UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: June 30, 2004
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
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
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. |X|
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, 2003, the aggregate value of the 2,067,977 shares of Common Stock of the registrant issued and outstanding on such date, which excludes 477,928 shares held by all directors and officers of the registrant as a group, was approximately $36.2 million. This figure is based on the last known trade price of $17.50 per share of the registrant's Common Stock on December 31, 2003.
Number of shares of Common Stock outstanding as of September 22, 2004: 2,446,624
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, 2004 are incorporated into Parts II and IV.
(2) Portions of the definitive proxy statement for the 2004 Annual Meeting of Stockholders are incorporated into Part III.
PART I.
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, 2004.
Lending Activities
General. At June 30, 2004, the Company's net portfolio of loans receivable totaled $68.0 million, as compared to $91.7 million at June 30, 2003. Net loans receivable comprised 15.7% of Company total assets and 42.3% of total deposits at June 30, 2004, as compared to 25.0% and 53.6%, respectively, at June 30, 2003. 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, land acquisition and development loans and commercial 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 substantially 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, 2004, the Savings Bank's limit on loans-to-one borrower was approximately $3.9 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, 2004, 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 $3.1 million, and are secured primarily by real estate located in the Company's primary market area.
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,
--------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------- ------------------- ------------------- ------------------- -------------------
Amount % Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ --- ------ ---
(Dollars in Thousands)
Real estate loans:
Single-family $ 25,825 32.52% $ 43,255 40.91% $ 89,889 53.69% $105,623 51.50% $105,964 52.49%
Multi-family 4,761 5.99 5,196 4.92 6,173 3.69 6,920 3.37 6,077 3.01
Commercial 9,950 12.53 17,949 16.98 25,439 15.19 34,955 17.05 32,847 16.27
Construction 18,070 22.76 16,942 16.03 19,965 11.92 28,157 13.73 26,935 13.34
Land acquisition
and development 7,947 10.01 7,437 7.03 6,691 4.00 6,343 3.09 7,510 3.72
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate
Loans 66,553 83.81 90,779 85.87 148,157 88.49 181,998 88.74 179,333 88.83
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Home equity 11,018 13.88 12,374 11.70 16,319 9.75 19,142 9.33 18,558 9.19
Education -- 0.00 -- 0.00 1 0.00 31 0.02 57 0.03
Other 870 1.09 1,069 1.01 1,514 0.90 2,092 1.02 2,062 1.02
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer
Loans 11,888 14.97 13,443 12.71 17,834 10.65 21,265 10.37 20,677 10.24
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial loans 968 1.22 1,499 1.42 1,447 0.86 1,819 0.89 1,879 0.93
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial lease
Financings -- 0.00 -- 0.00 -- 0.00 -- 0.00 -- 0.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
79,409 100.00% 105,721 100.00% 167,438 100.00% 205,082 100.00% 201,889 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Undisbursed loan
Proceeds (9,956) (11,348) (11,311) (16,481) (15,820)
Net deferred loan
Origination fees (115) (174) (464) (659) (801)
Allowance for loan
Losses (1,370) (2,530) (2,758) (2,763) (1,973)
-------- -------- -------- -------- --------
Net loans
Receivable $ 67,968 $ 91,669 $152,905 $185,179 $183,295
======== ======== ======== ======== ========
|
Contractual Maturities. The following table sets forth the scheduled contractual maturities of the Company's loans and mortgage-backed securities at June 30, 2004. 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 $ 1,637 $ -- $ 1,026 $ 15,941 $ 3,247 $ 778 $ -- $ 22,629
After one year through
Five years 2,159 17 2,256 1,917 4,661 2,791 44 13,845
After five years 22,029 4,744 6,668 212 39 9,287 75,546 118,525
-------- -------- -------- -------- -------- -------- -------- --------
Total(1) $ 25,825 $ 4,761 $ 9,950 $ 18,070 $ 7,947 $ 12,856 $ 75,590 $154,999
======== ======== ======== ======== ======== ======== ======== ========
Interest rate terms on amounts due after one year:
Fixed $ 20,740 $ 483 $ 5,850 $ 1,804 $ 466 $ 7,349 $ 6,047 $ 42,739
Adjustable 3,448 4,278 3,074 325 4,234 4,729 69,543 89,631
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 24,188 $ 4,761 $ 8,924 $ 2,129 $ 4,700 $ 12,078 $ 75,590 $132,370
======== ======== ======== ======== ======== ======== ======== ========
|
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, 2004, the Company had approximately $4.7 million of renewed commercial real estate and construction loans. The $4.7 million in aggregate disbursed principal that has been renewed is comprised of: construction and business lines of credit totaling $2.7 million and land acquisition and single-family speculative construction loans totaling $2.0 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 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 loan brokers and existing customers.
All processing and underwriting of real estate and commercial business loans 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. The Savings Bank's Director of Retail Lending, and its Manager of Commercial Lending, have individual lending authorities ranging from $5 thousand (unsecured loans) to $300 thousand (loans secured by first mortgage liens). On a joint basis, the aforementioned individuals would have a combined lending authority ranging from $7.5 thousand (unsecured) to $500 thousand (loans secured by a first mortgage). With the approval of the Savings Bank's President, the individual lending authorities range from $25 thousand (unsecured), $500 thousand (loans secured by non-real estate collateral), $750 thousand (first and second mortgages) and $2 million on secured builder lines of credit. All loan applications are required to be ratified 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 2004, the Company sold a $979 thousand participation interest in a commercial real estate loan and a $17 thousand home equity line of credit. The Company retained servicing rights with respect to the commercial real estate loan participation 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, 2004, $1.2 million or 1.8% of the Company's net loans receivable consisted of single-family mortgage whole loans purchased from another financial institution.
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, 2004, $1.1 million or 1.6% 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,
--------------------------------------
2004 2003 2002
---- ---- ----
(Dollars in Thousands)
Net loans receivable beginning balance $ 91,669 $ 152,905 $ 185,179
Real estate loan originations
Single-family(1) 2,202 1,220 5,313
Multi-family(2) 1,319 -- 40
Commercial 1,433 1,209 578
Construction 10,730 8,971 13,634
Land acquisition and development 982 2,471 3,695
--------- --------- ---------
Total real estate loan originations 16,666 13,871 23,260
--------- --------- ---------
Home equity 3,186 2,833 3,950
Education -- 2 333
Commercial -- 250 215
Other 258 189 370
--------- --------- ---------
Total loan originations 20,110 17,145 28,128
--------- --------- ---------
Disbursements against available credit lines:
Home equity 3,215 3,242 3,472
Other 466 685 250
Purchase of whole loans and participations 388 302 --
--------- --------- ---------
Total originations and purchases 24,179 21,374 31,850
--------- --------- ---------
Less:
Loan principal repayments 47,376 83,087 66,054
Sales of whole loans (3) 17 3 2,988
Sales of participation interests (4) 979 -- --
Transferred to real estate owned 550 -- 500
Change in loans in process 179 37 (5,170)
Other, net(5) (1,221) (517) (248)
--------- --------- ---------
Net decrease $ (23,701) $ (61,236) $ (32,274)
--------- --------- ---------
Net loans receivable ending balance $ 67,968 $ 91,669 $ 152,905
========= ========= =========
|
(2) Consists of loans secured by five or more family properties.
(3) Loans sold included servicing rights.
(4) As of June 30, 2004, loans serviced for others totaled approximately $1.0 million.
(5) Includes reductions for net deferred loan origination fees and the allowance for loan losses.
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, 2004, $25.8 million or 32.5% 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 $2.2 million and increased $1.0 million or 83.3% during the fiscal year ended June 30, 2004, when compared to the same period in 2003. Due to low levels of market interest rates, the Company continued to reduce its portfolio 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, 2004, approximately $22.4 million or 86.6% 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.
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, 2004, $4.8 million or 6.0% of the Company's total loan portfolio consisted of loans secured by existing multi-family residential real estate properties, which represented a decrease of $435 thousand or 8.4% from fiscal 2003. Of the $4.8 million, approximately $4.3 million or 89.6% provide for an adjustable rate of interest, while approximately $482 thousand or 10.4% are fixed rate loans.
At June 30, 2004, $10.0 million or 12.5% of the loan portfolio consisted of loans secured by existing commercial real estate properties, which represented a decrease of $8.0 million or 44.6% from fiscal 2003. Of the $10.0 million, approximately $3.9 million or 39.0% provide for an adjustable rate of interest, while approximately $6.1 million or 61.0% are fixed rate loans. During fiscal 2004, 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, 2004, the Company's multi-family residential and commercial real estate loan portfolio consisted of approximately 53 loans with an average principal balance of $278 thousand. At June 30, 2004, the Company had two commercial real estate loans to two borrowers, totaling $1.3 million, that were not accruing interest. During the year ended June 30, 2004, $88 thousand was collected and recognized on a cash basis.
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, 2004, construction loans amounted to approximately $18.1 million or 22.8% of the Company's total loan portfolio, which represented a increase of $1.2 million or 6.7% from fiscal 2003. The increase was principally due to increased levels of new home construction. As of June 30, 2004, the Company's portfolio of construction loans consisted of $17.2 million of loans for the construction of single-family residential real estate and $890 thousand of loans for the construction of multi-family residential real estate. Construction loan originations totaled $10.7 million and increased by $1.8 million or 19.6% during the fiscal year ended June 30, 2004, when compared to the same period in 2003.
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, 2004, approximately 92.1% 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, 3.0% of total construction loans were made to individuals for the purpose of constructing a personal residence and 4.9% of total construction loans were made to a developer for the purpose of constructing a six unit apartment 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, 2004, the Company also had $7.9 million or 10.0% of the total loan portfolio invested in land development loans, which consisted of 20 loans to 17 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, 2004, $11.9 million or 15.0% of the Company's total loan portfolio consisted of consumer loans, which represented a decrease of $1.6 million or 11.6% from fiscal 2003. 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, automobile loans, deposit account secured loans and personal loans. Approximately 92.7% 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, 2004, approximately 64.3% 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, 2004, $968 thousand or 1.2% 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 $531 thousand or 35.4% decrease from fiscal 2003 was principally due
to the normal amortization of the commercial loan portfolio. The Company is continuing to develop this line of business in order to increase interest income and to attract compensating deposit account balances.
Loan Fee Income. In addition to interest earned on loans, the Company may receive 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 $172 thousand, $332 thousand and $285 thousand of deferred loan fees during fiscal 2004, 2003 and 2002, respectively, in connection with loan refinancings, payoffs and ongoing amortization of outstanding loans. The decreases in loan origination fee income for fiscal year 2004 was principally attributable to a higher volume of loan refinancings with lower or no loan origination fees. Loans previously originated lower or no loan origination fees will reduce the recognition 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.
The following table sets forth the amounts and categories of the Company's non-performing assets at the dates indicated.
At June 30,
------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
Real estate:
Single-family(1) $ 281 $ 59 $ 582 $ 201 $ 67
Commercial(2) 4 3,342 3,267 3,326 2,344
Construction -- -- 520 1,355 1,520
Land Acquisition and Development (3) 427 58 477 -- --
Consumer (4) 71 -- -- 134 113
Commercial loans and leases(5) 45 22 198 -- 6
------ ------ ------ ------ ------
Total non-accrual loans 828 3,481 5,044 5,016 4,050
------ ------ ------ ------ ------
Accruing loans greater than 90 days
Delinquent -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans $ 828 $3,481 $5,044 $5,016 $4,050
------ ------ ------ ------ ------
Real estate owned -- -- 235 -- --
------ ------ ------ ------ ------
Total non-performing assets $ 828 $3,481 $5,279 $5,016 $4,050
====== ====== ====== ====== ======
Troubled debt restructurings(6) $1,343 $2,497 $ -- $ -- $ --
====== ====== ====== ====== ======
Total non-performing loans and troubled
debt restructurings as a percentage of
net loans receivable 3.19% 4.36% 3.30% 2.71% 2.21%
====== ====== ====== ====== ======
Total non-performing assets to total assets 0.19% 0.95% 1.30% 1.27% 0.99%
====== ====== ====== ====== ======
Total non-performing assets and troubled
debt restructurings as a percentage of
total assets 0.50% 1.09% 1.30% 1.27% 0.99%
====== ====== ====== ====== ======
|
(2) At June 30, 2004, non-accrual commercial real estate loans consisted of one loan.
(3) At June 30, 2004, non-accrual land acquisition and development loans consisted of one loan.
(4) At June 30, 2004, non-accrual consumer loans consisted of one loan.
(5) At June 30, 2004, non-accrual commercial loans and leases consisted of one loan.
(6) At June 30, 2004, trouble debt restructurings consisted of one loan.
The $2.7 million decrease in nonperforming assets during the twelve months ended June 30, 2004 was primarily attributable to: the $1.4 million reclassification of a commercial real estate loan from non-performing to restructured, a $591 thousand net reduction from the purchase and subsequent resale of related participating interests, a $509 thousand reduction related to the sale of a personal care home and a $489 thousand charge off related to a bankruptcy discussed below, which was partially offset by a $222 thousand increase in non-performing single-family real estate loans.
The Company has one accruing commercial loan participation interest that has been granted a ninety day maturity extension with a principal balance of $795 thousand. The loan is collateralized by a first mortgage loan on a full-service hotel located within the Company's market area. The Company bought a 7.4% participating interest from another local lender in July 1999. Weaknesses in the national and local economies, along with cut backs in corporate travel, have caused occupancy and average room rates to decline significantly. During the fourth quarter of fiscal 2004, the Company recorded general valuation allowances totaling approximately $79 thousand or 10% of the outstanding balance of the loan. The Company believes that this action was prudent given a reduction in appraised value from $20.2 million (at April 1999) to $12.0 million (at March 2003), subsequent declines in room rentals and operating income, and reduced debt coverage ratios since the March 2003 appraisal. The ninety day extension was granted at the request of the lead lender in order to give the borrowers time to explore refinancing options.
The Company has one restructured commercial real estate loan to a retirement village located in the North Hills. The Savings Bank's outstanding principal balance totaled $2.0 million at June 30, 2003. During the quarter ended September 30, 2003, the Savings Bank redeemed $388 thousand of participating interests. During the quarter ended December 31, 2003, the Bank sold a forty percent participating interest to another financial institution at par resulting in proceeds totaling $979 thousand. The Savings Bank's outstanding principal balance totaled $1.3 million at June 30, 2004. The Company had recorded interest received on this credit on a cost recovery basis until September 30, 2003 and is now recording interest income on a cash basis.
At June 30, 2004, the Company had one loan secured by undeveloped land totaling $427 thousand and one unsecured loan totaling $71 thousand to two borrowers. These loans represent two adjudicated Bankruptcy Court Claims in connection with a previously reported loan to a personal care home. During fiscal 2004, the personal care home was sold for net proceeds of approximately $50 thousand. During the fourth quarter of fiscal 2004, the Bankruptcy Court approved a secured claim totaling $440 thousand, and an unsecured claim totaling $76 thousand, be paid in accordance with a Bankruptcy Plan of Reorganization. All
Court ordered plans have been received in a timely manner. In accordance with generally accepted accounting principals, payments received are being applied on a cost recovery basis.
The Company had four non-accrual single-family real estate loans totaling approximately $281 thousand at June 30, 2004. Subsequent to June 30, 2004, two of these single-family loans totaling $140 thousand were paid off in full. The other two loans are in various stages of collection activity.
During fiscal 2004, 2003 and 2002, approximately $123 thousand, $256 thousand and $408 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 $94 thousand, $26 thousand and $162 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 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, 2004, is adequate.
The allowance for loan losses at June 30, 2004 decreased $1.2 million to $1.4 million. The decrease in the provision for loan loss was principally attributable to reduced levels of net loans receivable, the sale of participating interest in a commercial real estate loan and collection on past due loans. 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 Company's level of non-performing assets and the industry trend towards greater emphasis on the allowance method of providing for loan losses.
The following table summarizes changes in the Company's allowance for loan
losses and other selected statistics for the periods indicated.
At June 30,
-------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in Thousands)
Average net loans $ 74,656 $ 125,221 $ 173,023 $ 185,895 $ 177,557
========= ========= ========= ========= =========
Allowance balance (at beginning of period) $ 2,530 $ 2,758 $ 2,763 $ 1,973 $ 1,842
Provision for loan losses (794) (228) 57 788 150
Charge-offs:
Real estate:
Single-family -- -- -- -- --
Multi-family -- -- -- -- --
Commercial 524 -- -- 10 --
Construction -- -- -- -- --
Land acquisition and development -- -- -- -- --
Consumer:
Home equity -- -- 25 -- --
Education -- -- -- -- --
Other -- -- 43 -- 19
Commercial loans and leases -- -- -- 7 --
--------- --------- --------- --------- ---------
Total charge-offs 524 -- 68 17 19
--------- --------- --------- --------- ---------
Recoveries:
Real estate:
Single-family -- -- -- -- --
Multi-family -- -- -- -- --
Commercial 158 -- -- -- --
Construction -- -- -- -- --
Land acquisition and development -- -- -- -- --
Consumer:
Home equity -- -- -- -- --
Education -- -- -- -- --
Other -- -- 6 19 --
Commercial loans and leases -- -- -- -- --
--------- --------- --------- --------- ---------
Total recoveries 158 -- 6 19 --
--------- --------- --------- --------- ---------
Net loans charged-off 366 -- 62 (2) 19
Transfer to real estate owned loss reserve -- -- -- -- --
--------- --------- --------- --------- ---------
Allowance balance (at end of period) $ 1,370 $ 2,530 $ 2,758 $ 2,763 $ 1,973
========= ========= ========= ========= =========
Allowance for loan losses as a percentage of
total loans receivable 1.97% 2.68% 1.77% 1.47% 1.06%
========= ========= ========= ========= =========
Net loans charged-off as a percentage of
average net loans 0.49% 0.00% 0.04% 0.01% 0.01%
========= ========= ========= ========= =========
Allowance for loan losses to non-performing
loans 165.46% 72.68% 54.68% 55.08% 48.72%
========= ========= ========= ========= =========
Net loans charged-off to allowance for loan
losses 26.72% 0.00% 2.25% (0.07)% 0.96%
========= ========= ========= ========= =========
Recoveries to charge-offs 30.15% 0.00% 8.82% 111.76% 0.00%
========= ========= ========= ========= =========
|
The following table presents the allocation of the allowances for loan losses by loan category at the dates indicated.
At June 30,
--------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
% 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 $ 82 32.52% $ 75 40.91% $ 191 53.69% $ 180 51.50% $ 167 52.49%
Multi-family 18 5.99 26 4.92 31 3.69 35 3.37 30 3.01
Commercial 597 12.53 1,944 16.98 1,745 15.19 1,721 17.05 704 16.27
Construction 30 22.76 33 16.03 300 11.92 407 13.73 287 13.34
Land acquisition
and development 302 10.01 73 7.03 66 4.00 41 3.09 57 3.72
Unallocated -- 0.00 -- 0.00 10 0.00 -- 0.00 363 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total real estate
loans 1,029 83.81 2,151 85.87 2,343 88.49 2,384 88.74 1,608 88.83
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Consumer loans:
Home equity 117 13.88 124 11.70 165 9.75 231 9.33 184 9.19
Education -- 0.00 -- 0.00 -- 0.00 -- 0.02 1 0.03
Other 78 1.09 22 1.01 28 0.90 73 1.02 80 1.02
Unallocated -- 0.00 -- 0.00 -- 0.00 -- 0.00 -- 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total consumer
loans 195 14.97 146 12.71 193 10.65 304 10.37 265 10.24
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Commercial loans:
Commercial loans 116 1.22 200 1.42 187 0.86 75 0.89 100 0.93
Unallocated -- 0.00 -- 0.00 -- 0.00 -- 0.00 -- 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total commercial
loans 116 14.97 200 1.42 187 0.86 75 0.89 100 0.93
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Commercial lease
financings -- 0.00 -- 0.00 -- 0.00 -- 0.00 -- 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Off balance-sheet
items 30 0.00 33 0.00 35 0.00 -- 0.00 -- 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 1,370 100.00% $ 2,530 100.00% $ 2,758 100.00% $ 2,763 100.00% $ 1,973 100.00%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
|
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 commercial real estate loans, 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, 2004. 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
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 four fiscal years.
The following table summarizes the calculations of required allowance for loan losses by loan category as of June 30, 2004.
Allowance
for
Group Rate Loan Loss
--------------- -------------
Homogenous loans:
Single-family 0.0015 $ 38
Multi-family 0.0050 18
Commercial real estate 0.0100 73
Construction/land acquisition
and development 0.0015 - 0.0100 (1) 97
Secured consumer 0.0100 120
Unsecured consumer 0.0500 3
Commercial loans 0.0500 48
Off balance-sheet items (2) 0.0100 30
Unallocated --
Individually evaluated loans:
Single-family 44
Multi-family --
Commercial real estate 524
Construction/land acquisition
and development 235
Secured consumer --
Unsecured consumer 72
Commercial loans 68
Off balance-sheet items --
Total allowance for loan losses:
Single-family 82
Multi-family 18
Commercial real estate 597
Construction/land acquisition
and development 332
Secured consumer 120
Unsecured consumer 75
Commercial loans 116
Off balance-sheet items 30
Unallocated --
-------
Total allowance for loan losses $ 1,370
=======
----------
|
(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.
Management believes that the reserves it has established are adequate to cover potential losses in the Company's loan portfolio. 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, 2004, the Company's MBS portfolio totaled $75.6 million as compared to $111.9 million at June 30, 2003. The $36.3 million or 32.4% decrease in MBS balances outstanding during fiscal 2004 was primarily attributable to principal repayments on CMOs which were partially offset by purchases of floating rate CMOs. At June 30, 2004, approximately $69.5 million or 91.9% (book value) of the Company's portfolio of MBS, including CMOs, were comprised of adjustable or floating rate instruments, as compared to $97.4 million or 87.1% at June 30, 2003. 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.
2004 2003 2002
---- ---- ----
MBS Available for Sale at June 30, (Dollars in Thousands)
----------------------------------
FHLMC PCs $ 45 $ 47 $ 48
GNMA PCs 2,411 2,510 2,627
FNMA PCs 686 1,494 3,228
CMOs - agency collateral 92 168 293
CMOs - single-family whole loan collateral -- -- --
-------- -------- --------
Total amortized cost $ 3,234 $ 4,219 $ 6,196
======== ======== ========
Total estimated market value $ 3,357 $ 4,387 $ 6,450
======== ======== ========
MBS Held to Maturity at June 30,
--------------------------------
FHLMC PCs $ 17 $ 36 $ 60
GNMA PCs 591 2,603 4,069
FNMA PCs 19 29 35
CMOs - agency collateral 57,131 47,516 55,587
CMOs - single-family whole loan collateral 14,475 57,308 16,342
-------- -------- --------
Total amortized cost $ 72,233 $107,492 $ 76,093
======== ======== ========
Total estimated market value $ 72,099 $107,914 $ 76,819
======== ======== ========
|
The Company believes that its present MBS available for sale allocation of $3.2 million or 4.3% 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.
The following table sets forth the amortized cost, contractual maturities and weighted average yields of the Company's MBSs, including CMOs, at June 30, 2004.
One Year After One to After Five to Over Ten
or Less Five Years Ten Years Years Total
------- ---------- --------- ----- -----
(Dollars in Thousands)
MBS Available for Sale $ -- $ 18 $ -- $ 3,216 $ 3,234
0.00% 9.00% 0.00% 7.29% 7.30%
MBS Held to Maturity $ -- $ 26 $ -- $ 72,207 $ 72,233
0.00% 9.00% 0.00% 2.83% 2.83%
-------- -------- -------- -------- --------
Total $ -- $ 44 $ -- $ 75,423 $ 75,467
======== ======== ======== ======== ========
Weighted average yield 0.00% 9.00% 0.00% 3.02% 3.02%
======== ======== ======== ======== ========
|
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, 2004 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)
Mastr Asset Securitization Trust $ 6,341 $ 6,316
Washington Mutual Mortgage Securities Corp. 3,716 3,683
-------- --------
$ 10,057 $ 9,999
======== ========
|
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 increased significantly its position of U.S. Government Agency obligations. The Company purchased approximately $263.0 million of U.S. Government Agency obligations during fiscal 2004. Outstanding balances totaled $223.8 million or 79.6% of the total investment portfolio at June 30, 2004, as compared to $24.1 million or 15.6% of the total investment portfolio at June 30, 2003. At June 30, 2004, approximately $222.5 million or 99.4% 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 $5.2 million of investment grade corporate debt securities during fiscal year 2004 and held approximately $16.3 million or 5.8% 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.
The following tables set forth the amortized cost and estimated market values of the Company's investment securities portfolio at the dates indicated.
2004 2003 2002
---- ---- ----
Investment Securities Available for Sale at June 30, (Dollars in Thousands)
----------------------------------------------------
Trust preferred securities $ -- $ 128 $ 860
Corporate debt obligations 2,532 7,428 6,495
Commercial paper -- 15,442 --
Obligations of states and political subdivisions -- 1,000 --
--------- --------- ---------
Total amortized cost 2,532 23,998 7,355
Equity securities 1,581 1,312 1,020
--------- --------- ---------
Total amortized cost $ 4,113 $ 25,310 $ 8,375
========= ========= =========
Total estimated market value $ 4,416 $ 25,641 $ 8,426
========= ========= =========
Investment Securities Held to Maturity at June 30,
--------------------------------------------------
Corporate debt obligations $ 13,772 $ 66,978 $ 58,415
U.S. Government agency securities 223,808 24,097 55,216
Commercial paper -- 1,099 --
Obligations of states and political subdivisions 31,593 29,667 29,327
--------- --------- ---------
269,173 121,841 142,958
FHLB stock 7,532 7,797 8,281
--------- --------- ---------
Total amortized cost $ 276,705 $ 129,638 $ 151,239
========= ========= =========
Total estimated market value $ 278,635 $ 133,833 $ 154,427
========= ========= =========
|
Information regarding the amortized cost, contractual maturities and weighted average yields of the Company's investment portfolio at June 30, 2004 is presented below.
Investment Securities One Year After One to After Five to Over Ten
Available for Sale or Less Five Years Ten Years Years Total
------------------ ------- ---------- --------- ----- -----
(Dollars in Thousands)
Corporate debt obligations $ 2,532 $ -- $ -- $ -- $ 2,532
4.35% 0.00% 0.00% 0.00% 4.35%
Equity securities $ -- $ -- $ -- $ 1,581 $ 1,581
0.00% 0.00% 0.00% 5.23% 5.23%
--------- --------- --------- --------- ---------
Total $ 2,532 $ -- $ -- $ 1,581 $ 4,113
========= ========= ========= ========= =========
Weighted average yield 4.35% 0.00% 0.00% 5.23% 4.69%
========= ========= ========= ========= =========
Investment Securities One Year After One to After Five to Over Ten
Held to Maturity or Less Five Years Ten Years Years Total
---------------- ------- ---------- --------- ----- -----
Corporate debt obligations $ 13,772 $ -- $ -- $ -- $ 13,772
4.31% 0.00% 0.00% 0.00% 4.31%
U.S. Government Agency
securities $ -- $ -- $ -- $ 223,808 $ 223,808
0.00% 0.00% 0.00% 4.42% 4.42%
Obligations of states and political
subdivisions (1) $ 301 $ -- $ 2,062 $ 29,230 $ 31,593
2.79% 0.00% 6.44% 9.84% 9.55%
--------- --------- --------- --------- ---------
Total $ 14,073 $ -- $ 2,062 $ 253,038 $ 269,173
========= ========= ========= ========= =========
Weighted average yield 4.28% 0.00% 6.44% 5.04% 5.01%
========= ========= ========= ========= =========
|
Information regarding the amortized cost, earliest call dates and weighted average yield of the Company's investment portfolio at June 30, 2004, is presented below. All Company investments in callable U.S. Government Agency bonds were classified as held to maturity at June 30, 2004.
One Year After One to After Five to Over Ten
or Less Five Years Ten Years Years Total
------- ---------- --------- ----- -----
Corporate debt obligations $ 16,304 $ -- $ -- $ -- $ 16,304
4.32% 0.00% 0.00% 0.00% 4.32%
U.S. Government Agency
securities $ 222,468 $ -- $ -- $ 1,340 $ 223,808
4.44% 0.00% 0.00% 1.63% 4.42%
Obligations of states and political
subdivisions (1) $ 7,114 $ 17,778 $ 6,701 $ -- $ 31,593
11.98% 8.95% 8.56% 0.00% 9.55%
--------- --------- --------- --------- ---------
Total debt obligations $ 245,886 $ 17,778 $ 6,701 $ 1,340 $ 271,705
========= ========= ========= ========= =========
Weighted average yield 4.65% 8.95% 8.56% 1.63% 5.01%
========= ========= ========= ========= =========
Equity securities $ -- $ -- $ -- $ -- $ 1,581
--------- --------- --------- --------- ---------
Total $ 245,886 $ 17,778 $ 6,701 $ 1,340 $ 273,286
========= ========= ========= ========= =========
|
At June 30, 2004, the Company classified $993 million of U.S. Treasury securities as trading investment securities. See Note 1 to the consolidated financial statements.
The following table sets forth information with respect to the investment securities owned by the Company at June 30, 2004 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.
Estimated
Name of Issuer Carrying Value Market Value
-------------- -------------- ------------
(Dollars in Thousands)
Pittston Area School District $ 5,222 $ 5,476
CINERGY Corp Debenture 3,509 3,523
Sempra Energy 3,260 3,260
Diamler-Chrysler Corp. 3,023 3,025
New Castle PA School District 2,977 3,186
------- -------
$17,991 $18,470
======= =======
|
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 $160.6 million at June 30, 2004, as compared to $170.9 million at June 30, 2003. The $10.3 million decrease was primarily attributable to an approximate $14.6 million decrease in certificates of deposits, a $465 thousand decrease in money market accounts and a $365 thousand decrease in escrows, which was partially offset by a $5.1 million increase in core deposits. In order to attract new and lower cost core deposits, the Company continued to promote a no minimum balance, "free", checking account product and began to offer Internet Banking. 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 $6.9 million or 4.3% of the Company's total deposits at June 30, 2004, as compared to $14.2 million or 8.3% at June 30, 2003. 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, 2004. 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 CIRRUS(R) ATM networks. The Company also participates in a new ATM program called the Freedom ATM AllianceSM. The Freedom ATM AllianceSM allows West View Savings Bank customers to use other Pittsburgh area Freedom ATM AllianceSM affiliates' ATMs without being surcharged and vice versa. The Freedom ATM AllianceSM 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,
---------------------------------------------------------------
2004 2003 2002
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Regular savings and club
accounts $ 44,091 0.76% $ 41,906 1.21% $ 38,277 1.92%
NOW accounts 19,948 0.16 19,775 0.21 19,463 0.31
Money market deposit
accounts 13,839 0.79 14,334 1.28 13,460 1.91
Certificate of deposit accounts 72,800 2.52 80,208 3.18 90,022 4.44
Escrows 899 1.67 1,548 1.55 2,116 1.56
-------- ----- -------- ----- -------- -----
Total interest-bearing
deposits and escrows 151,577 1.53 157,771 2.10 163,338 3.11
Non-interest-bearing checking
accounts 12,542 0.00 12,149 0.00 11,814 0.00
-------- ----- -------- ----- -------- -----
Total deposits and escrows $164,119 1.42% $169,920 1.95% $175,152 2.90%
======== ===== ======== ===== ======== =====
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The following table sets forth the net deposit flows of the Company during the periods indicated.
Year Ended June 30,
--------------------------------------
2004 2003 2002
---- ---- ----
(Dollars in Thousands)
Increase(decrease) before interest
credited $ (12,952) $ (10,245) $ (9,365)
Interest credited 2,589 3,499 5,698
--------- --------- ---------
Net deposit increase (decrease) $ (10,363) $ (6,746) $ (3,667)
========= ========= =========
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The following table sets forth maturities of the Company's certificates of deposit of $100,000 or more at June 30, 2004, by time remaining to maturity.
Amounts
-------
(Dollars in Thousands)
Three months or less $ 1,429
Over three months through six months 1,414
Over six months through twelve months 2,126
Over twelve months 1,975
-------
$ 6,944
=======
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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, 2004, borrowings totaled $241.4 million as compared to $162.8 million at June 30, 2003. The $78.6 million or 48.2% increase was primarily due to purchases of investment and mortgage-backed securities. For a detailed discussion of the Company's asset and liability management activities, please see the "Quantitative and Qualitative Disclosures about Market Risk" section of the Company's fiscal year 2004 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 36 full-time employees and 15 part-time employees as of June 30, 2004. None of these employees is represented by a collective bargaining agent. The Company believes that it enjoys excellent relations with its personnel.
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
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, 2004.
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
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.
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 was 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, 2000, 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
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.
The following table sets forth certain information with respect to the offices and other properties of the Company at June 30, 2004.
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.
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.
Not applicable.
PART II.
(a) The information required herein is incorporated by reference on page 49 of the Company's 2004 Annual Report.
(b) Not applicable.
(c) The following table sets forth information with respect to purchases of common stock of the Company made by or on behalf of the Company during the three months ended June 30, 2004.
----------------------------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
----------------------------------------------------------------------------------------------------
Total Number of Maximum Number of
Total Shares Purchased as Shares that may yet
Number of part of Publicly be Repurchased
Shares Average Price Announced Plans or Under the Plans or
Period Purchased Paid per Share ($) Programs (1) Programs (2)(3)
----------------------------------------------------------------------------------------------------
04/01/04 - 04/30/04 17,400 18.95 17,400 110,185
----------------------------------------------------------------------------------------------------
05/01/04 - 05/31/04 1,278 18.04 1,278 108,907
----------------------------------------------------------------------------------------------------
06/01/04 - 06/30/04 12,000 17.56 12,000 96,907
----------------------------------------------------------------------------------------------------
Total 30,678 18.37 30,678 96,907
----------------------------------------------------------------------------------------------------
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The information required herein is incorporated by reference from pages 2 to 3 of the Company's 2004 Annual Report.
The information required herein is incorporated by reference from pages 4 to 16 of the Company's 2004 Annual Report.
The information required herein is incorporated by reference from pages 13 to 16 of the Company's 2004 Annual Report.
The information required herein is incorporated by reference from pages 17 to 48 of the Company's 2004 Annual Report.
Not applicable.
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, 2004. 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 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Not applicable.
PART III
The information required herein is incorporated by reference from pages 2 to 8 of the Company's Proxy Statement for the 2004 Annual Meeting of Stockholders dated September 24, 2004 ("Proxy Statement").
The Company has adopted a Code of Ethics for its employees and directors and executive officers, a copy of which has been filed as an exhibit to this Annual Report on Form 10-K.
The information required herein is incorporated by reference from pages 11 to 16 of the Company's Proxy Statement.
The security ownership of certain beneficial owners and management information required herein is incorporated by reference from pages 9 to 10 of the Company's Proxy Statement. For the related stockholder matters information required herein, see "Equity Compensation Plan Information" on page 12 of the Company's Proxy Statement.
The information required herein is incorporated by reference on page 16 of the Company's Proxy Statement.
The information required herein is incorporated by reference on page 6 of the Company's Proxy Statement.
PART IV.
(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 2004 Annual Report.
Report of Independent Auditors.
Consolidated Balance Sheet at June 30, 2004 and 2003.
Consolidated Statement of Income for the Years Ended June 30, 2004, 2003 and 2002.
Consolidated Statement of Changes in Stockholders' Equity for the Years Ended June 30, 2004, 2003 and 2002.
Consolidated Statement of Cash Flows for the Years Ended June 30, 2004, 2003 and 2002.
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) 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 ** ***
10.7 Directors Deferred Compensation Program** *
13 2004 Annual Report to Stockholders E-1
14.1 Ethics Policy E-57
14.2 Code of Ethics for Senior Financial Officers E-61
21 Subsidiaries of the Registrant - Reference is made to
Item 1. "Business" for the required information 2
23 Consent of Independent Registered Public Accounting Firm E-62
31.1 Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer E-63
31.2 Rule 13a-14(a) / 15d-14(a) Certification of the Chief Accounting Officer E-64
32.1 Section 1350 Certification of the Chief Executive Officer E-65
32.2 Section 1350 Certification of the Chief Accounting Officer E-66
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* 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.
(b) The Company filed a Current Report on Form 8-K dated April 30, 2004, reporting under Item 12 earnings for the three and nine months ending March 31, 2004. The Company included as an exhibit to the Form 8-K the press release dated April 30, 2004.
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 24, 2004 By: /s/ David J. Bursic
-------------------------------------
David J. Bursic
President and Chief Executive Officer
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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 24, 2004 Chief Executive Officer (Principal Executive Officer) /s/ Keith A. Simpson ----------------------------------------- Keith A. Simpson, Vice President, September 24, 2004 Treasurer and Chief Accounting Officer (Principal Accounting Officer) /s/ Donald E. Hook ----------------------------------------- Donald E. Hook, September 24, 2004 Chairman of the Board of Directors /s/ David L. Aeberli ----------------------------------------- David L. Aeberli, Director September 24, 2004 /s/ Arthur H. Brandt ----------------------------------------- Arthur H. Brandt, Director September 24, 2004 /s/ Lawrence M. Lehman ----------------------------------------- Lawrence M. Lehman, Director September 24, 2004 /s/ John M. Seifarth ----------------------------------------- John M. Seifarth, Director September 24, 2004 /s/ Margaret VonDerau ----------------------------------------- Margaret VonDerau, Director September 24, 2004 |
(LETTERHEAD WVS FINANCIAL CORP. THE HOLDING COMPANY
OF WEST VIEW SAVINGS BANK LOGO OMITTED)
2004 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
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To Our Stockholders:
During fiscal 2004, the level of market interest rates remained low due to the Federal Reserve's accommodative monetary policy and the continued weakness in the national economy. Geopolitical tensions (including the war in Iraq and the ongoing threat of terrorism), rising oil prices, moderate job creation and reduced corporate earnings have all contributed to a slow economic recovery. In the Pittsburgh region, manufacturing employment has fallen about 16.4% from its peak prior to the 2001 recession. Payrolls in transportation remain depressed largely due to cutbacks by US Airways.
A firmer national economy will provide some relief to manufacturers and providers of business services in the Pittsburgh area. Longer term, Pittsburgh's efforts to attract high-tech and biotech industries will contribute to growth. As economic conditions improve, we anticipate an eventual rise in market interest rates. The Federal Open Market Committee has increased its intended federal funds rate by twenty-five basis points at both their June 30 and August 10, 2004 meetings.
Company net income totaled $2.3 million and continued to be constrained by low market interest rates. However, we are pleased to report significant accomplishments were made during fiscal 2004. The Company continued to invest in its technology platform by introducing free online banking and Internet bill paying services. Our 3.63% dividend yield significantly exceeds both the PA median of 2.03% and the federal funds targeted rate of 1.25% at June 30, 2004. In the July 2004 issue of U.S. Banker Magazine, the Company's 14.3% 3-year return on average equity was ranked #44 of the Nation's Top 200 Publicly Traded Community Banks. We believe that these factors contributed to the Company's 149% market premium to book value at June 30, 2004.
Fiscal 2005 will undoubtedly bring its own set of challenges and opportunities. The board of directors and employees will continue to work hard to earn a competitive rate of return for our stockholders while meeting the banking needs of our customers. 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,
----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ---------- ---------- ----------
(Dollars in Thousands, except per share data)
Selected Financial Data:
Total assets $ 433,624 $ 367,188 $ 404,911 $ 396,440 $ 409,618
Net loans receivable 67,968 91,669 152,905 185,179 183,295
Mortgage-backed securities 75,590 111,879 82,543 64,132 73,673
Investment securities 273,589 147,482 151,384 129,593 137,502
Savings deposit accounts 159,318 169,316 174,659 178,029 169,508
FHLB advances 149,736 153,390 159,937 161,494 104,500
Other borrowings 91,639 9,453 33,731 20,660 101,025
Stockholders' equity 29,199 30,618 30,253 28,645 26,911
Non-performing assets and troubled
debt restructurings(1) 2,171 3,481 5,279 5,016 4,050
Selected Operating Data:
Interest income $ 16,006 $ 19,231 $ 23,760 $ 29,185 $ 27,987
Interest expense 10,987 11,810 14,025 18,561 16,933
----------- ----------- ---------- ---------- ----------
Net interest income 5,019 7,421 9,735 10,624 11,054
Provision for loan losses (794) (228) 57 788 150
----------- ----------- ---------- ---------- ----------
Net interest income after provision
for loan losses 5,813 7,649 9,678 9,836 10,904
Non-interest income 715 725 687 669 573
Non-interest expense 3,607 3,956 4,104 3,787 4,629
----------- ----------- ---------- ---------- ----------
Income before income tax expense 2,921 4,418 6,261 6,718 6,848
Income tax expense 619 1,070 1,813 1,956 2,469
----------- ----------- ---------- ---------- ----------
Net income $ 2,302 $ 3,348 $ 4,448 $ 4,762 $ 4,379
=========== =========== ========== ========== ==========
Per Share Information:
Basic earnings $ 0.91 $ 1.28 $ 1.63 $ 1.70 $ 1.48
Diluted earnings $ 0.90 $ 1.28 $ 1.63 $ 1.69 $ 1.47
Dividends per share $ 0.64 $ 0.64 $ 0.64 $ 0.64 $ 0.64
Dividend payout ratio 70.33% 50.00% 39.26% 37.65% 43.24%
Book value per share at period end $ 11.84 $ 11.86 $ 11.30 $ 10.40 $ 9.35
Average shares outstanding:
Basic 2,535,796 2,617,576 2,723,891 2,804,125 2,953,720
Diluted 2,544,404 2,624,395 2,732,491 2,815,867 2,977,089
|
As of or For the Year Ended June 30,
----------------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Selected Operating Ratios(2):
Average yield earned on interest-
earning assets(3) 4.27% 5.36% 6.41% 7.51% 7.41%
Average rate paid on interest-
bearing liabilities 3.13 3.57 4.13 5.21 4.91
Average interest rate spread(4) 1.14 1.79 2.28 2.30 2.50
Net interest margin(4) 1.47 2.19 2.74 2.83 2.97
Ratio of interest-earning assets to
interest-bearing liabilities 111.76 112.56 112.34 111.33 110.57
Non-interest expense as a percent of
average assets 0.91 1.05 1.07 0.94 1.20
Return on average assets 0.58 0.89 1.16 1.19 1.14
Return on average equity 7.64 10.97 14.85 17.17 16.27
Ratio of average equity to average
assets 7.02 8.10 7.78 6.92 6.99
Full-service offices at end of period 5 5 5 5 5
Asset Quality Ratios(2):
Non-performing loans and troubled
debt restructurings as a percent of
net total loans(1) 3.19% 3.80% 3.30% 2.71% 2.21%
Non-performing assets as a percent
of total assets(1) 0.19 0.95 1.30 1.27 0.99
Non-performing assets and troubled
debt restructurings as a percent of
total assets 0.50 0.95 1.30 1.27 0.99
Allowance for loan losses as a
percent of total loans receivable 1.97 2.68 1.77 1.47 1.06
Allowance for loan losses as a
percent of non-performing loans 165.46 72.68 54.68 55.08 48.72
Charge-offs to average loans
receivable outstanding during the
period 0.68 0.00 0.04 0.01 0.01
Capital Ratios(2):
Tier 1 risk-based capital ratio 18.65% 14.30% 13.42% 14.15% 14.05%
Total risk-based capital ratio 19.62 15.57 14.66 15.40 15.11
Tier 1 leverage capital ratio 6.92 8.42 7.69 7.35 6.69
|
(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.
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, 2004.
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 three fiscal years, market interest rates have plummeted and remained at 45 year lows. The Federal Reserve Board's accommodative monetary policy, coupled with increased fiscal stimulus, should lead to an economic recovery which began 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 2004, the Company maintained its quarterly cash dividends, which yielded 3.63% at June 30, 2004.
Commitment to Capital Management - The Company continued to balance the need to retain capital for future growth, paying an attractive cash dividend and supplement market liquidity with our Sixth and Seventh Common Stock Buyback Programs.
Strong Net Income - During fiscal 2004, the Company earned $2.3 million or $0.91 per share (basic) and $0.90 per share (diluted). Fiscal 2004 return on average stockholders' equity was 7.64% while return on average assets totaled 0.58%.
Substantial Core Deposits - As of June 30, 2004, $94.0 million or 59.0% of West View's total deposits consisted of regular savings and club accounts, money market deposit accounts, and checking accounts. Approximately $45.8 million or 48.7% 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 - Due to low market interest rates, West View has limited the portfolio origination of thirty year mortgage loans. Thirty year mortgage loans continue to be originated on a correspondent basis. Portfolio loan originations have focused on multi-family and commercial real estate loans, construction loans, consumer loans and small business loans for business equipment and inventory.
Strong Non-interest Expense Ratios - For the fiscal years ended June 30, 2004, 2003 and 2002, the Company's ratios of non-interest expense to average assets were 0.91%, 1.05% and 1.07%, respectively. In fiscal 2004, the Company introduced Internet banking and online bill paying to increase customer satisfaction and loyalty.
CHANGES IN FINANCIAL CONDITION
Change
June 30, June 30, ----------------------
2004 2003 Dollars Percentage
---- ---- ------- ----------
(Dollars in Thousands)
Cash and interest-earning
deposits $ 3,054 $ 2,815 $ 239 8.5%
Investment securities(1) 281,121 155,279 125,842 81.0
Mortgage-backed securities 75,590 111,879 (36,289) -32.4
Net loans receivable 67,968 91,669 (23,701) -25.9
Total assets 433,624 367,188 66,436 18.1
Deposits 160,563 170,926 (10,363) -6.1
FHLB and other borrowings 241,375 162,843 78,532 48.2
Total liabilities 404,425 336,570 67,855 20.2
Total equity 29,199 30,618 (1,419) -4.6
|
General. The $66.4 million increase in total assets was primarily comprised of a $125.8 million increase in investment securities including Federal Home Loan Bank ("FHLB") stock, a $993 thousand increase in trading assets and a $239 thousand increase in cash and cash equivalents, which were partially offset by a $36.3 million decrease in mortgage-backed securities, a $23.7 million decrease in net loans receivable, a $344 thousand decrease in accrued interest receivable, a $154 thousand decrease in premises and fixed assets and a $150 thousand decrease in other assets.
The $67.9 million or 20.2% increase in total liabilities was primarily comprised of a $82.2 million increase in other short-term borrowings, which was partially offset by a $10.4 million decrease in deposits, a $3.7 million decrease in FHLB advances and a $252 thousand decrease in accrued interest payable.
Total stockholders' equity decreased $1.4 million or 4.6% primarily due to the repurchase of $2.6 million of the Company's own common stock and $1.6 million of cash dividends paid to stockholders, which were partially offset by $2.3 million of Company net income and a $561 thousand increase in capital attributable to stock option exercises and Recognition and Retention Plan ("RRP") equity contributions. 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 increased $239 thousand or 8.5% to $3.1 million at June 30, 2004 from $2.8 million at June 30, 2003. Increases in these accounts were primarily due to increases in customer transaction accounts.
Investments. The Company's overall investment portfolio increased $89.5 million or 33.5% to $356.7 million at June 30, 2004 from $267.2 million at June 30, 2003. Investment securities increased $125.8 million or 81.0% to $281.1 million at June 30, 2004. This increase was due primarily to purchases of U.S. Government Agency securities, which were partially offset by calls of U.S. Government Agency securities and maturities of investment grade corporate bonds. Mortgage-backed securities decreased $36.3 million or 32.4% to $75.6 million at June 30, 2004. This decrease was due primarily to principal repayments on the portfolio, which were partially offset by purchases of floating rate mortgage-backed securities.
Net Loans Receivable. Net loans receivable decreased $23.7 million or 25.9% to $68.0 million at June 30, 2004. 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 $10.4 million or 6.1% to $160.6 million at June 30, 2004. Certificates of deposit decreased approximately $14.6 million or 18.3% due primarily to reduced levels of municipal time deposits, money market accounts decreased $465 thousand or 3.2% and escrow accounts decreased $365 thousand or 22.7%. Transaction accounts increased $3.4 million or 11.1% and savings accounts increased $1.7 million or 3.8%. The Savings Bank believes that these changes in depositor liquidity preferences are due to the relatively low level of market interest rates.
Borrowed Funds. Borrowed funds increased $78.5 million or 48.2% to $241.4 million at June 30, 2004. Other short-term borrowings increased $82.2 million or 869.4% to $91.6 million at June 30, 2004 and FHLB advances decreased $3.7 million or 2.4% to $149.7 million at June 30, 2004. The Company used these sums to fund investment purchases.
Stockholders' Equity. Total stockholders' equity decreased $1.4 million or 4.6% to $29.2 million at June 30, 2004. The decrease was principally attributable to the repurchase of $2.6 million of the Company's own common stock and $1.6 million of cash dividends paid to stockholders, which were partially offset by $2.3 million of Company net income and a $489 thousand increase in capital attributable to stock option exercises.
RESULTS OF OPERATIONS
June 30, June 30, June 30,
2004 Change 2003 Change 2002
-------- ------- -------- ------- --------
(Dollars in Thousands)
Interest income $16,006 ($3,225) $19,231 ($4,529) $23,760
-16.8% -19.1%
Interest expense $10,987 ($ 823) $11,810 ($2,215) $14,025
-7.0% -15.8%
Net interest income $ 5,019 ($2,402) $ 7,421 ($2,314) $ 9,735
-32.4% -23.8%
Provision for loan losses ($794) ($566) ($228) ($285) $ 57
248.2% -500.0%
Non-interest income $ 715 ($10) $ 725 $ 38 $ 687
-1.4% 5.5%
Non-interest expense $ 3,607 ($349) $ 3,956 ($148) $ 4,104
-8.8% -3.6%
Income tax expense $ 619 ($451) $ 1,070 ($743) $ 1,813
-42.1% -41.0%
Net income $ 2,302 ($1,046) $ 3,348 ($1,100) $ 4,448
-31.2% -24.7%
|
General. WVS reported net income of $2.3 million, $3.3 million and $4.4 million for the fiscal years ended June 30, 2004, 2003 and 2002, respectively. The $1.0 million or 31.2% decrease in net income during fiscal 2004 was primarily the result of a $2.4 million decrease in net interest income and a $10 thousand decrease in non-interest income, which were partially offset by a $566 thousand decrease in provisions for loan losses, a $451 thousand decrease in income tax expense and a $349 thousand decrease in non-interest expense. Earnings per share totaled $0.91 (basic) and $0.90 (diluted) for fiscal 2004 as compared to $1.28 (basic and diluted) for fiscal 2003. 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 2004.
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,
----------------------------------------------------------------
2004 2003
------------------------------ -------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Net loans receivable(1) $ 76,513 $ 5,180 6.77% $127,970 $ 9,524 7.44%
Net tax-free loans receivable(2) -- -- 0.00 -- -- 0.00
Mortgage-backed securities 84,770 2,347 2.77 82,427 2,854 3.46
Investments - taxable 199,341 6,829 3.43 131,193 5,228 3.98
Investments - tax-free(2) 29,588 2,391 8.08 28,610 2,340 8.18
Interest-bearing deposits 2,079 9 0.43 2,362 11 0.47
-------- ------- -------- -------
Total interest-earning assets 392,291 16,756 4.27% 372,562 119,957 5.36%
------- ====== ------- ======
Non-interest-earning assets 3,949 4,113
-------- --------
Total assets $396,240 $376,675
======== ========
Interest-bearing liabilities:
Interest-bearing deposits and escrows $151,577 $ 2,321 1.53% $157,771 $ 3,312 2.10%
Borrowings 199,439 8,666 4.35 173,226 8,498 4.91
-------- ------- -------- -------
Total interest-bearing liabilities 351,016 10,987 3.13% 330,997 11,810 3.57%
------- ====== ------- ======
Non-interest-bearing accounts 12,542 12,149
-------- --------
Total interest-bearing liabilities and
non-interest-bearing accounts 363,558 343,146
Non-interest-bearing liabilities 2,563 3,020
-------- --------
Total liabilities 366,121 346,166
Retained income 30,119 30,509
-------- --------
Total liabilities and retained income $396,240 $376,675
======== ========
Net interest income $ 5,769 $ 8,147
======= =======
Interest rate spread 1.14% 1.79%
====== ======
Net yield on interest-earning assets(3) 1.47% 2.19%
====== ======
Ratio of interest-earning assets to
interest-bearing liabilities 111.76% 112.56%
====== ======
For the Years Ended June 30,
--------------------------------
2002
--------------------------------
Average Average
Balance Interest Yield/Rate
------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Net loans receivable(1) $172,824 $13,224 7.65%
Net tax-free loans receivable(2) 199 26 13.28
Mortgage-backed securities 65,372 3,341 5.11
Investments - taxable 112,948 5,553 4.92
Investments - tax-free(2) 28,543 2,323 8.14
Interest-bearing deposits 1,766 10 0.57
-------- -------
Total interest-earning assets 381,652 24,477 6.41%
------- ======
Non-interest-earning assets 3,386
--------
Total assets $385,038
========
Interest-bearing liabilities:
Interest-bearing deposits and escrows $163,338 $ 5,082 3.11%
Borrowings 176,383 8,943 5.07
-------- -------
Total interest-bearing liabilities 339,721 14,025 4.13%
------- ======
Non-interest-bearing accounts 11,814
--------
Total interest-bearing liabilities and
non-interest-bearing accounts 351,535
Non-interest-bearing liabilities 3,547
--------
Total liabilities 355,082
Retained income 29,956
--------
Total liabilities and retained income $385,038
========
Net interest income $10,452
=======
Interest rate spread 2.28%
======
Net yield on interest-earning assets(3) 2.74%
======
Ratio of interest-earning assets to
interest-bearing liabilities 112.34%
======
|
(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.
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,
-------------------------------------------------------------------------------
2004 vs. 2003 2003 vs. 2002
------------------------------------ -------------------------------------
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 $(3,550) $ (794) $(4,344) $(3,349) $ (377) $(3,726)
Mortgage-backed securities 76 (583) (507) 747 (1,234) (487)
Investments - taxable 2,402 (801) 1,601 830 (1,155) (325)
Investments - tax-free 80 (29) 51 6 11 17
Interest-bearing deposits (1) (1) (2) 3 (2) 1
------- ------- ------- ------- ------- -------
Total interest-earning assets (993) (2,208) (3,201) (1,763) (2,757) (4,520)
Interest-bearing liabilities:
Interest-bearing deposits and
Escrows (222) (769) (991) (324) (1,446) (1,770)
Other borrowings 1,201 (1,033) 168 (166) (279) (445)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 979 (1,802) (823) (490) (1,725) (2,215)
------- ------- ------- ------- ------- -------
Decrease in net interest income $(1,972) $ (406) $(2,378) $(1,273) $(1,032) $(2,305)
======= ======= ======= ======= ======= =======
|
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 $3.2 million or 16.8% during fiscal 2004 and decreased by $4.5 million or 19.1% during fiscal 2003. The decrease in fiscal 2004 was primarily a result of a decrease in the average balance of the loan portfolio and continued low market interest rates, which were partially offset by increased average balances of the investment and mortgage-backed securities portfolios. 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.
Interest income on investment securities and FHLB stock increased $1.6 million or 23.7% during fiscal 2004 and decreased $325 thousand or 4.5% during fiscal 2003. The increase in fiscal 2004 was primarily attributable to a $69.1 million increase in the average balance of the investment securities outstanding, which was partially offset by a 58 basis point decrease in the weighted average yield on the Company's investment securities. 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.
Interest income on mortgage-backed securities decreased $507 thousand or 17.8% during fiscal 2004 and decreased $487 thousand or 14.6% during fiscal 2003. The decrease in fiscal 2004 was primarily attributable to a 69 basis point decrease in the weighted average yield on the Company's mortgage-backed securities portfolio, which was partially offset by a $2.3 million increase in the average balance of the mortgage-backed securities portfolio. 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.
Interest income on net loans receivable decreased $4.3 million or 45.6% during fiscal 2004 and decreased $3.7 million or 28.1% during fiscal 2003. The decrease in fiscal 2004 was primarily attributable to a $51.5 million decrease in the average balance of net loans outstanding and a 67 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 continued to offer longer-term fixed rate loans on a correspondent basis during fiscal 2004. 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.
Interest Expense. Total interest expense decreased $823 thousand or 7.0% during fiscal 2004 and decreased by $2.2 million or 15.8% during fiscal 2003. The decrease in fiscal 2004 was attributable to a decrease of $991 thousand of interest expense on deposits and escrows which was partially offset by an increase of $168 thousand of interest expense on borrowings. 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.
Interest expense on borrowings increased $168 thousand or 2.0% during fiscal 2004 and decreased $445 thousand or 5.0% during fiscal 2003. The increase in fiscal 2004 was attributable to a $26.2 million increase in the average balance of borrowings outstanding which was partially offset by a 56 basis point decrease in the weighted average yield on the Company's borrowings. The increase in the average balance of borrowings outstanding was due to $31.0 million increase in the average balance of other short-term borrowings and a $507 thousand increase in long-term FHLB advances, which were partially offset by a $4.3 million decrease in short-term FHLB advances. 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 both fiscal 2004 and 2003, the Company's borrowings were primarily longer-term with fixed rates of interest.
Interest expense on interest-bearing deposits and escrows decreased $991 thousand or 29.9% in fiscal 2004 and decreased $1.8 million or 34.8% in fiscal 2003. The decrease in fiscal 2004 was attributable to a 57 basis point decrease in the weighted average yield on the Company's deposits and a $6.2 million decrease in average balance of interest-bearing deposits. 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.
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 recorded a credit provision of $794 thousand in fiscal 2004, compared to a credit provision of $228 thousand in fiscal 2003. The increase in the credit provision for fiscal 2004 was primarily attributable to the work-out of non-performing assets and paydowns on the Company's loan portfolio. 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.
Non-interest Income. Total non-interest income decreased by $10 thousand or 1.4% in fiscal 2004 and increased by $38 thousand or 5.5% in fiscal 2003. The decrease in fiscal 2004 was primarily attributable to a decrease in pre-tax gains recognized on the sale of assets from the Company's investment and loan portfolios, which was partially offset by an increase in deposit account fee income. The increase in fiscal 2003 was primarily attributable to the sale of investments from the Company's investment portfolio.
Non-interest Expense. Total non-interest expense decreased $349 thousand or 8.8% and decreased $148 thousand or 3.6% during fiscal 2004 and 2003, respectively. The decrease in fiscal 2004 was primarily attributable to decreases in payroll and benefit related costs, charitable contributions eligible for PA tax credits and legal expenses and costs associated with the work-out of non-performing assets. 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.
Income Taxes. Income taxes decreased $451 thousand or 31.2% during fiscal 2004 and decreased $743 thousand or 41.0% during fiscal 2003. The decrease in fiscal 2004 was primarily attributable to lower levels of taxable income. The decrease in fiscal 2003 was primarily attributable to a decrease in taxable income and proportionately higher tax-free interest revenue on bank qualified municipal securities. The Company's effective tax rate was 21.2% at June 30, 2004 and 24.2% at June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is often analyzed by reviewing the cash flow statement. Cash and cash equivalents increased by $239 thousand during fiscal 2004 primarily due to $64.4 million of net cash provided by financing activities and $2.1 million of net cash provided by operating activities, which were partially offset by $66.3 million of net cash used for investing activities.
Funds provided by operating activities totaled $2.1 million during fiscal 2004 as compared to $7.1 million during fiscal 2003. Net cash provided by operating activities was primarily comprised of $2.3 million of net income, $1.2 million of amortization of discounts, premiums and deferred loan fees, and a $344 thousand decrease in accrued interest receivable and a $205 thousand decrease in accrued and deferred taxes, which were partially offset by a $999 thousand increase in purchases of trading securities, a $794 thousand credit provision for loan losses and a $252 thousand decrease in accrued interest payable.
Funds used for investing activities totaled $66.3 million during fiscal 2004 as compared to $33.4 million provided by investing activities during fiscal 2003. Primary uses of funds during fiscal 2004 include $427.0 million in purchases of investment and mortgage-backed securities (including FHLB stock), which were partially offset by $336.4 million in repayments and sales of investment and mortgage-backed securities (including FHLB stock) and a $23.8 million decrease in net loans receivable. The investment purchases were primarily comprised of callable U.S. Government agency bonds that reprice within two years. The mortgage-backed securities purchases were floating rate instruments that generally reprice on a monthly basis.
Funds provided by financing activities totaled $64.4 million for fiscal 2004 as compared to $40.8 million used for financing activities in fiscal 2003. Primary sources of funds for fiscal 2004 were a $82.2 million increase in other short-term borrowings and $221 thousand increase in FHLB long-term borrowings, which were partially offset by a $10.4 million decrease in deposits, $3.9 million decrease in FHLB short-term advances, $2.6 million in common stock repurchases and $1.6 million in cash dividends. During fiscal 2004 the Company purchased 142,953 shares of common stock for approximately $2.6 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, 2004, the total approved loan commitments outstanding amounted to $2.7 million. At the same date, commitments under unused letters and lines of credit amounted to $6.3 million and the unadvanced portion of construction loans approximated $11.2 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2004, totaled $39.8 million. Management believes that a significant portion of maturing deposits will remain with the Company.
The Company's contractual obligations at June 30, 2004 are as follows:
Contractual Obligations
(Dollars in Thousands)
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
--------- --------- --------- --------- ---------
Long-term debt 149,736 -- 4,157 13,500 132,079
Operating lease obligations 141 68 73 -- --
--------- --------- --------- --------- ---------
149,877 68 4,230 13,500 132,079
========= ========= ========= ========= =========
|
See also Note 13 of the Company's consolidated financial statements.
Historically, the Company used its sources of funds primarily to meet its ongoing commitments to pay maturing certificates of deposit and savings withdrawals, fund loan commitments and maintain a substantial portfolio of investment securities. The Company has been able to generate sufficient cash through 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 27, 2004, the Company's Board of Directors declared a cash dividend of $0.16 per share payable on August 19, 2004 to shareholders of record at the close of business on August 9, 2004. Dividends are subject to determination and declaration by the Board of Directors, which take into account the Company's financial condition, statutory and regulatory restrictions, general economic conditions and other factors. There can be no assurance that dividends will in fact be paid on the common stock in the future or that, if paid, such dividends will not be reduced or eliminated in future periods.
As of June 30, 2004, WVS Financial Corp. exceeded all regulatory capital requirements and maintained Tier I and total risk-based capital equal to $28.9 million or 18.7% and $30.4 million or 19.6%, respectively, of total risk-weighted assets; and Tier I leverage capital of $28.9 million or 6.9% 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 $2.7 or 76.2% to $828 thousand or 0.19% of total assets, at June 30, 2004. The decrease was primarily the result of a $571 thousand in repayments, $2.0 million in loans reclassified as performing due to improved economic performance and $366 thousand in charged off loans, which were partially offset by $272 thousand in loans reclassified as non-performing.
Impact of Inflation and Changing Prices. The consolidated financial statements of the Company and related notes presented herein have been prepared in accordance with accounting principles generally accepted in the United States which require the measurement of financial condition and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services since such prices are affected by inflation to a larger degree than interest rates. In the current interest rate environment, liquidity and the maturity structure of the Company's assets and liabilities are critical to the maintenance of acceptable performance levels.
Recent Accounting and Regulatory Pronouncements. The Company's discussion of recent accounting and regulatory pronouncements can be found in Note 1 of the Company's consolidated financial statements.
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 2004 the level of market interest rates remained low due to the Federal Reserve's accommodative monetary policy and the weakness in the national economy. Geopolitical tensions, rising energy prices, moderate job creation and reduced corporate earnings have all contributed to a slow economic recovery. As economic conditions improve, we anticipate an eventual rise in market interest rates. The Federal Open Market Committee increased its intended federal funds rate by twenty-five basis points at both their June 30 and August 10, 2004 meetings.
Due to the sustained decline in market interest rates, the Company's loan, investment and mortgage-backed securities portfolios continued to experience much higher than anticipated levels of prepayments. Principal repayments on the Company's loan, investment and mortgage-backed securities portfolios totaled $47.4 million, $199.5 million and $137.0 million respectively. In response to higher levels of liquidity the Company continued to rebalance its loan, investment and mortgage-backed securities portfolios. Due to the low level of market interest rates, the Company continued to reduce its portfolio of long-term fixed rate mortgages while continuing to offer consumer home equity and construction loans. The Company began to purchase callable U. S. Government Agency bonds in order to earn a higher return while limiting interest rate 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 has continued to offer multi-family, commercial real estate, land acquisition and development and shorter-term construction loans, primarily on residential properties, to increase interest income while limiting interest rate risk. The Company has also emphasized higher yielding home equity and small business loans to existing customers and seasoned prospective customers.
As of June 30, 2004, the implementation of these asset and liability management initiatives resulted in the following:
1) the Company's liquidity profile remains strong with $123.2 million callable within 3 months, $54.5 million being callable with 3 to 6 months and $ 51.6 million being callable with 6 to 12 months. Based upon current market conditions, management anticipates that a substantial portion of the investments will be called within the above time intervals.
2) $55.0 million or 19.6% of the Company's investment portfolio (including FHLB stock) was comprised of floating rate bonds which will reprice quarterly within one year;
3) $162.3 million or 57.7% of the Company's investment portfolio (including FHLB stock) was comprised of U.S. Government Agency Step-up bonds which will reprice from initial rates of 3.35% - 5.42% and increase to 7.00% within two years;
4) $15.1 million or 5.4% of the Company's investment portfolio (including FHLB stock) was comprised of investment grade corporate bonds with remaining maturities of less than one year;
5) $69.3 million or 91.7% of the Company's portfolio of mortgage-backed securities (including collateralized mortgage obligations - "CMOs") were comprised of floating rate instruments that reprice on a monthly basis;
6) the maturity distribution of the Company's borrowings is as follows:
less than 1 year: $91.6 million or 38.0%; 1-3 years: $4.2 or 1.7%; 3-5
years: $13.5 million or 5.6%; over 5 years: $132.1 million or 54.7%;
and
7) an aggregate of $33.7 million or 49.6% 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.
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,
-----------------------------------------
2004 2003 2002
--------- --------- ---------
(Dollars in Thousands)
Interest-earning assets maturing or
repricing within one year $ 288,451 $ 262,782 $ 252,467
Interest-bearing liabilities maturing or
repricing within one year 171,655 133,418 142,823
--------- --------- ---------
Interest sensitivity gap $ 116,796 $ 129,364 $ 109,644
========= ========= =========
Interest sensitivity gap as a percentage of
total assets 26.9% 35.2% 27.1%
Ratio of assets to liabilities
maturing or repricing within one year 168.0% 197.0% 176.8%
|
During fiscal 2004, the Company managed its one year interest sensitivity gap
by: (1) limiting the portfolio origination of long-term fixed rate mortgages;
(2) emphasizing loans with shorter terms or repricing frequencies; (3)
purchasing investments with maturities/repricing dates within 2 years; and (4)
purchasing floating rate CMO's which reprice on a monthly basis.
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, 2004. 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 ($'s) (10,549) (11,549) (24,679) (62,693) (79,788) (92,251) 26,444
% of Total
Assets -2.4% -2.7% -5.7% -14.4% -18.4% -21.3% 6.1%
Base Case Up 100 bp
-------------------
Cummulative
Gap ($'s) 43,923 43,249 45,505 10,411 51,697 78,439 26,444
% of Total
Assets 10.1% 10.0% 10.5% 2.4% 11.9% 18.1% 6.1%
Base Case No Change
-------------------
Cummulative
Gap ($'s) 96,304 99,518 116,796 194,004 183,364 164,885 26,444
% of Total
Assets 22.2% 22.9% 26.9% 44.7% 42.2% 38.0% 6.1%
Base Case Down 100 bp
---------------------
Cummulative
Gap ($'s) 115,093 120,934 141,000 204,736 192,403 169,095 26,444
% of Total
Assets 26.5% 27.9% 32.5% 47.2% 44.3% 39.0% 6.1%
Base Case Down 200 bp
---------------------
Cummulative
Gap ($'s) 134,210 172,340 208,637 209,726 194,428 169,285 26,444
% of Total
Assets 30.9% 39.7% 48.1% 48.3% 44.8% 39.0% 6.1%
|
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.
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, 2004 and June 30, 2003.
Analysis of Sensitivity to Changes in Market Interest Rates
-----------------------------------------------------------
Modeled Change in Market Interest Rates
--------------------------------------------------------------------------------------------------------
June 30, 2004 June 30, 2003
-------------------------------------------------- --------------------------------------------------
Estimated impact on: -200 -100 0 +100 +200 -200 -100 0 +100 +200
------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Change in net -44.9% -20.6% 0.00% 38.8% 64.4% -47.6% -35.0% 0.00% 24.8% 46.8%
interest income
Return on average 0.33% 4.01% 7.00% 12.39% 15.78% 0.31% 1.88% 6.16% 9.08% 11.62%
equity
Return on average 0.02% 0.29% 0.51% 0.92% 1.19% 0.02% 0.14% 0.47% 0.70% 0.91%
assets
Market value of $16,255 $21,386 $27,424 $26,957 $20,079 $(4,248) $ 5,191 $13,582 $19,086 $22,309
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, 2004.
Undisbursed construction and development loans
Fixed rate $ 2,719
5.58%
Adjustable rate $ 7,237
4.95%
Undisbursed lines of credit
Adjustable rate $ 6,015
4.80%
Loan origination commitments
Fixed rate $ 571
6.58%
Adjustable rate $ 2,095
6.21%
Letters of credit
Adjustable rate $ 1,576
5.01%
---------
$ 20,213
=========
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
WVS Financial Corp.
We have audited the accompanying consolidated balance sheet of WVS Financial Corp. and subsidiary as of June 30, 2004 and 2003, 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, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2004, in conformity with accounting principles generally accepted in the United States of America.
/s/ S.R. Snodgrass A.C. ---------------------- Wexford, PA July 30, 2004 |
WVS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
June 30,
2004 2003
---------- ----------
ASSETS
Cash and due from banks $ 769 $ 921
Interest-earning demand deposits 2,285 1,894
---------- ----------
Total cash and cash equivalents 3,054 2,815
Trading securities 993 --
Investment securities available for sale (amortized
cost of $4,113 and $25,310) 4,416 25,641
Investment securities held to maturity (market value
of $271,103 and $126,036) 269,173 121,841
Mortgage-backed securities available for sale
(amortized cost of $3,234 and $4,219) 3,357 4,387
Mortgage-backed securities held to maturity
(market value of $72,099 and $107,914) 72,233 107,492
Net loans receivable (allowance for loan losses of
$1,370 and $2,530) 67,968 91,669
Accrued interest receivable 2,456 2,800
Federal Home Loan Bank stock, at cost 7,532 7,797
Premises and equipment 1,077 1,231
Other assets 1,365 1,515
---------- ----------
TOTAL ASSETS $ 433,624 $ 367,188
========== ==========
LIABILITIES
Deposits $ 160,563 $ 170,926
Federal Home Loan Bank advances 149,736 153,390
Other borrowings 91,639 9,453
Accrued interest payable 1,197 1,449
Other liabilities 1,290 1,352
---------- ----------
TOTAL LIABILITIES 404,425 336,570
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 shares authorized;
none outstanding -- --
Common stock, par value $.01; 10,000,000 shares authorized;
3,762,968 and 3,736,750 shares issued 38 37
Additional paid-in capital 20,727 20,212
Treasury stock (1,296,544 and 1,153,591 shares at cost) (19,377) (16,767)
Retained earnings - substantially restricted 27,535 26,857
Accumulated other comprehensive income 281 329
Unallocated shares - Recognition and Retention Plans (5) (50)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 29,199 30,618
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 433,624 $ 367,188
========== ==========
|
See accompanying notes to the consolidated financial statements.
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Year Ended June 30,
2004 2003 2002
----------- ----------- -----------
INTEREST AND DIVIDEND INCOME
Loans $ 5,180 $ 9,524 $ 13,242
Investment securities 8,350 6,590 6,735
Mortgage-backed securities 2,347 2,854 3,341
Interest-earning demand deposits 9 11 10
Federal Home Loan Bank stock 120 252 432
----------- ----------- -----------
Total interest and dividend income 16,006 19,231 23,760
----------- ----------- -----------
INTEREST EXPENSE
Deposits 2,321 3,312 5,082
Federal Home Loan Bank advances 8,120 8,224 8,635
Other borrowings 546 274 308
----------- ----------- -----------
Total interest expense 10,987 11,810 14,025
----------- ----------- -----------
NET INTEREST INCOME 5,019 7,421 9,735
Provision (recovery) for loan losses (794) (228) 57
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
(RECOVERY) FOR LOAN LOSSES 5,813 7,649 9,678
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposits 385 361 403
Investment securities gains 20 64 --
Other 310 300 284
----------- ----------- -----------
Total noninterest income 715 725 687
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits 1,992 2,240 2,448
Occupancy and equipment 433 398 375
Data processing 231 221 190
Correspondent bank charges 142 152 163
Other 809 945 928
----------- ----------- -----------
Total noninterest expense 3,607 3,956 4,104
----------- ----------- -----------
Income before income taxes 2,921 4,418 6,261
Income taxes 619 1,070 1,813
----------- ----------- -----------
NET INCOME $ 2,302 $ 3,348 $ 4,448
=========== =========== ===========
EARNINGS PER SHARE:
Basic $ 0.91 $ 1.28 $ 1.63
Diluted 0.90 1.28 1.63
AVERAGE SHARES OUTSTANDING:
Basic 2,535,796 2,617,576 2,723,891
Diluted 2,544,404 2,624,395 2,732,491
|
See accompanying notes to the consolidated financial statements.
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
Retained
Additional Earnings-
Common Paid-in Treasury Substantially
Stock Capital Stock Restricted
------ ---------- -------- -------------
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 241
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
Accrued compensation expense for RRPs
Exercise of stock options 71
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
Comprehensive income:
Net income 2,302
Unrealized loss on available
for sale securities, net of tax benefit of $25
Tax benefit from stock grants issued
under RRPs 27
Accrued compensation expense for RRPs
Cancellation of unallocated RRP shares
Exercise of stock options 1 488
Purchase of treasury stock (2,610)
Cash dividends declared ($0.64 per share) (1,624)
------ -------- -------- --------
Balance June 30, 2004 $ 38 $ 20,727 $(19,377) $ 27,535
====== ======== ======== ========
Accumulated
Unallocated Other
Shares Held Comprehensive
by RRP Income (Loss) Total
----------- ------------- --------
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 241
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
Accrued compensation expense for RRPs 22 22
Exercise of stock options 71
Purchase of treasury stock (1,634)
Cash dividends declared ($0.64 per share) (1,674)
-------- -------- --------
Balance June 30, 2003 (50) 329 30,618
Comprehensive income:
Net income 2,302
Unrealized loss on available
for sale securities, net of tax benefit of $25 (48) (48)
Tax benefit from stock grants issued
under RRPs 27
Accrued compensation expense for RRPs 5 5
Cancellation of unallocated RRP shares 40 40
Exercise of stock options 489
Purchase of treasury stock (2,610)
Cash dividends declared ($0.64 per share) (1,624)
-------- -------- --------
Balance June 30, 2004 $ (5) $ 281 $ 29,199
======== ======== ========
|
See accompanying notes to the consolidated financial statements.
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Year Ended June 30,
2004 2003 2002
--------- --------- ---------
OPERATING ACTIVITIES
Net income $ 2,302 $ 3,348 $ 4,448
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision (recovery) for loan losses (794) (228) 57
Depreciation 188 156 123
Investment securities gains (20) (64) --
Amortization of discounts, premiums, and
deferred loan fees 1,166 3,205 766
Purchase of trading securities (999) -- --
Deferred income taxes 171 43 (93)
Decrease (increase) in accrued interest receivable 344 1,103 (66)
Decrease in accrued interest payable (252) (249) (743)
Other, net 20 (263) 11
--------- --------- ---------
Net cash provided by operating activities 2,126 7,051 4,503
--------- --------- ---------
INVESTING ACTIVITIES
Available for sale:
Purchase of investment and mortgage-backed
securities (23,890) (25,836) (29,454)
Proceeds from repayments of investment and
mortgage-backed securities 45,852 10,313 24,793
Proceeds from sales of investment and
mortgage-backed securities 251 639 --
Held to maturity:
Purchase of investment and mortgage-backed
securities (401,567) (259,234) (296,854)
Proceeds from repayments of investment and
mortgage-backed securities 288,489 246,069 260,973
Net decrease in net loans receivable 23,751 61,131 31,520
Purchase of Federal Home Loan Bank stock (1,584) (1,021) (131)
Redemption of Federal Home Loan Bank stock 1,849 1,505 --
Acquisition of premises and equipment (34) (391) (118)
Other, net 572 220 180
--------- --------- ---------
Net cash provided by (used for) investing activities (66,311) 33,395 (9,091)
--------- --------- ---------
FINANCING ACTIVITIES
Net decrease in deposits (10,363) (6,746) (3,667)
Net increase (decrease) in Federal Home Loan Bank short-term advances (3,875) 3,875 (14,836)
Net increase (decrease) in other borrowings 82,186 (24,278) 13,071
Proceeds from Federal Home Loan Bank long-term advances 500 578 23,279
Repayments of Federal Home Loan Bank long-term advances (279) (11,000) (10,000)
Net proceeds from exercise of stock options 489 71 212
Cash dividends paid (1,624) (1,674) (1,743)
Purchase of treasury stock (2,610) (1,634) (1,544)
--------- --------- ---------
Net cash provided by (used for) financing activities 64,424 (40,808) 4,772
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 239 (362) 184
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 2,815 3,177 2,993
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,054 $ 2,815 $ 3,177
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 11,238 $ 12,059 $ 14,768
Taxes 363 1,049 1,735
|
See accompanying notes to the consolidated financial statements.
WVS FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
The consolidated financial statements include the accounts of WVS and its wholly owned subsidiary, West View. All intercompany transactions have been eliminated in consolidation. The accounting and reporting policies of WVS and West View conform to 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 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Trading securities are held for resale in anticipation of short-term (generally 90 days or less) fluctuations in market prices. Trading securities are stated at fair value. Realized and unrealized gains and losses are included in noninterest income as investment securities gains.
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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 are stated at cost, less accumulated depreciation. Depreciation is principally computed on the straight-line method over the estimated useful lives of the related assets, which range from 3 to 10 years for furniture and equipment and 25 to 50 years for building premises. Leasehold improvements are amortized over the shorter of their estimated useful lives or their respective lease terms, which range from 7 to 15 years. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.
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.
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.
The Company maintains stock option plans for key officers, employees, and non-employee directors.
As permitted under Statement of Financial Accounting Standards ("FAS") 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 FAS 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company is required to present comprehensive income and its components in a full set of general-purpose financial statements for all periods presented. Other comprehensive income is composed exclusively of net unrealized holding gains (losses) on its available-for-sale securities portfolio. The Company has elected to report the effects of its other comprehensive income as part of the Consolidated Statement of Stockholders' Equity.
Cash and cash equivalents include cash and due from banks and interest-earning demand deposits.
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.
In December 2003 the Financial Accounting Standards Board ("FASB") revised FAS No. 132, Employers' Disclosures About Pension and Other Postretirement Benefit. This statement retains the disclosures required by FAS No. 132, which standardized the disclosure requirements for pensions and other postretirement benefits to the extent practicable and requires additional information on changes in the benefit obligations and fair value of plan assets. Additional disclosures include information describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods. This statement retains reduced disclosure requirements for nonpublic entities from FAS No. 132, and it includes reduced disclosure for certain of the new requirements. This statement is effective for financial statements with fiscal years ending after December 15, 2003. The interim disclosures required by this statement are effective for interim periods beginning after December 15, 2003. The adoption of this statement did not have a material effect on the Company's disclosure requirements.
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 September 30, 2003, except as stated below and for hedging
relationships designated after September 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 September 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 September
30, 2003. The adoption of this statement did not have a material effect on
the Company's financial position or results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 September 15, 2003. The adoption of this statement did not have a material effect on the Company's reported equity.
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. In October 2003 the FASB decided to defer to the fourth quarter from the third quarter the implementation date for Interpretation No. 46. This deferral only applies to variable interest entities that existed prior to February 1, 2003. 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 the weighted-average common shares used to calculate basic and diluted earnings per share.
2004 2003 2002
---------- ---------- ----------
Weighted-average common shares
issued 3,747,821 3,731,949 3,718,640
Average treasury stock shares (1,212,025) (1,114,373) (994,749)
---------- ---------- ----------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 2,535,796 2,617,576 2,723,891
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 8,608 6,819 8,600
---------- ---------- ----------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 2,544,404 2,624,395 2,732,491
========== ========== ==========
|
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.
3. COMPREHENSIVE INCOME
Other comprehensive income primarily reflects changes in net unrealized gains (losses) on available-for-sale securities. Total comprehensive income for the years ended June 30 is summarized as follows:
2004 2003 2002
--------- --------- ---------
Net Income $ 2,302 $ 3,348 $ 4,448
Other comprehensive income:
Unrealized gains (losses) on available-for-sale securities (93) 258 141
Less: Reclassification adjustment for gain included
in net income 20 64 --
--------- --------- ---------
Other comprehensive income (loss) before tax (73) 194 141
Income tax expense (benefit) related to other
comprehensive income (loss) (25) 66 48
--------- --------- ---------
Other comprehensive income (loss), net of tax (48) 128 93
--------- --------- ---------
Comprehensive income $ 2,254 $ 3,476 $ 4,541
========= ========= =========
|
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
---------- ---------- ---------- ----------
2004
----
AVAILABLE FOR SALE
Corporate debt securities $ 2,532 $ 18 $ -- $ 2,550
Equity securities 1,581 313 (28) 1,866
---------- ---------- ---------- ----------
Total $ 4,113 $ 331 $ (28) $ 4,416
========== ========== ========== ==========
HELD TO MATURITY
U.S. Government agency securities $ 223,808 $ 1,176 $ (864) $ 224,120
Corporate debt securities 13,772 16 -- 13,788
Obligations of states and political
subdivisions 31,593 1,641 (39) 33,195
---------- ---------- ---------- ----------
Total $ 269,173 $ 2,833 $ (903) $ 271,103
========== ========== ========== ==========
|
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
---------- ---------- ---------- ----------
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
========== ========== ========== ==========
|
In 2004 the Company recorded realized investment security gains, and unrealized holding gains and losses for trading securities, of $20. Proceeds from sales of investment securities during 2004 were $251.
The amortized cost and estimated market values of debt securities at June 30, 2004, 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 $ 2,532 $ -- $ -- $ -- $ 2,532
Estimated market value 2,550 -- -- -- 2,550
HELD TO MATURITY
Amortized cost $ 14,073 $ -- $ 2,062 $253,038 $269,173
Estimated market value 14,088 -- 2,200 254,815 271,103
|
Investment securities with amortized costs of $138,899 and $17,624 and estimated market values of $139,411 and $18,009 at June 30, 2004 and 2003, respectively, were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law.
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
---------- ---------- ---------- ----------
2004
----
AVAILABLE FOR SALE
Fannie Mae $ 686 $ 37 $ -- $ 723
Government National Mortgage
Association certificates 2,411 80 (1) 2,490
Freddie Mac 45 1 -- 46
Collateralized mortgage obligations 92 6 -- 98
---------- ---------- ---------- ----------
Total $ 3,234 $ 124 $ (1) $ 3,357
========== ========== ========== ==========
HELD TO MATURITY
Fannie Mae $ 19 $ -- $ -- $ 19
Government National Mortgage
Association certificates 591 42 -- 633
Freddie Mac 17 -- -- 17
Collateralized mortgage obligations 71,606 117 (293) 71,430
---------- ---------- ---------- ----------
Total $ 72,233 $ 159 $ (293) $ 72,099
========== ========== ========== ==========
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
2003
----
AVAILABLE FOR SALE
Fannie Mae $ 1,494 $ 78 $ -- $ 1,572
Government National Mortgage
Association certificates 2,510 70 -- 2,580
Freddie Mac 47 3 -- 50
Collateralized mortgage obligations 168 17 -- 185
---------- ---------- ---------- ----------
Total $ 4,219 $ 168 $ -- $ 4,387
========== ========== ========== ==========
HELD TO MATURITY
Fannie Mae $ 29 $ 1 $ -- $ 30
Government National Mortgage
Association certificates 2,603 81 (17) 2,667
Freddie Mac 36 -- -- 36
Collateralized mortgage obligations 104,824 392 (35) 105,181
---------- ---------- ---------- ----------
Total $ 107,492 $ 474 $ (52) $ 107,914
========== ========== ========== ==========
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
5. MORTGAGE-BACKED SECURITIES (Continued)
The amortized cost and estimated market value of mortgage-backed securities at June 30, 2004, 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 $ -- $ 18 $ -- $ 3,216 $ 3,234
Estimated market value -- 18 -- 3,339 3,357
HELD TO MATURITY
Amortized cost $ -- $ 26 $ -- $72,207 $72,233
Estimated market value -- 26 -- 72,073 72,099
|
At June 30, 2004 and 2003, mortgage-backed securities with an amortized cost of $65,496 and $67,746 and estimated market values of $65,486 and $68,179, were pledged to secure borrowings with the Federal Home Loan Bank.
6. UNREALIZED LOSSES ON SECURITIES
The following table shows the Company's gross unrealized losses and fair value, aggregated by category and length of time that the individual securities have been in a continuous unrealized loss position, at June 30, 2004.
Less than Twelve Months Twelve Months or Greater Total
------------------------------------------------------- ------------------------
Estimated Gross Estimated Gross Estimated Gross
Market Unrealized Market Unrealized Market Unrealized
Value Losses Value Losses Value Losses
--------- ---------- --------- ---------- --------- ----------
U.S. government agencies
securities $ 84,084 $ 864 $ -- $ -- $ 84,084 $ 864
Obligations of states and
political subdivisions 1,312 39 -- -- 1,312 39
Government National Mortgage
Association certificates 40 1 -- -- 40 1
Collateralized mortgage 60,419 290 348 3 60,767 293
obligations
Equity securities 972 28 -- -- 972 28
-------- -------- -------- -------- -------- --------
Total $146,827 $ 1,222 $ 348 $ 3 $147,175 $ 1,225
======== ======== ======== ======== ======== ========
|
The policy of the Company is to recognize an other than temporary impairment on equity securities where the fair value has been significantly below cost for three consecutive quarters. For fixed maturity investments with unrealized losses due to interest rates where the Company has the positive intent and ability to hold the investment for a period of time sufficient to allow a market recovery, declines in value below cost are not assumed to be other than temporary. The Company reviews its position
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
6. UNREALIZED LOSSES ON SECURITIES (Continued)
quarterly and has asserted that at June 30, 2004, the declines outlined in the above table represent temporary declines and the Company does have the intent and ability to hold those securities either to maturity or to allow a market recovery.
The Company has concluded that any impairment of its investment securities portfolio is not other than temporary but is the result of interest rate changes, sector credit rating changes, or company-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.
7. NET LOANS RECEIVABLE
2004 2003
---------- ----------
First mortgage loans:
1 - 4 family dwellings $ 25,825 $ 43,255
Construction 18,070 16,942
Land acquisition and development 7,947 7,437
Multi-family dwellings 4,761 5,196
Commercial 9,950 17,949
---------- ----------
66,553 90,779
---------- ----------
Consumer loans:
Home equity 7,086 8,006
Home equity lines of credit 3,932 4,368
Other 870 1,069
---------- ----------
11,888 13,443
---------- ----------
Commercial loans 968 1,499
---------- ----------
Less:
Undisbursed construction and land development 9,956 11,348
Net deferred loan fees 115 174
Allowance for loan losses 1,370 2,530
---------- ----------
11,441 14,052
---------- ----------
Net loans receivable $ 67,968 $ 91,669
========== ==========
|
Major classifications of loans are summarized as follows:
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. At June 30, 2004 and 2003, the Company had approximately $15 million and $12 million, respectively, of outstanding loans for land development and construction in the local trade area. Although the Company has a diversified loan portfolio at June 30, 2004 and 2003, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
7. 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:
2004 2003 2002
---------- ---------- ----------
Principal outstanding $ 2,181 $ 3,481 $ 5,044
---------- ---------- ----------
Interest income that would
have been recognized 123 256 408
Interest income recognized 94 26 162
---------- ---------- ----------
Interest income foregone $ 29 $ 230 $ 246
========== ========== ==========
|
The following table is a summary of the loans considered to be impaired as of June 30:
2004 2003 2002
---------- ---------- ----------
Impaired loans with an allocated allowance $ 1,900 $ 3,423 $ 3,600
Impaired loans without an allocated allowance -- -- --
---------- ---------- ----------
Total impaired loans $ 1,900 $ 3,423 $ 3,600
========== ========== ==========
Allocated allowance on impaired loans $ 762 $ 1,816 $ 1,764
Average impaired loans 1,836 3,441 3,586
Income recognized on impaired loans 89 23 116
|
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:
2004 2003
---------- ----------
Balance, July 1 $ 535 $ 822
Additions 101 49
Amounts collected (320) (336)
---------- ----------
Balance, June 30 $ 316 $ 535
========== ==========
|
8. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
2004 2003 2002
---------- ---------- ----------
Balance, July 1 $ 2,530 $ 2,758 $ 2,763
Add:
Provision (recovery) for loan losses (794) (228) 57
Recoveries 158 -- 6
Less:
Loans charged off 524 -- 68
---------- ---------- ----------
Balance, June 30 $ 1,370 $ 2,530 $ 2,758
========== ========== ==========
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
9. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
2004 2003
---------- ----------
Investment and mortgage-backed securities $ 2,135 $ 2,283
Loans receivable 321 517
---------- ----------
Total $ 2,456 $ 2,800
========== ==========
|
10. FEDERAL HOME LOAN BANK STOCK
The Savings Bank is a member of the FHLB System. As a member, West View maintains an investment in the capital stock of the 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.
11. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
2004 2003
---------- ----------
Land and improvements $ 264 $ 264
Buildings and improvements 2,024 2,024
Furniture, fixtures, and equipment 1,069 1,069
---------- ----------
3,357 3,357
Less accumulated depreciation 2,280 2,126
---------- ----------
Total $ 1,077 $ 1,231
========== ==========
|
Depreciation charged to operations was $188, $156, and $123, for the years ended June 30, 2004, 2003, and 2002, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
12. DEPOSITS
Deposit accounts are summarized as follows:
2004 2003
-------------------------- --------------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
---------- ---------- ---------- ----------
Non-interest-earning checking $ 10,996 6.8% $ 11,302 6.6%
Interest-earning checking 22,897 14.3 19,215 11.2
Savings accounts 45,837 28.5 44,152 25.8
Money market accounts 14,226 8.9 14,691 9.0
Advance payments by borrowers
for taxes and insurance 1,245 0.7 1,610 0.8
---------- ---------- ---------- ----------
95,201 59.2 90,970 53.4
---------- ---------- ---------- ----------
Savings certificates:
2.00% or less 38,528 24.0 34,419 20.1
2.01 - 4.00% 16,875 10.5 27,443 16.0
4.01 - 6.00% 8,604 5.4 15,685 9.1
6.01 - 8.00% 1,355 0.9 2,409 1.4
---------- ---------- ---------- ----------
65,362 40.8 79,956 46.6
---------- ---------- ---------- ----------
Total $ 160,563 100.0% $ 170,926 100.0%
========== ========== ========== ==========
|
The maturities of savings certificates at June 30, 2004, are summarized as follows:
Within one year $ 39,766
Beyond one year but within two years 12,301
Beyond two years but within three years 5,435
Beyond three years 7,860
---------
Total $ 65,362
=========
|
Savings certificates with balances of $100,000 or more amounted to $6,944 and $14,161 on June 30, 2004 and 2003, respectively.
Interest expense by deposit category for the years ended June 30 are as follows:
2004 2003 2002
---------- ---------- ----------
Interest-earning checking accounts $ 47 $ 66 $ 94
Savings accounts 334 509 735
Money market accounts 109 183 257
Savings certificates 1,831 2,554 3,996
Advance payments by borrowers for taxes
and insurance 15 24 33
---------- ---------- ----------
Total $ 2,336 $ 3,336 $ 5,115
========== ========== ==========
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
13. 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 2004 2003
----------- -------- -------- ------------- ----- ----- -------------- ------------
Convertible 02/20/08 06/22/16 5.35% 2.86% 6.10% $ 144,500 $ 144,500
Fixed rate 03/16/06 05/03/10 4.97 2.91 5.43 5,236 5,015
-------------- ------------
$ 149,736 $ 149,515
============== ============
|
Maturities of FHLB long-term advances at June 30, 2004, are summarized as follows:
Weighted-
Maturing During average
Fiscal Year Ended Interest
June 30: Amount Rate
----------------- ---------- --------
2006 $ 4,157 5.42%
2008 3,000 5.48
2009 5,500 5.16
2010 and thereafter 137,079 5.34
----------
Total $ 149,736 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.
The Company, also utilized revolving and short-term FHLB advances. Short-term FHLB advances generally mature within 90 days, while revolving FHLB advances may be repaid by the Company without penalty. The following table presents information regarding such advances as of June 30:
2004 2003
------------ ------------
FHLB revolving and short-term advances:
Ending balance $ -- $ 3,875
Average balance during the year 336 1,149
Maximum month-end balance during the year 2,250 14,350
Average interest rate during the year 2.24% 1.64%
Weighted-average rate at year-end --% 1.35%
|
At June 30, 2004, the Company had remaining intermediate term (maturing within five years) borrowing capacity with the FHLB of approximately $61 million.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
14. OTHER BORROWINGS
Other borrowings include securities sold under agreements to repurchase with securities brokers. The outstanding repurchase agreements generally mature within 1 to 90 days from the transaction date and qualifying collateral has been delivered. The Company pledged investment securities with a carrying value of $91,866 and $9,495 at June 30, 2004 and 2003, respectively, as collateral for the repurchase agreements as explained in Note 4. The following table presents information regarding other borrowings as of June 30:
2004 2003
---------- ----------
Ending balance $ 91,639 $ 9,453
Average balance during the year 48,749 18,277
Maximum month-end balance during the year 93,639 38,184
Average interest rate during the year 1.12% 1.50%
Weighted-average rate at year-end 1.28% 1.23%
15. COMMITMENTS AND CONTINGENT LIABILITIES
|
Loan Commitments
In the normal course of business, there are various commitments that are not reflected in the Bank's financial statements. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The Bank's exposure to credit loss in the event of nonperformance by the other parties to the financial instruments is represented by the contractual amounts as disclosed. Losses, if any, are charged to the allowance for loan losses. Management minimizes its exposure to credit loss under these commitments by subjecting them to credit approval, review procedures, and collateral requirements as deemed necessary. Various loan commitments totaling $20,213 and $19,340 at June 30, 2004 and 2003, respectively, represent financial instruments with off-balance sheet risk. The commitments outstanding at June 30, 2004, 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 composed 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.
Litigation
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 financial condition of WVS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
16. 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, 2004 and 2003, 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 10 percent, 6 percent, and 5 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, 2004
----------------------------------------------------------------
WVS West View
---------------------------- -----------------------------
Amount Ratio Amount Ratio
----------- --------- ------------ --------
Total Capital (to Risk-Weighted Assets)
---------------------------------------
Actual $ 30,416 19.62% $ 27,524 17.98%
To Be Well Capitalized 15,507 10.00 15,306 10.00
For Capital Adequacy Purposes 12,405 8.00 12,245 8.00
Tier I Capital (to Risk-Weighted Assets)
----------------------------------------
Actual $ 28,918 18.65% $ 26,155 17.09%
To Be Well Capitalized 9,304 6.00 9,184 6.00
For Capital Adequacy Purposes 6,203 4.00 6,123 4.00
Tier I Capital (to Average Total Assets)
----------------------------------------
Actual $ 28,918 6.92% $ 26,155 6.30%
To Be Well Capitalized 20,860 5.00 20,743 5.00
For Capital Adequacy Purposes 16,688 4.00 16,594 4.00
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
16. REGULATORY CAPITAL (Continued)
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
|
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.
17. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
17. 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, 2001 98,396 11,400 $ 13.89
Granted -- 1,214 15.77
Exercised (15,068) (6,200) 9.96
Forfeited (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
Granted -- --
Exercised (34,028) (800) 15.19
Forfeited (80) -- 5.00
------- -------
Outstanding, June 30, 2004 39,312 4,414 $ 14.99
======= =======
Exercisable at year-end 39,312 4,414 $ 14.99
======= =======
Available for future grant -- --
======= =======
|
At June 30, 2004, for officers and employees there were 39,312 options outstanding, exercisable at a weighted-average exercise price of $15.03, and a weighted-average remaining contractual life of 3.84 years.
There were also 4,414 options outstanding and exercisable for directors with a weighted-average exercise price of $14.70, and a weighted-average remaining contractual life of 5.33 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
17. STOCK BENEFIT PLANS (Continued)
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.
The RRP expired during 2004 and all unissued shares were retired. 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 $5, $23, and $59 for the years ended June 30, 2004, 2003, and 2002.
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, $100, and $200 for the years ended June 30, 2004, 2003, and 2002, respectively. Total ESOP shares as of June 30, 2004 and 2003, were 226,839 and 219,865, respectively.
18. 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 made no contributions to the Plan for the three years ended June 30, 2004, 2003, and 2002.
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, 2004, 2003, and 2002, 39,539, 37,939, and 48,311 shares, respectively, were held by the Plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
19. INCOME TAXES
The provision for income taxes consists of:
2004 2003 2002
---------- ---------- ----------
Currently payable:
Federal $ 366 $ 794 $ 1,667
State 82 233 239
---------- ---------- ----------
448 1,027 1,906
Deferred 171 43 (93)
---------- ---------- ----------
Total $ 619 $ 1,070 $ 1,813
========== ========== ==========
|
The following temporary differences gave rise to the net deferred tax assets at June 30:
2004 2003
---------- ----------
Deferred tax assets:
Allowance for loan losses $ 466 $ 860
Deferred compensation 270 314
Accrued interest receivable on loans 225 226
Net operating loss carryforward 72 --
Alternative minimum tax credit 174 --
---------- ----------
Total gross deferred tax assets 1,207 1,400
---------- ----------
Deferred tax liabilities:
Bad debt reserve for tax reporting purposes -- 19
Net unrealized gain on securities available for sale 145 169
Deferred origination fees, net 209 204
Premises and equipment 67 75
---------- ----------
Total gross deferred tax liabilities 421 467
---------- ----------
Net deferred tax assets $ 786 $ 933
========== ==========
|
No valuation allowance was established at June 30, 2004 and 2003, in view of the Company's ability to carryback to taxes paid in previous years, future anticipated taxable income, which is evidenced by the Company's earnings potential, and deferred tax liabilities at June 30.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
19. 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:
2004 2003 2002
--------------------- --------------------- ---------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
--------------------- --------------------- ---------------------
Provision at statutory rate $ 993 34.0% $ 1,502 34.0% $ 2,129 34.0%
State income tax, net of federal
tax benefit 54 1.9 154 3.5 158 2.5
Tax exempt income (558) (19.1) (549) (12.4) (555) (8.9)
Other, net 130 4.4 (37) (0.9) 81 1.4
------- ------- ------- ------- ------- -------
Actual tax expense and
effective rate $ 619 21.2% $ 1,070 24.2% $ 1,813 29.0%
======= ======= ======= ======= ======= =======
|
The Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax, which is calculated at 11.5 percent of earnings.
20. 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, 2004 and 2003, the Savings Bank had required reserves of $808 and $763, respectively. The required reserves are held in the form of vault cash and a non-interest-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 10 percent of the Savings Bank's capital surplus.
Dividend Restrictions
The Savings Bank is subject to the Pennsylvania Banking Code, which restricts the availability of surplus for dividend purposes. At June 30, 2004, surplus funds of $3,363 were not available for dividends.
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:
2004 2003
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
FINANCIAL ASSETS
Cash and cash equivalents $ 3,054 $ 3,054 $ 2,815 $ 2,815
Trading securities 993 993 -- --
Investment securities 273,589 275,519 147,482 151,677
Mortgage-backed securities 75,590 75,456 111,879 112,301
Net loans receivable 67,968 70,170 91,669 98,108
Accrued interest receivable 2,456 2,456 2,800 2,800
FHLB stock 7,532 7,532 7,797 7,797
FINANCIAL LIABILITIES
Deposits $160,563 $160,657 $170,926 $171,830
FHLB advances 149,736 153,944 153,390 163,829
Other borrowings 91,639 91,639 9,453 9,453
Accrued interest payable 1,197 1,197 1,449 1,449
|
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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The fair value approximates the current book value.
The fair value of investment and mortgage-backed securities 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.
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.
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.
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 15 to these financial statements.
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,
2004 2003
---------- ----------
ASSETS
Interest-earning deposits with subsidiary bank $ 868 $ 718
Investment securities available for sale 2,120 4,153
Investment and mortgage-backed securities held to maturity -- 250
Investment in subsidiary bank 26,257 25,360
Loan receivable -- 114
Accrued interest receivable and other assets 64 118
---------- ----------
TOTAL ASSETS $ 29,309 $ 30,713
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 110 $ 95
Stockholders' equity 29,199 30,618
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 29,309 $ 30,713
========== ==========
|
CONDENSED STATEMENT OF INCOME
Year Ended June 30,
2004 2003 2002
---------- ---------- ----------
INCOME
Loans $ 2 $ 27 $ 45
Investment and mortgage-backed securities 89 111 118
Dividend from subsidiary 1,300 2,400 3,800
Investment securities gains, net 20 64 --
Interest-earning deposits with subsidiary bank 10 33 50
---------- ---------- ----------
Total income 1,421 2,635 4,013
---------- ---------- ----------
OTHER OPERATING EXPENSE 104 111 96
---------- ---------- ----------
Income before equity in undistributed
earnings of subsidiary 1,317 2,524 3,917
Equity in undistributed earnings of subsidiary 983 840 558
---------- ---------- ----------
Income before income taxes 2,300 3,364 4,475
Income tax expense (benefit) (2) 16 27
---------- ---------- ----------
NET INCOME $ 2,302 $ 3,348 $ 4,448
========== ========== ==========
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
21. PARENT COMPANY (Continued)
CONDENSED STATEMENT OF CASH FLOWS
Year Ended June 30,
2004 2003 2002
---------- ---------- ----------
OPERATING ACTIVITIES
Net income $ 2,302 $ 3,348 $ 4,448
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed net income of subsidiary (983) (840) (558)
Investment securities gains (20) (64) --
Amortization (accretion) of investment discounts
and premiums, net (3) 22 (23)
Other, net 119 45 89
---------- ---------- ----------
Net cash provided by operating activities 1,415 2,511 3,956
---------- ---------- ----------
INVESTING ACTIVITIES
Available for sale:
Purchase of investment and
mortgage-backed securities (3,321) (4,934) (9,148)
Proceeds from repayments of investment and
mortgage-backed securities 5,183 2,582 8,159
Proceeds from sales of investment securities 251 639 --
Held to maturity:
Purchases of investment and mortgage-backed
securities (3,199) (1,817) (7,789)
Proceeds from repayments of investment and
mortgage-backed securities 3,451 1,555 10,304
Net decrease (increase) in loans receivable 115 354 (468)
---------- ---------- ----------
Net cash provided by (used for) investing activities 2,480 (1,621) 1,058
---------- ---------- ----------
FINANCING ACTIVITIES
Net proceeds from exercise of stock options 489 71 212
Cash dividends paid (1,624) (1,674) (1,743)
Purchases of treasury stock (2,610) (1,634) (1,544)
---------- ---------- ----------
Net cash used for financing activities (3,745) (3,237) (3,075)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents 150 (2,347) 1,938
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR 718 3,065 1,127
---------- ---------- ----------
CASH AND CASH EQUIVALENTS
END OF YEAR $ 868 $ 718 $ 3,065
========== ========== ==========
|
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
2003 2003 2004 2004
----------- ----------- ----------- -----------
Total interest and dividend income $ 3,811 $ 3,956 $ 4,067 $ 4,172
Total interest expense 2,769 2,760 2,716 2,742
----------- ----------- ----------- -----------
Net interest income 1,042 1,196 1,351 1,430
Provision (recovery) for loan losses (133) (624) (14) (23)
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 1,175 1,820 1,365 1,453
Total noninterest income 194 161 163 197
Total noninterest expense 892 938 899 878
----------- ----------- ----------- -----------
Income before income taxes 477 1,043 629 772
Income taxes 125 273 165 56
----------- ----------- ----------- -----------
Net income $ 352 $ 770 $ 464 $ 716
=========== =========== =========== ===========
Per share data:
Net income
Basic $ 0.14 $ 0.30 $ 0.18 $ 0.29
Diluted 0.14 0.30 0.18 0.29
Average shares outstanding
Basic 2,575,242 2,560,420 2,525,612 2,481,206
Diluted 2,585,081 2,569,578 2,533,697 2,488,556
|
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
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 (recovery) 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
|
COMMON STOCK MARKET PRICE AND DIVIDEND INFORMATION
WVS Financial Corp.'s common stock is traded on the Nasdaq Stock MarketSM 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 04 $19.400 $17.110 $0.16
March 04 19.980 17.350 0.16
December 03 18.400 16.810 0.16
September 03 18.650 16.500 0.16
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
|
There were six Nasdaq Market Makers in the Company's common stock as of June 30, 2004: Boenning & Scattergood Inc.; Schwab Capital Markets; Sandler O'Neill & Partners; Boston Stock Exchange; Ryan Beck & Co., Inc.; and Knight Equity Markets, L.P.
According to the records of the Company's transfer agent, there were approximately 785 shareholders of record at September 8, 2004. 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.
COMMON STOCK BOARD OF DIRECTORS
The common stock of WVS Financial Corp. is traded on
The Nasdaq Stock Market SM under the symbol "WVFC". David L. Aeberli
Funeral Director
TRANSFER AGENT & REGISTRAR McDonald-Aeberli Funeral Home, Inc.
Registrar and Transfer Company
10 Commerce Drive Arthur H. Brandt
Cranford, NJ 07016 Former President and CEO
1-800-368-5948 Brandt Excavating, Inc. and
Brandt Paving, Inc.
CORPORATE SECRETARY AND
INVESTOR RELATIONS David J. Bursic
Pamela M. Tracy President and Chief Executive Officer
412-364-1911 WVS Financial Corp. and
West View Savings Bank
COUNSEL
Bruggeman & Linn Donald E. Hook
Chairman
SPECIAL COUNSEL Pittsburgh Cut Flower Co.
Elias, Matz, Tiernan & Herrick L.L.P.
Washington, DC Lawrence M. Lehman
Sole Proprietor
Newton-Lehman Insurance Agency
John M. Seifarth
WEST VIEW SAVINGS BANK Senior Engineer - Consultant
9001 Perry Highway Nichols & Slagle Engineering, Inc.
Pittsburgh, PA 15237
412-364-1911 Margaret VonDerau
Former Senior Vice President
WEST VIEW OFFICE and Corporate Secretary
456 Perry Highway WVS Financial Corp. and
412-931-2171 West View Savings Bank
CRANBERRY OFFICE
20531 Perry Highway EXECUTIVE OFFICERS
412-931-6080/724-776-3480
Donald E. Hook
FRANKLIN PARK OFFICE Chairman
2566 Brandt School Road
724-935-7100 David J. Bursic
President and
BELLEVUE OFFICE Chief Executive Officer
572 Lincoln Avenue
412-761-5595 Jonathan D. Hoover
Vice President of Bank Operations
SHERWOOD OAKS OFFICE
Serving Sherwood Oaks Bernard P. Lefke
Cranberry Twp. Vice President of Savings
LENDING DIVISION Keith A. Simpson
2566 Brandt School Road Vice President, Treasurer and
724-935-7400 Chief Accounting Officer
|
The members of the Board of Directors serve in that capacity for both the Company and the Savings Bank.
(LETTERHEAD FOR WVS FINANCIAL CORP.
A Tradition of Quality Banking)
Exhibit 14.1
WVS FINANCIAL CORP.,
And
WEST VIEW SAVINGS BANK
WVS Financial Corp. has adopted this Ethics Policy to assure uniform standards of ethical conduct and to protect the reputation and integrity of our Company, our employees and our directors. WVS Financial Corp. (the "Company"), and its affiliate, West View Savings Bank, accept the challenge of fostering the highest possible ethical standards in dealings with clients, employees, suppliers, regulators, and the community at large. Committed to honesty, integrity and impartiality, we strive continually to assure the highest standards of ethical conduct and to maintain the trust and confidence of all those with whom we interact.
It is imperative that our employees and directors fully understand and subscribe to this Policy. It is equally imperative that whenever uncertainty exists with regard to the interpretation of this Policy, employees seek counsel from the Vice President - Operations. Should the Vice President - Operations, employees or directors involved need further counsel or discussion, the issue may be presented to the Chief Executive Officer or the Chairman of the Board of Directors. At the CEO or Chairman's discretion, the issue may be presented to the Board of Directors.
All business activities of the company are designed to comply with applicable laws. An equal responsibility for compliance with federal, state and local laws rests with each employee and director of the Company. The Company relies on your good judgment to avoid all activities which you believe involve improper subject matter or improper conduct, or even the appearance of improper conduct.
This Ethics Policy is not a summary of the laws applicable to each Company activity. It is intended only to highlight and emphasize the underlying standards of conduct to which the employees and directors of the Company are expected to subscribe. You should seek the guidance of your supervisor or the Company's Vice President - Operations if any concerns arise.
The Company intends to prevent any instances of fraud or misappropriation, or any fiscal irregularities by its employees. These include, but are not limited to, the following:
A. Any dishonest or fraudulent act;
B. Forgery or alteration of any document or account belonging to the Company;
C. Forgery or alteration of a check, bank draft, account statement or any other financial document;
D. Misappropriation of funds, securities, supplies, or other assets;
E. Profiteering as a result of insider knowledge of corporate activities;
F. Disclosing confidential and proprietary information to unauthorized parties; and
G. Disclosing to other persons securities, acquisition, or strategic activities engaged in or contemplated by the Company.
Gifts, favors, entertainment and payments without a legitimate business purpose may have the effect of improperly influencing decision making and may create the appearance of impropriety. Company employees and directors should not seek or accept for themselves or others any gift, favor, entertainment, or payment of services from any individual or entity which conducts or seeks to conduct business with the Company or is competitive with the Company, unless: (i) to do so would be consistent with good business practices; (ii) all such benefits, taken as a whole, are of nominal value; and (iii) public disclosure of the transaction would not embarrass the Company. Gifts of money should never be accepted. Gifts offered or received with a fair market value greater than $100 or Entertainment received with a fair market value in excess of $500 must be pre-approved by the President. Bribes or attempted bribes must be reported immediately to the Company's Vice President - Operations. If you have any questions as to whether a gift or entertainment is permissible under this policy, you should consult with the Company's Vice President - Operations.
Company employees and directors should avoid situations where their personal interests could conflict, or reasonably appear to conflict, with the interests of the Company. An example of conflict of interest includes, but is not limited to, any opportunity for personal gain apart from the normal compensation provided by the Company through its normal remuneration policies. In that regard, the following are some guidelines:
Employees and directors should avoid any outside financial interest that may influence their corporate decisions or actions. Such interests might include, among other things, a personal or family interest in an enterprise that has business relations with the Company. This would include any instance where an employee or director has an investment in or participates in the management of a business that provides services or products to or receives services or referrals from the Company. However, this restriction does not apply to minimal (less than 1%) holdings of stock of a business entity whose shares are publicly traded, and which may, incidentally, do business with the Company.
In addition, employees and directors should avoid an investment or participation in another business that competes directly with the Company or has interests which are adverse to those of the Company. However, this restriction does not apply to (less than 1%) holdings of stock of a business entity whose shares are publicly traded, and may compete directly with the Company.
Finally, employees should avoid outside employment or activities that would have a negative impact on the performance of their job, conflict with their obligation to the Company, or in any way negatively impact the Company's reputation in the community.
If you feel you may have a conflict of interest due to your investments or outside activities, you should consult with the Company's Vice President - Operations.
If you have a business opportunity which may conflict with these provisions, you should disclose in writing all material facts of the opportunity, including your personal interest, to the Company's Vice President - Operations.
Company assets are to be used solely for the benefit of the Company. Employees and directors are responsible for assuring that Company assets are used only for valid Company purposes. Company assets are much more than our equipment, inventory, corporate funds, or office supplies. They include concepts, business strategies and plans, business opportunities, financial data, intellectual property rights and other information about our business. These assets may not be improperly used to provide personal gain for employees or directors. Employees and directors may not transfer any Company assets to other persons or entities, except in the ordinary course of business.
It is important for all employees and directors to appropriately safeguard the Company's trade secrets, proprietary and confidential information including non-public customer and account information ("Confidential Information"). Confidential Information includes any information which is not in the public domain and which is useful or helpful to the Company, and/or information which would be useful or helpful to competitors. Common examples of Confidential Information include: financial data, projected earnings and business unit performance, business expansion information, strategic data, business processes, regulatory examination information, client information, lists of clients, wage and salary data, changes in management or policies of the Company, or plans we may have for improving any of our products.
The Company's guidelines regarding Confidential Information are as follows:
1) Confidential Information to which employees and directors may have access should be discussed with others only on a need-to-know basis.
2) Disclosure of proprietary information to any outside persons should be done only in conjunction with appropriate trade secret or confidential information disclosure agreements in conjunction with instructions from a senior officer of the Company.
3) Employees and directors must be alert to inadvertent disclosures which may arise in either social conversations or in normal business relations with our customers and vendors.
4) Client account information and data must be handled in a manner consistent with the Company's Privacy Policy.
5) Confidential Information obtained in the course of employment with the Company shall not be used, or given to a third party, for the purposes of trading in the securities of the Company or its clients.
6) Employees shall not access information about clients or employees except in the normal course of the employee's job responsibilities.
The Company maintains a system of internal controls which it believes provides reasonable assurance that transactions are executed in accordance with management's authorization and properly recorded. The system is characterized by a control-oriented environment which includes written policies and procedures. All employees are expected to adhere strictly to these policies.
No secret or unrecorded funds or assets may be created or maintained for any purpose. In addition, the making of false or fictitious entries in the books with respect to Company transactions or the disposition of Company assets is prohibited, and no employees may engage in any transaction that requires or contemplates the making of false or fictitious entries.
Employees shall not use Company funds for contributions of any kind to any political party or committee in the United States or to any candidate for or holder of any office of any government - national, state or local. Employees are free to make voluntary person contributions to political action committees and to candidates and parties of their choice, but may not make such contributions on behalf of the Company.
The Company's reputation depends, in large measure, on the reputation of its employees for honesty, integrity and financial responsibility. Employees shall not engage in any behavior during employment which may reasonably be deemed inappropriate and reflect negatively on the Company. Employees shall pay in a proper and timely manner all financial obligations. Employees who have been convicted, pleaded guilty or pleaded no contest to a felony or other criminal offense involving dishonesty or breach of trust which has not been annulled or expunged during the employee's term of employment shall notify the Company's Vice President - Operations.
Any violation of this Policy may subject the Employee to disciplinary action up to and including termination of employment. Any Employee having knowledge of any violation of this Policy shall promptly report such violation to their supervisor. The Company's Vice President - Operations shall be responsible for all interpretive guidance and shall be authorized to issue written opinions and/or waivers as to the application of this Policy to any specific circumstance.
On an annual basis, each Employee and Director of the Company will be required to acknowledge in writing their awareness and understanding of this Policy and their agreement to comply with its terms.
Individuals who suspect or know of violations of this Code have an obligation to contact the Company's Vice President - Operations in writing at 9001 Perry Highway, Pittsburgh PA 15237.
Individuals who suspect or know of questionable accounting or auditing practices have an obligation to contact the Company's Chairman of the Board in writing at 9001 Perry Highway, Pittsburgh PA 15237.
o Employee Personnel Manual
o Information Systems Policy
o Privacy Policy
o Regulation O Policy
Exhibit 14.2
WVS FINANCIAL CORP.
The WVS Financial Corp Code of Ethics for Senior Financial Officers applies to the Company's senior financial officers, which includes its principal executive officer, principal financial officer, principal accounting officer or controller or other persons performing similar functions. This Code of Ethics is intended to supplement WVS Financial Corp.'s Ethics Policy.
To the best of their knowledge and ability, the Company's senior financial officers shall:
o Engage in and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
o Provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company or its subsidiaries files with, or submits to, the Securities and Exchange Commission and in other public communications made by the Company;
o Comply with applicable governmental laws, rules and regulations, as well as the rules and regulations of self-regulatory organizations of which the Company is a member;
o Promptly report any violation of this Code of Ethics to the Company's Chairman of the Board of Directors and to the appropriate person(s) identified in the Company's Ethics Policy.
Each senior financial officer will be held accountable for adherence to this Code of Ethics and the Ethics Policy. Any violation of this Code of Ethics may result in disciplinary action, up to and including termination of employment and prosecution under the law. The Board of Directors shall have the sole and discretionary authority to approve any deviation or waiver from this Code of Ethics for senior financial officers. Any change in or waiver from and the grounds for such change or waiver of this Code of Ethics shall be promptly disclosed through a filing with the Securities and Exchange Commission on Form 8-K.
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 33-91684 of WVS Financial Corp. on Form S-8 of our report dated July 30, 2004, appearing in the Annual Report on Form 10-K of WVS Financial Corp. for the year ended June 30, 2004.
/s/ S.R. Snodgrass, A.C. Wexford, PA September 22, 2004 |
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 24, 2004 /s/ David J. Bursic
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David J. Bursic
President and Chief Executive Officer
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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 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 24, 2004 /s/ Keith A. Simpson
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Keith A. Simpson
Vice-President and Chief Accounting
Officer
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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, 2004 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
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David J. Bursic
President and
Chief Executive Officer
Date: September 24, 2004
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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.
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, 2004 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
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Keith A. Simpson
Vice-President and
Chief Accounting Officer
Date: September 24, 2004
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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.