-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PBymFapCPsoekS+RJYTz7X47i/86xMSZ7mSUZIOf5NWgQVoUAbZasPvY6yCnzOVj TFLqPt08St2+eIlhU8J3GQ== 0000914317-03-002869.txt : 20030926 0000914317-03-002869.hdr.sgml : 20030926 20030926164009 ACCESSION NUMBER: 0000914317-03-002869 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030509 FILED AS OF DATE: 20030926 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WVS FINANCIAL CORP CENTRAL INDEX KEY: 0000910679 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 251710500 STATE OF INCORPORATION: PA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22444 FILM NUMBER: 03912910 BUSINESS ADDRESS: STREET 1: 9001 PERRY HIGHWAY CITY: PITTSBURGH STATE: PA ZIP: 15237 BUSINESS PHONE: 4123641911 MAIL ADDRESS: STREET 1: 9001 PERRY HIGHWAY CITY: PITTSBURG STATE: PA ZIP: 15237 10-K 1 form10k-54180_wvs.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: June 30, 2003 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 No.: 0-22444 WVS Financial Corp. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 25-1710500 - --------------------------------------- ------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 9001 Perry Highway Pittsburgh, Pennsylvania 15237 - ---------------------------------------- ------------------------ (Address of Principal (Zip Code) Executive Offices) Registrant's telephone number, including area code: (412) 364-1911 Securities registered pursuant to Section 12(b) of the Act: Not Applicable Securities registered pursuant to Section 12(g) of the Act: Common Stock (par value $.01 per share) (Title of Class) 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 requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |_| No |X| As of December 31, 2002, the aggregate value of the 2,133,479 shares of Common Stock of the Registrant issued and outstanding on such date, which excludes 468,393 shares held by all directors and officers of the Registrant as a group, was approximately $34.0 million. This figure is based on the last known trade price of $15.92 per share of the Registrant's Common Stock on December 31, 2002. Number of shares of Common Stock outstanding as of September 24, 2003: 2,571,437 DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated: (1) Portions of the Annual Report to Stockholders for the fiscal year ended June 30, 2003 are incorporated into Parts II and IV. (2) Portions of the definitive proxy statement for the 2003 Annual Meeting of Stockholders are incorporated into Part III. PART I. Item 1. Business. - ----------------- WVS Financial Corp. ("WVS" or the "Company") is the parent holding company of West View Savings Bank ("West View" or the "Savings Bank"). The Company was organized in July 1993 as a Pennsylvania-chartered unitary bank holding company and acquired 100% of the common stock of the Savings Bank in November 1993. West View Savings Bank is a Pennsylvania-chartered, SAIF-insured stock savings bank conducting business from six offices in the North Hills suburbs of Pittsburgh. The Savings Bank converted to the stock form of ownership in November 1993. The Savings Bank had no subsidiaries at June 30, 2003. Lending Activities General. At June 30, 2003, the Company's net portfolio of loans receivable totaled $91.7 million, as compared to $152.9 million at June 30, 2002. Net loans receivable comprised 25.0% of Company total assets and 53.6% of total deposits at June 30, 2003, as compared to 37.8% and 86.1%, respectively, at June 30, 2002. The principal categories of loans in the Company's portfolio are single-family and multi-family residential real estate loans, commercial real estate loans, construction loans, consumer loans and land acquisition and development loans. Substantially all of the Company's mortgage loan portfolio consists of conventional mortgage loans, which are loans that are neither insured by the Federal Housing Administration ("FHA") nor partially guaranteed by the Department of Veterans Affairs ("VA"). Historically, the Company's lending activities have been concentrated in single-family residential loans secured by properties located in its primary market area of northern Allegheny County, southern Butler County and eastern Beaver County, Pennsylvania. On occasion, the Company has also purchased whole loans and loan participations secured by properties located outside of its primary market area but predominantly in Pennsylvania. The Company believes that all of its mortgage loans are secured by properties located in Pennsylvania. Moreover, substantially all of the Company's non-mortgage loan portfolio consists of loans made to residents and businesses located in the Company's primary market area. Federal regulations impose limitations on the aggregate amount of loans that a savings institution can make to any one borrower, including related entities. The permissible amount of loans-to-one borrower follows the national bank standard for all loans made by savings institutions, which generally does not permit loans-to-one borrower to exceed 15% of unimpaired capital and surplus. Loans in an amount equal to an additional 10% of unimpaired capital and surplus also may be made to a borrower if the loans are fully secured by readily marketable securities. At June 30, 2003, the Savings Bank's limit on loans-to-one borrower was approximately $3.8 million. The Company's general policy has been to limit loans-to-one borrower, including related entities, to $2.0 million although this general limit may be exceeded based on the merit of a particular credit. At June 30, 2003, the Company's five largest loans or groups of loans-to-one borrower, including related entities, ranged from an aggregate of $1.8 million to $3.3 million, and are secured primarily by real estate located in the Company's primary market area. 2 Loan Portfolio Composition. The following table sets forth the composition of the Company's net loans receivable portfolio by type of loan at the dates indicated.
At June 30, ---------------------------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------------ ------------------ ------------------ ----------------- ----------------- Amount % Amount % Amount % Amount % Amount % ------ - ------ - ------ - ------ - ------ - (Dollars in Thousands) Real estate loans: Single-family $ 43,255 40.91% $ 89,889 53.69% $105,623 51.50% $105,964 52.49% $103,035 54.43% Multi-family 5,196 4.92 6,173 3.69 6,920 3.37 6,077 3.01 5,925 3.12 Commercial 17,949 16.98 25,439 15.19 34,955 17.05 32,847 16.27 28,546 15.08 Construction 16,942 16.03 19,965 11.92 28,157 13.73 26,935 13.34 23,810 12.58 Land acquisition and development 7,437 7.03 6,691 4.00 6,343 3.09 7,510 3.72 7,646 4.04 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total real estate Loans 90,779 85.87 148,157 88.49 181,998 88.74 179,333 88.83 168,962 89.25 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Consumer loans: Home equity 12,374 11.70 16,319 9.75 19,142 9.33 18,558 9.19 16,467 8.70 Education 0 0.00 1 0.00 31 0.02 57 0.03 11 0.01 Other 1,069 1.01 1,514 0.90 2,092 1.02 2,062 1.02 2,153 1.14 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total consumer Loans 13,443 12.71 17,834 10.65 21,265 10.37 20,677 10.24 18,631 9.85 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Commercial loans 1,499 1.42 1,447 0.86 1,819 0.89 1,879 0.93 1,720 0.90 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Commercial lease Financings --- 0.00 --- 0.00 --- 0.00 --- 0.00 --- 0.00 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ 105,721 100.00% 167,438 100.00% 205,082 100.00% 201,889 100.00% 189,313 100.00% -------- ====== -------- ====== -------- ====== -------- ====== -------- ====== Less: Undisbursed loan Proceeds (11,348) (11,311) (16,481) (15,820) (16,327) Net deferred loan origination fees (174) (464) (659) (801) (817) Allowance for loan Losses (2,530) (2,758) (2,763) (1,973) (1,842) -------- -------- -------- -------- -------- Net loans Receivable $ 91,669 $152,905 $185,179 $183,295 $170,327 ======== ======== ======== ======== ========
Contractual Maturities. The following table sets forth the scheduled contractual maturities of the Company's loans and mortgage-backed securities at June 30, 2003. The amounts shown for each period do not take into account loan prepayments and normal amortization of the Company's loan portfolio.
Real Estate Loans ------------------------------------------------ Land Consumer acquisition loans and Mortgage Single- Multi- and commercial -backed family family Commercial Construction development loans securities Total ------ ------ ---------- ------------ ----------- ----- ---------- ----- (Dollars in Thousands) Amounts due in: One year or less $ 2,095 $ 589 $ 242 $ 11,719 $ 1,834 $ 1,239 $ 0 $ 17,718 After one year through five years 2,400 23 705 3,951 5,603 3,638 0 16,320 After five years 38,760 4,584 17,002 1,272 0 10,065 111,879 183,562 -------- -------- -------- -------- -------- -------- -------- -------- Total(1) $ 43,255 $ 5,196 $ 17,949 $ 16,942 $ 7,437 $ 14,942 $111,879 $217,600 ======== ======== ======== ======== ======== ======== ======== ======== Interest rate terms on amounts due after one year: Fixed $ 36,575 $ 2,778 $ 11,155 $ 1,757 $ 126 $ 8,758 $ 14,445 $ 75,594 Adjustable 4,585 1,829 6,552 3,466 5,477 4,945 97,434 124,288 -------- -------- -------- -------- -------- -------- -------- -------- Total $ 41,160 $ 4,607 $ 17,707 $ 5,223 $ 5,603 $ 13,703 $111,879 $199,882 ======== ======== ======== ======== ======== ======== ======== ========
- ---------- (1) Does not include adjustments relating to loans in process, the allowance for loan losses, accrued interest, deferred fee income and unearned discounts. 3 Scheduled contractual principal repayments do not reflect the actual maturities of loans. The average maturity of loans is substantially less than their average contractual terms because of prepayments and due-on-sale clauses. The average life of mortgage loans tends to increase when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgages are substantially higher than current mortgage loan rates (due to refinancings of adjustable-rate and fixed-rate loans at lower rates). As further discussed below, the Company has from time to time renewed commercial real estate loans and speculative construction (single-family) loans due to slower than expected sales of the underlying collateral. Commercial real estate loans are generally renewed at a contract rate that is the greater of the market rate at the time of the renewal or the original contract rate. Loans secured by speculative single-family construction or developed lots are generally renewed for an additional six month term with monthly payments of interest. Subsequent renewals, if necessary, are generally granted for an additional six month term; principal amortization may also be required. Land acquisition and development loans are generally renewed for an additional twelve month term with monthly payments of interest. At June 30, 2003, the Company had approximately $3.6 million of renewed commercial real estate and construction loans. The $3.6 million in aggregate disbursed principal that has been renewed is comprised of: construction and business lines of credit totaling $1.5 million and land acquisition and single-family speculative construction loans totaling $2.1 million. Management believes that the previously discussed whole loans will self-liquidate during the normal course of business, though some additional rollovers may be necessary. All but one of the loans that have been rolled over, as discussed above, are in compliance with all loan terms, including the receipt of all required payments, and are considered performing loans. Origination, Purchase and Sale of Loans. Applications for residential real estate loans and consumer loans are obtained at all of the Company's offices. Applications for commercial real estate loans are taken only at the Company's Franklin Park office. Loan applications are primarily attributable to existing customers, builders, walk-in customers and referrals from both real estate brokers and existing customers. All processing and underwriting of real estate and commercial business is performed solely at the Company's loan division at the Franklin Park office. The Company believes this centralized approach to approving such loan applications allows it to process and approve such applications faster and with greater efficiency. The Company also believes that this approach increases its ability to service the loans. All loan applications are required to be approved by the Company's Loan Committee, comprised of both outside directors and management, which meets at least monthly. Historically, the Company has originated substantially all of the loans retained in its portfolio. Substantially all of the residential real estate loans originated by the Company have been under terms, conditions and documentation which permit their sale to the Federal National Mortgage Association and other investors in the secondary market. Although West View has not been a frequent seller of loans in the secondary market, the Savings Bank is on the Federal National Mortgage Association approved list of sellers/servicers. The Company has held most of the loans it originates in its own portfolio until maturity, due, in part, to competitive pricing conditions in the marketplace for origination by nationwide lenders and portfolio lenders. During fiscal 2003, the Company sold loans with an approximate combined principal balance of $3.0 thousand comprised primarily of education loans. The Company did not retain any servicing rights with respect to the loans sold. The Company has not been an aggressive purchaser of loans. However, the Company may purchase whole loans or loan participations in those instances where demand for new loan originations in the Company's market area is insufficient or to increase the yield earned on the loan portfolio. Such loans are generally presented to the Company from contacts primarily at other financial institutions, particularly those which have previously done business with the Company. At June 30, 2003, $2.0 million or 2.2% of the Company's total loans receivable consisted of whole loans purchased from another financial institution which consisted of single-family mortgage loans. 4 The Company requires that all purchased loans be underwritten in accordance with its underwriting guidelines and standards. The Company reviews loans, particularly scrutinizing the borrower's ability to repay the obligation, the appraisal and the loan-to-value ratio. Servicing of loans or loan participations purchased by the Company generally is performed by the seller, with a portion of the interest being paid by the borrower retained by the seller to cover servicing costs. At June 30, 2003, $2.0 million or 2.2% of the Company's total loans receivable were being serviced for the Company by others. The following table shows origination, purchase and sale activity of the Company with respect to loans on a consolidated basis during the periods indicated.
At or For the Year Ended June 30, ------------------------------------ 2003 2002 2001 ---- ---- ---- (Dollars in Thousands) Net loans receivable beginning balance $152,905 $185,179 $183,295 Real estate loan originations Single-family(1) 1,220 5,313 7,918 Multi-family(2) --- 40 412 Commercial 1,209 578 3,268 Construction 8,971 13,634 22,255 Land acquisition and development 2,471 3,695 1,954 -------- -------- -------- Total real estate loan originations 13,871 23,260 35,807 -------- -------- -------- Home equity 2,833 3,950 5,358 Education 2 333 342 Commercial 250 215 295 Other 189 370 979 -------- -------- -------- Total loan originations 17,145 28,128 42,781 -------- -------- -------- Disbursements against available credit lines: Home equity 3,242 3,472 4,491 Other 685 250 776 Purchase of whole loans and participations 302 --- 2,848 -------- -------- -------- Total originations and purchases 21,374 31,850 50,896 -------- -------- -------- Less: Loan principal repayments 83,087 66,054 47,398 Sales of whole loans and participations(3) 3 2,988 313 Transferred to real estate owned --- 500 --- Change in loans in process 37 (5,170) 661 Other, net(4) (517) (248) 640 -------- -------- -------- Net increase (decrease) $(61,236) $(32,274) $ 1,884 -------- -------- -------- Net loans receivable ending balance $ 91,669 $152,905 $185,179 ======== ======== ========
- ---------- (1) Consists of loans secured by one-to-four family properties. (2) Consists of loans secured by five or more family properties. (3) Loans sold in fiscal years 2003, 2002 and 2001 included servicing rights. As of June 30, 2003, loans serviced for others totaled approximately $1.2 million. (4) Includes reductions for net deferred loan origination fees and the allowance for loan losses. 5 Real Estate Lending Standards. All financial institutions are required to adopt and maintain comprehensive written real estate lending policies that are consistent with safe and sound banking practices. These lending policies must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies ("Guidelines") adopted by the federal banking agencies in December 1992. The Guidelines set forth uniform regulations prescribing standards for real estate lending. Real estate lending is defined as an extension of credit secured by liens on interests in real estate or made for the purpose of financing the construction of a building or other improvements to real estate, regardless of whether a lien has been taken on the property. The policies must address certain lending considerations set forth in the Guidelines, including loan-to-value ("LTV") limits, loan administration procedures, underwriting standards, portfolio diversification standards, and documentation, approval and reporting requirements. These policies must also be appropriate to the size of the institution and the nature and scope of its operations, and must be reviewed and approved by the Board of Directors at least annually. The LTV ratio framework, with a LTV ratio being the total amount of credit to be extended divided by the appraised value of the property at the time the credit is originated, must be established for each category of real estate loans. If not a first lien, the lender must combine all senior liens when calculating this ratio. The Guidelines, among other things, establish the following supervisory LTV limits: raw land (65%); land development (75%); construction (commercial, multi-family and non-residential) (80%); improved property (85%); and one-to-four family residential (owner-occupied) (no maximum ratio; however any LTV ratio in excess of 80% should require appropriate insurance or readily marketable collateral). Consistent with its conservative lending philosophy, the Company's LTV limits are generally more restrictive than those in the Guidelines: raw land (60%); land development (70%); construction (commercial - 70%; multi-family - 75%; speculative residential - 80%); and residential properties (75% on larger family non-owner-occupied residences). Single-Family Residential Real Estate Loans. Historically, savings institutions such as the Company have concentrated their lending activities on the origination of loans secured primarily by first mortgage liens on existing single-family residences. At June 30, 2003, $43.3 million or 40.9% of the Company's total loan portfolio consisted of single-family residential real estate loans, substantially all of which are conventional loans. Single-family loan originations totaled $1.2 million and decreased $4.1 million or 77.4% during the fiscal year ended June 30, 2003, when compared to the same period in 2002. Due to low levels of market interest rates, the Company continued to reduce its originations of long-term fixed rate mortgages, while continuing to offer consumer home equity and construction loans. The Company historically has originated fixed-rate loans with terms of up to 30 years. Although such loans are originated with the expectation that they will be maintained in the portfolio, these loans are originated generally under terms, conditions and documentation that permit their sale in the secondary market. The Company also makes available single-family residential adjustable-rate mortgages ("ARMs"), which provide for periodic adjustments to the interest rate, but such loans have never been as widely accepted in the Company's market area as the fixed-rate mortgage loan products. The ARMs currently offered by the Company have up to 30-year terms and an interest rate, which adjusts in accordance with one of several indices. At June 30, 2003, approximately $38.7 million or 89.4% of the single-family residential loans in the Company's loan portfolio consisted of loans which provide for fixed rates of interest. Although these loans generally provide for repayments of principal over a fixed period of 15 to 30 years, it is the Company's experience that because of prepayments and due-on-sale clauses, such loans generally remain outstanding for a substantially shorter period of time. The Company is permitted to lend up to 100% of the appraised value of real property securing a residential loan; however, if the amount of a residential loan originated or refinanced exceeds 95% of the appraised value, the Company is required by state banking regulations to obtain private mortgage insurance on the portion of the principal amount that exceeds 75% of the appraised value of the security property. Pursuant to underwriting guidelines adopted by the Board of Directors, private mortgage insurance is obtained on residential loans for which loan-to-value ratios exceed 80% according to the following schedule: loans exceeding 80% but less than 90% - 25% coverage; loans exceeding 90% but less than 95% - 30% coverage; and loans exceeding 95% through 100% - 35% coverage. No loans are made in excess of 100% of appraised value. 6 Property appraisals on the real estate and improvements securing the Company's single-family residential loans are made by independent appraisers approved by the Board of Directors. Appraisals are performed in accordance with federal regulations and policies. The Company obtains title insurance policies on most of the first mortgage real estate loans originated. If title insurance is not obtained or is unavailable, the Company obtains an abstract of title and a title opinion. Borrowers also must obtain hazard insurance prior to closing and, when required by the United States Department of Housing and Urban Development, flood insurance. Borrowers may be required to advance funds, with each monthly payment of principal and interest, to a loan escrow account from which the Company makes disbursements for items such as real estate taxes and mortgage insurance premiums as they become due. Multi-Family Residential and Commercial Real Estate Loans. The Company originates mortgage loans for the acquisition and refinancing of existing multi-family residential and commercial real estate properties. At June 30, 2003, $5.2 million or 4.9% of the Company's total loan portfolio consisted of loans secured by existing multi-family residential real estate properties, which represented a decrease of $977 thousand or 15.8% from fiscal 2002. At June 30, 2003, $17.9 million or 17.0% of the loan portfolio consisted of loans secured by existing commercial real estate properties, which represented a decrease of $7.5 million or 29.4% from fiscal 2002. During fiscal 2003, the Company chose not to emphasize originations of commercial real estate loans to reduce credit risk associated with the national and local economic weaknesses. The majority of the Company's multi-family residential loans are secured primarily by 5 to 20 unit apartment buildings, while commercial real estate loans are secured by office buildings, hotels, small retail establishments and churches. These types of properties constitute the majority of the Company's commercial real estate loan portfolio. The Company's multi-family residential and commercial real estate loan portfolio consists primarily of loans secured by properties located in its primary market area. Although terms vary, multi-family residential and commercial real estate loans generally are amortized over a period of up to 15 years (although some loans amortize over a twenty year period) and mature in 5 to 15 years. The Company will originate these loans either with fixed or adjustable interest rates which generally is negotiated at the time of origination. Loan-to-value ratios on the Company's commercial real estate loans are currently limited to 75% or lower. As part of the criteria for underwriting multi-family residential and commercial real estate loans, the Company generally imposes a debt coverage ratio (the ratio of net cash from operations before payment of the debt service to debt service) of at least 100%. It is also the Savings Bank's general policy to obtain personal guarantees on its multi-family residential and commercial real estate loans from the principals of the borrower and, when this cannot be obtained, to impose more stringent loan-to-value, debt service and other underwriting requirements. At June 30, 2003, the Company's multi-family residential and commercial real estate loan portfolio consisted of approximately 74 loans with an average principal balance of $313 thousand. At June 30, 2003, the Company had four commercial real estate loans to three borrowers, totaling $3.3 million, that were not accruing interest. Construction Loans. In recent years, the Company has been active in originating loans to construct primarily single-family residences, and, to a much lesser extent, loans to acquire and develop real estate for construction of residential properties. These construction lending activities generally are limited to the Company's primary market area. At June 30, 2003, construction loans amounted to approximately $16.9 million or 16.0% of the Company's total loan portfolio, which represented a decrease of $3.1 million or 15.5% from fiscal 2002. The decrease was principally due to decreased levels of new home construction. As of June 30, 2003, the Company's portfolio of construction loans consisted of $15.6 million of loans for the construction of single-family residential real estate, $300 thousand of loans for the construction of commercial real estate, and $1.0 million of loans for the construction of multi-family residential real estate. Construction loan originations totaled $9.0 million and decreased by $4.6 million or 33.8% during the fiscal year ended June 30, 2003, when compared to the same period in 2002. Construction loans are made for the purpose of constructing a personal residence. In such circumstances, the Company will underwrite such loans on a construction/permanent mortgage loan basis. At June 30, 2003, approximately 86.3% of total outstanding construction loans were made to local real estate builders and developers with whom the Company has worked for a number of years for the purpose of constructing primarily single-family residential developments, 5.7% of total construction loans were made to 7 individuals for the purpose of constructing a personal residence, 6.2% of total construction loans were made to a developer for the purpose of constructing a six unit apartment building, and 1.8% of total construction loans were made to an individual for the purpose of constructing a commercial building. Upon application, credit review and analysis of personal and corporate financial statements, the Company will grant local builders lines of credit up to designated amounts. These credit lines may be used for the purpose of construction of speculative (or unsold) residential properties. In some instances, lines of credit will also be granted for purposes of acquiring finished residential lots and developing speculative residential properties thereon. Such lines generally have not exceeded $1.0 million, with the largest line totaling approximately $1.2 million. Once approved for a construction line, a developer must still submit plans and specifications and receive the Company's authorization, including an appraisal of the collateral satisfactory to the Company, in order to begin utilizing the line for a particular project. As of June 30, 2003, the Company also had $7.4 million or 7.0% of the total loan portfolio invested in land development loans, which consisted of 24 loans to 20 developers. Speculative construction loans generally have maturities of 18 months, including one 6 month extension, with payments being made monthly on an interest-only basis. Thereafter, the permanent financing arrangements will generally provide for either an adjustable or fixed interest rate, consistent with the Company's policies with respect to residential and commercial real estate financing. The Company intends to maintain its involvement in construction lending within its primary market area. Such loans afford the Company the opportunity to increase the interest rate sensitivity of its loan portfolio. Commercial real estate and construction lending is generally considered to involve a higher level of risk as compared to single-family residential lending, due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on real estate developers and managers. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a property's value at completion of the project and the estimated cost (including interest) of the project. The nature of these loans is such that they are generally more difficult to evaluate and monitor. In addition, speculative construction loans to a builder are not necessarily pre-sold and thus pose a greater potential risk to the Company than construction loans to individuals on their personal residences. The Company has attempted to minimize the foregoing risks by, among other things, limiting the extent of its commercial real estate lending generally and by limiting its construction lending to primarily residential properties. In addition, the Savings Bank has adopted underwriting guidelines which impose stringent loan-to-value, debt service and other requirements for loans which are believed to involve higher elements of credit risk, by generally limiting the geographic area in which the Savings Bank will do business to its primary market area and by working with builders with whom it has established relationships. Consumer Loans. The Company offers consumer loans, although such lending activity has not historically been a large part of its business. At June 30, 2003, $13.4 million or 12.7% of the Company's total loan portfolio consisted of consumer loans, which represented a decrease of $4.4 million or 24.7% from fiscal 2002. The consumer loan portfolio, like the mortgage loan portfolio, decreased due to the low levels of market interest rates and an increase in loan refinances. The consumer loans offered by the Company include home equity loans, home equity lines of credit, education loans, automobile loans, deposit account secured loans and personal loans. Approximately 92.0% of the Company's consumer loans are secured by real estate and are primarily obtained through existing and walk-in customers. The Company will originate either a fixed-rate, fixed term home equity loan, or a home equity line of credit with a variable rate. At June 30, 2003, approximately 64.7% of the Company's home equity loans were at a fixed rate for a fixed term. Although there have been a few exceptions with greater loan-to-value ratios, substantially all of such loans are originated with a loan-to-value ratio which, when coupled with the outstanding first mortgage loan, does not exceed 80%. Commercial Loans. At June 30, 2003, $1.5 million or 1.4% of the Company's total loan portfolio consisted of commercial loans, which include loans secured by accounts receivable, business inventory and equipment, and similar collateral. The $52 thousand or 3.6% increase from fiscal 2002 was principally due to draws against existing commercial lines of credit. The Company is continuing to develop this line of business in order to increase interest income and to attract compensating deposit account balances. 8 Loan Fee Income. In addition to interest earned on loans, the Company receives income from fees in connection with loan originations, loan modifications, late payments, prepayments and for miscellaneous services related to its loans. Income from these activities varies from period to period with the volume and type of loans made and competitive conditions. The Company's loan origination fees are generally calculated as a percentage of the amount borrowed. Loan origination and commitment fees and all incremental direct loan origination costs are deferred and recognized over the contractual remaining lives of the related loans on a level yield basis. Discounts and premiums on loans purchased are accreted and amortized in the same manner. In accordance with SFAS 91, the Company has recognized $332 thousand, $285 thousand and $202 thousand of deferred loan fees during fiscal 2003, 2002 and 2001, respectively, in connection with loan refinancings, payoffs and ongoing amortization of outstanding loans. The increases in loan origination fee income for fiscal year 2003 was principally attributable to a higher volume of loan refinancings. A higher volume of loan refinancings will permit the acceleration of associated deferred fee balances. Non-Performing Loans, Real Estate Owned and Troubled Debt Restructurings. When a borrower fails to make a required payment on a loan, the Company attempts to cure the deficiency by contacting the borrower and seeking payment. Contacts are generally made on the fifteenth day after a payment is due. In most cases, deficiencies are cured promptly. If a delinquency extends beyond 15 days, the loan and payment history is reviewed and efforts are made to collect the loan. While the Company generally prefers to work with borrowers to resolve such problems, when the account becomes 90 days delinquent, the Company does institute foreclosure or other proceedings, as necessary, to minimize any potential loss. Loans are placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. The Company normally does not accrue interest on loans past due 90 days or more. The Company may continue to accrue interest if, in the opinion of management, it believes it will collect on the loan. Real estate acquired by the Company as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired, it is recorded at the lower of cost or fair value at the date of acquisition and any write-down resulting therefrom is charged to the allowance for losses on real estate owned. All costs incurred in maintaining the Company's interest in the property are capitalized between the date the loan becomes delinquent and the date of acquisition. After the date of acquisition, all costs incurred in maintaining the property are expensed and costs incurred for the improvement or development of such property are capitalized. 9 The following table sets forth the amounts and categories of the Company's non-performing assets at the dates indicated.
At June 30, ------------------------------------------------------ 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (Dollars in Thousands) Non-accruing loans: Real estate: Single-family(1) $ 59 $ 582 $ 201 $ 67 $ 189 Commercial(2) 3,342 3,267 3,326 2,344 274 Construction --- 520 1,355 1,520 --- Land Acquisition and Development (3) 58 477 --- --- --- Consumer --- --- 134 113 77 Commercial loans and leases(4) 22 198 --- 6 7 ------ ------ ------ ------ ------ Total non-accrual loans 3,481 5,044 5,016 4,050 547 ------ ------ ------ ------ ------ Accruing loans greater than 90 days Delinquent --- --- --- --- --- ------ ------ ------ ------ ------ Total non-performing loans $3,481 $5,044 $5,016 $4,050 $ 547 ------ ------ ------ ------ ------ Real estate owned --- 235 --- --- 218 ------ ------ ------ ------ ------ Total non-performing assets $3,481 $5,279 $5,016 $4,050 $ 765 ====== ====== ====== ====== ====== Troubled debt restructurings(5) $2,497 $ --- $ --- $ --- $ --- ====== ====== ====== ====== ====== Total non-performing loans and troubled debt restructurings as a percentage of net loans receivable 4.36% 3.30% 2.71% 2.21% 0.32% ====== ====== ====== ====== ====== Total non-performing assets to total assets 0.95% 1.30% 1.27% 0.99% 0.22% ====== ====== ====== ====== ====== Total non-performing assets and troubled debt restructurings as a percentage of total assets 1.09% 1.30% 1.27% 0.99% 0.22% ====== ====== ====== ====== ======
- ---------- (1) At June 30, 2003, non-accrual single-family residential real estate loans consisted of one loan. (2) At June 30, 2003, non-accrual commercial real estate loans consisted of four loans. (3) At June 30, 2003, non-accrual land acquisition and development loans consisted of one loan. (4) At June 30, 2003, non-accrual commercial loans and leases consisted of one loan. (5) At June 30, 2003, trouble debt restructurings consisted of two loans, one of which totaling $1.98 million was also reported as non-accrual. The $1.6 million decrease in non-accrual loans during fiscal 2003 is comprised of a $520 thousand decrease in non-accrual single-family real estate loans, a $520 thousand decrease in non-accrual construction loans, a $419 thousand decrease in non-accrual land acquisition and development loans and a $176 thousand decrease in non-accrual commercial loans and leases, which were partially offset by a $75 thousand increase in non-accrual commercial real estate loans. As of June 30, 2003, the Company had four commercial real estate loans classified as non-accrual loans as described below. The Company had one non-accrual commercial real estate loan and one construction loan to a retirement village located in the North Hills area. Both loans became delinquent in fiscal 2000. The original outstanding principal balances totaled $3.8 million, of which $2.6 million was owned by the Company and the remaining $1.2 million was serviced by the Company for four participating lenders. During the quarter ended December 31, 2002, the Savings Bank entered into Loan Modification Agreements with respect to these credits. Among other things the obligor agreed to (i) resume monthly interest-only payments on the $1.3 million loan and to secure third-party refinancing on or before July 1, 2003; (ii) resume monthly principal and interest payments on the $2.5 million loan; (iii) consent to Judgment in Mortgage Foreclosure which will be discontinued upon payment of the $1.3 million loan; and (iv) to release the Savings Bank from any and all claims. Among other things, the Savings Bank agreed to (i) modify certain interest rates, and (ii) forgive accrued and uncollected interest, late charges and legal fees if the modified payments are received and the full principal balance on both loans are repaid according to their modified terms. During the quarter ended March 31, 2003, the Company returned the construction loan to accrual status due to timely repayments 10 under the modified terms and its first lien position. During the quarter ended June 30, 2003, the obligor was able to obtain third-party financing and paid off the $1.3 million construction loan and the Company reduced its allowances associated with this credit by approximately $257 thousand. At June 30, 2003, the Company owned approximately $2.0 million of the $2.4 million of remaining indebtedness. During the first quarter of fiscal 2004, the Company redeemed the remaining participants' balances of approximately $388 thousand. Payments continue to be received on a timely basis. The Company continues to record interest received on the remaining non-accrual commercial real estate loan on a cost recovery basis. The Company has one non-accruing commercial real estate loan, with a principal balance of $980 thousand, to a personal care home that was originally part of the two retirement village loans discussed above. Due to the low occupancy of the personal care home, and the related cash drain on the retirement village, the Savings Bank "carved out" approximately $1 million of loan debt from the retirement village, assigned that $1 million in debt to the personal care home, and allowed one of the obligors - a geriatric physician - to separately own and operate the personal care home as a separate facility. The borrower was in compliance with a written loan work-out agreement until February 2002. Sporadic payments have been received since March 2002. The borrower alleges insufficient operating cash, along with the loss of other income, to service the debt. The Savings Bank also holds three other loans, totaling $362 thousand, secured by pledges of various real estate and chattel, to this same borrower which were non-accrual as of September 30, 2002. During the quarter ended December 31, 2002, the obligor filed for bankruptcy protection under Chapter 11 of the Federal Bankruptcy Code. The Company has retained legal counsel, has obtained possession of the personal care home and related real property, and anticipates a sale of the property during the second quarter of fiscal 2004, with estimated proceeds of $500 thousand. The Company and its legal counsel are also investigating other claims and remedies against other properties pledged as collateral for these loans. The Company has one non-accruing commercial real estate loan with a principal balance of $103 thousand at June 30, 2003. The obligors have filed for bankruptcy under Chapter 7 of the Federal Bankruptcy Code. In January 2003 the Bankruptcy Court entered an Order authorizing the listing for sale of the real property securing the loan, ordered interest only payments to begin in February 2003 and granted Relief from the Automatic Stay to Foreclosure effective June 2003. The Company has collected nominal rents on a sporadic basis and anticipates a sheriff's sale during the second quarter of fiscal 2004. During fiscal 2003, 2002 and 2001, approximately $256 thousand, $408 thousand and $422 thousand, respectively, of interest would have been recorded on loans accounted for on a non-accrual basis and troubled debt restructurings if such loans had been current according to the original loan agreements for the entire period. These amounts were not included in the Company's interest income for the respective periods. The amount of interest income on loans accounted for on a non-accrual basis and troubled debt restructurings that was included in income during the same periods amounted to approximately $26 thousand, $162 thousand and $296 thousand, respectively. Allowances for Loan Losses. The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance account. Subsequent recoveries, if any, are credited to the allowance. The allowance is maintained at a level believed adequate by management to absorb estimated potential loan losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio considering past experience, current economic conditions, composition of the loan portfolio and other relevant factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant change. Effective December 21, 1993, the FDIC, in conjunction with the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Reserve Board, adopted an Interagency Policy Statement on the Allowance for Loan and Lease Losses ("Policy Statement"). The Policy Statement, which effectively supersedes previous FDIC proposed guidance, includes guidance (1) on the responsibilities of management for the assessment and establishment of an adequate allowance and (2) for the agencies' examiners to use in evaluating the adequacy of such allowance and the policies utilized to determine such allowance. The Policy Statement also sets forth quantitative measures for the allowance with respect to assets classified substandard and doubtful, described below, and with respect to the remaining portion of an institution's loan portfolio. Specifically, the Policy Statement sets forth the following quantitative measures which examiners may use to determine the reasonableness of an allowance: (1) 50% of the portfolio that is 11 classified doubtful; (2) 15% of the portfolio that is classified substandard; and (3) for the portions of the portfolio that have not been classified (including loans designated special mention), estimated credit losses over the upcoming twelve months based on facts and circumstances available on the evaluation date. While the Policy Statement sets forth this quantitative measure, such guidance is not intended as a "floor" or "ceiling". 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 ranges: (1) 0% to 5% of assets subject to special mention; (2) 5% to 100% of assets classified substandard; and (3) 50% to 100% of assets classified doubtful. Any loan classified as loss is charged-off. To further monitor and assess the risk characteristics of the loan portfolio, loan delinquencies are reviewed to consider any developing problem loans. Based upon the procedures in place, considering the Company's past charge-offs and recoveries and assessing the current risk elements in the portfolio, management believes the allowance for loan losses at June 30, 2003, is adequate. The allowance for loan losses at June 30, 2003 decreased $228 thousand to $2.53 million. The decrease in the provision for loan loss was principally attributable to pay downs in the loan portfolio, and the payoff of a previous non-performing commercial real estate loan. The Company believes that the loan loss reserve levels are prudent and warranted at this time due to the weakening of the national economy. The increases in prior years reflected a number of factors, the most significant of which were the industry trend towards greater emphasis on the allowance method of providing for loan losses and the increase in non-accrual loans. 12 The following table summarizes changes in the Company's allowance for loan losses and other selected statistics for the periods indicated.
At June 30, ------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- (Dollars in Thousands) Average net loans $125,221 $ 173,023 $ 185,895 $ 177,557 $ 158,651 ======== ========= ========= ========= ========= Allowance balance (at beginning of period) $ 2,758 $ 2,763 $ 1,973 $ 1,842 $ 1,860 Provision for loan losses (228) 57 788 150 --- Charge-offs: Real estate: Single-family --- --- --- --- 5 Multi-family --- --- --- --- --- Commercial --- --- 10 --- --- Construction --- --- --- --- --- Land acquisition and development --- --- --- --- --- Consumer: Home equity --- 25 --- --- 15 Education --- --- --- --- --- Other --- 43 --- 19 --- Commercial loans and leases --- --- 7 --- --- -------- --------- --------- --------- --------- Total charge-offs --- 68 17 19 20 -------- --------- --------- --------- --------- Recoveries: Real estate: Single-family --- --- --- --- 1 Multi-family --- --- --- --- --- Commercial --- --- --- --- --- Construction --- --- --- --- --- Land acquisition and development --- --- --- --- --- Consumer: Home equity --- --- --- --- 1 Education --- --- --- --- --- Other --- 6 19 --- --- Commercial loans and leases --- --- --- --- --- -------- --------- --------- --------- --------- Total recoveries --- 6 19 --- 2 -------- --------- --------- --------- --------- Net loans charged-off --- 62 (2) 19 18 Transfer to real estate owned loss reserve --- --- --- --- --- -------- --------- --------- --------- --------- Allowance balance (at end of period) $ 2,530 $ 2,758 $ 2,763 $ 1,973 $ 1,842 ======== ========= ========= ========= ========= Allowance for loan losses as a percentage of total loans receivable 2.68% 1.77% 1.47% 1.06% 1.07% ======== ========= ========= ========= ========= Net loans charged-off as a percentage of average net loans --- 0.04% 0.01% 0.01% 0.02% ======== ========= ========= ========= ========= Allowance for loan losses to non-performing loans 72.68% 54.68% 55.08% 48.72% 336.75% ======== ========= ========= ========= ========= Net loans charged-off to allowance for loan losses --- 2.25% (0.07)% 0.96% 0.98% ======== ========= ========= ========= ========= Recoveries to charge-offs --- 8.82% 111.76% 0.00% 11.12% ======== ========= ========= ========= =========
13 The following table presents the allocation of the allowances for loan losses by loan category at the dates indicated.
At June 30, ------------------------------------------------------------------------------------------------------------ 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- % of Total Loans by % of Total Loans by % of Total Loans by % of Total Loans by % of Total Loans by Amount Category Amount Category Amount Category Amount Category Amount Category ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in Thousands) Real estate loans: Single-family $ 75 40.91% $ 191 53.69% $ 180 51.50% $ 167 52.49% $ 174 54.43% Multi-family 26 4.92 31 3.69 35 3.37 30 3.01 152 3.12 Commercial 1,944 16.98 1,745 15.19 1,721 17.05 704 16.27 283 15.08 Construction 33 16.03 300 11.92 407 13.73 287 13.34 85 12.58 Land acquisition and development 73 7.03 66 4.00 41 3.09 57 3.72 57 4.04 Unallocated --- 0.00 10 0.00 --- 0.00 363 0.00 695 0.00 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total real estate loans 2,151 85.87 2,343 88.49 2,384 88.74 1,608 88.83 1,446 89.25 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Consumer loans: Home equity 124 11.70 165 9.75 231 9.33 184 9.19 202 8.70 Education --- 0.00 --- 0.00 --- 0.02 1 0.03 --- 0.01 Other 22 1.01 28 0.90 73 1.02 80 1.02 24 1.14 Unallocated --- 0.00 --- 0.00 --- 0.00 --- 0.00 77 0.00 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total consumer loans 146 12.71 193 10.65 304 10.37 265 10.24 303 9.85 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Commercial loans: Commercial loans 200 1.42 187 0.86 75 0.89 100 0.93 86 0.90 Unallocated --- 0.00 --- 0.00 --- 0.00 --- 0.00 7 0.00 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total commercial loans 200 1.42 187 0.86 75 0.89 100 0.93 93 0.90 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Commercial lease financings --- 0.00 --- 0.00 --- 0.00 --- 0.00 --- 0.00 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Off balance-sheet items 33 0.00 35 0.00 --- 0.00 --- 0.00 --- 0.00 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ $2,530 100.00% $2,758 100.00% $2,763 100.00% $1,973 100.00% $1,842 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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 SFAS 114. 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 SFAS 114. Generally the fair value of collateral is used since to date out impaired loans are real estate based. In connection with the fair value of collateral measurement, the Company generally would use an independent appraisal and determine costs to sell. The Company's appraisals for commercial income based loans, such as the retirement village, now 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) review prior period (historical) charge-offs and recoveries; and (3) present the results of this process, quarterly, to the Asset Classification Committee and the 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 June 30, 2003. In prior fiscal years, an unallocated loss allowance balance was maintained for real estate, consumer and small commercial loans. With respect to real estate loans, the Company believed that it was prudent to maintain a certain level of unallocated loss allowances as the Bank grew its commercial real estate and construction segments. At the time the Company's historical loss experience with these two segments was somewhat limited. Management 14 believed that risks were inherent within those segments but was uncertain as to the degree of loss. A reasonable estimate, using industry loss factors, was utilized. The same rationale applied to the unallocated allowance for consumer loans. The Company had no unallocated consumer loan allowances for the past three fiscal years. The following table summarizes the calculations of required allowance for loan losses by loan category as of June 30, 2003.
Allowance for Group Rate Loan Loss ----------------- ----------- Homogenous loans: Single-family 0.0015 $ 72 Multi-family 0.0050 26 Commercial real estate 0.0100 159 Construction/land acquisition and development 0.0015 - 0.0100(1) 89 Secured consumer 0.0100 137 Unsecured consumer 0.0500 8 Commercial loans 0.0500 65 Off balance-sheet items (2) 0.0100 33 Unallocated --- Individually evaluated loans: Single-family 3 Multi-family --- Commercial real estate 1,785 Construction/land acquisition and development 17 Secured consumer 1 Unsecured consumer --- Commercial loans 135 Off balance-sheet items --- Total allowance for loan losses: Single-family 75 Multi-family 26 Commercial real estate 1,944 Construction/land acquisition and development 106 Secured consumer 138 Unsecured consumer 8 Commercial loans 200 Off balance-sheet items 33 Unallocated --- ------ Total allowance for loan losses $2,530 ======
- ---------- (1) The rate applied ranges from 0.0015 to 0.0100 depending upon the underlying collateral, loan type (permanent vs. construction), historical loss experience, industry loss experience on similar loan segments, delinquency trends, loan volumes and concentrations, and other relevant economic and environmental factors. (2) The 1.00% rate is applied to the credit equivalent amount of the off-balance sheet item. Various off- balance sheet items have different risk weightings and credit conversion factors. 15 Management believes that the reserves it has established are adequate to cover potential losses in the Company's loan and real estate owned portfolios. However, future adjustments to these reserves may be necessary, and the Company's results of operations could be adversely affected if circumstances differ substantially from the assumptions used by management in making its determinations in this regard. 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 may be insured or guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal National Mortgage Association ("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. All of the Company's CMOs are rated in the highest category by at least two national rating services. At June 30, 2003, the Company's MBS portfolio totaled $111.9 million as compared to $82.5 million at June 30, 2002. The $29.4 million or 35.6% increase in MBS balances outstanding during fiscal 2003 was primarily attributable to purchases of floating rate CMOs which were partially offset by principal repayments. At June 30, 2003, approximately $97.4 million or 87.1% (book value) of the Company's portfolio of MBS, including CMOs, were comprised of adjustable or floating rate instruments, as compared to $58.5 million or 70.9% at June 30, 2002. Substantially all of the Company's floating rate MBS adjust monthly based upon changes in certain short-term market indices (e.g. LIBOR, Prime, etc.). The following tables set forth the amortized cost and estimated market values of the Company's MBSs available for sale and held to maturity as of the periods indicated.
2003 2002 2001 ---- ---- ---- MBS Available for Sale at June 30, (Dollars in Thousands) - ---------------------------------- FHLMC PCs $ 47 $ 48 $ 49 GNMA PCs 2,510 2,627 2,777 FNMA PCs 1,494 3,228 4,840 CMOs - agency collateral 168 293 472 CMOs - single-family whole loan collateral --- --- 248 -------- -------- -------- Total amortized cost $ 4,219 $ 6,196 $ 8,386 ======== ======== ======== Total estimated market value $ 4,387 $ 6,450 $ 8,551 ======== ======== ======== MBS Held to Maturity at June 30, - ------------------------------- FHLMC PCs $ 36 $ 60 $ 74 GNMA PCs 2,603 4,069 7,413 FNMA PCs 29 35 27 CMOs - agency collateral 47,516 55,587 17,590 CMOs - single-family whole loan collateral 57,308 16,342 30,477 -------- -------- -------- Total amortized cost $107,492 $ 76,093 $ 55,581 ======== ======== ======== Total estimated market value $107,914 $ 76,819 $ 56,082 ======== ======== ========
The Company believes that its present MBS available for sale allocation of $4.2 million or 3.8% of the carrying value of the MBS portfolio, is adequate to meet anticipated future liquidity requirements and to reposition its balance sheet and asset/liability mix should it wish to do so in the future. 16 The following table sets forth the amortized cost, contractual maturities and weighted average yields of the Company's MBSs, including CMOs, at June 30, 2003.
One Year or After One to After Five to Over Ten Less Five Years Ten Years Years Total ---- ---------- --------- ----- ----- (Dollars in Thousands) MBS available for sale $ --- $ --- $ 25 $ 4,194 $ 4,219 0.00% 0.00% 9.00% 7.24% 7.25% MBS held to maturity $ --- $ --- $ 34 $107,458 $107,492 0.00% 0.00% 9.00% 2.94% 2.94% ------- -------- -------- -------- -------- Total $ --- $ --- $ 59 $111,652 $111,711 ======= ======== ======== ======== ======== Weighted average yield 0.00% 0.00% 9.00% 3.10% 3.10% ======= ======== ======== ======== ========
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 following table sets forth information with respect to the MBS owned by the Company at June 30, 2003, which had a carrying value greater than 10% of the Company's stockholders' equity at such date, other than securities issued by the United States Government or United States Government agencies and corporations. All MBS owned by the Company have been assigned a triple A investment grade rating.
Estimated Name of Issuer Carrying Value Market Value -------------- -------------- ------------ (Dollars in Thousands) Bank of America Mortgage Securities $ 16,147 $ 16,228 Washington Mutual Mortgage Securities Corp. 15,847 15,887 Wells Fargo Mortgage Backed Securities Trust 9,352 9,393 Structured Asset Securities Corp. 5,723 5,793 Residential Funding Mortgage Securities, Inc. 3,530 3,548 ---------- ---------- $ 50,599 $ 50,849 ========== ==========
Investment Securities The Company may invest in various types of securities, including corporate debt and equity securities, U.S. Government and U.S. Government agency obligations, securities of various federal, state and municipal agencies, FHLB stock, commercial paper, bankers' acceptances, federal funds and interest-bearing deposits with other financial institutions. The Company's investment activities are directly monitored by the Company's Finance Committee under policy guidelines adopted by the Board of Directors. In recent years, the general objective of the Company's investment policy has been to manage the Company's interest rate sensitivity gap and generally to increase interest-earning assets. As reflected in the table below, the Company experienced significant prepayments in its investment portfolio of U.S. Government agency obligations. Outstanding balances totaled $24.1 million or 15.6% of the total investment portfolio at June 30, 2003, as compared to $55.2 million or 36.5% of the total investment portfolio at June 30, 2002. At June 30, 2003, approximately $22.1 million or 91.8% of the Company's U.S. Government Agency portfolio was comprised of U.S. Government Agency securities with longer-terms to maturity and optional principal redemption features ("callable bonds"). The Company purchased approximately $81.9 million of investment grade corporate debt securities during fiscal year 2003 and held approximately $74.4 million or 48.0% of the total investment portfolio in corporate debt obligations. All Company owned corporate debt obligations have been rated investment grade by at least two nationally recognized independent rating services. 17 The following tables set forth the amortized cost and estimated market values of the Company's investment securities portfolio at the dates indicated.
2003 2002 2001 ---- ---- ---- Investment Securities Available for Sale at June 30, (Dollars in Thousands) - ---------------------------------------------------- Trust preferred securities $ 128 $ 860 $ 161 Corporate debt obligations 7,428 6,495 --- Commercial paper 15,442 --- --- Obligations of states and political subdivisions 1,000 --- --- -------- -------- -------- Total amortized cost 23,998 7,355 161 Equity securities 1,312 1,020 1,219 -------- -------- -------- Total amortized cost $ 25,310 $ 8,375 $ 1,380 ======== ======== ======== Total estimated market value $ 25,641 $ 8,426 $ 1,380 ======== ======== ======== Investment Securities Held to Maturity at June 30, - -------------------------------------------------- Corporate debt obligations $ 66,978 $ 58,415 $ 10,520 U.S. Government agency securities 24,097 55,216 87,927 Commercial paper 1,099 --- --- Obligations of states and political subdivisions 29,667 29,327 29,766 -------- -------- -------- 121,841 142,958 128,213 FHLB stock 7,797 8,281 8,150 -------- -------- -------- Total amortized cost $129,638 $151,239 $136,363 ======== ======== ======== Total estimated market value $133,833 $154,427 $137,341 ======== ======== ========
18 Information regarding the amortized cost, contractual maturities and weighted average yields of the Company's investment portfolio at June 30, 2003 is presented below.
Investment Securities One Year or After One to After Five to Over Ten Available for Sale Less Five Years Ten Years Years Total - ------------------ ---- ---------- --------- ----- ----- (Dollars in Thousands) Trust preferred securities $ --- $ --- $ --- $ 128 $ 128 0.00% 0.00% 0.00% 8.63% 8.63% Corporate debt obligations $ 6,428 $ 1,000 $ --- $ --- $ 7,428 3.44% 7.40% 0.00% 0.00% 3.98% Commercial paper $ 15,442 $ --- $ --- $ --- $ 15,442 1.52% 0.00% 0.00% 0.00% 1.52% Obligations of states and political subdivisions $ 1,000 $ --- $ --- $ --- $ 1,000 1.25% 0.00% 0.00% 0.00% 1.25% Equity securities $ --- $ --- $ --- $ 1,312 $ 1,312 0.00% 0.00% 0.00% 4.85% 4.85% ---------- ---------- ---------- ---------- --------- Total $ 22,870 $ 1,000 $ --- $ 1,440 $ 25,310 ========== ========== ========== ========== ========= Weighted average yield 2.05% 7.40% 0.00% 5.18% 2.44% ========== ========== ========== ========== ========= Investment Securities One Year or After One to After Five to Over Ten Held to Maturity Less Five Years Ten Years Years Total - ---------------- ---- ---------- --------- ----- ----- Corporate debt obligations $ 54,913 $ 12,065 $ --- $ --- $ 66,978 3.51% 3.66% 0.00% 0.00% 3.54% U.S. Government agency securities $ --- $ --- $ --- $ 24,097 $ 24,097 0.00% 0.00% 0.00% 4.59% 4.59% Commercial paper $ 1,099 $ --- $ --- $ --- $ 1,099 1.70% 0.00% 0.00% 0.00% 1.70% Obligations of states and political subdivisions (1) $ 300 $ --- $ 1,495 $ 27,872 $ 29,667 3.07% 0.00% 7.43% 9.08% 8.93% ---------- ---------- ---------- ---------- --------- Total $ 56,312 $ 12,065 $ 1,495 $ 51,969 $ 121,841 ========== ========== ========== ========== ========= Weighted average yield 3.48 % 3.66% 7.43% 7.00% 5.04% ========== ========== ========== ========== =========
- ---------- (1) Tax exempt obligations of states and political subdivisions are calculated on a taxable equivalent basis utilizing a federal tax rate of 34%. 19 Information regarding the amortized cost, earliest call dates and weighted average yield of the Company's investment portfolio at June 30, 2003, is presented below. All Company investments in callable bonds were classified as held to maturity at June 30, 2003.
One Year or After One to After Five to Over Ten Less Five Years Ten Years Years Total ---- ---------- --------- ----- ----- Corporate debt obligations $ 61,341 $ 13,065 $ --- $ --- $ 74,406 3.50% 3.94% 0.00% 0.00% 3.58% U.S. Government agency securities $ 16,924 $ 5,197 $ --- $ 1,976 $ 24,097 3.85% 8.03% 0.00% 1.88% 4.59% Trust preferred securities $ --- $ --- $ --- $ 128 $ 128 0.00% 0.00% 0.00% 8.63% 8.63% Commercial paper $ 16,541 $ --- $ --- $ --- $ 16,541 1.53% 0.00% 0.00% 0.00% 1.53% Obligations of states and political subdivisions (1) $ 1,300 $ 22,017 $ 7,350 $ --- $ 30,667 1.67% 9.15% 8.53% 0.00% 8.68% ---------- ---------- ---------- ---------- -------- Total debt obligations $ 96,106 $ 40,279 $ 7,350 $ 2,104 $145,839 ========== ========== ========== ========== ======== Weighted average yield 3.20% 7.32% 8.53% 2.29% 4.59% ========== ========== ========== ========== ======== Equity securities $ --- $ --- $ --- $ 1,312 $ 1,312 ---------- ---------- ---------- ---------- -------- Total $ 96,106 $ 40,279 $ 7,350 $ 3,416 $147,151 ========== ========== ========== ========== ========
- ---------- (1) Tax exempt obligations of states and political subdivisions are calculated on a taxable equivalent basis utilizing a federal tax rate of 34%. The Company to date has not engaged, and does not intend to engage in the immediate future, in trading investment securities. 20 The following table sets forth information with respect to the investment securities owned by the Company at June 30, 2003, which had a carrying value greater than 10% of the Company's stockholders' equity at such date, other than securities issued by the United States Government and United States Government agencies and corporations. All investment securities owned by the Company, including those shown below, have been assigned an investment grade rating by at least two national rating services. The Company's investments in trust preferred securities are unrated. Estimated Name of Issuer Carrying Value Market Value -------------- -------------- ------------ (Dollars in Thousands) Pittston Area School District $5,221 $5,739 GMAC Demand Note 4,485 4,510 Ford Money Market 4,420 4,420 Eastman Kodak 4,348 4,348 AEP Resources Inc. 4,265 4,281 PNC Funding Corp Note 4,018 4,030 AT&T Corp Notes 3,842 3,858 Household Finance Corp 3,754 3,815 Capital One Bank Corp 3,724 3,727 Duke Energy Corp Note 3,696 3,701 CINERGY Corp Debenture 3,566 3,673 Energy East Corp Note 3,563 3,575 PA Electric Co 3,555 3,606 Walt Disney Company 3,517 3,548 Delphi Corp 3,499 3,499 Kraft Foods 3,497 3,497 Sempra Energy 3,376 3,414 Harleysville Group Corp 3,312 3,334 Textron Financial Corp 3,151 3,156 ------- ------- $72,809 $73,731 ======= ======= Sources of Funds The Company's principal source of funds for use in lending and for other general business purposes has traditionally come from deposits obtained through the Company's home and branch offices. Funding is also derived from FHLB advances, short-term borrowings, amortization and prepayments of outstanding loans and MBS and from maturing investment securities. Deposits. The Company's deposits totaled $170.9 million at June 30, 2003, as compared to $177.6 million at June 30, 2002. The $6.7 million decrease was primarily attributable to an approximate $4.8 million decrease in certificates of deposits, a $1.4 million decrease in escrows, a $438 thousand decrease in core deposits and a $152 thousand decrease in money market deposit accounts. In order to attract new and lower cost core deposits, the Company continued to promote a no minimum balance, "free", checking account product. Current deposit products include regular savings accounts, demand accounts, negotiable order of withdrawal ("NOW") accounts, money market deposit accounts and certificates of deposit ranging in terms from 30 days to 10 years. Included among these deposit products are certificates of deposit with negotiable interest rates and balances of $100,000 or more, which amounted to $14.2 million or 8.3% of the Company's total deposits at June 30, 2003, as compared to $12.3 million or 6.9% at June 30, 2002. The Company's deposit products also include Individual Retirement Account certificates ("IRA certificates"). The Company's deposits are obtained primarily from residents of northern Allegheny, southern Butler and eastern Beaver counties, Pennsylvania. The Company utilizes various marketing methods to attract new customers and savings deposits, including print media advertising and direct mailings. The Company does not advertise for deposits outside of its local market area or utilize the services of deposit brokers, and management believes that an insignificant number of deposit accounts were held by non-residents of Pennsylvania at June 30, 2003. The Company has drive-up banking facilities and automated teller machines ("ATMs") at its McCandless, Franklin Park, Bellevue and Cranberry Township offices. The Company also has an ATM machine at its West View Office. The Company participates in the STAR(R) and 21 CIRRUS(R) ATM networks. The Company also participates in a new ATM program called the Freedom ATM Alliance(SM). The Freedom ATM Alliance(SM) allows West View Savings Bank customers to use other Pittsburgh area Freedom ATM Alliance(SM) affiliates' ATMs without being surcharged and vice versa. The Freedom ATM Alliance(SM) was organized to help smaller local banks compete with larger national banks that have large ATM networks. The Company has been competitive in the types of accounts and in interest rates it has offered on its deposit products and continued to price its savings products nearer to the market average rate as opposed to the upper range of market offering rates. The Company has continued to emphasize the retention and growth of core deposits, particularly demand deposits. Financial institutions generally, including the Company, have experienced a certain degree of depositor disintermediation to other investment alternatives. Management believes that the degree of disintermediation experienced by the Company has not had a material impact on overall liquidity. The following table sets forth the average balance of the Company's deposits and the average rates paid thereon for the past three years. Average balances were derived from daily average balances.
At June 30, ------------------------------------------------------------------- 2003 2002 2001 ---- ---- ---- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- (Dollars in Thousands) Regular savings and club accounts $ 41,906 1.21% $ 38,277 1.92% $ 35,623 2.51% NOW accounts 19,775 0.21 19,463 0.31 17,543 0.54 Money market deposit accounts 14,334 1.28 13,460 1.91 12,409 2.65 Certificate of deposit accounts 80,208 3.18 90,022 4.44 93,879 5.82 Escrows 1,548 1.55 2,116 1.56 2,367 1.69 -------- ---- -------- ---- -------- ---- Total interest-bearing deposits and escrows 157,771 2.10 163,338 3.11 161,821 4.22 Non-interest-bearing checking accounts 12,149 0.00 11,814 0.00 11,616 0.00 -------- ---- -------- ---- -------- ---- Total deposits and escrows $169,920 1.95% $175,152 2.90% $173,437 3.93% ======== ==== ======== ==== ======== ====
The following table sets forth the net deposit flows of the Company during the periods indicated. Year Ended June 30, ----------------------------------- 2003 2002 2001 ---- ---- ---- (Dollars in Thousands) Increase(decrease) before interest credited $(10,245) $(9,365) $1,975 Interest credited 3,499 5,698 6,506 -------- ------- ------ Net deposit increase (decrease) $ (6,746) $(3,667) $8,481 ======== ======= ====== The following table sets forth maturities of the Company's certificates of deposit of $100,000 or more at June 30, 2003, by time remaining to maturity. Amounts ------- (Dollars in Thousands) Three months or less $ 3,578 Over three months through six months 6,003 Over six months through twelve months 2,625 Over twelve months 1,955 ------- $14,161 ======= Borrowings. Borrowings are comprised of FHLB advances with various terms and repurchase agreements with securities brokers with original maturities of ninety-two days or less. At June 30, 2003, borrowings totaled $162.8 million as compared to $193.7 million at June 30, 2002. The $30.9 million or 16.0% decrease was primarily due to maturities and repayments of investment and mortgage-backed securities. For a detailed discussion of the Company's asset and liability management activities, please see 22 the "Quantitative and Qualitative Disclosures about Market Risk" section of the Company's fiscal year 2003 Annual Report. Wholesale funding also provides the Company with a larger degree of control with respect to the term structure of its liabilities than traditional retail deposits. By utilizing borrowings, as opposed to retail certificates of deposit, the Company also avoids the additional operating costs associated with increasing its branch network and associated federal deposit insurance premiums. Competition The Company faces significant competition in attracting deposits. Its most direct competition for deposits has historically come from commercial banks and other savings institutions located in its market area. The Company also faces additional significant competition for investors' funds from other financial intermediaries. The Company competes for deposits principally by offering depositors a variety of deposit programs, competitive interest rates, convenient branch locations, hours and other services. The Company does not rely upon any individual group or entity for a material portion of its deposits. The Company's competition for real estate loans comes principally from mortgage banking companies, other savings institutions, commercial banks and credit unions. The Company competes for loan originations primarily through the interest rates and loan fees it charges, the efficiency and quality of services it provides borrowers, referrals from real estate brokers and builders, and the variety of its products. Factors which affect competition include the general and local economic conditions, current interest rate levels and volatility in the mortgage markets. Employees The Company had 40 full-time employees and 14 part-time employees as of June 30, 2003. None of these employees is represented by a collective bargaining agent. The Company believes that it enjoys excellent relations with its personnel. 23 REGULATION AND SUPERVISION The Company General. The Company, as a bank holding company, is subject to regulation and supervision by the Federal Reserve Board and by the Pennsylvania Department of Banking (the "Department"). The Company is required to file annually a report of its operations with, and is subject to examination by, the Board of Governors of the Federal Reserve System ("Federal Reserve Board") and the Department. Sarbanes-Oxley Act of 2002. On July 3, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002, which generally establishes a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors. BHCA Activities and Other Limitations. The Bank Holding Company Act of 1956, as amended ("BHCA") prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank, without prior approval of the Federal Reserve Board. The BHCA also generally prohibits a bank holding company from acquiring any bank located outside of the state in which the existing bank subsidiaries of the bank holding company are located unless specifically authorized by applicable state law. No approval under the BHCA is required, however, for a bank holding company already owning or controlling 50% of the voting shares of a bank to acquire additional shares of such bank. The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve Board is required to weigh the expected benefit to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve Board has by regulation determined that certain activities are closely related to banking within the meaning of the BHCA. These activities include operating a mortgage company, finance company, credit card company, factoring company, trust company or savings association; performing certain data processing operations; providing limited securities brokerage services; acting as an investment or financial advisor; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; providing tax planning and preparation services; operating a collection agency; and providing certain courier services. The Federal Reserve Board also has determined that certain other activities, including real estate brokerage and syndication, land development, property management and underwriting of life insurance not related to credit transactions, are not closely related to banking and a proper incident thereto. Capital Requirements. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. The Federal Reserve Board capital adequacy guidelines generally require bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets, with at least one-half of that amount consisting of Tier I or core capital and up to one-half of that amount consisting of Tier II or supplementary capital. Tier I capital for bank holding companies generally consists of the sum of common stockholders' equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier I capital), less goodwill. Tier II capital generally consists of hybrid capital instruments; perpetual preferred stock which is not eligible to be included as Tier I capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no additional capital) for assets such as cash to 100% for the bulk of assets which are typically held by a bank holding company, including multi-family residential and commercial real estate loans, commercial business loans and consumer loans. Single-family residential first mortgage loans which are not (90 days or more) past-due or non-performing and which have been made in accordance with prudent underwriting standards are assigned a 50% level in the risk-weighting system, while certain privately-issued MBS representing indirect ownership 24 of such loans are assigned a 20% level in the risk-weighting system. Off-balance sheet items also are adjusted to take into account certain risk characteristics. In addition to the risk-based capital requirements, the Federal Reserve Board requires bank holding companies to maintain a minimum leverage capital ratio of Tier I capital to total assets of 3%. Total assets for this purpose does not include goodwill and any other intangible assets and investments that the Federal Reserve Board determines should be deducted from Tier I capital. The Federal Reserve Board has announced that the 3% Tier I leverage capital ratio requirement is the minimum for the top-rated bank holding companies without any supervisory, financial or operational weaknesses or deficiencies or those which are not experiencing or anticipating significant growth. Other bank holding companies will be expected to maintain Tier I leverage capital ratios of at least 4% to 5% or more, depending on their overall condition. The Company is in compliance with the above-described Federal Reserve Board regulatory capital requirements. Commitments to Affiliated Institutions. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to the Savings Bank and to commit resources to support the Savings Bank in circumstances when it might not do so absent such policy. The legality and precise scope of this policy is unclear, however, in light of recent judicial precedent. The Savings Bank General. The Savings Bank is subject to extensive regulation and examination by the Department and by the FDIC, which insures its deposits to the maximum extent permitted by law, and is subject to certain requirements established by the Federal Reserve Board. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. The laws and regulations governing the Savings Bank generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. FDIC Insurance Premiums. The Savings Bank currently pays deposit insurance premiums to the FDIC on a risk-based assessment system established by the FDIC for all SAIF-member institutions. Under applicable regulations, institutions are assigned to one of three capital groups which is based solely on the level of an institution's capital - "well capitalized", "adequately capitalized" and "undercapitalized"- which is defined in the same manner as the regulations establishing the prompt corrective action system under Section 38 of the Federal Deposit Insurance Act ("FDIA"), as discussed below. These three groups are then divided into three subgroups which reflect varying levels of supervisory concern, from those which are considered to be healthy to those which are considered to be of substantial supervisory concern. The matrix so created results in nine assessment risk classifications, with rates ranging from 0.00% for well capitalized, healthy institutions to 0.27% for undercapitalized institutions with substantial supervisory concerns. The Savings Bank is a "well capitalized" institution as of June 30, 2003. Capital Requirements. The FDIC has promulgated regulations and adopted a statement of policy regarding the capital adequacy of state-chartered banks which, like the Savings Bank, are not members of the Federal Reserve System. These requirements are substantially similar to those adopted by the Federal Reserve Board regarding bank holding companies, as described above. The FDIC's capital regulations establish a minimum 3% Tier I leverage capital requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively will increase the minimum Tier I leverage ratio for such other banks to 4% to 5% or more. Under the FDIC's regulation, highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization and rated composite 1 under the Uniform Financial Institutions Rating System. A bank which has less than the minimum leverage capital requirement shall, within 60 days of the date as of which it fails to comply with such requirement, submit to its FDIC regional director for review and approval, a reasonable plan describing the means and timing by which the bank shall achieve its minimum leverage capital requirement. A bank which fails to file such plan with the FDIC is deemed to be operating in an unsafe and unsound manner, and could subject the bank to a cease-and-desist order from the FDIC. The 25 FDIC's regulation also provides that any insured depository institution with a ratio of Tier I capital to total assets that is less than 2% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and is subject to potential termination of deposit insurance. However, such an institution will not be subject to an enforcement proceeding thereunder solely on account of its capital ratios if it has entered into and is in compliance with a written agreement with the FDIC to increase its Tier I leverage capital ratio to such level as the FDIC deems appropriate and to take such other action as may be necessary for the institution to be operated in a safe and sound manner. The FDIC capital regulation also provides, among other things, for the issuance by the FDIC or its designee(s) of a capital directive, which is a final order issued to a bank that fails to maintain minimum capital to be restored to the minimum leverage capital requirement within a specified time period. Such directive is enforceable in the same manner as a final cease-and-desist order. Miscellaneous The Savings Bank is subject to certain restrictions on loans to the Company, on investments in the stock or securities thereof, on the taking of such stock or securities as collateral for loans to any borrower, and on the issuance of a guarantee or letter of credit on behalf of the Company. The Savings Bank is also subject to certain restrictions on most types of transactions with the Company, requiring that the terms of such transactions be substantially equivalent to terms of similar transactions with non-affiliated firms. In addition, there are various limitations on the distribution of dividends to the Company by the Savings Bank. The foregoing references to laws and regulations which are applicable to the Company and the Savings Bank are brief summaries thereof which do not purport to be complete and which are qualified in their entirety by reference to such laws and regulations. 26 FEDERAL AND STATE TAXATION General. The Company and the Savings Bank are subject to the generally applicable corporate tax provisions of the Internal Revenue Code of 1986 (the "Code"), as well as certain provisions of the Code which apply to thrift and other types of financial institutions. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company and the Savings Bank. Fiscal Year. The Company currently files a consolidated federal income tax return on the basis of the calendar year ending on December 31. Method of Accounting. The Company maintains its books and records for federal income tax purposes using the accrual method of accounting. The accrual method of accounting generally requires that items of income be recognized when all events have occurred that establish the right to receive the income and the amount of income can be determined with reasonable accuracy and that items of expense be deducted at the later of (1) the time when all events have occurred that establish the liability to pay the expense and the amount of such liability can be determined with reasonable accuracy or (2) the time when economic performance with respect to the item of expense has occurred. Bad Debt Reserves. Historically under Section 593 of the Code, thrift institutions such as the Savings Bank, which met certain definitional tests primarily relating to their assets and the nature of their business, were permitted to establish a tax reserve for bad debts and to make annual additions within specified limitations which may have been deducted in arriving at their taxable income. The Savings Bank's deduction with respect to "qualifying loans", which are generally loans secured by certain interests in real property, may currently be computed using an amount based on the Savings Bank's actual loss experience (the "experience method"). The Small Business Job Protection Act of 1996, adopted in August 1996, generally (1) repealed the provision of the Code which authorized use of the percentage of taxable income method by qualifying savings institutions to determine deductions for bad debts, effective for taxable years beginning after 1995, and (2) required that a savings institution recapture for tax purposes (i.e. take into income) over a six-year period its applicable excess reserves. For a savings institution such as West View which is a "small bank", as defined in the Code, generally this is the excess of the balance of its bad debt reserves as of the close of its last taxable year beginning before January 1, 1996, over the balance of such reserves as of the close of its last taxable year beginning before January 1, 1988. Any recapture would be suspended for any tax year that began after December 31, 1995, and before January 1, 1998 (thus a maximum of two years), in which a savings institution originated an amount of residential loans which was not less than the average of the principal amount of such loans made by a savings institution during its six most recent taxable years beginning before January 1, 1996. The amount of tax bad debt reserves subject to recapture is approximately $1.2 million, which is being recaptured ratably over a six-year period ending December 31, 2003. In accordance with FASB No. 109, deferred income taxes have previously been provided on this amount, therefore no financial statement expense has been recorded as a result of this recapture. The Company's supplemental bad debt reserve of approximately $3.8 million is not subject to recapture. The above-referenced legislation also repealed certain provisions of the Code that only apply to thrift institutions to which Section 593 applies: (1) the denial of a portion of certain tax credits to a thrift institution; (2) the special rules with respect to the foreclosure of property securing loans of a thrift institution; (3) the reduction in the dividends received deduction of a thrift institution; and (4) the ability of a thrift institution to use a net operating loss to offset its income from a residual interest in a real estate mortgage investment conduit. The repeal of these provisions did not have a material adverse effect on the Company's financial condition or operations. Audit by IRS. The Company's consolidated federal income tax returns for taxable years through December 31, 1999, have been closed for the purpose of examination by the Internal Revenue Service. State Taxation. The Company is subject to the Pennsylvania Corporate Net Income Tax and Capital Stock and Franchise Tax. The Pennsylvania Corporate Net Income Tax rate is 9.99% and is imposed on the Company's unconsolidated taxable income for federal purposes with certain adjustments. In general, the Capital Stock Tax is a property tax imposed at the rate of 0.699% of a corporation's capital stock 27 value, which is determined in accordance with a fixed formula based upon average net income and consolidated net worth. The Savings Bank is taxed under the Pennsylvania Mutual Thrift Institutions Tax Act (enacted on December 13, 1988, and amended in July 1989) (the "MTIT"), as amended to include thrift institutions having capital stock. Pursuant to the MTIT, the Savings Bank's current tax rate is 11.5%. The MTIT exempts the Savings Bank from all other taxes imposed by the Commonwealth of Pennsylvania for state income tax purposes and from all local taxation imposed by political subdivisions, except taxes on real estate and real estate transfers. The MTIT is a tax upon net earnings, determined in accordance with generally accepted accounting principles ("GAAP") with certain adjustments. The MTIT, in computing GAAP income, allows for the deduction of interest earned on state and federal securities, while disallowing a percentage of a thrift's interest expense deduction in the proportion of those securities to the overall investment portfolio. Net operating losses, if any, thereafter can be carried forward three years for MTIT purposes. 28 Item 2. Properties. - ------- ----------- The following table sets forth certain information with respect to the offices and other properties of the Company at June 30, 2003. Description/Address Leased/Owned ------------------- ------------ McCandless Office Owned 9001 Perry Highway Pittsburgh, PA 15237 West View Boro Office Owned 456 Perry Highway Pittsburgh, PA 15229 Cranberry Township Office Owned 20531 Perry Highway Cranberry Township, PA 16066 Sherwood Oaks Office Leased(1) 100 Norman Drive Cranberry Township, PA 16066 Bellevue Boro Office Leased(2) 572 Lincoln Avenue Pittsburgh, PA 15202 Franklin Park Boro Office Owned 2566 Brandt School Road Wexford, PA 15090 - ---------- (1) The Company operates this office out of a retirement community. The lease expires in June 2006. (2) The lease is for a period of 15 years ending in September 2006 with an option for the Company to renew the lease for an additional five years. Item 3. Legal Proceedings. - ------- ------------------ The Company is involved with various legal actions arising in the ordinary course of business. Management believes the outcome of these matters will have no material effect on the consolidated operations or consolidated financial condition of WVS Financial Corp. Item 4. Submission of Matters to a Vote of Security Holders. - ------- ---------------------------------------------------- Not applicable. PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. - ------- ---------------------------------------------------------------------- The information required herein is incorporated by reference from page 49 of the Company's 2003 Annual Report. Item 6. Selected Financial Data. - ------- ------------------------ The information required herein is incorporated by reference from pages 2 to 3 of the Company's 2003 Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------ ------------------------------------------------------------------------ of Operations. -------------- The information required herein is incorporated by reference from pages 4 to 16 of the Company's 2003 Annual Report. 29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. - -------- ----------------------------------------------------------- The information required herein is incorporated by reference from pages 12 to 16 of the Company's 2003 Annual Report. Item 8. Financial Statements and Supplementary Data. - ------- -------------------------------------------- The information required herein is incorporated by reference from pages 17 to 48 of the Company's 2003 Annual Report. Item 9. Changes in and Disagreements on Accounting and Financial Disclosure. - ------- -------------------------------------------------------------------- Not applicable. Item 9A. Controls and Procedures. - -------- ------------------------ Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2003. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations and are operating in an effective manner. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the fourth fiscal quarter of fiscal 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Part III Item 10. Directors and Executive Officers of the Registrant. - -------- --------------------------------------------------- The information required herein is incorporated by reference from pages 2 to 6 of the Company's Proxy Statement for the 2003 Annual Meeting of Stockholders dated September 26, 2003 ("Proxy Statement"). Item 11. Executive Compensation. - -------- ----------------------- The information required herein is incorporated by reference from pages 9 to 14 of the Company's Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and - -------- ---------------------------------------------------------------------- Related Stockholder Matters. ---------------------------- The security ownership of certain beneficial owners and management information required herein is incorporated by reference from pages 7 to 9 of the Company's Proxy Statement. For the related stockholder matters information required herein, see "Equity Compensation Plan Information" on page 10 of the Company's Proxy Statement. Item 13. Certain Relationships and Related Transactions. - -------- ----------------------------------------------- The information required herein is incorporated by reference from pages 14 to 15 of the Company's Proxy Statement. Item 14. Principal Accounting Fees and Services. - ------- --------------------------------------- Not applicable. 30 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. - -------- ---------------------------------------------------------------- (a) Documents filed as part of this report. (1) The following documents are filed as part of this report and are incorporated herein by reference from the Company's 2003 Annual Report. Report of Independent Auditors. Consolidated Balance Sheet at June 30, 2003 and 2002. Consolidated Statement of Income for the Years Ended June 30, 2003, 2002 and 2001. Consolidated Statement of Changes in Stockholders' Equity for the Years Ended June 30, 2003, 2002 and 2001. Consolidated Statement of Cash Flows for the Years Ended June 30, 2003, 2002 and 2001. Notes to the Consolidated Financial Statements. (2) All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission ("SEC") are omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or notes thereto. (3) (a) The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index.
No. Description Page --- ----------------------------------------------------------------------- ------ 3.1 Articles of Incorporation * 3.2 By-Laws * 4 Stock Certificate of WVS Financial Corp. * 10.1 WVS Financial Corp. Recognition Plans and Trusts for Executive Officers, Directors and Key Employees** * 10.2 WVS Financial Corp. 1993 Stock Incentive Plan** * 10.3 WVS Financial Corp. 1993 Directors' Stock Option Plan** * 10.4 WVS Financial Corp. Employee Stock Ownership Plan and Trust** * 10.5 Amended West View Savings Bank Employee Profit Sharing Plan** * 10.6 Employment Agreements between WVS Financial Corp. and David Bursic and Edward Wielgus ** *** 10.7 Directors Deferred Compensation Program** * 13 2003 Annual Report to Stockholders E-1 21 Subsidiaries of the Registrant - Reference is made to Item 1. "Business" for the required information 2 23 Consent of Independent Auditors E-57 31.1 Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer E-58 31.2 Rule 13a-14(a) / 15d-14(a) Certification of the Chief Accounting Officer E-59 32.1 Section 1350 Certification of the Chief Executive Officer E-60 32.2 Section 1350 Certification of the Chief Accounting Officer E-61
* Incorporated by reference from the Registration Statement on Form S-1 (Registration No. 33-67506) filed by the Company with the SEC on August 16, 1993, as amended. ** Management contract or compensatory plan or arrangement. *** Incorporated by reference from the Form 10-Q for the quarter ended September 30, 1998 filed by the Company with the SEC on November 13, 1998. (3)(b) The Company filed a Current Report on Form 8-K dated April 15, 2003, reporting under Item 9 earnings for the three and nine months ending March 31, 2003. The Company included as an exhibit the Form 8-K the press release dated April 15, 2003. 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WVS FINANCIAL CORP. September 26, 2003 By: /s/ David J. Bursic ------------------------------------- David J. Bursic President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ David J. Bursic - -------------------------------------------- David J. Bursic, Director, President and September 26, 2003 Chief Executive Officer (Principal Executive Officer) /s/ Donald E. Hook - -------------------------------------------- Donald E. Hook, September 26, 2003 Chairman of the Board /s/ Margaret VonDerau - -------------------------------------------- Margaret VonDerau, Director, September 26, 2003 and Corporate Secretary /s/ Keith A. Simpson - -------------------------------------------- Keith A. Simpson, Vice President, Treasurer September 26, 2003 and Chief Accounting Officer (Principal Accounting Officer) /s/ David L. Aeberli - -------------------------------------------- David L. Aeberli, Director September 26, 2003 /s/ Arthur H. Brandt - -------------------------------------------- Arthur H. Brandt, Director September 26, 2003 /s/ Lawrence M. Lehman - -------------------------------------------- Lawrence M. Lehman, Director September 26, 2003 /s/ John M. Seifarth - -------------------------------------------- John M. Seifarth, Director September 26, 2003 32 EX-13 3 exhibit13.txt [LETTERHEAD WVS FINANCIAL CORPORATION THE HOLDING COMPANY AND WEST VIEW SAVINGS LOGO OMITTED] 2003 ANNUAL REPORT TABLE OF CONTENTS Page Number ------ Stockholders' Letter 1 Selected Financial and Other Data 2 Management's Discussion and Analysis 4 Report of Independent Auditors 17 Consolidated Balance Sheet 18 Consolidated Statement of Income 19 Consolidated Statement of Changes in Stockholders' Equity 20 Consolidated Statement of Cash Flows 21 Notes to the Consolidated Financial Statements 22 Common Stock Market Price and Dividend Information 49 Corporate Information 50 PAGE LEFT INTENTIONALLY BLANK To Our Stockholders: During fiscal 2003, the economy continued to be adversely impacted by a slow recovery from the economic recession, relatively high levels of unemployment and the war with Iraq. In an attempt to restart the economy, the Federal Reserve further reduced interest rates to the lowest point in 45 years. Federal income tax rates were also reduced, most notably in wages and dividends, to encourage consumer spending and capital investment. While these efforts have improved equity market conditions over last year's depressed levels, the unemployment rate remains stubbornly high and spending has only started to recover. At this point it remains unclear as to how strong the economic recovery will be and when the unemployment rate will begin to improve. While Company earnings were impacted by the 45 year lows in market interest rates, at the end of fiscal 2003 our stock price increased by $2.18 or 13.78% and we continued to pay quarterly cash dividends which yielded over 3.50%. We are also gratified to report that the July 2003 issue of U.S. Banker Magazine, the Company was ranked #23 of the Nation's Top 200 Publicly Traded Community Banks, Ranked by 3-Year Average Return on Equity. During fiscal 2003, West View Savings Bank completed its second phase of computer system upgrades. The Bank's entire telecommunication network was replaced to improve customer response times. Our branch and teller platforms were also replaced with a PC based system to better serve our customer base. During the first half of fiscal 2004, we anticipate completing the internet banking phase of our systems upgrades. We would also like to extend our thanks to Mrs. Margaret VonDerau for completing 35 years of dedicated service as an employee of the Bank. During her tenure, Margaret was instrumental in managing the Bank's branch operations and human resources. Margaret continues to be actively involved in the business by serving as Corporate Secretary and a member of our Board of Directors. Fiscal 2004 will undoubtedly bring its own set of challenges. Please know that the Board of Directors, Senior Management and Employees will continue to work hard to earn a competitive rate of return for our stockholders while meeting the banking needs of our borrowers and depositors. Please continue to recommend West View Savings Bank to your family, friends and neighbors. /s/ DAVID J. BURSIC /s/ DONALD E. HOOK ------------------------- ------------------------- DAVID J. BURSIC DONALD E. HOOK President and Chairman of the Board Chief Executive Officer FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
As of or For the Year Ended June 30, ----------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands, except per share data) Selected Financial Data: Total assets $ 367,188 $ 404,911 $ 396,440 $ 409,618 $ 348,408 Net loans receivable 91,669 152,905 185,179 183,295 170,327 Mortgage-backed securities 111,879 82,543 64,132 73,673 72,380 Investment securities 147,482 151,384 129,593 137,502 92,166 Savings deposit accounts 169,316 174,659 178,029 169,508 171,114 FHLB advances 153,390 159,937 161,494 104,500 116,900 Other borrowings 9,453 33,731 20,660 101,025 25,820 Stockholders' equity 30,618 30,253 28,645 26,911 27,938 Non-performing assets and troubled debt restructurings(1) 3,481 5,279 5,016 4,050 765 Selected Operating Data: Interest income $ 19,231 $ 23,760 $ 29,185 $ 27,987 $ 23,031 Interest expense 11,810 14,025 18,561 16,933 12,739 ---------- ---------- ---------- ---------- ---------- Net interest income 7,421 9,735 10,624 11,054 10,292 Provision for loan losses (228) 57 788 150 --- ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 7,649 9,678 9,836 10,904 10,292 Non-interest income 725 687 669 570 458 Non-interest expense 3,956 4,104 3,787 4,626 4,285 ---------- ---------- ---------- ---------- ---------- Income before income tax expense 4,418 6,261 6,718 6,848 6,465 Income tax expense 1,070 1,813 1,956 2,469 2,434 ---------- ---------- ---------- ---------- ---------- Net income $ 3,348 $ 4,448 $ 4,762 $ 4,379 $ 4,031 ========== ========== ========== ========== ========== Per Share Information: Basic earnings $ 1.28 $ 1.63 $ 1.70 $ 1.48 $ 1.18 Diluted earnings $ 1.28 $ 1.63 $ 1.69 $ 1.47 $ 1.17 Dividends per share $ 0.64 $ 0.64 $ 0.64 $ 0.64 $ 0.63 Dividend payout ratio 50.00% 39.26% 37.65% 43.24% 53.39% Book value per share at period end $ 11.86 $ 11.30 $ 10.40 $ 9.35 $ 8.81 Average shares outstanding: Basic 2,617,576 2,723,891 2,804,125 2,953,720 3,405,662 Diluted 2,624,395 2,732,491 2,815,867 2,977,089 3,435,738
2
As of or For the Year Ended June 30, ------------------------------------------------------ 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ Selected Operating Ratios(2): Average yield earned on interest- earning assets(3) 5.36% 6.41% 7.51% 7.41% 7.32% Average rate paid on interest- bearing liabilities 3.57 4.13 5.21 4.91 4.64 Average interest rate spread(4) 1.79 2.28 2.30 2.50 2.68 Net interest margin(4) 2.19 2.74 2.83 2.97 3.27 Ratio of interest-earning assets to interest-bearing liabilities 112.56 112.34 111.33 110.57 114.54 Non-interest expense as a percent of average assets 1.05 1.07 0.94 1.20 1.35 Return on average assets 0.89 1.16 1.19 1.14 1.27 Return on average equity 10.97 14.85 17.17 16.27 13.01 Ratio of average equity to average assets 8.10 7.78 6.92 6.99 9.76 Full-service offices at end of period 6 6 6 6 6 Asset Quality Ratios(2): Non-performing loans and troubled debt restructurings as a percent of net total loans(1) 3.80% 3.30% 2.71% 2.21% 0.32% Non-performing assets as a percent of total assets(1) 0.95 1.30 1.27 0.99 0.22 Non-performing assets and troubled debt restructurings as a percent of total assets 0.95 1.30 1.27 0.99 0.22 Allowance for loan losses as a percent of total loans receivable 2.68 1.77 1.47 1.06 1.07 Allowance for loan losses as a percent of non-performing loans 72.68 54.68 55.08 48.72 336.75 Charge-offs to average loans receivable outstanding during the period 0.00 0.04 0.01 0.01 0.02 Capital Ratios(2): Tier 1 risk-based capital ratio 14.30% 13.42% 14.15% 14.05% 15.85% Total risk-based capital ratio 15.57 14.66 15.40 15.11 16.90 Tier 1 leverage capital ratio 8.42 7.69 7.35 6.69 8.29
- ---------- (1) Non-performing assets consist of non-performing loans and real estate owned ("REO"). Non- performing loans consist of non-accrual loans and accruing loans greater than 90 days delinquent, while REO consists of real estate acquired through foreclosure and real estate acquired by acceptance of a deed in lieu of foreclosure. (2) Consolidated asset quality ratios and capital ratios are end of period ratios, except for charge-offs to average net loans. With the exception of end of period ratios, all ratios are based on average monthly balances during the indicated periods. (3) Interest and yields on tax-exempt loans and securities (tax-exempt for federal income tax purposes) are shown on a fully taxable equivalent basis. (4) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities, and net interest margin represents net interest income as a percent of average interest-earning assets. 3 WVS FINANCIAL CORP. AND SUBSIDIARY ---------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS When used in this Annual Report, or, in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to forward looking statements to reflect events or circumstances after the date of statements or to reflect the occurrence of anticipated or unanticipated events. GENERAL WVS Financial Corp. ("WVS" or the "Company") is the parent holding company of West View Savings Bank ("West View" or the "Savings Bank"). The Company was organized in July 1993 as a Pennsylvania-chartered unitary bank holding company and acquired 100% of the common stock of the Savings Bank in November 1993. West View Savings Bank is a Pennsylvania-chartered, SAIF-insured stock savings bank conducting business from six offices in the North Hills suburbs of Pittsburgh. The Savings Bank converted to the stock form of ownership in November 1993. The Savings Bank had no subsidiaries at June 30, 2003. The operating results of the Company depend primarily upon its net interest income, which is determined by the difference between income on interest-earning assets, principally loans, mortgage-backed securities and investment securities, and interest expense on interest-bearing liabilities, which consist primarily of deposits and borrowings. The Company's net income is also affected by its provision for loan losses, as well as the level of its non-interest income, including loan fees and service charges, and its non-interest expenses, such as compensation and employee benefits, income taxes, deposit insurance and occupancy costs. The Company's strategic focus includes: Interest Rate Risk Management - During the past two fiscal years, market interest rates have plummeted to 45 year lows. The Federal Reserve Board's accommodative monetary policy, coupled with increased fiscal stimulus, should lead to an economic recovery during fiscal 2004. History has shown that economic recoveries are generally accompanied by higher levels of market interest rates. While these low market interest rates have impacted net income, the Company is well positioned for an eventual rise in market interest rates. Enhancing Stockholder Value - During fiscal 2003, the Company's stock price increased by $2.18 or 13.78% and the Company maintained its quarterly cash dividends, which yielded over 3.50%. 4 Commitment to Capital Management - The Company continued to retain capital for future growth, paying an attractive cash dividend and supplementing market liquidity with our Sixth Common Stock Buyback Program. Strong Net Income - During fiscal 2003, the Company earned $3.3 million or $1.28 per share (basic and diluted). Fiscal 2003 return on average stockholders' equity was 10.97% while return on average assets totaled 0.89%. The July 2003 issue of US Banker Magazine ranked the Company #23 of the Nation's Top 200 Public Traded Community Banks, Ranked by 3-year Average Return on Equity. Substantial Core Deposits - As of June 30, 2003, $89.4 million or 52.8% of West View's total deposits consisted of regular savings and club accounts, money market deposit accounts, and checking accounts. Approximately $44.2 million or 49.4% of core deposits consisted of regular savings and club accounts. Core deposits are considered to be more stable and lower cost funds than certificates of deposit and other borrowings. Community-based Lending - West View has consistently focused its lending activities on generating loans in its market area. Typical loan offerings include home mortgages, construction loans, and consumer loans for home improvement, automobile loans and home equity loans. West View's small business lending program includes term loans, business inventory loans and loans for business equipment and machinery. Strong Non-interest Expense Ratios - For the fiscal years ended June 30, 2003, 2002 and 2001, the Company's ratios of non-interest expense to average assets were 1.05%, 1.07% and 0.94%, respectively. In fiscal 2003, the Company upgraded its branch platform to a PC-based system to help streamline operations. Internet banking will be rolled out during Fiscal 2004 to increase customer satisfaction and loyalty. CHANGES IN FINANCIAL CONDITION Condensed Balance Sheet -----------------------
Change June 30, June 30, ------------------------ 2003 2002 Dollars Percentage ---- ---- ------- ---------- (Dollars in Thousands) Cash and interest-earning deposits $ 2,815 $ 3,177 $ (362) -11.4% Investment securities(1) 155,279 159,665 (4,386) -2.7 Mortgage-backed securities 111,879 82,543 29,336 35.5 Net loans receivable 91,669 152,905 (61,236) -40.0 Total assets 367,188 404,911 (37,723) -9.3 Deposits 170,926 177,672 (6,746) -3.8 FHLB and other borrowings 162,843 193,668 (30,825) -15.9 Total liabilities 336,570 374,658 (38,088) -10.2 Total equity 30,618 30,253 365 1.2
- ---------- (1) Includes Federal Home Loan Bank stock. 5 General. The $37.7 million or 9.3% decrease in total assets was primarily comprised of a $61.2 million decrease in net loans receivable, and a $4.4 million decrease in investment securities and Federal Home Loan Bank ("FHLB") stock, which were partially offset by a $29.3 million increase in mortgage-backed securities. The $38.1 million or 10.2% decrease in total liabilities was primarily comprised of a $30.8 million decrease in FHLB advances and other borrowings, a $6.7 million decrease in deposits and a $249 thousand decrease in accrued interest payable. Total stockholders' equity increased $365 thousand or 1.2% primarily due to $3.3 million of Company net income, and a $197 thousand increase in capital attributable to stock option exercises and Recognition and Retention Plan ("RRP") equity contributions, which were partially offset by the repurchase of $1.6 million of the Company's own common stock, and $1.7 million of cash dividends paid to stockholders. The Company believes that the repurchase of its common stock represented an attractive investment opportunity and favorably added to secondary market liquidity. Cash on Hand and Interest-earning Deposits. Cash on hand and interest-earning deposits represent cash equivalents. Cash equivalents decreased $362 thousand or 11.4% to $2.8 million at June 30, 2003 from $3.2 million at June 30, 2002. Decreases in these accounts were primarily due to a combination of new loan originations, customer withdrawals, investment purchases and repayments of borrowings, which were partially offset by increases in these accounts as a result of a combination of customer deposits, loan and investment repayments, and proceeds from borrowings. Investments. The Company's overall investment portfolio increased $25.0 million or 10.3% to $267.2 million at June 30, 2003 from $242.2 million at June 30, 2002. Mortgage-backed securities increased $29.3 million or 35.5% to $111.9 million at June 30, 2003. This increase was due primarily to purchases of floating rate mortgage-backed securities, which were partially offset by principal repayments on the portfolio. Investment securities decreased $4.4 million or 2.7% to $155.3 million at June 30, 2003. This decrease was due to calls of U.S. Government agency securities, maturities of investment grade corporate bonds, and redemption of FHLB stock. Net Loans Receivable. Net loans receivable decreased $61.2 million or 40.0% to $91.7 million at June 30, 2003. The decrease in loans receivable was principally the result of higher levels of refinancing activity due to record low mortgage interest rates. As part of its asset/liability management strategy, the Company chose to invest substantially all of these proceeds into adjustable rate and short-term investment and mortgage-backed securities. Deposits. Total deposits decreased $6.7 million or 3.8% to $170.9 million at June 30, 2003. Certificates of deposit decreased approximately $4.8 million or 5.6%, and money market accounts decreased $152 thousand or 1.0%. Savings accounts increased $2.5 million or 6.1%. The Savings Bank believes that these changes in depositor liquidity preferences are due to the relatively low level of market interest rates and stock market volatility. Borrowed Funds. Borrowed funds decreased $30.8 million or 15.9% to $162.8 million at June 30, 2003. Other short-term borrowings decreased $24.3 million or 72.0% to $9.5 million at June 30, 2003, and FHLB advances decreased $6.5 million or 4.1% to $153.4 million at June 30, 2003. The Company repaid these sums through internal cash flows. Stockholders' Equity. Total stockholders' equity increased $365 thousand or 1.2% to $30.6 million at June 30, 2003. The increase was principally the result of $3.3 million of Company net income and a $197 thousand increase in capital attributable to stock option exercises, and RRP equity contributions, which were partially offset by the repurchase of $1.6 million of the Company's own common stock and $1.7 million of cash dividends paid to stockholders. 6 RESULTS OF OPERATIONS Condensed Statements of Income ------------------------------
June 30, 2003 Change June 30, 2002 Change June 30, 2001 ------------- ------ ------------- ------ ------------- (Dollars in Thousands) Interest income $ 19,231 $(4,529) $23,760 $(5,425) $29,185 -19.1% -18.6% Interest expense $ 11,810 $(2,215) $14,025 $(4,536) $18,561 -15.8% -24.4% Net interest income $ 7,421 $(2,314) $ 9,735 $ (889) $10,624 -23.8% -8.4% Provision for loan losses $ (228) $ (285) $ 57 $ (731) $ 788 -500.0% -92.8% Non-interest income $ 725 $ 38 $ 687 $ 18 $ 669 5.5% 2.7% Non-interest expense $ 3,956 $ (148) $ 4,104 $ 317 $ 3,787 -3.6% 8.4% Income tax expense $ 1,070 $ (743) $ 1,813 $ (143) $ 1,956 -41.0% -7.3% Net income $ 3,348 $(1,100) $ 4,448 $ (314) $ 4,762 -24.7% -6.6%
General. WVS reported net income of $3.3 million, $4.4 million and $4.8 million for the fiscal years ended June 30, 2003, 2002 and 2001, respectively. The $1.1 million or 24.7% decrease in net income during fiscal 2003 was primarily the result of a $2.3 million decrease in net interest income, which was partially offset by a $743 thousand decrease in income tax expense, a $285 thousand decrease in the provision for loan losses, a $148 thousand decrease in non-interest expense, and a $38 thousand increase in non-interest income. Earnings per share totaled $1.28 (basic and diluted) for fiscal 2003 as compared to $1.63 (basic and diluted) for fiscal 2002. The decrease in earnings per share was due to a decrease in net income, which was partially offset by a reduction in the weighted average number of shares outstanding due to the Company's stock repurchases during fiscal 2003. 7 Average Balances, Net Interest Income and Yields Earned and Rates Paid. The following average balance sheet table sets forth at and for the periods indicated, information on the Company regarding: (1) the total dollar amounts of interest income on interest-earning assets and the resulting average yields; (2) the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs; (3) net interest income; (4) interest rate spread; (5) net interest-earning assets (interest-bearing liabilities); (6) the net yield earned on interest-earning assets; and (7) the ratio of total interest-earning assets to total interest-bearing liabilities.
For the Years Ended June 30, ----------------------------------------------------------------------------- 2003 2002 ------------------------------------ ------------------------------------ Average Average Average Average Balance Interest Yield/Rate Balance Interest Yield/Rate ------- -------- ---------- ------- -------- ---------- (Dollars in Thousands) Interest-earning assets: Net loans receivable(1) $127,970 $ 9,524 7.44% $172,824 $13,224 7.65% Net tax-free loans receivable(2) --- --- 0.00 199 26 13.28 Mortgage-backed securities 82,427 2,854 3.46 65,372 3,341 5.11 Investments - taxable 131,193 5,228 3.98 112,948 5,553 4.92 Investments - tax-free(2) 28,610 2,340 8.18 28,543 2,323 8.14 Interest-bearing deposits 2,362 11 0.47 1,766 10 0.57 -------- ------- -------- ------- Total interest-earning assets 372,562 19,957 5.36% 381,652 24,477 6.41% ------- ====== ------- ====== Non-interest-earning assets 4,113 3,386 -------- -------- Total assets $376,675 $385,038 ======== ======== Interest-bearing liabilities: Interest-bearing deposits and escrows $157,771 $ 3,312 2.10% $163,338 $ 5,082 3.11% Borrowings 173,226 8,498 4.91 176,383 8,943 5.07 -------- ------- -------- ------- Total interest-bearing liabilities 330,997 11,810 3.57% 339,721 14,025 4.13% ------- ====== ------- ====== Non-interest-bearing accounts 12,149 11,814 -------- -------- Total interest-bearing liabilities and non-interest-bearing accounts 343,146 351,535 Non-interest-bearing liabilities 3,020 3,547 -------- -------- Total liabilities 346,166 355,082 Retained income 30,509 29,956 -------- -------- Total liabilities and retained income $376,675 $385,038 ======== ======== Net interest income $ 8,147 $10,452 ======= ======= Interest rate spread 1.79% 2.28% ====== ====== Net yield on interest-earning assets(3) 2.19% 2.74% ====== ====== Ratio of interest-earning assets to interest-bearing liabilities 112.56% 112.34% ====== ====== For the Years Ended June 30, ------------------------------------ 2001 ------------------------------------ Average Average Balance Interest Yield/Rate ------- -------- ---------- (Dollars in Thousands) Interest-earning assets: Net loans receivable(1) $185,203 $14,656 7.91% Net tax-free loans receivable(2) 692 69 9.97 Mortgage-backed securities 70,403 4,835 6.87 Investments - taxable 114,000 8,205 7.20 Investments - tax-free(2) 24,785 1,993 8.04 Interest-bearing deposits 1,871 38 2.03 -------- ------- Total interest-earning assets 396,954 29,796 7.51% ------- ====== Non-interest-earning assets 4,148 -------- Total assets $401,102 ======== Interest-bearing liabilities: Interest-bearing deposits and escrows $161,821 $ 6,820 4.21% Borrowings 194,749 11,741 6.03 -------- ------- Total interest-bearing liabilities 356,570 18,561 5.21% ------- ====== Non-interest-bearing accounts 11,616 -------- Total interest-bearing liabilities and non-interest-bearing accounts 368,186 Non-interest-bearing liabilities 5,179 -------- Total liabilities 373,365 Retained income 27,737 ------- Total liabilities and retained income $401,102 ======== Net interest income $11,235 ======= Interest rate spread 2.30% ====== Net yield on interest-earning assets(3) 2.83% ====== Ratio of interest-earning assets to interest-bearing liabilities 111.33% ======
- ---------- (1) Includes non-accrual loans. (2) Interest and yields on tax-exempt loans and securities (tax-exempt for federal income tax purposes) are shown on a fully taxable equivalent basis utilizing a federal tax rate of 34%. (3) Net interest income divided by average interest-earning assets. 8 Rate/Volume Analysis. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Company's interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume (change in volume multiplied by prior year rate), (2) changes in rate (change in rate multiplied by prior year volume), and (3) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume. Changes in interest income on securities reflects the changes in interest income on a fully tax equivalent basis.
Year Ended June 30, ------------------------------------------------------------------------------- 2003 vs. 2002 2002 vs. 2001 ------------------------------------- ------------------------------------- Increase (Decrease) Increase (Decrease) Due to Total Due to Total ---------------------- Increase ---------------------- Increase Volume Rate (Decrease) Volume Rate (Decrease) ------- ------- ---------- ------- ------- ---------- (Dollars in Thousands) Interest-earning assets: Net loans receivable $(3,349) $ (377) $(3,726) $(1,021) $ (454) $(1,475) Mortgage-backed securities 747 (1,234) (487) (325) (1,169) (1,494) Investments - taxable 830 (1,155) (325) (76) (2,576) (2,652) Investments - tax-free 6 11 17 305 25 330 Interest-bearing deposits 3 (2) 1 (3) (25) (28) ------- ------- ------- ------- ------- ------- Total interest-earning assets (1,763) (2,757) (4,520) (1,120) (4,199) (5,319) ------- ------- ------- ------- ------- ------- Interest-bearing liabilities: Interest-bearing deposits and Escrows (324) (1,446) (1,770) (121) (1,617) (1,738) Other borrowings (166) (279) (445) (1,039) (1,759) (2,798) ------- ------- ------- ------- ------- ------- Total interest-bearing liabilities (490) (1,725) (2,215) (1,160) (3,376) (4,536) ------- ------- ------- ------- ------- ------- Increase (decrease) in net interest Income $(1,273) $(1,032) $(2,305) $ 40 $ (823) $ (783) ======= ======= ======= ======= ======= =======
Net Interest Income. Net interest income is determined by the Company's interest rate spread (i.e. the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Interest Income. Total interest income decreased by $4.5 million or 19.1% during fiscal 2003 and decreased by $5.4 million or 18.6% during fiscal 2002. The decrease in fiscal 2003 was primarily a result of historically low market interest rates and higher levels of loan repayments, which were partially offset by increased average balances of the investment and mortgage-backed securities portfolios. The decrease in fiscal 2002 was primarily a result of decreases in the weighted average yield earned and the average balances of the investment, mortgage-backed, and loan portfolios during the period. Interest income on investment securities and FHLB stock decreased $325 thousand or 4.5% during fiscal 2003 and decreased $2.4 million or 25.4% during fiscal 2002. The decrease in fiscal 2003 was primarily attributable to an 84 basis point decrease in the weighted average yield on the Company's investment securities, which was partially offset by a $18.3 million increase in the average balance of the investment securities outstanding. The decrease in fiscal 2002 was primarily attributable to a 178 basis point decrease in the weighted average yield on the Company's investment securities which was partially offset by a $2.7 million increase in the average balance of the investment securities outstanding. Interest income on mortgage-backed securities decreased $487 thousand or 14.6% during fiscal 2003 and decreased $1.5 million or 30.9% during fiscal 2002. The decrease in fiscal 2003 was attributable to a 165 basis point decrease in the weighted average yield on the Company's mortgage-backed securities portfolio, which was partially offset by a $17.1 million increase in the average balance of the mortgage-backed securities portfolio. The decrease in fiscal 2002 was attributable to a 176 basis point decrease in the weighted average yield on the mortgage-backed securities portfolio and a $5.0 million decrease in the average outstanding balance of mortgage-backed securities. 9 Interest income on net loans receivable decreased $3.7 million or 28.1% during fiscal 2003 and decreased $1.5 million or 9.9% during fiscal 2002. The decrease in fiscal 2003 was attributable to a $45.1 million decrease in the average balance of net loans outstanding and a 22 basis point decrease in the weighted average yield on the Company's loan portfolio. As part of its asset/liability management strategy, the Company previously limited its origination of longer-term fixed rate loans to mitigate its exposure to a rise in market interest rates. The Company began to offer longer-term fixed rate loans on a correspondent basis during fiscal 2003. The decrease in fiscal 2002 was attributable to a $12.9 million decrease in the average balance of net loans outstanding and a 26 basis point decrease in the weighted average yield on the Company's loan portfolio. Interest Expense. Total interest expense decreased $2.2 million or 15.8% during fiscal 2003 and decreased by $4.5 million or 24.4% during fiscal 2002. The decrease in fiscal 2003 was attributable to a decrease of $1.8 million of interest expense on deposits and a decrease of $445 thousand of interest expense on borrowings. The decrease during fiscal 2002 was attributable to a decrease of $2.8 million of interest expense on borrowings and a $1.7 million decrease of interest expense on deposits. Interest expense on borrowings decreased $445 thousand or 5.0% during fiscal 2003 and decreased $2.8 million or 23.8% during fiscal 2002. The decrease in fiscal 2003 was attributable to a 16 basis point decrease in the weighted average yield on the Company's borrowings, and a $3.2 million decrease in the average balance of borrowings outstanding. During fiscal 2003, the Company's borrowings were primarily longer-term, with fixed rates of interest. The decrease in fiscal 2002 was attributable to a 96 basis point decrease in the weighted average yield on the Company's borrowings and a $18.4 million decrease in the average balance of borrowings outstanding. Interest expense on interest-bearing deposits and escrows decreased $1.8 million or 34.8% in fiscal 2003 and decreased $1.7 million or 25.5% in fiscal 2002. The decrease in fiscal 2003 was attributable to a 101 basis point decrease in the weighted average yield on the Company's deposits, and a $5.6 million decrease in the average balance of interest-bearing deposits. The decrease in fiscal 2002 was primarily attributable to a 110 basis point decrease in the weighted average rate paid on the Company's deposits and a $3.9 million increase in the average balance of interest bearing time deposits. Provision for Loan Losses. A provision for loan losses is charged to earnings to bring the total allowance to a level considered adequate by management to absorb potential losses in the portfolio. Management's determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio considering past experience, current economic conditions, volume, growth, composition of the loan portfolio and other relevant factors. The Company reduced its provision for loan loss by $228 thousand during fiscal 2003, as compared to recording a provision of $57 thousand during fiscal 2002. The Company's reduced provision in fiscal 2003 was due to the reduced levels of net loans receivable and the payoff of a large non-performing commercial real estate loan. The fiscal 2002 provision was comparable to net charge-offs of $62 thousand. Non-interest Income. Total non-interest income increased by $38 thousand or 5.5% in fiscal 2003 and increased by $18 thousand or 2.7% in fiscal 2002. The increase in fiscal 2003 was primarily attributable to the sale of investments from the Company's investment portfolio. The increase in fiscal 2002 was primarily attributable to an increase in service charges on deposits. Non-interest Expense. Total non-interest expense decreased $148 thousand or 3.6% and increased $317 thousand or 8.4% during fiscal 2003 and 2002, respectively. The decrease in fiscal 2003 was primarily attributable to a decrease in payroll related costs, which was partially offset by increases in data processing expenses and fixed asset costs. The increase in fiscal 2002 was primarily attributable to increases in accrued legal fees, charitable contributions for local educational programs, PA Capital Stock Franchise taxes and other payroll costs. Income Taxes. Income taxes decreased $743 thousand or 41.0% during fiscal 2003 and decreased $143 thousand or 7.3% during fiscal 2002. The decrease in fiscal 2003 was primarily attributable to a decrease in 10 taxable income and proportionately higher tax-free interest revenue on bank qualified municipal securities. Fiscal year 2002 income tax expense was favorably impacted by the higher levels of tax-free bank qualified municipal securities in the Company's investment portfolio and a $100 thousand Pennsylvania tax credit for charitable contributions made in support of local educational programs. The Company's effective tax rate was 24.2% at June 30, 2003 and 29.0% at June 30, 2002. LIQUIDITY AND CAPITAL RESOURCES Liquidity is often analyzed by reviewing the cash flow statement. Cash and cash equivalents decreased by $362 thousand during fiscal 2003 primarily due to $40.8 million of net cash used for financing activities. These decreases were offset by $33.4 million of net cash provided by investing activities, and $7.1 million of net cash provided by operating activities. Funds provided by operating activities totaled $7.1 million during fiscal 2003 as compared to $4.5 million during fiscal 2002. Net cash provided by operating activities was primarily comprised of $3.3 million of net income, $3.2 million of amortization of discounts, premiums and deferred loan fees, and a $1.1 million decrease in accrued interest receivable, which were partially offset by a $249 thousand decrease in accrued interest payable, and a $228 thousand decrease in provisions for loan loss. Funds provided by investing activities totaled $33.4 million during fiscal 2003 as compared to $9.1 million used for investing activities during fiscal 2002. Primary sources of funds during fiscal 2003 include $258.5 million in repayments and sales of investment and mortgage-backed securities (including FHLB stock) and a $61.1 million decrease in net loans receivable, which were partially offset by $286.1 million in purchases of investment and mortgage-backed securities (including FHLB stock). The investment purchases were primarily comprised of investment grade commercial paper and investment grade corporate bonds that mature within two years. The mortgage-backed securities purchases were floating rate instruments that generally reprice on a monthly basis. Funds used for financing activities totaled $40.8 million for fiscal 2003 as compared to $4.8 million provided by financing activities in fiscal 2002. Primary uses of funds for fiscal 2003 were a $30.8 million decrease in FHLB and other borrowings, a $6.7 million decrease in deposits, $1.7 million of cash dividends and $1.6 million in common stock repurchases. During fiscal 2003, the Company purchased 101,719 shares of common stock for approximately $1.6 million. Management has determined that it currently is maintaining adequate liquidity and continues to better match funding sources with lending and investment opportunities. The Company's primary sources of funds are deposits, amortization, prepayments and maturities of existing loans, mortgage-backed securities and investment securities, funds from operations, and funds obtained through FHLB advances and other borrowings. At June 30, 2003, the total approved loan commitments outstanding amounted to $1.5 million. At the same date, commitments under unused letters and lines of credit amounted to $6.5 million and the unadvanced portion of construction loans approximated $11.3 million. The Company also had commitments to purchase approximately $21.1 million of floating rate mortgage-backed securities. Certificates of deposit scheduled to mature in one year or less at June 30, 2003, totaled $56.9 million. Management believes that a significant portion of maturing deposits will remain with the Company. Historically, the Company used its sources of funds primarily to meet its ongoing commitments to pay maturing certificates of deposit and savings withdrawals, fund loan commitments and maintain a substantial portfolio of investment securities. The Company has been able to generate sufficient cash through the retail deposit market, its traditional funding source, and through FHLB advances and other borrowings, to provide the cash utilized in investing activities. The Company has access to the Federal Reserve Bank Primary Credit Program. Management believes that the Company currently has adequate liquidity available to respond to liquidity demands. On July 29, 2003, the Company's Board of Directors declared a cash dividend of $0.16 per share payable on August 21, 2003 to shareholders of record at the close of business on August 11, 2003. Dividends are 11 subject to determination and declaration by the Board of Directors, which take into account the Company's financial condition, statutory and regulatory restrictions, general economic conditions and other factors. There can be no assurance that dividends will in fact be paid on the common stock in the future or that, if paid, such dividends will not be reduced or eliminated in future periods. As of June 30, 2003, WVS Financial Corp. exceeded all regulatory capital requirements and maintained Tier I and total risk-based capital equal to $30.3 million or 14.3% and $32.9 million or 15.6%, respectively, of total risk-weighted assets, and Tier I leverage capital of $30.3 million or 8.4% of average total assets. Non-performing assets consist of non-accrual loans and real estate owned. A loan is placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed insufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued but uncollected interest is deducted from interest income. Non-performing assets decreased $1.8 million or 35.6% to $3.5 million, or 0.95% of total assets, at June 30, 2003. The decrease was primarily the result of a $1.2 million in repayments, $520 thousand in pending payoffs, $404 thousand in loans reclassified as performing due to improved economic performance, and a decrease of $235 thousand in real estate owned, which were partially offset by $362 thousand in loans reclassified as non-performing. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of the Company's transactions are denominated in US dollars with no specific foreign exchange exposure. The Savings Bank has no agricultural loan assets and therefore would not have a specific exposure to changes in commodity prices. Any impacts that changes in foreign exchange rates and commodity prices would have on interest rates are assumed to be exogenous and will be analyzed on an ex post basis. ------- Interest rate risk ("IRR") is the exposure of a banking organization's financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value, however excessive levels of IRR can pose a significant threat to the Company's earnings and capital base. Accordingly, effective risk management that maintains IRR at prudent levels is essential to the Company's safety and soundness. Evaluating a financial institution's exposure to changes in interest rates includes assessing both the adequacy of the management process used to control IRR and the organization's quantitative level of exposure. When assessing the IRR management process, the Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain IRR at prudent levels with consistency and continuity. Evaluating the quantitative level of IRR exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity, and, where appropriate, asset quality. Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest-rate changes. For example, assume that an institution's assets carry intermediate- or long-term fixed rates and that those assets were funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution's interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution's profits could decrease on existing assets because the institution will either have lower net interest income or, possibly, net interest expense. Similar risks exist when assets are subject to contractual interest-rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate environment. During fiscal 2003 the level of market interest rates declined further due to the Federal Reserve's accommodative monetary policy and the weakness in the national economy. The marked decline in the 12 equity markets, reduced corporate earnings and heightened geopolitical tensions have caused a considerable disintermediation from the equity to the fixed income markets, further compounding the decline in market interest rates across the yield curve. Due to the rapid decline in market interest rates, the Company's loan, investment and mortgage-backed securities portfolios continued to experience much higher then anticipated levels of prepayments. During fiscal 2003, the Federal Reserve reduced the Federal Funds rate an additional six times for a total of 250 basis points. Principal repayments on the Company's loan, investment and mortgage-backed securities portfolios totaled $83.1 million, $143.8 million and $113.3 million respectively. In response to higher levels of liquidity the Company began to rebalance its loan, investment and mortgage-backed securities portfolios. Due to the low level of market interest rates, the Company began to reduce its originations of long-term fixed rate mortgages while continuing to offer consumer home equity and construction loans. The Company began to purchase investment grade commercial paper and corporate bonds in order to earn a higher return with a shorter maturity profile and to reduce the prepayment risk within the portfolio. Within the mortgage-backed securities portfolio, the Company aggressively purchased floating rate securities in order to provide current income and protection against an eventual rise in market interest rates. Each of the aforementioned strategies also helped to better the interest-rate and liquidity risks associated with the Savings Bank's customers liquidity preference for shorter term deposit products. The Company also makes available for origination residential mortgage loans with interest rates which adjust pursuant to a designated index, although customer acceptance has been somewhat limited in the Savings Bank's market area. The Company will continue to selectively offer commercial real estate, land acquisition and development, and shorter-term construction loans, primarily on residential properties, to partially increase its loan asset sensitivity. The Company intends to emphasize higher yielding home equity and small business loans to existing customers and seasoned prospective customers. As of June 30, 2003, the implementation of these asset and liability management initiatives resulted in the following: 1) the Company's liquidity profile remains high with the investment portfolio's stated final maturities as follows: less than 1 year: $79.2 million or 30.7%; 1-5 years: $13.1 million or 5.1%; over 5 years: $165.3 million or 64.2%; 2) $97.4 million or 87.1% of the Company's portfolio of mortgage-backed securities (including collateralized mortgage obligations - "CMOs") were secured by floating rate securities; 3) the maturity distribution of the Company's borrowings is as follows: less than 1 year: $13.6 million or 8.4%; 1-5 years: $7.2 million or 4.4%; over 5 years: $142.1 million or 87.2%; and 4) an aggregate of $33.6 million or 36.7% of the Company's net loan portfolio had adjustable interest rates or maturities of less than 12 months. The effect of interest rate changes on a financial institution's assets and liabilities may be analyzed by examining the "interest rate sensitivity" of the assets and liabilities and by monitoring an institution's interest rate sensitivity "gap". An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within a given time period. A gap is considered positive (negative) when the amount of rate sensitive assets (liabilities) exceeds the amount of rate sensitive liabilities (assets). During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income. During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income. 13 The following table sets forth certain information at the dates indicated relating to the Company's interest-earning assets and interest-bearing liabilities which are estimated to mature or are scheduled to reprice within one year.
June 30, -------------------------------------- 2003 2002 2001 -------- -------- -------- (Dollars in Thousands) Interest-earning assets maturing or repricing within one year $262,782 $252,467 $155,928 Interest-bearing liabilities maturing or repricing within one year 133,418 142,823 137,232 -------- -------- -------- Interest sensitivity gap $129,364 $109,644 $ 18,696 ======== ======== ======== Interest sensitivity gap as a percentage of total assets 35.2% 27.1% 4.7% Ratio of assets to liabilities maturing or repricing within one year 197.0% 176.8% 113.6%
During fiscal 2003, the Company managed its one year interest sensitivity gap by: (1) limiting the origination of long-term fixed rate mortgages; (2) emphasizing loans with shorter terms or repricing frequencies; (3) purchasing investments with maturities within 2 years; and (4) purchasing floating rate CMO's which reprice on a monthly basis. 14 The following table illustrates the Company's estimated stressed cumulative repricing gap - the difference between the amount of interest-earning assets and interest-bearing liabilities expected to reprice at a given point in time - at June 30, 2003. The table estimates the impact of an upward or downward change in market interest rates of 100 and 200 basis points. Cummulative Stressed Repricing Gap ----------------------------------
Month 3 Month 6 Month 12 Month 24 Month 36 Month 60 Long Term ------- ------- -------- -------- -------- -------- --------- (Dollars in Thousands) Base Case Up 200 bp - ------------------- Cummulative Gap ($'s) 123,940 116,233 103,039 111,979 120,903 140,870 29,111 % of Total Assets 33.7% 31.6% 28.0% 30.4% 32.9% 38.3% 7.9% Base Case Up 100 bp - ------------------- Cummulative Gap ($'s) 134,488 129,591 120,308 150,867 162,576 167,911 29,111 % of Total Assets 36.6% 35.2% 32.7% 41.0% 44.2% 45.6% 7.9% Base Case No Change - ------------------- Cummulative Gap ($'s) 138,535 136,286 129,364 160,276 170,439 172,522 29,111 % of Total Assets 37.7% 37.0% 35.2% 43.6% 46.3% 46.9% 7.9% Base Case Down 100 bp - --------------------- Cummulative Gap ($'s) 140,996 140,230 134,229 166,166 175,930 175,585 29,111 % of Total Assets 38.3% 38.1% 36.5% 45.2% 47.8% 47.7% 7.9% Base Case Down 200 bp - --------------------- Cummulative Gap ($'s) 154,224 154,189 148,818 169,264 178,141 176,428 29,111 % of Total Assets 41.9% 41.9% 40.5% 46.0% 48.4% 48.0% 7.9%
Beginning in the third quarter of fiscal 2001, the Company began to utilize an income simulation model to measure interest rate risk and to manage interest rate sensitivity. The Company believes that income simulation modeling may enable the Company to better estimate the possible effects on net interest income due to changing market interest rates. Other key model parameters include: estimated prepayment rates on the Company's loan, mortgage-backed securities and investment portfolios; savings decay rate assumptions; and the repayment terms and embedded options of the Company's borrowings. 15 The following table presents the simulated impact of a 100 and 200 basis point upward or downward shift in market interest rates and the estimated impact on net interest income, return on average equity, return on average assets and the market value of portfolio equity at June 30, 2003 and June 30, 2002. Analysis of Sensitivity to Changes in Market Interest Rates -----------------------------------------------------------
Modeled Change in Market Interest Rates ----------------------------------------------------------------------------------------------------------- June 30, 2003 June 30, 2002 ---------------------------------------------------- --------------------------------------------------- Estimated impact on: -200 -100 0 +100 +200 -200 -100 0 +100 +200 - -------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Change in net -47.6% -35.0% 0.00% 24.8% 46.8% -18.7% -10.1% 0.00% 8.5% 24.2% interest income Return on average 0.31% 1.88% 6.16% 9.08% 11.62% 8.70% 10.37% 12.32% 13.94% 16.83% equity Return on average 0.02% 0.14% 0.47% 0.70% 0.91% 0.66% 0.79% 0.95% 1.08% 1.32% assets Market value of $(4,248) $ 5,191 $13,582 $19,086 $22,309 $21,523 $25,461 $28,182 $28,529 $28,793 equity (in thousands)
The table below provides information about the Company's anticipated transactions comprised of firm loan commitments and other commitments, including undisbursed letters and lines of credit. The Company used no derivative financial instruments to hedge such anticipated transactions as of June 30, 2003. Anticipated Transactions -------------------------------------------------------------------------- (Dollars in Thousands) Undisbursed construction and development loans Fixed rate $ 3,483 5.67% Adjustable rate $ 7,865 5.32% Undisbursed lines of credit Adjustable rate $ 6,469 4.80% Loan origination commitments Fixed rate $ 1,222 5.62% Adjustable rate $ 250 3.75% Letters of credit Adjustable rate $ 51 7.25% Commitments to purchase mortgage-backed securities Adjustable rate $21,079 2.52% ------- $40,419 ======= 16 REPORT OF INDEPENDENT AUDITORS ------------------------------ Board of Directors and Stockholders WVS Financial Corp. We have audited the accompanying consolidated balance sheet of WVS Financial Corp. and subsidiary as of June 30, 2003 and 2002, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WVS Financial Corp. and subsidiary as of June 30, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ S.R. Snodgrass, A.C. - ------------------------ S.R. Snodgrass, A.C. Wexford, PA August 1, 2003 17 WVS FINANCIAL CORP. CONSOLIDATED BALANCE SHEET (In thousands, except per share data)
June 30, 2003 2002 --------- --------- ASSETS Cash and due from banks $ 921 $ 879 Interest-earning demand deposits 1,894 2,298 --------- --------- Total cash and cash equivalents 2,815 3,177 Investment securities available for sale (amortized cost of $25,310 and $8,375) (Note 4) 25,641 8,426 Investment securities held to maturity (market value of $126,036 and $146,146) (Note 4) 121,841 142,958 Mortgage-backed securities available for sale (amortized cost of $4,219 and $6,196) (Note 5) 4,387 6,450 Mortgage-backed securities held to maturity (market value of $107,914 and $76,819) (Note 5) 107,492 76,093 Net loans receivable (allowance for loan losses of $2,530 and $2,758) (Note 6) 91,669 152,905 Accrued interest receivable (Note 8) 2,800 3,903 Federal Home Loan Bank stock, at cost (Note 9) 7,797 8,281 Premises and equipment (Note 10) 1,231 996 Other assets 1,515 1,722 --------- --------- TOTAL ASSETS $ 367,188 $ 404,911 ========= ========= LIABILITIES Deposits (Note 11) $ 170,926 $ 177,672 Federal Home Loan Bank advances (Note 12) 153,390 159,937 Other borrowings (Note 13) 9,453 33,731 Accrued interest payable 1,449 1,698 Other liabilities 1,352 1,620 --------- --------- TOTAL LIABILITIES 336,570 374,658 --------- --------- STOCKHOLDERS' EQUITY (Notes 16) Preferred stock, no par value; 5,000,000 shares authorized; none outstanding - - Common stock, par value $.01; 10,000,000 shares authorized; 3,736,750 and 3,729,858 shares issued 37 37 Additional paid-in capital 20,212 20,037 Treasury stock (1,153,591 and 1,051,872 shares at cost) (16,767) (15,133) Retained earnings - substantially restricted 26,857 25,183 Accumulated other comprehensive income 329 201 Unallocated shares - Recognition and Retention Plans (50) (72) --------- --------- TOTAL STOCKHOLDERS' EQUITY 30,618 30,253 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 367,188 $ 404,911 ========= =========
See accompanying notes to the consolidated financial statements. 18 WVS FINANCIAL CORP. CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share data)
Year Ended June 30, 2003 2002 2001 ----------- ---------- ---------- INTEREST AND DIVIDEND INCOME Loans $ 9,524 $ 13,242 $ 14,704 Investment securities 6,590 6,735 9,075 Mortgage-backed securities 2,854 3,341 4,835 Interest-earning demand deposits 11 10 38 Federal Home Loan Bank stock 252 432 533 ----------- ---------- ---------- Total interest and dividend income 19,231 23,760 29,185 ----------- ---------- ---------- INTEREST EXPENSE Deposits (Note 10) 3,312 5,082 6,820 Federal Home Loan Bank advances 8,224 8,635 8,699 Other borrowings 274 308 3,042 ----------- ---------- ---------- Total interest expense 11,810 14,025 18,561 ----------- ---------- ---------- NET INTEREST INCOME 7,421 9,735 10,624 Provision for loan losses (Note 6) (228) 57 788 ----------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,649 9,678 9,836 ----------- ---------- ---------- NONINTEREST INCOME Service charges on deposits 361 403 348 Investment securities gains, net 64 - - Other 300 284 321 ----------- ---------- ---------- Total noninterest income 725 687 669 ----------- ---------- ---------- NONINTEREST EXPENSE Salaries and employee benefits 2,240 2,448 2,415 Occupancy and equipment 398 375 367 Deposit insurance premium 29 33 35 Data processing 221 190 186 Correspondent bank charges 152 163 153 Other 916 895 631 ----------- ---------- ---------- Total noninterest expense 3,956 4,104 3,787 ----------- ---------- ---------- Income before income taxes 4,418 6,261 6,718 Income taxes (Note 18) 1,070 1,813 1,956 ----------- ---------- ---------- NET INCOME $ 3,348 $ 4,448 $ 4,762 =========== ========== ========== EARNINGS PER SHARE: Basic $ 1.28 $ 1.63 $ 1.70 Diluted 1.28 1.63 1.69 AVERAGE SHARES OUTSTANDING (Note 2): Basic 2,617,576 2,723,891 2,804,125 Diluted 2,624,395 2,732,491 2,815,867
See accompanying notes to the consolidated financial statements. 19 WVS FINANCIAL CORP. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands, except per share data)
Retained Additional Earnings- Unallocated Common Paid-in Treasury Substantially Shares Held Stock Capital Stock Restricted by ESOP -------------------------------------------------------------------------- Balance June 30, 2000 $ 37 $ 19,548 $(11,770) $ 19,513 $ - Comprehensive income: Net income 4,762 Unrealized gain on available for sale securities, net of taxes of $157 Tax benefit from stock grants issued under RRPs 39 Accrued compensation expense for RRPs Exercise of stock options 119 Tax benefit from exercise of stock options 36 Purchase of treasury stock (1,819) Cash dividends declared ($0.64 per share) (1,797) -------- -------- -------- -------- -------- Balance June 30, 2001 37 19,742 (13,589) 22,478 - Comprehensive income: Net income 4,448 Unrealized gain on available for sale securities, net of taxes of $48 Tax benefit from stock grants issued under RRPs 54 Accrued compensation expense for RRPs Exercise of stock options 212 Tax benefit from exercise of stock options 29 Purchase of treasury stock (1,544) Cash dividends declared ($0.64 per share) (1,743) -------- -------- -------- -------- -------- Balance June 30, 2002 37 20,037 (15,133) 25,183 - Comprehensive income: Net income 3,348 Unrealized gain on available for sale securities, net of taxes of $66 Tax benefit from stock grants issued under RRPs 104 Compensation expense for RRPs Exercise of stock options 71 Tax benefit from exercise of stock options Purchase of treasury stock (1,634) Cash dividends declared ($0.64 per share) (1,674) -------- -------- -------- -------- -------- Balance June 30, 2003 $ 37 $ 20,212 $(16,767) $ 26,857 $ - ======== ======== ======== ======== ======== Accumulated Unallocated Other Shares Held Comprehensive by RRP Income (Loss) Total ------------------------------------------ Balance June 30, 2000 $ (220) $ (197) $ 26,911 Comprehensive income: Net income 4,762 Unrealized gain on available for sale securities, net of taxes of $157 305 305 Tax benefit from stock grants issued under RRPs 39 Accrued compensation expense for RRPs 89 89 Exercise of stock options 119 Tax benefit from exercise of stock options 36 Purchase of treasury stock (1,819) Cash dividends declared ($0.64 per share) (1,797) -------- -------- -------- Balance June 30, 2001 (131) 108 28,645 Comprehensive income: Net income 4,448 Unrealized gain on available for sale securities, net of taxes of $48 93 93 Tax benefit from stock grants issued under RRPs 54 Accrued compensation expense for RRPs 59 59 Exercise of stock options 212 Tax benefit from exercise of stock options 29 Purchase of treasury stock (1,544) Cash dividends declared ($0.64 per share) (1,743) -------- -------- -------- Balance June 30, 2002 (72) 201 30,253 Comprehensive income: Net income 3,348 Unrealized gain on available for sale securities, net of taxes of $66 128 128 Tax benefit from stock grants issued under RRPs 104 Compensation expense for RRPs 22 22 Exercise of stock options 71 Tax benefit from exercise of stock options Purchase of treasury stock (1,634) Cash dividends declared ($0.64 per share) (1,674) -------- -------- -------- Balance June 30, 2003 $ (50) $ 329 $ 30,618 ======== ======== ========
See accompanying notes to the consolidated financial statements. 20 WVS FINANCIAL CORP. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
Year Ended June 30, 2003 2002 2001 --------- --------- --------- OPERATING ACTIVITIES Net income $ 3,348 $ 4,448 $ 4,762 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses (228) 57 788 Depreciation 156 123 111 Investment securities gains, net (64) - - Amortization of discounts, premiums, and deferred loan fees 3,205 766 (225) Amortization of ESOP and RRP deferred compensation 22 59 89 Deferred income taxes 43 (93) (370) Decrease (increase) in accrued interest receivable 1,103 (66) 538 Decrease in accrued interest payable (249) (743) (263) Other, net (285) (48) 555 --------- --------- --------- Net cash provided by operating activities 7,051 4,503 5,985 --------- --------- --------- INVESTING ACTIVITIES Available for sale: Purchase of investment and mortgage-backed securities (25,836) (29,454) - Proceeds from repayments of investment and mortgage-backed securities 10,313 24,793 1,767 Proceeds from sales of investment and mortgage-backed securities 639 - - Held to maturity: Purchase of investment and mortgage-backed securities (259,234) (296,854) (36,865) Proceeds from repayments of investment and mortgage-backed securities 246,069 260,973 53,438 Net decrease (increase) in net loans receivable 61,131 31,520 (2,873) Purchase of Federal Home Loan Bank stock (1,021) (131) (2,925) Redemption of Federal Home Loan Bank stock 1,505 - - Acquisition of premises and equipment (391) (118) (62) Other, net 220 180 - --------- --------- --------- Net cash provided by (used for) investing activities 33,395 (9,091) 12,480 --------- --------- --------- FINANCING ACTIVITIES Net increase (decrease) in deposits (6,746) (3,667) 8,481 Net increase (decrease) in Federal Home Loan Bank short-term advances 3,875 (14,836) (1,663) Net increase (decrease) in other borrowings (24,278) 13,071 (80,365) Proceeds from Federal Home Loan Bank long-term advances 578 23,279 108,657 Repayments of Federal Home Loan Bank long-term advances (11,000) (10,000) (50,000) Net proceeds from exercise of stock options 71 212 119 Cash dividends paid (1,674) (1,743) (1,797) Purchase of treasury stock (1,634) (1,544) (1,819) --------- --------- --------- Net cash provided by (used for) financing activities (40,808) 4,772 (18,387) --------- --------- --------- Increase (decrease) in cash and cash equivalents (362) 184 78 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,177 2,993 2,915 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,815 $ 3,177 $ 2,993 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the year for: Interest $ 12,059 $ 14,768 $ 18,823 Taxes 1,049 1,735 2,140
See accompanying notes to the consolidated financial statements. 21 WVS FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization ------------ WVS Financial Corp. ("WVS" or the "Company") is a Pennsylvania-chartered unitary bank holding company which owns 100 percent of the common stock of West View Savings Bank ("West View" or the "Savings Bank"). The operating results of the Company depend primarily upon the operating results of the Savings Bank and, to a lesser extent, income from interest-earning assets such as investment securities. West View is a Pennsylvania-chartered, SAIF-insured stock savings bank conducting business from six offices in the North Hills suburbs of Pittsburgh. The Savings Bank's principal sources of revenue originate from its portfolio of residential real estate and commercial mortgage loans as well as income from investment and mortgage-backed securities. The Company is supervised by the Board of Governors of the Federal Reserve System, while the Savings Bank is subject to regulation and supervision by the Federal Deposit Insurance Corporation ("FDIC") and the Pennsylvania Department of Banking. Basis of Presentation --------------------- The consolidated financial statements include the accounts of WVS and its wholly-owned subsidiary, West View. All intercompany transactions have been eliminated in consolidation. The accounting and reporting policies of WVS and West View conform with accounting principles generally accepted in the United States of America. The Company's fiscal year-end for financial reporting is June 30. For regulatory and income tax reporting purposes, WVS reports on a December 31 calendar year basis. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for that period. Actual results could differ significantly from those estimates. Investment and Mortgage-Backed Securities ----------------------------------------- Investment securities are classified at the time of purchase as securities held to maturity or securities available for sale based on management's ability and intent. Debt and mortgage-backed securities acquired with the ability and intent to hold to maturity are stated at cost adjusted for amortization of premium and accretion of discount, which are computed using the level-yield method and recognized as adjustments of interest income. Amortization rates for mortgage-backed securities are periodically adjusted to reflect changes in the prepayment speeds of the underlying mortgages. Certain other debt, equity, and mortgage-backed securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized holding gains and losses for available for sale securities are reported as a separate component of stockholders' equity, net of tax, until realized. Realized securities gains and losses are computed using the specific identification method. Interest and dividends on investment and mortgage-backed securities are recognized as income when earned. Common stock of the Federal Home Loan Bank (the "FHLB") represents ownership in an institution, which is wholly owned by other financial institutions. This equity security is accounted for at cost and reported separately on the accompanying Consolidated Balance Sheet. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Net Loans Receivable -------------------- Net loans receivable are reported at their principal amount, net of the allowance for loan losses and deferred loan fees. Interest on mortgage, consumer, and commercial loans is recognized on the accrual method. The Company's general policy is to stop accruing interest on loans when, based upon relevant factors, the collection of principal or interest is doubtful, regardless of the contractual status. Interest received on nonaccrual loans is recorded as income or applied against principal according to management's judgment as to the collectibility of such principal. Loan origination and commitment fees, and all incremental direct loan origination costs, are deferred and recognized over the contractual remaining lives of the related loans on a level yield basis. Allowance for Loan Losses ------------------------- The allowance for loan losses represents the amount which management estimates is adequate to provide for probable losses inherent in its loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses charged to operations. The provision for loan losses is based on management's periodic evaluation of individual loans, economic factors, past loan loss experience, changes in the composition and volume of the portfolio, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to changes in the near term. Impaired loans are commercial and commercial real estate loans for which it is probable the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The Company individually evaluates such loans for impairment and does not aggregate loans by major risk classifications. The definition of "impaired loans" is not the same as the definition of "nonaccrual loans," although the two categories overlap. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired if the loan is not a commercial or commercial real estate loan. Factors considered by management in determining impairment include payment status and collateral value. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original interest rate, and its recorded value, or as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral. Mortgage loans on one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Loans that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired. Management determines the significance of payment delays on a case-by-case basis taking into consideration all circumstances surrounding the loan and the borrower including the length of the delay, the borrower's prior payment record, and the amount of shortfall in relation to the principal and interest owed. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Real Estate Owned ----------------- Real estate owned acquired through foreclosure is carried at the lower of cost or fair value minus estimated costs to sell. Costs relating to development and improvement of the property are capitalized, whereas costs of holding such real estate are expensed as incurred. Valuation allowances for estimated losses are provided when the carrying value of the real estate acquired exceeds the fair value. Premises and Equipment ---------------------- Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is principally computed on the straight-line method over the estimated useful lives of the related assets, which range from three to ten years for furniture and equipment and twenty-five to fifty years for building premises. Leasehold improvements are amortized over the shorter of their estimated useful lives or their respective lease terms, which range from seven to fifteen years. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized. Income Taxes ------------ Deferred tax assets and liabilities are computed based on the difference between the financial statement and the income tax basis of assets and liabilities using the enacted marginal tax rates. Deferred income taxes or benefits are based on the changes in the deferred tax asset or liability from period to period. The Company files a consolidated federal income tax return. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which such items are expected to be realized or settled. As changes in tax rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Earnings Per Share ------------------ The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share are calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share are calculated by dividing net income available to common stockholders, adjusted for the effects of any dilutive securities by the weighted-average number of common shares outstanding, adjusted for the effects of any dilutive securities. Stock Options ------------- The Company maintains stock option plans for key officers, employees, and non-employee directors. As permitted under Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation," the Company has elected to continue following Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related Interpretations, in accounting for stock-based awards to employees. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized in the Company's financial statements. Had compensation expense included stock option plan costs determined based on the fair value at the grant dates for options granted under these plans consistent with Statement No. 123, pro forma net income and earnings per share would not have been materially different than that presented on the Consolidated Statement of Income. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Comprehensive Income -------------------- The Company is required to present comprehensive income and its components in a full set of general- purpose financial statements for all periods presented. Other comprehensive income is comprised exclusively of net unrealized holding gains (losses) on its available for sale securities portfolio. The Company has elected to report the effects of its other comprehensive income as part of the Consolidated Statement of Stockholders' Equity. Cash Flow Information --------------------- Cash and cash equivalents include cash and due from banks and interest-earning demand deposits. Reclassification of Comparative Figures --------------------------------------- Certain comparative amounts for prior years have been reclassified to conform to current year presentations. Such reclassifications did not affect net income or stockholders' equity. Recent Accounting Pronouncements -------------------------------- In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement replaces EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). The new statement is effective for exit or disposal activities initiated after December 31, 2002. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. On October 1, 2002, the FASB issued FAS No. 147, Acquisitions of Certain Financial Institutions, effective for all business combinations initiated after October 1, 2002. This statement addresses the financial accounting and reporting for the acquisition of all or part of a financial institution, except for a transaction between two or more mutual enterprises. This statement removes acquisitions of financial institutions, other than transactions between two or more mutual enterprises, from the scope of FAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method. The acquisition of all or part of a financial institution that meets the definition of a business combination shall be accounted for by the purchase method in accordance with FAS No. 141, Business Combinations, and FAS No. 142, Goodwill and Other Intangible Assets. This statement also provides guidance on the accounting for the impairment or disposal of acquired long-term customer-relationship intangible assets (such as depositor and borrower-relationship intangible assets and credit cardholder intangible assets), including those acquired in transactions between two or more mutual enterprises. The adoption of FAS No. 147 did not have a material effect on the Company's financial position or results of operations. On December 31, 2002, the FASB issued FAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, which amends FAS No. 123, Accounting for Stock-Based Compensation. FAS No. 148 amends the disclosure requirements of FAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. Under the provisions of FAS No. 123, companies that adopted the preferable, fair value based method were required to apply that method prospectively for new stock option awards. This contributed to a "ramp-up" effect on stock-based compensation expense in the first few years following adoption, which caused concern for 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Pronouncements (Continued) -------------------------------------------- companies and investors because of the lack of consistency in reported results. To address that concern, FAS No. 148 provides two additional methods of transition that reflect an entity's full complement of stock-based compensation expense immediately upon adoption, thereby eliminating the ramp-up effect. FAS No. 148 also improves the clarity and prominence of disclosures about the pro forma effects of using the fair value based method of accounting for stock-based compensation for all companies-regardless of the accounting method used-by requiring that the data be presented more prominently and in a more user-friendly format in the footnotes to the financial statements. In addition, the statement improves the timeliness of those disclosures by requiring that this information be included in interim as well as annual financial statements. The transition guidance and annual disclosure provisions of FAS No. 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS No. 133. The amendments set forth in FAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in FAS No. 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. FAS No. 149 amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts that are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting. This statement is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The provisions of this statement that relate to FAS No. 133, Implementation Issues, that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003. The adoption of this statement is not expected to have a material effect on the Company's financial position or results of operations. In May 2003, the FASB issued FAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Such instruments may have been previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement has not and is not expected to have a material effect on the Company's reported equity. In November, 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. This interpretation clarifies that a guarantor is required to disclose (a) the nature of the guarantee, including the approximate term of 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Recent Accounting Pronouncements (Continued) -------------------------------------------- the guarantee, how the guarantee arose, and the events or circumstances that would require the guarantor to perform under the guarantee; (b) the maximum potential amount of future payments under the guarantee; (c) the carrying amount of the liability, if any, for the guarantor's obligations under the guarantee; and (d) the nature and extent of any recourse provisions or available collateral that would enable the guarantor to recover the amounts paid under the guarantee. This interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The objective of the initial measurement of that liability is the fair value of the guarantee at its inception. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this interpretation did not have a material effect on the Company's financial position or results of operations. In January, 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, in an effort to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities, and activities of another entity. The objective of this interpretation is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. This interpretation changes that, by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of this interpretation apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The adoption of this interpretation has not and is not expected to have a material effect on the Company's financial position or results of operations. 2. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share.
2003 2002 2001 ---------- ---------- ---------- Weighted-average common shares outstanding 3,731,949 3,718,640 3,695,294 Average treasury stock shares (1,114,373) (994,749) (891,169) Weighted-average common shares and common stock equivalents used to calculate basic earnings per share 2,617,576 2,723,891 2,804,125 Additional common stock equivalents (stock options) used to calculate diluted earnings per share 6,819 8,600 11,742 ---------- ---------- ---------- Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share 2,624,395 2,732,491 2,815,867 ========== ========== ==========
27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 2. EARNINGS PER SHARE (Continued) 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. Options to purchase 76,600 shares of common stock at prices from $14.00 to $15.625 were outstanding during 2001, but were not included in the computation of diluted EPS because to do so would have been anti-dilutive. 3. COMPREHENSIVE INCOME Other comprehensive income primarily reflects changes in net unrealized gains on available for sale securities. Total comprehensive income for the years ended June 30 is summarized as follows:
2003 2002 2001 ------ ------ ------ Net Income $3,348 $4,448 $4,762 Other comprehensive Income: Unrealized gains on available for sale securities 258 141 462 Less: Reclassification adjustment for gain included in net income 64 - - ------ ------ ------ Other comprehensive income before tax 258 141 462 Income tax expense related to other comprehensive income 88 48 157 ------ ------ ------ Other comprehensive income, net of tax 170 93 305 ------ ------ ------ Comprehensive income $3,518 $4,541 $5,067 ====== ====== ======
4. INVESTMENT SECURITIES The amortized cost and estimated market values of investments are as follows:
-------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- --------- 2003 ---- AVAILABLE FOR SALE Preferred trust securities $ 128 $ 3 $ - $ 131 Corporate debt securities 7,428 62 (2) 7,488 Obligations of states and political subdivisions 1,000 - - 1,000 Commercial paper 15,442 - (1) 15,441 Equity securities 1,312 269 - 1,581 -------- -------- -------- -------- Total $ 25,310 $ 334 $ (3) $ 25,641 ======== ======== ======== ======== HELD TO MATURITY U.S. Government agency securities $ 24,097 $ 601 $ - $ 24,698 Corporate debt securities 66,978 487 (6) 67,459 Commercial paper 1,099 - - 1,099 Obligations of states and political subdivisions 29,667 3,113 - 32,780 -------- -------- -------- -------- Total $121,841 $ 4,201 $ (6) $126,036 ======== ======== ======== ========
28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 4. INVESTMENT SECURITIES (Continued)
-------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- --------- 2002 ---- AVAILABLE FOR SALE Preferred trust securities $ 860 $ 17 $ (3) $ 874 Commercial paper 6,495 - - 6,495 Equity securities 1,020 38 (1) 1,057 -------- -------- -------- -------- Total $ 8,375 $ 55 $ (4) $ 8,426 ======== ======== ======== ======== HELD TO MATURITY U.S. Government agency securities $ 55,216 $ 1,016 $ (22) $ 56,210 Corporate debt securities 58,415 193 (51) 58,557 Obligations of states and political subdivisions 29,327 2,052 - 31,379 -------- -------- -------- -------- Total $142,958 $ 3,261 $ (73) $146,146 ======== ======== ======== ========
In 2003, the Company recorded investment security gains of $64. Proceeds from sales of investment securities during 2003 were $639. The amortized cost and estimated market values of debt securities at June 30, 2003, by contractual maturity, are shown below. Expected maturities may differ from the contractual maturities because issuers may have the right to call securities prior to their final maturities.
Due in Due after Due after one year one through five through Due after or less five years ten years ten years Total -------- ----------- ------------ --------- -------- AVAILABLE FOR SALE Amortized cost $ 22,870 $ 1,000 $ - $ 128 $ 23,998 Estimated market value 22,869 1,060 - 131 24,060 HELD TO MATURITY Amortized cost $ 56,313 $ 12,065 $ 1,494 $ 51,969 $121,841 Estimated market value 56,582 12,277 1,737 55,440 126,036
Investment securities with amortized cost of $17,624 and $41,219 and estimated market values of $18,009 and $41,956 at June 30, 2003 and 2002, respectively, were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 5. MORTGAGE-BACKED SECURITIES The amortized cost and estimated market values of mortgage-backed securities are as follows:
-------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- --------- 2003 ---- AVAILABLE FOR SALE Federal National Mortgage Association certificates $ 1,494 $ 78 $ - $ 1,572 Government National Mortgage Association certificates 2,510 70 - 2,580 Federal Home Loan Mortgage Corporation certificates 47 3 - 50 Collateralized mortgage obligations 168 17 185 -------- -------- -------- -------- Total $ 4,219 $ 168 $ - $ 4,387 ======== ======== ======== ======== HELD TO MATURITY Federal National Mortgage Association certificates $ 29 $ 1 $ - $ 30 Government National Mortgage Association certificates 2,603 81 (17) 2,667 Federal Home Loan Mortgage Corporation certificates 36 - - 36 Collateralized mortgage obligations 104,824 392 (35) 105,181 -------- -------- -------- -------- Total $107,492 $ 474 $ (52) $107,914 ======== ======== ======== ======== -------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- --------- 2002 ---- AVAILABLE FOR SALE Federal National Mortgage Association certificates $ 3,228 $ 106 $ - $ 3,334 Government National Mortgage Association certificates 2,627 128 - 2,755 Federal Home Loan Mortgage Corporation certificates 48 1 - 49 Collateralized mortgage obligations 293 19 - 312 -------- -------- -------- -------- Total $ 6,196 $ 254 $ - $ 6,450 ======== ======== ======== ======== HELD TO MATURITY Federal National Mortgage Association certificates $ 35 $ 3 $ - $ 38 Government National Mortgage Association certificates 4,069 190 - 4,259 Federal Home Loan Mortgage Corporation certificates 60 5 - 65 Collateralized mortgage obligations 71,929 615 (87) 72,457 -------- -------- -------- -------- Total $ 76,093 $ 813 $ (87) $ 76,819 ======== ======== ======== ========
30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 5. MORTGAGE-BACKED SECURITIES (Continued) The amortized cost and estimated market values of mortgage-backed securities at June 30, 2003, by contractual maturity, are shown below. Expected maturities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Due in Due after Due after one year one through five through Due after or less five years ten years ten years Total -------- ----------- ------------ --------- -------- AVAILABLE FOR SALE Amortized cost $ - $ - $ 25 $ 4,194 $ 4,219 Estimated market value - - 26 4,361 4,387 HELD TO MATURITY Amortized cost $ - $ - $ 34 $107,458 $107,492 Estimated market value - - 35 107,879 107,914
At June 30, 2003 and 2002, mortgage-backed securities with an amortized cost of $67,746 and $48,161 and estimated market values of $68,179 and $49,099, were pledged to secure borrowings with the Federal Home Loan Bank. 6. NET LOANS RECEIVABLE Major classifications of loans are summarized as follows: 2003 2002 -------- -------- First mortgage loans: 1 - 4 family dwellings $ 43,255 $ 89,889 Construction 16,942 19,965 Land acquisition and development 7,437 6,691 Multi-family dwellings 5,196 6,173 Commercial 17,949 25,439 -------- -------- 90,779 148,157 -------- -------- Consumer loans: Home equity 8,006 11,352 Home equity lines of credit 4,368 4,967 Other 1,069 1,515 -------- -------- 13,443 17,834 -------- -------- Commercial loans 1,499 1,447 -------- -------- Less: Undisbursed construction and land development 11,348 11,311 Net deferred loan fees 174 464 Allowance for loan losses 2,530 2,758 -------- -------- 14,052 14,533 -------- -------- Net loans receivable $ 91,669 $152,905 ======== ======== The Company's primary business activity is with customers located within its local trade area of Northern Allegheny and Southern Butler counties. The Company has concentrated its lending efforts by granting residential and construction mortgage loans to customers throughout its immediate trade area. The Company also selectively funds and participates in commercial and residential mortgage loans outside of its immediate trade area, provided such loans meet the Company's credit policy guidelines. In general, the Company's loan portfolio performance at June 30, 2003 and 2002, is dependent upon the local economic conditions. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 6. NET LOANS RECEIVABLE (Continued) Total nonaccrual loans and troubled debt restructurings and the related interest income recognized for the years ended June 30, are as follows: 2003 2002 2001 ------ ------ ------ Principal outstanding $3,481 $5,044 $5,016 ------ ------ ------ Interest income that would have been recognized $ 256 $ 408 $ 422 Interest income recognized 26 162 296 ------ ------ ------ Interest income foregone $ 230 $ 246 $ 126 ====== ====== ====== Included in total nonaccrual loans are impaired loans of approximately $3,423 and $3,600 at June 30, 2003 and 2002. A related allowance for loan losses of $1,816 and $1,764 has been reserved for these impaired loans, respectively. During the years, the Company had an average balance of $3,441 and $3,586, and recognized $23 and $116 in interest income on these loans, respectively. Certain officers, directors, and their associates were customers of, and had transactions with, the Company in the ordinary course of business. A summary of loan activity for those directors, executive officers, and their associates with aggregate loan balances outstanding of at least $60,000 during the years ended June 30, are as follows: 2003 2002 ----- ----- Balance, July 1 $ 822 $ 894 Additions 49 370 Amounts collected (336) (442) ----- ----- Balance, June 30 $ 535 $ 822 ===== ===== 7. ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses are as follows: 2003 2002 2001 ------- ------- ------- Balance, July 1 $ 2,758 $ 2,763 $ 1,973 Add: Provision for loan losses (228) 57 788 Recoveries - 6 19 Less: Loans charged off - 68 17 ------- ------- ------- Balance, June 30 $ 2,530 $ 2,758 $ 2,763 ======= ======= ======= 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 8. ACCRUED INTEREST RECEIVABLE Accrued interest receivable consists of the following: 2003 2002 ------ ------ Investment and mortgage-backed securities $2,283 $2,996 Loans receivable 517 907 ------ ------ Total $2,800 $3,903 ====== ====== 9. FEDERAL HOME LOAN BANK STOCK The Savings Bank is a member of the Federal Home Loan Bank System. As a member, West View maintains an investment in the capital stock of the Federal Home Loan Bank ("FHLB") of Pittsburgh in an amount not less than 70 basis points of the outstanding unused FHLB borrowing capacity and one twentieth of its outstanding FHLB borrowings, as calculated throughout the year. 10. PREMISES AND EQUIPMENT Major classifications of premises and equipment are summarized as follows: 2003 2002 ------ ------ Land and improvements $ 264 $ 264 Buildings and improvements 2,024 1,996 Furniture, fixtures, and equipment 1,069 1,035 ------ ------ 3,357 3,295 Less accumulated depreciation 2,126 2,299 ------ ------ Total $1,231 $ 996 ====== ====== Depreciation charged to operations was $156, $123, and $111, for the years ended June 30, 2003, 2002, and 2001, respectively. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 11. DEPOSITS Deposit accounts are summarized as follows: 2003 2002 -------------------- -------------------- Percent of Percent of Amount Portfolio Amount Portfolio -------- ---------- -------- ---------- Noninterest-earning checking $ 11,302 6.6% $ 12,615 7.0% Interest-earning checking 19,215 11.2 20,872 11.8 Savings accounts 44,152 25.8 41,620 23.4 Money market accounts 14,691 9.0 14,843 8.4 Advance payments by borrowers for taxes and insurance 1,610 0.8 3,013 1.7 -------- ----- -------- ----- 90,970 53.4 92,963 52.3 -------- ----- -------- ----- Savings certificates: 2.00% or less 34,419 20.1 7,726 4.3 2.01 - 4.00% 27,443 16.0 49,500 27.9 4.01 - 6.00% 15,685 9.1 23,955 13.5 6.01 - 8.00% 2,409 1.4 3,528 2.0 -------- ----- -------- ----- 79,956 46.6 84,709 47.7 -------- ----- -------- ----- Total $170,926 100.0% $177,672 100.0% ======== ===== ======== ===== The maturities of savings certificates at June 30, 2003, are summarized as follows: Within one year $56,887 Beyond one year but within two years 11,185 Beyond two years but within three years 4,583 Beyond three years 7,301 ------- Total $79,956 ======= Savings certificates with balances of $100,000 or more amounted to $14,161 and $12,277 on June 30, 2003 and 2002, respectively. Interest expense by deposit category for the years ended June 30, are as follows: 2003 2002 2001 ------ ------ ------ Checking accounts $ 66 $ 94 $ 135 Savings accounts 509 735 893 Money market accounts 183 257 329 Savings certificates 2,554 3,996 5,463 ------ ------ ------ Total $3,312 $5,082 $6,820 ====== ====== ====== 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 12. FEDERAL HOME LOAN BANK ADVANCES The following table presents contractual maturities of FHLB long-term advances as of June 30:
Weighted Stated interest Maturity range average rate range Description from to interest rate from to 2003 2002 ----------- -------- -------- ------------- ---- ---- -------- -------- Convertible 02/20/08 06/22/16 5.35% 2.86% 6.10% $144,500 $144,500 Fixed rate 12/22/03 05/03/10 5.09 3.36 5.43 5,015 15,437 -------- -------- $149,515 $159,937 ======== ========
Maturities of FHLB long-term advances at June 30, 2003 are summarized as follows: Weighted- Maturing During average Fiscal Year Ended Interest June 30: Amount Rate ------------------- -------- --------- 2004 $ 279 3.36% 2006 4,157 5.42 2008 3,000 5.48 2009 and thereafter 142,079 5.34 ------- Total $149,515 5.34% ======== The terms of the convertible advances reset to the three-month London Interbank Offered Rate ("LIBOR") and have various spreads and call dates ranging from three months to seven years. The FHLB has the right to call any convertible select advance on its call date or quarterly thereafter. Should the advance be called, the Company has the right to pay off the advance without penalty. The FHLB advances are secured by the Company's FHLB stock and investment securities and are subject to substantial prepayment penalties. WVS 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 June 30: 2003 2002 ------- ------- FHLB revolving and short-term advances: Ending balance $ 3,875 $ - Average balance during the year 1,149 5,814 Maximum month-end balance during the year 14,350 13,850 Average interest rate during the year 1.64% 2.92% Weighted-average rate at year-end 1.35% -% At June 30, 2003, WVS had an unused borrowing capacity of approximately $24,906. The FHLB advances are secured by the Company's FHLB stock and investment and mortgage-backed securities held in safekeeping at the FHLB, and are subject to substantial prepayment penalties. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 13. OTHER BORROWINGS Other borrowings include securities sold under agreements to repurchase with securities brokers. The outstanding repurchase agreements generally mature within one to ninety days from the transaction date and qualifying collateral has been delivered. The Company pledged investment securities with a carrying value of $9,495 and $33,075 at June 30, 2003 and 2002, respectively, as collateral for the repurchase agreements as explained in Notes 4 and 5. The following table presents information regarding other borrowings as of June 30: 2003 2002 ------- ------- Ending balance $ 9,453 $33,731 Average balance during the year 18,277 13,179 Maximum month-end balance during the year 38,184 33,731 Average interest rate during the year 1.50% 2.34% Weighted-average rate at year-end 1.23% 1.84% 14. COMMITMENTS AND CONTINGENT LIABILITIES Loan commitments In the normal course of business, there are various outstanding commitments and certain contingent liabilities that are not reflected in the accompanying consolidated balance sheet. Various loan commitments totaling $19,340 and $19,542 at June 30, 2003 and 2002, respectively, represent financial instruments with off-balance sheet risk. The commitments outstanding at June 30, 2003 contractually mature in less than one year. Loan commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The same credit policies are used in making commitments and conditional obligations as for on-balance sheet instruments. Generally, collateral, usually in the form of real estate, is required to support financial instruments with credit risk. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. These commitments are comprised primarily of the undisbursed portion of construction and land development loans (Note 6), residential, commercial real estate, and consumer loan originations. The exposure to loss under these commitments is limited by subjecting them to credit approval and monitoring procedures. Substantially all commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of the loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses. As of June 30, 2003, the Company had committed to purchase $21,079 in investment securities. Litigation The Company is involved with various other legal actions arising in the ordinary course of business. Management believes the outcome of these matters will have no material effect on the consolidated operations or financial condition of WVS. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 15. REGULATORY CAPITAL Federal regulations require the Company and Savings Bank to maintain minimum amounts of capital. Specifically, each is required to maintain certain minimum dollar amounts and ratios of Total and Tier I Capital to Risk-weighted Assets and of Tier I Capital to Average Total Assets. In addition to the capital requirements, the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") established five capital categories ranging from well capitalized to critically undercapitalized. Should any institution fail to meet the requirements to be considered adequately capitalized, it would become subject to a series of increasingly restrictive regulatory actions. As of June 30, 2003 and 2002, the FDIC categorized the Savings Bank as well capitalized under the regulatory framework for prompt corrective action. To be classified as a well capitalized financial institution, Total Risk-based, Tier 1 Risk-based, and Tier 1 Leverage Capital Ratios must be at least ten percent, six percent, and five percent, respectively. The Company's and Savings Bank's actual capital ratios are presented in the following tables, which show that both met all regulatory capital requirements.
June 30, 2003 -------------------------------------------- WVS West View ------------------- ------------------- Amount Ratio Amount Ratio ------- ----- ------- ----- Total Capital (to Risk-weighted Assets) --------------------------------------- Actual $32,941 15.57% $27,738 13.38% To Be Well Capitalized 21,176 10.00 20,737 10.00 For Capital Adequacy Purposes 16,941 8.00 16,590 8.00 Tier I Capital (to Risk-weighted Assets) ---------------------------------------- Actual $30,290 14.30% $25,202 12.15% To Be Well Capitalized 12,706 6.00 12,442 6.00 For Capital Adequacy Purposes 8,470 4.00 8,295 4.00 Tier I Capital (to Average Total Assets) ---------------------------------------- Actual $30,290 8.42% $25,202 7.07% To Be Well Capitalized 17,967 5.00 17,819 5.00 For Capital Adequacy Purposes 14,373 4.00 14,255 4.00
37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 15. REGULATORY CAPITAL (Continued)
June 30, 2002 -------------------------------------------- WVS West View ------------------- ------------------- Amount Ratio Amount Ratio ------- ----- ------- ----- Total Capital (to Risk-weighted Assets) --------------------------------------- Actual $32,826 14.66% $27,119 12.25% To Be Well Capitalized 22,400 10.00 22,144 10.00 For Capital Adequacy Purposes 17,920 8.00 17,715 8.00 Tier I Capital (to Risk-weighted Assets) ---------------------------------------- Actual $30,052 13.42% $24,360 11.00% To Be Well Capitalized 13,440 6.00 13,286 6.00 For Capital Adequacy Purposes 8,960 4.00 8,857 4.00 Tier I Capital (to Average Total Assets) ---------------------------------------- Actual $30,052 7.69% $24,360 6.29% To Be Well Capitalized 19,519 5.00 19,361 5.00 For Capital Adequacy Purposes 15,615 4.00 15,489 4.00
Prior to the enactment of the Small Business Job Protection Act, the Company accumulated approximately $3.9 million of retained earnings, which represent allocations of income to bad debt deductions for tax purposes only. Since there is no amount that represents the accumulated bad debt reserves subsequent to 1987, no provision for federal income tax has been made for such amount. If any portion of this amount is used other than to absorb loan losses (which is not anticipated), the amount will be subject to federal income tax at the current corporate rate. 16. STOCK BENEFIT PLANS Stock Option Plan The Company maintains a Stock Option Plan for the directors, officers, and employees. An aggregate of 347,258 shares of authorized but unissued common stock of WVS were reserved for future issuance under this Plan. The stock options typically have an expiration term of ten years, subject to certain extensions and early terminations. The per share exercise price of an incentive stock option shall at a minimum equal the fair market value of a share of common stock on the date the option is granted. The per share exercise price of a compensatory stock option granted shall at least equal the greater of par value or 85 percent of the fair market value of a share of common stock on the date the option is granted. Proceeds from the exercise of the stock options are credited to common stock for the aggregate par value and the excess is credited to paid-in capital. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 16. STOCK BENEFIT PLANS (Continued) Stock Option Plan (Continued) The following table presents information related to the outstanding options: Officers' and Weighted- Employees' Directors' average Stock Stock Exercise Options Options Price ------------- ---------- --------- Outstanding, June 30, 2000 110,866 16,400 $11.56 Granted 4,000 2,000 12.73 Exercised (16,310) (7,000) 5.11 Forfeited (160) - 5.00 ------- ------- Outstanding, June 30, 2001 98,396 11,400 $13.89 Granted - 1,214 15.77 Granted (15,068) (6,200) 9.96 Granted (4,916) - 15.63 ------- ------- Outstanding, June 30, 2002 78,412 6,414 $14.80 Granted - - Exercised (4,992) (1,200) 11.40 Forfeited - - ------- ------- Outstanding, June 30, 2003 73,420 5,214 $15.07 ======= ======= Exercisable at year-end 73,420 5,214 $15.07 ======= ======= Available for future grant 5,174 - ======= ======= At June 30, 2003, for officers and employees there were 73,420 options outstanding, exercisable at a weighted-average exercise price of $15.09, and a weighted-average remaining contractual life of 4.66 years. There were also 5,214 options outstanding and exercisable for directors with a weighted-average exercise price of $14.77, and a weighted-average remaining contractual life of 6.12 years. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 16. STOCK BENEFIT PLANS (Continued) Recognition and Retention Plans ("RRP") --------------------------------------- The Company also maintains an RRP for substantially all officers, employees, and directors of the Company. The objective of the RRPs is to enable the Company to retain its corporate officers, key employees, and directors who have the experience and ability necessary to manage WVS and the Savings Bank. Officers and key employees of the Company who were selected by members of a Board-appointed committee are eligible to receive benefits under the RRPs. Non-employee directors of the Company are eligible to participate in the RRP for directors. An aggregate of 300,000 shares of common stock of WVS were acquired at conversion for future issuance under these plans, of which 60,000 shares are subject to the RRP for directors and 240,000 shares are subject to the RRP for officers and key employees. As of June 30, 2003, 7,580 RRP shares were available for future issuance. RRP costs are accrued to operations and added back to stockholders' equity over a four to ten-year vesting period. Net compensation expense attributed to the RRPs amounted to $23, $59, and $89 for the years ended June 30, 2003, 2002, and 2001. Employee Stock Ownership Plan ("ESOP") -------------------------------------- WVS maintains an ESOP for the benefit of officers and Savings Bank employees who have met certain eligibility requirements related to age and length of service. Compensation expense for the ESOP was $100, $200, and $200, for the years ended June 30, 2003, 2002, and 2001, respectively. Total ESOP shares as of June 30, 2003 and 2002 were 219,865 and 220,806, respectively. 17. DIRECTOR, OFFICER, AND EMPLOYEE BENEFITS Profit Sharing Plan The Company maintains a non-contributory profit sharing 401(k) plan (the "Plan") for its officers and employees who have met the age and length of service requirements. The Plan is a defined contribution plan with the contributions based on a percentage of salaries of the Plan participants. The Company's contributions to the Plan, which were charged to expense, were $200 for the year ended June 30, 2000. Directors' Deferred Compensation Plan The Company maintains a deferred compensation plan (the "Plan") for directors who elect to defer all or a portion of their directors' fees. Deferred fees are paid to the participants in installments commencing in the year following the year the individual is no longer a member of the Board of Directors. The Plan allows for the deferred amounts to be paid in shares of common stock at the prevailing market price on the date of distribution. For fiscal years ended June 30, 2003, 2002, and 2001, 37,939, 48,311, and 46,961, shares respectively, were held by the Plan. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 18. INCOME TAXES The provision for income taxes consists of: 2003 2002 2001 ------- ------- ------- Currently payable: Federal $ 794 $ 1,667 $ 2,086 State 233 239 240 ------- ------- ------- 1,027 1,906 2,326 Deferred 43 (93) (370) ------- ------- ------- Total $ 1,070 $ 1,813 $ 1,956 ======= ======= ======= The following temporary differences gave rise to the net deferred tax assets at June 30:
2003 2002 ------ ------ Deferred tax assets: Allowance for loan losses $ 860 $ 937 Deferred compensation 314 297 Other 268 228 ------ ------ Total gross deferred tax assets 1,442 1,462 ------ ------ Deferred tax liabilities: Bad debt reserve for tax reporting purposes 19 85 Net unrealized gain on securities available for sale 169 104 Deferred origination fees, net 204 176 Other 117 56 ------ ------ Total gross deferred tax liabilities 509 421 ------ ------ Net deferred tax assets $ 933 $1,041 ====== ======
No valuation allowance was established at June 30, 2003 and 2002, in view of WVS's ability to carryback to taxes paid in previous years, future anticipated taxable income, which is evidenced by WVS's earnings potential, and deferred tax liabilities at June 30. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 18. INCOME TAXES (Continued) The following is a reconciliation between the actual provision for income taxes and the amount of income taxes which would have been provided at federal statutory rates for the years ended June 30:
2003 2002 2001 --------------------- -------------------- -------------------- % of % of % of Pre-tax Pre-tax Pre-tax Amount Income Amount Income Amount Income --------------------- -------------------- -------------------- Provision at statutory rate $ 1,502 34.0% $ 2,129 34.0% $ 2,284 34.0% State income tax, net of federal tax benefit 154 3.5 158 2.5 158 2.4 Tax exempt income (549) (12.4) (555) (8.9) (493) (7.3) Other, net (37) (0.9) 81 1.4 7 - ------- ---- ------- ---- ------- ---- Actual tax expense and effective rate $ 1,070 24.2% $ 1,813 29.0% $ 1,956 29.1% ======= ==== ======= ==== ======= ====
The Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax, which is calculated at 11.5 percent of earnings. 19. REGULATORY MATTERS Cash and Due from Banks The Federal Reserve requires the Savings Bank to maintain certain reserve balances. The required reserves are computed by applying prescribed ratios to the Savings Bank's average deposit transaction account balances. As of June 30, 2003 and 2002, the Savings Bank had required reserves of $763 and $809, respectively. The required reserves are held in the form of vault cash and a noninterest-bearing depository balance maintained directly with the Federal Reserve. Loans Federal law prohibits the Company from borrowing from the Savings Bank unless the loans are secured by specific obligations. Further, such secured loans are limited in amount to ten percent of the Savings Bank's capital surplus. Dividend Restrictions The Savings Bank is subject to the Pennsylvania Banking Code that restricts the availability of surplus for dividend purposes. At June 30, 2003, surplus funds of $3,363 were not available for dividends. 20. CONVERSION AND REORGANIZATION In accordance with regulations at the time that the Savings Bank converted from a mutual savings bank to a stock savings bank, a portion of retained earnings was restricted by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Savings Bank after the conversion, for a period of ten years from the date of the stock conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder's interest in the liquidation account. In the unlikely event of a complete liquidation of the Savings Bank, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for the accounts then held. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 21. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair values at June 30, are as follows:
2003 2002 ---------------------- ---------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- FINANCIAL ASSETS Cash and due from banks and interest- earning demand deposits $ 2,815 $ 2,815 $ 3,177 $ 3,177 Investment securities 147,482 151,677 151,384 154,572 Mortgage-backed securities 111,879 112,301 82,543 83,269 Net loans receivable 91,669 98,108 152,905 160,517 Accrued interest receivable 2,800 2,800 3,903 3,903 FHLB stock 7,797 7,797 8,281 8,281 FINANCIAL LIABILITIES Deposits $170,926 $171,830 $177,672 $178,357 FHLB advances 153,390 163,829 159,937 162,928 Other borrowings 9,453 9,453 33,731 33,731 Accrued interest payable 1,449 1,449 1,698 1,698
Financial instruments are defined as cash, evidence of an ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from or to a second entity on potentially favorable or unfavorable terms. Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument. If no readily available market exists, the fair value estimates for financial instruments should be based upon management's judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses and other factors, as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates, which are inherently uncertain, the resulting estimated values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in the assumptions on which the estimated values are based may have a significant impact on the resulting estimated values. As certain assets and liabilities, such as deferred tax assets, premises and equipment, and many other operational elements of WVS are not considered financial instruments, but have value, this estimated fair value of financial instruments would not represent the full market value of WVS. Estimated fair values have been determined by WVS using the best available data, as generally provided in internal Savings Bank reports and regulatory reports, using an estimation methodology suitable for each category of financial instruments. The estimation methodologies used are as follows: 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 21. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Cash and Due from Banks, Interest-Earning Demand Deposits, Accrued Interest --------------------------------------------------------------------------- Receivable and Payable, and Other Borrowings -------------------------------------------- The fair value approximates the current book value. Investment Securities, Mortgage-Backed Securities, and FHLB Stock ----------------------------------------------------------------- The fair value of investment and mortgage-backed securities held to maturity is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. Since the FHLB stock is not actively traded on a secondary market and held exclusively by member financial institutions, the estimated fair market value approximates the carrying amount. Net Loans Receivable and Deposits --------------------------------- Fair value for consumer mortgage loans is estimated using market quotes or discounting contractual cash flows for prepayment estimates. Discount rates were obtained from secondary market sources, adjusted to reflect differences in servicing, credit, and other characteristics. The estimated fair values for consumer, fixed rate commercial, and multi-family real estate loans are estimated by discounting contractual cash flows for prepayment estimates. Discount rates are based upon rates generally charged for such loans with similar credit characteristics. The estimated fair value for nonperforming loans is the appraised value of the underlying collateral adjusted for estimated credit risk. Demand, savings, and money market deposit accounts are reported at book value. The fair value of certificates of deposit is based upon the discounted value of the contractual cash flows. The discount rate is estimated using average market rates for deposits with similar average terms. FHLB Advances The fair values of fixed rate advances are estimated using discounted cash flows, based on current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount on variable rate advances approximates their fair value. Commitments to Extend Credit ---------------------------- These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment, and the fair value determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments are presented in Note 14 to these financial statements. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 22. PARENT COMPANY Condensed financial information of WVS Financial Corp. is as follows: CONDENSED BALANCE SHEET
June 30, 2003 2002 ------- ------- ASSETS Interest-earning deposits with subsidiary bank $ 718 $ 3,065 Investment securities available for sale 4,153 2,179 Investment and mortgage-backed securities held to maturity 250 - Investment in subsidiary bank 25,310 24,457 Loan receivable 114 463 Accrued interest receivable and other assets 168 125 ------- ------- TOTAL ASSETS $30,713 $30,289 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities $ 95 $ 36 Stockholders' equity 30,618 30,253 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $30,713 $30,289 ======= =======
CONDENSED STATEMENT OF INCOME
Year Ended June 30, 2003 2002 2001 ------ ------ ------ INCOME Loans $ 27 $ 45 $ - Investment and mortgage-backed securities 111 118 84 Dividend from subsidiary 2,400 3,800 4,549 Investment securities gains, net 64 - - Interest-earning deposits with subsidiary bank 33 50 76 ------ ------ ------ Total income 2,635 4,013 4,709 ------ ------ ------ OTHER OPERATING EXPENSE 111 96 51 ------ ------ ------ Income before equity in undistributed earnings of subsidiary 2,524 3,917 4,658 Equity in undistributed earnings of subsidiary 840 558 136 ------ ------ ------ Income before income taxes 3,364 4,475 4,794 Income taxes 16 27 32 ------ ------ ------ NET INCOME $3,348 $4,448 $4,762 ====== ====== ======
45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 22. PARENT COMPANY (Continued) CONDENSED STATEMENT OF CASH FLOWS
Year Ended June 30, 2003 2002 2001 -------- -------- -------- OPERATING ACTIVITIES Net income $ 3,348 $ 4,448 $ 4,762 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net income of subsidiary (840) (558) (136) Investment gains, net (64) - - Amortization (accretion) of investment discounts and premiums, net 22 (23) - Amortization of ESOP and RRP deferred compensation 22 59 75 Other, net 23 30 143 -------- -------- -------- Net cash provided by operating activities 2,511 3,956 4,844 -------- -------- -------- INVESTING ACTIVITIES Available for sale: Purchase of investment and mortgage-backed securities (4,934) (9,148) (2,503) Proceeds from repayments of investment and mortgage-backed securities 2,582 8,159 - Proceeds from sales of investment securities 639 - - Held to maturity: Purchases of investment and mortgage-backed securities (1,817) (7,789) - Proceeds from repayments of investment and mortgage-backed securities 1,555 10,304 - Net decrease (increase) in loans receivable 354 (469) - -------- -------- -------- Net cash provided by (used for) investing activities (1,621) 1,057 (2,503) -------- -------- -------- FINANCING ACTIVITIES Net proceeds from exercise of stock options 71 212 119 Cash dividends paid (1,674) (1,743) (1,797) Purchases of treasury stock (1,634) (1,544) (1,819) -------- -------- -------- Net cash used for financing activities (3,237) (3,075) (3,497) -------- -------- -------- Increase (decrease) in cash and cash equivalents (2,347) 1,938 (1,156) CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 3,065 1,127 2,283 -------- -------- -------- CASH AND CASH EQUIVALENTS END OF YEAR $ 718 $ 3,065 $ 1,127 ======== ======== ========
46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 23. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
Three Months Ended --------------------------------------------------------------- September December March June 2002 2002 2003 2003 ----------- ----------- ----------- ----------- Total interest and dividend income $ 5,432 $ 5,023 $ 4,636 $ 4,140 Total interest expense 3,188 3,018 2,841 2,763 ----------- ----------- ----------- ----------- Net interest income 2,244 2,005 1,795 1,377 Provision for loan losses 18 - (89) (157) ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 2,226 2,005 1,884 1,534 Total noninterest income 243 172 152 158 Total noninterest expense 1,120 1,045 975 816 ----------- ----------- ----------- ----------- Income before income taxes 1,349 1,132 1,061 876 Income taxes 349 351 329 41 ----------- ----------- ----------- ----------- Net income $ 1,000 $ 781 $ 732 $ 835 =========== =========== =========== =========== Per share data: Net income Basic $ 0.38 $ 0.30 $ 0.28 $ 0.32 Diluted 0.37 0.30 0.28 0.32 Average shares outstanding Basic 2,661,933 2,631,112 2,593,546 2,582,813 Diluted 2,667,220 2,636,633 2,598,775 2,594,053
47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In thousands, except per share data) 23. SELECTED QUARTERLY FINANCIAL DATA (unaudited) (Continued)
Three Months Ended --------------------------------------------------------------- September December March June 2001 2001 2002 2002 ----------- ----------- ----------- ----------- Total interest and dividend income $ 6,551 $ 6,091 $ 5,574 $ 5,544 Total interest expense 3,859 3,637 3,321 3,208 ----------- ----------- ----------- ----------- Net interest income 2,692 2,454 2,253 2,336 Provision for loan losses 37 20 - - ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 2,655 2,434 2,253 2,336 Total noninterest income 173 181 166 167 Total noninterest expense 976 1,109 978 1,041 ----------- ----------- ----------- ----------- Income before income taxes 1,852 1,506 1,441 1,462 Income taxes 611 397 476 329 ----------- ----------- ----------- ----------- Net income $ 1,241 $ 1,109 $ 965 $ 1,133 =========== =========== =========== =========== Per share data: Net income Basic $ 0.45 $ 0.40 $ 0.36 $ 0.42 Diluted 0.45 0.40 0.35 0.42 Average shares outstanding Basic 2,753,358 2,740,451 2,714,480 2,686,663 Diluted 2,763,744 2,752,157 2,720,976 2,692,474
48 COMMON STOCK MARKET PRICE AND DIVIDEND INFORMATION WVS Financial Corp.'s common stock is traded on the over-the-counter market and quoted on the Nasdaq Stock Market(SM) National Market System under the symbol "WVFC". The following table sets forth the high and low market prices of a share of common stock, and cash dividends declared per share, for the periods indicated. Market Price ---------------------- Cash Dividends Quarter Ended High Low Declared ------------- ------- ------- -------------- June 03 $18.930 $16.200 $ 0.16 March 03 16.250 15.410 0.16 December 02 16.250 15.100 0.16 September 02 16.050 15.800 0.16 June 02 $16.200 $13.990 $ 0.16 March 02 16.250 14.130 0.16 December 01 16.250 15.700 0.16 September 01 17.450 13.750 0.16 There were six Nasdaq Market Makers in the Company's common stock as of June 30, 2003: F. J. Morrissey & Co., Inc.; Schwab Capital Markets; Goldman, Sachs & Company; Morgan Stanley & Co, Inc; Ryan Beck & Co., Inc.; and Knight Securities L.P. According to the records of the Company's transfer agent, there were approximately 828 shareholders of record at September 10, 2003. This does not include any persons or entities who hold their stock in nominee or "street name" through various brokerage firms. Dividends are subject to determination and declaration by the Board of Directors, which takes into account the Company's financial condition, statutory and regulatory restrictions, general economic condition and other factors. 49 WVS FINANCIAL CORP. CORPORATE INFORMATION - -------------------------------------------------------------------------------- CORPORATE OFFICES WVS FINANCIAL CORP. o WEST VIEW SAVINGS BANK 9001 Perry Highway Pittsburgh, PA 15237 412-364-1911 COMMON STOCK The common stock of WVS Financial Corp. is traded on The Nasdaq Stock MarketSM under the symbol "WVFC". BOARD OF DIRECTORS TRANSFER AGENT & REGISTRAR David L. Aeberli Funeral Director Registrar and Transfer Company 10 McDonald-Aeberli Funeral Home, Inc. Commerce Drive Cranford, NJ 07016 1-800-368-5948 Arthur H. Brandt Retired - Former President and CEO Brandt INVESTOR RELATIONS Pamela M. Tracy Excavating, Inc. and Retired - 412-364-1911 Former President and CEO Brandt Paving, Inc. COUNSEL Bruggeman & Linn David J. Bursic President and Chief SPECIAL COUNSEL Elias, Matz, Executive Officer WVS Financial Tiernan & Herrick L.L.P. Corp. and West View Savings Bank Washington, DC Donald E. Hook Chairman Pittsburgh WEST VIEW SAVINGS BANK 9001 Perry Cut Flower Co. Highway Pittsburgh, PA 15237 412-364-1911 Lawrence M. Lehman Sole Proprietor Newton-Lehman Insurance Agency WEST VIEW OFFICE 456 Perry Highway 412-931-2171 John M. Seifarth Senior Engineer - Consultant Nichols & Slagle CRANBERRY OFFICE 20531 Perry Engineering, Inc. Highway 412-931-6080/724-776-3480 Margaret VonDerau Corporate FRANKLIN PARK OFFICE 2566 Brandt Secretary WVS Financial Corp. and School Road 724-935-7100 West View Savings Bank BELLEVUE OFFICE 572 Lincoln Avenue EXECUTIVE OFFICERS 412-761-5595 Donald E. Hook Chairman SHERWOOD OAKS OFFICE Serving Sherwood Oaks Cranberry Twp. David J. Bursic President and Chief Executive Officer LENDING DIVISION 2566 Brandt School Road 724-935-7400 Margaret VonDerau Corporate Secretary Edward M. Wielgus Senior Vice President and Chief Lending Officer Keith A. Simpson Vice President, Treasurer and Chief Accounting Officer The members of the Board of Directors serve in that capacity for both the Company and the Savings Bank. 50 [LETTERHEAD WVS FINANCIAL CORPORATION A TRADITION OF QUALITY BANKING] EX-23 4 exhibit23.txt Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in Registration Statement No. 33-91684 of WVS Financial Corp. on Form S-8 of our report dated August 1, 2003, appearing in the Annual Report on Form 10-K of WVS Financial Corp. for the year ended June 30, 2003. /s/ S.R. Snodgrass, A.C. Wexford, PA September 26, 2003 EX-31.1 5 exhibit31-1.txt EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 I, David J. Bursic, certify that: 1. I have reviewed this annual report on Form 10-K of WVS Financial Corp. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 26, 2003 /s/ David J. Bursic ------------------------------------- David J. Bursic President and Chief Executive Officer EX-31.2 6 exhibit31-2.txt EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 I, Keith A. Simpson, certify that: 1. I have reviewed this quarterly report on Form 10-K of WVS Financial Corp.(the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 26, 2003 /s/ Keith A. Simpson ----------------------------------- Keith A. Simpson Vice-President and Chief Accounting Officer EX-32.1 7 exhibit32-1.txt Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) The undersigned executive officer of WVS Financial Corp. (the "Registrant") hereby certifies that the Registrant's Annual Report on Form 10-K for the year ended June 30, 2003 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ David J. Bursic ---------------------------- David J. Bursic President and Chief Executive Officer Date: September 26, 2003 Note:A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act has been provided to WVS Financial Corp. and will be retained by WVS Financial Corp. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 8 exhibit32-2.txt Exhibit 32.2 CERTIFICATION OF CHIEF ACCOUNTING OFFICER Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) The undersigned executive officer of WVS Financial Corp. (the "Registrant") hereby certifies that the Registrant's Annual Report on Form 10-K for the year ended June 30, 2003 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ Keith A. Simpson --------------------------- Keith A. Simpson Vice-President and Chief Accounting Officer Date: September 26, 2003 Note:A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act has been provided to WVS Financial Corp. and will be retained by WVS Financial Corp. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----