Note 3: 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 $6.4 million at December 31, 2012, a decrease of $2.8 million from December 31, 2011. FRB stock was recorded at $4.8 million at December 31, 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 $6.4 million.

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
2012
U.S. Treasury	$	1,500	$	7	$	—		$	1,507
U.S. government agencies	49,848		122		(120		)	49,850
U.S. government agency mortgage-backed	127,716		1,605		(583		)	128,738
States and political subdivisions	14,639		1,216		—			15,855
Corporate Bonds	36,355		586		(55		)	36,886
Collateralized mortgage obligations	168,795		1,895		(1,090		)	169,600
Asset-backed securities	165,347		2,468		(322		)	167,493
Collateralized debt obligations	17,941		—		(7,984		)	9,957
	$	582,141	$	7,899	$	(10,154	)	$	579,886

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

During the twelve months ended December 31, 2012, we added $272.3 million to the available-for-sale portfolio (net of payoffs, maturities, calls, amortization and accretion). This change is largely found in the collateralized mortgage obligations and asset-backed securities components.

Securities valued at $210.1 million as of December 31, 2012 (up from $40.9 million at year-end 2011) were pledged to secure deposits and for other purposes.

The fair value, amortized cost and weighted average yield of debt securities at December 31, 2012 by contractual maturity, were as set forth below. Securities not due at a single maturity date, primarily mortgage-backed securities, collateralized mortgage obligations and collateralized debt obligations (“CDO”) are shown separately:

			Weighted
	Amortized		Average		Fair
	Cost		Yield		Value
Due in one year or less	$	4,967	1.77	%	$	4,991
Due after one year through five years	29,100		1.93	%	29,848
Due after five years through ten years	34,110		2.92	%	35,018
Due after ten years	34,165		3.61	%	34,241
	102,342		2.81	%	104,098
Mortgage-backed and collateralized mortgage obligations	296,511		1.77	%	298,338
Asset-backed	165,347		1.30	%	167,493
Collateralized debt obligations	17,941		1.75	%	9,957
	$	582,141	1.82	%	$	579,886

At December 31, 2012 and 2011, CDOs held, as issued by Trapeza CDO XIII, Ltd, were greater than 10% of stockholders’ equity. Additional detailed information related to these securities is provided below.

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

	Less than 12 months					Greater than 12 months
	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
2012	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	4	$	120	$	17,039	—	$	—	$	—	4	$	120	$	17,039
U.S. government agency mortgage-backed	12	583		53,184		—	—		—		12	583		53,184
Corporate bonds	4	55		9,724		—	—		—		4	55		9,724
Collateralized mortgage obligations	6	1,060		37,778		1	30		2,343		7	1,090		40,121
Asset-backed securities	6	322		37,488		—	—		—		6	322		37,488
Collateralized debt obligations	—	—		—		2	7,984		9,957		2	7,984		9,957
	32	$	2,140	$	155,213	3	$	8,014	$	12,300	35	$	10,154	$	167,513

	Less than 12 months					Greater than 12 months
	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
2011	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

In determining when OTTI exists for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security, or more likely than not will be required to sell the debt security, before its anticipated recovery. The assessment of whether an OTTI decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

Recognition of OTTI was not necessary in the years ended December 31, 2012 or 2011. The changes in fair values related more to interest rate fluctuations and other market factors and were generally not related to credit quality deterioration, although the amount of deferrals and defaults in the pooled CDOs decreased slightly from 28.4% at December 31, 2011 to 27.7% at December 31, 2012. An increase in rates will generally cause a decrease in the fair value of individual securities while a decrease in rates typically results in an increase in fair value. In addition to the impact of rate changes upon pricing, uncertainty in the financial markets in the periods presented has resulted in reduced liquidity for certain investments, particularly the CDOs, which also impacted market pricing for the periods presented. In the case of the CDOs fair value measurement, management supplemented its assessment with a third party discounted cash flow analysis, and included a risk premium adjustment as of both December 31, 2012 and 2011, to reflect an estimated amount that a market participant would demand because of uncertainty in cash flows. Management estimated that the present value of cash flows would allow the Bank to recover the amortized cost of those securities. Management made the risk premium adjustment initially because the level of market activity for the CDOs security had continued to decrease and information on orderly transaction sales was not generally available. Accordingly, management has designated this security as a level 3 security as described in Note 17. Management does not have the intent to sell the above securities, and it is more likely than not that the Company will not have to sell the securities before recovery of its cost basis.

Below is additional information as it relates to the CDOs, Trapeza CDO XIII, Ltd, which is secured by a pool of trust preferred securities issued by trusts sponsored by multiple financial institutions. This CDO was rated AAA at the time of purchase by the Company.

					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 %
December 31, 2012
Class A1	$	9,038	$	5,768	$	(3,270	)	BB+	63	$	208,000	27.7	%	$	190,982	25.5	%
Class A2A	8,903		4,189		(4,714		)	B+	63	208,000		27.7	%	93,982		12.5	%
	$	17,941	$	9,957	$	(7,984	)

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 December 31, 2012, and December 31, 2011. The Fitch ratings for class A1 and A2A were BBB and B, respectively, as of December 31, 2012, and December 31, 2011

	Years ended December 31,
	2012			2011
Proceeds from sales of securities	$	223,860		$	26,281
Gross realized gains on securities	1,937			738
Gross realized losses on securities	(362		)	(107		)
Securities gains, net	$	1,575		$	631
Income tax expense on net realized gains	$	641		$	258