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.