There are increased risks involved with speculative construction, land acquisition and
development, multi-family residential, commercial real estate, commercial business and consumer lending activities.
activities include loans secured by speculative construction, land acquisition and development and commercial real estate. In addition, from time to time we originate loans for the purchase or refinancing of multi-family residential real estate.
Speculative residential construction, land acquisition and development, multi-family residential and commercial real estate lending generally is considered to involve a higher degree of risk than single-family residential lending due to a variety of
factors, including generally larger loan balances, the dependency on successful completion or operation of the project for repayment, the difficulties in estimating construction costs and loan terms which often do not require full amortization of
the loan over its term and, instead, provide for a balloon payment at stated maturity. Our lending activities also include commercial business loans to small to medium businesses, which generally are secured by various equipment, machinery and other
corporate assets, and a variety of consumer loans, including home improvement loans, home equity loans and loans secured by automobiles and other personal property. Although commercial business loans and leases and consumer loans generally have
shorter terms and higher interest rates than mortgage loans, they generally involve more risk than mortgage loans because of the nature of, or in certain cases the absence of, the collateral which secures such loans.
The Company invests in mortgage-backed securities (MBS), including significant legacy positions in private label MBS
(PLMBS) which could result in impairment charges.
The Company has investments in MBS, including agency and private label
MBS. PLMBS investments carry a significant amount of credit risk, relative to other investments within the Companys portfolio. The PLMBS segment accounts for 0.3% of the Companys total assets and 0.4% of the Companys total interest
MBS are secured by mortgage properties that are geographically diverse, but may include exposure in some areas that have
experienced rapidly declining property values. The MBS portfolio is also subject to interest rate risk, prepayment risk, operational risk, servicer risk and originator risk, all of which can have a negative impact on the underlying collateral of the
MBS investments. The rate and timing of unscheduled payments and collections of principal on mortgage loans serving as collateral for these securities are difficult to predict and can be affected by a variety of factors, including the level of
prevailing interest rates, restrictions on voluntary prepayments contained in the mortgage loans, the availability of lender credit, loan modifications and other economic, demographic, geographic, tax and legal factors.
During fiscal 2018, 2017, and 2016, the Company recorded $14 thousand, $0, and $0, respectively, of credit impairment charges, and
$73 thousand, $0 thousand, and $0 thousand, respectively, to accumulated other comprehensive income (net of income tax effect of $27 thousand, $0 thousand, and $0 thousand, respectively) related to non-credit other than temporary impairments. During fiscal years 2018, 2017, and 2016, the Company was able to accrete back into other comprehensive income $20 thousand, $84 thousand, and
$110 thousand, respectively (net of income tax effect of $4 thousand, $43 thousand, and $56 thousand, respectively), based on principal repayments on private-label mortgage-backed securities previously identified with other than
temporary impairment (OTTI). Cash repayments on the Companys PLMBS portfolio totaled $276 thousand, $467 thousand, and $731 thousand, for fiscal years 2018, 2017, and 2016, respectively.
During fiscal 2018, the level of delinquencies continued at high levels within the PLMBS portfolio. Continued deterioration in the mortgage
and credit markets could result in additional other-than-temporary impairment charges in our legacy PLMBS which could negatively affect the Companys financial condition, results of operations, or its capital position.
At June 30, 2018, the Company, based on its analysis, has concluded that three PLMBS are other-than-temporarily impaired, as discussed
above. The remaining securities portfolio has experienced unrealized losses and a decreased fair value due to interest rate volatility, illiquidity in the market place or credit deterioration in the U.S. mortgage markets.