Securities

6 Months Ended

Jun. 30, 2012

Securities

Securities

Note 2 – Securities

Investment Portfolio Management

Our investment portfolio serves the liquidity and income needs of the Company.  While the portfolio serves as an important component of the overall liquidity management at the Bank, portions of the portfolio will also serve as income producing assets.  The size of the portfolio reflects liquidity needs, loan demand and interest income objectives.

Portfolio size and composition may 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.  All debt securities are classified as available-for-sale and may be sold under our management and asset/liability management strategies.  Securities available-for-sale are carried at fair value.  Unrealized gains and losses 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.

Non-marketable equity investments include Federal Home Loan Bank of Chicago (“FHLBC”) stock and Federal Reserve Bank of Chicago (“FRB”) stock.  FHLBC stock was recorded at a value of $7.4 million at June 30, 2012, a decrease of $1.9 million from December 31, 2011.  FRB stock was recorded at $4.8 million at June 30, 2012, which was unchanged from December 31, 2011.  Our FHLBC stock is necessary to maintain our continued access to FHLBC advances.  In late 2011, management at the Bank evaluated the October 17, 2011, FHLBC Capital Plan and determined the best overall course for the Bank was to accept the stock conversion as of January 1, 2012.  Subsequently, during the first half of 2012 management redeemed excess FHLBC stock held by the Bank reducing the value of FHLBC stock held by the Bank to $7.4 million.

The following table summarizes the amortized cost and fair value of the available-for-sale securities at June 30, 2012 and December 31, 2011 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
June 30, 2012:
U.S. Treasury	$	1,501	$	14	$	-	$	1,515
U.S. government agencies	44,482		173		(32)		44,623
U.S. government agency mortgage-backed	93,458		1,766		(16)		95,208
States and political subdivisions	12,926		1,137		(5)		14,058
Corporate Bonds	35,127		240		(100)		35,267
Collateralized mortgage obligations	62,890		367		(870)		62,387
Asset-backed securities	137,341		476		(1,143)		136,674
Collateralized debt obligations	17,910		-		(8,747)		9,163
	$	405,635	$	4,173	$	(10,913)	$	398,895
December 31, 2011:
U.S. Treasury	$	1,501	$	23	$	-	$	1,524
U.S. government agencies	43,112		286		-		43,398
U.S. government agency mortgage-backed	152,473		1,553		(19)		154,007
States and political subdivisions	12,152		1,657		-		13,809
Corporate Bonds	32,357		14		(982)		31,389
Collateralized mortgage obligations	25,616		242		(736)		25,122
Asset-backed securities	28,755		-		(414)		28,341
Collateralized debt obligations	17,892		-		(7,918)		9,974
	$	313,858	$	3,775	$	(10,069)	$	307,564

The fair value, amortized cost and weighted average yield of debt securities at June 30, 2012, by contractual maturity, were as follows.  Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized debt obligations are shown separately:

			Weighted
	Amortized		Average	Fair
	Cost		Yield	Value
Due in one year or less	$	8,256	1.81%	$	8,291
Due after one year through five years	48,540		2.01%	48,981
Due after five years through ten years	17,283		3.18%	18,043
Due after ten years	19,957		4.04%	20,148
	94,036		2.64%	95,463
Mortgage-backed securities	156,348		2.17%	157,595
Asset-back securites	137,341		1.63%	137,674
Collateralized debt obligations	17,910		1.89%	9,163
	$	405,635	2.08%	$	399,895

Securities with unrealized losses at June 30, 2012, and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows (in thousands except for number of securities):

	Less than 12 months					Greater than 12 months
June 30, 2012	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	4	$	32	$	14,156		$	-	$	-	4	$	32	$	14,156
U.S. government agency mortgage-backed	2	16		2,555		-	-		-		2	16		2,555
States and political subdivisions	1	5		1,295		-	-		-		1	5		1,295
Corporate bonds	6	100		12,184		-	-		-		6	100		12,184
Collateralized mortgage obligations	12	870		36,439		-	-		-		12	870		36,439
Asset-backed securities	12	1,143		93,066		-	-		-		12	1,143		93,066
Collateralized debt obligations	-	-		-		2	8,747		9,163		2	8,747		9,163
	37	$	2,166	$	159,695	2	$	8,747	$	9,163	39	$	10,913	$	168,858

	Less than 12 months					Greater than 12 months
December 31, 2011	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agency mortgage-backed	4	$	19	$	27,935	-	$	-	$	-	4	$	19	$	27,935
Corporate bonds	11	982		28,605		-	-		-		11	982		28,605
Collateralized mortgage obligations	3	736		9,032		-	-		-		3	736		9,032
Asset-backed securities	4	414		28,341		-	-		-		4	414		28,341
Collateralized debt obligations	-	-		-		2	7,918		9,974		2	7,918		9,974
	22	$	2,151	$	93,913	2	$	7,918	$	9,974	24	$	10,069	$	103,887

Recognition of other-than-temporary impairment was not necessary in the six months ended June 30, 2012, or the year ended December 31, 2011.  The changes in fair values related primarily to interest rate fluctuations and were generally not related to credit quality deterioration.  Further to this point as shown below, the amount of deferrals and defaults in the pooled collateralized debt obligations (“CDO”) decreased in the period from December 31, 2011 to June 30, 2012.

Uncertainty in the financial markets in the periods presented has resulted in reduced liquidity for certain investments, particularly the CDO.  In the case of the CDO fair value measurement, management included a risk premium adjustment as of June 30, 2012, to reflect an estimated yield that a market participant would demand because of uncertainty in cash flows, based on incomplete and sporadic levels of market activity.  Accordingly, management continues to designate these securities as level 3 securities as described in Note 12 of this quarterly report as of June 30, 2012.  Management did not have the intent to sell the above securities and it is more likely than not the Company will not sell the securities before recovery of its cost basis.

Below is additional information as it relates to the collateralized debt obligation, Trapeza 2007-13A, which is secured by a pool of trust preferred securities issued by trusts sponsored by multiple financial institutions.

					Gross		S&P	Number of	Issuance			Issuance
	Amortized		Fair		Unrealized		Credit	Banks in	Deferrals & Defaults			Excess Subordination
	Cost		Value		Loss		Rating 1	Issuance	Amount		Collateral %	Amount		Collateral %
June 30, 2012
Class A1	$	9,084	$	5,156	$	(3,928)	BB+	63	$	198,000	26.4%	$	198,690	26.5%
Class A2A	8,826		4,007		(4,819)		B+	63	198,000		26.4%	101,690		13.6%
	$	17,910	$	9,163	$	(8,747)
December 31, 2011
Class A1	$	9,136	$	5,584	$	(3,552)	CCC+	63	$	212,750	28.4%	$	181,630	24.2%
Class A2A	8,756		4,390		(4,366)		CCC-	63	212,750		28.4%	84,630		11.3%
	$	17,892	$	9,974	$	(7,918)

1 Moody’s credit rating for class A1 and A2A were Baa2 and Ba2, respectively, as of June 30, 2012, and unchanged from December 31, 2011.  The Fitch ratings for class A1 and A2A were BBB and B, respectively, as of June 30, 2012, and unchanged from December 31, 2011.