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Securities

6 Months Ended

Jun. 30, 2020

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 $3.7 million at June 30, 2020, and December 31, 2019. FRBC stock was recorded at $6.2 million at June 30, 2020, and December 31, 2019.

The following tables summarize the amortized cost and fair value of the securities portfolio at June 30, 2020, and December 31, 2019, and the corresponding amounts of gross unrealized gains and losses:


					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
June 30, 2020		Cost			Gains			Losses			Value
Securities available-for-sale
U.S. Treasury		$	4,012		$	135		$	-		$	4,147
U.S. government agencies			7,450			-			(174)			7,276
U.S. government agencies mortgage-backed			15,505			1,274			-			16,779
States and political subdivisions			235,111			16,388			(1,135)			250,364
Collateralized mortgage obligations			55,391			1,672			(950)			56,113
Asset-backed securities			82,004			430			(2,408)			80,026
Collateralized loan obligations			33,794			46			(1,109)			32,731
Total securities available-for-sale		$	433,267		$	19,945		$	(5,776)		$	447,436


					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
December 31, 2019		Cost¹			Gains			Losses			Value
Securities available-for-sale
U.S. Treasury		$	4,010		$	26		$	-		$	4,036
U.S. government agencies			8,502			-			(165)			8,337
U.S. government agencies mortgage-backed			16,164			443			(19)			16,588
States and political subdivisions			240,399			11,207			(2,431)			249,175
Collateralized mortgage obligations			57,059			963			(38)			57,984
Asset-backed securities			82,114			617			(887)			81,844
Collateralized loan obligations			66,898			29			(243)			66,684
Total securities available-for-sale		$	475,146		$	13,285		$	(3,783)		$	484,648

¹ Excludes accrued interest receivable of $2.9 million and $3.2 million at June 30, 2020 and December 31, 2019, 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, 2020, 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		$	416		2.01	%		$	420
Due after one year through five years			6,066		2.11				6,326
Due after five years through ten years			15,770		2.43				16,211
Due after ten years			224,321		2.98				238,830
			246,573		2.93				261,787
Mortgage-backed and collateralized mortgage obligations			70,896		3.10				72,892
Asset-backed securities			82,004		1.60				80,026
Collateralized loan obligations			33,794		2.44				32,731
Total securities available-for-sale		$	433,267		2.66	%		$	447,436

At June 30, 2020, the Company’s investments included $55.9 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. 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 $4.9 million, or 8.71% of outstanding principal.

The Company has invested in securities issued from one originator that individually amount to over 10% of the Company’s stockholders equity. Information regarding this issuer and the value of the securities issued follows:


		June 30, 2020
(in thousands)		Amortized			Fair
Issuer		Cost			Value
Towd Point Mortgage Trust		$	33,298		$	34,394

Securities with unrealized losses with no corresponding allowance for credit losses at June 30, 2020 and December 31, 2019, 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, 2020		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		-		$	-		$	-		4		$	174		$	7,276		4		$	174		$	7,276
States and political subdivisions		1			7			890		2			1,128			5,466		3			1,135			6,356
Collateralized mortgage obligations		8			944			11,867		1			6			522		9			950			12,389
Asset-backed securities		9			1,223			36,955		2			1,185			30,055		11			2,408			67,010
Collateralized loan obligations		3			646			16,343		2			463			11,703		5			1,109			28,046
Total securities available-for-sale		21		$	2,820		$	66,055		11		$	2,956		$	55,022		32		$	5,776		$	121,077


		Less than 12 months								12 months or more
December 31, 2019		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		-		$	-		$	-		4		$	165		$	8,337		4		$	165		$	8,337
U.S. government agencies mortgage-backed		3			10			3,018		2			9			843		5			19			3,861
States and political subdivisions		6			1,665			41,043		2			766			6,593		8			2,431			47,636
Collateralized mortgage obligations		2			26			9,054		2			12			1,209		4			38			10,263
Asset-backed securities		4			839			54,540		1			48			3,238		5			887			57,778
Collateralized loan obligations		4			62			21,927		4			181			25,020		8			243			46,947
Total securities available-for-sale		19		$	2,602		$	129,582		15		$	1,181		$	45,240		34		$	3,783		$	174,822

As required upon the adoption of ASU 2016-13, we performed an analysis to determine if any of the unrealized losses on securities available-for-sale were comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. Our assessment included 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. The Company also considered 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 the date of CECL adoption or as of the quarter ended June 30, 2020, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the second quarter end.

The following table presents net realized gains (losses) on securities available-for-sale for the three and six months ended June 30, 2020 and 2019.

Three Months Ended

Six Months Ended

June 30,

June 30,

Securities available-for-sale		2020			2019			2020			2019
Proceeds from sales of securities		$	-		$	39,072		$	18,006		$	120,596
Gross realized gains on securities			-			986			17			1,591
Gross realized losses on securities			-			-			(41)			(578)
Net realized gains (losses)		$	-		$	986		$	(24)		$	1,013
Income tax (expense) benefit on net realized gains (losses)		$	-		$	(276)		$	7		$	(284)
Effective tax rate applied			0.0	%		28.0	%		29.2	%		28.0	%

Securities valued at $329.5 million as of June 30, 2020, an increase from $320.8 million at year-end 2019, were pledged to secure deposits and borrowings, and for other purposes.