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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended December 31, 2016

or

 

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

For the transition period from               to               

Commission File Number: 0-22444

 

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

Pennsylvania

     

25-1710500

 

(State or other jurisdiction of

incorporation or organization)

     

(I.R.S. Employer

Identification Number)

 

9001 Perry Highway

Pittsburgh, Pennsylvania

   

15237

 
    (Address of principal executive offices)           (Zip Code)  

                                     (412) 364-1911                                     

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer                Accelerated filer         
Non-accelerated filer          (Do not check if a smaller reporting company)       Smaller reporting company   X  

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

Shares outstanding as of February 10, 2017: 2,008,144 shares Common Stock, $.01 par value.


Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

INDEX

 

PART I.

       

Financial Information

  

Page

    
Item 1.      Financial Statements      
     Consolidated Balance Sheet as of
December 31, 2016 and June 30, 2016
(Unaudited)
   3   
     Consolidated Statement of Income
for the Three and Six Months Ended
December 31, 2016 and 2015 (Unaudited)
   4   
     Consolidated Statement of Comprehensive
Income for the Three and Six Months Ended
December 31, 2016 and 2015 (Unaudited)
   5   
     Consolidated Statement of Changes in
Stockholders’ Equity for the Six Months
Ended December 31, 2016 (Unaudited)
   6   
     Consolidated Statement of Cash Flows
for the Six Months Ended December 31, 2016
and 2015 (Unaudited)
   7   
     Notes to Unaudited Consolidated
Financial Statements
   9   
Item 2.      Management’s Discussion and Analysis of
Financial Condition and Results of
Operations for the Three and Six Months
Ended December 31, 2016
   42   
Item 3.      Quantitative and Qualitative Disclosures
about Market Risk
   49   
Item 4.      Controls and Procedures    53   

PART II.

       

Other Information

  

Page

    
Item 1.      Legal Proceedings    54   
Item 1A.      Risk Factors    54   
Item 2.      Unregistered Sales of Equity Securities and
Use of Proceeds
   54   
Item 3.      Defaults Upon Senior Securities    55   
Item 4.      Mine Safety Disclosures    55   
Item 5.      Other Information    55   
Item 6.      Exhibits    56   
     Signatures    57   

 

2


Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

(In thousands, except share and per share data)

 

         December 31, 2016                 June 30, 2016          

Assets

    

Cash and due from banks

                 $       2,060        $       2,042   

Interest-earning demand deposits

     326        301   
  

 

 

   

 

 

 

Total cash and cash equivalents

     2,386        2,343   

Certificates of deposit

     10,385        350   

Trading Securities

     920        -   

Investment securities available-for-sale (amortized cost of $106,773 and $107,556)

     106,754        107,676   

Investment securities held-to-maturity (fair value of $8,861 and $9,990)

     8,684        9,523   

Mortgage-backed securities held-to-maturity (fair value of $124,463 and $137,679)

     123,273        137,416   

Net loans receivable (allowance for loan losses of $395 and $360)

     74,146        64,673   

Accrued interest receivable

     1,314        1,508   

Federal Home Loan Bank (FHLB) stock, at cost

     6,778        6,599   

Premises and equipment, net

     496        542   

Bank owned life insurance

     4,476        4,410   

Deferred tax assets (net)

     442        406   

Other assets

     81        277   
  

 

 

   

 

 

 

TOTAL ASSETS

                 $  340,135                    $  335,723   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits

    

Non-interest-bearing accounts

     $    20,190        $    17,284   

NOW accounts

     23,668        22,201   

Savings accounts

     45,696        47,232   

Money market accounts

     22,716        23,050   

Certificates of deposit

     29,934        30,250   

Advance payments by borrowers for taxes and insurance

     1,230        1,261   
  

 

 

   

 

 

 

Total deposits

     143,434        141,278   

Federal Home Loan Bank advances: short-term

     146,074        144,027   

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

     10,000        10,000   

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

     6,109        6,109   

Accrued interest payable

     166        189   

Other liabilities

     1,028        1,035   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     306,811        302,638   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock:

    

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

     -        -   

Common stock:

    

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

     38        38   

Additional paid-in capital

     21,485        21,485   

Treasury stock: 1,797,492 and 1,766,507 shares at cost, respectively

     (27,264     (26,905

Retained earnings, substantially restricted

     40,821        40,189   

Accumulated other comprehensive loss

     (285     (238

Unallocated Employee Stock Ownership Plan (“ESOP”) shares

     (1,471     (1,484
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     33,324        33,085   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

     $  340,135        $  335,723   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3


Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF INCOME

(UNAUDITED)

(In thousands, except share and per share data)

 

         Three Months Ended    
December 31,
         Six Months Ended    
December 31,
 
     2016     2015      2016     2015  

INTEREST AND DIVIDEND INCOME:

         

Loans, including fees

         $          668            $          567             $          1,303            $          1,089   

Investment securities—taxable

     503        461         1,012        968   

Mortgage-backed securities

     524        509         1,070        1,023   

Certificates of deposit

     34        2         43        3   

Interest-earning demand deposits

     -        -         -        1   

Trading securities

     2        -         2        -   

FHLB Stock

     83        83         162        174   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest and dividend income

     1,814        1,622         3,592        3,258   
  

 

 

   

 

 

    

 

 

   

 

 

 

INTEREST EXPENSE:

         

Deposits

     54        54         110        106   

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

     109        142         218        284   

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

     18        91         26        173   

Federal Home Loan Bank advances – short-term

     215        32         415        60   

Other short-term borrowings

     -        1         -        8   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     396        320         769        631   
  

 

 

   

 

 

    

 

 

   

 

 

 

NET INTEREST INCOME

     1,418        1,302         2,823        2,627   

PROVISION FOR LOAN LOSSES

     18        28         35        47   
  

 

 

   

 

 

    

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     1,400        1,274         2,788        2,580   
  

 

 

   

 

 

    

 

 

   

 

 

 

NON-INTEREST INCOME:

         

Service charges on deposits

     35        41         72        84   

Earnings on Bank Owned Life Insurance

     33        33         66        67   

Market losses on trading securities

     (41     -         (41     -   

Investment securities gains

     -        21         -        21   

Other

     80        61         140        124   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total non-interest income

     107        156         237        296   
  

 

 

   

 

 

    

 

 

   

 

 

 

NON-INTEREST EXPENSE:

         

Salaries and employee benefits

     541        565         1,084        1,108   

Occupancy and equipment

     81        80         163        164   

Data processing

     54        56         109        114   

Correspondent bank service charges

     10        10         20        20   

Federal deposit insurance premium

     12        49         61        98   

Other

     218        184         413        383   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total non-interest expense

     916        944         1,850        1,887   
  

 

 

   

 

 

    

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES

     591        486         1,175        989   

INCOME TAX EXPENSE

     196        193         382        385   
  

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME

     $          395        $          293         $          793        $          604   
  

 

 

   

 

 

    

 

 

   

 

 

 

EARNINGS PER SHARE:

         

Basic

     $         0.21        $         0.15         $         0.42        $         0.32   

Diluted

     $         0.21        $         0.15         $         0.42        $         0.32   

AVERAGE SHARES OUTSTANDING:

         

Basic

     1,881,086        1,910,190         1,878,623        1,909,726   

Diluted

     1,881,086        1,910,190         1,878,623        1,909,726   

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

(In thousands)

 

    Three Months Ended
December 31,
    Six Months Ended
December 31,
 
        2016             2015         2016             2015  

NET INCOME

          $ 395              $ 293              $ 793              $ 604   

OTHER COMPREHENSIVE INCOME (LOSS)

       

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

       

Losses arising during the year

    (58     (211     (138     (199

Less: Income tax effect

    20        72        47        68   
 

 

 

   

 

 

   

 

 

   

 

 

 
    (38     (139     (91     (131

Gains recognized in earnings

    -        (21     -        (21

Less: Income tax effect

    -        (7     -        (7
 

 

 

   

 

 

   

 

 

   

 

 

 
    -        (14     -        (14
 

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized holdings losses on securities available for sale not other-than-temporarily impaired, net of tax

    (38     (153     (91     (145
 

 

 

   

 

 

   

 

 

   

 

 

 

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

       

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

    37        45        70        99   

Less: Income tax effect

    (15     (16     (26     (34
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    22        29        44        65   
 

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized holdings losses on securities, net

    (16     (124     (47     (80
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

    (16     (124     (47     (80
 

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

          $   379              $   169              $   746              $   524   
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands)

 

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

Balance June 30, 2016

    $    38        $ 21,485          $ (26,905       $ 40,189          $ (238       $    (1,484       $33,085   

Net income

          793            793   

Other comprehensive loss

            (47       (47

Purchase of treasury stock (30,985 shares)

        (359           (359

Release of ESOP shares

              13        13   

Cash dividends declared ($0.08 per share)

          (161         (161
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance December 31, 2016

        $    38          $ 21,485          $ (27,264       $ 40,821          $ (285       $ (1,471       $33,324   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

     Six Months Ended  
     December 31,  
           2016                 2015        

OPERATING ACTIVITIES

    

Net income

   $ 793      $ 604   

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

    

Provision for loan losses

     35        47   

Depreciation

     49        49   

Gain on sale of investment securities

     -        (21

Amortization of discounts, premiums and deferred loan costs

     1,105        1,048   

Trading losses

     41        -   

Purchase of trading securities

     (961     -   

Deferred income taxes

     (36     (39

Increase (decrease) in prepaid/accrued income taxes

     (35     15   

Earnings on bank owned life insurance

     (66     (67

(Increase) decrease in accrued interest receivable

     194        (235

Increase (decrease) in accrued interest payable

     (23     12   

Increase in deferred director compensation payable

     17        14   

Other, net

     84        137   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,197        1,564   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Available-for-sale:

    

Purchase of investment securities

     (42,256     (37,399

Proceeds from repayments of investments

     42,029        9,714   

Sale of investment securities

     -        1,024   

Held-to-maturity:

    

Purchases of investment securities

     -        (9,358

Purchases of mortgage-backed securities

     (7,984     (6,750

Proceeds from repayments of investments

     833        34,966   

Proceeds from repayments of mortgage-backed securities

     22,218        17,473   

Purchase of certificates of deposit

     (10,135     (100

Maturities/redemptions of certificates of deposit

     100        100   

Increase in net loans receivable

     (9,472     (11,667

Purchase of FHLB stock

     (4,007     (3,167

Redemption of FHLB stock

     3,828        3,315   

Acquisition of premises and equipment

     (3     (7
  

 

 

   

 

 

 

Net cash used for investing activities

     (4,849     (1,856
  

 

 

   

 

 

 

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

     Six Months Ended  
     December 31,  
           2016                 2015        

FINANCING ACTIVITIES

    

Net increase in transaction and savings accounts

   $ 2,503      $ 4,243   

Net decrease in certificates of deposit

     (316     (1,768

Net (decrease) increase in advance payments by borrowers for taxes and insurance

     (31     53   

Proceeds from FHLB long-term advances – variable rate

     -        -   

Net increase (decrease) in FHLB short-term advances

     2,046        (2,697

Purchase of treasury stock

     (359     (19

Release of ESOP shares

     13        25   

Cash dividends paid

     (161     (244
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     3,695        (407
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     43        (699

CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD

     2,343        3,573   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD

   $   2,386      $   2,874   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    

Cash paid during the period for:

    

Interest on deposits and borrowings

   $      792      $      619   

Income taxes

   $      376      $      367   

Non-cash items:

    

Unsettled security purchases

   $ -      $      549   

Bonds received from issuer exchange offer

   $ -      $   1,002   

Educational Improvement Tax Credit

   $         49      $ -   

See accompanying notes to unaudited consolidated financial statements.

 

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WVS FINANCIAL CORP. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (GAAP). However, all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation have been included. The results of operations for the three and six months ended December 31, 2016, are not necessarily indicative of the results which may be expected for the entire fiscal year.

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). 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 currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contract with Customers (Topic 606). The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is evaluating the effect of adopting this new accounting Update.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (g) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through

 

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965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services (that are an output of the entity’s ordinary activities) in exchange for consideration. The amendments in this Update do not change the core principle of the guidance in Topic 606; they simply clarify the implementation guidance on principal versus agent considerations. The amendments in this Update are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). The amendments in this Update affect all entities that issue share-based payment awards to their employees. The standards in this Update provide simplification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as with equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition to those simplifications, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because the guidance that is being superseded was never effective. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services in exchange for consideration. The amendments in this Update do not change the core principle for revenue recognition in Topic 606. Instead, the amendments provide (1) more detailed guidance in a few areas and

 

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(2) additional implementation guidance and examples based on feedback the FASB received from its stakeholders. The amendments are expected to reduce the degree of judgment necessary to comply with Topic 606, which the FASB expects will reduce the potential for diversity arising in practice and reduce the cost and complexity of applying the guidance. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivative and Hedging (Topic 815), which rescinds SEC paragraphs pursuant to two SEC Staff Announcements at the March 3, 2016, Emerging Issues Task Force meeting. This Update did not have a significant impact on the Company’s financial statements.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606), which among other things clarifies the objective of the collectability criterion in Topic 606, as well as certain narrow aspects of Topic 606. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. This Update is not expected to have a significant impact on the Company’s financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which addresses eight specific cash flow issues with the objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of

 

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the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

In October 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) (“ASU 2016-18”), which requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements, which represents changes to clarify, correct errors, or make minor improvements to the Accounting Standards Codification. The amendments make the Accounting Standards Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. Most of the amendments in this Update do not require transition guidance and are effective upon issuance of this Update. This Update is not expected to have a significant impact on the Company’s financial statements.

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers “ASU 2016-20”. This Update, among others things, clarifies that guarantee fees within the scope of Topic 460, Guarantees, (other than product or service warranties) are not within the scope of Topic 606. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for the new revenue recognition guidance. For public entities with a calendar year-end, the new guidance is effective in the quarter and year beginning January 1, 2018. For all other entities with a calendar year-end, the new guidance is effective in the year ending December 31, 2019, and interim periods in 2020. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business “ASU 2017-01”, which provides a more robust framework to use in determining when a set of assets and activities (collectively referred to as a “set”) is a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update should be applied prospectively on or after the effective date. This Update is not expected to have a significant impact on the Company’s financial statements.

 

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3. EARNINGS PER SHARE

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

 

     Three Months Ended     Six Months Ended  
     December 31,     December 31,  
             2016                     2015                     2016                     2015          

Weighted average common shares issued

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

Average treasury stock shares

     (1,797,492     (1,766,507     (1,793,768     (1,766,429

Average unallocated ESOP shares

     (127,058     (128,939     (133,245     (129,481
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     1,881,086        1,910,190        1,878,623        1,909,726   

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

     1,881,086        1,910,190        1,878,623        1,909,726   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

At December 31, 2016, and 2015, there were 114,519 options outstanding with an exercise price of $16.20 which were anti-dilutive for the three and six month periods.

 

4. STOCK BASED COMPENSATION DISCLOSURE

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

During the six month periods ended December 31, 2016 and 2015, the Company recorded $0 in compensation expense related to our share-based compensation awards. As of December 31, 2016, there was no unrecognized compensation cost related to unvested share-based compensation awards granted in fiscal 2009.

The Company had no non-vested stock options outstanding at December 31, 2016 and 2015. There were no stock options exercised or issued during the six months ended December 31, 2016 and 2015.

 

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5. 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)  
December 31, 2016                                                       

AVAILABLE FOR SALE

                      

Corporate debt securities

   $           98,415       $           67       $           (61   $           98,421   

Foreign debt securities 1

        7,028            -            (1        7,027   

Obligations of states and political subdivisions

        1,330            -            (24        1,306   
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

   $           106,773       $           67       $           (86   $           106,754   
     

 

 

       

 

 

       

 

 

      

 

 

 
            Amortized Cost             Gross
Unrealized
Gains
            Gross
Unrealized
Losses
           Fair
Value
 
                        
            (Dollars in Thousands)  
December 31, 2016                                                       

HELD TO MATURITY

                      

U.S. government agency securities

   $           625       $           -       $           (6   $           619   

Corporate debt securities

        2,703            148            -           2,851   

Obligations of states and political subdivisions

        5,356            35            -           5,391   
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

   $           8,684       $           183       $           (6   $           8,861   
     

 

 

       

 

 

       

 

 

      

 

 

 
            Amortized
Cost
            Gross
Unrealized
Gains
            Gross
Unrealized
Losses
           Fair Value  
            (Dollars in Thousands)  
June 30, 2016                                                       

AVAILABLE FOR SALE

                      

Corporate debt securities

   $           96,742       $           150       $           (40   $           96,852   

Foreign debt securities 1

        8,780            5            (2        8,783   

Obligations of states and political subdivisions

        2,034            7            -           2,041   
     

 

 

       

 

 

       

 

 

      

 

 

 

Total

   $           107,556       $           162       $           (42   $           107,676   
     

 

 

       

 

 

       

 

 

      

 

 

 

 

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

 

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

June 30, 2016

     

HELD TO MATURITY

                       

U.S. government agency securities

   $           625       $           5       $           -       $           630   

Corporate debt securities

        3,543            228            -            3,771   

Obligations of states and political subdivisions 2

        5,355            234            -            5,589   
     

 

 

       

 

 

       

 

 

       

 

 

 

Total

   $           9,523       $           467       $           -       $           9,990   
     

 

 

       

 

 

       

 

 

       

 

 

 

There were no sales of investment securities for the three and six months ended December 31, 2016.

During the three and six months ended December 31, 2015, the Company recorded gross realized investment securities gains of $21 thousand. Proceeds from sales of investment during the three and six months ended December 31, 2015 were $1.0 million.

The amortized cost and fair values of debt securities at December 31, 2016, by contractual maturity, are shown below. Expected maturities may differ from the contractual maturities because issuers may have the right to call securities prior to their final maturities.

 

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

AVAILABLE FOR SALE

                             

Amortized cost

   $           70,872       $           33,897       $           2,004       $           -       $           106,773   

Fair value

        70,862            33,861            2,031            -            106,754   

HELD TO MATURITY

                             

Amortized cost

   $           2,032       $           3,822       $           2,205       $           625       $           8,684   

Fair value

        2,073            3,948            2,221            619            8,861   

At December 31, 2016, investment securities with amortized costs of $126.125 million, and fair values of $127.063 million were pledged to secure borrowings with the Federal Home Loan Bank (“FHLB”). Of the securities pledged, $5.599 million of amortized cost was excess collateral at the FHLB. Excess collateral is maintained to support future borrowings and may be withdrawn by the Company at any time.

As of December 31, 2016, investment securities with amortized costs of $3.053 million and fair values of $3.195 million were pledged to secure future borrowings with the Federal Reserve Bank of Cleveland (FRBC). Since the Company had no FRBC borrowings outstanding on December 31, 2016, all FRBC collateral pledges may be withdrawn by the Company at any time.

As of December 31, 2016, no investment securities were pledged to secure broker repurchase agreements.

 

 

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

 

 

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6. MORTGAGE-BACKED SECURITIES

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

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

At December 31, 2016, the Company’s Agency CMOs totaled $122.005 million as compared to $135.957 million at June 30, 2016. The Company’s private-label CMOs totaled $1.268 million at December 31, 2016 as compared to $1.459 million at June 30, 2016. The $13.952 million decrease in the CMO segment of our MBS portfolio was primarily due to repayments on our Agency and private-label CMOs which totaled $21.957 million and $261 thousand, respectively, which were partially offset by purchases of U.S. Government agency CMOs totaling $7.984 million. At December 31, 2016, approximately $123.273 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 $137.416 million or 100.0% at June 30, 2016. 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 its three private-label CMOs. This valuation is meant to be a “Level Three” valuation as defined by ASC Topic 820, Fair Value Measurements and Disclosures. The valuation does not represent the actual terms or prices at which any party could purchase the securities. There is currently no active secondary market for private-label CMOs and there can be no assurance that any secondary market for private-label CMOs will develop. The private-label CMO portfolio had three previously recorded other-than-temporary impairments at December 31, 2016. During the six months ending December 31, 2016, the Company reversed $38 thousand of non-credit unrealized holding losses on its three private-label CMOs with OTTI due to principal repayments. During the six months ended December 31, 2016, 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.

 

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The following table sets forth information with respect to the Company’s private-label CMO portfolio as of December 31, 2016. At the time of purchase, all of our private-label CMOs were rated in the highest investment category by at least two ratings agencies.

 

            At December 31, 2016  
            Rating      Book
  Value  
     Fair
  Value3  
    

Life to Date
Impairment
  Recorded in  
Earnings

 

      Cusip #      

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

126694CP1

     CWHL SER 21 A11         N/A         Caa2         D                 $ 697               $  903                   $  201   

126694KF4

     CWHL SER 24 A15         D         N/A         D           142         320         39   

126694KF4

     CWHL SER 24 A15         D         N/A         D           283         160         79   

126694MP0

     CWHL SER 26 1A5         D         N/A         D           146         158         36   
              

 

 

    

 

 

    

 

 

 
                       $  1,268               $  1,541                   $  355   
              

 

 

    

 

 

    

 

 

 

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

 

             Amortized
Cost
            Gross
  Unrealized  
Gains
            Gross
  Unrealized  
Losses
           Fair
  Value  
 
   

 

 

 
          (Dollars in Thousands)  

December 31, 2016

                    

HELD TO MATURITY

                    

Collateralized mortgage obligations:

                    

Agency

  $          122,005       $           1,279       $           (362   $           122,922   

Private-label

      1,268            273            -           1,541   
   

 

 

       

 

 

       

 

 

      

 

 

 

Total

  $          123,273       $           1,552       $           (362   $           124,463   
   

 

 

       

 

 

       

 

 

      

 

 

 
             Amortized   
Cost
            Gross
  Unrealized  
Gains
            Gross
  Unrealized  
Losses
           Fair
    Value    
 
   

 

 

 
          (Dollars in Thousands)  

June 30, 2016

   

HELD TO MATURITY

                    

Collateralized mortgage obligations:

                    

Agency

  $          135,957       $           932       $           (913   $           135,976   

Private-label

      1,459            244            -           1,703   
   

 

 

       

 

 

       

 

 

      

 

 

 

Total

  $          137,416       $           1,176       $           (913   $           137,679   
   

 

 

       

 

 

       

 

 

      

 

 

 

 

 

 

 

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

 

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The amortized cost and fair value of the Company’s mortgage-backed securities at December 31, 2016, 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

  $     -      $           -      $           301      $           122,972      $           123,273   

Fair value

      -           -           309           124,154           124,463   

At December 31, 2016, mortgage-backed securities with amortized costs of $150.3 million and fair values of $150.4 million were pledged to secure public deposits and borrowings with the FHLB. Of the securities pledged, $32.2 million of fair value was excess collateral. At June 30, 2016 mortgage-backed securities with an amortized cost of $127.6 million and fair values of $127.6 million, were pledged to secure public deposits and borrowings with the FHLB. Of the securities pledged, $16.7 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.

 

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7. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following tables present the changes in accumulated other comprehensive loss by component, for the three and six months ended December 31, 2016 and 2015.

 

    Three Months Ended December 31, 2016  
    (Dollars in Thousands – net of tax)  
        Unrealized Gains    
    and Losses on    
    Available-for-Sale    
    Securities    
        Unrealized Gains    
    and Losses on    
    Held-to-Maturity    
    Securities    
                Total              

Beginning Balance – September 30, 2016

    $ 25        $ (294     $ (269

Other comprehensive income (loss) before reclassifications

    (38     22        (16

Amounts reclassified from accumulated other comprehensive loss

    -        -        -   
 

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

    (38     22        (16
 

 

 

   

 

 

   

 

 

 

Ending Balance – December 31, 2016

    $ (13     $ (272     $ (285
 

 

 

   

 

 

   

 

 

 
    Six Months Ended December 31, 2016  
    (Dollars in Thousands – net of tax)  
        Unrealized Gains    
    and Losses on    
    Available-for-Sale    
    Securities    
        Unrealized Gains    
    and Losses on    
    Held-to-Maturity    
    Securities    
                Total              

Beginning Balance – June 30, 2016

    $ 78        $ (316     $ (238

Other comprehensive income (loss) before reclassifications

    (91     44        (47

Amounts reclassified from accumulated other comprehensive loss

    -        -        -   
 

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

    (91     44        (47
 

 

 

   

 

 

   

 

 

 

Ending Balance – December 31, 2016

    $ (13     $ (272     $ (285
 

 

 

   

 

 

   

 

 

 

 

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     Three Months Ended December 31, 2015  
     (Dollars in Thousands – net of tax)  
         Unrealized Gains    
    and Losses on    
    Available-for-Sale    
    Securities    
        Unrealized Gains    
    and Losses on    
    Held-to-Maturity    
    Securities    
                Total              

Beginning Balance – September 30, 2015

   $ (27   $ (390   $ (417

Other comprehensive income (loss) before reclassifications

     (139     29        (110

Amounts reclassified from accumulated other comprehensive income (loss)

     (14     -        (14
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (153     29        (124

Ending Balance – December 31, 2015

   $ (180   $ (361   $ (541
  

 

 

   

 

 

   

 

 

 
     Six Months Ended December 31, 2015  
     (Dollars in Thousands – net of tax)  
     Unrealized Gains and
Losses on
Available-for-Sale
Securities
    Unrealized Gains and
Losses on
Held-to-Maturity
Securities
    Total  

Beginning Balance – June 30, 2015

   $ (35   $ (426   $ (461

Other comprehensive income (loss) before reclassifications

     (131     65        (66

Amounts reclassified from accumulated other comprehensive income (loss)

     (14     -        (14
  

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (145     65        (80

Ending Balance – December 31, 2015

   $ (180   $ (361   $ (541
  

 

 

   

 

 

   

 

 

 

There were no amounts reclassified out of accumulated other comprehensive income for the three and six months ended December 31, 2016 and 2015.

 

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8. UNREALIZED LOSSES ON SECURITIES

The following tables show the Company’s gross unrealized losses and fair value, aggregated by category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2016 and June 30, 2016.

 

            December 31, 2016  
 

 

 
            Less Than Twelve Months         Twelve Months or Greater         Total  
 

 

 
            Fair
Value
        Gross
Unrealized
Losses
        Fair
Value
        Gross
Unrealized
Losses
        Fair
Value
        Gross
Unrealized
Losses
 
 

 

 
        (Dollars in Thousands)   

Corporate debt securities

    $     51,329      $     (57   $     4,004      $     (4   $     55,333      $     (61

Foreign Debt Securities 4

        2,601          (1       -          -          2,601          (1

U.S. Agencies

        619          (6       -          -          619          (6

Obligations of state and political subdivision

        1,306          (24       -          -          1,306          (24

Collateralized mortgage obligations:

                         

Agency

        1,405          (3       24,310          (359       25,715          (362
     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $     57,260      $     (91   $     28,314      $     (363   $     85,574      $     (454
     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
            June 30, 2016  
 

 

 
            Less Than Twelve Months         Twelve Months or Greater   Total  
 

 

 
            Fair
Value
        Gross
Unrealized
Losses
        Fair
Value
        Gross
Unrealized
Losses
        Fair
Value
        Gross
Unrealized
Losses
 
 

 

 
        (Dollars in Thousands)   

Corporate debt securities

    $     19,313      $     (27   $     6,243      $     (13   $     25,556      $     (40

Foreign Debt Securities 5

        4,646          (2       -          -          4,646          (2

Collateralized mortgage obligations:

                         

Agency

        17,862          (136       31,769          (777       49,631          (913
     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total

    $     41,821      $     (165   $     38,012      $     (790   $     79,833      $     (955
     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

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

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

 

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

 

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before its anticipated recovery. In the case of its private label residential MBSs, the Company also considers prepayment speeds, the historical and projected performance of the underlying loans and the credit support provided by the subordinate securities. These evaluations are inherently subjective and consider a number of quantitative and qualitative factors.

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

 

     Three Months Ended
December 31,
    Six Months Ended
December 31,
 
  

 

 

 
             2016                     2015                     2016                     2015          
     (Dollars in Thousands)  

Beginning balance

     $292        $234        $299        $248   

Initial credit impairment

     -        -        -        -   

Subsequent credit impairment

     -        -        -        -   

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

     -        -        -        -   

Reductions for securities sold

     -        -        -        -   

Reduction for actual realized losses

     (13     (3     (20     (17

Reduction for increase in cash flows expected to be collected

     -        -        -        -   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

     $279        $231        $279        $231   
  

 

 

   

 

 

   

 

 

   

 

 

 

During the three and six months ended December 31, 2016, the Company recorded no credit impairment charge and no non-credit unrealized holding loss to accumulated other comprehensive income. During the three and six months ended December 31, 2016, the Company accreted back into other comprehensive income $22 thousand and $44 thousand, respectively, (net of income tax effect of $15 thousand and $26 thousand, respectively), based on principal repayments on private-label CMOs previously identified with OTTI.

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

 

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

The Company reviewed the independent third party’s assumptions used in the December 31, 2016 OTTI process. Based on the results of this review, the Company deemed the independent third party’s assumptions to be reasonable and adopted them. However, different assumptions could produce materially different results, which could impact the Company’s conclusions as to whether an impairment is considered other-than-temporary and the magnitude of the credit loss. Management believes that no additional private-label CMOs in the portfolio had an other-than-temporary impairment at December 31, 2016, keeping the total at three private-label CMOs with OTTI at December 31, 2016.

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

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

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

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

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

The Company had investments in 53 positions that were impaired at December 31, 2016. Based on its analysis, management has concluded that three private-label CMOs are other-than-temporarily impaired, while the remaining securities portfolio has experienced unrealized losses and a decrease in fair value due to interest rate volatility, illiquidity in the marketplace, or credit deterioration in the U.S. mortgage markets.

 

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9. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

The following table summarizes the primary segments of the loan portfolio as of December 31, 2016 and June 30, 2016.

 

           December 31, 2016                  June 30, 2016  
          

Total

        Loans        

          

Individually

evaluated
for
impairment

            Collectively
evaluated
for
impairment
                

Total

Loans

          

Individually

evaluated
for
impairment

            Collectively
evaluated for
impairment
 
    

 

 

 
           (Dollars in Thousands)  

First mortgage loans:

    

1 – 4 family dwellings

  $           58,782      $           -       $           58,782          $           49,411      $           -       $           49,411   

Construction

       5,042           -            5,042               4,783           -            4,783   

Land acquisition & development

       651           -            651               666           -            666   

Multi-family dwellings

       3,784           -            3,784               3,961           -            3,961   

Commercial

       1,666           -            1,666               1,592           -            1,592   

Consumer Loans

                                   

Home equity

       932           -            932               802           -            802   

Home equity lines of credit

       2,185           -            2,185               1,900           -            1,900   

Other

       161           -            161               150           -            150   

Commercial Loans

       942           -            942               1,456           -            1,456   

Obligations (other than securities and leases) of states and political subdivisons

       -           -            -               -           -            -   
    

 

 

      

 

 

       

 

 

          

 

 

      

 

 

       

 

 

 
  $           74,145      $                       -       $           74,145          $                   64,721      $                           -       $                       64,721   
         

 

 

       

 

 

               

 

 

       

 

 

 

Plus: Deferred loan costs

       396                          312              

  Allowance for loan losses

       (395                       (360           
    

 

 

                     

 

 

            

Total

  $                   74,146                     $           64,673              
    

 

 

                     

 

 

            

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

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

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

 

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The following tables are a summary of the loans considered to be impaired as of December 31, 2016 and June 30, 2016, and the related interest income recognized for the three and six months ended December 31, 2016 and December 31, 2015:

 

                 December 31,        
2016
                 June 30,        
2016
 
         (Dollars in Thousands)  

Impaired loans with an allocated allowance:

         

Home equity lines of credit

  $      -      $      -   

Impaired loans without an allocated allowance:

         

Commercial real estate loans

           -               -   
    

 

 

      

 

 

 

Total impaired loans

  $      -      $      -   
    

 

 

      

 

 

 

Allocated allowance on impaired loans:

         

Home equity lines of credit

  $      -      $      -   

Commercial real estate loans

       -           -   
    

 

 

      

 

 

 

Total

  $      -      $      -   
    

 

 

      

 

 

 

 

           Three Months Ended      Six Months Ended  
               December 31,    
2016
                December 31,    
2015
                December 31,    
2016
                December 31,    
2015
 
           (Dollars in Thousands)  

Average impaired loans

                      

Construction loans

  $           -       $           -       $           -       $           -   

Land acquisition & development loans

       -            -            -            -   

Commercial real estate loans

       -            -            24            24   

Home equity lines of credit

       -            -            -            -   
    

 

 

       

 

 

       

 

 

       

 

 

 

Total

  $           -       $           -       $           24          $ 24   
    

 

 

       

 

 

       

 

 

       

 

 

 

Income recognized on impaired loans

                      

Construction loans

  $           -       $           -       $           -       $           -   

Land acquisition & development loans

       -            -            -            -   

Commercial real estate loans

       -            -            1            1   

Home equity lines of credit

       -            -            -            -   
    

 

 

       

 

 

       

 

 

       

 

 

 

Total

  $           -       $           -       $           1       $           1   
    

 

 

       

 

 

       

 

 

       

 

 

 

Total nonaccrual loans as of December 31, 2016 and June 30, 2016 and the related interest income recognized for the three and six months ended December 31, 2016 and December 31, 2015 are as follows:

 

                  December 31,        
2016
                  June 30,        
2016
 
          (Dollars in Thousands)  

Principal outstanding

           

1 – 4 family dwellings

   $      250       $      254   

Construction

        -            -   

Land acquisition & development

        -            -   

Commercial real estate

        -            -   

Home equity lines of credit

        -            -   
     

 

 

       

 

 

 

Total

   $      250       $      254   
     

 

 

       

 

 

 

 

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Table of Contents
            Three Months Ended      Six Months Ended  
                December 31,    
2016
                December 31,    
2015
                December 31,    
2016
                December 31,    
2015
 
            (Dollars in Thousands)  

Average nonaccrual loans

                       

1 – 4 family dwellings

   $           251       $           258       $           252       $           259   

Construction

        -            -            -            -   

Land acquisition & development

        -            -            -            -   

Commercial real estate

        -            -            -            24   

Home equity lines of credit

        -            -            -            -   
     

 

 

       

 

 

       

 

 

       

 

 

 

Total

   $           251       $           258       $           252       $           283   
     

 

 

       

 

 

       

 

 

       

 

 

 

Income that would have been recognized

   $           5       $           4       $           8       $           9   

Interest income recognized

   $           5       $           5       $           9       $           11   

Interest income foregone

   $           -       $           -       $           -       $           -   

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

During the three and six months ended December 31, 2016, and December 31, 2015, there were no TDRs, and no TDRs that subsequently defaulted.

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

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

 

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

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

The Company’s general policy is to internally classify its assets on a regular basis and establish prudent general valuation allowances that are adequate to absorb losses that have not been identified but that are inherent in the loan portfolio. The Company maintains general valuation allowances that it believes are adequate to absorb losses in its loan portfolio that are not clearly attributable to specific loans. The Company’s general valuation allowances are within the following general ranges: (1) 0% to 5% of assets subject to special mention; (2) 1.00% to 100% of assets classified substandard; and (3) 50% to 100% of assets classified doubtful. Any loan classified as loss is charged-off. To further monitor and assess the risk characteristics of the loan portfolio, loan delinquencies are reviewed to consider any developing problem loans. Based upon the procedures in place, considering the Company’s past charge-offs and recoveries and assessing the current risk elements in the portfolio, management believes the allowance for loan losses at December 31, 2016, is adequate.

 

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The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of December 31, 2016 and June 30, 2016:

 

          Current          

30 –59

  Days Past  

Due

            60 –89  
  Days Past  
Due
         

  90 Days +  
Past Due

Accruing

         

  90 Days +  
Past Due

Non-accrual

          Total  
Past  
Due  
         

Total

Loans

 
   

 

 

 
          (Dollars in Thousands)  

December 31, 2016

                           

First mortgage loans:

                           

1 – 4 family dwellings

  $           58,532      $           -      $           -      $           -      $           250      $           250      $           58,782   

Construction

      5,042          -          -          -          -          -          5,042   

Land acquisition & development

      651          -          -          -          -          -          651   

Multi-family dwellings

      3,784          -          -          -          -          -          3,784   

Commercial

      1,666          -          -          -          -          -          1,666   

Consumer Loans:

                           

Home equity

      932          -          -          -          -          -          932   

Home equity lines of credit

      2,185          -          -          -          -          -          2,185   

Other

      161          -          -          -          -          -          161   

Commercial Loans

      942          -          -          -          -          -          942   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $           73,895      $           -      $           -      $           -      $           250      $           250          74,145   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Plus: Deferred loan fees

                              396   

  Allowance for loan losses

                              (395
                           

 

 

 

Net Loans Receivable

                          $                   74,146   
                           

 

 

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

90 Days +
Past Due

Accruing

         

90 Days +
Past Due

Non-accrual

          Total
Past
Due
         

Total

Loans

 
   

 

 

 
          (Dollars in Thousands)  

June 30, 2016

                           

First mortgage loans:

                           

1 – 4 family dwellings

  $           49,157      $           -      $           -      $           -      $           254      $           254      $           49,411   

Construction

      4,783          -          -          -          -          -          4,783   

Land acquisition & development

      666          -          -          -          -          -          666   

Multi-family dwellings

      3,961          -          -          -          -          -          3,961   

Commercial

      1,592          -          -          -          -          -          1,592   

Consumer Loans:

                           

Home equity

      802          -          -          -          -          -          802   

Home equity lines of credit

      1,900          -          -          -          -          -          1,900   

Other

      150          -          -          -          -          -          150   

Commercial Loans

      1,456          -          -          -          -          -          1,456   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $                   64,467      $           -      $           -      $           -      $                   254      $                   254          64,721   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

Plus: Deferred loan fees

                              312   

Allowance for loan losses

                              (360
                           

 

 

 

Net Loans Receivable

                          $           64,673   
                           

 

 

 

 

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Credit quality information

The following tables represent credit exposure by internally assigned grades for the period ended December 31, 2016. The grading system analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or not at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

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

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

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

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

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

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

The following tables present the Company’s internally classified construction, land acquisition and development, multi-family residential, commercial real estate and commercial (not secured by real estate) loans at December 31, 2016 and June 30, 2016.

 

          December 31, 2016  
            Construction            

Land

Acquisition

&

  Development  

Loans

         

  Multi-family  

Residential

         

  Commercial  

Real

Estate

            Commercial    
     

 

 

 
          (Dollars in Thousands)  

Pass

   $      5,042       $      651       $      3,784       $      1,666       $      942   

Special Mention

        -            -            -            -            -   

Substandard

        -            -            -            -            -   

Doubtful

        -            -            -            -            -   
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Ending Balance

   $      5,042       $      651       $      3,784       $      1,666       $      942   
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

 

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            June 30, 2016  
            Construction            

Land

Acquisition

&

Development

Loans

           

Multi-family

Residential

           

Commercial
Real

Estate

            Commercial  
     

 

 

 
            (Dollars in Thousands)  

Pass

   $           4,783       $           666       $           3,961       $           1,592       $           1,456   

Special Mention

        -            -            -            -            -   

Substandard

        -            -            -            -            -   

Doubtful

        -            -            -            -            -   
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

Ending Balance

   $           4,783       $           666       $           3,961       $           1,592       $           1,456   
     

 

 

       

 

 

       

 

 

       

 

 

       

 

 

 

The following table presents performing and non-performing 1 – 4 family residential and consumer loans based on payment activity for the periods ended December 31, 2016 and June 30, 2016.

 

            December 31, 2016  
     

 

 

 
                1 – 4 Family                     Consumer        
     

 

 

 
            (Dollars in Thousands)  

Performing

       $            58,532       $           3,278   

Non-performing

        250            -   
     

 

 

       

 

 

 

Total

       $                    58,782       $                       3,278   
     

 

 

       

 

 

 
            June 30, 2016  
     

 

 

 
                1 – 4 Family                     Consumer        
     

 

 

 
            (Dollars in Thousands)  

Performing

       $            49,157       $           2,852   

Non-performing

        254            -   
     

 

 

       

 

 

 

Total

       $                        49,411       $           2,852   
     

 

 

       

 

 

 

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

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

 

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recoveries; and (3) presenting the results of this process, quarterly, to the Asset Classification Committee and the Savings Bank’s Board of Directors. We then tabulate, format and summarize the current loan loss allowance balance for financial and regulatory reporting purposes.

The Company had no unallocated loss allowance balance at December 31, 2016.

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.

 

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The following tables summarize the primary segments of the allowance for loan losses (“ALLL”), segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2016 and 2015. Activity in the allowance is presented for the three and six months ended December 31, 2016 and 2015.

 

          As of December 31, 2016  
          First Mortgage Loans                                
          1 – 4
Family
          Construction           Land
Acquisition &
Development
          Multi-
family
          Commercial           Consumer
Loans
          Commercial
Loans
          Total  
   

 

 

 
          (Dollars in Thousands)  

Beginning ALLL Balance at September 30, 2016

  $          256      $          46      $          7      $          21        $ 17      $          24      $          5      $          376   

Charge-offs

      -          -          -          -          -          -          -          -   

Recoveries

      -          -          -          -          -          -          -          -   

Provisions

      5          5          -          -          -          9          -          19   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending ALLL Balance at December 31, 2016

  $          261      $          51      $          7      $          21        $ 17      $          33      $          5      $          395   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Individually evaluated for impairment

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

Collectively evaluated for impairment

      261          51          7          21          17          33          5          395   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $          261      $          51      $          7      $          21        $ 17      $          33      $          5      $          395   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
          As of December 31, 2016  
          First Mortgage Loans                                
          1 – 4
Family
          Construction           Land
Acquisition &
Development
          Multi-
family
          Commercial           Consumer
Loans
          Commercial
Loans
          Total  
   

 

 

 
          (Dollars in Thousands)  

Beginning ALLL Balance at June 30, 2016

  $          222      $          57      $          7      $          22      $          16      $          29      $          7      $          360   

Charge-offs

      -          -          -          -          -          -          -          -   

Recoveries

      -          -          -          -          -          -          -          -   

Provisions

      39          (6       -          (1       1          4          (2       35   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending ALLL Balance at December 31, 2016

  $          261      $          51      $          7      $          21      $          17      $          33      $          5      $          395   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Individually evaluated for impairment

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

Collectively evaluated for impairment

      261          51          7          21          17          33          5          395   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $          261      $          51      $          7      $          21      $          17      $          33      $          5      $          395   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

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        As of December 31, 2015  
        First Mortgage Loans                                
        1 – 4
    Family  
            Construction           Land
  Acquisition &  
Development
        Multi-
  family  
          Commercial             Consumer  
Loans
          Commercial  
Loans
          Total    
 

 

 
        (Dollars in Thousands)  

Beginning ALLL Balance at September 30, 2015

  $     143      $          72      $     9      $     30      $     31      $     32      $     6      $     323   

Charge-offs

      -          -          -          -          -          -          -          -   

Recoveries

      -          -          -          -          -          -          -          -   

Provisions

      19          12          (1       (1       (2       -          1          28   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending ALLL Balance at December 31, 2015

  $     162      $          84      $     8      $     29      $     29      $     32      $     7      $     351   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Individually evaluated for impairment

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

Collectively evaluated for impairment

      162          84          8          29          29          32          7          351   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $     162      $          84      $     8      $     29      $     29      $     32      $     7      $     351   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
        As of December 31, 2015  
        First Mortgage Loans                                
        1 – 4
    Family    
              Construction             Land
  Acquisition &  
Development
        Multi-
  family  
          Commercial             Consumer  
Loans
          Commercial  
Loans
          Total    
   

 

 

 
        (Dollars in Thousands)  

Beginning ALLL Balance at June 30, 2015

  $     125      $          63      $     9      $     30      $     34      $     37      $     6      $     304   

Charge-offs

      -          -          -          -          -          -          -          -   

Recoveries

      -          -          -          -          -          -          -          -   

Provisions

      (37       21          (1       (1       (5       (5       1          47   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Ending ALLL Balance at December 31, 2015

  $     162      $          84      $     8      $     29      $     29      $     32      $     7      $     351   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Individually evaluated for impairment

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

Collectively evaluated for impairment

      162          84          8          29          29          32          7          351   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
  $     162      $          84      $     8      $     29      $     29      $     32      $     7      $     351   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

During the three and six months ending December 31, 2016, the ALLL increased $0.019 million and $0.035 million respectively. The primary reason for the changes in the ALLL balance, both in total, and within the identified segments, is changes in applicable loan balances.

 

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During the fiscal year ended June 30, 2016, the Company also increased its ALLL reserve factors, due to increases in associated loan balances and qualitative factors throughout fiscal 2016, for the following loan segments:

 

Loan Segment

   12/31/2016 Factor   12/31/2015 Factor

1 – 4 family

   0.40%   0.35%

Construction:

    

1 – 4 family

   0.75%   0.75%

5+ family

   1.00%   1.00%

During the three months ended December 31, 2015, the ALLL associated with multi-family residential real estate loans, 1 – 4 family real estate loans, and construction loans increased $9 thousand, $8 thousand, and $5 thousand, respectively. The primary reason for the increases in the ALLL associated with these segments, were the increases in associated loan balances.

During the six months ended December 31, 2015, the ALLL associated with the 1-4 family and construction loan portfolios increased by $37 thousand, and $21 thousand, respectively. The primary reason for the increases in the ALLL associated with these segments were the increases in associated loan balances. The ALLL associated with the commercial real estate loans and consumer loans decreased $5 thousand and $5 thousand, respectively. The decrease in the ALLL associated with commercial real estate loans was primarily due to the payoff of one non-performing loan in this segment, while the decrease in the ALLL associated with consumer loans was primarily due to lower loan balances within this segment.

 

10. FEDERAL HOME LOAN BANK (FHLB) ADVANCES

The following table presents contractual maturities of FHLB long-term advances as of December 31, 2016 and June 30, 2016.

 

     Maturity range      Weighted-
average
    Stated interest
rate range
        December 31,          June 30,  

Description

         from            to          interest rate 6         from     to         2016           2016  
                                         (Dollars in Thousands)  

Convertible

     07/27/17             07/27/17             4.26%        4.26     4.26         $     10,000      $      10,000   

Adjustable

     08/11/17         09/01/17         0.81%        0.79     0.82       6,109           6,109   
                

 

 

      

 

 

 

Total

                     $                 16,109      $          16,109   
                

 

 

      

 

 

 

 

 

 

6  As of December 31, 2016.

 

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Maturities of FHLB long-term advances at December 31, 2016, are summarized as follows:

 

Maturing During

Fiscal Year Ended

                     June 30:                    

       

         Amount          

  

Weighted-
Average
Interest
        Rate         

 
         (Dollars in Thousands)       

2017

  $    -      -   

2018

     16,109      2.95

2019

     -      -   

2020

     -      -   

2021 and thereafter

     -      -   
    

 

  

Total

  $    16,109      2.95
    

 

  

The terms of the convertible advance reset to the three-month London Interbank Offered Rate (“LIBOR”) and have various spreads and call dates of three months. The FHLB has the right to convert from a fixed rate to a predetermined floating rate on its conversion date or quarterly thereafter. Should the advance be converted, the Company has the right to pay off the advance without penalty. The adjustable rate advances adjust either monthly or quarterly, based on the one-month or three-month LIBOR index, and have various spreads to the LIBOR index. The spread to the applicable LIBOR index range is 0.13%. The adjustable rate advances are not convertible or callable. The FHLB advances are secured by the Company’s FHLB stock, mortgage-backed and investment securities, and loans, and are subject to substantial prepayment penalties.

The Company also utilized revolving and short-term FHLB advances. Short-term FHLB advances generally mature within 90 days, while revolving FHLB advances may be repaid by the Company without penalty. The following table presents information regarding such advances as of December 31, 2016 and June 30, 2016:

 

                 December 31,        
2016
                 June 30,        
2016
 
    

 

 

 
         (Dollars in Thousands)  

FHLB revolving and short-term advances:

         

Ending balance

  $      146,074      $      144,027   

Average balance

       141,404           47,413   

Maximum month-end balance

       148,216           144,027   

Average interest rate

       0.59        0.50

Weighted-average rate

       0.75        0.54

At December 31, 2016, the Company had remaining borrowing capacity with the FHLB of approximately $5.5 million.

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

 

11. OTHER BORROWINGS

Other borrowings include securities sold under agreements to repurchase with securities brokers (“repurchase agreements”). These borrowings generally mature within 1 to 90 days from the transaction date and require a collateral pledge. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor collateral levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.

 

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The following table presents information regarding other borrowings as of December 31, 2016 and June 30, 2016:

 

                 December 31,        
2016
                 June 30,        
2016
 
    

 

 

 
         (Dollars in Thousands)  

Other short-term borrowings:

         

Ending balance

  $      -      $      -   

Average balance

       -           2,748   

Maximum month-end balance

       -           9,700   

Average interest rate

       -        0.51

Weighted-average rate

       - %           - %   

 

12. FAIR VALUE MEASUREMENTS

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

 

LeveI I:   

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

LeveI lI:   

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

LeveI lII:   

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

Assets Measured at Fair Value on a Recurring Basis

Investment Securities Available-for-Sale

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

The following tables present the assets reported on a recurring basis on the Consolidated Balance Sheet at their fair value as of December 31, 2016 and June 30, 2016, by level within the fair value hierarchy. As required by GAAP, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

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         December 31, 2016  
               Level I                      Level II                      Level III                      Total        
         (Dollars in Thousands)  

Assets measured on a recurring basis:

                   

Trading Securities

  $      920      $      -      $      -      $      920   

Investment securities – available for sale:

                   

Obligations of states and political subdivisions

  $      -      $      1,306      $      -      $      1,306   

Corporate securities

       -           98,420           -           98,420   

Foreign debt securities 7

       -           7,028           -           7,028   
    

 

 

      

 

 

      

 

 

      

 

 

 
  $      920      $      106,754      $      -      $      107,674   
    

 

 

      

 

 

      

 

 

      

 

 

 
         June 30, 2016  
         Level I          Level II          Level III          Total  
         (Dollars in Thousands)  

Assets measured on a recurring basis:

                   

Investment securities – available for sale:

                   

Obligations of states and political subdivisions

  $      -      $      2,041      $      -      $      2,041   

Corporate securities

       -           96,852           -           96,852   

Foreign debt securities 7

       -           8,783           -           8,753   
    

 

 

      

 

 

      

 

 

      

 

 

 
  $      -      $      107,676      $      -      $      107,676   
    

 

 

      

 

 

      

 

 

      

 

 

 

Assets Measured at Fair Value on a Nonrecurring Basis

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

Impaired Loans

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

The following tables present the assets reported on a non-recurring basis on the consolidated balance sheet at their fair values as of December 31, 2016 and June 30, 2016, by level within the fair value hierarchy. As required by GAAP, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

 

  7 

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

 

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Table of Contents
          December 31, 2016  
          Level I                             Level II                       Level III                       Total        
          (Dollars in Thousands)  

Assets measured on a non-recurring basis:

               

Impaired loans

  $          -      $          -      $          -      $          -   
   

 

 

     

 

 

     

 

 

     

 

 

 

Total

  $          -      $          -      $          -      $          -   
   

 

 

     

 

 

     

 

 

     

 

 

 
          June 30, 2016  
          Level I                             Level II                       Level III                       Total        
          (Dollars in Thousands)  

Assets measured on a non-recurring basis:

               

Impaired loans

  $          -      $          -      $          -      $          -   
   

 

 

     

 

 

     

 

 

     

 

 

 

Total

  $          -      $          -      $          -      $          -   
   

 

 

     

 

 

     

 

 

     

 

 

 

For Level III assets measured at fair value on a recurring and non-recurring basis as of December 31, 2016 and June 30, 2016, the significant observable inputs used in the fair value measurements were as follows:

 

          Fair Value at                               
         

        December 31,        

2016

          

    June 30,    

2016

                  Valuation
      Technique      
      Significant
    Unobservable    
Inputs
              Significant Unobservable      
Input Range (Weighted
Average)
   

 

 

      

 

   

 

   

 

          (Dollars in Thousands)                               

Impaired loans

  $          -         $             -            Appraisal of
collateral8
    Discounted
appraisal9
    0%/0%

When evaluating the value of the collateral on impaired loans, the Company will consider the age of the most current appraisal, and may discount the appraised value from 0.0% to 15.0%.

The Company classifies financial instruments in Level III of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation model for Level III financial instruments typically also rely on a number of inputs that are readily observable, either directly or indirectly.

 

 

 

  8 

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable.

  9 

Appraisals may be adjusted by management for qualitative factors such as economic conditions. The range and weighted average of appraisal adjustments are presented as a percentage of the appraisals.

 

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13. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values are as follows:

 

                   December 31, 2016                                             
         Carrying
Amount
           Fair
Value
               Level I                    Level II                    Level III      
         (Dollars in Thousands)  

FINANCIAL ASSETS

                        

Cash and cash equivalents

  $      2,386      $           2386      $           2,386      $           -      $           -   

Certificates of deposit

       10,385           10,385           10,385           -           -   

Trading Securities

       920           920           920           -           -   

Investment securities – available for sale

       106,754           106,754           -           106,754           -   

Investment securities – held to maturity