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Impairment of Securities
12 Months Ended
Jun. 30, 2018
Investments Debt And Equity Securities [Abstract]  
Impairment of Securities

Note 6 – Impairment of Securities

The following two tables summarize the fair values and gross unrealized losses within the available for sale and held to maturity portfolios.  The gross unrealized losses, presented by security type, represent temporary impairments of value within each portfolio as of the dates presented.  Temporary impairments within the available for sale portfolio have been recognized through other comprehensive income as reductions in stockholders’ equity on a tax-effected basis.

The tables are followed by a discussion that summarizes the Company’s rationale for recognizing certain impairments as “temporary” versus those, if any, are identified as “other-than-temporary”.  Such rationale is presented by investment type and generally applies consistently to both the “available for sale” and “held to maturity” portfolios, except where specifically noted.

 

 

June 30, 2018

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

(In Thousands)

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

2,579

 

 

$

43

 

 

$

1,832

 

 

$

20

 

 

$

4,411

 

 

$

63

 

Obligations of state and political

  subdivisions

 

24,443

 

 

 

672

 

 

 

540

 

 

 

37

 

 

 

24,983

 

 

 

709

 

Asset-backed securities

 

-

 

 

 

-

 

 

 

24,728

 

 

 

134

 

 

 

24,728

 

 

 

134

 

Collateralized loan obligations

 

189,258

 

 

 

914

 

 

 

-

 

 

 

-

 

 

 

189,258

 

 

 

914

 

Corporate bonds

 

5,035

 

 

 

4

 

 

 

64,184

 

 

 

790

 

 

 

69,219

 

 

 

794

 

Trust preferred securities

 

-

 

 

 

-

 

 

 

2,783

 

 

 

184

 

 

 

2,783

 

 

 

184

 

Collateralized mortgage obligations

 

4,635

 

 

 

135

 

 

 

19,658

 

 

 

1,224

 

 

 

24,293

 

 

 

1,359

 

Residential pass-through securities

 

63,889

 

 

 

1,921

 

 

 

26,697

 

 

 

1,573

 

 

 

90,586

 

 

 

3,494

 

Commercial pass-through securities

 

3,890

 

 

 

66

 

 

 

3,982

 

 

 

8

 

 

 

7,872

 

 

 

74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

293,729

 

 

$

3,755

 

 

$

144,404

 

 

$

3,970

 

 

$

438,133

 

 

$

7,725

 

 

 

June 30, 2017

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

(In Thousands)

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

440

 

 

$

-

 

 

$

1,746

 

 

$

23

 

 

$

2,186

 

 

$

23

 

Obligations of state and political

  subdivisions

 

3,872

 

 

 

30

 

 

 

-

 

 

 

-

 

 

 

3,872

 

 

 

30

 

Asset-backed securities

 

16,860

 

 

 

84

 

 

 

86,975

 

 

 

923

 

 

 

103,835

 

 

 

1,007

 

Collateralized loan obligations

 

46,016

 

 

 

108

 

 

 

6,000

 

 

 

1

 

 

 

52,016

 

 

 

109

 

Corporate bonds

 

-

 

 

 

-

 

 

 

73,500

 

 

 

1,525

 

 

 

73,500

 

 

 

1,525

 

Trust preferred securities

 

-

 

 

 

-

 

 

 

7,540

 

 

 

372

 

 

 

7,540

 

 

 

372

 

Collateralized mortgage obligations

 

26,090

 

 

 

626

 

 

 

-

 

 

 

-

 

 

 

26,090

 

 

 

626

 

Residential pass-through securities

 

77,301

 

 

 

1,244

 

 

 

-

 

 

 

-

 

 

 

77,301

 

 

 

1,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

170,579

 

 

$

2,092

 

 

$

175,761

 

 

$

2,844

 

 

$

346,340

 

 

$

4,936

 

 

The number of available for sale securities with unrealized losses at June 30, 2018 totaled 132 and included nine U.S. agency securities, 65 municipal obligations,  three asset-backed securities, 19 collateralized loan obligations, six corporate obligations, two trust preferred securities,  seven collateralized mortgage obligations, 19 residential pass-through securities and two commercial pass-through securities.  The number of available for sale securities with unrealized losses at June 30, 2017 totaled 57 and included seven U.S. agency securities, nine municipal obligations, nine asset-backed securities, eight collateralized loan obligations, seven corporate obligations, four trust preferred securities, and five collateralized mortgage obligations and eight residential pass-through securities. 

Note 6 – Impairment of Securities (continued)

 

 

June 30, 2018

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

 

Fair

Value

 

 

Unrecognized

Losses

 

 

Fair

Value

 

 

Unrecognized

Losses

 

 

Fair

Value

 

 

Unrecognized

Losses

 

 

(In Thousands)

 

Securities Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of state and political

  subdivisions

$

86,678

 

 

$

1,662

 

 

$

3,151

 

 

$

203

 

 

$

89,829

 

 

$

1,865

 

Subordinated debt

 

41,010

 

 

 

284

 

 

 

-

 

 

 

-

 

 

 

41,010

 

 

 

284

 

Collateralized mortgage obligations

 

42,712

 

 

 

753

 

 

 

12,730

 

 

 

595

 

 

 

55,442

 

 

 

1,348

 

Residential pass-through securities

 

133,859

 

 

 

2,258

 

 

 

61,760

 

 

 

1,747

 

 

 

195,619

 

 

 

4,005

 

Commercial pass-through securities

 

172,382

 

 

 

2,867

 

 

 

1,191

 

 

 

3

 

 

 

173,573

 

 

 

2,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

476,641

 

 

$

7,824

 

 

$

78,832

 

 

$

2,548

 

 

$

555,473

 

 

$

10,372

 

 

 

June 30, 2017

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

 

Fair

Value

 

 

Unrecognized

Losses

 

 

Fair

Value

 

 

Unrecognized

Losses

 

 

Fair

Value

 

 

Unrecognized

Losses

 

 

(In Thousands)

 

Securities Held to Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

$

24,969

 

 

$

31

 

 

$

9,983

 

 

$

17

 

 

$

34,952

 

 

$

48

 

Obligations of state and political

  subdivisions

 

19,232

 

 

 

150

 

 

 

409

 

 

 

6

 

 

 

19,641

 

 

 

156

 

Collateralized mortgage obligations

 

17,317

 

 

 

403

 

 

 

22

 

 

 

-

 

 

 

17,339

 

 

 

403

 

Residential pass-through securities

 

119,538

 

 

 

887

 

 

 

1,750

 

 

 

48

 

 

 

121,288

 

 

 

935

 

Commercial pass-through securities

 

11,110

 

 

 

42

 

 

 

-

 

 

 

-

 

 

 

11,110

 

 

 

42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

192,166

 

 

$

1,513

 

 

$

12,164

 

 

$

71

 

 

$

204,330

 

 

$

1,584

 

 

The number of held to maturity securities with unrealized losses at June 30, 2018 totaled 371 and included 190 municipal obligations, seven subordinated debt securities, eight collateralized mortgage obligations, 131 residential pass-through securities and 35 commercial pass-through securities.  The number of held to maturity securities with unrealized losses at June 30, 2017 totaled 90 and included two U.S. agency securities, 44 municipal obligations, seven collateralized mortgage obligations,  34 residential pass-through securities and three commercial pass-through securities.  

In general, if the fair value of a debt security is less than its amortized cost basis at the time of evaluation, the security is “impaired” and the impairment is to be evaluated to determine if it is other than temporary.  The Company evaluates the impaired securities in its portfolio for possible other than temporary impairment (OTTI) on at least a quarterly basis.  The following represents the circumstances under which an impaired security is determined to be other than temporarily impaired:

 

When the Company intends to sell the impaired debt security;

 

When the Company more likely than not will be required to sell the impaired debt security before recovery of its amortized cost (for example, whether liquidity requirements or contractual or regulatory obligations indicate that the security will be required to be sold before a forecasted recovery occurs); or

 

When an impaired debt security does not meet either of the two conditions above, but the Company does not expect to recover the entire amortized cost of the security.  According to applicable accounting guidance for debt securities, this is generally when the present value of cash flows expected to be collected is less than the amortized cost of the security.

Note 6 – Impairment of Securities (continued)

In the first two circumstances noted above, the amount of OTTI recognized in earnings is the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date.  In the third circumstance, however, the OTTI is to be separated into the amount representing the credit loss from the amount related to all other factors.  The credit loss component is to be recognized in earnings while the non-credit loss component is to be recognized in other comprehensive income.  In these cases, OTTI is generally predicated on an adverse change in cash flows (e.g. principal and/or interest payment deferrals or losses) versus those expected at the time of purchase.  The absence of an adverse change in expected cash flows generally indicates that a security’s impairment is related to other “non-credit loss” factors and is thereby generally not recognized as OTTI.

The Company considers a variety of factors when determining whether a credit loss exists for an impaired security including, but not limited to:

 

The length of time and the extent (a percentage) to which the fair value has been less than the amortized cost basis;

 

Adverse conditions specifically related to the security, an industry, or a geographic area (e.g. changes in the financial condition of the issuer of the security, or in the case of an asset backed debt security, in the financial condition of the underlying loan obligors, including changes in technology or the discontinuance of a segment of the business that may affect the future earnings potential of the issuer or underlying loan obligors of the security or changes in the quality of the credit enhancement);

 

The historical and implied volatility of the fair value of the security;

 

The payment structure of the debt security;

 

Actual or expected failure of the issuer of the security to make scheduled interest or principal payments;

 

Changes to the rating of the security by external rating agencies; and

 

Recoveries or additional declines in fair value subsequent to the balance sheet date.

At June 30, 2018 and June 30, 2017, the Company held no securities for which credit-related OTTI had been recognized in earnings based on the Company’s analysis and determination that the impairment reported in the tables above was “temporary” in nature as of both dates.

The rationale for making that determination is based on several factors which are generally shared among the various sectors represented in the Company’s available for sale and held to maturity portfolios.  The most significant of these is the general mitigation of credit risk arising from the U.S. government, agency and GSE guarantees supporting the Company’s mortgage-backed securities, U.S. agency debt securities and asset-backed securities.

While not supported by such guarantees, the Company’s collateralized loan obligations represent tranches within a larger investment vehicle that reallocate cash flows and credit risk among the individual tranches comprised within that vehicle.  Through this structure, the Company is afforded significant protection against the risk that the securities within this sector will be adversely impacted by borrowers defaulting on the underlying loans.

In the absence of the guarantor or structural protections noted above, the securities within the other sectors of the Company’s securities portfolio, including its municipal obligations, subordinated debt, corporate bonds and single-issuer trust preferred securities are generally issued by credit-worthy entities with the ability and resources to fully meet their financial obligations.  The Company regularly monitors the historical cash flows and financial strength of all issuers and/or guarantors to confirm that security impairment, where applicable, is not due to an actual or expected adverse change in security cash flows that would result in the recognition of credit-related OTTI.

With credit risk being mitigated in the manner outlined above, the unrealized and unrecognized losses on the Company’s securities are due largely to the combined effects of several market-related factors including, most notably, changes in market interest rates and changing market conditions which affect the supply and demand for such securities.  Those market conditions may fluctuate over time resulting in certain securities being impaired for periods in excess of 12 months.  However, the longevity of such impairment is not necessarily reflective of an expectation for an adverse change in cash flows signifying a credit loss.  Consequently, the impairments of value resulting directly from these changing market conditions are considered “noncredit-related” and “temporary” in nature.

Note 6 – Impairment of Securities (continued)

The Company has the stated ability and intent to “hold until forecasted recovery” those securities so designated at June 30, 2018 and does not intend to sell the temporarily impaired available for sale securities prior to the recovery of their fair value to a level equal to or greater than the Company’s amortized cost.  Furthermore, the Company has concluded that the possibility of being required to sell the securities prior to their anticipated recovery is unlikely based upon its strong liquidity, asset quality and capital position as of that date.  In light of the factors noted above, the Company does not consider its balance of securities with unrealized and unrecognized losses at June 30, 2018 and June 30, 2017, to be “other-than-temporarily” impaired as of those dates.