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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

[X]

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

For the quarterly period ended September 30, 2018

or

 

[  ]

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

For the transition period from               to              

Commission File Number: 0-22444

 

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

Pennsylvania

      

25-1710500

 

(State or other jurisdiction of

incorporation or organization)

      

(I.R.S. Employer

Identification Number)

 

9001 Perry Highway

Pittsburgh, Pennsylvania

      

15237

 
    (Address of principal executive offices)            (Zip Code)  

                                     (412) 364-1911                                     

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.      YES  X   NO     

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

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

 

Large accelerated filer                Accelerated filer         
Non-accelerated filer                Smaller reporting company   X  
      Emerging growth company         

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.             

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

Shares outstanding as of November 9, 2018: 1,967,513 shares of Common Stock, $.01 par value.


Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

INDEX

 

PART I.

       

Financial Information

  

Page

    
Item 1.      Financial Statements      
     Consolidated Balance Sheet as of
September 30, 2018 and June 30, 2018
(Unaudited)
   3   
     Consolidated Statement of Income
for the Three Months Ended
September 30, 2018 and 2017 (Unaudited)
   4   
         Consolidated Statement of Comprehensive
Income for the Three Months Ended
September 30, 2018 and 2017 (Unaudited)
   5     
     Consolidated Statement of Changes in
Stockholders’ Equity for the Three Months
Ended September 30, 2018 (Unaudited)
   6   
     Consolidated Statement of Cash Flows
for the Three Months Ended September 30, 2018
and 2017 (Unaudited)
   7   
     Notes to Unaudited Consolidated
Financial Statements
   9   
Item 2.      Management’s Discussion and Analysis of
Financial Condition and Results of
Operations for the Three Months
Ended September 30, 2018
   38   
Item 3.      Quantitative and Qualitative Disclosures
about Market Risk
   44   
Item 4.      Controls and Procedures    48   

PART II.

        Other Information   

Page

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

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

(In thousands)

 

        September 30, 2018             June 30, 2018      

Assets

   

Cash and due from banks

                $       2,782       $       2,099  

Interest-earning demand deposits

    3,135       342  
 

 

 

   

 

 

 

Total cash and cash equivalents

    5,917       2,441  

Certificates of deposit

    350       350  

Investment securities available-for-sale (amortized cost of $128,286 and $124,824)

    128,397       128,811  

Investment securities held-to-maturity (fair value of $5,003 and $6,125)

    5,052       6,181  

Mortgage-backed securities held-to-maturity (fair value of $111,957 and $116,844)

    110,965       115,857  

Net loans receivable (allowance for loan losses of $487 and $468)

    85,806       84,675  

Accrued interest receivable

    1,240       1,225  

Federal Home Loan Bank (FHLB) stock, at cost

    6,603       7,161  

Premises and equipment, net

    377       392  

Bank owned life insurance

    4,699       4,668  

Deferred tax assets (net)

    358       359  

Other assets

    175       168  
 

 

 

   

 

 

 

TOTAL ASSETS

                $  349,939                   $  352,288  
 

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

   

Liabilities:

   

Deposits

   

Non-interest-bearing accounts

    $    31,853       $    18,436  

Interest-earning checking

    23,377       24,459  

Savings accounts

    43,782       44,727  

Money market accounts

    20,296       21,087  

Certificates of deposit

    32,677       34,376  

Advance payments by borrowers for taxes and insurance

    847       1,938  
 

 

 

   

 

 

 

Total deposits

    152,832       145,023  

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

    -       -  

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

    -       -  

Federal Home Loan Bank advances: short-term

    160,484       171,403  

Accrued interest payable

    391       380  

Other liabilities

    1,527       1,465  
 

 

 

   

 

 

 

TOTAL LIABILITIES

    315,234       318,271  
 

 

 

   

 

 

 

Stockholders’ equity:

   

Preferred stock:

   

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

    -       -  

Common stock:

   

10,000,000 shares, $.01 par value per share, authorized; 3,805,636 shares issued;

    38       38  

Additional paid-in capital

    21,525       21,516  

Treasury stock: 1,838,123 and 1,836,123 shares at cost, respectively

    (27,918     (27,886

Retained earnings, substantially restricted

    43,400       42,795  

Accumulated other comprehensive loss

    (121     (188

Unallocated Employee Stock Ownership Plan (“ESOP”) shares

    (2,219     (2,258
 

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

    34,705       34,017  
 

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

    $  349,939       $  352,288  
 

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

(In thousands, except per share data)

 

         Three Months Ended      
     September 30,  
     2018     2017  

INTEREST AND DIVIDEND INCOME:

    

Loans, including fees

       $           804         $           739  

Investment securities

     1,022       639  

Mortgage-backed securities

     889       729  

Certificates of deposit

     2       32  

Interest-earning demand deposits

     3       1  

FHLB Stock

     112       85  
  

 

 

   

 

 

 

Total interest and dividend income

     2,832       2,225  
  

 

 

   

 

 

 

INTEREST EXPENSE:

    

Deposits

     123       81  

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

     -       32  

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

     -       11  

Federal Home Loan Bank advances – short-term

     909       520  
  

 

 

   

 

 

 

Total interest expense

     1,032       644  
  

 

 

   

 

 

 

NET INTEREST INCOME

     1,800       1,581  

PROVISION FOR LOAN LOSSES

     19       5  
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     1,781       1,576  
  

 

 

   

 

 

 

NON-INTEREST INCOME:

    

Service charges on deposits

     29       32  

Earnings on Bank Owned Life Insurance

     31       33  

Investment securities losses

     (2     -  

Other than temporary impairment (“OTTI”) losses

     -       41  

Portion of loss (gain) recognized in other comprehensive income (before taxes)

     -       (49
  

 

 

   

 

 

 

Net impairment loss recognized in earnings

     -       (8

ATM fee income

     42       47  

Other

     10       11  
  

 

 

   

 

 

 

Total non-interest income

     110       115  
  

 

 

   

 

 

 

NON-INTEREST EXPENSE:

    

Salaries and employee benefits

     556       554  

Occupancy and equipment

     68       73  

Data processing

     58       49  

Correspondent bank service charges

     7       10  

Federal deposit insurance premium

     28       28  

ATM Network expense

     37       25  

Other

     147       153  
  

 

 

   

 

 

 

Total non-interest expense

     901       892  
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     990       799  

INCOME TAX EXPENSE

     242       297  
  

 

 

   

 

 

 

NET INCOME

   $ 748     $ 502  
  

 

 

   

 

 

 

EARNINGS PER SHARE:

    

Basic

   $ 0.42     $ 0.28  

Diluted

   $ 0.42     $ 0.28  

AVERAGE SHARES OUTSTANDING:

    

Basic

     1,793,055       1,824,878  

Diluted

     1,793,272       1,824,878  

See accompanying notes to unaudited consolidated financial statements.

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

(In thousands)

 

     Three Months Ended
September 30,
 
         2018             2017      

NET INCOME

         $ 748           $ 502  

OTHER COMPREHENSIVE INCOME

    

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

    

Gains arising during the year

     122       72  

Less: Income tax effect

     (26     (25
  

 

 

   

 

 

 
     96       47  

Losses recognized in earnings

     2       -  

Less: Income tax effect

     -       -  
  

 

 

   

 

 

 
     2       -  

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

     98       47  
  

 

 

   

 

 

 

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

    

Total losses

     -       41  

Losses recognized in earnings

     -       (8
  

 

 

   

 

 

 

Gains (losses) recognized in comprehensive income

     -       49  

Income tax effect

     -       (17
  

 

 

   

 

 

 
     -       32  

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

     (39     21  

Less: Income tax effect

     8       (7
  

 

 

   

 

 

 
     (31     14  

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

     (31     46  
  

 

 

   

 

 

 

Other comprehensive income

     67       93  
  

 

 

   

 

 

 

COMPREHENSIVE INCOME

         $   815             $   595  
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands, 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, 2018

     $    38        $ 21,516        $ (27,886       $ 42,795         $ (188       $    (2,258       $34,017  

Net income

             748           748  

Other comprehensive income

               67         67  

Purchase of treasury stock (2,000 shares)

           (32           (32

Amortization of unallocated ESOP shares

        9              39       48  

Cash dividends declared ($0.08 per share)

             (143         (143
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2018

         $    38          $ 21,525          $ (27,918       $ 43,400         $   (121       $ (2,219       $34,705  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

     Three Months Ended
September 30,
 
           2018                 2017        

OPERATING ACTIVITIES

    

Net income

   $ 748     $ 502  

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

    

Provision for loan losses

     19       5  

Depreciation

     15       21  

Amortization of discounts, premiums and deferred loan fees

     70       222  

Amortization of unallocated ESOP shares

     48       36  

Deferred income taxes

     (17     (56

Increase in accrued income taxes

     67       64  

Earnings on bank owned life insurance

     (31     (33

(Increase) decrease in accrued interest receivable

     (15     53  

Increase (decrease) in accrued interest payable

     11       (82

Increase in deferred director compensation payable

     11       9  

Decrease in cash items in process of collection

     -       1,230  

Other, net

     (23     144  
  

 

 

   

 

 

 

Net cash provided by operating activities

     903       2,115  
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Available-for-sale:

    

Purchases of investment securities

     (15,364     (18,339

Proceeds from sale of investments

     1,364       -  

Proceeds from repayments of investment securities

     14,450       10,133  

Held-to-maturity:

    

Purchases of mortgage-backed securities

     -       -  

Proceeds from repayments of investment securities

     1,125       1,163  

Proceeds from repayments of mortgage-backed securities

     4,861       3,851  

Purchases of certificates of deposit

     (100     (100

Maturities/redemptions of certificates of deposit

     100       5,600  

Increase in net loans receivable

     (1,136     (1,866

Purchase of FHLB stock

     (1,793     (1,776

Redemption of FHLB stock

     2,351       1,860  
  

 

 

   

 

 

 

Net cash provided by investing activities

     5,858       526  
  

 

 

   

 

 

 

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

     Three Months Ended
September 30,
 
           2018                 2017        

FINANCING ACTIVITIES

    

Net increase in transaction and savings accounts

   $ 10,599     $ 3,654  

Net (decrease) increase in certificates of deposit

     (1,699     2,077  

Net decrease in advance payments by borrowers for taxes and insurance

     (1,091     (976

Repayments of FHLB long-term advances - fixed rate

     -       (10,000

Repayments of FHLB long-term advances - variable rate

     -       (6,109

Net (decrease) increase in FHLB short-term advances

     (10,919     14,202  

Purchase of treasury stock

     (32     -  

Cash dividends paid

     (143     (129
  

 

 

   

 

 

 

Net cash provided by (used for) financial activities

     (3,285     2,719  
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     3,476       5,360  

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD

     2,441       2,272  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD

   $ 5,917     $ 7,632  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    

Cash paid during the period for:

    

Interest on deposits and borrowings

   $ 1,021     $ 726  

Income taxes

     193       236  

See accompanying notes to unaudited consolidated financial statements.

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (GAAP). However, all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation have been included. The results of operations for the three months ended September 30, 2018, are not necessarily indicative of the results which may be expected for the entire fiscal year.

 

2.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). This Update requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on July 1, 2018. Adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements other than additional disclosures in Note 3 as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09.

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 accounting standard (a) requires separate presentation of equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) on the balance sheet and 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.

The Company adopted ASU 2016-01 during the reporting period. On a prospective basis, the Company implemented changes to the measurement of the fair value of financial instruments using an exit price notion for disclosure purposes in Note 13 to the financial statements. The June 30, 2018, fair value of each class of financial instruments disclosure did not utilize the exit price notion when measuring fair value and, therefore, would not be comparable to the September 30, 2018 katdisclosure. The Company estimated the fair value based on guidance from ASC 820-10, Fair Value Measurements, which defines fair value as the price which would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is no active observable market for sale information on community bank loans and, thus, Level 3 fair value procedures were utilized, primarily in the use of present value techniques incorporating assumptions that market participants would use in estimating fair values. The fair value of loans held for investment, excluding

 

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impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit and nonperformance risk of the loans. Loans are considered a Level 3 classification.

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 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 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 January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), which provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date the entity adopts Topic 842; otherwise, an entity should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in ASU 2016-02. This Update is not expected to have a significant impact on the Company’s financial statements.

 

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Table of Contents

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10), to clarify certain aspects of the guidance issued in ASU 2016-01. (1) An entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820. (2) Adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place. (3) Remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities. (4) When the fair value option is elected for a financial liability, the guidance in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging – Embedded Derivatives, or 825-10, Financial Instruments – Overall. (5) Financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates. (6) The prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, Financial Services – Insurance, should apply a prospective transition method when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01. Adoption of this standard did not have a significant impact on the Company’s financial position or results of operations.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), which simplified the accounting for nonemployee share-based payment transactions. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this Update improve the following areas of nonemployee share-based payment accounting; (a) the overall measurement objective, (b) the measurement date, (c) awards with performance conditions, (d) classification reassessment of certain equity-classified awards, (e) calculated value (nonpublic entities only), and (f) intrinsic value (nonpublic entities only). The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments make the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and will be effective upon issuance of this ASU. However, many of the amendments in this ASU do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. This Update is not expected to have a significant impact on the Company’s financial statements.

 

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In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments in this ASU affect the amendments in ASU 2016-02, which are not yet effective, but for which early adoption upon issuance is permitted. For entities that early adopted Topic 842, the amendments are effective upon issuance of this ASU, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. This Update provides another transition method which allows entities to initially apply ASC 842 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Entities that elect this approach should report comparative periods in accordance with ASC 840, Leases. In addition, this Update provides a practical expedient under which lessors may elect, by class of underlying assets, to not separate nonlease components from the associated lease component, similar to the expedient provided for lessees. However, the lessor practical expedient is limited to circumstances in which the nonlease component or components otherwise would be accounted for under the new revenue guidance and both (a) the timing and pattern of transfer are the same for the nonlease component(s) and associated lease component and (b) the lease component, if accounted for separately, would be classified as an operating lease. If the nonlease component or components associated with the lease component are the predominant component of the combined component, an entity should account for the combined component in accordance with ASC 606, Revenue from Contracts with Customers. Otherwise, the entity should account for the combined component as an operating lease in accordance with ASC 842. If a lessor elects the practical expedient, certain disclosures are required. This Update is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 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 August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements. The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits (Topic 715-20). This Update amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The Update eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The Update also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. This Update is effective for public business entities for fiscal years ending after December 15, 2020, and must be applied on a retrospective basis. For all other entities, this Update is effective for fiscal years ending after December 15, 2021. This standard is not expected to have a significant impact on the Company’s financial position or results of operations.

 

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3.

REVENUE RECOGNITION

Effective July 1, 2018, the Company adopted Accounting Standards Update ASU 2014-09, Revenue from contracts with Customers – Topic 606, and all subsequent ASUs that modified ASC 606. The Company has elected to apply the standard to all prior periods presented utilizing the full retrospective approach. The implementation of the new standard had no material impact to the measurement or recognition of revenue of prior periods. Management determined that the primary sources of revenue emanating from interest and dividend income on loans and investments along with noninterest revenue resulting from investment security gains, and earnings on bank owned life insurances are not within the scope of ASC 606. As a result, no changes were made during the period related to these sources of revenue. The main types of noninterest income within the scope of the standard are as follows: Service Charges on deposit accounts – the Company has contracts with its deposit customers where fees are charged if certain parameters are not met. These agreements can be cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific transactions or activities resulting from a customer request or activity that include overdraft fees, online banking fees, interchange fees, ATM fees and other transaction fees. All of these fees are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time upon the completion of the requested service/transaction.

 

4.

EARNINGS PER SHARE

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

 

     Three Months Ended
September 30,
 
             2018                      2017          

Weighted average common shares issued

     3,805,636        3,805,636  

Average treasury stock shares

     (1,836,884      (1,797,492

Average unallocated ESOP shares

     (175,697      (183,266
  

 

 

    

 

 

 

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

     1,793,055        1,824,878  

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

     217        -  
  

 

 

    

 

 

 

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

     1,793,272        1,824,878  
  

 

 

    

 

 

 

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

At September 30, 2018 there were 77,019 options outstanding with an exercise price of $16.20 which were dilutive for the three month period. At September 30, 2017 there were 114,519 options outstanding with an exercise price of $16.20 which were anti-dilutive and were excluded from the diluted earnings per share calculation.

 

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5.

STOCK BASED COMPENSATION DISCLOSURE

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

During the three months ended September 30, 2018 and 2017, the Company recorded no compensation expense related to our share-based compensation awards. As of September 30, 2018, there was no unrecognized compensation cost related to unvested share-based compensation awards granted in fiscal 2009.

The Company had no non-vested stock options outstanding at September 30, 2018 and 2017. There were no stock options exercised or issued during the three months ended September 30, 2018 and 2017.

 

6.

INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and fair values of investments are as follows:

 

                          Gross             Gross               
                Amortized                     Unrealized                     Unrealized                Fair  
            Cost             Gains             Losses                Value      
            (Dollars in Thousands)  
September 30, 2018                                                       

AVAILABLE FOR SALE

                      

Corporate debt securities

   $          105,094      $          293      $          (162   $          105,225  

Foreign debt securities 1

        21,562           22           (30        21,554  

Obligations of states and political subdivisions

        1,630           -           (12        1,618  
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

   $          128,286      $          315      $          (204   $          128,397  
     

 

 

       

 

 

       

 

 

      

 

 

 
                          Gross             Gross               
                Amortized                     Unrealized                     Unrealized                Fair  
            Cost             Gains             Losses                Value      
            (Dollars in Thousands)  
September 30, 2018                                                       

HELD TO MATURITY

                      

Corporate debt securities

   $          1,057      $          4      $          -     $          1,061  

Obligations of states and political subdivisions

        3,995           -           (53        3,942  
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

   $          5,052      $          4      $          (53   $          5,003  
     

 

 

       

 

 

       

 

 

      

 

 

 

 

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

 

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                          Gross             Gross               
                Amortized                     Unrealized                     Unrealized                Fair  
            Cost             Gains             Losses                Value      
            (Dollars in Thousands)  
June 30, 2018                                                       

AVAILABLE FOR SALE

                      

Corporate debt securities

   $          104,316      $          204      $          (181   $          104,339  

Foreign debt securities¹

        22,878           11           (38        22,851  

Obligations of states and political subdivisions

        1,630           -           (9        1,621  
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

   $          128,824      $          215      $          (228   $          128,811  
     

 

 

       

 

 

       

 

 

      

 

 

 
                          Gross             Gross               
                Amortized                     Unrealized                     Unrealized                Fair  
            Cost             Gains             Losses                Value      
            (Dollars in Thousands)  
June 30, 2018                                                       

HELD TO MATURITY

                      

U.S. government agency securities

   $          625      $          -      $          (1   $          624  

Corporate debt securities

        1,061           13           -          1,074  

Obligations of states and political subdivisions

        4,495           -           (68        4,427  
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

   $          6,181      $          13      $          (69   $          6,125  
     

 

 

       

 

 

       

 

 

      

 

 

 

Proceeds from sales of investments during the quarter ended September 30, 2018 were $1.4 million and the Company recorded gross realized investment security losses of $2 thousand during this same period.

There were no sales of investment securities for the three months ended September 30, 2017.

 

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

 

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The amortized cost and fair values of debt securities at September 30, 2018, 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

   $          18,317      $          98,748      $          11,221      $          -      $          128,286  

Fair value

        18,312           98,828           11,257           -           128,397  

HELD TO MATURITY

                             

Amortized cost

   $          1,557      $          2,475      $          1,020      $          -      $          5,052  

Fair value

        1,561           2,443           999           -           5,003  

At September 30, 2018 investment securities with amortized costs of $3.5 million and fair values of $3.4 million were pledged to secure borrowings with the Federal Home Loan Bank (FHLB) of Pittsburgh.

 

7.

MORTGAGE-BACKED SECURITIES

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

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

At September 30, 2018, the Company’s Agency CMOs totaled $110.1 million as compared to $114.9 million at June 30, 2018. The Company’s private-label CMOs totaled $873 thousand at September 30, 2018 as compared to $958 thousand at June 30, 2018. The $4.8 million decrease in the Agency CMO segment of our MBS portfolio was due to repayments on our Agency CMOs which totaled $4.8 million. During the three months ended September 30, 2018, the Company received principal payments totaling $46 thousand on its private-label CMOs. At September 30, 2018 and June 30, 2018, all of the Company’s MBS portfolio was 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 London Interbank Offered Rate (LIBOR). The Company has no investment in multi-family or commercial real estate based MBS.

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

 

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The Company retains an independent third party to assist it in the determination of a fair value for its three private-label CMOs. This valuation is meant to be a “Level Three” valuation as defined by ASC Topic 820, Fair Value Measurements and Disclosures. The valuation does not represent the actual terms or prices at which any party could purchase the securities. There is currently no active secondary market for private-label CMOs and there can be no assurance that any secondary market for private-label CMOs will develop. The private-label CMO portfolio had four previously recorded other-than-temporary impairments at September 30, 2018. During the three months ending September 30, 2018, the Company reversed $21 thousand of non-credit unrealized holding losses on its three private-label CMOs with other than temporary impairments (“OTTI”) due to principal repayments. During the three months ended September 30, 2018, the Company recorded no additional credit impairment charges on its private-label CMO portfolio.

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

The following table sets forth information with respect to the Company’s private-label CMO portfolio as of September 30, 2018. At the time of purchase, all of our private-label CMOs were rated in the highest investment category by at least two ratings agencies.

 

            At September 30, 2018  
            Rating      Book
Value
     Fair
  Value2  
     Life to Date
Impairment
  Recorded in  
Earnings
 

      Cusip #      

         Security Description                S&P              Moody’s              Fitch          (in thousands)  

126694CP1

     CWHL SER 21 A11        N/A        Caa2        D              $  471              $  599              $  201  

126694KF4

     CWHL SER 24 A15        NR        N/A        D        101        117        44  

126694KF4

     CWHL SER 24 A15        NR        N/A        D        201        235        89  

126694MP0

     CWHL SER 26 1A5        NR        N/A        D        100        113        36  
              

 

 

    

 

 

    

 

 

 
                       $  873              $  1,064              $  370  
              

 

 

    

 

 

    

 

 

 

 

 

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

 

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

 

               Amortized    
Cost
            Gross
    Unrealized    
Gains
            Gross
    Unrealized    
Losses
           Fair
    Value    
 
    

 

 

 
           (Dollars in Thousands)  

September 30, 2018

                     

HELD TO MATURITY

                     

Collateralized mortgage obligations:

                     

Agency

  $          110,092      $          1,195      $          (394   $          110,893  

Private-label

       873           191           -          1,064  
    

 

 

       

 

 

       

 

 

      

 

 

 

Total

  $          110,965      $          1,386      $          (394   $          111,957  
    

 

 

       

 

 

       

 

 

      

 

 

 
               Amortized    
Cost
            Gross
    Unrealized    
Gains
            Gross
    Unrealized    
Losses
          

Fair

    Value    

 
    

 

 

 
           (Dollars in Thousands)  

June 30, 2018

    

HELD TO MATURITY

                     

Collateralized mortgage obligations:

                     

Agency

  $          114,899      $          1,260      $          (426   $          115,733  

Private-label

       958           153           -          1,111  
    

 

 

       

 

 

       

 

 

      

 

 

 

Total

  $          115,857      $          1,413      $          (426   $          116,844  
    

 

 

       

 

 

       

 

 

      

 

 

 

The amortized cost and fair value of the Company’s mortgage-backed securities at September 30, 2018, 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

   $          -      $          86      $          93      $          110,786      $          110,965  

Fair value

        -           88           94           111,775           111,957  

At September 30, 2018, mortgage-backed securities with amortized costs of $110.1 million and fair values of $110.9 million were pledged to secure public deposits and borrowings with the FHLB. Of the securities pledged, $18.1 million of fair value was excess collateral. At June 30, 2018, mortgage-backed securities with an amortized cost of $114.9 million and fair values of $115.7 million, were pledged to secure public deposits and borrowings with the FHLB. 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.

 

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8.

ACCUMULATED OTHER COMPREHENSIVE LOSS

The following tables present the changes in accumulated other comprehensive loss by component, for the three months ended September 30, 2018 and 2017.

 

    Three Months Ended September 30, 2018  
    (Dollars in Thousands – net of tax)  
        Unrealized Gains    
    and Losses on    
    Available-for-Sale    
    Securities    
        Unrealized Gains    
    and Losses on    
    Held-to-Maturity    
    Securities    
                Total              

Beginning Balance – June 30, 2018

      $ (10     $ (178     $ (188

Other comprehensive income (loss) before reclassifications

    96       (31     65  

Amounts reclassified from accumulated other comprehensive income (loss)

    2       -       2  
 

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

    98       (31     67  
 

 

 

   

 

 

   

 

 

 

Ending Balance – September 30, 2018

    $ 88       $ (209     $ (121
 

 

 

   

 

 

   

 

 

 
    Three Months Ended September 30, 2017  
    (Dollars in Thousands – net of tax)  
        Unrealized Gains    
    and Losses on    
    Available-for-Sale    
    Securities    
        Unrealized Gains
    and Losses on    
    Held-to-Maturity    
    Securities    
                Total              

Beginning Balance – June 30, 2017

    $ 44       $ (232     $ (188

Other comprehensive income before reclassifications

    47       46       93  

Amounts reclassified from accumulated other comprehensive income

    -       -       -  
 

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

    47       46       93  
 

 

 

   

 

 

   

 

 

 

Ending Balance – September 30, 2017

    $ 91       $ (186     $ (95
 

 

 

   

 

 

   

 

 

 

 

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9.

UNREALIZED LOSSES ON SECURITIES

The following tables show the Company’s gross unrealized losses and fair value, aggregated by category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2018 and June 30, 2018.

 

               September 30, 2018  
  

 

 
               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

      $      43,811      $      (119   $      2,992      $      (43   $      46,803      $      (162

Foreign debt securities³

           8,765           (30        -           -          8,765           (30

Obligations of states and political subdivisions

           5,261           (64        298           (1        5,559           (65

Collateralized mortgage obligations:

                                    

Agency

           4,572           (16        21,448           (378        26,020           (394
        

 

 

       

 

 

      

 

 

       

 

 

      

 

 

       

 

 

 

Total

     

$

     62,409      $      (229   $      24,738      $      (422   $      87,147      $      (651
        

 

 

       

 

 

      

 

 

       

 

 

      

 

 

       

 

 

 
               June 30, 2018  
  

 

 
               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)  

U.S. government agency securities

     

$

     624      $      (1   $      -      $      -     $      624      $      (1

Corporate debt securities

           56,714           (169        3,028           (12        59,742           (181

Foreign debt securities³

           13,761           (38        -           -          13,761           (38

Obligations of states and political subdivisions

           5,048           (77        -           -          5,048           (77

Collateralized mortgage obligations:

                                    

Agency

           7,600           (12        21,424           (414        29,024           (426
        

 

 

       

 

 

      

 

 

       

 

 

      

 

 

       

 

 

 

Total

      $      83,747      $      (297   $      24,452      $      (426   $      108,199      $      (723
        

 

 

       

 

 

      

 

 

       

 

 

      

 

 

       

 

 

 

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

The Company evaluates outstanding available-for-sale and held-to-maturity securities in an unrealized loss position (i.e., impaired securities) for OTTI on a quarterly basis. In doing so, the Company considers many factors including, but not limited to: the credit ratings assigned to the securities by the Nationally Recognized Statistical Rating Organizations (“NRSRO”); other indicators of the credit quality of the issuer; the strength of the provider of any guarantees; the length of time and extent that fair value has 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

 

³ U.S. dollar denominated investment-grade corporate bonds of large foreign corporate issuers.

 

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residential MBS, the Company also considers prepayment speeds, the historical and projected performance of the underlying loans and the credit support provided by the subordinate securities. These evaluations are inherently subjective and consider a number of quantitative and qualitative factors.

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

 

     Three Months Ended
September 30,
 
             2018                      2017          
     (Dollars in Thousands)  

Beginning balance

   $ 239      $ 259  

Initial credit impairment

     -        -  

Subsequent credit impairment

     -        8  

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

     -        -  

Reductions for securities sold

     -        -  

Reduction for actual realized losses

     (3      (9

Reduction for increase in cash flows expected to be collected

     -        -  
  

 

 

    

 

 

 

Ending Balance

   $ 236      $ 258  
  

 

 

    

 

 

 

During the three months ended September 30, 2018, the Company recorded no additional credit impairment charge and no non-credit unrealized holding losses to accumulated other comprehensive income. During the three months ended September 30, 2018, the Company accreted back out of other comprehensive income $(31) thousand (net of income tax effect of $(8) 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.

 

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The Company reviewed the independent third party’s assumptions used in the September 30, 2018 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.

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

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

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

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

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

The Company had investments in 55 positions that were temporarily impaired at September 30, 2018. Based on its analysis, management has concluded that three private-label CMOs are other-than-temporarily impaired, while the remaining securities portfolio has experienced unrealized losses and a decrease in fair value due to interest rate volatility, illiquidity in the marketplace, or credit deterioration in the U.S. mortgage markets.

 

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10.

LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

The following table summarizes the primary segments of the loan portfolio as of September 30, 2018 and June 30, 2018.

 

            September 30, 2018      June 30, 2018  
           

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

   $          73,765        $ -         $ 73,765         $ 72,237        $ -         $  72,237  

Construction

        1,429          -           1,429           1,769          -           1,769  

Land acquisition & development

        287          -           287           -          -           -  

Multi-family dwellings

        3,324          -           3,324           3,390          -           3,390  

Commercial

        3,233          -           3,233           3,482          -           3,482  

Consumer Loans

                                 

Home equity

        895          -           895           861          -           861  

Home equity lines of credit

        2,174          -           2,174           2,177          -           2,177  

Other

        131          -           131           125          -           125  

Commercial Loans

        584          -           584           633          -           633  
     

 

 

      

 

 

       

 

 

       

 

 

      

 

 

       

 

 

 
   $          85,822        $             -         $ 85,822         $          84,674        $                 -         $              84,674  
          

 

 

       

 

 

            

 

 

       

 

 

 

Plus: Deferred loan costs

        471                      469             

  Allowance for loan losses

        (487                    (468           
     

 

 

                  

 

 

            

Total

   $                  85,806                    $  84,675             
     

 

 

                  

 

 

            

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

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

Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower, including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.

As of September 30, 2018 and June 30, 2018, there were no loans considered to be impaired.

 

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Total nonaccrual loans as of September 30, 2018 and June 30, 2018 and the related interest income recognized for the three months ended September 30, 2018 and September 30, 2017 are as follows:

 

                    September 30,        
2018
                    June 30,        
2018
 
            (Dollars in Thousands)  

Principal outstanding

           

1 – 4 family dwellings

   $          233      $          235  

Construction

        -           -  

Land acquisition & development

        -           -  

Commercial real estate

        -           -  

Home equity lines of credit

        -           -  
     

 

 

       

 

 

 

Total

   $          233      $          235  
     

 

 

       

 

 

 

 

            Three Months Ended  
                September 30,    
2018
                September 30,    
2017
 
            (Dollars in Thousands)  

Average nonaccrual loans

           

1 – 4 family dwellings

   $          234      $          245  

Construction

        -           -  

Land acquisition & development

        -           -  

Commercial real estate

        -           -  

Home equity lines of credit

        -           -  
     

 

 

       

 

 

 

Total

   $          234      $          245  
     

 

 

       

 

 

 

Income that would have been recognized

   $          3      $          7  

Interest income recognized

   $          3      $          7  

Interest income foregone

   $          -      $          -  

 

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

During the three months ended September 30, 2018 and 2017, there were no troubled debt restructurings, and no troubled debt restructurings that subsequently defaulted.

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.

 

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Table of Contents

The Company’s general policy is to internally classify its assets on a regular basis and establish prudent general valuation allowances that are adequate to absorb losses that have not been identified but that are inherent in the loan portfolio. The Company maintains general valuation allowances that it believes are adequate to absorb losses in its loan portfolio that are not clearly attributable to specific loans. The Company’s general valuation allowances are within the following general ranges: (1) 0% to 5% of assets subject to special mention; (2) 1.00% to 100% of assets classified substandard; and (3) 50% to 100% of assets classified doubtful. Any loan classified as loss is charged-off. To further monitor and assess the risk characteristics of the loan portfolio, loan delinquencies are reviewed to consider any developing problem loans. Based upon the procedures in place, considering the Company’s past charge-offs and recoveries and assessing the current risk elements in the portfolio, management believes the allowance for loan losses at September 30, 2018, is adequate.

 

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Table of Contents

The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2018 and June 30, 2018:

 

          Current          

30 – 59

  Days Past  
Due

            60 – 89  
  Days Past  
Due
         

  90 Days +  
Past Due

Accruing

         

  90 Days +  
Past Due

Non-accrual

          Total  
Past  
Due  
         

Total

Loans

 
   

 

 

 
          (Dollars in Thousands)  

September 30, 2018

                           

First mortgage loans:

                           

1 – 4 family dwellings

  $           73,532     $           -     $           -     $           -     $           233     $           233     $           73,765  

Construction

      1,429         -         -         -         -         -         1,429  

Land acquisition & development

      287         -         -         -         -         -         287  

Multi-family dwellings

      3,324         -         -         -         -         -         3,324  

Commercial

      3,233         -         -         -         -         -         3,233  

Consumer Loans:

                           

Home equity

      895         -         -         -         -         -         895  

Home equity lines of credit

      2,174         -         -         -         -         -         2,174  

Other

      131         -         -         -         -         -         131  

Commercial Loans

      584         -         -         -         -         -         584  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $                   85,589     $           -     $           -     $           -     $                   233     $                   233         85,822  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Plus: Deferred loan fees

                              471  

  Allowance for loan losses

                              (487
                           

 

 

 

Net Loans Receivable

                          $           85,806  
                           

 

 

 
          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, 2018

                           

First mortgage loans:

                           

1 – 4 family dwellings

  $           72,002     $         -     $           -     $           -     $           235     $           235     $         72,237  

Construction

      1,769         -         -         -         -         -         1,769  

Land acquisition & development

      -         -         -         -         -         -         -  

Multi-family dwellings

      3,390         -         -         -         -         -         3,390  

Commercial

      3,482         -         -         -         -         -         3,482  

Consumer Loans

                           

Home equity

      861         -         -         -         -         -         861  

Home equity lines of credit

      2,177         -         -         -         -         -         2,177  

Other

      125         -         -         -         -         -         125  

Commercial Loans

      633         -         -         -         -         -         633  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $           84,439     $           -     $           -     $         -     $           235     $           235         84,674  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Plus: Deferred loan fees

                              469  

  Allowance for loan losses

                              (468
                           

 

 

 

Net Loans Receivable

                          $           84,675  
                           

 

 

 

 

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Credit quality information

The following tables represent credit exposure by internally assigned grades for the periods ended September 30, 2018 and June 30, 2018. The grading system analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or not at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

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

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

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

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

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

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

The following tables present the Company’s internally classified construction, land acquisition and development, multi-family residential, commercial real estate and commercial (not secured by real estate) loans at September 30, 2018 and June 30, 2018.

 

            September 30, 2018  
            Construction            

Land

Acquisition

&

Development

Loans

           

Multi-
family

Residential

           

Commercial
Real

Estate

            Commercial  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 
            (Dollars in Thousands)  

Pass

   $          1,429      $
 
 
     287      $          3,324      $          3,233      $          584  
Special Mention           -             -             -             -             -  

Substandard

        -           -           -           -           -  

Doubtful

        -           -           -           -           -  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Ending Balance

   $          1,429      $          287      $          3,324      $          3,233      $          584  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

 

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            June 30, 2018  
    

  Construction  

           

Land

Acquisition

&

  Development  

Loans

           

  Multi-family  

Residential

           

  Commercial  
Real

Estate

              Commercial      
  

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 
            (Dollars in Thousands)  

Pass

   $          1,769      $          -      $          3,390      $          3,482      $          633  

Special Mention

        -           -           -           -           -  

Substandard

        -           -           -           -           -  

Doubtful

        -           -           -           -           -  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Ending Balance

   $          1,769      $          -      $          3,390      $          3,482      $          633  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

The following table presents performing and non-performing 1 – 4 family residential and consumer loans based on payment activity for the periods ended September 30, 2018 and June 30, 2018.

 

            September 30, 2018  
     

 

 

 
                1 – 4 Family                     Consumer      
     

 

 

 
            (Dollars in Thousands)  

Performing

       $            73,532      $          3,200  

Non-performing

        233           -  
     

 

 

       

 

 

 

Total

       $                    73,765      $                      3,200  
     

 

 

       

 

 

 
            June 30, 2018  
     

 

 

 
                1 – 4 Family                     Consumer        
     

 

 

 
            (Dollars in Thousands)  

Performing

       $            72,002      $          3,163  

Non-performing

        235           -  
     

 

 

       

 

 

 

Total

       $                    72,237      $                      3,163  
     

 

 

       

 

 

 

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

Our methodology used to determine the allocated portion of the allowance is as follows. For groups of homogenous loans, we apply a loss rate to the groups’ aggregate balance. Our group loss rate reflects our historical loss experience. We may adjust these group rates to compensate for changes in environmental factors; but our adjustments have not been frequent due to a relatively stable charge-off experience. The Company also monitors industry loss experience on similar loan portfolio segments. We then identify loans for individual evaluation under ASC Topic 310. If the individually identified loans are performing, we apply a segment specific loss rate adjusted for relevant environmental factors, if necessary, for those loans reviewed individually and considered individually impaired, we use one of the three methods for measuring impairment mandated by ASC Topic 310. Generally the fair value of collateral is used since our impaired loans are generally real estate based. In connection with the fair value of collateral measurement, the Company generally uses an independent appraisal and determines costs to sell. The Company’s appraisals for commercial income based loans, such as multi-family and commercial real estate loans, assess value based upon the operating cash flows of the business as opposed to merely “as built” values. The Company then

 

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validates the reasonableness of our calculated allowances by: (1) reviewing trends in loan volume, delinquencies, restructurings and concentrations; (2) reviewing prior period (historical) charge-offs and recoveries; and (3) presenting the results of this process, quarterly, to the Asset Classification Committee and the Savings Bank’s Board of Directors. We then tabulate, format and summarize the current loan loss allowance balance for financial and regulatory reporting purposes.

The Company had no unallocated loss allowance balance at September 30, 2018.

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

The following tables summarize the primary segments of the allowance for loan losses (“ALLL”), segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2018 and 2017. Activity in the allowance is presented for the three months ended September 30, 2018 and 2017.

 

          As of September 30, 2018  
          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, 2018

  $         356     $         24     $         -     $         18     $         35     $         31     $         4     $         468  

Charge-offs

      -         -         -         -         -         -         -         -  

Recoveries

      -         -         -         -         -         -         -         -  

Provisions

      7         5         10         -         (3       1         (1       19  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending ALLL Balance at September 30, 2018

  $         363     $         29     $         10     $         18     $         32     $         32     $         3     $         487  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Individually evaluated for impairment

  $         -     $         -     $         -     $         -     $         -     $         -     $         -     $         -  

Collectively evaluated for impairment

      363         29         10         18         32         32         3         487  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $         363     $         29     $         10     $         18     $         32     $         32     $         3     $         487  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

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          As of September 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, 2017

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

Charge-offs

      -         -         -         -         -         -         -         -  

Recoveries

      -         -         -         -         -         -         -         -  

Provisions

      6         2         (3       -         1         -         (1       5  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending ALLL Balance at September 30, 2017

  $         311     $         32     $         2     $         20     $         21     $         34     $         3     $         423  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Individually evaluated for impairment

  $         -     $         -     $         -     $         -     $         -     $         -     $         -     $         -  

Collectively evaluated for impairment

      311         32         2         20         21         34         3         423  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $         311     $         32     $         2     $         20     $         21     $         34     $         3     $         423  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

During the three months ended September 30, 2018 the Company’s ALLL increased by $19 thousand. This increase in the ALLL was primarily attributable to increases in the ALLL associated with the following segments: land acquisition and development, 1 - 4 family and construction. These increases were $10 thousand, $7 thousand and $5 thousand, respectively. Changes to the ALLL within a particular loan segment during the quarter ended September 30, 2018, were primarily due to changes in associated loan balances.

During the three months ended September 30, 2017, the ALLL associated with the 1 – 4 family and construction loan portfolios increased by $6 thousand and $2 thousand, respectively. The primary reason for the increases in the ALLL associated with these segments was the increase in the associated loan balances. The ALLL for land acquisition and development loans decreased $3 thousand due to lower loan balances within this segment.

 

11.

FEDERAL HOME LOAN BANK (FHLB) ADVANCES

At September 30, 2018 and June 30, 2018, the Company’s borrowings consisted of revolving and short-term FHLB advances. Short-term FHLB advances generally mature within 90 days, while revolving FHLB advances may be repaid by the Company without penalty. The following table presents information regarding such advances as of September 30, 2018 and June 30, 2018:

 

                 September 30,        
2018
                 June 30,        
2018
 
    

 

 

 
         (Dollars in Thousands)  

FHLB revolving and short-term advances:

         

Ending balance

  $      160,484     $      171,403  

Average balance

       159,815          167,306  

Maximum month-end balance

       161,289          179,791  

Average interest rate

       2.28        1.60

Weighted-average rate

       2.38        2.12

 

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At September 30, 2018, the Company had remaining borrowing capacity with the FHLB of approximately $12.4 million.

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

 

12.

FAIR VALUE MEASUREMENTS

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

 

Level I:   

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

Level II:   

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

Level III:   

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

 

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Assets Measured at Fair Value on a Recurring Basis

Investment Securities Available-for-Sale

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

The following tables present the assets reported on a recurring basis on the Consolidated Balance Sheet at their fair value as of September 30, 2018 and June 30, 2018, by level within the fair value hierarchy. As required by GAAP, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

           September 30, 2018  
                 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

  $          -     $          1,618     $          -     $          1,618  

Corporate securities

       -          105,225          -          105,225  

Foreign debt securities 3

       -          21,554          -          21,554  
    

 

 

      

 

 

      

 

 

      

 

 

 
  $          -     $          128,397     $          -     $          128,397  
    

 

 

      

 

 

      

 

 

      

 

 

 

 

           June 30, 2018  
                 Level I                        Level II                        Level III                        Total        
           (Dollars in Thousands)  

Assets measured on a recurring basis:

                   

Investment securities – available for sale:

                   

Corporate securities

  $          -     $          104,339     $          -     $          104,339  

Foreign debt securities 3

       -          22,851          -          22,851  

Obligations of states and political subdivisions

       -          1,621          -          1,621  
    

 

 

      

 

 

      

 

 

      

 

 

 
  $          -     $          128,811     $          -     $          128,811  
    

 

 

      

 

 

      

 

 

      

 

 

 

 

3 

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

 

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Assets Measured at Fair Value on a Nonrecurring Basis

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

Impaired Loans

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310. The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. Collateral values are estimated using Level II inputs based on observable market data or Level III inputs based on customized discounting criteria. For a majority of impaired real estate related loans, the Company obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information. The Company has no Level I, Level II or Level III impaired loans at September 30, 2018 and June 30, 2018.

 

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13.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values are as follows:

 

        September 30, 2018                                    
        Carrying
Amount
        Fair
Value
            Level I                   Level II                       Level III      
        (Dollars in Thousands)  

FINANCIAL ASSETS

                   

Cash and cash equivalents

  $     5,917     $     5,917     $     5,917     $         -     $         -  

Certificates of deposit

      350         350         350         -         -  

Investment securities – available for sale

      128,397         128,397         -         128,397         -  

Investment securities – held to maturity

      5,052         5,003         -         5,003         -  

Mortgage-backed securities – held to maturity:

                   

Agency

      110,092         110,893         -         110,893         -  

Private-label

      873         1,064         -         -         1,064  

Net loans receivable

      85,806         85,509         -         -         85,509  

Accrued interest receivable

      1,240         1,240         1,240         -         -  

FHLB stock

      6,603         6,603         6,603         -         -  

Bank owned life insurance

      4,699         4,699         4,699         -         -  

FINANCIAL LIABILITIES

                   

Deposits:

                   

Non-interest bearing deposits

 

$

    31,853    

$

    31,853    

$

    31,853     $         -     $         -  

Interest-earning checking

      23,377         23,377         23,377         -         -  

Savings accounts

      43,782         43,782         43,782         -         -  

Money market accounts

      20,296         20,296         20,296         -         -  

Certificates of deposit

      32,677         32,428         -         -         32,428  

Advance payments by borrowers for taxes and insurance

      847         847         847         -         -  

FHLB short-term advances

      160,484         160,484         160,484         -         -  

Accrued interest payable

      391         391         391         -         -  

 

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           June 30, 2018                                         
           Carrying
Amount
           Fair
Value
               Level I                    Level II                    Level III      
           (Dollars in Thousands)  

FINANCIAL ASSETS

                        

Cash and cash equivalents

  $          2,441     $          2,441     $          2441     $          -     $          -  

Certificates of deposit

       350          350          350          -          -  

Investment securities – available for sale

       128,811          128,811          -          128,811          -  

Investment securities – held to maturity

       6,181          6,125          -          6,125          -  

Mortgage-backed securities – held to maturity:

                        

Agency

       114,899          115,733          -          115,733          -  

Private-label

       958          1,111          -          -          1,111  

Net loans receivable

       84,675          84,319          -          -          84,319  

Accrued interest receivable

       1,225          1,225          1,225          -          -  

FHLB stock

       7,161          7,161          7,161          -          -  

Bank owned life insurance

       4,668          4,668          4,668          -          -  

FINANCIAL LIABILITIES

                        

Deposits:

                        

Non-interest bearing deposits

  $          18,436     $          18,436     $          18,436     $          -     $          -  

Interest-earning checking

       24,459          24,459          24,459          -          -  

Savings accounts

       44,727          44,727          44,727          -          -  

Money market accounts

       21,087          21,087          21,087          -          -  

Certificates of deposit

       34,376          34,053          -          -          34,053  

Advance payments by borrowers for taxes and insurance

       1,938          1,938          1,938          -          -  

FHLB short-term advances

       171,403          171,403          171,403          -          -  

Accrued interest payable

       380          380          380          -          -  

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

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

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

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

 

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

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

The fair value approximates the current carrying value.

Investment Securities, Mortgage-Backed Securities, and FHLB Stock

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

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

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

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

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

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

Bank Owned Life Insurance (“BOLI”)

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

FHLB Long-term Advances

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

Commitments to Extend Credit

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

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2018

FORWARD LOOKING STATEMENTS

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

GENERAL

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

West View Savings Bank is a Pennsylvania-chartered, FDIC-insured stock savings bank conducting business from six offices in the North Hills suburbs of Pittsburgh. The Savings Bank converted from the mutual to the stock form of ownership in November 1993. The Savings Bank had no subsidiaries at September 30, 2018.

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

FINANCIAL CONDITION

The Company’s assets totaled $349.9 million at September 30, 2018, as compared to $352.3 million at June 30, 2018. The $2.3 million or 0.7% decrease in total assets was primarily due to a $4.9 million decrease in mortgage-backed securities, a $414 thousand decrease in investment securities available for sale and a $558 thousand decrease in Federal Home Loan Bank Stock. These decreases were partially offset by a $2.8 million increase in interest-earning demand deposits and a $1.1 million increase in net loans receivable. The increase in interest-earning demand deposits is associated with higher liquidity needs associated with seasonal demand deposits by local tax collectors. The increase in net loans receivable was primarily attributable to increases in the single-family owner occupied segment of the loan portfolio. The decrease in mortgage-backed securities was principally due to repayments totaling $4.9 million and the decrease in investment securities held to maturity was the result of maturities and calls.

The Company’s total liabilities decreased $3.0 million or 1.0% to $315.2 million as of September 30, 2018 from $318.3 million as of June 30, 2018. The decrease in total liabilities was primarily comprised of a $10.9 million or 6.4% decrease in FHLB short-term advances, which was partially offset by a $7.8 million increase in total deposits. The increase in total deposits was primarily attributable to increases in non-interest bearing accounts of $13.4 million, which was partially offset by decreases in various other deposit categories. Management believes that these decreases were primarily attributable to seasonal payments of local real estate taxes by depositors, timing differences associated with government direct deposits (e.g. social security benefits) and a $1.2 million decrease in brokered time deposits. Management believes that most of the increase in non-interest bearing deposits was attributable to seasonal local and school real estate tax obligations by tax collectors. See also Quantitative and Qualitative Disclosures About Market Risk “Asset and Liability Management”.

Total stockholders’ equity increased $688 thousand or 2.0% to $34.7 million as of September 30, 2018, from $34.0 million as of June 30, 2018. The changes to stockholders’ equity were primarily attributable to net income of $748 thousand, which was partially offset by cash dividends paid totaling $157 thousand.

 

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RESULTS OF OPERATIONS

General. WVS reported net income of $748 thousand or $0.42 earnings per share (basic and diluted) for the three months ended September 30, 2018. Net income increased by $246 thousand or 49.0% and earnings per share (basic and diluted) increased $0.14 or 50.0% for the three months ended September 30, 2018, when compared to the same period in 2017. The increase in net income for the three months ended September 30, 2018 was primarily attributable to a $219 thousand increase in net interest income and a $55 thousand decrease in income tax expense, which were partially offset by a $14 thousand increase in the provision for loan losses, a $9 thousand increase in non-interest expense and a $5 thousand decrease in non-interest income.

Net Interest Income. The Company’s net interest income increased by $219 thousand or 13.9% for the three months ended September 30, 2018, when compared to the same period in 2017. The increase in net interest income is attributable to a $607 thousand increase in interest and dividend income, which was partially offset by a $388 thousand increase in interest expense. The increase in interest income during the three months ended September 30, 2018 was primarily attributable to higher yields earned on the Company’s investment and mortgage-backed securities and FHLB Stock, when compared to the same period in 2017. The increase in interest expense during the three months ended September 30, 2018, was primarily attributable to higher market interest rates paid on FHLB short-term advances and time deposits, which were partially offset by lower average balances of FHLB long-term fixed and variable rate advances and time deposits when compared to the same period in 2017.

Interest Income. Interest income on net loans receivable increased $65 thousand or 8.8% for the three months ended September 30, 2018, when compared to the same period in 2017. The increase for the quarter ended September 30, 2018 was primarily attributable to a $6.5 million increase in the average balance of net loans receivable, when compared to the same period in 2017. The increase in the average balance of loans outstanding was primarily attributable to increased loan originations which were in excess of repayments. During fiscal 2018 and into fiscal 2019, the Company enjoyed higher demand for single-family home purchase loans. Substantially all of our loan originations and purchases were fixed-rate with a mix of 15, 20, and 30 year terms.

Interest income on investment securities increased $383 thousand or 59.9% for the three months ended September 30, 2018, when compared to the same period in 2017. The increase for the three months ended September 30, 2018 was primarily attributable to an $11.0 million increase in the average balance of investment securities, and a 96 basis point increase in the weighted average yield, when compared to the same period in 2017.

Interest income on mortgage-backed securities increased $160 thousand or 22.0% for the three months ended September 30, 2018, when compared to the same period in 2017. The increase for the three months ended September 30, 2018 was primarily attributable to an 86 basis point increase in the weighted average yield earned on U.S. Government agency mortgage-backed securities, which was partially offset by a $14.3 million decrease in the average balance of U.S. Government agency mortgage-backed securities, when compared to the same period in 2017. The decrease in the average balances of U.S. Government agency and private-label mortgage-backed securities during the three months ended September 30, 2018 was attributable to principal paydowns of U.S. Government agency and private-label mortgage-backed securities, when compared to the same period in 2017.

Interest income on certificates of deposit decreased $30 thousand or 93.8% for the three months ended September 30, 2018 when compared to the same period in 2017. The decrease for the three months ended September 30, 2018 was primarily attributable to a $6.9 million decrease in the average balance of certificates of deposit. All of the Company’s maturing certificates of deposit were floating rate instruments. The proceeds from maturing certificates of deposits were primarily used to fund purchases of floating rate corporate bonds and to fund loan disbursements.

 

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Interest Expense. Interest paid on FHLB short-term advances increased $389 thousand or 74.8% for the three months ended September 30, 2018, when compared to the same period in 2017. The increase for the three months ended September 30, 2018 was primarily attributable to a 97 basis point increase in the weighted average rate paid on FHLB short-term advances, and $1.7 million increase in the average balance of FHLB short-term advances outstanding, when compared to the same period in 2017. A portion of the proceeds from the FHLB short-term advances were used to fund loan growth and purchases of investment securities available for sale. The increase in rates paid on FHLB short-term borrowings were consistent with increases in short-term market interest rates.

Interest paid on FHLB long-term advances decreased $43 thousand for the three months ended September 30, 2018, when compared to the same period in 2017. The decrease for the three months ended September 30, 2018 was attributable to the reduction of $6.4 million in the average balance of FHLB long-term advances which were paid off during the quarter ended September 2017.

Interest expense on deposits increased $42 thousand or 51.9% for the three months ended September 30, 2018, when compared to the same period in 2017. The increase in interest expense on deposits for the three months ended September 30, 2018 was primarily attributable to a 60 basis point increase in the weighted average rate paid on time deposits partially offset by decreases in the average balances of time deposits and money market accounts of $3.7 million and $2.0 million, respectively, when compared to the same period in 2017. The decrease in time and money market deposits was primarily attributable to seasonal customer withdrawals associated with the payment of local real estate taxes.

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

Provisions for loan losses increased $14 thousand for the three months ended September 30, 2018, when compared to the same period in 2017. The increase in the provision for loan losses for the three months ended September 30, 2018 was primarily due to higher average volumes of loans within the land acquisition and development loans and the 1-4 family residential loan segments when compared to the same period in 2017. At September 30, 2018, the Company’s total allowance for loan losses amounted to $487 thousand or 0.57% of the Company’s total loan portfolio, as compared to $468 thousand or 0.55% at June 30, 2018. At September 30, 2018, the Company’s non-performing loans totaled $233 thousand as compared to $235 thousand at June 30, 2018.

Non-Interest Income. Non-interest income decreased by $5 thousand or 4.4% for the three months ended September 30, 2018, when compared to the same period in 2017. The decrease for the three months ended September 30, 2018 was primarily attributable to decreases in the volume of ATM transactions compared to the same period in 2017.

Non-Interest Expense. Non-interest expense decreased $9 thousand or 1.0% for the three months ended September 30, 2018, when compared to the same period in 2017. This increase was due in part to a $12 thousand increase in ATM expense resulting from the issuance of ATM debit cards with enhanced security features, which was partially offset by a $9 thousand decrease in postage, stationery and printing supplies, when compared to the same period in 2017.

Income Tax Expense. Income tax expense decreased $55 thousand for the three months ended September 30, 2018, when compared to the same period in 2017. The decrease for the three months ended September 30, 2018 was primarily due to the reduced federal income tax rate, when compared to the same period in 2017.

 

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LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities totaled $903 thousand during the three months ended September 30, 2018. Net cash provided by operating activities was primarily comprised of net income totaling $748 thousand, $70 thousand of amortized discounts, premiums and deferred loan fees, and a $67 thousand increase in accrued income taxes.

Net cash provided by investing activities totaled $5.9 million for the three months ended September 30, 2018. Primary sources of funds from investing activities during the three months ended September 30, 2018 included $14.5 million of repayments on investment securities available for sale, $1.4 million of proceeds on sales of investment securities available for sale, $4.9 million of repayments of mortgage-backed securities, $1.1 million of repayments of investment securities held to maturity and $2.4 million from redemptions of FHLB stock. Primary uses of funds for investing activities during the three months ended September 30, 2018 included purchases of investment securities available for sale totaling $15.4 million, purchases of FHLB stock totaling $1.8 million and an increase in net loans receivable of $1.1 million.

Funds used for financing activities totaled $3.3 million for the three months ended September 30, 2018. Primary uses of funds included a $10.9 million decrease in FHLB short-term advances, a $1.7 million decrease in certificates of deposit and a $1.1 million decrease in advance payments by borrowers for taxes, which were partially offset by a $10.6 million increase in transaction accounts. The increase in transaction accounts was primarily attributable to the seasonally higher volumes of local tax collector deposits. Management has determined that it currently is maintaining adequate liquidity and continues to match funding sources with lending and investment opportunities.

The Company’s primary sources of funds are deposits, amortization, repayments and maturities of existing loans, mortgage-backed securities and investment securities, funds from operations, and funds obtained through FHLB advances and other borrowings. Certificates of deposit scheduled to mature in one year or less at September 30, 2018 totaled $27.1 million.

Historically, the Company used its sources of funds primarily to meet its ongoing commitments to pay maturing savings certificates and savings withdrawals, fund loan commitments and maintain a substantial portfolio of investment securities. At September 30, 2018, total approved loan commitments outstanding were $1.3 million. At the same date, commitments under unused lines of credit amounted to $5.9 million and the unadvanced portion of construction loans approximated $3.2 million. The Company has been able to generate sufficient cash through the retail deposit market, its traditional funding source, and through FHLB advances, and other borrowings, to provide the cash utilized in investing activities. The Company’s available for sale segment of the investment portfolio totaled $128.4 million at September 30, 2018. Management believes that the Company currently has adequate liquidity available to respond to liquidity demands.

On October 30, 2018, the Company’s Board of Directors declared a quarterly cash dividend of $0.08 per share, payable on November 15, 2018, to shareholders of record at the close of business on November 9, 2018. Dividends are subject to determination and declaration by the Board of Directors, which take into account the Company’s financial condition, statutory and regulatory restrictions, general economic conditions and other factors. There can be no assurance that dividends will in fact be paid on the Common Stock in future periods or that, if paid, such dividends will not be reduced or eliminated.

As of September 30, 2018, WVS Financial Corp. exceeded all regulatory capital requirements and maintained Common Equity Tier I Capital, Tier I, and total risk-based capital equal to $34.8 million or 18.15%, $34.8 million or 18.15%, and $35.4 million or 18.43%, respectively, of total risk-weighted assets, and Tier I leverage capital of $34.8 million or 9.93% of average quarterly assets.

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

 

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The Company’s nonperforming assets at September 30, 2018 totaled $233 thousand or 0.07% of total assets as compared to $235 thousand or 0.07% of total assets at June 30, 2018. Nonperforming assets at September 30, 2018 consisted of one single-family real estate loan. The loan is currently under a bankruptcy order and making payments generally as agreed. The $2 thousand decrease in nonperforming assets during the three months ended September 30, 2018 was attributable to principal repayments on this one non-accrual single-family real estate loan.

During the three months ended September 30, 2018, the Company collected $3 thousand of interest income on non-accrual loans. Approximately $3 thousand of interest income would have been recorded during the three months ended September 30, 2018 on non-accrual loans if such loans had been current according to the original loan agreements for the entire period. These amounts were not included in the Company’s interest income for the three months ended September 30, 2018.

 

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ASSET AND LIABILITY MANAGEMENT

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

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

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

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 2013-2018 and into fiscal year 2019, intermediate and long-term market interest rates fluctuated considerably. Many central banks, including the Federal Reserve, continued above normal levels of monetary accommodation including quantitative easing and targeted asset purchase programs. The desired outcomes of these programs are to stimulate aggregate demand, reduce high levels of unemployment and to further lower market interest rates.

The 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.

 

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

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

 

     September 30,     June 30,  
     2018               2018                         2017            
     Dollars in Thousands  

Interest-earning assets maturing or repricing within one year

         $267,896           $270,356           $257,808  

Interest-bearing liabilities maturing or repricing within one year

     216,749       229,231       228,616  
  

 

 

   

 

 

   

 

 

 

Interest sensitivity gap

         $  51,147           $  41,125           $  29,192  
  

 

 

   

 

 

   

 

 

 

Interest sensitivity gap as a percentage of total assets

     14.62     11.67     8.30

Ratio of assets to liabilities maturing or repricing within one year

     123.60     117.94     112.77

 

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The following table illustrates the Company’s estimated stressed cumulative repricing gap – the difference between the amount of interest-earning assets and interest-bearing liabilities expected to reprice at a given point in time – at September 30, 2018. 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)

  $ 53,312     $ 50,146     $ 49,612     $ 46,527     $ 46,637     $ 44,481     $ 30,358  

% of Total
Assets

    15.2     14.3     14.2     13.3     13.3     12.7     8.7

Base Case Up 100 bp

 

           

Cumulative Gap ($’s)

  $ 53,461     $ 50,434     $ 50,131     $ 47,437     $ 47,850     $ 45,927     $ 30,358  

% of Total
Assets

    15.3     14.4     14.3     13.6     13.7     13.1     8.7

Base Case No Change

 

           

Cumulative Gap ($’s)

  $ 53,744     $ 50,982     $ 51,146     $ 49,181     $ 50,028     $ 48,475     $ 30,358  

% of Total
Assets

    15.4     14.6     14.6     14.1     14.3     13.9     8.7

Base Case Down 100 bp

 

           

Cumulative Gap ($’s)

  $ 54,425     $ 52,293     $ 53,567     $ 53,322     $ 55,198     $ 54,097     $ 30,358  

% of Total
Assets

    15.6     14.9     15.3     15.2     15.8     15.5     8.7

Base Case Down 200 bp

 

           

Cumulative Gap ($’s)

  $ 55,378     $ 54,112     $ 56,862     $ 58,735     $ 61,561     $ 60,498     $ 30,358  

% of Total
Assets

    15.8     15.5     16.2     16.8     17.6     17.4     8.7

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

 

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The following table presents the simulated impact of a 100 and 200 basis point upward or downward (parallel) shift in market interest rates on net interest income, return on average equity, return on average assets and the market value of portfolio equity at September 30, 2018. This analysis was done assuming that the interest-earning assets will average approximately $343 million and $356 million over a projected twelve and twenty-four month period, respectively, for the estimated impact on change in net interest income, return on average equity and return on average assets. The estimated changes in market value of equity were calculated using balance sheet levels at September 30, 2018. Actual future results could differ materially from our estimates primarily due to unknown future interest rate changes and the level of prepayments on our investment and loan portfolios and future FDIC regular and special assessments.

Analysis of Sensitivity to Changes in Market Interest Rates

 

     Twelve Month Forward Modeled Change in Market Interest Rates  
     September 30, 2019     September 30, 2020  

Estimated impact on:

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

Change in net interest income

     -16.4     -7.9     -       4.1     9.0     -21.8     -10.4     -       6.5     13.7

Return on average equity

     5.28     6.53     7.69     8.29     9.00     5.05     6.70     8.12     9.00     9.96

Return on average assets

     0.53     0.66     0.78     0.84     0.91     0.50     0.68     0.84     0.94     1.06

Market value of equity (in thousands)

   $ 43,717     $ 46,723     $ 48,705     $ 49,043     $ 49,415            

The table below provides information about the Company’s anticipated transactions comprised of firm loan commitments and other commitments, including undisbursed letters and lines of credit, at September 30, 2018. The Company used no derivative financial instruments to hedge such anticipated transactions as of September 30, 2018.

 

Anticipated Transactions  

 

 
     (Dollars in Thousands)  

Undisbursed construction and development loans

            $ 3,198  

Undisbursed lines of credit

            $ 5,938  

Loan origination commitments

            $ 1,346  

Letters of credit

            $ -  
  

 

 

 
            $   10,482  
  

 

 

 

 

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In the ordinary course of its construction lending business, the Savings Bank enters into performance standby letters of credit. Typically, the standby letters of credit are issued on behalf of a builder to a third party to ensure the timely completion of a certain aspect of a construction project or land development. At September 30, 2018, the Savings Bank had no performance standby letters of credit outstanding. In the event that an obligor is unable to perform its obligations as specified in the applicable letter of credit agreement, the Savings Bank would be obligated to disburse funds up to the amount specified in the letter of credit agreement. The Savings Bank’s policy is to maintain adequate collateral that could be liquidated to fund such contingent obligations.

ITEM 4. CONTROLS AND PROCEDURES

As of September 30, 2018, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Accounting Officer, on the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Accounting Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2018.

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

During the quarter ended September 30, 2018, no change in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) has occurred that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

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PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

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

(b) Not applicable.

ITEM 1A. Risk Factors

There are no material changes to the risk factors included in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018.

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

(a) Not applicable.

(b) Not applicable.

(c) The following table sets forth information with respect to purchases of common stock of the Company made by the WVS Financial Corp. Employee Stock Ownership Plan (ESOP) during the three months ended September 30, 2018.

 

AFFILIATE PURCHASES OF EQUITY SECURITIES  
Period   

Total

Number of
Shares
    Purchased    

     Average Price
  Paid per Share ($)  
    

Total Number of
Shares

Purchased as

part of Publicly
  Announced Plans  
or Programs

    

Approximate Dollar
Value of Shares

that May Yet Be
Purchased

  Under the Plans or  
Programs

 

07/01/18 – 07/31/18

     -                    -                    -                  $ -              

08/01/18 – 08/31/18

     -                    -                    -                  $ -              

09/01/18 – 09/30/18

     -                    -                    -                  $ -              

Total

     -                    -                    -                  $ -              

 

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The following table sets forth information with respect to purchases of common stock of the Company made by WVS Financial Corp. during the three months ended September 30, 2018.

 

COMPANY PURCHASES OF EQUITY SECURITIES  
Period  

Total

Number of

Shares
  Purchased(1)  

      Average  
Price Paid per Share ($)
   

Total Number of
Shares

Purchased as

part of Publicly
  Announced Plans  
or Programs (1)

   

Maximum Number

of Shares

that May Yet Be
Repurchased
  Under the Plans or  
Programs (2)

 

07/01/18 – 07/31/18

    -               -               -               54,128          

08/01/18 – 08/31/18

    2,000               15.92               -               52,128          

09/01/18 – 09/30/18

    -               -               -               52,128          

Total

    2,000               15.92               -               52,128          

 

(1)

All shares indicated were purchased under the Company’s reopened Eleventh Stock Repurchase Program.

(2)

Eleventh Stock Repurchase Program

  (a)

Announced October 27, 2015.

  (b)

100,800 common shares approved for repurchase.

  (c)

No fixed date of expiration.

  (d)

This Program has not expired and has 52,128 common shares remaining to be purchased at September 30, 2018.

  (e)

Not applicable.

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

(a) Not applicable.

(b) Not applicable.

 

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ITEM 6. Exhibits

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

 

Number        

       

Description

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

 

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SIGNATURES

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