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 at March 31, 2015, and December 31, 2014. Reserve Bank stock was recorded at $4.8 million at March 31, 2015, and December 31, 2014. 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 March 31, 2015, and December 31, 2014, and the corresponding amounts of gross unrealized gains and losses (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2015:	Cost		Gains		Losses		Value
Securities Available-for-Sale
U.S. Treasury	$	1,524	$	1	$	-	$	1,525
U.S. government agencies		1,704		-		(93)		1,611
States and political subdivisions		33,573		327		(154)		33,746
Corporate bonds		33,385		23		(404)		33,004
Collateralized mortgage obligations		69,205		50		(1,162)		68,093
Asset-backed securities		170,817		18		(2,579)		168,256
Collateralized loan obligations		94,221		13		(1,217)		93,017
Total Securities Available-for-Sale	$	404,429	$	432	$	(5,609)	$	399,252
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	37,135	$	2,541	$	-	$	39,676
Collateralized mortgage obligations		220,197		5,482		(260)		225,419
Total Securities Held-to-Maturity	$	257,332	$	8,023	$	(260)	$	265,095


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2014:	Cost		Gains		Losses		Value
Securities Available-for-Sale
U.S. Treasury	$	1,529	$	-	$	(2)	$	1,527
U.S. government agencies		1,711		-		(87)		1,624
States and political subdivisions		21,682		432		(96)		22,018
Corporate bonds		31,243		309		(567)		30,985
Collateralized mortgage obligations		65,728		31		(2,132)		63,627
Asset-backed securities		175,565		199		(2,268)		173,496
Collateralized loan obligations		94,236		176		(2,203)		92,209
Total Securities Available-for-Sale	$	391,694	$	1,147	$	(7,355)	$	385,486
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	37,125	$	2,030	$	-	$	39,155
Collateralized mortgage obligations		222,545		3,005		(1,439)		224,111
Total Securities Held-to-Maturity	$	259,670	$	5,035	$	(1,439)	$	263,266

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2015, 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	$	20,410	1.56%	$	20,454
Due after one year through five years		9,048	2.64%		9,199
Due after five years through ten years		35,588	2.16%		35,221
Due after ten years		5,140	3.27%		5,012
		70,186	2.13%		69,886
Collateralized mortgage obligations		69,205	1.95%		68,093
Asset-backed securities		170,817	1.11%		168,256
Collateralized loan obligations		94,221	2.85%		93,017
	$	404,429	1.84%	$	399,252
Securities Held-to-Maturity
Mortgage-backed and collateralized mortgage obligations	$	257,332	3.03%	$	265,095

Securities with unrealized losses at March 31, 2015, and December 31, 2014, 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
March 31, 2015	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. government agencies	-	$	-	$	-	1	$	93	$	1,611	1	$	93	$	1,611
States and political subdivisions	2		154		3,249	-		-		-	2		154		3,249
Corporate bonds	4		295		16,756	2		109		6,893	6		404		23,649
Collateralized mortgage obligations	5		434		38,849	3		728		19,754	8		1,162		58,603
Asset-backed securities	9		1,202		97,873	4		1,377		57,949	13		2,579		155,822
Collateralized loan obligations	13		1,217		88,020	-		-		-	13		1,217		88,020
	33	$	3,302	$	244,747	10	$	2,307	$	86,207	43	$	5,609	$	330,954
Securities Held-to-Maturity
Collateralized mortgage obligations	1	$	42	$	13,135	5	$	218	$	51,149	6	$	260	$	64,284
	1	$	42	$	13,135	5	$	218	$	51,149	6	$	260	$	64,284


	Less than 12 months					Greater than 12 months
December 31, 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	$	2	$	1,527	-	$	-	$	-	1	$	2	$	1,527
U.S. government agencies	-		-		-	1		87		1,624	1		87		1,624
States and political subdivisions	4		96		4,896	-		-		-	4		96		4,896
Corporate bonds	4		486		15,246	1		81		1,921	5		567		17,167
Collateralized mortgage obligations	5		900		38,284	3		1,232		21,604	8		2,132		59,888
Asset-backed securities	9		1,077		99,286	3		1,191		43,662	12		2,268		142,948
Collateralized loan obligations	12		2,203		82,387	-		-		-	12		2,203		82,387
	35	$	4,764	$	241,626	8	$	2,591	$	68,811	43	$	7,355	$	310,437
Securities Held-to-Maturity
Collateralized mortgage obligations	7	$	457	$	49,302	4	$	982	$	46,283	11		1,439		95,585
	7	$	457	$	49,302	4	$	982	$	46,283	11	$	1,439	$	95,585

Recognition of other-than-temporary impairment was not necessary in the three months ending March 31, 2015, or the year ended December 31, 2014. The changes in fair value related primarily to interest rate fluctuations. Our review of other-than-temporary impairment confirmed no credit quality deterioration.