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Securities | 9 Months Ended
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Sep. 30, 2017
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. FHLBC and FRBC stock are considered nonmarketable equity investments. FHLBC stock was recorded at $5.6 million at September 30, 2017, and $3.1 million at December 31, 2016, and is necessary to maintain access to FHLBC advances, which are utilized as a component to meet the Bank’s daily funding needs. FRBC stock was recorded at $4.8 million at September 30, 2017, and December 31, 2016. The following table summarizes the amortized cost and fair value of the securities portfolio at September 30, 2017, and December 31, 2016, and the corresponding amounts of gross unrealized gains and losses:
|  |  |  |  | Gross |  | Gross |  |  |
|  | Amortized |  | Unrealized |  | Unrealized |  | Fair
September 30, 2017 |  | Cost |  | Gains |  | Losses |  | Value
Securities available-for-sale |  |  |  |  |  |  |  |
U.S. Treasuries |  | $ | 4,001 |  | $ | - |  | $ | (11) |  | $ | 3,990
U.S. government agencies |  |  | 13,475 |  |  | 15 |  |  | (39) |  |  | 13,451
U.S. government agencies mortgage-backed |  |  | 11,131 |  |  | 18 |  |  | (119) |  |  | 11,030
States and political subdivisions |  |  | 224,648 |  |  | 5,173 |  |  | (789) |  |  | 229,032
Corporate bonds |  |  | 10,823 |  |  | 20 |  |  | (266) |  |  | 10,577
Collateralized mortgage obligations |  |  | 81,693 |  |  | 228 |  |  | (1,535) |  |  | 80,386
Asset-backed securities |  |  | 134,542 |  |  | 865 |  |  | (3,648) |  |  | 131,759
Collateralized loan obligations |  |  | 52,803 |  |  | 505 |  |  | (49) |  |  | 53,259
Total securities available-for-sale |  | $ | 533,116 |  | $ | 6,824 |  | $ | (6,456) |  | $ | 533,484
|  |  |  |  | Gross |  | Gross |  |  |
|  | Amortized |  | Unrealized |  | Unrealized |  | Fair
December 31, 2016 |  | Cost |  | Gains |  | Losses |  | Value
Securities available-for-sale |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agencies mortgage-backed |  | $ | 42,511 |  | $ | - |  | $ | (977) |  | $ | 41,534
States and political subdivisions |  |  | 68,718 |  |  | 258 |  |  | (273) |  |  | 68,703
Corporate bonds |  |  | 10,957 |  |  | 9 |  |  | (336) |  |  | 10,630
Collateralized mortgage obligations |  |  | 174,352 |  |  | 374 |  |  | (3,799) |  |  | 170,927
Asset-backed securities |  |  | 146,391 |  |  | 341 |  |  | (8,325) |  |  | 138,407
Collateralized loan obligations |  |  | 102,504 |  |  | 29 |  |  | (896) |  |  | 101,637
Total securities available-for-sale |  | $ | 545,433 |  | $ | 1,011 |  | $ | (14,606) |  | $ | 531,838
The fair value, amortized cost and weighted average yield of debt securities at September 30, 2017, 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 |  | $ | 3,400 |  | 2.60 | % |  | $ | 3,405 |
Due after one year through five years |  |  | 5,846 |  | 2.74 |  |  |  | 5,831 |
Due after five years through ten years |  |  | 16,105 |  | 2.52 |  |  |  | 16,057 |
Due after ten years |  |  | 227,596 |  | 2.98 |  |  |  | 231,757 |
|  |  | 252,947 |  | 2.94 |  |  |  | 257,050 |
Mortgage-backed and collateralized mortgage obligations |  |  | 92,824 |  | 2.72 |  |  |  | 91,416 |
Asset-backed securities |  |  | 134,542 |  | 2.41 |  |  |  | 131,759 |
Collateralized loan obligations |  |  | 52,803 |  | 4.38 |  |  |  | 53,259 |
Total securities available-for-sale |  | $ | 533,116 |  | 2.91 | % |  | $ | 533,484 |
At September 30, 2017, the Company’s investments include $110.6 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 U.S. Department of Education guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $12.3 million, or 10.42%, of outstanding principal. The Company has invested in securities issued from three originators that individually amount to over 10% of the Company’s stockholders equity. Information regarding these three issuers and the value of the securities issued follows:
|  | September 30, 2017 |
|  | Amortized |  | Fair |
Issuer |  | Cost |  | Value |
GCO Education Loan Funding Corp |  | $ | 27,555 |  | $ | 26,505 |
Towd Point Mortgage Trust |  |  | 29,544 |  |  | 29,445 |
Student Loan Marketing Assocation |  |  | 25,654 |  |  | 25,803 |
Securities with unrealized losses at September 30, 2017, and December 31, 2016, 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, 2017 |  | 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 |  | $ | 11 |  | $ | 3,990 |  | - |  | $ | - |  | $ | - |  | 1 |  | $ | 11 |  | $ | 3,990
U.S. government agencies |  | 2 |  |  | 39 |  |  | 6,701 |  | - |  |  | - |  |  | - |  | 2 |  |  | 39 |  |  | 6,701
U.S. government agencies mortgage-backed |  | 2 |  |  | 13 |  |  | 2,089 |  | 4 |  |  | 106 |  |  | 4,096 |  | 6 |  |  | 119 |  |  | 6,185
States and political subdivisions |  | 7 |  |  | 789 |  |  | 24,843 |  | - |  |  | - |  |  | - |  | 7 |  |  | 789 |  |  | 24,843
Corporate bonds |  | - |  |  | - |  |  | - |  | 3 |  |  | 266 |  |  | 10,078 |  | 3 |  |  | 266 |  |  | 10,078
Collateralized mortgage obligations |  | 4 |  |  | 238 |  |  | 21,281 |  | 8 |  |  | 1,297 |  |  | 43,684 |  | 12 |  |  | 1,535 |  |  | 64,965
Asset-backed securities |  | 1 |  |  | 265 |  |  | 4,293 |  | 9 |  |  | 3,383 |  |  | 76,725 |  | 10 |  |  | 3,648 |  |  | 81,018
Collateralized loan obligations |  | 1 |  |  | 49 |  |  | 7,948 |  | - |  |  | - |  |  | - |  | 1 |  |  | 49 |  |  | 7,948
Total securities available-for-sale |  | 18 |  | $ | 1,404 |  | $ | 71,145 |  | 24 |  | $ | 5,052 |  | $ | 134,583 |  | 42 |  | $ | 6,456 |  | $ | 205,728
|  | Less than 12 months |  | 12 months or more |  |  |  |  |  |  |  |
December 31, 2016 |  | 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 mortgage-backed |  | 11 |  | $ | 957 |  | $ | 40,636 |  | 1 |  | $ | 20 |  | $ | 898 |  | 12 |  | $ | 977 |  | $ | 41,534
States and political subdivisions |  | 12 |  |  | 273 |  |  | 35,241 |  | - |  |  | - |  |  | - |  | 12 |  |  | 273 |  |  | 35,241
Corporate bonds |  | 1 |  |  | 183 |  |  | 4,817 |  | 2 |  |  | 153 |  |  | 5,328 |  | 3 |  |  | 336 |  |  | 10,145
Collateralized mortgage obligations |  | 16 |  |  | 3,402 |  |  | 117,752 |  | 7 |  |  | 397 |  |  | 18,109 |  | 23 |  |  | 3,799 |  |  | 135,861
Asset-backed securities |  | 4 |  |  | 328 |  |  | 17,604 |  | 12 |  |  | 7,997 |  |  | 107,112 |  | 16 |  |  | 8,325 |  |  | 124,716
Collateralized loan obligations |  | - |  |  | - |  |  | - |  | 12 |  |  | 896 |  |  | 81,613 |  | 12 |  |  | 896 |  |  | 81,613
Total securities available-for-sale |  | 44 |  | $ | 5,143 |  | $ | 216,050 |  | 34 |  | $ | 9,463 |  | $ | 213,060 |  | 78 |  | $ | 14,606 |  | $ | 429,110
Recognition of other-than-temporary impairment was not necessary in the three and nine months ended September 30, 2017 or 2016. The changes in fair value related primarily to interest rate fluctuations. Our review of other-than-temporary impairment determined that there was no credit quality deterioration. The following table presents net realized gains (losses) on securities available-for-sale for the quarters and nine months ended September 30, 2017 and 2016.
|  |  | Quarter Ended |  |  | Nine Months Ended |
|  |  | September 30, |  |  | September 30, |
Securities available-for-sale |  | 2017 |  | 2016 |  | 2017 |  | 2016 |
Gross realized gains on securities |  | $ | 474 |  | $ | 1,380 |  | $ | 911 |  | $ | 1,518 |
Gross realized losses on securities |  |  | (371) |  |  | (3,339) |  |  | (1,076) |  |  | (3,538) |
Securities realized gains (losses), net |  | $ | 103 |  | $ | (1,959) |  | $ | (165) |  | $ | (2,020) |
The majority of the net realized losses in the prior year were incurred to meet the funding needs related to the Talmer branch acquisition in late 2016.

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