WVS FINANCIAL CORP - FORM 10-Q

Attached files

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EX-99 - EX-99 - WVS FINANCIAL CORP	d851326dex99.htm
EX-32.2 - EX-32.2 - WVS FINANCIAL CORP	d851326dex322.htm
EX-32.1 - EX-32.1 - WVS FINANCIAL CORP	d851326dex321.htm
EX-31.2 - EX-31.2 - WVS FINANCIAL CORP	d851326dex312.htm
EX-31.1 - EX-31.1 - WVS FINANCIAL CORP	d851326dex311.htm

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 December 31, 2019

[ ]

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)

Registrant’s telephone number, including area code: (412) 364-1911

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange

on which registered

Common Stock, par value $.01

WVFC

NASDAQ Global Market^SM

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 February 12, 2020: 1,935,641 shares of Common Stock, $.01 par value.

WVS FINANCIAL CORP. AND SUBSIDIARY

INDEX


PART I.	Financial Information	Page

Item 1.	Financial Statements

	Consolidated Balance Sheet as of December 31, 2019 and June 30, 2019 (Unaudited)	3

	Consolidated Statement of Income for the Three and Six Months Ended December 31, 2019 and 2018 (Unaudited)	4

	Consolidated Statement of Comprehensive Income (Loss) for the Three and Six Months Ended December 31, 2019 and 2018 (Unaudited)	5

	Consolidated Statement of Changes in Stockholders’ Equity for the Three and Six Months Ended December 31, 2019 and 2018 (Unaudited)	6

	Consolidated Statement of Cash Flows for the Six Months Ended December 31, 2019 and 2018 (Unaudited)	8

	Notes to Unaudited Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Six Months Ended December 31, 2019	40

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47

Item 4.	Controls and Procedures	51

PART II.	Other Information	Page

Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	53
	Signatures	54

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

(In thousands, except share and per share data)


	December 31, 2019			June 30, 2019
Assets
Cash and due from banks		$ 2,766			$ 1,849
Interest-earning demand deposits		276			2,530

Total cash and cash equivalents		3,042			4,379
Certificates of deposit		1,591			1,843
Investment securities available-for-sale (amortized cost of $137,541 and $132,673)		138,060			132,780
Investment securities held-to-maturity (fair value of $3,578 and $4,080)		3,495			3,995
Mortgage-backed securities held-to-maturity (fair value of $104,121 and $108,708)		103,956			108,331
Net loans receivable (allowance for loan losses of $530 and $548)		91,340			90,588
Accrued interest receivable		1,052			1,219
Federal Home Loan Bank (FHLB) stock, at cost		6,974			7,010
Premises and equipment, net		474			346
Bank owned life insurance		4,849			4,789
Deferred tax assets (net)		262			368
Other assets		153			170

TOTAL ASSETS		$ 355,248			$ 355,818


Liabilities and Stockholders’ Equity
Liabilities:
Deposits
Non-interest-bearing accounts		$ 18,113			$ 19,770
Interest-earning checking accounts		22,726			23,541
Savings accounts		42,719			43,740
Money market accounts		20,238			19,958
Certificates of deposit		41,888			37,361
Advance payments by borrowers for taxes and insurance		1,447			2,065

Total deposits		147,131			146,435
Federal Home Loan Bank advances: short-term		68,030			70,828
Federal Home Loan Bank advances: long-term – fixed rate		15,000			15,000
Federal Home Loan Bank advances: long-term – variable rate		85,000			85,000
Accrued interest payable		788			823
Other liabilities		1,786			1,683

TOTAL LIABILITIES		317,735			319,769


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		21,568			21,550
Treasury stock: 1,869,995 and 1,862,520 shares at cost, respectively		(28,382	)		(28,269	)
Retained earnings, substantially restricted		45,973			44,807
Accumulated other comprehensive income		347			15
Unallocated Employee Stock Ownership Plan (“ESOP”) shares		(2,031	)		(2,092	)

TOTAL STOCKHOLDERS’ EQUITY		37,513			36,049

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$ 355,248			$ 355,818

See accompanying notes to unaudited consolidated financial statements.

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

(In thousands, except share and per share data)


	Three Months Ended					Six Months Ended
	December 31,					December 31,
	2019			2018		2019			2018
INTEREST AND DIVIDEND INCOME:
Loans, including fees		$ 871			$ 825		$ 1,754			$ 1,628
Investment securities		997			1,066		2,078			2,088
Mortgage-backed securities		757			927		1,642			1,816
Certificates of deposit		15			3		30			5
Interest-earning demand deposits		1			6		2			9
FHLB Stock		130			116		252			228

Total interest and dividend income		2,771			2,943		5,758			5,774


INTEREST EXPENSE:
Deposits		232			129		482			252
Federal Home Loan Bank advances – long-term – fixed rate		116			116		232			116
Federal Home Loan Bank advances – long-term – variable rate		452			526		967			526
Federal Home Loan Bank advances – short-term		310			437		613			1,345

Total interest expense		1,110			1,208		2,294			2,239


NET INTEREST INCOME		1,661			1,735		3,464			3,535
(CREDIT) PROVISION FOR LOAN LOSSES		(8	)		14		(18	)		33

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,669			1,721		3,482			3,502


NON-INTEREST INCOME:
Service charges on deposits		30			26		60			55
Earnings on Bank Owned Life Insurance		29			30		59			61
Investment securities gains (losses)		32			-		32			(2	)
Other than temporary impairment (“OTTI”) losses		(16	)		-		(18	)		-
Portion of gain recognized in other comprehensive Income (before taxes)		-			-		-			-

Net impairment loss recognized in earnings		(16	)		-		(18	)		-
ATM fee income		36			43		78			85
Other		11			11		21			21

Total non-interest income		122			110		232			220


NON-INTEREST EXPENSE:
Salaries and employee benefits		535			565		1,080			1,121
Occupancy and equipment		57			58		119			126
Data processing		52			58		109			116
Correspondent bank service charges		9			7		18			15
Federal deposit insurance premium		-			22		(23	)		50
ATM network expense		18			25		41			62
Other		199			219		373			365

Total non-interest expense		870			954		1,717			1,855


INCOME BEFORE INCOME TAXES		921			877		1,997			1,867
INCOME TAX EXPENSE		194			192		477			435

NET INCOME		$ 727			$ 685		$ 1,520			$ 1,432


EARNINGS PER SHARE:
Basic		$ 0.41			$ 0.38		$ 0.86			$ 0.80
Diluted		$ 0.41			$ 0.38		$ 0.86			$ 0.80

AVERAGE SHARES OUTSTANDING:
Basic		1,771,457			1,782,091		1,773,509			1,787,573
Diluted		1,771,457			1,782,091		1,773,509			1,787,682

See accompanying notes to unaudited consolidated financial statements.

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(In thousands)


	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2019			2018			2019			2018

NET INCOME	$	727		$	685		$	1,520		$	1,432

OTHER COMPREHENSIVE INCOME (LOSS)

Investment securities available for sale not other-than-temporarily impaired:
Gains (losses) arising during the year		387			(1,992	)		444			(1,870	)
Less: Income tax effect		(81	)		418			(93	)		392

		306			(1,574	)		351			(1,478	)

(Gains) losses recognized in earnings		(32	)		-			(32	)		2
Less: Income tax effect		7			-			7			-

		(25	)		-			(25	)		2

Unrealized holdings gains (losses) on securities available for sale not other-than-temporarily impaired, net of tax		281			(1,574	)		326			(1,476	)


Investment securities held to maturity other-than-temporarily impaired:
Total losses		16			-			18			-
Losses recognized in earnings		16			-			18			-

Gains (losses) recognized in comprehensive income		-			-			-			-
Income tax effect		-			-			-			-

		-			-			-			-

Accretion of other comprehensive loss on other-than-temporarily impaired securities held to maturity		4			12			8			(27	)
Less: Income tax effect		(1	)		(2	)		(2	)		6


Unrealized holding (losses) gains on other-than-temporarily impaired securities held to maturity, net of tax		3			10			6			(21	)


Unrealized holdings gains (losses) on securities, net		3			10			6			(21	)


Other comprehensive income (loss)		284			(1,564	)		332			(1,497	)


COMPREHENSIVE INCOME (LOSS)	$	1,011		$	(879	)	$	1,852		$	(65	)

See accompanying notes to unaudited consolidated financial statements.

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands)


	Common Stock		Additional Paid-in Capital		Treasury Stock			Retained Earnings – Substantially Restricted			Accumulated Other Comprehensive Income		Unallocated ESOP Shares			Total
Balance September 30, 2019	$	38	$	21,560	$	(28,382	)	$	45,423		$	63	$	(2,064	)	$	36,638

Net income									727								727

Other comprehensive income												284					284

Amortization of unallocated ESOP Shares				8										33			41

Cash dividends declared ($0.10 per share)									(177	)							(177	)


Balance December 31, 2019	$	38	$	21,568	$	(28,382	)	$	45,973		$	347	$	(2,031	)	$	37,513


	Common Stock		Additional Paid-in Capital		Treasury Stock			Retained Earnings – Substantially Restricted			Accumulated Other Comprehensive Income		Unallocated ESOP Shares			Total
Balance June 30, 2019	$	38	$	21,550	$	(28,269	)	$	44,807		$	15	$	(2,092	)	$	36,049

Net income									1,520								1,520

Other comprehensive income												332					332

Purchase of treasury stock (7,475 shares)						(113	)										(113	)

Amortization of unallocated ESOP Shares				18										61			79

Cash dividends declared ($0.20 per share)									(354	)							(354	)


Balance December 31, 2019	$	38	$	21,568	$	(28,382	)	$	45,973		$	347	$	(2,031	)	$	37,513

See accompanying notes to unaudited consolidated financial statements.

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands)



	Common Stock		Additional Paid-in Capital		Treasury Stock			Retained Earnings – Substantially Restricted			Accumulated Other Comprehensive Loss			Unallocated ESOP Shares		Total
Balance September 30, 2018		$ 38		$ 21,525		$ (27,918)			$ 43,400			$ (121)			$ (2,219)		$ 34,705

Net income									685								685

Other comprehensive loss												(1,564	)				(1,564	)

Purchase of treasury stock (23,717 shares)						(340	)										(340	)

Amortization of unallocated ESOP Shares				5											40		45

Cash dividends declared ($0.08 per share)									(144	)							(144	)


Balance December 31, 2018		$ 38		$ 21,530		$ (28,258)			$ 43,941			$ (1,685)			$ (2,179)		$ 33,387


	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									1,432								1,432

Other comprehensive loss												(1,497	)				(1,497	)

Purchase of treasury stock (25,717 shares)						(372	)										(372	)

Amortization of unallocated ESOP Shares				14											79		93

Cash dividends declared ($0.16 per share)									(286	)							(286	)


Balance December 31, 2018		$ 38		$ 21,530		$ (28,258)			$ 43,941			$ (1,685)			$ (2,179)		$ 33,387

See accompanying notes to unaudited consolidated financial statements.

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(In thousands)


	Six Months Ended December 31,
	2019			2018
OPERATING ACTIVITIES

Net income	$	1,520		$	1,432
Adjustments to reconcile net income to cash provided by operating activities:
(Credit) provision for loan losses		(18	)		33
Depreciation		15			29
Net impairment loss recognized in earnings		18			-
(Gain) loss on sale of investments		(32	)		2
Amortization of discounts, premiums and deferred loan costs		50			111
Amortization of unallocated ESOP shares		79			93
Deferred income taxes		18			(27	)
Increase in prepaid/accrued income taxes		74			33
Earnings on bank owned life insurance		(59	)		(61	)
Decrease in accrued interest receivable		167			39
(Decrease) increase in accrued interest payable		(35	)		406
Increase in deferred director compensation payable		25			22
Other, net		18			22

Net cash provided by operating activities		1,840			2,134


INVESTING ACTIVITIES

Available-for-sale:
Purchase of investment securities		(17,324	)		(24,782	)
Proceeds from sale of investments		9,055			1,364
Proceeds from repayments of investments		3,330			22,705
Held-to-maturity:
Proceeds from repayments of investments		500			2,180
Proceeds from repayments of mortgage-backed securities		4,374			5,918
Purchase of certificates of deposit		(1,340	)		(1,096	)
Maturities/redemptions of certificates of deposit		1,593			100
Purchase of loans		(6,266	)		(5,102	)
Net decrease in net loans receivable		5,577			1,364
Purchase of FHLB stock		(6,974	)		(3,043	)
Redemption of FHLB stock		7,010			3,217
Acquisition of premises and equipment		(143	)		-

Net cash (used for) provided by investing activities		(608	)		2,825

See accompanying notes to unaudited consolidated financial statements.

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(In thousands)


	Six Months Ended December 31,
	2019			2018
FINANCING ACTIVITIES

Net (decrease) increase in transaction and savings accounts	$	(3,213	)	$	361
Net increase (decrease) in certificates of deposit		4,527			(1,751	)
Net decrease in advance payments by borrowers for taxes and insurance		(618	)		(388	)
Proceeds from FHLB long-term advances – fixed rate		-			15,000
Proceeds from FHLB long-term advances – variable rate		-			85,000
Net decrease in FHLB short-term advances		(2,798	)		(101,336	)
Purchases of treasury stock		(113	)		(372	)
Cash dividends paid		(354	)		(286	)

Net cash used for financing activities		(2,569	)		(3,772	)


(Decrease) increase in cash and cash equivalents		(1,337	)		1,187

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD		4,379			2,441


CASH AND CASH EQUIVALENTS AT END OF THE PERIOD	$	3,042		$	3,628


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Cash paid during the period for:
Interest on deposits and borrowings	$	2,329		$	1,833
Income taxes	$	386		$	430

Non-cash items:
Educational Improvement Tax Credit	$	45		$	45

See accompanying notes to unaudited consolidated financial statements.

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 and six months ended December 31, 2019, are not necessarily indicative of the results which may be expected for the entire fiscal year.

2.	RECENT ACCOUNTING PRONOUNCEMENTS

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. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. 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 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 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.

In November, 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, which amended the effective date of ASU 2016-13 for entities other than public business entities (PBEs), by requiring non-PBEs to adopt the standard for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Therefore, the revised effective dates of ASU 2016-13 for PBEs that are SEC filers will be fiscal years beginning after December 15, 2019, including interim periods within those years, PBEs other than SEC filers will be for fiscal years beginning after December 15, 2020, including interim periods within those years, and all other entities (non-PBEs) will be for fiscal years beginning after December 15, 2021, including interim periods within those years. The ASU also clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Rather, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The effective date and transition requirements for ASU 2018-19 are the same as those in ASU 2016-13, as amended by ASU 2018-19. In November, 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. For all other public business entities, the effective date is for fiscal years beginning after December 15, 2020, and for all other entities, the effective date is for fiscal years beginning after December 15, 2021. Topic 815, Derivatives and Hedging amendments are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. For entities that have adopted the amendments in Update 2017-12, the effective date is as of the beginning of the first annual period beginning after the issuance of this Update. Topic 825, Financial Instruments amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt ASU 2016-13.

In July 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections, Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates. This ASU amends various SEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. Other miscellaneous updates to agree to the electronic Code of Federal Regulations also have been incorporated.

In November 2019, the FASB issued ASU 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606), which requires entities to measure and classify share-based payments to a customer, in accordance with the guidance in ASC 718, Compensation – Stock Compensation. The amendments in that Update expanded the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and, in doing so, superseded guidance in Subtopic 505-50, Equity – Equity-Based Payments to Non-Employees. The amount that would be recorded as a reduction in revenue would be measured based on the grant date fair value of the share-based payment, in accordance with Topic 718. The grant date is the date at which a supplier and customer reach a mutual understanding of the award’s key terms and conditions. The award’s classification and subsequent measurement would be subject to ASC 718 unless the award is modified or the grantee is no longer a customer. For entities that have not yet adopted the amendments in Update 2018-07, the amendments in this Update are effective for (1) public business entities in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and (2) other than public business entities in fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. For entities that have adopted the amendments in Update 2018-07, the amendments in this Update are effective in fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. An entity may early adopt the amendments in this Update, but not before it adopts the amendments in Update 2018-07. This Update is not expected to have a significant impact on the Company’s financial statements.

In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective dates of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill impairment test under ASU No. 2017-04, Intangibles – Goodwill and Other

(Topic 350): Simplifying the Test for Goodwill Impairment (Goodwill), to align with those used for credit losses. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging and leases for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. 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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), to simplify the accounting for income taxes, change the accounting for certain tax transactions, and make minor improvements to the codification. This Update provides a policy election to not allocate consolidated income taxes when a member of a consolidated tax return is not subject to income tax and provides guidance to evaluate whether a step-up in tax basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. The Update also changes current guidance for making an intraperiod allocation, if there is a loss in continuing operations and gains outside of continuing operations; determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity method of accounting; accounting for tax law changes and year-to-date losses in interim periods; and determining how to apply the income tax guidance to franchise taxes that are partially based on income. For public business entities, the amendments in this Update are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

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						Six Months Ended
	December 31,						December 31,
	2019			2018			2019			2018
Weighted average common shares issued		3,805,636			3,805,636			3,805,636			3,805,636
Average treasury stock shares		(1,869,995	)		(1,849,437	)		(1,866,704	)		(1,843,161	)
Average unallocated ESOP shares		(164,184	)		(174,108	)		(165,423	)		(174,902	)


Weighted average common shares and common stock equivalents used to calculate basic earnings per share		1,771,457			1,782,091			1,773,509			1,787,573
Additional common stock equivalents (stock options) used to calculate diluted earnings per share		-			-			-			109


Weighted average common shares and common stock equivalents used to calculate diluted earnings per share		1,771,457			1,782,091			1,773,509			1,787,682

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 December 31, 2019, all options outstanding had expired. At December 31, 2018, there were 27,019 options outstanding with an exercise price of $16.20 which were anti-dilutive for the three month period and dilutive for the six month period.

5.	STOCK BASED COMPENSATION DISCLOSURE

The Company previously maintained 2008 Stock Incentive Plan (the “Plan”), which was approved by shareholders in October 2008, permitted 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 were 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 vested over five years of continuous service and have ten-year contractual terms. The Plan expired by its terms in September 2018.

During the six month periods ended December 31, 2019 and 2018, the Company recorded no compensation expense related to our share-based compensation awards. As of December 31, 2019, there was no unrecognized compensation cost related to unvested share-based compensation awards granted in fiscal 2009.

There were no stock options exercised or issued during the six months ended December 31, 2019 and 2018.

6.	INVESTMENT SECURITIES

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


					Gross			Gross
		Amortized			Unrealized			Unrealized				Fair
		Cost			Gains			Losses				Value
	(Dollars in Thousands)
December 31, 2019

AVAILABLE FOR SALE
Corporate debt securities	$		109,701	$		524	$		(121	)	$		110,104
Foreign debt securities ¹			27,840			126			(10	)			27,956


Total	$		137,541	$		650	$		(131	)	$		138,060


					Gross			Gross
		Amortized			Unrealized			Unrealized				Fair
		Cost			Gains			Losses				Value
	(Dollars in Thousands)
December 31, 2019

HELD TO MATURITY
Obligations of states and political subdivisions	$		3,495	$		83	$		-		$		3,578


Total	$		3,495	$		83	$		-		$		3,578

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


					Gross			Gross
		Amortized			Unrealized			Unrealized				Fair
		Cost			Gains			Losses				Value
		(Dollars in Thousands)
June 30, 2019

AVAILABLE FOR SALE
Corporate debt securities	$		104,760	$		355	$		(207	)	$		104,908
Foreign debt securities ¹			26,583			35			(75	)			26,543
Obligations of states and political subdivisions			1,330			-			(1	)			1,329


Total	$		132,673	$		390	$		(283	)	$		132,780


					Gross			Gross
		Amortized			Unrealized			Unrealized				Fair
		Cost			Gains			Losses				Value
		(Dollars in Thousands)
June 30, 2019

HELD TO MATURITY
Obligations of states and political subdivisions	$		3,995	$		85	$		-		$		4,080


Total	$		3,995	$		85	$		-		$		4,080

Proceeds from sales of investments during the three and six month periods ended December 31, 2019 were $9.1 million and the Company recorded gross realized investment gains of $32 thousand during these same periods.

Proceeds from sales of investments during the six month period ended December 31, 2018 were $1.4 million and the Company recorded gross realized investment losses of $2 thousand during this same period. There were no sales of investment securities during the quarter ended December 31, 2018.

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

The amortized cost and fair values of debt securities at December 31, 2019, 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	$		17,528	$		119,373	$		640	$		-	$		137,541
Fair value			17,514			119,902			644			-			138,060

HELD TO MATURITY
Amortized cost	$		750	$		2,745	$		-	$		-	$		3,495
Fair value			757			2,821			-			-			3,578

At December 31, 2019, investment securities with amortized cost of $3.5 million, and fair value of $3.6 million were pledged to secure borrowings with the Federal Home Loan Bank (“FHLB”).

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 tranches) with varying stated maturities, estimated average lives, coupon rates and prepayment characteristics.

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

At December 31, 2019, the Company’s Agency CMOs totaled $103.2 million as compared to $107.4 million at June 30, 2019. The Company’s private-label CMOs totaled $785 thousand at December 31, 2019 as compared to $883 thousand at June 30, 2019. The $4.4 million decrease in the CMO portfolio was primarily due to repayments on our Agency and private-label CMOs which totaled $4.3 million and $87 thousand, respectively. At December 31, 2019 and June 30, 2019, all of the Company’s MBS portfolio, including CMOs, were comprised of adjustable or floating rate investments. 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 tranches, the actual maturities of the Company’s MBS are expected to be substantially less than the scheduled maturities.

The Company retains an independent third party to assist it in the determination of a fair value for 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 Company recorded an additional credit impairment charge of $16 thousand on its private-label CMO portfolio during the quarter ended December 31, 2019.

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 December 31, 2019. 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 December 31, 2019
			Rating						Amortized Cost		Fair Value²		Life to Date Impairment Recorded in Earnings
Cusip #	Security Description		S&P		Moody’s		Fitch		(in thousands)
126694CP1		CWHL SER 21 A11		WR		WR		D	$	449	$	443	$	224
126694KF4		CWHL SER 24 A15		NR		NR		D		173		173		51
126694KF4		CWHL SER 24 A15		NR		NR		D		87		86		101
126694MP0		CWHL SER 26 1A5		NR		NR		D		76		79		41

									$	785	$	781	$	417

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)
December 31, 2019
HELD TO MATURITY

Collateralized mortgage obligations:
Agency	$		103,171	$		761	$		(592	)	$		103,340
Private-label			785			3			(7	)			781


Total	$		103,956	$		764	$		(599	)	$		104,121


		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses				Fair Value

		(Dollars in Thousands)
June 30, 2019
HELD TO MATURITY

Collateralized mortgage obligations:
Agency	$		107,448	$		954	$		(570	)	$		107,832
Private-label			883			5			(12	)			876


Total	$		108,331	$		959	$		(582	)	$		108,708

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

The amortized cost and fair value of the Company’s mortgage-backed securities at December 31, 2019, 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	$		-	$		-	$		103	$		103,853	$		103,956
Fair value			-			-			103			104,018			104,121

At December 31, 2019, mortgage-backed securities with amortized costs of $103.2 million and fair values of $103.3 million were pledged to secure public deposits and borrowings with the FHLB. Of the securities pledged, $8.3 million of fair value was excess collateral. At June 30, 2018, mortgage-backed securities with an amortized cost of $107.4 million and fair values of $107.8 million, were pledged to secure public deposits and borrowings with the FHLB. Of the securities pledged, $2.4 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.

8.	ACCUMULATED OTHER COMPREHENSIVE INCOME

The following tables present the changes in accumulated other comprehensive income by component, for the three and six months ended December 31, 2019 and 2018.


	Three Months Ended December 31, 2019
	(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 – September 30, 2019	$	129		$	(66	)	$	63

Other comprehensive income before reclassifications		306			3			309

Amounts reclassified from accumulated other comprehensive loss		(25	)		-			(25	)


Net current-period other comprehensive income		281			3			284


Ending Balance – December 31, 2019	$	410		$	(63	)	$	347


	Six Months Ended December 31, 2019
	(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, 2019	$	85		$	(70)		$	15

Other comprehensive income before reclassifications		351			6			357

Amounts reclassified from accumulated other comprehensive loss		(25	)		-			(25	)


Net current-period other comprehensive income		326			6			332


Ending Balance – December 31, 2019	$	411		$	(64	)	$	347


	Three Months Ended December 31, 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 – September 30, 2018	$	88		$	(209	)	$	(121)

Other comprehensive income (loss) before reclassifications		(1,574	)		10			(1,564	)

Amounts reclassified from accumulated other comprehensive income (loss)		-			-			-


Net current-period other comprehensive income (loss)		(1,574	)		10			(1,564	)


Ending Balance – December 31, 2018	$	(1,486	)	$	(199	)	$	(1,685	)


	Six Months Ended December 31, 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 loss before reclassifications		(1,478	)		(21	)		(1,499	)

Amounts reclassified from accumulated other comprehensive income		2			-			2


Net current-period other comprehensive loss		(1,476	)		(21	)		(1,497	)


Ending Balance – December 31, 2018	$	(1,486	)	$	(199	)	$	(1,685	)

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 December 31, 2019 and June 30, 2019.


			December 31, 2019

			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		$		5,018	$	(4	)	$		13,950	$	(117	)	$		18,968	$	(121	)
Foreign debt securities³				3,276		(1	)			1,994		(9	)			5,270		(10	)
Collateralized mortgage Obligations:
Agency				18,954		(214	)			23,161		(385	)			42,115		(599	)


Total		$		27,248	$	(219	)	$		39,105	$	(511	)	$		66,353	$	(730	)


			June 30, 2019

			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		$		11,728	$	(86	)	$		17,077	$	(121	)	$		28,805	$	(207	)
Foreign debt securities³				2,004		(2	)			5,699		(73	)			7,703		(75	)
Obligations of states and political subdivisions				-		-				1,329		(1	)			1,329		(1	)
Collateralized mortgage obligations:
Agency				24,368		(182	)			18,614		(400	)			42,982		(582	)


Total		$		38,100	$	(270	)	$		42,719	$	(595	)	$		80,819	$	(865	)

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

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

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

the Company has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. In the case of its private label residential MBSs, 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						Six Months Ended
	December 31,						December 31,
	2019			2018			2019			2018
	(Dollars in Thousands)
Beginning balance	$	239		$	236		$	248		$	239
Initial credit impairment		-			-			-			-
Subsequent credit impairment		16			-			18			8
Reductions for amounts recognized in earnings due to intent or requirement to sell		-			-			-			-
Reductions for securities sold		-			-			-			-
Reduction for actual realized losses		(13	)		(7	)		(24	)		(10	)
Reduction for increase in cash flows expected to be collected		-			-			-			-

Ending balance	$	242		$	229		$	242		$	229

During the three months and six months ended December 31, 2019, the Company recorded subsequent credit impairment charges of $16 thousand and $2 thousand, respectively. No non-credit unrealized holding losses to accumulated other comprehensive income were recorded during these same periods. During the three and six months ended December 31, 2019, the Company accreted back into other comprehensive income $3 thousand and $6 thousand, respectively (net of income tax effect of $1 thousand and $2 thousand, respectively), 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, the Company retained an independent third party to assist it with assessing its investments within the private-label CMO portfolio. The independent third party utilized certain assumptions for producing the cash flow analyses used in the OTTI assessment. Key assumptions would include interest rates, expected market participant spreads and discount rates, housing prices, projected future delinquency levels and assumed loss rates on any liquidated collateral.

The Company reviewed the independent third party’s assumptions used in the December 31, 2019 OTTI process. Based on the results of this review, the Company deemed the independent third party’s assumptions to be reasonable and adopted them. However, different assumptions could produce materially different results, which could impact the Company’s conclusions as to whether an impairment is considered other-than-temporary and the magnitude of the credit loss. The Company had three private-label CMOs with OTTI at December 31, 2019.

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 37 positions that were impaired at December 31, 2019. 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.

10.

LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

The following table summarizes the primary segments of the loan portfolio as of December 31, 2019 and June 30, 2019.


		December 31, 2019							June 30, 2019
		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	$		79,778		$	-	$	79,778	$	76,789		$	-	$	76,789
Construction			1,605			-		1,605		2,907			-		2,907
Land acquisition & development			246			-		246		694			-		694
Multi-family dwellings			2,341			-		2,341		3,123			-		3,123
Commercial			4,284			-		4,284		3,727			-		3,727

Consumer Loans
Home equity			1,095			-		1,095		906			-		906
Home equity lines of credit			1,910			-		1,910		1,953			-		1,953
Other			112			-		112		112			-		112

Commercial Loans			6			-		6		418			-		418

	$		91,377		$	-	$	91,377	$	90,629		$	-	$	90,629

Plus: Deferred loan costs			493							507
Allowance for loan losses			(530	)						(548	)

Total	$		91,340						$	90,588

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 Company collectively evaluates for impairment 1 – 4 family first mortgage loans and all consumer loans. 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 December 31, 2019 and June 30, 2019 there were no loans considered to be impaired.

Total nonaccrual loans as of December 31, 2019 and June 30, 2019 and the related interest income recognized for the three and six months ended December 31, 2019 and December 31, 2018 are as follows:


		December 31, 2019			June 30, 2019
		(Dollars in Thousands)
Principal outstanding
1 – 4 family dwellings	$		-	$		225
Construction			-			-
Land acquisition & development			-			-
Commercial real estate			-			-
Home equity lines of credit			-			-

Total	$		-	$		225


		Three Months Ended						Six Months Ended
		December 31,			December 31,			December 31,			December 31,
		2019			2018			2019			2018
		(Dollars in Thousands)
Average nonaccrual loans
1 – 4 family dwellings	$		-	$		233	$		93	$		234
Construction			-			-			-			-
Land acquisition & development			-			-			-			-
Commercial real estate			-			-			-			-
Home equity lines of credit			-			-			-			-

Total	$		-	$		233	$		93	$		234


Income that would have been recognized	$		-	$		4	$		6	$		9

Interest income recognized	$		-	$		3	$		6	$		6

During the quarter ended September 30, 2019, the Company’s one non-performing asset consisting of a single-family real estate loan was discharged from bankruptcy and was not delinquent at December 31, 2019.

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 and six months ended December 31, 2019, and December 31, 2018, there were no TDRs.

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.

Federal regulations require that each insured savings institution classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard”, “doubtful” and “loss”. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Another category designated “asset watch” is also utilized by the Bank for assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification as substandard, doubtful or loss. Assets classified as substandard or doubtful require the institution to establish general allowances for loan losses. If an asset or portion thereof is classified as loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge-off such amount. General loss allowances established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution’s regulatory capital, while specific valuation allowances for loan losses do not qualify as regulatory capital.

The Company’s general policy is to internally classify its assets on a regular basis and establish prudent general valuation allowances that are adequate to absorb losses that have not been identified but that are inherent in the loan portfolio. The Company maintains general valuation allowances that it believes are adequate to absorb losses in its loan portfolio that are not clearly attributable to specific loans. The Company’s general valuation allowances are within the following general ranges: (1) 0% to 5% of assets subject to special mention; (2) 1.00% to 100% of assets classified substandard; and (3) 50% to 100% of assets classified doubtful. Any loan classified as loss is charged-off. To further monitor and assess the risk characteristics of the loan portfolio, loan delinquencies are reviewed to consider any developing problem loans. Based upon the procedures in place, considering the Company’s past charge-offs and recoveries and assessing the current risk elements in the portfolio, management believes the allowance for loan losses at December 31, 2019, is adequate.

The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of December 31, 2019 and June 30, 2019:


		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)
December 31, 2019
First mortgage loans:
1 – 4 family dwellings	$		79,778	$		-	$		-	$		-	$		-	$		-	$		79,778
Construction			1,605			-			-			-			-			-			1,605
Land acquisition & development			246			-			-			-			-			-			246
Multi-family dwellings			2,341			-			-			-			-			-			2,341
Commercial			4,284			-			-			-			-			-			4,284

Consumer Loans:
Home equity			1,095			-			-			-			-			-			1,095
Home equity lines of credit			1,910			-			-			-			-			-			1,910
Other			112			-			-			-			-			-			112

Commercial Loans			6			-			-			-			-			-			6

	$		91,377	$		-	$		-	$		-	$		-	$		-			91,377

Plus: Deferred loan costs																					493
Allowance for loan losses																					(530	)

Net Loans Receivable																			$		91,340


		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, 2019
First mortgage loans:
1 – 4 family dwellings	$		76,564	$		-	$		-	$		-	$		225	$		225	$		76,789
Construction			2,907			-			-			-			-			-			2,907
Land acquisition & development			694			-			-			-			-			-			694
Multi-family dwellings			3,123			-			-			-			-			-			3,123
Commercial			3,727			-			-			-			-			-			3,727

Consumer Loans
Home equity			906			-			-			-			-			-			906
Home equity lines of credit			1,953			-			-			-			-			-			1,953
Other			112			-			-			-			-			-			112

Commercial Loans			418			-			-			-			-			-			418

	$		90,404	$		-	$		-	$		-	$		225	$		225			90,629

Plus: Deferred loan costs																					507
Allowance for loan losses																					(548	)

Net Loans Receivable																			$		90,588

Credit quality information

The following tables represent credit exposure by internally assigned grades for the period ended December 31, 2019 and June 30, 2019. 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 December 31, 2019 and June 30, 2019.


		December 31, 2019
		(Dollars in Thousands)
		Construction			Land Acquisition & Development Loans			Multi- family Residential			Commercial Real Estate			Commercial

Pass	$		1,605	$		246	$		2,341	$		4,284	$		6
Special Mention			-			-			-			-			-
Substandard			-			-			-			-			-
Doubtful			-			-			-			-			-

Ending Balance	$		1,605	$		246	$		2,341	$		4,284	$		6


		June 30, 2019
		(Dollars in Thousands)
	Construction				Land Acquisition & Development Loans			Multi-family Residential			Commercial Real Estate			Commercial


Pass	$		2,907	$		694	$		3,123	$		3,727	$		418
Special Mention			-			-			-			-			-
Substandard			-			-			-			-			-
Doubtful			-			-			-			-			-

Ending Balance	$		2,907	$		694	$		3,123	$		3,727	$		418

The following table presents performing and non-performing 1 – 4 family residential and consumer loans based on payment activity for the periods ended December 31, 2019 and June 30, 2019.


		December 31, 2019

		1 – 4 Family			Consumer

		(Dollars in Thousands)

Performing	$		79,778	$		3,117
Non-performing			-			-

Total	$		79,778	$		3,117


		June 30, 2019

		1 – 4 Family			Consumer

		(Dollars in Thousands)

Performing	$		76,564	$		2,971
Non-performing			225			-

Total	$		76,789	$		2,971

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

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

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

The Company had no unallocated loss allowance balance at December 31, 2019.

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 December 31, 2019 and 2018. Activity in the allowance is presented for the three and six months ended December 31, 2019 and 2018.


		As of December 31, 2019
		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 September 30, 2019	$		412		$		29	$		6		$		17		$		42	$		30	$		2		$		538
Charge-offs			-				-			-				-				-			-			-				-
Recoveries			-				-			-				-				-			-			-				-
Provisions			(14	)			8			(2	)			(4	)			3			2			(1	)			(8	)

Ending ALLL Balance at December 31, 2019	$		398		$		37	$		4		$		13		$		45	$		32	$		1		$		530

Individually evaluated for impairment	$		-		$		-	$		-		$		-		$		-	$		-	$		-		$		-
Collectively evaluated for impairment			398				37			4				13				45			32			1				530

	$		398		$		37	$		4		$		13		$		45	$		32	$		1		$		530


		As of December 31, 2019
		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, 2019	$		405		$		46		$		10		$		17		$		37	$		30	$		3		$		548
Charge-offs			-				-				-				-				-			-			-				-
Recoveries			-				-				-				-				-			-			-				-
Provisions			(7	)			(9	)			(6	)			(4	)			8			2			(2	)			(18	)

Ending ALLL Balance at December 31, 2019	$		398		$		37		$		4		$		13		$		45	$		32	$		1		$		530

Individually evaluated for impairment	$		-		$		-		$		-		$		-		$		-	$		-	$		-		$		-
Collectively evaluated for impairment			398				37				4				13				45			32			1				530

	$		398		$		37		$		4		$		13		$		45	$		32	$		1		$		530


		As of December 31, 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 September 30, 2018	$		363	$		29		$		10	$		18	$		32	$		32	$		3		$		487
Charge-offs			-			-				-			-			-			-			-				-
Recoveries			-			-				-			-			-			-			-				-
Provisions			10			(4	)			-			-			7			1			-				14

Ending ALLL Balance at December 31, 2018	$		373	$		25		$		10	$		18	$		39	$		33	$		3		$		501

Individually evaluated for impairment	$		-	$		-		$		-	$		-	$		-	$		-	$		-		$		-
Collectively evaluated for impairment			373			25				10			18			39			33			3				501

	$		373	$		25		$		10	$		18	$		39	$		33	$		3		$		501


		As of December 31, 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			17			1				10			-			4			2			(1	)			33

Ending ALLL Balance at December 31, 2018	$		373	$		25		$		10	$		18	$		39	$		33	$		3		$		501

Individually evaluated for impairment	$		-	$		-		$		-	$		-	$		-	$		-	$		-		$		-
Collectively evaluated for impairment			373			25				10			18			39			33			3				501

	$		373	$		25		$		10	$		18	$		39	$		33	$		3		$		501

During the three months and six months ended December 31, 2019, the ALLL decreased $8 thousand and $18 thousand, respectively. For the three months ended December 31, 2019, the ALLL associated with the 1-4 family real estate loan portfolio decreased $14 thousand and was partially offset by an $8 thousand increase in the ALLL associated with construction loans. During the six months ended December 31, 2019, the ALLL associated with 1 - 4 family real estate loans, construction and land acquisition and development loans decreased by $7 thousand, $9 thousand and $6 thousand, respectively. The primary reason for the changes in the ALLL balances, both in total, and within the identified segments, is changes in applicable loan balances and the return of one non-performing loan to performing status.

During the three and six months ending December 31, 2018, the ALLL increased $14 thousand and $33 thousand, respectively. For the three months ended December 31, 2018, the ALLL associated with 1 - 4 family real estate loans increased $10 thousand and the ALLL associated with commercial loans increased $7 thousand. These increases were partially offset by a decrease of $4 thousand in the ALLL associated with the construction loan segment. During the six months ended December 31, 2018, the ALLL associated with 1 - 4 family real estate loans, land acquisition and development loans and commercial loans increased by $17 thousand, $10 thousand and $4 thousand, respectively. The primary reason for the changes in the ALLL balances, both in total, and within the identified segments, is changes in applicable loan balances.

11.

FEDERAL HOME LOAN BANK (FHLB) ADVANCES

The following table presents contractual maturities of FHLB long-term advances as of December 31, 2019 and June 30, 2019.


					Weighted-			Stated interest
	Maturity range				average			rate range							December 31,			June 30,
Description	from		to		interest rate ⁴			from			to				2019			2019
															(Dollars in Thousands)
Fixed		10/01/20		10/03/22		3.03	%		2.95	%		3.09	%	$		15,000	$		15,000
Adjustable		10/01/20		10/01/21		2.02	%		1.85	%		2.16	%			85,000			85,000


Total														$		100,000	$		100,000

Maturities of FHLB long-term advances at December 31, 2019, are summarized as follows:


Maturing During Fiscal Year Ended June 30:		Amount		Weighted- Average Interest Rate⁽⁴⁾
		(Dollars in Thousands)
2020	$		-		-
2021			65,000		2.04%
2022			30,000		2.31%
2023			5,000		3.09%
2024			-		-

2025 and thereafter			-

Total	$		100,000		2.17%

⁴	As of December 31, 2019.

The adjustable rate advances are not convertible or callable. The FHLB advances are secured by the Company’s FHLB stock, mortgage-backed and investment securities, and loans, and are subject to substantial prepayment penalties.

The Company also utilized revolving and short-term FHLB advances. Short-term FHLB advances generally mature within 90 days, while revolving FHLB advances may be repaid by the Company without penalty. The following table presents information regarding such advances as of December 31, 2019 and June 30, 2019:


		December 31, 2019				June 30, 2019

		(Dollars in Thousands)
FHLB revolving and short-term advances:
Ending balance	$		68,030		$		70,828
Average balance			55,900				81,556
Maximum month-end balance			68,030				161,289
Average interest rate			2.19	%			2.45	%
Weighted-average rate			1.81	%			2.46	%

At December 31, 2019, the Company had remaining borrowing capacity with the FHLB of approximately $2.9 million.

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

The Company also has a $5 million unsecured line of credit with a regional bank. Borrowings under this line of credit generally are repayable within seven days. At December 31, 2019, no borrowings were outstanding on this unsecured line.

12.

FAIR VALUE MEASUREMENTS

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


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

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

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

Assets Measured at Fair Value on a Recurring Basis

Investment Securities Available-for-Sale

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

The following tables present the assets reported on a recurring basis on the Consolidated Balance Sheet at their fair value as of December 31, 2019 and June 30, 2019, 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.


		December 31, 2019
		Level I			Level II			Level III			Total
		(Dollars in Thousands)
Assets measured on a recurring basis:
Investment securities – available for sale:
Corporate securities	$		-	$		110,104	$		-	$		110,104
Foreign debt securities ⁵			-			27,956			-			27,956

	$		-	$		138,060	$		-	$		138,060


		June 30, 2019
		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	$		-	$		1,329	$		-	$		1,329
Corporate securities			-			104,908			-			104,908
Foreign debt securities ⁵			-			26,543			-			26,543

	$		-	$		132,780	$		-	$		132,780

⁵	U.S. dollar-denominated investment-grade corporate bonds of large foreign corporate issuers.

13.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values are as follows:


		December 31, 2019
		Carrying Amount			Fair Value			Level I			Level II			Level III
		(Dollars in Thousands)

FINANCIAL ASSETS
Cash and cash equivalents	$		3,042	$		3,042	$		3,042	$		-	$		-
Certificates of deposit			1,591			1,591			1,591			-			-
Investment securities – held to maturity			3,495			3,578			-			3,578			-
Mortgage-backed securities – held to maturity:
Agency			103,171			103,340			-			103,340			-
Private-label			785			781			-			-			781
Net loans receivable			91,340			93,414			-			-			93,414
Accrued interest receivable			1,052			1,052			1,052			-			-
FHLB stock			6,974			6,974			6,974			-			-
Bank owned life insurance			4,849			4,849			4,849			-			-

FINANCIAL LIABILITIES
Deposits:
Non-interest earning checking	$		18,113	$		18,113	$		18,113	$		-	$		-
Interest-earning checking			22,726			22,726			22,726			-			-
Savings accounts			42,719			42,719			42,719			-			-
Money market accounts			20,238			20,238			20,238			-			-
Certificates of deposit			41,888			41,922			-			-			41,922
Advance payments by borrowers for taxes and insurance			1,447			1,447			1,447			-			-
FHLB advances – fixed rate			15,000			14,357			-			-			14,357
FHLB advances – variable rate			85,000			85,000			85,000			-			-
FHLB short-term advances			68,030			68,030			68,030			-			-
Accrued interest payable			788			788			788			-			-


		June 30, 2019
		Carrying Amount			Fair Value			Level I			Level II			Level III
		(Dollars in Thousands)

FINANCIAL ASSETS
Cash and cash equivalents	$		4,379	$		4,379	$		4,379	$		-	$		-
Certificates of deposit			1,843			1,843			1,843			-			-
Investment securities – held to maturity			3,995			4,080			-			4,080			-
Mortgage-backed securities – held to maturity:
Agency			107,448			107,832			-			107,832			-
Private-label			883			876			-			-			876
Net loans receivable			90,588			92,062			-			-			92,062
Accrued interest receivable			1,219			1,219			1,219			-			-
FHLB stock			7,010			7,010			7,010			-			-
Bank owned life insurance			4,789			4,789			4,789			-			-

FINANCIAL LIABILITIES
Deposits:
Non-interest earning checking	$		19,770	$		19,770	$		19,770	$		-	$		-
Interest-earning checking			23,541			23,541			23,541			-			-
Savings accounts			43,740			43,740			43,740			-			-
Money market accounts			19,958			19,958			19,958			-			-
Certificates of deposit			37,361			37,359			-			-			37,359
Advance payments by borrowers for taxes and insurance			2,065			2,065			2,065			-			-
FHLB advances – fixed rate			15,000			14,323			-			-			14,323
FHLB advances – variable rate			85,000			85,000			85,000			-			-
FHLB short-term advances			70,828			70,828			70,828			-			-
Accrued interest payable			823			823			823			-			-

All financial instruments included in the above tables, with the exception of net loans receivable, certificates of deposit liabilities, and FHLB advances – fixed rate, are carried at cost, which approximates the fair value of the instruments.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2019

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.

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 December 31, 2019.

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 $355.2 million at December 31, 2019, as compared to $355.8 million at June 30, 2019. The $570 thousand or 0.2% decrease in total assets was principally due to a $4.4 million decrease in mortgage-backed securities and a $2.3 million decrease in interest-earning demand deposits, partially offset by a $5.3 million increase in investment securities available-for-sale and a $752 thousand increase in net loans receivable. The decrease in mortgage-backed securities was principally due to repayments of principal totaling $4.4 million and the decrease in interest-earning demand deposits is associated with changing liquidity needs of the Company. The increase in securities available-for-sale was primarily the result of purchases of floating rate investment-grade corporate bonds totaling $17.3 million, partially offset by securities sales of $9.1 million and $3.3 million of maturities and calls. The increase in net loans receivable was primarily attributable to an increase in the single-family owner occupied segment of the loan portfolio.

The Company’s total liabilities decreased $2.0 million or 0.6% to $317.7 million as of December 31, 2019 from $319.8 million as of June 30, 2019. The decrease in total liabilities was primarily comprised of a $2.8 million or 4.0% decrease in FHLB short-term advances, which was partially offset by a $700 thousand increase in total deposits. Certificates of deposit (“CDs”) increased by $4.5 million and non-interest bearing demand and savings deposit declined $1.7 million and $1.0 million, respectively, as of December 31, 2019 from June 30, 2019. Management believes that the decrease in non-interest bearing demand deposits was primarily the result of seasonal fluctuations related to local real estate tax collectors’ deposits. The increase in certificates of deposit was largely due to higher levels of brokered CDs as part of the Company’s overall funding strategy. See also Quantitative and Qualitative Disclosures About Market Risk “Asset and Liability Management”.

Total stockholders’ equity increased $1.5 million or 4.1% to $37.5 million as of December 31, 2019, from $36.0 million as of June 30, 2019. The increase in stockholders’ equity was primarily attributable to net income of $1.5 million, which was partially offset by cash dividends totaling $354 thousand.

RESULTS OF OPERATIONS

General. WVS Financial Corp. reported net income of $727 million or $0.41 per share (diluted and basic) for the three months ended December 31, 2019 as compared to $685 thousand or $0.38 per share for the same period in 2018. The $42 thousand or 6.1% increase in net income during the three months ended December 31, 2019 was primarily attributable to a $12 thousand increase in non-interest income, a decrease in non-interest expense of $84 thousand and a $22 thousand decrease in the provision for loan losses, which were partially offset by a $74 thousand decrease in net interest income, when compared to the same period of 2018.

Net income for the six months ended December 31, 2019 totaled $1.5 million or $0.86 per share (diluted and basic) as compared to $1.4 million or $0.80 per diluted share for the same period in 2018. The $88 thousand or 6.1% increase in net income during the six months ended December 31, 2019 was primarily attributable to a $138 thousand decrease in non-interest expense and a $51 thousand decrease in the provision for loan losses, partially offset by a $71 thousand decrease in net interest income and a $42 thousand increase in income tax expense, when compared to the same period in 2018.

Net Interest Income. The Company’s net interest income decreased by $74 thousand or 4.3% for the three months ended December 31, 2019, when compared to the same period in 2018. The decrease in net interest income during the three months ended December 31, 2019 was attributable to a $172 thousand decrease in interest income, partially offset by a $98 thousand decrease in interest expense for the three months ended December 31, 2019, when compared to the same period in 2018. The decrease in interest income for the three months ended December 31, 2019 was primarily attributable to lower market yields earned on the Company’s floating rate investment and mortgage-backed securities portfolio and lower average balances of mortgage-backed securities outstanding which were partially offset by higher yields on Federal Home Loan Bank (“FHLB”) stock, and higher average balances of investment securities, loans and certificates of deposit when compared to the same period in 2018. The decrease in interest expense for the three months ended December 31, 2019 was primarily attributable to lower rates paid on FHLB short-term and variable rate long-term borrowings and lower average balances of FHLB short-term borrowings, which were partially offset by higher average balances of wholesale time deposits and higher rates paid on time deposits when compared to the same period in 2018.

For the six months ended December 31, 2019, net interest income decreased $71 thousand or 2.0% when compared to the same period in 2018. The decrease in net interest income was primarily attributable to a $16 thousand decrease in interest income and a $55 thousand increase in interest expense for the six months ended December 31, 2019, when compared to the same period in 2018. The decrease in interest income was primarily the result of lower average yields on the Company’s floating rate investment and mortgage-backed securities, and lower outstanding balances of floating rate mortgage-backed securities partially offset by higher average outstanding balances of loans and investment securities, and higher yields earned on FHLB stock, when compared to the same period in 2018. The increase in interest expense was primarily attributable to higher average balances outstanding of wholesale time deposits and higher yields paid on time deposits which were partially offset by lower yields paid on FHLB advances and lower average balances of FHLB advances outstanding during the six months ended December 31, 2019, when compared to the same period of 2018.

Interest Income. Interest income on net loans receivable increased $46 thousand or 5.6% and $126 thousand or 7.7% for the three and six months ended December 31, 2019, respectively, when compared to the same periods in 2018. The increase for the three and six months ended December 31, 2019 was primarily attributable to increases of $5.1 million and $5.4 million, respectively, in the average balance of net loans receivable when compared to the same periods in 2018. For both the quarter and six months ended December 31, 2019, the increase in the average balance of loans outstanding was primarily attributable to loan originations and purchases in excess of repayments on new loans originated when compared to the same periods in 2018. During fiscal 2018, 2019 and into fiscal 2020, the Company enjoyed higher demand for single-family home purchase loans. Substantially all of our loan originations and purchases were fixed-rate loans with a mix of 15, 20, and 30 year terms.

Interest income on investment securities decreased $69 thousand or 6.5% and $10 thousand or 0.5% for the three and six months ended December 31, 2019, respectively, when compared to the same periods in 2018. The decrease for the three months ended December 31, 2019 was primarily attributable to a 37 basis point decrease in the weighted average yield on investment securities, partially offset by a $7.5 million increase in the average balance of investment securities outstanding, when compared to the same period in 2018. The decrease for the six months ended December 31, 2019 was primarily attributable to a decrease in the weighted average yield of 13 basis points, partially offset by a $5.0 million increase in the average balance of investment securities outstanding, when compared to the same period in 2018. The increase in the average balance of investments outstanding during both periods is attributable to the redeployment of mortgage-backed securities cash flows into floating rate corporate bonds. The decrease in weighted average yields in 2019 was principally attributable to lower three-month dollar London Interbank Offered Rates (“LIBOR”) when compared to the same periods in 2018.

Interest income on mortgage-backed securities decreased $170 thousand or 18.3% and $174 thousand or 9.6% for the three and six months ended December 31, 2019, respectively, when compared to the same periods in 2018. The decrease for the three months ended December 31, 2019 was primarily attributable to the $5.3 million decrease in the average balance of U.S. Government agency mortgage-backed securities and a 47 basis point decrease in the weighted average yield earned on these securities. The decrease for the six months ended December 31, 2019 was also primarily attributable to $5.6 million decline in the average balance of U.S. Government agency mortgage-backed securities and a 15 basis point decrease in the weighted average yield earned on these mortgage-backed securities, when compared to the same period in 2018. The decrease in the average balances of U.S. Government and agency private-label mortgage-backed securities during the three and six months ended December 31, 2019 was attributable to principal pay downs during the periods. The mortgage-backed securities proceeds during both periods were primarily used to fund purchases of floating rate corporate bonds in the investment portfolio and loan originations and purchases. The decrease in weighted average yields in 2019 was primarily attributable to higher one-month LIBOR when compared to the same periods in 2018.

Dividend income on FHLB stock increased $14 thousand or 12.1% and $24 thousand or 10.5% for the three and six months ended December 31, 2019, respectively, when compared to the same periods in 2018. The change in dividends on FHLB stock for both the three and six months ended December 31, 2019 was primarily attributable by a 96 basis point increase in the average yield on FHLB stock held during the three and six months ended December 31, 2019, when compared to the same periods in 2018.

Interest income on bank certificates of deposit increased $12 thousand and $25 thousand for the three and six months ended December 31, 2019, respectively, when compared to the same period in 2018. The increases in both periods of 2019 were primarily attributable to increases in the average portfolio balances of certificates of deposit of approximately $2.0 million.

Interest Expense. Interest paid on FHLB variable-rate long-term advances and FHLB short-term advances decreased by $74 thousand and $127 thousand, respectively, for the three months ended December 31, 2019, when compared to the same period in 2018. For the three months ended December 31, 2019, the decrease in interest expense on the FHLB variable-rate long-term advances was principally due to lower market interest rates, when compared to the same period in 2018. The decrease in interest expense on FHLB short-term advances for the three months ended December 31, 2019 reflects lower market interest rates as well as a $5.5 million decrease in the average balance of advances outstanding, when compared to the same period in 2018. Interest expense on FHLB short-term borrowings during the six months ended December 31, 2019 decreased by $732 thousand or 54.4% primarily due to a decrease of $57.9 million in the average balance of advances outstanding, when compared to the same period of 2018. For the six months ended December 31, 2019, interest expense on both FHLB long-term fixed and long-term variable FHLB advances increased by $116 thousand or 100.0% and $441 thousand or 83.8%, respectively, when compared to the same period in 2018. These increases were primarily due to higher average balances of FHLB long-term advances outstanding during the six months ended December 31, 2019, when compared to the same period in 2018.

Interest expense on deposits increased $103 thousand or 79.8% and $230 thousand or 91.3% for the three and six months ended December 31, 2019, respectively, when compared to the same periods in 2018. The increase in interest expense on deposits for the three months ended December 31, 2019 was primarily attributable to a 59 basis point increase in the weighted average rate paid on time deposits and a $14.3 million increase in the average balance of time deposits, when compared to the same period in 2018. For the six months ended December 31, 2019, the $230 thousand increase in interest expense was primarily due to a 55 basis point increase in the weighted average rate paid on time deposits and a $14.6 million increase in the average balance of the time deposits, when compared to the same period in 2018. The increases in the average balances of time deposits for both the three and six months ended December 31, 2019, were primarily attributable to higher levels of short-term brokered deposits when compared to the same periods of 2018. From time to time the Company uses brokered deposits to fund investment purchases or as an alternative to FHLB borrowings if the cost of such deposits is less than other wholesale funding options.

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

During the three and six months ending December 31, 2019, the allowance for loan losses (“ALLL”) decreased $8 thousand and $18 thousand, respectively. For the three months ended December 31, 2019, the ALLL associated with 1 - 4 family real estate loans decreased $14 thousand and the ALLL associated with construction loans increased $8 thousand. During the six months ended December 31, 2019, the ALLL associated with 1 - 4 family real estate loans, construction land acquisition and development loans decreased by $7 thousand, $9 thousand and $6 thousand, respectively. The primary reason for the changes in the ALLL balances, both in total, and within the identified segments, are changes in applicable loan balances and the return of one non-performing loan to performing status.

At December 31, 2019, the Company’s total allowance for loan losses amounted to $530 thousand or 0.58% of the Company’s total loan portfolio, as compared to $548 thousand or 0.60% at June 30, 2019. At December 31, 2019, the Company had no non-performing loans as compared to $225 thousand at June 30, 2019.

Non-Interest Income. Non-interest income increased $12 thousand or 10.9% for the three months ended December 31, 2019, when compared to the same period in 2018. The increase for the three months ended December 31, 2019 was primarily attributable to a $32 thousand gain on the sale of investment securities and a $4 thousand increase in service charges on deposits which were offset by a $16 thousand increase in other than temporary impairment losses on private label mortgage-backed securities, a $7 thousand decrease in automated teller machine (ATM) program income and a $1 thousand decrease in earnings on Bank-owned life insurance, when compared to the same period in 2018.

For the six months ended December 31, 2019, non-interest income increased $12 thousand or 5.5%, when compared to the same period in 2018. The increase in non-interest income for the six months ended December 31, 2019 was primarily attributable to a $34 thousand gain on the sale of investment securities and a $5 thousand increase in service charges on deposits, which were offset by an $18 thousand increase in other than temporary impairment losses on private label mortgage-backed securities, a $7 thousand decrease in ATM program income and a $2 thousand decrease in earnings on Bank-owned life insurance, when compared to the same period in 2018.

Non-Interest Expense. Non-interest expense decreased $84 thousand or 8.8% for the three months ended December 31, 2019, when compared to the same period in 2018. The decrease in non-interest expense for the three months ended December 31, 2019 was primarily attributable to a $30 thousand decrease in employee benefit costs, a $22 thousand decrease in federal deposit insurance expense, $20 thousand decrease in a variety of other operating expenses and a $7 thousand decrease in ATM network expenses, when compared to the same period in 2018. Non-interest expense decreased $138 thousand or 7.4% for the six months ended December 31, 2019, when compared to the same period in 2018. The decrease in non-interest expense for the six months ended December 31, 2019 was primarily attributable to a

$73 thousand decrease in federal deposit insurance expense, a $41 thousand decrease in employee benefit expense and a $21 thousand decrease in ATM network expense, when compared to the same period in 2018. The decrease in federal deposit insurance expense for both periods in 2019 was primarily attributable to the application of Small Bank Assessment Credits by the Federal Deposit Insurance Corporation.

Income Tax Expense. Income tax expense increased $2 thousand and $42 thousand for the three and six months ended December 31, 2019, respectively, when compared to the same periods in 2018. The increases for both periods ended December 31, 2019, were primarily due higher levels of taxable income when compared to the same periods of 2018.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities totaled $1.8 million during the six months ended December 31, 2019. Net cash provided by operating activities was primarily comprised of net income of $1.5 million and a $167 thousand decrease in accrued interest receivable.

Funds used for investing activities totaled $608 thousand during the six months ended December 31, 2019. Primary uses of funds during this period were purchases of investment securities available for sale totaling $17.3 million, purchases of loans totaling $6.3 million and purchases of certificates of deposit totaling $1.3 million. Primary sources of funds during the six months ended December 31, 2019 included proceeds from repayments of investment securities and mortgage-backed securities in the held-to-maturity portfolio totaling $500 thousand and $4.4 million, respectively, proceeds from repayments of investment securities in the available-for-sale portfolio totaling $3.3 million, $9.1 million of proceeds on sales of investment securities available for sale and repayments of loans in excess of originations of $5.6 million and $1.6 million of proceeds from maturing certificates of deposit.

Funds used for financing activities totaled $2.6 million for the six months ended December 31, 2019. The primary uses were a $2.8 million decrease in FHLB short-term advances, a $3.2 million decrease in transaction and savings accounts, a $618 thousand decrease in advance payments by borrowers for taxes and insurance and $354 thousand in cash dividends paid on the Company’s common stock, which were partially offset by increases in certificates of deposits totaling $4.5 million. Management believes that a significant portion of our local maturing deposits will remain with the Company. Management has determined that it currently is maintaining adequate liquidity and continues to match funding sources with lending and investment opportunities.

The Company’s primary sources of funds are deposits, amortization, repayments and maturities of existing loans, mortgage-backed securities and investment securities, funds from operations, and funds obtained through FHLB advances and other borrowings. Certificates of deposit scheduled to mature in one year or less at December 31, 2019 totaled $38.7 million including $14.7 million of maturing wholesale time deposits.

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 December 31, 2019, total approved loan commitments outstanding were $2.6 million. At the same date, commitments under unused lines of credit amounted to $5.1 million and the unadvanced portion of construction loans approximated $3.6 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 wholesale funding sources, to provide the cash utilized in investing activities. The Company’s available for sale segment of the investment portfolio totaled $138.1 million at December 31, 2019. In addition the Company had $1.6 million of certificates of deposit at December 31, 2019. Management believes that the Company currently has adequate liquidity available to respond to liquidity demands.

On January 27, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share, payable on February 20, 2020, to shareholders of record at the close of business on February 10, 2020. 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 December 31, 2019, WVS Financial Corp. maintained Common Equity Tier I Capital, Tier I, and total risk-based capital equal to $37.2 million or 19.1%, $37.2 million or 19.1%, and $37.7 million or 19.4%, respectively, of total risk-weighted assets, and Tier I leverage capital of $37.2 million or 10.4% of average quarterly assets.

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

The Company had no nonperforming assets at December 31, 2019 compared to $225 thousand or 0.06% of total assets at June 30, 2019.

During the quarter ended September 30, 2019, the Company’s one nonperforming single-family real estate loan was discharged from bankruptcy and since that time has been current.

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 2014 - 2019 and into fiscal year 2020, 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.

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.


	December 31,			June 30,
	2019			2019			2018
	(Dollars in Thousands)
Interest-earning assets maturing or repricing within one year		$279,078			$282,429			$270,356
Interest-bearing liabilities maturing or repricing within one year		221,983			214,916			229,231

Interest sensitivity gap		$ 57,095			$ 67,513			$ 41,125

Interest sensitivity gap as a percentage of total assets		16.07	%		18.97	%		11.67	%
Ratio of assets to liabilities maturing or repricing within one year		125.72	%		131.41	%		117.94	%

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 December 31, 2019. The table estimates the impact of an upward or downward change in market interest rates of 100 and 200 basis points.

Cumulative Stressed Repricing Gap


	Month 3			Month 6			Month 12			Month 24			Month 36			Month 60			Long Term
	(Dollars in Thousands)
Base Case Up 200 bp
Cumulative Gap ($’s)	$	61,406		$	57,549		$	49,521		$	44,400		$	40,908		$	43,645		$	33,871
% of Total Assets		17.3	%		16.2	%		13.9	%		12.5	%		11.5	%		12.3	%		9.5	%
Base Case Up 100 bp
Cumulative Gap ($’s)	$	61,964		$	58,622		$	51,459		$	47,721		$	45,192		$	48,456		$	33,871
% of Total Assets		17.4	%		16.5	%		14.5	%		13.4	%		12.7	%		13.6	%		9.5	%
Base Case No Change
Cumulative Gap ($’s)	$	63,628		$	61,782		$	57,096		$	56,885		$	56,372		$	60,104		$	33,871
% of Total Assets		17.9	%		17.4	%		16.1	%		16.0	%		15.9	%		16.9	%		9.5	%
Base Case Down 100 bp
Cumulative Gap ($’s)	$	65,090		$	64,506		$	61,761		$	63,873		$	64,238		$	67,005		$	33,871
% of Total Assets		18.3	%		18.2	%		17.4	%		18.0	%		18.1	%		18.9	%		9.5	%
Base Case Down 200 bp
Cumulative Gap ($’s)	$	65,632		$	65,508		$	63,431		$	66,268		$	66,803		$	68,894		$	33,871
% of Total Assets		18.5	%		18.4	%		17.9	%		18.7	%		18.8	%		19.4	%		9.5	%

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

The following table presents the simulated impact of a 100 and 200 basis point upward or downward (parallel) shift in market interest rates on net interest income, return on average equity, return on average assets and the market value of portfolio equity at December 31, 2019. This analysis was done assuming that the interest-earning assets will average approximately $348 million and $350 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 December 31, 2019. 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.

Analysis of Sensitivity to Changes in Market Interest Rates


	Twelve Month Forward Modeled Change in Market Interest Rates
	December 31, 2020															December 31, 2021
Estimated impact on:	-200			-100			0			+100			+200			-200			-100			0			+100			+200
Change in net interest income		-22.3	%		-11.5	%		-			6.9	%		14.2	%		-29.1	%		-14.6	%		-			9.1	%		18.1	%
Return on average equity		3.37	%		4.77	%		6.25	%		7.13	%		8.05	%		2.74	%		4.60	%		6.38	%		7.45	%		8.48	%
Return on average assets		0.36	%		0.51	%		0.67	%		0.77	%		0.87	%		0.29	%		0.51	%		0.72	%		0.85	%		0.98	%
Market value of equity (in thousands)	$	39,328		$	42,175		$	45,378		$	46,325		$	46,662

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 December 31, 2019. The Company used no derivative financial instruments to hedge such anticipated transactions as of December 31, 2019.


Anticipated Transactions

	(Dollars in Thousands)
Undisbursed construction and land development loans	$	3,573
Undisbursed lines of credit	$	5,119
Loan origination commitments	$	2,593
Letters of credit	$	-

	$	11,285

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 December 31, 2019, 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 maintains adequate collateral that could be liquidated to fund these contingent obligations.

ITEM 4. CONTROLS AND PROCEDURES

As of December 31, 2019, 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 December 31, 2019.

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 December 31, 2019, 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.

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, 2019.

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 WVS Financial Corp. during the three months ended December 31, 2019.


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⁾
10/01/19 – 10/31/19	-		-	-		20,256
11/01/19 – 11/30/19	-		-	-		20,256
12/01/19 – 12/31/19	-		-	-		20,256
Total	-		-	-		20,256

(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 20,256 of shares remaining to be purchased at December 31, 2019.

(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.

ITEM 6. Exhibits

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


Number				Description
31.1				Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer
31.2				Rule 13a-14(a) / 15d-14(a) Certification of the Chief Accounting Officer
32.1				Section 1350 Certification of the Chief Executive Officer
32.2				Section 1350 Certification of the Chief Accounting Officer
99				Report of Independent Registered Public Accounting Firm
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

SIGNATURES

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


	WVS FINANCIAL CORP.

February 13, 2020	BY:	/s/ David J. Bursic
Date		David J. Bursic President and Chief Executive Officer (Principal Executive Officer)

February 13, 2020	BY:	/s/ Linda K. Butia
Date		Linda K. Butia Vice-President, Treasurer and Chief Accounting Officer (Principal Accounting Officer)

WVS FINANCIAL CORP - FORM 10-Q - February 13, 2020

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