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Securities

9 Months Ended

Sep. 30, 2022

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 $4.5 million at September 30, 2022, and $7.1 million at December 31, 2021. FRBC stock was recorded at $14.9 million at September 30, 2022, and $6.2 million at December 31, 2021.

The following tables summarize the amortized cost and fair value of the securities portfolio at September 30, 2022, and December 31, 2021, and the corresponding amounts of gross unrealized gains and losses:


					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
September 30, 2022		Cost¹			Gains			Losses			Value
Securities available-for-sale
U.S. Treasury		$	223,910		$	-		$	(12,813)		$	211,097
U.S. government agencies			61,364			-			(5,401)			55,963
U.S. government agencies mortgage-backed			145,857			-			(18,231)			127,626
States and political subdivisions			243,515			1			(19,257)			224,259
Corporate bonds			10,000			-			(456)			9,544
Collateralized mortgage obligations			648,044			5			(60,203)			587,846
Asset-backed securities			227,130			23			(7,566)			219,587
Collateralized loan obligations			180,910			-			(7,073)			173,837
Total securities available-for-sale		$	1,740,730		$	29		$	(131,000)		$	1,609,759


					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
December 31, 2021		Cost¹			Gains			Losses			Value
Securities available-for-sale
U.S. Treasury		$	202,251		$	125		$	(37)		$	202,339
U.S. government agencies			62,587			-			(699)			61,888
U.S. government agencies mortgage-backed			172,016			856			(570)			172,302
States and political subdivisions			241,937			16,344			(672)			257,609
Corporate bonds			10,000			-			(113)			9,887
Collateralized mortgage obligations			673,238			2,014			(2,285)			672,967
Asset-backed securities			236,293			1,245			(661)			236,877
Collateralized loan obligations			79,838			3			(78)			79,763
Total securities available-for-sale		$	1,678,160		$	20,587		$	(5,115)		$	1,693,632

¹ Excludes accrued interest receivable of $6.3 million and $4.3 million at September 30, 2022 and December 31, 2021, 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, 2022, 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		$	8,816		1.10	%		$	8,617
Due after one year through five years			303,411		1.05				284,480
Due after five years through ten years			44,313		2.63				39,593
Due after ten years			182,249		3.02				168,173
			538,789		1.85				500,863
Mortgage-backed and collateralized mortgage obligations			793,901		2.22				715,472
Asset-backed securities			227,130		3.39				219,587
Collateralized loan obligations			180,910		4.64				173,837
Total securities available-for-sale		$	1,740,730		2.51	%		$	1,609,759

At September 30, 2022, the Company’s investments included $167.0 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 $20.3 million, or 9.29%, of outstanding principal.

At September 30, 2022, the Company had no securities issued from any one originator, other than the U.S. Government and its agencies, which individually amounted to over 10% of the Company’s stockholders’ equity.

Securities with unrealized losses with no corresponding allowance for credit losses at September 30, 2022 and December 31, 2021, 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, 2022		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. Treasuries		5		$	12,813		$	211,097		-		$	-		$	-		5		$	12,813		$	211,097
U.S. government agencies		2			1,987			27,188		7			3,414			28,775		9			5,401			55,963
U.S. government agencies mortgage-backed		126			16,766			122,905		6			1,465			4,721		132			18,231			127,626
States and political subdivisions		79			18,155			219,497		3			1,102			4,510		82			19,257			224,007
Corporate bonds		1			286			4,715		1			170			4,829		2			456			9,544
Collateralized mortgage obligations		205			48,552			505,601		15			11,651			77,102		220			60,203			582,703
Asset-backed securities		44			6,553			196,221		6			1,013			11,524		50			7,566			207,745
Collateralized loan obligations		26			5,735			134,712		8			1,338			39,125		34			7,073			173,837
Total securities available-for-sale		488		$	110,847		$	1,421,936		46		$	20,153		$	170,586		534		$	131,000		$	1,592,522


		Less than 12 months								12 months or more
December 31, 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. Treasuries		1		$	37		$	49,719		-		$	-		$	-		1		$	37		$	49,719
U.S. government agencies		5			592			56,879		4			107			5,008		9			699			61,887
U.S. government agencies mortgage-backed		63			505			78,711		1			65			1,663		64			570			80,374
States and political subdivisions		7			55			8,430		1			617			4,051		8			672			12,481
Corporate bonds		2			113			9,887		-			-			-		2			113			9,887
Collateralized mortgage obligations		133			2,285			381,658		-			-			-		133			2,285			381,658
Asset-backed securities		20			608			103,819		3			53			3,276		23			661			107,095
Collateralized loan obligations		10			35			45,132		2			43			10,628		12			78			55,760
Total securities available-for-sale		241		$	4,230		$	734,235		11		$	885		$	24,626		252		$	5,115		$	758,861

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, 2022, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the third quarter of 2022.


			Three Months Ended						Nine Months Ended
			September 30,						September 30,
Securities available-for-sale		2022			2021			2022			2021
Proceeds from sales of securities		$	-		$	26,873		$	3,303		$	35,075
Gross realized gains on securities		$	-		$	262		$	-		$	267
Gross realized losses on securities ¹			(1)			(18)			(34)			(21)
Net realized (losses) gains		$	(1)		$	244		$	(34)		$	246
Income tax benefit (expense) on net realized (losses) gains		$	1		$	(69)		$	10		$	(70)
Effective tax rate applied			N/M			28.3	%		29.4	%		28.5	%

¹ The Company received proceeds of $7.5 million from the call of available for sale investment securities for the nine months ended September 30, 2022. A loss of $1,000 was recorded on the call of securities during the third quarter of 2022.

N/M - Not meaningful

As of September 30, 2022, securities valued at $578.5 million were pledged to secure deposits and borrowings, and for other purposes, an increase from $501.3 million of securities pledged at year-end 2021.