Securities

6 Months Ended

Jun. 30, 2022

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 $5.5 million at June 30, 2022, and $7.1 million at December 31, 2021.  FRBC stock was recorded at $14.9 million at June 30, 2022, and $6.2 million at December 31, 2021.  

The following tables summarize the amortized cost and fair value of the securities portfolio at June 30, 2022, and December 31, 2021, and the corresponding amounts of gross unrealized gains and losses:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2022	Cost1		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	223,768	$	-	$	(8,948)	$	214,820
U.S. government agencies		61,673		-		(3,777)		57,896
U.S. government agencies mortgage-backed		152,583		-		(10,747)		141,836
States and political subdivisions		244,864		912		(12,124)		233,652
Corporate bonds		10,000		-		(457)		9,543
Collateralized mortgage obligations		681,539		31		(40,072)		641,498
Asset-backed securities		268,682		87		(9,147)		259,622
Collateralized loan obligations		181,116		-		(5,567)		175,549
Total securities available-for-sale	$	1,824,225	$	1,030	$	(90,839)	$	1,734,416

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2021	Cost1		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	202,251	$	125	$	(37)	$	202,339
U.S. government agencies		62,587		-		(699)		61,888
U.S. government agencies mortgage-backed		172,016		856		(570)		172,302
States and political subdivisions		241,937		16,344		(672)		257,609
Corporate bonds		10,000		-		(113)		9,887
Collateralized mortgage obligations		673,238		2,014		(2,285)		672,967
Asset-backed securities		236,293		1,245		(661)		236,877
Collateralized loan obligations		79,838		3		(78)		79,763
Total securities available-for-sale	$	1,678,160	$	20,587	$	(5,115)	$	1,693,632

¹ Excludes accrued interest receivable of $5.5 million and $4.3 million at June 30, 2022 and December 31, 2021, 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 June 30, 2022, 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	$	8,229	1.15	%	$	8,017
Due after one year through five years		304,142	1.05			291,151
Due after five years through ten years		44,642	2.52			41,310
Due after ten years		183,292	3.00			175,433
		540,305	1.83			515,911
Mortgage-backed and collateralized mortgage obligations		834,122	1.81			783,334
Asset-backed securities		268,682	2.17			259,622
Collateralized loan obligations		181,116	3.10			175,549
Total securities available-for-sale	$	1,824,225	2.00	%	$	1,734,416

At June 30, 2022, the Company’s investments included $216.4 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 June 30, 2022, 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 June 30, 2022 and December 31, 2021, 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
June 30, 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	5	$	8,948	$	214,820	-	$	-	$	-	5	$	8,948	$	214,820
U.S. government agencies	5		3,691		53,781	4		86		4,116	9		3,777		57,897
U.S. government agencies mortgage-backed	127		9,681		136,686	6		1,066		5,149	133		10,747		141,835
States and political subdivisions	36		10,463		119,482	1		1,661		2,941	37		12,124		122,423
Corporate bonds	2		457		9,543	-		-		-	2		457		9,543
Collateralized mortgage obligations	221		38,780		617,153	2		1,292		12,739	223		40,072		629,892
Asset-backed securities	48		8,853		236,143	5		294		6,956	53		9,147		243,099
Collateralized loan obligations	32		5,378		165,068	2		189		10,481	34		5,567		175,549
Total securities available-for-sale	476	$	86,251	$	1,552,676	20	$	4,588	$	42,382	496	$	90,839	$	1,595,058

	Less than 12 months					12 months or more
December 31, 2021	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	$	37	$	49,719	-	$	-	$	-	1	$	37	$	49,719
U.S. government agencies	5		592		56,879	4		107		5,008	9		699		61,887
U.S. government agencies mortgage-backed	63		505		78,711	1		65		1,663	64		570		80,374
States and political subdivisions	7		55		8,430	1		617		4,051	8		672		12,481
Corporate bonds	2		113		9,887	-		-		-	2		113		9,887
Collateralized mortgage obligations	133		2,285		381,658	-		-		-	133		2,285		381,658
Asset-backed securities	20		608		103,819	3		53		3,276	23		661		107,095
Collateralized loan obligations	10		35		45,132	2		43		10,628	12		78		55,760
Total securities available-for-sale	241	$	4,230	$	734,235	11	$	885	$	24,626	252	$	5,115	$	758,861

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.  No credit losses were determined to be present as of June 30, 2022, as there was no credit quality deterioration noted.  Therefore, no provision for credit losses on securities was recognized for the second quarter of 2022.

		Three Months Ended				Six Months Ended
		June 30,				June 30,
Securities available-for-sale	2022		2021		2022		2021
Proceeds from sales of securities	$	3,303	$	8,202	$	3,303	$	8,202
Gross realized gains on securities	$	-	$	5	$	-	$	5
Gross realized losses on securities		(33)		(3)		(33)		(3)
Net realized (losses) gains	$	(33)	$	2	$	(33)	$	2
Income tax benefit (expense) on net realized (losses) gains	$	9	$	(1)	$	9	$	(1)

Effective tax rate applied 27.3 % N/M % 27.3 % N/M %

As of June 30, 2022, securities valued at $511.4 million were pledged to secure deposits and borrowings, and for other purposes, an increase from $501.3 million of securities pledged at year-end 2021.