EX-13 2 d17476dex13.htm EX-13 EX-13

Exhibit 13

 

LOGO

FINANCIAL

CORP.

- THE HOLDING COMPANY OF WEST VIEW SAVINGS BANK-

“Over 100 Years of Quality Banking”

2015

ANNUAL REPORT


TABLE OF CONTENTS

 

     Page
Number
 

Shareholders’ Letter

     1   

Selected 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

     24   

Consolidated Balance Sheet

     25   

Consolidated Statement of Income

     26   

Consolidated Statement of Comprehensive Income

     27   

Consolidated Statement of Changes in Stockholders’ Equity

     28   

Consolidated Statement of Cash Flows

     29   

Notes to Consolidated Financial Statements

     30   

Common Stock Market Price and Dividend Information

     84   
Corporate Information      85   


LOGO    (412)364-1911    

—THE HOLDING COMPANY OF WEST VIEW SAVINGS BANK-

To our Shareholders:

During fiscal 2015, the U.S. and global economies continued to perform at subpar levels. Most recently China, the world’s second largest economy, has experienced a notable slowdown. Perceptions about the Chinese economy has caused increased levels of volatility in the global debt and equity markets. In the United States, the financial markets continue to discern the timing of interest rate increases by the Federal Reserve Open Market Committee.

Throughout fiscal 2015, the Company continued its strategy of balanced growth and risk management. Our total assets grew to $329.7 million, or about 6%, at June 30, 2015 as compared to $309.9 million at June 30, 2014. The $19.8 million of asset growth was primarily comprised of a $16.4 million, or a 55%, increase in net loans receivable and a $2.2 million increase in cash and equivalents. The Company continues to manually underwrite each loan application in order to maintain asset quality.

Net income grew to $1.3 million during fiscal 2015 as compared to $920 thousand in fiscal 2014. The $427 thousand or 46% increase in net income was driven by higher levels of Federal Home Loan Bank stock dividends and interest income combined with lower levels of interest expense. Provisions for loan losses increased due to higher levels of loan volumes. Non-interest expenses continue to be well-controlled.

We would like to thank two retiring board members – Dave Aeberli and Marge VonDerau – for their combined years of service to the Bank. Marge started in our West View branch in 1968 and was always the “go to” person for operations. Dave Aeberli joined the Board of Directors in 1985 and ultimately retired as our Chairman in 2014. While it is nearly impossible to immediately replace Marge’s and Dave’s combined 76 years of service to the Bank – through good and bad times – we would like to welcome two Board members with exceptional community bank credentials. John A. Howard, Jr. was elected to the Board at last year’s annual meeting. John is a retired community bank chief financial officer and CPA. Ed Twomey was elected to the Board in April 2015. Ed brings daily exposure to the financial markets, and a broad mix of financial institution clients and contacts, to the Board.

We thank each of our stakeholders – customers, employees and shareholders – for your continued support.

 

/s/    David J. Bursic

   /s/    John W. Grace

David J. Bursic

   John W. Grace

President and

   Chairman of the Board of Directors

Chief Executive Officer

  

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

 

1


FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED

FINANCIAL AND OTHER DATA

 

     As of or For the Year Ended June 30,  
     2015     2014     2013     2012     2011  
     (Dollars in Thousands, except per share data)  

Selected Financial Data:

          

Total assets

   $ 329,716      $ 309,940      $ 287,576      $ 273,341      $ 228,888   

Net loans receivable

     46,163        29,724        31,531        39,433        49,952   

Mortgage-backed securities

     162,639        215,335        139,268        79,086        70,568   

Investment securities

     103,534        50,434        103,606        140,020        89,438   

Deposit accounts – Retail

     138,928        141,859        140,524        142,173        143,518   

Deposit accounts – Wholesale

     —          —          —          —          248   

FHLB advances – long-term fixed

     12,500        12,500        17,500        17,500        22,500   

FHLB advances – long-term variable

     105,305        99,196        —          —          —     

FHLB advances – short-term

     37,830        23,626        96,712        79,270        32,059   

Stockholders’ equity

     32,043        31,788        31,828        30,413        28,878   

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

     309        607        1,608        1,739        2,401   

Selected Operating Data:

          

Interest income

   $ 6,378      $ 5,821      $ 5,959      $ 7,053      $ 9,225   

Interest expense

     1,155        1,357        1,407        1,544        4,220   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     5,223        4,464        4,552        5,509        5,005   

Provision for loan losses

     70        (73     (68     (104     (15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     5,153        4,537        4,620        5,613        5,020   

Non-interest income

     558        531        573        349        514   

Non-interest expense

     3,706        3,675        3,571        3,658        3,846   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     2,005        1,393        1,622        2,304        1,688   

Income tax expense

     658        473        542        902        462   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,347      $ 920      $ 1,080      $ 1,402      $ 1,226   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Information:

          

Basic earnings

   $ 0.69      $ 0.45      $ 0.52      $ 0.68      $ 0.60   

Diluted earnings

   $ 0.69      $ 0.45      $ 0.52      $ 0.68      $ 0.60   

Dividends per share

   $ 0.16      $ 0.16      $ 0.16      $ 0.16      $ 0.28   

Dividend payout ratio

     24.24     35.56     30.77     23.53     46.67

Book value per share at period end:

          

Common Equity

   $ 15.70      $ 15.45      $ 15.47      $ 14.78      $ 14.03   

Tier I Equity

   $ 15.93      $ 15.66      $ 15.83      $ 15.45      $ 14.92   

Average shares outstanding:

          

Basic

     1,941,872        2,057,920        2,057,930        2,057,930        2,057,930   

Diluted

     1,941,872        2,057,920        2,057,930        2,057,930        2,057,930   

 

2


FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED

FINANCIAL AND OTHER DATA

 

     As of or For the Year Ended June 30,  
     2015     2014     2013     2012     2011  

Selected Operating Ratios(2):

  

Average yield earned on interest-earning assets(3)

     2.07     1.96     2.22     2.85     3.30

Average rate paid on interest-bearing liabilities

     0.44        0.53        0.63        0.75        1.76   

Average interest rate spread(4)

     1.63        1.43        1.59        2.11        1.58   

Net interest margin(4)

     1.70        1.50        1.70        2.24        1.83   

Ratio of interest-earning assets to interest-bearing liabilities

     116.62        116.64        119.61        120.72        116.43   

Non-interest expense as a percent of average assets

     1.17        1.20        1.30        1.44        1.35   

Return on average assets

     0.43        0.30        0.39        0.55        0.43   

Return on average equity

     4.23        2.87        3.45        4.75        4.38   

Ratio of average equity to average assets

     10.05        10.50        11.42        11.64        9.85   

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)

     0.67     2.04     5.10     3.81     4.34

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

     0.09        0.20        0.51        0.58        1.05   

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

     0.09        0.20        0.56        0.64        1.05   

Allowance for loan losses as a percent of total loans receivable

     0.65        0.78        0.96        0.97        1.24   

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

     98.38        38.55        19.09        25.60        29.09   

Charge-offs to average loans receivable outstanding during the period

     0.00        0.00        0.03        0.30        0.00   

Capital Ratios(2):

          

Common Equity Tier 1 capital ratio

     21.75        

Tier 1 risk-based capital ratio

     21.75     29.27     20.02     20.43     21.57

Total risk-based capital ratio

     21.99        29.52        20.24        20.69        22.03   

Tier 1 leverage capital ratio

     10.03        10.17        11.88        11.14        13.12   

 

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

 

3


WVS FINANCIAL CORP. AND SUBSIDIARY

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

FORWARD LOOKING STATEMENTS

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

4


   

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

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

GENERAL

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

West View Savings Bank is a Pennsylvania-chartered, FDIC-insured stock savings bank conducting business from six offices in the North Hills suburbs of Pittsburgh. The Savings Bank converted from the mutual to the stock form of ownership in November 1993. The Savings Bank had no subsidiaries at June 30, 2015.

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

CHANGES IN FINANCIAL CONDITION

 

     Condensed Balance Sheet  
     June 30,      Change  
     2015      2014      Dollars      Percentage  
     (Dollars in Thousands)  

Cash equivalents

   $ 3,573       $ 1,360       $ 2,213         162.7

Certificates of deposit

     350         598         (248      -41.5   

Investments (1)

     272,792         272,209         583         0.2   

Net loans receivable

     46,163         29,724         16,439         55.3   

Total assets

     329,716         309,940         19,776         6.4   

Deposits

     138,928         141,859         (2,931      -2.1   

Borrowed funds

     155,635         135,322         20,313         15.0   

Total liabilities

     297,673         278,152         19,521         7.0   

Stockholders’ equity

     32,043         31,788         255         0.8   

 

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

 

5


Cash Equivalents. Cash on hand and due from banks, and interest-earning demand deposits represent cash equivalents. Cash equivalents increased $2.2 million or 162.7% to $3.6 million at June 30, 2015 from $1.4 million at June 30, 2014. Changes in cash equivalents are influenced by the timing of customer transaction account deposits, the redeployment of funds into other earning assets such as investments or loans, and the repayment of Company borrowings.

Certificates of Deposit. Certificates of deposit decreased $248 thousand or 41.5% to $350 thousand at June 30, 2015 from $598 thousand at June 30, 2014. As part of our asset liability and liquidity management strategies, the Company continued to redeem maturing FDIC insured certificates of deposit with other financial institutions. Proceeds from certificates of deposit were primarily used to fund investment portfolio purchases.

Investments. The Company’s investment portfolio is primarily comprised of U.S. Government Agency bonds, corporate bonds, foreign debt securities, obligations of state and political subdivisions, FHLB stock and mortgaged-backed securities issued by U.S. Government Agencies and private-issuers. See Notes 3 and 4 to the Consolidated Financial Statements for additional information. The Company’s investment portfolio increased $583 thousand or 0.2% to $272.8 million at June 30, 2015 from $272.2 million at June 30, 2014.

Investment securities other than mortgage-backed securities, increased $53.1 million or 105.3% to $103.5 million at June 30, 2015 from $50.4 million at June 30, 2014. This increase was due primarily to purchases of U.S. Government Agency multi step-up notes, investment-grade fixed rate corporate bonds, obligations of state and political subdivisions, U.S. dollar denominated investment-grade fixed-rate foreign bonds, investment grade fixed-rate utility first mortgage bonds, and U.S. dollar denominated investment grade floating-rate foreign bonds totaling $50.9 million, $47.4 million, $6.1 million, $3.3 million, $1.7 million, and $1.6 million, respectively, which were partially offset by early issuer redemptions and maturities totaling $40.4 million of U.S. Government Agency securities, $14.3 million of investment grade corporate bonds, $1.5 million of U.S. dollar denominated investment grade foreign bonds, and $323 thousand of investment grade corporate utility first mortgage bonds. Our investment in Federal Home Loan Bank (FHLB) stock increased $179 thousand or 2.8% to $6.6 million at June 30, 2015 from $6.4 million at June 30, 2014 due to an increased FHLB stock requirement caused by higher levels of FHLB advances. Investment purchases were primarily funded with cash flows from the mortgage-backed securities portfolio. See “Quantitative and Qualitative Disclosures about Market Risk” beginning on page 17.

Mortgage-backed securities decreased $52.7 million or 24.5% to $162.6 million at June 30, 2015 from $215.3 million at June 30, 2014. This decrease was due primarily to cash repayments on U.S. Government Agency floating rate mortgage-backed securities totaling $75.5 million and $717 thousand in cash repayments on the Company’s private-label floating-rate mortgage-backed securities portfolio, which were partially offset by $23.2 million in purchases of U.S. Government Agency floating-rate mortgage-backed securities.

Net Loans Receivable. Net loans receivable increased $16.4 million or 55.3% to $46.2 million at June 30, 2015, from $29.7 million at June 30, 2014. The increase in net loans was primarily attributable to: increases in single-family real estate loans, multi-family real estate loans, construction loans, home equity loans, and land acquisition and development loans totaling $13.0 million, $3.8 million, $1.2 million, $258 thousand, and $80 thousand, respectively, which were partially offset by decreases in commercial real estate loans, obligations (other than securities and leases) of states and political subdivisions, and commercial loans, totaling $1.1 million, $400 thousand, and $333 thousand, respectively. Due to the stagnant economy, a number of the Company’s small builders have exited the business while others have experienced slow sales of their housing inventories. This slowdown in sales also caused a substantially reduced number of new home starts which adversely impacted originations of new speculative construction loans. The Company continued to more aggressively pursue 15, 20, and 30 year fixed-rate single-family residential real estate loans. The Company also makes available residential

 

6


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 2016. The Company will continue to selectively offer commercial real estate, land acquisition and development, and shorter-term construction loans (primarily on residential properties), and commercial loans on business assets to partially increase interest income while managing credit and interest rate risk. The Company also offers higher yielding multi-family loans to existing, and seasoned prospective, customers. During fiscal 2015, the Company retained all of its loan originations. The Company also partners with the FHLB’s Mortgage Partnership Finance® (“MPF”) Program to make purchase money and refinancing mortgages available to the public. These loans are originated through the Company who then assigns the loans to the MPF Program. This MPF Program relationship allows the Company to earn loan origination fee income and avoid the interest rate risk of retaining long-term fixed rate mortgages with low interest rates on the Company’s balance sheet. Residential loan originations began to increase in fiscal 2014 and 2015, and we expect this trend to continue into fiscal 2016.

Deposits. Total deposits decreased approximately $2.9 million or 2.1% during the year ended June 30, 2015. The Company’s customers primarily reduced CD holdings by transferring funds to more liquid short-term holdings (primarily non-interest bearing checking accounts and savings accounts). Certificates of deposit decreased $3.5 million or 10.1%. Money market accounts decreased by $1.1 million or 4.6%, demand deposits increased $667 thousand or 1.8%, savings accounts increased $664 thousand or 1.5%, and advance payments by borrowers for taxes and insurance increased $374 thousand or 76.2%. See Note 12 to the Consolidated Financial Statements and “Quantitative and Qualitative Disclosures on Market Risk.”

Borrowed Funds. Borrowed funds increased $20.3 million or 15.0% to $155.6 million during fiscal 2015. The Company’s borrowed funds are comprised of three components: FHLB long-term advances – fixed rate, FHLB long-term advances – variable rate, and short-term borrowings. Short-term borrowings include FHLB short-term advances and other short-term borrowings such as broker repurchase agreements or borrowings from the Federal Reserve Bank of Cleveland (FRB).

At June 30, 2015, our FHLB long-term fixed rate advances totaled $12.5 million with a weighted-average interest rate of 4.44% and will mature in June 2016 and July 2017. At June 30, 2015, our FHLB long-term variable rate advances totaled $105.3 million, with a weighted average interest rate of 0.30%. These advances will mature within twenty-seven months.

The Company also uses a variety of short-term borrowing sources as part of its asset/liability management program. The actual short-term funding source used, at any given point in time, depends upon factors such as cost, terms, maturity terms and general market conditions. During fiscal 2015, we increased our FHLB short-term borrowings by $14.2 million or 60.1%. We had no other short-term borrowings at June 30, 2015.

Stockholders’ Equity. Total stockholders’ equity increased $255 thousand or 0.8% to $32.0 million at June 30, 2015, compared to $31.8 million at June 30, 2014. The increase in stockholders’ equity was primarily attributable to Company net income of $1.3 million, which was partially offset by the purchase of $548 thousand of unallocated ESOP shares, $329 thousand of cash dividends paid on the Company’s common stock, and $186 thousand paid for the acquisition of Treasury stock, and other comprehensive losses, net of tax, totaling $41 thousand. See the Consolidated Statement of Comprehensive Income and Note 5 to the Consolidated Financial Statements for a discussion of the components of other comprehensive income. Book value per share (tier 1 equity basis) increased from $15.66 at June 30, 2014 to $15.93 at June 30, 2015. On a common equity basis, book value per share increased from $15.45 at June 30, 2014 to $15.70 at June 30, 2015. The Company was able to maintain strong capital ratios during fiscal 2015 to further bolster its balance sheet. Our tier 1 leverage ratio was 10.03% and total risk-based capital ratio was 21.99% at June 30, 2015.

 

7


RESULTS OF OPERATIONS

 

    

Condensed Statements of Income

 
     Year Ended
June 30,
2015
     Change     Year Ended
June 30,
2014
     Change     Year Ended
June 30,
2013
 
     (Dollars in Thousands)  

Interest income

   $ 6,378       $ 557      $ 5,821       $ (138   $ 5,959   
        9.6        -2.3  

Interest expense

   $ 1,155       $ (202   $ 1,357       $ (50   $ 1,407   
        -14.9        -3.6  

Net interest income

   $ 5,223       $ 759      $ 4,464       $ (88   $ 4,552   
        17.0        -1.9  

Provision for loan losses

   $ 70       $ 143      $ (73    $ (5   $ (68
        195.9        -7.4  

Non-interest income

   $ 558       $ 27      $ 531       $ (42   $ 573   
        5.1        -7.3  

Non-interest expense

   $ 3,706       $ 31      $ 3,675       $ 104      $ 3,571   
        0.8        2.9  

Income tax expense

   $ 658       $ 185      $ 473       $ (69   $ 542   
        39.1        -12.7  

Net income

   $ 1,347       $ 427      $ 920       $ (160   $ 1,080   
        46.4        -14.8  

General. The Company reported net income of $1.3 million, $920 thousand and $1.1 million for the fiscal years ended June 30, 2015, 2014 and 2013, respectively. The $427 thousand increase in net income during fiscal 2015 was primarily the result of a $759 thousand increase in net interest income, and a $27 thousand increase in non-interest income, which were partially offset by a $185 thousand increase in income tax expense, a $143 thousand increase in provisions for loan losses, and a $31 thousand increase in non-interest expense. Earnings per share totaled $0.69 (basic and diluted) for fiscal 2015 as compared to $0.45 (basic and diluted) for fiscal 2014. The $160 thousand decrease in net income during fiscal 2014 was primarily the result of an $88 thousand decrease in net interest income, a $104 thousand increase in non-interest expense, a $42 thousand decrease in non-interest income, and a $5 thousand decrease in credit provisions for loan losses, which were partially offset by a $69 thousand decrease in income tax expense. Earnings per share totaled $0.45 (basic and diluted) for fiscal 2014 as compared to $0.52 (basic and diluted) for fiscal 2013.

 

8


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

 

     For the Years Ended June 30,  
     2015     2014     2013  
     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)

   $ 35,240       $ 1,640         4.65   $ 32,165       $ 1,579         4.91   $ 35,745       $ 2,027         5.67

Mortgage-backed securities

     192,411         2,781         1.45        184,171         2,547         1.38        92,979         1,162         1.25   

Investments - taxable

     73,017         1,493         2.04        74,325         1,567         2.11        132,813         2,743         2.07   

Investments - tax-free(2)

     —           —           0.00        —           —           0.00        —           —           0.00   

FHLB stock

     6,133         457         7.45        5,313         117         2.20        6,093         19         0.31   

Interest-bearing deposits

     349         1         0.29        391         1         0.26        441         1         0.23   

Certificates of deposits

     375         6         1.60        598         10         1.67        649         7         1.08   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     307,525         6,378         2.07     296,963         5,821         1.96     268,720         5,959         2.22
     

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-earning assets

     9,317           8,522           5,472      
  

 

 

         

 

 

         

 

 

       

Total assets

   $ 316,842         $ 305,485         $ 274,192      
  

 

 

         

 

 

         

 

 

       

Interest-bearing liabilities:

                        

Interest-earning checking accounts

   $ 21,240       $ 4         0.02   $ 21,405       $ 4         0.02   $ 20,717       $ 5         0.02

Savings accounts

     43,909         21         0.05        42,654         29         0.07        39,924         39         0.10   

Money market accounts

     24,401         22         0.09        24,321         22         0.09        24,354         28         0.11   

Savings certificates

     32,899         170         0.52        54,854         275         0.50        39,739         303         0.76   

Advance payments by borrowers for taxes and insurance

     571         —           0.00        425         —           0.00        441         3         0.68   

FHLB long-term advances

     116,930         860         0.74        27,344         814         2.98        17,500         837         4.78   

FHLB short-term advances

     23,496         73         0.31        79,243         202         0.25        81,995         192         0.23   

FRB short-term borrowings

     —           —           0.00        —           —           0.00        —           —           0.00   

Other short-term borrowings

     1,378         5         0.36        4,350         11         0.25        —           —           0.00   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     264,824         1,155         0.44     254,596         1,357         0.53     224,670         1,407         0.63
     

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

 

Non-interest-bearing accounts

     18,990              17,877              16,783         
  

 

 

         

 

 

         

 

 

       

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

     283,814              272,473              241,453         

Non-interest-bearing liabilities

     1,182              933              1,439         
  

 

 

         

 

 

         

 

 

       

Total liabilities

     284,996              273,406           242,892      

Equity

     31,846              32,079              31,300         
  

 

 

         

 

 

         

 

 

       

Total liabilities and equity

   $ 316,842            $ 305,485            $ 274,192         
  

 

 

         

 

 

         

 

 

       

Net interest income

      $ 5,223            $ 4,464            $ 4,552      
     

 

 

         

 

 

         

 

 

    

Interest rate spread

           1.63           1.43        1.59
        

 

 

         

 

 

         

 

 

 

Net yield on interest-earning assets(3)

           1.70           1.50        1.70
        

 

 

         

 

 

         

 

 

 

Ratio of interest-earning assets to interest-bearing liabilities

           116.62           116.64        119.61
        

 

 

         

 

 

         

 

 

 

 

(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, a 20% interest expense disallowance and a federal tax rate of 34%.
(3) Net interest income divided by average interest-earning assets.

 

9


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

 

     Year Ended June 30,  
     2015 vs. 2014     2014 vs. 2013  
     Increase (Decrease)
Due to
    Total
Increase

(Decrease)
    Increase (Decrease)
Due to
    Total
Increase

(Decrease)
 
     Volume     Rate       Volume     Rate    
     (Dollars in Thousands)  

Interest-earning assets:

        

Net loans receivable

   $ 163      $ (102   $ 61      $ (191   $ (257   $ (448

Mortgage-backed securities

     124        110        234        1,245        140        1,385   

Investments - taxable

     (17     (57     (74     (1,185     9        (1,176

FHLB stock

     21        319        340        (2     100        98   

Interest-bearing deposits

     —          —          —          —          —          —     

Certificates of deposit

     (4     —          (4     (1     4        3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

   $ 287      $ 270      $ 557      $ (134   $ (4   $ (138
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

      

Interest-earning checking accounts

   $ —        $ —        $ —        $ (1   $ —        $ (1

Savings accounts

     1        (9     (8     3        (13     (10

Money market accounts

     —          —          —          (1     (5     (6

Savings certificates

     (116     11        (105     94        (122     (28

Advance payments by borrowers for taxes and insurance

     —          —          —          —          (3     (3

FHLB long-term borrowings

     83        (37     46        363        (386     (23

FHLB short-term borrowings

     (169     40        (129     (5     15        10   

Other short-term borrowings

     (10     4        (6     11        —          11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

   $ (211   $ 9      $ (202   $ 464      $ (514   $ (50
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 498      $ 261      $ 759      $ (598   $ 510      $ (88
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income. Net interest income is determined by the Company’s interest rate spread (i.e. the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income increased by $759 thousand or 17.0% in fiscal 2015 and decreased $88 thousand or 1.9% in fiscal 2014. The increase in fiscal 2015 was the result of a $557 thousand or 9.6% increase in interest and dividend income and a $202 thousand or 14.9% decrease in interest expense. The decrease in net interest income in fiscal 2014 was the result of a $138 thousand or 2.3% decrease in interest and dividend income, which was partially offset by a $50 thousand or 3.6% decrease in interest expense. Fiscal years 2015 and 2014 were favorably impacted by the reduction of fixed interest costs associated with the repayments on our legacy FHLB long-term advances during the fourth quarter of fiscal 2014.

Interest Income. Total interest income increased by $557 thousand or 9.6% during fiscal 2015 and decreased $138 thousand or 2.3% during fiscal 2014. The increase in fiscal 2015 was primarily the result of higher average balances of net loans receivable and U.S. Government agency mortgage-backed securities, and higher yields earned on FHLB stock and U.S. Government mortgage-backed securities, which were partially offset by lower yields earned on the Company’s loan portfolio, and taxable investment securities. The decrease in fiscal 2014 was primarily the result of lower average balances of investment securities and loans outstanding, and lower yields on the Company’s loan portfolio, which were partially offset by higher average balances of U.S. Government agency mortgage-backed securities and higher yields on the Company’s U.S. Government agency mortgage-backed securities portfolio and FHLB stock. During fiscal 2009, the global economy went into a deep recession and this weakness continued through fiscal 2014. In response to the weak global economy, the world’s central banks implemented a variety of programs including lowering short-term interest rates and various liquidity programs to help restore investor confidence. The overall impact of

 

10


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

Dividend income on FHLB stock increased $340 thousand or 290.6% during fiscal 2015, and $98 thousand or 515.8% during fiscal 2014. The increase in fiscal 2015 was primarily attributable to a 525 basis point increase in the weighted average yield earned on the Company’s holdings of FHLB stock, and an $820 thousand increase in the average balance of FHLB stock held. The increase in the yield earned during fiscal 2015 was primarily attributable to a $145 thousand special dividend paid by FHLB Pittsburgh during the quarter ended March 31, 2015, and increases in the regular dividend rates paid during fiscal 2015. The increase in fiscal 2014 was primarily attributable to a 189 basis point increase in the weighted average yield earned on the Company’s holding of FHLB stock, which was partially offset by a $780 thousand decrease in the average balance of the Company’s holdings of FHLB stock. The Company’s average holdings of FHLB stock are directly related to the volume of outstanding FHLB advances. During fiscal 2015, the Company purchased approximately $179 thousand (net) of FHLB stock.

Interest income on mortgage-backed securities increased $234 thousand or 9.2% during fiscal 2015 and increased $1.4 million or 119.2% during fiscal 2014. The increase in fiscal 2015 was primarily attributable to an $8.9 million increase in the average balance of U.S. Government agency mortgage-backed securities, and a 6 basis point increase in the weighted average yield earned on the Company’s U.S. Government agency mortgage-backed securities portfolio, which were partially offset by a $615 thousand decrease in the average balance of private-label mortgage-backed securities and a 3 basis point decrease in the weighted average yield earned on the Company’s private-label mortgage-backed securities portfolio. The increase in fiscal 2014 was primarily attributable to a $1.3 million increase in the average balance of U.S. Government agency mortgage-backed securities, and a 13 basis point increase in the weighted average yield on the Company’s mortgage-backed securities portfolio. The average balances associated with the Company’s private label mortgage-backed securities declined $615 thousand and $3.3 million, during fiscal 2015 and fiscal 2014, respectively. For the fiscal years 2015 and 2014, the Company reduced its exposure to private-label mortgage-backed securities due to the substandard investment performance associated with this segment. Proceeds from repayments on the mortgage-backed securities were primarily used to fund investment and mortgage-backed securities purchases during fiscal 2015.

Interest income on net loans receivable increased $61 thousand or 3.9% during fiscal 2015 and decreased $448 thousand or 22.1% during fiscal 2014. The increase in fiscal 2015 was primarily attributable to a $3.1 million increase in the average balances of net loans outstanding, which was partially offset by a 26 basis point decrease in the weight average yield earned on the Company’s loan portfolio. The increase in the loan volumes was primarily attributable to loan originations in excess of repayments. The decrease in the yield on net loans receivable was primarily attributable to lower rates on new loans originated. The decrease in fiscal 2014 was primarily attributable to a 76 basis point decrease in the weighted average yield earned on the Company’s loan portfolio, and a $3.6 million decrease in the average balance of net loans outstanding. The decrease in loan volumes was primarily due to lower average volumes of construction loans and mortgage loans. The decrease in the weighted average yield earned was primarily due to lower levels of payoffs and collections of past due interest on non-accrual loans when compared to fiscal 2013. Prior to fiscal 2014, as part of its asset/liability management strategy, historically low long-term mortgage rates, weakness in the economy, rising inventories of existing homes available for sale, and lower construction starts throughout our lending area, the Company had limited its portfolio origination of longer-term fixed rate loans to mitigate its exposure to a rise in market interest rates and credit risk. The Company began portfolio originations of single-family mortgage loans with longer-term fixed rate loans during fiscal 2014, as well as reoffering multi-family and commercial real estate loans, construction loans, land acquisition and development loans, consumer loans, small business and commercial loans. Overall loan demand, and borrower financial capacity were constrained during both fiscal 2013 and 2012 due to weakness in the national economy. Beginning in fiscal 2014, and throughout fiscal 2015, the Company began to see an increase in single-family and multi-family refinancing loans. During fiscal 2015, the Company also enjoyed higher levels of single-family home purchase loans. Substantially all of our loan originations were fixed-rate with a mix of 15, 20 and 30 year terms.

 

11


Interest income on investment securities decreased $74 thousand or 4.7% during fiscal 2015 and $1.2 million or 42.9% during fiscal 2014. The decrease in fiscal 2015 was primarily attributable to a $1.3 million decrease in the average balance of the Company’s investment portfolio, and a 7 basis point decrease in the weighted average yield earned on the Company’s investment portfolio. Investment security maturities and redemptions were primarily used to fund loan growth and purchases of U.S. Government agency mortgage-backed securities during fiscal 2015. The decrease in fiscal 2014 was primarily attributable to a $58.5 million decrease in the average balance of the Company’s investment portfolio, which was partially offset by a 4 basis point increase in the weighted average yield on the Company’s investment portfolio. Investment security maturities and redemptions were used primarily to fund purchases of U.S. Government mortgage-backed securities during fiscal 2014.

Interest income on certificates of deposit decreased $4 thousand or 40.0% during fiscal 2015 and increased $3 thousand or 42.9% during fiscal 2014. The decrease in fiscal 2015 was primarily attributable to a $223 thousand decrease in the average balance of the Company’s holdings of FDIC insured certificates of deposit. The increase in fiscal 2014 was primarily attributable to a 59 basis point increase in the weighted average yield earned on the Company’s holdings of FDIC insured certificates of deposit holdings, which was partially offset by a $51 thousand decrease in the average balance of the Company’s certificate of deposit holdings.

Interest Expense. Total interest expense decreased $202 thousand or 14.9% during fiscal 2015 and decreased $50 thousand or 3.6% during fiscal 2014. The decrease in fiscal 2015 was primarily attributable to decreases in the average balances of FHLB long-term fixed-rate advances, FHLB short-term advances, and time deposits, and lower weighted average rates paid on FHLB long-term fixed-rate advances and savings accounts, which were partially offset by higher average balances of FHLB long-term variable-rate advances, and higher weighted average rates paid on FHLB short-term advances and time deposits. The decrease in the average balance, and weighted average rate paid on, FHLB long-term fixed-rate advances was primarily due to the repayment of $5.0 million of a FHLB long-term fixed rate advance during fiscal 2014. The decrease in the average balance of time deposits was primarily due to the absence of wholesale CDs during fiscal 2015. The decrease in fiscal 2014 was primarily attributable to a 10 basis point decrease in the weighted average rate paid on interest bearing liabilities, which was partially offset by a $9.8 million increase in the average balance of FHLB long-term advances, and a $15.1 million increase in the average balance of time deposits. The repayment of $5.0 million of a FHLB long-term convertible advance during fiscal 2014 significantly reduced the average rate paid on the Company’s interest-bearing liabilities. The increase in the average balance of time deposits was primarily due to the use of wholesale CD’s in fiscal 2014.

Interest expense on FHLB long-term fixed-rate borrowings decreased by $222 thousand or 28.3% during fiscal 2015, and decreased $52 thousand or 6.2% during fiscal 2014. The decrease in fiscal 2015 was primarily attributable to a $4.1 million decrease in the average balance of FHLB long-term fixed-rate advances outstanding and a 24 basis point decrease in the weighted average rate paid on FHLB long-term fixed rate advances. The decrease in fiscal 2014 was primarily attributable to a 4 basis point decrease in the weighted average rate paid on FHLB long-term fixed-rate borrowings, and a $945 thousand decrease in the average balance of FHLB long-term fixed-rate borrowings outstanding.

Interest expense on FHLB short-term borrowings decreased $129 thousand or 63.9% during fiscal 2015, and increased $10 thousand or 5.2% during fiscal 2014. The decrease in fiscal 2015 was primarily attributable to a $55.7 million decrease in the average balance of FHLB short-term borrowings outstanding, which was partially offset by a 6 basis point increase in the weighted average rate paid on FHLB short-term borrowings. The decrease in the average balance of FHLB short-term borrowings are due to the Company’s shift into FHLB long-term variable rate advances. The increase in fiscal 2014 was primarily attributable to a 2 basis point increase in the weighted average rate paid on FHLB short-term borrowings, which was partially offset by a $2.8 million decrease in the average balance on FHLB short-term borrowings outstanding. The decrease in the average balance of FHLB short-term borrowings reflects a shift from FHLB short-term borrowings to other short-term borrowings due to lower short-term borrowing rates available through brokers.

Interest expense on interest-bearing deposits and escrows decreased $113 thousand or 34.2% in fiscal 2015 and decreased $48 thousand or 12.7% in fiscal 2014. The decrease in fiscal 2015 was primarily attributable to a decrease in the average balance of time deposits and lower weighted average rates paid on savings

 

12


accounts, which were partially offset by higher average rates paid on time deposits. Average rates paid on savings accounts decreased 2 basis points while weighted average rates paid on time deposits increased 2 basis points. The average balance of time deposits decreased $22.0 million due to the Company’s exit from the wholesale CD market during fiscal 2014. The decrease in fiscal 2014 was primarily attributable to a decrease in the weighted average rates paid on interest-bearing deposits and escrows which were partially offset by an increase in the average balance of time deposits. Average rates paid on escrows, time deposits, passbooks and money markets decreased 68, 26, 3 and 2 basis points, respectively. Average balances of time deposits increased $15.1 million. The average balance of time deposits increased during fiscal 2014 due to higher utilization of short-term broker deposits. Terms associated with broker deposits were sometimes more favorable during fiscal 2014 than terms offered on short-term borrowings. The Company had no brokered deposits outstanding at June 30, 2015 or 2014.

Interest expense on other short-term borrowings decreased $6 thousand or 54.6% during fiscal 2015, and increased $11 thousand or 100.0% during fiscal 2014. The decrease in fiscal 2015 was primarily attributable to a $3.0 million decrease in the average balance of other short-term borrowings outstanding and an 11 basis point decrease in the weighted average rate paid on other short-term borrowings. The decrease in the average balance of other short-term borrowings reflects the Company’s shift into FHLB long-term variable-rate advances. The increase in fiscal 2014 was primarily attributable to a $4.3 million increase in the average balance of other short-term balances outstanding. The increase in the average balance of other short-term borrowings reflects a shift from FHLB short-term borrowings to other short-term borrowings due to lower short-term borrowing rates available through brokers.

Interest expense on FHLB long-term variable-rate advances increased $268 thousand or 924.1% during fiscal 2015, and increased $29 thousand or 100.0% during fiscal 2014. The increase in fiscal 2015 was primarily attributable to a $93.6 million increase in the average balance of FHLB long-term variable-rate advances outstanding and a 1 basis point increase in the weighted-average rate paid. The increase in fiscal 2014 was primarily attributable to a $10.8 million increase in the average balance of FHLB long-term variable-rate advances outstanding. The Company began using FHLB long-term variable-rate advances during fiscal 2014 to pay down FHLB short-term advances and to lock in longer-term variable rate funding for its variable rate mortgage-backed securities.

Provision for Loan Losses. A provision for loan losses is charged, or accreted to earnings to bring the total allowance to a level considered adequate by management to absorb potential losses in the portfolio. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio considering past experience, current economic conditions, volume, growth, composition of the loan portfolio and other relevant factors. The Company recorded provisions for loan losses totaling $70 thousand in fiscal 2015, and credit provisions totaling $73 thousand in fiscal 2014. The provision for loan losses recorded in fiscal 2015 was primarily attributable to an increase in the Company’s loan portfolio during the fiscal year, and the absence of a $109 thousand credit provision on a paid-off non-performing loan which was recorded in fiscal 2014. The credit provision for 2014 was primarily attributable to the payoff in full of one impaired single-family construction loan, which was partially offset by a higher provision for single-family loans due to growth in that segment.

Non-interest Income. Total non-interest income increased by $27 thousand or 5.1% in fiscal 2015 and decreased by $42 thousand or 7.3% in fiscal 2014. The increase in fiscal 2015 was primarily attributable to a $25 thousand increase in ATM and debit card related income, a $4 thousand increase in earnings on bank-owned life insurance, and the absence of $19 thousand in impairment losses on private-label mortgage-backed securities, which were partially offset by a $22 thousand decrease in service charges on deposits. The decrease in fiscal 2014 was primarily attributable to the absence of $101 thousand in recognized gains on the sale of two single-family real estate owned properties in fiscal 2013, the absence of $46 thousand of recognized gains on the sale of investment securities in fiscal 2013, an $11 thousand decrease in ATM fee income, and a $7 thousand increase in net impairment losses recognized in earnings related to the Company’s private label mortgage-backed securities, which were partially offset by a $136 thousand increase in earnings on bank-owned life insurance.

 

13


Non-interest Expense. Total non-interest expense increased $31 thousand or 0.8% in fiscal 2015, and increased $104 thousand or 2.9% during fiscal 2014. The increase in fiscal 2015 was primarily attributable to increases in ATM and debit card related expenses, employee related expenses, and provisions for off-balance sheet (loan origination) commitments, which were partially offset by recoveries of legal fees related to a paid off non-performing home equity line of credit, and decreases in federal deposit insurance premiums, charitable contributions eligible for PA tax credits, and occupancy and equipment costs. The increase in fiscal 2014 was primarily attributable to increases in employee related expenses, federal deposit insurance premiums, and depreciation expense related to the planned Windows® 7 upgrade to the Company’s personal computers and ATMs, which were partially offset by decreases in charitable contributions eligible for PA tax credits, provisions for losses on off-balance sheet (loan origination) commitments and other real estate owned expenses.

Income Taxes. Income taxes increased $185 thousand during fiscal 2015 and decreased $69 thousand during fiscal 2014. The increase in fiscal 2015 was due to increased levels of taxable income, while the decrease in fiscal 2014 was due to lower levels of taxable income. The Company’s combined effective tax rate was 32.8% for the year ended June 30, 2015 and 34.0% for the year ended June 30, 2014.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is often analyzed by reviewing the cash flow statement. Cash and cash equivalents increased by $2.2 million during fiscal 2015 primarily due to $16.3 million of net cash provided by financing activities, and by $1.6 million of net cash provided by operating activities, which were partially offset by $15.7 million of net cash used for investing activities.

Funds provided by financing activities totaled $16.3 million for fiscal 2015 as compared to $21.2 million provided by financing activities in fiscal 2014. Primary sources of funds for fiscal 2015 were a $14.2 million increase in FHLB short-term advances, and a $6.1 million increase in FHLB long-term variable-rate advances, which were partially offset by a $3.0 million decrease in total deposits, $504 thousand in increase in unallocated ESOP shares, $329 thousand in cash dividends paid on the Company’s common stock, and $186 thousand in purchases of treasury stock. Management has determined that it currently is maintaining adequate liquidity and continues to match funding sources with lending and investment opportunities.

Funds provided by operating activities totaled $1.6 million during fiscal 2015 as compared to $3.3 million during fiscal 2014. Net cash provided by operating activities was primarily comprised of $1.3 million of net income, $756 thousand of amortization and accretion of discounts, premiums and deferred loan fees, $91 thousand in depreciation, and $70 thousand of provisions for loan losses, which were partially offset by a $560 thousand increase in accrued interest receivable, and $140 thousand of earnings on bank-owned life insurance.

Funds used for investing activities totaled $15.7 million during fiscal 2015 as compared to $25.0 million used for investing activities during fiscal 2014. Primary uses of funds during fiscal 2015 included purchases of investments and mortgage-backed securities totaling $110.9 million, and $21.2 million, respectively, a $16.7 million increase in net loans receivable, and net purchases of FHLB stock totaling $179 thousand, which were partially offset by repayments of investments, and mortgage-backed securities totaling $56.6 million, and $76.2 million, respectively. Investment purchases were comprised primarily of U.S. Government Agency mortgage-backed securities and debentures, and investment grade corporate bonds.

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, 2015, the total approved loan commitments outstanding amounted to $4.2 million. At the same date, commitments under unused letters and lines of credit amounted to $6.4 million and the unadvanced portion of construction loans approximated $5.5 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2015, totaled $22.9 million. Management believes that a significant portion of our local maturing deposits will remain with the Company.

 

14


The Company’s contractual obligations at June 30, 2015 were as follows:

 

    

Contractual Obligations

(Dollars in Thousands)

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

Long-term debt

   $ 117,805       $ 101,696       $ 16,109       $ —         $ —     

Operating lease obligations

     80         50         30         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 117,885       $ 101,746       $ 16,139       $ —         $ —     

See also Note 13 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.

On July 28, 2015, the Company’s Board of Directors declared a cash dividend of $0.04 per share payable on August 20, 2015 to shareholders of record at the close of business on August 10, 2015. 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 total capital to risk weighted assets, Tier 1 capital to risk weighted assets, and Common equity Tier 1 capital to risk weighted assets were 21.99%, 21.75%, and 21.75%, respectively, at June 30, 2015. The Company’s ratio of Tier 1 capital to average total assets was 10.03% at June 30, 2015.

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

The Company’s non-performing assets at June 30, 2015 totaled approximately $309 thousand or 0.09% of total assets compared to $607 thousand or 0.20% of total assets at June 30, 2014. The $298 thousand decrease in non-performing assets during the twelve months ended June 30, 2015 was primarily attributable to the payoff in full of one non-performing home equity line of credit totaling $150 thousand, the transfer to real estate owned and subsequent sale of one non-performing single-family loan totaling $139 thousand, and principal payments on one non-performing single-family loan totaling $139 thousand. Non-performing assets at June 30, 2015 consisted of one single-family real estate loan totaling $260 thousand, and one commercial real estate loan totaling $49 thousand.

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

 

15


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.

 

16


QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

The Federal Open Market Committee (“Committee” or “FOMC”) issued a press release on October 29, 2014 which announced the Committee’s current assessments of the U.S. economy and the FOMC’s decision to conclude its Asset Purchase Program (“Program”). The Program included purchases of U.S. Government bonds and U.S. Government Agency mortgage-backed securities. The Committee further decided to maintain its present policy of reinvesting principal payments from its securities holdings and to rollover maturing U.S. Treasury securities at auction. The FOMC believes that the policy of keeping its holdings of longer-term securities at sizeable levels should help maintain accommodative financial conditions.

The Committee further stated that it will likely be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its Asset Purchase Program – especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal and provided that the longer-term inflation expectations remain well anchored.

Throughout fiscal year 2015, the Company continued to adjust its asset/liability management tactics by increasing total assets by about $19.8 million while continuing to manage its Tier 1 capital. The primary segments of asset growth for fiscal year 2015 were: investment securities – available for sale, $38.5 million; net loans receivable, $16.4 million; investment securities held to maturity, $14.6 million; and cash and cash equivalents, $2.2 million, which were partially offset by decreases in mortgage-backed securities held to maturity - $52.7 million. We anticipate growing our asset base to the range of $330 - $350 million during fiscal 2016, subject to economic and market conditions.

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.

 

17


During the fiscal years 2013, 2014 and 2015, intermediate and long-term market interest rates fluctuated considerably. Many central banks, including the Federal Reserve, continued above normal levels of monetary accommodation including quantitative easing and targeted asset purchase programs. The desired outcomes of these programs are to stimulate aggregate demand, reduce high levels of unemployment and to further lower market interest rates.

The table below shows the targeted federal funds rate and the benchmark two and ten year treasury yields at quarter ends beginning in June 30, 2007, and extending through June 30, 2015. The difference in yields on the two year and ten year Treasury’s is often used to determine the steepness of the yield curve and to assess the term premium of market interest rates.

 

          Yield on:      
    

Targeted Federal

Funds

  

Two (2)

Year

Treasury

   

Ten (10)

Year

Treasury

   

Shape of

Yield

Curve

  

 

  

 

 

June 30, 2007

   5.25%      4.87     5.03   Slightly positive

September 30, 2007

   4.75%      3.97     4.59   Moderately positive

December 31, 2007

   4.25%      3.05     4.04   Positive

March 31, 2008

   2.25%      1.62     3.45   Positive

June 30, 2008

   2.00%      2.63     3.99   Positive

September 30, 2008

   2.00%      2.00     3.85   Positive

December 31, 2008

   0.00% to 0.25%      0.76     2.25   Positive

March 31, 2009

   0.00% to 0.25%      0.81     2.71   Positive

June 30, 2009

   0.00% to 0.25%      1.11     3.53   Positive

September 30, 2009

   0.00% to 0.25%      0.95     3.31   Positive

December 31, 2009

   0.00% to 0.25%      1.14     3.85   Positive

March 31, 2010

   0.00% to 0.25%      1.02     3.84   Positive

June 30, 2010

   0.00% to 0.25%      0.61     2.97   Positive

September 30, 2010

   0.00% to 0.25%      0.42     2.53   Positive

December 31, 2010

   0.00% to 0.25%      0.61     3.30   Positive

March 31, 2011

   0.00% to 0.25%      0.80     3.47   Positive

June 30, 2011

   0.00% to 0.25%      0.45     3.18   Positive

September 30, 2011

   0.00% to 0.25%      0.25     1.92   Positive

December 31, 2011

   0.00% to 0.25%      0.25     1.89   Positive

March 31, 2012

   0.00% to 0.25%      0.33     2.23   Positive

June 30, 2012

   0.00% to 0.25%      0.33     1.67   Positive

September 30, 2012

   0.00% to 0.25%      0.23     1.65   Positive

December 31, 2012

   0.00% to 0.25%      0.24     1.85   Positive

March 31, 2013

   0.00% to 0.25%      0.25     1.87   Positive

June 30, 2013

   0.00% to 0.25%      0.36     2.52   Positive

September 30, 2013

   0.00% to 0.25%      0.33     2.64   Positive

December 31, 2013

   0.00% to 0.25%      0.30     2.84   Positive

March 31, 2014

   0.00% to 0.25%      0.44     2.73   Positive

June 30, 2014

   0.00% to 0.25%      0.47     2.53   Positive

September 30, 2014

   0.00% to 0.25%      0.58     2.52   Positive

December 31, 2014

   0.00% to 0.25%      0.53     1.90   Positive

March 31, 2015

   0.00% to 0.25%      0.56     1.99   Positive

June 30, 2015

   0.00% to 0.25%      0.64     2.33   Positive

These 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, 2015, totaled $8.8 million, $56.6 million, and $76.2 million, respectively. Despite stagnant global interest rates

 

18


and Treasury yields the Company continued to grow its balance sheet and used proceeds from maturities/calls of corporate bonds and U.S. Government agency bonds, repayments on its mortgage-backed securities, and borrowings to purchase U.S. Government agency bonds, U.S. Government agency CMOs, and investment grade corporate bonds, and fund loan growth. In particular, the Company increased its investment securities – available for sale portfolio allocation from $28.4 million at June 30, 2014 to $66.9 million at June 30, 2015, its investment securities held to maturity portfolio from $22.0 million at June 30, 2014 to $36.6 million at June 30, 2015, and its net loans receivable from $29.7 million at June 30, 2014 to $46.2 million at June 30, 2015.

During the fiscal year ended June 30, 2015, the Company increased its loan portfolio by $16.4 million or 54.6% as follows: portfolios of single-family real estate loans - $13.0 million, multi-family real estate loans - $3.8 million, construction loans - $1.2 million, consumer loans - $248 thousand, and land acquisition and development loans - $80 thousand, which were partially offset by decrease in its portfolio of commercial real estate loans of $1.1 million, obligations (other than securities and leases) of states and political subdivisions of $400 thousand, and commercial loans of $333 thousand. The Company also makes available for origination residential mortgage loans with interest rates which adjusts pursuant to a designated index, although customer acceptance has been somewhat limited in the Savings Bank’s market area. We expect that the housing market will modestly grow throughout fiscal 2016. 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 2015, principal investment purchases were comprised of: callable U.S. Government agency multiple step-up bonds with initial lock out periods of 1-4 months - $50.9 million with a weighted average yield to call of 3.17%; investment grade corporate bonds - $47.4 million with a weighted average yield of 1.46%; U.S. Government agency floating-rate CMOs - $23.2 million with a weighted average yield of 1.66%; taxable municipal bonds - $6.1 million with a weighted average yield of 2.69%; U.S. dollar denominated investment-grade fixed-rate corporate bonds of large foreign issuers - $3.3 million with a weighted average yield of 1.53%; investment grade fixed rate corporate utility first mortgage bonds - $1.7 million with a weighted average yield of 1.71%; and U.S. dollar denominated investment grade floating-rate corporate bonds of large foreign issuers - $1.6 million with a weighted average yield of 1.48%. Single step-up bonds have one “step” or increase in coupon. Multiple step-up bonds have more than one “step” or increase in coupon.

Major investment proceeds received during fiscal 2015 were: callable U.S. Government agency bonds - $40.4 million with a weighted average yield of approximately 1.77%; investment grade corporate bonds - $14.3 million with a weighted average yield of approximately 1.85%; investment grade corporate utility first mortgage bonds - $323 thousand with a weighted average yield of 1.28%.

As of June 30, 2015, the implementation of these asset and liability management initiatives resulted in the following:

 

  1) $164.6 million or 49.9% of the Company’s assets were comprised of floating rate investment and mortgage-backed securities. Of this $164.6 million, approximately $162.4 million float on a monthly basis based upon changes in the one-month London Interbank Offered Rate (LIBOR) and about $2.0 million reprice on a quarterly basis based upon the three-month LIBOR.

 

  2) $162.6 million or 66.4% 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) $62.8 million or 25.6% of the Company’s investment portfolio consisted of investment grade fixed-rate corporate bonds with remaining maturities as follows: 3 months or less - $1.6 million or 2.5%; 3 – 12 months - $9.2 million or 14.7%; 1 – 2 years - $45.4 million or 72.2%; 2 – 3 years - $5.5 million or 8.8%; 3 – 5 years - $1.1 million or 1.8% and over 5 years - $1.0 million or 1.8%;

 

  4) $27.4 million or 11.2% of the Company’s investment portfolio was comprised of callable U.S. Government Agency multiple step-up bonds which are callable in less than 6 months. These bonds may or may not actually be redeemed prior to maturity (i.e. called) depending upon the level of market interest rates at their respective call dates;

 

19


  5) $66.9 million or 20.3% of the Company’s assets were comprised of investment securities classified as available for sale;

 

  6) $6.1 million or 1.8% of the Company’s investment portfolio was comprised of obligations of state and political subdivisions;

 

  7) An aggregate of $12.8 million or 27.6% of the Company’s net loan portfolio had adjustable interest rates or maturities of less than 12 months;

 

  8) Approximately $100.3 million of the Company’s total FHLB long-term advances of $117.8 million are comprised of floating rate instruments which adjust on a monthly basis based upon changes in the one-month LIBOR;

 

  9) Approximately $5.0 million of the Company’s total FHLB long-term advances of $117.8 million are comprised of floating rate instruments which adjust on a quarterly basis based upon changes in the three-month LIBOR; and

 

  10) The maturity distribution of the Company’s borrowings is as follows: 3 months or less - $37.8 million or 24.3%;
3 – 12 months - $101.7 million or 65.4%; and 2 – 3 years - $16.1 million or 10.3%.

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.

 

20


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,  
     2015     2014     2013  
     (Dollars in Thousands)  

Interest-earning assets maturing or repricing within one year

   $ 227,461      $ 256,902      $ 236,125   

Interest-bearing liabilities maturing or repricing within one year

     228,335        209,986        188,841   
  

 

 

   

 

 

   

 

 

 

Interest sensitivity gap

   $ (874   $ 46,916      $ 47,284   
  

 

 

   

 

 

   

 

 

 

Interest sensitivity gap as a percentage of total assets

     -0.27     15.14     16.44

Ratio of assets to liabilities maturing or repricing within one year

     99.62     122.34     125.04

During fiscal 2015, the Company managed its one-year interest sensitivity gap primarily by: (1) purchasing $23.2 million of floating-rate U.S. Government agency CMOs which reprice monthly; and (2) increasing by approximately $6.1 million, the Company’s long-term variable rate borrowings that reprice within three months. At June 30, 2015, investments available for sale totaled $66.9 million, or 20.3% of total assets.

 

21


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, 2015. 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)

   $ 3,257      $ 287      $ (3,624   $ 36,321      $ 31,813      $ 28,827      $ 27,341   

% of Total Assets

     1.0     0.1     -1.1     11.0     9.6     8.7     8.3

Base Case Up 100 bp

              

Cumulative Gap ($’s)

   $ 3,469      $ 686      $ (2,890   $ 37,530      $ 33,323      $ 30,624      $ 27,341   

% of Total Assets

     1.1     0.2     -0.9     11.4     10.1     9.3     8.3

Base Case No Change

              

Cumulative Gap ($’s)

   $ 4,077      $ 1,825      $ (874   $ 40,748      $ 37,316      $ 35,092      $ 27,341   

% of Total Assets

     1.2     0.6     -0.3     12.4     11.3     10.6     8.3

Base Case Down 100 bp

              

Cumulative Gap ($’s)

   $ 4,385      $ 2,403      $ 147      $ 42,312      $ 39,134      $ 36,828      $ 27,341   

% of Total Assets

     1.3     0.7     0.0     12.8     11.9     11.2     8.3

Base Case Down 200 bp

              

Cumulative Gap ($’s)

   $ 4,829      $ 3,230      $ 1,577      $ 44,429      $ 41,474      $ 38,939      $ 27,341   

% of Total Assets

     1.5     1.30     0.5     13.5     12.6     11.8     8.3

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, 2015. This analysis was done assuming that the interest-earning assets will average approximately $334 million and $351 million over a projected twelve and twenty-four month period, respectively, for the estimated impact on change in net interest

 

22


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, 2015. 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, 2016     June 30, 2017  

Estimated impact on:

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

     -9.0     -6.6     —          2.4     5.5     -18.0     -12.7     —          8.2     16.7

Return on average equity

     3.48     3.74     4.49     4.76     5.10     3.86     4.51     6.05     7.04     8.05

Return on average assets

     0.33     0.35     0.43     0.45     0.49     0.36     0.42     0.57     0.67     0.77

Market value of equity (in thousands)

   $ 36,825      $ 37,178      $ 37,612      $ 36,696      $ 34,036             

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, 2015.

 

Anticipated Transactions

 
     (Dollars in Thousands)  

Undisbursed construction and development loans

  

Fixed rate

   $ 3,425   
     3.98

Adjustable rate

   $ 2,100   
     4.50

Undisbursed lines of credit

  

Adjustable rate

   $ 6,378   
     3.72

Loan origination commitments

  

Fixed rate

   $ 3,758   
     3.50

Adjustable rate

   $ 438   
     4.29

Letters of credit

  

Adjustable rate

   $ 130   
     4.25
  

 

 

 
   $ 16,221   
  

 

 

 

 

23


LOGO

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

WVS Financial Corp.

We have audited the accompanying consolidated balance sheet of WVS Financial Corp. and subsidiary as of June 30, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2015. These consolidated financial statements are the responsibility of WVS Financial Corp.’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WVS Financial Corp. and subsidiary as of June 30, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2015, in conformity with U.S. generally accepted accounting principles.

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

Wexford, Pennsylvania

September 17, 2015

S.R. Snodgrass, P.C. * 2100 Corporate Drive, Suite 400 * Wexford, Pennsylvania 15090-7647* Phone: (724) 934-0344 * Facsimile: (724) 934-0345

 

24


WVS FINANCIAL CORP.

CONSOLIDATED BALANCE SHEET

(In thousands)

 

     June 30,  
     2015     2014  

ASSETS

    

Cash and due from banks

   $ 1,839      $ 1,088   

Interest-earning demand deposits

     1,734        272   
  

 

 

   

 

 

 

Total cash and cash equivalents

     3,573        1,360   

Certificates of deposit

     350        598   

Investment securities available for sale (amortized cost of $66,968 and $28,189)

     66,916        28,387   

Investment securities held to maturity (fair value of $36,979 and $22,480)

     36,618        22,047   

Mortgage-backed securities held to maturity (fair value of $163,265 and $215,016)

     162,639        215,335   

Net loans receivable (allowance for loan losses of $304 and $234)

     46,163        29,724   

Accrued interest receivable

     1,198        638   

Federal Home Loan Bank stock, at cost

     6,619        6,440   

Premises and equipment

     630        615   

Bank owned life insurance

     4,276        4,136   

Deferred tax assets (net)

     524        512   

Other assets

     210        148   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 329,716      $ 309,940   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

   $ 138,928      $ 141,859   

Federal Home Loan Bank advances: short-term

     37,830        23,626   

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

     12,500        12,500   

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

     105,305        99,196   

Accrued interest payable

     156        170   

Other liabilities

     2,954        801   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     297,673        278,152   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

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

     —          —     

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

     38        38   

Additional paid-in capital

     21,485        21,485   

Treasury stock (1,764,917 and 1,748,661 shares at cost)

     (26,886     (26,700

Retained earnings - substantially restricted

     39,353        38,335   

Accumulated other comprehensive loss

     (461     (420

Unallocated Employee Stock Ownership Plan (“ESOP”) shares

     (1,486     (950
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     32,043        31,788   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 329,716      $ 309,940   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

25


WVS FINANCIAL CORP.

CONSOLIDATED STATEMENT OF INCOME

(In thousands, except per share data)

 

     Year Ended June 30,  
     2015      2014     2013  

INTEREST AND DIVIDEND INCOME

       

Loans, including fees

   $ 1,640       $ 1,579      $ 2,027   

Investment securities – taxable

     1,493         1,567        2,743   

Mortgage-backed securities

     2,781         2,547        1,162   

Certificates of deposit

     6         10        7   

Interest-earning demand deposits

     1         1        1   

Federal Home Loan Bank stock

     457         117        19   
  

 

 

    

 

 

   

 

 

 

Total interest and dividend income

     6,378         5,821        5,959   
  

 

 

    

 

 

   

 

 

 

INTEREST EXPENSE

       

Deposits

     217         330        378   

Federal Home Loan Bank advances – short-term

     73         202        192   

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

     297         29        —     

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

     563         785        837   

Other short-term borrowings

     5         11        —     
  

 

 

    

 

 

   

 

 

 

Total interest expense

     1,155         1,357        1,407   
  

 

 

    

 

 

   

 

 

 

NET INTEREST INCOME

     5,223         4,464        4,552   

Provision for loan losses

     70         (73     (68
  

 

 

    

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     5,153         4,537        4,620   
  

 

 

    

 

 

   

 

 

 

NONINTEREST INCOME

       

Service charges on deposits

     162         184        189   

Earnings on bank owned life insurance

     140         136        —     

Investment securities gains

     —           —          46   

Other than temporary impairment gains (losses)

     —           43        (4

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

     —           (62     (8
  

 

 

    

 

 

   

 

 

 

Net impairment loss recognized in earnings

     —           (19     (12
  

 

 

    

 

 

   

 

 

 

Gain on sale of other real estate owned

     5         —          101   

Other

     251         230        249   
  

 

 

    

 

 

   

 

 

 

Total noninterest income

     558         531        573   
  

 

 

    

 

 

   

 

 

 

NONINTEREST EXPENSE

       

Salaries and employee benefits

     2,164         2,121        1,996   

Occupancy and equipment

     323         329        310   

Data processing

     239         241        245   

Correspondent bank charges

     38         44        49   

Federal deposit insurance premium

     175         187        160   

Other

     767         753        811   
  

 

 

    

 

 

   

 

 

 

Total noninterest expense

     3,706         3,675        3,571   
  

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     2,005         1,393        1,622   

INCOME TAX EXPENSE

     658         473        542   
  

 

 

    

 

 

   

 

 

 

NET INCOME

   $ 1,347       $ 920      $ 1,080   
  

 

 

    

 

 

   

 

 

 

EARNINGS PER SHARE:

       

Basic

   $ 0.69       $ 0.45      $ 0.52   

Diluted

     0.69         0.45        0.52   

AVERAGE SHARES OUTSTANDING:

       

Basic

     1,941,872         2,057,920        2,057,930   

Diluted

     1,941,872         2,057,920        2,057,930   

See accompanying notes to the consolidated financial statements.

 

26


WVS FINANCIAL CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(In thousands)

 

     Year Ended June 30,  
     2015     2014     2013  

NET INCOME

   $ 1,347      $ 920      $ 1,080   

OTHER COMPREHENSIVE INCOME (LOSS)

      

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

      

Gains (losses) arising during the year

     (250     79        90   

LESS: Income tax effect

     (85     27        31   
  

 

 

   

 

 

   

 

 

 
     (165     52        59   

Gains recognized in earnings

     —          —          (46

LESS: Income tax effect

     —          —          (16
  

 

 

   

 

 

   

 

 

 
     —          —          (30

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

     (165     52        89   
  

 

 

   

 

 

   

 

 

 

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

      

Total gains (losses)

     —          43        (4

Losses recognized in earnings

     —          (19     (12
  

 

 

   

 

 

   

 

 

 

Gains recognized in comprehensive income

     —          62        8   

LESS: Income tax effect

     —          21        3   
  

 

 

   

 

 

   

 

 

 
     —          41        5   

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

     188        347        831   

LESS: Income tax effect

     64        118        282   
  

 

 

   

 

 

   

 

 

 
     124        229        549   

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

     124        270        554   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (41     322        643   
  

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 1,306      $ 1,242      $ 1,723   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

 

27


WVS FINANCIAL CORP.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands, except per share data)

 

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

Balance June 30, 2012

   $ 38       $ 21,458       $ (26,690   $ 36,992      $ (1,385   $ —        $ 30,413   

Net income

             1,080            1,080   

Other comprehensive income

               643          643   

Expense for stock options vested

        20                 20   

Cash dividends declared ($0.16 per share)

             (328         (328
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2013

     38         21,478         (26,690     37,744        (742     —          31,828   

Net income

             920            920   

Other comprehensive income

               322          322   

Purchase of treasury stock (955 shares)

           (10           (10

Increase in Unallocated ESOP shares

                 (950     (950

Expense for stock options vested

        7                 7   

Cash dividends declared ($0.16 per share)

             (329         (329
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2014

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

Net income

             1,347            1,347   

Other comprehensive Income (loss)

               (41       (41

Purchase of treasury stock (16,256 shares)

           (186           (186

Increase in Unallocated ESOP shares

                 (548     (548

Release of ESOP shares

                 12        12   

Cash dividends declared ($0.16 per share)

             (329         (329
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2015

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

28


WVS FINANCIAL CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

 

     Year Ended June 30,  
     2015     2014     2013  

OPERATING ACTIVITIES

      

Net income

   $ 1,347      $ 920      $ 1,080   

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

      

Provision for loan losses

     70        (73     (68

Net impairment loss recognized in earnings

     —          19        12   

Depreciation

     91        100        90   

Gain on sale of other real estate owned

     (5     —          (101

Investment securities gains

     —          —          (46

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

     756        1,582        2,861   

Deferred income taxes

     9        71        252   

Earnings on bank owned life insurance

     (140     (136     —     

Decrease (increase) in accrued interest receivable

     (560     733        250   

Decrease in accrued interest payable

     (14     (40     (47

Increase (decrease) in deferred director compensation payable

     6        (13     (29

Decrease in prepaid federal deposit insurance

     —          —          163   

Other, net

     86        101        (311
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     1,646        3,264        4,106   
  

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES

      

Available for sale:

      

Purchase of investment securities

     (54,653     —          (52,876

Proceeds from repayments of investment securities

     14,890        47,200        21,057   

Proceeds from sales of investment securities

     —          —          6,825   

Held to maturity:

      

Purchase of investment securities

     (56,249     (12,783     (9,994

Purchase of mortgage-backed securities

     (21,184     (98,710     (135,304

Proceeds from repayments of investment securities

     41,726        17,182        65,606   

Proceeds from repayments of mortgage-backed securities

     76,219        23,109        75,989   

Proceeds from sales of investment securities

     —          —          337   

Purchase of bank owned life insurance

     —          (2,000     (2,000

Purchase of certificates of deposit

     (100     —          (250

Maturities/redemptions of certificates of deposit

     348        —          497   

Net (increase) decrease in net loans receivable

     (16,655     1,874        7,951   

Purchase of Federal Home Loan Bank stock

     (12,519     (8,726     (998

Redemption of Federal Home Loan Bank stock

     12,340        7,968        2,911   

Acquisition of premises and equipment

     (106     (101     (121

Sale of other real estate owned

     254        —          225   

Other

     (2     —          (5
  

 

 

   

 

 

   

 

 

 

Net cash used for investing activities

     (15,689     (24,987     (20,150
  

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES

      

Net increase (decrease) in deposits

     (3,038     1,335        (1,649

Repayments of Federal Home Loan Bank long-term advances

     —          (5,000     —     

Proceeds from Federal Home Loan Bank long-term advances

     6,109        99,196        —     

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

     14,204        (73,086     17,442   

Purchase of treasury stock

     (186     (10     —     

Increase in unallocated ESOP shares

     (504     (950     —     

Cash dividends paid

     (329     (329     (328
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     16,256        21,156        15,465   
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     2,213        (567     (579

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

     1,360        1,927        2,506   
  

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF YEAR

   $ 3,573      $ 1,360      $ 1,927   
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

      

Cash paid during the year for:

      

Interest

   $ 1,169      $ 1,397      $ 1,454   

Taxes

     668        453        578   

Non-cash items:

      

Mortgage loans transferred to other real estate owned

     246        —          —     

Educational Improvement Tax Credits

     33        47        107   

Unfunded security commitments

     1,969        —          —     

See accompanying notes to the consolidated financial statements.

 

 

29


WVS FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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

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

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

Basis of Presentation

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

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

Investment and Mortgage-Backed Securities

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

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

 

30


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Investment and Mortgage-Backed Securities (Continued)

 

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

The Company retains an independent third party to assist it in the determination of fair values for its private-label collateralized mortgage obligations (“CMOs”). This valuation is meant to be a “Level Three” valuation as defined by ASC Topic 820, Fair Value Measurements and Disclosures. The valuation does not represent the actual terms or prices at which any party could purchase the securities. There is currently no active secondary market for private-label CMOs and there can be no assurance that any secondary market for private-label CMOs will develop. The Company believes that the private-label CMO portfolio had three other than temporary impairments at June 30, 2015.

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.

 

31


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Allowance for Loan Losses (Continued)

 

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

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

Real Estate Owned

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

Premises and Equipment

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

Income Taxes

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

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

 

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.

Stock Options

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

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

During the periods ended June 30, 2015, 2014, and 2013, the Company recorded $0, $7 thousand, and $20 thousand, respectively, in compensation expense related to our share-based compensation awards. As of June 30, 2015, there was no unrecognized compensation cost related to unvested share-based compensation awards granted in fiscal 2009, as all options issued have fully vested.

For purposes of computing results, the Company estimated the fair values of stock options using the Black-Scholes option-pricing model. The model requires the use of subjective assumptions that can materially affect fair value estimates. The fair value of each option is amortized into compensation expense on a straight line basis between the grant date for the option and each vesting date. The fair value of each stock option granted was estimated using the following weighted-average assumptions:

 

Assumptions

    

Volatility

     7.49% to 11.63%

Interest Rates

     2.59% to   3.89%

Dividend Yields

     3.94% to   4.02%

Weighted Average Life (in years)

   10

The Company had 0, 0 and 27,229 non-vested stock options outstanding at June 30, 2015, 2014, and 2013, respectively. The Company had the last 27,229 non-vested options vest during fiscal 2014.

 

33


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Comprehensive Income (Loss)

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

Cash Flow Information

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

Reclassification of Comparative Figures

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

Recent Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The amendments in this Update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this Update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this Update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. This Update is not expected have a significant impact on the Company’s financial statements.

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this Update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method. This Update is not expected to have a significant impact on the Company’s financial statements.

 

34


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements (Continued)

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting Update.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Earlier application is prohibited. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. The Company has included the disclosures related to this Update in Note 14.

In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40). The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the

 

35


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements (Continued)

 

time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this Update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. This Update is not expected to have a significant impact on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40). The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force). This ASU clarifies how current U.S. GAAP should be interpreted in subjectively evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Public business entities are required to implement the new requirements in fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This Update is not expected to have a significant impact on the Company’s financial statements.

In November 2014, the FASB issued ASU 2014-17, Business Combinations (Topic 805): Pushdown Accounting. The amendments in this Update apply to the separate financial statements of an acquired entity and its subsidiaries that are a business or nonprofit activity (either public or nonpublic) upon the occurrence of an event in which an acquirer (an individual or an entity) obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event. The amendments in this Update are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2015, the FASB issued ASU 2015-01, Income Statement – Extraordinary and Unusual Items, as part of its initiative to reduce complexity in accounting standards. This Update eliminates from GAAP the concept of extraordinary items. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.

 

36


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements (Continued)

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810). The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-04, Compensation-Retirement Benefits (Topic 715), as part of its initiative to reduce complexity in accounting standards. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-05, Intangible – Goodwill and Other Internal Use Software (Topic 350-40), as part of its initiative to reduce complexity in accounting standards. This guidance will

 

37


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements (Continued)

 

help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. For public business entities, the Board decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-06, Earnings Per Share (Topic 260):Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions. Topic 260, Earnings Per Share, contains guidance that addresses master limited partnerships that originated from Emerging Issues Task Force (EITF) Issue No. 07-4, Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships. Under Topic 260, master limited partnerships apply the two-class method of calculating earnings per unit because the general partner, limited partners, and incentive distribution rights holders each participate differently in the distribution of available cash in accordance with the contractual rights contained in the partnership agreement. The amendments in this Update specify that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method also are required. The amendments in this Update are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The Update applies to reporting entities that elect to measure the fair value of an investment using the net asset value per share (or its equivalent) practical expedient. Under the amendments in this Update, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate net asset value per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy. A reporting entity should continue to disclose information on investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. A reporting

 

38


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recent Accounting Pronouncements (Continued)

 

entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2015, the FASB issued ASU 2015-08, Business Combinations – Pushdown Accounting – Amendment to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115. This ASU was issued to amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2015, the FASB issued ASU 2015-09, Financial Services-Insurance (Topic 944) – Disclosure about Short-Duration Contracts. The amendments apply to all insurance entities that issue short-duration contracts as defined in Topic 944, Financial Services-Insurance. The amendments require insurance entities to disclose for annual reporting periods certain information about the liability for unpaid claims and claim adjustment expenses. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. Additionally, the amendments require insurance entities to disclose for annual and interim reporting periods a rollforward of the liability for unpaid claims and claim adjustment expenses, described in Topic 944. For health insurance claims, the amendments require the disclosure of the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. For all other entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Transition guidance varies based on the amendments in this Update. The amendments in this Update that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this Update. This Update is not expected to have a significant impact on the Company’s financial statements.

 

39


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. EARNINGS PER SHARE

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

 

     2015      2014      2013  

Weighted-average common shares issued

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

Average treasury stock shares

     (1,755,194      (1,747,716      (1,747,706

Average unallocated ESOP shares

     (108,570      —           —     
  

 

 

    

 

 

    

 

 

 

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

     1,941,872         2,057,920         2,057,930   

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

     —           —           —     
  

 

 

    

 

 

    

 

 

 

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

     1,941,872         2,057,920         2,057,930   
  

 

 

    

 

 

    

 

 

 

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

At June 30, 2015, 2014, and 2013, there were 114,519 options with an exercise price of $16.20 which were anti-dilutive.

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.

 

40


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. INVESTMENT SECURITIES

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

 

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

2015

           

AVAILABLE FOR SALE

           

Corporate debt securities

   $ 60,968       $ 63       $ (93    $ 60,938   

Foreign debt securities 1

     5,298         —           (17      5,281   

Obligations of states and political subdivisions

     702         —           (5      697   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 66,968       $ 63       $ (115    $ 66,916   
  

 

 

    

 

 

    

 

 

    

 

 

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

2015

           

HELD TO MATURITY

           

U.S. government agency securities

   $ 27,395       $ 5       $ (94    $ 27,306   

Corporate debt securities

     3,868         371         —           4,239   

Obligations of states and political subdivisions

     5,355         79         —           5,434   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,618       $ 455       $ (94    $ 36,979   
  

 

 

    

 

 

    

 

 

    

 

 

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

2014

           

AVAILABLE FOR SALE

           

Corporate debt securities

   $ 26,123       $ 188       $ —         $ 26,311   

Foreign debt securities 1

     2,066         10         —           2,076   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,189       $ 198       $ —         $ 28,387   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1 

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

 

41


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. INVESTMENT SECURITIES (Continued)

 

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

2014

           

HELD TO MATURITY

           

U.S. government agency securities

   $ 16,848       $ 11       $ (118    $ 16,741   

Corporate debt securities

     5,199         540         —           5,739   

Foreign debt securities 1

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,047       $ 551       $ (118    $ 22,480   
  

 

 

    

 

 

    

 

 

    

 

 

 

In fiscal years 2015, 2014, and 2013, the Company recorded gross realized investment security gains of $0, $0, and $46 thousand and there were no gross losses for any period. Proceeds from sales of investment securities during fiscal 2015, 2014, and 2013 were $0, $0, and $7.2 million. In fiscal year 2013, one held to maturity security totaling $337 thousand was sold. The investment sold had paid down below fifteen percent of the original investment amount, and was sold with a realized gain of $1 thousand.

The amortized cost and fair values of investment securities at June 30, 2015, by contractual maturity, are shown below. Expected maturities may differ from the contractual maturities because issuers may have the right to call securities prior to their final maturities.

 

     Due in
one year
or less
    Due after
one through
two years
    Due after
two through
three years
    Due after
three  through
five years
    Due after
five through
ten years
    Due after
ten years
    Total  
     (Dollars in Thousands)  

AVAILABLE FOR SALE

              

Amortized cost

   $ 11,319      $ 51,366      $ 3,290      $ 993      $ —        $ —        $ 66,968   

Fair value

     11,334        51,317        3,273        992        —          —          66,916   

Weighted average yield

     1.54     1.56     1.89     1.62     —       —       1.57

HELD TO MATURITY

              

Amortized cost

   $ —        $ 524      $ 3,095      $ 2,109      $ 14,833      $ 16,057      $ 36,618   

Fair value

     —          554        3,293        2,264        14,878        15,990        36,979   

Weighted average yield

     —       6.17     4.94     4.36     1.79     1.66     2.21

At June 30, 2015 and 2014, no investment securities were pledged to secure public deposits, repurchase agreements or borrowings with the Federal Home Loan Bank.

 

1 

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

 

42


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. MORTGAGE-BACKED SECURITIES

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

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

At June 30, 2015, the Company’s Agency CMOs totaled $160.6 million as compared to $212.8 million at June 30, 2014. The Company’s private-label CMOs totaled $2.0 million at June 30, 2015 as compared to $2.5 million at June 30, 2014. The $52.7 million decrease in the CMO segment of our MBS portfolio was primarily due to repayments on our U.S. Government agency CMO portfolio totaling $75.5 million, and $717 thousand in repayments on our private-label CMOs, which were partially offset by purchases of U.S. Government Agency CMOs totaling $23.2 million, and $188 thousand in amortization of non-credit unrealized holding losses on private-label CMOs with other-than-temporary impairment. At June 30, 2015, approximately $162.6 million or 100.0% (book value) of the Company’s MBS portfolio, including CMOs, were comprised of adjustable or floating rate investments, as compared to $215.3 million or 100.0% at June 30, 2014. Substantially all of the Company’s floating rate MBS adjust monthly based upon changes in the one month LIBOR. The Company has no investment in multi-family or commercial real estate based MBS.

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

The Company retains an independent third party to assist it in the determination of a fair value for three of its private-label CMOs. This valuation is meant to be a “Level Three” valuation as defined by ASC Topic 820, Fair Value Measurements and Disclosures. The valuation does not represent the actual terms or prices at which any party could purchase the securities. There is currently no active secondary market for private-label CMOs and there can be no assurance that any secondary market for private-label CMOs will develop. The private-label CMO portfolio had three previously recorded other-than-temporary impairments at June 30, 2015. During the fiscal year ending June 30, 2015, the Company reversed $188 thousand of non-credit unrealized holding losses on three of its private-label CMOs with OTTI due to principal repayments. During the twelve months ended June 30, 2015, the Company recorded no additional credit impairment charges on its private-label CMO portfolio.

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

 

43


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. MORTGAGE-BACKED SECURITIES (Continued)

 

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

 

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

2015

  

HELD TO MATURITY

           

Collateralized mortgage obligations:

           

Agency

   $ 160,614       $ 1,130       $ (909    $ 160,835   

Private-label

     2,025         405         —           2,430   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 162,639       $ 1,535       $ (909    $ 163,265   
  

 

 

    

 

 

    

 

 

    

 

 

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

2014

  

HELD TO MATURITY

           

Collateralized mortgage obligations:

           

Agency

   $ 212,781       $ 1,370       $ (2,097    $ 212,054   

Private-label

     2,554         408         —           2,962   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 215,335       $ 1,778       $ (2,097    $ 215,016   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and fair value of mortgage-backed securities at June 30, 2015, by contractual maturity, are shown below. Expected maturities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Due in
one year
or less
    Due after
one through
five years
    Due after
five through
ten years
    Due after
ten years
    Total  
     (Dollars in Thousands)  

HELD TO MATURITY

          

Amortized cost

   $ —        $ —        $ 446      $ 162,193      $ 162,639   

Fair value

     —          —          462        162,803        163,265   

Weighted average yield

     —       —       1.62     1.35     1.35

 

44


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. MORTGAGE-BACKED SECURITIES (Continued)

 

At June 30, 2015, mortgage-backed securities with amortized costs of $144.1 million and fair values of $144.2 million were pledged to secure public deposits and borrowings with the Federal Home Loan Bank. Of the securities pledged, $6.7 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, 2014 mortgage-backed securities with an amortized cost of $148.3 million and fair values of $147.0 million, were pledged to secure borrowings with the Federal Home Loan Bank and public deposits. Of the securities pledged, $16.5 million of fair value was excess collateral.

 

5. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following tables present the changes in accumulated other comprehensive loss by component for the three years ended June 30, 2015, 2014, and 2013.

 

     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, 2012

   $ (11    $ (1,374    $ (1,385

Other comprehensive income before reclassifications

     119         549         668   

Amounts reclassified from accumulated other comprehensive income (loss)

     (30      5         (25
  

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income

     89         554         643   
  

 

 

    

 

 

    

 

 

 

Balance – June 30, 2013

     78         (820      (742

Other comprehensive income before reclassifications

     52         229         281   

Amounts reclassified from accumulated other comprehensive income

     —           41         41   
  

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income

     52         270         322   
  

 

 

    

 

 

    

 

 

 

Balance – June 30, 2014

     130         (550      (420

Other comprehensive income (loss), before reclassifications

     (165      124         (41

Amounts reclassified from accumulated other comprehensive income (loss)

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income (loss)

     (165      124         (41
  

 

 

    

 

 

    

 

 

 

Balance – June 30, 2015

   $ (35    $ (426    $ (461
  

 

 

    

 

 

    

 

 

 

 

45


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5. ACCUMULATED OTHER COMPREHENSIVE LOSS (Continued)

 

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

 

     Amount Reclassified from Accumulated Other
Comprehensive Income
      
Details About Accumulated Other
Comprehensive Loss Components:
   2015      2014      2013      Affected Line Item in the Statement
Where Net Income is Presented
     (Dollars in Thousands)       

Unrealized gains and losses on available-for-sale securities

   $ —         $ —         $ (46    Investment security gains
  

 

 

    

 

 

    

 

 

    
     —