Investment Securities

9 Months Ended

Jun. 30, 2020

INVESTMENT SECURITIES

Held to maturity and available for sale investment securities have been classified according to management’s intent and were as follows as of June 30, 2020 and September 30, 2019 (dollars in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
June 30, 2020
Held to maturity
Mortgage-backed securities ("MBS"):
U.S. government agencies	$	30,413	$	1,657	$	(12)	$	32,058
Private label residential	247		302		(1)		548

Total	$	30,660	$	1,959	$	(13)	$	32,606

Available for sale

MBS: U.S. government agencies	$	41,910	$	33	$	(29)	$	41,914
Total	$	41,910	$	33	$	(29)	$	41,914

September 30, 2019
Held to maturity
MBS:
U.S. government agencies	$	27,786	$	999	$	(2)	$	28,783
Private label residential	317		490		(1)		806
U.S. Treasury and U.S. government agency securities	2,999		—		(8)		2,991
Total	$	31,102	$	1,489	$	(11)	$	32,580

Available for sale
MBS: U.S. government agencies	$	22,418	$	114	$	—	$	22,532

Total	$	22,418	$	114	$	—	$	22,532

Held to maturity and available for sale investment securities with unrealized losses were as follows as of June 30, 2020 (dollars in thousands):


	Less Than 12 Months									12 Months or Longer					Total
	Estimated Fair Value		Gross Unrealized Losses		Quantity	Estimated Fair Value		Gross Unrealized Losses		Quantity	Estimated Fair Value		Gross Unrealized Losses
Held to maturity
MBS:
U.S. government agencies	$	7,014	$	(11)	5	$	41	$	(1)	4	$	7,055	$	(12)
Private label residential	7		—		1	11		(1)		2	18		(1)

Total	$	7,021	$	(11)	6	$	52	$	(2)	6	$	7,073	$	(13)

Available for sale

MBS: U.S. government agencies	$	35,709	$	(29)	9	$	—	$	—	—	$	35,709	$	(29)
Total	$	35,709	$	(29)	9	$	—	$	—	—	$	35,709	$	(29)

Held to maturity investment securities with unrealized losses were as follows as of September 30, 2019 (dollars in thousands):


	Less Than 12 Months									12 Months or Longer					Total
	Estimated Fair Value		Gross Unrealized Losses		Quantity	Estimated Fair Value		Gross Unrealized Losses		Quantity	Estimated Fair Value		Gross Unrealized Losses
Held to maturity
MBS:
U.S. government agencies	$	291	$	(1)	2	$	76	$	(1)	6	$	367	$	(2)
Private label residential	—		—		—	23		(1)		5	23		(1)
U.S. Treasury and U.S. government agency securities	—		—		—	2,991		(8)		1	2,991		(8)
Total	$	291	$	(1)	2	$	3,090	$	(10)	12	$	3,381	$	(11)

The Company has evaluated the investment securities in the above tables and has determined that the decline in their fair value is temporary. The unrealized losses are primarily due to changes in market interest rates and spreads in the market for mortgage-related products. The fair value of these securities is expected to recover as the securities approach their maturity dates and/or as the pricing spreads narrow on mortgage-related securities. The Company has the ability and the intent to hold the investments until the fair value recovers. Furthermore, as of June 30, 2020, management does not have the intent to sell any of the securities classified as available for sale where the estimated fair value is below the recorded value and believes that it is more likely than not that the Company will not have to sell such securities before a recovery of cost (or recorded value if previously written down).

The Company bifurcates OTTI into (1) amounts related to credit losses which are recognized through earnings and (2) amounts related to all other factors which are recognized as a component of other comprehensive income (loss). To determine the component of the gross OTTI related to credit losses, the Company compared the amortized cost basis of the OTTI security to the present value of its revised expected cash flows, discounted using its pre-impairment yield. The revised expected cash flow estimates for individual securities are based primarily on an analysis of default rates, prepayment speeds and third-party analytic reports. Significant judgment by management is required in this analysis that includes, but is not limited to, assumptions regarding the collectability of principal and interest, net of related expenses, on the underlying loans.

The following table presents a summary of the significant inputs utilized to measure management’s estimates of the credit loss component on OTTI securities as of June 30, 2020 and 2019:


	Range						Weighted
	Minimum		Maximum		Average
June 30, 2020
Constant prepayment rate	6.00	%	15.00	%	9.21	%
Collateral default rate	2.00	%	19.96	%	10.21	%
Loss severity rate	—	%	12.41	%	2.48	%

June 30, 2019
Constant prepayment rate	6.00	%	15.00	%	11.52	%
Collateral default rate	—	%	11.28	%	5.28	%
Loss severity rate	—	%	78.00	%	37.73	%

The following table presents the OTTI recoveries for the three and nine months ended June 30, 2020 and 2019 (dollars in thousands):



	Three Months Ended June 30, 2020						Three Months Ended June 30, 2019
	Held To Maturity		Available For Sale		Held To Maturity		Available For Sale
Total recoveries	$	6	$	—	$	14	$	—
Adjustment for portion of OTTI transferred from other comprehensive income (loss) before income taxes (1)	—		—		—		—
Net recoveries recognized in earnings (2)	$	6	$	—	$	14	$	—


	Nine Months Ended June 30, 2020						Nine Months Ended June 30, 2019
	Held To Maturity		Available For Sale		Held To Maturity		Available For Sale
Total recoveries	$	113	$	—	$	46	$	—
Adjustment for portion of OTTI transferred from other comprehensive income (loss) before income taxes (1)	—		—		(12)		—
Net recoveries recognized in earnings (2)	$	113	$	—	$	34	$	—

_________________

(1) Represents OTTI related to all other factors.

(2) Represents OTTI related to credit losses.

The following table presents a roll forward of the credit loss component of held to maturity and available for sale debt securities that have been written down for OTTI with the credit loss component recognized in earnings for the nine months ended June 30, 2020 and 2019 (dollars in thousands):


	Nine Months Ended June 30,
	2020		2019
Beginning balance of credit loss	$	1,071	$	1,153
Additions:

Additional increases to the amount related to credit loss for which OTTI was previously recognized	2		13
Subtractions:
Realized losses previously recorded as credit losses	(65)		(16)
Recovery of prior credit loss	(112)		(47)
Ending balance of credit loss	$	896	$	1,103

During the nine months ended June 30, 2020, the Company recorded a $65,000 net realized loss (as a result of investment securities being deemed worthless) on nine held to maturity investment securities, all of which had been recognized previously as a credit loss. During the nine months ended June 30, 2019, the Company recorded a $16,000 net realized loss (as a result of investment securities being deemed worthless) on 17 held to maturity investment securities, all of which had been recognized previously as a credit loss.

The recorded amount of investment securities pledged as collateral for public fund deposits, federal treasury tax and loan deposits, FHLB collateral and other non-profit organization deposits totaled $67.35 million and $18.59 million at June 30, 2020 and September 30, 2019, respectively.

The contractual maturities of debt securities at June 30, 2020 were as follows (dollars in thousands). Expected maturities may differ from scheduled maturities due to the prepayment of principal or call provisions.


	Held to Maturity						Available for Sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due within one year	$	—	$	—	$	836	$	834
Due after one year to five years	144		151		1,118		1,108
Due after five years to ten years	6,708		7,444		6,150		6,160
Due after ten years	23,808		25,011		33,806		33,812
Total	$	30,660	$	32,606	$	41,910	$	41,914