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Exhibit 13

 

LOGO

FINANCIAL

CORP.

- THE HOLDING COMPANY OF WEST VIEW SAVINGS BANK-

“Over 100 Years of Quality Banking”

2017

ANNUAL REPORT


TABLE OF CONTENTS

 

     Page
Number
 

Shareholders’ Letter

     1  

Selected Consolidated Financial and Other Data

     2  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     4  

Report of Independent Registered Public Accounting Firm

     21  

Consolidated Balance Sheet

     22  

Consolidated Statement of Income

     23  

Consolidated Statement of Comprehensive Income

     24  

Consolidated Statement of Changes in Stockholders’ Equity

     25  

Consolidated Statement of Cash Flows

     26  

Notes to Consolidated Financial Statements

     27  

Common Stock Market Price and Dividend Information

     81  

Corporate Information

  


LOGO    (412)364-1911

-THE HOLDING COMPANY OF WEST VIEW SAVINGS BANK-

To Our Shareholders:

Fiscal 2017 was a year of continued strong growth and momentum at WVS Financial Corp.

The Company continued to invest in its host communities by providing consumers with flexible mortgage options to purchase or refinance a home or small businesses with commercial mortgages to expand their business. Net loans increased $12.8 million or 19.8% from $64.7 million at June 30, 2016 to $77.5 million at June 30, 2017. Looking over the past five years, net loans have increased from $31.5 million at June 30, 2012 to $77.5 million at June 30, 2017, which represents a compounded annual growth rate of approximately 25%. Though loan growth has been impressive, we have not ignored credit quality. Each loan is manually underwritten to ensure that the customer has the ability to repay the loan. We believe that individual attention to each customer and every loan is why we have had no chargeoffs for over five years.

Net income has also continued to improve. Net income increased approximately $300 thousand or 23% from $1.3 million at June 30, 2016 to $1.6 million at June 30, 2017. During fiscal 2017, the Company’s Board of Directors increased the regular quarterly cash dividend by 50% to $0.06 per share and authorized a $0.04 per share special cash dividend for a total dividend payout of $0.24 per share. The equity markets also began to recognize the value of bank stocks in 2017. The Company’s common stock price grew over 44% from $11.14 at June 30, 2016 to $16.10 at June 30, 2017.

As we look over the past fiscal year and to the future, we note an economy that has and continues to improve. Inflation and unemployment are at multi-year lows. Economic growth, though low by historical standards, has continued to improve both in the United States and abroad. Against this improving economic backdrop, the Federal Reserve Open Market Committee increased its targeted federal funds rate three times during fiscal 2017. Modestly increasing market interest rates over time allows savers to earn a better return on their hard earned savings, borrowers to affordably purchase homes and consumer goods over time, and the Company to begin to earn net income more in line with historical norms.

The Company would also like to take this opportunity to recognize Bernard P. Lefke – who recently retired as Vice President – Administration – for over 35 years of dedication, hard work, and loyal service. We wish him and his wife Barb a happy, healthy and well-earned retirement.

 

LOGO       LOGO
David J. Bursic       John W. Grace
President and       Chairman of the Board of Directors
Chief Executive Officer      

Town of McCandless • 9001 Perry Highway, Pittsburgh, Pennsylvania 15237

 

1


FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED

FINANCIAL AND OTHER DATA

 

     As of or For the Year Ended June 30,  
     2017     2016     2015     2014     2013  
     (Dollars in Thousands, except per share data)  

Selected Financial Data:

          

Total assets

   $ 351,609     $ 335,723     $ 329,716     $ 309,940     $ 287,576  

Net loans receivable

     77,455       64,673       46,163       29,724       31,531  

Mortgage-backed securities

     129,321       137,416       162,639       215,335       139,268  

Investment securities

     117,127       117,199       103,534       50,434       103,606  

Deposit accounts

     145,289       141,278       138,928       141,859       140,524  

FHLB advances – long-term fixed

     10,000       10,000       12,500       12,500       17,500  

FHLB advances – long-term variable

     6,109       6,109       105,305       99,196       —    

FHLB advances – short-term

     155,799       144,027       37,830       23,626       96,712  

Stockholders’ equity

     33,043       33,085       32,043       31,788       31,828  

Non-performing assets, troubled debt restructurings and potential problem loans (1)

     246       254       309       607       1,608  

Selected Operating Data:

          

Interest income

   $ 7,646     $ 6,812     $ 6,378     $ 5,821     $ 5,959  

Interest expense

     1,854       1,431       1,155       1,357       1,407  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     5,792       5,381       5,223       4,464       4,552  

Provision for loan losses

     58       56       70       (73     (68
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     5,734       5,325       5,153       4,537       4,620  

Non-interest income

     490       572       558       531       573  

Non-interest expense

     3,739       3,773       3,706       3,675       3,571  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     2,485       2,124       2,005       1,393       1,622  

Income tax expense

     848       799       658       473       542  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,637     $ 1,325     $ 1,347     $ 920     $ 1,080  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Information:

          

Basic earnings

   $ 0.87     $ 0.69     $ 0.69     $ 0.45     $ 0.52  

Diluted earnings

   $ 0.87     $ 0.69     $ 0.69     $ 0.45     $ 0.52  

Dividends per share

   $ 0.24     $ 0.24     $ 0.16     $ 0.16     $ 0.16  

Dividend payout ratio

     27.59     34.78     24.24     35.56     30.77

Book value per share at period end:

          

Common Equity

   $ 16.45     $ 16.22     $ 15.70     $ 15.45     $ 15.47  

Tier I Equity

   $ 16.54     $ 16.34     $ 15.93     $ 15.66     $ 15.83  

Average shares outstanding:

          

Basic

     1,873,790       1,910,538       1,941,872       2,057,920       2,057,930  

Diluted

     1,873,790       1,910,538       1,941,872       2,057,920       2,057,930  

 

2


FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED

FINANCIAL AND OTHER DATA

 

     As of or For the Year Ended June 30,  
     2017     2016     2015     2014     2013  

Selected Operating Ratios (2):

  

Average yield earned on interest-earning assets (3)

     2.29     2.09     2.07     1.96     2.22

Average rate paid on interest-bearing liabilities

     0.65       0.51       0.44       0.53       0.63  

Average interest rate spread (4)

     1.64       1.58       1.63       1.43       1.59  

Net interest margin (4)

     1.73       1.65       1.70       1.50       1.70  

Ratio of interest-earning assets to interest-bearing liabilities

     116.28       115.70       116.12       116.64       119.61  

Non-interest expense as a percent of average assets

     1.09       1.13       1.17       1.20       1.30  

Return on average assets

     0.48       0.40       0.43       0.30       0.39  

Return on average equity

     4.94       4.09       4.23       2.87       3.45  

Ratio of average equity to average assets

     9.65       9.68       10.05       10.50       11.42  

Full-service offices at end of period

     5       5       5       5       5  

Asset Quality Ratios (2):

          

Non-performing and potential problem loans and troubled debt restructurings as a percent of net total loans (1)

     0.32     0.39     0.67     2.04     5.10

Non-performing assets as a percent of total assets (1)

     0.07       0.08       0.09       0.20       0.51  

Non-performing assets, troubled debt restructurings and potential problem loans as a percent of total assets (1)

     0.07       0.08       0.09       0.20       0.56  

Allowance for loan losses as a percent of total loans receivable

     0.54       0.56       0.65       0.78       0.96  

Allowance for loan losses as a percent of non-performing loans

     169.92       141.73       98.38       38.55       19.09  

Charge-offs to average loans receivable outstanding during the period

     0.00       0.00       0.00       0.00       0.03  

Capital Ratios (2):

          

Common Equity Tier 1 risk-based capital ratio

     19.40     17.69     21.75     N/A       N/A  

Tier 1 risk-based capital ratio

     19.40       17.69       21.75       29.27     20.02

Total risk-based capital ratio

     19.67       17.90       21.99       29.52       20.24  

Tier 1 leverage capital ratio

     9.53       9.95       10.03       10.17       11.88  

 

(1) Non-performing assets consist of non-performing loans and real estate owned (“REO”). Non-performing loans consist of non-accrual loans and accruing loans greater than 90 days delinquent, while REO consists of real estate acquired through foreclosure and real estate acquired by acceptance of a deed in lieu of foreclosure. Potential problem loans include loans where management has some doubt as to the ability of the borrower to comply with present loan repayment terms.
(2) Consolidated asset quality ratios and capital ratios are end of period ratios, except for charge-offs to average net loans. With the exception of end of period ratios, all ratios are based on average monthly balances during the indicated periods.
(3) Interest and yields on tax-exempt loans and securities (tax-exempt for federal income tax purposes) are shown on a fully taxable equivalent basis.
(4) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, and net interest margin represents net interest income as a percent of average interest-earning assets.

 

3


WVS FINANCIAL CORP. AND SUBSIDIARY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 bank 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.

 

4


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 June 30, 2017.

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.

CHANGES IN FINANCIAL CONDITION

 

     Condensed Balance Sheet  
     June 30,      Change  
     2017      2016      Dollars      Percentage  
     (Dollars in Thousands)  

Cash equivalents

   $ 2,272      $ 2,343      $ (71      -3.03

Certificates of deposit

     10,380        350        10,030        n/m (2) 

Investments (1)

     253,510        261,214        (7,704      -2.95  

Net loans receivable

     77,455        64,673        12,782        19.76  

Total assets

     351,609        335,723        15,886        4.73  

Deposits

     145,289        141,278        4,011        2.84  

Borrowed funds

     171,908        160,136        11,772        7.35  

Total liabilities

     318,566        302,638        15,928        5.26  

Stockholders’ equity

     33,043        33,085        (42      -0.13  

 

(1) Includes mortgage-backed securities and Federal Home Loan Bank (FHLB) stock.
(2) n/m – not meaningful

 

5


Cash Equivalents. Cash on hand and due from banks, and interest-earning demand deposits represent cash equivalents. Cash equivalents decreased $71 thousand or 3.03% to $2.272 million at June 30, 2017 from $2.343 million at June 30, 2016. Changes in cash equivalents are influenced by the timing of customer transaction account deposits, the redeployment of funds into other earning assets such as investments or loans, and the repayment of Company borrowings.

Certificates of Deposit. Certificates of deposit increased to $10.380 million on June 30, 2017 from $350 thousand at June 30, 2016 as part of the Company’s overall liquidity and investing strategies. The certificates also qualify for a 20% risk-weight under the BASEL III risk-based capital regulations.

Investments. The Company’s investment portfolio is primarily comprised of U.S. Government Agency bonds, corporate bonds, foreign debt securities, obligations of state and political subdivisions, FHLB stock and mortgaged-backed securities issued by U.S. Government Agencies and private-issuers. See Notes 3 and 4 to the Consolidated Financial Statements for additional information. The Company’s investment portfolio decreased $7.704 million or 2.95% to $253.510 million at June 30, 2017 from $261.214 million at June 30, 2016. Proceeds from investments were primarily used to fund the Company’s purchases of certificates of deposit. The Company purchased certificates of deposit due to relatively attractive risk-adjusted returns when compared to other investment securities and to add to on balance sheet liquidity.

Investment securities other than mortgage-backed securities, decreased $0.072 million or 0.06% to $117.127 million at June 30, 2017 from $117.199 million at June 30, 2016. This change was due to the following purchases all of which were investment-grade: $39.528 million corporate bonds fixed-rate and $44.788 million floating-rate; U.S. dollar denominated foreign bonds fixed-rate $4.629 million and $10.849 million floating rate. These purchases were offset by early issuer redemptions and maturities totaling $83.922 million of corporate bonds, $6.650 million of U.S. dollar denominated foreign bonds, $6.841 million of corporate utility first mortgage bonds, and $705 thousand in sales of taxable municipal bonds. Our investment in Federal Home Loan Bank (FHLB) stock increased $463 thousand or 7.02% to $7.062 million at June 30, 2017 from $6.599 million at June 30, 2016 due to higher levels of FHLB advances. Investment purchases were primarily funded with cash flows from maturities and early issuer redemptions from investment securities other than mortgage-backed securities. See “Quantitative and Qualitative Disclosures about Market Risk”.

Mortgage-backed securities decreased $8.095 million or 5.89% to $129.321 million at June 30, 2017 from $137.416 million at June 30, 2016. This decrease was due primarily to cash repayments on U.S. Government Agency floating rate mortgage-backed securities totaling $29.7 million and $467 thousand in cash repayments on the Company’s private-label floating-rate mortgage-backed securities portfolio, which were partially offset by $21.954 million in purchases of U.S. Government Agency floating-rate mortgage-backed securities. Net cash flows from the mortgage-backed securities segment were used primarily to fund purchases of certificates of deposit and to partially fund loan growth.

Net Loans Receivable. Net loans receivable increased $12.782 million or 19.76% to $77.455 million at June 30, 2017, from $64.673 million at June 30, 2016. The increase in net loans was primarily attributable to an increase in single-family real estate loans totaling $15.742 million, which was partially offset by decreases in construction loans totaling $2.917 million. Due to the stagnant economy, a number of the Company’s small builders have continued to focus on construction contracts to end buyers as opposed to speculative construction without a buyer under contract. This shift in builder strategy also caused a substantially reduced number of new home starts which continued to adversely impact originations of new speculative construction loans. The Company continues to aggressively pursue 15, 20, and 30 year fixed-rate single-family residential real estate loans. The Company also makes available residential mortgage loans with interest rates which adjust pursuant to a designated index, although customer acceptance has been somewhat limited in the Savings Bank’s market area. We expect that the housing market will continue to modestly grow throughout fiscal 2018. 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

 

6


multi-family loans to existing, and seasoned prospective, customers. During fiscal 2017, the Company retained all of its loan originations. The Company also partners with the FHLB’s Mortgage Partnership Finance® (“MPF”) Program to make purchase money and refinancing mortgages available to the public. These loans are originated through the Company who then assigns the loans to the MPF Program. This MPF Program relationship allows the Company to earn loan origination fee income and avoid the interest rate risk of retaining long-term fixed rate mortgages with low interest rates on the Company’s balance sheet. Residential loan originations increased in fiscal 2015, 2016 and 2017, and we expect this trend to continue into fiscal 2018.

Deposits. Total deposits increased approximately $4.011 million or 2.84% during the year ended June 30, 2017. Certificates of deposit increased $2.063 million or 6.82% primarily due to an increase in CDARS deposits. Savings and money market accounts decreased by $1.708 million or 3.62% and $566 thousand or 2.46%, respectively. Checking account deposits increased $3.698 million or 9.37%. Advance payments by borrowers for taxes and insurance increased $524 thousand or 41.55% as a result of the increase in single family real estate loans during fiscal 2017 compared to fiscal 2016. See Note 12 to the Consolidated Financial Statements and “Quantitative and Qualitative Disclosures on Market Risk.”

Borrowed Funds. Borrowed funds increased $11.772 million or 7.35% to $171.908 million during fiscal 2017. The Company’s borrowed funds are comprised of three components: FHLB long-term advances – fixed rate, FHLB long-term advances – variable rate, and short-term borrowings. Short-term borrowings include FHLB short-term advances and other short-term borrowings such as broker repurchase agreements or borrowings from the Federal Reserve Bank of Cleveland (FRB).

At June 30, 2017, the Company had one FHLB long-term fixed rate advance totaling $10.000 million with a weighted-average interest rate of 4.26% which matured in July 2017. At June 30, 2017, the Company had two FHLB long-term variable rate advances totaling $6.109 million, with a weighted average interest rate of 1.25%. These advances will mature by the quarter ending September 30, 2017. The Company intends to replace all of its maturing FHLB advances with FHLB short-term advances.

The Company also uses a variety of short-term borrowing sources as part of its asset/liability management program. The actual short-term funding source used, at any given point in time, depends upon factors such as cost, terms, maturity terms and general market conditions. During fiscal 2017, we increased our FHLB short-term borrowings by $11.772 million or 8.17%. We had no other short-term borrowings at June 30, 2017.

Stockholders’ Equity. Total stockholders’ equity decreased slightly to $33.043 million at June 30, 2017, compared to $33.085 million at June 30, 2016. The changes in stockholders’ equity were attributable to Company net income of $1.637 million, which was partially offset by the purchase of $1.109 million of unallocated ESOP shares, $482 thousand of cash dividends paid on the Company’s common stock, $359 thousand paid for the acquisition of Treasury stock, and other comprehensive income, net of tax, totaling $50 thousand. See the Consolidated Statement of Comprehensive Income and Note 5 to the Consolidated Financial Statements for a discussion of the components of other comprehensive income. Book value per share (tier 1 equity basis) increased from $16.34 at June 30, 2016 to $16.54 at June 30, 2017. On a common equity basis, book value per share increased from $16.22 at June 30, 2016 to $16.45 at June 30, 2017. The Company was able to maintain strong capital ratios during fiscal 2017. Our tier 1 leverage ratio was 9.53% and total risk-based capital ratio was 19.67% at June 30, 2017, as compared to 9.95% and 17.69%, respectively, at June 30, 2016.

 

7


RESULTS OF OPERATIONS

 

     Condensed Statements of Income  
     Year Ended
June 30,
2017
     Change     Year Ended
June 30,
2016
     Change     Year Ended
June 30,
2015
 
     (Dollars in Thousands)  

Interest income

   $ 7,646      $ 834     $ 6,812      $ 434     $ 6,378  
        12.24        6.80  

Interest expense

   $ 1,854        423     $ 1,431      $ 276     $ 1,155  
        29.56        23.90  

Net interest income

   $ 5,792      $ 411     $ 5,381      $ 158     $ 5,223  
        7.64        3.03  

Provision for loan losses

   $ 58      $ 2     $ 56      $ (14   $ 70  
        3.57        -20.0  

Non-interest income

   $ 490      $ (82   $ 572      $ 14     $ 558  
        -14.34        2.51  

Non-interest expense

   $ 3,739      $ (34   $ 3,773      $ 67     $ 3,706  
        -0.90        1.81  

Income tax expense

   $ 848      $ 49     $ 799      $ 141     $ 658  
        6.13        21.43  

Net income

   $ 1,637      $ 312     $ 1,325      $ (22   $ 1,347  
        23.55        -1.63  

General. The Company reported net income of $1.637 million, $1.325 million and $1.347 million for the fiscal years ended June 30, 2017, 2016 and 2015, respectively. The $312 thousand increase in net income during fiscal 2017 was primarily attributable to a $411 thousand increase in net interest income and a $34 thousand decrease in non-interest expense, which was partially offset by an $82 thousand decrease in non-interest income, a $49 thousand increase in income tax expense, and a $2 thousand increase in provisions for loan losses. The $22 thousand decrease in net income during fiscal 2016 was primarily attributable to a $141 thousand increase in income tax expense and a $67 thousand increase in non-interest expense, which were partially offset by a $158 thousand increase in net interest income, a $14 thousand decrease in provisions for loan losses, and a $14 thousand increase in non-interest income. Earnings per share totaled $0.87 (basic and diluted) for fiscal 2017 as compared to $0.69 (basic and diluted) for both fiscal 2016 and 2015.

 

8


Average Balances, Net Interest Income and Yields Earned and Rates Paid. The following average balance sheet table sets forth at and for the periods indicated information on the Company regarding: (1) the total dollar amounts of interest income on interest-earning assets and the resulting average yields; (2) the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs; (3) net interest income; (4) interest rate spread; (5) net interest-earning assets (interest-bearing liabilities); (6) the net yield earned on interest-earning assets; and (7) the ratio of total interest-earning assets to total interest-bearing liabilities.

 

     For the Years Ended June 30,  
     2017     2016     2015  
     Average
Balance
     Interest      Average
Yield/Rate
    Average
Balance
     Interest      Average
Yield/Rate
    Average
Balance
     Interest      Average
Yield/Rate
 
     (Dollars in Thousands)  

Interest-earning assets:

          

Net loans receivable (1),(2)

   $ 72,120      $ 2,721        3.77   $ 56,974      $ 2,324        4.08   $ 35,240      $ 1,640        4.65

Mortgage-backed securities

     131,609        2,333        1.77       150,421        2,155        1.43       192,411        2,781        1.45  

Investments - taxable

     113,260        2,114        1.87       110,906        1,981        1.80       73,017        1,493        2.04  

Investments - tax-free (2)

     1,330        17        1.87       568        8        2.08       —          —          —    

Trading securities

     277        5        1.81       —          —          —         —          —          —    

FHLB stock

     6,698        329        4.91       6,505        336        5.17       6,133        457        7.45  

Interest-bearing deposits

     391        3        0.77       349        1        0.29       349        1        0.29  

Certificates of deposits

     8,282        124        1.50       350        7        2.00       375        6        1.60  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     333,967        7,646        2.29     326,073        6,812        2.09     307,525        6,378        2.07
     

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-earning assets

     9,335             8,919             9,317        
  

 

 

         

 

 

         

 

 

       

Total assets

   $ 343,302           $ 334,992           $ 316,842        
  

 

 

         

 

 

         

 

 

       

Interest-bearing liabilities:

                  

Interest-earning checking accounts

   $ 22,472        4        0.02   $ 21,602        4        0.02   $ 21,240        4        0.02

Savings accounts

     46,041        20        0.04       45,367        22        0.05       43,909        21        0.05  

Money market accounts

     23,034        21        0.09       24,263        22        0.09       24,401        22        0.09  

Savings certificates

     34,071        200        0.59       32,293        162        0.50       32,899        170        0.52  

Advance payments by borrowers for taxes and insurance

     1,213        —          —         1,020        —          —         571        —          —    

FHLB long-term advances

     16,109        491        3.05       107,117        969        0.90       116,930        860        0.74  

FHLB short-term advances

     144,258        1,118        0.78       47,413        238        0.50       23,496        73        0.31  

Other short-term borrowings

     —          —          —         2,748        14        0.51       1,378        5        0.36  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     287,198        1,854        0.65     281,823        1,431        0.51     264,824        1,155        0.44
     

 

 

    

 

 

      

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Non-interest-bearing accounts

     21,213             19,456             18,990        
  

 

 

         

 

 

         

 

 

       

Total interest-bearing liabilities and non-interest-bearing accounts

     308,411             301,279             283,814        

Non-interest-bearing liabilities

     1,748             1,298             1,182        
  

 

 

         

 

 

         

 

 

       

Total liabilities

     310,159             302,557             284,996        

Equity

     33,143             32,415             31,846        
  

 

 

         

 

 

         

 

 

       

Total liabilities and equity

   $ 343,302        $ 334,992           $ 316,842        
  

 

 

         

 

 

         

 

 

       

Net interest income

      $ 5,792           $ 5,381         $ 5,223     
     

 

 

         

 

 

         

 

 

    

Interest rate spread

        1.64        1.58        1.63
        

 

 

         

 

 

         

 

 

 

Net yield on interest-earning assets (3)

           1.73           1.65           1.70
        

 

 

         

 

 

         

 

 

 

Ratio of interest-earning assets to interest-bearing liabilities

           116.28           115.70           116.12
        

 

 

         

 

 

         

 

 

 

 

(1) Includes non-accrual and tax-exempt loans.
(2) Yields on tax-exempt loans and tax-exempt securities (tax-exempt for federal income tax purposes) are shown on a fully taxable equivalent basis utilizing a calculation that reflects the tax-exempt coupon, and a 20% interest expense disallowance and a federal tax rate of 34%.
(3) Net interest income divided by average interest-earning assets.

 

9


Rate/Volume Analysis. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Company’s interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume (change in volume multiplied by prior year rate), (2) changes in rate (change in rate multiplied by prior year volume), and (3) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.

 

     Year Ended June 30,  
     2017 vs. 2016     2016 vs. 2015  
     Increase (Decrease)
Due to
    Total
Increase
(Decrease)
    Increase (Decrease)
Due to
    Total
Increase
(Decrease)
 
     Volume     Rate       Volume     Rate    
     (Dollars in Thousands)  

Interest-earning assets:

            

Net loans receivable

   $ 574     $ (177   $ 397     $ 906     $ (222   $ 684  

Mortgage-backed securities

     (328     506       178       (612     (14     (626

Investments - taxable

     (32     174       142       709       (213     496  

Trading assets

     5       0       5       —         —         —    

FHLB stock

     10       (17     (7     26       (147     (121

Interest-bearing deposits

     —         2       2       —         —         —    

Certificates of deposit

     119       (2     117       (1     2       1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

   $ 348     $ 486     $ 834     $ 1,028     $ (594   $ 434  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

Interest-earning checking accounts

   $ —       $ —       $ —       $ —       $ —       $ —    

Savings accounts

     3       (5     (2     1       —         1  

Money market accounts

     (1     —         (1     —         —         —    

Savings certificates

     9       29       38       (1     (7     (8

Advance payments by borrowers for taxes and insurance

     —         —         —         —         —         —    

FHLB long-term borrowings

     (1,043     565       (478     (36     145       109  

FHLB short-term borrowings

     747       133       880       103       62       165  

Other short-term borrowings

     (14     0       (14     6       3       9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

   $ (299   $ 722     $ 423     $ 73     $ 203     $ 276  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 648     $ (236   $ 411     $ 955     $ (797   $ 158  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income. Net interest income is determined by the Company’s interest rate spread (i.e. the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income increased by $411 thousand or 7.64% in fiscal 2017 and increased $158 thousand or 3.03% in fiscal 2016. The increase in fiscal 2017 was the result of an $834 thousand or 12.24% increase in interest and dividend income which was partially offset by a $423 thousand or 29.56% increase in interest expense. The increase in fiscal 2016 was the result of a $434 thousand or 6.80% increase in interest and dividend income partially offset by a $276 thousand or 23.90% increase in interest expense. Fiscal year 2017 was favorably impacted by higher levels of net loans receivable and by the reduction of fixed interest costs associated with the repayments on our legacy FHLB long-term advances.

Interest Income. Total interest income increased by $834 thousand or 12.24% during fiscal 2017 and increased $434 thousand or 6.80% during fiscal 2016. The increase in fiscal 2017 was primarily the result of higher average balances of net loans receivable and certificates of deposit as well as higher yields on mortgage-backed securities and taxable investment securities, which more than offset lower average balances of mortgage-backed securities and lower yields on the Company’s loan portfolio. The increase in fiscal 2016 was due to higher average balances of net loans receivable and taxable investment securities which more than offset lower average balances of mortgage-backed securities and lower yields on the Company’s interest-earning assets. During fiscal 2009, the global economy went into a deep recession. In response to the weak global economy, the world’s central banks implemented a variety of programs including lowering short-term interest rates and various liquidity programs to help restore investor confidence. The overall impact of the global recession, central bank intervention efforts and market disruptions was markedly

 

10


lower interest rates, especially in the short and intermediate term bond markets. Management continuously evaluates market opportunities, and associated borrowing costs, to contribute to net interest income. The Company believes that it has sufficient capital to grow its balance sheet as opportunities become available.

Interest income on net loans receivable increased $397 thousand or 17.08% during fiscal 2017 and increased $684 thousand or 41.71% during fiscal 2016. The increase in fiscal 2017 was primarily the result of a $15.146 million increase in the average balances of net loans outstanding which more than offset a 31 basis point decrease in the weighted average yield on the Company’s loan portfolio. The increase in fiscal 2016 was primarily the result of a $21.734 million increase in the average balances of net loans outstanding which more than offset a 57 basis point decrease in the weighted average yield on the Company’s loan portfolio. Prior to fiscal 2014, as part of its asset/liability management strategy, historically low long-term mortgage rates, weakness in the economy, rising inventories of existing homes available for sale, and lower construction starts throughout our lending area, the Company had limited its portfolio origination of longer-term fixed rate loans to mitigate its exposure to a rise in market interest rates and credit risk. The Company began portfolio originations of single-family mortgage loans with longer-term fixed rate loans during fiscal 2014, as well as reoffering multi-family and commercial real estate loans, construction loans, land acquisition and development loans, consumer loans, small business and commercial loans. Overall loan demand, and borrower financial capacity were constrained during both fiscal 2013 and 2012 due to weakness in the national economy. Beginning in fiscal 2014, and throughout fiscal 2015, the Company began to see an increase in single-family and multi-family refinancing loans. During both fiscal 2017 and 2016, the Company also enjoyed higher levels of single-family home purchase loans. Substantially all of our loan originations were fixed-rate with a mix of 15, 20 and 30 year terms.

Interest income on investment securities increased $142 thousand or 7.14% during fiscal 2017 and increased $496 thousand or 33.22% during fiscal 2016. The increase in fiscal 2017 was primarily attributable to a $13.160 million increase in the average balance of investment grade corporate bonds, a 101 basis point increase in the weighted average yield on the Company’s U.S. Government Agency debentures and a 7 basis point increase in the weighted average yield earned on corporate bonds which more than offset a $10.029 million decrease in the average balance of U.S. Government Agency debentures outstanding. The increase in yields earned on, and the decrease in average balances of, U.S. Government Agency debentures were primarily attributable to accretion of purchase discounts on early issuer redemptions. The increase in fiscal 2016 was primarily attributable to a $50.909 million increase in the average balance of investment grade corporate bonds which more than offset a $16.233 million decrease in the average balance of U.S. Government Agency debentures and a 24 basis point decrease in the average yield of the Company’s taxable investment portfolio. The increase in corporate bond holdings for both periods was primarily attributable to relatively unattractive investment opportunities in other market segments such as U.S. Government Agency debentures and mortgage-backed securities. The 24 basis point decrease in overall yield was consistent with lower market yields on investments short and intermediate term securities during fiscal 2016, which more than offset an $18.327 million decrease in the average balance of U.S. Government Agency mortgage-backed securities.

During 2017, interest income on mortgage-backed securities increased $178 thousand or 8.26% and decreased $626 thousand or 22.51% during fiscal 2016. The increase in fiscal 2017 was primarily the result of an increase of 34 basis points in the weighted average yield on U.S. Government Agency mortgage-backed securities. The decrease in fiscal 2016 was primarily the result of a $41.470 million decrease in the average balance of U.S. Government Agency mortgage-backed securities. During both fiscal 2017 and 2016 the U.S. Government Agency mortgage-backed securities sector offered relatively unattractive investment opportunities. The Company began to reinvest cash repayments of principal into floating rate certificates of deposit, investment securities and increased its net loan portfolio. The average balances associated with the Company’s private label mortgage-backed securities declined $485 thousand and $520 thousand, during fiscal 2017 and fiscal 2016, respectively. The Company continues to reduce its exposure to private-label mortgage-backed securities due to the substandard investment performance associated with this segment. Proceeds from repayments on the mortgage-backed securities were primarily used to fund the growth of net loans and investment securities purchases during fiscal 2017 and fiscal 2016.

 

11


Dividend income on FHLB stock fell by $7 thousand or 2.08% during fiscal 2017, and decreased $121 thousand or 26.48% during fiscal 2016. The 2017 decrease was the result of a 26 basis point decline in the weighted average yield which more than offset a $193 thousand increase in the average balance of FHLB stock. The decrease in fiscal 2016 was primarily the result of the absence of a $145 thousand special dividend paid in fiscal 2015 which more than offset a $372 thousand increase in the average balance of FHLB stock holdings. The Company’s average holdings of FHLB stock are directly related to the volume of outstanding FHLB advances.

Interest income on certificates of deposit increased $117 thousand during fiscal 2017 and increased $1 thousand or 16.67% during fiscal 2016. The increase in fiscal 2017 was the result of a $7.932 million increase in the average balance of the Company’s holdings of floating rate certificates of deposit due to relatively higher yields in this market segment. The increase in fiscal 2016 was primarily the result of a 40 basis point increase in the average yield earned on certificates of deposit. Certificates of deposit also carry a substantially lower risk based capital requirement of 20% under the Basel III risk weighting system.

Interest Expense. Total interest expense increased $423 thousand or 29.56% during fiscal 2017 and increased $276 thousand or 23.90% during fiscal 2016. The increase in fiscal 2017 was primarily attributable to higher rates paid on FHLB variable rate and short-term advances of 63 basis points and 28 basis points, respectively, and a $96.845 million increase in the average balance of FHLB short-term advances which more than offset a $91.008 million decrease in the average balance of FHLB long-term advances. The increase in fiscal 2016 was primarily due to higher rates paid on FHLB variable rate and short-term advances of 15 basis points and 19 basis points, respectively and a $23.917 million increase in FHLB short-term advances which more than offset a $9.751 million decrease in the average balance of FHLB long-term variable rate advances. During both fiscal 2017 and 2016, the Company replaced maturing FHLB long-term advances with FHLB short-term borrowings and FHLB variable rate borrowings with maturities less than one year.

Interest expense on FHLB short-term borrowings increased $880 thousand or 369.75% during fiscal 2017, and increased $165 thousand or 226.03% during fiscal 2016. The increase in 2017 was the result of a $96.845 million increase in the average balance of FHLB short-term and a 28 basis point increase in the average rate paid. The increase in fiscal 2016 was primarily attributable to a $23.917 million increase in the average balance of FHLB short-term advances and a 19 basis point increase in the average yield paid on such advances. The increases in the average balance of FHLB short-term borrowings for both periods reflects a shift from FHLB long-term borrowings to FHLB short-term borrowings as part of the Company’s asset/liability management strategy. The increase in rates paid on FHLB short-term borrowings for both periods were consistent with increases in short-term market interest rates.

Interest expense on FHLB long-term variable-rate advances decreased $343 thousand or 84.07% and increased $111 thousand or 37.37% during fiscal 2016. The decrease in fiscal 2017 was due to an $88.570 million decrease in the average balance of FHLB long-term variable rate advances partially offset by a 63 basis point increase in the weighted-average rate paid. The increase in fiscal 2016 was primarily attributable to a 15 basis point increase in the average rate paid on FHLB advances which more than offset a $9.751 million decrease in the average balance of such advances. The decrease in the average balance is due to the Company’s use of FHLB short-term advances to replace maturing FHLB long-term variable rate advances during fiscal 2017 and 2016.

Interest expense on FHLB long-term fixed-rate borrowings decreased by $135 thousand or 24.06% during fiscal 2017 and decreased $2 thousand or 0.36% during fiscal 2016. The decrease in fiscal 2017 was primarily attributable to a $2.438 million decrease in the average balance of FHLB long-term fixed rate borrowings and a 25 basis point decrease in the average rate paid on such borrowings. The decrease in fiscal 2016 was primarily due to a $62 thousand decrease in the average balance of FHLB long-term fixed rate advances outstanding due to the payoff of a $2.5 million advance in late June 2016.

Interest expense on other short-term borrowings decreased $14 thousand or 100.00% during fiscal 2017 due to no outstanding balances during the entire fiscal year. The increase in fiscal 2016 was primarily attributable to a $1.370 million increase in the average balance of other short-term borrowings and a 15 basis point increase in the average yield paid on such borrowings. The decrease in the average balance of other short-term borrowings reflects the Company’s shift into FHLB short-term advances.

 

12


Interest expense on interest-bearing deposits increased $35 thousand or 16.67% in fiscal 2017 and decreased $7 thousand or 3.23% in fiscal 2016. The increase in fiscal 2017 was primarily attributable to a 9 basis point increase in the rate paid on time deposits, a $1.778 million increase in the average balance of time deposits and a $674 thousand increase in the average balance of savings deposits which were partially offset by a 1 basis point decrease in the rate paid on savings deposits. During fiscal 2017, the Company began to use brokered deposits in part of its asset/liability management strategy. The decrease in fiscal 2016 was primarily attributable to a 2 basis point decrease in the average yield paid on time deposits and a $606 thousand decrease in the average balance of time deposits which more than offset a $1.458 million increase in the average balance of savings deposits. Terms associated with broker deposits were sometimes more favorable during fiscal 2017 than terms offered on short-term borrowings. The Company had $5.772 million and $1.468 million of brokered deposits outstanding at June 30, 2017 and 2016, respectively.

Provision for Loan Losses. A provision for loan losses is charged, or accreted to earnings to bring the total allowance to 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 periodic evaluations of the loan portfolio considering past experience, current economic conditions, volume, growth, composition of the loan portfolio and other relevant factors. The Company recorded provisions for loan losses totaling $58 thousand in fiscal 2017 and $56 thousand in fiscal 2016. The changes in the provisions for loan losses recorded during both fiscal 2017 and 2016 were primarily attributable to growth in the Company’s single family owner occupied loan portfolio. In fiscal 2016 the Company also reversed previous provisions for loan losses due to payoffs in the commercial real estate and multi-family loan segments. In general, the Company records lower provisions for loan losses for less risky single-family owner occupied loans and higher provision for commercial real estate and multi-family loans.

Non-interest Income. Total non-interest income decreased $82 thousand or 14.34% in fiscal 2017 and increased $14 thousand or 2.51% in fiscal 2016. The decrease in fiscal 2017 was primarily attributable to a $31 thousand market loss on trading securities, the absence of $31 thousand in investment securities gains recorded in 2016, and an $18 thousand decrease in service charges on deposits. The increase in fiscal 2016 was primarily attributable to the $31 thousand investment securities gains which more than offset an $8 thousand decrease in service charges on deposits and a $6 thousand decrease in earnings on bank owned life insurance.

Non-interest Expense. Total non-interest expense decreased $34 thousand or 0.90% in fiscal 2017, and increased $67 thousand or 1.81% during fiscal 2016. The decrease in fiscal 2017 was primarily attributable to lower federal deposit insurance premiums and legal expenses, which were offset by increases in charitable contributions eligible for Pennsylvania tax credits and higher employee related expenses. The increase in fiscal 2016 was primarily due to increases in employee related costs, federal deposit insurance premiums and legal expenses.

Income Taxes. Income taxes increased $49 thousand during fiscal 2017 and increased $141 thousand during fiscal 2016. The increase in both periods was primarily due to increased levels of taxable income, partially offset by Pennsylvania educational improvement tax credits resulting from eligible charitable contributions. The Company’s combined effective tax rate was 34.1% for the year ended June 30, 2017 and 37.6% for the year ended June 30, 2016.

 

13


LIQUIDITY AND CAPITAL RESOURCES

Liquidity is often analyzed by reviewing the cash flow statement. Cash and cash equivalents decreased by $71 thousand during fiscal 2017 primarily due to $16.705 million net cash used by investing activities which was offset by $14.059 million of net cash provided by financing activities and by $2.575 million of net cash provided by operating activities.

Funds used for investing activities totaled $16.807 million during fiscal 2017 as compared to $10.819 million used for investing activities during fiscal 2016. Primary uses of funds during fiscal 2017 included purchases of investments and mortgage-backed securities totaling $99.794 million, and $21.954 million, respectively, a $12.792 million increase in net loans receivable, and a $10.138 million increase in purchases of certificates of deposit which were partially offset by repayments of investments, and mortgage-backed securities totaling $98.036 million, and $30.207 million, respectively. Investment purchases were comprised primarily of floating rate U.S. Government Agency mortgage-backed securities, floating rate certificates of deposits and investment grade corporate bonds.

Funds provided by financing activities totaled $14.059 million for fiscal 2017 as compared to $6.348 million provided by financing activities in fiscal 2017. Primary sources of funds for fiscal 2017 were a $11.772 million increase in FHLB short-term advances and a $4.011 million increase in deposits, which were partially offset by a $359 million purchase of treasury stock, an increase of $1.104 million in unallocated ESOP shares and $482 thousand in cash dividends paid on the Company’s common stock. Management has determined that it currently is maintaining adequate liquidity and continues to match funding sources with lending and investment opportunities.

Funds provided by operating activities totaled $2.677 million during fiscal 2017 as compared to $3.241 million during fiscal 2016. In fiscal 2017, net cash provided by operating activities was primarily attributable to $1.637 million of net income and $1.803 million of amortization and accretion of discounts, premiums and deferred loan fees, and a $302 thousand decrease in interest receivable, which were partially offset by a $1.230 million increase in cash items in the process of collection. Cash items in process of collection include checks written on customer checking accounts returned by the Savings Bank for various reasons including items rejected for non-sufficient funds or incorrect amounts paid by a depository bank or the Federal Reserve. The Savings Bank had one cash item in process of collection on June 30, 2017 and collected the $1.230 million due in early July 2017.

The Company’s primary sources of funds are deposits, repayments on existing loans, investment portfolio cash flow, funds from operations and funds obtained through various borrowings. At June 30, 2017, the total approved loan commitments outstanding amounted to $2.132 million. At the same date, commitments under unused lines of credit amounted to $5.729 million and the unadvanced portion of construction loans approximated $2.136 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2017, totaled $25.949 million. Management believes that a significant portion of our local maturing deposits will remain with the Company.

The Company’s contractual obligations at June 30, 2017 were as follows:

 

    

Contractual Obligations

(Dollars in Thousands)

 
     Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 

Long-term debt

   $ 16,109      $ 16,109      $ —        $ —        $ —    

Operating lease obligations

     172        44        115        13        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,281      $ 16,153      $ 115      $ 13      $ —    

See also Note 13 of the Company’s Consolidated Financial Statements.

 

14


Historically, the Company used its sources of funds primarily to meet its ongoing commitments to pay maturing certificates of deposit and savings withdrawals, fund loan commitments and maintain a substantial portfolio of investment securities. The Company has been able to generate sufficient cash through FHLB advances, other borrowings and the retail and broker deposit markets to provide the cash utilized in investing and financing activities. Management believes that the Company currently has adequate liquidity available to respond to liquidity demands.

On July 24, 2017, the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on August 17, 2017 to shareholders of record at the close of business on August 7, 2017. 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 the future or that, if paid, such dividends will not be reduced or eliminated in future periods.

The Company’s ratio of Tier 1 capital to risk weighted assets, Common equity Tier 1 capital to risk weighted assets and total capital to risk weighted assets were 19.40%, 19.40%, and 19.67%, respectively, at June 30, 2017. The Company’s ratio of Tier 1 capital to average total assets was 9.53% at June 30, 2017.

Non-performing assets consist of non-accrual loans and real estate owned. A loan is placed on non-accrual 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 non-accrual 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 non-performing assets at June 30, 2017 totaled approximately $246 thousand or 0.07% of total assets compared to $254 thousand or 0.08% of total assets at June 30, 2016. The $8 thousand decrease in non-performing assets during the twelve months ended June 30, 2017 was attributable to the principal payments on the Company’s one non-performing single-family real estate loan.

Impact of Inflation and Changing Prices. The consolidated financial statements of the Company and related notes presented herein have been prepared in accordance with U.S. generally accepted accounting principles which require the measurement of financial condition and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services since such prices are affected by inflation to a larger degree than interest rates. In the current interest rate environment, liquidity and the maturity structure of the Company’s assets and liabilities are critical to the maintenance of acceptable performance levels.

Recent Accounting and Regulatory Pronouncements. The Company’s discussion of recent accounting and regulatory pronouncements can be found in Note 1 to the Company’s Consolidated Financial Statements.

 

15


QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

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 2013-2017, and into fiscal year 2018, 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.

Throughout fiscal year 2017, the Company continued to adjust its asset/liability management tactics, increased total assets by $6.007 million and continued to manage its Tier 1 capital. The primary segments of asset growth for fiscal year 2017 were: investment securities – available for sale, $40.760 million; net loans receivable, $18.510 million, which were partially offset by decreases in investment securities held to maturity - $27.095 million and mortgage-backed securities held to maturity - $25.223 million. We anticipate our asset base to be in the range of $345 - $365 million during fiscal 2018, subject to economic and market conditions.

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 twelve months ended June 30, 2017, totaled $12.860 million, $98.036 million, and $30.207 million, respectively.

 

16


Despite stagnant global interest rates and Treasury yields the Company continued to grow its balance sheet and used proceeds from maturities/calls of corporate bonds and U.S. Government agency bonds, repayments on its mortgage-backed securities, and borrowings to purchase investment grade corporate bonds, floating rate certificates of deposit and to fund loan growth. In particular, the Company increased its investment securities – available for sale portfolio allocation from $107.676 million at June 30, 2016 to $108.449 million at June 30, 2017, its floating rate certificates of deposit from zero at June 30, 2016 to $10.380 million at June 30, 2017, and its net loans receivable from $64.673 million at June 30, 2016 to $77.455 million at June 30, 2017.

During the fiscal year ended June 30, 2017, the Company increased its loan portfolio by $12.782 million or 19.76% as follows: portfolios of single-family real estate loans - $15.742 million, home equity loans - $590 thousand, and commercial real estate loans - $441 thousand, which were partially offset by a $2.917 million decrease in construction loans. The Company also makes available for origination residential mortgage loans with interest rates which adjusts 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 2018. 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 limiting credit and interest rate risk. The Company has also offered higher yielding commercial and small business loans to existing customers and seasoned prospective customers.

During fiscal 2017, principal investment purchases were comprised of: investment grade corporate bonds - $84.316 million with a weighted average yield of approximately 1.56%, U.S. Government agency floating-rate CMOs - $21.954 million with a weighted average yield of approximately 1.79% and U.S. dollar denominated investment-grade corporate bonds of large foreign issuers - $15.478 million with a weighted average yield of approximately 1.59%. The Savings Bank also purchased approximately $10.000 million of floating rate certificates of deposit with various spreads based on the three-month London Interbank Offered Rate (“LIBOR”).

Investment proceeds received during fiscal 2017 were corporate bonds - $83.840 million with a weighted average yield of approximately 4.12%, corporate bonds of large foreign issuers - $6.650 million with a weighted average yield of approximately 5.20%, corporate utility first mortgage bonds - $6.841 million with a weighted average yield of approximately 3.23% and taxable municipal bonds - $705 thousand with a weighted average yield of approximately 1.09%.

As of June 30, 2017, the implementation of these asset and liability management initiatives resulted in the following:

 

  1) $191.3 million or 54.4% of the Company’s assets were comprised of floating rate certificates of deposit, investment and mortgage-backed securities. Of this $191.3 million, approximately $129.3 million float on a monthly basis based upon changes in the one-month London Interbank Offered Rate (LIBOR) and about $62.0 million reprice on a quarterly basis based upon the three-month LIBOR.

 

  2) $129.3 million or 52.5% 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) $58.2 million or 23.6% of the Company’s investment portfolio consisted of investment grade fixed-rate corporate bonds with remaining maturities as follows: 3 months or less - $10.1 million or 17.3%; 3 - 12 months - $25.9 million or 44.5%; 1 - 2 years - $22.2 million or 38.2%.

 

  4) $108.4 million or 30.8% of the Company’s assets were comprised of investment securities classified as available for sale;

 

  5) An aggregate of $8.8 million or 11.4% of the Company’s net loan portfolio had adjustable interest rates or maturities of less than 12 months; and

 

  6) The maturity distribution of the Company’s borrowings is as follows: 3 months or less - $171.9 million or 100.0%.

 

17


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.

 

     June 30,  
     2017     2016     2015  
     (Dollars in Thousands)  

Interest-earning assets maturing or repricing within one year

   $ 257,808     $ 260,710     $ 227,461  

Interest-bearing liabilities maturing or repricing within one year

     228,616       235,345       228,335  
  

 

 

   

 

 

   

 

 

 

Interest sensitivity gap

   $ 29,192     $ 25,365     $ (874
  

 

 

   

 

 

   

 

 

 

Interest sensitivity gap as a percentage of total assets

     8.30     7.56     -0.27

Ratio of assets to liabilities maturing or repricing within one year

     112.77     110.78     99.62

 

18


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 June 30, 2017. 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)

   $ 17,549     $ 30,304     $ 25,510     $ 46,683     $ 44,827     $ 38,890     $ 26,880  

% of Total Assets

     5.0     8.6     7.3     13.3     12.7     11.1     7.6

Base Case Up 100 bp

              

Cumulative Gap ($’s)

   $ 17,831     $ 30,847     $ 26,523     $ 48,414     $ 47,036     $ 41,646     $ 26,880  

% of Total Assets

     5.1     8.8     7.5     13.8     13.4     11.8     7.6

Base Case No Change

              

Cumulative Gap ($’s)

   $ 18,605     $ 32,297     $ 29,192     $ 52,898     $ 52,729     $ 48,429     $ 26,880  

% of Total Assets

     5.3     9.2     8.3     15.0     15.0     13.8     7.6

Base Case Down 100 bp

              

Cumulative Gap ($’s)

   $ 19,735     $ 34,401     $ 32,963     $ 58,910     $ 59,953     $ 56,066     $ 26,880  

% of Total Assets

     5.6     9.8     9.4     16.8     17.1     15.9     7.6

Base Case Down 200 bp

              

Cumulative Gap ($’s)

   $ 20,755     $ 36,283     $ 36,222     $ 63,769     $ 65,420     $ 61,120     $ 26,880  

% of Total Assets

     5.9     10.3     10.3     18.1     18.6     17.4     7.6

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.

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 June 30, 2017. This analysis was done assuming that the interest-earning assets will average approximately $354 million and $373 million over a projected twelve and twenty-four month period, respectively, for the estimated impact on change in net interest

 

19


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 June 30, 2017. 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  
     June 30, 2018     June 30, 2019  

Estimated impact on:

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

Change in net interest income

     -14.5     -8.7     —         3.2     7.1     -27.6     -15.0     —         8.5     17.5

Return on average equity

     4.36     5.09     6.18     6.58     7.06     3.10     4.69     6.52     7.54     8.59

Return on average assets

     0.41     0.47     0.58     0.62     0.66     0.28     0.43     0.61     0.71     0.82

Market value of equity (in thousands)

   $ 38,098     $ 40,328     $ 43,134     $ 43,686     $ 43,994            

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. The Company used no derivative financial instruments to hedge such anticipated transactions as of June 30, 2017.

 

Anticipated Transactions

 
                              (Dollars in Thousands)  

Undisbursed construction and development loans

   $ 2,136  

Undisbursed lines of credit

   $ 5,729  

Loan origination commitments

   $ 2,132  

Letters of credit

   $ —    
  

 

 

 
   $ 9,997  
  

 

 

 

 

20


LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

WVS Financial Corp.

We have audited the accompanying consolidated balance sheet of WVS Financial Corp. and subsidiary as of June 30, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2017. These consolidated financial statements are the responsibility of WVS Financial Corp.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. WVS Financial Corp. is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of WVS Financial Corp.’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WVS Financial Corp. and subsidiary as of June 30, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2017, in conformity with U.S. generally accepted accounting principles.

 

LOGO

Cranberry Township, Pennsylvania

September 8, 2017

S.R. Snodgrass, P.C. * 2009 Mackenzie Way, Suite 340, Cranberry Township, PA 16066* Phone: (724) 934-0344 *

Facsimile: (724) 934-0345

 

21


WVS FINANCIAL CORP.

CONSOLIDATED BALANCE SHEET

(In thousands)

 

     June 30,  
     2017     2016  

ASSETS

    

Cash and due from banks

   $ 1,944     $ 2,042  

Interest-earning demand deposits

     328       301  
  

 

 

   

 

 

 

Total cash and cash equivalents

     2,272       2,343  

Certificates of deposit

     10,380       350  

Investment securities available for sale (amortized cost of $108,380 and $107,556)

     108,449       107,676  

Investment securities held to maturity (fair value of $8,815 and $9,990)

     8,678       9,523  

Mortgage-backed securities held to maturity (fair value of $130,181 and $137,679)

     129,321       137,416  

Net loans receivable (allowance for loan losses of $418 and $360)

     77,455       64,673  

Accrued interest receivable

     1,206       1,508  

Federal Home Loan Bank stock, at cost

     7,062       6,599  

Premises and equipment (net)

     454       542  

Bank owned life insurance

     4,541       4,410  

Deferred tax assets (net)

     437       406  

Other assets

     1,354       277  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 351,609     $ 335,723  
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

   $ 145,289     $ 141,278  

Federal Home Loan Bank advances: short-term

     155,799       144,027  

Federal Home Loan Bank advances: long-term – fixed rate

     10,000       10,000  

Federal Home Loan Bank advances: long-term – variable rate

     6,109       6,109  

Accrued interest payable

     247       189  

Other liabilities

     1,122       1,035  
  

 

 

   

 

 

 

TOTAL LIABILITIES

     318,566       302,638  
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Preferred stock, no par value; 5,000,000 shares authorized; none outstanding

     —         —    

Common stock, par value $0.01; 10,000,000 shares authorized; 3,805,636 shares issued

     38       38  

Additional paid-in capital

     21,485       21,485  

Treasury stock (1,797,492 and 1,766,507 shares at cost)

     (27,264     (26,905

Retained earnings—substantially restricted

     41,344       40,189  

Accumulated other comprehensive loss

     (188     (238

Unallocated Employee Stock Ownership Plan (“ESOP”) shares

     (2,372     (1,484
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     33,043       33,085  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 351,609     $ 335,723  
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

22


WVS FINANCIAL CORP.

CONSOLIDATED STATEMENT OF INCOME

(In thousands, except per share data)

 

     Year Ended June 30,  
     2017     2016      2015  

INTEREST AND DIVIDEND INCOME

       

Loans, including fees

   $ 2,721     $ 2,324      $ 1,640  

Investment securities

     2,131       1,989        1,493  

Mortgage-backed securities

     2,333       2,155        2,781  

Certificates of deposit

     124       7        6  

Interest-earning demand deposits

     3       1        1  

Federal Home Loan Bank stock

     329       336        457  

Trading securities

     5       —          —    
  

 

 

   

 

 

    

 

 

 

Total interest and dividend income

     7,646       6,812        6,378  
  

 

 

   

 

 

    

 

 

 

INTEREST EXPENSE

       

Deposits

     245       210        217  

Federal Home Loan Bank advances – short-term

     1,118       238        73  

Federal Home Loan Bank advances – long-term – variable rate

     65       408        297  

Federal Home Loan Bank advances – long-term – fixed rate

     426       561        563  

Other short-term borrowings

     —         14        5  
  

 

 

   

 

 

    

 

 

 

Total interest expense

     1,854       1,431        1,155  
  

 

 

   

 

 

    

 

 

 

NET INTEREST INCOME

     5,792       5,381        5,223  

Provision for loan losses

     58       56        70  
  

 

 

   

 

 

    

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     5,734       5,325        5,153  
  

 

 

   

 

 

    

 

 

 

NONINTEREST INCOME

       

Service charges on deposits

     136       154        162  

Earnings on bank owned life insurance

     131       134        140  

Investment securities gains

     —         31        —    

Market losses on trading securities

     (31     —          —    

ATM fee income

     63       55        57  

Other

     191       198        199  
  

 

 

   

 

 

    

 

 

 

Total noninterest income

     490       572        558  
  

 

 

   

 

 

    

 

 

 

NONINTEREST EXPENSE

       

Salaries and employee benefits

     2,264       2,243        2,164  

Occupancy and equipment

     323       329        323  

Data processing

     222       220        239  

Correspondent bank charges

     38       38        38  

Federal deposit insurance premium

     111       194        175  

ATM network expense

     127       124        136  

Other

     654       625        631  
  

 

 

   

 

 

    

 

 

 

Total noninterest expense

     3,739       3,773        3,706  
  

 

 

   

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     2,485       2,124        2,005  

INCOME TAX EXPENSE

     848       799        658  
  

 

 

   

 

 

    

 

 

 

NET INCOME

   $ 1,637     $ 1,325      $ 1,347  
  

 

 

   

 

 

    

 

 

 

EARNINGS PER SHARE:

       

Basic

   $ 0.87     $ 0.69      $ 0.69  

Diluted

     0.87       0.69        0.69  

AVERAGE SHARES OUTSTANDING:

       

Basic

     1,873,790       1,910,538        1,941,872  

Diluted

     1,873,790       1,910,538        1,941,872  

See accompanying notes to the consolidated financial statements.

 

23


WVS FINANCIAL CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(In thousands)

 

     Year Ended June 30,  
     2017     2016     2015  

NET INCOME

   $ 1,637     $ 1,325     $ 1,347  

OTHER COMPREHENSIVE INCOME (LOSS)

      

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

      

Gains (losses) arising during the year

     (51     202       (250

LESS: Income tax effect

     17       69       (85
  

 

 

   

 

 

   

 

 

 
     (34     133       (165

Gains recognized in earnings

     —         (31     —    

LESS: Income tax effect

     —         (11     —    
  

 

 

   

 

 

   

 

 

 
     —         (20     —    

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

     (34     113       (165
  

 

 

   

 

 

   

 

 

 

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

      

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

     127       166       188  

LESS: Income tax effect

     43       56       64  
  

 

 

   

 

 

   

 

 

 
     84       110       124  

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

     84       110       124  
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     50       223       (41
  

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 1,687     $ 1,548     $ 1,306  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

24


WVS FINANCIAL CORP.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except per share data)

 

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

Balance June 30, 2014

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

Net income

             1,347           1,347  

Other comprehensive loss

               (41       (41

Purchase of treasury stock (16,256 shares)

           (186           (186

Increase in Unallocated ESOP shares

                 (548     (548

Release of ESOP shares

                 12       12  

Cash dividends declared ($0.16 per share)

             (329         (329
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2015

     38        21,485        (26,886     39,353       (461     (1,486     32,043  

Net income

             1,325           1,325  

Other comprehensive income

               223         223  

Purchase of treasury stock (1,590 shares)

           (19           (19

Increase in Unallocated ESOP shares

                 (50     (50

Release of ESOP shares

                 52       52  

Cash dividends declared ($0.24 per share)

             (489         (489
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2016

     38        21,485        (26,905     40,189       (238     (1,484     33,085  

Net income

             1,637           1,637  

Other comprehensive Income

               50         50  

Purchase of treasury stock (30,985 shares)

           (359           (359

Increase in unallocated ESOP shares

                 (1,109     (1,109

Release of ESOP shares

                 221       221  

Cash dividends declared ($0.24 per share)

             (482         (482
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2017

   $ 38      $ 21,485      $ (27,264   $ 41,344     $ (188   $ (2,372   $ 33,043  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

25


WVS FINANCIAL CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

 

     Year Ended June 30,  
     2017     2016     2015  

OPERATING ACTIVITIES

      

Net income

   $ 1,637     $ 1,325     $ 1,347  

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

      

Provision for loan losses

     58       56       70  

Depreciation

     97       98       91  

Gain on sale of other real estate owned

     —         —         (5

Investment securities gains

     —         (31     —    

Amortization of discounts, premiums, and deferred loan fees, net

     1,803       2,220       756  

Amortization of unallocated ESOP shares

     221       52       12  

Trading losses

     31       —         —    

Purchases of trading securities

     (961     —         —    

Sale of trading securities

     960       —         —    

Deferred income taxes

     (58     3       9  

Earnings on bank owned life insurance

     (132     (134     (140

Decrease (increase) in accrued interest receivable

     302       (310     (560

Increase (decrease) in accrued interest payable

     58       33       (14

Increase (decrease) in deferred director compensation payable

     29       (107     6  

Increase in cash items in process of collection

     (1,230     —         —    

Other, net

     83       88       76  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     2,898       3,293       1,648  
  

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES

      

Available for sale:

      

Purchase of investment securities

     (99,794     (72,318     (54,653

Proceeds from repayments of investment securities

     97,203       21,137       14,890  

Proceeds from sales of investment securities

     —         6,354       —    

Held to maturity:

      

Purchase of investment securities

     —         (9,358     (56,249

Purchase of mortgage-backed securities

     (21,954     (6,750     (21,184

Proceeds from repayments of investment securities

     833       36,466       41,726  

Proceeds from repayments of mortgage-backed securities

     30,207       32,191       76,219  

Purchase of certificates of deposit

     (10,138     (100     (100

Maturities/redemptions of certificates of deposit

     100       100       348  

Net increase in net loans receivable

     (12,792     (18,550     (16,655

Purchase of Federal Home Loan Bank stock

     (7,200     (7,039     (12,519

Redemption of Federal Home Loan Bank stock

     6,737       7,059       12,340  

Acquisition of premises and equipment

     (9     (11     (106

Sale of other real estate owned

     —         —         254  

Other

     —         —         (2
  

 

 

   

 

 

   

 

 

 

Net cash used for investing activities

     (16,807     (10,819     (15,691
  

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES

      

Net increase (decrease) in deposits

     4,011       2,350       (3,038

Repayments of Federal Home Loan Bank long-term advances

     —         (101,696     —    

Proceeds from Federal Home Loan Bank long-term advances

     —         —         6,109  

Net increase in Federal Home Loan Bank short-term advances

     11,772       106,197       14,204  

Purchase of treasury stock

     (359     (19     (186

Increase in unallocated ESOP shares

     (1,104     (47     (504

Cash dividends paid

     (482     (489     (329
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     13,838       6,296       16,256  
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (71     (1,230     2,213  

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

     2,343       3,573       1,360  
  

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF YEAR

   $ 2,272     $ 2,343     $ 3 573  
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

      

Cash paid during the year for:

      

Interest

   $ 1,796     $ 1,398     $ 1,169  

Taxes

     884       808       668  

Non-cash items:

      

Bonds received from issuer exchange offer

     —         1,002       —    

Mortgage loans transferred to other real estate owned

     —         —         246  

Educational Improvement Tax Credits

     80       —         33  

Unfunded security commitments

     —         —         1,969  

Capitalization of interest on loan to ESOP

     5       3       32  

See accompanying notes to the consolidated financial statements.

 

26


WVS FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

WVS Financial Corp. (“WVS” or the “Company”) is a Pennsylvania-chartered unitary bank holding company which owns 100 percent of the common stock of West View Savings Bank (“West View” or the “Savings Bank”). The operating results of the Company depend primarily upon the operating results of the Savings Bank and, to a lesser extent, income from interest-earning assets such as investment securities.

West View is a Pennsylvania-chartered, FDIC-insured stock savings bank conducting business from six offices in the North Hills suburbs of Pittsburgh. The Savings Bank’s principal sources of revenue originate from its portfolio of residential real estate and commercial mortgage loans as well as income from investment and mortgage-backed securities.

The Company is supervised by the Board of Governors of the Federal Reserve System, while the Savings Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation (“FDIC”) and the Pennsylvania Department of Banking and Securities.

Basis of Presentation

The consolidated financial statements include the accounts of WVS and its wholly owned subsidiary, West View. All intercompany transactions have been eliminated in consolidation. The accounting and reporting policies of WVS and West View conform to U.S. generally accepted accounting principles. The Company’s fiscal year-end for financial reporting is June 30. For regulatory and income tax reporting purposes, WVS reports on a December 31 calendar year basis.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the Consolidated Balance Sheet date and revenues and expenses for that period. Actual results could differ significantly from those estimates.

Investment and Mortgage-Backed Securities

Investment and mortgage-backed securities are classified at the time of purchase as securities held to maturity or securities available for sale based on management’s ability and intent. Investment and mortgage-backed securities acquired with the ability and intent to hold to maturity are stated at cost adjusted for amortization of premium and accretion of discount, which are computed using the level-yield method and recognized as adjustments of interest income. Amortization rates for mortgage-backed securities are periodically adjusted to reflect changes in the prepayment speeds of the underlying mortgages. Certain other investment and equity securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized holding gains and losses for available-for-sale securities are reported as a separate component of stockholders’ equity, net of tax, until realized. Realized securities gains and losses are computed using the specific identification method. Interest and dividends on investment and mortgage-backed securities are recognized as income when earned.

Common stock of the Federal Home Loan Bank (the “FHLB”) represents ownership in an institution which is wholly owned by other financial institutions. This equity security is accounted for at cost and reported separately on the accompanying Consolidated Balance Sheet.

 

27


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Investment and Mortgage-Backed Securities (Continued)

 

Management systematically evaluates investment securities for other-than-temporary declines in fair value on at least a quarterly basis. This analysis requires management to consider various factors, which include: (1) duration and magnitude of the decline in value; (2) the credit rating of the issuer or issuers; (3) structure of the security; and (4) the Company’s intent to sell the security or whether it’s more likely than not that the Company would be required to sell the security before its anticipated recovery in market value.

The Company retains an independent third party to assist it in the determination of fair values for its private-label collateralized mortgage obligations (“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 Company believes that the private-label CMO portfolio had three other than temporary impairments at June 30, 2017.

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.

Trading Securities

Trading securities are held for resale in anticipation of short-term (generally 90 days or less) fluctuations in market prices. Trading securities are stated at fair value. Realized and unrealized gains and losses are included in noninterest income as market gains and losses on trading securities.

Net Loans Receivable

Net loans receivable are reported at their principal amount, net of the allowance for loan losses and deferred loan fees. Interest on mortgage, consumer, and commercial loans is recognized on the accrual method. The Company’s general policy is to stop accruing interest on loans when, based upon relevant factors, the collection of principal or interest is doubtful, regardless of the contractual status. Interest received on nonaccrual loans is recorded as income or applied against principal according to management’s judgment as to the collectability of such principal.

Loan origination and commitment fees, and all incremental direct loan origination costs, are deferred and recognized over the contractual remaining lives of the related loans on a level-yield basis.

Allowance for Loan Losses

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.

 

28


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Allowance for Loan Losses (Continued)

 

Impaired loans are commercial and commercial real estate 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 Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. 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.

Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. 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.

Real Estate Owned

Real estate owned acquired through foreclosure is carried at the lower of cost or fair value minus estimated costs to sell. Costs relating to development and improvement of the property are capitalized, whereas costs of holding such real estate are expensed as incurred. Valuation allowances for estimated losses are provided when the carrying value of the real estate acquired exceeds the fair value.

Premises and Equipment

Land is carried at cost, while premises and equipment are stated at cost, less accumulated depreciation. Depreciation is principally computed on the straight-line method over the estimated useful lives of the related assets, which range from 3 to 10 years for furniture and equipment and 25 to 50 years for building premises. Leasehold improvements are amortized over the shorter of their estimated useful lives or their respective lease terms, which range from 7 to 15 years. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.

Income Taxes

Deferred tax assets and liabilities are computed based on the difference between the financial statement and the income tax basis of assets and liabilities using the enacted marginal tax rates. Deferred income taxes or benefits are based on the changes in the deferred tax asset or liability from period to period.

The Company files a consolidated federal income tax return. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which such items are expected to be realized or settled. As changes in tax rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

 

29


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Earnings Per Share

The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share are calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share are calculated by dividing net income available to common stockholders, adjusted for the effects of any dilutive securities, by the weighted-average number of common shares outstanding, adjusted for the effects of any dilutive securities.

Stock Options

The Company accounts for stock compensation based on the grant-date fair value of all share-based payment awards that are expected to vest, including employee share options to be recognized as employee compensation expense over the requisite service period.

The Company’s 2008 Stock Incentive Plan (the “Plan”) 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 based on five years of continuous service and have ten-year contractual terms.

During the periods ended June 30, 2017, 2016, and 2015, the Company recorded no compensation expense related to our share-based compensation awards. As of June 30, 2017, there was no unrecognized compensation cost related to unvested share-based compensation awards granted in fiscal 2009, as all options issued have fully vested.

Comprehensive Income (Loss)

The Company is required to present comprehensive income (loss) and its components in a full set of general-purpose financial statements for all periods presented. Other comprehensive income (loss) is composed exclusively of net unrealized holding gains (losses) on its available-for-sale securities portfolio, and the net non-credit component of other-than-temporary impairment on its held-to-maturity private-label CMO portfolio.

Cash Flow Information

Cash and cash equivalents include cash and due from banks and interest-earning demand deposits with original maturities of 90 days or less. Cash flow from loans, deposits, and short-term borrowings are reported net.

Reclassification of Comparative Figures

Certain comparative amounts for prior years have been reclassified to conform to current-year presentations. Such reclassifications did not affect net income or stockholders’ equity.

 

30


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements

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. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, we do not expect the new standard, or any of the amendments, to result in a material change from our current accounting for revenue because the majority of the Company’s financial instruments are not within the scope of Topic 606. However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contract 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 January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

31


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements (Continued)

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact on the financial statements. Based on the Company’s preliminary analysis of its current portfolio, the impact to the Company’s balance sheet is estimated to result in less than a 1 percent increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services (that are anoutput of the entity’s ordinary activities) in exchange for consideration. The amendments in this Update do not change the core principle of the guidance in Topic 606; they simply clarify the implementation guidance on principal versus agent considerations. The amendments in this Update are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). The amendments in this Update affect all entities that issue share-based payment awards to their employees. The standards in this Update provide simplification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as with equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition to those simplifications, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because the guidance that is being superseded was never effective. For public business entities, the amendments in this Update are effective

 

32


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements (Continued)

 

for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services in exchange for consideration. The amendments in this Update do not change the core principle for revenue recognition in Topic 606. Instead, the amendments provide (1) more detailed guidance in a few areas and (2) additional implementation guidance and examples based on feedback the FASB received from its stakeholders. The amendments are expected to reduce the degree of judgment necessary to comply with Topic 606, which the FASB expects will reduce the potential for diversity arising in practice and reduce the cost and complexity of applying the guidance. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606), which among other things clarifies the objective of the collectability criterion in Topic 606, as well as certain narrow aspects of Topic 606. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. This Update is not expected to have a significant impact on the Company’s financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations.

The underlying premise of the ASU is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s

 

33


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements (Continued)

 

current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

In October 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

 

34


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements (Continued)

 

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. This Update, among others things, clarifies that guarantee fees within the scope of Topic 460, Guarantees, (other than product or service warranties) are not within the scope of Topic 606. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for the new revenue recognition guidance. For public entities with a calendar year-end, the new guidance is effective in the quarter and year beginning January 1, 2018. For all other entities with a calendar year-end, the new guidance is effective in the year ending December 31, 2019, and interim periods in 2020. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business “ASU 2017-01”, which provides a more robust framework to use in determining when a set of assets and activities (collectively referred to as a “set”) is a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update should be applied prospectively on or after the effective date. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323), Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. This Update adds an SEC paragraph to the Codification following an SEC Staff Announcement about applying Staff Accounting Bulletin (SAB) Topic 11.M. Specifically, this announcement applies to ASU 2014-09, Revenue from Contracts with Customers (Topic 606); ASU 2016-02, Leases (Topic 842); and ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. A registrant should evaluate Updates that have not yet been adopted to determine the appropriate financial statement disclosures about the potential material effects of those Updates on the financial statements when adopted. If a registrant does not know or cannot reasonably estimate the impact that adoption of the Updates referenced in this announcement are expected to have on the financial statements, then in addition to making a statement to that effect, that registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. In this regard, the SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies that the registrant expects to apply, if determined, and a comparison to the registrant’s current accounting policies. Also, a registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The amendments in this Update are effective immediately.

 

35


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements (Continued)

 

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715). The amendments in this Update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718), which affects any entity that changes the terms or conditions of a share-based payment award. This Update amends the definition of modification by qualifying that modification accounting does not apply to changes to outstanding share-based payment awards that do not affect the total fair value, vesting requirements, or equity/liability classification of the awards. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

36


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. 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.

 

     2017      2016      2015  

Weighted-average common shares issued

     3,805,636        3,805,636        3,805,636  

Average treasury stock shares

     (1,795,615      (1,766,468      (1,755,194

Average unallocated ESOP shares

     (136,231      (128,630      (108,570
  

 

 

    

 

 

    

 

 

 

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

     1,873,790        1,910,538        1,941,872  

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

     1,873,790        1,910,538        1,941,872  
  

 

 

    

 

 

    

 

 

 

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 June 30, 2017, 2016, and 2015, there were 114,519 options with an exercise price of $16.20 which were anti-dilutive and were excluded from the calculation of diluted earnings per share.

The unallocated shares controlled by the ESOP are not considered in the weighted average shares outstanding until the shares are committed for allocation to an employee’s individual account.

 

37


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. 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)  

2017

           

AVAILABLE FOR SALE

           

Corporate debt securities

   $ 92,576      $ 144      $ (84    $ 92,636  

Foreign debt securities 1

     14,474        12        —          14,486  

Obligations of states and political subdivisions

     1,330        —          (3      1,327  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 108,380      $ 156      $ (87    $ 108,449  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (Dollars in Thousands)  

2017

           

HELD TO MATURITY

           

U.S. government agency securities

   $ 625      $ 6      $ —        $ 631  

Corporate debt securities

     2,698        91        —          2,789  

Obligations of states and political subdivisions

     5,355        41        (1      5,395  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,678      $ 138      $ (1    $ 8,815  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (Dollars in Thousands)  

2016

           

AVAILABLE FOR SALE

           

Corporate debt securities

   $ 96,742      $ 150      $ (40    $ 96,852  

Foreign debt securities 1

     8,780        5        (2      8,783  

Obligations of states and political subdivisions

     2,034        7        —          2,041  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 107,556      $ 162      $ (42    $ 107,676  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

38


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. INVESTMENT SECURITIES (Continued)

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (Dollars in Thousands)  

2016

           

HELD TO MATURITY

           

U.S. government agency securities

   $ 625      $ 5      $ —        $ 630  

Corporate debt securities

     3,543        228        —          3,771  

Obligations of states and political subdivisions

     5,355        234        —          5,589  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,523      $ 467      $ —        $ 9,990  
  

 

 

    

 

 

    

 

 

    

 

 

 

In fiscal years 2017, 2016 and 2015, the Company recorded gross realized investment security gains of $0, $31 thousand and $0, respectively, and there were no gross losses for any period. Proceeds from sales of investment securities during fiscal 2017, 2016, and 2015 were $0, $6.4 million, and $0, respectively.

The amortized cost and fair values of investment securities at June 30, 2017, 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
five years
    Due after
five through
ten years
    Due after
ten years
    Total  
     (Dollars in Thousands)  

AVAILABLE FOR SALE

          

Amortized cost

   $ 39,588     $ 64,272     $ 4,520     $ —       $ 108,380  

Fair value

     39,597       64,293       4,559       —         108,449  

Weighted average yield

     1.69     1.92     2.18     —       1.85

HELD TO MATURITY

          

Amortized cost

   $ 2,480     $ 3,368     $ 2,205     $ 625     $ 8,678  

Fair value

     2,512       3,454       2,232       631       8,815  

Weighted average yield

     4.73     3.81     3.39     2.50     3.87

At June 30, 2017, investment securities with amortized costs of $4.1 million, and fair values of $4.2 million, were pledged to secure borrowings with the Federal Home Loan Bank. At June 30, 2016, investment securities with amortized costs of $3.5 million, and fair values of $3.7 million were pledged to secure borrowings with the Federal Home Loan Bank.

 

39


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. 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 are passed through to the investor as they are 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 tranches) 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 June 30, 2017, the Company’s Agency CMOs totaled $128.2 million as compared to $136.0 million at June 30, 2016. The Company’s private-label CMOs totaled $1.1 million at June 30, 2017 as compared to $1.5 million at June 30, 2016. The $8.1 million decrease in the CMO segment of our MBS portfolio was primarily due to repayments on our U.S. Government agency CMO portfolio totaling $29.7 million, and $467 thousand in repayments on our private-label CMOs, which were partially offset by purchases of U.S. Government Agency CMOs totaling $22.0 million, and $127 thousand in amortization of non-credit unrealized holding losses on private-label CMOs with other-than-temporary impairment. At June 30, 2017, the Company’s MBS portfolio, including CMOs, were comprised of adjustable or floating rate investments. Substantially all of the Company’s floating rate MBS adjust monthly based upon changes in the one month LIBOR. The Company has no investment in multi-family or commercial real estate based MBS.

Due to prepayments of the underlying loans, and the prepayment characteristics of the CMO tranches, 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 three of its 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 (“OTTI”) at June 30, 2017. During the fiscal year ending June 30, 2017, the Company reversed $127 thousand of non-credit unrealized holding losses on three of its private-label CMOs with OTTI due to principal repayments. During the twelve months ended June 30, 2017, 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.

 

40


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. MORTGAGE-BACKED SECURITIES (Continued)

 

The amortized cost and fair values of mortgage-backed securities are as follows:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  
2017    (Dollars in Thousands)  

HELD TO MATURITY

           

Collateralized mortgage obligations:

           

Agency

   $ 128,201      $ 1,076      $ (437    $ 128,840  

Private-label

     1,120        221        —          1,341  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 129,321      $ 1,297      $ (437    $ 130,181  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  
2016    (Dollars in Thousands)  

HELD TO MATURITY

           

Collateralized mortgage obligations:

           

Agency

   $ 135,957      $ 932      $ (913    $ 135,976  

Private-label

     1,459        244        —          1,703  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and fair value of mortgage-backed securities at June 30, 2017, 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

   $ —       $ —       $ 262     $ 129,059     $ 129,321  

Fair value

     —         —         268       129,913       130,181  

Weighted average yield

     —       —       2.50     2.14     2.14

 

41


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. MORTGAGE-BACKED SECURITIES (Continued)

 

At June 30, 2017, mortgage-backed securities with amortized costs of $128.2 million and fair values of $128.8 million were pledged to secure public deposits and borrowings with the Federal Home Loan Bank. Of the securities pledged, $13.1 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. At June 30, 2016 mortgage-backed securities with an amortized cost of $127.6 million and fair values of $127.6 million, were pledged to secure borrowings with the Federal Home Loan Bank and public deposits. Of the securities pledged, $16.7 million of fair value was excess collateral.

 

5. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the changes in accumulated other comprehensive income (loss) by component for the three years ended June 30, 2017, 2016, and 2015.

 

     Unrealized Gains and
Losses on Available-
for-sale Securities
     Unrealized Gains and
Losses on Held-to-
maturity Securities
     Total  
     (Dollars in Thousands – net of tax)  

Balance – June 30, 2014

   $ 130      $ (550    $ (420

Other comprehensive income before reclassifications

     (165      124        (41

Amounts reclassified from accumulated other comprehensive income

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income

     (165      124        (41
  

 

 

    

 

 

    

 

 

 

Balance – June 30, 2015

     (35      (426      (461

Other comprehensive income (loss), before reclassifications

     133        110        243  

Amounts reclassified from accumulated other comprehensive income (loss)

     (20      —          (20
  

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive

income (loss)

     113        110        223  
  

 

 

    

 

 

    

 

 

 

Balance – June 30, 2016

     78        (316      (238

Other comprehensive income (loss), before reclassifications

     (34      84        50  

Amounts reclassified from accumulated other comprehensive income (loss)

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income (loss)

     (34      84        50  
  

 

 

    

 

 

    

 

 

 

Balance – June 30, 2017

   $ 44      $ (232    $ (188
  

 

 

    

 

 

    

 

 

 

 

42


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5. ACCUMULATED OTHER COMPREHENSIVE LOSS (Continued)

 

The following table presents the amounts reclassified out of accumulated other comprehensive loss.

 

     Amount Reclassified from Accumulated Other
Comprehensive Loss
      

Details About Accumulated Other

Comprehensive Income (Loss) Components:

   2017      2016      2015     

Affected Line Item in the Statement

Where Net Income is Presented

     (Dollars in Thousands)       

Unrealized gains and losses on available-for-sale securities

   $ —        $ (31    $ —        Investment security gains
  

 

 

    

 

 

    

 

 

    
     —          (31      —       
     —          (11      —        Income tax expense
  

 

 

    

 

 

    

 

 

    
     —          (20      —       
  

 

 

    

 

 

    

 

 

    

Total reclassifications for the period

   $ —        $ (20    $ —        Net of tax
  

 

 

    

 

 

    

 

 

    

 

6. 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 June 30, 2017 and 2016.

 

     2017  
     Less Than Twelve Months     Twelve Months or Greater     Total  
     Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
 
     (Dollars in Thousands)  

Corporate debt securities

   $ 37,965      $ (83   $ 994      $ (1   $ 38,959      $ (84

Obligations of states and political subdivisions

     1,827        (4     —          —         1,827        (4

Collateralized mortgage obligations:

               

Agency

     23,724        (69     22,949        (368     46,673        (437
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 63,516      $ (156   $ 23,943      $ (369   $ 87,459      $ (525
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

43


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6. UNREALIZED LOSSES ON SECURITIES (Continued)

 

     June 30, 2016  
     Less Than Twelve Months     Twelve Months or Greater     Total  
     Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
 
     (Dollars in Thousands)  

Corporate debt securities

   $ 19,313      $ (27   $ 6,243      $ (13   $ 25,556      $ (40

Foreign Debt Securities 4

     4,646        (2     —          —         4,646        (2

Collateralized mortgage obligations:

               

Agency

     17,862        (136     31,769        (777     49,631        (913
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 41,821      $ (165   $ 38,012      $ (790   $ 79,833      $ (955
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 (“NRSROs”); other indicators of the credit quality of the issuer; the strength of the provider of any guarantees; the length of time and extent that fair value has been less than amortized cost; and whether the Company has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. In the case of its private-label residential MBS, the Company also considers prepayment speeds, the historical and projected performance of the underlying loans and the credit support provided 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. In June 2016, the Company received a settlement from Bank of America with regards to its credit impaired mortgage-backed securities totaling $80 thousand. This settlement was applied to the credit loss component, increasing the credit loss component.

 

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

 

44


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6. UNREALIZED LOSSES ON SECURITIES (Continued)

 

Changes in the credit loss component of credit impaired mortgage-backed securities were as follows for the twelve month periods ended June 30, 2017 and 2016:

 

     Twelve Months Ended
June 30,
 
     2017      2016  
     (Dollars in Thousands)  

Beginning balance

   $ 299      $ 248  

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

     (40      (29

Reduction for increase in cash flows expected to be collected

     —          —    

Bank of America settlement

     —          80  
  

 

 

    

 

 

 

Ending Balance

   $ 259      $ 299  
  

 

 

    

 

 

 

During the twelve months ended June 30, 2017, the Company recorded no credit impairment charge, and no non-credit unrealized holding loss to accumulated other comprehensive loss. The Company was able to accrete back into other comprehensive income $84 thousand (net of income tax effect of $43 thousand), based on principal repayments on private-label CMOs previously identified with OTTI.

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

In conjunction with our adoption of ASC Topic 820 effective June 30, 2009, the Company retained an independent third party to assist it with assessing its investments within the private-label CMO portfolio. The independent third party utilized certain assumptions for producing the cash flow analyses used in the OTTI assessment. Key assumptions would include interest rates, expected market participant 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 June 30, 2017 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. The Company had three private-label CMOs with OTTI at June 30, 2017.

 

45


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6. UNREALIZED LOSSES ON SECURITIES (Continued)

 

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 CMOs, 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 June 30, 2017. Based on its analysis, management has concluded that three private-label CMOs were 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.

 

7. NET LOANS RECEIVABLE

The Company’s primary business activity is with customers located within its local market area of Northern Allegheny and Southern Butler counties within the state of Pennsylvania. The Company has concentrated its lending efforts by granting residential and construction mortgage loans to customers throughout its immediate trade area. The Company also selectively funds and participates in commercial and residential mortgage loans outside of its immediate trade area, provided such loans meet the Company’s credit policy

 

46


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. NET LOANS RECEIVABLE (Continued)

 

guidelines. At June 30, 2017 and 2016, the Company had approximately $2.3 million and $5.4 million, respectively, of outstanding loans for land development and construction in the local trade area. Although the Company had a diversified loan portfolio at June 30, 2017 and 2016, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.

Certain officers, directors, and their associates were customers of, and had transactions with, the Company in the ordinary course of business. There were no loans for those directors, executive officers, and their associates with aggregate loan balances outstanding of at least $60 thousand during the fiscal years ended June 30, 2017 and 2016.

The following table summarizes the primary segments of the loan portfolio as of June 30, 2017 and June 30, 2016.

 

     June 30, 2017      June 30, 2016  
     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

   $ 65,153     $ —        $ 65,153      $ 49,411     $ —        $ 49,411  

Construction

     1,866       —          1,866        4,783       —          4,783  

Land acquisition & development

     462       —          462        666       —          666  

Multi-family dwellings

     3,653       —          3,653        3,961       —          3,961  

Commercial

     2,033       —          2,033        1,592       —          1,592  

Consumer Loans

               

Home equity

     1,017       —          1,017        802       —          802  

Home equity lines of credit

     2,275       —          2,275        1,900       —          1,900  

Other

     139       —          139        150       —          150  

Commercial Loans

     841       —          841        1,456       —          1,456  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 77,439     $ —        $ 77,439      $ 64,721     $ —        $ 64,721  
    

 

 

    

 

 

      

 

 

    

 

 

 

Less: Deferred loan costs

     434             312       

Allowance for loan losses

     (418           (360     
  

 

 

         

 

 

      

Total

   $ 77,455           $ 64,673       
  

 

 

         

 

 

      

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.

 

47


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. NET LOANS RECEIVABLE (Continued)

 

The following table is a summary of the loans considered to be impaired as of June 30, 2017 and June 30, 2016, and the related interest income recognized for the twelve months ended June 30, 2017 and June 30, 2016:

 

     June 30,
2017
     June 30,
2016
 
     (Dollars in Thousands)  

Impaired loans with an allocated allowance:

  

Home equity lines of credit

   $ —        $ —    

Impaired loans without an allocated allowance:

     

Commercial real estate loans

     —          —    

Home equity lines of credit

     —          —    
  

 

 

    

 

 

 

Total impaired loans

   $ —        $ —    
  

 

 

    

 

 

 

Allocated allowance on impaired loans:

     

Commercial real estate loans

   $ —        $ —    

Home equity lines of credit

     —          —    
  

 

 

    

 

 

 

Total

   $ —        $ —    
  

 

 

    

 

 

 

Average impaired loans:

     

Construction loans

   $ —        $ —    

Land acquisition & development loans

     —          —    

Commercial real estate loans

     —          12  

Home equity lines of credit

     —          —    
  

 

 

    

 

 

 

Total

   $ —        $ 12  
  

 

 

    

 

 

 

Income recognized on impaired loans:

     

Construction loans

   $ —        $ —    

Land acquisition & development loans

     —          —    

Commercial real estate loans

     —          1  

Home equity lines of credit

     —          —    
  

 

 

    

 

 

 

Total

   $ —        $ 1  
  

 

 

    

 

 

 

 

48


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. NET LOANS RECEIVABLE (Continued)

 

Total nonaccrual loans as of June 30, 2017 and June 30, 2016 and the related interest income recognized for the twelve months ended June 30, 2017 and June 30, 2016 are as follows:

 

     June 30,
2017
     June 30,
2016
 
     (Dollars in Thousands)  

Principal outstanding:

     

1 – 4 family dwellings

   $ 246      $ 254  

Construction

     —          —    

Land acquisition & development

     —          —    

Commercial real estate

     —          —    

Home equity lines of credit

     —          —    
  

 

 

    

 

 

 

Total

   $ 246      $ 254  
  

 

 

    

 

 

 

Average nonaccrual loans:

     

1 – 4 family dwellings

   $ 250      $ 257  

Construction

     —          —    

Land acquisition & development

     —          —    

Commercial real estate

     —          12  

Home equity lines of credit

     —          —    
  

 

 

    

 

 

 

Total

   $ 250      $ 269  
  

 

 

    

 

 

 

Income that would have been recognized

   $ 15      $ 17  

Interest income recognized

   $ 17      $ 24  

Interest income foregone

   $ —        $ —    

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 fiscal 2017 and 2016, there were no loans modified and considered a trouble debt restructuring. At June 30, 2017 and 2016, there were no previously modified TDRs in default. One previously modified TDR, secured by commercial real estate, was paid off in full during fiscal 2016.

 

49


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. NET LOANS RECEIVABLE (Continued)

 

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.

 

50


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. NET LOANS RECEIVABLE (Continued)

 

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) 5.00% 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 June 30, 2017, is adequate.

The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of June 30, 2017 and 2016:

 

     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, 2017

                    

First mortgage loans:

                    

1 – 4 family dwellings

   $ 64,907      $ —        $ —        $ —        $ 246      $ 246      $ 65,153  

Construction

     1,866        —          —          —          —          —          1,866  

Land acquisition & development

     462        —          —          —          —          —          462  

Multi-family dwellings

     3,653        —          —          —          —          —          3,653  

Commercial

     2,033        —          —          —          —          —          2,033  

Consumer Loans

                    

Home equity

     1,017        —          —          —          —          —          1,017  

Home equity lines of credit

     2,275        —          —          —          —          —          2,275  

Other

     139        —          —          —          —          —          139  

Commercial Loans

     841        —          —          —          —          —          841  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 77,193      $ —        $ —        $ —        $ 246      $ 246        77,439  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Deferred loan costs

                       434  

Allowance for loan losses

                       (418
                    

 

 

 

Net Loans Receivable

                     $ 77,455  
                    

 

 

 

 

51


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. NET LOANS RECEIVABLE (Continued)

 

     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, 2016

                    

First mortgage loans:

                    

1 – 4 family dwellings

   $ 49,157      $ —        $ —        $ —        $ 254      $ 254      $ 49,411  

Construction

     4,783        —          —          —          —          —          4,783  

Land acquisition & development

     666        —          —          —          —          —          666  

Multi-family dwellings

     3,961        —          —          —          —          —          3,961  

Commercial

     1,592        —          —          —          —          —          1,592  

Consumer Loans

                    

Home equity

     802        —          —          —          —          —          802  

Home equity lines of credit

     1,900        —          —          —          —          —          1,900  

Other

     150        —          —          —          —          —          150  

Commercial Loans

     1,456        —          —          —          —          —          1,456  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 64,467      $ —        $ —        $ —        $ 254      $ 254        64,721  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Deferred loan costs

                       312  

Allowance for loan losses

                       (360
                    

 

 

 

Net Loans Receivable

                     $ 64,673  
                    

 

 

 

Credit Quality Information

The following tables represent credit exposure by internally assigned grades for the fiscal years ended June 30, 2017 and 2016. 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.

 

52


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. NET LOANS RECEIVABLE (Continued)

 

Credit Quality Information (continued)

 

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 June 30, 2017 and 2016.

 

     June 30, 2017  
     Construction      Land
Acquisition
&
Development
Loans
     Multi-family
Residential
     Commercial
Real
Estate
     Commercial  
     (Dollars in Thousands)  

Pass

   $ 1,866      $ 462      $ 3,653      $ 2,033      $ 841  

Special Mention

     —          —          —          —          —    

Substandard

     —          —          —          —          —    

Doubtful

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 1,866      $ 462      $ 3,653      $ 2,033      $ 841  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2016  
     Construction      Land
Acquisition
&
Development
Loans
     Multi-family
Residential
     Commercial
Real
Estate
     Commercial  
     (Dollars in Thousands)  

Pass

   $ 4,783      $ 666      $ 3,961      $ 1,592      $ 1,456  

Special Mention

     —          —          —          —          —    

Substandard

     —          —          —          —          —    

Doubtful

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 4,783      $ 666      $ 3,961      $ 1,592      $ 1,456  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

53


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. NET LOANS RECEIVABLE (Continued)

 

Credit Quality Information (Continued)

 

The following table presents performing and non-performing 1 – 4 family residential and consumer loans based on payment activity for the periods ended June 30, 2017 and June 30, 2016.

 

     June 30, 2017  
     1 – 4 Family      Consumer  
  

 

 

 
     (Dollars in Thousands)  

Performing

   $ 64,907      $ 3,431  

Non-performing

     246        —    
  

 

 

    

 

 

 

Total

   $ 65,153      $ 3,431  
  

 

 

    

 

 

 
     June 30, 2016  
     1 – 4 Family      Consumer  
  

 

 

 
     (Dollars in Thousands)  

Performing

   $ 49,157      $ 2,852  

Non-performing

     254        —    
  

 

 

    

 

 

 

Total

   $ 49,411      $ 2,852  
  

 

 

    

 

 

 

 

8. ALLOWANCE FOR LOAN LOSSES

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

 

54


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8. ALLOWANCE FOR LOAN LOSSES (Continued)

 

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

The Company had no unallocated loss allowance balance at June 30, 2017 and 2016.

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 is a summary of the changes in the allowance for loan losses:

 

     2017      2016      2015  
     (Dollars in Thousands)  

Balance, July 1

   $ 360      $ 304      $ 234  

Add:

        

Provision for loan losses

     58        56        70  

Less:

        

Loans charged off

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Balance, June 30

   $ 418      $ 360      $ 304  
  

 

 

    

 

 

    

 

 

 

 

55


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8. ALLOWANCE FOR LOAN LOSSES (Continued)

 

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 June 30, 2017, June 30, 2016 and June 30, 2015. Activity in the allowance is presented for the fiscal years ended June 30, 2017, 2016 and 2015.

 

     As of June 30, 2017  
     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, 2016

   $ 222      $ 57     $ 7     $ 22     $ 16     $ 29     $ 7     $ 360  

Charge-offs

     —          —         —         —         —         —         —         —    

Recoveries

     —          —         —         —         —         —         —         —    

Provisions

     83        (27     (2     (2     4       5       (3     58  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending ALLL Balance at June 30, 2017

   $ 305      $ 30     $ 5     $ 20     $ 20     $ 34     $ 4     $ 418  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

   $ —        $ —       $ —       $ —       $ —       $ —       $ —       $ —    

Collectively evaluated for impairment

     305        30       5       20       20       34       4       418  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 305      $ 30     $ 5     $ 20     $ 20     $ 34     $ 4     $ 418  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     As of June 30, 2016  
     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

     97        (6     (2     (8     (18     (8     1       56  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending ALLL Balance at June 30, 2016

   $ 222      $ 57     $ 7     $ 22     $ 16     $ 29     $ 7     $ 360  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

   $ —        $ —       $ —       $ —       $ —       $ —       $ —       $ —    

Collectively evaluated for impairment

     222        57       7       22       16       29       7       360  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 222      $ 57     $ 7     $ 22     $ 16     $ 29     $ 7     $ 360  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

56


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8. ALLOWANCE FOR LOAN LOSSES (Continued)

 

     As of June 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, 2014

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

Charge-offs

     —          —          —          —          —         —         —         —    

Recoveries

     —          —          —          —          —         —         —         —    

Provisions

     22        49        4        18        (11     (10     (2     70  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending ALLL Balance at June 30, 2015

   $ 125      $ 63      $ 9      $ 30      $ 34     $ 37     $ 6     $ 304  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Individually evaluated for impairment

   $ —        $ —        $ —        $ —        $ —       $ —       $ —       $ —    

Collectively evaluated for impairment

     125        63        9        30        34       37       6       304  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
   $ 125      $ 63      $ 9      $ 30      $ 34     $ 37     $ 6     $ 304  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

During the fiscal year ended June 30, 2017, the substantial changes to the ALLL were comprised of an $83 thousand increase associated with 1-4 family loans and a $27 thousand decrease attributable to construction loans. The primary reason for the changes in the ALLL balance, in total, and within the identified segments, is changes in applicable loan balances. Additionally, the reserve factor associated with the 1-4 family permanent loans increased from 0.40% to 0.43%.

During the fiscal year ended June 30, 2016, the ALLL associated with 1-4 family loans increased $97 thousand while the ALLL associated with commercial real estate, multi-family and consumer loans decreased $18 thousand, $8 thousand and $8 thousand, respectively. The increase in the ALLL associated with 1-4 family loans was primarily due to higher balances of these loans. Additionally, the reserve factor for the 1-4 family segment increased from 0.35% to 0.40%. The decreases in the ALLL associated with commercial real estate and consumer loans were primarily due to lower balances in these segments, while the decrease in the ALLL associated with multi-family loans was due to decreases in the balances of multi-family loans, partially offset by an increase in the reserve factor.

During the fiscal years ended June 30, 2017 and 2016, respectively, the Company increased its ALLL reserve factors for the following two loan segments:

 

Loan Segment

   06/30/2017 Factor    06/30/2016 Factor    6/30/2015 Factor
  

 

1-4 Family Permanent    0.43%    0.40%    0.35%
Multi-Family – Permanent    0.55%    0.55%    0.50%

 

57


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9. ACCRUED INTEREST RECEIVABLE

Accrued interest receivable consists of the following:

 

     2017      2016  
     (Dollars in Thousands)  

Investment and mortgage-backed securities

   $ 924      $ 1,265  

Loans receivable

     196        161  

FHLB stock

     86        82  
  

 

 

    

 

 

 

Total

   $ 1,206      $ 1,508  
  

 

 

    

 

 

 

 

10. FEDERAL HOME LOAN BANK STOCK

We are a member of the Federal Home Loan Bank of Pittsburgh (FHLB). The FHLB requires members to purchase and hold a specified minimum level of FHLB stock based upon their level of borrowings, collateral balances and participation in other programs offered by the FHLB. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Both cash and stock dividends on FHLB stock are reported as income. FHLB stock can only be purchased, redeemed and transferred at par value.

At June 30, 2017 and 2016, our FHLB stock totaled $7.1 million and $6.6 million, respectively, as shown on the consolidated balance sheets. We account for the stock in accordance with ASC 325, which requires the investment to be carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. Due to the continued improvement of the FHLB’s financial performance and stability over the past several years, along with a special dividend in 2015, combined with regular quarterly dividends in 2017 and 2016, we believe our holdings in FHLB stock are ultimately recoverable at par value and, therefore, determined that the stock was not other-than-temporarily impaired.

 

11. PREMISES AND EQUIPMENT

Major classifications of premises and equipment are summarized as follows:

 

     2017      2016  
     (Dollars in Thousands)  

Land and improvements

   $ 246      $ 246  

Buildings and improvements

     2,165        2,165  

Furniture, fixtures, and equipment

     1,201        1,192  
  

 

 

    

 

 

 
     3,612        3,603  

Less accumulated depreciation

     3,158        3,061  
  

 

 

    

 

 

 

Total

   $ 454      $ 542  
  

 

 

    

 

 

 

Depreciation charged to operations was $97 thousand, $98 thousand, and $91 thousand for the years ended June 30, 2017, 2016, and 2015, respectively.

 

58


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12. DEPOSITS

Retail deposit accounts are summarized as follows:

 

     2017     2016  
     Amount      Percent of
Portfolio
    Amount      Percent of
Portfolio
 
  

 

 

 
     (Dollars in Thousands)  

Non-interest earning checking

   $ 19,396        13.4   $ 17,284        12.2

Interest-earning checking

     23,787        16.4       22,201        15.7  

Savings accounts

     45,524        31.3       47,232        33.5  

Money market accounts

     22,484        15.5       23,050        16.3  

Savings certificates

     32,313        22.2       30,250        21.4  

Advance payments by borrowers for taxes and insurance

     1,785        1.2       1,261        0.9  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 145,289        100.0   $ 141,278        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The maturities of savings certificates at June 30, 2017, are summarized as follows:

 

     (Dollars in Thousands)  

Within one year

   $ 25,949  

Beyond one year but within two years

     2,811  

Beyond two years but within three years

     1,945  

Beyond three years but within four years

     628  

Beyond four years but within five years

     674  

Beyond five years

     306  
  

 

 

 

Total

   $ 32,313  
  

 

 

 

There were no savings certificates with balances of $250 thousand or more on June 30, 2017 and 2016. At June 30, 2017 and 2016, the Savings Bank had brokered CDs totaling $5.7 million and $1.5 million, respectively.

Interest expense by deposit category for the years ended June 30 is as follows:

 

     2017      2016      2015  
     (Dollars in Thousands)  

Interest-earning checking

   $ 4      $ 4      $ 4  

Savings accounts

     20        22        21  

Money market accounts

     21        22        22  

Savings certificates

     200        162        170  
  

 

 

    

 

 

    

 

 

 

Total

   $ 245      $ 210      $ 217  
  

 

 

    

 

 

    

 

 

 

 

59


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

13. FEDERAL HOME LOAN BANK ADVANCES

The following table presents contractual maturities of FHLB long-term advances as of June 30:

 

     Maturity range      Weighted-
average
   

Stated interest

rate range

       

Description

   from      to      interest rate 1     from     to     2017      2016  
              

 

 

 
                        (Dollars in Thousands)  

Convertible

     07/27/17        07/27/17        4.26     4.26     4.26   $ 10,000      $ 10,000  

Adjustable

     08/11/17        09/01/17        1.25     1.23     1.27     6,109        6,109  
              

 

 

    

 

 

 

Total

          $ 16,109      $ 16,109  
              

 

 

    

 

 

 

Maturities of FHLB long-term advances at June 30, 2017, are summarized as follows:

 

Maturing During

Fiscal Year Ended

June 30:

   Amount      Weighted-
Average
Interest
Rate
 
     (Dollars in Thousands)         

2018

   $ 16,109        3.12

2019

     —          —    

2020

     —          —    

2021

     —          —    

2022 and thereafter

     —          —    
  

 

 

    

 

 

 

Total

   $ 16,109        3.12
  

 

 

    

 

 

 

Convertible advances may be 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 Company repaid the convertible select advance on July 27, 2017.

The adjustable rate advances adjust monthly, based on the one-month LIBOR index, and have various spreads to the LIBOR index. The spreads to the applicable LIBOR index range from 0.16% to 0.17%. 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.

 

1  For fiscal year ended 2017.

 

60


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

13. FEDERAL HOME LOAN BANK ADVANCES (Continued)

 

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 June 30:

 

     2017     2016  
     (Dollars in Thousands)  

FHLB revolving and short-term advances:

    

Ending balance

   $ 155,799     $ 144,027  

Average balance during the year

     144,258       47,413  

Maximum month-end balance during the year

     155,799       144,027  

Average interest rate during the year

     0.78     0.50

Weighted-average rate at year-end

     1.24     0.54

At June 30, 2017, the Company had remaining borrowing capacity with the FHLB of approximately $4.8 million.

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

 

14. 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 June 30:

OTHER SHORT-TERM BORROWINGS

 

     2017     2016  
     (Dollars in Thousands)  

Ending balance

   $ —       $ —    

Average balance during the year

     —         2,748  

Maximum month-end balance during the year

     —         9,700  

Average interest rate during the year

     —       0.51

Weighted-average rate at year-end

     —       —  

 

61


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

15. COMMITMENTS AND CONTINGENT LIABILITIES

Loan Commitments

In the normal course of business, there are various commitments that are not reflected in the Company’s financial statements. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheet. The Company’s exposure to credit loss in the event of nonperformance by the other parties to the financial instruments is represented by the contractual amounts as disclosed. Losses, if any, are charged to the allowance losses on off- balance sheet items. Management minimizes its exposure to credit loss under these commitments by subjecting them to credit approval, review procedures, and collateral requirements, as deemed necessary. Various loan commitments totaling $10.0 million and $12.5 million at June 30, 2017 and 2016, respectively, represent financial instruments with off-balance sheet risk. The commitments outstanding at June 30, 2017, contractually mature in less than one year.

Loan commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheet. The same credit policies are used in making commitments and conditional obligations as for on-balance sheet instruments. Generally, collateral, usually in the form of real estate, is required to support financial instruments with credit risk.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. These commitments are composed primarily of the undisbursed portion of construction and land development loans (Note 7), residential, commercial real estate, and consumer loan originations.

The exposure to loss under these commitments is limited by subjecting them to credit approval and monitoring procedures. Substantially all commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of the loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses.

Litigation

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 financial condition of WVS.

 

16. REGULATORY CAPITAL

Federal regulations require the Savings Bank to maintain minimum amounts of capital. Specifically, the Savings Bank is required to maintain certain minimum dollar amounts and ratios of Total and Tier I Capital to Risk-Weighted Assets and of Tier I Capital to Average Total Assets.

In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) established five capital categories ranging from well capitalized to critically undercapitalized. Should any institution fail to meet the requirements to be considered adequately capitalized, it would become subject to a series of increasingly restrictive regulatory actions.

 

62


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

16. REGULATORY CAPITAL (Continued)

In July of 2013 the respective U.S. federal banking agencies issued final rules implementing Basel III and the Dodd-Frank Act capital requirements to be fully-phased in on a global basis on January 1, 2019. The new regulations establish a new tangible common equity capital requirement, increase the minimum requirement for the current Tier 1 risk-weighted asset (“RWA”) ratio, phase out certain kinds of intangibles treated as capital and certain types of instruments and change the risk weightings of certain assets used to determine required capital ratios. Provisions of the Dodd-Frank Act generally require these capital rules to apply to bank holding companies and their subsidiaries. The new common equity Tier 1 capital component requires capital of the highest quality – predominantly composed of retained earnings and common stock instruments. For community banks, such as West View Savings Bank, a common equity Tier 1 capital ratio of 4.5% became effective on January 1, 2015. The new capital rules also increased the current minimum Tier 1 capital ratio from 4.0% to 6.0% beginning on January 1, 2015. In addition, in order to make capital distributions and pay discretionary bonuses to executive officers without restriction, an institution must also maintain greater than 2.5% in common equity attributable to a capital conservation buffer to be phased in from January 1, 2016 until January 1, 2019. The new rules also increase the risk weights for several categories of assets, including an increase from 100% to 150% for certain acquisition, development and construction loans and more than 90-day past due exposures. The new capital rules maintain the general structure of the prompt corrective action rules, but incorporate the new common equity Tier 1 capital requirement and the increased Tier 1 RWA requirement into the prompt corrective action framework.

Bank holding companies are generally subject to statutory capital requirements, which were implemented by certain of the new capital regulations described above that became effective on January 1, 2015. However, the Small Banking Holding Company Policy Statement exempts certain small bank holding companies like the Company from those requirements provided that they meet certain conditions.

As of June 30, 2017, the FDIC categorized the Savings Bank as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, Common Equity Tier 1 Capital, Tier 1 Risk-Based, Total Risk-Based, and Tier 1 Leverage Capital Ratios must be at least 6.5 percent, 8 percent, 10 percent, and 5 percent, respectively.

 

63


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

16. REGULATORY CAPITAL (Continued)

 

The Savings Bank’s actual capital ratios for fiscal 2017 are presented in the following table, which show that the Savings Bank met all regulatory capital requirements.

 

     June 30, 2017  
     WVS     West View  
  

 

 

 
     Amount      Ratio     Amount      Ratio  
  

 

 

   

 

 

 
     (Dollars in Thousands)  

Common Equity Tier I Capital (to Risk-Weighted Assets)

          

Actual

   $ 33,231        19.40   $ 31,421        18.35

To Be Well Capitalized

     11,135        6.50       11,128        6.50  

For Capital Adequacy Purposes

     7,709        4.50       7,704        4.50  

Tier I Capital (to Risk-Weighted Assets)

          

Actual

   $ 33,231        19.40   $ 31,421        18.35

To Be Well Capitalized

     13,704        8.00       13,696        8.00  

For Capital Adequacy Purposes

     10,278        6.00       10,272        6.00  

Total Capital (to Risk-Weighted Assets)

          

Actual

   $ 33,688        19.67   $ 31,878        18.62

To Be Well Capitalized

     17,131        10.00       17,120        10.00  

For Capital Adequacy Purposes

     13,704        8.00       13,696        8.00  

Tier I Capital (to Average Total Assets)

     

Actual

   $ 33,231        9.53   $ 31,421        9.02

To Be Well Capitalized

     17,427        5.00       17,422        5.00  

For Capital Adequacy Purposes

     13,942        4.00       13,937        4.00  

 

64


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

16. REGULATORY CAPITAL (Continued)

 

The Savings Bank’s actual capital ratios for fiscal 2016 are presented in the following table, which show that the Savings Bank met all regulatory capital requirements.

 

     June 30, 2016  
     WVS     West View  
  

 

 

 
     Amount      Ratio     Amount      Ratio  
     (Dollars in Thousands)  

Common Equity Tier I Capital (to Risk-Weighted Assets)

          

Actual

   $ 33,323        17.69   $ 31,076        16.75

To Be Well Capitalized

     12,246        6.50       12,056        6.50  

For Capital Adequacy Purposes

     8,478        4.50       8,346        4.50  

Tier I Capital (to Risk-Weighted Assets)

          

Actual

   $ 33,323        17.69   $ 31,076        16.75

To Be Well Capitalized

     15,072        8.00       14,838        8.00  

For Capital Adequacy Purposes

     11,304        6.00       11,128        6.00  

Total Capital (to Risk-Weighted Assets)

          

Actual

   $ 33,731        17.90   $ 31,484        16.97

To Be Well Capitalized

     18,841        10.00       18,547        10.00  

For Capital Adequacy Purposes

     15,072        8.00       14,838        8.00  

Tier I Capital (to Average Total Assets)

     

Actual

   $ 33,323        9.95   $ 31,076        9.28

To Be Well Capitalized

     16,744        5.00       16,739        5.00  

For Capital Adequacy Purposes

     13,395        4.00       13,391        4.00  

As of June 30, 2017, the FDIC categorized the Savings Bank as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, Common Equity Tier 1 Capital, Tier 1 Risk-Based, Total Risk-Based, and Tier 1 Leverage Capital Ratios must be at least 6.5 percent, 8 percent, 10 percent, and 5 percent, respectively.

 

65


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

17. STOCK BENEFIT PLANS

Stock Option Plan

The Company maintains the 2008 Stock Incentive Plan, which provides for the issuance of up to 152,000 shares of common stock pursuant to the grant of stock options, stock appreciation rights and plan share awards of restricted stock to directors, officers and employees. The stock options granted typically have an expiration term of ten years, subject to certain extensions and early terminations. The per share exercise price of an incentive stock option shall at a minimum equal the fair market value of a share of common stock on the date the option is granted. The per share exercise price of a compensatory stock option granted shall at least equal the greater of par value or 100 percent of the fair market value of a share of common stock on the date the option is granted. Proceeds from the exercise of the stock options are credited to common stock for the aggregate par value and the excess is credited to paid-in capital. Up to 38,000 shares of common stock may be granted to non-employee directors and up to 38,000 shares may be granted in the form of share awards of restricted stock.

The following table presents information related to the outstanding options:

 

     Officers’ and
Employees’
Stock
Options
     Directors’
Stock
Options
     Weighted-
Average
Exercise
Price
 

Outstanding, June 30, 2014

     77,019        37,500      $ 16.20  

Granted

     —          —       

Exercised

     —          —       

Forfeited

     —          —       
  

 

 

    

 

 

    

Outstanding, June 30, 2015

     77,019        37,500      $ 16.20  

Granted

     —          —       

Exercised

     —          —       

Forfeited

     —          —       
  

 

 

    

 

 

    

Outstanding, June 30, 2016

     77,019        37,500      $ 16.20  

Granted

     —          —       

Exercised

     —          —       

Forfeited

     —          —       
  

 

 

    

 

 

    

Outstanding, June 30, 2017

     77,019        37,500      $ 16.20  
  

 

 

    

 

 

    

Exercisable at year-end

     77,019        37,500     
  

 

 

    

 

 

    

Available for future grant

     36,981        500     
  

 

 

    

 

 

    

 

66


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

17. STOCK BENEFIT PLANS (Continued)

 

At June 30, 2017, there were 37,500 options outstanding and exercisable for directors with a weighted-average exercise price of $16.20, and a weighted-average remaining contractual life of 1.25 years. At June 30, 2016 there were 37,500 options outstanding and exercisable for directors, with a weighted-average price of $16.20, and a weighted-average remaining contractual life of 2.25 years.

Employee Stock Ownership Plan (“ESOP”)

WVS maintains an ESOP for the benefit of officers and Savings Bank employees who have met certain eligibility requirements related to age and length of service. Compensation expense for the ESOP was $125 thousand, $120 thousand, and $116 thousand for the years ended June 30, 2017, 2016, and 2015, respectively. Total ESOP shares as of June 30, 2017 and 2016, were 339,971 and 368,471, respectively.

The following table presents the components of the ESOP shares as of June 30, 2017 and 2016.

 

     2017      2016  

Allocated shares

     130,951        240,936  

Unallocated shares

     209,020        127,535  
  

 

 

    

 

 

 

Total ESOP shares

     339,971        368,471  
  

 

 

    

 

 

 

Fair value of ESOP shares

   $ 5,473,397      $ 4,104,767  

The purchase of shares of the Company’s stock by the ESOP is funded by a line of credit and two term loans, and contributions from the Company, through the Savings Bank. Unreleased ESOP shares collateralize the loans payable and the cost of these shares is recorded as a contra-equity account in stockholders’ equity of the Company. The ESOP’s line of credit bears a weighted-average interest rate of 4.00% and will convert to a term loan on the earlier of: (i) the last day of the month in which the line is fully disbursed, or (ii) April 30, 2018. The term loans will mature twenty years after conversion. The ESOP’s term loans bear a weighted-average interest rate of 3.50%, which rate is subject to adjustment based on annual changes in the prime rate and will mature on March 31, 2035 and 2037, respectively. Shares are released as payments are made by the ESOP on the loans. The ESOP’s sources of repayment on the loans can include dividends, if any, on the unallocated stock held by the ESOP and discretionary contributions from the Savings Bank to the ESOP and other earnings.

Compensation is recognized under the shares released method and compensation expense is equal to the fair value of the shares committed to be released, and unallocated ESOP shares are excluded from outstanding shares for the purpose of computing EPS.

 

18. DIRECTOR, OFFICER, AND EMPLOYEE BENEFITS

Profit Sharing Plan

The Company maintains a non-contributory profit sharing 401(k) plan (the “Plan”) for its officers and employees who have met the age and length of service requirements. The Plan is a defined contribution plan with the contributions based on a percentage of salaries of the Plan participants. The Company made no contributions to the Plan for the three years ended June 30, 2017, 2016, and 2015.

 

67


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

18. DIRECTOR, OFFICER, AND EMPLOYEE BENEFITS (Continued)

 

Directors’ Deferred Compensation Plan

The Company maintains a deferred compensation plan (the “Plan”) for directors who elect to defer all or a portion of their directors’ fees. Deferred fees are paid to the participants in installments commencing in the year following the year the individual is no longer a member of the Board of Directors.

The Plan allows for the deferred amounts to be paid in shares of common stock at the prevailing market price on the date of distribution. For fiscal years ended June 30, 2017, 2016, and 2015, 1,731 shares were held by the Plan.

Amounts deferred are included in other non-interest expense and totaled $28 thousand, $28 thousand, and $27 thousand for the fiscal years 2017, 2016, and 2015, respectively. The aggregate liability for the deferred compensation arrangement at June 30, 2017 and 2016, was $208 thousand and $180 thousand, respectively, and is included in with “other liabilities” in the Consolidated Balance Sheet.

Bank-Owned Life Insurance (“BOLI”)

The Company has purchased single premium BOLI policies on certain executives. The policies are recorded at their cash surrender values. Increases in cash surrender values are included in noninterest income in the accompanying Consolidated Statement of Income. The Company recorded $131 thousand, $134 thousand and $140 thousand of income in fiscal 2017, 2016, and 2015, respectively, and the policies’ cash surrender values totaling $4.5 million and $4.4 million at June 30, 2017 and 2016, respectively, are reflected as an asset on the Consolidated Balance Sheets.

Executive Life Insurance

In fiscal 2014, the Company entered into endorsement split dollar life insurance arrangements (“Split Dollar Life Insurance Agreements”) with certain executives. This plan provides each executive a specified death benefit should the executive die while in the Company’s employ. The Company paid the insurance premiums in June and August 2013 and the arrangements were effective in September 2013. The Company owns the policies and all cash values thereunder. Upon death of the covered employee, the agreed-upon amount of death proceeds from the policies will be paid directly to the insured’s beneficiary. As of June 30, 2017, the policies had total death benefits of $10.9 million of which $2.4 million would have been paid to the executive’s beneficiaries and the remaining $8.5 million would have been paid to the Company. A portion of the death benefit coverage may continue to the Company’s CEO in the event of a change in control or other termination of his employment. In the event the other executives terminate employment with the Company, their split dollar interests in the policies cease. The Company accrued a benefit expense of $32 thousand, $34 thousand, and $35 thousand in fiscal 2017, 2016, and 2015, respectively, for the split dollar benefit.

Supplemental Executive Retirement Plan (“SERP”)

On September 1, 2013, the Company entered into a supplemental executive retirement plan (SERP) agreement with the CEO. The plan was targeted to provide him with an annual retirement benefit commencing at age 65. The Company accrued expenses of $118 thousand, $115 thousand, and $111 thousand for fiscal years 2017, 2016, and 2015, respectively, in connection with the SERP.

 

68


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

19. INCOME TAXES

The provision for income taxes consists of:

 

     2017      2016      2015  
     (Dollars in Thousands)  

Currently payable:

        

Federal

   $ 801      $ 659      $ 551  

State

     105        137        98  
  

 

 

    

 

 

    

 

 

 
     906        796        649  

Deferred

     (58      3        9  
  

 

 

    

 

 

    

 

 

 

Total

   $ 848      $ 799      $ 658  
  

 

 

    

 

 

    

 

 

 

In addition to income taxes applicable to income before taxes in the Consolidated Statement of Income, the following income tax amounts were recorded to stockholders’ equity during the years ended June 30:

 

     2017      2016      2015  
  

 

 

 
     (Dollars in Thousands)  

Net unrealized (gain) loss on securities available for sale

   $ 17      $ 58      $ 85  

Net non-credit (gain) loss on securities with OTTI

     (44      (56      (64
  

 

 

    

 

 

    

 

 

 

Net gain (loss) recorded to stockholders’ equity

   $ (27    $ 2      $ 21  
  

 

 

    

 

 

    

 

 

 

The following temporary differences gave rise to the net deferred tax assets at June 30:

 

     2017      2016  
     (Dollars in Thousands)  

Deferred tax assets:

     

Allowance for loan losses

   $ 147      $ 126  

Deferred compensation

     80        63  

Retirement Plan

     148        128  

Reserve for uncollected interest

     2        3  

Reserve for off-balance sheet commitments

     13        16  

OTTI other impairment

     120        164  

OTTI credit impairment

     65        102  

Other

     90        63  
  

 

 

    

 

 

 

Total gross deferred tax assets

     665        665  
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Net unrealized gain on securities available for sale

     24        41  

Deferred origination fees, net

     193        185  

Depreciation reserve

     11        31  

Other

     —          2  
  

 

 

    

 

 

 

Total gross deferred tax liabilities

     228        259  
  

 

 

    

 

 

 

Net deferred tax assets

   $ 437      $ 406  
  

 

 

    

 

 

 

No valuation allowance was established at June 30, 2017 and 2016, in view of the Company’s ability to carryback to taxes paid in previous years, future anticipated taxable income, which is evidenced by the Company’s earnings potential, and deferred tax liabilities at June 30, 2017 and 2016.

 

69


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

19. INCOME TAXES (Continued)

 

The Company and its subsidiary file a consolidated federal income tax return. Prior to 1996, the Savings Bank was permitted under the Internal Revenue Code to establish a tax reserve for bad debts, and to make annual additions within specified limitations which may have been deducted in arriving at its taxable income. Subsequent to 1995, the Savings Bank’s bad debt deduction may be computed using an amount based on its actual loss experience (the “experience method”).

U.S. generally accepted accounting principles prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Consolidated Statement of Income. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2014.

The following is a reconciliation between the actual provision for income taxes and the amount of income taxes which would have been provided at federal statutory rates for the years ended June 30:

 

     2017     2016     2015  
           % of          % of           % of  
           Pretax          Pretax           Pretax  
     Amount     Income     Amount    Income     Amount     Income  
  

 

 

 
     (Dollars in Thousands)  

Provision at statutory rate

   $ 845       34.0   $ 722      34.0   $ 682       34.0

State income tax, net of federal tax benefit

     69       2.8     90      4.2       65       3.2  

Tax exempt income

     (5     (0.2   (3)      —         —         —    

Bank Owned Life Insurance

     (45     (1.8   (46)      (0.1     (48     (2.4

Other, net

     (16     (0.7   36      1.7       (41     (2.0
  

 

 

   

 

 

   

 

  

 

 

   

 

 

   

 

 

 

Actual tax expense and effective rate

   $ 848       34.1   $ 799      37.6   $ 658       32.8
  

 

 

   

 

 

   

 

  

 

 

   

 

 

   

 

 

 

The Savings Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax, which is calculated at 11.5 percent of earnings.

Prior to the enactment of the Small Business Job Protection Act, the Company accumulated approximately $3.9 million of retained earnings, which represent allocations of income to bad debt deductions for tax purposes only. Since there is no amount that represents the accumulated bad debt reserves subsequent to 1987, no provision for federal income tax has been made for such amount. If any portion of this amount is used other than to absorb loan losses (which is not anticipated), the amount will be subject to federal income tax at the current corporate rate.

 

70


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

20. REGULATORY MATTERS

Cash and Due From Banks

The Federal Reserve requires the Savings Bank to maintain certain reserve balances. The required reserves are computed by applying prescribed ratios to the Savings Bank’s average deposit transaction account balances. As of June 30, 2017 and 2016, the Savings Bank had required reserves of $761 thousand and $719 thousand, respectively. The required reserves are held in the form of vault cash and an interest-bearing depository balance maintained directly with the Federal Reserve.

Loans

Federal law prohibits the Company from borrowing from the Savings Bank unless the loans are secured by specific obligations. Further, such secured loans are limited in amount to 10 percent of the Savings Bank’s capital surplus.

Dividend Restrictions

The Savings Bank is subject to the Pennsylvania Banking Code, which restricts the availability of surplus for dividend purposes. At June 30, 2017, surplus funds of $3.4 million were not available for dividends from the Savings Bank to the Company.

 

21. 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.

 

71


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

21. FAIR VALUE MEASUREMENTS (Continued)

 

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 June 30, 2017 and June 30, 2016, 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.

 

     June 30, 2017  
     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

   $ —        $ 1,327      $ —        $ 1,327  

Corporate securities

     —          92,636        —          92,636  

Foreign debt securities (1)

     —          14,486        —          14,486  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ 108,449      $ —        $ 108,449  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 30, 2016  
     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

   $ —        $ 2,041      $ —        $ 2,041  

Corporate securities

     —          96,852        —          96,852  

Foreign debt securities (1)

     —          8,783        —          8,783  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —        $ 107,676      $ —        $ 107,676  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

72


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

21. FAIR VALUE MEASUREMENTS (Continued)

 

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 fair 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 had no Level I, Level II or Level III impaired loans at June 30, 2017 or 2016.

Real Estate Owned

Real estate acquired through foreclosure or deed in lieu of foreclosure is carried at fair value less estimated costs to sell. Any reduction from the carrying value of the related loan to fair value at the time of acquisition is accounted for as a loan loss. Any subsequent reduction in fair market value is reflected as a valuation allowance through a charge to income. Costs of significant property improvements are capitalized, whereas costs relating to holding and maintaining the property, are charged to expense. The Company had no Level I, Level II, or Level III real estate owned at June 30, 2017 or 2016.

 

73


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

21. FAIR VALUE MEASUREMENTS (Continued)

 

Assets Measured at Fair Value on a Nonrecurring Basis (Continued)

 

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.

 

22. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values at June 30 are as follows:

 

     June 30, 2017                       
     Carrying
Amount
     Fair
Value
     Level I      Level II      Level III  
     (Dollars in Thousands)  

FINANCIAL ASSETS

              

Cash and cash equivalents

   $ 2,272      $ 2,272      $ 2,272      $ —        $ —    

Certificates of deposit

     10,380        10,380        10,380        —          —    

Investment securities – available for sale

     108,449        108,449        —          108,449        —    

Investment securities – held to maturity

     8,678        8,815        —          8,815        —    

Mortgage-backed securities – held to maturity:

              

Agency

     128,201        128,840        —          128,840        —    

Private-label

     1,120        1,341        —          —          1,341  

Net loans receivable

     77,455        77,224        —          —          77,224  

Accrued interest receivable

     1,206        1,206        1,206        —          —    

FHLB stock

     7,062        7,062        7,062        —          —    

Bank owned life insurance

     4,541        4,541        4,541        —          —    

FINANCIAL LIABILITIES

              

Deposits:

              

Non-interest bearing deposits

   $ 19,396      $ 19,396      $ 19,396      $ —        $ —    

NOW accounts

     23,787        23,787        23,787        —          —    

Savings accounts

     45,524        45,524        45,524        —          —    

Money market accounts

     22,484        22,484        22,484        —          —    

Certificates of deposit

     32,313        32,147        —          —          32,147  

Advance payments by borrowers for taxes

and insurance

     1,785        1,785        1,785        —          —    

FHLB advances – fixed rate

     10,000        10,000        —          —          10,000  

FHLB advances – variable rate

     6,109        6,109        6,109        —          —    

FHLB short-term advances

     155,799        155,799        155,799        —          —    

Accrued interest payable

     247        247        247        —          —    

 

74


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

22. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

     June 30, 2016                       
     Carrying
Amount
     Fair
Value
     Level I      Level II      Level III  
     (Dollars in Thousands)  

FINANCIAL ASSETS

              

Cash and cash equivalents

   $ 2,343      $ 2,343      $ 2,343      $ —        $ —    

Certificates of deposit

     350        350        350        —          —    

Investment securities – available for sale

     107,676        107,676        —          107,676        —    

Investment securities – held to maturity

     9,523        9,990        —          9,990        —    

Mortgage-backed securities – held to maturity:

              

Agency

     135,957        135,976        —          135,976        —    

Private-label

     1,459        1,703        —          —          1,703  

Net loans receivable

     64,673        67,335        —          —          67,335  

Accrued interest receivable

     1,508        1,508        1,508        —          —    

FHLB stock

     6,599        6,599        6,599        —          —    

Bank owned life insurance

     4,410        4,410        4,410        —          —    

FINANCIAL LIABILITIES

              

Deposits:

              

Non-interest bearing deposits

   $ 17,284      $ 17,284      $ 17,284      $ —        $ —    

NOW accounts

     22,201        22,201        22,201        —          —    

Savings accounts

     47,232        47,232        47,232        —          —    

Money market accounts

     23,050        23,050        23,050        —          —    

Certificates of deposit

     30,250        30,241        —          —          30,241  

Advance payments by borrowers for taxes and insurance

     1,261        1,261        1,261        —          —    

FHLB advances – fixed rate

     10,000        10,498        —          —          10,498  

FHLB advances – variable rate

     6,109        6,109        6,109        —          —    

FHLB short-term advances

     144,027        144,027        144,027        —          —    

Accrued interest payable

     189        189        189        —          —    

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.

 

75


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

22. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

 

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

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

The fair value approximates the current carrying value.

Investment Securities, Mortgage-Backed Securities, and FHLB Stock

The fair value of investment and mortgage-backed securities is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. For discussion of valuation of private-label CMOs, see Note 6 “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

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

 

76


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

23. PARENT COMPANY

Condensed financial information of WVS Financial Corp. is as follows:

CONDENSED BALANCE SHEET

 

     June 30,  
     2017      2016  
  

 

 

 
     (Dollars in Thousands)  

ASSETS

     

Interest-earning deposits with subsidiary bank

   $ 1,719      $ 2,161  

Investment in subsidiary bank

     31,232        30,837  

Other assets

     99        93  
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 33,050      $ 33,091  
  

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Other liabilities

   $ 7      $ 6  

Stockholders’ equity

     33,043        33,085  
  

 

 

    

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 33,050      $ 33,091  
  

 

 

    

 

 

 

CONDENSED STATEMENT OF INCOME

 

     Year Ended June 30,  
     2017      2016      2015  
  

 

 

 
     (Dollars in Thousands)  

INCOME

        

Interest on loans

   $ 55      $ 48      $ 40  

Interest on investment and mortgage-backed securities

     —          3        —    

Dividend from subsidiary

     1,300        1,200        1,225  

Interest-earning deposits with subsidiary bank

     2        1        1  
  

 

 

    

 

 

    

 

 

 

Total income

     1,357        1,252        1,266  
  

 

 

    

 

 

    

 

 

 

OTHER OPERATING EXPENSE

     121        125        123  
  

 

 

    

 

 

    

 

 

 

Income before equity in undistributed earnings of subsidiary

     1,236        1,127        1,143  

Equity in undistributed earnings of subsidiary

     344        170        173  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,580        1,297        1,316  

Income tax benefit

     (57      (28      (31
  

 

 

    

 

 

    

 

 

 

NET INCOME

   $ 1,637      $ 1,325      $ 1,347  
  

 

 

    

 

 

    

 

 

 

 

77


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

23. PARENT COMPANY (Continued)

 

     Year Ended June 30,  
     2017      2016      2015  
  

 

 

 
     (Dollars in Thousands)  

OPERATING ACTIVITIES

        

Net income

   $ 1,637      $ 1,325      $ 1,347  

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

        

Equity in undistributed earnings of subsidiary

     (344      (170      (173

Amortization of unallocated ESOP shares

     221        52        —    

Other, net

     (11      (1      (60
  

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities

     1,503        1,206        1,114  
  

 

 

    

 

 

    

 

 

 

INVESTING ACTIVITIES

        

Available for sale:

        

Purchases of investments

     —          (1,998      —    

Proceeds from repayments of investments

     —          2,000        —    
  

 

 

    

 

 

    

 

 

 

Net cash provided by investing activities

     —          2        —    
  

 

 

    

 

 

    

 

 

 

FINANCING ACTIVITIES

        

Cash dividends paid

     (482      (489      (329

Purchase of treasury stock

     (359      (19      (186

Increase in unallocated ESOP shares

     (1,104      (47      (504
  

 

 

    

 

 

    

 

 

 

Net cash used for financing activities

     (1,945      (555      (1,019
  

 

 

    

 

 

    

 

 

 

Increase (decrease) in cash and cash equivalents

     (442      653        95  

CASH AND CASH EQUIVALENTS BEGINNING OF YEAR

     2,161        1,508        1,413  
  

 

 

    

 

 

    

 

 

 

CASH AND CASH EQUIVALENTS END OF YEAR

   $ 1,719      $ 2,161      $ 1,508  
  

 

 

    

 

 

    

 

 

 

 

78


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

24. SELECTED QUARTERLY FINANCIAL DATA (unaudited)

 

     Three Months Ended  
     September
2016
     December
2016
     March
2017
     June
2017
 
  

 

 

 
     (Dollars in Thousands, except per share data)  

Total interest and dividend income

   $ 1,777      $ 1,814      $ 1,958      $ 2,097  

Total interest expense

     373        396        488        597  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     1,404        1,418        1,470        1,500  

Provision for loan losses

     16        18        15        9  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     1,388        1,400        1,455        1,491  

Total noninterest income

     130        107        130        123  

Total noninterest expense

     934        916        896        993  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     584        591        689        621  

Income taxes

     186        196        263        203  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 398      $ 395      $ 426      $ 418  
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share data:

           

Net income

           

Basic

   $ 0.21      $ 0.21      $ 0.23      $ 0.22  

Diluted

     0.21        0.21        0.23        0.22  

Average shares outstanding

           

Basic

     1,876,160        1,881,086        1,882,593        1,855,313  

Diluted

     1,876,160        1,881,086        1,882,593        1,855,313  

 

79


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

24. SELECTED QUARTERLY FINANCIAL DATA (unaudited) (Continued)

 

     Three Months Ended  
     September
2015
     December
2015
     March
2016
     June
2016
 
  

 

 

 
     (Dollars in Thousands, except per share data)  

Total interest and dividend income

   $ 1,637      $ 1,622      $ 1,764      $ 1,789  

Total interest expense

     311        320        402        398  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     1,326        1,302        1,362        1,391  

Provision for loan losses

     19        28        21        (12
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     1,307        1,274        1,341        1,403  

Total noninterest income

     139        156        131        146  

Total noninterest expense

     943        944        939        947  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     503        486        533        602  

Income taxes

     192        193        204        210  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 311      $ 293      $ 329      $ 392  
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share data:

           

Net income

           

Basic

   $ 0.16      $ 0.16      $ 0.17      $ 0.20  

Diluted

     0.16        0.16        0.17        0.20  

Average shares outstanding

           

Basic

     1,909,262        1,910,190        1,910,222        1,909,922  

Diluted

     1,909,262        1,910,190        1,910,222        1,909,922  

 

80


COMMON STOCK MARKET PRICE AND DIVIDEND INFORMATION

WVS Financial Corp.’s common stock is traded on the Nasdaq Global MarketSM under the symbol “WVFC”.

The following table sets forth the high and low market prices of a share of common stock, and cash dividends declared per share, for the periods indicated.

 

     Market Price      Cash Dividends
Declared
 

Quarter Ended

   High      Low     

June 2017

   $ 16.15      $ 14.44      $ 0.10  

March 2017

     15.50        14.10        0.06  

December 2016

     15.40        12.01        0.04  

September 2016

     12.90        11.10        0.04  

June 2016

   $ 12.50      $ 10.73      $ 0.08  

March 2016

     12.54        11.30        0.04  

December 2015

     12.60        10.78        0.08  

September 2015

     11.84        10.75        0.04  

There were six Nasdaq Market Makers in the Company’s common stock as of June 30, 2017: Merrill Lynch, Pierce, Fenner; UBS Securities LLC; VIRTU Americas LLC; Two Sigma Securities, LLC; Citadel Securities LLC and Keefe, Bruyette & Woods, Inc.

According to the records of the Company’s transfer agent, there were approximately 428 shareholders of record at August 25, 2017. This does not include any persons or entities who hold their stock in nominee or “street name” through various brokerage firms.

Dividends are subject to determination and declaration by the Board of Directors, which takes into account the Company’s financial condition, statutory and regulatory restrictions, general economic condition and other factors.

 

81


WVS FINANCIAL CORP.
CORPORATE INFORMATION
CORPORATE OFFICES
WVS FINANCIAL CORP. • WEST VIEW SAVINGS BANK
9001 Perry Highway Pittsburgh, PA 15237
412-364-1911

COMMON STOCK

The common stock of WVS Financial Corp. is traded on The Nasdaq Global MarketSM under the symbol “WVFC”.

 

TRANSFER AGENT & REGISTRAR

Computershare

8742 Lucent Blvd, Suite 225

Highlands Ranch, Co 80129

303-262-0710

 

INVESTOR RELATIONS

David J. Bursic

412-364-1911

 

SPECIAL COUNSEL

Silver, Freedman, Taff & Tiernan LLP

Washington, DC

 

WEST VIEW SAVINGS BANK

9001 Perry Highway

Pittsburgh, PA 15237

412-364-1911

 

WEST VIEW OFFICE

456 Perry Highway

412-931-2171

 

CRANBERRY OFFICE

20531 Perry Highway

724-776-3480

 

FRANKLIN PARK OFFICE

2566 Brandt School Road

724-935-7100

 

BELLEVUE OFFICE

572 Lincoln Avenue

412-761-5595

 

SHERWOOD OAKS OFFICE

Serving Sherwood Oaks

Cranberry Twp.

 

LENDING DIVISION

2566 Brandt School Road

724-935-7400

  

BOARD OF DIRECTORS

 

John W. Grace

President

G & R Investment Consultants, Inc.

 

David J. Bursic

President and Chief Executive Officer

WVS Financial Corp. and

West View Savings Bank

 

John A. Howard, Jr.

Former Senior Vice President and

Chief Financial Officer

Laurel Capital Corp.

 

Lawrence M. Lehman

Office Manager

Dinnin & Parkins Associates

 

Edward F. Twomey, III

Director, Institutional Sales

Piper Jaffray & Co.

 

Joseph W. Unger

Former President

White Heating, Inc.

 

EXECUTIVE OFFICERS

 

John W. Grace

Chairman

 

David J. Bursic

President and

Chief Executive Officer

 

Michael R. Rutan

Senior Vice President—Operations

Corporate Secretary

 

Linda K. Butia

Vice President, Treasurer and

Chief Accounting Officer

The members of the Board of Directors serve in that capacity for both the Company and the Savings Bank.