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Note 3: Securities
3 Months Ended
Dec. 31, 2016
Notes  
Note 3: Securities

Note 3:  Securities

 

The amortized cost, gross unrealized gains, gross unrealized losses, and approximate fair value of securities available for sale consisted of the following:

 

December 31, 2016

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair

(dollars in thousands)

Cost

Gains

Losses

Value

Investment and mortgage backed securities:

  U.S. government-sponsored enterprises (GSEs)

$6,470

$22

$(36)

$6,456

  State and political subdivisions

45,963

819

(580)

46,202

  Other securities

6,572

161

(689)

6,044

  Mortgage-backed: GSE residential

74,120

110

(816)

73,414

     Total investments and mortgage-backed securities

$133,125

$1,112

$(2,121)

$132,116

 

June 30, 2016

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair

(dollars in thousands)

Cost

Gains

Losses

Value

Investment and mortgage backed securities:

  U.S. government-sponsored enterprises (GSEs)

$6,460

$57

$-

$6,517

  State and political subdivisions

44,368

1,820

(3)

46,185

  Other securities

5,861

206

(776)

5,291

  Mortgage-backed GSE residential

69,893

1,342

(4)

71,231

     Total investments and mortgage-backed securities

$126,582

$3,425

$(783)

$129,224

 

 

The amortized cost and estimated fair value of investment and mortgage-backed securities, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

 

 

December 31, 2016

Amortized

Estimated

(dollars in thousands)

Cost

Fair Value

   Within one year

$607

$610

   After one year but less than five years

11,530

11,577

   After five years but less than ten years

20,986

21,072

   After ten years

25,882

25,443

      Total investment securities

59,005

58,702

   Mortgage-backed securities

74,120

73,414

     Total investments and mortgage-backed securities

$133,125

$132,116

 

 

 

The carrying value of investment and mortgage-backed securities pledged as collateral to secure public deposits and securities sold under agreements to repurchase amounted to $112.4 million at December 31, 2016 and $106.7 million at June 30, 2016.  The securities pledged consist of marketable securities, including $6.4 million and $5.5 million of U.S. Government and Federal Agency Obligations, $52.5 million and $52.2 million of Mortgage-Backed Securities, $14.1 million and $13.6 million of Collateralized Mortgage Obligations, $38.8 million and $34.8 million of State and Political Subdivisions Obligations, and $600,000 and $600,000 of Other Securities at December 31, 2016 and June 30, 2016,  respectively.

 

The following tables show our investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31 and June 30, 2016:

 

December 31, 2016

Less than 12 months

12 months or more

Total

 

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

Value

Losses

Value

Losses

Value

Losses

(dollars in thousands)

U.S. government-sponsored enterprises (GSEs)

$3,460

$36

$-

$-

$3,460

$36

Obligations of state and political subdivisions

18,946

580

-

-

18,946

580

Other securities

-

-

1,147

689

1,147

689

Mortgage-backed securities

54,732

806

343

10

55,075

816

  Total investments and mortgage-backed securities

$77,138

$1,422

$1,490

$699

$78,628

$2,121

 

June 30, 2016

Less than 12 months

12 months or more

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

Value

Losses

Value

Losses

Value

Losses

(dollars in thousands)

Obligations of state and political subdivisions

$720

$3

$-

$-

$720

$3

Other securities

-

-

1,080

776

1,080

776

Mortgage-backed securities

2,912

4

-

-

2,912

4

  Total investments and mortgage-backed securities

$3,632

$7

$1,080

$776

$4,712

$783

 

 

 

 

Other securities.  At December 31, 2016, there were three pooled trust preferred securities with an estimated fair value of $753,000 and unrealized losses of $681,000 in a continuous unrealized loss position for twelve months or more. These unrealized losses were primarily due to the long-term nature of the pooled trust preferred securities and a reduced demand for these securities, and concerns regarding the financial institutions that issued the underlying trust preferred securities. Rules adopted by the federal banking agencies in December 2013 to implement Section 619 of the Dodd-Frank Act (the “Volcker Rule”) generally prohibit banking entities from engaging in proprietary trading and from investing in, sponsoring, or having certain relationships with a hedge fund or private equity fund. All pooled trust preferred securities owned by the Company were included in a January 2014 listing of securities which the agencies considered to be grandfathered with regard to these prohibitions; as such, banking entities are permitted to retain their interest in these securities, provided the interest was acquired on or before December 10, 2013, unless acquired pursuant to a merger or acquisition.

 

The December 31, 2016, cash flow analysis for these three securities indicated it is probable the Company will receive all contracted principal and related interest projected. The cash flow analysis used in making this determination was based on anticipated default, recovery, and prepayment rates, and the resulting cash flows were discounted based on the yield anticipated at the time the securities were purchased. Other inputs include the actual collateral attributes, which include credit ratings and other performance indicators of the underlying financial institutions, including profitability, capital ratios, and asset quality. Assumptions for these three securities included annualized prepayments of 1.3 to 1.7 percent; recoveries of 31 percent on currently deferred issuers within the next two years; new deferrals of 47 to 50 basis points annually; and eventual recoveries of eight to nine percent of new deferrals. 

 

One of these three securities has continued to receive cash interest payments in full since our purchase. The second of the three securities received principal-in-kind (PIK), in lieu of cash interest, for a period of time following the recession and financial crisis which began in 2008, but resumed interest payments during fiscal 2014. The third security received PIK for a period of time following the recession and financial crisis which began in 2008, but resumed interest payments during the second quarter of fiscal 2017. Our cash flow analysis indicates that interest payments are expected to continue for these three securities, and that all contracted principal and interest will be received. Because the Company does not intend to sell these securities and it is not more-likely-than-not that the Company will be required to sell these securities prior to recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2016.

 

At December 31, 2008, analysis of a fourth pooled trust preferred security indicated other-than-temporary impairment (OTTI). The loss recognized at that time reduced the amortized cost basis for the security, and as of December 31, 2016, the estimated fair value of the security exceeds the new, lower amortized cost basis.

 

The Company does not believe any other individual unrealized loss as of December 31, 2016, represents OTTI. However, the Company could be required to recognize OTTI losses in future periods with respect to its available for sale investment securities portfolio. The amount and timing of any additional OTTI will depend on the decline in the underlying cash flows of the securities. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in the period the other-than-temporary impairment is identified.

 

 

Credit losses recognized on investments. As described above, one of the Company’s investments in trust preferred securities experienced fair value deterioration due to credit losses, but is not otherwise other-than-temporarily impaired. During fiscal 2009, the Company adopted ASC 820, formerly FASB Staff Position 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.”  The following table provides information about the trust preferred security for which only a credit loss was recognized in income and other losses are recorded in other comprehensive (loss) income for the six-month periods ended December 31, 2016 and 2015.

 

 

Accumulated Credit Losses

Six-Month Period Ended

(dollars in thousands)

December 31,

2016

2015

Credit losses on debt securities held

Beginning of period

$352

$365

  Additions related to OTTI losses not previously recognized

-

-

  Reductions due to sales

-

-

  Reductions due to change in intent or likelihood of sale

-

-

  Additions related to increases in previously-recognized OTTI losses

-

-

  Reductions due to increases in expected cash flows

(4)

(5)

End of period

$348

$360