 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
March 31, 2023	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. Treasuries	-	$	-	$	-	5	$	9,461	$	214,734	5	$	9,461	$	214,734
U.S. government agencies	-		-		-	9		4,249		56,703	9		4,249		56,703
U.S. government agencies mortgage-backed	3		143		2,235	127		13,423		119,703	130		13,566		121,938
States and political subdivisions	14		434		47,760	24		10,520		82,401	38		10,954		130,161
Corporate bonds	-		-		-	2		238		9,762	2		238		9,762
Collateralized mortgage obligations	13		794		23,540	157		56,092		430,566	170		56,886		454,106
Asset-backed securities	11		745		45,309	39		6,472		144,132	50		7,217		189,441
Collateralized loan obligations	5		222		13,632	29		4,115		160,934	34		4,337		174,566
Total securities available-for-sale	46	$	2,338	$	132,476	392	$	104,570	$	1,218,935	438	$	106,908	$	1,351,411

	Less than 12 months					12 months or more
December 31, 2022	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. Treasuries	1	$	1,025	$	24,121	4	$	10,900	$	188,008	5	$	11,925	$	212,129
U.S. government agencies	-		-		-	9		5,130		56,048	9		5,130		56,048
U.S. government agencies mortgage-backed	15		975		11,369	117		14,623		113,621	132		15,598		124,990
States and political subdivisions	45		5,800		128,770	15		8,434		48,877	60		14,234		177,647
Corporate bonds	-		-		-	2		378		9,622	2		378		9,622
Collateralized mortgage obligations	80		12,895		180,624	120		49,674		348,880	200		62,569		529,504
Asset-backed securities	30		3,030		121,915	21		5,436		79,659	51		8,466		201,574
Collateralized loan obligations	23		3,579		112,772	11		1,951		61,974	34		5,530		174,746
Total securities available-for-sale	194	$	27,304	$	579,571	299	$	96,526	$	906,689	493	$	123,830	$	1,486,260

Each quarter, we perform an analysis to determine if any of the unrealized losses on securities available-for-sale are comprised of credit losses as compared to unrealized losses due to market interest rate adjustments.  Our assessment includes 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.  We also consider the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies.  The portfolio continues to consist of a mix of fixed- and floating-rate, high quality securities, largely rated AA (or better), displaying an overall effective duration of approximately 3.2 years.  No credit losses were determined to be present as of March 31, 2023, as there was no credit quality deterioration noted.  Therefore, no provision for credit losses on securities was recognized for the first quarter of 2023.

		Three Months Ended
		March 31,
Securities available-for-sale	2023			2022
Proceeds from sales of securities	$	66,170		$	-
Gross realized losses on securities		(1,675)			-
Net realized losses	$	(1,675)		$	-
Income tax benefit on net realized losses	$	471		$	-
Effective tax rate applied		28.1	%		N/M

N/M - Not meaningful

As of March 31, 2023, securities valued at $995.3 million were pledged for borrowings, and for other purposes, an increase from $547.8 million of securities pledged at year-end 2022.