Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - WVS FINANCIAL CORPFinancial_Report.xls
EX-32.2 - EX-32.2 - WVS FINANCIAL CORPd786751dex322.htm
EX-99 - EX-99 - WVS FINANCIAL CORPd786751dex99.htm
EX-31.2 - EX-31.2 - WVS FINANCIAL CORPd786751dex312.htm
EX-31.1 - EX-31.1 - WVS FINANCIAL CORPd786751dex311.htm
EX-32.1 - EX-32.1 - WVS FINANCIAL CORPd786751dex321.htm
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to              

Commission File Number: 0-22444

 

                          WVS Financial Corp.                           
(Exact name of registrant as specified in its charter)

Pennsylvania

     

25-1710500

 

(State or other jurisdiction of

incorporation or organization)

     

(I.R.S. Employer

Identification Number)

 

9001 Perry Highway

Pittsburgh, Pennsylvania

   

15237

 
(Address of principal executive offices)       (Zip Code)  

                                     (412) 364-1911                                     

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.      

YES  X   NO     

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      YES  X   NO     

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer            Accelerated filer         
Non-accelerated filer          (Do not check if a smaller reporting company)   Smaller reporting company   X  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12 b-2 of the Exchange Act).      YES        NO  X 

Shares outstanding as of November 14, 2014: 2,050,430 shares Common Stock, $.01 par value.


Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

INDEX

 

PART I.

       

Financial Information

  

Page

    
Item 1.      Financial Statements     
     Consolidated Balance Sheet as of
September 30, 2014 and June 30, 2014
(Unaudited)
   3  
     Consolidated Statement of Income
for the Three Months Ended
September 30, 2014 and 2013 (Unaudited)
   4  
     Consolidated Statement of Comprehensive
Income for the Three Months Ended
September 30, 2014 and 2013 (Unaudited)
   5  
     Consolidated Statement of Changes in
Stockholders’ Equity for the Three Months
Ended September 30, 2014 (Unaudited)
   6  
     Consolidated Statement of Cash Flows
for the Three Months Ended September 30, 2014
and 2013 (Unaudited)
   7  
     Notes to Unaudited Consolidated
Financial Statements
   9  
Item 2.      Management’s Discussion and Analysis of
Financial Condition and Results of
Operations for the Three Months
Ended September 30, 2014
   36  
Item 3.      Quantitative and Qualitative Disclosures
about Market Risk
   42  
Item 4.      Controls and Procedures    48  

PART II.

        Other Information   

Page

    
Item 1.      Legal Proceedings    49  
Item 1A.      Risk Factors    49  
Item 2.      Unregistered Sales of Equity Securities and
Use of Proceeds
   49  
Item 3.      Defaults Upon Senior Securities    50  
Item 4.      Mine Safety Disclosures    50  
Item 5.      Other Information    50  
Item 6.      Exhibits    51  
     Signatures    52  

 

2


Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

(In thousands)

 

         September 30, 2014             June 30, 2014      

Assets

    

Cash and due from banks

                 $      1,255        $      1,088   

Interest-earning demand deposits

     278        272   
  

 

 

   

 

 

 

Total cash and cash equivalents

     1,533        1,360   

Certificates of deposit

     350        598   

Investment securities available-for-sale (amortized cost of $26,798 and $28,189)

     26,934        28,387   

Investment securities held-to-maturity (fair value of $36,661 and $22,480)

     36,283        22,047   

Mortgage-backed securities held-to-maturity (fair value of $208,095 and $215,016)

     207,793        215,335   

Net loans receivable (allowance for loan losses of $237 and $234)

     30,956        29,724   

Accrued interest receivable

     923        638   

Federal Home Loan Bank stock, at cost

     6,909        6,440   

Premises and equipment, net

     641        615   

Bank owned life insurance

     4,171        4,136   

Deferred tax assets (net)

     516        512   

Other assets

     227        148   
  

 

 

   

 

 

 

TOTAL ASSETS

                 $  317,236                    $  309,940   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits

    

Non-interest-bearing accounts

     $    18,590        $    16,300   

NOW accounts

     20,946        21,077   

Savings accounts

     43,756        44,428   

Money market accounts

     24,748        24,730   

Certificates of deposit

     33,644        34,833   

Advance payments by borrowers for taxes and insurance

     278        491   
  

 

 

   

 

 

 

Total deposits

     141,962        141,859   

Federal Home Loan Bank advances: long-term

     117,805        111,696   

Federal Home Loan Bank advances: short-term

     24,753        23,626   

Accrued interest payable

     168        170   

Other liabilities

     772        801   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     285,460        278,152   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock:

    

5,000,000 shares, no par value per share, authorized; none issued

     -        -   

Common stock:

    

10,000,000 shares, $.01 par value per share, authorized; 3,805,636 and 3,805,636 shares issued; 2,050,430 and 2,056,975 shares outstanding

     38        38   

Additional paid-in capital

     21,485        21,485   

Treasury stock: 1,755,206 and 1,748,661 shares at cost, respectively

     (26,772     (26,700

Retained earnings, substantially restricted

     38,552        38,335   

Accumulated other comprehensive loss

     (421     (420

Unallocated Employee Stock Ownership Plan (“ESOP”) shares

     (1,106     (950
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     31,776        31,788   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

     $  317,236        $  309,940   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3


Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

(In thousands, except per share data)

 

         Three Months Ended    
September 30,
 
     2014      2013  

INTEREST AND DIVIDEND INCOME:

     

Loans, including fees

         $          373             $          414   

Investment securities—taxable

     295         498   

Mortgage-backed securities

     796         474   

Certificates of deposit

     2         3   

FHLB Stock

     54         13   
  

 

 

    

 

 

 

Total interest and dividend income

     1,520         1,402   
  

 

 

    

 

 

 

INTEREST EXPENSE:

     

Deposits

     59         79   

Federal Home Loan Bank advances – long-term

     212         211   

Federal Home Loan Bank advances – short-term

     17         54   
  

 

 

    

 

 

 

Total interest expense

     288         344   
  

 

 

    

 

 

 

NET INTEREST INCOME

     1,232         1,058   

PROVISION FOR LOAN LOSSES

     3         12   
  

 

 

    

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     1,229         1,046   
  

 

 

    

 

 

 

NON-INTEREST INCOME:

     

Service charges on deposits

     41         52   

Earnings on Bank Owned Life Insurance

     35         26   

Other

     62         59   
  

 

 

    

 

 

 

Total non-interest income

     138         137   
  

 

 

    

 

 

 

NON-INTEREST EXPENSE:

     

Salaries and employee benefits

     533         511   

Occupancy and equipment

     77         73   

Data processing

     59         60   

Correspondent bank service charges

     10         11   

Federal deposit insurance premium

     46         47   

Other

     190         157   
  

 

 

    

 

 

 

Total non-interest expense

     915         859   
  

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     452         324   

INCOME TAX EXPENSE

     153         114   
  

 

 

    

 

 

 

NET INCOME

     $          299         $          210   
  

 

 

    

 

 

 

EARNINGS PER SHARE:

     

Basic

     $         0.15         $         0.10   

Diluted

     $         0.15         $         0.10   

AVERAGE SHARES OUTSTANDING:

     

Basic

     2,051,110         2,057,930   

Diluted

     2,051,110         2,057,930   

See accompanying notes to unaudited consolidated financial statements.

 

4


Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

(In thousands)

 

     Three Months Ended
September 30,
 
         2014             2013      

NET INCOME

           $ 299              $ 210   

OTHER COMPREHENSIVE INCOME (LOSS)

    

Investment securities available for sale not other-than-temporarily impaired:

    

Gains (losses) arising during the year

     (62     19   

Income tax effect

     (21     6   
  

 

 

   

 

 

 
     (41     13   
  

 

 

   

 

 

 

Unrealized holding gains (losses) on investment securities available for sale not other-than-temporarily impaired, net of tax

     (41     13   
  

 

 

   

 

 

 

Investment securities held to maturity other-than-temporarily impaired:

    

Accretion of other comprehensive loss on other-than-temporarily impaired securities held to maturity

     61        145   

Income tax effect

     21        50   
  

 

 

   

 

 

 
     40        95   

Unrealized holding gains on other-than-temporarily impaired securities held to maturity, net of tax

     40        95   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     (1     108   
  

 

 

   

 

 

 

COMPREHENSIVE INCOME

           $   298              $   318   
  

 

 

   

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5


Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands)

 

    Common
    Stock    
    Additional
Paid-in
    Capital    
    Treasury
    Stock    
    Retained
Earnings –
    Substantially    
Restricted
    Accumulated
Other
    Comprehensive    
Loss
        Unallocated    
ESOP
Shares
          Total        

Balance June 30, 2014

    $    38        $ 21,485        $(26,700     $ 38,335        $ (420     $    (950     $31,788   

Net income

          299            299   

Other comprehensive loss

            (1       (1

Purchase of treasury stock (6,545 shares)

        (72           (72

Purchase of ESOP shares

              (156     (156

Cash dividends declared ($0.04 per share)

          (82         (82
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2014

        $    38          $ 21,485        $(26,772     $ 38,552        $ (421     $ (1,106     $31,776   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6


Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

     Three Months Ended
September 30,
 
           2014                 2013        

OPERATING ACTIVITIES

    

Net income

         $       299            $        210   

Adjustments to reconcile net income to cash provided by operating activities:

    

Provision for loan losses

     3        12   

Depreciation

     20        21   

Gain on sale of other real estate owned

     (5     -   

Amortization of discounts, premiums and deferred loan fees

     120        570   

Deferred income taxes

     (4     52   

Increase in prepaid/accrued income taxes

     37        3   

Earnings on bank owned life insurance

     (35     (26

Increase in accrued interest receivable

     (285     (93

Increase (decrease) in accrued interest payable

     (2     2   

Increase (decrease) in deferred director compensation payable

     8        (8

Other, net

     (152     (121
  

 

 

   

 

 

 

Net cash provided by operating activities

     4        622   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Available-for-sale:

    

Proceeds from repayments of investments

     1,208        12,936   

Held-to-maturity:

    

Purchases of investment securities

     (18,380     (1,955

Purchases of mortgage-backed securities

     (6,081     (29,158

Proceeds from repayments of investments

     4,158        6,182   

Proceeds from repayments of mortgage-backed securities

     13,736        8,043   

Purchases of certificates of deposit

     (100     -   

Maturities/redemptions of certificates of deposit

     348        -   

Purchase of bank owned life insurance

     -        (2,000

Increase in net loans receivable

     (1,377     (2,778

Proceeds from sale of other real estate owned

     251        -   

Purchase of FHLB stock

     (1,214     (1,329

Redemption of FHLB stock

     745        1,800   

Acquisition of premises and equipment

     (46     (27
  

 

 

   

 

 

 

Net cash used for investing activities

     (6,752     (8,286
  

 

 

   

 

 

 

 

7


Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

     Three Months Ended
September 30,
 
           2014                 2013        

FINANCING ACTIVITIES

    

Net increase in transaction and savings accounts

           $  1,505              $  3,964   

Net decrease in certificates of deposit

     (1,189     (737

Net decrease in advance payments by borrowers for taxes and insurance

     (321     (299

Proceeds from FHLB long-term advances

     6,109        -   

Net increase in FHLB short-term advances

     1,127        5,358   

Purchase of treasury stock

     (72     -   

Purchases of ESOP shares

     (156     -   

Cash dividends paid

     (82     (82
  

 

 

   

 

 

 

Net cash provided by financial activities

     6,921        8,204   
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     173        540   

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD

     1,360        1,927   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD

     $  1,533        $  2,467   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    

Cash paid during the period for:

    

Interest on deposits, escrows and borrowings

     $     290        $     342   

Income taxes

     127        115   

Non-cash items:

    

Educational Improvement Tax Credit

     $         9        $         9   

Mortgage loans transferred to other real estate owned

     246        -   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

8


Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (GAAP). However, all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation have been included. The results of operations for the three months ended September 30, 2014, are not necessarily indicative of the results which may be expected for the entire fiscal year.

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-08, Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The amendments in this Update affect the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. The amendments do all of the following: (1) change the approach to the investment company assessment in Topic 946, clarify the characteristics of an investment company, and provide comprehensive guidance for assessing whether an entity is an investment company; (2) require an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting; and (3) require the following additional disclosures: (a) the fact that the entity is an investment company and is applying the guidance in Topic 946, (b) information about changes, if any, in an entity’s status as an investment company, and (c) information about financial support provided or contractually required to be provided by an investment company to any of its investees. The amendments in this Update are effective for an entity’s interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited. This Update did not have a significant impact on the Company’s financial statements.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. This Update became effective for the Company on January 1, 2014, and did not have a significant impact on the Company’s financial statements.

In January 2014, the FASB issued ASU 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The amendments in this Update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if

 

9


Table of Contents

certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this Update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this Update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this Update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting Update.

In June 2014, the FASB issued ASU 2014-10, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target

 

10


Table of Contents

Could Be Achieved After the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40). The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements -Going Concern (Subtopic 205-40). The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

 

11


Table of Contents
3. EARNINGS PER SHARE

The following table sets forth the computation of the weighted-average common shares used to calculate basic and diluted earnings per share.

 

     Three Months Ended
September 30,
 
             2014                     2013          

Weighted average common shares issued

     3,805,636        3,805,636   

Average treasury stock shares

         (1,754,526         (1,747,706
  

 

 

   

 

 

 

Weighted average common shares and common stock equivalents used to calculate basic earnings per share

     2,051,110        2,057,930   

Additional common stock equivalents (stock options) used to calculate diluted earnings per share

     -        -   
  

 

 

   

 

 

 

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share

     2,051,110        2,057,930   
  

 

 

   

 

 

 

There are no convertible securities that would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income is used.

At September 30, 2014, there were 114,519 options outstanding with an exercise price of $16.20 which were anti-dilutive for the three month period. At September 30, 2013 there were 114,519 options outstanding with an exercise price of $16.20 which were anti-dilutive for the three month period.

 

4. STOCK BASED COMPENSATION DISCLOSURE

The Company’s 2008 Stock Incentive Plan (the “Plan”), which was approved by shareholders in October 2008, permits the grant of stock options or restricted shares to its directors and employees for up to 152,000 shares (up to 38,000 restricted shares may be issued). Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest over five years of continuous service and have ten-year contractual terms.

During the three month periods ended September 30, 2014 and 2013, the Company recorded $0 and $5 thousand, respectively, in compensation expense related to our share-based compensation awards. As of September 30, 2014, there was no unrecognized compensation cost related to unvested share-based compensation awards granted in fiscal 2009.

The Company had no non-vested stock options outstanding at September 30, 2014, and 19,729 unvested stock options outstanding at September 30, 2013. There were no stock options exercised or issued during the three months ended September 30, 2014 and 2013.

 

12


Table of Contents
5. INVESTMENT SECURITIES

The amortized cost and fair values of investments are as follows:

 

                Amortized    
Cost
            Gross
    Unrealized    
Gains
            Gross
    Unrealized    
Losses
           Fair
        Value        
 
September 30, 2014           (Dollars in Thousands)  

AVAILABLE FOR SALE

                      

Corporate debt securities

     $         24,749         $         132         $         (3     $         24,878   

Foreign debt securities 1

        2,049            7            -           2,056   
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

     $         26,798         $         139         $         (3     $         26,934   
     

 

 

       

 

 

       

 

 

      

 

 

 
            Amortized
Cost
            Gross
Unrealized
Gains
            Gross
Unrealized
Losses
           Fair
Value
 
September 30, 2014           (Dollars in Thousands)  

HELD TO MATURITY

                      

U.S. government agency securities

     $         31,409         $         10         $         (115     $         31,304   

Corporate debt securities

        4,874            483            -           5,357   
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

     $         36,283         $         493         $         (115     $         36,661   
     

 

 

       

 

 

       

 

 

      

 

 

 
            Amortized
Cost
            Gross
Unrealized
Gains
            Gross
Unrealized
Losses
           Fair
Value
 
June 30, 2014           (Dollars in Thousands)  

AVAILABLE FOR SALE

                      

Corporate debt securities

     $         26,123         $         188         $         -        $         26,311   

Foreign debt securities 1

        2,066            10            -           2,076   
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

     $         28,189         $         198         $         -        $         28,387   
     

 

 

       

 

 

       

 

 

      

 

 

 
            Amortized
Cost
            Gross
Unrealized
Gains
            Gross
Unrealized
Losses
           Fair
Value
 
June 30, 2014           (Dollars in Thousands)  

HELD TO MATURITY

                      

U.S. government agency securities

     $         16,848         $         11         $         (118     $         16,741   

Corporate debt securities

        5,199            540            -           5,739   
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

     $         22,047         $         551         $         (118     $         22,480   
     

 

 

       

 

 

       

 

 

      

 

 

 

 

 

 

 

1  U.S. dollar-denominated investment-grade corporate bonds of large foreign issuers.

 

13


Table of Contents

There were no sales of investment securities for the three months ended September 30, 2014 and 2013.

The amortized cost and fair values of debt securities at September 30, 2014, by contractual maturity, are shown below. Expected maturities may differ from the contractual maturities because issuers may have the right to call securities prior to their final maturities.

 

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

AVAILABLE FOR SALE

                                  

Amortized cost

  $      13,242      $      11,561      $      1,003      $      -      $      992      $      -      $      26,798   

Fair value

       13,281           11,628           1,017           -           1,008           -           26,934   

Weighted average yield

       1.61        1.57        1.33        -        1.58        -        1.58

HELD TO MATURITY

                                  

Amortized cost

  $      1,000      $      523      $      927      $      5,422      $      1,299      $      27,112      $      36,283   

Fair value

       1,025           573           998           5,755           1,292           27,018           36,661   

Weighted average yield

       6.38        6.08        5.83        3.65        1.51        1.92        2.45

At September 30, 2014, and June 30, 2014, no investment securities were pledged to secure public deposits, repurchase agreements, or borrowings with the Federal Home Loan Bank.

 

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 September 30, 2014, the Company’s Agency CMOs totaled $205.4 million as compared to $212.8 million at June 30, 2014. The Company’s private-label CMOs totaled $2.4 million at September 30, 2014 as compared to $2.5 million at June 30, 2014. The $7.5 million decrease in the CMO segment of our MBS portfolio was primarily due to repayments on our Agency and private-label CMOs which totaled $13.5 million and $235 thousand, respectively, which were partially offset by purchases of U.S. Government agency CMOs totaling $6.1 million. During the three months ended September 30, 2014, the Company received principal payments totaling $235 thousand on its private-label CMOs. At September 30, 2014, approximately $207.8 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 $215.3 million or 100.0% at June 30, 2014. 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.

 

14


Table of Contents

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 September 30, 2014. During the three months ending September 30, 2014, the Company reversed $61 thousand of non-credit unrealized holding losses on its three private-label CMOs with OTTI due to principal repayments. During the three months ended September 30, 2014, 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 September 30, 2014. 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 September 30, 2014  
          Rating    Book
     Value     
     Fair
  Value2  
    

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            $  1,302               $  1,672                    $   201   

126694KF4

   CWHL SER 24 A15    D    N/A    D      266         296         40   

126694KF4

   CWHL SER 24 A15    D    N/A    D      533         593         79   

126694MP0

   CWHL SER 26 1A5    D    N/A    D      279         308         36   
              

 

 

    

 

 

    

 

 

 
                       $ 2,380               $  2,869                    $   356   
              

 

 

    

 

 

    

 

 

 

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)  

September 30, 2014

                    

HELD TO MATURITY

                    

Collateralized mortgage obligations:

                    

Agency

  $       205,413      $      1,389      $      (1,576   $      205,226   

Private-label

        2,380           489           -           2,869   
     

 

 

      

 

 

      

 

 

      

 

 

 

Total

  $       207,793      $      1,878      $      (1,576   $      208,095   
     

 

 

      

 

 

      

 

 

      

 

 

 

 

 

 

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

 

15


Table of Contents
        

   Amortized   

Cost

        

Gross

  Unrealized  

Gains

        

Gross

  Unrealized  

Losses

        

Fair

    Value    

 
    

 

 

 
June 30, 2014        (Dollars in Thousands)  

HELD TO MATURITY

                   

Collateralized mortgage obligations:

                   

Agency

  $      212,781      $      1,370      $      (2,097   $      212,054   

Private-label

       2,554           408           -           2,962   
    

 

 

      

 

 

      

 

 

      

 

 

 

Total

  $      215,335      $      1,778      $      (2,097   $      215,016   
    

 

 

      

 

 

      

 

 

      

 

 

 

The amortized cost and fair value of the Company’s mortgage-backed securities at September 30, 2014, 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

  $      -      $      -      $      532      $      551      $      207,793   

Fair value

       -           -           207,261           207,554           208,095   

Weighted average yield

       -        -        1.60        1.49        1.49

At September 30, 2014, mortgage-backed securities with amortized costs of $144.7 million and fair values of $144.1 million were pledged to secure public deposits and borrowings with the Federal Home Loan Bank. Of the securities pledged, $13.5 million of fair value was excess collateral. At June 30, 2014 mortgage-backed securities with an amortized cost of $148.3 million and fair values of $147.0 million, were pledged to secured borrowings with the Federal Home Loan Bank. Of the securities pledged, $16.5 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.

 

16


Table of Contents
7. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following tables present the changes in accumulated other comprehensive loss by component, for the three months ended September 30, 2014 and 2013.

 

    Three Months Ended September 30, 2014  
    (Dollars in Thousands – net of tax)  
        Unrealized Gains    
    and Losses on    
    Available-for-Sale    
    Securities    
        Unrealized Gains    
    and Losses on    
    Held-to-Maturity    
    Securities     
                Total              

Beginning Balance – June 30, 2014

    $ 130        $ (550     $ (420

Other comprehensive income (loss) before reclassifications

    (41     40        (1

Amounts reclassified from accumulated other comprehensive income (loss)

    -        -        -   
 

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

    (41     40        (1
 

 

 

   

 

 

   

 

 

 

Ending Balance – September 30, 2014

    $ 89        $ (510     $ (421
 

 

 

   

 

 

   

 

 

 

 

    Three Months Ended September 30, 2013  
    (Dollars in Thousands – net of tax)  
        Unrealized Gains    
    and Losses on    
    Available-for-Sale    
    Securities    
        Unrealized Gains    
    and Losses on    
    Held-to-Maturity    
    Securities     
                Total              

Beginning Balance – June 30, 2013

    $   78        $ (820     $ (742

Other comprehensive income (loss) before reclassifications

    13        95        108   

Amounts reclassified from accumulated other comprehensive income (loss)

    -        -        -   
 

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

    13        95        108   
 

 

 

   

 

 

   

 

 

 

Ending Balance – September 30, 2013

    $ 91        $ (725     $ (634
 

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

There were no amounts reclassified out of accumulated other comprehensive income for the three months ended September 30, 2014 and 2013.

 

8. UNREALIZED LOSSES ON SECURITIES

The following tables show the Company’s gross unrealized losses and fair value, aggregated by category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2014 and June 30, 2014.

 

             September 30, 2014  
  

 

 
             Less Than Six Months         Six through Twelve Months         Twelve Months or Greater         Total  
  

 

 
                       Gross                   Gross                   Gross                   Gross  
             Fair         Unrealized         Fair         Unrealized         Fair         Unrealized         Fair         Unrealized  
             Value         Losses         Value         Losses         Value         Losses         Value         Losses  
  

 

 
             (Dollars in Thousands)  

U.S. government agency securities

     $     7,311      $     (15   $     -      $     -      $     9,900      $     (100   $     17,211      $     (115

Corporate bonds

         1,002          (3       -          -          -          -          1,002          (3

Collateralized mortgage obligations:

                                  

Agency

         66,152          (763       25,116          (507       16,176          (306       107,444          (1,576
      

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

     $     74,465      $     (781   $     25,116      $     (507   $     26,076      $     (406   $     125,657      $     (1,694
      

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

             June 30, 2014  
  

 

 
             Less Than Six Months         Six through Twelve Months         Twelve Months or Greater         Total  
  

 

 
                       Gross                   Gross                   Gross                   Gross  
             Fair         Unrealized         Fair         Unrealized         Fair         Unrealized         Fair         Unrealized  
             Value         Losses         Value         Losses         Value         Losses         Value         Losses  
  

 

 
             (Dollars in Thousands)  

U.S. government agency securities

     $     -      $     -      $     -      $     -      $     9,882      $     (118   $     9,882      $     (118

Collateralized mortgage obligations:

                                  

Agency

         73,738          (1,133       30,320          (643       12,668          (321       116,726          (2,097
      

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

     $     73,738      $     (1,133   $     30,320      $     (643   $     22,550      $     (439   $     126,608      $     (2,215
      

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

For debt securities, impairment is considered to be other than temporary if an entity (1) intends to sell the security, (2) more likely than not will be required to sell the security before recovering its amortized cost basis, or (3) does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell the security). In addition, impairment is considered to be other than temporary if the present value of cash flows expected to be collected from the debt security is less than the amortized cost basis of the security (any such shortfall is referred to as a credit loss).

The Company evaluates outstanding available-for-sale and held-to-maturity securities in an unrealized loss position (i.e., impaired securities) for Other than temporary (“OTTI”) on a quarterly basis. In doing so, the Company considers many factors including, but not limited to: the credit ratings assigned to the securities by the Nationally Recognized Statistical Rating Organizations (NRSROs); other indicators of the credit quality of the issuer; the strength of the provider of any guarantees; the length of time and extent that fair value has been less than amortized cost; and whether the Company has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. In the case of its private label residential MBS, the Company also considers prepayment speeds, the historical and projected performance of the underlying loans and the credit support provided

 

18


Table of Contents

by the subordinate securities. These evaluations are inherently subjective and consider a number of quantitative and qualitative factors.

The following table presents a roll-forward of the credit loss component of the amortized cost of mortgage-backed securities that we have written down for OTTI and the credit component of the loss that is recognized in earnings. OTTI recognized in earnings for credit impaired mortgage-backed securities is presented as additions in two components based upon whether the current period is the first time the mortgage-backed security was credit-impaired (initial credit impairment) or is not the first time the mortgage-backed security was credit impaired (subsequent credit impairments). The credit loss component is reduced if we sell, intend to sell or believe that we will be required to sell previously credit-impaired mortgage-backed securities. Additionally, the credit loss component is reduced if we receive cash flows in excess of what we expected to receive over the remaining life of the credit impaired mortgage-backed securities, the security matures or is fully written down.

 

     Three Months Ended
September 30,
 
             2014                     2013          
     (Dollars in Thousands)  

Beginning balance

     $302        $316   

Initial credit impairment

     -        -   

Subsequent credit impairment

     -        -   

Reductions for amounts recognized in earnings due to intent or requirement to sell

     -        -   

Reductions for securities sold

     -        -   

Reduction for actual realized losses

     (10     (7

Reduction for increase in cash flows expected to be collected

     -        -   
  

 

 

   

 

 

 

Ending Balance

     $292        $309   
  

 

 

   

 

 

 

During the three months ended September 30, 2014, the Company recorded no credit impairment charge and no non-credit unrealized holding loss to accumulated other comprehensive income. During the three months ended September 30, 2014, the Company accreted back into other comprehensive income $40 thousand (net of income tax effect of $21 thousand), based on principal repayments on private-label CMOs previously identified with OTTI.

In the case of its private-label residential CMOs that exhibit adverse risk characteristics, the Company employs models to determine the cash flows that it is likely to collect from the securities. These models consider borrower characteristics and the particular attributes of the loans underlying the securities, in conjunction with assumptions about future changes in home prices and interest rates, to predict the likelihood a loan will default and the impact on default frequency, loss severity and remaining credit enhancement. A significant input to these models is the forecast of future housing price changes for the relevant states and metropolitan statistical areas, which are based upon an assessment of the various housing markets. In general, since the ultimate receipt of contractual payments on these securities will depend upon the credit and prepayment performance of the underlying loans and, if needed, the credit enhancements for the senior securities owned by the Company, the Company uses these models to assess whether the credit enhancement associated with each security is sufficient to protect against likely losses of principal and interest on the underlying mortgage loans. The development of the modeling assumptions requires significant judgment.

In conjunction with our adoption of ASC Topic 820 effective June 30, 2009, the Company retained an independent third party to assist it with assessing its investments within the private-label CMO portfolio. The independent third party utilized certain assumptions for producing the cash flow analyses used in the OTTI assessment. Key assumptions would include interest rates, expected market participant

 

19


Table of Contents

spreads and discount rates, housing prices, projected future delinquency levels and assumed loss rates on any liquidated collateral.

The Company reviewed the independent third party’s assumptions used in the September 30, 2014 OTTI process. Based on the results of this review, the Company deemed the independent third party’s assumptions to be reasonable and adopted them. However, different assumptions could produce materially different results, which could impact the Company’s conclusions as to whether an impairment is considered other-than-temporary and the magnitude of the credit loss. Management believes that no additional private-label CMOs in the portfolio had an other-than-temporary impairment at September 30, 2014, keeping the total at three private-label CMOs with OTTI at September 30, 2014.

If the Company intends to sell an impaired debt security, or more likely than not will be required to sell the security before recovery of its amortized cost basis, the impairment is other-than-temporary and is recognized currently in earnings in an amount equal to the entire difference between fair value and amortized cost. The Company does not anticipate selling its private-label CMO portfolio, nor does Management believe that the Company will be required to sell these securities before recovery of this amortized cost basis.

In instances in which the Company determines that a credit loss exists but the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before the anticipated recovery of its remaining amortized cost basis, the OTTI is separated into (1) the amount of the total impairment related to the credit loss and (2) the amount of the total impairment related to all other factors (i.e., the noncredit portion). The amount of the total OTTI related to the credit loss is recognized in earnings and the amount of the total OTTI related to all other factors is recognized in accumulated other comprehensive loss. The total OTTI is presented in the Consolidated Statement of Income with an offset for the amount of the total OTTI that is recognized in accumulated other comprehensive loss. Absent the intent or requirement to sell a security, if a credit loss does not exist, any impairment is considered to be temporary.

Regardless of whether an OTTI is recognized in its entirety in earnings or if the credit portion is recognized in earnings and the noncredit portion is recognized in other comprehensive income (loss), the estimation of fair values has a significant impact on the amount(s) of any impairment that is recorded.

The noncredit portion of any OTTI losses on securities classified as available-for-sale is adjusted to fair value with an offsetting adjustment to the carrying value of the security. The fair value adjustment could increase or decrease the carrying value of the security. All of the Company’s private-label CMOs were originally, and continue to be classified, as held to maturity.

In periods subsequent to the recognition of an OTTI loss, the other-than-temporarily impaired debt security is accounted for as if it had been purchased on the measurement date of the OTTI at an amount equal to the previous amortized cost basis less the credit-related OTTI recognized in earnings. For debt securities for which credit-related OTTI is recognized in earnings, the difference between the new cost basis and the cash flows expected to be collected is accreted into interest income over the remaining life of the security in a prospective manner based on the amount and timing of future estimated cash flows.

The Company had investments in 31 positions that were impaired at September 30, 2014. Based on its analysis, management has concluded that three private-label CMOs are other-than-temporarily impaired, while the remaining securities portfolio has experienced unrealized losses and a decrease in fair value due to interest rate volatility, illiquidity in the marketplace, or credit deterioration in the U.S. mortgage markets.

 

20


Table of Contents
9. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

The following table summarizes the primary segments of the loan portfolio as of September 30, 2014 and June 30, 2014.

 

         September 30, 2014        

June 30, 2014

 
        

Total

      Loans      

        

Individually

evaluated
for
impairment

         Collectively
evaluated
for
impairment
            

Total

Loans

        

Individually

evaluated
for
impairment

         Collectively
evaluated for
impairment
 
    

 

 

 
         (Dollars in Thousands)  

First mortgage loans:

                               

1 – 4 family dwellings

  $      16,564      $      -      $      16,564          $      15,634      $      -      $      15,634   

Construction

       2,495           -           2,495             1,872           -           1,872   

Land acquisition & development

       610           -           610             573           -           573   

Multi-family dwellings

       2,281           -           2,281             2,327           -           2,327   

Commercial

       4,058           49           4,009             4,523           49           4,474   

Consumer Loans

                               

Home equity

       807           -           807             849           -           849   

Home equity lines of credit

       2,214           150           2,064             1,985           150           1,835   

Other

       252           -           252             221           -           221   

Commercial Loans

       1,516           -           1,516             1,584           -           1,584   

Obligations (other than securities and leases) of states and political subdivisons

       400           -           400             400           -           400   
    

 

 

      

 

 

      

 

 

        

 

 

      

 

 

      

 

 

 
  $      31,197      $                    199      $                30,998          $      29,968      $                    199      $                  29,769   
         

 

 

      

 

 

             

 

 

      

 

 

 

Less: Deferred loan fees

       (4                    (10          

   Allowance for loan losses

       (237                    (234          
    

 

 

                  

 

 

           

Total

  $              30,956                    $              29,724             
    

 

 

                  

 

 

           

Impaired loans are loans for which it is probable the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The following loan categories are collectively evaluated for impairment. First mortgage loans: 1 – 4 family dwellings and all consumer loan categories (home equity, home equity lines of credit, and other). The following loan categories are individually evaluated for impairment. First mortgage loans: construction, land acquisition and development, multi-family dwellings, and commercial. The Company evaluates commercial loans not secured by real property individually for impairment.

The definition of “impaired loans” is not the same as the definition of “nonaccrual loans,” although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired if the loan is not a commercial or commercial real estate loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral.

Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower,

 

21


Table of Contents

including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.

The following tables are a summary of the loans considered to be impaired as of September 30, 2014 and June 30, 2014, and the related interest income recognized for the three months ended September 30, 2014 and September 30, 2013:

 

             September 30,    
2014
                  June 30,         
2014
 
         (Dollars in Thousands)  

Impaired loans with an allocated allowance:

         

Home equity lines of credit

  $      150      $      150   

Impaired loans without an allocated allowance:

         

Commercial real estate loans

       49           49   
    

 

 

      

 

 

 

Total impaired loans

  $      199      $      199   
    

 

 

      

 

 

 

Allocated allowance on impaired loans:

         

Home equity lines of credit

  $      37      $      15   
    

 

 

      

 

 

 

Total

  $      37      $      15   
    

 

 

      

 

 

 

 

         Three Months Ended  
             September 30,    
2014
             September 30,    
2013
 
         (Dollars in Thousands)  

Average impaired loans

         

Construction loans

  $      -      $      701   

Land acquisition & development loans

       -           57   

Commercial real estate loans

       49           -   

Home equity lines of credit

       150           150   
    

 

 

      

 

 

 

Total

  $      199      $      908   
    

 

 

      

 

 

 

Income recognized on impaired loans

         

Construction loans

  $      -      $      -   

Land acquisition & development loans

       -           -   

Commercial real estate loans

       -           -   

Home equity lines of credit

       1           1   
    

 

 

      

 

 

 

Total

  $      1      $      1   
    

 

 

      

 

 

 

Total nonaccrual loans as of September 30, 2014 and June 30, 2014 and the related interest income recognized for the three months ended September 30, 2014 and September 30, 2013 are as follows:

 

             September 30,    
2014
                  June 30,         
2014
 
         (Dollars in Thousands)  

Principal outstanding

         

1 – 4 family dwellings

  $      265      $      408   

Construction

       -           -   

Land acquisition & development

       -           -   

Commercial real estate

       49           49   

Home equity lines of credit

       150           150   
    

 

 

      

 

 

 

Total

  $      464      $      607   
    

 

 

      

 

 

 

 

22


Table of Contents
        Three Months Ended  
            September 30,    
2014
            September 30,    
2013
 
        (Dollars in Thousands)  

Average nonaccrual loans

       

1 – 4 family dwellings

  $     366      $     477   

Construction

      -          701   

Land acquisition & development

      -          57   

Commercial real estate

      49          -   

Home equity lines of credit

      150          150   
   

 

 

     

 

 

 

Total

  $     565      $     1,385   
   

 

 

     

 

 

 

Income that would have been recognized

  $     8      $     22   

Interest income recognized

  $     9      $     2   

Interest income foregone

  $     3      $     20   

The Company’s loan portfolio also includes troubled debt restructurings (TDRs), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

The following tables include the recorded investment and number of modifications for modified loans, as of September 30, 2014 and 2013. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured.

 

     For the Three Months Ended
September 30, 2014
 
    

Number

of

    Contracts    

        

 

Pre-Modification

Outstanding

Recorded

Investment

        

Post-Modification

Outstanding

Recorded

Investment

 
  

 

 

 
     (Dollars in Thousands)  

Troubled debt restructurings:

            

Commercial real estate

     1               $     49       $     49   

Troubled debt restructurings that subsequently defaulted:

     -               $     -       $     -   

One loan secured by commercial real estate was modified by reducing its required payment for a nine month period during the quarter ended September 30, 2014.

 

23


Table of Contents
    For the Three Months Ended  
    September 30, 2013  
 

 

 
   

Number

of

    Contracts    

      Pre-Modification    
Outstanding
Recorded
Investment
        Post-Modification    
Outstanding
Recorded
Investment
 
 

 

 
    (Dollars in Thousands)  

Troubled debt restructurings:

  -   $     -              $     -     

Troubled debt restructurings that subsequently defaulted:

  -   $     -              $     -     

There is one previously modified TDR, secured by a home equity line of credit, in default as of September 30, 2014.

When the Company modifies a loan, management evaluates any possible impairment based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, except when the sole (remaining) source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If management determines that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized by segment or class of loan, as applicable, through an allowance estimate or a charge-off to the allowance. Segment and class status is determined by the loan’s classification at origination.

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance account. Subsequent recoveries, if any, are credited to the allowance. The allowance is maintained at a level believed adequate by management to absorb estimated potential loan losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio considering past experience, current economic conditions, composition of the loan portfolio and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant change.

Effective December 13, 2006, the FDIC, in conjunction with the other federal banking agencies adopted a Revised Interagency Policy Statement on the Allowance for Loan and Lease Losses (“ALLL”). The revised policy statement revised and replaced the banking agencies’ 1993 policy statement on the ALLL. The revised policy statement provides that an institution must maintain an ALLL at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. The banking agencies also revised the policy to ensure consistency with generally accepted accounting principles (“GAAP”). The revised policy statement updates the previous guidance that describes the responsibilities of the board of directors, management, and bank examiners regarding the ALLL, factors to be considered in the estimation of the ALLL, and the objectives and elements of an effective loan review system.

Federal regulations require that each insured savings institution classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard”, “doubtful” and “loss”. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts,

 

24


Table of Contents

conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Another category designated “asset watch” is also utilized by the Bank for assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss. Assets classified as substandard or doubtful require the institution to establish general allowances for loan losses. If an asset or portion thereof is classified as loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge-off such amount. General loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution’s regulatory capital, while specific valuation allowances for loan losses do not qualify as regulatory capital.

The Company’s general policy is to internally classify its assets on a regular basis and establish prudent general valuation allowances that are adequate to absorb losses that have not been identified but that are inherent in the loan portfolio. The Company maintains general valuation allowances that it believes are adequate to absorb losses in its loan portfolio that are not clearly attributable to specific loans. The Company’s general valuation allowances are within the following general ranges: (1) 0% to 5% of assets subject to special mention; (2) 1.00% to 100% of assets classified substandard; and (3) 50% to 100% of assets classified doubtful. Any loan classified as loss is charged-off. To further monitor and assess the risk characteristics of the loan portfolio, loan delinquencies are reviewed to consider any developing problem loans. Based upon the procedures in place, considering the Company’s past charge-offs and recoveries and assessing the current risk elements in the portfolio, management believes the allowance for loan losses at September 30, 2014, is adequate.

The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2014 and June 30, 2014:

 

        Current         30 – 59
  Days Past  
Due
        60 – 89
  Days Past  
Due
       

  90 Days +  
Past Due

Accruing

       

  90 Days +  
Past Due

Non-accrual

        Total  
Past  
Due  
       

Total

Loans

 
   

 

 

 
        (Dollars in Thousands)  

September 30, 2014

                           

First mortgage loans:

                           

1 – 4 family dwellings

  $       16,209      $       66      $       24      $       -      $       265      $       355      $       16,564   

Construction

      2,495          -          -          -          -          -          2,495   

Land acquisition & development

      610          -          -          -          -          -          610   

Multi-family dwellings

      2,281          -          -          -          -          -          2,281   

Commercial

      4,009          -          -          -          49          49          4,058   

Consumer Loans:

                           

Home equity

      807          -          -          -          -          -          807   

Home equity lines of credit

      2,064          -          -          -          150          150          2,214   

Other

      252          -          -          -          -          -          252   

Commercial Loans

      1,516          -          -          -          -          -          1,516   

Obligations (other than securities and leases) of states and political subdivisions

      400          -          -          -          -          -          400   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $              30,643      $       66      $       24      $       -      $       464      $              554          31,197   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Less: Deferred loan fees

                              (4

  Allowance for loan loss

                              (237
                           

 

 

 

Net Loans Receivable

                          $               30,956   
                           

 

 

 

 

25


Table of Contents
        Current         30 – 59
  Days Past  
Due
        60 – 89
  Days Past  
Due
       

  90 Days +  
Past Due

Accruing

       

  90 Days +  
Past Due

Non-accrual

        Total  
Past  
Due  
       

Total

Loans

 
   

 

 

 
    (Dollars in Thousands)  

June 30, 2014

                           

First mortgage loans:

                           

1 – 4 family dwellings

  $       15,068      $       122      $       36      $       -      $       408      $       566      $       15,634   

Construction

      1,872          -          -          -          -          -          1,872   

Land acquisition & development

      573          -          -          -          -          -          573   

Multi-family dwellings

      2,327          -          -          -          -          -          2,327   

Commercial

      4,474          -          -          -          49          49          4,523   

Consumer Loans:

                           

Home equity

      849          -          -          -          -          -          849   

Home equity lines of credit

      1,835          -          -          -          150          150          1,985   

Other

      221          -          -          -          -          -          221   

Commercial Loans

      1,584          -          -          -          -          -          1,584   

Obligations (other than securities and leases) of states and political subdivisions

      400          -          -          -          -          -          400   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
    $            29,203     $     122     $     36     $     -     $     607     $            765         29,968  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Less: Deferred loan fees

                              (10

  Allowance for loan loss

                              (234
                           

 

 

 

Net Loans Receivable

                          $               29,724   
                           

 

 

 

Credit quality information

The following tables represent credit exposure by internally assigned grades for the period ended September 30, 2014. The grading system analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or not at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

Substandard – loans that have a well-defined weakness based on objective evidence and can be characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard loan. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

Loss – loans classified as loss are considered uncollectible, or of such value that continuance as a loan is not warranted.

 

26


Table of Contents

The primary credit quality indicator used by management in the 1 – 4 family and consumer loan portfolios is the performance status of the loans. Payment activity is reviewed by Management on a monthly basis to determine how loans are performing. Loans are considered to be non-performing when they become 90 days delinquent, have a history of delinquency, or have other inherent characteristics which Management deems to be weaknesses.

The following tables presents the Company’s internally classified construction, land acquisition and development, multi-family residential, commercial real estate and commercial (not secured by real estate) loans at September 30, 2014 and June 30, 2014.

 

        September 30, 2014  
          Construction          

Land

Acquisition

&

  Development  

Loans

       

  Multi-family  

Residential

       

  Commercial  
Real

Estate

          Commercial          

Obligations
(other than

securities

and leases)
of States

and Political

  Subdivisions  

 
 

 

 
        (Dollars in Thousands)  

Pass

  $     2,495      $     297      $     2,281      $     4,009      $     1,516      $     400   

Special Mention

      -          -          -          -          -          -   

Substandard

      -          313          -          49          -          -   

Doubtful

      -          -          -          -          -          -   
                       
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending Balance

  $     2,495      $     610      $     2,281      $     4,058      $     1,516      $     400   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

        June 30, 2014  
          Construction          

Land

Acquisition

&

  Development  

Loans

       

  Multi-family  

Residential

       

  Commercial  
Real

Estate

          Commercial          

Obligations
(other than

securities

and leases)
of States

and Political

  Subdivisions  

 
 

 

 
        (Dollars in Thousands)  

Pass

  $     1,872      $     258      $     2,327      $     4,474      $     1,584      $     400   

Special Mention

      -          -          -          -          -          -   

Substandard

      -          315          -          49          -          -   

Doubtful

      -          -          -          -          -          -   
                       
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending Balance

  $     1,872      $     573      $     2,327      $     4,523      $     1,584      $     400   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

27


Table of Contents

The following table presents performing and non-performing 1 – 4 family residential and consumer loans based on payment activity for the periods ended September 30, 2014 and June 30, 2014.

 

 

         September 30, 2014           
 

 

 
             1 – 4 Family                    Consumer        
    

 

 

 
         (Dollars in Thousands)  

Performing

      $        16,233      $           3,123   

Non-performing

       331           150   
         
    

 

 

      

 

 

 

Total

  $                    16,564      $                       3,273   
    

 

 

      

 

 

 

 

   

June 30, 2014

 
 

 

 
             1 – 4 Family                    Consumer        
    

 

 

 
         (Dollars in Thousands)  

Performing

      $        15,160      $           2,905   

Non-performing

       474           150   
         
    

 

 

      

 

 

 

Total

  $                    15,634      $                       3,055   
    

 

 

      

 

 

 

The Company determines its allowance for loan losses in accordance with generally accepted accounting principles. The Company uses a systematic methodology as required by Financial Reporting Release No. 28 and the various Federal Financial Institutions Examination Council guidelines. The Company also endeavors to adhere to SEC Staff Accounting Bulletin No. 102 in connection with loan loss allowance methodology and documentation issues.

Our methodology used to determine the allocated portion of the allowance is as follows. For groups of homogenous loans, we apply a loss rate to the groups’ aggregate balance. Our group loss rate reflects our historical loss experience. We may adjust these group rates to compensate for changes in environmental factors; but our adjustments have not been frequent due to a relatively stable charge-off experience. The Company also monitors industry loss experience on similar loan portfolio segments. We then identify loans for individual evaluation under ASC Topic 310. If the individually identified loans are performing, we apply a segment specific loss rate adjusted for relevant environmental factors, if necessary, for those loans reviewed individually and considered individually impaired, we use one of the three methods for measuring impairment mandated by ASC Topic 310. Generally the fair value of collateral is used since our impaired loans are generally real estate based. In connection with the fair value of collateral measurement, the Company generally uses an independent appraisal and determines costs to sell. The Company’s appraisals for commercial income based loans, such as multi-family and commercial real estate loans, assess value based upon the operating cash flows of the business as opposed to merely “as built” values. The Company then validates the reasonableness of our calculated allowances by: (1) reviewing trends in loan volume, delinquencies, restructurings and concentrations; (2) reviewing prior period (historical) charge-offs and recoveries; and (3) presenting the results of this process, quarterly, to the Asset Classification Committee and the Savings Bank’s Board of Directors. We then tabulate, format and summarize the current loan loss allowance balance for financial and regulatory reporting purposes.

The Company had no unallocated loss allowance balance at September 30, 2014.

The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to operations. The provision for loan losses is based on management’s periodic evaluation of individual loans, economic factors, past loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses,

 

28


Table of Contents

including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to changes in the near term.

The following tables present the activity in the allowance for loan losses for the three month periods ended September 30, 2014 and 2013.

 

        As of September 30, 2014  
        First Mortgage Loans                                
        1 – 4
    Family    
          Construction           Land
  Acquisition &  
Development
        Multi-
    family    
          Commercial             Consumer  
Loans
          Commercial  
Loans
            Total      
   

 

 

 
        (Dollars in Thousands)  

Beginning ALLL Balance at June 30, 2014

  $     103      $     14      $     5      $     12      $     45      $     47      $     8      $     234   

Charge-offs

      -          -          -          -          -          -          -          -   

Recoveries

      -          -          -          -          -          -          -          -   

Provisions

      (28       7          5          (1       (2       22          -          3   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending ALLL Balance at September 30, 2014

  $     75      $     21      $     10      $     11      $     43      $     69      $     8      $     237   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

 

        As of September 30, 2013  
        First Mortgage Loans                                
        1 – 4
    Family    
          Construction           Land
    Acquisition &  
Development
        Multi-
    family    
        Commercial             Consumer  
Loans
          Commercial  
Loans
            Total      
   

 

 

 
        (Dollars in Thousands)  

Beginning ALLL Balance at June 30, 2013

  $     47      $     117      $     8      $     14      $     57      $     53      $     53      $     307   

Charge-offs

      -          -          -          -          -          -          -          -   

Recoveries

      -          -          -          -          -          -          -          -   

Provisions

      3          13          -          -          (2       (2       (1       12   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending ALLL Balance at September 30, 2013

  $     50      $     130      $     8      $     14      $     55      $     55      $     55      $     319   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

The following tables summarize the primary segments of the ALLL, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2014 and June 30, 2014.

 

        As of September 30, 2014  
        First Mortgage Loans                                
        1 – 4
    Family    
          Construction           Land
Acquisition &
  Development  
        Multi-
    family    
          Commercial             Consumer  
Loans
          Commercial  
Loans
            Total      
   

 

 

 
        (Dollars in Thousands)  

Individually evaluated for impairment

  $     -      $     -      $     -      $     -      $     -      $     37      $     -      $     37   

Collectively evaluated for impairment

      75          21          10          11          43          32          8          200   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $     75      $     21      $     10      $     11      $     43      $     69      $     8      $     237   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

29


Table of Contents
        As of June 30, 2014  
        First Mortgage Loans                                
        1 – 4
    Family    
          Construction           Land
  Acquisition &  
Development
        Multi-
    family    
          Commercial             Consumer  
Loans
          Commercial  
Loans
            Total      
   

 

 

 
        (Dollars in Thousands)  

Individually evaluated for impairment

  $     -      $     -      $     -      $     -      $     -      $     15      $     -      $     15   

Collectively evaluated for impairment

      103          14          5          12          45          32          8          219   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $     103      $     14      $     5      $     12      $     45      $     47      $     8      $     234   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

10. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

 

Level I:   

Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level II:   

Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

Level III:   

Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Assets Measured at Fair Value on a Recurring Basis

Investment Securities Available-for-Sale

Fair values for securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The Company has no Level I or Level III investment securities. Level II investment securities were primarily comprised of investment-grade corporate bonds and U.S. dollar-denominated investment-grade corporate bonds of large foreign issuers.

The following tables present the assets reported on a recurring basis on the Consolidated Balance Sheet at their fair value as of September 30, 2014 and June 30, 2014, by level within the fair value hierarchy. As required by GAAP, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

30


Table of Contents
        September 30, 2014  
              Level I                     Level II                     Level III                     Total        
        (Dollars in Thousands)  

Assets measured on a recurring basis:

               

Investment securities – available for sale:

               

Corporate securities

  $     -      $     24,878      $     -      $     24,878   

Foreign debt securities (1)

      -          2,056          -          2,056   
   

 

 

     

 

 

     

 

 

     

 

 

 

Total

  $     -      $     26,934      $     -      $     26,934   
   

 

 

     

 

 

     

 

 

     

 

 

 

 

 

        June 30, 2014  
              Level I                     Level II                     Level III                     Total        
        (Dollars in Thousands)  

Assets measured on a recurring basis:

               

Investment securities – available for sale:

               

Corporate securities

  $     -      $     26,311      $     -      $     26,311   

Foreign debt securities (1)

      -          2,076          -          2,076   
   

 

 

     

 

 

     

 

 

     

 

 

 

Total

  $     -      $     28,387      $     -      $     28,387   
   

 

 

     

 

 

     

 

 

     

 

 

 

 

  (1)

U.S. dollar-denominated investment-grade corporate bonds of large foreign issuers.

Assets Measured at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.

Impaired Loans

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310. The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. For a majority of impaired real estate related loans, the Company obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information. The Company has no Level I or Level II impaired loans. Level III impaired loans were primarily comprised of one single-family residential construction loan, one land loan, and one home equity line of credit.

The following tables present the assets reported on a non-recurring basis on the consolidated balance sheet at their fair values as of September 30, 2014 and June 30, 2014, by level within the fair value hierarchy. As required by GAAP, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

31


Table of Contents
          September 30, 2014  
                Level I                       Level II                       Level III                       Total        
          (Dollars in Thousands)  

Assets measured on a non-recurring basis:

               

Impaired loans

  $          -      $          -      $          162      $          162   
   

 

 

     

 

 

     

 

 

     

 

 

 

Total

  $          -      $          -      $          162      $          162   
   

 

 

     

 

 

     

 

 

     

 

 

 
                                     June 30, 2014                            
          Level I           Level II           Level III           Total  
          (Dollars in Thousands)  

Assets measured on a non-recurring basis:

               

Impaired loans

  $          -      $          -      $          184      $          184   
   

 

 

     

 

 

     

 

 

     

 

 

 

Total

  $          -      $          -      $          184      $          184   
   

 

 

     

 

 

     

 

 

     

 

 

 

For Level III assets measured at fair value on a recurring and non-recurring basis as of September 30, 2014 and June 30, 2014, the significant observable inputs used in the fair value measurements were as follows:

 

           Fair Value at                            
          

    September 30,    

2014

         

    June 30,    

2014

               Valuation
      Technique      
       Significant
    Unobservable    
Inputs
             Significant Unobservable      
Input Range (Weighted
Average)
    

 

 

     

 

    

 

    

 

           (Dollars in Thousands)                            

Impaired loans

   $          162          $             184             Appraisal of
collateral(1)
     Discounted
appraisal(2)
     0%/0%

When evaluating the value of the collateral on impaired loans, the Company will consider the age of the most current appraisal, and may discount the appraised value from 1.0% to 15.0%.

The Company classifies financial instruments in Level III of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation model for Level III financial instruments typically also rely on a number of inputs that are readily observable, either directly or indirectly.

 

 

  (1) 

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable.

  (2) 

Appraisals may be adjusted by management for qualitative factors such as economic conditions. The range and weighted average of appraisal adjustments are presented as a percentage of the appraisals.

 

 

32


Table of Contents
11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values are as follows:

 

               September 30, 2014                                      
           Carrying
Amount
        Fair
Value
          Level I         Level II         Level III  
           (Dollars in Thousands)  

FINANCIAL ASSETS

                    

Cash and cash equivalents

   $          1,533        $ 1,533      $          1,533        $ -        $ -   

Certificates of deposit

       350          350          350          -          -   

Investment securities – available for sale

       26,934          26,934          -                  26,934          -   

Investment securities – held to maturity

       36,283          36,661          -          36,661          -   

Mortgage-backed securities – held to maturity:

                    

Agency

       205,413          205,226          -          205,226          -   

Private-label

       2,380          2,869          -          -                  2,869   

Net loans receivable

       30,956          32,065          -          -          32,065   

Accrued interest receivable

       923          923          923          -          -   

FHLB stock

       6,909          6,909          6,909          -          -   

Bank owned life insurance

       4,171          4,171          4,171          -          -   

FINANCIAL LIABILITIES

                    

Deposits:

                    

Non-interest bearing deposits

   $          18,590        $ 18,590      $          18,590        $ -        $ -   

NOW accounts

       20,946          20,946          20,946          -          -   

Savings accounts

       43,756          43,756          43,756          -          -   

Money market accounts

       24,748          24,748          24,748          -          -   

Certificates of deposit

       33,644          33,587          -          -          33,587   

Advance payments by borrowers for taxes and insurance

       278          278          278          -          -   

FHLB long-term advances

       117,805          118,625          -          -          118,625   

FHLB short-term advances

       24,753          24,753          24,753          -          -   

Accrued interest payable

       168          168          168          -          -   

 

33


Table of Contents
                   June 30, 2014                                            
         Carrying
Amount
        Fair
Value
            Level I                  Level II                  Level III      
         (Dollars in Thousands)  

FINANCIAL ASSETS

                      

Cash and cash equivalents

   $     1,360      $     1,360      $     1,360      $      -      $      -   

Certificates of deposit

       598          598          598           -           -   

Investment securities – available for sale

       28,387          28,387          -           23,387           -   

Investment securities – held to maturity

       22,047          22,480          -           22,480           -   

Mortgage-backed securities – held to maturity:

                      

Agency

       212,781          212,054          -           212,054           -   

Private-label

       2,554          2,962          -           -           2,962   

Net loans receivable

       29,724          30,966          -           -           30,966   

Accrued interest receivable

       638          638          638           -           -   

FHLB stock

       6,440          6,440          6,440           -           -   

Bank owned life insurance

       4,136          4,136          4,136           -           -   

FINANCIAL LIABILITIES

                      

Deposits:

                      

Non-interest bearing deposits

   $     16,300      $     16,300      $     16,300      $      -      $      -   

NOW accounts

       21,077          21,077          21,077           -           -   

Savings accounts

       44,428          44,428          44,428           -           -   

Money market accounts

       24,730          24,730          24,730           -           -   

Certificates of deposit

       34,833          34,795          -           -           34,795   

Advance payments by borrowers for taxes and insurance

       491          491          491           -           -   

FHLB long-term advances

       111,696          112,518          -           -           112,518   

FHLB short-term advances

       23,626          23,626          23,626           -           -   

Accrued interest payable

       170          170          170           -           -   

Financial instruments are defined as cash, evidence of an ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from or to a second entity on potentially favorable or unfavorable terms.

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors, as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates, which are inherently uncertain, the resulting estimated values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in the assumptions on which the estimated values are based may have a significant impact on the resulting estimated values.

As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of the Company, are not considered financial instruments, but have value, this estimated fair value of financial instruments would not represent the full market value of the Company.

 

34


Table of Contents

Estimated fair values have been determined by the Company using the best available data, as generally provided in internal Savings Bank regulatory, or third party valuation reports, using an estimation methodology suitable for each category of financial instruments. The estimation methodologies used are as follows:

Cash and Cash Equivalents, Certificates of Deposit, Accrued Interest Receivable and Payable, and FHLB Short-term Advances

The fair value approximates the current carrying value.

Investment Securities, Mortgage-Backed Securities, and FHLB Stock

The fair value of investment and mortgage-backed securities is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. For discussion of valuation of private-label CMOs, see Note 8 “Unrealized Losses on Securities”. Since the FHLB stock is not actively traded on a secondary market and held exclusively by member financial institutions, the estimated fair market value approximates the carrying amount.

Net Loans Receivable, Deposits, and Advance Payments by Borrowers for Taxes and Insurance

Fair value for consumer mortgage loans is estimated using market quotes or discounting contractual cash flows for prepayment estimates. Discount rates were obtained from secondary market sources, adjusted to reflect differences in servicing, credit, and other characteristics.

The estimated fair values for consumer, fixed-rate commercial, and multi-family real estate loans are estimated by discounting contractual cash flows for prepayment estimates. Discount rates are based upon rates generally charged for such loans with similar credit characteristics.

The estimated fair value for nonperforming loans is the appraised value of the underlying collateral adjusted for estimated credit risk.

Demand, savings, money market deposit accounts, and advance payments by borrowers for taxes and insurance are reported at book value. The fair value of certificates of deposit is based upon the discounted value of the contractual cash flows. The discount rate is estimated using average market rates for deposits with similar average terms.

Bank Owned Life Insurance (“BOLI”)

The fair value of BOLI approximates the cash surrender value of the policies at these dates.

FHLB Long-term Advances

The fair values of fixed-rate advances are estimated using discounted cash flows, based on current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount on variable rate advances approximates their fair value.

Commitments to Extend Credit

These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, is not considered material for disclosure.

 

35


Table of Contents

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2014

FORWARD LOOKING STATEMENTS

In the normal course of business, we, in an effort to help keep our shareholders and the public informed about our operations, may from time to time issue or make certain statements, either in writing or orally, that are or contain forward-looking statements, as that term is defined in the U.S. federal securities laws. Generally, these statements relate to business plans or strategies, projected or anticipated benefits from acquisitions made by or to be made by us, projections involving anticipated revenues, earnings, profitability or other aspects of operating results or other future developments in our affairs or the industry in which we conduct business. Forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology such as “anticipated,” “believe,” “expect,” “intend,” “plan,” “estimate” or similar expressions.

Although we believe that the anticipated results or other expectations reflected in our forward-looking statements are based on reasonable assumptions, we can give no assurance that those results or expectations will be attained. Forward-looking statements involve risks, uncertainties and assumptions (some of which are beyond our control), and as a result actual results may differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from forward-looking statements include, but are not limited to, the following, as well as those discussed elsewhere herein:

 

   

our investments in our businesses and in related technology could require additional incremental spending, and might not produce expected deposit and loan growth and anticipated contributions to our earnings;

 

   

general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for loan losses or a reduced demand for credit or fee-based products and services;

 

   

changes in the interest rate environment could reduce net interest income and could increase credit losses;

 

   

the conditions of the securities markets could change, which could adversely affect, among other things, the value or credit quality of our assets, the availability and terms of funding necessary to meet our liquidity needs and our ability to originate loans and leases;

 

   

changes in the extensive laws, regulations and policies governing financial holding companies and their subsidiaries could alter our business environment or affect our operations;

 

   

the potential need to adapt to industry changes in information technology systems, on which we are highly dependent, could present operational issues or require significant capital spending;

 

   

competitive pressures could intensify and affect our profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments such as the internet or bank regulatory reform; and

 

   

acts or threats of terrorism and actions taken by the United States or other governments as a result of such acts or threats, including possible military action, could further adversely affect business and economic conditions in the United States generally and in our principal markets, which could have an adverse effect on our financial performance and that of our borrowers and on the financial markets and the price of our common stock.

 

36


Table of Contents

You should not put undue reliance on any forward-looking statements. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new or future events except to the extent required by federal securities laws.

GENERAL

WVS Financial Corp. (the “Company”) is the parent holding company of West View Savings Bank (“West View” or the “Savings Bank”). The Company was organized in July 1993 as a Pennsylvania-chartered unitary bank holding company and acquired 100% of the common stock of the Savings Bank in November 1993.

West View Savings Bank is a Pennsylvania-chartered, FDIC-insured stock savings bank conducting business from six offices in the North Hills suburbs of Pittsburgh. The Savings Bank converted from the mutual to the stock form of ownership in November 1993. The Savings Bank had no subsidiaries at September 30, 2014.

The operating results of the Company depend primarily upon its net interest income, which is determined by the difference between income on interest-earning assets, principally loans, mortgage-backed securities and investment securities, and interest expense on interest-bearing liabilities, which consist primarily of deposits and borrowings. The Company’s net income is also affected by its provision for loan losses, as well as the level of its non-interest income, including loan fees and service charges, and its non-interest expenses, such as compensation and employee benefits, income taxes, deposit insurance and occupancy costs.

FINANCIAL CONDITION

The Company’s assets totaled $317.2 million at September 30, 2014, as compared to $309.9 million at June 30, 2014. The $7.3 million or 2.4% increase in total assets was primarily comprised of a $14.2 million increase in investment securities – held to maturity, a $1.2 million increase in net loans receivable, a $469 thousand increase in FHLB stock, a $285 thousand increase in accrued interest receivable, and a $173 thousand increase in cash and cash equivalents, which were partially offset by a $7.5 million decrease in mortgage-backed securities - held to maturity, a $1.5 million decrease in investment securities – available for sale, and a $248 thousand decrease in certificates of deposit. The increase in investment securities held to maturity was primarily due to purchases of U.S. Government agency multiple step-up bonds totaling $18.3 million, which were partially offset by repayments on U.S. Government agency multiple step-up bonds and investment-grade corporate bonds totaling $3.8 million and $323 thousand, respectively. The U.S. Government agency bonds purchased were primarily used to offset maturities and repayments of mortgage-backed securities and to bolster interest revenue. The decrease in investment securities available for sale was primarily due to maturities and early redemptions of investment-grade corporate bonds totaling $1.2 million. The decrease in mortgage-backed securities held to maturity was primarily due to repayments on floating rate U.S. Government agency CMOs and floating rate private-label CMOs totaling $13.5 million and $235 thousand, respectively. See “Asset and Liability Management”.

The Company’s total liabilities increased $7.3 million or 2.6% to $285.5 million as of September 30, 2014 from $278.2 million as of June 30, 2014. The $7.3 million increase in total liabilities was primarily comprised of a $6.1 million or 5.5% increase in FHLB long-term variable rate advances, a $1.1 million or 4.8% increase in FHLB short-term advances and a $103 thousand or 0.1% increase in total deposits, which were partially offset by a $29 thousand or 3.5% decrease in other liabilities. The increases in FHLB short-term and long-term advances were primarily a result of funding needs for the purchase of investment securities. The increase in total deposits was primarily attributable to an increase in non-interest bearing accounts of $2.3 million, which was partially offset by decreases in time deposits, savings accounts, advance payments by borrowers for real estate taxes and NOW accounts of $1.2 million, $672 thousand, $213 thousand, and $131 thousand, respectively. See also “Asset and Liability Management”.

Total stockholders’ equity decreased $12 thousand or 0.04% to $31.78 million as of September 30, 2014, from $31.79 million as of June 30, 2014. The decrease was primarily attributable to the purchase of

 

37


Table of Contents

$156 thousand in unallocated ESOP shares, $82 thousand of cash dividends paid on the Company’s common stock, $72 thousand paid for the acquisition of Treasury stock, and other comprehensive loss of $1 thousand, which were partially offset by Company net income of $299 thousand. The other comprehensive loss was primarily attributable to $41 thousand (net of tax effect) of unrealized holding losses on the Company’s available for sale investment portfolio, which was partially offset by a $40 thousand (net of tax effect) reversal of unrealized holding losses on three private-label CMOs with previously identified OTTI.

RESULTS OF OPERATIONS

General.   WVS reported net income of $299 thousand or $0.15 earnings per share (basic and diluted) for the three months ended September 30, 2014. Net income increased by $89 thousand or 42.4% and earnings per share (basic and diluted) increased $0.05 or 50.0% for the three months ended September 30, 2014, when compared to the same period in 2013. The increase in net income for the three months ended September 30, 2014 was primarily attributable to a $174 thousand increase in net interest income, a $9 thousand decrease in provisions for loan losses, and a $1 thousand increase in non-interest income, which were partially offset by a $56 thousand increase in non-interest expense and a $39 thousand increase in income tax expense.

Net Interest Income.  The Company’s net interest income increased by $174 thousand or 16.4% for the three months ended September 30, 2014, when compared to the same period in 2013. The increase in net interest income is attributable to a $118 thousand increase in interest income, and a $56 thousand decrease in interest expense. The increase in interest income was primarily due to higher average balances and higher yields earned on the Company’s mortgage-backed securities portfolio, and a higher yield earned on FHLB stock, which was partially offset by lower average balances on the Company’s investment and loan portfolios, during the quarter ended September 30, 2014, when compared to the same period in 2013. The decrease in interest expense was primarily attributable to lower average balances of FHLB short-term advances and time deposits, and lower rates paid on FHLB long-term advances and time deposits during the three months ended September 30, 2014, which were partially offset by higher rates paid on FHLB short-term advances and higher average balances of FHLB long-term advances, when compared to the same period in 2013.

Interest Income.  Interest income on mortgage-backed securities increased $322 thousand or 67.9% for the three months ended September 30, 2014, when compared to the same period in 2013. The increase for the three months ended September 30, 2014 was primarily attributable to a $63.0 million increase in the average balance of U.S. Government agency mortgage-backed securities outstanding, a 24 basis point increase in the weighted average yield earned on U.S. Government agency mortgage-backed securities, and a 6 basis point increase in the weighted average yield earned on private-label mortgage-backed securities, which were partially offset by an $879 thousand decrease in the average balance of private-label mortgage-backed securities outstanding, for the three months ended September 30, 2014, when compared to the same period in 2013. The decrease in the average balances of private-label mortgage-backed securities during the three months ended September 30, 2014 was attributable to principal paydowns of private-label mortgage-backed securities during the period. The increase in the average balance of U.S. Government agency mortgage-backed securities for the three months ended September 30, 2014, was primarily attributable to purchases of U.S. Government agency mortgage-backed securities totaling $75.6 million during the twelve months, which was partially offset by repayments of $27.8 million on the U.S. Government agency mortgage-backed securities portfolio during the twelve months ended September 30, 2014. The mortgage-backed securities purchased during this period were primarily used to offset maturities and early calls of securities within the investment portfolio and to bolster interest revenue.

Interest income on FHLB stock increased $41 thousand or 315.4% for the three months ended September 30, 2014, when compared to the same period in 2013. The increase in dividends on FHLB stock for the three months ended September 30, 2014 was attributable to a 242 basis point increase in the yield earned on FHLB stock, and an $830 thousand increase in the average balance of FHLB stock held during the three months ended September 30, 2014, when compared to the same period in 2013.

Interest income on investment securities decreased $203 thousand or 40.8% for the three months ended September 30, 2014, respectively, when compared to the same period in 2013. The decrease for the

 

38


Table of Contents

three months ended September 30, 2014 was primarily attributable to a $37.8 million decrease in the average balance of investment securities outstanding, and a 1 basis point decrease in the weighted average yield on investment securities, when compared to the same period in 2013.

Interest income on net loans receivable decreased $41 thousand or 9.9% for the three months ended September 30, 2014, when compared to the same period in 2013. The decrease for the three months ended September 30, 2014 was primarily attributable to a $3.5 million decrease in the average balance of net loans receivable outstanding, which was partially offset by an increase of 3 basis points in the weighted average yield earned on net loans receivable for the three months ended September 30, 2014, when compared to the same period in 2013. The decrease in the average balance of loans outstanding was primarily attributable to lower construction and mortgage loans outstanding.

Interest income on FDIC insured bank certificates of deposit decreased $1 thousand or 33.3% for the three months ended September 30, 2014, when compared to the same period in 2013. The decrease for the three months ended September 30, 2014 was primarily attributable to a 23 basis point decrease in the weighted average yield earned, and a $148 thousand decrease in the average portfolio balance of certificates of deposit, when compared to the same period in 2013. The certificates have remaining maturities ranging from twelve to one hundred three months. Due to decreases in market yields in this investment sector, the Company has decided to limit reinvestments in certificates of deposit and to redeploy maturities and early issuer redemptions to other investment portfolio segments.

Interest Expense.    Interest paid on FHLB short-term advances decreased $37 thousand or 68.5% for the three months ended September 30, 2014, when compared to the same period in 2013. The decrease for the three months ended September 30, 2014 was primarily attributable to a $71.5 million decrease in the average balance of FHLB short-term advances outstanding, which was partially offset by a 7 basis point increase in the weighted average rate paid on FHLB short-term advances, for the three months ended September 30, 2014, when compared to the same period in 2013.

Interest expense on deposits and escrows decreased $20 thousand or 25.3% for the three months ended September 30, 2014, when compared to the same period in 2013. The decrease in interest expense on deposits for the three months ended September 30, 2014 was primarily attributable to a 10 basis point decrease in the weighted average rate paid on time deposits, and a 3 basis point decrease in the weighted average rate paid on savings accounts, and a $5.3 million decrease in the average balance of time deposits for the three months ended September 30, 2014, when compared to the same period in 2013.

Interest paid on FHLB long-term advances increased $1 thousand or 0.5% for the three months ended September 30, 2014, when compared to the same period in 2013. The increase for the three months ended September 30, 2014 was primarily attributable to a $101.8 million increase in the average balance of FHLB long-term variable-rate advances, which was partially offset by a $5.0 million decrease in the average balance of FHLB long-term fixed-rate advances, and a 28 basis point decrease in the weighted average rate paid on FHLB long-term fixed-rate advances, for the three months ended September 30, 2014, when compared to the same period in 2013.

Provision for Loan Losses.    A provision for loan losses is charged to earnings (while credit provision for loan losses are accretive to earnings) to maintain the total allowance at a level considered adequate by management to absorb potential losses in the portfolio. Management’s determination of the adequacy of the allowance is based on an evaluation of the portfolio considering past experience, current economic conditions, volume, growth and composition of the loan portfolio, and other relevant factors.

Provisions for loan losses decreased $9 thousand for the three months ended September 30, 2014, when compared to the same period in 2013. The decrease in the provisions for loan losses for the three months ended September 30, 2014, was primarily attributable to changes in the Company’s performing and non-performing loan segments, when compared to the same period in 2013. At September 30, 2014, the Company’s total allowance for loan losses amounted to $237 thousand or 0.8% of the Company’s total loan portfolio, as compared to $234 thousand or 0.8% at June 30, 2014. At September 30, 2014, the Company’s non-performing loans totaled $464 thousand as compared to $607 thousand at June 30, 2014.

 

39


Table of Contents

Non-Interest Income.  Non-interest income increased by $1 thousand or 0.7% for the three months ended September 30, 2014, when compared to the same period in 2013. The increase for the three months ended September 30, 2014 was primarily attributable to a $9 thousand increase in earnings on bank-owned life insurance and a $3 thousand increase in other non-interest income, which were partially offset by an $11 thousand decrease in service charges on deposits for the three months ended September 30, 2014, when compared to the same period in 2013.

Non-Interest Expense.  Non-interest expense increased $56 thousand or 6.5% for the three months ended September 30, 2014, when compared to the same period in 2013. The increase for the three months ended September 30, 2014 was principally attributable to a $22 thousand increase in employee related expense, a $17 thousand increase in provisions for off-balance sheet (loan origination) commitments, an $11 thousand increase in legal expenses, and a $4 thousand increase in equipment depreciate expense, when compared to the same period in 2013.

Income Tax Expense.  Income tax expense increased $39 thousand for the three months ended September 30, 2014, when compared to the same period in 2013. The increase for the three months ended September 30, 2014 was primarily due to higher levels of taxable income, during the three months ended September 30, 2014, when compared to the same period in 2013.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities totaled $4 thousand during the three months ended September 30, 2014. Net cash provided by operating activities was primarily comprised of net income of $299 thousand, $120 thousand of amortization of investment premiums, a $37 thousand increase in accrued income taxes, and $20 thousand of depreciation expense, which were partially offset by a $285 thousand increase in accrued interest receivable, and $35 thousand of earnings on bank owned life insurance.

Funds used for investing activities totaled $6.8 million during the three months ended September 30, 2014. Primary uses of funds during the three months ended September 30, 2014 included purchases of investment securities held to maturity totaling $18.3 million, purchases of mortgage-backed securities held to maturity totaling $6.1 million, an increase in net loans receivable totaling $1.4 million, net purchases of FHLB stock totaling $470 thousand, and acquisitions of equipment totaling $46 thousand. Primary sources of funds during the three months ended September 30, 2014 included proceeds from mortgage-backed and investment securities in the held-to-maturity portfolio totaling $13.7 million and $4.2 million, respectively, proceeds from investment securities in the available-for-sale portfolio totaling $1.2 million, and maturities of certificates of deposits totaling $348 thousand. The mortgage-backed securities repayments were primarily used to offset purchases of securities in the investment portfolio.

Funds provided by financing activities totaled $6.9 million for the three months ended September 30, 2014. The primary sources included a $6.1 million increase in FHLB long-term variable rate advances, a $1.5 million increase in transaction and savings accounts, and a $1.1 million increase in FHLB short-term advances, which were partially offset by a $1.2 million decrease in retail certificates of deposit, a $321 thousand decrease in escrow accounts, $156 thousand in purchases of unallocated ESOP shares, $82 thousand in cash dividends paid on the Company’s common stock, and $72 thousand in purchases of treasury stock. The increase in FHLB short-term and long-term variable rate borrowings were primarily a result of funding needs for the purchase of investment and mortgage-backed securities. Management believes that a significant portion of our local maturing deposits will remain with the Company.

The Company’s primary sources of funds are deposits, amortization, repayments and maturities of existing loans, mortgage-backed securities and investment securities, funds from operations, and funds obtained through FHLB advances and other borrowings. Certificates of deposit scheduled to mature in one year or less at September 30, 2014 totaled $25.0 million.

Historically, the Company used its sources of funds primarily to meet its ongoing commitments to pay maturing savings certificates and savings withdrawals, fund loan commitments and maintain a substantial portfolio of investment securities. At September 30, 2014, total approved loan commitments outstanding were $4.4 million. At the same date, commitments under unused lines of credit amounted to $5.8 million and

 

40


Table of Contents

the unadvanced portion of construction loans approximated $4.4 million. The Company has been able to generate sufficient cash through the retail deposit market, its traditional funding source, and through FHLB advances, and other borrowings, to provide the cash utilized in investing activities. The Company’s available for sale segment of the investment portfolio totaled $26.9 million at September 30, 2014. Management believes that the Company currently has adequate liquidity available to respond to liquidity demands.

On October 28, 2014, the Company’s Board of Directors declared a cash dividend of $0.04 per share payable November 20, 2014, to shareholders of record at the close of business on November 10, 2014. Dividends are subject to determination and declaration by the Board of Directors, which take into account the Company’s financial condition, statutory and regulatory restrictions, general economic conditions and other factors. There can be no assurance that dividends will in fact be paid on the Common Stock in future periods or that, if paid, such dividends will not be reduced or eliminated.

As of September 30, 2014, WVS Financial Corp. exceeded all regulatory capital requirements and maintained Tier I and total risk-based capital equal to $32.2 million or 29.4% and $32.5 million or 29.6% respectively, of total risk-weighted assets, and Tier I leverage capital of $32.2 million or 10.1% of average quarterly assets.

Nonperforming assets consist of nonaccrual loans and real estate owned. A loan is placed on nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but uncollected interest is deducted from interest income. The Company normally does not accrue interest on loans past due 90 days or more, however, interest may be accrued if management believes that it will collect on the loan.

The Company’s nonperforming assets at September 30, 2014 totaled $464 thousand or 0.2% of total assets as compared to $607 thousand or 0.2% of total assets at June 30, 2014. Nonperforming assets at September 30, 2014 consisted of: one single-family real estate loan totaling $265 thousand, one home equity line of credit totaling $150 thousand, and one commercial real estate loan totaling $49 thousand. The loans are in various stages of collection activity.

The $143 thousand decrease in nonperforming assets during the three months ended September 30, 2014 was primarily attributable to the transfer to real estate owned and subsequent sale of one non-accrual single-family construction loan totaling $139 thousand, and the principal repayments on one non-accrual single-family real estate loan totaling $3 thousand.

During the three months ended September 30, 2014, the Company collected $9 thousand of interest income on non-accrual loans. Approximately $8 thousand of interest income would have been recorded during the three months ended September 30, 2014, on non-accrual loans if such loans had been current according to the original loan agreements for the entire periods. These amounts were not included in the Company’s interest income for the three months ended September 30, 2014. The Company continues to work with the borrowers in an attempt to cure the defaults and is also pursuing various legal avenues in order to collect on these loans.

 

41


Table of Contents

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ASSET AND LIABILITY MANAGEMENT

The Company’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of the Company’s transactions are denominated in US dollars with no specific foreign exchange exposure. The Savings Bank has no agricultural loan assets and therefore would not have a specific exposure to changes in commodity prices. Any impacts that changes in foreign exchange rates and commodity prices would have on interest rates are assumed to be exogenous and will be analyzed on an ex post basis.

Interest rate risk (“IRR”) is the exposure of a banking organization’s financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value, however excessive levels of IRR can pose a significant threat to the Company’s earnings and capital base. Accordingly, effective risk management that maintains IRR at prudent levels is essential to the Company’s safety and soundness.

Evaluating a financial institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process used to control IRR and the organization’s quantitative level of exposure. When assessing the IRR management process, the Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain IRR at prudent levels with consistency and continuity. Evaluating the quantitative level of IRR exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity, and, where appropriate, asset quality.

The Federal Open Market Committee (“Committee” or “FOMC”) issued a press release on October 29, 2014 which announced the Committee’s current assessments of the U.S. economy and the FOMC’s decision to conclude its Asset Purchase Program (“Program”). The Program included purchases of U.S. Government bonds and U.S. Government Agency mortgage-backed securities. The Committee further decided to maintain its present policy of reinvesting principal payments from its securities holdings and to rollover maturing U.S. Treasury securities at auction. The FOMC believes that the policy of keeping its holdings of longer-term securities at sizeable levels should help maintain accommodative financial conditions.

The Committee further stated that it will likely be appropriate to maintain the 0 to  14 percent target range for the federal funds rate for a considerable time following the end of its Asset Purchase Program – especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal and provided that the longer-term inflation expectations remain well anchored.

During the three months ended September 30, 2014, the Company continued to adjust its asset/liability management tactics in two ways. First, the Company increased total assets by about $7.3 million while continuing to manage its Tier 1 capital. The primary segments of asset growth for the three months ended September 30, 2014 were: investment securities – held to maturity, $14.2 million, and net loans receivable - $1.2 million, which were partially offset by decreases in mortgage-backed securities held to maturity - $7.5 million, and investment securities – available for sale - $1.5 million. Second, we increased our FHLB long-term variable rate advance balances to $105.3 million at September 30, 2014 as compared to $99.2 million at June 30, 2014. $100.3 million of the FHLB long-term variable rate advances float on a monthly basis based upon the one-month LIBOR, while $5.0 million of the FHLB long-term variable rate advances float on a quarterly basis based upon the three-month LIBOR. The Company believes that these FHLB long-term variable rate advances complement our holdings of floating rate MBS and provide an attractive funding spread.

 

42


Table of Contents

Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest-rate changes. For example, assume that an institution’s assets carry intermediate- or long-term fixed rates and that those assets were funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution’s profits could decrease on existing assets because the institution will either have lower net interest income or, possibly, net interest expense. Similar risks exist when assets are subject to contractual interest-rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate environment.

During the fiscal years 2013, 2014 and into fiscal year 2015, intermediate and long-term market interest rates fluctuated considerably. Many central banks, including the Federal Reserve, continued above normal levels of monetary accommodation including quantitative easing and targeted asset purchase programs. The desired outcomes of these programs are to stimulate aggregate demand, reduce high levels of unemployment and to further lower market interest rates.

The table below shows the targeted federal funds rate and the benchmark two and ten year treasury yields at quarter ends beginning in June 30, 2007, and extending through September 30, 2014. The difference in yields on the two year and ten year Treasury’s is often used to determine the steepness of the yield curve and to assess the term premium of market interest rates.

 

         

Yield on:

    
    

Targeted
      Federal Funds      

 

  

Two (2)

Year
      Treasury      

  

Ten (10)

Year
      Treasury      

  

Shape of Yield
Curve

 

June 30, 2007

   5.25%    4.87%    5.03%    Slightly Positive

September 30, 2007

   4.75%    3.97%    4.59%    Moderately Positive

December 31, 2007

   4.25%    3.05%    4.04%    Positive

March 31, 2008

   2.25%    1.62%    3.45%    Positive

June 30, 2008

   2.00%    2.63%    3.99%    Positive

September 30, 2008

   2.00%    2.00%    3.85%    Positive

December 31, 2008

   0.00% to 0.25%    0.76%    2.25%    Positive

March 31, 2009

   0.00% to 0.25%    0.81%    2.71%    Positive

June 30, 2009

   0.00% to 0.25%    1.11%    3.53%    Positive

September 30, 2009

   0.00% to 0.25%    0.95%    3.31%    Positive

December 31, 2009

   0.00% to 0.25%    1.14%    3.85%    Positive

March 31, 2010

   0.00% to 0.25%    1.02%    3.84%    Positive

June 30, 2010

   0.00% to 0.25%    0.61%    2.97%    Positive

September 30, 2010

   0.00% to 0.25%    0.42%    2.53%    Positive

December 31, 2010

   0.00% to 0.25%    0.61%    3.30%    Positive

March 31, 2011

   0.00% to 0.25%    0.80%    3.47%    Positive

June 30, 2011

   0.00% to 0.25%    0.45%    3.18%    Positive

September 30, 2011

   0.00% to 0.25%    0.25%    1.92%    Positive

December 31, 2011

   0.00% to 0.25%    0.25%    1.89%    Positive

March 31, 2012

   0.00% to 0.25%    0.33%    2.23%    Positive

June 30, 2012

   0.00% to 0.25%    0.33%    1.67%    Positive

September 30, 2012

   0.00% to 0.25%    0.23%    1.65%    Positive

December 31, 2012

   0.00% to 0.25%    0.24%    1.85%    Positive

March 31, 2013

   0.00% to 0.25%    0.25%    1.87%    Positive

June 30, 2013

   0.00% to 0.25%    0.36%    2.52%    Positive

 

43


Table of Contents

September 30, 2013

   0.00% to 0.25%    0.33%    2.64%    Positive

December 31, 2013

   0.00% to 0.25%    0.30%    2.84%    Positive

March 31, 2014

   0.00% to 0.25%    0.44%    2.73%    Positive

June 30, 2014

   0.00% to 0.25%    0.47%    2.53%    Positive

September 30, 2014

   0.00% to 0.25%    0.58%    2.52%    Positive

These changes in intermediate and long-term market interest rates, the changing slope of the Treasury yield curve, and higher levels of interest rate volatility have impacted prepayments on the Company’s loan, investment and mortgage-backed securities portfolios. Principal repayments on the Company’s loan, investment, and mortgage-backed securities portfolios for the three months ended September 30, 2014, totaled $2.1 million, $5.4 million, and $13.7 million, respectively. Despite stagnant global interest rates and Treasury yields the Company continued to grow its balance sheet and used proceeds from maturities and Corporate calls of bonds, repayments on its mortgage-backed securities, and borrowings to purchase U.S. Government agency bonds, and U.S. Government agency CMOs.

During the three months ended September 30, 2014, the Company increased its portfolio of: single-family mortgages by approximately $930 thousand, construction loans by $630 thousand, home equity loans by $187 thousand and land acquisition and development loans by $37 thousand, which were partially offset by a $465 thousand decrease in commercial real estate loans, and a $46 thousand decrease in multi-family real estate loans. The Company began to more aggressively pursue 15, 20, 30 year fixed-rate single-family residential real estate loans. The Company also makes available for origination residential mortgage loans with interest rates which adjust pursuant to a designated index, although customer acceptance has been somewhat limited in the Savings Bank’s market area. We expect that the housing market will continue to be weak throughout fiscal 2015. The Company will continue to selectively offer commercial real estate, land acquisition and development, and shorter-term construction loans (primarily on residential properties), and commercial loans on business assets to partially increase interest income while managing credit and interest rate risk. The Company also offers higher yielding multi-family loans to existing, and seasoned prospective, customers.

During the three months ended September 30, 2014, principal investment purchases were comprised of: $18.4 million of callable U.S. Government agency multiple step-up bonds with initial lock out periods from 1 to 3 months and with a weighted average yield to first call of 4.25% and a weighted average yield to maturity of 3.66%. Single step-up bonds have one “step” or increase in coupon. Multiple step-up bonds have more than one “step” or increase in coupon. The Company also purchased $6.1 million of floating-rate U.S. Government agency CMOs with a weighted average yield of 2.01%. All of the purchases were classified as held to maturity for accounting purposes. The Company believes that the purchases will earn a return above the Company’s cost of funds.

Major investment proceeds received during the three months ended September 30, 2014 were: U.S. Government agency multi step-up bonds - $3.8 million with a weighted average yield of 1.50%; investment grade corporate bonds - $1.2 million with a weighted average yield of 1.30%; and investment grade corporate utility first mortgage bonds - $323 thousand with a weighted average yield of 5.83%.

As of September 30, 2014, the implementation of these asset and liability management initiatives resulted in the following:

 

  1)

$209.8 million or 66.1% of the Company’s assets were comprised of floating rate investment and mortgage-backed securities. Of this $209.8 million, approximately $207.5 million float on a monthly basis based upon changes in the one-month London Interbank Offered Rate (LIBOR) and about $2.0 million reprice on a quarterly basis based upon the three-month LIBOR.

  2)

$207.8 million or 76.7% of the Company’s total investment portfolio was comprised of floating rate mortgage-backed securities (including collateralized mortgage obligations – “CMOs”) that reprice on a monthly basis;

 

44


Table of Contents
  3)

$27.6 million or 10.2% of the Company’s investment portfolio consisted of investment grade fixed-rate corporate bonds with remaining maturities as follows: 3 months or less - $6.0 million or 21.8%; 3 – 12 months - $6.2 million or 22.3%; 1 – 2 years - $12.1 million or 43.7%; 2 – 3 years - $930 thousand or 3.4% and 3 – 5 years - $2.4 million or 8.8%;

  4)

$31.4 million or 11.6% of the Company’s investment portfolio was comprised of callable U.S. Government Agency multiple step-up bonds which are callable in less than 3 months. These bonds may or may not actually be redeemed prior to maturity (i.e. called) depending upon the level of market interest rates at their respective call dates;

  5)

$26.9 million or 8.5% of the Company’s assets were comprised of investment securities classified as available for sale;

  6)

An aggregate of $11.3 million or 36.1% of the Company’s net loan portfolio had adjustable interest rates or maturities of less than 12 months;

  7)

Approximately $100.3 million of the Company’s total FHLB long-term advances of $117.8 million are comprised of floating rate instruments which adjust on a monthly basis based upon changes in the one-month LIBOR;

  8)

Approximately $5.0 million of the Company’s total FHLB long-term advances of $117.8 million are comprised of floating rate instruments which adjust on a quarterly basis based upon changes in the three-month LIBOR; and

  9)

The maturity distribution of the Company’s borrowings is as follows: 3 months or less - $24.8 million or 17.4%; 2 – 3 years - $101.57 million or 71.3%; and over 3 years - $16.1 million or 11.3%.

The effect of interest rate changes on a financial institution’s assets and liabilities may be analyzed by examining the “interest rate sensitivity” of the assets and liabilities and by monitoring an institution’s interest rate sensitivity “gap”. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within a given time period. A gap is considered positive (negative) when the amount of rate sensitive assets (liabilities) exceeds the amount of rate sensitive liabilities (assets). During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income. During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income.

As part of its asset/liability management strategy, the Company maintained an asset sensitive financial position due to unusually low market interest rates. An asset sensitive financial position may benefit earnings during a period of rising interest rates and reduce earnings during a period of declining interest rates.

The following table sets forth certain information at the dates indicated relating to the Company’s interest-earning assets and interest-bearing liabilities which are estimated to mature or are scheduled to reprice within one year.

 

         September 30,    
2014
         June 30,  
                    2014                             2013           
                (Dollars in Thousands)             

Interest-earning assets maturing or repricing within one year

         $267,180               $256,902               $236,125   

Interest-bearing liabilities maturing or repricing within one year

     215,448           209,986           188,841   
  

 

 

      

 

 

      

 

 

 

Interest sensitivity gap

         $  51,732               $  46,916               $  47,284   
  

 

 

      

 

 

      

 

 

 

Interest sensitivity gap as a percentage of total assets

     16.31        15.14        16.44

Ratio of assets to liabilities maturing or repricing within one year

     124.01        122.34        125.04

 

45


Table of Contents

During the three months ended September 30, 2014, the Company managed its one-year interest sensitivity gap by: (1) purchasing $6.1 million of floating-rate U.S. Government agency CMOs which reprice monthly; (2) increasing by approximately $7.2 million the Company’s borrowings that mature or reprice within one year. All of the referenced purchases were designated as held to maturity for accounting purposes. At September 30, 2014, investments available for sale totaled $26.9 million or 8.5% of total assets.

The following table illustrates the Company’s estimated stressed cumulative repricing gap – the difference between the amount of interest-earning assets and interest-bearing liabilities expected to reprice at a given point in time – at September 30, 2014. The table estimates the impact of an upward or downward change in market interest rates of 100 and 200 basis points.

Cumulative Stressed Repricing Gap

 

       Month 3           Month 6           Month 12           Month 24           Month 36           Month 60           Long Term          
     (Dollars in Thousands)      

Base Case Up 200 bp

  

             
Cumulative
Gap ($’s)
     $61,255        $43,795        $49,931        $57,041        $44,126        $39,288        $26,213     

% of Total
Assets

     19.3     13.8     15.7     18.0     13.9     12.4     8.3  

Base Case Up 100 bp

  

             
Cumulative
Gap ($’s)
     $61,498        $44,258        $50,760        $58,352        $45,720        $40,942        $26,213     

% of Total
Assets

     19.4     14.0     16.0     18.4     14.4     12.9     8.3  

Base Case No Change

  

             
Cumulative
Gap ($’s)
     $61,795        $44,814        $51,732        $59,832        $47,433        $42,432        $26,213     

% of Total
Assets

     19.5     14.1     16.3     18.9     15.0     13.4     8.3  

Base Case Down 100 bp

  

             
Cumulative
Gap ($’s)
     $62,064        $45,318        $52,600        $61,092        $48,814        $43,586        $26,213     

% of Total
Assets

     19.6     14.3     16.6     19.3     15.4     13.7     8.3  

Base Case Down 200 bp

  

             
Cumulative
Gap ($’s)
     $62,260        $45,677        $53,198        $61,923        $49,671        $44,222        $26,213     

% of Total
Assets

     19.6     14.4     16.8     19.5     15.7     13.9     8.3  

The Company utilizes an income simulation model to measure interest rate risk and to manage interest rate sensitivity. The Company believes that income simulation modeling may enable the Company to better estimate the possible effects on net interest income due to changing market interest rates. Other key model parameters include: estimated prepayment rates on the Company’s loan, mortgage-backed securities and investment portfolios; savings decay rate assumptions; and the repayment terms and embedded options of the Company’s borrowings.

 

46


Table of Contents

The following table presents the simulated impact of a 100 and 200 basis point upward or downward (parallel) shift in market interest rates on net interest income, return on average equity, return on average assets and the market value of portfolio equity at September 30, 2014. This analysis was done assuming that the interest-earning assets will average approximately $330 million and $360 million over a projected twelve and twenty-four month period, respectively, for the estimated impact on change in net interest income, return on average equity and return on average assets. The estimated changes in market value of equity were calculated using balance sheet levels at September 30, 2014. Actual future results could differ materially from our estimates primarily due to unknown future interest rate changes and the level of prepayments on our investment and loan portfolios and future FDIC regular and special assessments.

Analysis of Sensitivity to Changes in Market Interest Rates

 

    Twelve Month Forward Modeled Change in Market Interest Rates  
    September 30, 2014     September 30, 2015  

  Estimated impact on:      

      -200             -100                 0                 +100             +200             -200             -100                 0                 +100             +200      

Change in net interest income

    -6.2     -4.4