Note 3: Securities

Investment Portfolio Management

Our investment portfolio serves the liquidity and income needs of the Company. While the portfolio serves as an important component of the overall liquidity management at the Bank, portions of the portfolio will 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. Until the third quarter of 2013, all debt securities had been 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.

Securities held-to-maturity are carried at amortized cost and the discount or premium created in the 2013 transfer from available-for-sale securities or at the time of purchase thereafter is accreted or amortized to the maturity or expected payoff date but not an earlier call. In accordance with GAAP, the Company has the positive intent and ability to hold the securities to maturity.

Nonmarketable equity investments include FHLBC stock and Reserve Bank stock. FHLBC stock was $3.7 million and $4.3 million at December 31, 2015, and December 31, 2014. Reserve Bank stock was $4.8 million at December 31, 2015, and December 31, 2014. 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, 2015 and December 31, 2014 and the corresponding amounts of gross unrealized gains and losses (in thousands):


			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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2014:	Cost		Gains		Losses		Value
Securities Available-for-Sale
U.S. Treasury	$	1,529	$	-	$	(2)	$	1,527
U.S. government agencies		1,711		-		(87)		1,624
States and political subdivisions		21,682		432		(96)		22,018
Corporate bonds		31,243		309		(567)		30,985
Collateralized mortgage obligations		65,728		31		(2,132)		63,627
Asset-backed securities		175,565		199		(2,268)		173,496
Collateralized loan obligations		94,236		176		(2,203)		92,209
Total Securities Available-for-Sale	$	391,694	$	1,147	$	(7,355)	$	385,486
Securities Held-to-Maturity
U.S. government agency mortgage-backed	$	37,125	$	2,030	$	-	$	39,155
Collateralized mortgage obligations		222,545		3,005		(1,439)		224,111
Total Securities Held-to-Maturity	$	259,670	$	5,035	$	(1,439)	$	263,266

During the twelve months ended December 31, 2015, we added $58.7 million to the total securities portfolio (net of payoffs, maturities, sales, calls, amortization and accretion). This change is largely found in asset-backed securities and, to a lesser amount, states and political subdivisions. Holdings of asset backed securities, primarily securities backed by student loan obligations, were reduced in 2014.

Securities valued at $340.2 million as of December 31, 2015, (up from $267.8 million at year-end 2014) were pledged to secure deposits and for other purposes.

The fair value, amortized cost and weighted average yield of debt securities at December 31, 2015, 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	$	17,130	1.74	%	$	17,138
Due after one year through five years		6,897	2.92	%		6,959
Due after five years through ten years		34,843	2.39	%		34,171
Due after ten years		4,820	3.21	%		4,723
		63,690	2.33	%		62,991
Mortgage-backed and collateralized mortgage obligations		70,783	2.29	%		68,916
Asset-backed securities		241,872	1.47	%		231,908
Collateralized loan obligations		94,374	3.06	%		92,251
	$	470,719	2.03	%	$	456,066
Securities Held-to-Maturity
Mortgage-backed and collateralized mortgage obligations	$	247,746	2.78	%	$	251,675

At December 31, 2015, the Company’s investments include 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, not less than 97% of the outstanding principal amount of the loans made under FFEL are guaranteed by the U.S. Department of Education. A number of major student loan originators packaged loans and sold them as asset-backed securities.

The Company has accumulated the securities of the following three different originators that individually amount to over 10% of the Company’s stockholders equity. Information regarding these three issuers and the value of the securities issued follows:


	December 31, 2015
	Amortized		Fair
Issuer	Cost		Value
College Loan Corporation	$	73,293	$	70,254
Nelnet Student Loan		23,359		23,291
GCO Education Loan Funding Corp		37,508		35,263

Securities with unrealized losses at December 31, 2015, and December 31, 2014, 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					Greater than 12 months
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
	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
	8	$	505	$	40,307	2	$	460	$	33,842	10	$	965	$	74,149


	Less than 12 months					Greater than 12 months
December 31, 2014	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. Treasury	1	$	2	$	1,527	-	$	-	$	-	1	$	2	$	1,527
U.S. government agencies	-		-		-	1		87		1,624	1		87		1,624
States and political subdivisions	4		96		4,896	-		-		-	4		96		4,896
Corporate bonds	4		486		15,246	1		81		1,921	5		567		17,167
Collateralized mortgage obligations	5		900		38,284	3		1,232		21,604	8		2,132		59,888
Asset-backed securities	9		1,077		99,286	3		1,191		43,662	12		2,268		142,948
Collateralized loan obligations	12		2,203		82,387	-		-		-	12		2,203		82,387
	35	$	4,764	$	241,626	8	$	2,591	$	68,811	43	$	7,355	$	310,437
Securities Held-to-Maturity
Collateralized mortgage obligations	7	$	457	$	49,302	4	$	982	$	46,283	11	$	1,439	$	95,585
	7	$	457	$	49,302	4	$	982	$	46,283	11	$	1,439	$	95,585

Recognition of other-than-temporary impairment was not necessary in the year ended December 31, 2015, or the year ended December 31, 2014. The changes in fair value related primarily to interest rate fluctuations. Our review of other-than-temporary impairment confirmed no credit quality deterioration.



	Years ended December 31,
	2015		2014		2013
Proceeds from sales of securities	$	70,176	$	296,013	$	533,302
Gross realized gains on securities		106		3,231		5,376
Gross realized losses on securities		(284)		(1,512)		(7,288)
Securities gains (losses), net	$	(178)	$	1,719	$	(1,912)
Income tax expense (benefit) on net realized gains (losses)	$	(71)	$	704	$	(784)