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 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.

Securities held-to-maturity are carried at amortized cost and the discount or premium created in the 2013 transfer from available-for-sale securities or at the time of purchase thereafter is accreted or amortized to the maturity or expected payoff date but not an earlier call. In accordance with GAAP, the Company has the positive intent and ability to hold the securities to maturity.

Nonmarketable equity investments include Federal Home Loan Bank of Chicago (“FHLBC”) stock and Federal Reserve Bank of Chicago (“Reserve Bank”) stock. FHLBC stock was recorded at $4.3 million and $5.5 million at September 30, 2014, and December 31, 2013, respectively. Reserve Bank stock was recorded at $4.8 million at September 30, 2014, and December 31, 2013. Our FHLBC stock is necessary to maintain access to FHLBC advances.

The following table summarizes the amortized cost and fair value of the securities portfolio at September 30, 2014 and December 31, 2013 and the corresponding amounts of gross unrealized gains and losses (in thousands):



			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2014:	Cost		Gains		Losses		Value
Securities Available-for-Sale
U.S. Treasury	$	1,533	$	-	$	(1)	$	1,532
U.S. government agencies		1,718		-		(80)		1,638
States and political subdivisions		13,794		313		(228)		13,879
Corporate bonds		31,272		65		(556)		30,781
Collateralized mortgage obligations		29,951		41		(1,575)		28,417
Asset-backed securities		194,927		98		(2,227)		192,798
Collateralized loan obligations		94,202		-		(1,004)		93,198
Total Securities Available-for-Sale	$	367,397	$	517	$	(5,671)	$	362,243
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	37,321	$	1,346	$	(11)	$	38,656
Collateralized mortgage obligations		225,719		2,017		(2,049)		225,687
Total Securities Held-to-Maturity	$	263,040	$	3,363	$	(2,060)	$	264,343



			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2013:	Cost		Gains		Losses		Value
Securities Available-for-Sale
U.S. Treasury	$	1,549	$	-	$	(5)	$	1,544
U.S. government agencies		1,738		-		(66)		1,672
States and political subdivisions		16,382		629		(217)		16,794
Corporate bonds		15,733		17		(648)		15,102
Collateralized mortgage obligations		66,766		256		(3,146)		63,876
Asset-backed securities		274,118		2,168		(3,083)		273,203
Total Securities Available-for-Sale	$	376,286	$	3,070	$	(7,165)	$	372,191
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	35,268	$	45	$	(73)	$	35,240
Collateralized mortgage obligations		221,303		643		(2,858)		219,088
Total Securities Held-to-Maturity	$	256,571	$	688	$	(2,931)	$	254,328

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2014, by contractual maturity, were as follows 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	$	410	4.50%	$	421
Due after one year through five years		5,811	2.87%		5,992
Due after five years through ten years		36,724	2.44%		36,218
Due after ten years		5,372	3.31%		5,199
		48,317	2.61%		47,830
Collateralized mortgage obligations		29,951	2.46%		28,417
Asset-back securities		194,927	2.10%		192,798
Collateralized loan obligations		94,202	2.78%		93,198
	$	367,397	2.37%	$	362,243
Securities Held-to-Maturity
Mortgage-backed and collateralized mortgage obligations	$	263,040	3.05%	$	264,343

Securities with unrealized losses at September 30, 2014, and December 31, 2013, 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					Greater than 12 months
September 30, 2014	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. Treasury	1	$	1	$	1,532	-	$	-	$	-	1	$	1	$	1,532
U.S. government agencies	-		-		-	1		80		1,638	1		80		1,638
States and political subdivisions	3		215		4,450	2		13		1,862	5		228		6,312
Corporate bonds	5		463		20,581	2		93		2,411	7		556		22,992
Collateralized mortgage obligations	1		18		4,739	3		1,557		21,704	4		1,575		26,443
Asset-backed securities	10		1,231		117,440	3		996		44,042	13		2,227		161,482
Collateralized loan obligations	13		1,004		93,198	-		-		-	13		1,004		93,198
	33	$	2,932	$	241,940	11	$	2,739	$	71,657	44	$	5,671	$	313,597
Securities Held-to-Maturity
U.S. government agency mortgage-backed	1	$	11	$	1,972	-	$	-	$	-	1	$	11	$	1,972
Collateralized mortgage obligations	13		1,164		83,545	2		885		37,828	15		2,049		121,373
	14	$	1,175	$	85,517	2	$	885	$	37,828	16	$	2,060	$	123,345



	Less than 12 months					Greater than 12 months
December 31, 2013	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. Treasury	1	$	5	$	1,544	-	$	-	$	-	1	$	5	$	1,544
U.S. government agencies	-		-		-	1		66		1,672	1		66		1,672
States and political subdivisions	6		217		4,625	-		-		-	6		217		4,625
Corporate bonds	4		429		10,493	2		219		2,796	6		648		13,289
Collateralized mortgage obligations	5		3,146		54,021	-		-		-	5		3,146		54,021
Asset-backed securities	11		2,836		99,466	2		247		6,368	13		3,083		105,834
	27	$	6,633	$	170,149	5	$	532	$	10,836	32	$	7,165	$	180,985
Securities Held-to-Maturity
U.S. government agency mortgage-backed	6	$	73	$	19,134	-	$	-	$	-	6	$	73	$	19,134
Collateralized mortgage obligations	19		2,858		156,632	-		-		-	19		2,858		156,632
	25	$	2,931	$	175,766	-	$	-	$	-	25	$	2,931	$	175,766

Recognition of other-than-temporary impairment was not necessary in the nine months ended September 30, 2014, or the year ended December 31, 2013. The changes in fair value related primarily to interest rate fluctuations. Our review of other-than-temporary impairment confirmed no credit quality deterioration.