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.