EXHIBIT 13
TABLE OF CONTENTS
Page
Number
------
Stockholders' Letter 1
Selected Financial and Other Data 2
Management's Discussion and Analysis 4
Report of Independent Registered Public Accounting Firm 18
Consolidated Balance Sheet 19
Consolidated Statement of Income 20
Consolidated Statement of Changes in Stockholders' Equity 21
Consolidated Statement of Cash Flows 22
Notes to the Consolidated Financial Statements 23
Common Stock Market Price and Dividend Information 51
Corporate Information 52
To Our Stockholders:
During Fiscal 2005, WVS Financial Corp. achieved solid gains in net
income, diluted earnings per share and return on stockholders' equity. We are
pleased to report that net income increased $607 thousand, or 26%, to $2.9
million; diluted earnings per share increased 32% to $1.19 from $0.90; and
return on stockholders' equity increased to 10.03% from 7.64%.
In response to a firming national economy, the Federal Reserve Board's
Open Market Committee increased its targeted federal funds rate by one-quarter
of a percent eight times during fiscal 2005, from 1.25% at June 30, 2004 to
3.25% at June 30, 2005. These changes have benefited depositors by enabling West
View Savings Bank to increase the rates paid on our money market and certificate
accounts. However, the intermediate and long-term market rates used to set our
loan offerings have remained stubbornly low with a downward bias. This
combination of rising short-term and low long-term rates causes us to cautiously
approach the first half of fiscal 2006.
While earning a competitive rate of return for our stockholders, the Bank
continues to serve its communities and invest for the future. In both September
2004 and 2005, Bank employees accepted donations, and provided other needed
support to local charities, for flood relief during Hurricanes Ivan and Katrina.
During the second half of fiscal 2006, the Bank will be upgrading its core
processing capabilities. These upgrades will support our customers' demands for
around the clock and secure banking access from home, office or while traveling.
We would like to thank retiring Director John M. Seifarth for 14 years of
dedicated service. John joined the Bank's board in 1991 following the merger of
Home Savings Association of Bellevue. As Chairman of the Audit Committee, John
has worked tirelessly with other board members, auditors and management to
seamlessly integrate the numerous accounting and financial reporting changes
over the years.
The Company also extends its thanks to each stockholder for your continued
support and trust. 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,
--------------------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands, except per share data)
Selected Financial Data:
Total assets $ 421,044 $ 433,624 $ 367,188 $ 404,911 $ 396,440
Net loans receivable 60,151 67,968 91,669 152,905 185,179
Mortgage-backed securities 162,151 75,590 111,879 82,543 64,132
Investment securities 183,066 273,589 147,482 151,384 129,593
Savings deposit accounts 163,589 159,318 169,316 174,659 178,029
FHLB advances 155,036 149,736 153,390 159,937 161,494
Other borrowings 69,680 91,639 9,453 33,731 20,660
Stockholders' equity 29,201 29,199 30,618 30,253 28,645
Non-performing assets and troubled
debt restructurings(1) 2,171 2,171 3,481 5,279 5,016
Selected Operating Data:
Interest income $ 17,874 $ 16,006 $ 19,231 $ 23,760 $ 29,185
Interest expense 11,844 10,987 11,810 14,025 18,561
----------- ----------- ----------- ----------- -----------
Net interest income 6,030 5,019 7,421 9,735 10,624
Provision for loan losses (46) (794) (228) 57 788
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 6,076 5,813 7,649 9,678 9,836
Non-interest income 992 715 725 687 669
Non-interest expense 3,532 3,607 3,956 4,104 3,787
----------- ----------- ----------- ----------- -----------
Income before income tax expense 3,536 2,921 4,418 6,261 6,718
Income tax expense 627 619 1,070 1,813 1,956
----------- ----------- ----------- ----------- -----------
Net income $ 2,909 $ 2,302 $ 3,348 $ 4,448 $ 4,762
=========== =========== =========== =========== ===========
Per Share Information:
Basic earnings $ 1.20 $ 0.91 $ 1.28 $ 1.63 $ 1.70
Diluted earnings $ 1.19 $ 0.90 $ 1.28 $ 1.63 $ 1.69
Dividends per share $ 0.64 $ 0.64 $ 0.64 $ 0.64 $ 0.64
Dividend payout ratio 53.33% 70.33% 50.00% 39.26% 37.65%
Book value per share at period end $ 12.20 $ 11.84 $ 11.86 $ 11.30 $ 10.40
Average shares outstanding:
Basic 2,432,267 2,535,796 2,617,576 2,723,891 2,804,125
Diluted 2,437,647 2,544,404 2,624,395 2,732,491 2,815,867
2
As of or For the Year Ended June 30,
----------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
Selected Operating Ratios(2):
Average yield earned on interest-
earning assets(3) 4.61% 4.27% 5.36% 6.41% 7.51%
Average rate paid on interest-
bearing liabilities 3.27 3.13 3.57 4.13 5.21
Average interest rate spread(4) 1.34 1.14 1.79 2.28 2.30
Net interest margin(4) 1.68 1.47 2.19 2.74 2.83
Ratio of interest-earning assets to
interest-bearing liabilities 111.45 111.76 112.56 112.34 111.33
Non-interest expense as a percent of
average assets 0.87 0.91 1.05 1.07 0.94
Return on average assets 0.71 0.58 0.89 1.16 1.19
Return on average equity 10.03 7.64 10.97 14.85 17.17
Ratio of average equity to average
assets 7.10 7.02 8.10 7.78 6.92
Full-service offices at end of period 5 5 5 5 5
Asset Quality Ratios(2):
Non-performing loans and troubled
debt restructurings as a percent of
net total loans(1) 3.49% 3.19% 3.80% 3.30% 2.71%
Non-performing assets as a percent
of total assets(1) 0.25 0.19 0.95 1.30 1.27
Non-performing assets and troubled
debt restructurings as a percent of
total assets 0.52 0.50 0.95 1.30 1.27
Allowance for loan losses as a
percent of total loans receivable 1.83 1.97 2.68 1.77 1.47
Allowance for loan losses as a
percent of non-performing loans 113.58 163.48 72.68 54.68 55.08
Charge-offs to average loans
receivable outstanding during the
period 0.37 0.68 0.00 0.04 0.01
Capital Ratios(2):
Tier 1 risk-based capital ratio 20.99% 18.65% 14.30% 13.42% 14.15%
Total risk-based capital ratio 21.80 19.62 15.57 14.66 15.40
Tier 1 leverage capital ratio 7.14 6.92 8.42 7.69 7.35
- ----------------
(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, 2005.
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:
Strong Net Income - During fiscal 2005, Company net income increased 26% and
totaled $2.9 million. Diluted earnings per share increased 32% to $1.19.
Enhancing Stockholder Value - During fiscal 2005, the Company returned over $2.7
million to stockholders via cash dividends and stock repurchases.
4
Commitment to Capital Management - Return on average stockholders' equity
increased to 10.03% from 7.64%. The Company has returned in excess of $20
million through the repurchase of 1,368,508 shares or approximately 36% of our
issued shares.
Interest Rate Risk Management - During the past fiscal year, the Federal Reserve
has increased its targeted federal funds rate eight times - from 1.25% to 3.25%.
Intermediate and long-term rates remain stubbornly low with a downward bias. The
Company has positioned itself well for this rise in short-term rates by actively
managing its asset/liability mix.
Substantial Core Deposits - As of June 30, 2005, $95.3 million or 58.2% of West
View's total savings deposits consisted of regular savings and club accounts,
money market deposit accounts, and checking accounts. Approximately $44.3
million or 46.5% of core deposits consisted of regular savings and club
accounts. Core deposits are considered to be more stable and lower cost funds
than certificates of deposit and other borrowings.
Community Based Lending - Due to low market interest rates, West View has
limited origination of thirty year mortgage loans to be held in the portfolio.
Thirty year mortgage loans continue to be originated on a correspondent basis.
Portfolio loan originations have focused on multi-family and commercial real
estate loans, construction loans, consumer loans and small business loans for
business equipment and inventory.
Strong Non-interest Expense Ratios - For the fiscal years ended June 30, 2005,
2004 and 2003, the Company's ratios of non-interest expense to average assets
were 0.87%, 0.91% and 1.05%, respectively. In fiscal 2004, the Company
introduced Internet banking and online bill paying to increase customer
satisfaction and loyalty.
CHANGES IN FINANCIAL CONDITION
Condensed Balance Sheet
-----------------------
Change
June 30, June 30, -----------------------
2005 2004 Dollars Percentage
---- ---- ------- ----------
(Dollars in Thousands)
Cash and interest-earning
deposits $ 3,566 $ 3,054 $ 512 16.8%
Investments (1) 352,986 357,704 (4,718) -1.3
Net loans receivable 60,151 67,968 (7,817) -11.5
Total assets 421,044 433,624 (12,580) -2.9
Deposits 164,706 160,563 4,143 2.6
Borrowed funds 224,716 241,375 (16,659) -6.9
Total liabilities 391,843 404,425 (12,582) -3.1
Stockholders' equity 29,201 29,199 2 0.0
- ---------------
(1) Includes Federal Home Loan Bank stock and trading securities.
5
Cash and Interest-Earning Deposits. Cash on hand and interest-earning deposits
represent cash equivalents. Cash equivalents increased $512 thousand or 16.8% to
$3.6 million at June 30, 2005 from $3.1 million at June 30, 2004. Increases in
these accounts were primarily due to increases in customer transaction accounts.
Investments. The Company's investment and mortgage-backed portfolios decreased
$4.7 million or 1.3% to $353.0 million at June 30, 2005 from $357.7 million at
June 30, 2004. Investment securities decreased $90.3 million or 32.1% to $190.8
million at June 30, 2005. This decrease was due primarily to calls of U.S.
Government Agency securities, caused by changes in short, intermediate and
long-term market interest rates, the flattening of the Treasury Yield curve and
continued high levels of interest rate volatility. Mortgage-backed securities
increased $86.6 million or 114.5% to $162.2 million at June 30, 2005. This
increase was due primarily to purchases of floating rate mortgage-backed
securities, in response to increases in short-term market interest rates. See
"Quantitative and Qualitative Disclosures about Market Risk" beginning on page
13.
Net Loans Receivable. Net loans receivable decreased $7.8 million or 11.5% to
$60.2 million at June 30, 2005. The decrease in loans receivable was principally
the result of principal repayments on the loan portfolio and high levels of
refinancing activity due to historically low mortgage interest rates. As part of
its asset/liability management strategy, the Company chose to invest
substantially all of these proceeds into short-term corporate investments and
adjustable rate mortgage-backed securities.
Deposits. Total deposits increased $4.1 million or 2.6% to $164.7 million at
June 30, 2005. Transaction accounts increased approximately $3.4 million or
10.0%. Certificates of deposit increased approximately $3.0 million or 4.6% due
primarily to higher levels of municipal time deposits. Savings accounts
decreased $1.5 million or 3.3% and money market accounts decreased $601 thousand
or 4.2%.
Borrowed Funds. Borrowed funds decreased $16.7 million or 6.9% to $224.7 million
at June 30, 2005. Other short-term borrowings decreased $22.0 million or 24.0%
to $69.7 million, FHLB long-term advances decreased $7.0 million or 4.7% to
$142.7 million and FHLB short-term advances increased $12.3 million or 100.00%.
The Company repositioned borrowings as part of its assets/liability management
program.
Stockholders' Equity. Total stockholders' equity remained unchanged at $29.2
million. Company earnings of $2.9 million were partially offset by $1.6 million
of cash dividends paid on the Company's common stock and $1.2 million was used
to repurchase 71,964 shares of the Company's common stock. The Company believes
that the repurchase of its common stock represented an attractive investment
opportunity and favorably added to secondary market liquidity.
6
RESULTS OF OPERATIONS
Condensed Statements of Income
------------------------------
June 30, June 30, June 30,
2005 Change 2004 Change 2003
------- ------ ------- ------- -------
(Dollars in Thousands)
Interest income $17,874 $1,868 $16,006 ($3,225) $19,231
11.7% -16.8%
Interest expense $11,844 $857 $10,987 ($823) $11,810
7.8% -7.0%
Net interest income $6,030 $1,011 $5,019 ($2,402) $7,421
20.1% -32.4%
Provision for loan losses ($46) $748 ($794) ($566) ($228)
-94.2% 248.2%
Non-interest income $992 $277 $715 ($10) $725
38.7% -1.4%
Non-interest expense $3,532 ($75) $3,607 ($349) $3,956
-2.1% -8.8%
Income tax expense $627 $8 $619 ($451) $1,070
1.3% -42.1%
Net income $2,909 $607 $2,302 ($1,046) $3,348
26.4% -31.2%
General. WVS reported net income of $2.9 million, $2.3 million and $3.3 million
for the fiscal years ended June 30, 2005, 2004 and 2003, respectively. The $607
thousand or 26.4% increase in net income during fiscal 2005 was primarily the
result of a $1.0 million increase in net interest income, a $277 thousand
increase in non-interest income and a $75 thousand decrease in non-interest
expense which were partially offset by a $748 thousand decrease in credit
provisions for loan losses, and an $8 thousand increase in income tax expense.
Earnings per share totaled $1.20 (basic) and $1.19 (diluted) for fiscal 2005 as
compared to $0.91 (basic) and $0.90 (diluted) for fiscal 2004. The increase in
earnings per share was due to an increase in net income and a reduction in the
weighted average number of shares outstanding due to the Company's stock
repurchases during fiscal 2005.
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,
2005 2004 2003
----------------------------- ----------------------------- -----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
-------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Net loans receivable(1) $ 63,725 $ 4,206 6.60% $ 76,513 $ 5,180 6.77% $127,970 $ 9,524 7.44%
Mortgage-backed securities 103,307 3,981 3.85 84,770 2,347 2.77 82,427 2,854 3.46
Investments - taxable 208,282 8,051 3.87 199,341 6,829 3.43 131,193 5,228 3.98
Investments - tax-free(2) 27,142 2,372 8.74 29,588 2,391 8.08 28,610 2,340 8.18
Interest-bearing deposits 1,818 10 0.55 2,079 9 0.43 2,362 11 0.47
-------- -------- -------- -------- -------- --------
Total interest-earning assets 404,274 18,620 4.61% 392,291 16,756 4.27% 372,562 19,957 5.36%
-------- ====== -------- ====== -------- ======
Non-interest-earning assets 3,849 3,949 4,113
-------- -------- --------
Total assets $408,123 $396,240 $376,675
======== ======== ========
Interest-bearing liabilities:
Interest-bearing deposits and
escrows $146,366 $ 2,238 1.53% $151,577 $ 2,321 1.53% $157,771 $ 3,312 2.10%
Borrowings 216,380 9,606 4.44 199,439 8,666 4.35 173,226 8,498 4.91
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 362,746 11,844 3.27% 351,016 10,987 3.13% 330,997 11,810 3.57%
-------- ====== -------- ====== -------- ======
Non-interest-bearing accounts 12,774 12,542 12,149
-------- -------- --------
Total interest-bearing liabilities
and non-interest-bearing accounts 375,520 363,558 343,146
Non-interest-bearing liabilities 3,609 2,563 3,020
-------- -------- --------
Total liabilities 379,129 366,121 346,166
Retained income 28,994 30,119 30,509
-------- -------- --------
Total liabilities and retained income $408,123 $396,240 $376,675
======== ======== ========
Net interest income $ 6,776 $ 5,769 $ 8,147
======== ======== ========
Interest rate spread 1.34% 1.14% 1.79%
====== ====== ======
Net yield on interest-earning assets(3) 1.68% 1.47% 2.19%
====== ====== ======
Ratio of interest-earning assets to
interest-bearing liabilities 111.45% 111.76% 112.56%
====== ====== ======
- ----------------
(1) Includes non-accrual loans.
(2) Interest and yields on tax-exempt 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,
--------------------------------------------------------------------
2005 vs. 2004 2004 vs. 2003
-------------------------------- --------------------------------
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 $ (847) $ (127) $ (974) $ (3,550) $ (794) $ (4,344)
Mortgage-backed securities 590 1,044 1,634 76 (583) (507)
Investments - taxable 316 906 1,222 2,402 (801) 1,601
Investments - tax-free (206) 187 (19) 80 (29) 51
Interest-bearing deposits (1) 2 1 (1) (1) (2)
-------- -------- -------- -------- -------- --------
Total interest-earning assets (148) 2,012 1,864 (993) (2,208) (3,201)
Interest-bearing liabilities:
Interest-bearing deposits and
Escrows (200) 117 (83) (222) (769) (991)
Borrowings 758 182 940 1,201 (1,033) 168
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 558 299 857 979 (1,802) (823)
-------- -------- -------- -------- -------- --------
Change in net interest income $ (706) $ 1,713 $ 1,007 $ (1,972) $ (406) $ (2,378)
======== ======== ======== ======== ======== ========
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 increased by $1.9 million or 11.7% during
fiscal 2005 and decreased by $3.2 million or 16.8% during fiscal 2004. The
increase in fiscal 2005 was primarily a result of increased yields and average
balances on the investment and mortgage-backed securities portfolios which were
partially offset by a decrease in the average balance and weighted average yield
earned on the loan portfolio. The decrease in fiscal 2004 was primarily a result
of decreases in the average balance of the loan portfolio and lower yields on
Company assets caused by declining market interest rates which were partially
offset by increased average balances of the investment and mortgage-backed
securities portfolios.
Interest income on investment securities and FHLB stock increased $1.2 million
or 14.3% during fiscal 2005 and increased $1.6 million or 23.7% during fiscal
2004. The increase in fiscal 2005 was primarily attributable to a 40 basis point
increase in the weighted average yield on the Company's investment securities
and a $6.5 million increase in the average balance of the investment securities
outstanding. The increase in fiscal 2004 was primarily attributable to a $69.1
million increase in the average balance of the investment securities
outstanding, which was partially offset by a 58 basis point decrease in the
weighted average yield on the Company's investment securities.
Interest income on mortgage-backed securities increased $1.6 million or 69.6%
during fiscal 2005 and decreased $507 thousand or 17.8% during fiscal 2004. The
increase in fiscal 2005 was primarily attributable to a 108 basis point increase
in the weighted average yield on the Company's mortgage-backed securities
portfolio and a $18.5 million increase in the average balance of the
mortgage-backed securities portfolio. The decrease in fiscal 2004 was primarily
attributable to a 69 basis point decrease in the weighted average yield on the
Company's mortgage-backed securities portfolio, which was partially offset by a
$2.3 million increase in the average balance of the mortgage-backed securities
portfolio.
9
Interest income on net loans receivable decreased $974 thousand or 18.8% during
fiscal 2005 and decreased $4.3 million or 45.6% during fiscal 2004. The decrease
in fiscal 2005 was primarily attributable to a $12.8 million decrease in the
average balance of net loans outstanding and a 17 basis point decrease in the
weighted average yield on the Company's loan portfolio. The decrease in fiscal
2004 was primarily attributable to a $51.5 million decrease in the average
balance of net loans outstanding and a 67 basis point decrease in the weighted
average yield on the Company's loan portfolio. As part of its asset/liability
management strategy, the Company previously limited its origination of
longer-term fixed rate loans to mitigate its exposure to a rise in market
interest rates. The Company continued to offer longer-term fixed rate loans on a
correspondent basis during fiscal 2005 and 2004.
Interest Expense. Total interest expense increased $857 thousand or 7.8% during
fiscal 2005 and decreased by $823 thousand or 7.0% during fiscal 2004. The
increase in fiscal 2005 was attributable to higher average levels of
interest-bearing liabilities and higher rates paid on such liabilities due to
the Federal Reserve's tightening of monetary policy. The decrease in fiscal 2004
was attributable to a lower interest expense paid on interest-bearing
liabilities due to the Federal Reserve's easing of monetary policy which was
partially offset by an increase in average levels of interest-bearing
liabilities.
Interest expense on borrowings increased $940 thousand or 10.8% during fiscal
2005 and increased $168 thousand or 2.0% during fiscal 2004. The increase in
fiscal 2005 was primarily attributable to a $16.9 million increase in the
average balance of borrowings outstanding and a 9 basis point increase in the
weighted average yield on the Company's borrowings. The increase in the average
balances outstanding was due to a $16.7 million increase in the average balance
of other short-term borrowings and a $2.4 million increase in the average
balance of short-term FHLB advances, which were partially offset by a $2.2
million decrease in the average balance of long-term FHLB advances. The increase
in fiscal 2004 was attributable to a $26.2 million increase in the average
balance of borrowings outstanding which was partially offset by a 56 basis point
decrease in the weighted average yield on the Company's borrowings. The increase
in the average balance of borrowings outstanding was due to $31.0 million
increase in the average balance of other short-term borrowings and a $507
thousand increase in long-term FHLB advances, which were partially offset by a
$4.3 million decrease in short-term FHLB advances. During both fiscal 2005 and
2004, the Company's borrowings were primarily longer-term with fixed rates of
interest.
Interest expense on interest-bearing deposits and escrows decreased $83 thousand
or 3.6% in fiscal 2005 and decreased $991 thousand or 29.9% in fiscal 2004. The
decrease in fiscal 2005 was primarily attributable to a $5.2 million decrease in
the average balance of interest bearing deposits. The decrease in fiscal 2004
was attributable to a 57 basis point decrease in the weighted average yield on
the Company's deposits and a $6.2 million decrease in average balance of
interest-bearing deposits.
Provision for Loan Losses. A provision for loan losses is charged to earnings to
bring the total allowance to a level considered adequate by management to absorb
potential losses in the portfolio. Management's determination of the adequacy of
the allowance is based on periodic evaluations of the loan portfolio considering
past experience, current economic conditions, volume, growth, composition of the
loan portfolio and other relevant factors. The Company recorded a credit
provision for loan losses of $46 thousand in fiscal 2005, compared to a credit
provision of $794 thousand in fiscal 2004. The decrease in the credit provision
for fiscal 2005 was primarily attributable to reduced levels of non-performing
loans and net loans receivable. The increase in the credit provision for fiscal
2004 was primarily attributable to the work-out of non-performing assets and
paydowns on the Company's loan portfolio.
Non-interest Income. Total non-interest income increased by $277 thousand or
38.7% in fiscal 2005 and decreased by $10 thousand or 1.4% in fiscal 2004. The
increase in fiscal 2005 was primarily attributable to an increase of $316
thousand in pre-tax securities gains, which was partially offset by decreased
deposit account fee income. The decrease in fiscal 2004 was primarily
attributable to a decrease in pre-tax securities gains which was partially
offset by an increase in deposit account fee income.
10
Non-interest Expense. Total non-interest expense decreased $75 thousand or 2.1%
and decreased $349 thousand or 8.8% during fiscal 2005 and 2004, respectively.
The decrease in fiscal 2005 was primarily attributable to decreases in legal
expenses and costs associated with the work-out of non-performing assets,
payroll and benefit related costs, real estate owned expenses and ATM network
expenses, which were partially offset by increases in data processing expenses
and fixed asset costs. The decrease in fiscal 2004 was primarily attributable to
decreases in payroll and benefit related costs, charitable contributions
eligible for Pennsylvania tax credits and legal expenses and costs associated
with the work-out of non-performing assets.
Income Taxes. Income taxes increased $8 thousand or 1.3% during fiscal 2005 and
decreased $451 thousand or 42.1% during fiscal 2004. The increase in fiscal 2005
was primarily attributable to higher levels of taxable income, which was
partially offset by higher levels of interest on FHLB obligations which are not
taxable for Pennsylvania Mutual Thrift Tax purposes. The decrease in fiscal 2004
was primarily attributable to lower levels of taxable income. The Company's
effective tax rate was 17.7% at June 30, 2005 and 21.2% at June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is often analyzed by reviewing the cash flow statement. Cash and cash
equivalents increased by $512 thousand during fiscal 2005 primarily due to $12.0
million of net cash provided by investing activities and $3.8 million of net
cash provided by operating activities, which were partially offset by $15.3
million of net cash used for financing activities.
Funds provided by operating activities totaled $3.8 million during fiscal 2005
as compared to $2.1 million during fiscal 2004. Net cash provided by operating
activities was primarily comprised of $2.9 million of net income and $1.0
million in sales of trading securities.
Funds provided by investing activities totaled $12.0 million during fiscal 2005
as compared to $66.3 million used for investing activities during fiscal 2004.
Primary sources of funds during fiscal 2005 include $407.3 million in repayments
and sales of investment and mortgage-backed securities (including FHLB stock),
and a $7.7 million decrease in net loans receivable, which were partially offset
by $403.0 million in purchases of investments and mortgage-backed securities
(including FHLB stock). The investment purchases were primarily comprised of
callable U.S. Government agency bonds that reprice within two years. The
mortgage-backed securities purchases were floating rate instruments that
generally reprice on a monthly basis.
Funds used for financing activities totaled $15.3 million for fiscal 2005 as
compared to $64.4 million provided by financing activities in fiscal 2004.
Primary uses of funds for fiscal 2005 were a $22.0 million decrease in other
short-term borrowings, a $7.0 million decrease in FHLB long-term borrowings,
$1.6 million in cash dividends and $1.2 million in common stock repurchases,
which were partially offset by a $12.3 million increase in FHLB short-term
advances and a $4.1 million increase in deposits. During fiscal 2005 the Company
purchased 71,964 shares of common stock for approximately $1.2 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, 2005, the total approved loan commitments
outstanding amounted to $833 thousand. At the same date, commitments under
unused letters and lines of credit amounted to $7.3 million and the unadvanced
portion of construction loans approximated $12.3 million. Certificates of
deposit scheduled to mature in one year or less at June 30, 2005, totaled $43.8
million. Management believes that a significant portion of maturing deposits
will remain with the Company.
11
The Company's contractual obligations at June 30, 2005 were as follows:
Contractual Obligations
(Dollars in Thousands)
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
----------- -------------- ----------- ------------ ------------
Long-term debt 142,736 4,157 3,000 31,079 104,500
Operating lease obligations 72 63 9 - -
----------- -------------- ----------- ------------ ------------
142,808 4,220 3,009 31,079 104,500
=========== ============== =========== ============ ============
See also Note 13 of the Company's consolidated financial statements.
Historically, the Company used its sources of funds primarily to meet its
ongoing commitments to pay maturing certificates of deposit and savings
withdrawals, fund loan commitments and maintain a substantial portfolio of
investment securities. The Company has been able to generate sufficient cash
through the retail deposit market, its traditional funding source, and through
FHLB advances and other borrowings, to provide the cash utilized in investing
activities. The Company has access to the Federal Reserve Bank Primary Credit
Program. Management believes that the Company currently has adequate liquidity
available to respond to liquidity demands.
On July 26, 2005, the Company's Board of Directors declared a cash dividend of
$0.16 per share payable on August 18, 2005 to shareholders of record at the
close of business on August 8, 2005. Dividends are subject to determination and
declaration by the Board of Directors, which take into account the Company's
financial condition, statutory and regulatory restrictions, general economic
conditions and other factors. There can be no assurance that dividends will in
fact be paid on the common stock in the future or that, if paid, such dividends
will not be reduced or eliminated in future periods.
As of June 30, 2005, WVS Financial Corp. exceeded all regulatory capital
requirements and maintained Tier I and total risk-based capital equal to $29.1
million or 21.0% and $30.2 million or 21.8%, respectively, of total
risk-weighted assets; and Tier I leverage capital of $29.1 million or 7.1% 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
increased $229 thousand or 27.7% to $1.1 million or 0.25% of total assets, at
June 30, 2005. The increase was primarily the result of $542 thousand in loans
reclassified as non-performing which were partially offset by $30 thousand in
repayments, $58 thousand in loans reclassified as performing due to improved
economic performance and $237 thousand in charged off loans.
Impact of Inflation and Changing Prices. The consolidated financial statements
of the Company and related notes presented herein have been prepared in
accordance with U.S. generally accepted accounting principles which require the
measurement of financial condition and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services since such prices are affected by inflation to a
larger degree than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Company's assets and liabilities are
critical to the maintenance of acceptable performance levels.
Recent Accounting and Regulatory Pronouncements. The Company's discussion of
recent accounting and regulatory pronouncements can be found in Note 1 of the
Company's Consolidated Financial Statements.
12
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 2005, the Federal Open-Market Committee increased its intended
federal funds rate by twenty-five basis points eight times, from 1.25% at June
30, 2004 to 3.25% at June 30, 2005. As economic conditions continue to improve,
we anticipate continued increases in short-term market interest rates.
Longer-term yields fell, however, due to well contained inflationary pressures,
strong foreign demand for intermediate and long-term Treasury's associated with
the U.S. trade deficit with other nations and stronger domestic demand for
longer-dated Treasury's from domestic pension funds with limited new treasury
issues of longer-term bonds. The benchmark ten year treasury yield continued to
experience market volatility and declined sixty-eight basis points from 4.62% at
June 30, 2004 to 3.94% at June 30, 2005. The Benchmark two year treasury yield
also experienced market volatility and increased ninety-six basis points from
2.70% at June 30, 2004 to 3.66% at June 30, 2005. These changes in short,
intermediate and long-term market interest rates, the flattening of the Treasury
yield curve and continued high levels on interest rate volatility have
precipitated continued prepayments in the Company's loan, investment and
mortgage-backed securities portfolios.
13
During fiscal 2005, principal repayments on the Company's loan, investment and
mortgage-backed securities portfolios totaled $28.4 million, $304.0 million and
$94.8 million respectively. In response to higher levels of liquidity the
Company continued to rebalance its loan, investment and mortgage-backed
securities portfolios. Due to the low level of intermediate and long-term market
interest rates, the Company continued to reduce its portfolio of long-term fixed
rate mortgages while continuing to offer consumer home equity and construction
loans. The Company purchased callable U. S. Government Agency bonds in order to
earn a higher return while limiting interest rate risk within the portfolio.
Within the mortgage-backed securities portfolio, the
Company aggressively purchased floating rate securities in order to provide
current income and protection against rising short-term market interest rates.
Each of the aforementioned strategies also helped to better the interest-rate
and liquidity risks associated with the Savings Bank's customers liquidity
preference for shorter term deposit products.
The Company also makes available for origination residential mortgage loans with
interest rates which adjust pursuant to a designated index, although customer
acceptance has been somewhat limited in the Savings Bank's market area. The
Company has continued to offer multi-family, commercial real estate, land
acquisition and development and shorter-term construction loans, primarily on
residential properties, to increase interest income while limiting interest rate
risk. The Company has also emphasized higher yielding home equity and small
business loans to existing customers and seasoned prospective customers.
As of June 30, 2005, the implementation of these asset and liability management
initiatives resulted in the following:
1) the Company's liquidity profile remains strong with $158.0 million
callable within 3 months, $2.0 million being callable with 3 to 6
months and $ 1.4 million being callable with 6 to 12 months. Based
upon current market conditions, management anticipates that a
substantial portion of the investments will be called within the
next twelve months;
2) $117.9 million or 61.8% of the Company's investment portfolio
(including FHLB stock) was comprised of fixed-to-floating rate bonds
which will reprice as follows: 3 months or less - $15.0 million; 3-6
months - $87.9 million; and over 1 year - $15.0 million;
3) $30.1 million or 15.8% of the Company's investment portfolio
(including FHLB stock) was comprised of U.S. Government Agency
Step-up bonds which will reprice as follows: 1 year or less - $14.9
million from 4.00% to 7.00%; 1-2 years - $10.5 million from 4.00% to
7.00% and over two years - $4.7 million from 4.70% to 6.00%;
4) $8.7 million or 4.6% of the Company's investment portfolio
(including FHLB stock) was comprised of corporate demand notes
issued by Ford Motor Credit and General Motors Acceptance Corp.;
5) $158.2 million or 97.5% of the Company's portfolio of
mortgage-backed securities (including collateralized mortgage
obligations - "CMOs") were comprised of floating rate instruments
that reprice on a monthly basis;
6) the maturity distribution of the Company's borrowings is as follows:
1 month or less - $80.0 million or 35.6%; 1-6 months - $2.0 million
or 0.9%; 6-12 months - $4.2 million or 1.9%; 1-3 years - $3.0
million or 1.3%; 3-5 years - $31.1 million or 13.8%; over 5 years -
$104.5 million or 46.5%; and
7) an aggregate of $33.3 million or 55.3% of the Company's net loan
portfolio had adjustable interest rates or maturities of less than
12 months.
14
The effect of interest rate changes on a financial institution's assets and
liabilities may be analyzed by examining the "interest rate sensitivity" of the
assets and liabilities and by monitoring an institution's interest rate
sensitivity "gap". An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within a given time
period. A gap is considered positive (negative) when the amount of rate
sensitive assets (liabilities) exceeds the amount of rate sensitive liabilities
(assets). During a period of falling interest rates, a negative gap would tend
to result in an increase in net interest income. During a period of rising
interest rates, a positive gap would tend to result in an increase in net
interest income.
The following table sets forth certain information at the dates indicated
relating to the Company's interest-earning assets and interest-bearing
liabilities which are estimated to mature or are scheduled to reprice within one
year.
June 30,
--------------------------------
2005 2004 2003
-------- -------- --------
(Dollars in Thousands)
Interest-earning assets maturing or
repricing within one year $318,015 $288,451 $262,782
Interest-bearing liabilities maturing or
repricing within one year 181,085 171,655 133,418
-------- -------- --------
Interest sensitivity gap $136,930 $116,796 $129,364
======== ======== ========
Interest sensitivity gap as a percentage of
total assets 32.5% 26.9% 35.2%
Ratio of assets to liabilities
maturing or repricing within one year 175.6% 168.0% 197.0%
During fiscal 2005, the Company managed its one year interest sensitivity gap
by: (1) limiting the portfolio origination of long-term fixed rate mortgages;
(2) emphasizing loans with shorter terms or repricing frequencies; (3)
purchasing investments with maturities/repricing dates within 2 years; and (4)
purchasing floating rate CMO's which reprice on a monthly basis.
15
The following table illustrates the Company's estimated stressed cumulative
repricing gap - the difference between the amount of interest-earning assets and
interest-bearing liabilities expected to reprice at a given point in time - at
June 30, 2005. The table estimates the impact of an upward or downward change in
market interest rates of 100 and 200 basis points.
Cummulative Stressed Repricing Gap
----------------------------------
Month 3 Month 6 Month 12 Month 24 Month 36 Month 60 Long Term
------- ------- -------- -------- -------- -------- ---------
(Dollars in Thousands)
Base Case Up 200 bp
- -------------------
Cummulative
Gap ($'s) 96,612 106,218 123,258 163,624 162,320 145,766 27,358
% of Total
Assets 22.9% 25.2% 29.3% 38.9% 38.6% 34.6% 6.5%
Base Case Up 100 bp
- -------------------
Cummulative
Gap ($'s) 97,747 107,707 132,806 170,347 167,071 154,009 27,358
% of Total
Assets 23.2% 25.6% 31.5% 40.5% 39.7% 36.6% 6.5%
Base Case No Change
- -------------------
Cummulative
Gap ($'s) 99,022 110,218 136,930 176,119 173,538 158,987 27,358
% of Total
Assets 23.5% 26.2% 32.5% 41.8% 41.2% 37.8% 6.5%
Base Case Down 100 bp
- ---------------------
Cummulative
Gap ($'s) 120,155 129,839 148,278 186,207 181,557 161,853 27,358
% of Total
Assets 28.5% 30.8% 35.2% 44.2% 43.1% 38.4% 6.5%
Base Case Down 200 bp
- ---------------------
Cummulative
Gap ($'s) 199,239 205,156 193,703 191,019 183,388 161,950 27,358
% of Total
Assets 47.3% 48.7% 46.0% 45.4% 43.6% 38.5% 6.5%
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.
16
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, 2005 and June 30, 2004.
Analysis of Sensitivity to Changes in Market Interest Rates
-----------------------------------------------------------
Modeled Change in Market Interest Rates
-------------------------------------------------------------------------------------------------
June 30, 2005 June 30, 2004
---------------------------------------------- ------------------------------------------------
Estimated impact on: -200 -100 0 +100 +200 -200 -100 0 +100 +200
- -------------------- ---- ---- - ---- ---- ---- ---- - ---- ----
Change in net interest income -88.1% -26.6% 0.00% 17.6% 38.0% -44.9% -20.6% 0.00% 38.8% 64.4%
Return on average equity -5.26% 4.42% 8.33% 10.83% 13.69% 0.33% 4.01% 7.00% 12.39% 15.78%
Return on average assets -0.34% 0.30% 0.58% 0.76% 0.97% 0.02% 0.29% 0.51% 0.92% 1.19%
Market value of equity (in
thousands) $11,310 $18,758 $24,370 $23,484 $15,770 $16,255 $21,386 $27,424 $26,957 $20,079
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,
2005.
Anticipated Transactions
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Undisbursed construction and development loans
Fixed rate $ 6,990
6.48%
Adjustable rate $ 5,349
6.80%
Undisbursed lines of credit
Adjustable rate $ 6,378
6.28%
Loan origination commitments
Fixed rate $ 533
6.62%
Adjustable rate $ 300
6.52%
Letters of credit
Adjustable rate $ 923
7.26%
----------
$ 20,473
==========
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors and Stockholders
WVS Financial Corp.
We have audited the accompanying consolidated balance sheet of WVS Financial
Corp. and subsidiary as of June 30, 2005 and 2004, 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, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WVS Financial Corp.
and subsidiary as of June 30, 2005 and 2004, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 2005, in conformity with U.S. generally accepted accounting principles.
/s/ S.R. Snodgrass A.C.
Wexford, PA
July 28, 2005
18
WVS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
June 30,
2005 2004
--------- ---------
ASSETS
Cash and due from banks $ 900 $ 769
Interest-earning demand deposits 2,666 2,285
--------- ---------
Total cash and cash equivalents 3,566 3,054
Trading securities -- 993
Investment securities available for sale (amortized
cost of $9,155 and $4,113) 9,155 4,416
Investment securities held to maturity (market value
of $174,323 and $271,103) 173,911 269,173
Mortgage-backed securities available for sale
(amortized cost of $2,893 and $3,234) 3,120 3,357
Mortgage-backed securities held to maturity
(market value of $159,566 and $72,099) 159,031 72,233
Net loans receivable (allowance for loan losses of
$1,121 and $1,370) 60,151 67,968
Accrued interest receivable 2,057 2,456
Federal Home Loan Bank stock, at cost 7,769 7,532
Premises and equipment 939 1,077
Other assets 1,345 1,365
--------- ---------
TOTAL ASSETS $ 421,044 $ 433,624
========= =========
LIABILITIES
Deposits $ 164,706 $ 160,563
Federal Home Loan Bank advances 155,036 149,736
Other borrowings 69,680 91,639
Accrued interest payable 1,260 1,197
Other liabilities 1,161 1,290
--------- ---------
TOTAL LIABILITIES 391,843 404,425
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 shares authorized;
none outstanding -- --
Common stock, par value $.01; 10,000,000 shares authorized;
3,762,618 and 3,762,968 shares issued 38 38
Additional paid-in capital 20,726 20,727
Treasury stock (1,368,508 and 1,296,544 shares at cost) (20,594) (19,377)
Retained earnings - substantially restricted 28,885 27,535
Accumulated other comprehensive income 149 281
Unallocated shares - Recognition and Retention Plans (3) (5)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 29,201 29,199
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 421,044 $ 433,624
========= =========
See accompanying notes to the consolidated financial statements.
19
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Year Ended June 30,
2005 2004 2003
----------- ----------- -----------
INTEREST AND DIVIDEND INCOME
Loans $ 4,206 $ 5,180 $ 9,524
Investment securities 9,499 8,350 6,590
Mortgage-backed securities 3,981 2,347 2,854
Interest-earning demand deposits 10 9 11
Federal Home Loan Bank stock 178 120 252
----------- ----------- -----------
Total interest and dividend income 17,874 16,006 19,231
----------- ----------- -----------
INTEREST EXPENSE
Deposits 2,238 2,321 3,312
Federal Home Loan Bank advances 8,119 8,120 8,224
Other borrowings 1,487 546 274
----------- ----------- -----------
Total interest expense 11,844 10,987 11,810
----------- ----------- -----------
NET INTEREST INCOME 6,030 5,019 7,421
Recovery for loan losses (46) (794) (228)
----------- ----------- -----------
NET INTEREST INCOME AFTER
RECOVERY FOR LOAN LOSSES 6,076 5,813 7,649
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposits 361 385 361
Investment securities gains 336 20 64
Other 295 310 300
----------- ----------- -----------
Total noninterest income 992 715 725
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits 1,971 1,992 2,240
Occupancy and equipment 438 433 398
Data processing 267 231 221
Correspondent bank charges 134 142 152
Other 722 809 945
----------- ----------- -----------
Total noninterest expense 3,532 3,607 3,956
----------- ----------- -----------
Income before income taxes 3,536 2,921 4,418
Income taxes 627 619 1,070
----------- ----------- -----------
NET INCOME $ 2,909 $ 2,302 $ 3,348
=========== =========== ===========
EARNINGS PER SHARE:
Basic $ 1.20 $ 0.91 $ 1.28
Diluted 1.19 0.90 1.28
AVERAGE SHARES OUTSTANDING:
Basic 2,432,267 2,535,796 2,617,576
Diluted 2,437,647 2,544,404 2,624,395
See accompanying notes to the consolidated financial statements.
20
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
Accumulated
Retained Unallocated Other
Additional Earnings- Shares Compre-
Common Paid-in Treasury Substantially Held hensive
Stock Capital Stock Restricted by RRP Income (Loss) Total
-------- -------- -------- ---------- -------- ------------ --------
Balance June 30, 2002 $ 37 $ 20,037 $(15,133) 25,183 $ (72) $ 201 $ 30,253
Comprehensive income:
Net income 3,348 3,348
Unrealized gain on available-
for-sale securities, net of taxes of $66 128 128
Tax benefit from stock grants issued
under RRPs 104 104
Accrued compensation expense for RRPs 22 22
Exercise of stock options 71 71
Purchase of treasury stock (1,634) (1,634)
Cash dividends declared ($0.64 per share) (1,674) (1,674)
-------- -------- -------- -------- -------- -------- --------
Balance June 30, 2003 37 20,212 (16,767) 26,857 (50) 329 30,618
Comprehensive income:
Net income 2,302 2,302
Unrealized loss on available-
for-sale securities, net of taxes of $25 (48) (48)
Tax benefit from stock grants issued
under RRPs 27 27
Accrued compensation expense for RRPs 5 5
Cancellation of unallocated RRP shares 40 40
Exercise of stock options 1 488 489
Purchase of treasury stock (2,610) (2,610)
Cash dividends declared ($0.64 per share) (1,624) (1,624)
-------- -------- -------- -------- -------- -------- --------
Balance June 30, 2004 38 20,727 (19,377) 27,535 (5) 281 29,199
Comprehensive income:
Net income 2,909 2,909
Unrealized loss on available
for sale securities, net of taxes of $68 (132) (132)
Purchase of treasury stock (1,217) (1,217)
Cash dividends declared ($0.64 per share) (1,559) (1,559)
Other, net (1) 2 1
-------- -------- -------- -------- -------- -------- --------
Balance June 30, 2005 $ 38 $ 20,726 $(20,594) $ 28,885 $ (3) $ 149 $ 29,201
======== ======== ======== ======== ======== ======== ========
See accompanying notes to the consolidated financial statements.
21
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Year Ended June 30,
2005 2004 2003
--------- --------- ---------
OPERATING ACTIVITIES
Net income $ 2,909 $ 2,302 $ 3,348
Adjustments to reconcile net income to net cash
provided by operating activities:
Recovery for loan losses (46) (794) (228)
Depreciation 193 188 156
Investment securities gains (336) (20) (64)
Amortization of discounts, premiums, and
deferred loan fees (415) 1,166 3,205
Purchase of trading securities -- (999) --
Sale of trading securities 1,000 -- --
Deferred income taxes 73 171 43
Decrease in accrued interest receivable 399 344 1,103
Increase (decrease) in accrued interest payable 63 (252) (249)
Other, net (43) 20 (263)
--------- --------- ---------
Net cash provided by operating activities 3,797 2,126 7,051
--------- --------- ---------
INVESTING ACTIVITIES
Available for sale:
Purchase of investment and mortgage-backed
securities (26,145) (23,890) (25,836)
Proceeds from repayments of investment and
mortgage-backed securities 20,364 45,852 10,313
Proceeds from sales of investment and
mortgage-backed securities 1,409 251 639
Held to maturity:
Purchase of investment and mortgage-backed
securities (368,064) (401,567) (259,234)
Proceeds from repayments of investment and
mortgage-backed securities 377,002 288,489 246,069
Net decrease in net loans receivable 7,733 23,751 61,131
Purchase of Federal Home Loan Bank stock (8,761) (1,584) (1,021)
Redemption of Federal Home Loan Bank stock 8,524 1,849 1,505
Acquisition of premises and equipment (55) (34) (391)
Other, net -- 572 220
--------- --------- ---------
Net cash provided by (used for) investing activities 12,007 (66,311) 33,395
--------- --------- ---------
FINANCING ACTIVITIES
Net Increase (decrease) in deposits 4,143 (10,363) (6,746)
Net increase (decrease) in Federal Home Loan Bank short-term advances 12,300 (3,875) 3,875
Net increase (decrease) in other borrowings (21,959) 82,186 (24,278)
Proceeds from Federal Home Loan Bank long-term advances -- 500 578
Repayments of Federal Home Loan Bank long-term advances (7,000) (279) (11,000)
Net proceeds from exercise of stock options -- 489 71
Cash dividends paid (1,559) (1,624) (1,674)
Purchase of treasury stock (1,217) (2,610) (1,634)
--------- --------- ---------
Net cash provided by (used for) financing activities (15,292) 64,424 (40,808)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 512 239 (362)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 3,054 2,815 3,177
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,566 $ 3,054 $ 2,815
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 11,782 $ 11,238 $ 12,059
Taxes 655 363 1,049
See accompanying notes to the consolidated financial statements.
22
WVS FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
WVS Financial Corp. ("WVS" or the "Company") is a Pennsylvania-chartered
unitary bank holding company which owns 100 percent of the common stock of
West View Savings Bank ("West View" or the "Savings Bank"). The operating
results of the Company depend primarily upon the operating results of the
Savings Bank and, to a lesser extent, income from interest-earning assets
such as investment securities.
West View is a Pennsylvania-chartered, SAIF-insured stock savings bank
conducting business from six offices in the North Hills suburbs of
Pittsburgh. The Savings Bank's principal sources of revenue originate from
its portfolio of residential real estate and commercial mortgage loans as
well as income from investment and mortgage-backed securities.
The Company is supervised by the Board of Governors of the Federal Reserve
System, while the Savings Bank is subject to regulation and supervision by
the Federal Deposit Insurance Corporation ("FDIC") and the Pennsylvania
Department of Banking.
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of WVS and its
wholly owned subsidiary, West View. All intercompany transactions have
been eliminated in consolidation. The accounting and reporting policies of
WVS and West View conform to U.S. generally accepted accounting
principles. 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.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Trading Securities
------------------
Trading securities are held for resale in anticipation of short-term
(generally 90 days or less) fluctuations in market prices. Trading
securities are stated at fair value. Realized and unrealized gains and
losses are included in noninterest income as investment securities gains.
Net Loans Receivable
--------------------
Net loans receivable are reported at their principal amount, net of the
allowance for loan losses and deferred loan fees. Interest on mortgage,
consumer, and commercial loans is recognized on the accrual method. The
Company's general policy is to stop accruing interest on loans when, based
upon relevant factors, the collection of principal or interest is
doubtful, regardless of the contractual status. Interest received on
nonaccrual loans is recorded as income or applied against principal
according to management's judgment as to the collectibility of such
principal.
Loan origination and commitment fees, and all incremental direct loan
origination costs, are deferred and recognized over the contractual
remaining lives of the related loans on a level-yield basis.
Allowance for Loan Losses
-------------------------
The allowance for loan losses represents the amount which management
estimates is adequate to provide for probable losses inherent in its loan
portfolio. The allowance method is used in providing for loan losses.
Accordingly, all loan losses are charged to the allowance, and all
recoveries are credited to it. The allowance for loan losses is
established through a provision for loan losses charged to operations. The
provision for loan losses is based on management's periodic evaluation of
individual loans, economic factors, past loan loss experience, changes in
the composition and volume of the portfolio, and other relevant factors.
The estimates used in determining the adequacy of the allowance for loan
losses, including the amounts and timing of future cash flows expected on
impaired loans, are particularly susceptible to changes in the near term.
Impaired loans are commercial and commercial real estate loans for which
it is probable the Company will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The Company
individually evaluates such loans for impairment and does not aggregate
loans by major risk classifications. The definition of "impaired loans" is
not the same as the definition of "nonaccrual loans," although the two
categories overlap. The Company may choose to place a loan on nonaccrual
status due to payment delinquency or uncertain collectibility, while not
classifying the loan as impaired if the loan is not a commercial or
commercial real estate loan. Factors considered by management in
determining impairment include payment status and collateral value. The
amount of impairment for these types of impaired loans is determined by
the difference between the present value of the expected cash flows
related to the loan, using the original interest rate, and its recorded
value, or as a practical expedient in the case of collateralized loans,
the difference between the fair value of the collateral and the recorded
amount of the loans. When foreclosure is probable, impairment is measured
based on the fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are
large groups of smaller-balance homogeneous loans and are measured for
impairment collectively. Loans that experience insignificant payment
delays, which are defined as 90 days or less, generally are not classified
as impaired. Management determines the significance of payment delays on a
case-by-case basis taking into consideration all circumstances surrounding
the loan and the borrower, including the length of the delay, the
borrower's prior payment record, and the amount of shortfall in relation
to the principal and interest owed.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate Owned
-----------------
Real estate owned acquired through foreclosure is carried at the lower of
cost or fair value minus estimated costs to sell. Costs relating to
development and improvement of the property are capitalized, whereas costs
of holding such real estate are expensed as incurred. Valuation allowances
for estimated losses are provided when the carrying value of the real
estate acquired exceeds the fair value.
Premises and Equipment
----------------------
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is principally computed on the straight-line method over the
estimated useful lives of the related assets, which range from 3 to 10
years for furniture and equipment and 25 to 50 years for building
premises. Leasehold improvements are amortized over the shorter of their
estimated useful lives or their respective lease terms, which range from 7
to 15 years. Expenditures for maintenance and repairs are charged against
income as incurred. Costs of major additions and improvements are
capitalized.
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
nonemployee directors.
As permitted under Statement of Financial Accounting Standards ("FAS") No.
123, "Accounting for Stock-Based Compensation," the Company has elected to
continue following Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and related interpretations, in
accounting for stock-based awards to employees. Under APB 25, because the
exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of the grant, no compensation
expense is recognized in the Company's financial statements. Had
compensation expense included stock option plan costs determined based on
the fair value at the grant dates for options granted under these plans
consistent with FAS No. 123, pro forma net income and earnings per share
would not have been materially different than that presented on the
Consolidated Statement of Income.
25
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 composed exclusively of net
unrealized holding gains (losses) on its available-for-sale securities
portfolio. The Company has elected to report the effects of its other
comprehensive income as part of the Consolidated Statement of
Stockholders' Equity.
Cash 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 March 2004, the Financial Accounting Standards Board ("FASB") reached
consensus on the guidance provided by Emerging Issues Task Force Issue
03-1 ("EITF 03-1"), The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. The guidance is applicable to debt and
equity securities that are within the scope of FASB Statement of Financial
Accounting Standard ("SFAS") No. 115, Accounting for Certain Investments
In Debt and Equity Securities and certain other investments. EITF 03-1
specifies that an impairment would be considered other than temporary
unless: (a) the investor has the ability and intent to hold an investment
for a reasonable period of time sufficient for the recovery of the fair
value up to (or beyond) the cost of the investment, and (b) evidence
indicating the cost of the investment is recoverable within a reasonable
period of time outweighs evidence to the contrary. EITF 03-1 cost method
investment and disclosure provisions were effective for reporting periods
ending after June 15, 2004. The measurement and recognition provisions
relating to debt and equity securities have been delayed until the FASB
issues additional guidance. The Company adopted cost method investment and
disclosure provisions of EITF 03-1 on June 30, 2004. The adoption did not
have a material impact on the consolidated financial statements, results
of operations or liquidity of the Company.
This statement is effective for loans acquired in fiscal years beginning
after December 31, 2004. SOP 03-3 applies to a loan that is acquired where
it is probable, at acquisition, that a transferee will be unable to
collect all contractually required payments receivable. SOP 03-3 requires
the recognition, as accretable yield, of the excess of all cash flows
expected at acquisition over the investor's initial investment in the loan
as interest income on a level-yield basis over the life of the loan. The
amount by which the loan's contractually required payments exceed the
amount of its expected cash flows at acquisition may not be recognized as
an adjustment to yield, a loss accrual, or a valuation allowance for
credit risk.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
--------------------------------
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (FAS No. 123R). FAS No. 123R revised FAS No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees, and its related
implementation guidance. FAS No. 123R will require compensation costs
related to share-based payment transactions to be recognized in the
financial statement (with limited exceptions). The amount of compensation
cost will be measured based on the grant-date fair value of the equity or
liability instruments issued. Compensation cost will be recognized over
the period that an employee provides service in exchange for the award.
In April, the Securities and Exchange Commission adopted a new rule that
amends the compliance dates for FAS No. 123R. The Statement requires that
compensation cost relating to share-based payment transactions be
recognized in financial statements and that this cost be measured based on
the fair value of the equity or liability instruments issued. FAS No. 123R
covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. The Company will
adopt FAS No. 123R on July 1, 2005. Management has determined that unless
additional options are granted, there will be no impact on future earnings
as a result of the adoption.
In March 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 107 ("SAB No. 107"), Share-Based Payment,
providing guidance on option valuation methods, the accounting for income
tax effects of share-based payment arrangements upon adoption of FAS No.
123R, and the disclosures in MD&A subsequent to the adoption. The Company
will provide SAB No. 107 required disclosures upon adoption of FAS No.
123R on July 1, 2005. Management has determined that unless additional
options are granted, there will be no impact on the Company's financial
statements as a result of the adoption.
In December 2004, FASB issued FAS No. 153, Exchanges of Nonmonetary Assets
- An Amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged. The guidance in that Opinion, however, included
certain exceptions to that principle. FAS No. 153 amends Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. The
provisions of FAS No. 153 are effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Early
application is permitted, and companies must apply the standard
prospectively. The adoption of this standard is not expected to have a
material effect on the Company's results of operations or financial
position.
In June 2005, the FASB issued FAS No. 154, Accounting Changes and Errors
Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The
Statement applies to all voluntary changes in accounting principle, and
changes the requirements for accounting for and reporting of a change in
accounting principle. FAS No. 154 requires retrospective application to
prior periods' financial statements of a voluntary change in accounting
principle unless it is impractical. APB Opinion No. 20 previously required
that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect
of changing to the new accounting principle. FAS No. 154 improves the
financial reporting because its requirements enhance the consistency of
financial reporting between periods.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
2. EARNINGS PER SHARE
The following table sets forth the computation of the weighted-average
common shares used to calculate basic and diluted earnings per share.
2005 2004 2003
---------- ---------- ----------
Weighted-average common shares
issued 3,762,892 3,747,821 3,731,949
Average treasury stock shares (1,330,625) (1,212,025) (1,114,373)
---------- ---------- ----------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 2,432,267 2,535,796 2,617,576
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 5,380 8,608 6,819
---------- ---------- ----------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 2,437,647 2,544,404 2,624,395
========== ========== ==========
There are no convertible securities that would affect the numerator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statement of Income is used.
3. COMPREHENSIVE INCOME
Other comprehensive income primarily reflects changes in net unrealized
gains (losses) on available-for-sale securities. Total comprehensive
income for the years ended June 30 is summarized as follows:
2005 2004 2003
------- ------- -------
Net Income $ 2,909 $ 2,302 $ 3,348
Other comprehensive income:
Unrealized gains (losses) on available-for-sale securities (536) (93) 258
Less: Reclassification adjustment for gain included
in net income 336 20 64
------- ------- -------
Other comprehensive income (loss) before tax (200) (73) 194
Income tax expense (benefit) related to other
comprehensive income (loss) (68) (25) 66
------- ------- -------
Other comprehensive income (loss), net of tax (132) (48) 128
------- ------- -------
Comprehensive income $ 2,777 $ 2,254 $ 3,476
======= ======= =======
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
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
------------ ------------ ------------ ------------
2005
- ----
AVAILABLE FOR SALE
Corporate debt securities $ 9,155 $ -- $ -- $ 9,155
------------ ------------ ------------ ------------
Total $ 9,155 $ -- $ -- $ 9,155
============ ============ ============ ============
HELD TO MATURITY
U.S. Government agency securities $ 149,360 $ 77 $ (493) $ 148,944
Obligations of states and political
subdivisions 24,551 848 (20) 25,379
------------ ------------ ------------ ------------
Total $ 173,911 $ 925 $ (513) $ 174,323
============ ============ ============ ============
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
2004
- ----
AVAILABLE FOR SALE
Corporate debt securities $ 2,532 $ 18 $ -- $ 2,550
Equity securities 1,581 313 (28) 1,866
------------ ------------ ------------ ------------
Total $ 4,113 $ 331 $ (28) $ 4,416
============ ============ ============ ============
HELD TO MATURITY
U.S. Government agency securities $ 223,808 $ 1,176 $ (864) $ 224,120
Corporate debt securities 13,772 16 -- 13,788
Obligations of states and political
subdivisions 31,593 1,641 (39) 33,195
------------ ------------ ------------ ------------
Total $ 269,173 $ 2,833 $ (903) $ 271,103
============ ============ ============ ============
In 2005, 2004, and 2003, the Company recorded realized investment security
gains, and unrealized holding gains and losses for trading securities, of
$336, $20, and $64. Proceeds from sales of investment securities during
2005, 2004, and 2003, were $1,409, $251, and $639.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
4. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market values of debt securities at June
30, 2005, 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 $ 9,155 $ -- $ -- $ -- $ 9,155
Estimated market value 9,155 -- -- -- 9,155
HELD TO MATURITY
Amortized cost $ -- $ -- $ 6,261 $ 167,650 $ 173,911
Estimated market value -- -- 6,478 167,845 174,323
Investment securities with amortized costs of $101,208 and $138,899 and
estimated market values of $100,951 and $139,411 at June 30, 2005 and
2004, respectively, were pledged to secure public deposits, repurchase
agreements, and for other purposes as required by law.
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
------------ ------------ ------------ ------------
2005
- ----
AVAILABLE FOR SALE
Fannie Mae $ 449 $ 25 $ -- $ 474
Government National Mortgage
Association certificates 2,333 196 -- 2,529
Freddie Mac 44 1 -- 45
Collateralized mortgage obligations 67 5 -- 72
------------ ------------ ------------ ------------
Total $ 2,893 $ 227 $ -- $ 3,120
============ ============ ============ ============
HELD TO MATURITY
Fannie Mae $ 16 $ 1 $ -- $ 17
Government National Mortgage
Association certificates 370 25 -- 395
Freddie Mac 9 1 -- 10
Collateralized mortgage obligations 158,636 525 (17) 159,144
------------ ------------ ------------ ------------
Total $ 159,031 $ 552 $ (17) $ 159,566
============ ============ ============ ============
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
5. MORTGAGE-BACKED SECURITIES (Continued)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
2004
- ----
AVAILABLE FOR SALE
Fannie Mae $ 686 $ 37 $ -- $ 723
Government National Mortgage
Association certificates 2,411 80 (1) 2,490
Freddie Mac 45 1 -- 46
Collateralized mortgage obligations 92 6 -- 98
------------ ------------ ------------ ------------
Total $ 3,234 $ 124 $ (1) $ 3,357
============ ============ ============ ============
HELD TO MATURITY
Fannie Mae $ 19 $ -- $ -- $ 19
Government National Mortgage
Association certificates 591 42 -- 633
Freddie Mac 17 -- -- 17
Collateralized mortgage obligations 71,606 117 (293) 71,430
------------ ------------ ------------ ------------
Total $ 72,233 $ 159 $ (293) $ 72,099
============ ============ ============ ============
The amortized cost and estimated market value of mortgage-backed
securities at June 30, 2005, 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 $ -- $ 13 $ -- $ 2,880 $ 2,893
Estimated market value -- 13 -- 3,107 3,120
HELD TO MATURITY
Amortized cost $ -- $ 18 $ 13 $ 159,000 $ 159,031
Estimated market value -- 18 13 159,535 159,566
At June 30, 2005 and 2004, mortgage-backed securities with an amortized
cost of $112,047 and $65,496 and estimated market values of $112,730 and
$65,486, were pledged to secure borrowings with the Federal Home Loan
Bank.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
6. UNREALIZED LOSSES ON SECURITIES
The following table shows the Company's gross unrealized losses and fair
value, aggregated by category and length of time that the individual
securities have been in a continuous unrealized loss position, at June 30,
2005.
Less than Twelve Months Twelve Months or Greater Total
--------------------------- --------------------------- ---------------------------
Estimated Gross Estimated Gross Estimated Gross
Market Unrealized Market Unrealized Market Unrealized
Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
U.S. government agencies
securities $ 113,715 $ (493) $ -- $ -- $ 113,715 $ (493)
Obligations of states and
political subdivisions -- -- 1,316 (20) 1,316 (20)
Collateralized mortgage
obligations 43,107 (16) 277 (1) 43,384 (17)
------------ ------------ ------------ ------------ ------------ ------------
Total $ 156,822 $ (509) $ 1,593 $ (21) $ 158,415 $ (530)
============ ============ ============ ============ ============ ============
The policy of the Company is to recognize an other-than-temporary
impairment of equity securities where the fair value has been
significantly below cost for three consecutive quarters. For fixed
maturity investments with unrealized losses due to interest rates where
the Company has the positive intent and ability to hold the investment for
a period of time sufficient to allow a market recovery, declines in value
below cost are not assumed to be other than temporary. The Company reviews
its position quarterly and has asserted that at June 30, 2005, the
declines outlined in the above table represent temporary declines and the
Company does have the intent and ability either to hold those securities
to maturity or to allow a market recovery.
The Company has concluded that any impairment of its investment securities
portfolio is not other than temporary but is the result of interest rate
changes, sector credit changes, or Company-specific rating changes that
are not expected to result in the noncollection of principal and interest
during the period.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
7. NET LOANS RECEIVABLE
Major classifications of loans are summarized as follows:
2005 2004
-------- --------
First mortgage loans:
1 - 4 family dwellings $ 20,680 $ 25,825
Construction 22,065 18,070
Land acquisition and development 5,884 7,947
Multi-family dwellings 4,960 4,761
Commercial 8,561 9,950
-------- --------
62,150 66,553
-------- --------
Consumer loans:
Home equity 6,504 7,086
Home equity lines of credit 3,578 3,932
Other 1,089 870
-------- --------
11,171 11,888
-------- --------
Commercial loans 915 968
-------- --------
Less:
Undisbursed construction and land development 12,882 9,956
Net deferred loan fees 82 115
Allowance for loan losses 1,121 1,370
-------- --------
14,085 11,441
-------- --------
Net loans receivable $ 60,151 $ 67,968
======== ========
The Company's primary business activity is with customers located within
its local trade area of Northern Allegheny and Southern Butler counties.
The Company has concentrated its lending efforts by granting residential
and construction mortgage loans to customers throughout its immediate
trade area. The Company also selectively funds and participates in
commercial and residential mortgage loans outside of its immediate trade
area, provided such loans meet the Company's credit policy guidelines. At
June 30, 2005 and 2004, the Company had approximately $14 million and $15
million, respectively, of outstanding loans for land development and
construction in the local trade area. Although the Company had a
diversified loan portfolio at June 30, 2005 and 2004, loans outstanding to
individuals and businesses are dependent upon the local economic
conditions in its immediate trade area.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
7. NET LOANS RECEIVABLE (Continued)
Total nonaccrual loans and troubled debt restructurings and the related
interest income recognized for the years ended June 30 are as follows:
2005 2004 2003
------ ------ ------
Principal outstanding $2,101 $2,181 $3,481
------ ------ ------
Interest income that would
have been recognized 150 123 256
Interest income recognized 99 94 26
------ ------ ------
Interest income foregone $ 51 $ 29 $ 230
====== ====== ======
The following table is a summary of the loans considered to be impaired as
of June 30:
2005 2004 2003
------ ------ ------
Impaired loans with an allocated allowance $ -- $1,900 $3,423
Impaired loans without an allocated allowance -- -- --
------ ------ ------
Total impaired loans $ -- $1,900 $3,423
====== ====== ======
Allocated allowance on impaired loans $ -- $ 762 $1,816
Average impaired loans -- 1,836 3,441
Income recognized on impaired loans -- 89 23
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:
2005 2004
-------- --------
Balance, July 1 $ 316 $ 535
Additions 631 101
Amounts collected (435) (320)
-------- --------
Balance, June 30 $ 512 $ 316
======== ========
8. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
2005 2004 2003
-------- -------- --------
Balance, July 1 $ 1,370 $ 2,530 $ 2,758
Add:
Recovery for loan losses (46) (794) (228)
Recoveries 34 158 --
Less:
Loans charged off 237 524 --
-------- -------- --------
Balance, June 30 $ 1,121 $ 1,370 $ 2,530
======== ======== ========
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
9. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
2005 2004
-------- --------
Investment and mortgage-backed securities $ 1,758 $ 2,135
Loans receivable 299 321
-------- --------
Total $ 2,057 $ 2,456
======== ========
10. FEDERAL HOME LOAN BANK STOCK
The Savings Bank is a member of the FHLB System. As a member, West View
maintains an investment in the capital stock of the FHLB of Pittsburgh in
an amount not less than 60 basis points of the outstanding unused FHLB
borrowing capacity and 4.75 percent of its outstanding FHLB borrowings, as
calculated throughout the year.
11. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
2005 2004
-------- --------
Land and improvements $ 246 $ 264
Buildings and improvements 1,992 2,024
Furniture, fixtures, and equipment 851 1,069
-------- --------
3,089 3,357
Less accumulated depreciation 2,150 2,280
-------- --------
Total $ 939 $ 1,077
======== ========
Depreciation charged to operations was $193, $188, and $156, for the years
ended June 30, 2005, 2004, and 2003, respectively.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
12. DEPOSITS
Deposit accounts are summarized as follows:
2005 2004
--------------------------- ---------------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
------------ ------------ ------------ ------------
Noninterest-earning checking $ 11,926 7.2% $ 10,996 6.8%
Interest-earning checking 25,396 15.4 22,897 14.3
Savings accounts 44,323 26.9 45,837 28.5
Money market accounts 13,625 8.3 14,226 8.9
Advance payments by borrowers
for taxes and insurance 1,117 0.7 1,245 0.7
------------ ------------ ------------ ------------
96,387 58.5 95,201 59.2
------------ ------------ ------------ ------------
Savings certificates:
2.00% or less 16,044 9.7 38,528 24.0
2.01 - 4.00% 44,895 27.3 16,875 10.5
4.01 - 6.00% 6,605 4.0 8,604 5.4
6.01 - 6.95% 775 0.5 1,355 0.9
------------ ------------ ------------ ------------
68,319 41.5 65,362 40.8
------------ ------------ ------------ ------------
Total $ 164,706 100.0% $ 160,563 100.0%
============ ============ ============ ============
The maturities of savings certificates at June 30, 2005, are summarized as
follows:
Within one year $ 43,811
Beyond one year but within two years 11,826
Beyond two years but within three years 4,859
Beyond three years 7,823
------------
Total $ 68,319
============
Savings certificates with balances of $100,000 or more amounted to $13,513
and $6,944 on June 30, 2005 and 2004, respectively.
Interest expense by deposit category for the years ended June 30 are as
follows:
2005 2004 2003
------------ ------------ ------------
Interest-earning checking accounts $ 14 $ 32 $ 42
Savings accounts 311 334 509
Money market accounts 166 109 183
Savings certificates 1,734 1,831 2,554
Advance payments by borrowers for taxes
and insurance 13 15 24
------------ ------------ ------------
Total $ 2,238 $ 2,321 $ 3,312
============ ============ ============
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
13. FEDERAL HOME LOAN BANK ADVANCES
The following table presents contractual maturities of FHLB long-term
advances as of June 30:
Weighted- Stated interest
Maturity range average rate range
Description from to interest rate from to 2005 2004
- ----------- -------- -------- ------------- ------ ------ -------- --------
Convertible 02/20/08 06/22/16 5.47% 4.96% 6.10% $137,500 $144,500
Fixed rate 03/16/06 05/03/10 4.97 2.91 5.43 5,236 5,236
-------- --------
$142,736 $149,736
======== ========
Maturities of FHLB long-term advances at June 30, 2005, are summarized as
follows:
Weighted-
Maturing During Average
Fiscal Year Ended Interest
June 30: Amount Rate
-------------------- ------------ ------------
2006 $ 4,157 5.42%
2008 3,000 5.48
2009 10,500 4.99
2010 20,579 5.86
2011 and thereafter 104,500 5.42
------------
Total $ 142,736 5.45%
============
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
convert from a fixed rate to a predetermined floating rate on its
conversion date or quarterly thereafter. Should the advance be converted,
the Company has the right to pay off the advance without penalty. The FHLB
advances are secured by the Company's FHLB stock and investment securities
and are subject to substantial prepayment penalties.
The Company also utilized revolving and short-term FHLB advances.
Short-term FHLB advances generally mature within 90 days, while revolving
FHLB advances may be repaid by the Company without penalty. The following
table presents information regarding such advances as of June 30:
2005 2004
-------- --------
FHLB revolving and short-term advances:
Ending balance $ 12,300 $ --
Average balance during the year 3,021 336
Maximum month-end balance during the year 35,400 2,250
Average interest rate during the year 2.63% 2.24%
Weighted-average rate at year end 3.31% --%
At June 30, 2005, the Company had remaining intermediate term (maturing
within five years) borrowing capacity with the FHLB of approximately $115
million.
The FHLB advances are secured by the Company's FHLB stock and investment
and mortgage-backed securities held in safekeeping at the FHLB, and are
subject to substantial prepayment penalties.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
14. OTHER BORROWINGS
Other borrowings include securities sold under agreements to repurchase
with securities brokers. The outstanding repurchase agreements generally
mature within 1 to 90 days from the transaction date and qualifying
collateral has been delivered. The Company pledged investment securities
with a carrying value of $69,775 and $91,866 at June 30, 2005 and 2004,
respectively, as collateral for the repurchase agreements as explained in
Note 4. The following table presents information regarding other
borrowings as of June 30:
2005 2004
------------ ------------
Ending balance $ 69,680 $ 91,639
Average balance during the year 65,578 48,749
Maximum month-end balance during the year 117,976 93,639
Average interest rate during the year 2.27% 1.12%
Weighted-average rate at year end 3.29% 1.28%
15. COMMITMENTS AND CONTINGENT LIABILITIES
Loan Commitments
In the normal course of business, there are various commitments that are
not reflected in the Bank's financial statements. These instruments
involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance sheet. The
Bank's exposure to credit loss in the event of nonperformance by the other
parties to the financial instruments is represented by the contractual
amounts as disclosed. Losses, if any, are charged to the allowance for
loan losses. Management minimizes its exposure to credit loss under these
commitments by subjecting them to credit approval, review procedures, and
collateral requirements as deemed necessary. Various loan commitments
totaling $20,473 and $20,213 at June 30, 2005 and 2004, respectively,
represent financial instruments with off-balance sheet risk. The
commitments outstanding at June 30, 2005, contractually mature in less
than one year.
Loan commitments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the Consolidated
Balance Sheet. The same credit policies are used in making commitments and
conditional obligations as for on-balance sheet instruments. Generally,
collateral, usually in the form of real estate, is required to support
financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the loan
agreement. These commitments are composed primarily of the undisbursed
portion of construction and land development loans (Note 7), residential,
commercial real estate, and consumer loan originations.
The exposure to loss under these commitments is limited by subjecting them
to credit approval and monitoring procedures. Substantially all
commitments to extend credit are contingent upon customers maintaining
specific credit standards at the time of the loan funding. Management
assesses the credit risk associated with certain commitments to extend
credit in determining the level of the allowance for loan losses.
Litigation
The Company is involved with various legal actions arising in the ordinary
course of business. Management believes the outcome of these matters will
have no material effect on the consolidated operations or financial
condition of WVS.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
16. REGULATORY CAPITAL
Federal regulations require the Company and Savings Bank to maintain
minimum amounts of capital. Specifically, each is required to maintain
certain minimum dollar amounts and ratios of Total and Tier I Capital to
Risk-Weighted Assets and of Tier I Capital to Average Total Assets.
In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") established five capital categories
ranging from well capitalized to critically undercapitalized. Should any
institution fail to meet the requirements to be considered adequately
capitalized, it would become subject to a series of increasingly
restrictive regulatory actions.
As of June 30, 2005 and 2004, the FDIC categorized the Savings Bank as
well capitalized under the regulatory framework for prompt corrective
action. To be classified as a well capitalized financial institution,
Total Risk-Based, Tier 1 Risk-Based, and Tier 1 Leverage Capital Ratios
must be at least 10 percent, 6 percent, and 5 percent, respectively.
The Company's and Savings Bank's actual capital ratios are presented in
the following tables, which show that both met all regulatory capital
requirements.
June 30, 2005
------------------------------------------
WVS West View
------------------- -------------------
Amount Ratio Amount Ratio
-------- -------- -------- --------
Total Capital (to Risk-Weighted Assets)
- ---------------------------------------
Actual $ 30,172 21.80% $ 28,417 20.74%
To Be Well Capitalized 13,838 10.00 13,702 10.00
For Capital Adequacy Purposes 11,070 8.00 10,961 8.00
Tier I Capital (to Risk-Weighted Assets)
- ----------------------------------------
Actual $ 29,051 20.99% $ 27,296 19.92%
To Be Well Capitalized 8,303 6.00 8,221 6.00
For Capital Adequacy Purposes 5,535 4.00 5,481 4.00
Tier I Capital (to Average Total Assets)
- ----------------------------------------
Actual $ 29,051 7.14% $ 27,296 6.73%
To Be Well Capitalized 20,357 5.00 20,283 5.00
For Capital Adequacy Purposes 16,285 4.00 16,227 4.00
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
16. REGULATORY CAPITAL (Continued)
June 30, 2004
------------------------------------------
WVS West View
------------------- -------------------
Amount Ratio Amount Ratio
-------- -------- -------- --------
Total Capital (to Risk-Weighted Assets)
- ---------------------------------------
Actual $ 30,416 19.62% $ 27,524 17.98%
To Be Well Capitalized 15,507 10.00 15,306 10.00
For Capital Adequacy Purposes 12,405 8.00 12,245 8.00
Tier I Capital (to Risk-Weighted Assets)
- ----------------------------------------
Actual $ 28,918 18.65% $ 26,155 17.09%
To Be Well Capitalized 9,304 6.00 9,184 6.00
For Capital Adequacy Purposes 6,203 4.00 6,123 4.00
Tier I Capital (to Average Total Assets)
- ----------------------------------------
Actual $ 28,918 6.92% $ 26,155 6.30%
To Be Well Capitalized 20,860 5.00 20,743 5.00
For Capital Adequacy Purposes 16,688 4.00 16,594 4.00
Prior to the enactment of the Small Business Job Protection Act, the
Company accumulated approximately $3.9 million of retained earnings, which
represent allocations of income to bad debt deductions for tax purposes
only. Since there is no amount that represents the accumulated bad debt
reserves subsequent to 1987, no provision for federal income tax has been
made for such amount. If any portion of this amount is used other than to
absorb loan losses (which is not anticipated), the amount will be subject
to federal income tax at the current corporate rate.
17. STOCK BENEFIT PLANS
Stock Option Plan
-----------------
The Company maintains a Stock Option Plan for the directors, officers, and
employees. An aggregate of 347,258 shares of authorized but unissued
common stock of WVS was 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.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
17. STOCK BENEFIT PLANS (Continued)
Stock Option Plan (Continued)
-----------------
The following table presents information related to the outstanding
options:
Officers' and Weighted-
Employees' Directors' Average
Stock Stock Exercise
Options Options Price
------------ ------------ ------------
Outstanding, June 30, 2002 78,412 6,414 $ 14.80
Granted -- --
Exercised (4,992) (1,200) 11.40
Forfeited -- --
------------ ------------
Outstanding, June 30, 2003 73,420 5,214 $ 15.07
Granted -- --
Exercised (34,028) (800) 15.19
Foreited (80) -- 5.00
------------ ------------
Outstanding, June 30, 2004 39,312 4,414 $ 14.99
Granted -- --
Exercised -- --
Forfeited -- --
------------ ------------
Outstanding, June 30, 2005 39,312 4,414 $ 14.99
============ ============
Exercisable at year end 39,312 4,414 $ 14.99
============ ============
Available for future grant -- --
============ ============
At June 30, 2005, for officers and employees there were 39,312 options
outstanding, exercisable at a weighted-average exercise price of $15.03,
and a weighted-average remaining contractual life of 2.84 years.
There were also 4,414 options outstanding and exercisable for directors
with a weighted-average exercise price of $14.70, and a weighted-average
remaining contractual life of 4.33 years.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
17. 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.
The RRP expired during 2004 and all unissued shares were retired. RRP
costs are accrued to operations and added back to stockholders' equity
over a four-to ten-year vesting period. Net compensation expense
attributed to the RRPs amounted to $1, $5, and $23 for the years ended
June 30, 2005, 2004, and 2003.
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, $100, and
$100 for the years ended June 30, 2005, 2004, and 2003, respectively.
Total ESOP shares as of June 30, 2005 and 2004, were 232,031 and 225,565,
respectively.
18. DIRECTOR, OFFICER, AND EMPLOYEE BENEFITS
Profit Sharing Plan
-------------------
The Company maintains a non-contributory profit sharing 401(k) plan (the
"Plan") for its officers and employees who have met the age and length of
service requirements. The Plan is a defined contribution plan with the
contributions based on a percentage of salaries of the Plan participants.
The Company made no contributions to the Plan for the three years ended
June 30, 2005, 2004, and 2003.
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, 2005, 2004, and 2003, 29,979, 39,539, and
37,939 shares, respectively, were held by the Plan.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
19. INCOME TAXES
The provision for income taxes consists of:
2005 2004 2003
---------- ---------- ----------
Currently payable:
Federal $ 475 $ 366 $ 794
State 79 82 233
---------- ---------- ----------
554 448 1,027
Deferred 73 171 43
---------- ---------- ----------
Total $ 627 $ 619 $ 1,070
========== ========== ==========
The following temporary differences gave rise to the net deferred tax
assets at June 30:
2005 2004
-------- --------
Deferred tax assets:
Allowance for loan losses $ 381 $ 466
Deferred compensation 294 270
Accrued interest receivable on loans 233 225
Net operating loss carryforward -- 72
Alternative minimum tax credit 206 174
-------- --------
Total gross deferred tax assets 1,114 1,207
-------- --------
Deferred tax liabilities:
Net unrealized gain on securities available for sale 77 145
Deferred origination fees, net 200 209
Premises and equipment 56 67
-------- --------
Total gross deferred tax liabilities 333 421
-------- --------
Net deferred tax assets $ 781 $ 786
======== ========
No valuation allowance was established at June 30, 2005 and 2004, in view
of the Company's ability to carryback to taxes paid in previous years,
future anticipated taxable income, which is evidenced by the Company's
earnings potential, and deferred tax liabilities at June 30.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
19. INCOME TAXES (Continued)
The following is a reconciliation between the actual provision for income
taxes and the amount of income taxes which would have been provided at
federal statutory rates for the years ended June 30:
2005 2004 2003
-------------------- -------------------- --------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-------------------- -------------------- --------------------
Provision at statutory rate $ 1,202 34.0% $ 993 34.0% $ 1,502 34.0%
State income tax, net of federal
tax benefit 52 1.5 54 1.9 154 3.5
Tax exempt income (553) (15.6) (558) (19.1) (549) (12.4)
Other, net (74) (2.2) 130 4.4 (37) (0.9)
-------- -------- -------- -------- -------- --------
Actual tax expense and
effective rate $ 627 17.7% $ 619 21.2% $ 1,070 24.2%
======== ======== ======== ======== ======== ========
The Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax,
which is calculated at 11.5 percent of earnings.
20. REGULATORY MATTERS
Cash and Due From Banks
-----------------------
The Federal Reserve requires the Savings Bank to maintain certain reserve
balances. The required reserves are computed by applying prescribed ratios
to the Savings Bank's average deposit transaction account balances. As of
June 30, 2005 and 2004, the Savings Bank had required reserves of $923 and
$808, respectively. The required reserves are held in the form of vault
cash and a non-interest-bearing depository balance maintained directly
with the Federal Reserve.
Loans
-----
Federal law prohibits the Company from borrowing from the Savings Bank
unless the loans are secured by specific obligations. Further, such
secured loans are limited in amount to 10 percent of the Savings Bank's
capital surplus.
Dividend Restrictions
---------------------
The Savings Bank is subject to the Pennsylvania Banking Code, which
restricts the availability of surplus for dividend purposes. At June 30,
2005, surplus funds of $3,363 were not available for dividends.
44
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:
2005 2004
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
FINANCIAL ASSETS
Cash and cash equivalents $ 3,566 $ 3,566 $ 3,054 $ 3,054
Trading securities -- -- 993 993
Investment securities 183,066 183,478 273,589 275,519
Mortgage-backed securities 162,151 162,686 75,590 75,456
Net loans receivable 60,151 62,297 67,968 70,170
Accrued interest receivable 2,057 2,057 2,456 2,456
FHLB stock 7,769 7,769 7,532 7,532
FINANCIAL LIABILITIES
Deposits $ 164,706 $ 164,593 $ 160,563 $ 160,657
FHLB advances 155,036 159,511 149,736 153,944
Other borrowings 69,680 69,680 91,639 91,639
Accrued interest payable 1,260 1,260 1,197 1,197
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:
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Cash and Cash Equivalents, Interest-Earning Demand Deposits, Trading
--------------------------------------------------------------------------
Securities, 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 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 15 to these financial statements.
46
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,
2005 2004
---------- ----------
ASSETS
Interest-earning deposits with subsidiary bank $ 402 $ 868
Investment securities available for sale 1,333 2,120
Investment in subsidiary bank 27,446 26,257
Accrued interest receivable and other assets 28 64
---------- ----------
TOTAL ASSETS $ 29,209 $ 29,309
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 8 $ 110
Stockholders' equity 29,201 29,199
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 29,209 $ 29,309
========== ==========
Year Ended June 30,
2005 2004 2003
-------- -------- --------
INCOME
Loans $ -- $ 2 $ 27
Investment and mortgage-backed securities 52 89 111
Dividend from subsidiary 1,600 1,300 2,400
Investment securities gains, net 332 20 64
Interest-earning deposits with subsidiary bank 3 10 33
-------- -------- --------
Total income 1,987 1,421 2,635
-------- -------- --------
OTHER OPERATING EXPENSE 101 104 111
-------- -------- --------
Income before equity in undistributed
earnings of subsidiary 1,886 1,317 2,524
Equity in undistributed earnings of subsidiary 1,114 983 840
-------- -------- --------
Income before income taxes 3,000 2,300 3,364
Income tax expense (benefit) 91 (2) 16
-------- -------- --------
NET INCOME $ 2,909 $ 2,302 $ 3,348
======== ======== ========
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
22. PARENT COMPANY (Continued)
Year Ended June 30,
2005 2004 2003
-------- -------- --------
OPERATING ACTIVITIES
Net income $ 2,909 $ 2,302 $ 3,348
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed net income of subsidiary (1,114) (983) (840)
Investment securities gains (332) (20) (64)
Amortization (accretion) of investment discounts
and premiums, net -- (3) 22
Other, net 62 119 45
-------- -------- --------
Net cash provided by operating activities 1,525 1,415 2,511
-------- -------- --------
INVESTING ACTIVITIES
Available for sale:
Purchase of investment and
mortgage-backed securities (1,550) (3,321) (4,934)
Proceeds from repayments of investment and
mortgage-backed securities 1,422 5,183 2,582
Proceeds from sales of investment securities 913 251 639
Held to maturity:
Purchases of investment and mortgage-backed
securities -- (3,199) (1,817)
Proceeds from repayments of investment and
mortgage-backed securities -- 3,451 1,555
Net decrease in loans receivable -- 115 354
-------- -------- --------
Net cash provided by (used for) investing activities 785 2,480 (1,621)
-------- -------- --------
FINANCING ACTIVITIES
Net proceeds from exercise of stock options -- 489 71
Cash dividends paid (1,559) (1,624) (1,674)
Purchases of treasury stock (1,217) (2,610) (1,634)
-------- -------- --------
Net cash used for financing activities (2,776) (3,745) (3,237)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (466) 150 (2,347)
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR 868 718 3,065
-------- -------- --------
CASH AND CASH EQUIVALENTS
END OF YEAR $ 402 $ 868 $ 718
======== ======== ========
48
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
2004 2004 2005 2005
------------ ------------ ------------ ------------
Total interest and dividend income $ 4,430 $ 4,405 $ 4,509 $ 4,530
Total interest expense 2,752 2,977 3,018 3,097
------------ ------------ ------------ ------------
Net interest income 1,678 1,428 1,491 1,433
Provision (recovery) for loan losses 78 (7) (5) (112)
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 1,600 1,435 1,496 1,545
Total noninterest income 408 266 159 159
Total noninterest expense 878 903 891 860
------------ ------------ ------------ ------------
Income before income taxes 1,130 798 764 844
Income taxes 296 209 200 (78)
------------ ------------ ------------ ------------
Net income $ 834 $ 589 $ 564 $ 922
============ ============ ============ ============
Per share data:
Net income
Basic $ 0.34 $ 0.24 $ 0.23 $ 0.38
Diluted 0.34 0.24 0.23 0.38
Average shares outstanding
Basic 2,453,189 2,445,349 2,430,679 2,399,463
Diluted 2,458,926 2,451,242 2,435,935 2,404,097
49
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
2003 2003 2004 2004
------------ ------------ ------------ ------------
Total interest and dividend income $ 3,811 $ 3,956 $ 4,067 $ 4,172
Total interest expense 2,769 2,760 2,716 2,742
------------ ------------ ------------ ------------
Net interest income 1,042 1,196 1,351 1,430
Provision (recovery) for loan losses (133) (624) (14) (23)
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 1,175 1,820 1,365 1,453
Total noninterest income 194 161 163 197
Total noninterest expense 892 938 899 878
------------ ------------ ------------ ------------
Income before income taxes 477 1,043 629 772
Income taxes 125 273 165 56
------------ ------------ ------------ ------------
Net income $ 352 $ 770 $ 464 $ 716
============ ============ ============ ============
Per share data:
Net income
Basic $ 0.14 $ 0.30 $ 0.18 $ 0.29
Diluted 0.14 0.30 0.18 0.29
Average shares outstanding
Basic 2,575,242 2,560,420 2,525,612 2,481,206
Diluted 2,585,081 2,569,578 2,533,697 2,488,556
50
COMMON STOCK MARKET PRICE AND DIVIDEND INFORMATION
WVS Financial Corp.'s common stock is traded on the Nasdaq Stock MarketSM
National Market System under the symbol "WVFC".
The following table sets forth the high and low market prices of a share
of common stock, and cash dividends declared per share, for the periods
indicated.
Market Price
----------------------- Cash Dividends
Quarter Ended High Low Declared
- ----------------------- -------- -------- -----------------
June 2005 $ 17.250 $ 16.600 $0.16
March 2005 18.140 16.250 0.16
December 2004 18.100 16.000 0.16
September 2004 18.000 16.000 0.16
June 2004 $ 19.400 $ 17.110 $0.16
March 2004 19.980 17.350 0.16
December 2003 18.400 16.810 0.16
September 2003 18.650 16.500 0.16
There were eight Nasdaq Market Makers in the Company's common stock as of
June 30, 2005: Boenning & Scattergood Inc.; Sandler O'Neill & Partners;
Boston Stock Exchange; Ryan Beck & Co., Inc.; Morgan Stanley & Co., Inc;
UBS Securities LLC; Hill, Thompson, Magid and Co. and Knight Equity
Markets, L.P.
According to the records of the Company's transfer agent, there were
approximately 750 shareholders of record at September 7, 2005. 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.
51
WVS FINANCIAL CORP.
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
CORPORATE OFFICES
WVS FINANCIAL CORP. o WEST VIEW SAVINGS BANK
9001 Perry Highway Pittsburgh, PA 15237
412-364-1911
COMMON STOCK BOARD OF DIRECTORS
The common stock of WVS Financial Corp.
is traded on The Nasdaq Stock Market
SM under the symbol "WVFC". David L. Aeberli
Funeral Director
TRANSFER AGENT & REGISTRAR McDonald-Aeberli Funeral Home, Inc.
Registrar and Transfer Company
10 Commerce Drive Arthur H. Brandt
Cranford, NJ 07016 Former President and CEO
1-800-368-5948 Brandt Excavating, Inc. and
Brandt Paving, Inc.
CORPORATE SECRETARY AND
INVESTOR RELATIONS David J. Bursic
Pamela M. Tracy President and Chief Executive Officer
412-364-1911 WVS Financial Corp. and
West View Savings Bank
COUNSEL
Bruggeman & Linn Donald E. Hook
Chairman
SPECIAL COUNSEL Pittsburgh Cut Flower Co.
Elias, Matz, Tiernan & Herrick L.L.P.
Washington, DC Lawrence M. Lehman
Sole Proprietor
Newton-Lehman Insurance Agency
John M. Seifarth
WEST VIEW SAVINGS BANK Senior Engineer - Consultant
9001 Perry Highway Nichols & Slagle Engineering, Inc.
Pittsburgh, PA 15237
412-364-1911 Margaret VonDerau
Former Senior Vice President
WEST VIEW OFFICE and Corporate Secretary
456 Perry Highway WVS Financial Corp. and
412-931-2171 West View Savings Bank
CRANBERRY OFFICE
20531 Perry Highway EXECUTIVE OFFICERS
412-931-6080/724-776-3480
Donald E. Hook
FRANKLIN PARK OFFICE Chairman
2566 Brandt School Road
724-935-7100 David J. Bursic
President and
BELLEVUE OFFICE Chief Executive Officer
572 Lincoln Avenue
412-761-5595 Jonathan D. Hoover
Vice President of Bank Operations
SHERWOOD OAKS OFFICE
Serving Sherwood Oaks Bernard P. Lefke
Cranberry Twp. Vice President of Savings
LENDING DIVISION Keith A. Simpson
2566 Brandt School Road Vice President, Treasurer and
724-935-7400 Chief Accounting Officer
The members of the Board of Directors serve in that capacity for both the
Company and the Savings Bank.