Note 2 – 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 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 $3.5 million at September 30, 2015, and $4.3 million at December 31, 2014. Reserve Bank stock was recorded at $4.8 million at September 30, 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 September 30, 2015, and December 31, 2014, and the corresponding amounts of gross unrealized gains and losses (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2015:	Cost		Gains		Losses		Value
Securities Available-for-Sale
U.S. Treasury	$	1,514	$	1	$	-	$	1,515
U.S. government agencies		1,690		-		(113)		1,577
U.S. government agencies mortgage-backed		2,049		-		(15)		2,034
States and political subdivisions		22,918		401		(149)		23,170
Corporate bonds		30,160		-		(580)		29,580
Collateralized mortgage obligations		72,015		53		(1,191)		70,877
Asset-backed securities		195,100		49		(8,053)		187,096
Collateralized loan obligations		94,265		-		(1,278)		92,987
Total Securities Available-for-Sale	$	419,711	$	504	$	(11,379)	$	408,836
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	36,746	$	2,442	$	-	$	39,188
Collateralized mortgage obligations		213,298		5,746		(24)		219,020
Total Securities Held-to-Maturity	$	250,044	$	8,188	$	(24)	$	258,208


			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 September 30, 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	$	12,136	1.52	%	$	12,159
Due after one year through five years		6,898	2.90	%		7,092
Due after five years through ten years		33,586	2.39	%		33,077
Due after ten years		3,662	2.82	%		3,514
		56,282	2.29	%		55,842
Mortgage-backed and collateralized mortgage obligations		74,064	1.30	%		72,911
Asset-backed securities		195,100	1.26	%		187,096
Collateralized loan obligations		94,265	2.87	%		92,987
	$	419,711	1.77	%	$	408,836
Securities Held-to-Maturity
Mortgage-backed and collateralized mortgage obligations	$	250,044	2.98	%	$	258,208

Securities with unrealized losses at September 30, 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
September 30, 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	$	113	$	1,577	1	$	113	$	1,577
U.S. government agencies mortgage-backed	1		15		2,034	-		-		-	1		15		2,034
States and political subdivisions	1		28		1,490	1		121		1,703	2		149		3,193
Corporate bonds	5		160		15,000	3		420		14,580	8		580		29,580
Collateralized mortgage obligations	7		386		43,651	4		805		19,211	11		1,191		62,862
Asset-backed securities	9		2,499		74,269	6		5,554		93,838	15		8,053		168,107
Collateralized loan obligations	5		212		29,684	9		1,066		63,303	14		1,278		92,987
	28	$	3,300	$	166,128	24	$	8,079	$	194,212	52	$	11,379	$	360,340
Securities Held-to-Maturity
Collateralized mortgage obligations	-	$	-	$	-	2	$	24	$	34,550	2	$	24	$	34,550
	-	$	-	$	-	2	$	24	$	34,550	2	$	24	$	34,550


	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 and nine months ending September 30, 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 determined that there was no credit quality deterioration.