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 $3.8 million at June 30, 2017, and $3.1 million at December 31, 2016, and is necessary to maintain access to FHLBC advances, which are utilized as a component to meet the Bank’s daily funding needs. FRBC stock was recorded at $4.8 million at June 30, 2017, and December 31, 2016.

The following table summarizes the amortized cost and fair value of the securities portfolio at June 30, 2017, and December 31, 2016, and the corresponding amounts of gross unrealized gains and losses:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
June 30, 2017	Cost		Gains		Losses		Value
Securities available-for-sale
U.S. government agencies mortgage-backed	$	21,039	$	6	$	(199)	$	20,846
States and political subdivisions		222,098		4,472		(1,052)		225,518
Corporate bonds		12,807		58		(249)		12,616
Collateralized mortgage obligations		102,717		159		(1,963)		100,913
Asset-backed securities		144,812		557		(4,984)		140,385
Collateralized loan obligations		67,735		305		(91)		67,949
Total securities available-for-sale	$	571,208	$	5,557	$	(8,538)	$	568,227


			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

The fair value, amortized cost and weighted average yield of debt securities at June 30, 2017, 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	$	11,600	2.60	%	$	11,636
Due after one year through five years		1,847	4.65			1,844
Due after five years through ten years		18,178	2.88			18,202
Due after ten years		203,280	3.01			206,452
		234,905	2.99			238,134
Mortgage-backed and collateralized mortgage obligations		123,756	2.54			121,759
Asset-backed securities		144,812	2.21			140,385
Collateralized loan obligations		67,735	4.01			67,949
Total securities available-for-sale	$	571,208	2.82	%	$	568,227

At June 30, 2017, the Company’s investments include $119.3 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 and packaged and sold them as asset-backed securities. While the program was modified several times before elimination in 2010, not less than 97% of the outstanding principal amount of the loans made under FFEL are guaranteed by the U.S. Department of Education. In addition to the U.S. Department of Education guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $13.4 million, or 10.43%, of outstanding principal.

The Company has invested in securities issued from one originator that individually amounts to over 10% of the Company’s stockholders equity. As of June 30, 2017, GCO Education Loan Funding Corp’s amortized cost was $27.5 million and fair value was $26.0 million within the Company’s portfolio.

Securities with unrealized losses at June 30, 2017, and December 31, 2016, 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
June 30, 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. government agencies mortgage-backed	8	$	178	$	17,764	1	$	21	$	805	9	$	199	$	18,569
States and political subdivisions	4		1,052		16,372	-		-		-	4		1,052		16,372
Corporate bonds	1		108		4,892	2		141		5,205	3		249		10,097
Collateralized mortgage obligations	10		1,776		64,987	4		187		10,898	14		1,963		75,885
Asset-backed securities	1		274		4,281	12		4,710		106,755	13		4,984		111,036
Collateralized loan obligations	1		91		7,905	-		-		-	1		91		7,905
Total securities available-for-sale	25	$	3,479	$	116,201	19	$	5,059	$	123,663	44	$	8,538	$	239,864


	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

Recognition of other-than-temporary impairment was not necessary in the three and six months ended June 30, 2017, June 30, 2016, or the year ended December 31, 2016. 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.