Investment Securities

9 Months Ended

Mar. 31, 2012

Investments, Debt and Equity Securities [Abstract]

Investment Securities

NOTE 5 – Investment Securities

The carrying value and estimated market values of investment securities by maturity are as follows:

	Amortized		Gross Unrealized					Fair
	Cost Basis		Gain		(Loss)			Value
	(in thousands)
March 31, 2012
Available-for-sale:
Debt securities:
U.S. government and government-sponsored securities:
Due in one year or less	$	495	$	11	$	-		$	506
From one through five years		3,500		5		-			3,505
		3,995		16		-			4,011
Corporate bonds and other securities:
After ten years		5,999		-		(1,613	)		4,386
U.S. Government sponsored and guaranteed mortgage-backed securities:
Due in one year or less		1		-		-			1
From one through five years		511		30		-			541
From five through ten years		2,981		202		-			3,183
After ten years		20,716		1,183		(22	)		21,877
		24,209		1,415		(22	)		25,602
Non-agency mortgage-backed securities:
After ten years		10,755		8		(1,595	)		9,168
Total debt securities		44,958		1,439		(3,230	)		43,167
Equity securities:
Auction rate preferred stock		10,000		131		-			10,131
Total available-for-sale securities	$	54,958	$	1,570	$	(3,230	)	$	53,298
Held-to-maturity:
U.S. government and government-sponsored securities:
From one through five years	$	6,996	$	29	$	-		$	7,025
From five through ten years		4,206		124		(28	)		4,302
		11,202		153		(28	)		11,327
U.S. Government sponsored and guaranteed mortgage-backed securities:
From five through ten years		7,263		129		-			7,392
After ten years		80,169		2,423		-			82,592
		87,432		2,552		-			89,984
Total held-to-maturity securities	$	98,634	$	2,705	$	(28	)	$	101,311

	Amortized		Gross Unrealized					Fair
	Cost Basis		Gain		(Loss)			Value
	(in thousands)
June 30, 2011:
Available-for-sale:
Debt securities:
US government and agency obligations:
From one through five years	$	630	$	36	$	-		$	666
Corporate bonds and other obligations:
After ten years		5,998		-		(1,093	)		4,905
Mortgage-backed securities		43,253		1,673		(2,888	)		42,038
Equity securities:
Auction rate preferred stock		10,047		682		(329	)		10,400
Total available-for-sale securities	$	59,928	$	2,391	$	(4,310	)	$	58,009
June 30, 2011:
Held-to-maturity:
US government and agency obligations:
From one through five years		2,000		34		-			2,034
From five through ten years		11,234		51		(26	)		11,259
After ten years		2,851		-		(15	)		2,836
		16,085		85		(41	)		16,129
Mortgage-backed securities
After ten years		98,656		1,221		(44	)		99,833
Total held-to-maturity securities	$	114,741	$	1,306	$	(85	)	$	115,962

There were no realized gains or losses on sales of available-for-sale securities for the three months ended March 31, 2012 and 2011.  Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.  There were other-than-temporary impairment charges on available-for-sale securities of $493,000 and $84,000 during the three months ended March 31, 2012 and 2011, respectively.  The loss on write-downs of securities included total other-than-temporary impairment losses of $1.2 million and $403,000, net of $700,000 and $319,000 recognized in other comprehensive income/loss for the three months ended March 31, 2012 and 2011, respectively, before taxes.  There were gross gains of $235,000 and no gross losses realized on sales of available-for-sale securities for the nine months ended March 31, 2012 and $254,000 of gross gains and no gross losses for the nine months ended March 31, 2011.  There were other-than-temporary impairment charges on available-for-sale securities of $1.5 million during the nine months ended March 31, 2012 and $611,000 during the nine months ended March 31, 2011.  The loss on write-downs of securities included total other-than-temporary impairment losses of $3.4 million and $2.2 million, net of $1.9 million and $1.6 million recognized in other comprehensive income/loss for the nine months ended March 31, 2012 and 2011, respectively, before taxes.  See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview.”

The following is a summary of the estimated fair value and related unrealized losses segregated by category and length of time that individual securities have been in a continuous unrealized loss position at:

March 31, 2012:	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(in thousands)	Value		Losses			Value		Losses			Value		Losses
Available-for-sale:
Debt securities:
Corporate bonds and other securities	$	-	$	-		$	4,386	$	(1,613	)	$	4,386	$	(1,613	)
U.S. Government sponsored and guaranteed mortgage-backed securities		1,917		(22	)		-		-			1,917		(22	)
Total temporarily impaired available-for-sale		1,917		(22	)		4,386		(1,613	)		6,303		(1,635	)
Held-to-maturity:
U.S. Government and government-sponsored securities		3,248		(28	)		-		-			3,248		(28	)
Other-than-temporarily impaired debt securities (1):
Non-agency mortgage-backed securities		-		-			7,211		(1,595	)		7,211		(1,595	)
Total temporarily-impaired and other-than-temporarily impaired securities	$	5,165	$	(50	)	$	11,597	$	(3,208	)	$	16,762	$	(3,258	)
June 30, 2011:	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(in thousands)	Value		Losses			Value		Losses			Value		Losses
Available-for-sale:
Debt securities:
U.S. Government and government-sponsored securities	$	3,810	$	(41	)	$	-	$	-		$	3,810	$	(41	)
Corporate bonds and other obligations		-		-			4,905		(1,093	)		4,905		(1,093	)
U.S. Government sponsored and guaranteed mortgage-backed securities		10,323		(44	)		-		-			10,323		(44	)
Equity securities		-		-			6,671		(329	)		6,671		(329	)
Total temporarily impaired available-for-sale		14,133		(85	)		11,576		(1,422	)		25,709		(1,507	)
Other-than-temporarily impaired debt securities (1):
Mortgage-backed securities		4,567		(537	)		7,155		(2,351	)		11,722		(2,888	)
Total temporarily-impaired and other-than-temporarily impaired securities	$	18,700	$	(622	)	$	18,731	$	(3,773	)	$	37,431	$	(4,395	)

(1)  Includes other-than-temporary impaired available-for-sale debt securities in which a portion of the other-than-temporary impairment loss remains in accumulated other comprehensive loss.

Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.

At March 31, 2012 and June 30, 2011, there were 22 and 32 individual investment securities, respectively, with declines in fair value below the amortized cost basis of the security.  Management has the intent and ability to hold these securities until cost recovery occurs and considers these declines to be temporary.

The unrealized losses on the Company’s investment in U.S. Government-sponsored agency bonds and U.S. government guaranteed and government-sponsored residential mortgage-backed securities were primarily caused by interest rate fluctuations.  These investments are guaranteed or sponsored by the U.S. government or an agency thereof.  Accordingly, it is expected that the securities would not be settled at a price less than the par value of the investment.  Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2012.

The Company’s unrealized losses on investments in corporate bonds and other securities relate to investments in companies within the financial services sector.  The unrealized losses are primarily caused by (a) interest rate fluctuations, (b) recent decreases in profitability and near-term profit forecasts by industry analysts and (c) recent downgrades by industry analysts.  The contractual terms of these investments do not permit the companies to settle the security at a price less than the par value of investment.  While the companies’ credit ratings have decreased, the Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments.  Therefore, it is expected that the bonds would not be settled at a price less than the par value of the investment.  Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2012.

For the quarter ended March 31, 2012, securities with other-than-temporary impairment losses related to credit loss that were recognized in earnings consisted of non-agency mortgage-backed securities.  For these debt securities, the Company estimated the portion of loss attributable to credit loss using a discounted cash flow model.  Significant inputs included the estimated cash flows of the underlying loans based on key assumptions, such as default rate, loss severity and prepayment rate.  Assumptions can vary widely from security to security, and are influenced by such factors as loan interest rate, geographical location of the borrower, borrower characteristics and collateral type.  The present value of the expected cash flows was compared to the Company’s amortized cost basis to determine the credit-related impairment loss.  Based on the expected cash flows derived from the model, the Company expects to recover the remaining unrealized losses on these securities.

The following table represents a roll-forward of the amount of credit losses on debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (in thousands):

Balance as of June 30, 2010	$	12,241
Credit losses on securities for which other-than-temporary impairment was not previously recorded		-
Additional credit losses on securities for which an other-than-temporary impairment charge was previously recorded		1,065
Reductions for securities sold during the period		-
Balance as of June 30, 2011		13,306
Credit losses on securities for which other-than-temporary impairment was not previously recorded		-
Additional credit losses on securities for which an other-than-temporary impairment charge was previously recorded		1,505
Reductions for securities sold during the period		-
Balance as of March 31, 2012	$	14,811

            Auction-rate trust preferred securities. At March 31, 2012, our auction-rate trust preferred securities (ARP) portfolio totaled $10.1 million, all of which were classified as available-for-sale.   Auction-rate trust preferred securities are a floating rate preferred stock, on which the dividend rate generally resets every 90 days based on an auction process to reflect the yield demand for the instruments by potential purchasers.  At March 31, 2012, our investments in auction-rate trust preferred securities consisted of investments in three corporate issuers.  These securities were originally purchased by the Company because they represented highly liquid, tax-preferred investments secured, in most cases, by preferred stock issued by high quality, investment grade companies (generally other financial institutions) (“collateral preferred shares”).  The ARP shares, or certificates, purchased by the Company are Class A certificates, which, among other rights, entitle the holder to priority claim on dividends paid into the Trust holding the preferred shares.

In most cases, the trusts which issued the ARP certificates own various callable preferred shares of stock by a single entity.  In addition to the call dates for redemption established by the collateral preferred shares, each trust has a maturity date upon which the trust itself will terminate.  The value of the remaining collateral preferred shares is not guaranteed, and may be more or less than the stated par value of the collateral preferred shares, and is dependent on the market value of those collateral preferred shares on the date of the trust’s maturity.

The certificates issued by the trusts traded in an active, open auction market, with each individual trust establishing the frequency of its auctions, typically every 90 days (the “reset date”).  The results of an auction would be the exchange of certificates, at par, between participants entering or exiting the market, and resetting of the yield to be earned by holders of the Class A certificates as well as the holders of other classes of trust certificates.

Beginning in February 2008, auctions for these securities began to fail when investors declined to bid on the securities.  Five of the largest investment banks that made a market in these securities (Merrill Lynch, Citigroup, UBS, AIG and Morgan Stanley) declined to act as bidders of last resort, as they had in the past.  The auction failures did not result in the loss of any principal value to the certificate holders, but prevented many sellers from exiting, or redeeming, their certificates at the reset date.  These unsuccessful sellers were required to continue to hold the certificates until the next scheduled reset date.  To compensate these unsuccessful sellers, the failed auctions triggered a penalty-rate feature which provided that owners of the Class A certificates were entitled to a higher portion of the dividends, and thus a higher yield, on the Class A certificates.

During this time, the Company attempted to divest itself of the ARPs, but was prevented from doing so due to the continued failure of the auction market.  The Company continued to carry its investments at par value, despite the increased liquidity risk, because the credit strength of the issuers of the collateral preferred shares remained high, and the yield remained above-market.

The turmoil in the financial markets caused the value of the underlying collateral preferred shares to decline. These declines in value are not considered other-than-temporary.

The Company had difficulty identifying market prices of comparable instruments for ARPs due to the inactive market.  As a result, during the quarter ended June 30, 2009, the Company modified its methodology for determining the fair value of the ARPs classified as Level 3, and used the quoted market values of the underlying collateral preferred shares, adjusted for the higher yield earned by the Company through the Class A certificates compared with the nominal rate available to a direct owner of the collateral preferred shares.

The Company adopted the guidance in ASC 820-10, “Fair Value Measurements and Disclosures,” in the second quarter of 2009.  The Company concluded that the market value of the underlying collateral preferred shares did not represent orderly transactions and adopted the use of a discounted cash flow model to determine if there was any other-than-temporary impairment of its investments in the ARPs.  The resulting discounted cash flow for each ARP classified as Level 3 showed no impairment in the fair value of the securities.

The Company has the ability and intent to hold these securities for the time necessary to collect the expected cash flows.

The chart below includes information as of March 31, 2012 on the various issuers of Auction Rate Preferred securities owned by the Company:

Issuer	Goldman Sachs	Merrill Lynch	Bank of America
Par amount	$3,000,000	$5,000,000	$2,000,000
Book Value	$3,000,000	$5,000,000	$2,000,000
Purchase Date	12-12-07	09-04-07	11-20-07
Maturity Date	08-23-26	05-28-27	08-17-47
Next Reset Date	05-21-12	05-25-12	05-16-12
Reset Frequency	Quarterly	Quarterly	Quarterly
Failed Auction	Yes	Yes	Yes
Receiving Default Rates	Yes	Yes	Yes
Current Rate	4.592%	4.604%	4.677%
Dividends Current:	Yes	Yes	Yes