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Exhibit 13

 

LOGO

FINANCIAL

CORP.

- THE HOLDING COMPANY OF WEST VIEW SAVINGS BANK-

“Over 100 Years of Quality Banking”

2021

ANNUAL REPORT


TABLE OF CONTENTS

 

    

Page

Number

 

Shareholders’ Letter

     1  

Selected Consolidated Financial and Other Data

     2  

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

     4  

Report of Independent Registered Public Accounting Firm

     21  

Consolidated Balance Sheet

     24  

Consolidated Statement of Income

     25  

Consolidated Statement of Comprehensive Income

     26  

Consolidated Statement of Changes in Stockholders’ Equity

     27  

Consolidated Statement of Cash Flows

     28  

Notes to Consolidated Financial Statements

     29  

Common Stock Market Price and Dividend Information

     76  

Corporate Information

     77  


LOGO    (412) 364-1911

-THE HOLDING COMPANY OF WEST VIEW SAVINGS BANK-

To Our Shareholders:

Fiscal 2021 was a year of turbulence – economically, politically and socially. Economically, the Federal Reserve cut interest rates to near zero and increased purchases of U.S. Government bonds and mortgage-backed securities by about $120 billion per month in order to increase financial liquidity and to shore up the financial markets. The U.S. government also massively increased fiscal spending, and as a result the federal deficit, to develop and distribute Covid-19 vaccines while creating new stimulus programs to support businesses and families during the Covid-19 pandemic. As we ended fiscal 2021, Covid-19 vaccines were widely available, state and government lockdowns of businesses and schools appeared to be behind us and business and consumer outlooks began to improve. However, as we write this letter, a new Covid-19 variant – Delta – is causing businesses and consumers to temper their outlooks for at least the near term.

Our Company faced, and met head-on, many new and evolving challenges as we managed through the pandemic. Government restrictions significantly hampered our construction lending business because construction sites were essentially shut down. Restrictions placed upon real estate agents to show homes, a limited supply of existing homes available for sale and rising prices for existing and new homes adversely impacted our loan originations and purchases. All portfolio lenders faced (at least) one perplexing question: would a loan or investment made during a pandemic – an unprecedented time of rising unemployment – be repaid?

Our Company’s Board of Directors, management and employees embraced the challenges presented by the pandemic. Lobby hours and staff schedules needed to be reworked. Loan closings took longer because of delays in receiving appraisals and closing documents. Work at home regimens adopted by our third-party partners also lengthened the loan closing process. We learned early on that our previous investments in technology ensured that our customers had access to their financial information without having to come into a branch lobby or department. We saw a notable increase in our mobile, on-line banking and internet bill paying platforms. Our employees performed extremely well in the face of daily challenges and uncertainties. Customers responded in-kind because they knew our employees were doing their very best every day.

As expected, the Company’s net income declined during fiscal 2021 for two main reasons. First the adverse impact of near zero interest rates on net interest income – especially on the Company’s floating rate investment and mortgage-backed securities portfolios. And second, a modest but necessary increase in operating expenses due to additional pandemic related costs for employee compensation and recruitment, office cleaning and hygiene and technology support. However, the Board was able to maintain the current dividend of $0.40 per share and we currently plan to do so in fiscal 2022.

Asset quality continued to be pristine. The Company had no loan charge-offs or associated write-downs during fiscal 2021. We were able to work with customers experiencing declines in income associated with the pandemic to keep their loan payments affordable and on track to be caught up as soon as possible. We are pleased to report, that all our Covid-19 loan deferrals, which totaled $5.8 million or 6% of loans outstanding at June 30, 2020 were entirely brought current by June 30, 2021. At June 30, 2021, the Company had no delinquent loans nor have we had any loan charge offs in more than 8 years. Our capital levels, including the allowance for loan losses, continue to grow to support the business and are consistent with West View Savings Bank being a well-capitalized bank.

We would also like to especially recognize four employees who have retired or relocated after many years of service. Linda Butia - Vice President and Chief Accounting Officer, Richard Eichner – Director Retail Lending, Patricia Opacic – Assistant Corporate Secretary and Faith Fisher – Loan Processor. Thank you for over 100 years (combined) of dedicated service.

 

LOGO     LOGO
David J. Bursic     John A. Howard, Jr.
President and Chief Executive Officer     Chairman of the Board of Directors

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

 

1


FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED

FINANCIAL AND OTHER DATA

 

     As of or For the Year Ended June 30,  
     2021     2020     2019     2018     2017  
     (Dollars in Thousands, except per share data)  

Selected Financial Data:

          

Total assets

   $ 346,078     $ 357,101     $ 355,818     $ 352,288     $ 351,609  

Net loans receivable

     80,684       91,032       90,588       84,675       77,455  

Mortgage-backed securities

     82,459       97,106       108,331       115,857       129,321  

Investment securities

     151,577       147,639       132,780       128,811       117,127  

Deposit accounts

     157,167       151,335       146,435       145,023       145,289  

FHLB advances – short-term

     113,093       59,159       70,828       171,403       155,799  

FHLB advances – long-term fixed

     10,000       15,000       15,000       —         10,000  

FHLB advances – long-term variable

     25,000       85,000       85,000       —         6,109  

Stockholders’ equity

     38,389       36,913       36,049       34,017       33,043  

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

     —         —         225       235       246  

Selected Operating Data:

          

Interest income

   $ 5,754     $ 10,485     $ 12,054     $ 9,670     $ 7,646  

Interest expense

     891       3,854       4,872       3,124       1,854  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     4,863       6,631       7,182       6,546       5,792  

Provision for loan losses

     (53     70       80       50       58  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     4,916       6,561       7,102       6,496       5,734  

Non-interest income

     475       362       415       470       490  

Non-interest expense

     3,650       3,563       3,790       3,713       3,739  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     1,741       3,360       3,727       3,253       2,485  

Income tax expense

     445       870       932       1,128       848  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,296     $ 2,490     $ 2,795     $ 2,125     $ 1,637  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Information:

          

Basic earnings

   $ 0.74     $ 1.41     $ 1.57     $ 1.16     $ 0.87  

Diluted earnings

   $ 0.74     $ 1.41     $ 1.57     $ 1.16     $ 0.87  

Dividends per share

   $ 0.40     $ 0.40     $ 0.44     $ 0.32     $ 0.24  

Dividend payout ratio

     54.05     28.37     28.03     27.59     27.59

Book value per share at period end:

          

Common Equity

   $ 20.37     $ 19.36     $ 18.55     $ 17.27     $ 16.45  

Tier I Equity

   $ 20.11     $ 19.65     $ 18.54     $ 17.37     $ 16.54  

Average shares outstanding:

          

Basic

     1,748,592       1,768,201       1,780,527       1,826,893       1,873,790  

Diluted

     1,748,592       1,768,201       1,780,581       1,827,260       1,873,790  

 

2


FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED

FINANCIAL AND OTHER DATA

 

     As of or For the Year Ended June 30,  
     2021     2020     2019     2018     2017  

Selected Operating Ratios(2):

  

Average yield earned on interest- earning assets(3)

     1.82     3.00     3.53     2.81     2.29

Average rate paid on interest-bearing liabilities

     0.34       1.29       1.68       1.05       0.65  

Average interest rate spread(4)

     1.48       1.71       1.85       1.76       1.64  

Net interest margin(4)

     1.54       1.90       2.10       1.90       1.73  

Ratio of interest-earning assets to interest-bearing liabilities

     121.91       117.40       117.43       115.89       116.28  

Non-interest expense as a percent of average assets

     1.12       0.99       1.08       1.05       1.09  

Return on average assets

     0.40       0.69       0.80       0.60       0.48  

Return on average equity

     3.40       6.90       8.14       6.31       4.94  

Ratio of average equity to average assets

     11.71       10.06       9.80       9.66       9.65  

Full-service offices at end of period

     5       5       5       5       5  

Asset Quality Ratios(2):

          

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

     0.00     0.00     0.25     0.28     0.32

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

     0.00       0.00       0.06       0.07       0.07  

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

     0.00       0.00       0.06       0.07       0.07  

Allowance for loan losses as a percent of total loans receivable

     0.70       0.68       0.60       0.55       0.54  

Allowance for loan losses as a percent of non-performing loans(5)

     NMF       NMF       243.56       199.15       169.92  

Charge-offs to average loans receivable outstanding during the period

     0.00       0.00       0.00       0.00       0.00  

Capital Ratios(2):

          

Common Equity Tier 1 risk-based capital ratio

     18.76     18.55     19.07     18.18     19.40

Tier 1 risk-based capital ratio

     18.76       18.55       19.07       18.18       19.40  

Total risk-based capital ratio

     19.06       18.88       19.38       18.45       19.67  

Tier 1 leverage capital ratio

     11.71       10.16       10.20       9.65       9.53  

 

(1)

Non-performing assets consist of non-performing loans and real estate owned (“REO”). Non-performing loans consist of non-accrual loans and accruing loans greater than 90 days delinquent, while REO consists of real estate acquired through foreclosure and real estate acquired by acceptance of a deed in lieu of foreclosure. Potential problem loans include loans where management has some doubt as to the ability of the borrower to comply with present loan repayment terms.

(2)

Consolidated asset quality ratios and capital ratios are end of period ratios, except for charge-offs to average net loans. With the exception of end of period ratios, all ratios are based on average monthly balances during the indicated periods.

(3)

Interest and yields on tax-exempt loans and securities (tax-exempt for federal income tax purposes) are shown on a fully taxable equivalent basis.

(4)

Interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities, and net interest margin represents net interest income as a percent of average interest-earning assets.

(5)

NMF – No meaningful figure due to no non-performing loans.

 

3


WVS FINANCIAL CORP. AND SUBSIDIARY

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

FORWARD LOOKING STATEMENTS

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

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

 

   

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

 

   

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

 

   

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 bank holding companies and their subsidiaries could alter our business environment or affect our operations;

 

   

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

 

   

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

 

   

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

 

4


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

GENERAL

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

West View Savings Bank is a Pennsylvania-chartered, FDIC-insured stock savings bank conducting business from six offices in the North Hills suburbs of Pittsburgh. The Savings Bank converted from the mutual to the stock form of ownership in November 1993. The Savings Bank had no subsidiaries at June 30, 2021.

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 and equipment 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 persistence 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 were to close once again, 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:

 

   

Periodically restricted lobby traffic at all branch locations to essential transactions (e.g. safe deposit box access, signing of legal documents, etc.).

   

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). Business hours may change at any time depending upon COVID-19 conditions and government guidance.

   

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.

 

5


CHANGES IN FINANCIAL CONDITION

 

     Condensed Balance Sheet  
     June 30,      Change  
     2021      2020      Dollars      Percentage  
    

(Dollars in Thousands)

 

Cash equivalents

   $ 2,551      $ 2,500      $ 51        2.04

Certificates of deposit

     350        1,840        (1,490      (80.98

Investments (1)

     255,569        254,804        765        0.30  

Net loans receivable

     80,684        91,032        (10,348      (11.37

Total assets

     346,078        357,101        (11,023      (3.09

Deposits

     157,167        151,335        5,832        3.85  

Borrowed funds

     148,093        166,159        (18,066      (10.87

Total liabilities

     307,689        320,188        (12,499      (3.90

Stockholders’ equity

     38,389        36,913        1,476        4.00  

 

(1)

Includes investment securities, mortgage-backed securities and Federal Home Loan Bank (FHLB) stock.

 

6


Cash Equivalents. Cash on hand and due from banks, and interest-earning demand deposits, represent total cash and cash equivalents. Cash and cash equivalents increased $51 thousand or 2.04% to $2.6 million at June 30, 2021 from $2.5 million at June 30, 2020. Changes in cash and cash equivalents are influenced by the timing of customer transaction account deposits, the redeployment of funds into other earning assets such as investments or loans, and the repayment of Company borrowings.

Certificates of Deposit. The level of certificates of deposit decreased $1.5 million or 80.98% to $350 thousand at June 30, 2021 from $1.8 million at June 30, 2020. Due to low market interest rates in this segment, the Company used cash proceeds from maturing certificates of deposit to repay borrowings.

Investments. The Company’s investment portfolio is comprised of corporate bonds, foreign debt securities, commercial paper, obligations of state and political subdivisions, Federal Home Loan Bank (“FHLB”) stock and mortgaged-backed securities issued by U.S. Government Agencies and private-issuers. See Notes 4 and 5 to the Consolidated Financial Statements for additional information. The Company’s investment portfolio increased $765 thousand or 0.30% to $255.6 million at June 30, 2021 from $254.8 million at June 30, 2020.

Investment securities other than mortgage-backed securities, increased $15.9 million or 10.54% to $167.1 million at June 30, 2021 from $151.1 million at June 30, 2020. This increase was due to the following purchases of securities, all of which were investment-grade: $40.8 million of corporate bonds, $11.0 million of U.S. dollar denominated foreign bonds, $34.5 million of commercial paper, $16.0 million of U.S. Government Agency Bonds and $800 thousand of municipal bonds. These purchases were partially offset by $3.3 million in sales of corporate bonds, $3.1 million in sales of foreign bonds and early issuer redemptions and maturities as follows: $41.3 million of corporate bonds, $4.0 million of U.S. dollar denominated foreign bonds, $35.5 million in proceeds from maturities of commercial paper and $750 thousand of municipal bonds. Our investment in FHLB stock decreased $520 thousand or 7.92% to $6.0 million at June 30, 2021 from $6.6 million at June 30, 2020 due to lower levels of FHLB advances. Investment purchases were primarily funded with cash flows from our mortgage-backed securities portfolio. See “Quantitative and Qualitative Disclosures about Market Risk”.

Mortgage-backed securities decreased $14.6 million or 15.08% to $82.5 million at June 30, 2021 from $97.1 million at June 30, 2020. This decrease was due primarily to cash repayments on U.S. Government Agency floating rate mortgage-backed securities totaling $63.9 million and $221 thousand on the Company’s private-label floating-rate mortgage-backed securities portfolio, partially offset by $49.4 million in U.S. Government Agency purchases. Net cash flows from the mortgage-backed securities segment were used primarily to fund investment purchases.

Net Loans Receivable. Net loans receivable decreased $10.3 million or 11.37% to $80.7 million at June 30, 2021, from $91.0 million at June 30, 2020. The decrease in net loans was primarily attributable to a $10.7 million decrease in single-family real estate loans, a $286 thousand decrease in multi-family dwelling loans, a $193 thousand decrease in commercial real estate loans and an $11 thousand decrease in commercial loans not secured by real estate, partially offset by increases of $744 thousand in single family construction loans, $220 thousand in land acquisition and development loans and $221 thousand in home equity lines of credit. The decrease in the average balance of loans outstanding during the fiscal year ended June 30, 2021, was primarily attributable to loan repayments in excess of originations and purchases, when compared to fiscal 2020. The Company actively pursues 15, 20, and 30 year fixed-rate single-family residential real estate loans. The Company also makes available residential mortgage loans with interest rates which adjust pursuant to a designated index, although customer acceptance has been somewhat limited in the Savings Bank’s market area. We expect that the housing market will continue to modestly grow throughout fiscal 2022. The Company will continue to selectively offer commercial real estate, land acquisition and development, and shorter-term construction loans (primarily on residential properties), and commercial loans on business assets to increase interest income while managing credit and interest rate risk. The Company also offers higher yielding multi-family loans to existing, and seasoned prospective, customers. During fiscal 2021, the Company retained all of its loan originations. The Company also partners with the FHLB’s Mortgage Partnership Finance® (“MPF”) Program to make purchase money and refinancing mortgages available to the public. These loans are originated through the Company who then assigns the loans to the MPF Program. This MPF Program relationship allows the Company to earn loan origination fee income while avoiding the interest rate risk of retaining long-term fixed rate mortgages with low interest rates on the Company’s balance sheet. Residential loan originations decreased slightly in fiscal 2021, although we expect an increase into fiscal 2022.

 

7


Deposits. Total deposits increased approximately $5.8 million or 3.85% during the year ended June 30, 2021. Checking account deposits increased $4.6 million or 9.64% during the year ended June 30, 2021. Savings and money market accounts increased by $5.5 million or 12.39% and $1.3 million or 5.76%, respectively. The increase in checking, money market and savings accounts were likely attributable to customer preferences for liquid investments and government payments due to the COVID-19 pandemic. Advance payments by borrowers for taxes and insurance decreased $206 thousand or 9.13% as a result of the decrease in single family real estate loans during fiscal 2021 compared to fiscal 2020. These increases were partially offset by a decrease in certificates of deposit of $5.3 million or 15.21%, primarily due to lower market rates paid on certificates of deposit in comparison to savings and money market accounts and a decrease in wholesale CDs issued. At June 30, 2021, the Savings Bank had $8.8 million in brokered certificates of deposits as compared to $9.9 million at June 30, 2020. In general, brokered deposits are considered more sensitive to changes in market interest rates and may be more likely to leave a bank than core deposits. See Note 13 to the Consolidated Financial Statements and “Quantitative and Qualitative Disclosures on Market Risk.”

Borrowed Funds. Borrowed funds decreased $18.1 million or 10.87% to $148.1 million during fiscal 2021. The Company’s borrowed funds are comprised of FHLB short and long-term advances and other short-term borrowings.

At June 30, 2021, the Company had one FHLB long-term variable rate advance totaling $25.0 million, with a weighted-average interest rate of 0.26%, two FHLB long-term fixed rate advances totaling $10.0 million with a weighted-average interest rate of 3.07%, and FHLB short-term advances totaling $113.1 million with a weighted-average rate of 0.28%. At June 30, 2020, the Company’s borrowed funds consisted of four FHLB long-term variable rate advances totaling $85.0 million and three FHLB fixed rate advances totaling $15 million with weighted-average rates of 1.00% and 3.03%, respectively. In addition, FHLB short-term advances totaled $59.2 million with a weighted-average rate of 0.39%. See Notes 13 and 14 to the Consolidated Financial Statements.

The Company may also use a variety of short-term borrowing sources, such as FRB discount window borrowings, as part of its asset/liability management program. The actual short-term funding source used, at any given point in time, depends upon factors such as cost, terms, maturity terms and general market conditions.

Stockholders’ Equity. Total stockholders’ equity increased to $38.4 million at June 30, 2021, compared to $36.9 million at June 30, 2020. The increase in stockholders’ equity was primarily attributable to Company net income of $1.3 million and other comprehensive income totaling $1.1 million, which were partially offset by $700 thousand of cash dividends paid on the Company’s common stock and $344 thousand paid for the purchase of Treasury stock. See the Consolidated Statement of Comprehensive Income and Note 6 to the Consolidated Financial Statements for a discussion of the components of other comprehensive income. Book value per share (Tier 1 equity basis) increased from $19.65 at June 30, 2020 to $20.11 at June 30, 2021. On a common equity basis, book value per share increased from $19.36 at June 30, 2020 to $20.37 at June 30, 2021. The Company was able to maintain strong capital ratios during fiscal 2021. Our Tier 1 leverage ratio was 11.71% and total risk-based capital ratio was 19.06% at June 30, 2021, as compared to 10.16% and 18.88%, respectively, at June 30, 2020.

 

8


RESULTS OF OPERATIONS

 

     Condensed Statements of Income  
     Year Ended            Year Ended             Year Ended  
     June 30, 2021     Change      June 30, 2020      Change      June 30, 2019  
     (Dollars in Thousands)  

Interest income

   $ 5,754     $ (4,731)      $ 10,485      $ (1,569)      $ 12,054  
           -45.12%             -13.02%         

Interest expense

   $ 891     $ (2,963)      $ 3,854      $ (1,018)      $ 4,872  
           -76.88%             -20.89%         

Net interest income

   $ 4,863     $ (1,768)      $ 6,631      $ (551)      $ 7,182  
           -26.66%             -7.67%         

Provision for loan losses

   $ (53   $ (123)      $ 70      $ (10)      $ 80  
           -175.71%             -12.50%         

Non-interest income

   $ 475     $ 113      $ 362      $ (53)      $ 415  
           31.22%             -12.77%         

Non-interest expense

   $ 3,650     $ 87      $ 3,563      $ (227)      $ 3,790  
           2.44%             -5.99%         

Income tax expense

   $ 445     $ (425)      $ 870      $ (62)      $ 932  
           -48.85%             -6.65%         

Net income

   $ 1,296     $ (1,194)      $ 2,490      $ (305)      $ 2,795  
           -47.95%             -10.91%         

General. The Company reported net income of $1.3 million, $2.5 million and $2.8 million for the fiscal years ended June 30, 2021, 2020 and 2019, respectively. The $1.2 million or 47.95% decrease in net income during fiscal 2021 was primarily attributable to a $1.8 million decrease in net interest income and an increase of $87 thousand in non-interest expense, which were partially offset by a $123 thousand decrease in the provision for loan losses, a $113 thousand increase in non-interest income and a $425 thousand decrease in income tax expense. The $305 thousand or 10.91% decrease in net income during fiscal 2020 was primarily attributable to a $551 thousand decrease in net interest income and a $53 thousand decrease in non-interest income and a $62 thousand decrease in income tax expense, which were partially offset by a $10 thousand decrease in the provision for loan losses and a decrease of $227 thousand in non-interest expense. Earnings per share totaled $0.74 (basic and diluted) for fiscal 2021 as compared to $1.41 and $1.57 for fiscal 2020 and 2019, respectively.

 

9


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

 

     For the Years Ended June 30,  
     2021     2020     2019  
    

Average

Balance

     Interest     

Average

Yield/Rate

   

Average

Balance

     Interest     

Average

Yield/Rate

   

Average

Balance

     Interest     

Average

Yield/Rate

 
  

 

 

 
            (Dollars in Thousands)  

Interest-earning assets:

 

                  

Net loans receivable(1),(2)

   $ 89,091      $ 3,148        3.53   $ 90,958      $ 3,460        3.80   $ 87,256      $ 3,342        3.83

Mortgage-backed securities

     70,051        782        1.12       104,005        2,714        2.61       110,561        3,745        3.39  

Investments - taxable

     151,501        1,582        1.04       145,196        3,799        2.62       133,817        4,428        3.31  

Investments - tax-free(2)

     —          —          —         334        4        1.45       1,555        19        1.46  

FHLB stock

     3,919        227        5.79       6,618        458        6.92       6,562        486        7.41  

Interest-bearing deposits

     174        —          —         238        3        1.26       561        12        2.14  

Certificates of deposits

     888        15        1.69       2,099        47        2.24       894        22        2.46  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     315,624        5,754        1.82     349,448        10,485        3.00     341,206        12,054        3.53
     

 

 

         

 

 

         

 

 

    

Non-interest-earning assets

     9,652             9,418             9,227        
  

 

 

         

 

 

         

 

 

       

Total assets

   $ 325,276           $ 358,866           $ 350,433        
  

 

 

         

 

 

         

 

 

       

Interest-bearing liabilities:

                        

Interest-earning checking accounts

   $ 44,870        14        0.03   $ 23,042        4        0.02   $ 23,718        4        0.02

Savings accounts

     46,331        23        0.05       43,089        21        0.05       43,987        22        0.05  

Money market accounts

     22,154        18        0.08       20,379        19        0.09       20,223        18        0.09  

Savings certificates

     56,137        243        0.43       48,824        815        1.67       44,970        812        1.81  

Advance payments by borrowers for taxes and insurance

     1,559        —          —         1,586        —          —         1,555        —          —    

FHLB long-term advances

     52,667        473        0.90       100,000        2,076        2.08       74,548        2,020        2.71  

FHLB short-term advances

     34,715        119        0.34       58,146        913        1.57       81,556        1,996        2.45  

Other short-term borrowings

     463        1        0.22       2,592        6        0.25       —          —          —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     258,896        891        0.34     297,658        3,854        1.29     290,557        4,872        1.68
     

 

 

         

 

 

         

 

 

    

Non-interest-bearing accounts

     25,883             22,497             23,301        
  

 

 

         

 

 

         

 

 

       

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

     284,779             320,155             313,858        

Non-interest-bearing liabilities

     2,417             2,625             2,216        
  

 

 

         

 

 

         

 

 

       

Total liabilities

     287,196             322,780             316,074        

Equity

     38,080             36,086             34,359        
  

 

 

         

 

 

         

 

 

       

Total liabilities and equity

   $ 325,276           $ 358,866           $ 350,433        
  

 

 

         

 

 

         

 

 

       

Net interest income

      $ 4,863           $ 6,631           $ 7,182     
     

 

 

         

 

 

         

 

 

    

Interest rate spread

           1.48           1.71           1.85
        

 

 

         

 

 

         

 

 

 

Net yield on interest-earning assets(3)

           1.54           1.90           2.10
        

 

 

         

 

 

         

 

 

 

Ratio of interest-earning assets to

interest-bearing liabilities

           121.91           117.40           117.43
        

 

 

         

 

 

         

 

 

 

 

(1)

Includes non-accrual and tax-exempt loans.

(2)

Yields on tax-exempt loans and tax-exempt securities (tax-exempt for federal income tax purposes) are shown on a fully taxable equivalent basis utilizing a calculation that reflects the tax-exempt coupon, and a 20% interest expense disallowance and federal tax rates of 21% for fiscal 2021, 2020 and 2019.

(3)

Net interest income divided by average interest-earning assets.

 

10


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

 

     Year Ended June 30,  
     2021 vs. 2020     2020 vs. 2019  
     Increase (Decrease)     Total     Increase (Decrease)     Total  
     Due to     Increase     Due to     Increase  
     Volume     Rate     (Decrease)     Volume     Rate     (Decrease)  
     (Dollars in Thousands)  

Interest-earning assets:

            

Net loans receivable

   $ (66   $ (246)     $ (312   $ 144     $ (26   $ 118  

Mortgage-backed securities

     (382     (1,550     (1,932     (163     (868     (1,031

Investments

     33       (2,254     (2,221     290       (934     (644

FHLB stock

     (156     (75     (231     4       (32     (28

Interest-bearing deposits

     —         (3     (3     (5     (3     (8

Certificates of deposit

     (22     (10     (32     26       (2     24  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

   $ (593   $ (4,138)     $ (4,731)     $ 296     $ (1,865)     $ (1,569)  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

        

Interest-earning checking accounts

   $ 8     $ 2     $ 10     $ —       $ —       $ —    

Savings accounts

     2       —         2       (1     —         (1

Money market accounts

     1       (2     (1     1       —         1  

Savings certificates

     34       (606     (572     66       (63     3  

Advance payments by borrowers for taxes and insurance

     —         —         —         —         —         —    

FHLB long-term borrowings

     (253     (1,350     (1,603     533       (477     56  

FHLB short-term borrowings

     (79     (715     (794     (365     (718     (1,083

Other short-term borrowings

     (5     —         (5     6       —         6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

   $ (292   $ (2,671   $ (2,963   $ 240     $ (1,258   $ (1,018
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ (301   $ (1,467   $ (1,768   $ 56     $ (607   $ (551
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income. Net interest income is determined by the Company’s interest rate spread (i.e. the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income decreased by $1.8 million or 26.66% in fiscal 2021 and decreased by $551 thousand or 7.67% in fiscal 2020. The decrease in fiscal 2021 was the result of a $4.7 million or 45.12% decrease in interest and dividend income, which was partially offset by a $3.0 million decrease in interest expense. The decrease in fiscal 2020 was the result of a $1.6 million or 13.02% decrease in interest and dividend income, which was partially offset by a $1.0 million decrease in interest expense. Fiscal year 2021 was impacted by lower average yields on the Company’s floating rate investment and mortgage-backed securities, FHLB stock and loan portfolio and lower average balances of mortgage-backed securities, loans outstanding and FHLB stock, while fiscal year 2020 was impacted by lower average yields on the Company’s floating rate investment and mortgage-backed securities.

Interest Income. Total interest income decreased by $4.7 million or 45.12% during fiscal 2021 and $1.6 million or 13.02% during fiscal 2020. The fiscal 2021 decrease was primarily attributable to lower average yields on the Company’s floating rate investment and mortgage-backed securities, FHLB stock and loan portfolio and lower average balances of mortgage-backed securities, loans outstanding and FHLB stock. The fiscal 2020 decrease was primarily attributable to lower average yields on the Company’s floating rate investment and mortgage-backed securities, FHLB stock and loan portfolio when compared to the same period of 2019. Management continuously evaluates market opportunities, and associated borrowing costs, to contribute to net interest income. The Company believes that it has sufficient capital to grow its balance sheet as opportunities become available.

Interest income on net loans receivable decreased $312 thousand or 9.02% during fiscal 2021 and increased $118 thousand or 3.53% during fiscal 2020. The decrease in fiscal 2021 was primarily the result of a $1.9 million decrease in the average balances of net loans outstanding, as well as a 27 basis point decrease in the weighted-average yield on the Company’s loan portfolio. During fiscal 2020, the increase was primarily

 

11


attributable to a $3.7 million increase in the average balance of net loans outstanding, which more than offset a 3 basis point decrease in the weighted-average yield on the Company’s loan portfolio. During fiscal 2020 and 2019, the Company also enjoyed higher levels of single-family home purchase loans. Substantially all of our loan originations and purchases were fixed-rate with a mix of 15, 20 and 30 year terms.

Interest income on investment securities decreased $2.2 million or 58.40% during fiscal 2021 and $644 thousand or 14.48% during fiscal 2020. During fiscal 2021, the decrease was primarily due to a 157 basis point decrease in the average yield on these investments, partially offset by an increase of $6.0 million in the average balance of these investments. The decrease in 2020 was primarily attributable to a 68 basis point decrease in the weighted-average yield on these investments, partially offset by an increase of $10.2 million in the average balance of these investments when compared to the same period of 2019. The increase in the average balance of investments outstanding during both 2021 and 2020 was attributable to the redeployment of mortgage-backed securities cash flows into corporate bonds. The changes in weighted-average yields in 2021 and 2020 were principally attributable to changes in the three-month dollar London Interbank Offered Rates (“LIBOR”) during these periods.

Interest income on mortgage-backed securities decreased by $1.9 million or 71.19% during fiscal 2021, compared to fiscal 2020 and $1.0 million or 27.53% in fiscal 2020 compared to fiscal 2019. The decrease in fiscal 2021 was primarily due to a 149 basis point decrease in the weighted-average yield earned on U.S. Government Agency mortgage-backed securities as well as $33.7 million decrease in the average balance of these securities. The decrease for fiscal 2020 was primarily attributable to a 78 basis point decrease in the weighted average yield earned on U.S. Government Agency mortgage-backed securities as well as a $6.6 million decline in the average balance of U.S. Government Agency mortgage-backed securities. During fiscal 2021, 2020 and 2019, the U.S. Government Agency mortgage-backed securities sector offered relatively unattractive investment opportunities. The Company began to reinvest cash repayments of principal into investment securities and also increased its net loan portfolio. The average balances associated with the Company’s private label mortgage-backed securities (“PLMBS”) declined $275 thousand and $105 thousand during fiscal 2021 and fiscal 2020, respectively. The Company continues to reduce its exposure to private-label mortgage-backed securities due to the substandard investment performance associated with this segment. The decrease in weighted-average yields in 2021 was principally attributable to lower one-month dollar LIBOR when compared to the same period in 2020.

Dividend income on FHLB stock decreased $231 thousand or 50.44% during fiscal 2021 and decreased $28 thousand or 5.76% during fiscal 2020. The decrease in 2021 was due to a 113 basis point decline in the weighted-average yield and a $2.7 million decrease in the average balance of FHLB stock outstanding. During fiscal 2020, the change was the result of a 49 basis point decrease in the weighted-average yield, which was partially offset by a $56 thousand increase in the average balance. The Company’s average holdings of FHLB stock are directly related to its volume of outstanding FHLB advances.

Interest income on certificates of deposit decreased by $32 thousand and increased by $25 thousand during fiscal 2021 and fiscal 2020, respectively. The 2021 decrease was attributable to a $1.2 million decrease in the average balance of certificates of deposit and a 55 basis point decrease in the average yield earned on certificates of deposit. The increase in 2020 was primarily due to a $1.2 million increase in the average balance of certificates of deposit, which was partially offset by a 22 basis point decrease in the weighted-average yield.

Interest Expense. Total interest expense decreased $3.0 million or 76.88% during fiscal 2021 and $1.0 million or 20.89% during fiscal 2020. For fiscal 2021, the decrease was primarily due to lower average market rates paid on both our FHLB long-term (variable rate) and short-term advances. The market rates paid on the FHLB short-term advances decreased 123 basis points during fiscal 2021 compared to fiscal 2020 and the market rates paid on the FHLB long-term advances decreased 118 basis points during the same period. The decline in fiscal 2021 compared to fiscal 2020 was also due a $47.3 million decrease in the average balances of our long-term FHLB advances and a $23.4 million reduction in the average balance of our FHLB short-term borrowings. The decrease in fiscal 2020 was primarily due to lower average market rates paid on FHLB borrowings and time deposits, which were partially offset by higher average balances of long-term FHLB advances outstanding when compared to the same period in 2019. In 2020, interest paid on FHLB long-term advances increased $56 thousand, when compared to 2019, primarily as a result of a $25.5 million increase in the average balances outstanding. Also during fiscal 2020, interest expense on FHLB short-term advances declined by $1.1 million as a result of a decrease of $23.4 million in the average balance outstanding and a decrease in the rate paid of 88 basis points. The changes in rates paid on FHLB borrowings for both periods were consistent with changes in short-term market interest rates.

 

12


Interest on other short-term borrowings decreased $5 thousand in fiscal 2021, when compared to fiscal 2020. The decrease in fiscal 2021 was attributable to the decrease in FRB discount window borrowings outstanding. There were no such borrowings as of June 30, 2021.

Interest expense on interest-bearing deposits decreased $561 thousand in fiscal 2021 and increased $3 thousand in fiscal 2020. The decrease in fiscal 2021, compared to fiscal 2020, was primarily attributable to a 124 basis point decrease in the rate paid on time deposits partially offset by a $7.3 million increase in the average balance of time deposits. The slight increase in fiscal 2020, when compared to the same period of 2019, was primarily the result of a $3.9 million increase in the average balance of time deposits, partially offset by a 14 basis point decrease in the rate paid on time deposits. Terms associated with broker deposits are sometimes more favorable than terms offered on other short-term borrowings. The Company had $8.8 million and $9.9 million of brokered deposits outstanding at June 30, 2021 and 2020, respectively. Beginning in fiscal 2017 and continuing through fiscal 2021, the Company used various brokered deposits as part of its asset/liability management strategy.

Provision for Loan Losses. A provision for loan losses is charged, or accreted to earnings to bring the total allowance to a level considered adequate by management to absorb potential losses in the portfolio. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio considering past experience, current economic conditions, volume, growth, composition of the loan portfolio and other relevant factors. The Company recorded a credit for loan losses totaling $53 thousand in fiscal 2021 compared to a provision for loan losses of $70 thousand in fiscal 2020. The decrease in the provision in fiscal 2021 was attributable to lower levels of single-family residential loans. See Note 9 to the Consolidated Financial Statements. The decrease in the provision in fiscal 2020 was primarily attributable to lower levels of construction and land acquisition and development loans, partially offset by increased reserve factors related to the economic uncertainty as a result of the COVID-19 pandemic.

Non-interest Income. Total non-interest income increased $113 thousand or 31.22% in fiscal 2021 and decreased $53 thousand or 12.77% in fiscal 2020. The increase in fiscal 2021 reflects a $75 thousand decrease in other-than-temporary impairment losses on the Company’s legacy PLMBS portfolio and a $61 thousand increase in gains on the sales of investment securities, which were partially offset by a $19 thousand decrease in service charges on deposit accounts and a $4 thousand decrease in earnings on bank owned life insurance. The decrease in fiscal 2020 was primarily attributable to a $60 thousand increase in other-than-temporary impairment losses on the Company’s legacy PLMBS portfolio, a $17 thousand decrease in ATM income and a $10 thousand decrease in service charges on deposit accounts.

Non-interest Expense. Total non-interest expense increased $87 thousand or 2.44% in fiscal 2021, and decreased $227 thousand or 5.99% during fiscal 2020. During fiscal 2021, the increase was primarily due to higher employee compensation and recruitment related expenses and higher FDIC insurance premium expenses. The decrease in fiscal 2020 was primarily the result of decreases in employee post-retirement benefit costs, lower FDIC insurance premium expenses due to the FDIC Small Bank Assessment Credits and lower ATM program expenses. These increases were partially offset by lower occupancy and equipment expenses as well as lower FDIC insurance premium expenses.

Income Taxes. Income taxes decreased $425 thousand during fiscal 2021 and decreased $62 thousand during fiscal 2020, respectively. The decreases in income tax expense for fiscal 2021 and 2020 were primarily attributable to lower taxable income. The Company’s combined effective tax rate was 25.6% for the year ended June 30, 2021 and 25.9% for the year ended June 30, 2020.

 

13


LIQUIDITY AND CAPITAL RESOURCES

Liquidity is often analyzed by reviewing the cash flow statement. Cash and cash equivalents increased by $51 thousand during fiscal 2021 primarily due to $11.7 million net cash provided by investing activities which was partially offset by $13.3 thousand net cash used for financing activities, and $1.6 million net cash provided by operating activities.

Funds provided by investing activities totaled $11.7 million during fiscal 2021 as compared to $4.3 million used for investing activities during fiscal 2020. Primary sources of funds during fiscal 2021 were repayments of investments and mortgage-backed securities totaling $81.6 million and $64.1 million, respectively, an $18.2 million decrease in net loans receivable, and $6.4 million in proceeds from sales of investment securities. Primary uses of funds during fiscal 2021 included purchases of investments totaling $103.0 million, purchases of mortgage-backed securities of $49.4 million, purchases of loans of $8.0 million, purchases of $18.1 million of FHLB stock and purchases of certificates of deposit totaling $100 thousand. During fiscal 2021, investment purchases were comprised primarily of investment grade corporate bonds.

Funds used for financing activities totaled $13.3 million for fiscal 2021, as compared to $982 thousand used for financing activities in fiscal 2020. Primary uses of funds for financing activities during fiscal 2021 were: $65.0 million reduction in FHLB long-term advances; $344 thousand for purchases of treasury stock; $7 million for reduction in other short-term borrowings and $700 thousand in cash dividends paid on the Company’s common stock. Primary sources of funds provided for financing activities during fiscal 2021 were a $53.9 million increase in FHLB short-term borrowings and a $5.8 million increase in net deposits. Management has determined that it currently is maintaining adequate liquidity and continues to match funding sources with lending and investment opportunities.

Funds provided by operating activities totaled $1.6 million during fiscal 2021 as compared to $3.4 million during fiscal 2020. During fiscal 2021, net cash provided from operations was primarily due to $1.3 million of net income. In fiscal 2020, net cash provided by operating activities was primarily attributable to $2.5 million of net income and $475 thousand decrease in accrued interest receivable.

The Company’s primary sources of funds are deposits, repayments on existing loans, investment portfolio cash flow, funds from operations and funds obtained through various borrowings. At June 30, 2021, the total approved loan commitments outstanding amounted to $643 thousand. At the same date, commitments under unused lines of credit amounted to $5.2 million and the undisbursed portion of construction loans approximated $3.7 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2021 totaled $24.9 million. Management believes that a significant portion of our local maturing deposits will remain with the Company.

The Company’s contractual obligations at June 30, 2021 were as follows:

 

    

Contractual Obligations

(Dollars in Thousands)

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

Operating lease obligations

     22        18        4        —          —    

See also Note 15 of the Company’s Consolidated Financial Statements.

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

 

14


On July 26, 2021, the Company’s Board of Directors declared a cash dividend of $0.10 per share payable on August 19, 2021 to shareholders of record at the close of business on August 9, 2021. Dividends are subject to determination and declaration by the Board of Directors, which take into account the Company’s financial condition, statutory and regulatory restrictions, general economic conditions and other factors. There can be no assurance that dividends will in fact be paid on the common stock in the future or that, if paid, such dividends will not be reduced or eliminated in future periods.

The Company’s ratio of Tier 1 capital to risk weighted assets, common equity Tier 1 capital to risk weighted assets and total capital to risk weighted assets were 18.76%, 18.76%, and 19.06%, respectively, at June 30, 2021. The Company’s ratio of Tier 1 capital to average total assets was 11.71% at June 30, 2021.

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

The Company had no non-performing assets at June 30, 2021 and June 30, 2020.

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

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

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

 

15


QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of the Company’s transactions are denominated in U.S. 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 2013-2021, and into fiscal year 2022, short intermediate and long-term market interest rates fluctuated considerably. Many central banks, including the Federal Reserve, continued above normal levels of monetary accommodation including quantitative easing and targeted asset purchase programs. The desired outcomes of these programs are to stimulate aggregate demand, reduce high levels of unemployment and to further lower market interest rates.

Throughout fiscal year 2021, the Company continued to adjust its asset/liability management tactics, decreased total assets by $11.0 million and continued to manage its Tier 1 capital. The primary segments of asset growth for fiscal year 2021 were: investment securities available for sale - $3.9 million and investment securities held to maturity - $12.0 million, which were partially offset by decreases in net loans receivable - $10.3 million and mortgage-backed securities held to maturity - $14.6 million.    

Changes in intermediate and long-term market interest rates, the changing slope of the Treasury yield curve, and higher levels of interest rate volatility have impacted prepayments on the Company’s loan, investment and mortgage-backed securities portfolios. Principal repayments on the Company’s loan, investment, and mortgage-backed securities portfolios for the twelve months ended June 30, 2021, totaled $27.8 million, $81.6 million, and $64.1 million, respectively.

Despite stagnant global interest rates and Treasury yields the Company maintained its balance sheet and used proceeds from maturities/calls of corporate bonds, repayments on its mortgage-backed securities, and borrowings to purchase floating rate investment grade corporate bonds and to fund loan growth. In particular, the Company increased its investment securities – available for sale portfolio allocation from

 

16


$147.6 million at June 30, 2020 to $151.6 million at June 30, 2021 and decreased its net loans receivable from $91.0 million at June 30, 2020 to $80.7 million at June 30, 2021.

During the fiscal year ended June 30, 2021, the Company decreased its loan portfolio by $10.3 million or 11.25% with a $10.7 million decrease in single-family real estate loans, a $286 thousand decrease in multi-family dwellings and a $193 thousand decrease in commercial real estate loans, which were partially offset by an increase of $744 thousand in single-family construction loans. The Company also makes available for origination residential mortgage loans with interest rates adjusting pursuant to a designated index, although customer acceptance has been somewhat limited in the Savings Bank’s market area. We expect that the housing market will modestly grow throughout fiscal 2022. The Company will continue to selectively offer commercial real estate, land acquisition and development, and shorter-term construction loans (primarily on residential properties), and commercial loans on business assets to partially increase interest income while limiting credit and interest rate risk. The Company has also offered higher yielding commercial and small business loans to existing customers and seasoned prospective customers.

During fiscal 2021, principal investment purchases were comprised of: investment grade corporate bonds - $40.8 million with a weighted-average yield of approximately 0.69%, and U.S. dollar denominated investment-grade corporate bonds of large foreign issuers - $11.0 million with a weighted-average yield of approximately 0.57%, commercial paper - $34.5 million with a weighted-average yield of approximately 0.58%, U.S. government agencies - $16.0 million with a weighted average yield of approximately 0.91% and municipals - $740 thousand with a weighted-average yield of approximately 1.62%. Corporate bond purchases are fixed and floating rate. The floating rate bonds reprice quarterly based upon changes in the three-month LIBOR.

Investment proceeds received during fiscal 2021 included commercial paper - $35.5 million with a weighted-average yield of approximately 0.76%, corporate bonds - $45.6 million with a weighted-average yield of approximately 1.64%, corporate bonds of large foreign issuers - $6.1 million with a weighted- average yield of approximately 1.79%, and tax-exempt municipal bonds - $750 thousand with a weighted-average yield of approximately 2.84%.

As of June 30, 2021, the implementation of these asset and liability management initiatives resulted in the following:

 

  1)

$186.0 million or 53.5% of the Company’s assets were comprised of floating rate investment and mortgage-backed securities. Of this $186.0 million, approximately $82.5 million float on a monthly basis based upon changes in the one-month LIBOR and about $103.5 million reprice on a quarterly basis based upon the three-month LIBOR;

 

  2)

$82.5 million or 33.0% of the Company’s total investment portfolio was comprised of floating rate mortgage-backed securities (including collateralized mortgage obligations – “CMOs”) that reprice on a monthly basis;

 

  3)

$151.6 million or 43.8% of the Company’s assets were comprised of investment securities classified as available for sale;

 

  4)

The maturity distribution of the Company’s investment portfolio excluding CMOs is as follows:

   

3 months or less: $8.5 million; after 3 months – 6 months: $10.4 million; 6 months – 1 year: $21.5 million; 1 year – 2 years: $67.2 million; after 2 years through 3 years: $40.9 million; after 3 years - 5 years: $5.4 million; after 5 years: $13.2 million.

 

  5)

The maturity distribution of the Company’s borrowings is as follows: 3 months or less - $113.1 million, 3-12 months - $30.0 million and 1-3 years - $5.0 million.

 

17


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

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

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

 

     June 30,  
     2021     2020     2019  
     (Dollars in Thousands)  

Interest-earning assets maturing or repricing within one year

   $ 222,105     $ 289,076     $ 282,429  

Interest-bearing liabilities maturing or repricing within one year

     201,614       218,272       214,916  
  

 

 

   

 

 

   

 

 

 

Interest sensitivity gap

   $ 20,491     $ 70,804     $ 67,513  
  

 

 

   

 

 

   

 

 

 

Interest sensitivity gap as a percentage of total assets

     5.92     19.83     18.97

Ratio of assets to liabilities maturing or repricing within one year

     110.16     132.44     131.41

 

18


The following table illustrates the Company’s estimated stressed cumulative repricing gap – the difference between the amount of interest-earning assets and interest-bearing liabilities expected to reprice at a given point in time – at June 30, 2021. The table estimates the impact of an upward or downward change in market interest rates of 100 and 200 basis points.

Cumulative Stressed Repricing Gap

 

     Month 3     Month 6     Month 12     Month 24     Month 36     Month 60     Long Term  
     (Dollars in Thousands)  

Base Case Up 200 bp

              

Cumulative Gap ($’s)

   $ 15,826     $ 9,424     $ 13,912     $ 42,335     $ 66,859     $ 62,330     $ 31,360  

% of Total Assets

     4.6     2.7     4.0     12.2     19.3     18.0     9.1

Base Case Up 100 bp

              

Cumulative Gap ($’s)

   $ 16,667     $ 11,036     $ 16,852     $ 47,099     $ 72,271     $ 67,869     $ 31,360  

% of Total Assets

     4.8     3.2     4.9     13.6     20.9     19.6     9.1

Base Case No Change

              

Cumulative Gap ($’s)

   $ 17,747     $ 13,080     $ 20,491     $ 52,679     $ 78,280     $ 73,367     $ 31,360  

% of Total Assets

     5.1     3.8     5.9     15.2     22.6     21.2     9.1

Base Case Down 100 bp

              

Cumulative Gap ($’s)

   $ 18,137     $ 13,812     $ 21,761     $ 54,568     $ 80,246     $ 75,029     $ 31,360  

% of Total Assets

     5.2     4.0     6.3     15.8     23.2     21.7     9.1

Base Case Down 200 bp

              

Cumulative Gap ($’s)

   $ 18,344     $ 14,197     $ 22,421     $ 55,530     $ 81,262     $ 75,855     $ 31,360  

% of Total Assets

     5.3     4.1     6.5     16.0     23.5     21.9     9.1

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

The following table presents the simulated impact of a 100 and 200 basis point upward or downward (parallel) shift in market interest rates on net interest income, return on average equity, return on average assets and the market value of portfolio equity at June 30, 2021. This analysis was done assuming that the interest-earning assets will average approximately $346 million and $347 million over a projected twelve and twenty-four month period, respectively, for the estimated impact on change in net interest

 

19


income, return on average equity and return on average assets. The estimated changes in market value of equity were calculated using balance sheet levels at June 30, 2021. Actual future results could differ materially from our estimates primarily due to unknown future interest rate changes and the level of prepayments on our investment and loan portfolios and future FDIC regular and special assessments.

Analysis of Sensitivity to Changes in Market Interest Rates

 

     Twelve Month Forward Modeled Change in Market Interest Rates  
     June 30, 2022     June 30, 2023  

Estimated impact on:

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

Change in net interest income

     -12.7     -8.8     —         1.3     3.1     -30.2     -22.4     —         8.5     16.8

Return on average equity

     1.43     1.79     2.61     2.73     2.91     -0.14     0.61     2.71     3.50     4.26

Return on average assets

     0.16     0.20     0.29     0.30     0.32     -0.02     0.07     0.30     0.39     0.48

Market value of equity (in thousands)

   $ 42,750     $ 42,280     $ 44,414     $ 45,535     $ 46,110            

The table below provides information about the Company’s anticipated transactions comprised of firm loan commitments and other commitments, including undisbursed letters and lines of credit. The Company used no derivative financial instruments to hedge such anticipated transactions as of June 30, 2021.

 

Anticipated Transactions

 

                      (Dollars in Thousands)

 

Undisbursed construction and development loans

   $ 3,694  

Undisbursed lines of credit

     5,133  

Loan origination commitments

     643  
  

 

 

 
   $ 9,470  
  

 

 

 

 

20


LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of WVS Financial Corp.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of WVS Financial Corp. and subsidiary (the “Company”) as of June 30, 2021 and 2020; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2021; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

S.R. Snodgrass, P.C. * 2009 Mackenzie Way, Suite 340, Cranberry Township, PA 16066* Phone: (724) 934-0344 * Facsimile: (724) 934-0345

 

21


Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter, in any way, our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses (ALL) – Qualitative Factors

Description of the Matter

The Company’s loan portfolio totaled $81.2 million as of June 30, 2021, and the associated ALL was $564 thousand. As discussed in Notes 8 and 9 to the consolidated financial statements, determining the amount of the ALL requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. Management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and classified loans, collateral values, and concentrations of credit risk for the commercial loan portfolios.

We identified these qualitative adjustments within the ALL as critical audit matters because they involve a high degree of subjectivity. In turn, auditing management’s judgments regarding the qualitative factors applied in the ALL calculation involved a high degree of subjectivity.

Furthermore, concern about the spread of COVID-19 has caused and is likely to continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property vacancy rates, reduced profitability and ability for property owners to make mortgage payments, and overall economic and financial market instability, all of which may cause borrowers to be unable to make scheduled loan payments. If the effects of COVID-19 result in widespread and sustained loan repayment shortfalls, significant loan delinquencies, foreclosures, declines in collateral values, and credit losses could result in, and significantly impact, the overall adequacy of the ALL. The extent of COVID-19’s effects on business, operations, or the global economy as a whole is highly uncertain and cannot be predicted, including the scope and duration of the pandemic, which increases the degree of subjectivity involved in estimating the related qualitative factors within the ALL.

How We Addressed the Matter in Our Audit

We gained an understanding of the Company’s process for establishing the ALL, including the qualitative adjustments made to the ALL. We evaluated the design and tested the operating effectiveness of controls over the Company’s ALL process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the ALL , as well as the reliability of the data utilized to support management’s assessment.

 

22


To test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether all relevant risks were reflected in the ALL and the need to consider qualitative adjustments, including the potential effect of COVID-19 on the adjustments.

Regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. For example, we compared the inputs and data to the Company’s system reports, third-party macroeconomic data, and other internal and external sources and considered the existence of new or contrary information. Furthermore, we analyzed the changes in the components of the qualitative reserves relative to change in external market factors, the Company’s loan portfolio, and asset quality trends, which included the evaluation of management’s ability to capture and assess relevant data from both external sources and internal reports on loan customers affected by the COVID-19 pandemic and the supporting documentation for substantiating revisions to qualitative factors to ensure that movement in the factors was directionally consistent with the underlying data.

We have served as the Company’s auditor since 1993.

 

/s/ S.R. Snodgrass, P.C.

Cranberry Township, Pennsylvania

September 15, 2021

 

23


WVS FINANCIAL CORP.

CONSOLIDATED BALANCE SHEET

(In thousands)

 

 
     June 30,  
     2021     2020  

ASSETS

    

Cash and due from banks

   $ 2,514     $ 2,488  

Interest-earning demand deposits

     37       12  
  

 

 

   

 

 

 

Total cash and cash equivalents

     2,551       2,500  

Certificates of deposit

     350       1,840  

Investment securities available for sale (amortized cost of $150,886 and $148,271)

     151,577       147,639  

Investment securities held to maturity (fair value of $15,592 and $3,622)

     15,489       3,495  

Mortgage-backed securities held to maturity (fair value of $82,659 and $96,649)

     82,459       97,106  

Net loans receivable (allowance for loan losses of $565 and $618)

     80,684       91,032  

Accrued interest receivable

     749       744  

Federal Home Loan Bank stock, at cost

     6,044       6,564  

Premises and equipment (net)

     657       574  

Bank owned life insurance

     5,021       4,907  

Deferred tax assets (net)

     245       548  

Other assets

     252       152  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 346,078     $ 357,101  
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

   $ 157,167     $ 151,335  

Federal Home Loan Bank advances: short-term

     113,093       59,159  

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

     10,000       15,000  

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

     25,000       85,000  
  

 

 

   

 

 

 

Total Federal Home Loan Bank advances

     148,093       159,159  

Other short-term borrowings

     —         7,000  

Accrued interest payable

     155       487  

Other liabilities

     2,274       2,207  
  

 

 

   

 

 

 

TOTAL LIABILITIES

     307,689       320,188  
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

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

     —         —    

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

     38       38  

Additional paid-in capital

     21,596       21,577  

Treasury stock (1,921,522 and 1,898,932 shares at cost)

     (29,119     (28,775

Retained earnings - substantially restricted

     47,186       46,590  

Accumulated other comprehensive income (loss)

     502       (556

Unallocated Employee Stock Ownership Plan (“ESOP”) shares

     (1,814     (1,961
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     38,389       36,913  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 346,078     $ 357,101  
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

24


WVS FINANCIAL CORP.

CONSOLIDATED STATEMENT OF INCOME

(In thousands, except share and per share data)

 

     Year Ended June 30,  
     2021     2020     2019  

INTEREST AND DIVIDEND INCOME

      

Loans, including fees

   $ 3,148     $ 3,460     $ 3,342  

Investment securities

     1,582       3,803       4,447  

Mortgage-backed securities

     782       2,714       3,745  

Certificates of deposit

     15       47       22  

Interest-earning demand deposits

     —         3       12  

Federal Home Loan Bank stock

     227       458       486  
  

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     5,754       10,485       12,054  
  

 

 

   

 

 

   

 

 

 

INTEREST EXPENSE

      

Deposits

     298       859       856  

Federal Home Loan Bank advances – short-term

     119       913       1,996  

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

     129       1,618       1,676  

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

     344       458       344  

Other short-term borrowings

     1       6        
  

 

 

   

 

 

   

 

 

 

Total interest expense

     891       3,854       4,872  
  

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME

     4,863       6,631       7,182  

(CREDIT) PROVISION FOR LOAN LOSSES

     (53     70       80  
  

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME AFTER (CREDIT) PROVISION FOR LOAN LOSSES

     4,916       6,561       7,102  
  

 

 

   

 

 

   

 

 

 

NONINTEREST INCOME

      

Service charges on deposits

     85       104       114  

Earnings on bank owned life insurance

     114       118       121  

Investment securities gains (losses)

     101       40       (2

Other than temporary impairment losses

     (13     (88     120  

Portion of loss recognized in other comprehensive income

     —         —         (148
  

 

 

   

 

 

   

 

 

 

Net impairment losses recognized in earnings

     (13     (88     (28

ATM fee income

     149       149       166  

Other

     39       39       44  
  

 

 

   

 

 

   

 

 

 

Total noninterest income

     475       362       415  
  

 

 

   

 

 

   

 

 

 

NONINTEREST EXPENSE

      

Salaries and employee benefits

     2,395       2,295       2,422  

Occupancy and equipment

     274       243       262  

Data processing

     239       220       230  

Correspondent bank charges

     39       35       33  

Federal deposit insurance premium

     85       13       97  

ATM network expense

     59       82       106  

Other

     559       675       640  
  

 

 

   

 

 

   

 

 

 

Total noninterest expense

     3,650       3,563       3,790  
  

 

 

   

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     1,741       3,360       3,727  

INCOME TAX EXPENSE

     445       870       932  
  

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 1,296     $ 2,490     $ 2,795  
  

 

 

   

 

 

   

 

 

 

EARNINGS PER SHARE:

      

Basic

   $ 0.74     $ 1.41     $ 1.57  

Diluted

     0.74       1.41       1.57  

AVERAGE SHARES OUTSTANDING:

      

Basic

     1,748,592       1,768,201       1,780,527  

Diluted

     1,748,592       1,768,201       1,780,581  

See accompanying notes to the consolidated financial statements.

 

25


WVS FINANCIAL CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(In thousands)

 

     Year Ended June 30,  
     2021     2020     2019  

NET INCOME

   $ 1,296     $ 2,490     $ 2,795  

OTHER COMPREHENSIVE INCOME (LOSS)

      

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

      

Gains (losses) arising during the year

     1,424       (698     119  

LESS: Income tax effect

     (299     146       (26
  

 

 

   

 

 

   

 

 

 
     1,125       (552     93  

(Gains) losses recognized in earnings

     (101     (40     2  

LESS: Income tax effect

     21       (8     —    
  

 

 

   

 

 

   

 

 

 
     (80     (32     2  

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

     1,045       (584     95  
  

 

 

   

 

 

   

 

 

 

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

      

Total losses

     13       88       120  

Losses recognized in earnings

     13       88       28  
  

 

 

   

 

 

   

 

 

 

Gains recognized in comprehensive income

     —         —         148  

LESS: Income tax effect

     —         —         (31
  

 

 

   

 

 

   

 

 

 
     —         —         117  

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

     16       16       (12

LESS: Income tax effect

     (3     (3     (3
  

 

 

   

 

 

   

 

 

 

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

     13       13       (9
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     1,058       (571     203  
  

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 2,354     $ 1,919     $ 2,998  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

26


WVS FINANCIAL CORP.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except share and per share data)

 

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

Balance June 30, 2018

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

Net Income

             2,795           2,795  

Other comprehensive Income

               203         203  

Purchase of treasury stock (26,397 shares)

           (383           (383

Amortization of unallocated ESOP shares

        34              166       200  

Cash dividends declared ($0.44 per share)

             (783         (783
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2019

     38        21,550        (28,269     44,807       15       (2,092     36,049  

Net income

             2,490           2,490  

Other comprehensive Loss

               (571       (571

Purchase of treasury stock (36,412 shares)

           (506           (506

Amortization of unallocated ESOP shares

        27              131       158  

Cash dividends declared ($0.40 per share)

             (707         (707
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2020

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

Net income

             1,296           1.296  

Other comprehensive income

               1,058         1,058  

Purchase of treasury stock (22,590 shares)

           (344           (344

Amortization of unallocated ESOP shares

        19              147       166  

Cash dividends declared ($0.40 per share)

             (700         (700
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2021

   $ 38      $ 21,596      $ (29,119   $ 47,186     $ 502     $ (1,814   $ 38,389  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

27


WVS FINANCIAL CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

 

     Year Ended June 30,  
     2021     2020     2019  

OPERATING ACTIVITIES

      

Net income

   $ 1,296     $ 2,490     $ 2,795  

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

      

(Credit) Provision for loan losses

     (53     70       80  

Depreciation

     71       38       47  

Investment securities (gains) losses

     (101     (40     2  

Net impairment loss recognized in earnings

     13       88       28  

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

     677       21       142  

Amortization of unallocated ESOP shares

     166       158       200  

Deferred income taxes

     22       (28     (9

Increase (decrease) in accrued taxes

     (371     196       (54

Earnings on bank owned life insurance

     (114     (118     (121

Increase in accrued employee benefits

     190       176       184  

(Increase) decrease in accrued interest receivable

     (5     475       6  

(Decrease) increase in accrued interest payable

     (332     (336     443  

Increase in deferred director compensation payable

     73       77       72  

Other, net

     76       92       (41
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     1,608       3,359       3,774  
  

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES

      

Available for sale:

      

Purchase of investment securities

     (90,285     (54,675     (42,498

Proceeds from repayments of investment securities

     80,801       28,867       37,074  

Proceeds from sales of investment securities

     6,398       10,121       1,364  

Held to maturity:

      

Purchase of investment securities

     (12,744     —         —    

Purchase of mortgage-backed securities

     (49,420     —         —    

Proceeds from repayments of investment securities

     750       500       2,180  

Proceeds from repayments of mortgage-backed securities

     64,093       11,172       7,649  

Purchases of certificates of deposit

     (100     (2,830     (1,842

Maturities/redemptions of certificates of deposit

     1,590       2,833       349  

Purchases of loans

     (7,950     (9,141     (11,497

Net decrease in net loans receivable

     18,222       8,717       5,564  

Purchase of Federal Home Loan Bank stock

     (18,117     (6,743     (8,684

Redemption of Federal Home Loan Bank stock

     18,637       7,189       8,835  

Acquisition of premises and equipment

     (154     (266     (1
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used for) investing activities

     11,721       (4,256     (1,507
  

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES

      

Net increase in deposits

     5,832       4,900       1,412  

Repayments of Federal Home Loan Bank long-term advances

     (65,000     —         —    

Proceeds from Federal Home Loan Bank long-term advances

     —         —         100,000  

Net increase (decrease) in Federal Home Loan Bank short-term advances

     53,934       (11,669     (100,575

Net proceeds from other short-term borrowings

     (7,000     7,000       —    

Purchase of treasury stock

     (344     (506     (383

Cash dividends paid

     (700     (707     (783
  

 

 

   

 

 

   

 

 

 

Net cash used for financing activities

     (13,278     (982     (329
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     51       (1,879     1,938  

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

     2,500       4,379       2,441  
  

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF YEAR

   $ 2,551     $ 2,500     $ 4,379  
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

      

Cash paid during the year for:

      

Interest

   $ 1,223     $ 4,190     $ 4,429  

Taxes

     829       666       970  

Non-cash items:

      

Educational Improvement Tax Credits

     —         45       45  

See accompanying notes to the consolidated financial statements.

 

28


WVS FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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

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

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

Basis of Presentation

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

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

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.

 

29


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 January 1, 2022. 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 June 30, 2021, the Savings Bank had no loans in deferral as compared to fifteen (15) loans with an aggregate balance of $5.8 million and an aggregate appraisal value of $9.6 million at June 30, 2020.

Investment and Mortgage-Backed Securities

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

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

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

The Company retains an independent third party to assist it in the determination of fair values for its private-label collateralized mortgage obligations (“CMOs”). This valuation is meant to be a “Level Three” valuation as defined by ASC Topic 820, Fair Value Measurements and Disclosures. The valuation does not represent the actual terms or prices at which any party could purchase the securities. There is currently no active secondary market for private-label CMOs and there can be no assurance that any secondary market for private-label CMOs will develop. The Company believes that the private-label CMO portfolio had six other than temporary impairments at June 30, 2021.

 

30


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Investment and Mortgage-Backed Securities (Continued)

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

Net Loans Receivable

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

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

Allowance for Loan Losses

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

Impaired loans are commercial and commercial real estate loans for which it is probable the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. The definition of “impaired loans” is not the same as the definition of “nonaccrual loans,” although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectability, while not classifying the loan as impaired if the loan is not a commercial or commercial real estate loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash

 

31


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Allowance for Loan Losses (Continued)

 

flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral.

Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower, including the length of the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.

Real Estate Owned

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

Premises and Equipment

Land is carried at cost, while premises and equipment are stated at cost, less accumulated depreciation. Depreciation is principally computed on the straight-line method over the estimated useful lives of the related assets, which range from 3 to 25 years for furniture and equipment and 7 to 50 years for building premises. Leasehold improvements are amortized over the shorter of their estimated useful lives or their respective lease terms, which range from 5 to 40 years. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.

Income Taxes

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

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

 

32


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Earnings Per Share

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

Comprehensive Income

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

Cash Flow Information

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

Reclassification of Comparative Figures

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

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the ASU is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

 

33


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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. 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. 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 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

 

34


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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 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 2019-11, 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.

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 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.

 

35


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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 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.

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which requires an entity to treat a modification of an equity-classified warrant that does not cause the warrant to become liability-classified as an exchange of the original warrant for a new warrant. This guidance applies whether the modification is structured as an amendment to the terms and conditions of the warrant or as termination of the original warrant and issuance of a new warrant. An entity should measure the effect of a modification as the difference between the fair value of the modified warrant and the fair value of that warrant immediately before modification. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted for all entities, including adoption in an interim period. If an entity elects to early adopt the amendments in this Update in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842), which amends ASC 842 so that lessors are no longer required to recognize a selling loss upon commencement of a lease with variable lease payments that, prior to the amendments, would have been classified as a sales-type or direct financing lease. Furthermore, a lessor must classify as an operating lease any lease that would otherwise be classified as a sales-type or direct financing lease and that would result in the recognition of a selling loss at lease commencement, provided that the lease includes variable lease payments that do not depend on an index or rate. For public business entities and certain not-for-profit entities and employee benefit plans that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years. For all other entities that have adopted ASC 842, the amendments are effective for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. All entities that have adopted ASC 842 are permitted to early adopt the amendments in ASU 2021-05. The amendments in ASU 2021-05 are effective as of the same date as the guidance in ASC 842 for entities that have not adopted ASC 842. This Update is not expected to have a significant impact on the Company’s financial statements.

 

36


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2.

REVENUE RECOGNITION-NON INTEREST INCOME

The main types of noninterest income 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.

 

3.

EARNINGS PER SHARE

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

 

     2021      2020      2019  

Weighted-average common shares issued

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

Average treasury stock shares

     (1,904,948      (1,874,720      (1,852,450

Average unallocated ESOP shares

     (152,096      (162,715      (172,659
  

 

 

    

 

 

    

 

 

 

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

     1,748,592        1,768,201        1,780,527  

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

     —          —          54  
  

 

 

    

 

 

    

 

 

 

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

     1,748,592        1,768,201        1,780,581  
  

 

 

    

 

 

    

 

 

 

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.

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

 

37


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4.

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)  

2021

           

AVAILABLE FOR SALE

           

U.S. government agency securities

   $ 3,215      $ —        $ (1    $ 3,214  

Corporate debt securities

     109,501        546        (7      110,040  

Foreign debt securities 1

     37,440        179        (21      37,598  

Obligations of states and political subdivisions

     730        —          (5      725  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 150,886      $ 725      $ (34    $ 151,577  
  

 

 

    

 

 

    

 

 

    

 

 

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

2021

           

HELD TO MATURITY

           

U.S. government agency securities

   $ 12,744      $ 5      $ —        $ 12,749  

Obligations of states and political subdivisions

     2,745        98        —          2,843  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,489      $ 103      $ —        $ 15,592  
  

 

 

    

 

 

    

 

 

    

 

 

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

2020

           

AVAILABLE FOR SALE

           

Corporate debt securities

   $ 115,710      $ 163      $ (774    $ 115,099  

Foreign debt securities 1

     32,561        42        (63      32,540  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

 

1

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

 

38


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4.

INVESTMENT SECURITIES (Continued)

 

 

 

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

2020

           

HELD TO MATURITY

           

Obligations of states and political subdivisions

   $ 3,495      $ 127      $ —        $ 3,622  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,495      $ 127      $ —        $ 3,622  
  

 

 

    

 

 

    

 

 

    

 

 

 

Proceeds from sales of investments during the fiscal year 2021 were $6.4 million and the Company recorded gross realized investment gains of $101 thousand during this same period. During fiscal year 2020, the Company recorded gross realized investment securities gains of $40 thousand and received proceeds from sales of investment securities of $10.1 million. During fiscal year 2019, the Company recorded gross realized investment securities losses of $2 thousand and received proceeds from sales of investment securities of $1.4 million.

The amortized cost and fair values of investment securities at June 30, 2021, 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     Due after     Due after               
     one year     one through     five through     Due after         
     or less     five years     ten years     ten years      Total  
     (Dollars in Thousands)  

AVAILABLE FOR SALE

           

Amortized cost

   $ 39,693     $ 110,723     $ 470     $ —        $ 150,886  

Fair value

     39,828       111,280       469       —          151,577  

Weighted-average yield

     0.88     0.84     1.55     —          0.85

HELD TO MATURITY

           

Amortized cost

   $ 540     $ 2,205     $ 12,744     $ —        $ 15,489  

Fair value

     545       2,298       12,749       —          15,592  

Weighted-average yield

     3.14     3.39     1.01     —          1.42

At June 30, 2021, investment securities with amortized costs of $18.7 million and $40.4 million, and fair values of $18.8 million and $40.8 million, were pledged to secure borrowings with the Federal Home Loan Bank of Pittsburgh (“FHLB”) and the Federal Reserve Bank of Cleveland, respectively. At June 30, 2020, investment securities with amortized costs of $3.5 million and $57.5 million, and fair values of $3.6 million and $57.4 million, were pledged to secure borrowings with the FHLB and the Federal Reserve Bank of Cleveland, respectively.

 

39


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.

MORTGAGE-BACKED SECURITIES

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

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

At June 30, 2021, the Company’s Agency CMOs totaled $82.1 million as compared to $96.5 million at June 30, 2020. The Company’s private-label CMOs totaled $400 thousand at June 30, 2021 as compared to $618 thousand at June 30, 2020. The $14.7 million net decrease in the CMO segment of our portfolio was due to repayments on the U.S. Government Agency CMO portfolio totaling $63.9 million, and $221 thousand in repayments on the private-label CMOs, which were partially offset by purchases of U.S. Government Agency securities totaling $49.4 million. At June 30, 2021, the Company’s entire MBS portfolio, including CMOs, was comprised of adjustable or floating rate investments. The Company has no investment in multi-family or commercial real estate based MBS.

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

The Company retains an independent third party to assist it in the determination of a fair value for three of its private-label CMOs. This valuation is meant to be a “Level Three” valuation as defined by ASC Topic 820, Fair Value Measurements and Disclosures. The valuation does not represent the actual terms or prices at which any party could purchase the securities. There is currently no active secondary market for private-label CMOs and there can be no assurance that any secondary market for private-label CMOs will develop. The private-label CMO portfolio had six previously recorded other-than-temporary impairments (“OTTI”) at June 30, 2021. During the twelve months ended June 30, 2021, the Company recorded an additional $13 thousand of credit impairment charges on its private-label CMO portfolio.

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

 

 

40


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.

MORTGAGE-BACKED SECURITIES (Continued)

 

The amortized cost, unrealized gains and losses, and fair values of mortgage-backed securities are as follows:

 

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

2021

           

HELD TO MATURITY

           

Collateralized mortgage obligations:

           

Agency

   $ 82,059      $ 283      $ (140    $ 82,202  

Private-label

     400        57        —          457  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 82,459      $ 340      $ (140    $ 82,659  
  

 

 

    

 

 

    

 

 

    

 

 

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

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 mortgage-backed securities at June 30, 2021, 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      Due after     Due after               
     one year      one through     five through      Due after        
     or less      five years     ten years      ten years     Total  
     (Dollars in Thousands)  

HELD TO MATURITY

            

Amortized cost

   $ —        $ 50     $ —        $ 82,409     $ 82,459  

Fair value

     —          51       —          82,608       82,659  

Weighted-average yield

     —          1.57     —          0.91     0.91

 

41


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5.

MORTGAGE-BACKED SECURITIES (Continued)

 

At June 30, 2021, mortgage-backed securities with amortized costs of $78.9 million and fair values of $79.0 million were pledged to secure public deposits and borrowings with the FHLB. Of the securities pledged, $5.0 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. 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 borrowings with the FHLB and public deposits. Of the securities pledged, $10.0 million of fair value was excess collateral.

 

6.

ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The following tables present the changes in accumulated other comprehensive (loss) income by component for the three years ended June 30, 2021, 2020, and 2019.

 

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

Balance – June 30, 2018

  $ (10   $ (178    $ (188

Other comprehensive income (loss) before reclassifications

    93       117        210  

Amounts reclassified from accumulated other comprehensive (loss) income

    2       (9      (7
 

 

 

   

 

 

    

 

 

 

Net current-period other comprehensive (loss) income

    95       108        203  
 

 

 

   

 

 

    

 

 

 

Balance – June 30, 2019

    85       (70      15  

Other comprehensive income, before reclassifications

    (552     —          (552

Amounts reclassified from accumulated other comprehensive income (loss)

    (32     13        (19
 

 

 

   

 

 

    

 

 

 

Net current-period other comprehensive income

    (584     13        (571
 

 

 

   

 

 

    

 

 

 

Balance – June 30, 2020

    (499     (57      (556

Other comprehensive loss, before reclassifications

    1,125       —          1,125  

Amounts reclassified from accumulated other comprehensive (loss) income

    (80     13        (67
 

 

 

   

 

 

    

 

 

 

Net current-period other comprehensive (loss) income

    1,045       13        1,058  
 

 

 

   

 

 

    

 

 

 

Balance – June 30, 2021

  $ 546     $ (44    $ 502  
 

 

 

   

 

 

    

 

 

 

 

42


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6.

ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (Continued)

 

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

 

     Amount Reclassified from Accumulated Other
Comprehensive Income (Loss) 2
    

 

Details About Accumulated Other
Comprehensive (Loss) Income Components:
   2021      2020      2019     

Affected Line Item in the Statement
Where Net Income is Presented

     (Dollars in Thousands)       

Unrealized gains and losses on available-for-sale securities

   $ 101      $ 40      $ (2    Investment securities gains (losses)

Other than temporary impairment losses on held to maturity securities

     (16      (16      11      Net impairment losses recognized in earnings

Tax effect

     (18      (5      (2    Income tax expense
  

 

 

    

 

 

    

 

 

    

Total reclassifications for the period

   $ 67      $ 19      $ 7     
  

 

 

    

 

 

    

 

 

    

 

2 

Amounts in parenthesis indicate expenses and other amounts indicate income.

 

7.

UNREALIZED LOSSES ON SECURITIES

The following tables show the Company’s gross unrealized losses and fair value, aggregated by category and length of time that the individual securities have been in a continuous unrealized loss position, at June 30, 2021 and 2020.

 

     June 30, 2021  
     Less Than Twelve Months     Twelve Months or Greater     Total  
  

 

 

 
            Gross            Gross            Gross  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
     Value      Losses     Value      Losses     Value      Losses  
     (Dollars in Thousands)  

U.S. government agency securities

   $ 3,214      $ (1   $ —        $ —       $ 3,214      $ (1

Corporate debt securities

     17,111        (7     —          —         17,111        (7

Foreign debt securities3

     10,929        (21     —          —         10,929        (21

Obligations of states and political subdivisions

     725        (5     —          —         725        (5

Collateralized mortgage obligations

     22,810        (42     10,407        (98     33,217        (140
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 54,789      $ (76   $ 10,407      $ (98   $ 65,196      $ (174
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

3 

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

 

43


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7.

UNREALIZED LOSSES ON SECURITIES (Continued)

 

     June 30, 2020  
     Less Than Twelve Months     Twelve Months or Greater     Total  
            Gross            Gross            Gross  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
     Value      Losses     Value      Losses     Value      Losses  
     (Dollars in Thousands)  

Corporate debt securities

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

Foreign debt securities4

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

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

 

4

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

 

44


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7.

UNREALIZED LOSSES ON SECURITIES (Continued)

 

Changes in the credit loss component of credit impaired mortgage-backed securities were as follows for the twelve month periods ended June 30, 2021 and 2020:

 

     Twelve Months Ended  
     June 30,  
     2021      2020  
     (Dollars in
Thousands)
 

Beginning balance

   $ 311      $ 248  

Initial credit impairment

     —          —    

Subsequent credit impairment

     13        88  

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

     —          —    

Reductions for securities sold

     —          —    

Reduction for actual realized losses

     (2      (25

Reduction for increase in cash flows expected to be collected

     —          —    
  

 

 

    

 

 

 

Ending balance

   $  322      $  311  
  

 

 

    

 

 

 

During the twelve months ended June 30, 2021, the Company recorded a subsequent credit impairment charge of $13 thousand, and no non-credit unrealized holding losses to accumulated other comprehensive loss. The Company was able to accrete back into other comprehensive income $16 thousand (net of income tax effect of $3 thousand), based on principal repayments on private-label CMOs previously identified with OTTI.

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

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

The Company reviewed the independent third party’s assumptions used in the June 30, 2021 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

 

45


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7.

UNREALIZED LOSSES ON SECURITIES (Continued)

 

considered other-than-temporary and the magnitude of the credit loss. The Company had three private-label CMOs with OTTI at June 30, 2021.

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

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

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

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

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

The Company had investments in 27 positions that were temporarily impaired at June 30, 2021. Based on its analysis, management has concluded that three private-label CMOs were other-than-temporarily impaired, while the remaining securities portfolio has experienced unrealized losses and a decrease in fair value due to interest rate volatility, illiquidity in the marketplace, or credit deterioration in the U.S. mortgage markets.

 

8.

NET LOANS RECEIVABLE

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

 

46


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.

NET LOANS RECEIVABLE (Continued)

 

and residential mortgage loans outside of its immediate trade area, provided such loans meet the Company’s credit policy guidelines. At June 30, 2021 and 2020, the Company had approximately $3.3 million and $2.3 million, respectively, of outstanding loans for land development and construction in the local trade area. Although the Company had a diversified loan portfolio at June 30, 2021 and 2020, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.

Certain officers, directors, and their associates were customers of, and had transactions with, the Company in the ordinary course of business. There were no loans to those directors, executive officers, or their associates during the fiscal years ended June 30, 2021 and 2020.

The following table summarizes the primary segments of the loan portfolio as of June 30, 2021 and June 30, 2020.

 

     June 30, 2021      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

   $ 67,410     $ —        $ 67,410      $ 78,077     $ —        $ 78,077  

Construction

     2,612       —          2,612        1,868       —          1,868  

Land acquisition & development

     666       —          666        446       —          446  

Multi-family dwellings

     3,469       —          3,469        3,755       —          3,755  

Commercial

     3,939       —          3,939        4,132       —          4,132  

Consumer Loans

               

Home equity

     1,340       —          1,340        1,137       —          1,137  

Home equity lines of credit

     1,508       —          1,508        1,729       —          1,729  

Other

     27       —          27        79       —          79  

Commercial Loans 5

     —         —          —          11       —          11  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
   $ 80,971     $ —        $ 80,971      $ 91,234     $ —        $ 91,234  
    

 

 

    

 

 

      

 

 

    

 

 

 

Deferred loan costs

     278             416       

Allowance for loan losses

     (565           (618     
  

 

 

         

 

 

      

Total

   $ 80,684           $ 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. At June 30, 2021 and 2020, there were no loans considered to be impaired.

 

5

Not secured by real estate.

 

47


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.

NET LOANS RECEIVABLE (Continued)

 

Total nonaccrual loans as of June 30, 2021 and June 30, 2020 and the related interest income recognized during the fiscal years ended June 30, 2021 and June 30, 2020 are as follows:

 

     June 30,
2021
     June 30,
2020
 
     (Dollars in Thousands)  

Principal outstanding:

     

1 – 4 family dwellings

   $ —        $ —    

Construction

     —          —    

Land acquisition & development

     —          —    

Commercial real estate

     —          —    

Home equity lines of credit

     —          —    
  

 

 

    

 

 

 

Total

   $ —        $ —    
  

 

 

    

 

 

 

Average nonaccrual loans:

     

1 – 4 family dwellings

   $ —        $ 47  

Construction

     —          —    

Land acquisition & development

     —          —    

Commercial real estate

     —          —    

Home equity lines of credit

     —          —    
  

 

 

    

 

 

 

Total

   $ —        $ 47  
  

 

 

    

 

 

 

Income that would have been recognized

   $ —        $ —    

Interest income recognized

   $ —        $ —    

Interest income foregone

   $ —        $ —    

The Company’s loan portfolio may 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. Under the provisions of the CARES Act, as of June 30, 2020, the Company had granted 15 loan modification requests with an aggregate balance of $5.8 million, or 6.0% of loans outstanding and an aggregate appraised value of approximately $9.6 million. The characteristics of these modifications are considered short-term and do not result in a reclassification of these loans to TDR status. Substantially all of these modification requests provide for full collection of taxes and insurance, partial to full collection of interest and no, partial or full collection of principal during the deferral period. During fiscal 2021, the Company collected all deferred amounts due and there were no loans in deferral status.

During fiscal 2021 and 2020, there were no loans modified and considered a trouble debt restructuring. At June 30, 2021 and 2020, there were no previously modified TDRs in default.

 

48


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.

NET LOANS RECEIVABLE (Continued)

 

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

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

Effective December 13, 2006, the FDIC, in conjunction with the other federal banking agencies adopted a Revised Interagency Policy Statement on the Allowance for Loan and Lease Losses (“ALLL”). The revised policy statement revised and replaced the banking agencies’ 1993 policy statement on the ALLL. The revised policy statement provides that an institution must maintain an ALLL at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan and lease portfolio. The banking agencies also revised the policy to ensure consistency with generally accepted accounting principles (“GAAP”). The revised policy statement updates the previous guidance that describes the responsibilities of the board of directors, management, and bank examiners regarding the ALLL, factors to be considered in the estimation of the ALLL, and the objectives and elements of an effective loan review system.

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

 

49


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.

NET LOANS RECEIVABLE (Continued)

 

The Company’s general policy is to internally classify its assets on a regular basis and establish prudent general valuation allowances that are adequate to absorb losses that have not been identified but that are inherent in the loan portfolio. The Company maintains general valuation allowances that it believes are adequate to absorb losses in its loan portfolio that are not clearly attributable to specific loans. The Company’s general valuation allowances are within the following general ranges: (1) 0% to 5% of assets subject to special mention; (2) 5.00% to 100% of assets classified substandard; and (3) 50% to 100% of assets classified doubtful. Any loan classified as loss is charged-off. To further monitor and assess the risk characteristics of the loan portfolio, loan delinquencies are reviewed to consider any developing problem loans. Based upon the procedures in place, considering the Company’s past charge-offs and recoveries and assessing the current risk elements in the portfolio, management believes the allowance for loan losses at June 30, 2021 is adequate.

The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of June 30, 2021 and 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)  

June 30, 2021

                    

First mortgage loans:

                    

1 – 4 family dwellings

   $ 67,410      $ —        $ —        $ —        $ —        $ —        $ 67,410  

Construction

     2,612        —          —          —          —          —          2,612  

Land acquisition & development

     666        —          —          —          —          —          666  

Multi-family dwellings

     3,469        —          —          —          —          —          3,469  

Commercial

     3,939        —          —          —          —          —          3,939  

Consumer Loans

                    

Home equity

     1,340        —          —          —          —          —          1,340  

Home equity lines of credit

     1,508        —          —          —          —          —          1,508  

Other

     27        —          —          —          —          —          27  

Commercial Loans 5

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 80,971      $ —        $ —        $ —        $ —        $ —          80,971  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Deferred loan costs

                       278  

Allowance for loan losses

                       (565
                    

 

 

 

Net Loans Receivable

                     $ 80,684  
                    

 

 

 

 

5 

Not secured by real estate.

 

50


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.

NET LOANS RECEIVABLE (Continued)

 

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

90 Days +
Past Due

Accruing

    

90 Days +
Past Due

Non-accrual

     Total
Past
Due
    

Total

Loans

 
  

 

 

 
     (Dollars in Thousands)  

June 30, 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 Loans5

     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 fiscal years ended June 30, 2021 and 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.

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.

 

5 

Not secured by real estate.

 

51


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.

NET LOANS RECEIVABLE (Continued)

 

Credit Quality Information (Continued)

 

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

The following tables 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 June 30, 2021 and 2020.

 

     June 30, 2021  
     Construction      Land
Acquisition
&
Development
Loans
     Multi-
family
Residential
     Commercial
Real
Estate
     Commercial5  
     (Dollars in Thousands)  

Pass

   $ 2,612      $ 666      $ 3,469      $ 3,939      $ —    

Special Mention

     —          —          —          —          —    

Substandard

     —          —          —          —          —    

Doubtful

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 2,612      $ 666      $ 3,469      $ 3,939      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     June 30, 2020  
     Construction      Land
Acquisition
&
Development
Loans
     Multi-
family
Residential
     Commercial
Real
Estate
     Commercial5  
     (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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

5 

Not secured by real estate.

 

52


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8.

NET LOANS RECEIVABLE (Continued)

 

Credit Quality Information (Continued)

 

The following table presents performing and non-performing 1 – 4 family residential and consumer loans based on payment activity for the periods ended June 30, 2021 and June 30, 2020.

 

     June 30, 2021  
     1 – 4 Family      Consumer  
  

 

 

 
     (Dollars in Thousands)  

Performing

   $ 67,410      $ 2,875  

Non-performing

     —          —    
  

 

 

    

 

 

 

Total

   $ 67,410      $ 2,875  
  

 

 

    

 

 

 
     June 30, 2020  
     1 – 4 Family      Consumer  
  

 

 

 
     (Dollars in Thousands)  

Performing

   $ 78,077      $ 2,945  

Non-performing

     —          —    
  

 

 

    

 

 

 

Total

   $ 78,077      $ 2,945  
  

 

 

    

 

 

 

 

9.

ALLOWANCE FOR LOAN LOSSES

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

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

 

53


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9.

ALLOWANCE FOR LOAN LOSSES (Continued)

 

The Company had no unallocated loss allowance balance at June 30, 2021 and 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 is a summary of the changes in the allowance for loan losses:

 

     2021      2020      2019  
     (Dollars in Thousands)  

Balance, July 1

   $ 618      $ 548      $ 468  

Add:

        

(Credit) provision for loan losses

     (53      70        80  

Less:

        

Loans charged off

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Balance, June 30

   $ 565      $ 618      $ 548  
  

 

 

    

 

 

    

 

 

 

 

54


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9.

ALLOWANCE FOR LOAN LOSSES (Continued)

 

The following tables summarize the primary segments of the allowance for loan losses (“ALLL”), segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2021, June 30, 2020 and June 30, 2019. Activity in the allowance is presented for the fiscal years ended June 30, 2021, 2020 and 2019.

 

     As of June 30, 2021  
     First Mortgage Loans                     
     1 – 4
Family
    Construction     Land
Acquisition &
Development
    Multi-
family
    Commercial     Consumer
Loans
     Commercial
Loans5
    Total  
  

 

 

 
     (Dollars in Thousands)  

Beginning ALLL Balance at June 30, 2020

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

Charge-offs

     —         —         —         —         —         —          —         —    

Recoveries

     —         —         —         —         —         —          —         —    

Provisions

     (60     12       5       (2     (7     —          (1     (53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending ALLL Balance at June 30, 2021

   $ 389     $ 50     $ 11     $ 24     $ 59     $ 32      $ —       $ 565  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Individually evaluated for impairment

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

Collectively evaluated for impairment

     389       50       11       24       59       32        —         565  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
   $ 389     $ 50     $ 11     $ 24     $ 59     $ 32      $ —       $ 565  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 
     As of June 30, 2020  
     First Mortgage Loans                     
     1 – 4
Family
    Construction     Land
Acquisition &
Development
    Multi-
family
    Commercial     Consumer
Loans
     Commercial
Loans5
    Total  
  

 

 

 
     (Dollars in Thousands)  

Beginning ALLL Balance at June 30, 2019

   $ 405     $ 46     $ 10     $ 17     $ 37     $ 30      $ 3     $ 548  

Charge-offs

     —         —         —         —         —         —          —         —    

Recoveries

     —         —         —         —         —         —          —         —    

Provisions

     44       (8     (4     9       29       2        (2     70  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending ALLL Balance at June 30, 2020

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Individually evaluated for impairment

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

Collectively evaluated for impairment

     449       38       6       26       66       32        1       618  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

5 

Not secured by real estate.

 

55


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9.

ALLOWANCE FOR LOAN LOSSES (Continued)