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Securities | 3 Months Ended
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Mar. 31, 2020
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. Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank of Chicago (“FRBC”) stock are considered nonmarketable equity investments. FHLBC stock was recorded at $3.7 million at March 31, 2020, and December 31, 2019. FRBC stock was recorded at $6.2 million at March 31, 2020, and December 31, 2019. The following tables summarize the amortized cost and fair value of the securities portfolio at March 31, 2020, and December 31, 2019, and the corresponding amounts of gross unrealized gains and losses:
|  |  |  |  | Gross |  | Gross |  |  |
|  | Amortized |  | Unrealized |  | Unrealized |  | Fair
March 31, 2020 |  | Cost 1 |  | Gains |  | Losses |  | Value
Securities available-for-sale |  |  |  |  |  |  |  |
U.S. Treasury |  | $ | 4,011 |  | $ | 141 |  | $ | - |  | $ | 4,152
U.S. government agencies |  |  | 7,870 |  |  | - |  |  | (147) |  |  | 7,723
U.S. government agencies mortgage-backed |  |  | 16,021 |  |  | 1,234 |  |  | - |  |  | 17,255
States and political subdivisions |  |  | 244,429 |  |  | 12,353 |  |  | (1,687) |  |  | 255,095
Collateralized mortgage obligations |  |  | 56,104 |  |  | 709 |  |  | (3,410) |  |  | 53,403
Asset-backed securities |  |  | 82,005 |  |  | 210 |  |  | (4,488) |  |  | 77,727
Collateralized loan obligations |  |  | 36,104 |  |  | 69 |  |  | (1,834) |  |  | 34,339
Total securities available-for-sale |  | $ | 446,544 |  | $ | 14,716 |  | $ | (11,566) |  | $ | 449,694
|  |  |  |  | Gross |  | Gross |  |  |
|  | Amortized |  | Unrealized |  | Unrealized |  | Fair
December 31, 2019 |  | Cost 1 |  | Gains |  | Losses |  | Value
Securities available-for-sale |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury |  | $ | 4,010 |  | $ | 26 |  | $ | - |  | $ | 4,036
U.S. government agencies |  |  | 8,502 |  |  | - |  |  | (165) |  |  | 8,337
U.S. government agencies mortgage-backed |  |  | 16,164 |  |  | 443 |  |  | (19) |  |  | 16,588
States and political subdivisions |  |  | 240,399 |  |  | 11,207 |  |  | (2,431) |  |  | 249,175
Collateralized mortgage obligations |  |  | 57,059 |  |  | 963 |  |  | (38) |  |  | 57,984
Asset-backed securities |  |  | 82,114 |  |  | 617 |  |  | (887) |  |  | 81,844
Collateralized loan obligations |  |  | 66,898 |  |  | 29 |  |  | (243) |  |  | 66,684
Total securities available-for-sale |  | $ | 475,146 |  | $ | 13,285 |  | $ | (3,783) |  | $ | 484,648
1 Excludes accrued interest receivable of $3.0 million and $3.2 million at March 31, 2020 and December 31, 2019, respectively, that is recorded in other assets on the consolidated balance sheet. The fair value, amortized cost and weighted average yield of debt securities at March 31, 2020, 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 |  | $ | 6,606 |  | 2.42 | % |  | $ | 6,625 |
Due after one year through five years |  |  | 6,287 |  | 2.11 |  |  |  | 6,509 |
Due after five years through ten years |  |  | 16,117 |  | 2.96 |  |  |  | 16,506 |
Due after ten years |  |  | 227,300 |  | 3.01 |  |  |  | 237,330 |
|  |  | 256,310 |  | 2.97 |  |  |  | 266,970 |
Mortgage-backed and collateralized mortgage obligations |  |  | 72,125 |  | 3.30 |  |  |  | 70,658 |
Asset-backed securities |  |  | 82,005 |  | 2.75 |  |  |  | 77,727 |
Collateralized loan obligations |  |  | 36,104 |  | 3.59 |  |  |  | 34,339 |
Total securities available-for-sale |  | $ | 446,544 |  | 3.03 | % |  | $ | 449,694 |
At March 31, 2020, the Company’s investments included $55.8 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 $4.8 million, or 8.52% 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:
|  | March 31, 2020
(in thousands) |  | Amortized |  | Fair
Issuer |  | Cost |  | Value
GCO Education Loan Funding Corp |  | $ | 27,911 |  | $ | 26,501
Towd Point Mortgage Trust |  |  | 33,360 |  |  | 31,996
Securities with unrealized losses with no corresponding allowance for credit losses at March 31, 2020 and December 31, 2019, 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 |  |  |  |  |  |  |  |
March 31, 2020 |  | 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 |  | - |  | $ | - |  | $ | - |  | 4 |  | $ | 147 |  | $ | 7,723 |  | 4 |  | $ | 147 |  | $ | 7,723
States and political subdivisions |  | 4 |  |  | 588 |  |  | 25,038 |  | 2 |  |  | 1,099 |  |  | 5,904 |  | 6 |  |  | 1,687 |  |  | 30,942
Collateralized mortgage obligations |  | 12 |  |  | 3,339 |  |  | 35,811 |  | 2 |  |  | 71 |  |  | 1,051 |  | 14 |  |  | 3,410 |  |  | 36,862
Asset-backed securities |  | 9 |  |  | 2,530 |  |  | 36,074 |  | 2 |  |  | 1,958 |  |  | 29,244 |  | 11 |  |  | 4,488 |  |  | 65,318
Collateralized loan obligations |  | 3 |  |  | 849 |  |  | 16,140 |  | 2 |  |  | 985 |  |  | 11,187 |  | 5 |  |  | 1,834 |  |  | 27,327
Total securities available-for-sale |  | 28 |  | $ | 7,306 |  | $ | 113,063 |  | 12 |  | $ | 4,260 |  | $ | 55,109 |  | 40 |  | $ | 11,566 |  | $ | 168,172
|  | Less than 12 months |  | 12 months or more |  |  |  |  |  |  |  |
December 31, 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. government agencies |  | - |  |  | - |  |  | - |  | 4 |  |  | 165 |  |  | 8,337 |  | 4 |  |  | 165 |  |  | 8,337
U.S. government agencies mortgage-backed |  | 3 |  |  | 10 |  |  | 3,018 |  | 2 |  |  | 9 |  |  | 843 |  | 5 |  |  | 19 |  |  | 3,861
States and political subdivisions |  | 6 |  |  | 1,665 |  |  | 41,043 |  | 2 |  |  | 766 |  |  | 6,593 |  | 8 |  |  | 2,431 |  |  | 47,636
Collateralized mortgage obligations |  | 2 |  |  | 26 |  |  | 9,054 |  | 2 |  |  | 12 |  |  | 1,209 |  | 4 |  |  | 38 |  |  | 10,263
Asset-backed securities |  | 4 |  |  | 839 |  |  | 54,540 |  | 1 |  |  | 48 |  |  | 3,238 |  | 5 |  |  | 887 |  |  | 57,778
Collateralized loan obligations |  | 4 |  |  | 62 |  |  | 21,927 |  | 4 |  |  | 181 |  |  | 25,020 |  | 8 |  |  | 243 |  |  | 46,947
Total securities available-for-sale |  | 19 |  | $ | 2,602 |  | $ | 129,582 |  | 15 |  | $ | 1,181 |  | $ | 45,240 |  | 34 |  | $ | 3,783 |  | $ | 174,822
Upon the adoption of ASU 2016-13 as of January 1, 2020, and again as of March 31, 2020, we performed an analysis to determine if any of the unrealized losses on securities available-for-sale were comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. The Company’s assessment included a review of the severity and duration of the unrealized loss; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades; and the Company’s ability and intent to hold the security for a period of time sufficient for a recovery in value. The Company also considered the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies. No credit losses were determined to be present as of the date of CECL adoption or as of the quarter ended March 31, 2020, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the first quarter end. The following table presents net realized gains (losses) on securities available-for-sale for the three months ended March 31, 2020 and 2019.
|  |  | Three Months Ended |
|  |  | March 31, |
Securities available-for-sale |  | 2020 |  | 2019 |
Proceeds from sales of securities |  | $ | 18,126 |  | $ | 81,524 |
Gross realized gains on securities |  |  | 17 |  |  | 605 |
Gross realized losses on securities |  |  | (41) |  |  | (578) |
Net realized (losses) gains |  | $ | (24) |  | $ | 27 |
Income tax benefit (expense) on net realized (losses) gains |  | $ | 7 |  | $ | (8) |
Effective tax rate applied |  |  | 29.2 | % |  | 29.6 | %
Securities valued at $320.3 million as of March 31, 2020, a decrease from $320.8 million at year-end 2019, were pledged to secure deposits and borrowings, and for other purposes.

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