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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

[X]

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

For the quarterly period ended September 30, 2020

or

 

[  ]

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

For the transition period from                to               

Commission File Number: 0-22444

 

                           WVS Financial Corp.                          
(Exact name of registrant as specified in its charter)
Pennsylvania        25-1710500

(State or other jurisdiction of

incorporation or organization)

      

(I.R.S. Employer

Identification Number)

9001 Perry Highway

Pittsburgh, Pennsylvania

       15237
    (Address of principal executive offices)            (Zip Code)
                                     (412) 364-1911                                     

(Registrant’s telephone number, including area code)

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 November 9, 2020: 1,902,690 shares of Common Stock, $.01 par value.


Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

INDEX

 

PART I.

       

Financial Information

  

Page

    
Item 1.      Financial Statements      
     Consolidated Balance Sheet as of
September 30, 2020 and June 30, 2020
(Unaudited)
   3   
     Consolidated Statement of Income
for the Three Months Ended
September 30, 2020 and 2019 (Unaudited)
   4   
     Consolidated Statement of Comprehensive
Income for the Three Months Ended
September 30, 2020 and 2019 (Unaudited)
   5   
     Consolidated Statement of Changes in
Stockholders’ Equity for the Three Months
Ended September 30, 2020 and 2019 (Unaudited)
   6   
     Consolidated Statement of Cash Flows
for the Three Months Ended September 30, 2020
and 2019 (Unaudited)
   7   
     Notes to Unaudited Consolidated
Financial Statements
   9   
Item 2.      Management’s Discussion and Analysis of
Financial Condition and Results of
Operations for the Three Months
Ended September 30, 2020
   34   
Item 3.      Quantitative and Qualitative Disclosures
about Market Risk
   40   
Item 4.      Controls and Procedures    44   

PART II.

        Other Information   

Page

    
Item 1.      Legal Proceedings    45   
Item 1A.      Risk Factors    45   
Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds    45   
Item 3.      Defaults Upon Senior Securities    46   
Item 4.      Mine Safety Disclosures    46   
Item 5.      Other Information    46   
Item 6.      Exhibits    46   
     Signatures    47   

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

(In thousands)

 

         September 30, 2020             June 30, 2020      

Assets

    

Cash and due from banks

                 $       3,804       $       2,488  

Interest-earning demand deposits

     7       12  
  

 

 

   

 

 

 

Total cash and cash equivalents

     3,811       2,500  

Certificates of deposit

     1,343       1,840  

Investment securities available-for-sale (amortized cost of $140,672 and $148,271)

     141,044       147,639  

Investment securities held-to-maturity (fair value of $3,613 and $3,622)

     3,495       3,495  

Mortgage-backed securities held-to-maturity (fair value of $77,661 and $96,649)

     77,937       97,106  

Net loans receivable (allowance for loan losses of $620 and $618)

     91,749       91,032  

Accrued interest receivable

     709       744  

Federal Home Loan Bank (FHLB) stock, at cost

     5,923       6,564  

Premises and equipment, net

     675       574  

Bank owned life insurance

     4,935       4,907  

Deferred tax assets (net)

     314       548  

Other assets

     216       152  
  

 

 

   

 

 

 

TOTAL ASSETS

     $  332,151       $  357,101  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits

    

Non-interest-bearing accounts

     $   22,765       $    22,657  

Interest-earning checking

     24,844       25,075  

Savings accounts

     44,560       44,541  

Money market accounts

     19,994       21,743  

Certificates of deposit

     29,865       35,063  

Advance payments by borrowers for taxes and insurance

     909       2,256  
  

 

 

   

 

 

 

Total deposits

     142,937       151,335  

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  

Federal Home Loan Bank advances: short-term

     43,281       59,159  

Other short-term borrowings

     5,875       7,000  

Accrued interest payable

     314       487  

Other liabilities

     1,805       2,207  
  

 

 

   

 

 

 

TOTAL LIABILITIES

     294,212       320,188  
  

 

 

   

 

 

 

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

     21,578       21,577  

Treasury stock: 1,902,946 and 1,898,932 shares at cost, respectively

     (28,827     (28,775

Retained earnings, substantially restricted

     46,835       46,590  

Accumulated other comprehensive income (loss)

     241       (556

Unallocated Employee Stock Ownership Plan (“ESOP”) shares

     (1,926     (1,961
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     37,939       36,913  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

     $  332,151       $  357,101  
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

(In thousands, except per share data)

 

         Three Months Ended      
     September 30,  
     2020     2019  

INTEREST AND DIVIDEND INCOME:

    

Loans, including fees

       $                 864         $                 883  

Investment securities

     437       1,081  

Mortgage-backed securities

     269       885  

Certificates of deposit

     6       15  

Interest-earning demand deposits

     —         1  

FHLB Stock

     89       122  
  

 

 

   

 

 

 

Total interest and dividend income

     1,665       2,987  
  

 

 

   

 

 

 

INTEREST EXPENSE:

    

Deposits

     104       250  

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

     115       114  

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

     71       518  

Federal Home Loan Bank advances – short-term

     34       302  

Other short-term borrowings

     1       -  
  

 

 

   

 

 

 

Total interest expense

     325       1,184  
  

 

 

   

 

 

 

NET INTEREST INCOME

     1,340       1,803  

PROVISION (CREDIT) FOR LOAN LOSSES

     2       (10
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES

     1,338       1,813  
  

 

 

   

 

 

 

NON-INTEREST INCOME:

    

Service charges on deposits

     22       29  

Earnings on Bank Owned Life Insurance

     28       30  

Investment securities gains

     25       -  
    

Other than temporary impairment (“OTTI”) losses

     (13     (1

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

     -       -  
  

 

 

   

 

 

 

Net impairment loss recognized in earnings

     (13     (1
    

ATM fee income

     38       42  

Other

     11       10  
  

 

 

   

 

 

 

Total non-interest income

     111       110  
  

 

 

   

 

 

 

NON-INTEREST EXPENSE:

    

Salaries and employee benefits

     552       545  

Occupancy and equipment

     68       63  

Data processing

     59       57  

Correspondent bank service charges

     9       9  

Federal deposit insurance premium

     27       (23

ATM Network expense

     21       23  

Other

     144       173  
  

 

 

   

 

 

 

Total non-interest expense

     880       847  
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     569       1,076  

INCOME TAX EXPENSE

     149       283  
  

 

 

   

 

 

 

NET INCOME

       $                420         $                793  
  

 

 

   

 

 

 

EARNINGS PER SHARE:

    

Basic

       $                0.24         $                0.45  

Diluted

       $                0.24         $                0.45  

AVERAGE SHARES OUTSTANDING:

    

Basic

     1,748,040       1,775,561  

Diluted

     1,748,040       1,775,561  

See accompanying notes to unaudited consolidated financial statements.

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

(In thousands)

 

         Three Months Ended      
     September 30,  
     2020     2019  

NET INCOME

   $ 420     $ 793  

OTHER COMPREHENSIVE INCOME

    

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

    

Gains arising during the year

     1,030       58  

Less: Income tax effect

     (216     (13
  

 

 

   

 

 

 
     814       45  

(Gains) recognized in earnings

     (25     -  

Less: Income tax effect

     (5     -  
  

 

 

   

 

 

 
     (20     -  

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

     794       45  
  

 

 

   

 

 

 

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

    

Total losses

     13       1  

Losses recognized in earnings

     13       1  
  

 

 

   

 

 

 

Gains (losses) recognized in comprehensive income

     -       -  

Income tax effect

     -       -  
  

 

 

   

 

 

 
     -       -  

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

     4       4  

Less: Income tax effect

     (1     (1
  

 

 

   

 

 

 
     3       3  

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

     3       3  
  

 

 

   

 

 

 

Other comprehensive income

     797       48  
  

 

 

   

 

 

 

COMPREHENSIVE INCOME

         $   1,217           $   841  
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands, except per share data)

 

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

Balance June 30, 2020

  $     38      $  21,577      $ (28,775     $  46,590       $ (556     $ (1,961     $ 36,913  

Net income

          420           420  

Other comprehensive income

            797         797  

Purchase of treasury stock (4,014 shares)

        (52           (52

Amortization of unallocated ESOP shares

      1             35       36  

Cash dividends declared ($0.10 per share)

          (175         (175
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2020

  $     38       $  21,578       $ (28,827     $  46,835       $ 241       $ (1,926     $ 37,939  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    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

          793           793  

Other comprehensive income

            48         48  

Purchase of treasury stock (7,475 shares)

        (113           (113

Amortization of unallocated ESOP shares

      10             28       38  

Cash dividends declared

($0.10 per share)

          (177         (177
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2019

  $     38       $  21,560       $ (28,382     $  45,423       $  63       $ (2,064     $  36,638  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

     Three Months Ended
September 30,
 
           2020                 2019        

OPERATING ACTIVITIES

    

Net income

   $ 420     $ 793  

Adjustments to reconcile net income to cash (used for) provided by operating activities:

    

Provision (credit) for loan losses

     2       (10

Depreciation

     18       6  

Investment securities gains

     (25     -  

Net impairment loss recognized in earnings

     13       1  

Amortization of discounts, premiums and deferred loan fees, net

     8       24  

Amortization of unallocated ESOP shares

     36       38  

Deferred income taxes

     22       (9

(Decrease) increase in accrued income taxes

     (355     94  

Earnings on bank owned life insurance

     (28     (30

Decrease in accrued interest receivable

     35       39  

Decrease in accrued interest payable

     (173     (26

Increase in deferred director compensation payable

     14       12  

Other, net

     (125     (95
  

 

 

   

 

 

 

Net cash (used for) provided by operating activities

     (138     837  
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Available-for-sale:

    

Purchases of investment securities

     (12,945     (1,965

Proceeds from sale of investments

     1,015       -  

Proceeds from repayments of investment securities

     19,507       -  

Held-to-maturity:

    

Proceeds from repayments of investment securities

     -       500  

Proceeds from repayments of mortgage-backed securities

     19,171       2,024  

Purchases of certificates of deposit

     (100     (1,092

Maturities/redemptions of certificates of deposit

     597       349  

Purchase of loans

     (5,248     (2,377

Net decrease in net loans receivable

     4,558       2,665  

Purchase of FHLB stock

     (3,044     (2,525

Redemption of FHLB stock

     3,685       2,908  

Acquisition of premises and equipment

     (119     (15
  

 

 

   

 

 

 

Net cash provided by investing activities

     27,077       472  
  

 

 

   

 

 

 

 

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

     Three Months Ended
September 30,
 
           2020                 2019        

FINANCING ACTIVITIES

    

Net (decrease) increase in transaction and savings accounts

   $ (1,853   $ 9,613  

Net (decrease) increase in certificates of deposit

     (5,198     4,659  

Net decrease in advance payments by borrowers for taxes and insurance

     (1,347     (1,083

Net decrease in FHLB short-term advances

     (15,878     (11,274

Repayments of other short-term borrowings

     (1,125     —    

Purchase of treasury stock

     (52     (113

Cash dividends paid

     (175     (177
  

 

 

   

 

 

 

Net cash (used for) provided by financing activities

     (25,628     1,625  
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     1,311       2,934  

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD

     2,500       4,379  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD

   $ 3,811     $ 7,313  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    

Cash paid during the period for:

    

Interest on deposits and borrowings

   $ 498     $ 1,210  

Income taxes

     518       198  

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (GAAP). However, all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation have been included. The results of operations for the three months ended September 30, 2020, are not necessarily indicative of the results which may be expected for the entire fiscal year.

The coronavirus (COVID-19) pandemic has negatively impacted the global economy, disrupted global supply chains and increased unemployment levels. The resulting temporary closure of many businesses and the implementation of social distancing and sheltering-in-place policies has and may continue to impact many of the Company’s customers. While the full effects of the pandemic remain unknown, the Company is committed to supporting its customers, employees and communities during this difficult time. The Company has given hardship relief assistance to customers, including the consideration of various loan payment deferral and fee waiver options, and encourages customers to reach out for assistance to support their individual circumstances. The pandemic could result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed, the impact on the global economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize impairments on the securities we hold. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States. Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by COVID-19. Under these provisions, loan modifications deemed to be COVID-19 related would not be considered a troubled debt restructuring (TDR) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. The banking regulators issued similar guidance, which also clarified that a COVID-19-related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term. As of September 30, 2020, the number of loans in deferral totaled 14 with an aggregate balance of $5.4 million and an aggregate appraised value of $8.9 million. Effective July 1, 2020 these loans were given a twelve month catch-up period to repay any previously due deferred amounts. As of September 30, 2020 all of these loans were current with the terms of their deferral agreements.

 

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

 

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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 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. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November. 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. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November. 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. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In May 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

 

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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. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU is expected to be issued in mid-November. 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 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 qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

 

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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 intra-period 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.

In January 2020, the FASB issued ASU 2020-02, Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), February 2020, to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is effective upon issuance. This did not have a significant impact on the Company’s financial statements.

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue

 

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applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 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. Management determined that the primary sources of revenue emanating from interest and dividend income on loans and investments along with noninterest revenue resulting from investment security gains, and earnings on bank owned life insurances are not within the scope of ASC 606. As a result, no changes were made during the period related to these sources of revenue. The main types of noninterest income within the scope of the standard are as follows: Service Charges on deposit accounts - the Company has contracts with its deposit customers where fees are charged if certain parameters are not met. These agreements can be cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific transactions or activities resulting from a customer request or activity that include overdraft fees, online banking fees, interchange fees, ATM fees and other transaction fees. All of these fees are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time upon the completion of the requested service/transaction.

 

4.

EARNINGS PER SHARE

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

 

     Three Months Ended  
     September 30,  
             2020                     2019          

Weighted average common shares issued

     3,805,636       3,805,636  

Average treasury stock shares

     (1,901,801     (1,863,414

Average unallocated ESOP shares

     (155,795     (166,661
  

 

 

   

 

 

 

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

     1,748,040       1,775,561  
  

 

 

   

 

 

 

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

     1,748,040       1,775,561  
  

 

 

   

 

 

 

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.

 

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5.

INVESTMENT SECURITIES

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

 

                          Gross             Gross               
                Amortized                     Unrealized                     Unrealized                    Fair      
            Cost             Gains             Losses            Value  
            (Dollars in Thousands)  
September 30, 2020                                                       

AVAILABLE FOR SALE

                      

Corporate debt securities

   $          107,894      $          409      $          (171   $          108,132  

Foreign debt securities 1

        29,513           154           (19        29,648  

Commercial paper

        2,998           -           -          2,998  

Obligations of states and political subdivisions

        267           -           (1        266  
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

   $          140,672      $          563      $          (191   $          141,044  
     

 

 

       

 

 

       

 

 

      

 

 

 
                          Gross             Gross               
            Amortized             Unrealized             Unrealized            Fair  
            Cost             Gains             Losses            Value  
            (Dollars in Thousands)  
September 30, 2020                                                       

HELD TO MATURITY

                      

Obligations of states and political subdivisions

   $          3,495      $          118      $          -     $          3,613  
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

   $          3,495      $          118      $          -     $          3,613  
     

 

 

       

 

 

       

 

 

      

 

 

 
                          Gross             Gross               
            Amortized             Unrealized             Unrealized            Fair  
            Cost             Gains             Losses            Value  
            (Dollars in Thousands)  
June 30, 2020                                                       

AVAILABLE FOR SALE

                      

Corporate debt securities

   $          109,739      $          163      $          (774   $          109,128  

Foreign debt securities 1

        32,561           42           (63        32,540  

Commercial paper

        5,971           -           -          5,971  
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

   $          148,271      $          205      $          (837   $          147,639  
     

 

 

       

 

 

       

 

 

      

 

 

 

 

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

 

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                          Gross             Gross                
                Amortized                     Unrealized                     Unrealized                     Fair      
            Cost             Gains             Losses             Value  
            (Dollars in Thousands)  
June 30, 2020                                                        

HELD TO MATURITY

                       

Obligations of states and political subdivisions

   $          3,495      $          127      $          -      $          3,622  
     

 

 

       

 

 

       

 

 

       

 

 

 

Total

   $          3,495      $          127      $          -      $          3,622  
     

 

 

       

 

 

       

 

 

       

 

 

 

The Company recorded gross realized investment security gains of $25.3 thousand during the quarter ended September 30, 2020. Proceeds from the sales of investment securities totaled $1.0 million during this same period.

There were no sales of investment securities for the three months ended September 30, 2019.

The amortized cost and fair values of debt securities at September 30, 2020, 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

   $          25,430      $          114,975      $          267      $          -      $          140,672  

Fair value

        25,393           115,385           266           -           141,044  

HELD TO MATURITY

                             

Amortized cost

   $          750      $          2,745      $          -      $          -      $          3,495  

Fair value

        753           2,860           -           -           3,613  

At September 30, 2020 investment securities with amortized costs of $3.5 million and $51.5 million and fair values of $3.6 million and $51.7 million were pledged to secure borrowings with the Federal Home Loan Bank (“FHLB”) of Pittsburgh and the Federal Reserve Bank of Cleveland (“FRB”), respectively. Of the securities pledged to the FRB, $45.6 million of amortized cost, and $45.8 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.

 

6.

MORTGAGE-BACKED SECURITIES

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

 

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

At September 30, 2020, the Company’s Agency CMOs totaled $77.4 million as compared to $96.5 million at June 30, 2020. The Company’s Private-Label CMOs totaled $544 thousand at September 30, 2020 as compared to $618 thousand at June 30, 2020. The $19.1 million decrease in the Agency CMO segment of our MBS portfolio was due to repayments on our Agency CMOs which totaled $19.1 million. During the three months ended September 30, 2020, the Company received principal payments totaling $66 thousand on its Private-Label CMOs. At September 30, 2020 and June 30, 2020, all of the Company’s MBS portfolio was 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 traunches, the actual maturities of the Company’s MBS are expected to be substantially less than the scheduled maturities.

The Company retains an independent third party to assist it in the determination of a fair value for its three private-label CMOs. This valuation is meant to be a “Level Three” valuation as defined by ASC Topic 820, Fair Value Measurements and Disclosures. The valuation does not represent the actual terms or prices at which any party could purchase the securities. There is currently no active secondary market for Private-Label CMOs and there can be no assurance that any secondary market for Private-Label CMOs will develop. The Private-Label CMO portfolio had six previously recorded other-than-temporary impairments at September 30, 2020. During the three months ended September 30, 2020, the Company recorded an additional credit impairment charge of $13 thousand on its Private-Label CMO portfolio.

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

The following table sets forth information with respect to the Company’s Private-Label CMO portfolio as of September 30, 2020. At the time of purchase, all of our Private-Label CMOs were rated in the highest investment category by at least two ratings agencies.

 

            At September 30, 2020  
                       Rating      Book
  Value  
     Fair
  Value2  
     Life to Date
Impairment
  Recorded in  
Earnings
 

      Cusip #      

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

126694CP1

     CWHL SER 21 A11        WR        WR        D          $ 328          $ 322              $ 271  

126694KF4

     CWHL SER 24 A15        NR        N/A        D        54        54        60  

126694KF4

     CWHL SER 24 A15        NR        N/A        D        107        108        120  

126694MP0

     CWHL SER 26 1A5        NR        N/A        D        55        57        48  
              

 

 

    

 

 

    

 

 

 
                   $ 544          $ 541              $ 499  
              

 

 

    

 

 

    

 

 

 

  

 

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

 

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

 

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

September 30, 2020

                      

HELD TO MATURITY

                      

Collateralized mortgage obligations:

                      

Agency

   $          77,393      $          383      $          (656   $          77,120  

Private-label

        544           3           (6        541  
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

   $          77,937      $          386      $          (662   $          77,661  
     

 

 

       

 

 

       

 

 

      

 

 

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

June 30, 2020

                      

HELD TO MATURITY

                      

Collateralized mortgage obligations:

                      

Agency

   $          96,488      $          486      $          (932   $          96,042  

Private-label

        618           3           (14        607  
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

   $          97,106      $          489      $          (946   $          96,649  
     

 

 

       

 

 

       

 

 

      

 

 

 

The amortized cost and fair value of the Company’s mortgage-backed securities at September 30, 2020, 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

   $          -      $          80      $          -      $          77,857      $          77,937  

Fair value

        -           80           -           77,581           77,661  

At September 30, 2020, mortgage-backed securities with amortized costs of $77.4 million and fair values of $77.1 million were pledged to secure public deposits and borrowings with the FHLB. Of the securities pledged, $7.3 million of fair value was excess collateral. At June 30, 2020, mortgage-backed securities with an amortized cost of $96.5 million and fair values of $96.0 million, were pledged to secure public deposits and borrowings with the FHLB. Of the securities pledged, $10.0 million of fair value was excess collateral. Excess collateral is maintained to support future borrowings and may be withdrawn by the Company at any time.

 

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7.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the changes in accumulated other comprehensive income (loss) by component, for the three months ended September 30, 2020 and 2019.

 

     Three Months Ended September 30, 2020  
     (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, 2020

     $ (499     $ (57     $ (556

Other comprehensive income before reclassifications

     814       -       814  

Amounts reclassified from accumulated other comprehensive income (loss)

     (20     3       (17
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

     794       3       797  
  

 

 

   

 

 

   

 

 

 

Ending Balance – September 30, 2020

     $ 295       $ (54     $ 241  
  

 

 

   

 

 

   

 

 

 
     Three Months Ended September 30, 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

     $ 84       $ (69)       $ 15  

Other comprehensive income (loss) before reclassifications

     45       -       45  

Amounts reclassified from accumulated other comprehensive income (loss)

     -       3       3  
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     45       3       48  
  

 

 

   

 

 

   

 

 

 

Ending Balance – September 30, 2019

     $ 129       $ (66     $ 63  
  

 

 

   

 

 

   

 

 

 

 

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8.

UNREALIZED LOSSES ON SECURITIES

The following tables show the Company’s gross unrealized losses and fair value, aggregated by category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2020 and June 30, 2020.

 

              September 30, 2020  
   

 

 

 
              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

    $         18,684     $     (95   $         5,737     $     (76   $         24,421     $     (171

Foreign debt securities 3

        4,493         (19       -         -         4,493         (19

Obligations of states and political subdivisions

        266         (1       -         -         266         (1

Collateralized mortgage obligations

        8,127         (385       25,062         (277       33,189         (662
     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $         31,570     $     (500   $         30,799     $     (353   $         62,369     $     (853
     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
              June 30, 2020  
   

 

 

 
              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

    $         50,115     $     (509   $         8,550     $     (265   $         58,665     $     (774

Foreign debt securities3

        13,970         (63       -         -         13,970         (63

Collateralized mortgage obligations

        13,782         (348       26,919         (598       40,701         (946
     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $         77,867     $     (920   $         35,469     $     (863   $         113,336     $     (1,783
     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

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 (“NRSRO”); other indicators of the credit quality of the issuer; the strength of the provider of any guarantees; the length of time and extent that fair value has been less than amortized cost; and whether the Company has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. In the case of its Private-Label residential MBS, the Company also considers prepayment speeds, the historical and projected performance of the underlying loans and the credit support provided by the subordinate securities. These evaluations are inherently subjective and consider a number of quantitative and qualitative factors.

 

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

 

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

 

     Three Months Ended  
     September 30,  
             2020                      2019          
     (Dollars in Thousands)  

Beginning balance

   $ 311      $ 248  

Initial credit impairment

     -        -  

Subsequent credit impairment

     13        1  

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

     -        -  

Reductions for securities sold

     -        -  

Reduction for actual realized losses

     -        (10

Reduction for increase in cash flows expected to be collected

     -        -  
  

 

 

    

 

 

 

Ending balance

   $ 324      $ 239  
  

 

 

    

 

 

 

During the three months ended September 30, 2020, the Company recorded a $13 thousand subsequent credit impairment charge and no non-credit unrealized holding losses to accumulated other comprehensive income. During the three months ended September 30, 2020, the Company accreted back out of other comprehensive income $4 thousand (net of income tax effect of $1 thousand), based on principal repayments on Private-Label CMOs previously identified with OTTI.

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

In conjunction with our adoption of ASC Topic 820 effective June 30, 2009, the Company retained an independent third party to assist it with assessing its investments within the Private-Label CMO portfolio. The independent third party utilized certain assumptions for producing the cash flow analyses used in the OTTI assessment. Key assumptions would include interest rates, expected market participant spreads and discount rates, housing prices, projected future delinquency levels and assumed loss rates on any liquidated collateral.

 

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The Company reviewed the independent third party’s assumptions used in the September 30, 2020 OTTI process. Based on the results of this review, the Company deemed the independent third party’s assumptions to be reasonable and adopted them. However, different assumptions could produce materially different results, which could impact the Company’s conclusions as to whether an impairment is considered other-than-temporary and the magnitude of the credit loss.

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

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

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

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

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

The Company had investments in 38 positions that were temporarily impaired at September 30, 2020. Based on its analysis, management has concluded that three Private-Label CMOs are OTTI, while the remaining securities portfolio has experienced unrealized losses and a decrease in fair value due to interest rate volatility, illiquidity in the marketplace, or credit deterioration in the U.S. mortgage markets.

 

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9.

LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

The following table summarizes the primary segments of the loan portfolio as of September 30, 2020 and June 30, 2020.

 

            September 30, 2020      June 30, 2020  
           

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

   $          79,189        $ -         $ 79,189         $ 78,077        $ -         $ 78,077  

Construction

        1,789          -           1,789           1,868          -           1,868  

Land acquisition & development

        360          -           360           446          -           446  

Multi-family dwellings

        3,687          -           3,687           3,755          -           3,755  

Commercial

        4,247          -           4,247           4,132          -           4,132  

Consumer Loans

                                 

Home equity

        1,020          -           1,020           1,137          -           1,137  

Home equity lines of credit

        1,602          -           1,602           1,729          -           1,729  

Other

        61          -           61           79          -           79  

Commercial Loans

        17          -           17           11          -           11  
     

 

 

      

 

 

       

 

 

       

 

 

      

 

 

       

 

 

 
   $          91,972        $             -         $             91,972         $             91,234        $                 -         $             91,234  
          

 

 

       

 

 

            

 

 

       

 

 

 

Plus: Deferred loan costs

        397                      416             

Allowance for loan losses

        (620                    (618           
     

 

 

                  

 

 

            

Total

   $                  91,749                    $ 91,032             
     

 

 

                  

 

 

            

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

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

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

As of September 30, 2020 and June 30, 2020, there were no loans considered to be impaired and no nonaccrual loans. 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 has been current since that time.

 

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Table of Contents
            Three Months Ended  
              September 30,                 September 30,    
            2020             2019  
            (Dollars in Thousands)  

Average nonaccrual loans

           

1 – 4 family dwellings

   $          -      $          185  

Construction

        -           -  

Land acquisition & development

        -           -  

Commercial real estate

        -           -  

Home equity lines of credit

        -           -  
     

 

 

       

 

 

 

Total

   $          -      $          185  
     

 

 

       

 

 

 

Income that would have been recognized

   $          -      $          2  

Interest income recognized

   $          -      $          2  

Interest income foregone

   $          -      $          -  

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

During the three months ended September 30, 2020 and 2019, there were no troubled debt restructurings, and no troubled debt restructurings that subsequently defaulted.

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

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

Effective December 13, 2006, the Federal Deposit Insurance Corporation (“FDIC”), in conjunction with the other federal banking agencies adopted a Revised Interagency Policy Statement on the Allowance for Loan and Lease Losses (“ALLL”). The revised policy statement revised and replaced the

 

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

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

The Company’s general policy is to internally classify its assets on a regular basis and establish prudent general valuation allowances that are adequate to absorb losses that have not been identified but that are inherent in the loan portfolio. The Company maintains general valuation allowances that it believes are adequate to absorb losses in its loan portfolio that are not clearly attributable to specific loans. The Company’s general valuation allowances are within the following general ranges: (1) 0% to 5% of assets subject to special mention; (2) 1.00% to 100% of assets classified substandard; and (3) 50% to 100% of assets classified doubtful. Any loan classified as loss is charged-off. To further monitor and assess the risk characteristics of the loan portfolio, loan delinquencies are reviewed to consider any developing problem loans. Based upon the procedures in place, considering the Company’s past charge-offs and recoveries and assessing the current risk elements in the portfolio, management believes the allowance for loan losses at September 30, 2020, is adequate.

 

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Table of Contents

The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of September 30, 2020 and June 30, 2020:

 

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

  90 Days +  
Past Due

Accruing

         

  90 Days +  
Past Due

Non-accrual

          Total  
Past  
Due  
         

Total

Loans

 
   

 

 

 
          (Dollars in Thousands)  

September 30, 2020

                           

First mortgage loans:

                           

1 – 4 family dwellings

  $           79,189     $           -     $           -     $           -     $           -     $           -     $           79,189  

Construction

      1,789         -         -         -         -         -         1,789  

Land acquisition &

development

      360         -         -         -             -         360  

Multi-family dwellings

      3,687         -         -         -         -         -         3,687  

Commercial

      4,247         -         -         -         -         -         4,247  

Consumer Loans:

                           

Home equity

      1,020         -         -         -         -         -         1,020  

Home equity lines of credit

      1,602         -         -         -         -         -         1,602  

Other

      61         -         -         -         -         -         61  

Commercial Loans

      17         -         -         -         -         -         17  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $           91,972     $           -     $           -     $           -     $           -     $           -         91,972  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Deferred loan costs

                              397  

  Allowance for loan losses

                              (620
                           

 

 

 

Net Loans Receivable

                          $           91,749  
                           

 

 

 
          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, 2020

                           

First mortgage loans:

                           

1 – 4 family dwellings

  $           78,077     $           -     $           -     $           -     $           -     $           -     $           78,077  

Construction

      1,868         -         -         -         -         -         1,868  

Land acquisition & development

      446         -         -         -         -         -         446  

Multi-family dwellings

      3,755         -         -         -         -         -         3,755  

Commercial

      4,132         -         -         -         -         -         4,132  

Consumer Loans

                           

Home equity

      1,137         -         -         -         -         -         1,137  

Home equity lines of credit

      1,729         -         -         -         -         -         1,729  

Other

      79         -         -         -         -         -         79  

Commercial Loans

      11         -         -         -         -         -         11  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $           91,234     $           -     $           -     $           -     $           -     $           -         91,234  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Deferred loan costs

                              416  

  Allowance for loan losses

                              (618
                           

 

 

 

Net Loans Receivable

                          $           91,032  
                           

 

 

 

Credit quality information

The following tables represent credit exposure by internally assigned grades for the periods ended September 30, 2020 and June 30, 2020. 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.

 

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The Company’s internally assigned grades are as follows:

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

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

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

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

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

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

The following tables present the Company’s internally classified construction, land acquisition and development, multi-family residential, commercial real estate and commercial (not secured by real estate) loans at September 30, 2020 and June 30, 2020.

 

            September 30, 2020  
            Construction            

Land

Acquisition

&

Development

Loans

           

Multi-family

Residential

           

Commercial

Real

Estate

            Commercial  
     

 

 

 
            (Dollars in Thousands)  

Pass

   $          1,789      $          360      $          3,687      $          4,247      $          17  

Special Mention

        -           -           -           -           -  

Substandard

        -           -           -           -           -  

Doubtful

        -           -           -           -           -  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Ending Balance

   $          1,789      $          360      $          3,687      $          4,247      $          17  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

 

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Table of Contents
            June 30, 2020  
              Construction              

Land

Acquisition

&

  Development  

Loans

           

  Multi-family  

Residential

           

  Commercial  
Real

Estate

              Commercial    
  

 

 

 
            (Dollars in Thousands)  

Pass

   $          1,868      $          446      $          3,755      $          4,132      $          11  

Special Mention

        -           -           -           -           -  

Substandard

        -           -           -           -           -  

Doubtful

        -           -           -           -           -  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Ending Balance

   $          1,868      $          446      $          3,755      $          4,132      $          11  
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

The following table presents performing and non-performing 1 – 4 family residential and consumer loans based on payment activity for the periods ended September 30, 2020 and June 30, 2020.

 

            September 30, 2020  
     

 

 

 
                1 – 4 Family                     Consumer      
     

 

 

 
            (Dollars in Thousands)  

Performing

       $            79,189      $          2,683  

Non-performing

        -           -  
     

 

 

       

 

 

 

Total

       $            79,189      $          2,683  
     

 

 

       

 

 

 
            June 30, 2020  
     

 

 

 
                1 – 4 Family                     Consumer      
     

 

 

 
            (Dollars in Thousands)  

Performing

       $            78,077      $          2,945  

Non-performing

        -           -  
     

 

 

       

 

 

 

Total

       $            78,077      $          2,945  
     

 

 

       

 

 

 

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

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

 

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

The Company had no unallocated loss allowance balance at September 30, 2020.

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

The following tables summarize the primary segments of the allowance for loan losses (“ALLL”), segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of September 30, 2020 and 2019. Activity in the allowance is presented for the three months ended September 30, 2020 and 2019.

 

            As of September 30, 2020  
            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, 2020

   $          449      $          38     $          6      $          26      $          66     $          32     $          1      $          618  

Charge-offs

        -           -          -           -           -          -          -           -  

Recoveries

        -           -          -           -           -          -          -           -  

Provisions

        6           (2        1           -           (2        (2        1           2  
     

 

 

       

 

 

      

 

 

       

 

 

       

 

 

      

 

 

      

 

 

       

 

 

 

Ending ALLL Balance at September 30, 2020

   $          455      $          36     $          7      $          26      $          64     $          30     $          2      $          620  
     

 

 

       

 

 

      

 

 

       

 

 

       

 

 

      

 

 

      

 

 

       

 

 

 

Individually evaluated for impairment

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

Collectively evaluated for impairment

        455           36          7           26           64          30          2           620  
     

 

 

       

 

 

      

 

 

       

 

 

       

 

 

      

 

 

      

 

 

       

 

 

 
   $          455      $          36     $          7      $          26      $          64     $          30     $          2      $          620  
     

 

 

       

 

 

      

 

 

       

 

 

       

 

 

      

 

 

      

 

 

       

 

 

 

 

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Table of Contents
          As of September 30, 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         (17       (4       -         5         -         (1       (10
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending ALLL Balance at September 30, 2019

  $         412     $         29     $         6     $         17     $         42     $         30     $         2     $         538  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Individually evaluated for impairment

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

Collectively evaluated for impairment

      412         29         6         17         42         30         2         538  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $         412     $         29     $         6     $         17     $         42     $         30     $         2     $         538  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

During the three months ended September 30, 2020 the Company’s ALLL increased by $2 thousand. This increase in the ALLL was primarily attributable to an increase in the ALLL associated with the 1 – 4 family segment, partially offset by decreases in the ALLL associated with the construction, commercial real estate and consumer loan segments.

During the quarter ended September 30, 2019, the ALLL decreased $10 thousand primarily due to lower levels of construction and land acquisition and development loans.

 

10.

FEDERAL HOME LOAN BANK (FHLB) ADVANCES

The following table presents contractual maturities of FHLB long-term advances as of September 30, 2020.

 

                   Weighted-     Stated interest                               
     Maturity range      average     rate range              September 30,             June 30,  

    Description    

       from              to              interest rate4         from         to                2020             2020  
                                            (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        0.32     0.29     0.36        85,000           85,000  
                 

 

 

       

 

 

 

Total

               $          100,000      $          100,000  
                 

 

 

       

 

 

 

 

 

4 As of September 30, 2020

 

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Table of Contents

Maturities of FHLB long-term advances at September 30, 2020, are summarized as follows:

 

Maturing During

Fiscal Year Ended
                        June 30:                     

                        Amount                        Weighted-
      Average      
Interest
Rate4
 
            (Dollars in Thousands)                

2021

   $          65,000           0.51%  

2022

        30,000           0.80%  

2023

        5,000           3.09%  

2024

        -           -  

2025

        -           -  

2026 and thereafter

        -           -  
     

 

 

       

Total

   $          100,000           0.73%  
     

 

 

       

The Company also utilized revolving and short-term FHLB advances. Short-term FHLB advances generally mature within 90 days, while revolving FHLB advances may be repaid by the Company without penalty. The following table presents information regarding such advances as of September 30, 2020 and June 30, 2020:

 

                 September 30,        
2020
                 June 30,        
2020
 
    

 

 

 
         (Dollars in Thousands)  

FHLB revolving and short-term advances:

         

Ending balance

  $      43,281     $      59,159  

Average balance

       34,644          58,146  

Maximum month-end balance

       43,281          68,030  

Average interest rate

       0.39        1.57

Weighted-average rate at period end

       0.37        0.39

At September 30, 2020, 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.

 

11.

OTHER SHORT-TERM BORROWINGS

The company also utilized other short-term borrowings comprised of Federal Reserve Bank of Cleveland (“FRBC”) discount window borrowings. FRBC discount window borrowings mature within 90 days and may be repaid prior to maturity without penalty, in whole or in part, plus accrued interest. The following table presents information regarding the FRBC borrowings as of September 30, 2020 and June 30, 2020:

FRBC Discount Window Borrowings:

 

                 September 30,        
2020
                 June 30,        
2020
 
    

 

 

 
         (Dollars in Thousands)  

Ending balance

  $      5,875     $      7,000  

Average balance

       1,262          2,592  

Maximum month-end balance

       5,875          24,800  

Average interest rate

       0.25        0.25

Weighted-average rate at period end

       0.25        0.25

 

4 As of September 30, 2020.

 

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12.

FAIR VALUE MEASUREMENTS

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

 

Level I:   

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

Level II:   

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

Level III:   

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

Assets Measured at Fair Value on a Recurring Basis

Investment Securities Available-for-Sale

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

The following tables present the assets reported on a recurring basis on the Consolidated Balance Sheet at their fair value as of September 30, 2020 and June 30, 2020, by level within the fair value hierarchy. As required by GAAP, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

            September 30, 2020  
                  Level I                         Level II                         Level III                         Total        
            (Dollars in Thousands)  

Assets measured on a recurring basis:

                       

Investment securities – available for sale:

                       

Corporate debt securities

   $          -      $          108,132      $          -      $          108,132  

Foreign debt securities5

        -           29,648           -           29,648  

Commercial paper

        -           2,998           -           2,998  

Obligations of states and political subdivisions

        -           266           -           266  
     

 

 

       

 

 

       

 

 

       

 

 

 
   $          -      $          141,044      $          -      $          141,044  
     

 

 

       

 

 

       

 

 

       

 

 

 

 

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

 

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Table of Contents
            June 30, 2020  
                  Level I                         Level II                         Level III                         Total        
            (Dollars in Thousands)  

Assets measured on a recurring basis:

                       

Investment securities – available for sale:

                       

Corporate securities

   $          -         $ 109,128      $          -      $          109,128  

Foreign debt securities5

        -           32,540           -           32,540  

Commercial paper

        -           5,971           -           5,971  
     

 

 

       

 

 

       

 

 

       

 

 

 
   $          -         $ 147,639      $          -      $          147,639  
     

 

 

       

 

 

       

 

 

       

 

 

 

 

13.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of financial instruments are as follows:

 

            September 30, 2020  
            Carrying
Amount
            Fair
Value
                Level I                     Level II                     Level III      
            (Dollars in Thousands)  

FINANCIAL ASSETS

                             

Cash and cash equivalents

   $          3,811      $          3,811      $          3,811      $          -      $          -  

Certificates of deposit

        1,343           1,343           1,343           -           -  

Investment securities – held to maturity

        3,495           3,613           -           3,613           -  

Mortgage-backed securities – held to maturity:

                             

Agency

        77,393           77,120           -           77,120           -  

Private-label

        544           541           -           -           541  

Net loans receivable

        91,749           98,725           -           -           98,725  

Accrued interest receivable

        709           709           709           -           -  

FHLB stock

        5,923           5,923           5,923           -           -  

Bank owned life insurance

        4,935           4,935           4,935           -           -  

FINANCIAL LIABILITIES

                             

Deposits:

                             

Non-interest bearing deposits

   $          22,765      $          22,765      $          22,765      $          -      $          -  

Interest-earning checking

        24,844           24,844           24,844           -           -  

Savings accounts

        44,560           44,560           44,560           -           -  

Money market accounts

        19,994           19,994           19,994           -           -  

Certificates of deposit

        29,865           29,998           -           -           29,998  

Advance payments by borrowers for taxes and insurance

        909           909           909           -           -  

FHLB advances – fixed rate

        15,000           14,824           -           -           14,824  

FHLB advances – variable rate

        85,000           85,000           85,000           -           -  

FHLB short-term advances

        43,281           43,281           43,281           -           -  

Other short-term advances

        5,875           5,875           5,875           -           -  

Accrued interest payable

        314           314           314           -           -  

 

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

 

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            June 30, 2020  
            Carrying
Amount
            Fair
Value
                Level I                     Level II                     Level III      
            (Dollars in Thousands)  

FINANCIAL ASSETS

                             

Cash and cash equivalents

   $          2,500      $          2,500      $          2,500      $          -      $          -  

Certificates of deposit

        1,840           1,840           1,840           -           -  

Investment securities – held to maturity

        3,495           3,622           -           3,622           -  

Mortgage-backed securities – held to maturity:

                             

Agency

        96,488           96,042           -           96,042           -  

Private-label

        618           607           -           -           607  

Net loans receivable

        91,032           98,700           -           -           98,700  

Accrued interest receivable

        744           744           744           -           -  

FHLB stock

        6,564           6,564           6,564           -           -  

Bank owned life insurance

        4,907           4,907           4,907           -           -  

FINANCIAL LIABILITIES

                             

Deposits:

                             

Non-interest bearing deposits

   $          22,657      $          22,657      $          22,657      $          -      $          -  

Interest-earning checking

        25,075           25,075           25,075           -           -  

Savings accounts

        44,541           44,541           44,541           -           -  

Money market accounts

        21,743           21,743           21,743           -           -  

Certificates of deposit

        35,063           35,237           -           -           35,237  

Advance payments by borrowers for taxes and insurance

        2,256           2,256           2,256           -           -  

FHLB advances – fixed rate

        15,000           14,818           -           -           14,818  

FHLB advances – variable rate

        85,000           85,000           85,000           -           -  

FHLB short-term advances

        59,159           59,159           59,159           -           -  

Other short-term advances

        7,000           7,000           7,000           -           -  

Accrued interest payable

        487           487           487           -           -  

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.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020

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;

 

   

the effects and extent of the coronavirus (COVID-19) pandemic on the global economy, and its impact on the Company’s operations and financial condition, including the granting of various loan payment deferral and fee waivers, the possibility of credit losses in our loan portfolios and increases in our allowance for credit losses as well as possible impairments on the securities we hold;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

GENERAL

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

West View Savings Bank is a Pennsylvania-chartered, FDIC-insured stock savings bank conducting business from six offices in the North Hills suburbs of Pittsburgh. The Savings Bank converted from the mutual to the stock form of ownership in November 1993. The Savings Bank had no subsidiaries at September 30, 2020.

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.

Effects of COVID-19 Pandemic

The Company’s business is dependent upon the willingness and ability of our employees and clients to conduct banking and other financial transactions. The outbreak of the novel coronavirus (COVID-19) pandemic has negatively impacted the global economy, disrupted global supply chains and increased unemployment levels. While the full effects of the pandemic remain unknown, the Company is committed to supporting its customers, employees and communities during this difficult time. The Company has given hardship relief assistance to customers, including the consideration of various loan payment deferral and fee waiver options, and encourages customers to reach out for assistance to support their individual circumstances. The pandemic could result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed, the impact on the global economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize impairments on the securities we hold. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

The Company has responded to the circumstances surrounding the pandemic to support the safety and well-being of the employees, customers and shareholders by enacting the following measures:

 

   

Modified branch business hours Monday through Thursday to close at 4:00 pm (no change), Friday close at 4:00 pm (as opposed to 6:00 pm, and Saturday close at 12:00 pm (no change).

 

   

Monitor federal, state and local COVID-19 websites and adopt guidance as appropriate and feasible.

 

   

Encourage customers to use our various on-line portals (e.g. internet banking, online bill pay service), automated teller machines and night depositories to redirect routine transactions away from our branch staff as much as possible.

 

   

Non-branch banking services (e.g. lending, accounting, check and electronic processing) continue to be offered consistent with COVID-19 guidelines.

 

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FINANCIAL CONDITION

The Company’s assets totaled $332.2 million at September 30, 2020, as compared to $357.1 million at June 30, 2020. The $24.9 million or 7.0% decrease in total assets was primarily due to a $6.6 million decrease in investment securities available-for-sale and a $19.2 million decrease in mortgage-backed securities, which were partially offset by a $1.3 million increase in cash and cash equivalents. The decrease in investment securities available-for-sale was primarily the result of maturities and sales of $19.5 million and $1.0 million, respectively, partially offset by purchases of investment securities totaling $12.9 million. The decrease in mortgage-backed securities was due to repayments of $19.2 million.

The Company’s total liabilities decreased $26.0 million or 8.1% to $294.2 million as of September 30, 2020 from $320.2 million as of June 30, 2020. The decrease in total liabilities was primarily comprised of an $8.4 million or 5.6% decrease in total deposits, a $15.9 million decrease in Federal Home Loan Bank (“FHLB”) short-term advances and a $1.1 million decrease in other short-term borrowings. Additionally, other liabilities decreased $402 thousand to $1.8 million at September 30, 2020 from $2.2 million at June 30, 2020, primarily due to a $318 thousand decrease in accrued income taxes payable and a $20 thousand decrease in the reserve for off-balance sheet loan commitments. The decrease in total deposits was primarily attributable to decreases in money market accounts and certificates of deposit of $1.7 million and $5.2 million, respectively. Management believes that the decrease in money market accounts was primarily due to seasonal withdrawals for the payment of local real estate taxes and the decrease in certificates of deposit was primarily the result of a $4.4 million decrease in brokered deposits. The decrease in FHLB short-term borrowings, other short-term borrowings, and brokered deposits were primarily funded by proceeds received from repayments of investment securities available-for-sale and mortgage-backed securities 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 $1.0 million or 2.8% to $37.9 million as of September 30, 2020, from $36.9 million as of June 30, 2020. The change to stockholders’ equity was primarily attributable to net income of $420 thousand and an increase in accumulated other comprehensive income (loss) of $797 thousand, which was partially offset by cash dividends paid totaling $175 thousand and the purchase of $52 thousand of Treasury shares. The increase in accumulated other comprehensive income was primarily the result of an unrealized gain on the Company’s available-for-sale investment portfolio.

RESULTS OF OPERATIONS

General. WVS reported net income of $420 thousand or $0.24 earnings per share (basic and diluted) for the three months ended September 30, 2020 as compared to $793 thousand or $0.45 per share (basic and diluted) for the same period in 2019. The $373 thousand decrease in net income for the for the three months ended September 30, 2020 was primarily attributable to a $463 thousand decrease in net interest income, a $12 thousand increase in the provision for loan losses and a $33 thousand increase in non-interest expense, which were partially offset by a $134 thousand decrease in income tax expense.

Net Interest Income. The Company’s net interest income decreased by $463 thousand or 25.7% for the three months ended September 30, 2020, when compared to the same period in 2019. The decrease in net interest income is attributable to a $1.3 million decrease in interest and dividend income, which was partially offset by an $859 thousand decrease in interest expense. The decrease in interest and dividend income during the three months ended September 30, 2020 was primarily attributable to lower yields earned on the Company’s investment and mortgage-backed securities, FHLB stock and net loans, when compared to the same period in 2019. The decrease in interest expense during the three months ended September 30, 2020 was primarily attributable to lower market interest rates paid on FHLB advances and time deposits as well as a slightly higher level of average time deposits, when compared to the same period in 2019.

Interest Income. Interest income on net loans receivable decreased $19 thousand or 2.2% for the three months ended September 30, 2020, when compared to the same period in 2019. The decrease for the quarter ended September 30, 2020 was primarily attributable to a 15 basis point decrease in the average portfolio yield, partially offset by a $1.7 million increase in the average balance of net loans receivable, when compared to the same period in 2019. The increase in the average balance of loans outstanding was primarily attributable to increased loan originations and purchases which were in excess of repayments. During fiscal 2020 and into fiscal 2021, the Company enjoyed higher demand for single-family home purchase loans. Substantially all of our loan originations and purchases were fixed-rate with a mix of 15, 20, and 30 year terms.

 

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Interest income on investment securities decreased $644 thousand or 59.6% for the three months ended September 30, 2020, when compared to the same period in 2019. The decrease for the three months ended September 30, 2020 was primarily attributable to a 196 basis point decrease in the weighted-average yield on the available-for-sale portfolio, partially offset by a $9.6 million increase in the average balance of these investment securities when compared to the same period in 2019.

Interest income on mortgage-backed securities decreased $616 thousand or 69.6% for the three months ended September 30, 2020, when compared to the same period in 2019. The decrease for the three months ended September 30, 2020 was primarily attributable to a 210 basis point decrease in the weighted-average yield earned on U.S. Government agency mortgage-backed securities and a $17.3 million decrease in the average balance of these U.S. Government agency mortgage-backed securities, when compared to the same period in 2019. The decrease in the average balances of U.S. Government agency and Private-Label mortgage-backed securities during the three months ended September 30, 2020 was attributable to principal pay-downs of $19.2 million on U.S. Government agency and Private-Label mortgage-backed securities, when compared to the same period in 2019. The $19.2 million in principal paydowns was used in part to reduce the level of FHLB short-term advances and other short-term borrowings outstanding and to decrease brokered certificates of deposit by $4.4 million.

Interest income on bank certificates of deposit decreased $9 thousand for the three months ended September 30, 2020 when compared to the same period in 2019. The decrease for the three months ended September 30, 2020 was attributable to a decrease of $750 thousand in the average balance of certificates of deposit as well as a decrease of 123 basis points in the average yield earned.

Interest income on FHLB stock decreased $33 thousand or 27.0% for the three months ended September 30, 2020 when compared to the same period in 2019. The decrease for the three months ended September 30, 2020 was primarily attributable to a 144 basis point decrease in the weighted-average yield earned as well as a $593 thousand decrease in the average balance of FHLB stock held.

Interest Expense. Interest paid on FHLB short-term advances decreased $268 thousand or 88.7% for the three months ended September 30, 2020, when compared to the same period in 2019. The decrease for the three months ended September 30, 2020 was primarily attributable to a 205 basis point decrease in the weighted-average rate paid on FHLB short-term balances outstanding as well as a $14.9 million decrease in the average balance of FHLB short-term advances outstanding. The decrease in rates paid on FHLB short-term borrowings were consistent with decreases in short-term market interest rates.

Interest paid on FHLB long-term variable rate advances decreased $447 thousand for the three months ended September 30, 2020, when compared to the same period in 2019. The decrease for the three months ended September 30, 2020 was primarily attributable to a 211 basis point decrease in the weighted-average interest rate paid on these variable rate advances.

Interest expense on deposits decreased $146 thousand or 58.4% for the three months ended September 30, 2020, when compared to the same period in 2019. The decrease in interest expense on deposits for the three months ended September 30, 2020 was primarily attributable to a 126 basis point decrease in the weighted-average rate paid on time deposits and was partially offset by an increase of $981 thousand in the average balance of time deposits when compared the same period of the prior year.

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

Provision for loan losses increased $12 thousand for the three months ended September 30, 2020, when compared to the same period in 2019. The increase in the provision for loan losses for the three months ended September 30, 2020 was primarily due to increased reserve factors related to the economic uncertainty as a result of the COVID-19 pandemic, when compared to the same period in 2019. At September 30, 2020, the Company’s total allowance for loan losses amounted to $620 thousand or 0.68% of the Company’s total loan portfolio, as compared to $618 thousand and 0.68% at June 30, 2020. At September 30, 2020 and June 30, 2020, the Company had no non-performing loans.

 

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Non-Interest Income. For the three months ended September 30, 2020, non-interest income increased $1 thousand compared to the same period in 2019. For the quarter ended September 30, 2020, gains on sales of investments increased $25 thousand and a $1 thousand increase in miscellaneous operating income which were offset by a $12 thousand increase in security impairment losses, a $7 thousand decrease in service charges on deposits, a $4 thousand decrease in automated teller machine and debit card fee income and a $2 thousand decrease in earnings on bank owned life insurance.

Non-Interest Expense. Non-interest expense increased $33 thousand or 3.9% for the three months ended September 30, 2020, when compared to the same period in 2019. This increase was primarily due to a $50 thousand increase in federal deposit insurance premium expense, a $13 thousand increase in depreciation expense, and a $7 thousand increase in employee compensation and benefits expenses, which were partially offset by a $37 thousand decrease in the provision for off-balance sheet items relating to lower balances of unfunded mortgage commitments, when compared to the same period of 2019. The $50 thousand increase in federal deposit insurance expense was the result of the absence of Small Bank Assessment Credits applied by the Federal Deposit Insurance Corporation (“FDIC”) beginning in the quarter ended September 30, 2019. The FDIC provided small banks (those with consolidated assets of less than $10 billion) assessment credits after the Deposit Insurance Fund ratio reached, and remained at, 1.38 percent. The Savings Bank had no remaining assessment credits as of September 30, 2020. The increase in depreciation expense was attributable to purchases of fixed assets to upgrade technology or other capital improvements.

Income Tax Expense. Income tax expense decreased $134 thousand for the three months ended September 30, 2020, when compared to the same period in 2019. The decrease for the three months ended September 30, 2020 was primarily due to lower levels of taxable income, when compared to the same period in 2019.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used for operating activities totaled $138 thousand during the three months ended September 30, 2020. Net cash used by operating activities was primarily due to decreases in accrued income taxes, accrued interest payable and earnings on bank owned life insurance of $355 thousand, $173 thousand and $28 thousand, respectively, which were partially offset by Company net income totaling $420 thousand.

Net cash provided by investing activities totaled $27.1 million for the three months ended September 30, 2020. Primary sources of funds from investing activities during the three months ended September 30, 2020 included proceeds from repayments of investment securities of $19.5 million, proceeds from sales of investment securities of $1.0 million, $19.2 million of repayments of mortgage-backed securities and a decrease in loans receivable of $4.6 million. Primary uses of funds for investing activities during the three months ended September 30, 2020 included purchases of investment securities available-for-sale totaling $12.9 million and purchase of loans totaling $5.2 million.

Funds used for financing activities totaled $25.6 million for the three months ended September 30, 2020. Primary uses of funds by financing activities were decreases in FHLB short-term advances of $15.9 million, a $1.1 million decrease in other short-term borrowings, and decreases in transaction accounts and certificates of deposit of $1.8 million and $5.2 million, respectively.

The decrease in transaction accounts was primarily attributable to seasonal withdrawals for the payment of local real estate taxes. The decrease in certificates of deposit at September 30, 2020 was due principally to a $4.4 million decrease in brokered deposits. Management has determined that it currently is maintaining adequate liquidity and continues to match funding sources with lending and investment opportunities.

The Company’s primary sources of funds are deposits, amortization, repayments and maturities of existing loans, mortgage-backed securities and investment securities, funds from operations, and funds obtained through FHLB advances and other borrowings. Certificates of deposit scheduled to mature in one year or less at September 30, 2020 totaled $27.1 million.

Historically, the Company used its sources of funds primarily to meet its ongoing commitments to pay maturing savings certificates and savings withdrawals, fund loan commitments and maintain a substantial portfolio of investment

 

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securities. At September 30, 2020, total approved loan commitments outstanding were $1.7 million. At the same date, commitments under unused lines of credit amounted to $5.1 million and the unadvanced portion of construction loans approximated $2.8 million. The Company has been able to generate sufficient cash through the retail deposit market, its traditional funding source, and through FHLB advances, and other borrowings, to provide the cash utilized in investing activities. The Company’s available-for-sale segment of the investment portfolio totaled $141.0 million at September 30, 2020. In addition, the Company had $1.3 million of certificates of deposit at September 30, 2020. Management believes that the Company currently has adequate liquidity available to respond to liquidity demands.

On October 27, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share, payable on November 19, 2020, to shareholders of record at the close of business on November 9, 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 September 30, 2020, WVS Financial Corp. exceeded all regulatory capital requirements and maintained Common Equity Tier I Capital, Tier I, and total risk-based capital equal to $37.7 million or 19.53%, $37.7 million or 19.53%, and $38.4 million or 19.86%, respectively, of total risk-weighted assets, and Tier I leverage capital of $37.7 million or 10.87% 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 non-performing assets at September 30, 2020. 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. The loan was not delinquent at September 30, 2019 or September 30, 2020.

 

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ASSET AND LIABILITY MANAGEMENT

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

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

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

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

During the fiscal years 2013-2020 and into fiscal year 2021, intermediate and long-term market interest rates fluctuated considerably. Many central banks, including the Federal Reserve, continued above normal levels of monetary accommodation including quantitative easing and targeted asset purchase programs. The desired outcomes of these programs are to stimulate aggregate demand, reduce high levels of unemployment and to further lower market interest rates.

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

 

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

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

 

     September 30,     June 30,  
     2020               2020                         2019            
     (Dollars in Thousands)  

Interest-earning assets maturing or repricing within one year

         $248,744         $289,076         $282,429  

Interest-bearing liabilities maturing or repricing within one year

     194,894       218,272       214,916  
  

 

 

   

 

 

   

 

 

 

Interest sensitivity gap

         $  53,850         $  70,804         $  67,513  
  

 

 

   

 

 

   

 

 

 

Interest sensitivity gap as a percentage of total assets

     16.21     19.83     18.97

Ratio of assets to liabilities maturing or repricing within one year

     127.63     132.44     131.41

 

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The following table illustrates the Company’s estimated stressed cumulative repricing gap – the difference between the amount of interest-earning assets and interest-bearing liabilities expected to reprice at a given point in time – at September 30, 2020. 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)

   $ 47,433     $ 45,667     $ 47,177     $ 50,369     $ 52,365     $ 57,133     $ 29,571  

% of Total
Assets

     14.3     13.7     14.2     15.2     15.8     17.2     8.9

Base Case Up 100 bp

 

           

Cumulative Gap ($’s)

   $ 48,294     $ 48,439     $ 52,028     $ 57,777     $ 60,789     $ 65,199     $ 29,571  

% of Total
Assets

     14.7     14.6     15.7     17.4     18.3     19.6     8.9

Base Case No Change

 

         

Cumulative Gap ($’s)

   $ 49,509     $ 49,506     $ 53,849     $ 60,417     $ 63,580     $ 67,254     $ 29,571  

% of Total
Assets

     14.9     14.9     16.2     18.2     19.1     20.2     8.9

Base Case Down 100 bp

 

           

Cumulative Gap ($’s)

   $ 49,963     $ 50,431     $ 55,237     $ 62,315     $ 65,562     $ 68,793     $ 29,571  

% of Total
Assets

     15.0     15.2     16.6     18.8     19.7     20.7     8.9

Base Case Down 200 bp

 

           

Cumulative Gap ($’s)

   $ 50,043     $ 50,486     $ 55,480     $ 62,814     $ 66,242     $ 69,388     $ 29,571  

% of Total
Assets

     15.1     15.2     16.7     18.9     19.9     20.9     8.9

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

 

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The following table presents the simulated impact of a 100 and 200 basis point upward or downward (parallel) shift in market interest rates on net interest income, return on average equity, return on average assets and the market value of portfolio equity at September 30, 2020. This analysis was done assuming that the interest-earning assets will average approximately $321 million and $321 million over a projected twelve and twenty-four month period, respectively, for the estimated impact on change in net interest income, return on average equity and return on average assets. The estimated changes in market value of equity were calculated using balance sheet levels at September 30, 2020. Actual future results could differ materially from our estimates primarily due to unknown future interest rate changes and the level of prepayments on our investment and loan portfolios and future FDIC regular and special assessments.

Analysis of Sensitivity to Changes in Market Interest Rates

 

     Twelve Month Forward Modeled Change in Market Interest Rates  
     September 30, 2021     September 30, 2022  
Estimated impact on:       -200           -100               0              +100           +200               -200               -100               0           +100           +200     

Change in net interest income

     -17.5     -12.2     -       6.6     13.9     -36.1     -25.5     -       11.6     22.9

Return on average equity

     1.89     2.44     3.72     4.41     5.16     -0.16     0.96     3.55     4.68     5.75

Return on average assets

     0.22     0.28     0.43     0.51     0.60     -0.02     0.11     0.42     0.55     0.69

Market value of equity (in thousands)

   $ 44,257     $ 40,993     $ 41,558     $ 43,620     $ 45,436            

The table below provides information about the Company’s anticipated transactions comprised of firm loan commitments and other commitments, including undisbursed letters and lines of credit, at September 30, 2020. The Company used no derivative financial instruments to hedge such anticipated transactions as of September 30, 2020.

 

Anticipated Transactions  

 

 
     (Dollars in Thousands)  

Undisbursed construction and development loans

             $ 2,767  

Undisbursed lines of credit

     5,117  

Loan origination commitments

     1,651  
  

 

 

 
             $   9,535  
  

 

 

 

 

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In the ordinary course of its construction lending business, the Savings Bank enters into performance standby letters of credit. Typically, the standby letters of credit are issued on behalf of a builder to a third party to ensure the timely completion of a certain aspect of a construction project or land development. At September 30, 2020, the Savings Bank had no performance standby letters of credit outstanding.    In the event that an obligor is unable to perform its obligations as specified in the applicable letter of credit agreement, the Savings Bank would be obligated to disburse funds up to the amount specified in the letter of credit agreement. The Savings Bank’s policy is to maintain adequate collateral that could be liquidated to fund such contingent obligations.

ITEM 4. CONTROLS AND PROCEDURES

As of September 30, 2020, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Accounting Officer, on the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Accounting Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2020.

Disclosure controls and pr