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Securities

6 Months Ended

Jun. 30, 2023

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 $21.8 million at June 30, 2023, and $5.6 million at December 31, 2022. FRBC stock was recorded at $14.9 million at June 30, 2023 and December 31, 2022.

The following tables summarize the amortized cost and fair value of the securities portfolio at June 30, 2023, and December 31, 2022, and the corresponding amounts of gross unrealized gains and losses:


					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
June 30, 2023		Cost¹			Gains			Losses			Value
Securities available-for-sale
U.S. Treasury		$	224,337		$	-		$	(9,724)		$	214,613
U.S. government agencies			60,593			-			(4,612)			55,981
U.S. government agencies mortgage-backed			129,973			-			(14,833)			115,140
States and political subdivisions			241,764			557			(12,787)			229,534
Corporate bonds			5,000			-			(118)			4,882
Collateralized mortgage obligations			468,029			-			(60,534)			407,495
Asset-backed securities			140,791			-			(6,472)			134,319
Collateralized loan obligations			177,523			-			(3,865)			173,658
Total securities available-for-sale		$	1,448,010		$	557		$	(112,945)		$	1,335,622


					Gross			Gross
		Amortized			Unrealized			Unrealized			Fair
December 31, 2022		Cost¹			Gains			Losses			Value
Securities available-for-sale
U.S. Treasury		$	224,054		$	-		$	(11,925)		$	212,129
U.S. government agencies			61,178			-			(5,130)			56,048
U.S. government agencies mortgage-backed			140,588			-			(15,598)			124,990
States and political subdivisions			239,999			363			(14,234)			226,128
Corporate bonds			10,000			-			(378)			9,622
Collateralized mortgage obligations			596,336			1			(62,569)			533,768
Asset-backed securities			210,388			6			(8,466)			201,928
Collateralized loan obligations			180,276			-			(5,530)			174,746
Total securities available-for-sale		$	1,662,819		$	370		$	(123,830)		$	1,539,359

¹ Excludes accrued interest receivable of $6.9 million and $6.8 million at June 30, 2023 and December 31, 2022, respectively, that is recorded in other assets on the consolidated balance sheets.

The fair value, amortized cost and weighted average yield of debt securities at June 30, 2023, 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		$	153,576		0.93	%		$	149,066
Due after one year through five years			151,098		1.19				140,669
Due after five years through ten years			52,232		3.03				48,401
Due after ten years			174,788		3.07				166,874
			531,694		1.91				505,010
Mortgage-backed and collateralized mortgage obligations			598,002		2.29				522,635
Asset-backed securities			140,791		5.15				134,319
Collateralized loan obligations			177,523		6.92				173,658
Total securities available-for-sale		$	1,448,010		3.00	%		$	1,335,622

At June 30, 2023, 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 June 30, 2023 and December 31, 2022, 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, 2023		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		$	9,724		$	214,613		5		$	9,724		$	214,613
U.S. government agencies		-			-			-		9			4,612			55,981		9			4,612			55,981
U.S. government agencies mortgage-backed		3			177			2,188		127			14,656			112,952		130			14,833			115,140
States and political subdivisions		31			1,178			92,606		26			11,609			83,930		57			12,787			176,536
Corporate bonds		-			-			-		1			118			4,882		1			118			4,882
Collateralized mortgage obligations		3			381			7,817		149			60,153			399,678		152			60,534			407,495
Asset-backed securities		4			536			29,088		27			5,936			105,231		31			6,472			134,319
Collateralized loan obligations		1			8			2,970		33			3,857			170,688		34			3,865			173,658
Total securities available-for-sale		42		$	2,280		$	134,669		377		$	110,665		$	1,147,955		419		$	112,945		$	1,282,624


		Less than 12 months								12 months or more
December 31, 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		1		$	1,025		$	24,121		4		$	10,900		$	188,008		5		$	11,925		$	212,129
U.S. government agencies		-			-			-		9			5,130			56,048		9			5,130			56,048
U.S. government agencies mortgage-backed		15			975			11,369		117			14,623			113,621		132			15,598			124,990
States and political subdivisions		45			5,800			128,770		15			8,434			48,877		60			14,234			177,647
Corporate bonds		-			-			-		2			378			9,622		2			378			9,622
Collateralized mortgage obligations		80			12,895			180,624		120			49,674			348,880		200			62,569			529,504
Asset-backed securities		30			3,030			121,915		21			5,436			79,659		51			8,466			201,574
Collateralized loan obligations		23			3,579			112,772		11			1,951			61,974		34			5,530			174,746
Total securities available-for-sale		194		$	27,304		$	579,571		299		$	96,526		$	906,689		493		$	123,830		$	1,486,260

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.

The portfolio continues to consist of a mix of fixed and floating-rate, high quality securities, largely rated AA (or better), displaying an overall effective duration of approximately 3.0 years. No credit losses were determined to be present as of June 30, 2023, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the second quarter of 2023.

The following table presents net realized losses on securities available-for-sale for three and six months ended:


			Three Months Ended						Six Months Ended
			June 30,						June 30,
Securities available-for-sale		2023			2022			2023			2022
Proceeds from sales of securities		$	73,996		$	3,303		$	140,166		$	3,303
Gross realized losses on securities			(1,547)			(33)			(3,222)			(33)
Net realized losses		$	(1,547)		$	(33)		$	(3,222)		$	(33)
Income tax benefit on net realized losses		$	434		$	9		$	905		$	9
Effective tax rate applied			28.1	%		27.3	%		28.1	%		27.3	%

As of June 30, 2023, securities valued at $938.5 million were pledged for borrowings, and for other purposes, an increase from $547.8 million of securities pledged at year-end 2022.