[GRAPHIC -- COMPANY LOGO]
WVS
FINANCIAL CORP.
1997 ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
Page
Number
------
Stockholders' Letter 1
Selected Financial and Other Data 2
Management's Discussion and Analysis 4
Report of Independent Auditors 25
Consolidated Statements of Financial Condition 26
Consolidated Statements of Income 27
Consolidated Statements of Changes in Stockholders' Equity 28
Consolidated Statements of Cash Flows 29
Notes to the Consolidated Financial Statements 30
Common Stock Market Price and Dividend Information 57
Corporate Information 58
<PAGE>
To Our Stockholders:
Fiscal 1997 was a year of accomplishment for WVS Financial Corp. and its
operating subsidiary West View Savings Bank. Company assets increased $35.1
million or 13.5% to $294.7 million at June 30, 1997. Investment and
mortgage-backed securities grew $23.7 million or 23.4% significantly enhancing
bottom line results. Net loans receivable rose by $9.1 million and totaled
$158.1 million or 53.6% of Company assets. Cash dividends paid to stockholders
totaled $3.00 per share in fiscal 1997 as compared to $2.06 per share in fiscal
1996, including special cash dividends of $2.30 and $1.70 per share paid in
fiscal years 1997 and 1996, respectively.
Net income for the year totaled $2.96 million or $1.69 per share both on a
primary and fully diluted basis as compared to $3.58 million or $2.06 per share
on a comparable basis for the same period in 1996. Fiscal 1997 operations were
significantly impacted by a $1.1 million one-time expense to recapitalize the
Federal Deposit Insurance Corporation's Savings Association Insurance Fund
(SAIF). Without this one-time charge, Company net income would have been
approximately $3.65 million or $2.08 per share.
Our commitment to enhance stockholder value remains steadfast. On June 30, 1997
the Company's stock was trading at $25 7/8 compared to $20 1/2 on June 30, 1996,
which, when combined with the cash dividends paid during fiscal 1997, provided
an impressive 40.9% return.
The Board of Directors, Senior Management and staff would like to thank you for
your continued support and we welcome the opportunity to serve you in the
future. By referring your family, friends and neighbors to West View Savings
Bank, you can contribute to the Company's future success.
ROBERT C. SINEWE JAMES S. McKAIN, JR.
President and Chairman of the Board
Chief Executive Officer
1
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FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED
FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
As of or For the Year Ended June 30,
------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets ...................... $ 294,693 $ 259,622 $ 227,368 $ 221,315 $ 210,633
Net loans receivable .............. 158,134 149,011 133,343 123,600 119,348
Mortgage-backed securities ........ 37,490 42,118 22,655 25,704 14,793
Investment securities ............. 87,548 59,218 61,525 63,578 61,917
Real estate owned ................. -- -- -- 25 --
Deposit accounts .................. 170,879 170,843 168,786 180,329 190,358
FHLB advances ..................... 77,857 38,000 14,984 4,000 --
Other borrowings .................. 6,784 10,652 4,047 -- --
Stockholders' equity .............. 32,889 34,038 33,809 32,369 15,349
Nonperforming assets and troubled
debt restructurings(1) ......... 274 980 1,959 1,931 1,118
Selected Operating Data:
Interest income ................... $ 21,125 $ 18,317 $ 15,612 $ 14,615 $ 16,026
Interest expense .................. 10,884 8,840 7,372 7,545 8,815
---------- ---------- ---------- ---------- ----------
Net interest income ............... 10,241 9,477 8,240 7,070 7,211
Provision for loan losses ......... 60 150 211 211 666
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses ................ 10,181 9,327 8,029 6,859 6,545
Non-interest income ............... 374 383 307 315 298
Non-interest expense .............. 5,666 4,067 4,894 4,270 3,598
---------- ---------- ---------- ---------- ----------
Income before income tax expense .. 4,889 5,643 3,442 2,904 3,245
Income tax expense ................ 1,930 2,066 1,652 914 1,369
---------- ---------- ---------- ---------- ----------
Net income before cumulative effect
of accounting change ........... 2,959 3,577 1,790 1,990 1,876
Cumulative effect of change in
accounting for income taxes .... -- -- -- 245 --
---------- ---------- ---------- ---------- ----------
Net income ........................ $ 2,959 $ 3,577 $ 1,790 $ 2,235 $ 1,876
========== ========== ========== ========== ==========
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<CAPTION>
As of or For the Year Ended June 30,
------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Per Share Information(2):
Primary:
Net income before cumulative effect
of accounting change ........... $ 1.69 $ 2.06 $ 1.05 $ 1.18 N/A
Cumulative effect of change in
accounting for income taxes .... -- -- -- 0.14 N/A
---------- ---------- ---------- ---------- ----------
Primary and fully diluted earnings $ 1.69 $ 2.06 $ 1.05 $ 1.32 N/A
========== ========== ========== ========== ==========
Dividends per share(3) ............ $ 3.00 $ 2.06 $ 0.42 $ 0.04 N/A
Dividend payout ratio(3) .......... 177.51% 100.00% 40.00% 3.10% N/A
Book value per share at period end $ 18.82 $ 19.60 $ 19.47 $ 18.64 N/A
Average shares outstanding
primary ........................ 1,752,216 1,732,348 1,709,243 1,693,580 N/A
fully diluted .................. 1,754,442 1,734,467 1,710,696 1,694,138 N/A
</TABLE>
2
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<TABLE>
<CAPTION>
As of or For the Year Ended June 30,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Ratios(4):
Average yield earned on interest-
earning assets ................... 7.69% 7.83% 7.33% 6.81% 7.97%
Average rate paid on interest-
bearing liabilities .............. 4.78 4.58 4.19 4.02 4.67
Average interest rate spread(5) ..... 2.91 3.25 3.14 2.79 3.30
Net interest margin(5) .............. 3.73 4.05 3.87 3.30 3.59
Ratio of interest-earning assets
to interest-bearing liabilities .. 120.70 121.18 121.09 114.30 106.43
Non-interest expense as a percent
of average assets ................ 2.04 1.71 2.26 1.96 1.73
Return on average assets ............ 1.06 1.51 0.83 1.02 0.90
Return on average equity ............ 8.63 10.19 5.34 8.74 13.15
Ratio of average equity to average
assets ........................... 12.33 14.81 15.48 11.70 6.85
Full-service offices at end of period 5 5 5 5 5
Asset Quality Ratios(4):
Non-performing loans and troubled
debt restructurings as a percent
of net total loans(1) ............ 0.17% 0.66% 1.47% 1.54% 0.94%
Non-performing assets as a percent
of total assets(1) ............... 0.09 0.15 0.45 0.45 0.08
Non-performing assets and troubled
debt restructurings as a percent
of total assets .................. 0.09 0.38 0.86 0.86 0.53
Allowances for loan losses as a
percent of total loans receivable 1.16 1.17 1.25 1.14 1.10
Allowances for loan losses as a
percent of non-performing loans .. 733.21 520.95 178.43 169.75 893.21
Charge-offs to average loans
receivable outstanding during
the period ....................... 0.01 0.02 0.01 0.02 0.07
Capital Ratios(4):
Tier 1 risk-based capital ratio ..... 24.52 27.19 27.06 21.39 11.13
Total risk-based capital ratio ...... 25.77 28.44 28.32 22.47 12.18
Tier 1 leverage capital ratio ....... 11.44 13.90 14.74 14.59 7.36
</TABLE>
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- ---------------------
(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) Earnings per share for fiscal 1994 have been computed as if all shares
were issued on July 1, 1993. Earnings per share computed for the period
from November 29, 1993 (date of the mutual-to-stock conversion) to June
30, 1994, would be $0.78.
(3) Dividends per share and dividend payout ratio includes special cash
dividends of $2.30, $1.70 and $0.20 per share, paid during fiscal 1997,
1996 and 1995, respectively.
(4) Asset quality ratios and capital ratios are end of period ratios,
except for net 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.
(5) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities, and net interest margin represents net
interest income as a percent of average interest-earning assets.
3
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WVS FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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. Originally organized under Pennsylvania law in 1908 as West View
Building Loan Association, West View changed its name to West View Savings and
Loan Association in 1954. In June 1992, West View converted from a
Pennsylvania-chartered mutual savings and loan association to a
Pennsylvania-chartered mutual savings bank. The Savings Bank converted to the
stock form of ownership in November 1993. The Savings Bank had no subsidiaries
at June 30, 1997.
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. 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 strategy focuses on traditional thrift lending,
maintaining asset quality and increasing core earnings. Specific strategic
components include:
Core Deposits - As of June 30, 1997, $71.2 million or 41.7% of West
View's total deposits consisted of regular savings and club accounts, money
market deposit accounts, and checking accounts. Approximately $36.6 million or
51.4% of core deposits consisted of regular savings and club accounts. Checking
Account balances grew $1.9 million or 9.3% during fiscal 1997 and totaled $22.5
million or 31.6% of core deposits at June 30, 1997. The continued growth in
checking account deposits was primarily due to increased marketing and
promotional efforts by the Company to gain market share. Core deposits are
4
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considered to be more stable and lower cost funds than certificates of deposit
and other borrowings.
Consistent Core Earnings - The Company's net interest income has
consistently covered operating expenses (non-interest expense). During fiscal
1997, net interest income totaled $10.2 million, representing a $0.7 million or
7.4% increase over fiscal 1996. See "Selected Consolidated Financial and Other
Data".
Asset Quality - Largely reflecting a lending strategy that emphasizes
local loan origination, West View has not had significant non-performing assets.
For the fiscal years ended June 30, 1997, 1996 and 1995, the Company's ratios of
non-performing assets and troubled debt restructurings to total assets were
0.09%, 0.38% and 0.86%, respectively. Total net charge-offs for the past three
fiscal years have aggregated $46 thousand.
Non-Interest Expense Ratios - For the fiscal years ended June 30,
1997, 1996 and 1995, the Company's ratios of non-interest expense to average
assets were 2.04%, 1.71% and 2.26%, respectively. Excluding unusual items
relating to shareholder litigation and the one-time SAIF recapitalization
charge, the Company's ratios of non-interest expense to average assets were
1.63%, 1.88% and 1.91% for the fiscal years ended June 30, 1997, 1996 and 1995,
respectively.
Traditional Thrift Lending - West View has consistently focused its
lending activities toward traditional thrift loan products. At June 30, 1997,
$128.9 million or 74.3% of the Company's total loans consisted of permanent
single-family mortgage and home equity loans. At June 30, 1997, approximately
$171.5 million or 98.8% of the Company's total loan portfolio consisted of loans
secured by real estate.
FINANCIAL CONDITION
The Company's assets totaled $294.7 million at June 30, 1997 as
compared to $259.6 million at June 30, 1996. The $35.1 million or 13.5% growth
in total assets was primarily comprised of a $23.7 million or 23.4% increase in
investment and mortgage-backed securities, a $9.1 million or 6.1% increase in
net loans receivable and a $2.0 million or 105.3% increase in Federal Home Loan
Bank ("FHLB") stock. The Company's total liabilities increased $36.2 million or
16.0% to $261.8 million as of June 30, 1997 from $225.6 million as of June 30,
1996. The $36.2 million increase in total liabilities was primarily comprised of
a $35.9 million or 73.7% increase in Federal Home Loan Bank advances and
short-term borrowings. Total stockholders' equity decreased $1.1 million or 3.2%
to $32.9 million as of June 30, 1997 from $34.0 million as of June 30, 1996,
primarily due to the Company's ongoing commitment to manage its capital levels
to further enhance stockholder value. The $1.1 million decrease in stockholders'
equity was principally
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attributable to $2.9 million of Company net income, less cash dividends paid to
stockholders totaling $4.9 million for the fiscal year ended June 30, 1997.
ASSET AND LIABILITY MANAGEMENT. The Company continued a strategy
designed to reduce the interest rate sensitivity of its financial assets to its
financial liabilities. The primary elements of this strategy include: (i)
expanding the Company's investment growth program in order to enhance net
interest income; (ii) maintaining the Company's level of short-term liquid
investments by funding loan commitments and purchasing longer-term investment
securities; (iii) emphasizing the retention of lower-cost savings accounts and
other core deposits; (iv) pricing the Company's certificates of deposit and loan
products nearer to the market average rate as opposed to the upper range of
market offered rates.
The Company has expanded its investment growth program, originally
initiated in the third quarter of fiscal 1994, throughout fiscal 1997 in order
to realize additional net interest income. Under this strategy, a longer-term
callable or noncallable investment security, or mortgage-backed security, is
purchased and funded through the use of short-term non-deposit liabilities, such
as FHLB advances and short-term borrowings. With this strategy, the Company
increases its net interest income, but also faces the risk, during periods of
rising market interest rates, that it may experience a decline in net interest
income if the rate paid on its various borrowings rises above the rate earned on
the investment security purchased. In order to mitigate this exposure, the Board
has placed certain restrictions on the investment growth program, including: (i)
the average outstanding daily balance of total borrowings, computed quarterly,
may not exceed approximately $85.0 million; (ii) suitable investments shall be
confined to those meeting the credit quality criteria outlined in the Company's
investment policy; and (iii) each security purchased shall initially yield a
minimum of seventy-five basis points above the incremental rate paid on
short-term borrowings, at the time of purchase. In most cases, the initial yield
spread earned on investment security purchases exceeded approximately two
hundred basis points.
The Company has continued to aggressively purchase bonds with optional
principal redemption features ("callable bonds") in order to capture additional
net interest income. Callable bonds generally provide investors with higher
rates of return than noncallable bonds because the issuer has the option to
redeem the bonds before maturity. While this strategy affords WVS the current
opportunity to improve its net interest income, during a period of declining
interest rates, such as was experienced during the first half of fiscal 1997,
the Company would be exposed to the risk that the investment will be redeemed
prior to its final stated maturity. In order to mitigate this risk, the Company
has funded a significant portion of its purchases of callable bonds with
short-term borrowings. Approximately $23.1 million of callable agency bonds with
an estimated weighted average rate of 8.0% were called during the fiscal year
ended June 30, 1997. During the fiscal year
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ended June 30, 1997, the Company purchased approximately $56.5 million of
callable bonds with an approximate weighted average yield to call and maturity
of 8.4% and 8.0%, respectively. The callable agency bond purchases, totaling
$56.5 million, are summarized by initial term to call as follows: $25.0 million
within three months, $5.5 million with greater than three months and within six
months, $14.0 million with greater than six months and within twelve months and
$12.0 million within twenty-four months. In addition, during the twelve months
ended June 30, 1997, the Company sold approximately $1.7 million of adjustable
rate mortgage-backed securities with an approximate weighted average yield of
6.6% at a gain of $26 thousand.
The Company's net interest income could also be adversely impacted by
a general rise in market interest rates, such as was experienced during the
second half of fiscal 1997. In order to partially mitigate this risk,
approximately $19.0 million or 50.7% of the Company's mortgage-backed securities
portfolio were comprised of floating rate securities. The yields on the floating
rate securities adjust monthly based upon certain short-term market indexes
(e.g. LIBOR, Prime, etc.). The Company's floating rate mortgage-backed
securities had an approximate weighted average yield of 6.9% as of June 30,
1997.
The Company also makes available for origination residential mortgage
loans with interest rates which adjust pursuant to a designated index, although
customer acceptance has been somewhat limited in the Savings Bank's market area.
The Company will continue to selectively offer land acquisition and development
and shorter-term construction loans, primarily on residential properties, to
partially increase its loan asset sensitivity.
During the fiscal year ended June 30, 1997, the Company lengthened the
maturity structure of a portion of its borrowings in order to lock in a
favorable cost of funds on a longer term basis. The Company borrowed
approximately $84.3 million from the FHLB as follows: $66.9 million of
convertible advances, with terms ranging from three years to five years at a
weighted average rate of 5.69%, $6.4 million of various fixed rate advances with
terms ranging from eighteen to twenty-four months with a weighted average rate
of 6.08%, and various short-term borrowings totaling approximately $11.0
million. During the twelve months ended June 30, 1997, the Company repaid $44.4
million of FHLB advances and $3.9 million of other borrowings. Convertible
advances generally provide for a fixed rate of interest for a portion of the
term of the advance, an ability for the FHLB to convert the advance from a fixed
rate to an adjustable rate at some predetermined time during the remaining term
of advance (the "conversion" feature), and a concurrent opportunity for the
Company to prepay the advance with no prepayment penalty in the event that the
FHLB elects to exercise the conversion feature.
As of June 30, 1997, the implementation of these asset and liability
management initiatives resulted in the following: (i) an aggregate of $49.0
million or 31.0% of the
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Company's net loan portfolio had adjustable interest rates or maturities of less
than 12 months; (ii) $19.0 million or 50.7% of the Company's portfolio of
mortgage-backed securities (including CMOs) were secured by floating rate
securities; (iii) $1.7 million or 1.9% of the Company's investment securities
portfolio had scheduled maturities of one year or less; and (iv) $81.9 million
or 93.6% of the Company's investment securities portfolio was comprised of
callable bonds.
The effect of interest rate changes on a financial institution's assets
and liabilities may be analyzed by examining the extent to which such assets and
liabilities are "interest rate sensitive" 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 when the amount of rate
sensitive assets exceeds the amount of rate sensitive liabilities. A gap is
considered negative when the amount of interest sensitive liabilities exceeds
the amount of interest sensitive assets. During a period of falling interest
rates, a positive gap would tend to adversely affect net interest income, while
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, while a negative gap would tend to adversely
affect net interest income.
The Company's one year cumulative interest rate sensitivity gap
amounted to a negative 13.3% of total assets at June 30, 1997 as compared to a
negative 18.0% at June 30, 1996, in each instance, based on certain assumptions
by management with respect to the repricing of certain assets and liabilities.
At June 30, 1997, the Company's interest-earning assets maturing or repricing
within one year totaled $103.2 million while the Company's interest-bearing
liabilities maturing or repricing within one year totaled $142.3 million,
providing a deficiency of interest-earning assets over interest-bearing
liabilities of $39.1 million. At June 30, 1997, the percentage of the Company's
assets to liabilities maturing or repricing within one year was 72.5%.
8
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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.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------
1997 1996 1995 1994
--------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets maturing or
repricing within one year(1) ........ $ 103,161 $ 88,530 $ 87,294 $ 117,767
Interest-bearing liabilities maturing or
repricing within one year(2) ........ $ 142,265 $ 135,344 $ 105,486 $ 87,816
--------- --------- --------- ---------
Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities ......................... $ (39,104) $ (46,814) $ (18,192) $ 29,951
========= ========= ========= =========
Excess (deficiency) of interest-earning
assets over interest-bearing
liabilities as a percentage of total
assets .............................. (13.3)% (18.0)% (8.0)% 13.5%
Percentage of assets to liabilities
maturing or repricing within one year 72.5 % 65.4 % 82.8 % 134.1%
</TABLE>
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(1) Adjustable and floating rate assets are included in the period in
which interest rates are next scheduled to adjust rather than in the
period in which they are contractually due to mature, and fixed rate
loans are included in the periods in which they are scheduled to be
repaid, based on scheduled amortization, in each case as adjusted to
take into account estimated prepayments based on the assumptions set
forth in the footnotes to the following table. The Company believes
that the assumptions utilized, which are based on statistical data
provided by a federal regulatory agency in the Company's market area,
are reasonable.
(2) Deposit decay rates are based on the assumptions set forth in the
footnotes to the following table.
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The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities as of
June 30, 1997, based on the information and assumptions set forth in the notes.
The Company believes that the assumptions utilized, which are based on
statistical data provided by a federal regulatory agency in the Company's market
area, are reasonable.
<TABLE>
<CAPTION>
More Than More Than
Within Six to One Year Three Over
Six Twelve to Three Years to Five
Months Months Years Five Years Years Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)(2)(3)(4) $ 37,754 $ 18,803 $ 31,138 $ 20,455 $ 52,828 $160,978
Mortgage-backed securities .... 19,069 2,816 4,217 3,793 7,732 37,627
Investments(5) .............. 22,807 9 500 1,500 66,795 91,611
Interest-bearing deposits ... 1,904 -- -- -- -- 1,904
-------- -------- -------- -------- -------- --------
Total .................. $ 81,534 $ 21,628 $ 35,855 $ 25,748 $127,355 $292,120
======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Interest-bearing deposits
and escrows(6)(7)(8) ...... $ 46,893 $ 42,088 $ 47,346 $ 15,870 $ 22,213 $174,410
Borrowings .................. 36,784 16,500 31,357 -- -- 84,641
-------- -------- -------- -------- -------- --------
Total .................. $ 83,677 $ 58,588 $ 78,703 $ 15,870 $ 22,213 $259,051
======== ======== ======== ======== ======== ========
Excess (deficiency) of
interest-earning assets
over interest-bearing
liabilities ................. $ (2,143) $(36,960) $(42,848) $ 9,878 $105,142
======== ======== ======== ======== ========
Cumulative excess of
interest-earning assets
over interest-bearing
liabilities ................. $ (2,143) $(39,103) $(81,951) $(72,073) $ 33,069
======== ======== ======== ======== ========
Cumulative excess of
interest-earning assets
over interest-bearing
liabilities as a percentage
of total assets ............. (0.7)% (13.3)% (27.8)% (24.5)% 11.2%
======== ======== ======== ======== ========
</TABLE>
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(1) Net of undisbursed loan proceeds and does not include net deferred loan
fees or the allowance for loan losses.
(2) For single-family residential loans, assumes annual amortization and
prepayment rate at 15% for adjustable rate loans, and 8% to 37% for
fixed rate loans. For multi-family residential loans and other loans,
assumes amortization and prepayment rate of 12%.
(3) For second mortgage loans, assumes annual amortization and prepayment
rate of 18%.
(4) Consumer loans assumes amortization and prepayment rate of 13%.
(5) Totals include the Company's investment in Federal Home Loan Bank
stock. Amounts adjusted to reflect called investment securities
totaling approximately $16,750.
(6) For regular savings accounts, assumes an annual decay rate of 17% for
three years or less, 16% for more than three through five years and 14%
for more than five years.
(7) For NOW accounts, assumes an annual decay rate of 37% for one year or
less, 32% for more than one through three years and 17% for more than
three years.
(8) For money market deposit accounts, assumes an annual decay rate of 79%
for one year or less and 31% for more than one year.
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QUANTITATIVE 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
U.S. 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.
The Federal Reserve Board, together with the Office of the Comptroller
of the Currency and the Federal Deposit Insurance Corporation, adopted a Joint
Agency Policy Statement on Interest-Rate Risk, effective June 26, 1996. The
policy statement provides guidance to examiners and bankers on sound practices
for managing interest rate risk, which will form the basis for ongoing
evaluation of the adequacy of interest-rate risk management at supervised
institutions. The policy statement also outlines fundamental elements of sound
management that have been identified in prior Federal Reserve guidance and
discusses the importance of these elements in the context of managing
interest-rate risk. Specifically, the guidance emphasizes the need for active
board of director and senior management oversight and a comprehensive
risk-management process that effectively identifies, measures, and controls
interest-rate risk. 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
11
<PAGE>
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. Several techniques might be used by an institution to minimize
interest-rate risk. One approach used by the Company is to periodically analyze
its assets and liabilities and make future financing and investment decisions
based on payment streams, interest rates, contractual maturities, and estimated
sensitivity to actual or potential changes in market interest rates. Such
activities fall under the broad definition of asset/liability management. The
Company's primary asset/liability management technique is the measurement of the
Company's asset/liability gap-that is, the difference between the cash flow
amounts of interest-sensitive assets and liabilities that will be refinanced (or
repriced) during a given period. For example, if the asset amount to be repriced
exceeds the corresponding liability amount for a certain day, month, year, or
longer period, the institution is in an asset-sensitive gap position. In this
situation, net interest income would increase if market interest rates rose or
decrease if market interest rates fell. If, alternatively, more liabilities than
assets will reprice, the institution is in a liability-sensitive position.
Accordingly, net interest income would decline when rates rose and increase when
rates fell. Also, these examples assume that interest-rate changes for assets
and liabilities are of the same magnitude, whereas actual interest-rate changes
generally differ in magnitude for assets and liabilities.
Several ways an institution can manage interest-rate risk include:
selling existing assets or repaying certain liabilities; matching repricing
periods for new assets and liabilities for example, by shortening terms of new
loans or investments; hedging existing assets, liabilities, or anticipated
transactions. An institution might also invest in more complex financial
instruments intended to hedge or otherwise change interest-rate risk.
Interest-rate swaps, futures contracts, options on futures, and other such
derivative financial instruments often are used for this purpose. Because these
instruments are sensitive to interest-rate changes, they require management
expertise to be effective. Financial institutions are also subject to prepayment
risk in falling rate environments. For example, mortgage loans and other
financial assets may be prepaid by a debtor so that the debtor may refund its
obligations at new, lower rates. The Company has not purchased derivative
financial instruments in the past and does not presently intend to purchase such
instruments in the near future. Prepayments of assets carrying higher rates
reduce the Company's interest income and overall asset yields. A large portion
of an institution's liabilities may be short term or due on demand, while most
of its assets may be invested in long-term loans or investments. Accordingly,
the Company seeks to have in place sources of cash to meet short-term demands.
These funds can be obtained by increasing deposits, borrowing, or selling
assets. Also, FHLB advances and wholesale borrowings have become increasingly
important sources of liquidity for the Company.
12
<PAGE>
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of June 30, 1997
based on the information and assumptions set forth in the notes. The Company
believes that the assumptions utilized, which are based on statistical data
provided by a federal regulatory agency in the Company's market area, are
reasonable. The Company had no derivative financial instruments, or trading
portfolio, as of June 30, 1997. The expected maturity date values for loans
receivable, mortgage-backed securities, and investment securities were
calculated by adjusting the instrument's contractual maturity date for
expectations of prepayments, as set forth in the notes. Similarly, expected
maturity date values for interest-bearing core deposits were calculated based
upon estimates of the period over which the deposits would be outstanding as set
forth in the notes. With respect to the Company's adjustable rate instruments,
expected maturity date values were measured by adjusting the instrument's
contractual maturity date for expectations of prepayments, as set forth in the
notes. From a risk management perspective, however, the Company believes that
repricing dates, as opposed to expected maturity dates, may be a more relevant
metric in analyzing the value of such instruments. Similarly, substantially all
of the Company's investment securities portfolio is comprised of callable
government agency securities. Company borrowings were tabulated by contractual
maturity dates and without regard to any conversion or repricing dates.
13
<PAGE>
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE-FISCAL YEAR ENDED JUNE 30,
------------------------------------------------------------------------------------------------
There- Fair
1998 1999 2000 2001 2002 after Total value
-------- ------- ------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ON-BALANCE SHEET
FINANCIAL INSTRUMENTS
Interest-earning assets:
Loans receivable (1)(2)(3)(4)
Fixed rate $23,239 $15,089 $11,857 $10,444 $8,170 $48,726 $117,525 $117,087
Average interest rate 8.37% 8.03% 7.95% 7.91% 7.81% 7.55%
Adjustable rate 8,316 7,040 5,951 5,020 4,224 12,627 43,178 43,474
Average interest rate(5) 8.01% 8.02% 8.03% 8.04% 8.05% 7.71%
Mortgage-backed securities
Fixed rate 1,437 1,110 454 1,619 171 13,907 18,698 18,557
Average interest rate 6.03% 7.00% 6.35% 7.61% 8.08% 7.02%
Adjustable rate --- --- --- --- --- 18,929 18,929 19,104
Average interest rate(6) 0.00% 0.00% 0.00% 0.00% 0.00% 6.92%
Investments(7) 18,393 500 --- 500 1,000 71,218 91,611 91,369
Average interest rate 7.25% 6.40% 0.00% 6.41% 7.02% 7.75%
Interest-bearing deposits 1,904 --- --- --- --- --- 1,904 1,904
Average interest rate 6.26% 0.00% 0.00% 0.00% 0.00% 0.00%
-------- ------- ------- -------- ------- -------- -------- --------
Total $53,289 $23,739 $18,262 $17,583 $13,565 $165,407 $291,845 $291,495
Interest-bearing liabilities:
Interest-bearing deposits
and escrows(8)(9)(10) $88,981 $23,673 $23,673 $ 7,936 $ 7,936 $ 22,211 $174,410 $174,428
Average interest rate 4.42% 4.41% 4.41% 3.65% 3.65% 2.22%
Borrowings 21,784 1,357 8,000 --- 53,500 --- 84,641 83,991
Average interest rate 5.74% 6.19% 5.89% 0.00% 5.74% 0.00%
-------- ------- ------- -------- ------- -------- -------- --------
Total $110,765 $25,030 $31,673 $ 7,936 $61,436 $ 22,211 $259,051 $258,419
</TABLE>
- ----------------
(1) Net of undisbursed loan proceeds and does not include net deferred loan
fees or the allowance for loan losses.
(2) For single-family residential loans, assumes annual amortization and
prepayment rate at 15% for adjustable rate loans, and 8% to 37% for
fixed rate loans. For multi-family residential loans and other loans,
assumes amortization and prepayment rate of 12%.
(3) For second mortgage loans, assumes annual amortization and prepayment
rate of 18%.
(4) Consumer loans assumes amortization and prepayment rate of 13%.
(5) Substantially all of the Company's adjustable rate loans reprice on an
annual basis based upon changes in the one-year constant maturity
treasury index with various market based annual and lifetime interest
rate caps and floors.
(6) Substantially all of the Company's adjustable rate mortgage-backed
securities reprice on a monthly basis based upon changes in the one
month LIBOR index with various lifetime caps and floors.
(7) Totals include the Company's investment in Federal Home Loan Bank
stock. Amounts adjusted to reflect called investment securities
totaling approximately $16,750.
(8) For regular savings accounts, assumes an annual decay rate of 17% for
three years or less, 16% for more than three through five years and 14%
for more than five years.
(9) For NOW accounts, assumes an annual decay rate of 37% for one year or
less, 32% for more than one though three years and 17% for more than
three years.
(10) For money market deposit accounts, assumes an annual decay rate of 79%
for one year or less and 31% for more than one year.
14
<PAGE>
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,
1997.
Anticipated Transactions
- ----------------------------------------------------------------
Undisbursed construction and
land development loans
Fixed rate $ 7,494
9.43%
Adjustable rate 5,011
8.78%
Undisbursed lines of credit
Adjustable rate 6,108
8.56%
Loan origination commitments
Fixed rate 1,109
8.34%
Adjustable rate 1,966
8.11%
Letters of credit
Adjustable rate 82
11.50%
-------
$21,770
15
<PAGE>
RESULTS OF OPERATIONS
GENERAL. WVS reported net income of $3.0 million, $3.6 million and $1.8
million for the fiscal years ended June 30, 1997, 1996 and 1995 respectively.
Net income for the fiscal year ended June 30, 1997 totaled $3.0 million or $1.69
per share on both a primary and fully diluted basis as compared to net income of
$3.6 million or $2.06 per share on both a primary and fully diluted basis for
the same period in 1996. The $600 thousand or 16.7% decrease in net income was
the result of a $1.6 million increase in non-interest expense, which was
partially offset by a $764 thousand increase in net interest income, a $136
thousand decrease in income tax expense, and a $90 thousand decrease in the
provision for the loan losses. The $1.6 million increase in fiscal year
non-interest expense was principally attributable to one-time items including a
$1.0 net increase in federal deposit premiums to recapitalize the Savings
Association Insurance Fund ("SAIF"). Fiscal 1996 net income increased by $1.8
million or 100% primarily as the result of a $1.3 million increase in net
interest income, an $827 thousand decrease in non-interest expense, a $76
thousand increase in non-interest income and a $61 thousand decrease in the
provision for loan losses, which was partially offset by a $414 thousand
increase in income tax expense.
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.
16
<PAGE>
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: (i) the total dollar amounts of
interest income on interest-earning assets and the resulting average yields;
(ii) the total dollar amounts of interest expense on interest-bearing
liabilities and the resulting average costs; (iii) net interest income; (iv)
interest rate spread; (v) net interest-earning assets (interest-bearing
liabilities); (vi) the net yield earned on interest-earning assets; and (vii)
the ratio of total interest-earning assets to total interest-bearing
liabilities. Average balances are derived from month-end balances. Management
does not believe that the use of month-end balances instead of daily average
balances has caused any material differences in the information presented.
<TABLE>
<CAPTION>
For the Years Ended June 30,
At June 30, ---------------------------------------------------------------------------------------
1997 1997 1996 1995
----------- --------------------------- ----------------------------- -----------------------------
Period End Average Average Average Average Average Average
Rate/Cost Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
--------- ------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Net loans receivable(1) 7.89% $153,726 $12,440 8.09% $141,643 $11,756 8.30% $133,516 $11,152 8.35%
Mortgage-backed securities 6.96% 39,451 2,724 6.90% 25,384 1,638 6.45% 22,852 1,326 5.80%
Investments 7.70% 79,128 5,881 7.43% 64,679 4,831 7.47% 53,765 3,000 5.58%
Interest-bearing deposits 6.26% 2,335 80 3.43% 2,288 92 4.02% 2,896 134 4.63%
-------- ------- -------- ------- -------- -------
Total interest-earning assets 7.70% 274,640 21,125 7.69% 233,994 18,317 7.83% 213,029 15,612 7.33%
===== ------ ====== ------- ====== ------ ======
Non-interest-earning assets 3,331 3,140 3,516
-------- -------- --------
Total assets $277,971 $237,134 $216,545
======== ======== ========
Interest-bearing liabilities:
Interest-bearing deposits
and escrows 4.30% $165,017 $7,086 4.29% $168,280 $7,431 4.42% $171,980 $ 7,146 4.16%
Borrowings 5.76% 62,522 3,798 6.07% 24,814 1,409 5.68% 3,947 226 5.73%
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 4.79% 227,539 10,884 4.78% 193,094 8,840 4.58% 175,927 7,372 4.19%
===== ------ ====== ------- ====== ------ ======
Non-interest-bearing accounts 6,459 4,559 3,583
-------- ------- --------
Total interest-bearing
liabilities
and non-interest-bearing
accounts 233,998 197,653 179,510
Non-interest-bearing
liabilities 9,686 4,361 3,524
------- -------- --------
Total liabilities 243,684 202,014 183,034
Retained income 34,287 35,120 33,511
-------- -------- --------
Total liabilities and retained
income $277,971 $237,134 $216,545
======== ======== ========
<PAGE>
<CAPTION>
For the Years Ended June 30,
At June 30, ---------------------------------------------------------------------------------------
1997 1997 1996 1995
----------- --------------------------- ----------------------------- -----------------------------
Period End Average Average Average Average Average Average
Rate/Cost Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
--------- ------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $10,241 $ 9,477 $ 8,240
======= ======= =======
Interest rate spread 2.91% 2.91% 3.25% 3.14%
====== ====== ====== ======
Net yield on interest-earning
assets(2) 3.54% 3.73% 4.05% 3.87%
====== ====== ====== ======
Ratio of interest-earning
assets to interest-bearing
liabilities 114.79% 120.70% 121.18% 121.09%
======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes non-accrual loans.
(2) Net interest income divided by interest-earning assets.
17
<PAGE>
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
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
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.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
---------------------------------- -----------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
-------------------- --------------------
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Net loans receivable ......... $ 987 $ (303) $ 684 $ 671 $ (67) $ 604
Mortgage-backed securities ... 965 121 1,086 155 157 312
Investments .................. 1,076 (26) 1,050 686 1,145 1,831
Interest-bearing deposits .... 1 (13) (12) (26) (16) (42)
------- ------- ------- ------- ------- -------
Total interest-earning assets 3,029 (221) 2,808 1,486 1,219 2,705
Interest-bearing liabilities:
Interest-bearing deposits
and escrows ............... (156) (189) (345) 135 150 285
Other borrowings ............. 2,286 103 2,389 1,185 (2) 1,183
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities ................ 2,130 (86) 2,044 1,320 148 1,468
------- ------- ------- ------- ------- -------
Increase (decrease) in net
interest income .............. $ 899 $ (135) $ 764 $ 166 $ 1,071 $ 1,237
======= ======= ======= ======= ======= =======
</TABLE>
INTEREST INCOME. Total interest income increased by $2.8 million or
15.3% during fiscal 1997 and increased by $2.7 million or 17.3% during fiscal
1996, primarily as a result of changes in interest income on the Company's
investment and mortgage-backed securities portfolio, and net loans receivable,
during the periods.
Interest income on net loans receivable increased $684 thousand or
5.8% during fiscal 1997 and increased $604 thousand or 5.4% during fiscal 1996.
The increase in fiscal 1997 was attributable to a $12.1 million increase in the
average balance of net loans outstanding which more than offset a decrease of 21
basis points in the weighted average yield earned on the Company's loan
portfolio. The increase in fiscal 1996 was attributable to an $8.1 million
increase in the average balance of net loans outstanding, which more than offset
a decrease of 5 basis points in the weighted average yield earned on the
Company's loan portfolio.
Interest income on mortgage-backed securities increased $1.1 million or
68.8% during fiscal 1997 and increased $312 thousand or 23.5% during fiscal
1996. The increase
18
<PAGE>
in fiscal 1997 was attributable to an increase of 45 basis points in the
weighted average yield earned on the Company's mortgage-backed securities
portfolio and a $14.1 million increase in the average balance of mortgage-backed
securities outstanding. The increase in fiscal 1996 was attributable to an
increase of 65 basis points in the weighted average yield earned on the
Company's mortgage-backed securities portfolio and a $2.5 million increase in
the average balance of mortgage-backed securities outstanding.
Interest income on investment securities and FHLB stock increased $1.1
million or 22.9% during fiscal 1997 and $1.8 million or 60.0% during fiscal
1996. The increase in fiscal 1997 was attributable to a $14.4 million increase
in the average balance of investment securities and FHLB stock outstanding,
which more than offset a decrease of 4 basis points in the weighted average
yield earned on the Company's investment and FHLB stock portfolio. The increase
in fiscal 1996 was attributable to a $10.9 million increase in the average
balance of investment securities and FHLB stock outstanding and to an increase
of 189 basis points in the weighted average yield earned on the Company's
investment securities and FHLB stock portfolio.
Interest income on interest-bearing deposits decreased $12 thousand or
13.0% during fiscal 1997 and decreased $42 thousand or 31.3% during fiscal 1996.
The decrease in fiscal 1997 was primarily due to a $47 thousand decrease in the
average balance of interest-earning deposits outstanding and a decrease of 59
basis points in the weighted average yield earned on the Company's
interest-earning deposits. The decrease in fiscal 1996 was attributable to a
$608 thousand decrease in the average balance of interest-bearing deposits
outstanding and a decrease of 61 basis points in the weighted average yield
earned on the Company's interest-earning deposits.
Throughout the first half of fiscal 1997, market interest rates
continued to decrease primarily due to reduced inflationary expectations in the
capital markets. During the second half of fiscal 1997, market interest rates
began to increase in response to inflationary expectations in the capital
markets due to continued economic expansion and the Federal Reserve Board's
predilection to tighten the Federal Funds rate. The Company continued to
restructure its balance sheet by lengthening the maturity of its financial
assets, particularly its investment securities portfolio, and lengthening the
maturities of its financial liabilities by emphasizing the use of FHLB term
borrowings. The Company believes that this strategy has contributed to increased
net interest income during fiscal 1997.
INTEREST EXPENSE. Total interest expense increased $2.1 million or
23.9% during fiscal 1997 and increased by $1.4 million or 18.9% during fiscal
1996.
Interest expense on interest-bearing deposits and escrows decreased
$345 thousand or 4.6% in fiscal 1997 and increased $285 thousand or 4.0% in
fiscal 1996. The decrease in fiscal 1996 was primarily attributable to a
decrease of 13 basis points in the weighted average rate paid on the Company's
deposits and a $3.2 million decrease in the average balance of interest-bearing
deposits and escrows outstanding. The increase in
19
<PAGE>
fiscal 1996 was primarily attributable to an increase of 26 basis points in the
weighted average rate paid on the Company's deposits and a $7.9 million increase
in the proportion of time deposits to the average total of interest-bearing
deposits and escrows outstanding.
Interest expense on borrowings increased $2.4 million or 171.4% during
fiscal 1997 and increased $1.2 million or 523.6% during fiscal 1996. The
increases for both fiscal 1997 and 1996 were primarily attributable to increases
in the average balance of borrowings outstanding totaling $37.7 million and
$20.9 million, respectively. In order to better match investment opportunities
and resources, enhance its net interest income and reduce the amount of excess
cash invested at the FHLB of Pittsburgh, the Company continues to utilize short
and intermediate term borrowings to purchase investment securities and fund
other commitments.
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 established provisions for possible losses on loans of $60
thousand, $150 thousand and $211 thousand, for the fiscal years ended June 30,
1997, 1996 and 1995, respectively. The provisions for fiscal 1997 and 1996 were
primarily due to increases in the Company's general allowance for losses on
loans.
NON-INTEREST INCOME. Total non-interest income decreased by $9 thousand
or 2.3% in fiscal 1997 and increased $76 thousand or 24.8% in fiscal 1996.
Service charges on deposits increased by $7 thousand or 3.6% in fiscal
1997 and increased $20 thousand or 11.4% in fiscal 1996. The increase in both
fiscal years was principally attributable to service charges applied to a larger
number of transaction accounts opened during the respective fiscal year. The
Company has continued to aggressively pursue transaction accounts in order to
enhance its level of core deposits and to increase its relationship base with
new and existing customers.
Other non-interest income (e.g. safe deposit box fees, income from
loan late charges, automated teller machine (ATM) fee income, profit on sale of
real estate owned, miscellaneous income, and money order fee income) increased
$8 thousand in fiscal 1997 and increased $2 thousand in fiscal 1996.
20
<PAGE>
NON-INTEREST EXPENSE. Total non-interest expense increased $1.6
million or 39.0% during fiscal 1997 and decreased $827 thousand or 16.9% during
fiscal 1996. The decrease in non-interest expense during fiscal 1996 was
primarily attributable to a $748 thousand decrease in litigation defense and
settlement charges, $391 thousand of insurance reimbursements related to a class
action lawsuit, partially offset by a $227 thousand increase in compensation
expense and a $96 thousand increase in other non-interest expense. The increase
in non-interest expense during the fiscal 1997 was principally attributable to
an $893 increase in deposit insurance premiums, the absence of $382 thousand of
non-taxable insurance settlement proceeds resulting from previously disclosed
and settled shareholder litigation and defense costs and a $337 thousand
increase in compensation expense.
Salaries and employee benefits increased $337 thousand or 12.8% during
fiscal 1997 and increased $227 thousand or 9.5% during fiscal 1996. The increase
in fiscal 1997 was principally attributable to a $195 thousand increase related
to the Company's Employee Stock Ownership Plan ("ESOP"), a $75 thousand increase
in employee wages and salaries and a $57 thousand increase in profit sharing
plan expense. The increase in fiscal 1996 was primarily attributable to a $134
thousand increase related to the ESOP, a $51 thousand increase in employee wages
and salaries, a $23 thousand increase in the Company's recognition and retention
plan expense and a $15 thousand increase in federal unemployment tax expense.
Occupancy and equipment expense increased $8 thousand or 2.0% in
fiscal 1997 and declined $3 thousand or 0.7% in fiscal 1996. The change in both
fiscal years was due to changes in the amount of equipment purchases and
depreciation expense.
Federal deposit insurance premiums increased $893 thousand or 222.7%
during fiscal 1997 and decreased $17 thousand or 4.1% during fiscal 1996. On
September 30, 1996 the President signed the Deposit Insurance Funds Act of 1996
(the "Funds Act") into law. The Funds Act calls for a Special Assessment on
SAIF-assessable deposits as of March 31, 1995 to capitalize the SAIF to its
designated reserve ratio of 1.25%. The Company recorded a pre-tax charge of
approximately $1.1 million during the quarter ended September 30, 1996 using an
FDIC estimated assessment rate of $0.657 for every $100 of assessable deposits.
During the quarter ended December 31, 1996, the Company accrued a $102 thousand
refund of prepaid federal deposit insurance premiums as a result of the
capitalization of the SAIF. Federal insurance premiums are dependent on the size
of the Company's deposit base and premiums which were assessed by the FDIC
during the respective years.
Data processing expense increased $3 thousand or 1.8% during fiscal
1997 and declined $3 thousand or 1.8% during fiscal 1996. Data processing
expense is directly related to processing volumes and certain pricing features
associated with the Company's third party data processor.
21
<PAGE>
Correspondent bank service charges increased $2 thousand or 1.8% in
fiscal 1997 and increased $12 thousand or 12.1% in fiscal 1996. The increase in
correspondent bank service charges for both periods is due to higher volumes of
check and deposit processing and coin and currency service charges and
investment security safekeeping costs.
Other non-interest expense (e.g. director's compensation expense,
advertising, Pennsylvania capital stock tax expense, ATM network expense,
provision for loss on real estate owned, legal expense, transfer agent expense,
etc.) decreased $15 thousand or 2.0% during fiscal 1997 and decreased $96
thousand or 15.0% during fiscal 1996. The decrease in fiscal 1997 was primarily
attributable to the absence of foreclosed real estate disposition costs and
related expenses. The increase in fiscal 1996 was principally attributable to a
$52 thousand increase in Pennsylvania capital stock tax expense, a $25 thousand
increase in real estate owned charges relating to the disposition of two
foreclosed properties, a $10 thousand increase in supervisory assessment charges
imposed by the Pennsylvania Department of Banking, and a $9 thousand increase in
advertising expense to attract new core deposit and loan business.
INCOME TAXES. Income taxes decreased $136 thousand or 6.6% during
fiscal 1997 and increased $414 thousand or 25.1% during fiscal 1996. The
decrease in fiscal 1997 was principally attributable to a $754 or 13.4% decrease
in taxable income. The increase in fiscal 1996 was primarily attributable to a
$2.2 million or 64.7% increase in taxable income partially offset by a $123
thousand benefit associated with the shareholder litigation insurance
reimbursement. The Company's effective tax rate was 39.4%, 36.6% and 48.0% at
June 30, 1997, 1996 and 1995 respectively. The decrease in the effective rate
for fiscal 1996 was due primarily to a one-time adjustment for the non-taxable
litigation and settlement insurance settlement previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $3.7 million with no
significant change during the fiscal year ended June 30, 1997 when compared with
the same period in 1996. Net cash provided by operating activities was primarily
comprised of $3.0 million in net income.
Funds used by investing activities totaled $34.8 million during the
fiscal year ended June 30, 1997. Primary uses of funds during the fiscal year
ended June 30, 1997 include $23.3 million in net purchases of investment and
mortgage-backed securities, a $9.5 million increase in net loan receivables, and
a $2.0 million increase in FHLB stock.
22
<PAGE>
Funds provided by financing activities totaled $31.0 million for the
fiscal year ended June 30, 1997. Primary sources of funding include $40.0
million in FHLB advances used to fund loan commitments and investment security
purchases, which was partially offset by $4.9 million in cash dividends paid,
and a $3.9 million decrease in other borrowings. Financial institutions
generally, including the Company, have experienced a certain degree of depositor
disintermediation to other investment alternatives. Management believes that the
degree of disintermediation experienced by the Company has not had a material
impact on overall liquidity. As of June 30, 1997, $71.2 million or 41.7% of the
Company's total deposits consisted of core deposits. 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 Federal
Home Loan Bank advances and other borrowings. At June 30, 1997, the total
approved loan commitments outstanding amounted to $3.1 million. At the same
date, commitments under unused letters and lines of credit amounted to $6.6
million, the unadvanced portion of construction loans approximated $12.5
million, and commitments to purchase when-issued investments totaled $1.1
million. Certificates of deposit scheduled to mature in one year or less at June
30, 1997 totaled $70.0 million. Management believes that a significant portion
of maturing deposits will remain with the Company.
Historically, the Company used its sources of funds primarily to meet
its ongoing commitments to pay maturing certificates of deposit and savings
withdrawals, fund loan commitments and maintain a substantial portfolio of
investment securities. The Company has been able to generate sufficient cash
through the retail deposit market, its traditional funding source, and through
FHLB advances and other borrowings, to provide the cash utilized in investing
activities. The Company has established a $15.0 million line of credit with the
FHLB, which is scheduled to mature on March 25, 1998 and is subject to various
conditions, including the pledging and delivery of acceptable collateral. The
primary purpose of the line of credit is to serve as a back-up liquidity
facility for the Company, however, the Company may from time to time utilize the
line of credit to purchase investment securities and fund other commitments. In
addition, the Company has access to the Federal Reserve Bank discount window.
Management believes that the Company currently has adequate liquidity available
to respond to liquidity demands.
On July 29, 1997 the Company's Board of Directors declared a cash
dividend of $0.20 per share payable on August 21, 1997 to shareholders of record
at the close of
23
<PAGE>
business on August 11, 1997. 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, 1997, WVS Financial Corp. exceeded all regulatory
capital requirements and maintained Tier I and total risk-based capital equal to
$33.1 million or 24.5% and $34.8 million or 25.8%, respectively, of total
risk-weighted assets, and Tier I leverage capital of $33.1 million or 11.4% of
average total assets.
Nonperforming assets consist of nonaccrual loans and real estate owned.
A loan is placed on nonaccrual 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 nonaccrual status, previously accrued but
uncollected interest is deducted from interest income. The Company normally does
not accrue interest on loans past due 90 days or more, however, interest may be
accrued if management believes that it will collect on the loan.
The Company's nonperforming assets at June 30, 1997 totaled
approximately $274 thousand or 0.09% of total assets as compared to $377
thousand or 0.15% of total assets as of June 30, 1996. Nonperforming assets at
March 31, 1997 consisted of $274 thousand in a single commercial real estate
loan. Approximately $15 thousand of additional interest income would have been
recorded during the fiscal year ended June 30, 1997, if the Company's nonaccrual
and restructured loans had been current in accordance with their original loan
terms and outstanding throughout the fiscal year ended June 30, 1997.
24
<PAGE>
SNODGRASS
Certified Public Accountants and Consultants
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
WVS Financial Corp.
We have audited the accompanying consolidated statements of financial condition
of WVS Financial Corp. and subsidiary as of June 30, 1997, and 1996, 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, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three year period ended June
30, 1997, in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, in fiscal
1996, the Company changed its method of accounting for the impairment of loans
and the related allowance for loan losses.
/s/S.R. Snodgrass, A.C.
Wexford, PA
August 1, 1997
S.R. Snodgrass, A.C.
101 Bradford Road Wexford, PA 15090-6909
Phone: 412-934-0344 Facsimile: 412-934-0345
25
<PAGE>
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
<TABLE>
<CAPTION>
June 30,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks ...................................... $ 667 $ 508
Interest - earning demand deposits ........................... 1,904 2,219
Investment securities available for sale (amortized
cost of $3,689 and $2,193) (Note 2) .................... 3,553 1,981
Investment securities held to maturity (market value of
$83,889 and $56,671) (Note 2) .......................... 83,995 57,237
Mortgage - backed securities available for sale (amortized
cost of $18,417 and $22,775) (Note 3) .................. 18,280 22,428
Mortgage - backed securities held to maturity (market value
of $19,381 and $19,735) (Note 3) ....................... 19,210 19,690
Net loans receivable (Notes 4 and 5) ......................... 158,134 149,011
Accrued interest receivable .................................. 2,809 2,373
Federal Home Loan Bank stock, at cost ........................ 3,927 1,900
Premises and equipment ....................................... 1,298 1,327
Deferred taxes and other assets .............................. 916 948
--------- ---------
TOTAL ASSETS ................................................. $ 294,693 $ 259,622
========= =========
LIABILITIES
Deposits (Note 9) ............................................ $ 170,879 $ 170,843
Federal Home Loan Bank Advances (Note 10) .................... 77,857 38,000
Other borrowings (Note 11) ................................... 6,784 10,652
Advance payments by borrowers for taxes and insurance ........ 3,531 3,772
Accrued interest payable ..................................... 1,768 1,425
Other liabilities ............................................ 985 892
--------- ---------
TOTAL LIABILITIES ............................................ 261,804 225,584
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares authorized;
none outstanding ....................................... -- --
Common stock, par value $.01; 10,000,000 shares authorized;
1,747,280 and 1,736,760 shares issued and outstanding .. 17 17
Additional paid - in capital ................................. 17,236 16,947
Retained earnings - substantially restricted (Note 13) ....... 16,900 18,861
Net unrealized loss on securities ............................ (180) (368)
Unallocated shares - Employee Stock Ownership Plan (Note 14) . (453) (584)
Unallocated shares - Recognition and Retention Plans (Note 14) (631) (835)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ................................... 32,889 34,038
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................... $ 294,693 $ 259,622
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
26
<PAGE>
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans .................................................. $ 12,440 $ 11,756 $ 11,152
Investment securities .................................. 5,696 4,747 2,931
Mortgage - backed securities ........................... 2,724 1,638 1,326
Interest - earning demand deposits ..................... 80 92 134
Federal Home Loan Bank stock ........................... 185 84 69
----------- ----------- -----------
Total interest and dividend income ..................... 21,125 18,317 15,612
----------- ----------- -----------
INTEREST EXPENSE
Deposits (Note 9) ...................................... 7,041 7,385 7,107
Borrowings (Notes 10 and 11) ........................... 3,798 1,409 226
Advance payments by borrowers for
taxes and insurance .............................. 45 46 39
----------- ----------- -----------
Total interest expense ................................. 10,884 8,840 7,372
----------- ----------- -----------
NET INTEREST INCOME .................................... 10,241 9,477 8,240
Provision for loan losses (Note 5) ..................... 60 150 211
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES .................................. 10,181 9,327 8,029
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposits ............................ 203 196 176
Investment securities gains ............................ 30 54 --
Other .................................................. 141 133 131
----------- ----------- -----------
Total noninterest income ............................... 374 383 307
----------- ----------- -----------
<PAGE>
<CAPTION>
Year Ended June 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NONINTEREST EXPENSE
Unusual items:
Shareholder litigation settlement (Note 12) ... (11) (245) 491
Shareholder litigation costs (Note 12) ........ -- (137) 266
Salaries and employee benefits ......................... 2,962 2,625 2,398
Occupancy and equipment ................................ 416 408 411
Deposit insurance premium (Note 19) .................... 1,294 401 418
Data processing ........................................ 171 168 171
Correspondent bank service charges ..................... 113 111 99
Other .................................................. 721 736 640
----------- ----------- -----------
Total noninterest expense .............................. 5,666 4,067 4,894
----------- ----------- -----------
Income before income taxes ............................. 4,889 5,643 3,442
Income taxes (Note 16) ................................. 1,930 2,066 1,652
----------- ----------- -----------
NET INCOME ............................................. $ 2,959 $ 3,577 $ 1,790
=========== =========== ===========
EARNINGS PER SHARE:
Primary and Fully Diluted .............................. $ 1.69 $ 2.06 $ 1.05
AVERAGE SHARES OUTSTANDING:
Primary ................................................ 1,752,216 1,732,348 1,709,243
Fully Diluted .......................................... 1,754,442 1,734,467 1,710,696
</TABLE>
See accompanying notes to the consolidated financial statements.
27
<PAGE>
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
<TABLE>
<CAPTION>
Net
Additional Unallocated Unallocated Unrealized
Common Paid-in Shares Held Shares Held Loss on
Stock Capital by ESOP by RRP Securities
------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994 $17 $16,795 $(765) $(1,194) $ --
Release of earned Employee
Stock Ownership Plan shares 44 101
Accrued compensation expense
for Recognition and Retention Plans 181
Market value adjustment for
additional stock grant issued 27 (27)
Exercise of Stock Options 1
Cash dividends declared
($.42 per share)
Net income
------------- -------------- ------------- -------------- -------------
Balance, June 30, 1995 17 16,867 (664) (1,040) --
Release of earned Employee
Stock Ownership Plan shares 76 80
Accrued compensation expense
for Recognition and Retention Plans 205
Exercise of Stock Options 4
Cash dividends declared
($2.06 per share)
Net unrealized loss on securities (368)
Net income
------------- -------------- ------------- -------------- -------------
Balance, June 30, 1996 17 16,947 (584) (835) (368)
<PAGE>
<CAPTION>
Retained
Earnings-
Substantially
Restricted Total
-------------- -------------
<S> <C> <C>
Balance, June 30, 1994 $17,517 $32,370
Release of earned Employee
Stock Ownership Plan shares 145
Accrued compensation expense
for Recognition and Retention Plans 181
Market value adjustment for
additional stock grant issued
Exercise of Stock Options 1
Cash dividends declared
($.42 per share) (678) (678)
Net income 1,790 1,790
-------------- -------------
Balance, June 30, 1995 18,629 33,809
Release of earned Employee
Stock Ownership Plan shares 156
Accrued compensation expense
for Recognition and Retention Plans 205
Exercise of Stock Options 4
Cash dividends declared
($2.06 per share) (3,345) (3,345)
Net unrealized loss on securities (368)
Net income 3,577 3,577
-------------- -------------
Balance, June 30, 1996 18,861 34,038
<PAGE>
<CAPTION>
Net
Additional Unallocated Unallocated Unrealized
Common Paid-in Shares Held Shares Held Loss on
Stock Capital by ESOP by RRP Securities
------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Release of earned Employee
Stock Ownership Plan shares 184 131
Accrued compensation expense
for Recognition and Retention Plans 204
Exercise of Stock Options 105
Cash dividends declared
($3.00 per share)
Net unrealized gain on securities 188
Net income
------------- -------------- ------------- -------------- -------------
Balance June 30, 1997 $17 $17,236 $(453) $(631) $(180)
============= ============== ============= ============== =============
<PAGE>
<CAPTION>
Retained
Earnings-
Substantially
Restricted Total
-------------- -------------
<S> <C> <C>
Release of earned Employee
Stock Ownership Plan shares 315
Accrued compensation expense
for Recognition and Retention Plans 204
Exercise of Stock Options 105
Cash dividends declared
($3.00 per share) (4,920) (4,920)
Net unrealized gain on securities 188
Net income 2,959 2,959
-------------- -------------
Balance June 30, 1997 $16,900 $32,889
============== =============
</TABLE>
See accompanying notes to the consolidated financial statements.
28
<PAGE>
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended June 30,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ...................................................................... $ 2,959 $ 3,577 $ 1,790
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan and real estate owned losses ................................. 60 161 211
Provision for litigation settlement ............................................. -- -- 491
Depreciation and amortization, net .............................................. 134 133 145
Amortization of discounts, premiums and deferred loan fees ...................... 111 (203) 883
Amortization of ESOP and RRP deferred and unearned
compensation .............................................................. 519 361 326
Investment securities gains ..................................................... (30) (54) --
Deferred income taxes ........................................................... (52) 95 148
(Increase) decrease in accrued interest receivable .............................. (436) (288) 346
Increase in accrued interest payable ............................................ 343 159 278
Other, net ...................................................................... 71 (192) (164)
-------- -------- --------
Net cash provided by operating activities ....................................... 3,679 3,749 4,454
-------- -------- --------
INVESTING ACTIVITIES
Decrease in certificates of deposit with other institutions, net ................ -- -- 648
Available for sale:
Purchase of investment and mortgage-backed securities ..................... (1,508) (13,470) --
Proceeds from repayments of investment and
mortgage-backed securities ............................................ 2,711 4,135 --
Proceeds from sale of investment and
mortgage-backed securities ............................................ 1,678 301 --
Held to maturity:
Purchase of investment and mortgage-backed securities ..................... (75,006) (71,399) (53,526)
Proceeds from repayments of investment and
mortgage - backed securities .......................................... 48,856 62,705 57,497
Increase in net loans receivable ................................................ (9,476) (15,637) (9,706)
Proceeds from sale of real estate owned ......................................... 73 24 41
Increase in Federal Home Loan Bank Stock ........................................ (2,027) (747) (96)
Acquisition of premises and equipment ........................................... (105) (6) (15)
-------- -------- --------
Net cash used by investing activities ........................................... (34,804) (34,094) (5,157)
-------- -------- --------
<PAGE>
<CAPTION>
Year Ended June 30,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in deposits ............................................. 36 2,057 (11,543)
Net increase in Federal Home Loan Bank Advances ................................. 39,857 23,016 10,984
Net increase (decrease) in other borrowings ..................................... (3,868) 6,604 4,048
Net increase (decrease) in advance payments by
borrowers for taxes and insurance ......................................... (241) 518 150
Net proceeds from issuance of common stock ...................................... 105 4 1
Cash dividends paid ............................................................. (4,920) (3,345) (678)
-------- -------- --------
Net cash provided by financing activities ....................................... 30,969 28,854 2,962
-------- -------- --------
Increase (decrease) in cash and cash equivalents ................................ (156) (1,491) 2,259
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR ................................................................... 2,727 4,218 1,959
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............................ $ 2,571 $ 2,727 $ 4,218
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest .................................................................. $ 10,541 $ 8,681 $ 7,129
Taxes ..................................................................... 2,118 1,869 1,506
</TABLE>
See accompanying notes to the consolidated financial statements.
29
<PAGE>
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") was organized in July, 1993 as a
Pennsylvania- chartered unitary bank holding company and acquired 100% of the
common stock of West View Savings Bank ("West View" or the "Savings Bank") in
November, 1993. 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 emanate 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 Savings Bank. All intercompany transactions
have been eliminated in consolidation. The accounting and reporting policies of
WVS and its wholly-owned subsidiary conform with 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 effect the reported amounts of assets and
liabilities as of the balance sheet date and revenues and expenses for that
period. Actual results could differ significantly from those estimates.
Investment and Mortgage-Backed Securities
Debt and mortgage-backed securities acquired with the intent to hold to maturity
are stated at cost adjusted for amortization of premium and accretion of
discount, which are computed using the interest 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 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 statement of financial condition.
In December, 1995, in accordance with the Financial Accounting Standards Board
Special Report, "A Guide to Implementation of Statement No. 115 on Accounting
for Certain Investments in Debt and Equity Securities", the Company reclassified
certain mortgage-backed securities, with an amortized cost of $15.9 million and
an estimated market value of $16.1 million, from the held to maturity
classification to the available for sale classification. The net appreciation of
these securities, at the time of transfer, was recorded net of federal income
taxes to an unrealized securities gain (loss) account which is a component of
stockholders' equity.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Loans Receivable
Loans receivable are reported at their principal amount, net of the allowance
for loan losses and deferred loan fees. Interest on mortgage loans, consumer
loans, financing leases 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.
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
Effective January 1, 1995, WVS adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," as
amended by Statement No. 118. Under this Standard, the Bank estimates credit
losses on impaired loans based on the present value of expected cash flows or
fair value of the underlying collateral if the loan repayment is expected to
come from the sale or operation of such collateral. The adoption of these
statements did not have a material effect on WVS' consolidated financial
position or results of operation.
Impaired loans are commercial and commercial real estate loans for which it is
probable that WVS will not be able to collect all amounts due according to the
contractual terms of the loan agreement. WVS 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. WVS 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 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 represent
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 of the 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.
The allowance for loan losses is established through a provision for loan losses
charged against income. Loans deemed to be uncollectible are charged against the
allowance account. Subsequent recoveries, if any, are credited to the allowance.
The allowance is maintained at a level believed adequate by management to absorb
estimated potential loan losses. Management's determination of the adequacy of
the allowance is based on periodic evaluations of the loan portfolio considering
past experience, current economic conditions, composition of the loan portfolio,
and other relevant factors. This evaluation is inherently subjective, as it
requires material estimates that may be susceptible to significant change in the
near term.
31
<PAGE>
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. Leasehold improvements are
amortized over their estimated useful lives or their respective lease terms,
whichever is shorter. Expenditures for maintenance and repairs are charged
against income as incurred. Costs of major additions and improvements are
capitalized.
Income Taxes
Deferred tax assets or 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 the deferred tax assets or liabilities 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.
Cash Flow Information
Cash and cash equivalents include cash and due from banks and interest-earning
demand deposits, as noted on the consolidated statements of financial condition.
Earnings Per Share
Earnings per share for the years ended June 30, 1997, 1996, and 1995 have been
calculated based upon the weighted average number of issued and outstanding
common shares, including common stock equivalents, if such items have a dilutive
effect.
Reclassification of Comparative Figures
Certain comparative amounts for 1996 and 1995 have been reclassified to conform
to 1997 presentations. Such reclassifications did not affect net income.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities", which provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishment of liabilities. This statement applies prospectively in fiscal
years beginning after December 31, 1996, and establishes new standards that
focus on control, whereas, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished.
In December 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125". Statement 127 defers for one year
the effective date of certain portions of Statement No. 125 that address secured
borrowings and collateral for all transactions. Additionally, Statement No. 127
defers for one year the effective date of transfers of financial assets that are
part of repurchase agreements, securities lending and similar transactions. WVS
does not expect the adoption of Statement 125 and 127 to have a material impact
on the Company's consolidated financial condition or results of operations.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share", effective for
financial statements issued for periods ending after December 15, 1997. The new
standard specifies the computation, presentation, and disclosure requirements
for earnings per share for entities with publicly held common stock. WVS does
not anticipate adoption to have a material impact on presentation and disclosure
for earnings per share.
In July 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income".
Statement No. 130 is effective for fiscal years beginning after December 15,
1997. This statement establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements. Statement No.
130 requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial condition.
Reclassification of financial statements for earlier periods provided for
comprehensive purposes is required.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
2. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments are as follows:
<TABLE>
<CAPTION>
1997
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Government securities ......... $2,192 $ -- $ (185) $2,007
Equity securities .................. 1,497 49 -- 1,546
------ ------ ------ ------
Total ........................ $3,689 $ 49 $ (185) $3,553
====== ====== ====== ======
<CAPTION>
1997
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Government agency securities .. $81,850 $ 134 $ (241) $81,743
Corporate securities ............... 2,145 3 (2) 2,146
------ ------ ------ ------
Total ........................ $83,995 $ 137 $ (243) $83,889
====== ====== ====== ======
<PAGE>
<CAPTION>
1996
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Government securities ......... $2,193 $ -- $ (212) $1,981
====== ====== ====== ======
<CAPTION>
1996
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Government agency securities .. $51,981 $ 42 $ (610) $51,413
Obligations of state and
political subdivisions ....... 300 -- -- 300
Corporate securities ............... 4,956 25 (23) 4,958
------ ------ ------ ------
Total .............. $57,237 $ 67 $ (633) $56,671
====== ====== ====== ======
</TABLE>
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
2. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market values of debt securities at June 30,
1997, 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.
<TABLE>
<CAPTION>
Due in Due after Due after
one year one through five through Due after
or less five years ten years ten years Total
------- ----------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
Amortized Cost ......... $ -- $ -- $ -- $ 2,192 $ 2,192
Estimated Market Value ..... -- -- -- 2,007 2,007
HELD TO MATURITY
Amortized Cost ......... $ 1,644 $ 2,000 $47,733 $32,618 $83,995
Estimated Market Value ..... 1,647 1,991 47,520 32,731 83,889
</TABLE>
Proceeds from the sale of securities available for sale were $1,678 and $301 in
1997 and 1996. The gains resulting from these sales were $30 and $54,
respectively. There were no sales of investment securities during 1995.
Investment securities with carrying values of $9,256 and $11,479 and estimated
market values of $9,144 and $11,158 at June 30, 1997 and 1996, respectively,
were pledged to secure public deposits, repurchase agreements and for other
purposes as required by law.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
3. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market values of mortgage-backed securities are
as follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Federal National Mortgage
Association certificates ........... $10,708 $ 6 $ (265) $10,449
Government National Mortgage
Association Certificates ........... 1,306 38 -- 1,344
Federal Home Loan Mortgage
Corporation Certificates ........... 931 19 -- 950
Collateralized mortgage obligations issued
by agencies of the U.S. Government . 5,472 74 (9) 5,537
------- ------- ------- -------
Total ............................... $18,417 $ 137 $ (274) $18,280
======= ======= ======= =======
<PAGE>
<CAPTION>
1997
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
HELD TO MATURITY
Federal National Mortgage
Association certificates ........... $ 194 $ 11 $ -- $ 205
Government National Mortgage
Association certificates ........... 1,219 14 (13) 1,220
Federal Home Loan Mortgage
Corporation certificates ........... 350 30 -- 380
Collateralized mortgage obligations issued
by agencies of the U.S. Government . 16,728 115 -- 16,843
Collateralized mortgage obligations backed
by securities issued by U.S. Government
agencies ........................... 719 14 -- 733
------- ------- ------- -------
Total ............................... $19,210 $ 184 $ (13) $19,381
======= ======= ======= =======
</TABLE>
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
3. MORTGAGE-BACKED SECURITIES (Continued)
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Federal National Mortgage
Association certificates ........... $11,359 $ 8 $ (443) $10,924
Government National Mortgage
Association certificates ........... 1,580 28 -- 1,608
Federal Home Loan Mortgage
Corporation certificates ........... 2,880 31 (2) 2,909
Collateralized mortgage obligations issued
by agencies of the U.S. Government . 6,956 57 (26) 6,987
------- ------- ------- -------
Total ............................... $22,775 $ 124 $ (471) $22,428
======= ======= ======= =======
<CAPTION>
1996
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
HELD TO MATURITY
Federal National Mortgage
Association certificates ........... $ 269 $ 11 $ -- $ 280
Government National Mortgage
Association certificates ........... 1,268 18 (31) 1,255
Federal Home Loan Mortgage
Corporation certificates ........... 450 32 -- 482
Collateralized mortgage obligations issued
by agencies of the U.S. Government . 16,878 29 (18) 16,889
Collateralized mortgage obligations backed
by securities issued by U.S. Government
agencies ........................... 825 5 (1) 829
------- ------- ------- -------
Total ............................... $19,690 $ 95 $ (50) $19,735
======= ======= ======= =======
</TABLE>
<PAGE>
The amortized cost and estimated market values of mortgage-backed securities at
June 30, 1997, 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.
<TABLE>
<CAPTION>
Due in Due after Due after
one year one through five through Due after
or less five years ten years ten years Total
------- ----------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
Amortized Cost ............... $ 103 $ 1,811 $ 2,782 $13,721 $18,417
Estimated Market Value ....... 103 1,807 2,702 13,668 18,280
HELD TO MATURITY
Amortized Cost ............... $ -- $ 75 $ -- $19,135 $19,210
Estimated Market Value ....... -- 78 -- 19,303 19,381
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
4. NET LOANS RECEIVABLE
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
First mortgage loans:
1 - 4 family dwellings ........................... $116,663 $109,776
Construction and land development ................ 24,381 28,273
Multi-family dwellings ........................... 3,499 3,235
Commercial ....................................... 14,669 13,088
-------- --------
159,212 154,372
-------- --------
Consumer loans:
Home equity ...................................... 6,701 6,619
Home equity lines of credit ...................... 5,557 5,344
Education loans .................................. 516 590
Other ............................................ 1,403 1,484
-------- --------
14,177 14,037
-------- --------
Commercial loans and leases ............................ 93 54
-------- --------
Less:
Undisbursed construction and land development .... 12,505 16,651
Net deferred loan fees ........................... 834 837
Allowance for loan losses ........................ 2,009 1,964
-------- --------
15,348 19,452
-------- --------
Net loans receivable ................................... $158,134 $149,011
======== ========
</TABLE>
The Company's primary business activity is with customers located within its
local trade area of Northern Allegheny and Southern Butler counties. The Company
has concentrated its lending efforts by granting residential and construction
mortgage loans to customers throughout its immediate trade area. The Company
also selectively funds and participates in commercial and residential mortgage
loans outside of its immediate trade area, provided such loans meet the
Company's credit policy guidelines. In general, the Company's loan portfolio
performance is dependent upon the local economic conditions.
<PAGE>
Total nonaccrual loans and troubled debt restructurings and the related interest
for the years ended June 30, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Principal outstanding ...................... $ 274 $ 980 $1,959
Interest income that would
have been recognized ................. $ 35 $ 84 $ 186
Interest income recognized ................. 20 75 144
------ ------ ------
Interest income foregone ............. $ 15 $ 9 $ 42
====== ====== ======
</TABLE>
At June 30, 1996, the recorded investment in loans which are considered to be
impaired in accordance with SFAS No. 114 was $877 of which $274 was considered
to be nonaccrual. In addition, $131 of the related allowance for loan losses has
been allocated for these impaired loans. The average recorded investment in
impaired loans during the year ended June 30, 1996 was approximately $871. For
the year ended June 30, 1996, interest income totaling $73 was recognized on
impaired loans both on the accrual and cash basis of income recognition. There
were no material impaired loans at June 30, 1997.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
4. NET LOANS RECEIVABLE (Continued)
Certain officers, directors, and their associates were customers of, and had
transactions with the Company in the ordinary course of business. All loans were
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other
customers. A summary of loan activity for those directors, executive officers,
and their associates with aggregate loan balances in excess of $60,000 for the
years ended June 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Balance, July 1 .......................... $ 1,635 $ 1,499
Additions ............................ 240 392
Amounts collected .................... (417) (256)
------- -------
Balance, June 30 ......................... $ 1,458 $ 1,635
======= =======
</TABLE>
5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Balance, July 1 ............................ $1,964 $1,836 $1,634
Add:
Provision charged to operations ...... 60 150 211
Recoveries ........................... 3 7 3
Less loans charged off ..................... 18 29 12
------ ------ ------
Balance, June 30 ........................... $2,009 $1,964 $1,836
====== ====== ======
</TABLE>
<PAGE>
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Investment and mortgage-backed securities ............ $1,820 $1,453
Loans receivable ..................................... 989 920
------ ------
Total .......................................... $2,809 $2,373
====== ======
</TABLE>
7. FEDERAL HOME LOAN BANK STOCK
The Savings Bank is a member of the Federal Home Loan Bank System. As a member,
West View maintains an investment in the capital stock of the Federal Home Loan
Bank of Pittsburgh in an amount not less than one percent of its outstanding
qualifying assets as defined by the FHLB or 1/20 of its outstanding FHLB
borrowings, whichever is greater, as calculated throughout the year.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
8. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Land and improvements ............................ $ 226 $ 226
Buildings and improvements ....................... 1,930 1,948
Furniture, fixtures, and equipment ............... 1,041 967
------ ------
3,197 3,141
Less accumulated depreciation .................... 1,899 1,814
------ ------
Total ....................................... $1,298 $1,327
====== ======
</TABLE>
Depreciation charged to operations was $134, $133 and $145, for the years ended
June 30, 1997, 1996, and 1995, respectively.
9. DEPOSITS
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Noninterest-earning checking $ 7,283 4.3% $ 6,259 3.7%
Interest-earning checking .. 15,177 8.9 14,252 8.3
Savings accounts ........... 36,591 21.4 37,976 22.2
Money market accounts ...... 12,103 7.1 11,682 6.8
-------- ----- -------- -----
71,154 41.7 70,169 41.0
-------- ----- -------- -----
Savings Certificates:
5.00% or less ........ 15,321 9.0 28,009 16.4
5.01 - 6.00% ......... 67,858 39.7 53,622 31.4
6.01 - 7.00% ......... 8,930 5.2 10,756 6.3
7.01 or more ......... 7,616 4.4 8,287 4.9
-------- ----- -------- -----
99,725 58.3 100,674 59.0
-------- ----- -------- -----
Total ................ $170,879 100.0% $170,843 100.0%
======== ===== ======== =====
</TABLE>
<PAGE>
The maturities of savings certificates at June 30, 1997 are summarized as
follows:
Within one year ............................................... $60,994
Beyond one year but within two years .......................... 20,110
Beyond two years but within three years ....................... 10,329
Beyond three years ............................................ 8,292
-------
Total .................................................... $99,725
=======
Savings certificates with balances of $100 thousand or more amounted to $11,061
and $9,664 on June 30, 1997 and 1996. The Company does not have any brokered
deposits.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
9. DEPOSITS (Continued)
Interest expense by deposit category for the years ended June 30, are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Checking accounts ................. $ 127 $ 195 $ 262
Savings accounts .................. 940 998 1,248
Money market accounts ............. 327 302 354
Savings certificates .............. 5,647 5,890 5,243
------ ------ ------
Total ........................ $7,041 $7,385 $7,107
====== ====== ======
</TABLE>
10. FEDERAL HOME LOAN BANK ADVANCES
The following table presents information regarding FHLB term advances
as of June 30:
<TABLE>
<CAPTION>
Maturing during Weighted Weighted
fiscal year ended Interest Interest
June 30: 1997 Rate 1996 Rate
- ------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
1997 $ -- --% $10,000 5.50%
1998 5,000 6.05 -- --
1999 1,357 6.19 -- --
2000 8,000 5.89 -- --
2001 -- -- -- --
2002 53,500 5.74 -- --
-------------- --------------
$67,857 $10,000
============== ==============
</TABLE>
<PAGE>
WVS also utilized revolving and short-term FHLB advances. Short-term FHLB
advances generally mature within ninety days, while revolving FHLB advances may
be repaid without penalty. The following table presents information regarding
such advances as of June 30:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
FHLB revolving and short-term advances:
Ending Balance ................................... $10,000 $28,000
Average balance during the year .................. 8,800 19,340
Maximum month-end balance during the year ........ 25,000 28,000
Average interest rate during the year ............ 5.15% 5.63%
Weighted average rate at year end ................ 5.64% 5.40%
</TABLE>
At June 30, 1997, WVS had unused revolving borrowing capacity of approximately
$15,000.
Although no specific collateral is required to be pledged, Federal Home Loan
Bank advances are secured by a blanket security agreement that includes the
Company's FHLB stock, investment and mortgage-backed securities held in
safekeeping at the FHLB, and certain qualifying first mortgage loans.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
11. OTHER BORROWINGS
Other borrowings include Treasury, Tax, and Loan ("TT&L") demand notes and
securities sold under agreements to repurchase with securities brokers. TT&L
notes amounted to $848 and $671 at June 30, 1997 and 1996. Repurchase agreements
amounted to $5,936 and $9,981 as of June 30, 1997 and 1996. The outstanding
repurchase agreements generally mature within one to ninety-two days from the
transaction date and qualifying collateral has been delivered. The Company has
pledged investment securities with a carrying value of $6,006 and $9,979 at June
30, 1997 and 1996, as collateral for the repurchase agreements as explained in
Note 2. The following table presents information regarding repurchase agreements
as of June 30:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Ending Balance ..................................... $ 5,936 $ 9,981
Average balance during the year .................... 9,165 3,995
Maximum month-end balance during the year .......... 17,196 9,981
Average interest rate during the year .............. 5.19% 5.57%
Weighted average rate at year end .................. 5.60% 5.12%
</TABLE>
12. COMMITMENTS AND CONTINGENT LIABILITIES
Loan commitments
In the normal course of business, there are various outstanding commitments and
certain contingent liabilities which are not reflected in the accompanying
consolidated financial statements. Various loan commitments totaling $21,686 and
$26,440 at June 30, 1997 and 1996, respectively, represent financial instruments
with off-balance-sheet risk.
Loan commitments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the statement of financial
condition. The same credit policies are used in making commitments and
conditional obligations as for on-balance-sheet instruments. Generally,
collateral, usually in the form of real estate, is required to support financial
instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the loan agreement. These
commitments are comprised primarily of the undisbursed portion of construction
and land development loans (Note 4), 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 of the 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.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
12. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Litigation
A settlement agreement was entered into during the fourth quarter of fiscal 1995
in connection with the class action lawsuit filed by Jeffrey Carberry, et. al.,
in the United States District Court for the Western District of Pennsylvania
against the Company and the Savings Bank. The lawsuit alleged, among other
things, antitrust and securities laws violations in connection with the Savings
Bank's mutual-to-stock conversion. The Company entered into the settlement to,
among other reasons, avoid the cost of and disruption of the continuing
litigation. During the quarter and fiscal year ended June 30, 1995, the Company
established a provision for the settlement of litigation totaling $491,000. On
January 16, 1996, the Company received an executed Release of Claims (the
"Release") in connection with this lawsuit. The Release fully and finally
discharged all Defendants from all claims, causes of action and disputes of any
kind that the class members directly or indirectly had with respect to the
Plaintiff's claims. Also on January 16, 1996, the Company's insurance carrier
entered into a settlement with regard to coverage for claims and costs of
defense arising from the previously settled class action lawsuit. The insurance
carrier agreed to pay the Savings Bank, as designee of the officers and
directors, the sum of approximately $391,000 to reimburse the Company and the
Savings Bank for litigation defense and settlement costs incurred or accrued
through December 1, 1995. In addition, the insurance carrier agreed to pay 50%
of the amount of future defense costs and expenses relating to the Carberry
lawsuit that may arise after December 1, 1995, for a one year period beginning
January 15, 1996.
On March 27, 1995, the United States District Court for the Western District of
Pennsylvania entered an Opinion and Orders dismissing in its entirety a lawsuit
brought by Plaintiff William S. Karn, who is a depositor of the Savings Bank and
a shareholder of the Company, which alleged, among other things, antitrust and
securities laws violations in connection with the Savings Bank's mutual-to-stock
conversion. The court also dismissed this same Plaintiff's federal claims in a
second and substantially similar lawsuit while remanding to the court of Common
Pleas of Allegheny County any cognizable state law claims. This Plaintiff has
filed Motion to Amend Judgment with the Court on the Opinion and Orders and a
Memorandum Response in Opposition has been filed. On August 28, 1995, the Court
denied the Plaintiff's motion to Amend Judgment.
The Company is also involved with various other legal actions arising in the
ordinary course of business. Management believes the outcome of these matters
will have no material effect on the consolidated operations or consolidated
financial condition of WVS.
13. 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,"
respectively, it would become subject to a series of increasingly restrictive
regulatory actions.
As of June 30, 1997 and 1996, 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%, 6%, and 5%,
respectively.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
13. REGULATORY CAPITAL (Continued)
The Company and Savings Bank's actual capital ratios are presented in the
following tables, which shows that both met all regulatory capital requirements.
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------------------------------------------
WVS Financial Corp. West View Savings Bank
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets)
Actual $34,759 25.8% $26,259 19.9%
To be "Well Capitalized" 13,487 10.0 13,215 10.0
For Capital Adequacy Purposes 10,790 8.0 10,572 8.0
Tier I Capital (to Risk-Weighted Assets)
Actual $33,069 24.5% $24,603 18.6%
To be "Well Capitalized" 8,092 6.0 7,929 6.0
For Capital Adequacy Purposes 5,395 4.0 5,286 4.0
Tier I Capital (to Average Total Assets)
Actual $33,069 11.4% $24,603 8.8%
To be "Well Capitalized" 14,454 5.0 14,016 5.0
For Capital Adequacy Purposes 11,563 4.0 11,213 4.0
<PAGE>
<CAPTION>
June 30, 1996
-----------------------------------------------------------------------
WVS Financial Corp. West View Savings Bank
--------------------------------- ---------------------------------
Amount Ratio Amount Ratio
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets)
Actual $35,994 28.4% $27,065 21.9%
To be "Well Capitalized" 12,656 10.0 12,351 10.0
For Capital Adequacy Purposes 10,125 8.0 9,881 8.0
Tier I Capital (to Risk-Weighted Assets)
Actual $34,406 27.2% $25,516 20.7%
To be "Well Capitalized" 7,594 6.0 7,411 6.0
For Capital Adequacy Purposes 5,062 4.0 4,941 4.0
Tier I Capital (to Average Total Assets)
Actual $34,406 13.9% $25,516 10.7%
To be "Well Capitalized" 12,376 5.0 11,887 5.0
For Capital Adequacy Purposes 9,901 4.0 9,509 4.0
</TABLE>
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
14. STOCK BENEFIT PLANS
Stock Option and Stock Appreciation Plans
In November 1993, the Board of Directors adopted Stock Option Plans for the
Company's directors, officers, and employees, which were approved by
stockholders at a special meeting held on February 22, 1994. An aggregate of
173,629 shares of authorized but unissued common stock of WVS were reserved for
future issuance under these plans. 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% 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.
Stock appreciation rights (SARs) were also authorized under the Plans, and may
be granted in conjunction with stock options or in lieu of exercising all or a
portion of a stock option. An SAR entitles the holder to receive cash or shares
of WVS common stock, or combinations thereof, at a value equal to the difference
between the fair market value of all or part of the shares subject to option on
the date the right is exercised and the options exercise price. Exercise of an
option or companion SAR automatically cancels the related option or right. No
SARs have been issued under the Plans.
<PAGE>
The following table presents share data related to the outstanding options:
<TABLE>
<CAPTION>
Officers' and Weighted
Employees' Directors' Average
Stock Stock Exercise
Options Options Price
-------------- -------------- --------------
<S> <C> <C> <C>
Outstanding, June 30, 1995 85,400 36,400 10.0445
Granted -- 1,400 18.6250
Exercised (360) -- 10.0000
Forfeited (320) -- --
-------------- --------------
Outstanding, June 30, 1996 84,720 37,800 10.1428
Granted -- 1,400 23.1875
Exercised (10,520) -- 10.0000
Forfeited (500) -- --
-------------- --------------
Outstanding, June 30, 1997 73,700 39,200 10.3185
============== ==============
Exercisable at year end 54,512 39,200 10.3838
============== ==============
Available for future grant 45,542 4,207
============== ==============
</TABLE>
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
14. STOCK BENEFIT PLANS (Continued)
Stock Option and Stock Appreciation Plans (Continued)
Effective July 1, 1996, the Company adopted Statement of Financial Accounting
Standards Statement No. 123, "Accounting for Stock-based Compensation". As
permitted under Statement 123, 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 grant, no compensation expense is recognized in the Company's
financial statements. Had the fair value method of Statement No. 123 been
applied, the pro forma net income and earnings per share would not be materially
different than that presented on the consolidated statements of income.
Retention and Recognition Plans (RRP)
The Board of Directors adopted and shareholders subsequently approved at a
special meeting on February 22, 1994, RRP's for selected officers, employees and
directors of the Company. The objective of the RRP's 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 RRP's.
Non-employee directors of the Company are eligible to participate in the RRP for
directors. WVS has appointed an independent fiduciary to serve as trustee for
the RRP Trusts.
An aggregate of 150,000 shares of common stock of WVS were acquired at
conversion for future issuance under these plans, of which 30,000 shares are
subject to the RRP for directors and 120,000 shares are subject to the RRP for
officers and key employees. Officers, employees, and directors who terminate
their association with the Company shall forfeit the right to any shares which
were awarded but not earned.
As of June 30, 1997, 48,350 RRP shares were available for future issuance. RRP
costs are accrued to operations, and added back to stockholders' equity, over a
four to ten year vesting period.
Employee Stock Ownership Plan ("ESOP")
During the year ended June 30, 1994, WVS adopted an ESOP for the benefit of
officers and employees who have met certain eligibility requirements related to
age and length of service. An ESOP Trust was created, and acquired 80,500 shares
of common stock in WVS' initial public offering, using proceeds of a loan
obtained from WVS, which bears interest at one quarter point over the prime
rate, adjusted quarterly. The loan, which is secured by the shares of stock
purchased, calls for quarterly interest and principal payments over a ten year
term.
The Company makes quarterly contributions to the Trust to allow the Trust to
make the required loan payments to WVS. Shares are released from collateral
based upon the proportion of annual principal payments made on the loan each
year and allocated to qualified employees. As shares are released from
collateral, the Company reports compensation expense based upon the amounts
contributed or committed to be contributed each year and the shares become
outstanding for earnings per share computations. Dividends paid on allocated
ESOP shares are recorded as a reduction of retained earnings. Dividends paid on
unallocated shares are added to participant accounts and reported as
compensation. Compensation expense for the ESOP was $487, $291 and $156 for the
years ended June 30, 1997, 1996 and 1995, respectively.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
14. STOCK BENEFIT PLANS (Continued)
Employee Stock Ownership Plan ("ESOP") (Continued)
The following table presents the components of the ESOP shares at June 30:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Allocated shares ................... 22,604 14,087 6,037
Shares released for allocation ..... 8,050 8,050 8,050
Shares distributed ................. (468) (133) --
Unallocated shares ................. 50,313 58,363 66,413
----------- ----------- -----------
Total ESOP shares .............. 80,499 80,367 80,500
=========== =========== ===========
Fair value of ESOP shares .......... $ 2,082,912 $ 1,667,615 $ 1,102,057
=========== =========== ===========
</TABLE>
During fiscal 1997, the ESOP purchased an additional 600 shares of WVS stock,
which is included in the allocated share balance as of June 30, 1997. The 600
shares were purchased using vested participant funds.
15. DIRECTOR, OFFICER AND EMPLOYEE BENEFITS
Profit Sharing Plan
The Company maintains a non-contributory pension plan for its officers and
employees who have met the age and length of service requirements. The plan is a
defined contribution plan with the contributions based on a percentage of
salaries of the plan participants. The Company's contributions, which were
charged to expense, were $150, $115, and $110 for the years ended June 30, 1997,
1996 and 1995, respectively.
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 payment. In addition, the plan
permits directors of the Company, who are also employees to defer receipt of a
portion of their other compensation, including salary and bonuses. For fiscal
years ended June 30, 1997, 1996, and 1995, 20,399 shares were held by the
Deferred Compensation Plan.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
16. INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Currently payable:
Federal .......................... $ 1,747 $ 1,687 $ 1,265
State ............................ 235 291 233
------- ------- -------
1,982 1,978 1,498
Deferred ......................... (52) 88 154
------- ------- -------
Total ...................... $ 1,930 $ 2,066 $ 1,652
======= ======= =======
</TABLE>
The following temporary differences gave rise to the net deferred tax assets at
June 30:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Allowance for loan and real estate owned losses ........ $ 685 $ 671
Deferred origination fees, net ......................... 68 124
Deferred directors compensation ........................ 158 115
Net unrealized loss on securities available for sale ... 93 190
Other .................................................. 26 41
------ ------
Total gross deferred tax assets .................... 1,030 1,141
------ ------
Deferred tax liabilities:
Bad debt reserve for tax reporting purposes ............ 393 458
Retention and recognition plans ........................ 83 86
Depreciation ........................................... 15 13
------ ------
Total gross deferred tax liabilities ............... 491 557
------ ------
Net deferred tax assets ................................ $ 539 $ 584
====== ======
</TABLE>
On August 20, 1996, the Small Business Job Protection Act (the "Act") was signed
into law. The Act eliminated the percentage of taxable income bad debt deduction
for thrift institutions for tax years beginning after December 31, 1995. The Act
provides that bad debt reserves accumulated prior to 1988 be exempt from
recapture. Bad debt reserves accumulated after 1987 are subject to recapture.
The recapture tax will be paid over six years beginning with the 1998 tax year.
At December 31, 1995, the Savings Bank had $1,174 in bad debt reserves in excess
of the base year. Subject to prevailing corporate tax rates, the Savings Bank
owes approximately $393 in federal income taxes which is reflected as a deferred
tax liability.
No valuation allowance was established at June 30, 1997 and 1996, in view of
WVS' ability to carryback to taxes paid in previous years, future anticipated
taxable income, which is evidenced by WVS' earnings potential, and deferred tax
liabilities at June 30.
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
16. 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:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- -------------------- -------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory rate ............. $ 1,662 34.0% $ 1,918 34.0% $ 1,170 34.0%
State income tax, net of federal
tax benefit ........................... 155 3.2 192 3.4 154 4.5
Non - deductible (taxable) litigation and
settlement costs (reimbursements) ....... -- -- (123) (2.2) 248 7.2
Other, net .......................... 113 2.2 79 1.4 80 2.3
------- ---- ------- ---- ------- ----
Actual tax expense and
effective rate ........................ $ 1,930 39.4% $ 2,066 36.6% $ 1,652 48.0%
======= ==== ======= ==== ======= ====
</TABLE>
17. REGULATORY RESTRICTIONS
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,
1997 and 1996, the Savings Bank had required reserves of $560 and $502,
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 ten percent of the Savings Bank's capital surplus.
Regulatory Restrictions
The Savings Bank is subject to the Pennsylvania Banking Code which restricts the
availability of surplus for dividend purposes. At June 30, 1997, surplus funds
of $3,363 were not available for dividends.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
18. CONVERSION AND REORGANIZATION
WVS was formed July, 1993, as a bank holding company to acquire 100 percent of
the common stock of the Savings Bank in a conversion from the mutual to the
stock form of ownership. A public offering of WVS' common stock was completed
November 29, 1993, through the sale of 1,763,300 shares of $ .01 par value
common stock at $10 per share. WVS acquired the Savings Bank by exchanging
$3,363 of the proceeds received in the public offering for all of the common
stock of the Savings Bank.
In accordance with regulations at the time that the Savings Bank converted from
a mutual savings bank to a stock savings bank, a portion of retained earnings
was restricted by establishing a liquidation account. The liquidation account
will be maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Savings Bank after the conversion. The
liquidation account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits. Subsequent increases will not
restore an eligible account holder's interest in the liquidation account. In the
unlikely event of a complete liquidation of the Savings Bank, each account
holder will be entitled to receive a distribution from the liquidation account
in an amount proportionate to the current adjusted qualifying balances for the
accounts then held.
19. SAVINGS ASSOCIATION INSURANCE FUND RECAPITALIZATION
On September 30, 1996, the President signed into law legislation which included
recapitalization of the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC") by a one-time charge to
SAIF-insured institutions of 65.7 basis points per one hundred dollars of
insurable deposits. The gross effect to the Savings Bank amounted to $1,138,
which is reflected in the consolidated results of operations for the year ended
June 30, 1997.
<PAGE>
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values at June 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Financial Assets
Cash, due from banks and interest-earning
demand deposits $ 2,571 $ 2,571 $ 2,727 $ 2,727
Investment securities 87,548 87,442 59,218 58,652
Mortgage - backed securities 37,490 37,661 42,118 42,161
Net loans receivable 158,134 160,835 149,011 149,479
Accrued interest receivable 2,809 2,809 2,373 2,373
Federal Home Loan Bank stock 3,927 3,927 1,900 1,900
------------- ------------- ------------- -------------
Total financial assets $ 292,479 $ 295,245 $ 257,347 $ 257,292
============= ============= ============= =============
Financial Liabilities
Deposits $ 170,879 $ 170,897 $ 170,843 $ 170,835
FHLB Advances 77,857 77,207 38,000 38,000
Other borrowings 6,784 6,784 10,652 10,652
Advance payments by borrowers
for taxes and insurance 3,531 3,531 3,772 3,772
Accrued interest payable 1,768 1,768 1,425 1,425
------------- ------------- ------------- -------------
Total financial liabilities $ 260,819 $ 260,187 $ 224,692 $ 224,684
============= ============= ============= =============
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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:
Cash, Due from Banks, Interest-Earning Demand Deposits, Accrued Interest
Receivable and Payable, Advance Payments by Borrowers for Taxes and Insurance,
and Other Borrowings
The fair value approximates the current book value.
Investment Securities, Mortgage-backed Securities and FHLB stock
The fair value of investment and mortgage-backed securities held to maturity is
equal to the available quoted market price. If no quoted market price is
available, fair value is estimated using the quoted market price for similar
securities. The fair value of securities available for sale is equal to the
current carrying value. 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.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Net Loans Receivable and Deposits (Continued)
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 value of fixed rate advances are estimated using discounted cash flows,
based on current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amount on variable rate advances approximates their
fair value.
Commitments to Extend Credit
These financial instruments are generally not subject to sale and estimated fair
values are not readily available. The carrying value, represented by the net
deferred fee arising from the unrecognized commitment, and the fair value
determined by discounting the remaining contractual fee over the term of the
commitment using fees currently charged to enter into similar agreements with
similar credit risk, are not considered material for disclosure. The contractual
amounts of unfunded commitments are presented in Note 12 to these financial
statements.
<PAGE>
21. PARENT COMPANY
Condensed financial information of WVS Financial Corp. is as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
June 30,
1997 1996
------- -------
<S> <C> <C>
ASSETS
Interest-earning deposits with subsidiary bank ........... $ 404 $ 386
Investment securities available for sale ................. 1,286 --
Investment and mortgage-backed securities held-to-maturity 7,169 9,202
Investment in subsidiary bank ............................ 23,273 23,710
Loan receivable from ESOP ................................ 493 604
Accrued interest receivable and other assets ............. 282 182
------- -------
TOTAL ASSETS ............................................. $32,907 $34,084
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities .................................. $ 18 $ 46
Stockholders' equity ............................... 32,889 34,038
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............... $32,907 $34,084
======= =======
</TABLE>
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
21. PARENT COMPANY (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME
Year Ended June 30,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
INCOME
Loans ...................................................... $ 47 $ 56 $ 60
Investment and mortgage-backed securities .................. 627 671 595
Dividend from subsidiary ................................... 3,500 -- --
Interest-earning deposits with subsidiary bank ............. 16 51 34
Investment securities gain ................................. 4 54 --
------- ------- -------
Total income ............................................... 4,194 832 689
------- ------- -------
OPERATING EXPENSE
Unusual items:
Shareholder litigation settlement .................... (5) (123) 245
Shareholder litigation costs ......................... -- (20) --
Other ...................................................... 91 100 56
------- ------- -------
Total operating expense .................................... 86 (43) 301
------- ------- -------
Income before equity in undistributed earnings of subsidiary 4,108 875 388
Equity in undistributed earnings of subsidiary ............. (913) 2,994 1,665
------- ------- -------
Income before income taxes ................................. 3,195 3,869 2,053
Income taxes ............................................... 236 292 263
------- ------- -------
NET INCOME ................................................. $ 2,959 $ 3,577 $ 1,790
======= ======= =======
</TABLE>
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
21. PARENT COMPANY (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
Year Ended June 30,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................................. $ 2,959 $ 3,577 $ 1,790
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed net income of subsidiary ..................... 913 (2,994) (1,665)
Provision for litigation settlement ........................ -- -- 245
Amortization of investment discounts and premiums .......... 16 34 221
Amortization of ESOP and RRP deferred and
unearned compensation ................................. 184 76 71
Investment securities gains ................................ (4) (54) --
(Increase) decrease in accrued interest receivable ......... 8 76 (10)
Other ...................................................... (130) (168) (130)
-------- -------- --------
Net cash provided by operating activities .................. 3,946 547 522
-------- -------- --------
INVESTING ACTIVITIES
Available for sale:
Purchase of investment and mortgage-backed securities (1,258) (247) --
Proceeds from sale of investment securities .......... 13 301 --
Held to maturity:
Purchases of investment and mortgage-backed securities -- (11,403) (4,732)
Proceeds from repayments of investment and
mortgage-backed securities ....................... 2,021 12,148 6,511
ESOP loan repayments ....................................... 111 80 80
-------- -------- --------
Net cash provided by investing activities .................. 887 879 1,859
-------- -------- --------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock ................. 105 4 1
Cash dividends paid ........................................ (4,920) (3,344) (677)
-------- -------- --------
Net cash used by financing activities ...................... (4,815) (3,340) (676)
-------- -------- --------
Increase (decrease) in cash and cash equivalents ........... 18 (1,914) 1,705
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD .............. 386 2,300 595
-------- -------- --------
CASH AND CASH EQUIVALENTS END OF PERIOD .................... $ 404 $ 386 $ 2,300
======== ======== ========
</TABLE>
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
22. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------
September December March June
1996 1996 1997 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total interest income $ 5,065 $ 5,298 $ 5,221 $ 5,541
Total interest expense 2,528 2,780 2,662 2,914
-------------- -------------- -------------- --------------
Net interest income 2,537 2,518 2,559 2,627
Provision for loan losses 30 30 -- --
-------------- -------------- -------------- --------------
Net interest income after
provision for loan losses 2,507 2,488 2,559 2,627
Security gains, net 26 -- -- 4
Total noninterest income 84 97 78 85
Total noninterest expense 2,203 1,079 1,126 1,258
-------------- -------------- -------------- --------------
Income before income taxes 414 1,506 1,511 1,458
Income taxes 164 594 597 575
-------------- -------------- -------------- --------------
Net income $ 250 $ 912 $ 914 $ 883
============== ============== ============== ==============
Per Share Data:
Average shares outstanding
Primary 1,741,995 1,749,039 1,756,228 1,761,689
Fully diluted 1,743,938 1,753,025 1,757,428 1,763,465
Net Income
Primary and fully diluted $ 0.14 $ 0.52 $ 0.52 $ 0.51
</TABLE>
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except shares and per share data)
22. SELECTED QUARTERLY FINANCIAL DATA (unaudited) (Continued)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------
September December March June
1995 1995 1996 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Total interest income $ 4,510 $ 4,624 $ 4,455 $ 4,728
Total interest expense 2,194 2,269 2,108 2,270
-------------- -------------- -------------- --------------
Net interest income 2,316 2,355 2,347 2,458
Provision for loan losses 37 38 37 38
-------------- -------------- -------------- --------------
Net interest income after
provision for loan losses 2,279 2,317 2,310 2,420
Security gains, net -- -- -- 54
Total noninterest income 80 87 81 81
Total noninterest expense 1,031 723 1,094 1,218
-------------- -------------- -------------- --------------
Income before income taxes 1,328 1,681 1,297 1,337
Income taxes 553 448 504 561
-------------- -------------- -------------- --------------
Net income $ 775 $ 1,233 $ 793 $ 776
============== ============== ============== ==============
Per Share Data:
Average shares outstanding
Primary 1,722,803 1,729,776 1,737,602 1,739,258
Fully diluted 1,728,920 1,730,561 1,739,105 1,739,327
Net Income
Primary and fully diluted $ 0.45 $ 0.71 $ 0.46 $ 0.45
</TABLE>
56
<PAGE>
COMMON STOCK MARKET PRICE AND DIVIDEND INFORMATION
WVS Financial Corp.'s common stock is traded on the over-the-counter
market and quoted on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") National Market System under the symbol "WVFC".
The bid and ask quotations for the common stock on September 16, 1997 were:
Bid Ask
--- ---
$27 1/4 $28 1/4
The following table sets forth the high and low market prices for the
periods indicated.
<TABLE>
<CAPTION>
Market Price
------------------- Cash Dividends
Quarter Ended High Low Declared
------------- ------ ------ -----------
<S> <C> <C> <C>
June 97 $27 1/4 $23 1/2 $2.50(1)
March 97 26 1/2 24 0.20
December 96 25 21 1/2 0.20
September 96 22 1/2 20 1/4 0.10
Quarter Ended
June 96 $22 $19 1/2 $1.80(1)
March 96 22 1/4 18 3/4 0.10
December 95 19 1/4 18 1/4 0.10
September 95 19 1/4 16 0.06
</TABLE>
- -----------
(1) Includes special cash dividends of $2.30 and $1.70 per share, paid
during the quarter ended June 30, 1997 and 1996, respectively.
The Company's stock commenced trading on November 29, 1993. There were
seven NASDAQ Market Makers in the Company's common stock as of June 30, 1997: F.
J. Morrissey & Co., Inc.; Legg Mason Wood Walker, Inc.; Sandler O'Neill &
Partners; Capital Resources, Inc.; Herzog, Heine, Geduld, Inc.; Ryan, Beck &
Co., Inc.; and Parker/Hunter, Inc.
According to the records of the Company's transfer agent, there were
approximately 998 shareholders of record at September 12, 1997. 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.
57
<PAGE>
WVS FINANCIAL CORP.
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
CORPORATE OFFICES
WVS FINANCIAL CORP. -- WEST VIEW SAVINGS BANK
9001 Perry Highway Pittsburgh, PA 15237
(412)364-1911
COMMON STOCK
The Common Stock of WVS Financial Corp. is traded on the NASDAQ
National Market System under the symbol "WVFC".
TRANSFER AGENT & REGISTRAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
1-800-368-5948
INVESTOR RELATIONS
Janet L. Campisino
(412)364-1911
COUNSEL
Bruggeman & Linn
SPECIAL COUNSEL
Elias, Matz, Tiernan & Herrick L.L.P.
WEST VIEW SAVINGS BANK
9001 Perry Highway
Pittsburgh, PA 15237
(412)364-1911
WEST VIEW OFFICE
456 Perry Highway
931-2171
CRANBERRY OFFICE
20531 Perry Highway
931-6080/776-3480
FRANKLIN PARK OFFICE
2566 Brandt School Road
935-7100
BELLEVUE OFFICE
572 Lincoln Avenue
761-5595
SHERWOOD OAKS OFFICE
Serving Sherwood Oaks
Cranberry Twp.
LENDING DIVISION
2566 Brandt School Road
Route 19 at Richard Road
935-7400
<PAGE>
BOARD OF DIRECTORS
David L. Aeberli
President
McDonald-Aeberli Funeral Home, Inc.
Arthur H. Brandt
President and CEO
Brandt Paving, Inc. and
Brandt Excavating, Inc.
William J. Hoegel
Sole Proprietor
William J. Hoegel & Associates
Donald E. Hook
Chairman
Pittsburgh Cut Flower Co.
James S. McKain, Jr.
Retired - Former Chairman & President
Barden McKain Ford, Inc. and
Jim McKain Car and Truck Leasing, Inc.
James H. Ritchie
Retired - Former Owner
Ingomar Pharmacy
John M. Seifarth
Senior Engineer - Consultant
Nichols & Slagle Engineering, Inc.
Robert C. Sinewe
President and Chief Executive Officer
WVS Financial Corp. and
West View Savings Bank
Margaret VonDerau
Senior Vice President and Secretary
WVS Financial Corp. and
West View Savings Bank
EXECUTIVE OFFICERS
James S. McKain, Jr.
Chairman
Robert C. Sinewe
President and
Chief Executive Officer
Margaret VonDerau
Senior Vice President and
Corporate Secretary
David J. Bursic
Vice President, Treasurer and
Chief Financial Officer
Edward M. Wielgus
Vice President and
Chief Lending Officer
The members of the Board of Directors serve in that capacity for both the
Company and the Savings Bank.
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A Tradition of Quality Banking
WVS FINANCIAL CORP.
