Note 3: Securities

The table below provides the amortized cost, unrealized gains and losses and fair values of securities summarized by major category (dollars in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2018:	Cost		Gains		Losses		Value
Available for sale
U.S. Treasury securities	$	61,066	$	—	$	(1,212)	$	59,854
Obligations of U.S. government corporations and agencies		91,767		5		(2,106)		89,666
Obligations of states and political subdivisions		245,459		315		(3,849)		241,925
Residential mortgage-backed securities		342,421		207		(11,046)		331,582
Corporate debt securities		140,884		19		(549)		140,354
Total	$	881,597	$	546	$	(18,762)	$	863,381

Held to maturity
Obligations of states and political subdivisions	$	36,689	$	13	$	(301)	$	36,401
Commercial mortgage-backed securities		60,172		—		(1,705)		58,467
Residential mortgage-backed securities		529,389		—		(12,955)		516,434
Total	$	626,250	$	13	$	(14,961)	$	611,302


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2017:	Cost		Gains		Losses		Value
Available for sale
U.S. Treasury securities	$	60,829	$	7	$	(488)	$	60,348
Obligations of U.S. government corporations and agencies		104,807		1		(1,143)		103,665
Obligations of states and political subdivisions		280,216		1,160		(1,177)		280,199
Residential mortgage-backed securities		400,661		612		(3,837)		397,436
Corporate debt securities		30,946		132		(44)		31,034
Total	$	877,459	$	1,912	$	(6,689)	$	872,682

Held to maturity
Obligations of states and political subdivisions	$	41,300	$	228	$	(64)	$	41,464
Commercial mortgage-backed securities		60,474		41		(297)		60,218
Residential mortgage-backed securities		341,776		25		(2,431)		339,370
Total	$	443,550	$	294	$	(2,792)	$	441,052

Securities classified as available for sale are those debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on factors including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations or other similar factors. They are carried at fair value with unrealized gains and losses, net of taxes, reported in other comprehensive income. Securities classified as held to maturity are those debt securities that the Company intends to hold to maturity. Accordingly, they are carried at cost, adjusted for amortization of premiums and accretion of discounts.

The Company held equity securities, consisting of money market mutual funds, with fair values of $7.3 million at September 30, 2018. The Company held equity securities, consisting of common stock and money market mutual funds, with fair values of $0.8 million and $4.6 million, respectively, at December 31, 2017. The Company recorded $0.1 million of unrealized losses in non-interest income in the accompanying unaudited Consolidated Financial Statements during the nine months ended September 30, 2018, related to the change in fair value of the common stock. The common stock was sold in the second quarter of 2018 and realized security gains recorded during the nine months ended September 30, 2018 were $0.2 million.

The amortized cost and fair value of debt securities as of September 30, 2018, by contractual maturity or pre-refunded date, are shown below. Mortgages underlying mortgage-backed securities may be called or prepaid; therefore, actual maturities could differ from the contractual maturities. All mortgage-backed securities were issued by U.S. government agencies and corporations (dollars in thousands).


	Available for sale				Held to maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	86,344	$	86,041	$	9,858	$	9,837
Due after one year through five years		335,204		330,511		56,077		54,998
Due after five years through ten years		152,272		149,199		29,754		28,867
Due after ten years		307,777		297,630		530,561		517,600
Total	$	881,597	$	863,381	$	626,250	$	611,302

Realized gains and losses related to sales of available for sale securities are summarized as follows (dollars in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Gross security gains	$	—	$	290	$	—	$	1,259
Gross security (losses)		—		—		—		(116)
Security gains, net(1)	$	—	$	290	$	—	$	1,143

(1)

Security gains, net reported on the Consolidated Statements of Income in 2018 relate to the sale of equity securities as noted above.

The tax provision for the net realized gains and losses was $0.1 million for the three months ended September 30, 2017. The tax provision for the net realized gains and losses was $0.4 million for the nine months ended September 30, 2017.

Investment securities with carrying amounts of $598.7 million and $638.2 million on September 30, 2018 and December 31, 2017, respectively, were pledged as collateral for public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

Information pertaining to securities with gross unrealized losses at September 30, 2018 and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (dollars in thousands):


	Continuous unrealized				Continuous unrealized
	losses existing for less than				losses existing for greater
	12 months, gross				than 12 months, gross				Total, gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
September 30, 2018:	Value		Losses		Value		Losses		Value		Losses
Available for sale
U.S. Treasury securities	$	35,883	$	(471)	$	23,971	$	(741)	$	59,854	$	(1,212)
Obligations of U.S. government corporations and agencies		29,899		(707)		58,946		(1,399)		88,845		(2,106)
Obligations of states and political subdivisions		186,959		(3,067)		36,612		(782)		223,571		(3,849)
Residential mortgage-backed securities		204,979		(5,089)		114,013		(5,957)		318,992		(11,046)
Corporate debt securities		138,019		(546)		47		(3)		138,066		(549)
Total temporarily impaired securities	$	595,739	$	(9,880)	$	233,589	$	(8,882)	$	829,328	$	(18,762)

Held to maturity
Obligations of states and political subdivisions	$	31,932	$	(284)	$	911	$	(17)	$	32,843	$	(301)
Commercial mortgage-backed securities		49,853		(1,385)		8,614		(320)		58,467		(1,705)
Residential mortgage-backed securities		449,798		(9,550)		66,636		(3,405)		516,434		(12,955)
Total temporarily impaired securities	$	531,583	$	(11,219)	$	76,161	$	(3,742)	$	607,744	$	(14,961)


	Continuous unrealized				Continuous unrealized
	losses existing for less than				losses existing for greater
	12 months, gross				than 12 months, gross				Total, gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2017:	Value		Losses		Value		Losses		Value		Losses
Available for sale
U.S. Treasury securities	$	59,773	$	(488)	$	—	$	—	$	59,773	$	(488)
Obligations of U.S. government corporations and agencies		78,610		(636)		24,831		(507)		103,441		(1,143)
Obligations of states and political subdivisions		162,213		(1,027)		12,045		(150)		174,258		(1,177)
Residential mortgage-backed securities		223,261		(1,428)		90,930		(2,409)		314,191		(3,837)
Corporate debt securities		16,176		(44)		—		—		16,176		(44)
Total temporarily impaired securities	$	540,033	$	(3,623)	$	127,806	$	(3,066)	$	667,839	$	(6,689)

Held to maturity
Obligations of states and political subdivisions	$	17,939	$	(64)	$	—	$	—	$	17,939	$	(64)
Commercial mortgage-backed securities		44,514		(214)		2,374		(83)		46,888		(297)
Residential mortgage-backed securities		277,826		(2,431)		—		—		277,826		(2,431)
Total temporarily impaired securities	$	340,279	$	(2,709)	$	2,374	$	(83)	$	342,653	$	(2,792)

Securities are periodically evaluated for other-than-temporary impairment (“OTTI”). The total number of securities in the investment portfolio in an unrealized loss position as of September 30, 2018 was 897, and represented an unrealized loss of 2.29% of the aggregate carrying value. As of September 30, 2018, the Company does not intend to sell such securities and it is more-likely-than-not that the Company will recover the amortized cost prior to being required to sell the securities. Full collection of the amounts due according to the contractual terms of the securities is expected; therefore, the Company does not consider these investments to be OTTI at September 30, 2018.

The Company had available for sale obligations of state and political subdivisions with a fair value of $241.9 million and $280.2 million as of September 30, 2018 and December 31, 2017, respectively. In addition, the Company had held to maturity obligations of state and political subdivisions with a fair value of $36.4 million and $41.5 million as of September 30, 2018 and December 31, 2017, respectively.

As of September 30, 2018, the fair value of the Company’s obligations of state and political subdivisions portfolio was comprised of $236.2 million of general obligation bonds and $42.1 million of revenue bonds issued by 386 issuers, primarily consisting of states, counties, cities, towns, villages and school districts. The Company held investments in general obligation bonds in 35 states, including nine states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 20 states, including three states where the aggregate fair value exceeded $5.0 million.

As of December 31, 2017, the fair value of the Company’s obligations of state and political subdivisions portfolio was comprised of $271.7 million of general obligation bonds and $50.0 million of revenue bonds issued by 446 issuers, primarily consisting of states, counties, cities, towns, villages and school districts. The Company held investments in general obligation bonds in 36 states (including the District of Columbia), including nine states in which the aggregate fair value exceeded $5.0 million. The Company held investments in revenue bonds in 22 states, including three states where the aggregate fair value exceeded $5.0 million.

The amortized cost and fair values of the Company’s portfolio of general obligation bonds are summarized in the following tables by the issuers’ state (dollars in thousands):


September 30, 2018:						Average Exposure
	Number of		Amortized	Fair		Per Issuer
U.S. State	Issuers	Cost		Value		(Fair Value)
Illinois	89	$	87,902	$	86,739	$	975
Wisconsin	27		18,971		18,690		692
Texas	43		24,893		24,431		568
Michigan	25		13,589		13,620		545
Ohio	20		14,665		14,505		725
Pennsylvania	15		9,250		9,197		613
New Jersey	12		5,576		5,525		460
Missouri	9		5,556		5,472		608
California	7		8,829		8,765		1,252
Other	85		50,153		49,223		579
Total general obligations bonds	332	$	239,384	$	236,167	$	711


December 31, 2017:						Average Exposure
	Number of	Amortized		Fair		Per Issuer
U.S. State	Issuers	Cost		Value		(Fair Value)
Illinois	97	$	95,340	$	95,344	$	983
Wisconsin	41		27,852		27,809		678
Texas	46		27,485		27,514		598
Michigan	34		19,641		19,849		584
Ohio	20		15,172		15,162		758
Pennsylvania	18		12,189		12,174		676
New Jersey	15		7,755		7,760		517
Missouri	10		5,759		5,747		575
Minnesota	8		5,657		5,667		708
Other	92		54,649		54,633		594
Total general obligations bonds	381	$	271,499	$	271,659	$	713

The general obligation bonds are diversified across many issuers, with $4.9 million and $4.0 million being the largest exposure to a single issuer at September 30, 2018 and December 31, 2017, respectively. Accordingly, as of September 30, 2018 and December 31, 2017, the Company did not hold general obligation bonds of any single issuer, the aggregate book or market value of which exceeded 10% of the Company’s stockholders’ equity. Of the general obligation bonds in the Company’s portfolio, 99.1% had been rated by at least one nationally recognized rating organization and 0.9% were unrated as of September 30, 2018. Of the general obligation bonds in the Company’s portfolio, 99.3% had been rated by at least one nationally recognized rating organization and 0.7% were unrated, based on the aggregate fair value as of December 31, 2017.

The amortized cost and fair values of the Company’s portfolio of revenue bonds are summarized in the following tables by the issuers’ state (dollars in thousands):


September 30, 2018:						Average Exposure
	Number of	Amortized		Fair		Per Issuer
U.S. State	Issuers	Cost		Value		(Fair Value)
Indiana	13	$	10,902	$	10,801	$	831
Missouri	5		7,041		6,966		1,393
Illinois	5		5,218		5,128		1,026
Other	31		19,603		19,264		621
Total revenue bonds	54	$	42,764	$	42,159	$	781


December 31, 2017:						Average Exposure
	Number of	Amortized		Fair		Per Issuer
U.S. State	Issuers	Cost		Value		(Fair Value)
Indiana	14	$	12,001	$	12,054	$	861
Missouri	6		7,376		7,336		1,223
Illinois	7		6,477		6,456		922
Other	38		24,163		24,158		636
Total revenue bonds	65	$	50,017	$	50,004	$	769

The revenue bonds are diversified across many issuers and revenue sources with $3.5 million and $3.6 million being the largest exposure to a single issuer at each of September 30, 2018 and December 31, 2017, respectively. Accordingly, as of September 30, 2018 and December 31, 2017, the Company did not hold revenue bonds of any single issuer, the aggregate book or market value of which exceeded 10% of the Company’s stockholders’ equity. Of the revenue bonds in the Company's portfolio, 100.0% had been rated by at least one nationally recognized rating organization as of September 30, 2018. Of the revenue bonds in the Company’s portfolio, 99.4% had been rated by at least one nationally recognized rating organization and 0.6% were unrated, based on the fair value as of December 31, 2017. Some of the primary types of revenue bonds held in the Company’s portfolio include: primary education or government building lease rentals secured by ad valorem taxes, utility systems secured by utility system net revenues, housing authorities secured by mortgage loans or principal receipts on mortgage loans, secondary education secured by student fees/tuitions, and pooled issuances (i.e. bond bank) consisting of multiple underlying municipal obligors.

At September 30, 2018, all of the Company’s obligations of state and political subdivision securities are owned by its subsidiary bank, which has adopted First Busey’s investment policy requiring that state and political subdivision securities purchased be investment grade. Such investment policy also limits the amount of rated state and political subdivision securities to an aggregate 100% of the subsidiary bank’s total capital (as defined by federal regulations) at the time of purchase and an aggregate 15% of total capital for unrated state and political subdivision securities issued by municipalities having taxing authority or located in counties/micropolitan statistical areas/metropolitan statistical areas in which an office is located.

All securities in First Busey’s obligations of state and political subdivision securities portfolio are subject to periodic review. Factors that may be considered as part of monitoring of state and political subdivision securities include credit rating changes by nationally recognized rating organizations, market valuations, third-party municipal credit analysis, which may include indicative information regarding the issuer’s capacity to pay, market and economic data and such other factors as are available and relevant to the security or the issuer such as its budgetary position and sources, strength and stability of taxes and/or other revenue.