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Note 3: Securities | 3 Months Ended
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Sep. 30, 2015
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:
| September 30, 2015
|  | 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) | $13,939 | $54 | $(53) | $13,940
State and political subdivisions | 42,809 | 1,553 | (48) | 44,314
Other securities | 3,170 | 177 | (651) | 2,696
Mortgage-backed: GSE residential | 65,824 | 727 | (16) | 66,535
Total investments and mortgage-backed securities | $125,742 | $2,511 | $(768) | $127,485
| June 30, 2015
|  | 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) | $14,924 | $49 | $(159) | $14,814
State and political subdivisions | 40,641 | 1,473 | (93) | 42,021
Other securities | 3,189 | 184 | (669) | 2,704
Mortgage-backed GSE residential | 69,483 | 597 | (26) | 70,054
Total investments and mortgage-backed securities | $128,237 | $2,303 | $(947) | $129,593
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.
| September 30, 2015
| Amortized | Estimated
(dollars in thousands) | Cost | Fair Value
Within one year | $1,920 | $1,923
After one year but less than five years | 14,917 | 15,015
After five years but less than ten years | 16,107 | 16,488
After ten years | 26,974 | 27,524
Total investment securities | 59,918 | 60,950
Mortgage-backed securities | 65,824 | 66,535
Total investments and mortgage-backed securities | $125,742 | $127,485
The carrying value of securities sold under agreement to repurchase amounted to $24.4 million at September 30, 2015 and $27.3 million at June 30, 2015. The securities, which are classified as borrowings, generally mature within one to four days. The securities underlying the agreements consist of marketable securities, including $10.0 million and $10.9 million U.S. Government and Federal Agency Obligations, $15.0 million and $15.6 million Mortgage-Backed Securities, and $1.9 million and $2.1 million Collateralized Mortgage Obligations, at September 30 and June 30, 2015, respectively. The right of offset for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreement should the Company be in default. The collateral is held by the Company in a segregated custodial account. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional securities. The Company closely monitors collateral levels to ensure adequate levels are maintained. 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 September 30 and June 30, 2015:
| September 30, 2015
| Less than 12 months | More than 12 months | Total
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized
(dollars in thousands) | Value | Losses | Value | Losses | Value | Losses
U.S. government-sponsored enterprises (GSEs) | $996 | $3 | $6,942 | $50 | $7,938 | $53
Obligations of state and political subdivisions | 2,447 | 31 | 1,523 | 17 | 3,970 | 48
Other securities | - | - | 1,219 | 651 | 1,219 | 651
Mortgage-backed securities | 3,757 | 16 | - | - | 3,757 | 16
Total investments and mortgage-backed securities | $7,200 | $50 | $9,684 | $718 | $16,884 | $768
| June 30, 2015
| Less than 12 months | More than 12 months | Total
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized
(dollars in thousands) | Value | Losses | Value | Losses | Value | Losses
U.S. government-sponsored enterprises (GSEs) | $2,970 | $28 | $6,862 | $131 | $9,832 | $159
Obligations of state and political subdivisions | 3,872 | 59 | 1,507 | 34 | 5,379 | 93
Other securities | - | - | 1,206 | 669 | 1,206 | 669
Mortgage-backed securities | 6,787 | 26 | - | - | 6,787 | 26
Total investments and mortgage-backed securities | $13,629 | $113 | $9,575 | $834 | $23,204 | $947
Other securities. At September 30, 2015, there were three pooled trust preferred securities with an estimated fair value of $791,000 and unrealized losses of $643,000 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, or acquired after that date pursuant to a merger or acquisition with a banking entity holding the security under similar grandfathered status. The September 30, 2015, cash flow analysis for the 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 1.2 to 1.6 percent; no recoveries on issuers currently in default; recoveries of zero to 71 percent on currently deferred issuers within the next two years; new defaults of 50 basis points annually; and recoveries of 10% of new defaults. 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) for a period of time following the recession and financial crisis which began in 2008, but resumed cash interest payments during fiscal 2014. Our cash flow analysis indicates that interest payments are expected to continue for these two securities. 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 September 30, 2015. For the last of these three securities, the Company is receiving PIK in lieu of cash interest. Pooled trust preferred securities generally 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 issuer is 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 in receipt of PIK, the principal balance is increasing, cash flow has stopped, and, as a result, credit risk is increasing. The Company currently expects this security to remain in PIK status for a period of less than one year. Despite these facts, because the Company does not intend to sell this security and it is not more-likely-than-not that the Company will be required to sell this security prior to recovery of its amortized cost basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at September 30, 2015. 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 September 30, 2015, 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 September 30, 2015, 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 income (loss) for the three-month periods ended September 30, 2015 and 2014.
| Accumulated Credit Losses
| Three-Month Period Ended
| September 30,
(dollars in thousands) | 2015 | 2014
Credit losses on debt securities held |  |
Beginning of period | $365 | $375
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 | (3) | (2)
End of period | $362 | $373

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