W
V
S
FINANCIAL
- ---------
CORP.
THE HOLDING COMPANY OF WEST VIEW SAVINGS BANK
2002
Annual
Report
TABLE OF CONTENTS
Page
Number
------
Report of Independent Auditors 18
Consolidated Balance Sheets 19
Consolidated Statements of Income 20
Consolidated Statements of Changes in Stockholders' Equity 21
Consolidated Statements of Cash Flows 22
Notes to the Consolidated Financial Statements 23
Common Stock Market Price and Dividend Information 47
Corporate Information 48
To Our Stockholders:
We are pleased to report another strong year of financial success. Company
net income during fiscal 2002 totaled $4.4 million or $1.63 per diluted share-
the second best year in our Company's history. Return on average stockholders
equity was 14.85% while book value per share grew by 8.65% and totaled $11.30 on
June 30, 2002. Our Company's stock price began the fiscal year at $14.00 and
closed at $15.82 on June 30, 2002. The resulting $1.82 appreciation in stock
price, coupled with cash dividends paid of $0.64 per share, resulted in an
impressive total return of approximately 17.6%. This was achieved during a year
of high market volatility, and substantial losses experienced by the equity
markets.
As we look forward to fiscal 2003, a continuing challenge will be dealing
with markedly low interest rates and the related compression of net interest
margins. Since our last annual report to you, the Federal Reserve further
reduced interest rates four times for a total of one hundred and seventy-five
basis points. These actions were taken by the Federal Reserve in response to the
terrorist attacks of September 11, 2001 and continued weakness in the national
economy. Lower market interest rates impact the amount of interest income that
we earn on our assets, and the rates that we can offer our borrowers and
depositors. Before the end of calendar year 2002, we also anticipate a total
replacement of the Bank's technology platform. Our goal is to continue to use
technology to better serve customers and improve our "back office" processing.
We also recognize that we must manage today for an eventual increase in
interest rates in order to protect our balance sheet and ongoing profitability.
During fiscal 2002 we significantly improved the Company's interest rate risk
posture. Our capital structure was strengthened by increasing retained earnings.
We also continued to enhance the liquidity of your investment by continuing to
repurchase about 96,700 shares of our common stock. Capital management will
continue to be our focus in order to deliver continuing shareholder value.
The Company's Board of Directors continues to be actively involved in the
Company's strategic planning. Bill Hoegel, our previous Chairman, retired during
the fiscal year and moved to Florida. Bill served with distinction as a director
since 1984 and as Chairman since 1999. Bill's seventeen years of dedicated
service, marketing focus, and good cheer will be missed but not forgotten. Don
Hook was elected as Chairman in October 2001. The Board of Directors believes
that Don's extensive business and non-profit board leadership background will
help to further strengthen the Company and the Bank. We also welcome Larry
Lehman to the Board. Larry was elected to the Board effective March 2002, has
over twenty-seven years of insurance sales and service experience, and holds a
number of insurance professional designations. Larry's business contacts,
insurance background and community involvement will enhance our business
opportunities.
On behalf of the Board of Directors and employees, we would like to thank
you for your ongoing interest in the Company, and in many cases, your continued
patronage of West View Savings Bank. Our Bank is a full service bank. We offer a
variety of business, consumer and mortgage loans to meet all of your needs.
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,
---------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------- -------------- --------------- -------------- --------------
(Dollars in Thousands, except per share data)
Selected Financial Data:
Total assets $ 404,911 $ 396,440 $ 409,618 $ 348,408 $ 297,054
Net loans receivable 152,905 185,179 183,295 170,327 157,737
Mortgage-backed securities 82,543 64,132 73,673 72,380 46,314
Investment securities 151,384 129,593 137,502 92,166 81,268
Savings deposit accounts 174,659 178,029 169,508 171,114 167,670
FHLB advances 159,937 161,494 104,500 116,900 88,857
Other borrowings 33,731 20,660 101,025 25,820 889
Stockholders' equity 30,253 28,645 26,911 27,938 32,978
Non-performing assets and troubled
debt restructurings(1) 5,279 5,016 4,050 765 603
Selected Operating Data:
Interest income $ 23,760 $ 29,185 $ 27,987 $ 23,031 $ 22,178
Interest expense 14,025 18,561 16,933 12,739 11,781
Net interest income 9,735 10,624 11,054 10,292 10,397
Provision for loan losses 57 788 150 -- (120)
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 9,678 9,836 10,904 10,292 10,517
Non-interest income 687 669 570 458 506
Non-interest expense 4,104 3,787 4,626 4,285 5,422
----------- ----------- ----------- ----------- -----------
Income before income tax expense 6,261 6,718 6,848 6,465 5,601
Income tax expense 1,813 1,956 2,469 2,434 2,109
----------- ----------- ----------- ----------- -----------
Net income $ 4,448 $ 4,762 $ 4,379 $ 4,031 $ 3,492
=========== =========== =========== =========== ===========
Per Share Information:
Basic earnings $ 1.63 $ 1.70 $ 1.48 $ 1.18 $ 1.01
Diluted earnings $ 1.63 $ 1.69 $ 1.47 $ 1.17 $ 0.98
Dividends per share(2) $ 0.64 $ 0.64 $ 0.64 $ 0.63 $ 1.50
Dividend payout ratio(2) 39.26% 37.65% 43.24% 53.39% 148.51%
Book value per share at period end $ 11.30 $ 10.40 $ 9.35 $ 8.81 $ 9.12
Average shares outstanding:
Basic 2,723,891 2,804,125 2,953,720 3,405,662 3,470,479
Diluted 2,732,491 2,815,867 2,977,089 3,435,738 3,574,043
2
As of or For the Year Ended June 30,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Selected Operating Ratios(3):
Average yield earned on interest-
earning assets(4) 6.41% 7.51% 7.41% 7.32% 7.71%
Average rate paid on interest-
bearing liabilities 4.13 5.21 4.91 4.64 4.77
Average interest rate spread(5) 2.28 2.30 2.50 2.68 2.94
Net interest margin(5) 2.74 2.83 2.97 3.27 3.61
Ratio of interest-earning assets to
interest-bearing liabilities 112.34 111.33 110.57 114.54 116.65
Non-interest expense as a percent of
average assets 1.07 0.94 1.20 1.35 1.86
Return on average assets 1.16 1.19 1.14 1.27 1.20
Return on average equity 14.85 17.17 16.27 13.01 10.45
Ratio of average equity to average
Assets 7.78 6.92 6.99 9.76 11.48
Full-service offices at end of period 5 5 5 5 5
Asset Quality Ratios(3):
Non-performing loans and troubled
debt restructurings as a percent of
net total loans(1) 3.30% 2.71% 2.21% 0.32% 0.38%
Non-performing assets as a percent
of total assets(1) 1.30 1.27 0.99 0.22 0.20
Non-performing assets and troubled
debt restructurings as a percent of
total assets 1.30 1.27 0.99 0.22 0.20
Allowance for loan losses as a
percent of total loans receivable 1.77 1.47 1.06 1.07 1.08
Allowance for loan losses as a
percent of non-performing loans 54.68 55.08 48.72 336.75 308.46
Charge-offs to average loans
receivable outstanding during the
period 0.04 0.01 0.01 0.02 0.02
Capital Ratios(3):
Tier 1 risk-based capital ratio 13.42% 14.15% 14.05% 15.85% 20.90%
Total risk-based capital ratio 14.66 15.40 15.11 16.90 22.09
Tier 1 leverage capital ratio 7.69 7.35 6.69 8.29 10.98
______________________________________
(1) Non-performing assets consist of non-performing loans and real estate owned
("REO"). Non- performing loans consist of non-accrual loans and accruing
loans greater than 90 days delinquent, while REO consists of real estate
acquired through foreclosure and real estate acquired by acceptance of a
deed in lieu of foreclosure.
(2) Dividends per share and dividend payout ratios include a special cash
dividend of $0.95 per share, paid during fiscal 1998.
(3) 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.
(4) Interest and yields on tax-exempt loans and securities (tax-exempt for
federal income tax purposes) are shown on a fully taxable equivalent basis.
(5) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities, and net interest margin represents net
interest income as a percent of average interest-earning assets.
3
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, 2002.
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:
Steady Income in Market Price and Book Value - During fiscal 2002, the Company's
market price outperformed such broad market indexes as the Standard & Poor's 500
and the Total NASDAQ (US). Book value has grown at a compounded annual rate of
8.65% from $8.81 in fiscal 1999 to $11.30 in fiscal 2002.
Commitment to Capital Management - The Company is committed to maximizing
long-term shareholder value. Specific components of this strategy include: (1)
the repurchase of 96,728 shares of Company common stock during fiscal 2002; (2)
and paying an above-average dividend yield in excess of 4.00% on the Company's
common stock during fiscal 2002.
Substantial Net Income - During fiscal 2002, the Company earned $4.4 million or
$1.63 per share (basic and diluted). Fiscal 2002 return on average stockholders'
equity was 14.85% while return on average assets totaled 1.16%.
Growth of Core Deposits - As of June 30, 2002, $89.9 million or 51.5% of West
View's total deposits consisted of regular savings and club accounts, money
market deposit accounts, and checking accounts. Approximately $41.6 million or
46.3% of core deposits consisted of regular savings and club accounts. Checking
account balances grew $3.4 million or 11.5% during fiscal 2002 and totaled $33.5
million or 37.3% of core deposits at June 30, 2002. The continued growth in
checking account deposits was primarily due to increased marketing and
promotional efforts by the Company to gain market share. Core deposits are
considered to be more stable and lower cost funds than certificates of deposit
and other borrowings.
Community-based Lending - West View has consistently focused its lending
activities on generating loans in its market area. Typical loan offerings
include home mortgages, construction loans, and consumer loans for home
improvement, automobile loans and home equity loans. West View's small business
lending program includes term loans, business inventory loans and loans for
business equipment and machinery.
4
Strong Non-interest Expense Ratios - For the fiscal years ended June 30, 2002,
2001 and 2000, the Company's ratios of non-interest expense to average assets
were 1.07%, 0.94% and 1.20%, respectively. The Company believes that the
judicious use of FHLB long-term borrowings to fund approximately 39.5% of its
total assets significantly reduces operating costs. The Company will continue to
invest in technology to help streamline operations and to increase customer
satisfaction and loyalty.
CHANGES IN FINANCIAL CONDITION
Condensed Balance Sheet
-----------------------
June 30, June 30, Change
---------------------------------
2002 2001 Dollars Percentage
---- ---- ------- ----------
(Dollars in Thousands)
Cash and interest-earning
Deposits $ 3,177 $ 2,993 $ 184 6.1%
Investment securities(1) 159,665 137,743 21,922 15.9
Mortgage-backed securities 82,543 64,132 18,411 28.7
Net loans receivable 152,905 185,179 (32,274) -17.4
Total assets 404,911 396,440 8,471 2.1
Deposits 177,672 181,339 (3,667) -2.0
FHLB and other borrowings 193,668 182,154 11,514 6.3
Total liabilities 374,658 367,795 6,863 1.9
Total equity 30,253 28,645 1,608 5.6
_______________
(1) Includes Federal Home Loan Bank stock.
General. The $8.5 million or 2.1% increase in total assets was primarily
comprised of a $21.9 million increase in investment securities and Federal Home
Loan Bank ("FHLB") stock, and a $18.4 million increase in mortgage-backed
securities, which was partially offset by a $32.3 million decrease in net loans
receivable.
The $6.9 million or 1.9% increase in total liabilities was primarily comprised
of a $11.5 million increase in FHLB advances and other borrowings, which was
partially offset by a $3.7 million decrease in deposits and a $743 thousand
decrease in accrued interest payable.
Total stockholders' equity increased $1.6 million or 5.6% primarily due to $4.4
million of Company net income, and a $388 thousand increase in capital
attributable to stock option exercises and Recognition and Retention Plan
("RRP") equity contributions, which were partially offset by the repurchase of
$1.5 million of the Company's own common stock, and $1.7 million of cash
dividends paid to stockholders. The Company believes that the repurchase of its
common stock represented an attractive investment opportunity and favorably
added to secondary market liquidity.
Cash on Hand and Interest-earning Deposits. Cash on hand and interest-earning
deposits represent cash equivalents. Cash equivalents increased $184 thousand or
6.1% to $3.2 million at June 30, 2002
5
from $3.0 million at June 30, 2001. Increases in these accounts are usually the
result of a combination of customer deposits, loan and investment repayments,
and proceeds from borrowings. Decreases in these accounts are primarily due to a
combination of new loan originations, customer withdrawals, investment purchases
and repayments of borrowings.
Investments. The Company's overall investment portfolio increased $40.3 million
or 20.0% to $242.2 million at June 30, 2002 from $201.9 million at June 30,
2001. Investment securities increased $21.9 million or 15.9% to $159.7 million
at June 30, 2002. This increase was due to purchases of investment grade
corporate bonds with maturities generally less than 18 months. Mortgage-backed
securities increased $18.4 million or 28.7% to $82.5 million at June 30, 2002.
This increase was due primarily to purchases of floating rate mortgage-backed
securities which were partially offset by principal repayments on the portfolio.
Net Loans Receivable. Net loans receivable decreased $32.3 million or 17.4% to
$152.9 million at June 30, 2002. The decrease in loans receivable was
principally the result of increased principal repayments on the loan portfolio
due to higher levels of refinancing activity.
Deposits. Total deposits decreased $3.7 million or 2.0% to $177.7 million at
June 30, 2002. Certificates of deposit decreased approximately $14.6 million or
14.7%. Savings accounts increased $5.0 million or 13.8% and money market
accounts increased $2.7 million or 22.7%. The Savings Bank believes that these
changes in depositor liquidity preferences are due to the relatively low level
of market interest rates and due to stock market declines and associated
volatility.
Borrowed Funds. Borrowed funds increased $11.5 million or 6.3% to $193.7 million
at June 30, 2002. The increase is principally the result of borrowing to fund
investment purchases. Other short-term borrowings increased $13.1 million or
63.3% to $33.7 million at June 30, 2002, and FHLB advances decreased $1.6
million or 1.0% to $159.9 million at June 30, 2002.
Stockholders' Equity. Total stockholders' equity increased $1.6 million or 5.6%
to $30.3 million at June 30, 2002. The increase was principally the result of
$4.4 million of Company net income and a $338 thousand increase in capital
attributable to stock option exercises, and RRP equity contributions, which were
partially offset by the repurchase of $1.5 million of the Company's own common
stock and $1.7 million of cash dividends paid to stockholders.
6
RESULTS OF OPERATIONS
Condensed Statements of Income
------------------------------
June 30, June 30, June 30,
2002 Change 2001 Change 2000
---- ------ ---- ------ ----
(Dollars in Thousands)
Interest income $ 23,760 $ (5,425) $ 29,185 $ 1,198 $ 27,987
-18.6% 4.3%
Interest expense $ 14,025 $ (4,536) $ 18,561 $ 1,628 $ 16,933
-24.4% 9.6%
Net interest income $ 9,735 $ (889) $10,624 $ (430) $ 11,054
-8.4% -3.9%
Provision for loan losses $ 57 $ (731) $ 788 $ 638 $ 150
-92.8% 425.3%
Non-interest income $ 687 $ 18 $ 669 $ 99 $ 570
2.7% 17.4%
Non-interest expense $ 4,104 $ 317 $ 3,787 $ (839) $ 4,626
8.4% -18.1%
Income tax expense $ 1,813 $ (143) $ 1,956 $ (513) $ 2,469
-7.3% -20.8%
Net income $ 4,448 $ ( 314) $ 4,762 $ 383 $ 4,379
-6.6% 8.7%
General. WVS reported net income of $4.4 million, $4.8 million and $4.4 million
for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. The $314
thousand or 6.6% decrease in net income during fiscal 2002 was primarily the
result of a $889 thousand decrease in net interest income, and a $317 thousand
increase in non-interest expense, which was partially offset by a $731 thousand
decrease in the provision for loan losses, a $143 thousand decrease in income
tax expense, and a $18 thousand increase in non-interest income. Earnings per
share totaled $1.63 (basic and diluted) for fiscal 2002 as compared to $1.70
(basic) and $1.69 (diluted) for fiscal 2001. 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 2002.
7
Average Balances, Net Interest Income and Yields Earned and Rates Paid. The
following average balance sheet table sets forth at and for the periods
indicated, information on the Company regarding: (1) the total dollar amounts of
interest income on interest-earning assets and the resulting average yields; (2)
the total dollar amounts of interest expense on interest-bearing liabilities and
the resulting average costs; (3) net interest income; (4) interest rate spread;
(5) net interest-earning assets (interest-bearing liabilities); (6) the net
yield earned on interest-earning assets; and (7) the ratio of total
interest-earning assets to total interest-bearing liabilities.
For the Years Ended June 30,
------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------- ----------------------------- -----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Net loans receivable(1) $172,824 $13,224 7.65% $185,203 $14,656 7.91% $176,851 $13,840 7.83%
Net tax-free loans receivable(2) 199 26 13.28 692 69 9.97 706 71 10.01
Mortgage-backed securities 65,372 3,341 5.11 70,403 4,835 6.87 75,312 5,170 6.86
Investments - taxable 112,948 5,553 4.92 114,000 8,205 7.20 116,500 8,352 7.17
Investments - tax-free(2) 28,543 2,323 8.14 24,785 1,993 8.04 9,901 768 7.76
Interest-bearing deposits 1,766 10 0.57 1,871 38 2.03 1,710 36 2.11
------- ------ ------- ------ ------- ------
Total interest-earning assets 381,652 24,477 6.41% 396,954 29,796 7.51% 380,980 28,237 7.41%
------ ==== ------ ==== ------ ====
Non-interest-earning assets 3,386 4,148 4,385
-------- -------- --------
Total assets $385,038 $401,102 $385,365
======== ======== ========
Interest-bearing liabilities:
Interest-bearing deposits and escrows $163,338 $5,082 3.11% $161,821 $6,820 4.21% $161,727 $6,375 3.94%
Borrowings 176,383 8,943 5.07 194,749 11,741 6.03 182,818 10,558 5.78
-------- ------ -------- ------ -------- ------
Total interest-bearing liabilities 339,721 14,025 4.13% 356,570 18,561 5.21% 344,545 16,933 4.91%
----- ==== ----- ==== ------ =====
Non-interest-bearing accounts 11,814 11,616 10,281
-------- -------- --------
Total interest-bearing
liabilities and
non-interest-bearing accounts 351,535 368,186 354,826
Non-interest-bearing liabilities 3,547 5,179 3,618
-------- -------- --------
Total liabilities 355,082 373,365 358,444
Retained income 29,956 27,737 26,921
-------- -------- --------
Total liabilities and retained
income $385,038 $401,102 $385,365
======== ======== ========
Net interest income $10,452 $11,235 $11,304
======= ======= =======
Interest rate spread 2.28% 2.30% 2.50%
==== ==== ====
Net yield on interest-earning
assets(3) 2.74% 2.83% 2.97%
== ==== ==== ====
Ratio of interest-earning assets to
interest-bearing liabilities 112.34% 111.33% 110.57%
====== ====== ======
________________
(1) Includes non-accrual loans.
(2) Interest and yields on tax-exempt loans and securities (tax-exempt for
federal income tax purposes) are shown on a fully taxable equivalent basis.
(3) Net interest income divided by average interest-earning assets.
8
Rate/Volume Analysis. The following table describes the extent to which changes
in interest rates and changes in volume of interest-related assets and
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (1) changes in volume (change in volume multiplied by prior year rate), (2)
changes in rate (change in rate multiplied by prior year volume), and (3) total
change in rate and volume. The combined effect of changes in both rate and
volume has been allocated proportionately to the change due to rate and the
change due to volume.
Year Ended June 30,
---------------------------------------------------------------------------
2002 vs. 2001 2001 vs. 2000
------------------------------------- ------------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
-------------------- -------------------
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
Interest-earning assets:
Net loans receivable $(1,008) $ (454) $(1,462) $ 673 $ 142 $ 815
Mortgage-backed securities (325) (1,169) (1,494) (343) 8 (335)
Investments - taxable (76) (2,576) (2,652) (182) 35 (147)
Investments - tax-free 186 25 211 834 29 863
Interest-bearing deposits 3 (25) (28) 3 (1) 2
------- ------- ------- ------- ------- -------
Total interest-earning assets (1,226) (4,199) (5,425) 985 213 1,198
Interest-bearing liabilities:
Interest-bearing deposits and
Escrows (121) (1,617) (1,738) 47 398 445
Other borrowings (1,039) (1,759) (2,798) 714 469 1,183
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities (1,160) (3,376) (4,536) 761 867 1,628
Increase (decrease) in net interest
Income $ (66) $ (823) $ (889) $ 224 $ (654) $ (430)
======= ======= ======= ======= ======= =======
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 $5.4 million or 18.6% during
fiscal 2002 and increased by $1.2 million or 4.3% during fiscal 2001. The
decrease in fiscal 2002 was primarily a result of decreases in the weighted
average yield earned and the average balances of the investment,
mortgage-backed, and loan portfolios during the period. Increase in fiscal 2001
was primarily a result of volume growth in the Company's investment and net
loans receivable.
Interest income on investment securities and FHLB stock decreased $2.4 million
or 25.4% during fiscal 2002 and increased $716 thousand or 8.1% during fiscal
2001. The decrease in fiscal 2002 was primarily attributable to a 178 basis
point decrease in the weighted average yield on the Company's investment
securities which was partially offset by a $2.7 million increase in the average
balance of the investment securities outstanding. The increase in fiscal 2001
was primarily attributable to a $14.9 million increase in the average balance of
tax-free investment securities outstanding and a 13 basis point increase in the
weighted average yield on the Company's investment securities.
Interest income on mortgage-backed securities decreased $1.5 million or 30.9%
during fiscal 2002 and decreased $335 thousand or 6.5% during fiscal 2001. The
decrease in fiscal 2002 was attributable to a 176 basis point decrease in the
weighted average yield on the mortgage-backed securities portfolio and a $5.0
million decrease in the average outstanding balance of mortgage-backed
securities. The decrease during fiscal 2001 was attributable to an increase in
the average outstanding balance of mortgage-backed securities of $4.9 million,
and an increase in the weighted average interest rate yield of 1 basis point.
9
Interest income on net loans receivable decreased $1.5 million or 9.9% during
fiscal 2002 and increased $815 thousand or 5.9% during fiscal 2001. The decrease
in fiscal 2002 was attributable to a $12.9 million decrease in the average
balance of net loans outstanding and a 26 basis point decrease in the weighted
average yield on the Company's loan portfolio. The increase in fiscal 2001 was
attributable to a $8.3 million increase in the average balance of net loans
outstanding and a 8 basis point increase in the weighted average yield on the
Company's loan portfolio.
Interest Expense. Total interest expense decreased $4.5 million or 24.4% during
fiscal 2002 and increased by $1.6 million or 9.6% during fiscal 2001. The
decrease during fiscal 2002 was attributable to a decrease of $2.8 million of
interest expense on borrowings and a $1.7 million decrease of interest expense
on deposits. The increase during fiscal 2001 was attributable to an increase of
$1.2 million of interest expense on borrowings and a $445 thousand decrease of
interest expense on deposits.
Interest expense on borrowings decreased $2.8 million or 23.8% during fiscal
2002 and increased $1.2 million or 11.2% during fiscal 2001. The decrease in
fiscal 2002 was attributable to a 96 basis point decrease in the weighted
average yield on the Company's borrowings and a $18.4 million decrease in the
average balance of borrowings outstanding. The increase for fiscal 2001 was
primarily attributable to increases in the average balance of borrowings
outstanding totaling $11.9 million and a 25 basis point increase in the weighted
average yield on the Company's borrowings. The Company took advantage of a
decline in market interest rates during the second half of fiscal year 2001 to
reposition the maturity profile of its balance sheet.
Interest expense on interest-bearing deposits and escrows decreased $1.7 million
or 25.5% in fiscal 2002 and increased $445 thousand or 7.0% in fiscal 2001. The
decrease in fiscal 2002 was primarily attributable to a 110 basis point decrease
in the weighted average rate paid on the Company's deposits and a $3.9 million
increase in the average balance of interest bearing time deposits. The increase
in fiscal 2001 was primarily attributable to a decrease of 27 basis points in
the weighted average rate paid on the Company's deposits and a $94 thousand
increase in the average balance of interest bearing deposits and escrows.
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. A $57 thousand provision for loan
loss was recorded in fiscal 2002, and a $788 thousand provision for loan loss
was recorded in fiscal 2001 to increase the Company's general loan loss
reserves. The Company's provision of $57 thousand in fiscal 2002 was comparable
to its net charge-offs which totaled $62 thousand. The increase in the provision
for loan losses during fiscal 2001 was attributable to a reappraisal of the real
estate collateral underlying a non-performing commercial loan relationship. The
Company believes that the additional loan loss reserves are prudent and
warranted at this time due to the weakening of the national economy and the
current work-out of this particular credit.
Non-interest Income. Total non-interest income increased by $18 thousand or 2.7%
in fiscal 2002 and increased by $99 thousand or 17.4% in fiscal 2001. The
increase in fiscal 2002 was primarily attributable to an increase in service
charges on deposits. The increase in fiscal 2001 was primarily due to an
increase in service charges and ATM fee income. The increase in service charge
and ATM fee income for both periods was directly attributable to the Company's
checking account promotion marketing strategies.
Non-interest Expense. Total non-interest expense increased $317 thousand or 8.4%
and decreased $839 thousand or 18.1% during fiscal 2002 and 2001, respectively.
The increase in fiscal 2002 was primarily attributable to increases in accrued
legal fees, charitable contributions for local educational programs, PA Capital
Stock Franchise taxes and other payroll costs. The decrease in fiscal 2001 was
principally attributable to the absence of discretionary employee stock
ownership plan amortization, and decreases in accrued legal fees and PA Capital
Sock Franchise taxes.
10
Income Taxes. Income taxes decreased $143 thousand or 7.3% during fiscal 2002
and decreased $513 thousand or 20.8% during fiscal 2001. Fiscal year 2002 income
tax expense was favorably impacted by the higher levels of tax-free bank
qualified municipal securities in the Company's investment portfolio and a $100
thousand Pennsylvania tax credit for charitable contributions made in support of
local educational programs. The Company's effective tax rate was 29.0% at June
30, 2002 and 29.1% at June 30, 2001.
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Company's transactions are denominated
in US dollars with no specific foreign exchange exposure. The Savings Bank has
no agricultural loan assets and therefore would not have a specific exposure to
changes in commodity prices. Any impacts that changes in foreign exchange rates
and commodity prices would have on interest rates are assumed to be exogenous
and will be analyzed on an ex post basis.
-- ---
Interest rate risk ("IRR") is the exposure of a banking organization's financial
condition to adverse movements in interest rates. Accepting this risk can be an
important source of profitability and shareholder value, however excessive
levels of IRR can pose a significant threat to the Company's earnings and
capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the Company's safety and soundness.
Evaluating a financial institution's exposure to changes in interest rates
includes assessing both the adequacy of the management process used to control
IRR and the organization's quantitative level of exposure. When assessing the
IRR management process, the Company seeks to ensure that appropriate policies,
procedures, management information systems and internal controls are in place to
maintain IRR at prudent levels with consistency and continuity. Evaluating the
quantitative level of IRR exposure requires the Company to assess the existing
and potential future effects of changes in interest rates on its consolidated
financial condition, including capital adequacy, earnings, liquidity, and, where
appropriate, asset quality.
Financial institutions derive their income primarily from the excess of interest
collected over interest paid. The rates of interest an institution earns on its
assets and owes on its liabilities generally are established contractually for a
period of time. Since market interest rates change over time, an institution is
exposed to lower profit margins (or losses) if it cannot adapt to interest-rate
changes. For example, assume that an institution's assets carry intermediate- or
long-term fixed rates and that those assets were funded with short-term
liabilities. If market interest rates rise by the time the short-term
liabilities must be refinanced, the increase in the institution's interest
expense on its liabilities may not be sufficiently offset if assets continue to
earn at the long-term fixed rates. Accordingly, an institution's profits could
decrease on existing assets because the institution will either have lower net
interest income or, possibly, net interest expense. Similar risks exist when
assets are subject to contractual interest-rate ceilings, or rate sensitive
assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate
environment.
During fiscal 2002 the level of market interest rates declined dramatically in
response to the weakening national economy and the Federal Reserve Boards easing
of interest rates. Additionally, the marked decline in equity market prices and
corporate earnings have caused a considerable disinter mediation from the equity
to the fixed income markets, further compounding the decline in market interest
rates across the yield curve.
Due to the rapid decline in market interest rates, the Company's loan,
investment and mortgage-backed securities portfolios experienced much higher
then anticipated levels of prepayments. Beginning with the terrorist attacks of
September 11, 2001 the Federal Reserve further reduced the Federal Funds rate an
11
additional four times for a total of 175 basis points. Principal repayments on
the Company's loan, investment and mortgage-backed securities portfolios totaled
$66.1 million, $267.3 million and $35.3 million respectively. In response to
higher levels of liquidity the Company began to rebalance its loan, investment
and mortgage-backed securities portfolios. Due to the low level of market
interest rates, the Company began to reduce its originations of long-term fixed
rate mortgages while continuing to offer consumer home equity and construction
loans. The Company's commercial loan exposure was also reduced in recognition of
the weaknesses in the national and local economies. The Company began to
purchase investment grade commercial paper and corporate bonds in order to earn
a higher return with a shorter maturity profile and to reduce the prepayment
risk within the portfolio. Within the mortgage-backed securities portfolio, the
Company aggressively purchased floating rate securities in order to provide
current income and protection against an eventual rise in market interest rates.
Each of the aforementioned strategies also helped to better the interest-rate
and liquidity risks associated with the Savings Bank's customers liquidity
preference for shorter term deposit products.
The Company also makes available for origination residential mortgage loans with
interest rates which adjust pursuant to a designated index, although customer
acceptance has been somewhat limited in the Savings Bank's market area. The
Company will continue to selectively offer commercial real estate, land
acquisition and development, and shorter-term construction loans, primarily on
residential properties, to partially increase its loan asset sensitivity. The
Company intends to emphasize higher yielding home equity and small business
loans to existing customers and seasoned prospective customers.
As of June 30, 2002, the implementation of these asset and liability management
initiatives resulted in the following:
1) the Company's liquidity profile has improved by reducing the
investment portfolio's stated final maturities as follows: less than 1
year: $55.4 million or 23.7%; 1-3 years: $9.9 million or 4.2%; 3-5
years: $0 million or 0.0%; over 5 years: $168.3 million or 72.1%;
2) $58.5 million or 70.9% of the Company's portfolio of mortgage-backed
securities (including collateralized mortgage obligations - "CMOs")
were secured by floating rate securities;
3) the maturity distribution of the Company's borrowings is as follows:
less than 1 year: $44.7 million or 23.1%; 1-3 years: $279 thousand or
0.1%; 3-5 years: $4.2 million or 2.2%; over 5 years: $144.5 million or
74.6%; and
4) an aggregate of $43.0 million or 28.1% 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.
12
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,
---------------------------------------------------
2002 2001 2000
------------- ------------------- ---------------
(Dollars in Thousands)
Interest-earning assets maturing or
repricing within one year $ 252,467 $ 155,928 $ 86,215
Interest-bearing liabilities maturing or
repricing within one year 142,823 137,232 275,814
------------- ------------------- ---------------
Interest sensitivity gap $ 109,644 $ 18,696 $(189,599)
============= =================== ===============
Interest sensitivity gap as a percentage of
total assets 27.1% 4.7% (46.3)%
Ratio of assets to liabilities
maturing or repricing within one year 176.8% 113.6% 31.3%
During fiscal 2002, the Company markedly improved its one year interest
sensitivity gap by: (1) limiting the origination of long-term fixed rate
mortgages; (2) emphasizing loans with shorter terms or repricing frequencies;
(3) purchasing investments with shorter terms to maturity; and (4) purchasing
floating rate mortgage-backed securities.
13
The following table illustrates the Company's estimated stressed cumulative
repricing gap - the difference between the amount of interest-earning assets and
interest-bearing liabilities expected to reprice at a given point in time - at
June 30, 2002. The table estimates the impact of an upward or downward change in
market interest rates of 100 and 200 basis points.
Cummulative Stressed Repricing Gap
----------------------------------
Month 3 Month 6 Month 12 Month 24 Month 36 Month 60 Long Term
------- ------- -------- -------- -------- -------- ---------
(Dollars in Thousands)
Base Case Up 200 bp
- -------------------
Cummulative
Gap($'s) 55,334 45,136 50,337 51,837 34,024 36,445 25,014
% of Total
Assets 13.6% 11.1% 12.4% 12.7% 8.4% 8.9% 6.1%
Base Case Up 100 bp
- -------------------
Cummulative
Gap($'s) 59,181 49,919 92,975 95,865 88,311 75,492 25,014
% of Total
Assets 14.5% 12.3% 22.8% 23.5% 21.7% 18.5% 6.1%
Base Case No Change
- -------------------
Cummulative
Gap($'s) 65,760 64,073 109,644 108,765 103,645 99,876 27,735
% of Total
Assets 16.1% 15.7% 27.1% 26.7% 25.4% 24.5% 6.8%
Base Case Down 100 bp
- ---------------------
Cummulative
Gap($'s) 67,066 66,243 110,807 108,477 103,715 98,406 25,014
% of Total
Assets 16.5% 16.3% 27.2% 26.6% 25.5% 24.2% 6.1%
Base Case Down 200 bp
- ---------------------
Cummulative
Gap($'s) 68,970 67,812 112,095 109,970 104,954 99,254 25,014
% of Total
Assets 16.9% 16.6% 27.5% 27.0% 25.8% 24.4% 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.
14
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, 2002 and June 30, 2001.
Analysis of Sensitivity to Changes in Market Interest Rates
-----------------------------------------------------------
Modeled Change in Market Interest Rates
----------------------------------------------------------------------------------------------------------
June 30, 2002 June 30, 2001
------------------------------------------------------ -------------------------------------------------
Estimated impact on: -200 -100 0 +100 +200 -200 -100 0 +100 +200
- -------------------- ---- ---- --- ---- ---- ---- ---- -- ---- ----
Change in net -18.7% -10.1% 0.00% 8.5% 24.2% -29.9% -8.4% 0.0% 0.6% 1.4%
interest income
Return on average 8.70% 10.37% 12.32% 13.94% 16.83% 10.24% 15.45% 17.43% 17.5% 17.76%
equity
Return on average 0.66% 0.79% 0.95% 1.08% 1.32% 0.76% 1.17% 1.33% 1.34% 1.35%
assets
Market value of equity $21,523 $25,461 $28,182 $28,529 $28,793 $24,416 $37,962 $44,330 $40,681 $36,178
(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,
2002.
Anticipated Transactions
------------------------------------------------------------------
(Dollars in Thousands)
Undisbursed construction and
land development loans
Fixed rate $ 5,585
7.08%
Adjustable rate $ 5,726
5.97%
Undisbursed lines of credit
Adjustable rate $ 7,065
5.52%
Loan origination commitments
Fixed rate $ 947
6.84%
Adjustable rate $ 112
7.50%
Letters of credit
Adjustable rate $ 107
7.75%
-------
$19,542
=======
15
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is often analyzed by reviewing the cash flow statement. Cash and cash
equivalents increased by $184 thousand during fiscal 2002 primarily due to $4.8
million of net cash provided by financing activities and $4.5 million of net
cash provided by operating activities. These increases were offset by $9.1
million of net cash used for investing activities.
Funds provided by operating activities totaled $4.5 million during fiscal 2002
as compared to $6.0 million during fiscal 2001. Net cash provided by operating
activities was primarily comprised of $4.4 million of net income.
Funds used for investing activities totaled $9.1 million during fiscal 2002 as
compared to $12.5 million provided by investing activities during fiscal 2001.
Primary uses of funds during fiscal 2002 include $326.3 million in purchases of
investment and mortgage-backed securities, which were partially offset by $285.8
million in repayments of investment and mortgage-backed securities, and a $31.5
million decrease in net loans receivable.
Funds provided by financing activities totaled $4.8 million for fiscal 2002 as
compared to $18.4 million used for financing activities in fiscal 2001. Primary
sources of funds for fiscal 2002 were a $11.5 million increase in FHLB and other
borrowings used to fund investment and mortgage-backed security purchases, which
was partially offset by a $3.7 million decrease in deposits, $1.7 million of
cash dividends and $1.5 million in common stock repurchases. During fiscal 2002,
the Company purchased 96,728 shares of common stock for approximately $1.5
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, 2002, the total approved loan commitments
outstanding amounted to $1.1 million. At the same date, commitments under unused
letters and lines of credit amounted to $7.2 million and the unadvanced portion
of construction loans approximated $11.3 million. Certificates of deposit
scheduled to mature in one year or less at June 30, 2002, totaled $53.5 million.
Management believes that a significant portion of maturing deposits will remain
with the Company.
Historically, the Company used its sources of funds primarily to meet its
ongoing commitments to pay maturing certificates of deposit and savings
withdrawals, fund loan commitments and maintain a substantial portfolio of
investment securities. The Company has been able to generate sufficient cash
through the retail deposit market, its traditional funding source, and through
FHLB advances and other borrowings, to provide the cash utilized in investing
activities. The Company has access to the Federal Reserve Bank discount window.
Management believes that the Company currently has adequate liquidity available
to respond to liquidity demands.
On July 29, 2002, the Company's Board of Directors declared a cash dividend of
$0.16 per share payable on August 15, 2002 to shareholders of record at the
close of business on August 5, 2002. 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, 2002, WVS Financial Corp. exceeded all regulatory capital
requirements and maintained Tier I and total risk-based capital equal to $30.1
million or 13.4% and $32.8 million or 14.7%, respectively, of total
risk-weighted assets, and Tier I leverage capital of $30.1 million or 7.7% of
average total assets.
16
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
increased $263 thousand or 5.2% to $5.3 million, or 1.3% of total assets, at
June 30, 2002. The increase was primarily the result of a $235 thousand increase
in real estate owned.
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.
17
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
WVS Financial Corp.
We have audited the accompanying consolidated balance sheet of WVS Financial
Corp. and subsidiary as of June 30, 2002 and 2001, 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, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WVS Financial Corp.
and subsidiary as of June 30, 2002 and 2001, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 2002, in conformity with accounting principles generally accepted in the
United States of America.
/s/ S.R. Snodgrass A.C.
- ----------------------
Wexford, PA
July 26, 2002
18
WVS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
June 30,
2002 2001
--------- ---------
ASSETS
Cash and due from banks $ 879 $ 696
Interest-earning demand deposits 2,298 2,297
Investment securities available for sale (amortized
cost of $8,375 and $1,380) (Note 3) 8,426 1,380
Investment securities held to maturity (market value
of $146,146 and $129,191) (Note 3) 142,958 128,213
Mortgage-backed securities available for sale
(amortized cost of $6,196 and $8,386) (Note 4) 6,450 8,551
Mortgage-backed securities held to maturity
(market value of $76,819 and $56,082) (Note 4) 76,093 55,581
Net loans receivable (allowance for loan losses of
$2,758 and $2,763) (Note 5) 152,905 185,179
Accrued interest receivable (Note 7) 3,903 3,837
Federal Home Loan Bank stock, at cost (Note 8) 8,281 8,150
Premises and equipment (Note 9) 996 1,001
Deferred taxes and other assets 1,722 1,555
--------- ---------
TOTAL ASSETS $ 404,911 $ 396,440
========= =========
LIABILITIES
Deposits (Note 10) $ 177,672 $ 181,339
Federal Home Loan Bank advances (Note 11) 159,937 161,494
Other borrowings (Note 12) 33,731 20,660
Accrued interest payable 1,698 2,441
Other liabilities 1,620 1,861
--------- ---------
TOTAL LIABILITIES 374,658 367,795
--------- ---------
STOCKHOLDERS' EQUITY (Notes 14 and 15)
Preferred stock, no par value; 5,000,000 shares authorized;
none outstanding - -
Common stock, par value $.01; 10,000,000 shares authorized;
3,729,858 and 3,708,590 shares issued 37 37
Additional paid-in capital 20,037 19,742
Treasury stock (1,051,872 and 955,144 shares at cost) (15,133) (13,589)
Retained earnings - substantially restricted 25,183 22,478
Accumulated other comprehensive income 201 108
Unallocated shares - Recognition and Retention Plans (72) (131)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 30,253 28,645
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 404,911 $ 396,440
========= =========
See accompanying notes to the consolidated financial statements.
19
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Year Ended June 30,
2002 2001 2000
--------------- ---------------- ----------------
INTEREST AND DIVIDEND INCOME
Loans $ 13,242 $ 14,704 $ 13,889
Investment securities 6,735 9,075 8,428
Mortgage-backed securities 3,341 4,835 5,170
Interest-earning demand deposits 10 38 36
Federal Home Loan Bank stock 432 533 464
--------------- ---------------- ----------------
Total interest and dividend income 23,760 29,185 27,987
-------------- ---------------- ----------------
INTEREST EXPENSE
Deposits (Note 10) 5,082 6,820 6,375
Borrowings 8,943 11,741 10,558
Total interest expense 14,025 18,561 16,933
--------------- ---------------- ----------------
NET INTEREST INCOME 9,735 10,624 11,054
Provision for loan losses (Note 6) 57 788 150
--------------- ---------------- ----------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 9,678 9,836 10,904
--------------- ---------------- ----------------
NONINTEREST INCOME
Service charges on deposits 403 348 312
Other 284 321 258
--------------- ---------------- ----------------
Total noninterest income 687 669 570
--------------- ---------------- ----------------
NONINTEREST EXPENSE
Salaries and employee benefits 2,448 2,415 3,095
Occupancy and equipment 375 367 354
Deposit insurance premium 33 35 69
Data processing 190 186 179
Correspondent bank charges 163 153 144
Other 895 631 785
--------------- ---------------- ----------------
Total noninterest expense 4,104 3,787 4,626
--------------- ---------------- ----------------
Income before income taxes 6,261 6,718 6,848
Income taxes (Note 17) 1,813 1,956 2,469
--------------- ---------------- ----------------
NET INCOME $ 4,448 $ 4,762 $ 4,379
=============== ================ ================
EARNINGS PER SHARE:
Basic $ 1.63 $ 1.70 $ 1.48
Diluted
1.63 1.69 1.47
AVERAGE SHARES OUTSTANDING (Note 2):
Basic 2,723,891 2,804,125 2,953,720
Diluted 2,732,491 2,815,867 2,977,089
See accompanying notes to the consolidated financial statements.
20
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
Retained
Additional Earnings- Unallocated Unallocated
Common Paid-in Treasury Substantially Shares Held Shares Held
Stock Capital Stock Restricted by ESOP by RRP
--------- ---------- --------- ------------ ------------ ------------
Balance, June 30, 1999 $ 37 $ 19,062 $ (7,596) $ 17,024 $ (232) $ (326)
Comprehensive income:
Net income 4,379
Unrealized loss on available
for sale securities, net of tax benefit
of $86
Total comprehensive income
Release of earned ESOP shares 345 232
Tax benefit from stock grants issued
under RRPs 50
Accrued compensation expense for RRPs 106
Exercise of stock options 91
Purchase of treasury stock (4,174)
Cash dividends declared ($0.64 per share) (1,890)
-------- --------- --------- ---------- -------- ---------
Balance June 30, 2000 37 19,548 (11,770) 19,513 - (220)
Comprehensive income:
Net income 4,762
Unrealized gain on available
for sale securities, net of taxes of $157
Total comprehensive income
Tax benefit from stock grants issued
under RRPs 39
Accrued compensation expense for RRPs 89
Exercise of stock options 119
Tax benefit from exercise of stock options 36
Purchase of treasury stock (1,819)
Cash dividends declared ($0.64 per share) (1,797)
-------- --------- --------- ---------- -------- ---------
Balance June 30, 2001 37 19,742 (13,589) 22,478 - (131)
Comprehensive income:
Net income 4,448
Unrealized gain on available
for sale securities, net of taxes of $48
Total comprehensive income
Tax benefit from stock grants issued
under RRPs 54
Accrued compensation expense for RRPs 59
Exercise of stock options 212
Tax benefit from exercise of stock options 29
Purchase of treasury stock (1,544)
Cash dividends declared ($0.64 per share) (1,743)
-------- --------- --------- ---------- -------- ---------
Balance June 30, 2002 $ 37 $ 20,037 $(15,133) $25,183 - $(72)
========= ========= ========= ========== ======== =========
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
Accumulated
Other
Comprehensive
Income (Loss) Total
-------------- --------
Balance, June 30, 1999 $ (31) $ 27,938
Comprehensive income:
Net income 4,379
Unrealized loss on available
for sale securities, net of tax benefit (166) (166)
of $86 -----
Total comprehensive income 4,213
Release of earned ESOP shares 577
Tax benefit from stock grants issued
under RRPs 50
Accrued compensation expense for RRPs 106
Exercise of stock options 91
Purchase of treasury stock (4,174)
Cash dividends declared ($0.64 per share) (1,890)
-------- --------
Balance June 30, 2000 (197) 26,911
Comprehensive income:
Net income 4,762
Unrealized gain on available
for sale securities, net of taxes of $157 305 305
--------
Total comprehensive income 5,067
Tax benefit from stock grants issued
under RRPs 39
Accrued compensation expense for RRPs 89
Exercise of stock options 119
Tax benefit from exercise of stock options 36
Purchase of treasury stock (1,819)
Cash dividends declared ($0.64 per share) (1,797)
-------- --------
Balance June 30, 2001 108 28,645
Comprehensive income:
Net income 4,448
Unrealized gain on available
for sale securities, net of taxes of $48 93 93
--------
Total comprehensive income 4,541
Tax benefit from stock grants issued
under RRPs 54
Accrued compensation expense for RRPs 59
Exercise of stock options 212
Tax benefit from exercise of stock options 29
Purchase of treasury stock (1,544)
Cash dividends declared ($0.64 per share) (1,743)
-------- --------
Balance June 30, 2002 $ 201 $30,253
======== ========
See accompanying notes to the consolidated financial statements.
21
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Year Ended June 30,
2002 2001 2000
--------- --------- ---------
OPERATING ACTIVITIES
Net income $ 4,448 $ 4,762 $ 4,379
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 57 788 150
Depreciation and amortization, net 123 111 115
Amortization of discounts, premiums, and
deferred loan fees 766 (225) (120)
Amortization of ESOP and RRP deferred
compensation 59 89 683
Deferred income taxes (93) (370) (121)
Decrease (increase) in accrued interest receivable (66) 538 (1,270)
Increase (decrease) in accrued interest payable (743) (263) 774
Other, net (48) 555 (328)
--------- --------- ---------
Net cash provided by operating activities 4,503 5,985 4,262
--------- --------- ---------
INVESTING ACTIVITIES
Available for sale:
Purchase of investment and mortgage-backed
securities (29,454) - (2,932)
Proceeds from repayments of investment and
mortgage-backed securities 24,793 1,767 2,114
Held to maturity:
Purchase of investment and mortgage-backed
securities (296,854) (36,865) (58,774)
Proceeds from repayments of investment and
mortgage-backed securities 260,973 53,438 13,045
Net decrease (increase) in net loans receivable 31,520 (2,873) (13,353)
Decrease (increase) in Federal Home Loan Bank stock (131) (2,925) 970
Acquisition of premises and equipment (118) (62) (10)
Other, net 180 - 253
--------- --------- ---------
Net cash provided by (used for) investing activities (9,091) 12,480 (58,687)
--------- --------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (3,667) 8,481 (1,385)
Net decrease in Federal Home Loan Bank short-term advances (14,836) (1,663) (23,500)
Net increase (decrease) in other borrowings 13,071 (80,365) 86,305
Proceeds from Federal Home Loan Bank long-term advances 23,279 108,657 -
Repayments of Federal Home Loan Bank long-term advances (10,000) (50,000) -
Net proceeds from issuance of common stock 212 119 91
Cash dividends paid (1,743) (1,797) (1,890)
Purchase of treasury stock (1,544) (1,819) (4,174)
--------- --------- ---------
Net cash provided by (used for) financing activities 4,772 (18,387) 55,447
--------- --------- ---------
Increase in cash and cash equivalents 184 78 1,022
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 2,993 2,915 1,893
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,177 $ 2,993 $ 2,915
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 14,768 $ 18,823 $ 16,159
Taxes 1,735 2,140 2,668
See accompanying notes to the consolidated financial statements.
22
WVS FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
- ------------
WVS Financial Corp. ("WVS" or the "Company") is a Pennsylvania-chartered unitary
bank holding company which owns 100 percent of the common stock of West View
Savings Bank ("West View" or the "Savings Bank"). The operating results of the
Company depend primarily upon the operating results of the Savings Bank and, to
a lesser extent, income from interest-earning assets such as investment
securities.
West View is a Pennsylvania-chartered, SAIF-insured stock savings bank
conducting business from six offices in the North Hills suburbs of Pittsburgh.
The Savings Bank's principal sources of revenue originate from its portfolio of
residential real estate and commercial mortgage loans as well as income from
investment and mortgage-backed securities.
The Company is supervised by the Board of Governors of the Federal Reserve
System, while the Savings Bank is subject to regulation and supervision by the
Federal Deposit Insurance Corporation ("FDIC") and the Pennsylvania Department
of Banking.
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of WVS and its
wholly-owned subsidiary, West View. All intercompany transactions have been
eliminated in consolidation. The accounting and reporting policies of WVS and
West View conform with accounting principles generally accepted in the United
States of America. The Company's fiscal year-end for financial reporting is June
30. For regulatory and income tax reporting purposes, WVS reports on a December
31 calendar year basis.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that effect the reported amounts of assets and
liabilities as of the balance sheet date and revenues and expenses for that
period. Actual results could differ significantly from those estimates.
Investment and Mortgage-backed Securities
- -----------------------------------------
Investment securities are classified at the time of purchase as securities held
to maturity or securities available for sale based on management's ability and
intent. Debt and mortgage-backed securities acquired with the ability and intent
to hold to maturity are stated at cost adjusted for amortization of premium and
accretion of discount, which are computed using the level-yield method and
recognized as adjustments of interest income. Amortization rates for
mortgage-backed securities are periodically adjusted to reflect changes in the
prepayment speeds of the underlying mortgages. Certain other debt, equity, and
mortgage-backed securities have been classified as available for sale to serve
principally as a source of liquidity. Unrealized holding gains and losses for
available for sale securities are reported as a separate component of
stockholders' equity, net of tax, until realized. Realized securities gains and
losses are computed using the specific identification method. Interest and
dividends on investment and mortgage-backed securities are recognized as income
when earned.
Common stock of the Federal Home Loan Bank (the "FHLB") represents ownership in
an institution, which is wholly owned by other financial institutions. This
equity security is accounted for at cost and reported separately on the
accompanying consolidated balance sheet.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Loans Receivable
- --------------------
Net loans receivable are reported at their principal amount, net of the
allowance for loan losses and deferred loan fees. Interest on mortgage,
consumer, and commercial loans is recognized on the accrual method. The
Company's general policy is to stop accruing interest on loans when, based upon
relevant factors, the collection of principal or interest is doubtful,
regardless of the contractual status. Interest received on nonaccrual loans is
recorded as income or applied against principal according to management's
judgment as to the collectibility of such principal.
Loan origination and commitment fees, and all incremental direct loan
origination costs, are deferred and recognized over the contractual remaining
lives of the related loans on a level yield basis.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses represents the amount which management estimates
is adequate to provide for probable losses inherent in its loan portfolio. The
allowance method is used in providing for loan losses. Accordingly, all loan
losses are charged to the allowance, and all recoveries are credited to it. The
allowance for loan losses is established through a provision for loan losses
charged to operations. The provision for loan losses is based on management's
periodic evaluation of individual loans, economic factors, past loan loss
experience, changes in the composition and volume of the portfolio, and other
relevant factors. The estimates used in determining the adequacy of the
allowance for loan losses, including the amounts and timing of future cash flows
expected on impaired loans, are particularly susceptible to changes in the near
term.
Impaired loans are commercial and commercial real estate loans for which it is
probable the Company will not be able to collect all amounts due according to
the contractual terms of the loan agreement. The Company individually evaluates
such loans for impairment and does not aggregate loans by major risk
classifications. The definition of "impaired loans" is not the same as the
definition of "nonaccrual loans," although the two categories overlap. The
Company may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan as
impaired if the loan is not a commercial or commercial real estate loan. Factors
considered by management in determining impairment include payment status and
collateral value. The amount of impairment for these types of impaired loans is
determined by the difference between the present value of the expected cash
flows related to the loan, using the original interest rate, and its recorded
value, or as a practical expedient in the case of collateralized loans, the
difference between the fair value of the collateral and the recorded amount of
the loans. When foreclosure is probable, impairment is measured based on the
fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are large
groups of smaller-balance homogeneous loans and are measured for impairment
collectively. Loans that experience insignificant payment delays, which are
defined as 90 days or less, generally are not classified as impaired. Management
determines the significance of payment delays on a case-by-case basis taking
into consideration all circumstances surrounding the loan and the borrower
including the length of the delay, the borrower's prior payment record, and the
amount of shortfall in relation to the principal and interest owed.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate Owned
- -----------------
Real estate owned acquired through foreclosure is carried at the lower of cost
or fair value minus estimated costs to sell. Costs relating to development and
improvement of the property are capitalized, whereas costs of holding such real
estate are expensed as incurred. Valuation allowances for estimated losses are
provided when the carrying value of the real estate acquired exceeds the fair
value.
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is principally computed on the straight-line method over the
estimated useful lives of the related assets, which range from three to ten
years for furniture and equipment and 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 seven to fifteen years.
Expenditures for maintenance and repairs are charged against income as incurred.
Costs of major additions and improvements are capitalized.
Income Taxes
- ------------
Deferred tax assets and liabilities are computed based on the difference between
the financial statement and the income tax basis of assets and liabilities using
the enacted marginal tax rates. Deferred income taxes or benefits are based on
the changes in the deferred tax asset or liability from period to period.
The Company files a consolidated federal income tax return. Deferred tax assets
and liabilities are reflected at currently enacted income tax rates applicable
to the period in which such items are expected to be realized or settled. As
changes in tax rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
Earnings Per Share
- ------------------
The Company provides dual presentation of basic and diluted earnings per share.
Basic earnings per share is 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 is calculated by dividing net
income available to common stockholders, adjusted for the effects of any
dilutive securities by the weighted-average number of common shares outstanding,
adjusted for the effects of any dilutive securities.
Comprehensive Income
- --------------------
The Company is required to present comprehensive income and its components in a
full set of general purpose financial statements for all periods presented.
Other comprehensive income is comprised exclusively of net unrealized holding
gains (losses) on its available for sale securities portfolio. The Company has
elected to report the effects of its other comprehensive income as part of the
Consolidated Statement of Stockholders' Equity.
Cash Flow Information
- ---------------------
Cash and cash equivalents include cash and due from banks and interest-earning
demand deposits.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassification of Comparative Figures
- ---------------------------------------
Certain comparative amounts for prior years have been reclassified to conform to
current year presentations. Such reclassifications did not effect net income or
stockholders' equity.
Recent Accounting Pronouncements
- --------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (FAS) No. 141, Business Combinations,
effective for all business combinations initiated after June 30, 2001, as well
as all business combinations accounted for by the purchase method that are
completed after June 30, 2001. The new statement requires that the purchase
method of accounting be used for all business combinations and prohibits the use
of the pooling-of-interests method. The adoption of FAS No. 141 is not expected
to have a material effect on the Company's financial position or results of
operations.
In July 2001, the FASB issued FAS No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. This statement
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Thus, amortization of goodwill, including goodwill
recorded in past business combinations, will cease upon adoption of this
statement. However, this new statement did not amend FAS No. 72, Accounting for
Certain Acquisitions of Banking or Thrift Institutions, which requires
recognition and amortization of unidentified intangible assets relating to the
acquisition of financial institutions or branches thereof. The FASB has
undertaken a limited scope project to reconsider the provisions of FAS No. 72 in
2002 and has issued an exposure draft of a proposed statement, Acquisitions of
Certain Financial Statements, that would remove acquisitions of financial
institutions from the scope of FAS No. 72. The adoption of the proposed
statement would require all goodwill originating from acquisitions that meet the
definition of a business combination as defined in Emerging Issues Task Force
Issue ("EITF") No. 98-3 to be discontinued. The adoption of FAS No. 142 is not
expected to have any effect on the Company's financial position or results of
operations, as the Company does not currently have goodwill or any other
intangible assets.
In August 2001, the FASB issued FAS No. 143, Accounting for Asset Retirement
Obligations, which requires that the fair value of a liability be recognized
when incurred for the retirement of a long-lived asset and the value of the
asset be increased by that amount. The statement also requires that the
liability be maintained at its present value in subsequent periods and outlines
certain disclosures for such obligations. The new statement takes effect for
fiscal years beginning after June 15, 2002. The adoption of this statement,
which is effective July 1, 2002, is not expected to have a material effect on
the Company `s financial statements.
In October 2001, the FASB issued FAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. FAS No. 144 supercedes FAS No. 121 and applies to
all long-lived assets (including discontinued operations) and consequently
amends Accounting Principles Bulletin Opinion No. 30, Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business. FAS
No. 144 requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book value or fair value less costs to sell. FAS No.
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, its provisions are to be applied
prospectively. The adoption of this statement is not expected to have a material
effect on the Company's financial statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
- --------------------------------------------
In April 2002, the FASB issued FAS No. 145, "Rescission of FASB Statement No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". FAS
No. 145 rescinds FAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. This
statement also amends FAS No. 13 to require that certain lease modifications
that have economic effects similar to sale-leaseback transactions be accounted
for in the same manner as sale-leaseback transactions. This statement also makes
technical corrections to existing pronouncements, which are not substantive but
in some cases may change accounting practice. FAS No. 145 is effective for
transactions occurring after May 15, 2002. The adoption of FAS No. 145 did not
have a material effect on the Company's financial position or results of
operations.
In July 2002, the FASB issue FAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather that
at the date of a commitment to an exit or disposal plan. This statement replaces
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring). The new statement will be effective for exit or disposal
activities initiated after December 31, 2002, the adoption of which is not
expected to have a material effect on the Company's financial statements.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share.
2002 2001 2000
---------------- ---------------- ----------------
Weighted-average common shares
outstanding 3,718,640 3,695,294 3,672,506
Average treasury stock shares (994,749) (891,169) (684,957)
Average unearned ESOP shares - - (33,829)
---------------- ---------------- ----------------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 2,723,891 2,804,125 2,953,720
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 8,600 11,742 23,369
---------------- ---------------- ----------------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 2,732,491 2,815,867 2,977,089
================ ================ ================
There are no convertible securities that would effect the numerator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the consolidated statement of income is used.
Options to purchase 76,600 shares of common stock at prices from $14.00 to
$15.625 were outstanding during 2001 and 93,746 shares at price from $11.59 to
$15.625 were outstanding during 2000, but were not included in the computation
of diluted EPS because to do so would have been anti-dilutive.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
3.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
--------- --------- --------- ---------
2002
- ----
AVAILABLE FOR SALE
Preferred trust securities $ 860 $ 17 $ (3) $ 874
Commercial paper 6,495 - - 6,495
Equity securities 1,020 38 (1) 1,057
--------- --------- --------- ---------
Total $ 8,375 $ 55 $ (4) $ 8,426
========= ========= ========= =========
HELD TO MATURITY
U.S. Government agency securities $ 55,216 $ 1,016 $ (22) $ 56,210
Corporate debt securities 58,415 193 (51) 58,557
Obligations of states and political
subdivisions 29,327 2,052 - 31,379
--------- --------- --------- ---------
Total $ 142,958 $ 3,261 $ (73) $ 146,146
========= ========= ========= =========
2001
- ----
AVAILABLE FOR SALE
Preferred trust securities $ 161 $ - $ (13) $ 148
Equity securities 1,219 27 (14) 1,232
--------- --------- --------- ---------
Total $ 1,380 $ 27 $ (27) $ 1,380
========= ========= ========= =========
HELD TO MATURITY
U.S. Government agency securities $ 87,927 $ 593 $ (928) $ 87,592
Corporate debt securities 10,520 - (1) 10,519
Obligations of states and political
subdivisions 29,766 1,367 (53) 31,080
--------- --------- --------- ---------
Total $ 128,213 $ 1,960 $ (982) $ 129,191
========= ========= ========= =========
The amortized cost and estimated market values of debt securities at June 30,
2002, 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 $ 6,495 $ - $ - $ 860 $ 7,355
Estimated market value 6,495 - - 874 7,369
HELD TO MATURITY
Amortized cost $48,479 $9.936 $ 1,461 $ 83,082 $ 142,958
Estimated market value 48,606 9,951 1,583 86,006 146,146
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
3. INVESTMENT SECURITIES (Continued)
Investment securities with amortized cost of $41,219 and $35,228 and estimated
market values of $41,956 and $34,954 at June 30, 2002 and 2001, respectively,
were pledged to secure public deposits, repurchase agreements, and for other
purposes as required by law.
4. 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
-------- -------- -------- --------
2002
- ----
AVAILABLE FOR SALE
Federal National Mortgage
Association certificates $ 3,228 $ 106 $ - $ 3,334
Government National Mortgage
Association certificates 2,627 128 - 2,755
Federal Home Loan Mortgage
Corporation certificates 48 1 - 49
Collateralized mortgage obligations 293 19 - 312
-------- -------- -------- --------
Total $ 6,196 $ 254 $ - $ 6,450
======== ======== ======== ========
HELD TO MATURITY
Federal National Mortgage
Association certificates $ 35 $ 3 $ - $ 38
Government National Mortgage
Association certificates 4,069 190 - 4,259
Federal Home Loan Mortgage
Corporation certificates 60 5 - 65
Collateralized mortgage obligations 71,929 615 (87) 72,457
-------- -------- -------- --------
Total $ 76,093 $ 813 $ (87) $ 76,819
======== ======== ======== ========
2001
- ----
AVAILABLE FOR SALE
Federal National Mortgage
Association certificates $ 4,840 $ 25 $ (8) $ 4,857
Government National Mortgage
Association certificates 2,777 130 - 2,907
Federal Home Loan Mortgage
Corporation certificates 49 1 - 50
Collateralized mortgage obligations 720 18 (1) 737
-------- -------- -------- --------
Total $ 8,386 $ 174 $ (9) $ 8,551
======== ======== ======== ========
HELD TO MATURITY
Federal National Mortgage
Association certificates $ 27 $ 1 $ - $ 28
Government National Mortgage
Association certificates 7,413 171 (9) (7,575)
Federal Home Loan Mortgage
Corporation certificates 74 5 - 79
Collateralized mortgage obligations 48,067 456 (123) 48,400
-------- -------- -------- --------
Total $ 55,581 $ 633 $ (132) $ 56,082
======== ======== ======== ========
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
4. MORTGAGE-BACKED SECURITIES (Continued)
The amortized cost and estimated market values of mortgage-backed securities at
June 30, 2002, 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 $ 433 $ - $ 35 $ 5,728 $ 6,196
Estimated market value 443 - 37 5,970 6,450
HELD TO MATURITY
Amortized cost $ - $ - $ 58 $76,035 $76,093
Estimated market value - - 62 76,757 76,819
At June 30, 2002 and 2001, mortgage-backed securities with an amortized cost of
$48,161 and $42,669 and estimated market values of $49,099 and $43,062, were
pledged to secure borrowings with the Federal Home Loan Bank.
5. NET LOANS RECEIVABLE
Major classifications of loans are summarized as follows:
2002 2001
-------- --------
First mortgage loans:
1 - 4 family dwellings $ 89,889 $105,623
Construction 19,965 28,157
Land acquisition and development 6,691 6,343
Multi-family dwellings 6,173 6,920
Commercial 25,439 34,269
-------- --------
148,157 181,312
-------- --------
Consumer loans:
Home equity 11,352 13,660
Home equity lines of credit 4,967 5,482
Education loans 1 31
Other 1,514 2,092
-------- --------
17,834 21,265
-------- --------
Commercial loans 1,447 1,819
-------- --------
Obligations of state and political subdivisions - 686
-------- --------
Less:
Undisbursed construction and land development 11,311 16,481
Net deferred loan fees 464 659
Allowance for loan losses 2,758 2,763
-------- --------
14,533 19,903
-------- --------
Net loans receivable $ 152,905 $ 185,179
======== ========
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
5. NET LOANS RECEIVABLE (Continued)
The Company's primary business activity is with customers located within its
local trade area of Northern Allegheny and Southern Butler counties. The Company
has concentrated its lending efforts by granting residential and construction
mortgage loans to customers throughout its immediate trade area. The Company
also selectively funds and participates in commercial and residential mortgage
loans outside of its immediate trade area, provided such loans meet the
Company's credit policy guidelines. In general, the Company's loan portfolio
performance at June 30, 2002 and 2001, is dependent upon the local economic
conditions.
Total nonaccrual loans and troubled debt restructurings and the related interest
income recognized for the years ended June 30, are as follows:
2002 2001 2000
------ ------ ------
Principal outstanding $5,044 $5,016 $4,050
------ ------ ------
Interest income that would
have been recognized $ 408 $ 422 $ 357
Interest income recognized 162 296 180
------ ------ ------
Interest income foregone $ 246 $ 126 $ 177
====== ====== ======
Included in total nonaccrual loans are impaired loans of approximately $3,600 at
June 30, 2002 and 2001. A related allowance for loan losses of $1,764 and $1,624
has been reserved for these impaired loans, respectively. During the years, the
Company had an average balance of $3,586 and $3,600, and recognized $116 and
$181 in interest income on these loans, respectively.
Certain officers, directors, and their associates were customers of, and had
transactions with, the Company in the ordinary course of business. A summary of
loan activity for those directors, executive officers, and their associates with
aggregate loan balances outstanding of at least $60,000 during the years ended
June 30, are as follows:
2002 2001
----- -----
Balance, July 1 $ 894 $ 881
Additions 370 207
Amounts collected (442) (194)
----- -----
Balance, June 30 $ 822 $ 894
===== =====
6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
2002 2001 2000
------ ------ ------
Balance, July 1 $2,763 $1,973 $1,842
Add:
Provision charged to operations 57 788 150
Recoveries 6 19 -
Less loans charged off 68 17 19
------ ------ ------
Balance, June 30 $2,758 $2,763 $1,973
====== ====== ======
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
7. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
2002 2001
----- -----
Investment and mortgage-backed securities $2,996 $2,696
Loans receivable 907 1,141
------- -----
Total $3,903 $3,837
======= ======
8. FEDERAL HOME LOAN BANK STOCK
The Savings Bank is a member of the Federal Home Loan Bank System. As a member,
West View maintains an investment in the capital stock of the Federal Home Loan
Bank ("FHLB") of Pittsburgh in an amount not less than one percent of its
outstanding qualifying assets as defined by the FHLB or 1/20 of its outstanding
FHLB borrowings, whichever is greater, as calculated throughout the year.
9. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
2002 2001
------ ------
Land and improvements $ 264 $ 264
Buildings and improvements 1,996 1,906
Furniture, fixtures, and equipment 1,035 1,007
------ ------
3,295 3,177
Less accumulated depreciation 2,299 2,176
------ ------
Total $ 996 $1,001
====== ======
Depreciation charged to operations was $123, $111, and $115, for the years ended
June 30, 2002, 2001, and 2000, respectively.
10. DEPOSITS
Deposit accounts are summarized as follows:
2002 2001
--------------------------- -------------------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
-------- ---------- ---------- -----------
Noninterest-earning checking $ 12,615 7.0% $ 11,634 6.4%
Interest-earning checking 20,872 11.8 18,411 10.2
Savings accounts 41,620 23.4 36,589 20.2
Money market accounts 14,843 8.4 12,095 6.7
Advance payments by borrowers
for taxes and insurance 3,013 1.7 3,310 1.8
-------- -------- ---------- -------
92,963 52.3 82,039 45.3
-------- -------- ---------- -------
Savings certificates:
2.00% or less 7,726 4.3 - -
2.01 - 4.00% 49,500 27.9 12,938 7.1
4.01 - 6.00% 23,955 13.5 54,919 30.3
6.01 - 8.00% 3,528 2.0 31,443 17.3
-------- -------- ---------- -------
84,709 47.7 99,300 54.7
-------- -------- ---------- -------
Total $177,672 100.0% $ 181,339 100.0%
======== ======== ========== =======
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
10. DEPOSITS (Continued)
The maturities of savings certificates at June 30, 2002, are summarized as
follows:
Within one year $ 53,547
Beyond one year but within two years 19,672
Beyond two years but within three years 5,076
Beyond three years 6,414
-----------
Total $ 84,709
===========
Savings certificates with balances of $100,000 or more amounted to $12,277 and
$16,364 on June 30, 2002 and 2001, respectively. The Company does not have any
brokered deposits.
Interest expense by deposit category for the years ended June 30, are as
follows:
2002 2001 2000
----- ----- -----
Checking accounts $ 94 $ 135 $ 139
Savings accounts 735 893 915
Money market accounts 257 329 340
Savings certificates 3,996 5,463 4,981
----- ----- -----
Total $5,082 $6,820 $6,375
===== ===== =====
11. FEDERAL HOME LOAN BANK ADVANCES
The following table presents contractual maturities of FHLB long-term advances
as of June 30:
Weighted- Weighted-
Maturing During average average
Fiscal Year Ended Interest Interest
June 30: 2002 Rate 2001 Rate
--------------------- ----------- ----------- ---------- ----------
2002 $ - -% $ 10,000 6.17%
2003 11,000 2.47 - -
2004 280 3.36 - -
2005 - - - -
2006 4,157 5.42 4,157 5.42
2007 - - - -
2008 and thereafter 144,500 5.35 132,500 5.49
-------- ----------
Total $159,937 5.15% $ 146,657 5.53%
======== ==========
The advances maturing in 2008 and thereafter are convertible to variable rate
advances on specific dates at the discretion of the FHLB. Should the FHLB
convert these advances, the Bank has the option of accepting the variable rate
or repaying the advance without penalty.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
11. FEDERAL HOME LOAN BANK ADVANCES (Continued)
WVS also utilized revolving and short-term FHLB advances. Short-term FHLB
advances generally mature within 90 days, while revolving FHLB advances may be
repaid by the Company without penalty. The following table presents information
regarding such advances as of June 30:
2002 2001
------------ -------------
FHLB revolving and short-term advances:
Ending balance $ - $ 14,837
Average balance during the year 5,814 52,350
Maximum month-end balance during the year 13,850 19,264
Average interest rate during the year 2.92% 6.02%
Weighted-average rate at year-end -% 3.92%
At June 30, 2002, WVS had an unused borrowing capacity of approximately $34,930.
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.
12. OTHER BORROWINGS
Other borrowings include securities sold under agreements to repurchase with
securities brokers. The outstanding repurchase agreements generally mature
within one to ninety days from the transaction date and qualifying collateral
has been delivered. The Company pledged investment securities with a carrying
value of $33,075 and $19,693 at June 30, 2002 and 2001, respectively, as
collateral for the repurchase agreements as explained in Notes 3 and 4. The
following table presents information regarding other borrowings as of June 30:
2002 2001
-------- --------
Ending balance $33,731 $20,660
Average balance during the year 13,179 96,457
Maximum month-end balance during the year 33,731 46,589
Average interest rate during the year 2.34% 6.47%
Weighted-average rate at year-end 1.84% 4.27%
13. COMMITMENTS AND CONTINGENT LIABILITIES
Loan commitments
In the normal course of business, there are various outstanding commitments and
certain contingent liabilities that are not reflected in the accompanying
consolidated balance sheet. Various loan commitments totaling $19,542 and
$25,294 at June 30, 2002 and 2001, respectively, represent financial instruments
with off-balance sheet risk.
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.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
13. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Loan commitments (Continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the loan agreement. These
commitments are comprised primarily of the undisbursed portion of construction
and land development loans (Note 5), 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 other legal actions arising in the ordinary
course of business. Management believes the outcome of these matters will have
no material effect on the consolidated operations or financial condition of WVS.
14. 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, 2002 and 2001, the FDIC categorized the Savings Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
classified as a well capitalized financial institution, Total Risk-based, Tier 1
Risk-based, and Tier 1 Leverage Capital Ratios must be at least ten percent, six
percent, and five percent, respectively.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
14. REGULATORY CAPITAL (Continued)
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, 2002
-------------------------------------------------------------------------
WVS West View
-------------------------------- ------------------------------------
Amount Ratio Amount Ratio
---------------- -------------- ---------------- ------------------
Total Capital (to Risk-weighted Assets)
- ---------------------------------------
Actual $ 32,826 14.66 % $ 27,119 12.25 %
To Be Well Capitalized 22,400 10.00 22,144 10.00
For Capital Adequacy Purposes
17,920 8.00 17,715 8.00
Tier I Capital (to Risk-weighted Assets)
- ----------------------------------------
Actual $ 30,052 13.42 % $ 24,360 11.00 %
To Be Well Capitalized 13,440 6.00 13,286 6.00
For Capital Adequacy Purposes 8,960 4.00 8,857 4.00
Tier I Capital (to Average Total Assets)
- ----------------------------------------
Actual $ 30,052 7.69 % $ 24,360 6.29 %
To Be Well Capitalized 19,519 5.00 19,361 5.00
For Capital Adequacy Purposes 15,615 4.00 15,489 4.00
June 30, 2001
-------------------------------------------------------------------------
WVS West View
-------------------------------- ------------------------------------
Amount Ratio Amount Ratio
---------------- -------------- ---------------- ------------------
Total Capital (to Risk-weighted Assets)
- ---------------------------------------
Actual $ 31,066 15.40 % $ 26,284 13.27 %
To Be Well Capitalized 20,171 10.00 19,813 10.00
For Capital Adequacy Purposes 16,137 8.00 15,850 8.00
Tier I Capital (to Risk-weighted Assets)
- ----------------------------------------
Actual $ 28,537 14.15 % $ 23,803 12.01 %
To Be Well Capitalized 12,103 6.00 11,888 6.00
For Capital Adequacy Purposes 8,068 4.00 7,925 4.00
Tier I Capital (to Average Total Assets)
- ----------------------------------------
Actual $ 28,537 7.35 % $ 23,803 6.15 %
To Be Well Capitalized 19,408 5.00 15,476 5.00
For Capital Adequacy Purposes 15,526 4.00 19,345 4.00
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
15. 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.
The following table presents information related to the outstanding options:
Officers' and Weighted-
Employees' Directors' average
Stock Stock Exercise
Options Options Price
---------------- ---------------- ----------------
Outstanding, June 30, 2000 110,866 16,400 $ 11.56
Granted 4,000 2,000 12.73
Exercised (16,310) (7,000) 5.1
Forfeited (160) - 5.00
---------------- -------------
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
================ =============
Exercisable at year-end 70,878 6,414 14.29
================ =============
Available for future grant 5,174 -
================ =============
At June 30, 2002, for officers and employees there were 78,412 options
outstanding, of which 70,878 were exercisable at a weighted-average exercise
price of $14.85, and a weighted-average remaining contractual life of 5.76
years.
There were also 6,414 options outstanding for directors with a weighted-average
exercise price of $14.07, and a weighted-average remaining contractual life of
7.05 years. All of these options are exercisable.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
15. STOCK BENEFIT PLANS (Continued)
Stock Option Plan (Continued)
As permitted under Statement of Financial Accounting Standards No. 123
"Accounting for Stock-based Compensation," the Company has elected to continue
following Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations, in accounting for
stock-based awards to employees. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of the grant, no compensation expense is recognized in the Company's
financial statements. Had compensation expense included stock option plan costs
determined based on the fair value at the grant dates for options granted under
these plans consistent with Statement No. 123, pro forma net income and earnings
per share would not have been materially different than that presented on the
Consolidated Statement of Income.
Recognition and Retention Plans ("RRP")
- ---------------------------------------
The Company also maintains an RRP for substantially all officers, employees, and
directors of the Company. The objective of the RRPs is to enable the Company to
retain its corporate officers, key employees, and directors who have the
experience and ability necessary to manage WVS and the Savings Bank. Officers
and key employees of the Company who were selected by members of a
Board-appointed committee are eligible to receive benefits under the RRPs.
Non-employee directors of the Company are eligible to participate in the RRP for
directors.
An aggregate of 300,000 shares of common stock of WVS were acquired at
conversion for future issuance under these plans, of which 60,000 shares are
subject to the RRP for directors and 240,000 shares are subject to the RRP for
officers and key employees.
As of June 30, 2002, 6,510 RRP shares were available for future issuance. RRP
costs are accrued to operations, and added back to stockholders' equity, over a
four to ten-year vesting period. Net compensation expense attributed to the RRPs
amounted to $59, $89, and $106 for the years ended June 30, 2002, 2001, and
2000.
Employee Stock Ownership Plan ("ESOP")
- --------------------------------------
WVS maintains an ESOP for the benefit of officers and Savings Bank employees who
have met certain eligibility requirements related to age and length of service.
An ESOP Trust was created, and acquired 161,000 shares of common stock in WVS's
initial public offering.
The Savings Bank makes discretionary contributions to the Trust to allow the
Trust to purchase additional shares to be allocated to eligible employees. The
Company reports compensation expense based upon the amounts contributed or
committed to be contributed each year and the shares become outstanding for
earnings per share computations. Dividends paid on allocated ESOP shares are
recorded as a reduction of retained earnings. Compensation expense for the ESOP
was $200, $200, and $627, for the years ended June 30, 2002, 2001, and 2000,
respectively. Total ESOP shares as of June 30, 2002 and 2001 were 220,806 and
212,553, respectively.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
16. DIRECTOR, OFFICER, AND EMPLOYEE BENEFITS
Profit Sharing Plan
The Company maintains a non-contributory profit sharing 401(k) plan (the "Plan")
for its officers and employees who have met the age and length of service
requirements. The Plan is a defined contribution plan with the contributions
based on a percentage of salaries of the Plan participants. The Company's
contributions to the Plan, which were charged to expense, was $200 for the year
ended June 30, 2000.
Directors' Deferred Compensation Plan
The Company maintains a deferred compensation plan (the "Plan") for directors
who elect to defer all or a portion of their directors' fees. Deferred fees are
paid to the participants in installments commencing in the year following the
year the individual is no longer a member of the Board of Directors.
The Plan allows for the deferred amounts to be paid in shares of common stock at
the prevailing market price on the date of distribution. For fiscal years ended
June 30, 2002, 2001, and 2000; 48,311, 46,961, and 44,318 shares respectively,
were held by the Plan.
17. INCOME TAXES
The provision for income taxes consists of:
2002 2001 2000
-------- -------- --------
Currently payable:
Federal $ 1,667 $ 2,086 $ 2,364
State 239 240 226
-------- -------- --------
1,906 2,326 2,590
Deferred (93) (370) (121)
-------- -------- --------
Total $ 1,813 $ 1,956 $ 2,469
======== ======== ========
The following temporary differences gave rise to the net deferred tax assets at
June 30:
2002 2001
------ ------
Deferred tax assets:
Allowance for loan losses $ 937 $ 956
Deferred compensation 297 288
Other 228 160
------ ------
Total gross deferred tax assets 1,462 1,404
------ ------
Deferred tax liabilities:
Bad debt reserve for tax reporting purposes 85 151
Net unrealized gain on securities available for sale 104 56
Deferred origination fees, net 176 146
Other 56 55
------ -------
Total gross deferred tax liabilities 421 408
------ -------
Net deferred tax assets $1,041 $ 996
====== =======
No valuation allowance was established at June 30, 2002 and 2001, in view of
WVS's ability to carryback to taxes paid in previous years, future anticipated
taxable income, which is evidenced by WVS's earnings potential, and deferred tax
liabilities at June 30.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
17. 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:
2002 2001 2000
--------------------- ---------------------- ----------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
--------------------- ---------------------- ----------------------
Provision at statutory rate $ 2,129 34.0% $ 2,284 34.0% $ 2,328 34.0%
State income tax, net of federal
tax benefit 158 2.5 158 2.4 149 2.2
Tax exempt income (555) (8.9) (493) (7.3) (201) (2.9)
Other, net 81 1.4 7 - 193 2.8
-------- ------- -------- ------- ------- ------
Actual tax expense and
effective rate $ 1,813 29.0% $ 1,956 29.1% $ 2,469 36.1%
======== ======= ======== ======= ======= ======
18. 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,
2002 and 2001, the Savings Bank had required reserves of $809 and $717,
respectively. The required reserves are held in the form of vault cash and a
noninterest-bearing depository balance maintained directly with the Federal
Reserve.
Loans
Federal law prohibits the Company from borrowing from the Savings Bank unless
the loans are secured by specific obligations. Further, such secured loans are
limited in amount to ten percent of the Savings Bank's capital surplus.
Dividend Restrictions
The Savings Bank is subject to the Pennsylvania Banking Code that restricts the
availability of surplus for dividend purposes. At June 30, 2002, surplus funds
of $3,363 were not available for dividends.
19. CONVERSION AND REORGANIZATION
In accordance with regulations at the time that the Savings Bank converted from
a mutual savings bank to a stock savings bank, a portion of retained earnings
was restricted by establishing a liquidation account. The liquidation account
will be maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Savings Bank after the conversion, for a period
of ten years from the date of the stock conversion. The liquidation account will
be reduced annually to the extent that eligible account holders have reduced
their qualifying deposits. Subsequent increases will not restore an eligible
account holder's interest in the liquidation account. In the unlikely event of a
complete liquidation of the Savings Bank, each account holder will be entitled
to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for the accounts then
held.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values at June 30, are as follows:
2002 2001
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- --------- ---------- ---------
FINANCIAL ASSETS
Cash, due from banks, and interest-
earning demand deposits $ 3,177 $ 3,177 $ 2,993 $ 2,993
Investment securities 151,384 154,572 129,593 130,571
Mortgage-backed securities 82,543 83,269 64,132 64,633
Net loans receivable 152,905 160,517 185,179 193,374
Accrued interest receivable 3,903 3,903 3,837 3,837
FHLB stock 8,281 8,281 8,150 8,150
--------- --------- --------- ---------
Total financial assets $402,193 $413,719 $393,884 $403,558
========= ========= ========= =========
FINANCIAL LIABILITIES
Deposits $177,672 $178,357 $181,339 $182,047
FHLB advances 159,937 162,928 161,494 161,024
Other borrowings 33,731 33,731 20,660 20,660
Accrued interest payable 1,698 1,698 2,441 2,441
--------- --------- --------- ---------
Total financial liabilities $373,038 $376,714 $365,934 $366,172
========= ========= ========= =========
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:
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Cash, Due from Banks, Interest-earning Demand Deposits, Accrued Interest
- --------------------------------------------------------------------------------
Receivable and Payable, and Other Borrowings
- -------------------------------------------
The fair value approximates the current book value.
Investment Securities, Mortgage-backed Securities, and FHLB Stock
- -----------------------------------------------------------------
The fair value of investment and mortgage-backed securities held to maturity is
equal to the available quoted market price. If no quoted market price is
available, fair value is estimated using the quoted market price for similar
securities. Since the FHLB stock is not actively traded on a secondary market
and held exclusively by member financial institutions, the estimated fair market
value approximates the carrying amount.
Net Loans Receivable and Deposits
- ---------------------------------
Fair value for consumer mortgage loans is estimated using market quotes or
discounting contractual cash flows for prepayment estimates. Discount rates were
obtained from secondary market sources, adjusted to reflect differences in
servicing, credit, and other characteristics.
The estimated fair values for consumer, fixed rate commercial, and multi-family
real estate loans are estimated by discounting contractual cash flows for
prepayment estimates. Discount rates are based upon rates generally charged for
such loans with similar credit characteristics.
The estimated fair value for nonperforming loans is the appraised value of the
underlying collateral adjusted for estimated credit risk.
Demand, savings, and money market deposit accounts are reported at book value.
The fair value of certificates of deposit is based upon the discounted value of
the contractual cash flows. The discount rate is estimated using average market
rates for deposits with similar average terms.
FHLB Advances and Other Borrowings
- ----------------------------------
The fair value of fixed rate advances are estimated using discounted cash flows,
based on current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amount on variable rate advances approximates their
fair value.
Commitments to Extend Credit
- ----------------------------
These financial instruments are generally not subject to sale and estimated fair
values are not readily available. The carrying value, represented by the net
deferred fee arising from the unrecognized commitment, and the fair value
determined by discounting the remaining contractual fee over the term of the
commitment using fees currently charged to enter into similar agreements with
similar credit risk, are not considered material for disclosure. The contractual
amounts of unfunded commitments are presented in Note 13 to these financial
statements.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
21. PARENT COMPANY
Condensed financial information of WVS Financial Corp. is as follows:
CONDENSED BALANCE SHEET
June 30,
2002 2001
---------- ----------
ASSETS
Interest-earning deposits with subsidiary bank $ 3,065 $ 1,127
Investment securities available for sale 2,179 1,128
Investment and mortgage-backed securities held to maturity - 2,503
Investment in subsidiary bank 24,457 23,781
Loan Receivable 463 -
Accrued interest receivable and other assets 125 111
---------- ----------
TOTAL ASSETS $30,289 $28,650
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 36 $ 5
Stockholders' equity 30,253 28,645
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $30,289 $28,650
========== ==========
CONDENSED STATEMENT OF INCOME
Year Ended June 30,
2002 2001 2000
---------- ----------- ----------
INCOME
Loans $ 45 $ - $ 16
Investment and mortgage-backed securities 118 84 83
Dividend from subsidiary 3,800 4,549 7,429
Interest-earning deposits with subsidiary bank 50 76 32
---------- ----------- ----------
Total income 4,013 4,709 7,560
---------- ----------- ----------
OTHER OPERATING EXPENSE 96 51 104
---------- ----------- ----------
Income before equity in undistributed
earnings of subsidiary 3,917 4,658 7,456
Equity in undistributed earnings of subsidiary 558 136 (3,081)
---------- ----------- ----------
Income before income taxes 4,475 4,794 4,375
Income taxes 27 32 (4)
---------- ----------- ----------
NET INCOME $ 4,448 $ 4,762 $ 4,379
========== =========== ==========
43
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,
2002 2001 2000
---------- ----------- ----------
OPERATING ACTIVITIES
Net income $ 4,448 $ 4,762 $ 4,379
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed net income of subsidiary (558) (136) 3,081
Amortization of investment discounts and premiums (23) - -
Amortization of ESOP and RRP deferred
compensation 59 75 345
Other 20 143 (124)
---------- ----------- ----------
Net cash provided by operating activities 3,946 4,844 7,681
---------- ----------- ----------
INVESTING ACTIVITIES
Available for sale:
Purchase of investment and
mortgage-backed securities (9,148) (2,503) -
Proceeds from repayments of investment and
mortgage-backed securities 8,159 - -
Held to maturity:
Purchases of investment and mortgage-backed
securities (7,789) - -
Proceeds from repayments of investment and
mortgage-backed securities 10,304 - 18
Net increase in loans (469) - -
ESOP loan - - 232
---------- ----------- ----------
Net cash provided by (used for) investing activities 1,057 (2,503) 250
---------- ----------- ----------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 212 119 91
Cash dividends paid (1,743) (1,797) (1,890)
Purchases of treasury stock (1,544) (1,819) (4,174)
---------- ----------- ----------
Net cash used for financing activities (3,075) (3,497) (5,973)
---------- ----------- ----------
Increase (decrease) in cash and cash equivalents 1,928 (1,156) 1,958
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR 1,127 2,283 325
---------- ----------- ----------
CASH AND CASH EQUIVALENTS
END OF YEAR $ 3,055 $ 1,127 $ 2,283
========== =========== ==========
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
22. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
Three Months Ended
-------------------------------------------------------------
September December March June
2001 2001 2002 2002
---------- ---------- ---------- ----------
Total interest and dividend income $ 6,551 $ 6,091 $ 5,574 $ 5,544
Total interest expense 3,859 3,637 3,321 3,208
---------- ---------- ---------- ----------
Net interest income 2,692 2,454 2,253 2,336
Provision for loan losses 37 20 - -
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 2,655 2,434 2,253 2,336
Total noninterest income 173 181 166 167
Total noninterest expense 976 1,109 978 1,041
---------- ---------- ---------- ----------
Income before income taxes 1,852 1,506 1,441 1,462
Income taxes 611 397 476 329
---------- ---------- ---------- ----------
Net income $ 1,241 $ 1,109 $ 965 $ 1,133
========== ========== ========== ==========
Per share data:
Net income
Basic $ 0.45 $ 0.40 $ 0.36 $ 0.42
Diluted 0.45 0.40 0.35 0.42
Average shares outstanding
Basic 2,753,358 2,740,451 2,714,480 2,686,663
Diluted 2,763,744 2,752,157 2,720,976 2,692,474
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
22 . SELECTED QUARTERLY FINANCIAL DATA (unaudited) (Continued)
Three Months Ended
-------------------------------------------------------------
September December March June
2000 2000 2001 2001
---------- ---------- ---------- ----------
Total interest and dividend income $ 7,526 $ 7,534 $ 7,234 $ 6,891
Total interest expense 4,988 5,005 4,463 4,105
---------- ---------- ---------- ----------
Net interest income 2,538 2,529 2,771 2,786
Provision for loan losses - - 150 638
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 2,538 2,529 2,621 2,148
Total noninterest income 164 169 155 181
Total noninterest expense 956 1,006 989 836
---------- ---------- ---------- ----------
Income before income taxes 1,746 1,692 1,787 1,493
Income taxes 646 591 643 76
---------- ---------- ---------- ----------
Net income $ 1,100 $ 1,101 $ 1,144 $ 1,417
========== ========== ========== ==========
Per share data:
Net income
Basic $ 0.39 $ 0.39 $ 0.41 $ 0.51
Diluted 0.38 0.39 0.41 0.51
Average shares outstanding
Basic 2,858,302 2,814,033 2,778,839 2,764,345
Diluted 2,873,787 2,829,455 2,787,946 2,771,297
46
COMMON STOCK MARKET PRICE AND DIVIDEND INFORMATION
WVS Financial Corp.'s common stock is traded on the over-the-counter market and
quoted on the Nasdaq Stock 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 02 $16.200 $13.990 $0.16
March 02 16.250 14.130 0.16
December 01 16.250 15.700 0.16
September 01 17.450 13.750 0.16
June 01 $14.000 $12.550 $0.16
March 01 12.938 12.188 0.16
December 00 12.500 12.000 0.16
September 00 13.000 11.563 0.16
There were five Nasdaq Market Makers in the Company's common stock as of June
30, 2002: F. J. Morrissey & Co., Inc.; Herzog, Heine, Geduld, Inc.; Ryan Beck &
Co., Inc.; Spear, Leeds & Kellogg and Knight Securities L.P.
According to the records of the Company's transfer agent, there were
approximately 868 shareholders of record at September 11, 2002. 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.
47
WVS FINANCIAL CORP.
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
CORPORATE OFFICES
WVS FINANCIAL CORP. o WEST VIEW SAVINGS BANK
9001 Perry Highway Pittsburgh, PA 15237
412-364-1911
COMMON STOCK BOARD OF DIRECTORS
The common stock of WVS Financial Corp.
is traded on The Nasdaq Stock MarketSM
under the symbol "WVFC". David L. Aeberli
President
TRANSFER AGENT & REGISTRAR McDonald-Aeberli Funeral Home, Inc.
Registrar and Transfer Company
10 Commerce Drive Arthur H. Brandt
Cranford, NJ 07016 Retired - Former President and CEO
1-800-368-5948 Brandt Excavating, Inc. and
Retired - Former President and CEO
INVESTOR RELATIONS Brandt Paving, Inc.
Pamela M. Tracy
412-364-1911 David J. Bursic
President and Chief Executive Officer
COUNSEL WVS Financial Corp. and
Bruggeman & Linn West View Savings Bank
SPECIAL COUNSEL Donald E. Hook
Elias, Matz, Tiernan & Herrick L.L.P. Chairman
Washington, DC Pittsburgh Cut Flower Co.
WEST VIEW SAVINGS BANK Lawrence M. Lehman
9001 Perry Highway Sole Proprietor
Pittsburgh, PA 15237 Newton-Lehman Insurance Agency
412-364-1911
John M. Seifarth
WEST VIEW OFFICE Senior Engineer - Consultant
456 Perry Highway Nichols & Slagle Engineering, Inc.
412-931-2171
Margaret VonDerau
CRANBERRY OFFICE Senior Vice President, Treasurer and Secretary
20531 Perry Highway WVS Financial Corp. and
412-931-6080/724-776-3480 West View Savings Bank
FRANKLIN PARK OFFICE EXECUTIVE OFFICERS
2566 Brandt School Road
724-935-7100 Donald E. Hook
Chairman
BELLEVUE OFFICE
572 Lincoln Avenue David J. Bursic
412-761-5595 President and
Chief Executive Officer
SHERWOOD OAKS OFFICE
Serving Sherwood Oaks Margaret VonDerau
Cranberry Twp. Senior Vice President, Treasurer and
Corporate Secretary
LENDING DIVISION
2566 Brandt School Road Edward M. Wielgus
724-935-7400 Senior Vice President and
Chief Lending Officer
The members of the Board of Directors serve in that capacity for both the
Company and the Savings Bank.
48
A Tradition of Quality Banking