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Securities

9 Months Ended

Sep. 30, 2021

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 September 30, 2021, and December 31, 2020. FRBC stock was recorded at $6.2 million at September 30, 2021, and December 31, 2020.

The following tables summarize the amortized cost and fair value of the securities portfolio at September 30, 2021, and December 31, 2020, and the corresponding amounts of gross unrealized gains and losses:


					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
September 30, 2021		Cost¹			Gains			Losses			Value
Securities available-for-sale
U.S. Treasury		$	4,017		$	53		$	-		$	4,070
U.S. government agencies			33,915			-			(340)			33,575
U.S. government agencies mortgage-backed			17,269			764			(215)			17,818
States and political subdivisions			222,833			16,758			(639)			238,952
Corporate bonds			5,000			-			(8)			4,992
Collateralized mortgage obligations			163,756			1,966			(308)			165,414
Asset-backed securities			187,825			1,646			(133)			189,338
Collateralized loan obligations			61,085			18			(74)			61,029
Total securities available-for-sale		$	695,700		$	21,205		$	(1,717)		$	715,188


					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
December 31, 2020		Cost¹			Gains			Losses			Value
Securities available-for-sale
U.S. Treasury		$	4,014		$	103		$	-		$	4,117
U.S. government agencies			6,811			-			(154)			6,657
U.S. government agencies mortgage-backed			16,098			1,112			(1)			17,209
States and political subdivisions			229,352			21,269			(1,362)			249,259
Collateralized mortgage obligations			53,999			2,866			(280)			56,585
Asset-backed securities			130,959			1,370			(511)			131,818
Collateralized loan obligations			30,728			15			(210)			30,533
Total securities available-for-sale		$	471,961		$	26,735		$	(2,518)		$	496,178

¹ Excludes accrued interest receivable of $2.8 million and $2.7 million at September 30, 2021 and December 31, 2020, 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 September 30, 2021, by contractual maturity, are listed 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		$	4,227		1.87	%		$	4,281
Due after one year through five years			36,288		0.79				36,240
Due after five years through ten years			28,159		2.35				29,387
Due after ten years			197,091		3.01				211,681
			265,765		2.62				281,589
Mortgage-backed and collateralized mortgage obligations			181,025		1.73				183,232
Asset-backed securities			187,825		1.14				189,338
Collateralized loan obligations			61,085		1.40				61,029
Total securities available-for-sale		$	695,700		1.88	%		$	715,188

At September 30, 2021, the Company’s investments included $154.5 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 $15.6 million, or 10.03% of outstanding principal.

At September 30, 2021, the Company had invested in securities issued from one originator that individually amounted to over 10% of the Company’s stockholders’ equity. Information regarding this issuer and the value of the securities issued follows:


		September 30, 2021
		Amortized			Fair
Issuer		Cost			Value
Towd Point Mortgage Trust		$	32,836		$	34,339

Securities with unrealized losses with no corresponding allowance for credit losses at September 30, 2021 and December 31, 2020, 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, 2021		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		2		$	229		$	28,066		4		$	111		$	5,509		6		$	340		$	33,575
U.S. government agencies mortgage-backed		6			215			6,084		-			-			-		6			215			6,084
States and political subdivisions		2			23			1,490		1			616			4,085		3			639			5,575
Corporate bonds		1			8			4,992		-			-			-		1			8			4,992
Collateralized mortgage obligations		7			244			63,495		1			64			7,531		8			308			71,026
Asset-backed securities		5			79			35,048		1			54			3,270		6			133			38,318
Collateralized loan obligations		6			27			20,386		2			47			10,625		8			74			31,011
Total securities available-for-sale		29		$	825		$	159,561		9		$	892		$	31,020		38		$	1,717		$	190,581


		Less than 12 months								12 months or more
December 31, 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		$	154		$	6,657		4		$	154		$	6,657
U.S. government agencies mortgage-backed		1			1			141		-			-			-		1			1			141
States and political subdivisions		-			-			-		1			1,362			3,433		1			1,362			3,433
Collateralized mortgage obligations		4			279			8,142		1			1			146		5			280			8,288
Asset-backed securities		1			2			251		3			509			49,572		4			511			49,823
Collateralized loan obligations		1			31			7,468		4			179			21,477		5			210			28,945
Total securities available-for-sale		7		$	313		$	16,002		13		$	2,205		$	81,285		20		$	2,518		$	97,287

Each quarter we perform an analysis to determine if any of the unrealized losses on securities available-for-sale are comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. Our assessment includes 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. We also consider 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 September 30, 2021, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the third quarter of 2021.

The following table presents proceeds from sale and net realized gains (losses) on securities available-for-sale for the three and nine months ended September 30, 2021 and 2020:


			Three Months Ended						Nine Months Ended
			September 30,						September 30,
Securities available-for-sale		2021			2020			2021			2020
Proceeds from sales of securities		$	26,873		$	-		$	35,075		$	18,006
Gross realized gains on securities		$	262		$	-		$	267		$	17
Gross realized losses on securities			(18)			(1)			(21)			(42)
Net realized gains (losses)		$	244		$	(1)		$	246		$	(25)
Income tax (expense) benefit on net realized gains (losses)		$	(69)		$	-		$	(70)		$	7
Effective tax rate applied			28.3	%		0.0	%		28.5	%		28.0	%

As of September 30, 2021, securities valued at $353.2 million were pledged to secure deposits and borrowings, and for other purposes, an increase from $335.8 million of securities pledged at year-end 2020.