Note 4: Securities

Investment Portfolio Management

Investments are comprised of debt securities and non-marketable equity investments. As of the second quarter of 2016, all debt securities are classified as available-for-sale. 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.

Nonmarketable equity investments include FHLBC stock and FRBC stock. FHLBC stock was $3.1 million and $3.7 million at December 31, 2016, and December 31, 2015. FRBC stock was $4.8 million at December 31, 2016, and December 31, 2015. Our FHLBC stock is necessary to maintain access to FHLBC advances.

The following table summarizes the amortized cost and fair value of the securities portfolio at December 31, 2016 and December 31, 2015, and the corresponding amounts of gross unrealized gains and losses (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2016	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. government agencies mortgage-backed	$	42,511	$	-	$	(977)	$	41,534
States and political subdivisions		68,718		258		(273)		68,703
Corporate bonds		10,957		9		(336)		10,630
Collateralized mortgage obligations		174,352		374		(3,799)		170,927
Asset-backed securities		146,391		341		(8,325)		138,407
Collateralized loan obligations		102,504		29		(896)		101,637
Total securities available-for-sale	$	545,433	$	1,011	$	(14,606)	$	531,838


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2015	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	1,509	$	-	$	-	$	1,509
U.S. government agencies		1,683		-		(127)		1,556
U.S. government agencies mortgage-backed		2,040		-		(44)		1,996
States and political subdivisions		30,341		285		(100)		30,526
Corporate bonds		30,157		-		(757)		29,400
Collateralized mortgage obligations		68,743		24		(1,847)		66,920
Asset-backed securities		241,872		74		(10,038)		231,908
Collateralized loan obligations		94,374		-		(2,123)		92,251
Total securities available-for-sale	$	470,719	$	383	$	(15,036)	$	456,066
Securities held-to-maturity
U.S. government agency mortgage-backed	$	36,505	$	1,592	$	-	$	38,097
Collateralized mortgage obligations		211,241		3,302		(965)		213,578
Total securities held-to-maturity	$	247,746	$	4,894	$	(965)	$	251,675

During the twelve months ended December 31, 2016, the total securities portfolio declined $172.0 million. This reduction stemmed from funding needs related to the Talmer branch acquisition and loan growth. Certain portfolios did increase in the year over year period, such as states and political subdivisions and collateralized loan obligations. Purchases totaling $92.3 million were executed in these portfolios during 2016 due to favorable pricing in the rising interest rate environment. These portfolio increases were more than offset by reductions in holdings of asset-backed securities and collateralized mortgage obligations; these reductions were comprised of sales of $287.7 million and paydowns of $31.8 million.

Securities valued at $262.6 million as of December 31, 2016, (a decline from $340.2 million at year-end 2015) were pledged to secure deposits and for other purposes.

The fair value, amortized cost and weighted average yield of debt securities at December 31, 2016, 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	$	14,410	1.93	%	$	14,416
Due after one year through five years		4,575	3.02			4,571
Due after five years through ten years		16,855	2.62			16,594
Due after ten years		43,835	3.51			43,752
		79,675	3.01			79,333
Mortgage-backed and collateralized mortgage obligations		216,863	2.43			212,461
Asset-backed securities		146,391	2.15			138,407
Collateralized loan obligations		102,504	3.80			101,637
Total securities available-for-sale	$	545,433	2.70	%	$	531,838

At December 31, 2016, the Company’s investments include asset-backed securities totaling $117.4 million 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 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. As of December 31, 2016, the likelihood of the decrease in the government guarantee was minimal as the average rate of reimbursement for 2015 was less than 1.0%. A number of major student loan originators packaged FFEL loans and sold them as asset-backed securities.

The Company has accumulated the securities of the following two different 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:


	December 31, 2016
	Amortized		Fair
Issuer	Cost		Value
GCO Education Loan Funding Corp	$	37,812	$	34,678
Towd Point Mortgage Trust		20,302		19,792

Securities with unrealized losses at December 31, 2016, and December 31, 2015, 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
December 31, 2016	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 mortgage-backed	11	$	957	$	40,636	1	$	20	$	898	12	$	977	$	41,534
States and political subdivisions	12		273		35,241	-		-		-	12		273		35,241
Corporate bonds	1		183		4,817	2		153		5,328	3		336		10,145
Collateralized mortgage obligations	16		3,402		117,752	7		397		18,109	23		3,799		135,861
Asset-backed securities	4		328		17,604	12		7,997		107,112	16		8,325		124,716
Collateralized loan obligations	-		-		-	12		896		81,613	12		896		81,613
Total securities available-for-sale	44	$	5,143	$	216,050	34	$	9,463	$	213,060	78	$	14,606	$	429,110


	Less than 12 months					12 months or more
December 31, 2015	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	-	$	-	$	-	1	$	127	$	1,556	1	$	127	$	1,556
U.S. government agencies mortgage-backed	1		44		1,996	-		-		-	1		44		1,996
States and political subdivisions	2		19		1,541	1		81		1,713	3		100		3,254
Corporate bonds	5		292		14,866	3		465		14,534	8		757		29,400
Collateralized mortgage obligations	4		334		16,218	7		1,513		43,618	11		1,847		59,836
Asset-backed securities	9		2,080		78,301	8		7,958		121,217	17		10,038		199,518
Collateralized loan obligations	5		446		29,480	9		1,677		62,771	14		2,123		92,251
Total securities available-for-sale	26	$	3,215	$	142,402	29	$	11,821	$	245,409	55	$	15,036	$	387,811
Securities held-to-maturity
Collateralized mortgage obligations	8	$	505	$	40,307	2	$	460	$	33,842	10	$	965	$	74,149
Total securities held-to-maturity	8	$	505	$	40,307	2	$	460	$	33,842	10	$	965	$	74,149

Recognition of other-than-temporary impairment was not necessary in the year ended December 31, 2016, or the year ended December 31, 2015. The changes in fair value related primarily to interest rate fluctuations. The Company’s review of other-than-temporary impairment confirmed no credit quality deterioration.



	Years ended December 31,
	2016		2015		2014
Proceeds from sales of securities	$	306,400	$	70,176	$	296,013
Gross realized gains on securities		1,675		106		3,231
Gross realized losses on securities		(3,888)		(284)		(1,512)
Securities gains (losses), net	$	(2,213)	$	(178)	$	1,719
Income tax expense (benefit) on net realized gains (losses)	$	(882)	$	(71)	$	704