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 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.

In the second quarter of 2016, the securities held-to-maturity portfolio was reclassified to available-for-sale to allow for portfolio restructuring and to fund loan growth. This transfer of $244.8 million at net book value was approved by the Board of Directors, and will preclude any holdings of securities held-to-maturity for a two year period.

In the third quarter of 2016, approximately $233.5 million of securities available-for-sale were sold to satisfy anticipated funding requirements for the acquisition of the Talmer branch. Securities losses of $2.0 million pretax were realized upon these sales.

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 $3.2 million at September 30, 2016, and $3.7 million at December 31, 2015. Reserve Bank stock was recorded at $4.8 million at September 30, 2016, and December 31, 2015. 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, 2016, and December 31, 2015, and the corresponding amounts of gross unrealized gains and losses (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2016	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. government agencies	$	1,661	$	-	$	(158)	$	1,503
U.S. government agencies mortgage-backed		42,899		824		-		43,723
States and political subdivisions		21,489		765		-		22,254
Corporate bonds		10,958		-		(228)		10,730
Collateralized mortgage obligations		202,670		2,478		(758)		204,390
Asset-backed securities		149,394		431		(9,652)		140,173
Collateralized loan obligations		109,468		-		(1,184)		108,284
Total securities available-for-sale	$	538,539	$	4,498	$	(11,980)	$	531,057


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2015	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	1,509	$	-	$	-	$	1,509
U.S. government agencies		1,683		-		(127)		1,556
U.S. government agencies mortgage-backed		2,040				(44)		1,996
States and political subdivisions		30,341		285		(100)		30,526
Corporate bonds		30,157		-		(757)		29,400
Collateralized mortgage obligations		68,743		24		(1,847)		66,920
Asset-backed securities		241,872		74		(10,038)		231,908
Collateralized loan obligations		94,374		-		(2,123)		92,251
Total securities available-for-sale	$	470,719	$	383	$	(15,036)	$	456,066
Securities held-to-maturity
U.S. government agency mortgage-backed	$	36,505	$	1,592	$	-	$	38,097
Collateralized mortgage obligations		211,241		3,302		(965)		213,578
Total securities held-to-maturity	$	247,746	$	4,894	$	(965)	$	251,675

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2016, 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	4.60	%	$	420
Due after one year through five years		11,575	2.31			11,734
Due after five years through ten years		18,573	2.43			18,538
Due after ten years		3,550	2.77			3,795
		34,108	2.45			34,487
Mortgage-backed and collateralized mortgage obligations		245,569	2.43			248,113
Asset-backed securities		149,394	1.95			140,173
Collateralized loan obligations		109,468	3.66			108,284
Total securities available-for-sale	$	538,539	2.55	%	$	531,057

At September 30, 2016, the Company’s investments include $118.9 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 and packaged and sold them as asset-backed securities. While the program was modified several times before elimination in 2010, not less than 97% of the outstanding principal amount of the loans made under FFEL are guaranteed by the U.S. Department of Education. In addition to the U.S. Department of Education guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $12.8 million, or 9.62%, of outstanding principal.

Securities with unrealized losses at September 30, 2016, and December 31, 2015, 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
September 30, 2016	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	$	158	$	1,503	1	$	158	$	1,503
Corporate bonds	2		52		5,423	2		176		5,307	4		228		10,730
Collateralized mortgage obligations	10		415		50,958	6		343		17,020	16		758		67,978
Asset-backed securities	6		694		23,817	10		8,958		99,432	16		9,652		123,249
Collateralized loan obligations	2		48		11,947	12		1,136		81,337	14		1,184		93,284
Total securities available-for-sale	20	$	1,209	$	92,145	31	$	10,771	$	204,599	51	$	11,980	$	296,744


	Less than 12 months					12 months or more
December 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	$	127	$	1,556	1	$	127	$	1,556
U.S. government agencies mortgage-backed	1		44		1,996	-		-		-	1		44		1,996
States and political subdivisions	2		19		1,541	1		81		1,713	3		100		3,254
Corporate bonds	5		292		14,866	3		465		14,534	8		757		29,400
Collateralized mortgage obligations	4		334		16,218	7		1,513		43,618	11		1,847		59,836
Asset-backed securities	9		2,080		78,301	8		7,958		121,217	17		10,038		199,518
Collateralized loan obligations	5		446		29,480	9		1,677		62,771	14		2,123		92,251
Total securities available-for-sale	26	$	3,215	$	142,402	29	$	11,821	$	245,409	55	$	15,036	$	387,811
Securities held-to-maturity
Collateralized mortgage obligations	8	$	505	$	40,307	2	$	460	$	33,842	10	$	965	$	74,149
Total securities held-to-maturity	8	$	505	$	40,307	2	$	460	$	33,842	10	$	965	$	74,149

Recognition of other-than-temporary impairment was not necessary in the three and nine months ending September 30, 2016, or the year ended December 31, 2015. 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.