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Note 2: Available-for-sale Securities | 12 Months Ended
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Jun. 30, 2016
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, 2016
|  | Gross | Gross | Estimated
| Amortized | Unrealized | Unrealized | Fair
(dollars in thousands) | Cost | Gains | Losses | Value
Debt and equity securities: |  |  |  |
U.S. government and Federal agency obligations | $ 6,460 | $ 57 | $ - | $ 6,517
Obligations of states and political subdivisions | 44,368 | 1,820 | (3) | 46,185
Other securities | 5,861 | 206 | (776) | 5,291
TOTAL DEBT AND EQUITY SECURITIES | 56,689 | 2,083 | (779) | 57,993
Mortgage-backed securities: |  |  |  |
FHLMC certificates | 23,298 | 501 | - | 23,799
GNMA certificates | 1,814 | 42 | - | 1,856
FNMA certificates | 28,292 | 639 | - | 28,931
CMOs issues by government agencies | 16,489 | 160 | (4) | 16,645
TOTAL MORTGAGE-BACKED SECURITIES | 69,893 | 1,342 | (4) | 71,231
TOTAL | $ 126,582 | $ 3,425 | $ (783) | $ 129,224
| June 30, 2015
|  | Gross | Gross | Estimated
| Amortized | Unrealized | Unrealized | Fair
(dollars in thousands) | Cost | Gains | Losses | Value
Debt and equity securities: |  |  |  |
U.S. government and Federal agency obligations | $ 14,924 | $ 49 | $ (159) | $ 14,814
Obligations of states and political subdivisions | 40,641 | 1,473 | (93) | 42,021
Other securities | 3,189 | 184 | (669) | 2,704
TOTAL DEBT AND EQUITY SECURITIES | 58,754 | 1,706 | (921) | 59,539
Mortgage-backed securities: |  |  |  |
FHLMC certificates | 24,371 | 228 | (13) | 24,586
GNMA certificates | 2,230 | 18 | - | 2,248
FNMA certificates | 32,391 | 282 | (5) | 32,668
CMOs issues by government agencies | 10,491 | 69 | (8) | 10,552
TOTAL MORTGAGE-BACKED SECURITIES | 69,483 | 597 | (26) | 70,054
TOTAL | $ 128,237 | $ 2,303 | $ (947) | $ 129,593
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, 2016
| Amortized | Estimated
(dollars in thousands) | Cost | Fair Value
Within one year | $ 868 | $ 876
After one year but less than five years | 10,439 | 10,554
After five years but less than ten years | 18,155 | 18,820
After ten years | 27,227 | 27,743
Total investment securities | 56,689 | 57,993
Mortgage-backed securities | 69,893 | 71,231
Total investments and mortgage-backed securities | $ 126,582 | $ 129,224
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 $106.7 million and $112.6 million at June 30, 2016 and 2015, respectively. The securities pledged consist of marketable securities, including $5.5 million and $14.9 million of U.S. Government and Federal Agency Obligations, $52.2 million and $55.4 million of Mortgage-Backed Securities, $13.6 million and $10.6 million of Collateralized Mortgage Obligations, $34.8 million and $31.2 million of State and Political Subdivisions Obligations, and $600,000 and $500,000 of Other Securities at June 30, 2016 and 2015, respectively. Gains of $9,919, $105,221, and $202,722 were recognized from sales of available-for-sale securities in 2016, 2015, and 2014 respectively. Losses of $4,956, $98,993, and $86,558 were recognized from sales of available-for-sale securities in 2016, 2015, and 2014 respectively. 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, 2016. 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, 2016, was $4.7 million, which is approximately 3.6% of the Company’s available for sale investment portfolio, as compared to $23.2 million or approximately 17.9% of the Company’s available for sale investment portfolio at June 30, 2015. 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, 2016 and 2015.
| Less than 12 months | More than 12 months | Total
|  | Unrealized |  | Unrealized |  | Unrealized
For the year ended June 30, 2016 | Fair Value | Losses | Fair Value | Losses | Fair 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
| Less than 12 months | More than 12 months | Total
|  | Unrealized |  | Unrealized |  | Unrealized
For the year ended June 30, 2015 | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses
(dollars in thousands) |  |  |  |  |  |
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
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, 2016. Other securities. At June 30, 2016, there were three pooled trust preferred securities with an estimated fair value of $673,000 and unrealized losses of $767,000 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 June 30, 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 1.0 to 1.7 percent; recoveries of 68 to 100 percent on currently deferred issuers within the next two years; new deferrals of 50 to 70 basis points annually; and eventual recoveries of five to ten 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. 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 June 30, 2016. For the last of these three securities, with an estimated fair value of $238,000 and unrealized losses of $233,000, the Company has been receiving PIK in lieu of cash interest since June 2009. Pooled trust preferred securities generally allow, under the terms of the issue, for issuers included in the pool 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 bank. 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 this security 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 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 June 30, 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 June 30, 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 June 30, 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 income (loss) for the years ended June 30, 2016 and 2015.
| Accumulated Credit Losses
| Twelve-Month Period Ended
(dollars in thousands) | June 30,
| 2016 | 2015
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 | (13) | (10)
End of period | $ 352 | $ 365

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