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 $4.3 million at June 30, 2018, and $5.4 million at December 31, 2017. FRBC stock was recorded at $4.8 million at both June 30, 2018, and December 31, 2017.

The following table summarizes the amortized cost and fair value of the securities portfolio at June 30, 2018, and December 31, 2017, and the corresponding amounts of gross unrealized gains and losses:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2018	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasuries	$	4,004	$	-	$	(128)	$	3,876
U.S. government agencies		12,369		-		(153)		12,216
U.S. government agencies mortgage-backed		14,011		-		(604)		13,407
States and political subdivisions		279,007		1,640		(4,535)		276,112
Corporate bonds		685		21		(6)		700
Collateralized mortgage obligations		63,778		60		(2,406)		61,432
Asset-backed securities		110,053		1,011		(1,801)		109,263
Collateralized loan obligations		66,489		223		(74)		66,638
Total securities available-for-sale	$	550,396	$	2,955	$	(9,707)	$	543,644


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2017	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,002	$	-	$	(55)	$	3,947
U.S. government agencies		13,062		8		(9)		13,061
U.S. government agencies mortgage-backed		12,372		7		(165)		12,214
States and political subdivisions		272,240		7,116		(1,264)		278,092
Corporate bonds		823		21		(11)		833
Collateralized mortgage obligations		66,892		202		(1,155)		65,939
Asset-backed securities		113,983		862		(1,913)		112,932
Collateralized loan obligations		54,271		251		(101)		54,421
Total securities available-for-sale	$	537,645	$	8,467	$	(4,673)	$	541,439

The fair value, amortized cost and weighted average yield of debt securities at June 30, 2018, 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	$	10,550	2.10	%	$	10,540
Due after one year through five years		4,689	2.20			4,576
Due after five years through ten years		5,343	3.27			5,413
Due after ten years		275,483	2.98			272,375
		296,065	2.94			292,904
Mortgage-backed and collateralized mortgage obligations		77,789	3.11			74,839
Asset-backed securities		110,053	3.23			109,263
Collateralized loan obligations		66,489	4.34			66,638
Total securities available-for-sale	$	550,396	3.19	%	$	543,644

At June 30, 2018, the Company’s investments included $92.5 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 $10.9 million, or 11.44%, 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:


	June 30, 2018
	Amortized		Fair
Issuer	Cost		Value
GCO Education Loan Funding Corp	$	27,685	$	26,754
Towd Point Mortgage Trust		28,966		28,080
Student Loan Marketing Association		25,780		26,176

Securities with unrealized losses at June 30, 2018, and December 31, 2017, 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, 2018	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	$	128	$	3,876	-	$	-	$	-	1	$	128	$	3,876
U.S. government agencies	4		153		12,216	-		-		-	4		153		12,216
U.S. government agencies mortgage-backed	7		356		8,968	5		248		4,439	12		604		13,407
States and political subdivisions	43		3,264		141,455	2		1,271		3,849	45		4,535		145,304
Corporate bonds	-		-		-	1		6		198	1		6		198
Collateralized mortgage obligations	3		399		20,353	9		2,007		37,782	12		2,406		58,135
Asset-backed securities	3		65		8,451	6		1,736		56,539	9		1,801		64,990
Collateralized loan obligations	3		60		17,364	1		14		7,986	4		74		25,350
Total securities available-for-sale	64	$	4,425	$	212,683	24	$	5,282	$	110,793	88	$	9,707	$	323,476


	Less than 12 months					12 months or more
December 31, 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	$	55	$	3,947	-	$	-	$	-	1	$	55	$	3,947
U.S. government agencies	2		9		6,550	-		-		-	2		9		6,550
U.S. government agencies mortgage-backed	4		24		5,501	5		141		4,843	9		165		10,344
States and political subdivisions	13		1,237		45,985	1		27		1,512	14		1,264		47,497
Corporate bonds	-		-		-	1		11		332	1		11		332
Collateralized mortgage obligations	3		31		11,534	8		1,124		40,219	11		1,155		51,753
Asset-backed securities	-		-		-	7		1,913		61,745	7		1,913		61,745
Collateralized loan obligations	3		101		29,313	-		-		-	3		101		29,313
Total securities available-for-sale	26	$	1,457	$	102,830	22	$	3,216	$	108,651	48	$	4,673	$	211,481

Recognition of other-than-temporary impairment was not necessary as of the three and six months ended June 30, 2018. 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 three and six months ended June 30, 2018 and 2017.


		Three Months Ended				Six Months Ended
		June 30,				June 30,
Securities available-for-sale	2018		2017		2018		2017
Proceeds from sales of securities	$	90,224	$	36,468	$	92,746	$	100,856
Gross realized gains on securities		312		71		347		437
Gross realized losses on securities		-		(202)		-		(704)
Securities realized gains (losses), net	$	312	$	(131)	$	347	$	(267)
Income tax (expense) benefit on net realized gains (losses)		(88)		52		(98)		106

The majority of the net realized losses in the prior year were incurred as the portfolio was repositioned during 2017 to invest in higher yielding tax exempt municipal securities.

Securities valued at $311.4 million as of June 30, 2018, an increase from $301.0 million at year-end 2017, were pledged to secure deposits and borrowings, and for other purposes.