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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, 2015

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 9, 2015: 2,039,129 shares of Common Stock, $.01 par value.

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WVS FINANCIAL CORP. AND SUBSIDIARY

INDEX

 

PART I.				Financial Information		Page
Item 1.				Financial Statements
				Consolidated Balance Sheet as of September 30, 2015 and June 30, 2015 (Unaudited)		3
				Consolidated Statement of Income for the Three Months Ended September 30, 2015 and 2014 (Unaudited)		4
				Consolidated Statement of Comprehensive Income for the Three Months Ended September 30, 2015 and 2014 (Unaudited)		5
				Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended September 30, 2015 (Unaudited)		6
				Consolidated Statement of Cash Flows for the Three Months Ended September 30, 2015 and 2014 (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, 2015		41
Item 3.				Quantitative and Qualitative Disclosures about Market Risk		47
Item 4.				Controls and Procedures		53
PART II.				Other Information		Page
Item 1.				Legal Proceedings		54
Item 1A.				Risk Factors		54
Item 2.				Unregistered Sales of Equity Securities and Use of Proceeds		54
Item 3.				Defaults Upon Senior Securities		55
Item 4.				Mine Safety Disclosures		55
Item 5.				Other Information		55
Item 6.				Exhibits		56
				Signatures		57

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

(In thousands)

 

		September 30, 2015				June 30, 2015
Assets
Cash and due from banks			$      1,575				$      1,839
Interest-earning demand deposits			394				1,734
Total cash and cash equivalents			1,969				3,573
Certificates of deposit			350				350
Investment securities available-for-sale (amortized cost of $89,238 and $66,968)			89,199				66,916
Investment securities held-to-maturity (fair value of $25,592 and $36,979)			25,123				36,618
Mortgage-backed securities held-to-maturity (fair value of $152,281 and $163,265)			151,428				162,639
Net loans receivable (allowance for loan losses of $323 and $304)			52,543				46,163
Accrued interest receivable			1,387				1,198
Federal Home Loan Bank (FHLB) stock, at cost			6,482				6,619
Premises and equipment, net			611				630
Bank owned life insurance			4,310				4,276
Deferred tax assets (net)			495				524
Other assets			192				210
TOTAL ASSETS			$  334,089				$  329,716
Liabilities and Stockholders’ Equity
Liabilities:
Deposits
Non-interest-bearing accounts			$    16,512				$    17,806
NOW accounts			20,205				20,238
Savings accounts			44,686				45,092
Money market accounts			24,183				23,601
Certificates of deposit			30,059				31,326
Advance payments by borrowers for taxes and insurance			853				865
Total deposits			136,498				138,928
Federal Home Loan Bank advances: long-term – fixed rate			12,500				12,500
Federal Home Loan Bank advances: long-term – variable rate			105,305				105,305
Federal Home Loan Bank advances: short-term			38,392				37,830
Other short-term borrowings			7,950				-
Accrued interest payable			164				156
Other liabilities			969				2,954
TOTAL LIABILITIES			301,778				297,673
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 shares issued; 2,039,129 and 2,040,719 shares outstanding			38				38
Additional paid-in capital			21,485				21,485
Treasury stock: 1,766,507 and 1,764,917 shares at cost, respectively			(26,905	)			(26,886	)
Retained earnings, substantially restricted			39,583				39,353
Accumulated other comprehensive loss			(417	)			(461	)
Unallocated Employee Stock Ownership Plan (“ESOP”) shares			(1,473	)			(1,486	)
TOTAL STOCKHOLDERS’ EQUITY			32,311				32,043
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY			$  334,089				$  329,716

See accompanying notes to unaudited consolidated financial statements.

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

(In thousands, except per share data)

 

		Three Months Ended     September 30,
		2015				2014
INTEREST AND DIVIDEND INCOME:
Loans, including fees			$          522				$          373
Investment securities—taxable			507				295
Mortgage-backed securities			514				796
Certificates of deposit			2				2
FHLB Stock			92				54
Total interest and dividend income			1,637				1,520
INTEREST EXPENSE:
Deposits			52				59
Federal Home Loan Bank advances – long-term – fixed rate			142				142
Federal Home Loan Bank advances – long-term – variable rate			83				70
Federal Home Loan Bank advances – short-term			28				17
Other short-term borrowings			6				-
Total interest expense			311				288
NET INTEREST INCOME			1,326				1,232
PROVISION FOR LOAN LOSSES			19				3
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			1,307				1,229
NON-INTEREST INCOME:
Service charges on deposits			43				41
Earnings on Bank Owned Life Insurance			34				35
Other			62				62
Total non-interest income			139				138
NON-INTEREST EXPENSE:
Salaries and employee benefits			544				533
Occupancy and equipment			84				77
Data processing			59				59
Correspondent bank service charges			9				10
Federal deposit insurance premium			50				46
Other			197				190
Total non-interest expense			943				915
INCOME BEFORE INCOME TAXES			503				452
INCOME TAX EXPENSE			192				153
NET INCOME			$          311				$          299
EARNINGS PER SHARE:
Basic			$         0.16				$         0.15
Diluted			$         0.16				$         0.15
AVERAGE SHARES OUTSTANDING:
Basic			1,909,262				1,959,381
Diluted			1,909,262				1,959,381

See accompanying notes to unaudited consolidated financial statements.

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

(In thousands)

 

		Three Months Ended September 30,
		2015				2014
NET INCOME		$	311			$	299
OTHER COMPREHENSIVE INCOME (LOSS)
Investment securities available for sale not other-than-temporarily impaired:
Gains (losses) arising during the year			12				(62	)
Less: Income tax effect			4				(21	)
			8				(41	)
Unrealized holding gains (losses) on investment securities available for sale not other-than-temporarily impaired, net of tax			8				(41	)
Investment securities held to maturity other-than-temporarily impaired:
Accretion of other comprehensive loss on other-than-temporarily impaired securities held to maturity			54				61
Less: Income tax effect			18				21
			36				40
Unrealized holding gains on other-than-temporarily impaired securities held to maturity, net of tax			36				40
Other comprehensive income (loss)			44				(1	)
COMPREHENSIVE INCOME		$	355			$	298

See accompanying notes to unaudited consolidated financial statements.

 

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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, 2015			$    38				$ 21,485				$(26,886	)			$ 39,353				$ (461	)			$    (1,486	)			$32,043
Net income															311												311
Other comprehensive income																			44								44
Purchase of treasury stock (1,590 shares)											(19	)															(19	)
Release of ESOP shares																							13				13
Cash dividends declared ($0.04 per share)															(81	)											(81	)
Balance September 30, 2015			$    38				$ 21,485				$(26,905	)			$ 39,583				$ (417	)			$ (1,473	)			$32,311

See accompanying notes to unaudited consolidated financial statements.

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

		Three Months Ended September 30,
		2015				2014
OPERATING ACTIVITIES
Net income		$	311			$	299
Adjustments to reconcile net income to cash provided by (used for) operating activities:
Provision for loan losses			20				3
Depreciation			25				20
Gain on sale of other real estate owned			-				(5	)
Amortization of discounts, premiums and deferred loan fees			487				120
Deferred income taxes			24				(4	)
Increase in prepaid/accrued income taxes			35				37
Earnings on bank owned life insurance			(34	)			(35	)
Increase in accrued interest receivable			(189	)			(285	)
Increase (decrease) in accrued interest payable			8				(2	)
Increase (decrease) in deferred director compensation payable			-				8
Decrease in unsettled security purchases			(1,969	)			-
Other, net			(49	)			(152	)
Net cash provided by (used for) operating activities			(1,331	)			4
INVESTING ACTIVITIES
Available-for-sale:
Purchases of investment securities			(24,838	)			-
Proceeds from repayments of investment securities			2,058				1,208
Held-to-maturity:
Purchases of investment securities			(9,358	)			(18,380	)
Purchases of mortgage-backed securities			-				(6,081	)
Proceeds from repayments of investment securities			20,866				4,158
Proceeds from repayments of mortgage-backed securities			11,274				13,736
Purchases of certificates of deposit			(100	)			(100	)
Maturities/redemptions of certificates of deposit			100				348
Increase in net loans receivable			(6,401	)			(1,377	)
Proceeds from sale of other real estate owned			-				251
Purchase of FHLB stock			(1,643	)			(1,214	)
Redemption of FHLB stock			1,780				745
Acquisition of premises and equipment			(6	)			(46	)
Net cash used for investing activities			(6,268	)			(6,752	)

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

		Three Months Ended September 30,
		2015				2014
FINANCING ACTIVITIES
Net increase (decrease) in transaction and savings accounts			$ (1,151	)			$  1,505
Net decrease in certificates of deposit			(1,267	)			(1,189	)
Net decrease in advance payments by borrowers for taxes and insurance			(12	)			(321	)
Proceeds from FHLB long-term advances – variable rate			-				6,109
Net increase in FHLB short-term advances			562				1,127
Net increase in other short-term borrowings			7,950				-
Purchase of treasury stock			(19	)			(72	)
Increase in unallocated ESOP shares			-				(156	)
Release of ESOP shares			13				-
Cash dividends paid			(81	)			(82	)
Net cash provided by financial activities			5,995				6,921
Increase (decrease) in cash and cash equivalents			(1,604	)			173
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD			3,573				1,360
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD			$  1,969				$  1,533
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits and borrowings			$     303				$     290
Income taxes			150				127
Non-cash items:
Educational Improvement Tax Credit			$         -				$         9
Mortgage loans transferred to other real estate owned			-				246

See accompanying notes to unaudited consolidated financial statements.

 

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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, 2015, are not necessarily indicative of the results which may be expected for the entire fiscal year.

 

2.	RECENT ACCOUNTING PRONOUNCEMENTS

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 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 did not 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 did not 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.

 

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In June 2014, the FASB issued ASU 2014-11, 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 has included the disclosures related to this Update in Note 11.

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 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. This Update did not have a significant impact on the Company’s financial statements.

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.

 

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In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force). This Update clarifies how current U.S. GAAP should be interpreted in subjectively evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Public business entities are required to implement the new requirements in fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This Update is not expected to have a significant impact on the Company’s financial statements.

In November 2014, the FASB issued ASU 2014-17, Business Combinations (Topic 805): Pushdown Accounting. The amendments in this Update apply to the separate financial statements of an acquired entity and its subsidiaries that are a business or nonprofit activity (either public or nonpublic) upon the occurrence of an event in which an acquirer (an individual or an entity) obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event. The amendments in this Update are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2015, the FASB issued ASU 2015-01, Income Statement – Extraordinary and Unusual Items, as part of its initiative to reduce complexity in accounting standards. This Update eliminates from U.S. GAAP the concept of extraordinary items. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity may also apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810). The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related-party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30), as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments

 

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in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-04, Compensation – Retirement Benefits (Topic 715), as part of its initiative to reduce complexity in accounting standards. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40), as part of its initiative to reduce complexity in accounting standards. This guidance will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. For public business entities, the FASB decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-06, Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions. Topic 260, Earnings Per Share, contains guidance that addresses master limited partnerships that originated from Emerging Issues Task Force (“EITF”) Issue No. 07-4, Application of the Two-Class Method Under FASB Statement No. 128 to Master Limited Partnerships. Under Topic 260, master limited partnerships apply the two-class method of calculating earnings per unit because the general partner, limited partners, and incentive distribution rights holders each participate differently in the distribution of available cash in accordance with the contractual rights contained in the partnership agreement. The amendments in this Update specify that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method are also required. The amendments in this Update are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

 

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In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). The Update applies to reporting entities that elect to measure the fair value of an investment using the net asset value per share (or its equivalent) practical expedient. Under the amendments in this Update, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate net asset value per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy. A reporting entity should continue to disclose information on investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2015, the FASB issued ASU 2015-08, Business Combinations – Pushdown Accounting – Amendment to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115. This Update was issued to amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115. This Update did not have a significant impact on the Company’s financial statements.

In May 2015, the FASB issued ASU 2015-09, Financial Services – Insurance (Topic 944): Disclosure About Short-Duration Contracts. The amendments apply to all insurance entities that issue short-duration contracts as defined in Topic 944, Financial Services – Insurance. The amendments require insurance entities to disclose for annual reporting periods certain information about the liability for unpaid claims and claim adjustment expenses. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. Additionally, the amendments require insurance entities to disclose for annual and interim reporting periods a rollforward of the liability for unpaid claims and claim adjustment expenses, described in Topic 944. For health insurance claims, the amendments require the disclosure of the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. For all other entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The amendments in this Update represent changes to clarify the FASB Accounting Standards Codification (“Codification”), correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Transition guidance varies based on the amendments in this Update. The amendments in this Update that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this Update. This Update is not expected to have a significant impact on the Company’s financial statements.

 

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In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is evaluating the effect of adopting this new accounting Update.

In August 2015, the FASB issued ASU 2015-15, Interest – Imputation of Interest (Subtopic 835-30): Presentation And Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This Update adds SEC paragraphs pursuant to the SEC Staff Announcement at the June 18, 2015 Emerging Issues Task Force meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. This Update is not expected to have a significant impact on the Company’s financial statements.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805). The amendments in this Update require that an acquirer recognizes adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

 

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,
		2015				2014
Weighted average common shares issued			3,805,636				3,805,636
Average treasury stock shares			(1,766,351	)			(1,754,526	)
Average unallocated ESOP shares			(130,023	)			(91,729	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share			1,909,262				1,959,381
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			1,909,262				1,959,381

 

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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, 2015, 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, 2014 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, 2015 and 2014, the Company recorded no compensation expense related to our share-based compensation awards. As of September 30, 2015, 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, 2015, and 2014. There were no stock options exercised or issued during the three months ended September 30, 2015 and 2014.

 

5.	INVESTMENT SECURITIES

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

 

						Amortized     Cost								Gross     Unrealized     Gains								Gross     Unrealized     Losses								Fair         Value
						(Dollars in Thousands)
September 30, 2015
AVAILABLE FOR SALE
Corporate debt securities		$					83,791			$					61			$					(102	)		$					83,750
Foreign debt securities 1							4,745								3								(1	)							4,747
Obligations of states and political subdivisions							702								-								-								702
Total		$					89,238			$					64			$					(103	)		$					89,199

 

 

 

 

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

 

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						Amortized     Cost								Gross     Unrealized     Gains								Gross     Unrealized     Losses								Fair         Value
						(Dollars in Thousands)
September 30, 2015
HELD TO MATURITY
U.S. government agency securities		$					16,219			$					38			$					(1	)		$					16,256
Corporate debt securities							3,549								306								-								3,855
Obligations of states and political subdivisions							5,355								126								-								5,481
Total		$					25,123			$					470			$					(1	)		$					25,592
						Amortized Cost								Gross Unrealized Gains								Gross Unrealized Losses								Fair Value
						(Dollars in Thousands)
June 30, 2015
AVAILABLE FOR SALE
Corporate debt securities		$					60,968			$					63			$					(93	)		$					60,938
Foreign debt securities 2							5,298								-								(17	)							5,281
Obligations of states and political subdivisions							702								-								(5	)							697
Total		$					66,968			$					63			$					(115	)		$					66,916
						Amortized Cost								Gross Unrealized Gains								Gross Unrealized Losses								Fair Value
						(Dollars in Thousands)
June 30, 2015
HELD TO MATURITY
U.S. government agency securities		$					27,395			$					5			$					(94	)		$					27,306
Corporate debt securities							3,868								371								-								4,239
Obligations of states and political subdivisions							5,355								79								-								5,434
Total		$					36,618			$					455			$					(94	)		$					36,979

There were no sales of investment securities for the three months ended September 30, 2015 and 2014.

 

 

 

 

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

 

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The amortized cost and fair values of debt securities at September 30, 2015, 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		$			32,638			$			55,607			$			-			$			993			$			-			$			-			$			89,238
Fair value					32,620						55,595						-						985						-						-						89,199
Weighted average yield					1.41	%					1.51	%					-	%					1.68	%					-	%					-	%					1.47	%
HELD TO MATURITY
Amortized cost		$			524			$			1,471			$			1,809			$			1,605			$			14,088			$			5,626			$			25,123
Fair value					548						1,499						1,734						1,734						14,216						5,640						25,592
Weighted average yield					6.15	%					3.46	%					5.29	%					4.96	%					1.82	%					1.75	%					2.44	%

At September 30, 2015, investment securities with amortized costs of $14.7 million and fair values of $14.8 million were pledged to secure borrowings with the Federal Home Loan Bank (FHLB) and broker repurchase agreements. Of the securities pledged, $6.2 million of fair value was excess collateral at the FHLB. Excess collateral is maintained to support future borrowings and may be withdrawn by the Company at any time.

At June 30, 2015, no investment securities were pledged to secure public deposits, broker 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, 2015, the Company’s Agency CMOs totaled $149.5 million as compared to $160.6 million at June 30, 2015. The Company’s private-label CMOs totaled $1.9 million at September 30, 2015 as compared to $2.0 million at June 30, 2015. The $11.2 million decrease in the CMO segment of our MBS portfolio was primarily due to repayments on our Agency and private-label CMOs which totaled $11.1 million. During the three months ended September 30, 2015, the Company received principal payments totaling $204 thousand on its private-label CMOs. At September 30, 2015, approximately $151.4 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 $162.6 million or 100.0% at June 30, 2015. 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.

 

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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, 2015. During the three months ending September 30, 2015, the Company reversed $54 thousand of non-credit unrealized holding losses on its three private-label CMOs with other than temporary impairments (“OTTI”) due to principal repayments. During the three months ended September 30, 2015, 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, 2015. 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, 2015
				Rating						Book      Value				Fair   Value3				Life to Date Impairment   Recorded in   Earnings
Cusip #		Security Description		S&P		Moody’s		Fitch		(in thousands)
126694CP1		CWHL SER 21 A11		N/A		Caa2		D		$	1,002			$	1,290			$	201
126694KF4		CWHL SER 24 A15		D		N/A		D			221				234				39
126694KF4		CWHL SER 24 A15		D		N/A		D			442				467				79
126694MP0		CWHL SER 26 1A5		D		N/A		D			210				224				36
										$	1,875			$	2,215			$	355

 

 

 

 

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

 

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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, 2015
HELD TO MATURITY
Collateralized mortgage obligations:
Agency		$							149,553			$					1,224			$					(711	)		$					150,066
Private-label									1,875								340								-								2,215
Total		$							151,428			$					1,564			$					(711	)		$					152,281
								Amortized    Cost								Gross   Unrealized   Gains								Gross   Unrealized   Losses								Fair     Value
								(Dollars in Thousands)
June 30, 2015
HELD TO MATURITY
Collateralized mortgage obligations:
Agency		$							160,614			$					1,130			$					(909	)		$					160,835
Private-label									2,025								405								-								2,430
Total		$							162,639			$					1,535			$					(909	)		$					163,265

The amortized cost and fair value of the Company’s mortgage-backed securities at September 30, 2015, 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		$			-			$			-			$			416			$			151,012			$			151,428
Fair value					-						-						430						151,851						152,281
Weighted average yield					-	%					-	%					1.62	%					1.31	%					1.31	%

At September 30, 2015, mortgage-backed securities with amortized costs of $149.6 million and fair values of $150.1 million were pledged to secure public deposits and borrowings with the Federal Home Loan Bank. Of the securities pledged, $19.2 million of fair value was excess collateral. At June 30, 2015 mortgage-backed securities with an amortized cost of $144.1 million and fair values of $144.2 million, were pledged to secure public deposits and 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.

 

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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, 2015 and 2014.

 

		Three Months Ended September 30, 2015
		(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, 2015		$	(35	)		$	(426	)		$	(461	)
Other comprehensive income (loss) before reclassifications			8				36				44
Amounts reclassified from accumulated other comprehensive income (loss)			-				-				-
Net current-period other comprehensive income (loss)			8				36				44
Ending Balance – September 30, 2015		$	(27	)		$	(390	)		$	(417	)

 

		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	)

There were no amounts reclassified out of accumulated other comprehensive income for the three months ended September 30, 2015 and 2014.

 

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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, 2015 and June 30, 2015.

 

						September 30, 2015
						Less Than Six Months												Six through Twelve Months										Twelve Months or Greater												Total
						Fair Value						Gross Unrealized Losses						Fair Value				Gross Unrealized Losses						Fair Value						Gross Unrealized Losses						Fair Value						Gross Unrealized Losses
							(Dollars in Thousands)
Corporate debt securities				$			38,537			$			(73	)		$		8,115		$			(29	)		$			-			$			-			$			46,652			$			(102	)
Foreign Debt Securities 4							1,574						(1	)				-					-						-						-						1,574						(1	)
U.S. government agency securities							499						(1	)				-					-						-						-						499						(1	)
Obligations of states and political subdivisions							702						-					-					-						-						-						702						-
Collateralized mortgage obligations:
Agency							5,788						(9	)				27,285					(480	)					19,768						(222	)					52,841						(711	)
Total				$			47,100			$			(84	)		$		35,400		$			(509	)		$			19,768			$			(222	)		$			102,268			$			(815	)

 

						June 30, 2015
						Less Than Six Months												Six through Twelve Months										Twelve Months or Greater												Total
						Fair Value						Gross Unrealized Losses						Fair Value				Gross Unrealized Losses						Fair Value						Gross Unrealized Losses						Fair Value						Gross Unrealized Losses
							(Dollars in Thousands)
Corporate debt securities				$			28,284			$			(88	)		$		1,285		$			(5	)		$			-			$			-			$			29,569			$			(93	)
Foreign Debt Securities 4							4,780						(16	)				501					(1	)					-						-						5,281						(17	)
U.S. government agency securities							21,318						(94	)				-					-						-						-						21,318						(94	)
Obligations of states and political subdivisions							697						(5	)				-					-						-						-						697						(5	)
Collateralized mortgage obligations:
Agency							22,504						(121	)				21,243					(663	)					16,092						(125	)					59,839						(909	)
Total				$			77,583			$			(324	)		$		23,029		$			(669	)		$			16,092			$			(125	)		$			116,704			$			(1,118	)

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 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 (“NRSRO”); 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

 

 

 

 

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

 

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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 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,
		2015				2014
		(Dollars in Thousands)
Beginning balance			$248				$302
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			(14	)			(10	)
Reduction for increase in cash flows expected to be collected			-				-
Ending Balance			$234				$292

During the three months ended September 30, 2015, 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, 2015, the Company accreted back into other comprehensive income $36 thousand (net of income tax effect of $18 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.

 

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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 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, 2015 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, 2015, keeping the total at three private-label CMOs with OTTI at September 30, 2015.

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 48 positions that were temporarily impaired at September 30, 2015. 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.

 

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9.	LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

The following table summarizes the primary segments of the loan portfolio as of September 30, 2015 and June 30, 2015.

 

				September 30, 2015																		June 30, 2015
				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		$			33,733			$			-			$			33,733					$			28,620			$			-			$			28,620
Construction					4,935						-						4,935								3,032						-						3,032
Land acquisition & development					763						-						763								653						-						653
Multi-family dwellings					5,992						-						5,992								6,084						-						6,084
Commercial					3,110						-						3,110								3,395						49						3,346
Consumer Loans
Home equity					811						-						811								1,175						-						1,175
Home equity lines of credit					1,967						-						1,967								1,917						-						1,917
Other					170						-						170								211						-						211
Commercial Loans					1,206						-						1,206								1,251						-						1,251
Obligations (other than securities and leases) of states and political subdivisons					-						-						-								-						-						-
		$			52,687			$			-			$			52,687					$			46,338			$			49			$			46,289
Plus: Deferred loan costs					179																				129
Allowance for loan losses					(323	)																			(304	)
Total		$			52,543																	$			46,163

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, 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.

 

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The following tables are a summary of the loans considered to be impaired as of September 30, 2015 and June 30, 2015, and the related interest income recognized for the three months ended September 30, 2015 and September 30, 2014:

 

				September 30,         2015						June 30,         2015
				(Dollars in Thousands)
Impaired loans with an allocated allowance:
Home equity lines of credit		$			-			$			-
Impaired loans without an allocated allowance:
Commercial real estate loans					-						49
Total impaired loans		$			-			$			49
Allocated allowance on impaired loans:
Home equity lines of credit		$			-			$			-
Total		$			-			$			-

 

						Three Months Ended
						September 30,     2015								September 30,     2014
						(Dollars in Thousands)
Average impaired loans
Construction loans		$					-			$					-
Land acquisition & development loans							-								-
Commercial real estate loans							48								49
Home equity lines of credit							-								150
Total		$					48			$					199
Income recognized on impaired loans
Construction loans		$					-			$					-
Land acquisition & development loans							-								-
Commercial real estate loans							1								-
Home equity lines of credit							-								1
Total		$					1			$					1

Total nonaccrual loans as of September 30, 2015 and June 30, 2015 and the related interest income recognized for the three months ended September 30, 2015 and September 30, 2014 are as follows:

 

				September 30,         2015						June 30,         2015
				(Dollars in Thousands)
Principal outstanding
1 – 4 family dwellings		$			259			$			260
Construction					-						-
Land acquisition & development					-						-
Commercial real estate					-						49
Home equity lines of credit					-						-
Total		$			259			$			309

 

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						Three Months Ended
						September 30,         2015								September 30,         2014
						(Dollars in Thousands)
Average nonaccrual loans
1 – 4 family dwellings		$					260			$					366
Construction							-								-
Land acquisition & development							-								-
Commercial real estate							48								49
Home equity lines of credit							-								150
Total		$					308			$					565
Income that would have been recognized		$					5			$					8
Interest income recognized		$					6			$					9
Interest income foregone		$					-			$					3

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.

During the three months ended September 30, 2015, there were no trouble debt restructurings, and no trouble debt restructurings that subsequently defaulted. One previously modified TDR, secured by commercial real estate, was paid off in full during the three months ended September 30, 2015.

The following table includes the recorded investment and number of modifications for modified loans, as of September 30, 2014. 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:			-			$			-			$			-

 

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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, 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, 2015, is adequate.

 

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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, 2015 and June 30, 2015:

 

				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, 2015
First mortgage loans:
1 – 4 family dwellings		$			33,406			$			68			$			-			$			-			$			259			$			327			$			33,733
Construction					4,935						-						-						-						-						-						4,935
Land acquisition & development					763						-						-						-						-						-						763
Multi-family dwellings					5,992						-						-						-						-						-						5,992
Commercial					3,110						-						-						-						-						-						3,110
Consumer Loans:
Home equity					811						-						-						-						-						-						811
Home equity lines of credit					1,967						-						-						-						-						-						1,967
Other					170						-						-						-						-						-						170
Commercial Loans					1,206						-						-						-						-						-						1,206
Obligations (other than securities and leases) of states and political subdivisions					-						-						-						-						-						-						-
		$			52,360			$			68			$			-			$			-			$			259			$			327						52,687
Plus: Deferred loan fees																																									179
Allowance for loan losses																																									(323	)
Net Loans Receivable																																						$			52,543
				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, 2015
First mortgage loans:
1 – 4 family dwellings		$			28,327			$			-			$			33			$			-			$			260			$			293			$			28,620
Construction					3,032						-						-						-						-						-						3,032
Land acquisition & development					653						-						-						-						-						-						653
Multi-family dwellings					6,084						-						-						-						-						-						6,084
Commercial					3,335						11						-						-						49						60						3,395
Consumer Loans
Home equity					1,175						-						-						-						-						-						1,175
Home equity lines of credit					1,917						-						-						-						-						-						1,917
Other					211						-						-						-						-						-						211
Commercial Loans					1,251						-						-						-						-						-						1,251
Obligations (other than securities and leases) of states and political subdivisions					-						-						-						-						-						-						-
		$			45,985			$			11			$			33			$			-			$			309			$			353						46,338
Plus: Deferred loan fees																																									129
Allowance for loan losses																																									(304	)
Net Loans Receivable																																						$			46,163

 

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Credit quality information

The following tables represent credit exposure by internally assigned grades for the period ended September 30, 2015. 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.

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, 2015 and June 30, 2015.

 

				September 30, 2015
				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		$			4,935			$			559			$			5,992			$			3,110			$					1,206			$					-
Special Mention					-						-						-						-								-								-
Substandard					-						204						-						-								-								-
Doubtful					-						-						-						-								-								-
Ending Balance		$			4,935			$			763			$			5,992			$			3,110			$					1,206			$					-

 

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				June 30, 2015
				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		$			3,032			$			445			$			6,084			$			3,346			$					1,251			$					-
Special Mention					-						-						-						-								-								-
Substandard					-						208						-						49								-								-
Doubtful					-						-						-						-								-								-
Ending Balance		$			3,032			$			653			$			6,084			$			3,395			$					1,251			$					-

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, 2015 and June 30, 2015.

 

				September 30, 2015
				1 – 4 Family								Consumer
				(Dollars in Thousands)
Performing		$			33,474			$					2,948
Non-performing					259								-
Total		$			33,733			$					2,948

 

				June 30, 2015
				1 – 4 Family								Consumer
				(Dollars in Thousands)
Performing		$			28,360			$					3,303
Non-performing					260								-
Total		$			28,620			$					3,303

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

 

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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, 2015.

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, 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 summarize the primary segments of the allowance for loan losses (“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, 2015 and 2014. Activity in the allowance is presented for the three months ended September 30, 2015 and 2014.

 

				As of September 30, 2015
				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, 2015		$			125			$					63			$			9			$			30			$			34			$			37			$			6			$			304
Charge-offs					-								-						-						-						-						-						-						-
Recoveries					-								-						-						-						-						-						-						-
Provisions					18								9						-						-						(3	)					(5	)					-						19
Ending ALLL Balance at September 30, 2015		$			143			$					72			$			9			$			30			$			31			$			32			$			6			$			323
Individually evaluated for impairment		$			-			$					-			$			-			$			-			$			-			$			-			$			-			$			-
Collectively evaluated for impairment					143								72						9						30						31						32						6						323
		$			143			$					72			$			9			$			30			$			31			$			32			$			6			$			323

 

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				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						-						-
Ending ALLL Balance at September 30, 2014		$			75			$					21			$			10			$			11			$			43			$			69			$			8			$			3
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

During the three months ended September 30, 2015, the ALLL associated with the 1 – 4 family and construction loan portfolios increased by $18 thousand and $9 thousand, respectively. The primary reason for the increases in the ALLL associated with these segments were the increases in associated loan balances. The ALLL for consumer loans and commercial real estate loans decreased $5 thousand and $3 thousand, respectively. The decrease in the ALLL associated with consumer loans was primarily due to lower loan balances within this segment, while the decrease in the ALLL associated with commercial real estate loans was primarily due to the payoff of one non-performing loan in this segment. The decrease in the ALLL associated with the commercial (non-real estate) loan segment was primarily related to the lower loan balances within this segment.

During the fiscal year ended June 30, 2015, the Company also increased its ALLL reserve factors, due to increases in associated loan balances and qualitative factors throughout fiscal 2015, for the following loan segments:

 

Loan Segment		09/30/2015 Factor		09/30/2014 Factor
1 – 4 family		0.35%		0.25%
Construction:
1 – 4 family		0.75%		0.25%
5+ family		1.00%		0.50%

During the three months ended September 30, 2014, the ALLL associated with 1-4 family permanent loans decreased $28 thousand, while the ALLL associated with consumer loans increased $22 thousand. The decrease in the ALLL associated with the 1-4 family permanent loan segment was primarily due to the payoff of one non-performing loan within this segment. The increase in the ALLL associated with the consumer loan segment was primarily due to an increase in the ALLL associated with one non-performing home equity line of credit within this segment.

 

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10.	FEDERAL HOME LOAN BANK (FHLB) ADVANCES

The following table presents contractual maturities of FHLB long-term advances as of September 30, 2015 and June 30, 2015

 

		Maturity range				Weighted- average				Stated interest rate range										September 30,						June 30,
Description		from		to		interest rate 5				from				to						2015						2015
																				(Dollars in Thousands)
Convertible		06/22/16		07/27/17			4.44	%			4.26	%			5.16	%		$			12,500			$			12,500
Adjustable		05/06/16		09/01/17			0.32	%			0.30	%			0.39	%					105,305						105,305
Total																		$			117,805			$			117,805

Maturities of FHLB long-term advances at September 30, 2015, are summarized as follows:

 

Maturing During Fiscal Year Ended                     June 30:				Amount		Weighted- Average Interest         Rate
				(Dollars in Thousands)
2016		$		101,696			0.43	%
2017				-			-
2018				16,109			2.78
2019				-			-
2020 and thereafter				-			-
Total		$		117,805			0.76	%

The terms of the convertible advances reset to the three-month London Interbank Offered Rate (“LIBOR”) and have various spreads and call dates of three months. The FHLB has the right to convert from a fixed rate to a predetermined floating rate on its conversion date or quarterly thereafter. Should the advance be converted, the Company has the right to pay off the advance without penalty. The adjustable rate advances adjust either monthly or quarterly, based on the one-month or three-month LIBOR index, and have various spreads to the LIBOR index. The spreads to the applicable LIBOR index range from 0.05% to 0.16%. The adjustable rate advances are not convertible or callable. The FHLB advances are secured by the Company’s FHLB stock, mortgage-backed and investment securities, and loans, and are subject to substantial prepayment penalties.

 

 

 

5	As of September 30, 2015.

 

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The Company also utilized revolving and short-term FHLB advances. Short-term FHLB advances generally mature within 90 days, while revolving FHLB advances may be repaid by the Company without penalty. The following table presents information regarding such advances as of September 30, 2015 and June 30, 2015:

 

				September 30,         2015						June 30,         2015
				(Dollars in Thousands)
FHLB revolving and short-term advances:
Ending balance		$			38,392			$			37,830
Average balance					31,675						23,496
Maximum month-end balance					38,392						37,830
Average interest rate					0.35	%					0.31	%
Weighted-average rate					0.35	%					0.32	%

At September 30, 2015, the Company had remaining borrowing capacity with the FHLB of approximately $22.6 million.

The FHLB advances are secured by the Company’s FHLB stock, loans, and mortgage-backed and investment securities held in safekeeping at the FHLB. FHLB advances are subject to substantial prepayment penalties.

 

11.	OTHER BORROWINGS

Other borrowings include securities sold under agreements to repurchase with securities brokers (“repurchase agreements”). These borrowings generally mature within 1 to 90 days from the transaction date and require a collateral pledge. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.

The following table presents information regarding other borrowings as of September 30, 2015 and June 30, 2015:

 

				September 30,         2015						June 30,         2015
				(Dollars in Thousands)
Other short-term borrowings:
Ending balance		$			7,950			$			-
Average balance					6,317						1,378
Maximum month-end balance					9,700						9,464
Average interest rate					0.38	%					0.36	%
Weighted-average rate					0.41	%					-	%

The remaining contractual maturity of repurchase agreements in the consolidated balance sheet as of September 30, 2015 is presented in the following table.

 

				Remaining Contractual Maturity of the  Repurchase Agreements
				Overnight and Continuous						Up to 30 Days						30 – 90 Days						Greater than 90 Days						Total
September 30, 2015
Repurchase agreements:		$			-			$			7,950			$			-			$			-			$			7,950
Total borrowings		$			-			$			7,950			$			-			$			-			$			7,950
Gross amount of recognized liabilities for repurchase agreements																										$			7,950
Amounts related to agreements not included in offsetting disclosures above																										$			-

 

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12.	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, 2015 and June 30, 2015, 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.

 

				September 30, 2015
				Level I						Level II						Level III						Total
				(Dollars in Thousands)
Assets measured on a recurring basis:
Investment securities – available for sale:
Obligations of states and political subdivisions		$			-			$			702			$			-			$			702
Corporate securities					-						83,750						-						83,750
Foreign debt securities 6					-						4,747						-						4,747
		$			-			$			89,199			$			-			$			89,199

 

 

 

6

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

 

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				June 30, 2015
				Level I						Level II						Level III						Total
				(Dollars in Thousands)
Assets measured on a recurring basis:
Investment securities – available for sale:
Obligations of states and political subdivisions		$			-			$			697			$			-			$			697
Corporate securities					-						60,938						-						60,938
Foreign debt securities 7					-						5,281						-						5,281
		$			-			$			66,916			$			-			$			66,916

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, Level II or Level III impaired loans at September 30, 2015. At June 30, 2015, Level III impaired loans were primarily comprised of one commercial real estate loan.

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, 2015 and June 30, 2015, 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.

 

September 30, 2015

Level I

Level II

Level III

Total

(Dollars in Thousands)

Assets measured on a non-recurring basis:

Impaired loans

$

-

$

-

$

-

$

-

Total

$

-

$

-

$

-

$

-

 

7

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

 

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						June 30, 2015
						Level I								Level II								Level III								Total
						(Dollars in Thousands)
Assets measured on a non-recurring basis:
Impaired loans		$					-			$					-			$					49			$					49
Total		$					-			$					-			$					49			$					49

For Level III assets measured at fair value on a recurring and non-recurring basis as of September 30, 2015 and June 30, 2015, the significant observable inputs used in the fair value measurements were as follows:

 

Fair Value at

September 30,         2015

June 30,     2015

Valuation       Technique

Significant     Unobservable     Inputs

Significant Unobservable       Input Range (Weighted Average)

(Dollars in Thousands)

Impaired loans

$

-

$

49

Appraisal of collateral8

Discounted appraisal9

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.

 

8

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

9

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.

 

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13.	FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values are as follows:

 

						September 30, 2015
						Carrying Amount						Fair Value								Level I						Level II						Level III
						(Dollars in Thousands)
FINANCIAL ASSETS
Cash and cash equivalents		$					1,969			$			1,969			$					1,969					$	-					$	-
Certificates of deposit							350						350								350						-						-
Investment securities – available for sale							89,199						89,199								-						89,199						-
Investment securities – held to maturity							25,123						25,592								-						25,592						-
Mortgage-backed securities – held to maturity:
Agency							149,553						150,066								-						150,066						-
Private-label							1,875						2,215								-						-						2,215
Net loans receivable							52,543						53,616								-						-						53,616
Accrued interest receivable							1,387						1,387								1,387						-						-
FHLB stock							6,482						6,482								6,482						-						-
Bank owned life insurance							4,310						4,310								4,310						-						-
FINANCIAL LIABILITIES
Deposits:
Non-interest bearing deposits		$					16,512			$			16,512			$					16,512					$	-					$	-
NOW accounts							20,205						20,205								20,205						-						-
Savings accounts							44,686						44,686								44,686						-						-
Money market accounts							24,183						24,183								24,183						-						-
Certificates of deposit							30,059						30,030								-						-						30,030
Advance payments by borrowers for taxes and insurance							853						853								853						-						-
FHLB long-term advances – fixed rate							12,500						13,051								-						-						13,051
FHLB long-term advances – variable rate							105,305						105,305								105,305						-						-
FHLB short-term advances							38,392						38,392								38,392						-						-
Other short-term borrowings							7,950						7,950								7,950						-						-
Accrued interest payable							164						164								164						-						-

 

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				June 30, 2015
				Carrying Amount						Fair Value						Level I						Level II						Level III
				(Dollars in Thousands)
FINANCIAL ASSETS
Cash and cash equivalents		$			3,573			$			3,573			$			3,573			$			-			$			-
Certificates of deposit					350						350						350						-						-
Investment securities – available for sale					66,916						66,916						-						66,916						-
Investment securities – held to maturity					36,618						36,979						-						36,979						-
Mortgage-backed securities – held to maturity:
Agency					160,614						160,835						-						160,835						-
Private-label					2,025						2,430						-						-						2,430
Net loans receivable					46,163						46,897						-						-						46,897
Accrued interest receivable					1,198						1,198						1,198						-						-
FHLB stock					6,619						6,619						6,619						-						-
Bank owned life insurance					4,276						4,276						4,276						-						-
FINANCIAL LIABILITIES
Deposits:
Non-interest bearing deposits		$			17,806			$			17,806			$			17,806			$			-			$			-
NOW accounts					20,238						20,238						20,238						-						-
Savings accounts					45,092						45,092						45,092						-						-
Money market accounts					23,601						23,601						23,601						-						-
Certificates of deposit					31,326						31,267						-						-						31,267
Advance payments by borrowers for taxes and insurance					865						865						865						-						-
FHLB long-term advances – fixed rate					12,500						13,174						-						-						13,174
FHLB long-term advances – variable rate					105,305						105,305						105,305						-						-
FHLB short-term advances					37,830						37,830						37,830						-						-
Other short-term borrowings					-						-						-						-						-
Accrued interest payable					156						156						156						-						-

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.

 

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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, FHLB Short-term Advances, and Other Short-term Borrowings

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.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015

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.

 

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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, 2015.

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 $334.1 million at September 30, 2015, as compared to $329.7 million at June 30, 2015. The $4.4 million or 1.3% increase in total assets was primarily comprised of a $22.3 million increase in investment securities – available for sale, a $6.4 million increase in net loans receivable, a $189 thousand increase in accrued interest receivable, and a $34 thousand increase in bank owned life insurance, which were partially offset by a $11.5 million decrease in investment securities - held to maturity, a $11.2 million decrease in mortgage-backed securities – held to maturity, and a $1.6 million decrease in cash and cash equivalents. The increase in investment securities available for sale was primarily due to purchases of investment-grade corporate bonds totaling $23.8 million, which were partially offset by repayments on investment-grade fixed-rate corporate bonds totaling $2.1 million. The investment-grade fixed rate corporate bonds purchased were primarily used to offset maturities and repayments of U.S. Government agency multiple step-up and mortgage-backed securities (discussed below) and to bolster interest revenue and liquidity. The increase in net loans receivable was primarily attributable to increases in single-family real estate loans, and construction loans, totaling $5.1 million and $1.9 million, respectively, which were partially offset by decreases in home equity loans, commercial real estate loans, multi-family real estate loans, commercial loans, and other consumer loans, totaling $364 thousand, $285 thousand, $92 thousand, $45 thousand, and $41 thousand, respectively. The decrease in investment securities held to maturity was primarily due to early redemptions of U.S. Government agency multi-step up bonds totaling $20.6 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 $11.1 million and $204 thousand, respectively. See Quantitative and Qualitative Disclosures About Market Risk “Asset and Liability Management”.

The Company’s total liabilities increased $4.1 million or 1.4% to $301.8 million as of September 30, 2015 from $297.7 million as of June 30, 2015. The $4.1 million increase in total liabilities was primarily comprised of a $7.9 million or 100.0% increase in other short-term borrowings, and a $562 thousand or 1.5% increase in FHLB short-term advances, which were partially offset by a $2.4 million or 1.7% decrease in total deposits, and a $2.0 million or 67.2% decrease in other liabilities. The increases in other short-term borrowings and FHLB short-term advances were primarily a result of funding needs for the purchase of investment securities. The decrease in total deposits was primarily attributable to decrease in non-interest bearing accounts, time deposits, and savings accounts, totaling $1.3 million, $1.3 million, and $406 thousand,

 

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respectively, which were partially offset by increases in money market accounts, totaling $582 thousand. The $2.0 million decrease in other liabilities was primarily due to a decrease in security purchase commitments. See also Quantitative and Qualitative Disclosures About Market Risk “Asset and Liability Management”.

Total stockholders’ equity increased $268 thousand or 0.8% to $32.3 million as of September 30, 2015, from $32.0 million as of June 30, 2015. The increase was primarily attributable to Company net income of $311 thousand, and other comprehensive income of $44 thousand, which were partially offset by $81 thousand of cash dividends paid on the Company’s common stock, and $19 thousand paid for the acquisition of Treasury stock. The other comprehensive income was primarily attributable to a $36 thousand (net of tax effect) reversal of unrealized holding losses on three private-label CMOs with previously identified OTTI, and $8 thousand (net of tax effect) of unrealized holding gains on the Company’s available for sale investment portfolio.

RESULTS OF OPERATIONS

General.    WVS reported net income of $311 thousand or $0.16 earnings per share (basic and diluted) for the three months ended September 30, 2015. Net income increased by $12 thousand or 4.0% and earnings per share (basic and diluted) increased $0.01 or 6.7% for the three months ended September 30, 2015, when compared to the same period in 2014. The increase in net income for the three months ended September 30, 2015 was primarily attributable to a $94 thousand increase in net interest income, and a $2 thousand increase in non-interest income, which were partially offset by a $39 thousand increase in income tax expense, a $28 thousand increase in non-interest expense, and a $17 thousand increase in provisions for loan losses.

Net Interest Income.    The Company’s net interest income increased by $94 thousand or 7.6% for the three months ended September 30, 2015, when compared to the same period in 2014. The increase in net interest income is attributable to a $117 thousand increase in interest income, which was partially offset by a $23 thousand increase in interest expense. The increase in interest income was primarily due to higher average balances of investments and loan portfolios, and a higher yield earned on FHLB stock, which were partially offset by lower average yields earned on the Company’s investment and loan portfolios, during the quarter ended September 30, 2015, when compared to the same period in 2014. The increase in interest expense was primarily attributable to higher rates paid on FHLB long-term variable rate and FHLB short-term advances, and higher average balances of, and higher rates paid on other short-term borrowings during the three months ended September 30, 2015, which were partially offset by lower average balances and lower rates paid on time deposits, when compared to the same period in 2014.

Interest Income.    Interest income on investment securities increased $212 thousand or 71.9% for the three months ended September 30, 2015, when compared to the same period in 2014. The increase for the three months ended September 30, 2015 was primarily attributable to a $60.3 million increase in the average balance of investment securities outstanding, which was partially offset by a 37 basis point decrease in the weighted average yield on investment securities, when compared to the same period in 2014.

Interest income on net loans receivable increased $149 thousand or 39.9% for the three months ended September 30, 2015, when compared to the same period in 2014. The increase for the three months ended September 30, 2015 was primarily attributable to a $19.2 million increase in the average balance of net loans receivable outstanding, which was partially offset by a decrease of 72 basis points in the weighted average yield earned on net loans receivable for the three months ended September 30, 2015, when compared to the same period in 2014. The increase in the average balance of loans outstanding was primarily attributable to loan originations in excess of repayments, while the decrease in the average yield earned on net loans receivable was primarily attributable to lower rates on new loans originated. During fiscal 2015 and into fiscal 2016, the Company enjoyed higher demand for single-family home purchase loans. Substantially off of our loan originations and purchases were fixed-rate with a mix of 15, 20, and 30 year terms.

Interest income on FHLB stock increased $38 thousand or 70.4% for the three months ended September 30, 2015, when compared to the same period in 2014. The increase in dividends on FHLB stock for the three months ended September 30, 2015 was attributable to a 246 basis point increase in the yield

 

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earned on FHLB stock, which was partially offset by a $136 thousand decrease in the average balance of FHLB stock held during the three months ended September 30, 2015, when compared to the same period in 2014.

Interest income on mortgage-backed securities decreased $282 thousand or 35.4% for the three months ended September 30, 2015, when compared to the same period in 2014. The decrease for the three months ended September 30, 2015 was primarily attributable to a $56.2 million decrease in the average balance of U.S. Government agency mortgage-backed securities outstanding, an 18 basis point decrease in the weighted average yield earned on U.S. Government agency mortgage-backed securities, and an 18 basis point decrease in the weighted average yield earned on private-label mortgage-backed securities, for the three months ended September 30, 2015, when compared to the same period in 2014. The decrease in the average balances of U.S. Government agency and private-label mortgage-backed securities during the three months ended September 30, 2015 was attributable to principal paydowns of U.S. Government agency and private-label mortgage-backed securities during the period.

Interest Expense.    Interest paid on FHLB long-term advances increased $13 thousand or 6.1% for the three months ended September 30, 2015, when compared to the same period in 2014. The increase for the three months ended September 30, 2015 was primarily attributable to a $3.5 million increase in the average balance of FHLB long-term variable-rate advances, for the three months ended September 30, 2015, when compared to the same period in 2014.

Interest paid on FHLB short-term advances increased $11 thousand or 64.7% for the three months ended September 30, 2015, when compared to the same period in 2014. The increase for the three months ended September 30, 2015 was primarily attributable to a $9.1 million increase in the average balance of FHLB short-term advances outstanding, and a 5 basis point increase in the weighted average rate paid on FHLB short-term advances, for the three months ended September 30, 2015, when compared to the same period in 2014.

Interest on other short-term borrowings increased $6 thousand, or 100.0% for the three months ended September 30, 2015, when compared to the same period in 2014. The increase for the three months ended September 30, 2015 was primarily attributable to a $6.3 million increase in the average balance of other short-term borrowings outstanding for the three months ended September 30, 2015, when compared to the same period in 2014.

Interest expense on deposits decreased $7 thousand or 11.9% for the three months ended September 30, 2015, when compared to the same period in 2014. The decrease in interest expense on deposits for the three months ended September 30, 2015 was primarily attributable to a 6 basis point decrease in the weighted average rate paid on time deposits, and a 2 basis point decrease in the weighted average rate paid on money market accounts, and a $1.8 million decrease in the average balance of time deposits for the three months ended September 30, 2015, when compared to the same period in 2014.

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 increased $16 thousand for the three months ended September 30, 2015, when compared to the same period in 2014. The increase in the provisions for loan losses for the three months ended September 30, 2015, was primarily attributable to an increase in the Company’s loan portfolio and increases in qualitative factors for 1-4 family first mortgages, and 1-4 family and multi-family construction loans since September 30, 2014. At September 30, 2015, the Company’s total allowance for loan losses amounted to $323 thousand or 0.61% of the Company’s total loan portfolio, as compared to $304 thousand or 0.65% at June 30, 2015. At September 30, 2015, the Company’s non-performing loans totaled $259 thousand as compared to $309 thousand at June 30, 2015.

 

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Non-Interest Income.    Non-interest income increased by $1 thousand or 0.7% for the three months ended September 30, 2015, when compared to the same period in 2014. The increase for the three months ended September 30, 2015 was primarily attributable to a $2 thousand increase in service charges on deposits for the three months ended September 30, 2015, when compared to the same period in 2014.

Non-Interest Expense.    Non-interest expense increased $28 thousand or 3.1% for the three months ended September 30, 2015, when compared to the same period in 2014. The increase for the three months ended September 30, 2015 was principally attributable to a $11 thousand increase in employee related expense, a $17 thousand increase in ATM network expense, a $10 thousand increase in provisions for off-balance sheet (loan origination) commitments, a $7 thousand increase in occupancy and equipment costs, and a $4 thousand increase in federal deposit insurance premiums, which were partially offset by an $11 thousand decrease in legal expense and $10 thousand decrease in charitable contributions eligible for PA tax credits, when compared to the same period in 2014.

Income Tax Expense.    Income tax expense increased $39 thousand for the three months ended September 30, 2015, when compared to the same period in 2014. The increase for the three months ended September 30, 2015 was primarily due to higher levels of taxable income, during the three months ended September 30, 2015, when compared to the same period in 2014, and lower levels of PA tax credits.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used for operating activities totaled $1.3 million during the three months ended September 30, 2015. Net cash used for operating activities was primarily comprised of net income of a $2.0 million decrease in unsettled security purchases, a $189 thousand increase in accrued interest receivable, and $34 thousand of earnings on bank owned life insurance, which were partially offset by net income of $311 thousand, $487 thousand of amortization of investment premiums, a $35 thousand increase in accrued income taxes, and $25 thousand of depreciation expense.

Funds used for investing activities totaled $6.3 million during the three months ended September 30, 2015. Primary uses of funds during the three months ended September 30, 2015 included purchases of investment securities available for sale totaling $24.8 million, purchases of investment securities held to maturity totaling $9.4 million, and an increase in net loans receivable totaling $6.4 million. Primary sources of funds during the three months ended September 30, 2015 included proceeds from investments and mortgage-backed securities in the held-to-maturity portfolio totaling $20.9 million and $11.3 million, respectively, proceeds from investment securities in the available-for-sale portfolio totaling $2.1 million, and net redemptions of FHLB stock totaling $137 thousand. The mortgage-backed securities repayments were primarily used to offset purchases of securities in the investment portfolio.

Funds provided by financing activities totaled $6.0 million for the three months ended September 30, 2015. The primary sources included a $7.9 million increase in other short-term borrowings, and a $562 thousand increase in FHLB short-term advances, which were partially offset by a $1.3 million decrease in retail certificates of deposit, a $1.2 million decrease in transaction and savings deposits, and $81 thousand in cash dividends paid on the Company’s common stock. Management believes that a significant portion of our local maturing deposits will remain with the Company. Management has determined that it currently is maintaining adequate liquidity and continues to match funding sources with lending and investment opportunities.

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, 2015 totaled $22.5 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, 2015, total approved loan commitments outstanding were $6.0 million. At the same date, commitments under unused lines of credit amounted to $6.5 million and

 

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the unadvanced portion of construction loans approximated $4.7 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 $89.2 million at September 30, 2015. Management believes that the Company currently has adequate liquidity available to respond to liquidity demands.

On October 27, 2015, the Company’s Board of Directors declared a quarterly cash dividend of $0.04 per share, and a special cash dividend of $0.04 per share, both payable on November 19, 2015, to shareholders of record at the close of business on November 9, 2015. 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, 2015, WVS Financial Corp. exceeded all regulatory capital requirements and maintained Common Equity Tier I Capital, Tier I, and total risk-based capital equal to $32.7 million or 19.2%, $32.7 million or 19.2%, and $33.1 million or 19.5%, respectively, of total risk-weighted assets, and Tier I leverage capital of $32.7 million or 9.7% 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, 2015 totaled $259 thousand or 0.08% of total assets as compared to $309 thousand or 0.09% of total assets at June 30, 2015. Nonperforming assets at September 30, 2015 consisted of one single-family real estate loan totaling $259 thousand. The loan is currently under a bankruptcy order and making payments as agreed.

The $50 thousand decrease in nonperforming assets during the three months ended September 30, 2015 was primarily attributable to the payoff in full of one non-accrual commercial real estate loan totaling $49 thousand, and principal repayments on one non-accrual single-family real estate loan totaling $2 thousand.

During the three months ended September 30, 2015, the Company collected $6 thousand of interest income on non-accrual loans. Approximately $5 thousand of interest income would have been recorded during the three months ended September 30, 2015, 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, 2015.

 

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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.

On September 17 and October 28, 2015, the Federal Reserve Open Market Committee (FOMC) issued two press releases. Both press releases affirmed the FOMC’s view that the current 0 to  ¹⁄₄ percent target range for the federal funds rate remained appropriate. The FOMC also maintained its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and rolling over maturing Treasury securities at auction. The FOMC further indicated it anticipates that, even after employment and inflation are near mandate consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the FOMC views as normal in the longer run.

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, 2015 and into fiscal year 2016, 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.

 

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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, 2015. 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
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
December 31, 2014		0.00% to 0.25%		0.53%		1.90%		Positive
March 31, 2015		0.00% to 0.25%		0.56%		1.99%		Positive
June 30, 2015		0.00% to 0.25%		0.64%		2.33%		Positive
September 30, 2015		0.00% to 0.25%		0.64%		2.06%		Positive

 

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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, 2015, totaled $3.6 million, $22.9 million, and $11.3 million, respectively. Despite stagnant global interest rates and Treasury yields the Company continued to grow its balance sheet and used proceeds from maturities and calls of bonds, repayments on its mortgage-backed securities, and borrowings to purchase investment and mortgage-backed securities and to fund loan growth.

During the three months ended September 30, 2015, the Company increased its portfolio of: single-family mortgages by approximately $5.1 million, and construction loans by $1.9 million, which were partially offset by a $364 thousand decrease in home equity loans, and a $285 thousand decrease in commercial real estate loans. The Company continued 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 modestly grow throughout fiscal 2016. 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, 2015, principal investment purchases were comprised of: $24.8 million of investment grade fixed-rate corporate bonds with a weighted average yield to maturity of 1.50%; $9.4 million of U.S. Government agency multiple step-up bonds with initial lock out periods from 1 – 7 months and a weighted average yield to first call of 1.35%, and a weighted average yield to maturity of 3.97%. Single step-up bonds have one “step” or increase in coupon. Multiple step-up bonds have more than one “step” or increase in coupon. All of the corporate bond purchases were classified as available for sale for accounting purposes, while the U.S. Government agency bonds were classified as held to maturity. 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, 2015 were: U.S. Government agency multi step-up bonds - $20.6 million with a weighted average yield of 1.52%; investment grade corporate bonds - $1.6 million with a weighted average yield of 1.66%; and U.S. dollar denominated investment grade corporate bonds of large foreign issuers - $500 thousand with a weighted average yield of 1.12%.

As of September 30, 2015, the implementation of these asset and liability management initiatives resulted in the following:

 

1)

$153.4 million or 45.3% of the Company’s assets were comprised of floating rate investment and mortgage-backed securities. Of this $153.4 million, approximately $151.2 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)

$151.4 million or 57.0% 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;

3)

$84.3 million or 31.7% of the Company’s investment portfolio consisted of investment grade fixed-rate corporate bonds with remaining maturities as follows: 3 months or less - $6.7 million or 7.9%; 3 – 12 months - $23.9 million or 28.4%; 1 – 2 years - $48.1 million or 57.0%; 2 – 3 years - $4.6 million or 5.4% and 3 – 5 years - $1.1 million or 1.3%;

4)

$16.2 million or 6.1% of the Company’s investment portfolio was comprised of callable U.S. Government Agency multiple step-up bonds with call features. Approximately $14.6 million are callable within three months, and the remainder are callable within nine 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;

 

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5)

$89.2 million or 26.7% of the Company’s assets were comprised of investment securities classified as available for sale;

6)

An aggregate of $15.5 million or 29.5% 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 - $46.3 million or 28.2%; 3 – 12 months - $101.7 million or 62.0%; and over 1 year - $16.1 million or 9.8%.

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,     2015						June 30,
								2015						2014
								(Dollars in Thousands)
Interest-earning assets maturing or repricing within one year			$229,803						$227,461						$256,902
Interest-bearing liabilities maturing or repricing within one year			236,745						228,335						209,986
Interest sensitivity gap			$(6,942	)					$      (874	)					$  46,916
Interest sensitivity gap as a percentage of total assets			-2.08	%					-0.27	%					15.14	%
Ratio of assets to liabilities maturing or repricing within one year			97.07	%					99.62	%					122.34	%

 

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During the three months ended September 30, 2015, the Company managed its one-year interest sensitivity gap by increasing by approximately $8.5 million the Company’s borrowings that mature or reprice within one year. At September 30, 2015, investments available for sale totaled $89.2 million or 26.7% 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, 2015. 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)			$(15,540	)			$(32,499	)			$(10,128	)			$20,281				$25,925				$23,310				$25,884
% of Total Assets			-4.7	%			-9.7	%			-3.0	%			6.1	%			7.8	%			7.0	%			7.7	%
Base Case Up 100 bp
Cumulative Gap ($’s)			$(15,302	)			$(32,045	)			$  (9,314	)			$21,648				$27,652				$25,396				$25,884
% of Total Assets			-4.6	%			-9.6	%			-2.8	%			6.5	%			8.3	%			7.6	%			7.7	%
Base Case No Change
Cumulative Gap ($’s)			$(14,588	)			$(30,704	)			$  (6,942	)			$25,585				$32,557				$30,970				$25,884
% of Total Assets			-4.4	%			-9.2	%			-2.1	%			7.7	%			9.7	%			9.3	%			7.7	%
Base Case Down 100 bp
Cumulative Gap ($’s)			$(14,177	)			$(29,938	)			$  (5,619	)			$27,653				$34,976				$33,331				$25,884
% of Total Assets			-4.2	%			-9.0	%			-1.7	%			8.3	%			10.5	%			10.0	%			7.7	%
Base Case Down 200 bp
Cumulative Gap ($’s)			$(13,657	)			$(28,970	)			$  (3,953	)			$30,121				$37,702				$35,714				$25,884
% of Total Assets			-4.1	%			-8.7	%			-1.2	%			9.0	%			11.3	%			10.7	%			7.7	%

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.

 

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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, 2015. This analysis was done assuming that the interest-earning assets will average approximately $345 million and $366 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, 2015. 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, 2016																				September 30, 2017
Estimated impact on:		-200				-100				0				+100				+200				-200				-100				0				+100				+200
Change in net interest income			-8.7	%			-7.5	%			-				-6.5	%			-6.8	%			-21.5	%			-19.0	%			-				-5.3	%			3.4	%
Return on average equity			3.83	%			3.78	%			4.63	%			3.89	%			3.86	%			3.67	%			4.00	%			6.42	%			5.81	%			6.95	%
Return on average assets			0.36	%			0.38	%			0.44	%			0.38	%			0.38	%			0.38	%			0.42	%			0.61	%			0.59	%			0.71	%
Market value of equity (in thousands)		$	37,178			$	37,149				$37,371				$36,720				$34,694

The table below provides information about the Company’s anticipated transactions comprised of firm loan commitments and other commitments, including undisbursed letters and lines of credit, at September 30, 2015. The Company used no derivative financial instruments to hedge such anticipated transactions as of September 30, 2015.

 

Anticipated Transactions
(Dollars in Thousands)
Undisbursed construction and development loans
Fixed rate				$	3,416
					4.06	%
Adjustable rate				$	1,329
					5.00	%
Undisbursed lines of credit
Adjustable rate				$	6,458
					3.85	%
Loan origination commitments
Fixed rate				$	5,980
					3.57	%
Letters of credit
Adjustable rate				$	130
					4.25	%
				$	17,313

 

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In the ordinary course of its construction lending business, the Savings Bank enters into performance standby letters of credit. Typically, the standby letters of credit are issued on behalf of a builder to a third party to ensure the timely completion of a certain aspect of a construction project or land development. At September 30, 2015, the Savings Bank had two performance standby letters of credit outstanding totaling approximately $130 thousand. Both performance letters of credit are secured by developed property. The letters of credit will mature within fifteen months. In the event that the obligor is unable to perform its obligations as specified in the applicable letter of credit agreement, the Savings Bank would be obligated to disburse funds up to the amount specified in the letter of credit agreement. The Savings Bank maintains adequate collateral that could be liquidated to fund these contingent obligations.

ITEM 4.     CONTROLS AND PROCEDURES

As of September 30, 2015, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Accounting Officer, on the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Accounting Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2015.

Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed by the Company in its reports filed and submitted under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its reports filed under the Exchange Act is accumulated and communicated to the Company’s management, including the principal executive officer and principal accounting officer, as appropriate to allow timely decisions regarding required disclosure.

During the quarter ended September 30, 2015, no change in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) has occurred that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

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PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

(a) The Company is involved with various legal actions arising in the ordinary course of business. Management believes the outcome of these matters will have no material effect on the consolidated operations or consolidated financial condition of WVS Financial Corp.

(b) Not applicable.

ITEM 1A. Risk Factors

There are no material changes to the risk factors included in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable.

(b) Not applicable.

(c) The following table sets forth information with respect to purchases of common stock of the Company made by the WVS Financial Corp. Employee Stock Ownership Plan (ESOP) during the three months ended September 30, 2015.

 

AFFILIATE PURCHASES OF EQUITY SECURITIES
Period		Total Number of Shares     Purchased(1)				Average Price   Paid per Share ($)				Total Number of Shares Purchased as part of Publicly   Announced Plans   or Programs(2)				Approximate Dollar Value of Shares that May Yet Be Purchased   Under the Plans or   Programs(3)
07/01/15 – 07/31/15			-				-				-			$	630,400
08/01/15 – 08/31/15			-				-				-			$	630,400
09/01/15 – 09/30/15			-				-				-			$	630,400
Total			-				-				-			$	630,400

 

(1)	All shares indicated were purchased under the Company’s ESOP Stock Purchase Program.

(2)	Shares purchased using funds borrowed from the Company.

(3)	ESOP Stock Purchase Program

(a)

Announced March 31, 2015.

(b)

$750,000 of common shares approved for purchase.

(c)

No fixed date of expiration.

(d)

This Program has not expired and has $630,400 of shares remaining to be purchased at September 30, 2015.

(e)

Not applicable.

 

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The following table sets forth information with respect to purchases of common stock of the Company made by WVS Financial Corp. during the three months ended September 30, 2015.

 

COMPANY PURCHASES OF EQUITY SECURITIES
Period		Total Number of Shares   Purchased(1)				Average Price   Paid per Share ($)				Total Number of Shares Purchased as part of Publicly   Announced Plans   or Programs(1)				Maximum Number of Shares that May Yet Be Repurchased   Under the Plans or   Programs(2)
07/01/15 – 07/31/15			1,590			$	11.50				1,590				22,944
08/01/15 – 08/31/15			-				-				-				22,944
09/01/15 – 09/30/15			-				-				-				22,944
Total			1,590			$	11.50				1,590				22,944

 

(1)	All shares indicated were purchased under the Company’s reopened Tenth Stock Repurchase Program.

(2)	Tenth Stock Repurchase Program

(a)

Announced April 30, 2014.

(b)

41,745 common shares approved for repurchase.

(c)

No fixed date of expiration.

(d)

This Program has not expired and has 22,944 shares remaining to be purchased at September 30, 2015.

(e)

Not applicable.

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

(a) Not applicable.

(b) Not applicable.

 

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ITEM 6. Exhibits

The following exhibits are filed as part of this Form 10-Q, and this list includes the Exhibit Index.

 

Number				Description				Page
31.1				Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer				E-1
31.2				Rule 13a-14(a) / 15d-14(a) Certification of the Chief Accounting Officer				E-2
32.1				Section 1350 Certification of the Chief Executive Officer				E-3
32.2				Section 1350 Certification of the Chief Accounting Officer				E-4
99				Report of Independent Registered Public Accounting Firm				E-5
101.INS				XBRL Instance Document
101.SCH				XBRL Taxonomy Extension Schema Document
101.CAL				XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB				XBRL Taxonomy Extension Label Linkbase Document
101.PRE				XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF				XBRL Taxonomy Extension Definitions Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

				WVS FINANCIAL CORP.
		November 13, 2015		BY:		/s/ David J. Bursic
		Date				David J. Bursic   President and Chief Executive Officer   (Principal Executive Officer)
		November 13, 2015		BY:		/s/ Keith A. Simpson
		Date				Keith A. Simpson   Vice-President, Treasurer and Chief Accounting Officer   (Principal Accounting Officer)

 

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