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Note 2: Available-for-sale Securities | 12 Months Ended
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Jun. 30, 2014
Notes |
Note 2: Available-for-sale Securities | NOTE 2: Available-for-Sale Securities The amortized cost, gross unrealized gains, gross unrealized losses and approximate fair value of securities available for sale consisted of the following:
| June 30, 2014
|  | Gross | Gross | Estimated
| Amortized | Unrealized | Unrealized | Fair
| Cost | Gains | Losses | Value
Debt and equity securities: |  |  |  |
U.S. government and Federal agency obligations | $24,606,970 | $21,463 | $(554,419) | $24,074,014
Obligations of states and political subdivisions | 43,632,048 | 1,855,840 | (131,444) | 45,356,444
Other securities | 3,294,235 | 264,114 | (917,623) | 2,640,726
TOTAL DEBT AND EQUITY SECURITIES | 71,533,253 | 2,141,417 | (1,603,486) | 72,071,184
Mortgage-backed securities: |  |  |  |
FHLMC certificates | 14,008,424 | 197,804 | (17,223) | 14,189,005
GNMA certificates | 4,227,589 | 24,766 | (4,206) | 4,248,149
FNMA certificates | 26,470,063 | 313,576 | - | 26,783,639
CMOs issues by government agencies | 13,074,321 | 41,072 | (185,188) | 12,930,205
TOTAL MORTGAGE-BACKED SECURITIES | 57,780,397 | 577,218 | (206,617) | 58,150,998
TOTAL | $129,313,650 | $2,718,635 | $(1,810,103) | $130,222,182
| June 30, 2013
|  | Gross | Gross | Estimated
| Amortized | Unrealized | Unrealized | Fair
| Cost | Gains | Losses | Value
Debt and equity securities: |  |  |  |
U.S. government and Federal agency obligations | $22,972,073 | $2,590 | $(566,778) | $22,407,885
Obligations of states and political subdivisions | 38,135,005 | 1,432,739 | (244,437) | 39,323,307
Other securities | 2,638,303 | 37,328 | (1,116,652) | 1,558,979
TOTAL DEBT AND EQUITY SECURITIES | 63,745,381 | 1,472,657 | (1,927,867) | 63,290,171
Mortgage-backed securities: |  |  |  |
FHLMC certificates | 3,404,901 | 136,052 | (31,499) | 3,509,454
GNMA certificates | 69,895 | 1,895 | - | 71,790
FNMA certificates | 2,700,570 | 145,206 | - | 2,845,776
CMOs issues by government agencies | 10,404,445 | 59,985 | (177,395) | 10,287,035
TOTAL MORTGAGE-BACKED SECURITIES | 16,579,811 | 343,138 | (208,894) | 16,714,055
TOTAL | $80,325,192 | $1,815,795 | $(2,136,761) | $80,004,226
The amortized cost and fair value of available-for-sale 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 call or prepayment penalties.
| June 30, 2014
|  | Estimated
| Amortized | Fair
| Cost | Value
Available for Sale: |  |
Within one year | $956,174 | $958,079
After one year but less than five years | 20,223,032 | 20,124,579
After five years but less than ten years | 22,817,853 | 23,043,967
After ten years | 27,536,194 | 27,944,560
Total investment securities | 71,533,253 | 72,071,185
Mortgage-backed securities | 57,780,397 | 58,150,997
Total investments and mortgage-backed securities | $129,313,650 | $130,222,182
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 $81.9 million and $61.7 million at June 30, 2014 and 2013, respectively. A gain of $116,164 was recognized from sales of available-for-sale securities in 2014. There were no sales in 2013 or 2012. With the exception of U.S. government agencies and corporations, the Company did not hold any securities of a single issuer, payable from and secured by the same source of revenue or taxing authority, the book value of which exceeded 10% of stockholders’ equity at June 30, 2014. Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at June 30, 2014, was $39.5 million, which is approximately 30.3% of the Company’s available for sale investment portfolio, as compared to $37.4 million or approximately 46.8% of the Company’s available for sale investment portfolio at June 30, 2013. Except as discussed below, management believes the declines in fair value for these securities to be temporary. The tables below 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 June 30, 2014 and 2013.
| Less than 12 months | More than 12 months | Total
|  | Unrealized |  | Unrealized |  | Unrealized
For the year ended June 30, 2014 | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses
U.S. government-sponsored enterprises (GSEs) | $2,676,283 | $26,022 | $18,451,364 | $528,397 | $21,127,647 | $554,419
Obligations of state and political subdivisions | 1,863,035 | 2,759 | 4,937,657 | 128,685 | 6,800,692 | 131,444
Other securities | 476,376 | 2,246 | 531,699 | 915,377 | 1,008,075 | 917,623
Mortgage-backed securities | 8,882,124 | 77,086 | 1,649,304 | 129,531 | 10,531,428 | 206,617
Total investments and mortgage-backed securities | $13,897,818 | $108,113 | $25,570,024 | $1,701,990 | $39,467,842 | $1,810,103
| Less than 12 months | More than 12 months | Total
|  | Unrealized |  | Unrealized |  | Unrealized
For the year ended June 30, 2013 | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses
U.S. government-sponsored enterprises (GSEs) | $20,397,826 | $566,778 | $- | $- | $20,397,826 | $566,778
Obligations of state and political subdivisions | 8,588,542 | 173,966 | 2,525,673 | 70,471 | 11,114,215 | 244,437
Other securities | - | - | 445,777 | 1,116,652 | 445,777 | 1,116,652
Mortgage-backed securities | 3,052,113 | 206,713 | 2,403,467 | 2,181 | 5,455,580 | 208,894
Total investments and mortgage-backed securities | $32,038,481 | $947,457 | $5,374,917 | $1,189,304 | $37,413,398 | $2,136,761
The unrealized losses on the Company’s investments in U.S. government-sponsored enterprises, mortgage-backed securities, and obligations of state and political subdivisions were caused by increases in market interest rates. The contractual terms of these instruments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2014. Other securities. At June 30, 2014, there were four pooled trust preferred securities with an estimated fair value of $532,000 and unrealized losses of $915,000 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, a lack of demand or inactive market for these securities, and concerns regarding the financial institutions that have 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. The 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 June 30, 2014, cash flow analysis for three of these 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%, no recoveries on issuers currently in default, recoveries of 38 to 100 percent on currently deferred issuers within the next two years, new defaults of 2% annually for the next two years, annual defaults of 36 basis points, annually, thereafter, and recoveries of 10% on new defaults. One of these three securities has continued to receive cash interest payments in full since the Company’s purchase, and our cash flow analysis indicates that these payments are likely to continue. A 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 that began in 2008, but resumed cash interest payments in fiscal 2014. And the last of the three securities continues to receive PIK. These securities all allow, under the terms of the issue, for issuers to defer interest for up to five consecutive years. After five years, if not cured, the securities are considered to be in default and the trustee may demand payment in full of principal and accrued interest. Issuers are also considered to be in default in the event of the failure of the issuer or a subsidiary. Both deferred and defaulted issuers are considered non-performing, and the trustee calculates, on a quarterly or semi-annual basis, certain coverage tests prior to the payment of cash interest to owners of the various tranches of the securities. The tests must show that performing collateral is sufficient to meet requirements for senior tranches, both in terms of cash flow and collateral value, before cash interest can be paid to subordinate tranches. If the tests are not met, available cash flow is diverted to pay down the principal balance of senior tranches until the coverage tests are met, before cash interest payments to subordinate tranches may resume. The Company is receiving PIK for this security due to failure of the required coverage tests described above at senior tranche levels of the security. The risk to holders of a tranche of a security in PIK status is that the pool’s total cash flow will not be sufficient to repay all principal and accrued interest related to the investment. The impact of payment of PIK to subordinate tranches is to strengthen the position of senior tranches, by reducing the senior tranches’ principal balances relative to available collateral and cash flow, while increasing principal balances, decreasing cash flow, and increasing credit risk to the tranches receiving PIK. For our security which remains in receipt of PIK, the principal balance is increasing, cash flow has stopped, and, as a result, credit risk is increasing. The Company expects this security to remain in PIK status for a period of five years. Despite these facts, because the Company does not intend to sell these any of the three securities, and because it is not more-likely-than-not that the Company will be required to sell these securities prior to recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2014. At December 31, 2008, analysis of the fourth pooled trust preferred security indicated other-than-temporary impairment (OTTI) and the Company performed further analysis to determine the portion of the loss that was related to credit conditions of the underlying issuers. The credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. The discounted cash flow was based on anticipated default and recovery rates, and resulting projected cash flows were discounted based on the yield anticipated at the time the security was purchased. Based on this analysis, the Company recorded an impairment charge of $375,000 for the credit portion of the unrealized loss for this trust preferred security. This loss established a new, lower amortized cost basis of $125,000 for this security, and reduced non-interest income for the second quarter and the twelve months ended June 30, 2009. At June 30, 2014, cash flow analyses showed it is probable the Company will receive all of the remaining cost basis and related interest projected for the security. The cash flow analysis used in making this determination was based similar inputs and factors as those described above. Assumptions for this security included annualized prepayments of 1%, no recoveries on issuers currently in default, recoveries of 58% on currently deferred issuers within the next two years, new defaults of 2% annually for the next two years, annual defaults of 36 basis points, annually, thereafter, and recoveries of 10% on new defaults. This security was in PIK status for a period of time following the recession and financial crisis that began in 2008, but resumed cash interest payments in fiscal 2014. Because the Company does not intend to sell this security and it is not more-likely-than-not the Company will be required to sell this security before recovery of its new, lower amortized cost basis, which may be maturity, the Company does not consider the remainder of the investment in this security to be other-than-temporarily impaired at June 30, 2014. The Company does not believe any other individual unrealized loss as of June 30, 2014, represents OTTI. However, given the recent disruption in the financial markets, the Company may 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, some of the Company’s investments in trust preferred securities have experienced fair value deterioration due to credit losses, but are 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 income (loss) for the years ended June 30, 2014 and 2013.
| Accumulated Credit Losses
| Period Ended June 30,
| 2014 | 2013
Credit losses on debt securities held |  |
Beginning of period | $375,000 | $375,000
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 | - | -
End of period | $375,000 | $375,000

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