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 September 30, 2018, and $5.4 million at December 31, 2017. FRBC stock was recorded at $6.2 million and $4.8 million at September 30, 2018, and December 31, 2017, respectively.

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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
September 30, 2018	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasuries	$	4,005	$	-	$	(151)	$	3,854
U.S. government agencies		11,881		-		(178)		11,703
U.S. government agencies mortgage-backed		15,474		-		(708)		14,766
States and political subdivisions		278,604		398		(6,738)		272,264
Collateralized mortgage obligations		67,762		118		(2,920)		64,960
Asset-backed securities		108,622		991		(440)		109,173
Collateralized loan obligations		65,555		162		(99)		65,618
Total securities available-for-sale	$	551,903	$	1,669	$	(11,234)	$	542,338


			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 September 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	$	1,500	4.78	%	$	1,502
Due after one year through five years		4,005	1.85			3,854
Due after five years through ten years		6,688	3.03			6,626
Due after ten years		282,297	3.00			275,839
		294,490	3.00			287,821
Mortgage-backed and collateralized mortgage obligations		83,236	3.21			79,726
Asset-backed securities		108,622	3.22			109,173
Collateralized loan obligations		65,555	4.71			65,618
Total securities available-for-sale	$	551,903	3.28	%	$	542,338

At September 30, 2018, the Company’s investments included $92.6 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 DOE guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $11.7 million, or 12.44% 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:


	September 30, 2018
	Amortized		Fair
Issuer	Cost		Value
GCO Education Loan Funding Corp	$	27,711	$	27,788
Towd Point Mortgage Trust		34,390		33,181
Student Loan Marketing Association		25,798		26,134

Securities with unrealized losses at September 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
September 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	$	151	$	3,854	1	$	151	$	3,854
U.S. government agencies	3		109		7,829	1		69		3,874	4		178		11,703
U.S. government agencies mortgage-backed	6		287		7,357	7		421		7,409	13		708		14,766
States and political subdivisions	55		3,843		174,924	9		2,895		28,218	64		6,738		203,142
Collateralized mortgage obligations	4		714		25,620	8		2,206		33,342	12		2,920		58,962
Asset-backed securities	3		79		7,526	5		361		30,240	8		440		37,766
Collateralized loan obligations	4		85		24,502	1		14		7,986	5		99		32,488
Total securities available-for-sale	75	$	5,117	$	247,758	32	$	6,117	$	114,923	107	$	11,234	$	362,681


	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 nine months ended September 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 nine months ended September 30, 2018 and 2017.


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
Securities available-for-sale	2018		2017		2018		2017
Proceeds from sales of securities	$	1,917	$	51,620	$	94,663	$	152,476
Gross realized gains on securities		23		474		370		911
Gross realized losses on securities		(10)		(371)		(10)		(1,076)
Securities realized gains (losses), net	$	13	$	103	$	360	$	(165)
Income tax (expense) benefit on net realized gains (losses)		(2)		(42)		(100)		24

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 $311.2 million as of September 30, 2018, an increase from $301.0 million at year-end 2017, were pledged to secure deposits and borrowings, and for other purposes.