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Securities | 9 Months Ended
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Sep. 30, 2019
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 $4.5 million at September 30, 2019, and $7.2 million at December 31, 2018. FRBC stock was recorded at $6.2 million at September 30, 2019, and December 31, 2018. The following tables summarize the amortized cost and fair value of the securities portfolio at September 30, 2019, and December 31, 2018, and the corresponding amounts of gross unrealized gains and losses:
|  |  |  |  | Gross |  | Gross |  |  |
|  | Amortized |  | Unrealized |  | Unrealized |  | Fair
September 30, 2019 |  | Cost |  | Gains |  | Losses |  | Value
Securities available-for-sale |  |  |  |  |  |  |  |
U.S. Treasuries |  | $ | 4,009 |  | $ | 29 |  | $ | - |  | $ | 4,038
U.S. government agencies |  |  | 9,304 |  |  | - |  |  | (161) |  |  | 9,143
U.S. government agencies mortgage-backed |  |  | 16,338 |  |  | 619 |  |  | (17) |  |  | 16,940
States and political subdivisions |  |  | 227,680 |  |  | 11,962 |  |  | (915) |  |  | 238,727
Collateralized mortgage obligations |  |  | 62,965 |  |  | 1,216 |  |  | (60) |  |  | 64,121
Asset-backed securities |  |  | 82,106 |  |  | 1,243 |  |  | (167) |  |  | 83,182
Collateralized loan obligations |  |  | 72,454 |  |  | 46 |  |  | (229) |  |  | 72,271
Total securities available-for-sale |  | $ | 474,856 |  | $ | 15,115 |  | $ | (1,549) |  | $ | 488,422
|  |  |  |  | Gross |  | Gross |  |  |
|  | Amortized |  | Unrealized |  | Unrealized |  | Fair
December 31, 2018 |  | Cost |  | Gains |  | Losses |  | Value
Securities available-for-sale |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury |  | $ | 4,006 |  | $ | - |  | $ | (83) |  | $ | 3,923
U.S. government agencies |  |  | 11,112 |  |  | - |  |  | (161) |  |  | 10,951
U.S. government agencies mortgage-backed |  |  | 14,407 |  |  | 45 |  |  | (377) |  |  | 14,075
States and political subdivisions |  |  | 277,112 |  |  | 1,916 |  |  | (4,961) |  |  | 274,067
Collateralized mortgage obligations |  |  | 66,494 |  |  | 79 |  |  | (2,144) |  |  | 64,429
Asset-backed securities |  |  | 108,574 |  |  | 1,165 |  |  | (225) |  |  | 109,514
Collateralized loan obligations |  |  | 65,162 |  |  | 24 |  |  | (897) |  |  | 64,289
Total securities available-for-sale |  | $ | 546,867 |  | $ | 3,229 |  | $ | (8,848) |  | $ | 541,248
The fair value, amortized cost and weighted average yield of debt securities at September 30, 2019, 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 |  | $ | 736 |  | 1.92 | % |  | $ | 736 |
Due after one year through five years |  |  | 4,655 |  | 1.88 |  |  |  | 4,687 |
Due after five years through ten years |  |  | 4,645 |  | 3.29 |  |  |  | 4,944 |
Due after ten years |  |  | 230,957 |  | 3.04 |  |  |  | 241,541 |
|  |  | 240,993 |  | 3.02 |  |  |  | 251,908 |
Mortgage-backed and collateralized mortgage obligations |  |  | 79,303 |  | 3.15 |  |  |  | 81,061 |
Asset-backed securities |  |  | 82,106 |  | 3.27 |  |  |  | 83,182 |
Collateralized loan obligations |  |  | 72,454 |  | 4.53 |  |  |  | 72,271 |
Total securities available-for-sale |  | $ | 474,856 |  | 3.31 | % |  | $ | 488,422 |
At September 30, 2019, the Company’s investments included $55.7 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 $4.7 million, or 8.30% of outstanding principal. The Company has invested in securities issued from two originators that individually amount to over 10% of the Company’s stockholders equity. Information regarding these two issuers and the value of the securities issued follows:
|  | September 30, 2019
|  | Amortized |  | Fair
Issuer |  | Cost |  | Value
GCO Education Loan Funding Corp |  | $ | 27,840 |  | $ | 27,744
Towd Point Mortgage Trust |  |  | 33,744 |  |  | 34,378
Securities with unrealized losses at September 30, 2019, and December 31, 2018, 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, 2019 |  | 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 |  | - |  | $ | - |  | $ | - |  | - |  | $ | - |  | $ | - |  | - |  | $ | - |  | $ | -
U.S. government agencies |  | - |  |  | - |  |  | - |  | 4 |  |  | 161 |  |  | 9,143 |  | 4 |  |  | 161 |  |  | 9,143
U.S. government agencies mortgage-backed |  | 3 |  |  | 7 |  |  | 3,044 |  | 2 |  |  | 10 |  |  | 848 |  | 5 |  |  | 17 |  |  | 3,892
States and political subdivisions |  | 3 |  |  | 326 |  |  | 15,526 |  | 2 |  |  | 589 |  |  | 6,757 |  | 5 |  |  | 915 |  |  | 22,283
Collateralized mortgage obligations |  | 2 |  |  | 44 |  |  | 9,320 |  | 3 |  |  | 16 |  |  | 2,332 |  | 5 |  |  | 60 |  |  | 11,652
Asset-backed securities |  | 2 |  |  | 101 |  |  | 29,389 |  | 1 |  |  | 66 |  |  | 3,213 |  | 3 |  |  | 167 |  |  | 32,602
Collateralized loan obligations |  | 5 |  |  | 56 |  |  | 26,932 |  | 4 |  |  | 173 |  |  | 25,030 |  | 9 |  |  | 229 |  |  | 51,962
Total securities available-for-sale |  | 15 |  | $ | 534 |  | $ | 84,211 |  | 16 |  | $ | 1,015 |  | $ | 47,323 |  | 31 |  | $ | 1,549 |  | $ | 131,534
|  | Less than 12 months |  | 12 months or more |  |  |  |  |  |  |  |
December 31, 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 |  | $ | 83 |  | $ | 3,923 |  | 1 |  | $ | 83 |  | $ | 3,923
U.S. government agencies |  | 3 |  |  | 100 |  |  | 7,385 |  | 1 |  |  | 61 |  |  | 3,566 |  | 4 |  |  | 161 |  |  | 10,951
U.S. government agencies mortgage-backed |  | - |  |  | - |  |  | - |  | 11 |  |  | 377 |  |  | 11,439 |  | 11 |  |  | 377 |  |  | 11,439
States and political subdivisions |  | 4 |  |  | 126 |  |  | 17,713 |  | 33 |  |  | 4,835 |  |  | 110,326 |  | 37 |  |  | 4,961 |  |  | 128,039
Collateralized mortgage obligations |  | 2 |  |  | 309 |  |  | 15,211 |  | 10 |  |  | 1,835 |  |  | 43,687 |  | 12 |  |  | 2,144 |  |  | 58,898
Asset-backed securities |  | - |  |  | - |  |  | - |  | 4 |  |  | 225 |  |  | 16,473 |  | 4 |  |  | 225 |  |  | 16,473
Collateralized loan obligations |  | 7 |  |  | 721 |  |  | 46,547 |  | 1 |  |  | 176 |  |  | 7,824 |  | 8 |  |  | 897 |  |  | 54,371
Total securities available-for-sale |  | 16 |  | $ | 1,256 |  | $ | 86,856 |  | 61 |  | $ | 7,592 |  | $ | 197,238 |  | 77 |  | $ | 8,848 |  | $ | 284,094
Recognition of other-than-temporary impairment was not necessary as of the three months ended September 30, 2019. 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, 2019 and 2018.
|  |  | Three Months Ended |  |  | Nine Months Ended |
|  |  | September 30, |  |  | September 30, |
Securities available-for-sale |  | 2019 |  | 2018 |  | 2019 |  | 2018 |
Proceeds from sales of securities |  | $ | 57,228 |  | $ | 1,917 |  | $ | 177,824 |  | $ | 94,663 |
Gross realized gains on securities |  |  | 3,841 |  |  | 23 |  |  | 5,432 |  |  | 370 |
Gross realized losses on securities |  |  | (378) |  |  | (10) |  |  | (956) |  |  | (10) |
Net realized gains |  | $ | 3,463 |  | $ | 13 |  | $ | 4,476 |  | $ | 360 |
Income tax expense on net realized gains |  | $ | (973) |  | $ | (3) |  | $ | (1,257) |  | $ | (100) |
Effective tax rate applied |  |  | 28.1 | % |  | 23.1 | % |  | 28.1 | % |  | 27.8 | %
Securities valued at $328.8 million as of September 30, 2019, an increase from $311.2 million at year-end 2018, were pledged to secure deposits and borrowings, and for other purposes.

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