NOTE 3 – SECURITIES

Securities as shown in these consolidated financial statements reflect revised categories as required by the Company’s adoption of ASU 2016‑01 on January 1, 2018. That new guidance refined the definition of equity securities and required their segregation from debt securities available-for-sale.

While changes in the fair value of debt securities available-for-sale continue to be recorded in accumulated other comprehensive income (loss), the new guidance requires changes in the fair value of equity securities to be recorded in current earnings. As required by the new guidance, the unrealized gain in fair value on equity securities (recorded in accumulated other comprehensive loss at December 31, 2017) was reclassified to retained earnings on January 1, 2018. The amount of the reclassification was $122,000.

The carrying balances of the securities were as follows:


	September 30,		December 31,
	2019		2018
	(dollars in thousands)
Securities available-for-sale	$	618,120	$	679,526
Securities held-to-maturity		99,861		121,715
Equity securities:
Readily determinable fair value		3,251		3,081
No readily determinable fair value		1,185		180
Total securities	$	722,417	$	804,502

The Company has elected to measure the equity securities with no readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes for identical or similar securities of the same issuer. During the three and nine months ended September 30, 2019, the Company recognized a $(128,000) adjustment to the carrying value of equity securities with no readily determinable fair value based on an observable price change of an identical investment.

The amortized cost and fair values of securities available-for-sale, with gross unrealized gains and losses, are as follows:


September 30, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:	(dollars in thousands)
U.S. government agency	$	38,633	$	947	$	(6)	$	39,574
Municipal		150,058		2,451		(10)		152,499
Mortgage-backed:
Agency residential		215,303		3,182		(239)		218,246
Agency commercial		127,550		2,084		(185)		129,449
Private-label		22		—		—		22
Corporate		77,202		1,135		(7)		78,330
Total	$	608,768	$	9,799	$	(447)	$	618,120


December 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale:	(dollars in thousands)
U.S. government agency	$	46,977	$	250	$	(361)	$	46,866
Municipal		161,957		761		(1,268)		161,450
Mortgage-backed:
Agency residential		235,903		788		(2,388)		234,303
Agency commercial		151,878		285		(2,082)		150,081
Private-label		254		2		—		256
Corporate		87,118		207		(755)		86,570
Total	$	684,087	$	2,293	$	(6,854)	$	679,526

The carrying value and fair value of securities held-to-maturity, with gross unrealized gains and losses, are as follows:


September 30, 2019	Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:	(dollars in thousands)
Municipal	$	55,182	$	1,424	$	—	$	56,606
Mortgage-backed:
Agency residential		20,336		163		(145)		20,354
Agency commercial		24,343		1,093		(18)		25,418
Total	$	99,861	$	2,680	$	(163)	$	102,378


December 31, 2018	Carrying Value		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity:	(dollars in thousands)
Municipal	$	73,176	$	1,149	$	(42)	$	74,283
Mortgage-backed:
Agency residential		23,192		—		(998)		22,194
Agency commercial		25,347		177		(495)		25,029
Total	$	121,715	$	1,326	$	(1,535)	$	121,506

Amortized cost of securities held-to-maturity amounted to $55,221,000 and $72,982,000 for municipal securities and $44,739,000 and $48,611,000 for mortgage-backed securities as of September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019 and December 31, 2018, the Banks had securities with a carrying value of $288,305,000 and $291,404,000, respectively, which were pledged to secure public and trust deposits, securities sold under agreements to repurchase, and for other purposes required or permitted by law.

The Company has no direct exposure to the State of Illinois, but approximately 56% of the obligations of local municipalities portfolio consists of securities issued by municipalities located in Illinois as of September 30, 2019. Approximately 91% of such securities were general obligation issues as of September 30, 2019.

The amortized cost and fair value of securities available-for-sale and the carrying value and fair value of securities held-to-maturity, as of September 30, 2019, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Carrying Value		Fair Value
	(dollars in thousands)
Due in 1 year or less	$	55,909	$	55,967	$	146	$	147
Due after 1 year through 5 years		112,593		114,296		25,160		25,684
Due after 5 years through 10 years		89,863		92,422		26,209		26,941
Due after 10 years		7,528		7,718		3,667		3,834

Mortgage-backed:
Agency residential		215,303		218,246		20,336		20,354
Agency commercial		127,550		129,449		24,343		25,418
Private-label		22		22		—		—
Total	$	608,768	$	618,120	$	99,861	$	102,378

Sales of securities available-for-sale were as follows during the three and nine months ended September 30:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(dollars in thousands)
Proceeds from sales	$	—	$	15,665	$	—	$	15,665
Gross realized gains		—		280		—		280
Gross realized losses		—		(18)		—		(18)

Gains (losses) on securities were as follows during the three and nine months ended September 30:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(dollars in thousands)
Net realized gains on sales	$	—	$	262	$	—	$	262
Net unrealized gains (losses) on equities:
Readily determinable fair value		55		(82)		170		(112)
No readily determinable fair value		(128)		—		(128)		—
Gains (losses) on securities	$	(73)	$	180	$	42	$	150

The following tables present gross unrealized losses and fair value of investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2019 and December 31, 2018:


	Investments in a Continuous Unrealized Loss Position
	Less than 12 Months				12 Months or More				Total
September 30, 2019	Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value
Available-for-sale:	(dollars in thousands)
U.S. government agency	$	—	$	—	$	(6)	$	1,991	$	(6)	$	1,991
Municipal		(7)		4,480		(3)		1,111		(10)		5,591
Mortgage-backed:
Agency residential		(21)		17,348		(218)		31,241		(239)		48,589
Agency commercial		—		—		(185)		16,678		(185)		16,678
Corporate		(5)		14,990		(2)		4,995		(7)		19,985
Total	$	(33)	$	36,818	$	(414)	$	56,016	$	(447)	$	92,834

Held-to-maturity:
Mortgage-backed:
Agency residential	$	(16)	$	3,225	$	(129)	$	9,760	$	(145)	$	12,985
Agency commercial		(11)		2,226		(7)		622		(18)		2,848
Total	$	(27)	$	5,451	$	(136)	$	10,382	$	(163)	$	15,833


	Investments in a Continuous Unrealized Loss Position
	Less than 12 Months				12 Months or More				Total
December 31, 2018	Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value
Available-for-sale:	(dollars in thousands)
U.S. government agency	$	(302)	$	19,079	$	(59)	$	7,938	$	(361)	$	27,017
Municipal		(230)		31,034		(1,038)		59,702		(1,268)		90,736
Mortgage-backed:
Agency residential		(299)		40,864		(2,089)		99,967		(2,388)		140,831
Agency commercial		(262)		35,462		(1,820)		81,899		(2,082)		117,361
Corporate		(263)		20,734		(492)		39,054		(755)		59,788
Total	$	(1,356)	$	147,173	$	(5,498)	$	288,560	$	(6,854)	$	435,733

Held-to-maturity:
Municipal	$	(32)	$	4,166	$	(10)	$	1,856	$	(42)	$	6,022
Mortgage-backed:
Agency residential		(59)		4,046		(939)		17,564		(998)		21,610
Agency commercial		(67)		8,910		(428)		10,413		(495)		19,323
Total	$	(158)	$	17,122	$	(1,377)	$	29,833	$	(1,535)	$	46,955

As of September 30, 2019, there were 74 securities in an unrealized loss position for a period of twelve months or more, and 36 securities in an unrealized loss position for a period of less than twelve months. These unrealized losses are primarily a result of fluctuations in interest rates in the bond market. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. Management believes that all declines in value of these securities are deemed to be temporary.