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MORTGAGE-BACKED SECURITIES

6 Months Ended

Dec. 31, 2016

MORTGAGE-BACKED SECURITIES [Abstract]

6.	MORTGAGE-BACKED SECURITIES

Mortgage-backed securities (“MBS”) include mortgage pass-through certificates (“PCs”) and collateralized mortgage obligations (“CMOs”). With a pass-through security, investors own an undivided interest in the pool of mortgages that collateralize the PCs. Principal and interest is passed through to the investor as it is generated by the mortgages underlying the pool. PCs and CMOs may be insured or guaranteed by Freddie Mac (“FHLMC”), Fannie Mae (“FNMA”) and the Government National Mortgage Association (“GNMA”). CMOs may also be privately issued with varying degrees of credit enhancements. A CMO reallocates mortgage pool cash flow to a series of bonds (called traunches) with varying stated maturities, estimated average lives, coupon rates and prepayment characteristics.

The Company’s CMO portfolio is comprised of two segments: CMOs backed by U.S. Government Agencies (“Agency CMOs”) and CMOs backed by single-family whole loans not guaranteed by a U.S. Government Agency (“private-label CMOs”).

At December 31, 2016, the Company’s Agency CMOs totaled $122.005 million as compared to $135.957 million at June 30, 2016. The Company’s private-label CMOs totaled $1.268 million at December 31, 2016 as compared to $1.459 million at June 30, 2016. The $13.952 million decrease in the CMO segment of our MBS portfolio was primarily due to repayments on our Agency and private-label CMOs which totaled $21.957 million and $261 thousand, respectively, which were partially offset by purchases of U.S. Government agency CMOs totaling $7.984 million. At December 31, 2016, approximately $123.273 million or 100.0% (book value) of the Company’s MBS portfolio, including CMOs, were comprised of adjustable or floating rate investments, as compared to $137.416 million or 100.0% at June 30, 2016. Substantially all of the Company’s floating rate MBS adjust monthly based upon changes in the one month LIBOR. The Company has no investment in multi-family or commercial real estate based MBS.

Due to prepayments of the underlying loans, and the prepayment characteristics of the CMO traunches, the actual maturities of the Company’s MBS are expected to be substantially less than the scheduled maturities.

The Company retains an independent third party to assist it in the determination of a fair value for its three private-label CMOs. This valuation is meant to be a “Level Three” valuation as defined by ASC Topic 820, Fair Value Measurements and Disclosures. The valuation does not represent the actual terms or prices at which any party could purchase the securities. There is currently no active secondary market for private-label CMOs and there can be no assurance that any secondary market for private-label CMOs will develop. The private-label CMO portfolio had three previously recorded other-than-temporary impairments at December 31, 2016. During the six months ending December 31, 2016, the Company reversed $38 thousand of non-credit unrealized holding losses on its three private-label CMOs with OTTI due to principal repayments. During the six months ended December 31, 2016, the Company recorded no additional credit impairment charges on its private-label CMO portfolio.

The Company believes that the data and assumptions used to determine the fair values are reasonable. The fair value calculations reflect relevant facts and market conditions. Events and conditions occurring after the valuation date could have a material effect on the private-label CMO segment’s fair value.

The following table sets forth information with respect to the Company’s private-label CMO portfolio as of December 31, 2016. At the time of purchase, all of our private-label CMOs were rated in the highest investment category by at least two ratings agencies.


			At December 31, 2016
			Rating						Book Value		Fair Value³		Life to Date Impairment Recorded in Earnings
Cusip #	Security Description		S&P		Moody’s		Fitch		(in thousands)
126694CP1		CWHL SER 21 A11		N/A		Caa2		D	$	697	$	903	$	201
126694KF4		CWHL SER 24 A15		D		N/A		D		142		320		39
126694KF4		CWHL SER 24 A15		D		N/A		D		283		160		79
126694MP0		CWHL SER 26 1A5		D		N/A		D		146		158		36

									$	1,268	$	1,541	$	355

The amortized cost and fair values of the Company’s mortgage-backed securities are as follows:


		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses				Fair Value

		(Dollars in Thousands)
December 31, 2016
HELD TO MATURITY

Collateralized mortgage obligations:
Agency	$		122,005	$		1,279	$		(362	)	$		122,922
Private-label			1,268			273			-				1,541


Total	$		123,273	$		1,552	$		(362	)	$		124,463


		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses				Fair Value

		(Dollars in Thousands)
June 30, 2016
HELD TO MATURITY

Collateralized mortgage obligations:
Agency	$		135,957	$		932	$		(913	)	$		135,976
Private-label			1,459			244			-				1,703


Total	$		137,416	$		1,176	$		(913	)	$		137,679

³ Fair value estimate provided by the Company’s independent third party valuation consultant.

The amortized cost and fair value of the Company’s mortgage-backed securities at December 31, 2016, by contractual maturity, are shown below. Expected maturities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


		Due in one year or less			Due after one through five years			Due after five through ten years			Due after ten years			Total
								(Dollars in Thousands)

HELD TO MATURITY
Amortized cost	$		-	$		-	$		301	$		122,972	$		123,273
Fair value			-			-			309			124,154			124,463

At December 31, 2016, mortgage-backed securities with amortized costs of $150.3 million and fair values of $150.4 million were pledged to secure public deposits and borrowings with the FHLB. Of the securities pledged, $32.2 million of fair value was excess collateral. At June 30, 2016 mortgage-backed securities with an amortized cost of $127.6 million and fair values of $127.6 million, were pledged to secure public deposits and borrowings with the FHLB. Of the securities pledged, $16.7 million of fair value was excess collateral. Excess collateral is maintained to support future borrowings and may be withdrawn by the Company at any time.