[LETTERHEAD WVS FINANCIAL CORPORATION THE HOLDING COMPANY AND WEST
VIEW SAVINGS LOGO OMITTED]
2003
ANNUAL REPORT
TABLE OF CONTENTS
Page
Number
------
Stockholders' Letter 1
Selected Financial and Other Data 2
Management's Discussion and Analysis 4
Report of Independent Auditors 17
Consolidated Balance Sheet 18
Consolidated Statement of Income 19
Consolidated Statement of Changes in Stockholders' Equity 20
Consolidated Statement of Cash Flows 21
Notes to the Consolidated Financial Statements 22
Common Stock Market Price and Dividend Information 49
Corporate Information 50
PAGE LEFT INTENTIONALLY BLANK
To Our Stockholders:
During fiscal 2003, the economy continued to be adversely impacted by
a slow recovery from the economic recession, relatively high levels of
unemployment and the war with Iraq. In an attempt to restart the economy,
the Federal Reserve further reduced interest rates to the lowest point in
45 years. Federal income tax rates were also reduced, most notably in wages
and dividends, to encourage consumer spending and capital investment. While
these efforts have improved equity market conditions over last year's
depressed levels, the unemployment rate remains stubbornly high and
spending has only started to recover. At this point it remains unclear as
to how strong the economic recovery will be and when the unemployment rate
will begin to improve.
While Company earnings were impacted by the 45 year lows in market
interest rates, at the end of fiscal 2003 our stock price increased by
$2.18 or 13.78% and we continued to pay quarterly cash dividends which
yielded over 3.50%. We are also gratified to report that the July 2003
issue of U.S. Banker Magazine, the Company was ranked #23 of the Nation's
Top 200 Publicly Traded Community Banks, Ranked by 3-Year Average Return on
Equity.
During fiscal 2003, West View Savings Bank completed its second phase
of computer system upgrades. The Bank's entire telecommunication network
was replaced to improve customer response times. Our branch and teller
platforms were also replaced with a PC based system to better serve our
customer base. During the first half of fiscal 2004, we anticipate
completing the internet banking phase of our systems upgrades.
We would also like to extend our thanks to Mrs. Margaret VonDerau for
completing 35 years of dedicated service as an employee of the Bank. During
her tenure, Margaret was instrumental in managing the Bank's branch
operations and human resources. Margaret continues to be actively involved
in the business by serving as Corporate Secretary and a member of our Board
of Directors.
Fiscal 2004 will undoubtedly bring its own set of challenges. Please
know that the Board of Directors, Senior Management and Employees will
continue to work hard to earn a competitive rate of return for our
stockholders while meeting the banking needs of our borrowers and
depositors. Please continue to recommend West View Savings Bank to your
family, friends and neighbors.
/s/ DAVID J. BURSIC /s/ DONALD E. HOOK
------------------------- -------------------------
DAVID J. BURSIC DONALD E. HOOK
President and Chairman of the Board
Chief Executive Officer
FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED
FINANCIAL AND OTHER DATA
As of or For the Year Ended June 30,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands, except per share data)
Selected Financial Data:
Total assets $ 367,188 $ 404,911 $ 396,440 $ 409,618 $ 348,408
Net loans receivable 91,669 152,905 185,179 183,295 170,327
Mortgage-backed securities 111,879 82,543 64,132 73,673 72,380
Investment securities 147,482 151,384 129,593 137,502 92,166
Savings deposit accounts 169,316 174,659 178,029 169,508 171,114
FHLB advances 153,390 159,937 161,494 104,500 116,900
Other borrowings 9,453 33,731 20,660 101,025 25,820
Stockholders' equity 30,618 30,253 28,645 26,911 27,938
Non-performing assets and troubled
debt restructurings(1) 3,481 5,279 5,016 4,050 765
Selected Operating Data:
Interest income $ 19,231 $ 23,760 $ 29,185 $ 27,987 $ 23,031
Interest expense 11,810 14,025 18,561 16,933 12,739
---------- ---------- ---------- ---------- ----------
Net interest income 7,421 9,735 10,624 11,054 10,292
Provision for loan losses (228) 57 788 150 ---
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 7,649 9,678 9,836 10,904 10,292
Non-interest income 725 687 669 570 458
Non-interest expense 3,956 4,104 3,787 4,626 4,285
---------- ---------- ---------- ---------- ----------
Income before income tax expense 4,418 6,261 6,718 6,848 6,465
Income tax expense 1,070 1,813 1,956 2,469 2,434
---------- ---------- ---------- ---------- ----------
Net income $ 3,348 $ 4,448 $ 4,762 $ 4,379 $ 4,031
========== ========== ========== ========== ==========
Per Share Information:
Basic earnings $ 1.28 $ 1.63 $ 1.70 $ 1.48 $ 1.18
Diluted earnings $ 1.28 $ 1.63 $ 1.69 $ 1.47 $ 1.17
Dividends per share $ 0.64 $ 0.64 $ 0.64 $ 0.64 $ 0.63
Dividend payout ratio 50.00% 39.26% 37.65% 43.24% 53.39%
Book value per share at period end $ 11.86 $ 11.30 $ 10.40 $ 9.35 $ 8.81
Average shares outstanding:
Basic 2,617,576 2,723,891 2,804,125 2,953,720 3,405,662
Diluted 2,624,395 2,732,491 2,815,867 2,977,089 3,435,738
2
As of or For the Year Ended June 30,
------------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Selected Operating Ratios(2):
Average yield earned on interest-
earning assets(3) 5.36% 6.41% 7.51% 7.41% 7.32%
Average rate paid on interest-
bearing liabilities 3.57 4.13 5.21 4.91 4.64
Average interest rate spread(4) 1.79 2.28 2.30 2.50 2.68
Net interest margin(4) 2.19 2.74 2.83 2.97 3.27
Ratio of interest-earning assets to
interest-bearing liabilities 112.56 112.34 111.33 110.57 114.54
Non-interest expense as a percent of
average assets 1.05 1.07 0.94 1.20 1.35
Return on average assets 0.89 1.16 1.19 1.14 1.27
Return on average equity 10.97 14.85 17.17 16.27 13.01
Ratio of average equity to average
assets 8.10 7.78 6.92 6.99 9.76
Full-service offices at end of period 6 6 6 6 6
Asset Quality Ratios(2):
Non-performing loans and troubled
debt restructurings as a percent of
net total loans(1) 3.80% 3.30% 2.71% 2.21% 0.32%
Non-performing assets as a percent
of total assets(1) 0.95 1.30 1.27 0.99 0.22
Non-performing assets and troubled
debt restructurings as a percent of
total assets 0.95 1.30 1.27 0.99 0.22
Allowance for loan losses as a
percent of total loans receivable 2.68 1.77 1.47 1.06 1.07
Allowance for loan losses as a
percent of non-performing loans 72.68 54.68 55.08 48.72 336.75
Charge-offs to average loans
receivable outstanding during the
period 0.00 0.04 0.01 0.01 0.02
Capital Ratios(2):
Tier 1 risk-based capital ratio 14.30% 13.42% 14.15% 14.05% 15.85%
Total risk-based capital ratio 15.57 14.66 15.40 15.11 16.90
Tier 1 leverage capital ratio 8.42 7.69 7.35 6.69 8.29
- ----------
(1) Non-performing assets consist of non-performing loans and real estate owned
("REO"). Non- performing loans consist of non-accrual loans and accruing
loans greater than 90 days delinquent, while REO consists of real estate
acquired through foreclosure and real estate acquired by acceptance of a
deed in lieu of foreclosure.
(2) Consolidated asset quality ratios and capital ratios are end of period
ratios, except for charge-offs to average net loans. With the exception of
end of period ratios, all ratios are based on average monthly balances
during the indicated periods.
(3) Interest and yields on tax-exempt loans and securities (tax-exempt for
federal income tax purposes) are shown on a fully taxable equivalent basis.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities, and net interest margin represents net
interest income as a percent of average interest-earning assets.
3
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD LOOKING STATEMENTS
When used in this Annual Report, or, in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project" or similar expressions are intended to identify "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to forward
looking statements to reflect events or circumstances after the date of
statements or to reflect the occurrence of anticipated or unanticipated events.
GENERAL
WVS Financial Corp. ("WVS" or the "Company") is the parent holding company of
West View Savings Bank ("West View" or the "Savings Bank"). The Company was
organized in July 1993 as a Pennsylvania-chartered unitary bank holding company
and acquired 100% of the common stock of the Savings Bank in November 1993.
West View Savings Bank is a Pennsylvania-chartered, SAIF-insured stock savings
bank conducting business from six offices in the North Hills suburbs of
Pittsburgh. The Savings Bank converted to the stock form of ownership in
November 1993. The Savings Bank had no subsidiaries at June 30, 2003.
The operating results of the Company depend primarily upon its net interest
income, which is determined by the difference between income on interest-earning
assets, principally loans, mortgage-backed securities and investment securities,
and interest expense on interest-bearing liabilities, which consist primarily of
deposits and borrowings. The Company's net income is also affected by its
provision for loan losses, as well as the level of its non-interest income,
including loan fees and service charges, and its non-interest expenses, such as
compensation and employee benefits, income taxes, deposit insurance and
occupancy costs.
The Company's strategic focus includes:
Interest Rate Risk Management - During the past two fiscal years, market
interest rates have plummeted to 45 year lows. The Federal Reserve Board's
accommodative monetary policy, coupled with increased fiscal stimulus, should
lead to an economic recovery during fiscal 2004. History has shown that economic
recoveries are generally accompanied by higher levels of market interest rates.
While these low market interest rates have impacted net income, the Company is
well positioned for an eventual rise in market interest rates.
Enhancing Stockholder Value - During fiscal 2003, the Company's stock price
increased by $2.18 or 13.78% and the Company maintained its quarterly cash
dividends, which yielded over 3.50%.
4
Commitment to Capital Management - The Company continued to retain capital for
future growth, paying an attractive cash dividend and supplementing market
liquidity with our Sixth Common Stock Buyback Program.
Strong Net Income - During fiscal 2003, the Company earned $3.3 million or $1.28
per share (basic and diluted). Fiscal 2003 return on average stockholders'
equity was 10.97% while return on average assets totaled 0.89%. The July 2003
issue of US Banker Magazine ranked the Company #23 of the Nation's Top 200
Public Traded Community Banks, Ranked by 3-year Average Return on Equity.
Substantial Core Deposits - As of June 30, 2003, $89.4 million or 52.8% of West
View's total deposits consisted of regular savings and club accounts, money
market deposit accounts, and checking accounts. Approximately $44.2 million or
49.4% of core deposits consisted of regular savings and club accounts. Core
deposits are considered to be more stable and lower cost funds than certificates
of deposit and other borrowings.
Community-based Lending - West View has consistently focused its lending
activities on generating loans in its market area. Typical loan offerings
include home mortgages, construction loans, and consumer loans for home
improvement, automobile loans and home equity loans. West View's small business
lending program includes term loans, business inventory loans and loans for
business equipment and machinery.
Strong Non-interest Expense Ratios - For the fiscal years ended June 30, 2003,
2002 and 2001, the Company's ratios of non-interest expense to average assets
were 1.05%, 1.07% and 0.94%, respectively. In fiscal 2003, the Company upgraded
its branch platform to a PC-based system to help streamline operations. Internet
banking will be rolled out during Fiscal 2004 to increase customer satisfaction
and loyalty.
CHANGES IN FINANCIAL CONDITION
Condensed Balance Sheet
-----------------------
Change
June 30, June 30, ------------------------
2003 2002 Dollars Percentage
---- ---- ------- ----------
(Dollars in Thousands)
Cash and interest-earning
deposits $ 2,815 $ 3,177 $ (362) -11.4%
Investment securities(1) 155,279 159,665 (4,386) -2.7
Mortgage-backed securities 111,879 82,543 29,336 35.5
Net loans receivable 91,669 152,905 (61,236) -40.0
Total assets 367,188 404,911 (37,723) -9.3
Deposits 170,926 177,672 (6,746) -3.8
FHLB and other borrowings 162,843 193,668 (30,825) -15.9
Total liabilities 336,570 374,658 (38,088) -10.2
Total equity 30,618 30,253 365 1.2
- ----------
(1) Includes Federal Home Loan Bank stock.
5
General. The $37.7 million or 9.3% decrease in total assets was primarily
comprised of a $61.2 million decrease in net loans receivable, and a $4.4
million decrease in investment securities and Federal Home Loan Bank ("FHLB")
stock, which were partially offset by a $29.3 million increase in
mortgage-backed securities.
The $38.1 million or 10.2% decrease in total liabilities was primarily comprised
of a $30.8 million decrease in FHLB advances and other borrowings, a $6.7
million decrease in deposits and a $249 thousand decrease in accrued interest
payable.
Total stockholders' equity increased $365 thousand or 1.2% primarily due to $3.3
million of Company net income, and a $197 thousand increase in capital
attributable to stock option exercises and Recognition and Retention Plan
("RRP") equity contributions, which were partially offset by the repurchase of
$1.6 million of the Company's own common stock, and $1.7 million of cash
dividends paid to stockholders. The Company believes that the repurchase of its
common stock represented an attractive investment opportunity and favorably
added to secondary market liquidity.
Cash on Hand and Interest-earning Deposits. Cash on hand and interest-earning
deposits represent cash equivalents. Cash equivalents decreased $362 thousand or
11.4% to $2.8 million at June 30, 2003 from $3.2 million at June 30, 2002.
Decreases in these accounts were primarily due to a combination of new loan
originations, customer withdrawals, investment purchases and repayments of
borrowings, which were partially offset by increases in these accounts as a
result of a combination of customer deposits, loan and investment repayments,
and proceeds from borrowings.
Investments. The Company's overall investment portfolio increased $25.0 million
or 10.3% to $267.2 million at June 30, 2003 from $242.2 million at June 30,
2002. Mortgage-backed securities increased $29.3 million or 35.5% to $111.9
million at June 30, 2003. This increase was due primarily to purchases of
floating rate mortgage-backed securities, which were partially offset by
principal repayments on the portfolio. Investment securities decreased $4.4
million or 2.7% to $155.3 million at June 30, 2003. This decrease was due to
calls of U.S. Government agency securities, maturities of investment grade
corporate bonds, and redemption of FHLB stock.
Net Loans Receivable. Net loans receivable decreased $61.2 million or 40.0% to
$91.7 million at June 30, 2003. The decrease in loans receivable was principally
the result of higher levels of refinancing activity due to record low mortgage
interest rates. As part of its asset/liability management strategy, the Company
chose to invest substantially all of these proceeds into adjustable rate and
short-term investment and mortgage-backed securities.
Deposits. Total deposits decreased $6.7 million or 3.8% to $170.9 million at
June 30, 2003. Certificates of deposit decreased approximately $4.8 million or
5.6%, and money market accounts decreased $152 thousand or 1.0%. Savings
accounts increased $2.5 million or 6.1%. The Savings Bank believes that these
changes in depositor liquidity preferences are due to the relatively low level
of market interest rates and stock market volatility.
Borrowed Funds. Borrowed funds decreased $30.8 million or 15.9% to $162.8
million at June 30, 2003. Other short-term borrowings decreased $24.3 million or
72.0% to $9.5 million at June 30, 2003, and FHLB advances decreased $6.5 million
or 4.1% to $153.4 million at June 30, 2003. The Company repaid these sums
through internal cash flows.
Stockholders' Equity. Total stockholders' equity increased $365 thousand or 1.2%
to $30.6 million at June 30, 2003. The increase was principally the result of
$3.3 million of Company net income and a $197 thousand increase in capital
attributable to stock option exercises, and RRP equity contributions, which were
partially offset by the repurchase of $1.6 million of the Company's own common
stock and $1.7 million of cash dividends paid to stockholders.
6
RESULTS OF OPERATIONS
Condensed Statements of Income
------------------------------
June 30, 2003 Change June 30, 2002 Change June 30, 2001
------------- ------ ------------- ------ -------------
(Dollars in Thousands)
Interest income $ 19,231 $(4,529) $23,760 $(5,425) $29,185
-19.1% -18.6%
Interest expense $ 11,810 $(2,215) $14,025 $(4,536) $18,561
-15.8% -24.4%
Net interest income $ 7,421 $(2,314) $ 9,735 $ (889) $10,624
-23.8% -8.4%
Provision for loan losses $ (228) $ (285) $ 57 $ (731) $ 788
-500.0% -92.8%
Non-interest income $ 725 $ 38 $ 687 $ 18 $ 669
5.5% 2.7%
Non-interest expense $ 3,956 $ (148) $ 4,104 $ 317 $ 3,787
-3.6% 8.4%
Income tax expense $ 1,070 $ (743) $ 1,813 $ (143) $ 1,956
-41.0% -7.3%
Net income $ 3,348 $(1,100) $ 4,448 $ (314) $ 4,762
-24.7% -6.6%
General. WVS reported net income of $3.3 million, $4.4 million and $4.8 million
for the fiscal years ended June 30, 2003, 2002 and 2001, respectively. The $1.1
million or 24.7% decrease in net income during fiscal 2003 was primarily the
result of a $2.3 million decrease in net interest income, which was partially
offset by a $743 thousand decrease in income tax expense, a $285 thousand
decrease in the provision for loan losses, a $148 thousand decrease in
non-interest expense, and a $38 thousand increase in non-interest income.
Earnings per share totaled $1.28 (basic and diluted) for fiscal 2003 as compared
to $1.63 (basic and diluted) for fiscal 2002. The decrease in earnings per share
was due to a decrease in net income, which was partially offset by a reduction
in the weighted average number of shares outstanding due to the Company's stock
repurchases during fiscal 2003.
7
Average Balances, Net Interest Income and Yields Earned and Rates Paid. The
following average balance sheet table sets forth at and for the periods
indicated, information on the Company regarding: (1) the total dollar amounts of
interest income on interest-earning assets and the resulting average yields; (2)
the total dollar amounts of interest expense on interest-bearing liabilities and
the resulting average costs; (3) net interest income; (4) interest rate spread;
(5) net interest-earning assets (interest-bearing liabilities); (6) the net
yield earned on interest-earning assets; and (7) the ratio of total
interest-earning assets to total interest-bearing liabilities.
For the Years Ended June 30,
-----------------------------------------------------------------------------
2003 2002
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Net loans receivable(1) $127,970 $ 9,524 7.44% $172,824 $13,224 7.65%
Net tax-free loans receivable(2) --- --- 0.00 199 26 13.28
Mortgage-backed securities 82,427 2,854 3.46 65,372 3,341 5.11
Investments - taxable 131,193 5,228 3.98 112,948 5,553 4.92
Investments - tax-free(2) 28,610 2,340 8.18 28,543 2,323 8.14
Interest-bearing deposits 2,362 11 0.47 1,766 10 0.57
-------- ------- -------- -------
Total interest-earning assets 372,562 19,957 5.36% 381,652 24,477 6.41%
------- ====== ------- ======
Non-interest-earning assets 4,113 3,386
-------- --------
Total assets $376,675 $385,038
======== ========
Interest-bearing liabilities:
Interest-bearing deposits and escrows $157,771 $ 3,312 2.10% $163,338 $ 5,082 3.11%
Borrowings 173,226 8,498 4.91 176,383 8,943 5.07
-------- ------- -------- -------
Total interest-bearing liabilities 330,997 11,810 3.57% 339,721 14,025 4.13%
------- ====== ------- ======
Non-interest-bearing accounts 12,149 11,814
-------- --------
Total interest-bearing liabilities and
non-interest-bearing accounts 343,146 351,535
Non-interest-bearing liabilities 3,020 3,547
-------- --------
Total liabilities 346,166 355,082
Retained income 30,509 29,956
-------- --------
Total liabilities and retained income $376,675 $385,038
======== ========
Net interest income $ 8,147 $10,452
======= =======
Interest rate spread 1.79% 2.28%
====== ======
Net yield on interest-earning assets(3) 2.19% 2.74%
====== ======
Ratio of interest-earning assets to
interest-bearing liabilities 112.56% 112.34%
====== ======
For the Years Ended June 30,
------------------------------------
2001
------------------------------------
Average Average
Balance Interest Yield/Rate
------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Net loans receivable(1) $185,203 $14,656 7.91%
Net tax-free loans receivable(2) 692 69 9.97
Mortgage-backed securities 70,403 4,835 6.87
Investments - taxable 114,000 8,205 7.20
Investments - tax-free(2) 24,785 1,993 8.04
Interest-bearing deposits 1,871 38 2.03
-------- -------
Total interest-earning assets 396,954 29,796 7.51%
------- ======
Non-interest-earning assets 4,148
--------
Total assets $401,102
========
Interest-bearing liabilities:
Interest-bearing deposits and escrows $161,821 $ 6,820 4.21%
Borrowings 194,749 11,741 6.03
-------- -------
Total interest-bearing liabilities 356,570 18,561 5.21%
------- ======
Non-interest-bearing accounts 11,616
--------
Total interest-bearing liabilities and
non-interest-bearing accounts 368,186
Non-interest-bearing liabilities 5,179
--------
Total liabilities 373,365
Retained income 27,737
-------
Total liabilities and retained income $401,102
========
Net interest income $11,235
=======
Interest rate spread 2.30%
======
Net yield on interest-earning assets(3) 2.83%
======
Ratio of interest-earning assets to
interest-bearing liabilities 111.33%
======
- ----------
(1) Includes non-accrual loans.
(2) Interest and yields on tax-exempt loans and securities (tax-exempt for
federal income tax purposes) are shown on a fully taxable equivalent basis
utilizing a federal tax rate of 34%.
(3) Net interest income divided by average interest-earning assets.
8
Rate/Volume Analysis. The following table describes the extent to which changes
in interest rates and changes in volume of interest-related assets and
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (1) changes in volume (change in volume multiplied by prior year rate), (2)
changes in rate (change in rate multiplied by prior year volume), and (3) total
change in rate and volume. The combined effect of changes in both rate and
volume has been allocated proportionately to the change due to rate and the
change due to volume. Changes in interest income on securities reflects the
changes in interest income on a fully tax equivalent basis.
Year Ended June 30,
-------------------------------------------------------------------------------
2003 vs. 2002 2002 vs. 2001
------------------------------------- -------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
---------------------- Increase ---------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- ------- ---------- ------- ------- ----------
(Dollars in Thousands)
Interest-earning assets:
Net loans receivable $(3,349) $ (377) $(3,726) $(1,021) $ (454) $(1,475)
Mortgage-backed securities 747 (1,234) (487) (325) (1,169) (1,494)
Investments - taxable 830 (1,155) (325) (76) (2,576) (2,652)
Investments - tax-free 6 11 17 305 25 330
Interest-bearing deposits 3 (2) 1 (3) (25) (28)
------- ------- ------- ------- ------- -------
Total interest-earning assets (1,763) (2,757) (4,520) (1,120) (4,199) (5,319)
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Interest-bearing deposits and
Escrows (324) (1,446) (1,770) (121) (1,617) (1,738)
Other borrowings (166) (279) (445) (1,039) (1,759) (2,798)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities (490) (1,725) (2,215) (1,160) (3,376) (4,536)
------- ------- ------- ------- ------- -------
Increase (decrease) in net interest
Income $(1,273) $(1,032) $(2,305) $ 40 $ (823) $ (783)
======= ======= ======= ======= ======= =======
Net Interest Income. Net interest income is determined by the Company's interest
rate spread (i.e. the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities.
Interest Income. Total interest income decreased by $4.5 million or 19.1% during
fiscal 2003 and decreased by $5.4 million or 18.6% during fiscal 2002. The
decrease in fiscal 2003 was primarily a result of historically low market
interest rates and higher levels of loan repayments, which were partially offset
by increased average balances of the investment and mortgage-backed securities
portfolios. The decrease in fiscal 2002 was primarily a result of decreases in
the weighted average yield earned and the average balances of the investment,
mortgage-backed, and loan portfolios during the period.
Interest income on investment securities and FHLB stock decreased $325 thousand
or 4.5% during fiscal 2003 and decreased $2.4 million or 25.4% during fiscal
2002. The decrease in fiscal 2003 was primarily attributable to an 84 basis
point decrease in the weighted average yield on the Company's investment
securities, which was partially offset by a $18.3 million increase in the
average balance of the investment securities outstanding. The decrease in fiscal
2002 was primarily attributable to a 178 basis point decrease in the weighted
average yield on the Company's investment securities which was partially offset
by a $2.7 million increase in the average balance of the investment securities
outstanding.
Interest income on mortgage-backed securities decreased $487 thousand or 14.6%
during fiscal 2003 and decreased $1.5 million or 30.9% during fiscal 2002. The
decrease in fiscal 2003 was attributable to a 165 basis point decrease in the
weighted average yield on the Company's mortgage-backed securities portfolio,
which was partially offset by a $17.1 million increase in the average balance of
the mortgage-backed securities portfolio. The decrease in fiscal 2002 was
attributable to a 176 basis point decrease in the weighted average yield on the
mortgage-backed securities portfolio and a $5.0 million decrease in the average
outstanding balance of mortgage-backed securities.
9
Interest income on net loans receivable decreased $3.7 million or 28.1% during
fiscal 2003 and decreased $1.5 million or 9.9% during fiscal 2002. The decrease
in fiscal 2003 was attributable to a $45.1 million decrease in the average
balance of net loans outstanding and a 22 basis point decrease in the weighted
average yield on the Company's loan portfolio. As part of its asset/liability
management strategy, the Company previously limited its origination of
longer-term fixed rate loans to mitigate its exposure to a rise in market
interest rates. The Company began to offer longer-term fixed rate loans on a
correspondent basis during fiscal 2003. The decrease in fiscal 2002 was
attributable to a $12.9 million decrease in the average balance of net loans
outstanding and a 26 basis point decrease in the weighted average yield on the
Company's loan portfolio.
Interest Expense. Total interest expense decreased $2.2 million or 15.8% during
fiscal 2003 and decreased by $4.5 million or 24.4% during fiscal 2002. The
decrease in fiscal 2003 was attributable to a decrease of $1.8 million of
interest expense on deposits and a decrease of $445 thousand of interest expense
on borrowings. The decrease during fiscal 2002 was attributable to a decrease of
$2.8 million of interest expense on borrowings and a $1.7 million decrease of
interest expense on deposits.
Interest expense on borrowings decreased $445 thousand or 5.0% during fiscal
2003 and decreased $2.8 million or 23.8% during fiscal 2002. The decrease in
fiscal 2003 was attributable to a 16 basis point decrease in the weighted
average yield on the Company's borrowings, and a $3.2 million decrease in the
average balance of borrowings outstanding. During fiscal 2003, the Company's
borrowings were primarily longer-term, with fixed rates of interest. The
decrease in fiscal 2002 was attributable to a 96 basis point decrease in the
weighted average yield on the Company's borrowings and a $18.4 million decrease
in the average balance of borrowings outstanding.
Interest expense on interest-bearing deposits and escrows decreased $1.8 million
or 34.8% in fiscal 2003 and decreased $1.7 million or 25.5% in fiscal 2002. The
decrease in fiscal 2003 was attributable to a 101 basis point decrease in the
weighted average yield on the Company's deposits, and a $5.6 million decrease in
the average balance of interest-bearing deposits. The decrease in fiscal 2002
was primarily attributable to a 110 basis point decrease in the weighted average
rate paid on the Company's deposits and a $3.9 million increase in the average
balance of interest bearing time deposits.
Provision for Loan Losses. A provision for loan losses is charged to earnings to
bring the total allowance to a level considered adequate by management to absorb
potential losses in the portfolio. Management's determination of the adequacy of
the allowance is based on periodic evaluations of the loan portfolio considering
past experience, current economic conditions, volume, growth, composition of the
loan portfolio and other relevant factors. The Company reduced its provision for
loan loss by $228 thousand during fiscal 2003, as compared to recording a
provision of $57 thousand during fiscal 2002. The Company's reduced provision in
fiscal 2003 was due to the reduced levels of net loans receivable and the payoff
of a large non-performing commercial real estate loan. The fiscal 2002 provision
was comparable to net charge-offs of $62 thousand.
Non-interest Income. Total non-interest income increased by $38 thousand or 5.5%
in fiscal 2003 and increased by $18 thousand or 2.7% in fiscal 2002. The
increase in fiscal 2003 was primarily attributable to the sale of investments
from the Company's investment portfolio. The increase in fiscal 2002 was
primarily attributable to an increase in service charges on deposits.
Non-interest Expense. Total non-interest expense decreased $148 thousand or 3.6%
and increased $317 thousand or 8.4% during fiscal 2003 and 2002, respectively.
The decrease in fiscal 2003 was primarily attributable to a decrease in payroll
related costs, which was partially offset by increases in data processing
expenses and fixed asset costs. The increase in fiscal 2002 was primarily
attributable to increases in accrued legal fees, charitable contributions for
local educational programs, PA Capital Stock Franchise taxes and other payroll
costs.
Income Taxes. Income taxes decreased $743 thousand or 41.0% during fiscal 2003
and decreased $143 thousand or 7.3% during fiscal 2002. The decrease in fiscal
2003 was primarily attributable to a decrease in
10
taxable income and proportionately higher tax-free interest revenue on bank
qualified municipal securities. Fiscal year 2002 income tax expense was
favorably impacted by the higher levels of tax-free bank qualified municipal
securities in the Company's investment portfolio and a $100 thousand
Pennsylvania tax credit for charitable contributions made in support of local
educational programs. The Company's effective tax rate was 24.2% at June 30,
2003 and 29.0% at June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is often analyzed by reviewing the cash flow statement. Cash and cash
equivalents decreased by $362 thousand during fiscal 2003 primarily due to $40.8
million of net cash used for financing activities. These decreases were offset
by $33.4 million of net cash provided by investing activities, and $7.1 million
of net cash provided by operating activities.
Funds provided by operating activities totaled $7.1 million during fiscal 2003
as compared to $4.5 million during fiscal 2002. Net cash provided by operating
activities was primarily comprised of $3.3 million of net income, $3.2 million
of amortization of discounts, premiums and deferred loan fees, and a $1.1
million decrease in accrued interest receivable, which were partially offset by
a $249 thousand decrease in accrued interest payable, and a $228 thousand
decrease in provisions for loan loss.
Funds provided by investing activities totaled $33.4 million during fiscal 2003
as compared to $9.1 million used for investing activities during fiscal 2002.
Primary sources of funds during fiscal 2003 include $258.5 million in repayments
and sales of investment and mortgage-backed securities (including FHLB stock)
and a $61.1 million decrease in net loans receivable, which were partially
offset by $286.1 million in purchases of investment and mortgage-backed
securities (including FHLB stock). The investment purchases were primarily
comprised of investment grade commercial paper and investment grade corporate
bonds that mature within two years. The mortgage-backed securities purchases
were floating rate instruments that generally reprice on a monthly basis.
Funds used for financing activities totaled $40.8 million for fiscal 2003 as
compared to $4.8 million provided by financing activities in fiscal 2002.
Primary uses of funds for fiscal 2003 were a $30.8 million decrease in FHLB and
other borrowings, a $6.7 million decrease in deposits, $1.7 million of cash
dividends and $1.6 million in common stock repurchases. During fiscal 2003, the
Company purchased 101,719 shares of common stock for approximately $1.6 million.
Management has determined that it currently is maintaining adequate liquidity
and continues to better match funding sources with lending and investment
opportunities.
The Company's primary sources of funds are deposits, amortization, prepayments
and maturities of existing loans, mortgage-backed securities and investment
securities, funds from operations, and funds obtained through FHLB advances and
other borrowings. At June 30, 2003, the total approved loan commitments
outstanding amounted to $1.5 million. At the same date, commitments under unused
letters and lines of credit amounted to $6.5 million and the unadvanced portion
of construction loans approximated $11.3 million. The Company also had
commitments to purchase approximately $21.1 million of floating rate
mortgage-backed securities. Certificates of deposit scheduled to mature in one
year or less at June 30, 2003, totaled $56.9 million. Management believes that a
significant portion of maturing deposits will remain with the Company.
Historically, the Company used its sources of funds primarily to meet its
ongoing commitments to pay maturing certificates of deposit and savings
withdrawals, fund loan commitments and maintain a substantial portfolio of
investment securities. The Company has been able to generate sufficient cash
through the retail deposit market, its traditional funding source, and through
FHLB advances and other borrowings, to provide the cash utilized in investing
activities. The Company has access to the Federal Reserve Bank Primary Credit
Program. Management believes that the Company currently has adequate liquidity
available to respond to liquidity demands.
On July 29, 2003, the Company's Board of Directors declared a cash dividend of
$0.16 per share payable on August 21, 2003 to shareholders of record at the
close of business on August 11, 2003. Dividends are
11
subject to determination and declaration by the Board of Directors, which take
into account the Company's financial condition, statutory and regulatory
restrictions, general economic conditions and other factors. There can be no
assurance that dividends will in fact be paid on the common stock in the future
or that, if paid, such dividends will not be reduced or eliminated in future
periods.
As of June 30, 2003, WVS Financial Corp. exceeded all regulatory capital
requirements and maintained Tier I and total risk-based capital equal to $30.3
million or 14.3% and $32.9 million or 15.6%, respectively, of total
risk-weighted assets, and Tier I leverage capital of $30.3 million or 8.4% of
average total assets.
Non-performing assets consist of non-accrual loans and real estate owned. A loan
is placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed insufficient to warrant further
accrual. When a loan is placed on non-accrual status, previously accrued but
uncollected interest is deducted from interest income. Non-performing assets
decreased $1.8 million or 35.6% to $3.5 million, or 0.95% of total assets, at
June 30, 2003. The decrease was primarily the result of a $1.2 million in
repayments, $520 thousand in pending payoffs, $404 thousand in loans
reclassified as performing due to improved economic performance, and a decrease
of $235 thousand in real estate owned, which were partially offset by $362
thousand in loans reclassified as non-performing.
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Company's transactions are denominated
in US dollars with no specific foreign exchange exposure. The Savings Bank has
no agricultural loan assets and therefore would not have a specific exposure to
changes in commodity prices. Any impacts that changes in foreign exchange rates
and commodity prices would have on interest rates are assumed to be exogenous
and will be analyzed on an ex post basis.
-------
Interest rate risk ("IRR") is the exposure of a banking organization's financial
condition to adverse movements in interest rates. Accepting this risk can be an
important source of profitability and shareholder value, however excessive
levels of IRR can pose a significant threat to the Company's earnings and
capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the Company's safety and soundness.
Evaluating a financial institution's exposure to changes in interest rates
includes assessing both the adequacy of the management process used to control
IRR and the organization's quantitative level of exposure. When assessing the
IRR management process, the Company seeks to ensure that appropriate policies,
procedures, management information systems and internal controls are in place to
maintain IRR at prudent levels with consistency and continuity. Evaluating the
quantitative level of IRR exposure requires the Company to assess the existing
and potential future effects of changes in interest rates on its consolidated
financial condition, including capital adequacy, earnings, liquidity, and, where
appropriate, asset quality.
Financial institutions derive their income primarily from the excess of interest
collected over interest paid. The rates of interest an institution earns on its
assets and owes on its liabilities generally are established contractually for a
period of time. Since market interest rates change over time, an institution is
exposed to lower profit margins (or losses) if it cannot adapt to interest-rate
changes. For example, assume that an institution's assets carry intermediate- or
long-term fixed rates and that those assets were funded with short-term
liabilities. If market interest rates rise by the time the short-term
liabilities must be refinanced, the increase in the institution's interest
expense on its liabilities may not be sufficiently offset if assets continue to
earn at the long-term fixed rates. Accordingly, an institution's profits could
decrease on existing assets because the institution will either have lower net
interest income or, possibly, net interest expense. Similar risks exist when
assets are subject to contractual interest-rate ceilings, or rate sensitive
assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate
environment.
During fiscal 2003 the level of market interest rates declined further due to
the Federal Reserve's accommodative monetary policy and the weakness in the
national economy. The marked decline in the
12
equity markets, reduced corporate earnings and heightened geopolitical tensions
have caused a considerable disintermediation from the equity to the fixed income
markets, further compounding the decline in market interest rates across the
yield curve.
Due to the rapid decline in market interest rates, the Company's loan,
investment and mortgage-backed securities portfolios continued to experience
much higher then anticipated levels of prepayments. During fiscal 2003, the
Federal Reserve reduced the Federal Funds rate an additional six times for a
total of 250 basis points. Principal repayments on the Company's loan,
investment and mortgage-backed securities portfolios totaled $83.1 million,
$143.8 million and $113.3 million respectively. In response to higher levels of
liquidity the Company began to rebalance its loan, investment and
mortgage-backed securities portfolios. Due to the low level of market interest
rates, the Company began to reduce its originations of long-term fixed rate
mortgages while continuing to offer consumer home equity and construction loans.
The Company began to purchase investment grade commercial paper and corporate
bonds in order to earn a higher return with a shorter maturity profile and to
reduce the prepayment risk within the portfolio. Within the mortgage-backed
securities portfolio, the Company aggressively purchased floating rate
securities in order to provide current income and protection against an eventual
rise in market interest rates. Each of the aforementioned strategies also helped
to better the interest-rate and liquidity risks associated with the Savings
Bank's customers liquidity preference for shorter term deposit products.
The Company also makes available for origination residential mortgage loans with
interest rates which adjust pursuant to a designated index, although customer
acceptance has been somewhat limited in the Savings Bank's market area. The
Company will continue to selectively offer commercial real estate, land
acquisition and development, and shorter-term construction loans, primarily on
residential properties, to partially increase its loan asset sensitivity. The
Company intends to emphasize higher yielding home equity and small business
loans to existing customers and seasoned prospective customers.
As of June 30, 2003, the implementation of these asset and liability management
initiatives resulted in the following:
1) the Company's liquidity profile remains high with the investment
portfolio's stated final maturities as follows: less than 1 year:
$79.2 million or 30.7%; 1-5 years: $13.1 million or 5.1%; over 5
years: $165.3 million or 64.2%;
2) $97.4 million or 87.1% of the Company's portfolio of mortgage-backed
securities (including collateralized mortgage obligations - "CMOs")
were secured by floating rate securities;
3) the maturity distribution of the Company's borrowings is as follows:
less than 1 year: $13.6 million or 8.4%; 1-5 years: $7.2 million or
4.4%; over 5 years: $142.1 million or 87.2%; and
4) an aggregate of $33.6 million or 36.7% of the Company's net loan
portfolio had adjustable interest rates or maturities of less than 12
months.
The effect of interest rate changes on a financial institution's assets and
liabilities may be analyzed by examining the "interest rate sensitivity" of the
assets and liabilities and by monitoring an institution's interest rate
sensitivity "gap". An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within a given time
period. A gap is considered positive (negative) when the amount of rate
sensitive assets (liabilities) exceeds the amount of rate sensitive liabilities
(assets). During a period of falling interest rates, a negative gap would tend
to result in an increase in net interest income. During a period of rising
interest rates, a positive gap would tend to result in an increase in net
interest income.
13
The following table sets forth certain information at the dates indicated
relating to the Company's interest-earning assets and interest-bearing
liabilities which are estimated to mature or are scheduled to reprice within one
year.
June 30,
--------------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in Thousands)
Interest-earning assets maturing or
repricing within one year $262,782 $252,467 $155,928
Interest-bearing liabilities maturing or
repricing within one year 133,418 142,823 137,232
-------- -------- --------
Interest sensitivity gap $129,364 $109,644 $ 18,696
======== ======== ========
Interest sensitivity gap as a percentage of
total assets 35.2% 27.1% 4.7%
Ratio of assets to liabilities
maturing or repricing within one year 197.0% 176.8% 113.6%
During fiscal 2003, the Company managed its one year interest sensitivity gap
by: (1) limiting the origination of long-term fixed rate mortgages; (2)
emphasizing loans with shorter terms or repricing frequencies; (3) purchasing
investments with maturities within 2 years; and (4) purchasing floating rate
CMO's which reprice on a monthly basis.
14
The following table illustrates the Company's estimated stressed cumulative
repricing gap - the difference between the amount of interest-earning assets and
interest-bearing liabilities expected to reprice at a given point in time - at
June 30, 2003. The table estimates the impact of an upward or downward change in
market interest rates of 100 and 200 basis points.
Cummulative Stressed Repricing Gap
----------------------------------
Month 3 Month 6 Month 12 Month 24 Month 36 Month 60 Long Term
------- ------- -------- -------- -------- -------- ---------
(Dollars in Thousands)
Base Case Up 200 bp
- -------------------
Cummulative
Gap ($'s) 123,940 116,233 103,039 111,979 120,903 140,870 29,111
% of Total
Assets 33.7% 31.6% 28.0% 30.4% 32.9% 38.3% 7.9%
Base Case Up 100 bp
- -------------------
Cummulative
Gap ($'s) 134,488 129,591 120,308 150,867 162,576 167,911 29,111
% of Total
Assets 36.6% 35.2% 32.7% 41.0% 44.2% 45.6% 7.9%
Base Case No Change
- -------------------
Cummulative
Gap ($'s) 138,535 136,286 129,364 160,276 170,439 172,522 29,111
% of Total
Assets 37.7% 37.0% 35.2% 43.6% 46.3% 46.9% 7.9%
Base Case Down 100 bp
- ---------------------
Cummulative
Gap ($'s) 140,996 140,230 134,229 166,166 175,930 175,585 29,111
% of Total
Assets 38.3% 38.1% 36.5% 45.2% 47.8% 47.7% 7.9%
Base Case Down 200 bp
- ---------------------
Cummulative
Gap ($'s) 154,224 154,189 148,818 169,264 178,141 176,428 29,111
% of Total
Assets 41.9% 41.9% 40.5% 46.0% 48.4% 48.0% 7.9%
Beginning in the third quarter of fiscal 2001, the Company began to utilize an
income simulation model to measure interest rate risk and to manage interest
rate sensitivity. The Company believes that income simulation modeling may
enable the Company to better estimate the possible effects on net interest
income due to changing market interest rates. Other key model parameters
include: estimated prepayment rates on the Company's loan, mortgage-backed
securities and investment portfolios; savings decay rate assumptions; and the
repayment terms and embedded options of the Company's borrowings.
15
The following table presents the simulated impact of a 100 and 200 basis point
upward or downward shift in market interest rates and the estimated impact on
net interest income, return on average equity, return on average assets and the
market value of portfolio equity at June 30, 2003 and June 30, 2002.
Analysis of Sensitivity to Changes in Market Interest Rates
-----------------------------------------------------------
Modeled Change in Market Interest Rates
-----------------------------------------------------------------------------------------------------------
June 30, 2003 June 30, 2002
---------------------------------------------------- ---------------------------------------------------
Estimated impact on: -200 -100 0 +100 +200 -200 -100 0 +100 +200
- -------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Change in net -47.6% -35.0% 0.00% 24.8% 46.8% -18.7% -10.1% 0.00% 8.5% 24.2%
interest income
Return on average 0.31% 1.88% 6.16% 9.08% 11.62% 8.70% 10.37% 12.32% 13.94% 16.83%
equity
Return on average 0.02% 0.14% 0.47% 0.70% 0.91% 0.66% 0.79% 0.95% 1.08% 1.32%
assets
Market value of $(4,248) $ 5,191 $13,582 $19,086 $22,309 $21,523 $25,461 $28,182 $28,529 $28,793
equity (in thousands)
The table below provides information about the Company's anticipated
transactions comprised of firm loan commitments and other commitments, including
undisbursed letters and lines of credit. The Company used no derivative
financial instruments to hedge such anticipated transactions as of June 30,
2003.
Anticipated Transactions
--------------------------------------------------------------------------
(Dollars in Thousands)
Undisbursed construction and development loans
Fixed rate $ 3,483
5.67%
Adjustable rate $ 7,865
5.32%
Undisbursed lines of credit
Adjustable rate $ 6,469
4.80%
Loan origination commitments
Fixed rate $ 1,222
5.62%
Adjustable rate $ 250
3.75%
Letters of credit
Adjustable rate $ 51
7.25%
Commitments to purchase mortgage-backed securities
Adjustable rate $21,079
2.52%
-------
$40,419
=======
16
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
WVS Financial Corp.
We have audited the accompanying consolidated balance sheet of WVS Financial
Corp. and subsidiary as of June 30, 2003 and 2002, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended June 30, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WVS Financial Corp.
and subsidiary as of June 30, 2003 and 2002, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 2003, in conformity with accounting principles generally accepted in the
United States of America.
/s/ S.R. Snodgrass, A.C.
- ------------------------
S.R. Snodgrass, A.C.
Wexford, PA
August 1, 2003
17
WVS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
June 30,
2003 2002
--------- ---------
ASSETS
Cash and due from banks $ 921 $ 879
Interest-earning demand deposits 1,894 2,298
--------- ---------
Total cash and cash equivalents 2,815 3,177
Investment securities available for sale (amortized
cost of $25,310 and $8,375) (Note 4) 25,641 8,426
Investment securities held to maturity (market value
of $126,036 and $146,146) (Note 4) 121,841 142,958
Mortgage-backed securities available for sale
(amortized cost of $4,219 and $6,196) (Note 5) 4,387 6,450
Mortgage-backed securities held to maturity
(market value of $107,914 and $76,819) (Note 5) 107,492 76,093
Net loans receivable (allowance for loan losses of
$2,530 and $2,758) (Note 6) 91,669 152,905
Accrued interest receivable (Note 8) 2,800 3,903
Federal Home Loan Bank stock, at cost (Note 9) 7,797 8,281
Premises and equipment (Note 10) 1,231 996
Other assets 1,515 1,722
--------- ---------
TOTAL ASSETS $ 367,188 $ 404,911
========= =========
LIABILITIES
Deposits (Note 11) $ 170,926 $ 177,672
Federal Home Loan Bank advances (Note 12) 153,390 159,937
Other borrowings (Note 13) 9,453 33,731
Accrued interest payable 1,449 1,698
Other liabilities 1,352 1,620
--------- ---------
TOTAL LIABILITIES 336,570 374,658
--------- ---------
STOCKHOLDERS' EQUITY (Notes 16)
Preferred stock, no par value; 5,000,000 shares authorized;
none outstanding - -
Common stock, par value $.01; 10,000,000 shares authorized;
3,736,750 and 3,729,858 shares issued 37 37
Additional paid-in capital 20,212 20,037
Treasury stock (1,153,591 and 1,051,872 shares at cost) (16,767) (15,133)
Retained earnings - substantially restricted 26,857 25,183
Accumulated other comprehensive income 329 201
Unallocated shares - Recognition and Retention Plans (50) (72)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 30,618 30,253
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 367,188 $ 404,911
========= =========
See accompanying notes to the consolidated financial statements.
18
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Year Ended June 30,
2003 2002 2001
----------- ---------- ----------
INTEREST AND DIVIDEND INCOME
Loans $ 9,524 $ 13,242 $ 14,704
Investment securities 6,590 6,735 9,075
Mortgage-backed securities 2,854 3,341 4,835
Interest-earning demand deposits 11 10 38
Federal Home Loan Bank stock 252 432 533
----------- ---------- ----------
Total interest and dividend income 19,231 23,760 29,185
----------- ---------- ----------
INTEREST EXPENSE
Deposits (Note 10) 3,312 5,082 6,820
Federal Home Loan Bank advances 8,224 8,635 8,699
Other borrowings 274 308 3,042
----------- ---------- ----------
Total interest expense 11,810 14,025 18,561
----------- ---------- ----------
NET INTEREST INCOME 7,421 9,735 10,624
Provision for loan losses (Note 6) (228) 57 788
----------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,649 9,678 9,836
----------- ---------- ----------
NONINTEREST INCOME
Service charges on deposits 361 403 348
Investment securities gains, net 64 - -
Other 300 284 321
----------- ---------- ----------
Total noninterest income 725 687 669
----------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 2,240 2,448 2,415
Occupancy and equipment 398 375 367
Deposit insurance premium 29 33 35
Data processing 221 190 186
Correspondent bank charges 152 163 153
Other 916 895 631
----------- ---------- ----------
Total noninterest expense 3,956 4,104 3,787
----------- ---------- ----------
Income before income taxes 4,418 6,261 6,718
Income taxes (Note 18) 1,070 1,813 1,956
----------- ---------- ----------
NET INCOME $ 3,348 $ 4,448 $ 4,762
=========== ========== ==========
EARNINGS PER SHARE:
Basic $ 1.28 $ 1.63 $ 1.70
Diluted 1.28 1.63 1.69
AVERAGE SHARES OUTSTANDING (Note 2):
Basic 2,617,576 2,723,891 2,804,125
Diluted 2,624,395 2,732,491 2,815,867
See accompanying notes to the consolidated financial statements.
19
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
Retained
Additional Earnings- Unallocated
Common Paid-in Treasury Substantially Shares Held
Stock Capital Stock Restricted by ESOP
--------------------------------------------------------------------------
Balance June 30, 2000 $ 37 $ 19,548 $(11,770) $ 19,513 $ -
Comprehensive income:
Net income 4,762
Unrealized gain on available
for sale securities, net of taxes of $157
Tax benefit from stock grants issued
under RRPs 39
Accrued compensation expense for RRPs
Exercise of stock options 119
Tax benefit from exercise of stock options 36
Purchase of treasury stock (1,819)
Cash dividends declared ($0.64 per share) (1,797)
-------- -------- -------- -------- --------
Balance June 30, 2001 37 19,742 (13,589) 22,478 -
Comprehensive income:
Net income 4,448
Unrealized gain on available
for sale securities, net of taxes of $48
Tax benefit from stock grants issued
under RRPs 54
Accrued compensation expense for RRPs
Exercise of stock options 212
Tax benefit from exercise of stock options 29
Purchase of treasury stock (1,544)
Cash dividends declared ($0.64 per share) (1,743)
-------- -------- -------- -------- --------
Balance June 30, 2002 37 20,037 (15,133) 25,183 -
Comprehensive income:
Net income 3,348
Unrealized gain on available
for sale securities, net of taxes of $66
Tax benefit from stock grants issued
under RRPs 104
Compensation expense for RRPs
Exercise of stock options 71
Tax benefit from exercise of stock options
Purchase of treasury stock (1,634)
Cash dividends declared ($0.64 per share) (1,674)
-------- -------- -------- -------- --------
Balance June 30, 2003 $ 37 $ 20,212 $(16,767) $ 26,857 $ -
======== ======== ======== ======== ========
Accumulated
Unallocated Other
Shares Held Comprehensive
by RRP Income (Loss) Total
------------------------------------------
Balance June 30, 2000 $ (220) $ (197) $ 26,911
Comprehensive income:
Net income 4,762
Unrealized gain on available
for sale securities, net of taxes of $157 305 305
Tax benefit from stock grants issued
under RRPs 39
Accrued compensation expense for RRPs 89 89
Exercise of stock options 119
Tax benefit from exercise of stock options 36
Purchase of treasury stock (1,819)
Cash dividends declared ($0.64 per share) (1,797)
-------- -------- --------
Balance June 30, 2001 (131) 108 28,645
Comprehensive income:
Net income 4,448
Unrealized gain on available
for sale securities, net of taxes of $48 93 93
Tax benefit from stock grants issued
under RRPs 54
Accrued compensation expense for RRPs 59 59
Exercise of stock options 212
Tax benefit from exercise of stock options 29
Purchase of treasury stock (1,544)
Cash dividends declared ($0.64 per share) (1,743)
-------- -------- --------
Balance June 30, 2002 (72) 201 30,253
Comprehensive income:
Net income 3,348
Unrealized gain on available
for sale securities, net of taxes of $66 128 128
Tax benefit from stock grants issued
under RRPs 104
Compensation expense for RRPs 22 22
Exercise of stock options 71
Tax benefit from exercise of stock options
Purchase of treasury stock (1,634)
Cash dividends declared ($0.64 per share) (1,674)
-------- -------- --------
Balance June 30, 2003 $ (50) $ 329 $ 30,618
======== ======== ========
See accompanying notes to the consolidated financial statements.
20
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Year Ended June 30,
2003 2002 2001
--------- --------- ---------
OPERATING ACTIVITIES
Net income $ 3,348 $ 4,448 $ 4,762
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses (228) 57 788
Depreciation 156 123 111
Investment securities gains, net (64) - -
Amortization of discounts, premiums, and
deferred loan fees 3,205 766 (225)
Amortization of ESOP and RRP deferred
compensation 22 59 89
Deferred income taxes 43 (93) (370)
Decrease (increase) in accrued interest receivable 1,103 (66) 538
Decrease in accrued interest payable (249) (743) (263)
Other, net (285) (48) 555
--------- --------- ---------
Net cash provided by operating activities 7,051 4,503 5,985
--------- --------- ---------
INVESTING ACTIVITIES
Available for sale:
Purchase of investment and mortgage-backed
securities (25,836) (29,454) -
Proceeds from repayments of investment and
mortgage-backed securities 10,313 24,793 1,767
Proceeds from sales of investment and
mortgage-backed securities 639 - -
Held to maturity:
Purchase of investment and mortgage-backed
securities (259,234) (296,854) (36,865)
Proceeds from repayments of investment and
mortgage-backed securities 246,069 260,973 53,438
Net decrease (increase) in net loans receivable 61,131 31,520 (2,873)
Purchase of Federal Home Loan Bank stock (1,021) (131) (2,925)
Redemption of Federal Home Loan Bank stock 1,505 - -
Acquisition of premises and equipment (391) (118) (62)
Other, net 220 180 -
--------- --------- ---------
Net cash provided by (used for) investing activities 33,395 (9,091) 12,480
--------- --------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (6,746) (3,667) 8,481
Net increase (decrease) in Federal Home Loan Bank short-term advances 3,875 (14,836) (1,663)
Net increase (decrease) in other borrowings (24,278) 13,071 (80,365)
Proceeds from Federal Home Loan Bank long-term advances 578 23,279 108,657
Repayments of Federal Home Loan Bank long-term advances (11,000) (10,000) (50,000)
Net proceeds from exercise of stock options 71 212 119
Cash dividends paid (1,674) (1,743) (1,797)
Purchase of treasury stock (1,634) (1,544) (1,819)
--------- --------- ---------
Net cash provided by (used for) financing activities (40,808) 4,772 (18,387)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (362) 184 78
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 3,177 2,993 2,915
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,815 $ 3,177 $ 2,993
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 12,059 $ 14,768 $ 18,823
Taxes 1,049 1,735 2,140
See accompanying notes to the consolidated financial statements.
21
WVS FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
WVS Financial Corp. ("WVS" or the "Company") is a Pennsylvania-chartered
unitary bank holding company which owns 100 percent of the common stock of
West View Savings Bank ("West View" or the "Savings Bank"). The operating
results of the Company depend primarily upon the operating results of the
Savings Bank and, to a lesser extent, income from interest-earning assets
such as investment securities.
West View is a Pennsylvania-chartered, SAIF-insured stock savings bank
conducting business from six offices in the North Hills suburbs of
Pittsburgh. The Savings Bank's principal sources of revenue originate from
its portfolio of residential real estate and commercial mortgage loans as
well as income from investment and mortgage-backed securities.
The Company is supervised by the Board of Governors of the Federal Reserve
System, while the Savings Bank is subject to regulation and supervision by
the Federal Deposit Insurance Corporation ("FDIC") and the Pennsylvania
Department of Banking.
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of WVS and its
wholly-owned subsidiary, West View. All intercompany transactions have been
eliminated in consolidation. The accounting and reporting policies of WVS
and West View conform with accounting principles generally accepted in the
United States of America. The Company's fiscal year-end for financial
reporting is June 30. For regulatory and income tax reporting purposes, WVS
reports on a December 31 calendar year basis.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the balance sheet date and revenues and
expenses for that period. Actual results could differ significantly from
those estimates.
Investment and Mortgage-Backed Securities
-----------------------------------------
Investment securities are classified at the time of purchase as securities
held to maturity or securities available for sale based on management's
ability and intent. Debt and mortgage-backed securities acquired with the
ability and intent to hold to maturity are stated at cost adjusted for
amortization of premium and accretion of discount, which are computed using
the level-yield method and recognized as adjustments of interest income.
Amortization rates for mortgage-backed securities are periodically adjusted
to reflect changes in the prepayment speeds of the underlying mortgages.
Certain other debt, equity, and mortgage-backed securities have been
classified as available for sale to serve principally as a source of
liquidity. Unrealized holding gains and losses for available for sale
securities are reported as a separate component of stockholders' equity,
net of tax, until realized. Realized securities gains and losses are
computed using the specific identification method. Interest and dividends
on investment and mortgage-backed securities are recognized as income when
earned.
Common stock of the Federal Home Loan Bank (the "FHLB") represents
ownership in an institution, which is wholly owned by other financial
institutions. This equity security is accounted for at cost and reported
separately on the accompanying Consolidated Balance Sheet.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Loans Receivable
--------------------
Net loans receivable are reported at their principal amount, net of the
allowance for loan losses and deferred loan fees. Interest on mortgage,
consumer, and commercial loans is recognized on the accrual method. The
Company's general policy is to stop accruing interest on loans when, based
upon relevant factors, the collection of principal or interest is doubtful,
regardless of the contractual status. Interest received on nonaccrual loans
is recorded as income or applied against principal according to
management's judgment as to the collectibility of such principal.
Loan origination and commitment fees, and all incremental direct loan
origination costs, are deferred and recognized over the contractual
remaining lives of the related loans on a level yield basis.
Allowance for Loan Losses
-------------------------
The allowance for loan losses represents the amount which management
estimates is adequate to provide for probable losses inherent in its loan
portfolio. The allowance method is used in providing for loan losses.
Accordingly, all loan losses are charged to the allowance, and all
recoveries are credited to it. The allowance for loan losses is established
through a provision for loan losses charged to operations. The provision
for loan losses is based on management's periodic evaluation of individual
loans, economic factors, past loan loss experience, changes in the
composition and volume of the portfolio, and other relevant factors. The
estimates used in determining the adequacy of the allowance for loan
losses, including the amounts and timing of future cash flows expected on
impaired loans, are particularly susceptible to changes in the near term.
Impaired loans are commercial and commercial real estate loans for which it
is probable the Company will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Company
individually evaluates such loans for impairment and does not aggregate
loans by major risk classifications. The definition of "impaired loans" is
not the same as the definition of "nonaccrual loans," although the two
categories overlap. The Company may choose to place a loan on nonaccrual
status due to payment delinquency or uncertain collectibility, while not
classifying the loan as impaired if the loan is not a commercial or
commercial real estate loan. Factors considered by management in
determining impairment include payment status and collateral value. The
amount of impairment for these types of impaired loans is determined by the
difference between the present value of the expected cash flows related to
the loan, using the original interest rate, and its recorded value, or as a
practical expedient in the case of collateralized loans, the difference
between the fair value of the collateral and the recorded amount of the
loans. When foreclosure is probable, impairment is measured based on the
fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are
large groups of smaller-balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment
delays, which are defined as 90 days or less, generally are not classified
as impaired. Management determines the significance of payment delays on a
case-by-case basis taking into consideration all circumstances surrounding
the loan and the borrower including the length of the delay, the borrower's
prior payment record, and the amount of shortfall in relation to the
principal and interest owed.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate Owned
-----------------
Real estate owned acquired through foreclosure is carried at the lower of
cost or fair value minus estimated costs to sell. Costs relating to
development and improvement of the property are capitalized, whereas costs
of holding such real estate are expensed as incurred. Valuation allowances
for estimated losses are provided when the carrying value of the real
estate acquired exceeds the fair value.
Premises and Equipment
----------------------
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is principally computed on the straight-line method over the
estimated useful lives of the related assets, which range from three to ten
years for furniture and equipment and twenty-five to fifty years for
building premises. Leasehold improvements are amortized over the shorter of
their estimated useful lives or their respective lease terms, which range
from seven to fifteen years. Expenditures for maintenance and repairs are
charged against income as incurred. Costs of major additions and
improvements are capitalized.
Income Taxes
------------
Deferred tax assets and liabilities are computed based on the difference
between the financial statement and the income tax basis of assets and
liabilities using the enacted marginal tax rates. Deferred income taxes or
benefits are based on the changes in the deferred tax asset or liability
from period to period.
The Company files a consolidated federal income tax return. Deferred tax
assets and liabilities are reflected at currently enacted income tax rates
applicable to the period in which such items are expected to be realized or
settled. As changes in tax rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Earnings Per Share
------------------
The Company provides dual presentation of basic and diluted earnings per
share. Basic earnings per share are calculated by dividing net income
available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share are
calculated by dividing net income available to common stockholders,
adjusted for the effects of any dilutive securities by the weighted-average
number of common shares outstanding, adjusted for the effects of any
dilutive securities.
Stock Options
-------------
The Company maintains stock option plans for key officers, employees, and
non-employee directors.
As permitted under Statement of Financial Accounting Standards No. 123
"Accounting for Stock-based Compensation," the Company has elected to
continue following Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and related Interpretations, in
accounting for stock-based awards to employees. Under APB 25, because the
exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of the grant, no compensation
expense is recognized in the Company's financial statements. Had
compensation expense included stock option plan costs determined based on
the fair value at the grant dates for options granted under these plans
consistent with Statement No. 123, pro forma net income and earnings per
share would not have been materially different than that presented on the
Consolidated Statement of Income.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
--------------------
The Company is required to present comprehensive income and its components
in a full set of general- purpose financial statements for all periods
presented. Other comprehensive income is comprised exclusively of net
unrealized holding gains (losses) on its available for sale securities
portfolio. The Company has elected to report the effects of its other
comprehensive income as part of the Consolidated Statement of Stockholders'
Equity.
Cash Flow Information
---------------------
Cash and cash equivalents include cash and due from banks and
interest-earning demand deposits.
Reclassification of Comparative Figures
---------------------------------------
Certain comparative amounts for prior years have been reclassified to
conform to current year presentations. Such reclassifications did not
affect net income or stockholders' equity.
Recent Accounting Pronouncements
--------------------------------
In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, which requires companies
to recognize costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. This statement replaces EITF Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring). The new
statement is effective for exit or disposal activities initiated after
December 31, 2002. The adoption of this statement did not have a material
effect on the Company's financial position or results of operations.
On October 1, 2002, the FASB issued FAS No. 147, Acquisitions of Certain
Financial Institutions, effective for all business combinations initiated
after October 1, 2002. This statement addresses the financial accounting
and reporting for the acquisition of all or part of a financial
institution, except for a transaction between two or more mutual
enterprises. This statement removes acquisitions of financial institutions,
other than transactions between two or more mutual enterprises, from the
scope of FAS No. 72, Accounting for Certain Acquisitions of Banking or
Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions
No. 16 and 17 When a Savings and Loan Association or a Similar Institution
Is Acquired in a Business Combination Accounted for by the Purchase Method.
The acquisition of all or part of a financial institution that meets the
definition of a business combination shall be accounted for by the purchase
method in accordance with FAS No. 141, Business Combinations, and FAS No.
142, Goodwill and Other Intangible Assets. This statement also provides
guidance on the accounting for the impairment or disposal of acquired
long-term customer-relationship intangible assets (such as depositor and
borrower-relationship intangible assets and credit cardholder intangible
assets), including those acquired in transactions between two or more
mutual enterprises. The adoption of FAS No. 147 did not have a material
effect on the Company's financial position or results of operations.
On December 31, 2002, the FASB issued FAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, which amends FAS No.
123, Accounting for Stock-Based Compensation. FAS No. 148 amends the
disclosure requirements of FAS No. 123 to require more prominent and more
frequent disclosures in financial statements about the effects of
stock-based compensation. Under the provisions of FAS No. 123, companies
that adopted the preferable, fair value based method were required to apply
that method prospectively for new stock option awards. This contributed to
a "ramp-up" effect on stock-based compensation expense in the first few
years following adoption, which caused concern for
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------------------
companies and investors because of the lack of consistency in reported
results. To address that concern, FAS No. 148 provides two additional
methods of transition that reflect an entity's full complement of
stock-based compensation expense immediately upon adoption, thereby
eliminating the ramp-up effect. FAS No. 148 also improves the clarity and
prominence of disclosures about the pro forma effects of using the fair
value based method of accounting for stock-based compensation for all
companies-regardless of the accounting method used-by requiring that the
data be presented more prominently and in a more user-friendly format in
the footnotes to the financial statements. In addition, the statement
improves the timeliness of those disclosures by requiring that this
information be included in interim as well as annual financial statements.
The transition guidance and annual disclosure provisions of FAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002.
In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under FAS No. 133. The amendments set forth in FAS No. 149
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this statement
clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in FAS No.
133. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
FAS No. 149 amends certain other existing pronouncements. Those changes
will result in more consistent reporting of contracts that are derivatives
in their entirety or that contain embedded derivatives that warrant
separate accounting. This statement is effective for contracts entered into
or modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be
applied prospectively. The provisions of this statement that relate to FAS
No. 133, Implementation Issues, that have been effective for fiscal
quarters that began prior to June 15, 2003, should continue to be applied
in accordance with their respective effective dates. In addition, certain
provisions relating to forward purchases or sales of when-issued securities
or other securities that do not yet exist, should be applied to existing
contracts as well as new contracts entered into after June 30, 2003. The
adoption of this statement is not expected to have a material effect on the
Company's financial position or results of operations.
In May 2003, the FASB issued FAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Such
instruments may have been previously classified as equity. This statement
is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this statement has
not and is not expected to have a material effect on the Company's reported
equity.
In November, 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. This interpretation clarifies that a guarantor is required to
disclose (a) the nature of the guarantee, including the approximate term of
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------------------
the guarantee, how the guarantee arose, and the events or circumstances
that would require the guarantor to perform under the guarantee; (b) the
maximum potential amount of future payments under the guarantee; (c) the
carrying amount of the liability, if any, for the guarantor's obligations
under the guarantee; and (d) the nature and extent of any recourse
provisions or available collateral that would enable the guarantor to
recover the amounts paid under the guarantee. This interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken in issuing the
guarantee, including its ongoing obligation to stand ready to perform over
the term of the guarantee in the event that the specified triggering events
or conditions occur. The objective of the initial measurement of that
liability is the fair value of the guarantee at its inception. The initial
recognition and initial measurement provisions of this interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements in this interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of this interpretation did not have a material effect on the
Company's financial position or results of operations.
In January, 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, in an effort to expand upon and strengthen
existing accounting guidance that addresses when a company should include
in its financial statements the assets, liabilities, and activities of
another entity. The objective of this interpretation is not to restrict the
use of variable interest entities but to improve financial reporting by
companies involved with variable interest entities. Until now, one company
generally has included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. This
interpretation changes that, by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. The
consolidation requirements of this interpretation apply immediately to
variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31,
2003, regardless of when the variable interest entity was established. The
adoption of this interpretation has not and is not expected to have a
material effect on the Company's financial position or results of
operations.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share.
2003 2002 2001
---------- ---------- ----------
Weighted-average common shares
outstanding 3,731,949 3,718,640 3,695,294
Average treasury stock shares (1,114,373) (994,749) (891,169)
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 2,617,576 2,723,891 2,804,125
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 6,819 8,600 11,742
---------- ---------- ----------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 2,624,395 2,732,491 2,815,867
========== ========== ==========
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
2. EARNINGS PER SHARE (Continued)
There are no convertible securities that would affect the numerator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statement of Income is used.
Options to purchase 76,600 shares of common stock at prices from $14.00 to
$15.625 were outstanding during 2001, but were not included in the
computation of diluted EPS because to do so would have been anti-dilutive.
3. COMPREHENSIVE INCOME
Other comprehensive income primarily reflects changes in net unrealized
gains on available for sale securities. Total comprehensive income for the
years ended June 30 is summarized as follows:
2003 2002 2001
------ ------ ------
Net Income $3,348 $4,448 $4,762
Other comprehensive Income:
Unrealized gains on available for sale securities 258 141 462
Less: Reclassification adjustment for gain included
in net income 64 - -
------ ------ ------
Other comprehensive income before tax 258 141 462
Income tax expense related to other comprehensive income 88 48 157
------ ------ ------
Other comprehensive income, net of tax 170 93 305
------ ------ ------
Comprehensive income $3,518 $4,541 $5,067
====== ====== ======
4. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments are as
follows:
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
2003
----
AVAILABLE FOR SALE
Preferred trust securities $ 128 $ 3 $ - $ 131
Corporate debt securities 7,428 62 (2) 7,488
Obligations of states and political
subdivisions 1,000 - - 1,000
Commercial paper 15,442 - (1) 15,441
Equity securities 1,312 269 - 1,581
-------- -------- -------- --------
Total $ 25,310 $ 334 $ (3) $ 25,641
======== ======== ======== ========
HELD TO MATURITY
U.S. Government agency securities $ 24,097 $ 601 $ - $ 24,698
Corporate debt securities 66,978 487 (6) 67,459
Commercial paper 1,099 - - 1,099
Obligations of states and political
subdivisions 29,667 3,113 - 32,780
-------- -------- -------- --------
Total $121,841 $ 4,201 $ (6) $126,036
======== ======== ======== ========
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
4. INVESTMENT SECURITIES (Continued)
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
2002
----
AVAILABLE FOR SALE
Preferred trust securities $ 860 $ 17 $ (3) $ 874
Commercial paper 6,495 - - 6,495
Equity securities 1,020 38 (1) 1,057
-------- -------- -------- --------
Total $ 8,375 $ 55 $ (4) $ 8,426
======== ======== ======== ========
HELD TO MATURITY
U.S. Government agency securities $ 55,216 $ 1,016 $ (22) $ 56,210
Corporate debt securities 58,415 193 (51) 58,557
Obligations of states and political
subdivisions 29,327 2,052 - 31,379
-------- -------- -------- --------
Total $142,958 $ 3,261 $ (73) $146,146
======== ======== ======== ========
In 2003, the Company recorded investment security gains of $64. Proceeds
from sales of investment securities during 2003 were $639.
The amortized cost and estimated market values of debt securities at June
30, 2003, by contractual maturity, are shown below. Expected maturities may
differ from the contractual maturities because issuers may have the right
to call securities prior to their final maturities.
Due in Due after Due after
one year one through five through Due after
or less five years ten years ten years Total
-------- ----------- ------------ --------- --------
AVAILABLE FOR SALE
Amortized cost $ 22,870 $ 1,000 $ - $ 128 $ 23,998
Estimated market value 22,869 1,060 - 131 24,060
HELD TO MATURITY
Amortized cost $ 56,313 $ 12,065 $ 1,494 $ 51,969 $121,841
Estimated market value 56,582 12,277 1,737 55,440 126,036
Investment securities with amortized cost of $17,624 and $41,219 and
estimated market values of $18,009 and $41,956 at June 30, 2003 and 2002,
respectively, were pledged to secure public deposits, repurchase
agreements, and for other purposes as required by law.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
5. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market values of mortgage-backed
securities are as follows:
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
2003
----
AVAILABLE FOR SALE
Federal National Mortgage
Association certificates $ 1,494 $ 78 $ - $ 1,572
Government National Mortgage
Association certificates 2,510 70 - 2,580
Federal Home Loan Mortgage
Corporation certificates 47 3 - 50
Collateralized mortgage obligations 168 17 185
-------- -------- -------- --------
Total $ 4,219 $ 168 $ - $ 4,387
======== ======== ======== ========
HELD TO MATURITY
Federal National Mortgage
Association certificates $ 29 $ 1 $ - $ 30
Government National Mortgage
Association certificates 2,603 81 (17) 2,667
Federal Home Loan Mortgage
Corporation certificates 36 - - 36
Collateralized mortgage obligations 104,824 392 (35) 105,181
-------- -------- -------- --------
Total $107,492 $ 474 $ (52) $107,914
======== ======== ======== ========
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
2002
----
AVAILABLE FOR SALE
Federal National Mortgage
Association certificates $ 3,228 $ 106 $ - $ 3,334
Government National Mortgage
Association certificates 2,627 128 - 2,755
Federal Home Loan Mortgage
Corporation certificates 48 1 - 49
Collateralized mortgage obligations 293 19 - 312
-------- -------- -------- --------
Total $ 6,196 $ 254 $ - $ 6,450
======== ======== ======== ========
HELD TO MATURITY
Federal National Mortgage
Association certificates $ 35 $ 3 $ - $ 38
Government National Mortgage
Association certificates 4,069 190 - 4,259
Federal Home Loan Mortgage
Corporation certificates 60 5 - 65
Collateralized mortgage obligations 71,929 615 (87) 72,457
-------- -------- -------- --------
Total $ 76,093 $ 813 $ (87) $ 76,819
======== ======== ======== ========
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
5. MORTGAGE-BACKED SECURITIES (Continued)
The amortized cost and estimated market values of mortgage-backed
securities at June 30, 2003, by contractual maturity, are shown below.
Expected maturities may differ from the contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
Due in Due after Due after
one year one through five through Due after
or less five years ten years ten years Total
-------- ----------- ------------ --------- --------
AVAILABLE FOR SALE
Amortized cost $ - $ - $ 25 $ 4,194 $ 4,219
Estimated market value - - 26 4,361 4,387
HELD TO MATURITY
Amortized cost $ - $ - $ 34 $107,458 $107,492
Estimated market value - - 35 107,879 107,914
At June 30, 2003 and 2002, mortgage-backed securities with an amortized
cost of $67,746 and $48,161 and estimated market values of $68,179 and
$49,099, were pledged to secure borrowings with the Federal Home Loan Bank.
6. NET LOANS RECEIVABLE
Major classifications of loans are summarized as follows:
2003 2002
-------- --------
First mortgage loans:
1 - 4 family dwellings $ 43,255 $ 89,889
Construction 16,942 19,965
Land acquisition and development 7,437 6,691
Multi-family dwellings 5,196 6,173
Commercial 17,949 25,439
-------- --------
90,779 148,157
-------- --------
Consumer loans:
Home equity 8,006 11,352
Home equity lines of credit 4,368 4,967
Other 1,069 1,515
-------- --------
13,443 17,834
-------- --------
Commercial loans 1,499 1,447
-------- --------
Less:
Undisbursed construction and land development 11,348 11,311
Net deferred loan fees 174 464
Allowance for loan losses 2,530 2,758
-------- --------
14,052 14,533
-------- --------
Net loans receivable $ 91,669 $152,905
======== ========
The Company's primary business activity is with customers located within
its local trade area of Northern Allegheny and Southern Butler counties.
The Company has concentrated its lending efforts by granting residential
and construction mortgage loans to customers throughout its immediate trade
area. The Company also selectively funds and participates in commercial and
residential mortgage loans outside of its immediate trade area, provided
such loans meet the Company's credit policy guidelines. In general, the
Company's loan portfolio performance at June 30, 2003 and 2002, is
dependent upon the local economic conditions.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
6. NET LOANS RECEIVABLE (Continued)
Total nonaccrual loans and troubled debt restructurings and the related
interest income recognized for the years ended June 30, are as follows:
2003 2002 2001
------ ------ ------
Principal outstanding $3,481 $5,044 $5,016
------ ------ ------
Interest income that would
have been recognized $ 256 $ 408 $ 422
Interest income recognized 26 162 296
------ ------ ------
Interest income foregone $ 230 $ 246 $ 126
====== ====== ======
Included in total nonaccrual loans are impaired loans of approximately
$3,423 and $3,600 at June 30, 2003 and 2002. A related allowance for loan
losses of $1,816 and $1,764 has been reserved for these impaired loans,
respectively. During the years, the Company had an average balance of
$3,441 and $3,586, and recognized $23 and $116 in interest income on these
loans, respectively.
Certain officers, directors, and their associates were customers of, and
had transactions with, the Company in the ordinary course of business. A
summary of loan activity for those directors, executive officers, and their
associates with aggregate loan balances outstanding of at least $60,000
during the years ended June 30, are as follows:
2003 2002
----- -----
Balance, July 1 $ 822 $ 894
Additions 49 370
Amounts collected (336) (442)
----- -----
Balance, June 30 $ 535 $ 822
===== =====
7. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
2003 2002 2001
------- ------- -------
Balance, July 1 $ 2,758 $ 2,763 $ 1,973
Add:
Provision for loan losses (228) 57 788
Recoveries - 6 19
Less:
Loans charged off - 68 17
------- ------- -------
Balance, June 30 $ 2,530 $ 2,758 $ 2,763
======= ======= =======
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
2003 2002
------ ------
Investment and mortgage-backed securities $2,283 $2,996
Loans receivable 517 907
------ ------
Total $2,800 $3,903
====== ======
9. FEDERAL HOME LOAN BANK STOCK
The Savings Bank is a member of the Federal Home Loan Bank System. As a
member, West View maintains an investment in the capital stock of the
Federal Home Loan Bank ("FHLB") of Pittsburgh in an amount not less than 70
basis points of the outstanding unused FHLB borrowing capacity and one
twentieth of its outstanding FHLB borrowings, as calculated throughout the
year.
10. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
2003 2002
------ ------
Land and improvements $ 264 $ 264
Buildings and improvements 2,024 1,996
Furniture, fixtures, and equipment 1,069 1,035
------ ------
3,357 3,295
Less accumulated depreciation 2,126 2,299
------ ------
Total $1,231 $ 996
====== ======
Depreciation charged to operations was $156, $123, and $111, for the years ended
June 30, 2003, 2002, and 2001, respectively.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
11. DEPOSITS
Deposit accounts are summarized as follows:
2003 2002
-------------------- --------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
-------- ---------- -------- ----------
Noninterest-earning checking $ 11,302 6.6% $ 12,615 7.0%
Interest-earning checking 19,215 11.2 20,872 11.8
Savings accounts 44,152 25.8 41,620 23.4
Money market accounts 14,691 9.0 14,843 8.4
Advance payments by borrowers
for taxes and insurance 1,610 0.8 3,013 1.7
-------- ----- -------- -----
90,970 53.4 92,963 52.3
-------- ----- -------- -----
Savings certificates:
2.00% or less 34,419 20.1 7,726 4.3
2.01 - 4.00% 27,443 16.0 49,500 27.9
4.01 - 6.00% 15,685 9.1 23,955 13.5
6.01 - 8.00% 2,409 1.4 3,528 2.0
-------- ----- -------- -----
79,956 46.6 84,709 47.7
-------- ----- -------- -----
Total $170,926 100.0% $177,672 100.0%
======== ===== ======== =====
The maturities of savings certificates at June 30, 2003, are summarized as
follows:
Within one year $56,887
Beyond one year but within two years 11,185
Beyond two years but within three years 4,583
Beyond three years 7,301
-------
Total $79,956
=======
Savings certificates with balances of $100,000 or more amounted to $14,161
and $12,277 on June 30, 2003 and 2002, respectively.
Interest expense by deposit category for the years ended June 30, are as
follows:
2003 2002 2001
------ ------ ------
Checking accounts $ 66 $ 94 $ 135
Savings accounts 509 735 893
Money market accounts 183 257 329
Savings certificates 2,554 3,996 5,463
------ ------ ------
Total $3,312 $5,082 $6,820
====== ====== ======
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
12. FEDERAL HOME LOAN BANK ADVANCES
The following table presents contractual maturities of FHLB long-term
advances as of June 30:
Weighted Stated interest
Maturity range average rate range
Description from to interest rate from to 2003 2002
----------- -------- -------- ------------- ---- ---- -------- --------
Convertible 02/20/08 06/22/16 5.35% 2.86% 6.10% $144,500 $144,500
Fixed rate 12/22/03 05/03/10 5.09 3.36 5.43 5,015 15,437
-------- --------
$149,515 $159,937
======== ========
Maturities of FHLB long-term advances at June 30, 2003 are summarized as
follows:
Weighted-
Maturing During average
Fiscal Year Ended Interest
June 30: Amount Rate
------------------- -------- ---------
2004 $ 279 3.36%
2006 4,157 5.42
2008 3,000 5.48
2009 and thereafter 142,079 5.34
-------
Total $149,515 5.34%
========
The terms of the convertible advances reset to the three-month London
Interbank Offered Rate ("LIBOR") and have various spreads and call dates
ranging from three months to seven years. The FHLB has the right to call
any convertible select advance on its call date or quarterly thereafter.
Should the advance be called, the Company has the right to pay off the
advance without penalty. The FHLB advances are secured by the Company's
FHLB stock and investment securities and are subject to substantial
prepayment penalties.
WVS also utilized revolving and short-term FHLB advances. Short-term FHLB
advances generally mature within 90 days, while revolving FHLB advances may
be repaid by the Company without penalty. The following table presents
information regarding such advances as of June 30:
2003 2002
------- -------
FHLB revolving and short-term advances:
Ending balance $ 3,875 $ -
Average balance during the year 1,149 5,814
Maximum month-end balance during the year 14,350 13,850
Average interest rate during the year 1.64% 2.92%
Weighted-average rate at year-end 1.35% -%
At June 30, 2003, WVS had an unused borrowing capacity of approximately
$24,906.
The FHLB advances are secured by the Company's FHLB stock and investment
and mortgage-backed securities held in safekeeping at the FHLB, and are
subject to substantial prepayment penalties.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
13. OTHER BORROWINGS
Other borrowings include securities sold under agreements to repurchase
with securities brokers. The outstanding repurchase agreements generally
mature within one to ninety days from the transaction date and qualifying
collateral has been delivered. The Company pledged investment securities
with a carrying value of $9,495 and $33,075 at June 30, 2003 and 2002,
respectively, as collateral for the repurchase agreements as explained in
Notes 4 and 5. The following table presents information regarding other
borrowings as of June 30:
2003 2002
------- -------
Ending balance $ 9,453 $33,731
Average balance during the year 18,277 13,179
Maximum month-end balance during the year 38,184 33,731
Average interest rate during the year 1.50% 2.34%
Weighted-average rate at year-end 1.23% 1.84%
14. COMMITMENTS AND CONTINGENT LIABILITIES
Loan commitments
In the normal course of business, there are various outstanding commitments
and certain contingent liabilities that are not reflected in the
accompanying consolidated balance sheet. Various loan commitments totaling
$19,340 and $19,542 at June 30, 2003 and 2002, respectively, represent
financial instruments with off-balance sheet risk. The commitments
outstanding at June 30, 2003 contractually mature in less than one year.
Loan commitments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheet. The same credit policies are used in making commitments and
conditional obligations as for on-balance sheet instruments. Generally,
collateral, usually in the form of real estate, is required to support
financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the loan
agreement. These commitments are comprised primarily of the undisbursed
portion of construction and land development loans (Note 6), residential,
commercial real estate, and consumer loan originations.
The exposure to loss under these commitments is limited by subjecting them
to credit approval and monitoring procedures. Substantially all commitments
to extend credit are contingent upon customers maintaining specific credit
standards at the time of the loan funding. Management assesses the credit
risk associated with certain commitments to extend credit in determining
the level of the allowance for loan losses.
As of June 30, 2003, the Company had committed to purchase $21,079 in
investment securities.
Litigation
The Company is involved with various other legal actions arising in the
ordinary course of business. Management believes the outcome of these
matters will have no material effect on the consolidated operations or
financial condition of WVS.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
15. REGULATORY CAPITAL
Federal regulations require the Company and Savings Bank to maintain
minimum amounts of capital. Specifically, each is required to maintain
certain minimum dollar amounts and ratios of Total and Tier I Capital to
Risk-weighted Assets and of Tier I Capital to Average Total Assets.
In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") established five capital categories
ranging from well capitalized to critically undercapitalized. Should any
institution fail to meet the requirements to be considered adequately
capitalized, it would become subject to a series of increasingly
restrictive regulatory actions.
As of June 30, 2003 and 2002, the FDIC categorized the Savings Bank as well
capitalized under the regulatory framework for prompt corrective action. To
be classified as a well capitalized financial institution, Total
Risk-based, Tier 1 Risk-based, and Tier 1 Leverage Capital Ratios must be
at least ten percent, six percent, and five percent, respectively.
The Company's and Savings Bank's actual capital ratios are presented in the
following tables, which show that both met all regulatory capital
requirements.
June 30, 2003
--------------------------------------------
WVS West View
------------------- -------------------
Amount Ratio Amount Ratio
------- ----- ------- -----
Total Capital (to Risk-weighted Assets)
---------------------------------------
Actual $32,941 15.57% $27,738 13.38%
To Be Well Capitalized 21,176 10.00 20,737 10.00
For Capital Adequacy Purposes 16,941 8.00 16,590 8.00
Tier I Capital (to Risk-weighted Assets)
----------------------------------------
Actual $30,290 14.30% $25,202 12.15%
To Be Well Capitalized 12,706 6.00 12,442 6.00
For Capital Adequacy Purposes 8,470 4.00 8,295 4.00
Tier I Capital (to Average Total Assets)
----------------------------------------
Actual $30,290 8.42% $25,202 7.07%
To Be Well Capitalized 17,967 5.00 17,819 5.00
For Capital Adequacy Purposes 14,373 4.00 14,255 4.00
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
15. REGULATORY CAPITAL (Continued)
June 30, 2002
--------------------------------------------
WVS West View
------------------- -------------------
Amount Ratio Amount Ratio
------- ----- ------- -----
Total Capital (to Risk-weighted Assets)
---------------------------------------
Actual $32,826 14.66% $27,119 12.25%
To Be Well Capitalized 22,400 10.00 22,144 10.00
For Capital Adequacy Purposes 17,920 8.00 17,715 8.00
Tier I Capital (to Risk-weighted Assets)
----------------------------------------
Actual $30,052 13.42% $24,360 11.00%
To Be Well Capitalized 13,440 6.00 13,286 6.00
For Capital Adequacy Purposes 8,960 4.00 8,857 4.00
Tier I Capital (to Average Total Assets)
----------------------------------------
Actual $30,052 7.69% $24,360 6.29%
To Be Well Capitalized 19,519 5.00 19,361 5.00
For Capital Adequacy Purposes 15,615 4.00 15,489 4.00
Prior to the enactment of the Small Business Job Protection Act, the
Company accumulated approximately $3.9 million of retained earnings, which
represent allocations of income to bad debt deductions for tax purposes
only. Since there is no amount that represents the accumulated bad debt
reserves subsequent to 1987, no provision for federal income tax has been
made for such amount. If any portion of this amount is used other than to
absorb loan losses (which is not anticipated), the amount will be subject
to federal income tax at the current corporate rate.
16. STOCK BENEFIT PLANS
Stock Option Plan
The Company maintains a Stock Option Plan for the directors, officers, and
employees. An aggregate of 347,258 shares of authorized but unissued common
stock of WVS were reserved for future issuance under this Plan. The stock
options typically have an expiration term of ten years, subject to certain
extensions and early terminations. The per share exercise price of an
incentive stock option shall at a minimum equal the fair market value of a
share of common stock on the date the option is granted. The per share
exercise price of a compensatory stock option granted shall at least equal
the greater of par value or 85 percent of the fair market value of a share
of common stock on the date the option is granted. Proceeds from the
exercise of the stock options are credited to common stock for the
aggregate par value and the excess is credited to paid-in capital.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
16. STOCK BENEFIT PLANS (Continued)
Stock Option Plan (Continued)
The following table presents information related to the outstanding
options:
Officers' and Weighted-
Employees' Directors' average
Stock Stock Exercise
Options Options Price
------------- ---------- ---------
Outstanding, June 30, 2000 110,866 16,400 $11.56
Granted 4,000 2,000 12.73
Exercised (16,310) (7,000) 5.11
Forfeited (160) - 5.00
------- -------
Outstanding, June 30, 2001 98,396 11,400 $13.89
Granted - 1,214 15.77
Granted (15,068) (6,200) 9.96
Granted (4,916) - 15.63
------- -------
Outstanding, June 30, 2002 78,412 6,414 $14.80
Granted - -
Exercised (4,992) (1,200) 11.40
Forfeited - -
------- -------
Outstanding, June 30, 2003 73,420 5,214 $15.07
======= =======
Exercisable at year-end 73,420 5,214 $15.07
======= =======
Available for future grant 5,174 -
======= =======
At June 30, 2003, for officers and employees there were 73,420 options
outstanding, exercisable at a weighted-average exercise price of $15.09,
and a weighted-average remaining contractual life of 4.66 years.
There were also 5,214 options outstanding and exercisable for directors
with a weighted-average exercise price of $14.77, and a weighted-average
remaining contractual life of 6.12 years.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
16. STOCK BENEFIT PLANS (Continued)
Recognition and Retention Plans ("RRP")
---------------------------------------
The Company also maintains an RRP for substantially all officers,
employees, and directors of the Company. The objective of the RRPs is to
enable the Company to retain its corporate officers, key employees, and
directors who have the experience and ability necessary to manage WVS and
the Savings Bank. Officers and key employees of the Company who were
selected by members of a Board-appointed committee are eligible to receive
benefits under the RRPs. Non-employee directors of the Company are eligible
to participate in the RRP for directors.
An aggregate of 300,000 shares of common stock of WVS were acquired at
conversion for future issuance under these plans, of which 60,000 shares
are subject to the RRP for directors and 240,000 shares are subject to the
RRP for officers and key employees.
As of June 30, 2003, 7,580 RRP shares were available for future issuance.
RRP costs are accrued to operations and added back to stockholders' equity
over a four to ten-year vesting period. Net compensation expense attributed
to the RRPs amounted to $23, $59, and $89 for the years ended June 30,
2003, 2002, and 2001.
Employee Stock Ownership Plan ("ESOP")
--------------------------------------
WVS maintains an ESOP for the benefit of officers and Savings Bank
employees who have met certain eligibility requirements related to age and
length of service. Compensation expense for the ESOP was $100, $200, and
$200, for the years ended June 30, 2003, 2002, and 2001, respectively.
Total ESOP shares as of June 30, 2003 and 2002 were 219,865 and 220,806,
respectively.
17. DIRECTOR, OFFICER, AND EMPLOYEE BENEFITS
Profit Sharing Plan
The Company maintains a non-contributory profit sharing 401(k) plan (the
"Plan") for its officers and employees who have met the age and length of
service requirements. The Plan is a defined contribution plan with the
contributions based on a percentage of salaries of the Plan participants.
The Company's contributions to the Plan, which were charged to expense,
were $200 for the year ended June 30, 2000.
Directors' Deferred Compensation Plan
The Company maintains a deferred compensation plan (the "Plan") for
directors who elect to defer all or a portion of their directors' fees.
Deferred fees are paid to the participants in installments commencing in
the year following the year the individual is no longer a member of the
Board of Directors.
The Plan allows for the deferred amounts to be paid in shares of common
stock at the prevailing market price on the date of distribution. For
fiscal years ended June 30, 2003, 2002, and 2001, 37,939, 48,311, and
46,961, shares respectively, were held by the Plan.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
18. INCOME TAXES
The provision for income taxes consists of:
2003 2002 2001
------- ------- -------
Currently payable:
Federal $ 794 $ 1,667 $ 2,086
State 233 239 240
------- ------- -------
1,027 1,906 2,326
Deferred 43 (93) (370)
------- ------- -------
Total $ 1,070 $ 1,813 $ 1,956
======= ======= =======
The following temporary differences gave rise to the net deferred tax
assets at June 30:
2003 2002
------ ------
Deferred tax assets:
Allowance for loan losses $ 860 $ 937
Deferred compensation 314 297
Other 268 228
------ ------
Total gross deferred tax assets 1,442 1,462
------ ------
Deferred tax liabilities:
Bad debt reserve for tax reporting purposes 19 85
Net unrealized gain on securities available for sale 169 104
Deferred origination fees, net 204 176
Other 117 56
------ ------
Total gross deferred tax liabilities 509 421
------ ------
Net deferred tax assets $ 933 $1,041
====== ======
No valuation allowance was established at June 30, 2003 and 2002, in view
of WVS's ability to carryback to taxes paid in previous years, future
anticipated taxable income, which is evidenced by WVS's earnings potential,
and deferred tax liabilities at June 30.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
18. INCOME TAXES (Continued)
The following is a reconciliation between the actual provision for income
taxes and the amount of income taxes which would have been provided at
federal statutory rates for the years ended June 30:
2003 2002 2001
--------------------- -------------------- --------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
--------------------- -------------------- --------------------
Provision at statutory rate $ 1,502 34.0% $ 2,129 34.0% $ 2,284 34.0%
State income tax, net of federal
tax benefit 154 3.5 158 2.5 158 2.4
Tax exempt income (549) (12.4) (555) (8.9) (493) (7.3)
Other, net (37) (0.9) 81 1.4 7 -
------- ---- ------- ---- ------- ----
Actual tax expense and
effective rate $ 1,070 24.2% $ 1,813 29.0% $ 1,956 29.1%
======= ==== ======= ==== ======= ====
The Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax,
which is calculated at 11.5 percent of earnings.
19. REGULATORY MATTERS
Cash and Due from Banks
The Federal Reserve requires the Savings Bank to maintain certain reserve
balances. The required reserves are computed by applying prescribed ratios
to the Savings Bank's average deposit transaction account balances. As of
June 30, 2003 and 2002, the Savings Bank had required reserves of $763 and
$809, respectively. The required reserves are held in the form of vault
cash and a noninterest-bearing depository balance maintained directly with
the Federal Reserve.
Loans
Federal law prohibits the Company from borrowing from the Savings Bank
unless the loans are secured by specific obligations. Further, such secured
loans are limited in amount to ten percent of the Savings Bank's capital
surplus.
Dividend Restrictions
The Savings Bank is subject to the Pennsylvania Banking Code that restricts
the availability of surplus for dividend purposes. At June 30, 2003,
surplus funds of $3,363 were not available for dividends.
20. CONVERSION AND REORGANIZATION
In accordance with regulations at the time that the Savings Bank converted
from a mutual savings bank to a stock savings bank, a portion of retained
earnings was restricted by establishing a liquidation account. The
liquidation account will be maintained for the benefit of eligible account
holders who continue to maintain their accounts at the Savings Bank after
the conversion, for a period of ten years from the date of the stock
conversion. The liquidation account will be reduced annually to the extent
that eligible account holders have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest
in the liquidation account. In the unlikely event of a complete liquidation
of the Savings Bank, each account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for the accounts then held.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values at June 30, are as follows:
2003 2002
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
FINANCIAL ASSETS
Cash and due from banks and interest-
earning demand deposits $ 2,815 $ 2,815 $ 3,177 $ 3,177
Investment securities 147,482 151,677 151,384 154,572
Mortgage-backed securities 111,879 112,301 82,543 83,269
Net loans receivable 91,669 98,108 152,905 160,517
Accrued interest receivable 2,800 2,800 3,903 3,903
FHLB stock 7,797 7,797 8,281 8,281
FINANCIAL LIABILITIES
Deposits $170,926 $171,830 $177,672 $178,357
FHLB advances 153,390 163,829 159,937 162,928
Other borrowings 9,453 9,453 33,731 33,731
Accrued interest payable 1,449 1,449 1,698 1,698
Financial instruments are defined as cash, evidence of an ownership
interest in an entity, or a contract which creates an obligation or right
to receive or deliver cash or another financial instrument from or to a
second entity on potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could
be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. If a quoted market price is available for
a financial instrument, the estimated fair value would be calculated based
upon the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for
financial instruments should be based upon management's judgment regarding
current economic conditions, interest rate risk, expected cash flows,
future estimated losses and other factors, as determined through various
option pricing formulas or simulation modeling. As many of these
assumptions result from judgments made by management based upon estimates,
which are inherently uncertain, the resulting estimated values may not be
indicative of the amount realizable in the sale of a particular financial
instrument. In addition, changes in the assumptions on which the estimated
values are based may have a significant impact on the resulting estimated
values.
As certain assets and liabilities, such as deferred tax assets, premises
and equipment, and many other operational elements of WVS are not
considered financial instruments, but have value, this estimated fair value
of financial instruments would not represent the full market value of WVS.
Estimated fair values have been determined by WVS using the best available
data, as generally provided in internal Savings Bank reports and regulatory
reports, using an estimation methodology suitable for each category of
financial instruments. The estimation methodologies used are as follows:
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Cash and Due from Banks, Interest-Earning Demand Deposits, Accrued Interest
---------------------------------------------------------------------------
Receivable and Payable, and Other Borrowings
--------------------------------------------
The fair value approximates the current book value.
Investment Securities, Mortgage-Backed Securities, and FHLB Stock
-----------------------------------------------------------------
The fair value of investment and mortgage-backed securities held to
maturity is equal to the available quoted market price. If no quoted market
price is available, fair value is estimated using the quoted market price
for similar securities. Since the FHLB stock is not actively traded on a
secondary market and held exclusively by member financial institutions, the
estimated fair market value approximates the carrying amount.
Net Loans Receivable and Deposits
---------------------------------
Fair value for consumer mortgage loans is estimated using market quotes or
discounting contractual cash flows for prepayment estimates. Discount rates
were obtained from secondary market sources, adjusted to reflect
differences in servicing, credit, and other characteristics.
The estimated fair values for consumer, fixed rate commercial, and
multi-family real estate loans are estimated by discounting contractual
cash flows for prepayment estimates. Discount rates are based upon rates
generally charged for such loans with similar credit characteristics.
The estimated fair value for nonperforming loans is the appraised value of
the underlying collateral adjusted for estimated credit risk.
Demand, savings, and money market deposit accounts are reported at book
value. The fair value of certificates of deposit is based upon the
discounted value of the contractual cash flows. The discount rate is
estimated using average market rates for deposits with similar average
terms.
FHLB Advances
The fair values of fixed rate advances are estimated using discounted cash
flows, based on current incremental borrowing rates for similar types of
borrowing arrangements. The carrying amount on variable rate advances
approximates their fair value.
Commitments to Extend Credit
----------------------------
These financial instruments are generally not subject to sale, and
estimated fair values are not readily available. The carrying value,
represented by the net deferred fee arising from the unrecognized
commitment, and the fair value determined by discounting the remaining
contractual fee over the term of the commitment using fees currently
charged to enter into similar agreements with similar credit risk, are not
considered material for disclosure. The contractual amounts of unfunded
commitments are presented in Note 14 to these financial statements.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
22. PARENT COMPANY
Condensed financial information of WVS Financial Corp. is as follows:
CONDENSED BALANCE SHEET
June 30,
2003 2002
------- -------
ASSETS
Interest-earning deposits with subsidiary bank $ 718 $ 3,065
Investment securities available for sale 4,153 2,179
Investment and mortgage-backed securities held to maturity 250 -
Investment in subsidiary bank 25,310 24,457
Loan receivable 114 463
Accrued interest receivable and other assets 168 125
------- -------
TOTAL ASSETS $30,713 $30,289
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 95 $ 36
Stockholders' equity 30,618 30,253
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $30,713 $30,289
======= =======
CONDENSED STATEMENT OF INCOME
Year Ended June 30,
2003 2002 2001
------ ------ ------
INCOME
Loans $ 27 $ 45 $ -
Investment and mortgage-backed securities 111 118 84
Dividend from subsidiary 2,400 3,800 4,549
Investment securities gains, net 64 - -
Interest-earning deposits with subsidiary bank 33 50 76
------ ------ ------
Total income 2,635 4,013 4,709
------ ------ ------
OTHER OPERATING EXPENSE 111 96 51
------ ------ ------
Income before equity in undistributed
earnings of subsidiary 2,524 3,917 4,658
Equity in undistributed earnings of subsidiary 840 558 136
------ ------ ------
Income before income taxes 3,364 4,475 4,794
Income taxes 16 27 32
------ ------ ------
NET INCOME $3,348 $4,448 $4,762
====== ====== ======
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
22. PARENT COMPANY (Continued)
CONDENSED STATEMENT OF CASH FLOWS
Year Ended June 30,
2003 2002 2001
-------- -------- --------
OPERATING ACTIVITIES
Net income $ 3,348 $ 4,448 $ 4,762
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed net income of subsidiary (840) (558) (136)
Investment gains, net (64) - -
Amortization (accretion) of investment discounts and premiums, net 22 (23) -
Amortization of ESOP and RRP deferred
compensation 22 59 75
Other, net 23 30 143
-------- -------- --------
Net cash provided by operating activities 2,511 3,956 4,844
-------- -------- --------
INVESTING ACTIVITIES
Available for sale:
Purchase of investment and
mortgage-backed securities (4,934) (9,148) (2,503)
Proceeds from repayments of investment and
mortgage-backed securities 2,582 8,159 -
Proceeds from sales of investment securities 639 - -
Held to maturity:
Purchases of investment and mortgage-backed
securities (1,817) (7,789) -
Proceeds from repayments of investment and
mortgage-backed securities 1,555 10,304 -
Net decrease (increase) in loans receivable 354 (469) -
-------- -------- --------
Net cash provided by (used for) investing activities (1,621) 1,057 (2,503)
-------- -------- --------
FINANCING ACTIVITIES
Net proceeds from exercise of stock options 71 212 119
Cash dividends paid (1,674) (1,743) (1,797)
Purchases of treasury stock (1,634) (1,544) (1,819)
-------- -------- --------
Net cash used for financing activities (3,237) (3,075) (3,497)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (2,347) 1,938 (1,156)
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR 3,065 1,127 2,283
-------- -------- --------
CASH AND CASH EQUIVALENTS
END OF YEAR $ 718 $ 3,065 $ 1,127
======== ======== ========
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
23. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
Three Months Ended
---------------------------------------------------------------
September December March June
2002 2002 2003 2003
----------- ----------- ----------- -----------
Total interest and dividend income $ 5,432 $ 5,023 $ 4,636 $ 4,140
Total interest expense 3,188 3,018 2,841 2,763
----------- ----------- ----------- -----------
Net interest income 2,244 2,005 1,795 1,377
Provision for loan losses 18 - (89) (157)
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 2,226 2,005 1,884 1,534
Total noninterest income 243 172 152 158
Total noninterest expense 1,120 1,045 975 816
----------- ----------- ----------- -----------
Income before income taxes 1,349 1,132 1,061 876
Income taxes 349 351 329 41
----------- ----------- ----------- -----------
Net income $ 1,000 $ 781 $ 732 $ 835
=========== =========== =========== ===========
Per share data:
Net income
Basic $ 0.38 $ 0.30 $ 0.28 $ 0.32
Diluted 0.37 0.30 0.28 0.32
Average shares outstanding
Basic 2,661,933 2,631,112 2,593,546 2,582,813
Diluted 2,667,220 2,636,633 2,598,775 2,594,053
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
23. SELECTED QUARTERLY FINANCIAL DATA (unaudited) (Continued)
Three Months Ended
---------------------------------------------------------------
September December March June
2001 2001 2002 2002
----------- ----------- ----------- -----------
Total interest and dividend income $ 6,551 $ 6,091 $ 5,574 $ 5,544
Total interest expense 3,859 3,637 3,321 3,208
----------- ----------- ----------- -----------
Net interest income 2,692 2,454 2,253 2,336
Provision for loan losses 37 20 - -
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 2,655 2,434 2,253 2,336
Total noninterest income 173 181 166 167
Total noninterest expense 976 1,109 978 1,041
----------- ----------- ----------- -----------
Income before income taxes 1,852 1,506 1,441 1,462
Income taxes 611 397 476 329
----------- ----------- ----------- -----------
Net income $ 1,241 $ 1,109 $ 965 $ 1,133
=========== =========== =========== ===========
Per share data:
Net income
Basic $ 0.45 $ 0.40 $ 0.36 $ 0.42
Diluted 0.45 0.40 0.35 0.42
Average shares outstanding
Basic 2,753,358 2,740,451 2,714,480 2,686,663
Diluted 2,763,744 2,752,157 2,720,976 2,692,474
48
COMMON STOCK MARKET PRICE AND DIVIDEND INFORMATION
WVS Financial Corp.'s common stock is traded on the over-the-counter market
and quoted on the Nasdaq Stock Market(SM) National Market System under the
symbol "WVFC".
The following table sets forth the high and low market prices of a share of
common stock, and cash dividends declared per share, for the periods
indicated.
Market Price
---------------------- Cash Dividends
Quarter Ended High Low Declared
------------- ------- ------- --------------
June 03 $18.930 $16.200 $ 0.16
March 03 16.250 15.410 0.16
December 02 16.250 15.100 0.16
September 02 16.050 15.800 0.16
June 02 $16.200 $13.990 $ 0.16
March 02 16.250 14.130 0.16
December 01 16.250 15.700 0.16
September 01 17.450 13.750 0.16
There were six Nasdaq Market Makers in the Company's common stock as of
June 30, 2003: F. J. Morrissey & Co., Inc.; Schwab Capital Markets;
Goldman, Sachs & Company; Morgan Stanley & Co, Inc; Ryan Beck & Co., Inc.;
and Knight Securities L.P.
According to the records of the Company's transfer agent, there were
approximately 828 shareholders of record at September 10, 2003. This does
not include any persons or entities who hold their stock in nominee or
"street name" through various brokerage firms.
Dividends are subject to determination and declaration by the Board of
Directors, which takes into account the Company's financial condition,
statutory and regulatory restrictions, general economic condition and other
factors.
49
WVS FINANCIAL CORP.
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
CORPORATE OFFICES
WVS FINANCIAL CORP. o WEST VIEW SAVINGS BANK
9001 Perry Highway Pittsburgh, PA 15237
412-364-1911
COMMON STOCK
The common stock of WVS Financial Corp. is traded on The Nasdaq
Stock MarketSM under the symbol "WVFC".
BOARD OF DIRECTORS
TRANSFER AGENT & REGISTRAR David L. Aeberli Funeral Director
Registrar and Transfer Company 10 McDonald-Aeberli Funeral Home, Inc.
Commerce Drive Cranford, NJ 07016
1-800-368-5948 Arthur H. Brandt Retired - Former
President and CEO Brandt
INVESTOR RELATIONS Pamela M. Tracy Excavating, Inc. and Retired -
412-364-1911 Former President and CEO Brandt
Paving, Inc.
COUNSEL Bruggeman & Linn
David J. Bursic President and Chief
SPECIAL COUNSEL Elias, Matz, Executive Officer WVS Financial
Tiernan & Herrick L.L.P. Corp. and West View Savings Bank
Washington, DC
Donald E. Hook Chairman Pittsburgh
WEST VIEW SAVINGS BANK 9001 Perry Cut Flower Co.
Highway Pittsburgh, PA 15237
412-364-1911 Lawrence M. Lehman Sole Proprietor
Newton-Lehman Insurance Agency
WEST VIEW OFFICE 456 Perry Highway
412-931-2171 John M. Seifarth Senior Engineer -
Consultant Nichols & Slagle
CRANBERRY OFFICE 20531 Perry Engineering, Inc.
Highway 412-931-6080/724-776-3480
Margaret VonDerau Corporate
FRANKLIN PARK OFFICE 2566 Brandt Secretary WVS Financial Corp. and
School Road 724-935-7100 West View Savings Bank
BELLEVUE OFFICE 572 Lincoln Avenue EXECUTIVE OFFICERS
412-761-5595
Donald E. Hook Chairman
SHERWOOD OAKS OFFICE Serving
Sherwood Oaks Cranberry Twp. David J. Bursic President and Chief
Executive Officer
LENDING DIVISION 2566 Brandt School
Road 724-935-7400 Margaret VonDerau Corporate
Secretary
Edward M. Wielgus Senior Vice
President and Chief Lending Officer
Keith A. Simpson Vice President,
Treasurer and Chief Accounting
Officer
The members of the Board of Directors serve in that capacity for both the
Company and the Savings Bank.
50
[LETTERHEAD WVS FINANCIAL CORPORATION A TRADITION OF QUALITY BANKING]