W
V
S
FINANCIAL
---------
CORPORATION
THE HOLDING COMPANY OF WEST VIEW SAVINGS BANK
1998 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 23
Consolidated Statements of Financial Condition 24
Consolidated Statements of Income 25
Consolidated Statements of Changes in Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to the Consolidated Financial Statements 28
Common Stock Market Price and Dividend Information 58
Corporate Information
<PAGE>
To Our Stockholders:
WVS Financial Corp. has completed its fourth successful year as a
public company. During fiscal 1998 the Company and its shareholders benefited
from several significant accomplishments: (1) a 23.7% increase in the Company's
stock price; (2) the payment of a two-for-one stock split; and (3) cash
dividends paid to shareholders totaling $1.50 per share, including a $0.95 per
share special cash dividend. Our current regular dividend yield of 3.9% is among
the highest bank and thrift common stock dividend yields in the nation.
Net income for fiscal 1998 totaled $3.5 million - an increase of $533
thousand or 18.0% over fiscal 1997. Basic earnings per share totaled $1.01 as
compared to $0.88 and diluted earnings per share amounted to $0.98 as compared
to $0.85 in fiscal 1997. As more fully explained in this Annual Report, fiscal
year 1998 net income was impacted by four significant one-time items: federal
deposit insurance premiums decreased approximately $1.2 million due to a special
one-time charge in fiscal 1997; a $553 thousand non-recurring charge related to
the resignation of the Company's former President; a $180 thousand decrease in
the provision for loan losses; and a $133 thousand non-recurring gain on the
sale of an office building. Excluding the four one-time items, net income would
have totaled approximately $3.7 million with corresponding basic and diluted
earnings per share of $1.06 and $1.03, respectively.
As we enter fiscal 1999, the financial markets face significant
challenges. Market interest rates have declined substantially during the past
fiscal year due in large part to deterioration in certain key foreign economies.
South Korea, Indonesia and Thailand are in an economic depression. Japan is in
its worst slump since the end of World War II. Economic unrest has struck Russia
and may begin to impact Brazil, Argentina and Mexico.
During times of economic turmoil, foreign investors seek the safety and
stability of the U.S. dollar and U.S. Treasury securities. Unfortunately this
economic spillover has caused the U.S. stock markets into their first correction
in a number of years. The recent downturn in the stock market has impacted most
stock prices, including the Company's. In response to market conditions, the
Company's Board of Directors authorized a 5% stock buyback on July 28, 1998. The
Company's announcement was well received by the capital markets and we look
forward to updating our stockholders about the buyback's progress at the
Company's Annual Meeting.
West View Savings Bank has served our communities well for over 90
years by reinvesting local deposits back into mortgage loans within the
community. As we enter our next 90 years, West View Savings Bank will continue
to provide loans to fund home purchases and improvements, consumer loans and
small business loans. This reinvestment into our communities has resulted in
impressive stockholder returns. We wish to thank you for your continued support
and hope to see you at the Annual Meeting.
/S/David J. Bursic /S/James S. McKain, Jr.
- ------------------ -----------------------
DAVID J. BURSIC JAMES S. MCKAIN, JR.
President and Chairman of the Board
Chief Executive Officer
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<TABLE>
<CAPTION>
FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED
FINANCIAL AND OTHER DATA
As of or For the Year Ended June 30,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets ....................... $ 297,054 $ 294,693 $ 259,622 $ 227,368 $ 221,315
Net loans receivable ............... 157,737 158,134 149,011 133,343 123,600
Mortgage-backed securities ......... 46,314 37,490 42,118 22,655 25,704
Investment securities .............. 81,268 87,548 59,218 61,525 63,578
Real estate owned .................. -- -- -- -- 25
Deposit accounts ................... 167,670 170,879 170,843 168,786 180,329
FHLB advances ...................... 88,857 77,857 38,000 14,984 4,000
Other borrowings ................... 889 6,784 10,652 4,047 --
Stockholders' equity ............... 32,978 32,889 34,038 33,809 32,369
Nonperforming assets and troubled
debt restructurings(1) ........... 603 274 980 1,959 1,931
Selected Operating Data:
Interest income .................... $ 22,146 $ 21,125 $ 18,317 $ 15,612 $ 14,615
Interest expense ................... 11,781 10,884 8,840 7,372 7,545
----------- ----------- ----------- ----------- -----------
Net interest income ................ 10,365 10,241 9,477 8,240 7,070
Provision for loan losses .......... (120) 60 150 211 211
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses .................. 10,485 10,181 9,327 8,029 6,859
Non-interest income ................ 538 374 383 307 315
Non-interest expense ............... 5,422 5,666 4,067 4,894 4,270
----------- ----------- ----------- ----------- -----------
Income before income tax expense ... 5,601 4,889 5,643 3,442 2,904
Income tax expense ................. 2,109 1,930 2,066 1,652 914
----------- ----------- ----------- ----------- -----------
Net income before cumulative effect
of accounting change ............. 3,492 2,959 3,577 1,790 1,990
Cumulative effect of change in
accounting for income taxes ...... -- -- -- -- 245
----------- ----------- ----------- ----------- -----------
Net income ......................... $ 3,492 $ 2,959 $ 3,577 $ 1,790 $ 2,235
=========== =========== =========== =========== ===========
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Per Share Information(2)(3):
Basic:
Net income before cumulative effect
of accounting change ............. $ 1.01 $ 0.88 $ 1.07 $ 0.54 $ 0.60
Cumulative effect of change in
accounting for income taxes ...... -- -- -- -- 0.07
----------- ----------- ----------- ----------- -----------
Basic earnings ..................... $ 1.01 $ 0.88 $ 1.07 $ 0.54 $ 0.67
=========== =========== =========== =========== ===========
Diluted earnings ................... $ 0.98 $ 0.85 $ 1.04 $ 0.52 $ 0.66
Dividends per share(4) ............. $ 1.50 $ 1.50 $ 1.03 $ 0.21 $ 0.02
Dividend payout ratio(4) ........... 148.51% 170.45% 96.26% 38.89% 2.99%
Book value per share at period end . $ 9.50 $ 9.41 $ 9.80 $ 9.73 $ 9.32
Average shares outstanding:
Basic ........................ 3,472,328 3,369,796 3,347,363 3,331,086 3,315,299
Diluted ...................... 3,575,892 3,490,226 3,452,854 3,409,688 3,372,647
</TABLE>
2
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<TABLE>
<CAPTION>
As of or For the Year Ended June 30,
--------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Ratios(5):
Average yield earned on interest-
earning assets .................... 7.69% 7.69% 7.83% 7.33% 6.81%
Average rate paid on interest-
bearing liabilities ............... 4.77 4.78 4.58 4.19 4.02
Average interest rate spread(6) ..... 2.92 2.91 3.25 3.14 2.79
Net interest margin(6) .............. 3.60 3.73 4.05 3.87 3.30
Ratio of interest-earning assets to
interest-bearing liabilities ...... 116.65 120.70 121.18 121.09 114.30
Non-interest expense as a percent of
average assets .................... 1.86 2.04 1.71 2.26 1.96
Return on average assets ............ 1.20 1.06 1.51 0.83 1.02
Return on average equity ............ 10.45 8.63 10.19 5.34 8.74
Ratio of average equity to average
assets ............................ 11.48 12.33 14.81 15.48 11.70
Full-service offices at end of period 5 5 5 5 5
Asset Quality Ratios(5):
Non-performing loans and troubled
debt restructurings as a percent of
net total loans(1) ................ 0.38% 0.17% 0.66% 1.47% 1.54%
Non-performing assets as a percent
of total assets(1) ................ 0.20 0.09 0.15 0.45 0.45
Non-performing assets and troubled
debt restructurings as a percent of
total assets ...................... 0.20 0.09 0.38 0.86 0.86
Allowance for loan losses as a
percent of total loans receivable . 1.08 1.16 1.17 1.25 1.14
Allowance for loan losses as a
percent of non-performing loans ... 308.46 733.21 520.95 178.43 169.75
Charge-offs to average loans
receivable outstanding during the
period ............................ 0.02 0.01 0.02 0.01 0.02
Capital Ratios(5):
Tier 1 risk-based capital ratio ..... 20.90% 24.52% 27.19% 27.06% 21.39%
Total risk-based capital ratio ...... 22.09 25.77 28.44 28.32 22.47
Tier 1 leverage capital ratio ....... 10.98 11.44 13.90 14.74 14.59
</TABLE>
(1) Non-performing assets consist of non-performing loans and real estate owned
("REO"). Nonperforming 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.
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(3) All per share information for fiscal years ended June 30, 1997, 1996, 1995
and 1994 have been restated to reflect the two-for-one stock split of May
22, 1998.
(4) Dividends per share and dividend payout ratio includes special cash
dividends of $0.95, $1.15, and $0.85 per share, paid during fiscal 1998,
1997 and 1996, respectively.
(5) 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.
(6) 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, 1998.
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, 1998, $74.1 million or 44.2% of West
View's total deposits consisted of regular savings and club accounts, money
market deposit accounts, and checking accounts. Approximately $38.0 million or
51.3% of core deposits consisted of regular savings and club accounts. Checking
account balances grew $0.4 million or 1.8% during fiscal 1998 and totaled $22.9
million or 30.9% of core deposits at June 30, 1998. The continued growth in
checking account deposits was primarily due to increased marketing and
promotional efforts by the Company to gain market share. Core deposits are
considered to be more stable and lower cost funds than certificates of deposit
and other borrowings.
Consistent Core Earnings - The Company's net interest income has
consistently covered operating expenses (non-interest expense). During fiscal
1998, net interest income totaled $10.4 million, representing a $0.2 million or
1.2% increase over fiscal 1997.
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, 1998, 1997 and 1996, the Company's ratios of
non-performing assets and troubled debt
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restructurings to total assets were 0.20%, 0.09% and 0.38%, respectively. Total
net charge-offs for the past three fiscal years have aggregated $66 thousand.
Non-Interest Expense Ratios - For the fiscal years ended June 30,
1998, 1997 and 1996, the Company's ratios of non-interest expense to average
assets were 1.86%, 2.04% and 1.71%, respectively. Excluding unusual items
relating to severance costs, shareholder litigation and the one-time SAIF
recapitalization charge, the Company's ratios of non-interest expense to average
assets were 1.68%, 1.63% and 1.88% for the fiscal years ended June 30, 1998,
1997 and 1996, respectively.
Traditional Thrift Lending - West View has consistently focused its
lending activities toward traditional thrift loan products. At June 30, 1998,
$118.5 million or 74.3% of the Company's total loans consisted of permanent
single-family mortgage and home equity loans. At June 30, 1998, approximately
$154.8 million or 97.0% of the Company's total loan portfolio consisted of loans
secured by real estate.
FINANCIAL CONDITION
The Company's assets totaled $297.1 million at June 30, 1998 as
compared to $294.7 million at June 30, 1997. The $2.4 million or 0.8% growth in
total assets was primarily comprised of an $8.8 million or 23.5% increase in
mortgage-backed securities and a $0.7 million or 19.1% increase in Federal Home
Loan Bank ("FHLB") stock, partially offset by a $6.3 million or 7.2% decrease in
investment securities and a $0.4 million or 0.3% decrease in net loans
receivable. The Company's total liabilities increased $2.3 million or 0.9% to
$264.1 million as of June 30, 1998 from $261.8 million as of June 30, 1997. The
$2.3 million increase in total liabilities was primarily comprised of an $11.0
million or 14.1% increase in Federal Home Loan Bank advances and short-term
borrowings, partially offset by a $5.9 million or 86.9% decrease in other
borrowings and a $3.2 million or 1.9% decrease in total deposits. Total
stockholders' equity increased $89 thousand or 0.3% to $33.0 million as of June
30, 1998 from $32.9 million as of June 30, 1997, primarily due to the Company's
ongoing commitment to manage its capital levels to further enhance stockholder
value. The $89 thousand increase in stockholders' equity was principally
attributable to $3.5 million of Company net income, a $1.5 million increase in
capital attributable to stock option exercises, Employee Stock Ownership Plan
("ESOP") share releases and Recognition and Retention Plan ("RRP") equity
contributions and a $337 thousand increase in unrealized securities gains, less
cash dividends paid to stockholders totaling $5.2 million for the fiscal year
ended June 30, 1998.
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 continued its investment growth program, originally
initiated in the third quarter of fiscal 1994, throughout fiscal 1998 in order
to realize additional net interest income. Under this strategy, a longer-term
callable investment security, or mortgage-backed security, is
5
<PAGE>
purchased and funded through the use of FHLB advances and, to a lesser extent,
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 $125.0 million; (ii) suitable investments shall be
restricted to those meeting the credit quality criteria outlined in the
Company's investment policy; (iii) each security purchased (excluding commercial
paper) shall initially yield a minimum of seventy-five basis points above the
incremental rate paid on short-term borrowings, at the time of purchase; and
(iv) the Company's total borrowed funds position may not exceed $150.0 million.
In most cases, the initial yield spread earned on investment security purchases
exceeded approximately one hundred to one hundred and forty basis points.
During the fiscal year ended June 30, 1998, the Company increased its
mortgage-backed securities holdings by $8.8 million. At June 30, 1998 the
Company held $46.3 million of mortgage-backed securities with an approximate
yield of 7.0%. The mortgage-backed securities purchases were made in order to
mitigate the principal calls on the Company's callable bond portfolio and earn a
higher yield with an expected average life profile comparable to longer-term
callable agency bonds.
The Company has continued to 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 fiscal 1998, 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 FHLB advances. Approximately $80.0 million of
callable agency bonds with an estimated weighted average rate of 7.66% were
called during the fiscal year ended June 30, 1998. During the fiscal year ended
June 30, 1998, the Company purchased approximately $61.7 million of callable
bonds with an approximate weighted average yield to call and maturity of 7.10%
and 7.41%, respectively. The callable agency bond purchases, totaling $61.7
million, are summarized by initial term to call as follows: $13.6 million within
three months, $11.2 million with greater than three months and within six
months, $21.5 million with greater than six months and within twelve months,
$13.5 million within twenty-four months, and $2.0 million over twenty-four
months.
During the fiscal year ended June 30, 1998, the Company borrowed
approximately $57.2 million from the FHLB in the way of various borrowings with
a weighted average rate of 5.38% and $40.6 million in other borrowings with a
weighted average rate of 5.61%. During the twelve months ended June 30, 1998,
the Company repaid $46.2 million of FHLB advances and $46.6 million of other
borrowings. Due to a decline in market interest rates during the fiscal year
ended June 30, 1998, the Company increased its use of FHLB Convertible Select
advances. FHLB Convertible Select advances offer fixed rate funding during a
portion of the advance term. After this initial period, the FHLB may elect to
convert the advance to variable interest rate, generally on a quarterly basis.
If the FHLB elects to convert the advance, the Company may repay the advance
without penalty. The Company believes that FHLB Convertible Select advances
offer an attractive funding alternative to short-term fixed rate advances or
broker repurchase agreements under present market conditions.
6
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The Company's net interest income could also be adversely impacted by
a general rise in market interest rates. In order to partially mitigate this
risk, approximately $17.8 million or 38.5% 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 6.87% as of June 30,
1998.
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.
As of June 30, 1998, the implementation of these asset and liability
management initiatives resulted in the following: (i) an aggregate of $49.5
million or 31.0% of the Company's net loan portfolio had adjustable interest
rates or maturities of less than 12 months; (ii) $17.8 million or 38.5% of the
Company's portfolio of mortgage-backed securities (including collateralized
mortgage obligations - "CMOs") were secured by floating rate securities; (iii)
$20.4 million or 25.1% of the Company's investment securities portfolio had
scheduled maturities of one year or less; and (iv) $63.7 million or 78.5% 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 24.6% of total assets at June 30, 1998, as compared to a
negative 13.3% at June 30, 1997, in each instance, based on certain assumptions
by management with respect to the repricing of certain assets and liabilities.
At June 30, 1998, the Company's interest-earning assets maturing or repricing
within one year totaled $107.2 million while the Company's interest-bearing
liabilities maturing or repricing within one year totaled $180.3 million,
providing a deficiency of interest-earning assets over interest-bearing
liabilities of $73.1 million. At June 30, 1998, the percentage of the Company's
assets to liabilities maturing or repricing within one year was 59.4%.
7
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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,
---------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets maturing or
repricing within one year(1) ........... $ 107,186 $ 103,161 $ 88,530
Interest-bearing liabilities maturing or
repricing within one year(2) .......... 180,318 142,265 135,344
--------- --------- ---------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities $ (73,132) $ (39,104) $ (46,814)
========= ========= =========
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities
as a percentage of total assets ........ (24.6)% (13.3)% (18.0)%
Percentage of assets to liabilities
maturing or repricing within one year .. 59.4% 72.5 % 65.4 %
</TABLE>
(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, 1998, 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) $ 37,075 $ 21,165 $ 41,430 $ 20,349 $ 40,393 $ 160,412
Mortgage-backed securities .. 18,388 1,595 4,341 1,807 19,983 46,114
Investments(5) .............. 27,156 -- -- -- 58,749 85,905
Interest-bearing deposits ... 1,807 -- -- -- -- 1,807
--------- --------- --------- --------- --------- ---------
Total .................. 84,426 22,760 45,771 22,156 119,125 294,238
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Interest-bearing deposits
and escrows (6)(7)(8) ....... 49,371 44,201 40,412 14,401 22,597 170,982
Borrowings .................. 76,746 10,000 -- 3,000 -- 89,746
--------- --------- --------- --------- --------- ---------
Total .................. 126,117 54,201 40,412 17,401 22,597 260,728
--------- --------- --------- --------- --------- ---------
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities .. (41,691) (31,441) 5,359 4,755 96,528
--------- --------- --------- --------- ---------
Cumulative excess of
interest-earning assets over
interest-bearing liabilities .. (41,691) (73,132) (67,773) (63,018) 33,510
--------- --------- --------- --------- ---------
Cumulative excess of
interest-earning assets over
interest-bearing liabilities as
a percentage of total assets .. (14.0)% (24.6)% (22.8)% (21.2)% 11.3%
--------- --------- --------- --------- ---------
</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 11% to 38% 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 $5,000.
(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.
<PAGE>
(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 US
dollars with no specific foreign exchange exposure. The Savings Bank has no
agricultural loan assets and therefore would not have a specific exposure to
changes in commodity prices. Any impacts that changes in foreign exchange rates
and commodity prices would have on interest rates are assumed to be exogenous
and will be analyzed on an ex post basis.
Interest-rate risk ("IRR") is the exposure of a banking organization's
financial condition to adverse movements in interest rates. Accepting this risk
can be an important source of profitability and shareholder value, however
excessive levels of IRR can pose a significant threat to the Company's earnings
and capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the Company's safety and soundness.
Evaluating a financial institution's exposure to changes in interest
rates includes assessing both the adequacy of the management process used to
control IRR and the organization's quantitative level of exposure. When
assessing the IRR management process, the Company seeks to ensure that
appropriate policies, procedures management information systems and internal
controls are in place to maintain IRR at prudent levels with consistency and
continuity. Evaluating the quantitative level of IRR exposure requires the
Company to assess the existing and potential future effects of changes in
interest rates on its consolidated financial condition, including capital
adequacy, earnings, liquidity, and, where appropriate, asset quality.
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 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
10
<PAGE>
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.
An institution could also manage interest-rate risk by: 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.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of June 30, 1998,
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, 1998. 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.
11
<PAGE>
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE -
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------------
There- Fair
1999 2000 2001 2002 2003 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 $ 27,781 $17,393 $12,905 $10,732 $7,937 $36,462 $113,210 $118,324
Average interest rate 8.28% 8.01% 7.90% 7.85% 7.74% 7.49%
Adjustable rate 9,578 7,885 6,672 5,633 4,744 12,690 47,202 49,826
Average interest rate(5) 8.15% 8.16% 8.17% 8.18% 8.19% 7.94%
Mortgage-backed securities
Fixed rate 54 260 --- 120 2,309 26,071 28,814 28,535
Average interest rate 6.43% 6.37% 0.00% 8.03% 6.02% 6.53%
Adjustable rate --- --- --- --- --- 17,301 17,301 18,283
Average interest rate(6) 0.00% 0.00% 0.00% 0.00% 0.00% 6.86%
Investments(7) 20,419 --- --- --- --- 65,486 85,905 86,190
Average interest rate 6.27% 0.00% 0.00% 0.00% 0.00% 7.07%
Interest-bearing deposits 1,807 --- --- --- --- --- 1,807 1,807
Average interest rate 6.11% 0.00% 0.00% 0.00% 0.00% 0.00%
-------- ------- ------- ------- ------- -------- -------- --------
Total $ 59,639 $25,538 $19,577 $16,485 $14,990 $158,010 $294,239 $302,965
Interest-bearing liabilities:
Interest-bearing deposits
and escrows(8)(9)(10) $ 93,569 $20,208 $20,208 $ 7,201 $ 7,201 $ 22,595 $170,982 $171,194
Average interest rate 4.54% 3.93% 3.93% 3.36% 3.36% 2.31%
Borrowings 7,246 8,000 --- 51,500 --- 23,000 89,746 88,960
Average interest rate 5.19% 5.89% 0.00% 5.75% 0.00% 5.05%
-------- ------- ------- ------- ------- -------- -------- --------
Total $100,815 $28,208 $20,208 $58,701 $ 7,201 $ 45,595 $260,728 $260,154
</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 11% to 38% 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.
<PAGE>
(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 $5,000.
(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.
12
<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,
1998.
Anticipated Transactions
----------------------------------------
Undisbursed construction and
land development loans
Fixed rate ........... $ 3,984
8.84%
Adjustable rate ...... $ 7,328
9.44%
Undisbursed lines of credit
Adjustable rate ...... $ 7,982
8.32%
Loan origination commitments
Fixed rate ........... $ 648
7.31%
Adjustable rate ...... $ 3,847
8.76%
Letters of credit
Adjustable rate ...... $ 82
11.5%
-------
$23,871
=======
13
<PAGE>
RESULTS OF OPERATIONS
GENERAL. WVS reported net income of $3.5 million, $3.0 million and $3.6
million for the fiscal years ended June 30, 1998, 1997 and 1996, respectively.
Net income for the fiscal year ended June 30, 1998, totaled $3.5 million or
$1.01 basic and $0.98 diluted earnings per share as compared to net income of
$3.0 million or $0.88 basic and $0.85 diluted earnings per share for the same
period in 1997. The $533 thousand or 18.0% increase in net income during fiscal
1998 was primarily the result of a $244 thousand decrease in non-interest
expense, a $180 thousand decrease in the provision for loan losses, a $164
thousand increase in non-interest income and a $124 thousand increase in net
interest income which was partially offset by a $179 thousand increase in income
tax expense. As more fully explained within this Annual Report, fiscal year 1998
net income was impacted by four significant one-time items: federal deposit
insurance premiums decreased approximately $1.2 million primarily due to the
Savings Association Insurance Fund ("SAIF") recapitalization incurred in fiscal
1997; a $553 thousand non-recurring charge related to the resignation of the
Company's former President; the Company's provision for loan losses decreased
$180 thousand, primarily due to the payoff of a past due commercial loan; and a
$133 thousand non-recurring gain on the sale of an office building. Excluding
the four one-time items, net income for the fiscal year ended June 30, 1998
would have totaled approximately $3.7 million with basic and diluted earnings
per share totaling $1.06 and $1.03 respectively.
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.
14
<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 ---------------------------------------------------------------------------------------------
1998 1998 1997 1996
----------- ----------------------------- ------------------------------ -------------------------------
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) 7.95% $163,046 $13,191 8.09% $153,726 $12,440 8.09% $141,643 $11,756 8.30%
Mortgage-backed
securities 6.98 40,066 2,715 6.78 39,451 2,724 6.90 25,384 1,638 6.45
Investments 6.88 82,877 6,167 7.44 79,128 5,881 7.43 64,679 4,831 7.47
Interest-bearing deposits 6.11 1,842 73 3.96 2,335 80 3.43 2,288 92 4.02
-------- ------- -------- ------- -------- -------
Total interest-earning
assets 7.47% 287,831 22,146 7.69% 274,640 21,125 7.69% 233,994 18,317 7.83%
====== ------- ====== ------- ====== ------- =====
Non-interest-earning
assets 3,143 3,331 3,140
-------- -------- --------
Total assets $290,974 $277,971 $237,134
======== ======== ========
Interest-bearing liabilities:
Interest-bearing deposits
and escrows 4.00% $161,855 $6,943 4.29% $165,017 $7,086 4.29% $168,280 $7,431 4.42%
Borrowings 5.54 84,887 4,838 5.70 62,522 3,798 6.07 24,814 1,409 5.68
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 4.53% 246,742 11,781 4.78% 227,539 10,884 4.78% 193,094 8,840 4.58%
====== ------- ====== ------- ====== ------- =====
Non-interest-bearing
accounts 7,073 6,459 4,559
-------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest-bearing
liabilities and non-
interest-bearing
accounts 253,815 233,998 197,653
Non-interest-bearing
liabilities 3,747 9,686 4,361
-------- -------- --------
Total liabilities 257,562 243,684 202,014
Retained income 33,412 34,287 35,120
-------- -------- --------
Total liabilities and
retained income $290,974 $277,971 $237,134
======== ======== ========
Net interest income $10,365 $10,241 $9,477
======= ======= ======
Interest rate spread 2.94% 2.91% 2.91% 3.25%
====== ====== ====== ======
Net yield on interest-
earning assets(2) 3.55% 3.60% 3.73% 4.05%
====== ====== ====== ======
Ratio of interest-earning
assets to interest-
bearing liabilities 111.92% 116.65% 120.70% 121.18%
====== ====== ====== ======
</TABLE>
(1)Includes non-accrual loans.
(2)Net interest income divided by interest-earning assets.
15
<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,
----------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
---------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
--------------------- Increase --------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Net loans receivable .............. $ 751 $ 0 $ 751 $ 987 $ (303) $ 684
Mortgage-backed securities ........ 39 (48) (9) 965 121 1,086
Investments ....................... 278 8 286 1,076 (26) 1,050
Interest-bearing deposits ......... (18) 11 (7) 1 (13) (12)
------- ------- ------- ------- ------- -------
Total interest-earning assets 1,050 (29) 1,021 3,029 (221) 2,808
Interest-bearing liabilities:
Interest-bearing deposits and
escrows ........................ (212) 69 (143) (156) (189) (345)
Other borrowings .................. 1,283 (243) 1,040 2,286 103 2,389
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities ................. 1,071 (174) 897 2,130 (86) 2,044
------- ------- ------- ------- ------- -------
Increase (decrease) in net interest
income .............................. $ (21) $ 145 $ 124 $ 899 $ (135) $ 764
======= ======= ======= ======= ======= =======
</TABLE>
INTEREST INCOME. Total interest income increased by $1.0 million or
4.8% during fiscal 1998 and increased by $2.8 million or 15.3% during fiscal
1997, primarily as a result of changes in interest income on the Company's net
loans receivable and investment securities portfolio during the periods.
Interest income on net loans receivable increased $751 thousand or
6.0% during fiscal 1998 and increased $684 thousand or 5.8% during fiscal 1997.
The increase in fiscal 1998 was attributable to a $9.3 million increase in the
average balance of net loans outstanding while maintaining a constant weighted
average yield on the Company's loan portfolio. 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.
Interest income on investment securities and FHLB stock increased $286
thousand or 4.9% during fiscal 1998 and increased $1.1 million or 22.9% during
fiscal 1997. The increase in the average balance of investment securities was
primarily attributable to increased purchases of callable government agency
securities during the first six months of fiscal 1998. In response to the marked
decline in market interest rates during the second half of fiscal 1998,
management
16
<PAGE>
increased its purchase of mortgage-backed securities. The Company held
approximately $15.4 million of investment grade commercial paper at June 30,
1998, to capitalize on seasonally high quarter end money market rates and for
liquidity management. 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.
Interest income on mortgage-backed securities decreased $9 thousand or
0.33% during fiscal 1998 and increased $1.1 million or 68.8% during fiscal 1997.
While the average outstanding balance of mortgage-backed securities increased by
$615 thousand during fiscal 1998, the weighted average interest rate yield on
such investments decreased by 12 basis points, keeping interest income from
mortgage-backed securities relatively constant. During the second half of fiscal
1998, the Company began to increase its holdings of mortgage-backed securities.
The Company believes that its mortgage-backed securities provided a higher rate
of return than callable agency securities offered at the time and generally
provided monthly payments of principal and interest. As in the past, the
Company's purchases of mortgage-backed securities emphasized current coupon
paper in order to avoid increased levels of premium amortization due to
relatively high prepayments. The Company believes that this conservative
approach has contributed to the overall yield of the mortgage-backed securities
portfolio. The increase 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.
Interest income on interest-bearing deposits decreased $7 thousand or
8.8% during fiscal 1998 and decreased $12 thousand or 13.0% during fiscal 1997.
The decrease in fiscal 1998 was primarily due to a $493 thousand decrease in the
average balance of interest-bearing deposits outstanding, which was considerably
offset by an increase of 53 basis points in the weighted average yield earned on
these deposits. 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.
Throughout fiscal 1998, market interest rates continued to decline due
to (i) financial turmoil abroad, especially in the economies of Asia (e.g.
Japan, South Korea, Thailand) and Russia; (ii) low domestic inflation in the
United States due to record low levels of commodity prices; and (iii) the
desirability of U.S. dollar denominated bonds as a "safe haven" investment for
foreign investors seeking shelter from foreign currency fluctuations. The
Company continued to restructure its balance sheet by adjusting the mix of its
financial assets, particularly its investment and mortgage-backed securities
portfolios, and lengthening the maturities of its financial liabilities by
emphasizing the use of FHLB advances. The Company believes that this strategy
has contributed to increased net interest income during fiscal 1998.
INTEREST EXPENSE. Total interest expense increased $897 thousand or
8.2% during fiscal 1998 and increased by $2.1 million or 23.9% during fiscal
1997.
Interest expense on borrowings increased $1.0 million or 27.4% during
fiscal 1998 and increased $2.4 million or 171.4% during fiscal 1997. The
increases for both fiscal 1998 and 1997 were primarily attributable to increases
in the average balance of borrowings outstanding totaling $22.3 million and
$37.7 million, respectively. In order to better match investment opportunities
and
17
<PAGE>
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.
Interest expense on interest-bearing deposits and escrows decreased
$143 thousand or 2.0% in fiscal 1998 and decreased $345 thousand or 4.6% in
fiscal 1997. The decrease in fiscal 1998 was principally attributable to a $3.2
million decrease in the average balance of interest-bearing deposits and escrows
outstanding, which was slightly offset by an increase of 4 basis points in the
weighted average rate paid on the Company's deposits. The decrease in fiscal
1997 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.
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's provision for loan losses decreased by $180 thousand for
fiscal 1998 primarily due to a recovery of previously established loan loss
reserves attributable to the payoff of a commercial loan participation. The
Company established provisions for possible losses on loans of $60 thousand and
$150 thousand for the fiscal years ended June 30, 1997 and 1996, 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 increased by $164
thousand or 43.9% in fiscal 1998 and decreased $9 thousand or 2.3% in fiscal
1997. The increase in non-interest income for fiscal year 1998 was partially
offset by the absence of a $30 thousand gain from the sale of securities in
1997.
Service charges on deposits increased by $31 thousand or 15.3% in
fiscal 1998 and increased $7 thousand or 3.6% in fiscal 1997. 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 increase in fiscal 1998 was also attributable to increased service charges
on automated teller machines and transaction accounts. 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
$163 thousand in fiscal 1998 and increased $8 thousand in fiscal 1997. Other
non-interest income increased during fiscal 1998 principally as a result of the
recognition of a $133 thousand gain on the sale of an office building.
NON-INTEREST EXPENSE. Total non-interest expense decreased $244
thousand or 4.3% during fiscal 1998 and increased $1.6 million or 39.0% during
fiscal 1997. The decrease in non-interest expense during fiscal 1998 was
primarily attributable to a $1.2 million decrease in
18
<PAGE>
deposit insurance premiums, which was partially offset by an $893 thousand
increase in employee salaries and benefits, principally a $533 thousand one-time
expense as further discussed below. The increase in non-interest expense during
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 $893 thousand or 30.2% during
fiscal 1998 and increased $337 thousand or 12.8% during fiscal 1997. The
increase in fiscal 1998 was primarily attributable to a non-recurring charge
totaling $533 thousand related to the resignation of the Company's former Chief
Executive Officer, a $125 thousand discretionary increase related to the
Company's ESOP, a $115 thousand increase in employee wages and salaries
principally attributable to merit pay and cost of living adjustments, and a $28
thousand increase in profit sharing plan expense. The increase in fiscal 1997
was principally attributable to a $195 thousand increase related to the
Company's ESOP, a $75 thousand increase in employee wages and salaries and a $57
thousand increase in profit sharing plan expense.
Federal deposit insurance premiums decreased $1.2 million or 91.7%
during fiscal 1998 and increased $893 thousand or 222.7% during fiscal 1997. 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.
This was a non-recurring charge for fiscal 1997 and a non-recurring decrease in
premiums for fiscal 1998. 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.
Other non-interest expense (e.g. director's compensation expense,
advertising, Pennsylvania capital stock tax expense, ATM network expense, legal
expense, transfer agent expense, etc.) increased $53 thousand or 7.4% during
fiscal 1998 and decreased $15 thousand or 2.0% during fiscal 1997. The increase
in fiscal 1998 was primarily attributable to a $36 thousand increase in
professional, telecommunications and advertising expense which was partially
offset by an $11 thousand decrease in ATM network expenses. The decrease in
fiscal 1997 was primarily attributable to the absence of $25 thousand of
foreclosed real estate disposition costs and related expenses.
INCOME TAXES. Income taxes increased $179 thousand or 9.3% during
fiscal 1998 and decreased $136 thousand or 6.6% during fiscal 1997. The increase
in fiscal 1998 was primarily attributable to a $712 thousand or 14.6% increase
in taxable income. The decrease in fiscal 1997 was principally attributable to a
$754 or 13.4% decrease in taxable income. The Company's effective tax rate was
37.7%, 39.4% and 36.6% at June 30, 1998, 1997 and 1996, respectively. The
decrease in the effective rate for fiscal 1996 was due primarily to a one-time
adjustment for the non-taxable litigation settlement previously discussed.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $5.1 million during
fiscal 1998 as compared to $3.7 million for fiscal 1997. Net cash provided by
operating activities was primarily comprised of $3.5 million in net income.
Funds used by investing activities totaled $2.2 million during the
fiscal year ended June 30, 1998. Primary uses of funds during the fiscal year
ended June 30, 1998, include $136.7 million in purchases of investment and
mortgage-backed securities, a $2.6 million increase in net loan receivables, and
a $0.7 million increase in FHLB stock, partially offset by the receipt of $134.9
million of proceeds from the repayment of principal on investments and
mortgage-backed securities and $2.9 million in proceeds from the sale of loans.
Funds used for financing activities totaled $2.9 million for the
fiscal year ended June 30, 1998. Primary financial uses include a $5.9 million
decrease in other borrowings, $5.2 million in cash dividends paid and a $3.2
million decrease in interest-bearing deposits, which were partially offset by an
$11.0 million increase in FHLB advances used to fund loan commitments and
investment security purchases. 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, 1998, $74.1 million or 44.2% 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, 1998, the total
approved loan commitments outstanding amounted to $4.5 million. At the same
date, commitments under unused letters and lines of credit amounted to $8.0
million and the unadvanced portion of construction loans approximated $11.3
million. Certificates of deposit scheduled to mature in one year or less at June
30, 1998, totaled $63.0 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, 1999, 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 28, 1998, the Company's Board of Directors declared a cash
dividend of $0.15 per share payable on August 20, 1998, to shareholders of
record at the close of business on August
20
<PAGE>
10, 1998. 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, 1998, WVS Financial Corp. exceeded all regulatory
capital requirements and maintained Tier I and total risk-based capital equal to
$32.8 million or 20.9% and $34.7 million or 22.1%, respectively, of total
risk-weighted assets, and Tier I leverage capital of $32.8 million or 11.0% 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, 1998, totaled
approximately $603 thousand or 0.21% of total assets as compared to $274
thousand or 0.09% of total assets as of June 30, 1997. Nonperforming assets at
June 30, 1998, consisted of $481 thousand in commercial real estate loans, $52
thousand in single-family loans and $70 thousand in consumer loans.
Approximately $20 thousand of additional interest income would have been
recorded during the fiscal year ended June 30, 1998, 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, 1998.
YEAR 2000 COMPLIANCE
The Company outsources substantially all of its data processing
requirements and it is to a large extent dependent upon vendor cooperation for
systems used in its day-to-day business. The Company, in conjunction with its
vendors, is testing its computer systems and requiring representations from its
vendors that the products provided are or will be year 2000 compliant. The
Company has developed a plan of action to help ensure that its operational and
financial systems will not be adversely affected by year 2000 software/hardware
failures due to processing errors arising from calculations using the year 2000
date. All hardware and software products are expected to be compliant by the end
of calendar 1998. The Company does not expect material expenditures to be
incurred to address the year 2000 issue. Based upon current estimates, the
Company does not expect to incur more than $75 thousand (pre-tax) in Year 2000
remediation expenses. Any year 2000 compliance failures could result in
additional expenses or business disruption to the Company which are currently
unknown.
FORWARD LOOKING STATEMENTS
When used in this Annual Report, or, in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases or
other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer,
21
<PAGE>
the words or phrases "will likely result", "are expected to", "will continue",
"is anticipated", "estimate", "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties including changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area and competition
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers that
the factors listed above could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
forward-looking statements to reflect events or circumstances after the date of
statements or to reflect the occurrence of anticipated or unanticipated events.
22
<PAGE>
[SNODGRASS LETTERHEAD]
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, 1998, and 1997, 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, 1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three year period ended June
30, 1998, in conformity with generally accepted accounting principles.
/s/S.R. Snodgrass, A.C.
- -----------------------
S.R. Snodgrass, A.C.
Wexford, PA
July 31, 1998
23
<PAGE>
<TABLE>
<CAPTION>
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
June 30,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks ...................................... $ 699 $ 667
Interest - earning demand deposits ........................... 1,807 1,904
Investment securities available for sale (amortized
cost of $17,481 and $3,689) (Note 4) ..................... 17,519 3,553
Investment securities held to maturity (market value of
$63,996 and $83,889) (Note 4) ............................ 63,749 83,995
Mortgage - backed securities available for sale (amortized
cost of $18,842 and $18,417) (Note 5) .................... 19,041 18,280
Mortgage - backed securities held to maturity (market value
of $27,777 and $19,381) (Note 5) ......................... 27,273 19,210
Net loans receivable (Note 6) ................................ 157,737 158,134
Accrued interest receivable .................................. 2,414 2,809
Federal Home Loan Bank stock, at cost ........................ 4,675 3,927
Premises and equipment ....................................... 1,179 1,298
Deferred taxes and other assets .............................. 961 916
--------- ---------
TOTAL ASSETS ................................................. $ 297,054 $ 294,693
========= =========
LIABILITIES
Deposits (Note 11) ........................................... $ 167,670 $ 170,879
Federal Home Loan Bank advances (Note 12) .................... 88,857 77,857
Other borrowings (Note 13) ................................... 889 6,784
Advance payments by borrowers for taxes and insurance ........ 3,312 3,531
Accrued interest payable ..................................... 1,874 1,768
Other liabilities ............................................ 1,474 985
--------- ---------
TOTAL LIABILITIES ............................................ 264,076 261,804
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares authorized;
none outstanding ......................................... -- --
Common stock, par value $.01; 10,000,000 shares authorized;
3,617,120 and 1,747,280 shares issued and outstanding .... 36 17
Additional paid - in capital ................................. 18,386 17,236
Retained earnings - substantially restricted (Note 15) ....... 15,143 16,900
Net unrealized gain (loss) on securities ..................... 157 (180)
Unallocated shares - Employee Stock Ownership Plan (Note 16) . (312) (453)
Unallocated shares - Recognition and Retention Plans (Note 16) (432) (631)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ................................... 32,978 32,889
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................... $ 297,054 $ 294,693
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year Ended June 30,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans .......................................................... $ 13,191 $ 12,440 $ 11,756
Investment securities .......................................... 5,908 5,696 4,747
Mortgage - backed securities ................................... 2,715 2,724 1,638
Interest - earning demand deposits ............................. 73 80 92
Federal Home Loan Bank stock ................................... 259 185 84
----------- ----------- -----------
Total interest and dividend income ............................. 22,146 21,125 18,317
----------- ----------- -----------
INTEREST EXPENSE
Deposits (Note 11) ............................................. 6,899 7,041 7,385
Borrowings (Notes 12 and 13) ................................... 4,838 3,798 1,409
Advance payments by borrowers for
taxes and insurance ........................................ 44 45 46
----------- ----------- -----------
Total interest expense ......................................... 11,781 10,884 8,840
----------- ----------- -----------
NET INTEREST INCOME ............................................ 10,365 10,241 9,477
Provision for loan losses (Note 7) ............................. (120) 60 150
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES ............................................ 10,485 10,181 9,327
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposits .................................... 234 203 196
Investment securities gains .................................... -- 30 54
Other .......................................................... 304 141 133
----------- ----------- -----------
Total noninterest income ....................................... 538 374 383
----------- ----------- -----------
NONINTEREST EXPENSE
Unusual items:
Shareholder litigation settlement (Note 14) ................ -- (11) (245)
Shareholder litigation costs (Note 14) ..................... -- -- (137)
Salaries and employee benefits ................................. 3,855 2,962 2,625
Occupancy and equipment ........................................ 399 416 408
Deposit insurance premium (Note 21) ............................ 107 1,294 401
Data processing ................................................ 169 171 168
Other .......................................................... 892 834 847
----------- ----------- -----------
Total noninterest expense ...................................... 5,422 5,666 4,067
----------- ----------- -----------
Income before income taxes ..................................... 5,601 4,889 5,643
Income taxes (Note 18) ......................................... 2,109 1,930 2,066
----------- ----------- -----------
NET INCOME ..................................................... $ 3,492 $ 2,959 $ 3,577
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
EARNINGS PER SHARE:
Basic .......................................................... $ 1.01 $ 0.88 $ 1.07
Diluted ........................................................ 0.98 0.85 1.04
AVERAGE SHARES OUTSTANDING:
Basic .......................................................... 3,472,328 3,369,796 3,347,363
Diluted ........................................................ 3,575,892 3,490,226 3,452,854
</TABLE>
See accompanying notes to the consolidated financial statements.
25
<PAGE>
<TABLE>
<CAPTION>
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
Retained Net
Additional Earnings- Unrealized Unallocated Unallocated
Common Paid-in Substantially Gain (Loss) Shares Held Shares Held
Stock Capital Restricted on Securities by ESOP by RRP Total
------- --------- ------------- ------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 $ 17 $ 16,867 $ 18,629 $ - $ (664) $ (1,040) $ 33,809
Release of earned Employee
Stock Ownership Plan shares 76 80 156
Accrued compensation expense
for Recognition and Retention Plans 205 205
Exercise of Stock Options 4 4
Cash dividends declared
($1.03 per share) (3,345) (3,345)
Net unrealized loss on securities (368) (368)
Net income 3,577 3,577
------- --------- --------- ------ -------- -------- ---------
Balance, June 30, 1996 17 16,947 18,861 (368) (584) (835) 34,038
Release of earned Employee
Stock Ownership Plan shares 184 131 315
Accrued compensation expense
for Recognition and Retention Plans 204 204
Exercise of Stock Options 105 105
Cash dividends declared
($1.50 per share) (4,920) (4,920)
Net unrealized gain on securities 188 188
Net income 2,959 2,959
------- --------- --------- ------ -------- -------- ---------
Balance, June 30, 1997 17 17,236 16,900 (180) (453) (631) 32,889
Release of earned Employee
Stock Ownership Plan shares 360 141 501
Accrued compensation expense
for Recognition and Retention Plans 199 199
Exercise of Stock Options 1 635 636
Tax benefit from stock grants issued
under Recognition and Retention Plan 173 173
Two-for-one stock split 18 (18) -
Cash dividends declared
($1.50 per share) (5,249) (5,249)
Net unrealized gain on securities 337 337
Net income 3,492 3,492
------- --------- --------- ------- ------- -------- ---------
Balance, June 30, 1998 $ 36 $ 18,386 $ 15,143 $ 157 $ (312) $ (432) $ 32,978
======= ========= ========= ======= ======= ======== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
26
<PAGE>
<TABLE>
<CAPTION>
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended June 30,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ............................................... $ 3,492 $ 2,959 $ 3,577
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses ................................ (120) 60 161
Depreciation and amortization, net ....................... 126 134 133
Amortization of discounts, premiums and deferred loan fees (32) 111 (203)
Amortization of ESOP and RRP deferred and unearned
compensation ......................................... 899 519 361
Investment securities gains .............................. -- (30) (54)
Deferred income taxes .................................... (202) (52) 88
Decrease (increase) in accrued interest receivable ....... 396 (436) (288)
Increase in accrued interest payable ..................... 106 343 159
Other, net ............................................... 445 71 (185)
--------- --------- ---------
Net cash provided by operating activities ................ 5,110 3,679 3,749
--------- --------- ---------
INVESTING ACTIVITIES
Available for sale:
Purchase of investment and mortgage-backed securities (36,992) (1,508) (13,470)
Proceeds from repayments of investment and
mortgage-backed securities ....................... 20,731 2,711 4,135
Proceeds from sale of investment and
mortgage-backed securities ....................... 2,192 1,678 301
Held to maturity:
Purchase of investment and mortgage-backed securities (99,744) (75,006) (71,399)
Proceeds from repayments of investment and
mortgage - backed securities ..................... 112,017 48,856 62,705
Net increase in net loans receivable ..................... (2,602) (9,476) (15,637)
Proceeds from sale of real estate owned .................. -- 73 24
Proceeds from sale of loans .............................. 2,914 -- --
Increase in Federal Home Loan Bank Stock ................. (748) (2,027) (747)
Acquisition of premises and equipment .................... (8) (105) (6)
--------- --------- ---------
Net cash used for investing activities ................... (2,240) (34,804) (34,094)
--------- --------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in deposits ...................... (3,208) 36 2,057
Net increase in Federal Home Loan Bank advances .......... 11,000 39,857 23,016
Net increase (decrease) in other borrowings .............. (5,895) (3,868) 6,604
Net increase (decrease) in advance payments by
borrowers for taxes and insurance .................... (219) (241) 518
Net proceeds from issuance of common stock ............... 636 105 4
Cash dividends paid ...................................... (5,249) (4,920) (3,345)
--------- --------- ---------
Net cash provided by (used for) financing activities ..... (2,935) 30,969 28,854
--------- --------- ---------
Decrease in cash and cash equivalents .................... (65) (156) (1,491)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR .............................................. 2,571 2,727 4,218
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................. $ 2,506 $ 2,571 $ 2,727
========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest ............................................. $ 11,675 $ 10,541 $ 8,681
Taxes ................................................ 2,286 2,118 1,869
</TABLE>
See accompanying notes to the consolidated financial statements.
27
<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") is a Pennsylvania-chartered unitary
bank holding company which owns 100% of the common stock of West View Savings
Bank ("West View" or the "Savings Bank"). The operating results of the Company
depend primarily upon the operating results of the Savings Bank and, to a lesser
extent, income from interest-earning assets such as investment securities.
West View is a Pennsylvania-chartered, SAIF-insured stock savings bank
conducting business from six offices in the North Hills suburbs of Pittsburgh.
The Savings Bank's principal sources of revenue 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. All intercompany transactions have been
eliminated in consolidation. The accounting and reporting policies of WVS and
West View 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 ability and intent to hold
to maturity are stated at cost adjusted for amortization of premium and
accretion of discount, which are computed using the 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.
28
<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
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential loan losses in its loan portfolio. The
allowance method is used in providing for loan losses. Accordingly, all loan
losses are charged to the allowance, and all recoveries are credited to it. The
allowance for loan losses is established through a provision for loan losses
which is charged to operations. The provision is based on management's periodic
evaluation of the adequacy of the allowance for loan losses which encompasses
the overall risk characteristics of the various portfolio segments, past
experience with losses, the impact of economic conditions on borrowers, and
other relevant factors. The estimates used in determining the adequacy of the
allowance for loan losses including the amounts and timing of future cash flows
expected on impaired loans are particularly susceptible to significant change in
the near term.
A loan is considered impaired when it is probable that the borrower will not
repay the loan according to the original contractual terms of the loan
agreement. Management has determined that first mortgage loans on one-to-four
family properties and all consumer loans represent large groups of
smaller-balance homogeneous loans that are to be collectively evaluated.
Management considers an insignificant delay, which is defined as less than 90
days by the Savings Bank, will not cause a loan to be classified as impaired. A
loan is not impaired during a period of delay in payment if the Savings Bank
expects to collect all amounts due including interest accrued at the contractual
interest rate for the period of delay. All loans identified as impaired are
evaluated independently by management. The Savings Bank estimates credit losses
on impaired loans based on the present value of expected cash flows or the fair
value of the underlying collateral if the loan repayment is expected to come
from the sale or operation of such collateral. Impaired loans, or portions
thereof, are charged-off when it is determined that a realized loss has
occurred. Until such time, an allowance for loan losses is maintained for
estimated losses. Cash receipts on impaired loans are applied first to accrued
interest receivable, unless otherwise required by the loan terms, except when an
impaired loan is also a nonaccrual loan, in which case the portion of the
receipts related to interest is recognized as income.
29
<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.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
Statement No. 128, which became effective for financial statements issued for
fiscal periods ending after December 15, 1997, replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All references to per share information for 1997 and 1996
have been restated to conform with the Statement.
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.
Reclassification of Comparative Figures
Certain comparative amounts for 1997 and 1996 have been reclassified to conform
to 1998 presentations. Such reclassifications did not affect net income.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
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.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way public companies report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The statement defines an operating segment as a component of an enterprise that
generates revenue and incurs expense, whose operating results are reviewed by
the chief operating decision maker in the determination of resource allocation
and performance, and for which discrete financial information is available. This
statement is effective for fiscal years beginning after December 15, 1997,
however, it does not require disclosure in interim reporting in the year of
initial application.
In January 1998, Statement of Financial Accounting Standards No. 132,
"Employers' Disclosure About Pensions and Other Post-Retirement Benefits," was
issued. This standard will require certain footnote disclosure requirements
related primarily to defined benefit pension and other retiree benefits.
Implementation of this standard is required for fiscal years beginning after
December 15, 1997.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The statement provides accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring the recognition of those items as
assets or liabilities in the statement of financial position, recorded at fair
value. Statement No. 133, precludes a held-to-maturity security from being
designated as a hedged item, however, at the date of initial application of this
statement, an entity is permitted to transfer any held-to-maturity security into
the available-for-sale or trading categories. The unrealized holding gain or
loss on such transferred securities shall be reported consistent with the
requirements of Statement No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." Such transfers do not raise an issue regarding an
entity's intent to hold other debt securities to maturity in the future. This
statement applies prospectively for all fiscal quarters of all years beginning
after June 15, 1999. Earlier adoption is permitted for any fiscal quarter that
begins after the issue date of this statement.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share.
There are no convertible securities which would effect the numerator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statements of Income will be used as the
numerator. The following table sets forth a reconciliation of the denominator of
the basic and diluted earnings per share computation.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Denominator for basic earnings per
share - weighted-average shares ..... 3,472,328 3,369,796 3,347,363
Employee stock options .................. 103,564 120,430 105,491
--------- --------- ---------
Denominator for diluted earnings per
share - adjusted weighted-average
assumed conversions ................. 3,575,892 3,490,226 3,452,854
========= ========= =========
</TABLE>
3. COMMON STOCK SPLIT
On April 28, 1998, the Board of Directors approved a two-for-one stock split.
All references to the number of common shares and per share amounts for 1997 and
1996 have been restated to reflect the stock split.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
4. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments are as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------- ------- -------- --------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Corporate securities $ 15,419 $ - $ (3) $ 15,416
Equity securities 2,062 86 (45) 2,103
------- ------- -------- --------
Total $ 17,481 $ 86 $ (48) $ 17,519
======= ======= ======== ========
<CAPTION>
1998
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------- ------- -------- --------
<S> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Government agency securities $ 63,749 $ 262 $ (15) $ 63,996
------- ------- -------- --------
Total $ 63,749 $ 262 $ (15) $ 63,996
======= ======= ======== ========
<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
======= ======= ======== ========
</TABLE>
<PAGE>
<TABLE>
<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
======== ======= ======== ========
</TABLE>
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
4. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market values of debt securities at June 30,
1998, 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 $ 15,419 $ - $ - $ - $ 15,419
Estimated Market Value 15,416 - - - 15,416
HELD TO MATURITY
Amortized Cost $ - $ - $ 21,995 $ 41,754 $ 63,749
Estimated Market Value - - 22,110 41,886 63,996
</TABLE>
Proceeds from the sale of investment securities available for sale and the gross
realized gains and losses for the year ended June 30 are as follows:
1998 1997 1996
------- ------- ------
Proceeds $ 2,192 $ 1,678 $ 301
Gross gains - 30 54
Gross losses - - -
Investment securities with carrying values of $2,000 and $9,256 and estimated
market values of $2,003 and $9,144 at June 30, 1998 and 1997, respectively, were
pledged to secure public deposits, repurchase agreements and for other purposes
as required by law.
<PAGE>
5. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market values of mortgage-backed securities are
as follows:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------- ------- ---------- -------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
Federal National Mortgage
Association certificates ............. $ 9,178 $ 83 $ (6) $ 9,255
Government National Mortgage
Association certificates ............. 1,022 27 - 1,049
Federal Home Loan Mortgage
Corporation certificates ............. 308 6 - 314
Collateralized mortgage obligations issued
by agencies of the U.S. Government ... 8,334 89 - 8,423
------- ------- ---------- -------
Total ............................... $18,842 $ 205 $ (6) $19,041
======= ======= ========== =======
</TABLE>
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
5. MORTGAGE-BACKED SECURITIES (Continued)
<TABLE>
<CAPTION>
1998
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
HELD TO MATURITY
Federal National Mortgage
Association certificates .............. $ 151 $ 8 $ - $ 159
Government National Mortgage
Association certificates .............. 1,156 15 - 1,171
Federal Home Loan Mortgage
Corporation certificates .............. 246 19 - 265
Collateralized mortgage obligations issued
by agencies of the U.S. Government .... 25,001 437 (7) 25,431
Collateralized mortgage obligations backed
by securities issued by U.S. Government
agencies .............................. 719 32 - 751
-------- -------- ----------- --------
Total ................................ $ 27,273 $ 511 $ (7) $ 27,777
======== ======== =========== ========
<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
======= ======= ========== ========
</TABLE>
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
5. MORTGAGE-BACKED SECURITIES (Continued)
<TABLE>
<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>
The amortized cost and estimated market values of mortgage-backed securities at
June 30, 1998, 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 ....... $ 54 $ 2,633 $ - $16,155 $18,842
Estimated Market Value 54 2,632 - 16,355 19,041
HELD TO MATURITY
Amortized Cost ....... $ - $ 55 $ - $27,218 $27,273
Estimated Market Value - 57 - 27,720 27,777
</TABLE>
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
6. NET LOANS RECEIVABLE
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
First mortgage loans:
1 - 4 family dwellings ........................... $104,849 $116,663
Construction and land development ................ 25,012 24,381
Multi-family dwellings ........................... 4,012 3,499
Commercial ....................................... 20,291 14,669
-------- --------
154,164 159,212
-------- --------
Consumer loans:
Home equity ...................................... 7,801 6,701
Home equity lines of credit ...................... 5,812 5,557
Education loans .................................. 591 516
Other ............................................ 2,336 1,403
-------- --------
16,540 14,177
-------- --------
Commercial loans and leases .......................... 290 93
-------- --------
Obligations of state and political subdivisions ...... 730 -
-------- --------
Less:
Undisbursed construction and land development .... 11,312 12,505
Net deferred loan fees ........................... 815 834
Allowance for loan losses ........................ 1,860 2,009
-------- --------
13,987 15,348
-------- --------
Net loans receivable ................................. $157,737 $158,134
======== ========
</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:
1998 1997 1996
---- ---- ----
Principal outstanding ................... $603 $274 $980
Interest income that would
have been recognized ................ 64 35 84
Interest income recognized .............. 44 20 75
---- ---- ----
Interest income foregone ............ $ 20 $ 15 $ 9
==== ==== ====
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
6. NET LOANS RECEIVABLE (Continued)
At June 30, 1996, the recorded investment in loans which were considered to be
impaired was $877 of which $274 was considered to be nonaccrual. In addition,
$131 of the related allowance for loan losses was 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, 1998 and 1997.
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 outstanding of at least
$60,000 during the years ended June 30 are as follows:
1998 1997
------- -------
Balance, July 1 ........................ $ 1,458 $ 1,635
Additions .......................... 335 240
Amounts collected .................. (129) (417)
------- -------
Balance, June 30 ....................... $ 1,664 $ 1,458
======= =======
7. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
1998 1997 1996
------- ------- -------
Balance, July 1 ........................ $ 2,009 $ 1,964 $ 1,836
Add:
Provision charged to operations .... (120) 60 150
Recoveries ......................... 10 3 7
Less loans charged off ................. 39 18 29
------- ------- -------
Balance, June 30 ....................... $ 1,860 $ 2,009 $ 1,964
======= ======= =======
<PAGE>
8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
1998 1997
------ ------
Investment and mortgage-backed securities .......... $1,352 $1,820
Loans receivable ................................... 1,062 989
------ ------
Total .......................................... $2,414 $2,809
====== ======
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
9. FEDERAL HOME LOAN BANK STOCK
The Savings Bank is a member of the Federal Home Loan Bank System. As a member,
West View maintains an investment in the capital stock of the Federal Home Loan
Bank 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.
10. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
1998 1997
------ ------
Land and improvements .......................... $ 226 $ 226
Buildings and improvements ..................... 1,923 1,930
Furniture, fixtures, and equipment ............. 915 1,041
------ ------
3,064 3,197
Less accumulated depreciation .................. 1,885 1,899
------ ------
Total ..................................... $1,179 $1,298
====== ======
Depreciation charged to operations was $126, $134, and $133, for the years ended
June 30, 1998, 1997, and 1996, respectively.
During 1998, having satisfied the criteria defined in Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate," a deferred
gain on the sale of branch office property of $136 was recognized and included
in other noninterest income on the Consolidated Statements of Income.
<PAGE>
11. DEPOSITS
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ -----------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Noninterest-earning checking $ 7,528 4.5 $ 7,283 4.3%
Interest-earning checking 15,347 9.1 15,177 8.9
Savings accounts 37,966 22.6 36,591 21.4
Money market accounts 13,259 7.9 12,103 7.1
-------- ---------- -------- ----------
74,100 44.1 71,154 41.7
-------- ---------- -------- ----------
Savings Certificates:
5.00% or less 12,819 7.7 15,321 9.0
5.01 - 6.00% 66,527 39.7 67,858 39.7
6.01 - 7.00% 7,812 4.7 8,930 5.2
7.01 or more 6,412 3.8 7,616 4.4
-------- ---------- -------- ----------
93,570 55.9 99,725 58.3
-------- ---------- -------- ----------
Total $167,670 100.0 $170,879 100.0%
======== ========= ======== ==========
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
11. DEPOSITS (Continued)
The maturities of savings certificates at June 30, 1998 are summarized as
follows:
Within one year ............................................. $63,001
Beyond one year but within two years ........................ 16,167
Beyond two years but within three years ..................... 7,866
Beyond three years .......................................... 6,536
-------
Total .................................................. $93,570
=======
Savings certificates with balances of $100 thousand or more amounted to $10,250
and $11,061 on June 30, 1998 and 1997. The Company does not have any brokered
deposits.
Interest expense by deposit category for the years ended June 30, are as
follows:
1998 1997 1996
------ ------ ------
Checking accounts ................. $ 136 $ 127 $ 195
Savings accounts .................. 957 940 998
Money market accounts ............. 309 327 302
Savings certificates .............. 5,497 5,647 5,890
------ ------ ------
Total ........................ $6,899 $7,041 $7,385
====== ====== ======
12. FEDERAL HOME LOAN BANK ADVANCES
The following table presents information regarding FHLB term advances as of June
30:
<TABLE>
<CAPTION>
Weighted Weighted
Maturing during Average Average
fiscal year ended Interest Interest
June 30: 1998 Rate 1997 Rate
-------- ------- ---- ------- ----
<S> <C> <C> <C> <C>
1998 $ - - % $ 5,000 6.05 %
1999 6,357 5.16 1,357 6.19
2000 8,000 5.89 8,000 5.89
2002 51,500 5.75 53,500 5.74
2008 23,000 5.05 - -
------- -------
$88,857 $67,857
======= =======
</TABLE>
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
12. FEDERAL HOME LOAN BANK ADVANCES (Continued)
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:
1998 1997
------- -------
FHLB revolving and short-term advances:
Ending Balance ................................. $ - $10,000
Average balance during the year ................ 3,523 8,800
Maximum month-end balance during the year ...... 13,355 25,000
Average interest rate during the year .......... 5.72% 5.15%
Weighted average rate at year end .............. - 5.64%
At June 30, 1998, WVS had unused revolving borrowing capacity of approximately
$41,223.
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.
13. 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 $889 and $848 at June 30, 1998 and 1997. Repurchase agreements
amounted to $5,936 as of June 30, 1997. There were no outstanding repurchase
agreements at June 30, 1998. The outstanding repurchase agreements generally
mature within one to ninety-two days from the transaction date and qualifying
collateral has been delivered. The Company pledged investment securities with a
carrying value of $6,006 at June 30, 1997, as collateral for the repurchase
agreements as explained in Note 4. The following table presents information
regarding repurchase agreements as of June 30:
1998 1997
------- -------
Ending Balance ................................... $ - $ 5,936
Average balance during the year .................. 5,616 9,165
Maximum month-end balance during the year ........ 11,195 17,196
Average interest rate during the year ............ 5.69% 5.19%
Weighted average rate at year end ................ - 5.60%
14. 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 $23,789 and
$21,686 at June 30, 1998 and 1997, respectively, represent financial instruments
with off-balance-sheet risk.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
14. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
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 6), residential, commercial real estate, and
consumer loan originations.
The exposure to loss under these commitments is limited by subjecting them to
credit approval and monitoring procedures. Substantially all 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.
Litigation
A settlement agreement was entered into during the fourth quarter of fiscal 1995
in connection with a class action lawsuit against the Company and the Savings
Bank. The Company entered into the settlement to, among other reasons, avoid the
cost of and disruption of the continuing litigation. On January 16, 1996, the
Company's insurance carrier agreed to pay the Savings Bank, as designee of the
officers and directors, the sum of approximately $391 to reimburse the Company
and the Savings Bank for litigation 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 lawsuit that
may arise after December 1, 1995, for a one year period beginning January 15,
1996. Such reimbursed costs are reflected in the consolidated statements of
income under the caption of unusual items.
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 stockholder 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. On February 6, 1998
the state law claims were also dismissed.
The Company is involved with various other legal actions arising in the ordinary
course of business. Management believes the outcome of these matters will have
no material effect on the consolidated operations or financial condition of WVS.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
15. REGULATORY CAPITAL
Federal regulations require the Company and Savings Bank to maintain minimum
amounts of capital. Specifically, each is required to maintain certain minimum
dollar amounts and ratios of Total and Tier I capital to risk-weighted assets
and of Tier I capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvement Act (FDICIA) established five capital categories ranging
from "well capitalized" to "critically undercapitalized." Should any institution
fail to meet the requirements to be considered "adequately capitalized,"
respectively, it would become subject to a series of increasingly restrictive
regulatory actions.
As of June 30, 1998 and 1997, 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.
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, 1998
-------------------------------------------------------------
WVS Financial Corp. West View Savings Bank
------------------------- --------------------------
Amount Ratio Amount Ratio
------- ---- ------- ----
<S> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets)
Actual $34,681 22.1% $29,665 19.4%
To be "Well Capitalized" 15,700 10.0 15,298 10.0
For Capital Adequacy Purposes 12,560 8.0 12,238 8.0
Tier I Capital (to Risk-Weighted Assets)
Actual $32,821 20.9% $27,805 18.2%
To be "Well Capitalized" 9,420 6.0 9,179 6.0
For Capital Adequacy Purposes 6,280 4.0 6,119 4.0
Tier I Capital (to Average Total Assets)
Actual $32,821 11.0% $27,805 9.4%
To be "Well Capitalized" 14,941 5.0 14,712 5.0
For Capital Adequacy Purposes 11,952 4.0 11,770 4.0
</TABLE>
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
15. REGULATORY CAPITAL (Continued)
<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
</TABLE>
16. STOCK BENEFIT PLANS
Stock Option and Stock Appreciation Plans
The Company maintains both Stock Option and Stock Appreciation Plans for the
directors, officers, and employees. An aggregate of 347,258 shares of authorized
but unissued common stock of WVS were reserved for future issuance under 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.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
16. STOCK BENEFIT PLANS (Continued)
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, 1996 ........ 169,440 75,600 $ 5.07
Granted ....................... -- 2,800 11.59
Exercised ..................... (21,040) -- 5.00
Forfeited ..................... (1,000) -- 5.00
------- ------
Outstanding, June 30, 1997 ........ 147,400 78,400 $ 5.15
Granted ....................... 91,084 2,800 15.63
Exercised ..................... (71,960) (50,600) 5.19
Forfeited ..................... (12,640) -- 15.63
------- ------
Outstanding, June 30, 1998 ........ 153,884 30,600 $ 9.82
======= ======
Exercisable at year end ........... 83,120 30,600
======= ======
Available for future grant ........ 12,640 5,614
======= ======
</TABLE>
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 compensation expense included stock option plan costs
determined based on the fair value at the grant dates for options granted under
these plans consistent with Statement No. 123, pro forma net income and earnings
per share would not have been materially different than that presented on the
consolidated statements of income.
Retention and Recognition Plans (RRP)
The Company also maintains an RRP 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.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
16. STOCK BENEFIT PLANS (Continued)
An aggregate of 300,000 shares of common stock of WVS were acquired at
conversion for future issuance under these plans, of which 60,000 shares are
subject to the RRP for directors and 240,000 shares are subject to the RRP for
officers and key employees. Officers, employees, and directors who terminate
their association with the Company forfeit the right to any shares which were
awarded but not earned.
As of June 30, 1998, 11,572 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")
WVS maintains 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 161,000 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 $680, $487 and $291 for the
years ended June 30, 1998, 1997 and 1996, respectively.
The following table presents the components of the ESOP shares at June 30:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Allocated shares ................... 70,398 45,208 28,174
Shares released for allocation ..... 28,176 26,124 16,100
Shares distributed ................. -- (934) (266)
Unallocated shares ................. 62,424 90,600 116,726
--------- --------- ---------
Total ESOP shares .............. 160,998 160,998 160,734
========= ========= =========
Fair value of unreleased ESOP shares $ 999 $ 1,246 $ 1,211
========= ========= =========
</TABLE>
During fiscal 1997, the ESOP purchased an additional 1200 shares of WVS stock,
which is included in the allocated share balance as of June 30, 1997. The 1200
shares were purchased using vested participant funds.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
17. DIRECTOR, OFFICER AND EMPLOYEE BENEFITS
Profit Sharing Plan
The Company maintains a non-contributory profit sharing 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. In conjunction with the profit sharing plan,
an integrated 401(k) employee savings plan was also implemented. Employees may
contribute up to the maximum allowed by law. The Company may make matching
contributions as approved at the discretion of the Board of Directors. The
Company has made no matching contributions to date. The Company's contributions
to the profit sharing plan, which were charged to expense, were $200, $172, and
$115 for the years ended June 30, 1998, 1997 and 1996, 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, 1998, 1997, and 1996, 41,598, 40,798, and 40,798 shares
respectively were held by the Deferred Compensation Plan.
18. INCOME TAXES
The provision for income taxes consists of:
1998 1997 1996
------- ------- -------
Currently payable:
Federal ...................... $ 2,064 $ 1,747 $ 1,687
State ........................ 247 235 291
------- ------- -------
2,311 1,982 1,978
Deferred ..................... (202) (52) 88
------- ------- -------
Total .................... $ 2,109 $ 1,930 $ 2,066
======= ======= =======
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
18. INCOME TAXES (Continued)
The following temporary differences gave rise to the net deferred tax assets at
June 30:
1998 1997
------ ------
Deferred tax assets:
Allowance for loan losses ............................ $ 646 $ 685
Deferred origination fees, net ....................... 22 68
Net unrealized loss on securities available for sale . - 93
Deferred compensation ................................ 387 158
Other ................................................ 22 26
------ ------
Total gross deferred tax assets .................. 1,077 1,030
------ ------
Deferred tax liabilities:
Bad debt reserve for tax reporting purposes .......... 353 393
Net unrealized gain on securities available for sale . 81 -
Other ................................................ 76 98
------ ------
Total gross deferred tax liabilities ............. 510 491
------ ------
Net deferred tax assets .............................. $ 567 $ 539
====== ======
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 excess bad debt reserves accumulated prior to 1988 are exempt from
recapture. The recapture tax will be paid over six years beginning with the 1998
tax year. 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 $353 in federal income taxes at June 30, 1998 which is reflected
as a deferred tax liability.
No valuation allowance was established at June 30, 1998 and 1997, 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)
18. INCOME TAXES (Continued)
The following is a reconciliation between the actual provision for income taxes
and the amount of income taxes which would have been provided at federal
statutory rates for the years ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- -------------------- ---------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory rate ............. $1,904 34.0% $1,662 34.0% $1,918 34.0%
State income tax, net of federal
tax benefit ........................ 163 2.9 155 3.2 192 3.4
Non - deductible (taxable) litigation and
settlement costs (reimbursements) .... -- -- -- -- (123) (2.2)
Other, net .............................. 42 0.8 113 2.2 79 1.4
------ ----- ------ ------ ------ ----
Actual tax expense and
effective rate ..................... $2,109 37.7% $ 1,930 39.4% $2,066 36.6%
====== ==== ======= ===== ====== ====
</TABLE>
19. REGULATORY MATTERS
Cash and Due from Banks
The Federal Reserve requires the Savings Bank to maintain certain reserve
balances. The required reserves are computed by applying prescribed ratios to
the Savings Bank's average deposit transaction account balances. As of June 30,
1998 and 1997, the Savings Bank had required reserves of $577 and $560,
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.
Dividend Restrictions
The Savings Bank is subject to the Pennsylvania Banking Code which restricts the
availability of surplus for dividend purposes. At June 30, 1998, surplus funds
of $3,363 were not available for dividends.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
20. CONVERSION AND REORGANIZATION
In accordance with regulations at the time that the Savings Bank converted from
a mutual savings bank to a stock savings bank, a portion of retained earnings
was restricted by establishing a liquidation account. The liquidation account
will be maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Savings Bank after the conversion, for a period
of ten years from the date of the stock conversion. The liquidation account will
be reduced annually to the extent that eligible account holders have reduced
their qualifying deposits. Subsequent increases will not restore an eligible
account holder's interest in the liquidation account. In the unlikely event of a
complete liquidation of the Savings Bank, each account holder will be entitled
to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for the accounts then
held.
21. 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 statement of income for the year ended
June 30, 1997.
22. SUBSEQUENT EVENT - REPURCHASE OF COMMON STOCK
On July 28, 1998, the Board of Directors of the Company authorized the
repurchase of up to 183,156 shares, or approximately five percent, of the
Company's outstanding common stock during the next twelve months. The
repurchased shares will be held in treasury stock and may be reserved for
issuance pursuant to the Company's stock benefit plans.
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
23. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values at June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial Assets
Cash, due from banks and interest-earning
demand deposits ..................... $ 2,506 $ 2,506 $ 2,571 $ 2,571
Investment securities ................... 81,268 81,515 87,548 87,442
Mortgage - backed securities ............ 46,314 46,818 37,490 37,661
Net loans receivable .................... 157,737 168,150 158,134 160,835
Accrued interest receivable ............. 2,414 2,414 2,809 2,809
Federal Home Loan Bank stock ............ 4,675 4,675 3,927 3,927
-------- -------- -------- --------
Total financial assets .............. $294,914 $306,078 $292,479 $295,245
======== ======== ======== ========
Financial Liabilities
Deposits ................................ $167,670 $167,882 $170,879 $170,897
FHLB Advances ........................... 88,857 88,071 77,857 77,207
Other borrowings ........................ 889 889 6,784 6,784
Advance payments by borrowers
for taxes and insurance ............. 3,312 3,312 3,531 3,531
Accrued interest payable ................ 1,874 1,874 1,768 1,768
-------- -------- -------- --------
Total financial liabilities ......... $262,602 $262,028 $260,819 $260,187
======== ======== ======== ========
</TABLE>
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.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
23. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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. Since the FHLB stock is not actively traded on a secondary market
and held exclusively by member financial institutions, the estimated fair market
value approximates the carrying amount.
Net Loans Receivable and Deposits
Fair value for consumer mortgage loans is estimated using market quotes or
discounting contractual cash flows for prepayment estimates. Discount rates were
obtained from secondary market sources, adjusted to reflect differences in
servicing, credit, and other characteristics.
The estimated fair values for consumer, fixed rate commercial and multi-family
real estate loans are estimated by discounting contractual cash flows for
prepayment estimates. Discount rates are based upon rates generally charged for
such loans with similar credit characteristics.
The estimated fair value for nonperforming loans is the appraised value of the
underlying collateral adjusted for estimated credit risk.
Demand, savings, and money market deposit accounts are reported at book value.
The fair value of certificates of deposit is based upon the discounted value of
the contractual cash flows. The discount rate is estimated using average market
rates for deposits with similar average terms.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
23. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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 14 to these financial
statements.
24. PARENT COMPANY
Condensed financial information of WVS Financial Corp. is as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
June 30,
1998 1997
------- -------
<S> <C> <C>
ASSETS
Interest-earning deposits with subsidiary bank ........... $ 502 $ 404
Investment securities available for sale ................. 4,264 1,286
Investment and mortgage-backed securities held to maturity 616 7,169
Investment in subsidiary bank ............................ 27,200 23,273
Loan receivable from ESOP ................................ 312 493
Accrued interest receivable and other assets ............. 101 282
------- -------
TOTAL ASSETS ............................................. $32,995 $32,907
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities .................................... $ 17 $ 18
Stockholders' equity ................................. 32,978 32,889
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............... $32,995 $32,907
======= =======
</TABLE>
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
24. PARENT COMPANY (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME
Year Ended June 30,
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
INCOME
Loans ...................................................... $ 33 $ 47 $ 56
Investment and mortgage-backed securities .................. 442 627 671
Dividend from subsidiary ................................... - 3,500 -
Interest-earning deposits with subsidiary bank ............. 31 16 51
Investment securities gain ................................. - 4 54
------- ------- -------
Total income ............................................... 506 4,194 832
------- ------- -------
OPERATING EXPENSE
Unusual items:
Shareholder litigation settlement ...................... - (5) (123)
Shareholder litigation costs ........................... - - (20)
Other ...................................................... 111 91 100
------- ------- -------
Total operating expense .................................... 111 86 (43)
------- ------- -------
Income before equity in undistributed earnings of subsidiary 395 4,108 875
Equity in undistributed earnings of subsidiary ............. 3,202 (913) 2,994
------- ------- -------
Income before income taxes ................................. 3,597 3,195 3,869
Income taxes ............................................... 105 236 292
------- ------- -------
NET INCOME ................................................. $ 3,492 $ 2,959 $ 3,577
======= ======= =======
</TABLE>
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
24. PARENT COMPANY (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
Year Ended June 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ...................................... $ 3,492 $ 2,959 $ 3,577
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed net income of subsidiary .......... (3,202) 913 (2,994)
Amortization of investment discounts and premiums (120) 16 34
Amortization of ESOP and RRP deferred and
unearned compensation ...................... 360 184 76
Investment securities gains ..................... - (4) (54)
Decrease in accrued interest receivable ......... 63 8 76
Other ........................................... 293 (130) (168)
-------- -------- --------
Net cash provided by operating activities ....... 886 3,946 547
-------- -------- --------
INVESTING ACTIVITIES
Available for sale:
Purchase of investment and mortgage-backed
securities .............................. (12,735) (1,258) (247)
Proceeds from sale of investment securities . - 13 301
Proceeds from repayments of investment and
mortgage-backed securities .............. 9,842 - -
Held to maturity:
Purchases of investment and mortgage-backed
securities .............................. (7,579) - (11,403)
Proceeds from repayments of investment and
mortgage-backed securities .............. 14,156 2,021 12,148
ESOP loan repayments ............................ 141 111 80
-------- -------- --------
Net cash provided by investing activities ....... 3,825 887 879
-------- -------- --------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock ...... 636 105 4
Cash dividends paid ............................. (5,249) (4,920) (3,344)
-------- -------- --------
Net cash used for financing activities .......... (4,613) (4,815) (3,340)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 98 18 (1,914)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD ... 404 386 2,300
-------- -------- --------
CASH AND CASH EQUIVALENTS END OF PERIOD ......... $ 502 $ 404 $ 386
======== ======== ========
</TABLE>
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except shares and per share data)
25. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
September December March June
1997 1997 1998 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total interest and dividend income $ 5,550 $ 5,484 $ 5,515 $ 5,597
Total interest expense ........... 2,969 2,939 2,892 2,981
----------- ----------- ----------- -----------
Net interest income .............. 2,581 2,545 2,623 2,616
Provision for loan losses ........ - (120) - -
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses .... 2,581 2,665 2,623 2,616
Investment securities gains ...... - - - -
Total noninterest income ......... 90 106 98 244
Total noninterest expense ........ 1,126 1,316 1,276 1,704
----------- ----------- ----------- -----------
Income before income taxes ....... 1,545 1,455 1,445 1,156
Income taxes ..................... 610 459 571 469
----------- ----------- ----------- -----------
Net income ....................... $ 935 $ 996 $ 874 $ 687
=========== =========== =========== ===========
Per Share Data:
Net Income
Basic ........................ $ 0.27 $ 0.29 $ 0.25 $ 0.20
Diluted ...................... 0.26 0.28 0.24 0.20
Average shares outstanding
Basic ........................ 3,407,641 3,418,340 3,513,627 3,551,460
Diluted ...................... 3,531,473 3,547,240 3,593,231 3,633,379
</TABLE>
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except shares and per share data)
25. SELECTED QUARTERLY FINANCIAL DATA (unaudited) (Continued)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
September December March June
1996 1996 1997 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total interest and dividend 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
Investment securities gains ...... 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:
Net Income
Basic ........................ $ 0.07 $ 0.27 $ 0.27 $ 0.27
Diluted ....................... 0.07 0.26 0.26 0.26
Average shares outstanding
Basic ........................ 3,358,306 3,362,608 3,367,269 3,391,179
Diluted ...................... 3,471,146 3,484,144 3,497,379 3,508,414
</TABLE>
57
<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") Stock MarketSM under the symbol "WVFC". The bid and ask
quotations for the common stock on September 11, 1998 were:
Bid Ask
-------- -------
$15 5/16 $15 3/4
The following table sets forth the high and low market prices, and cash
dividends declared, for the periods indicated. All data has been adjusted for
the two-for-one stock split paid on May 22, 1998.
Market Price
--------------------- Cash Dividends
Quarter Ended High Low Declared
------------- ---- --- --------
June 98 $20 3/8 $16 $0.15
March 98 19 1/2 16 3/8 1.10(1)
December 97 17 5/8 14 1/8 0.15
September 97 14 5/8 12 5/8 0.10
Quarter Ended
-------------
June 97 $13 5/8 $11 3/4 $1.25(1)
March 97 13 1/4 12 0.10
December 96 12 1/2 10 3/4 0.10
September 96 11 1/4 10 1/8 0.05
(1) Includes special cash dividends of $0.95 and $1.15 per share, paid
during the quarter ended March 31, 1998, and June 30, 1997, 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, 1998: 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 1042 shareholders of record at September 11, 1998. 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.
58
<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 Stock MarketSM 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
(412)931-2171
CRANBERRY OFFICE
20531 Perry Highway
(412)931-6080/(724)776-3480
FRANKLIN PARK OFFICE
2566 Brandt School Road
(724)935-7100
BELLEVUE OFFICE
572 Lincoln Avenue
(412)761-5595
SHERWOOD OAKS OFFICE
Serving Sherwood Oaks
Cranberry Twp.
LENDING DIVISION
2566 Brandt School Road
(724)935-7400
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BOARD OF DIRECTORS
David L. Aeberli
President
McDonald-Aeberli Funeral Home, Inc.
Arthur H. Brandt
President and CEO Brandt Excavating, Inc. and
Retired - Former President and CEO
Brandt Paving, 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.
David J. Bursic
President and Chief Executive Officer
WVS Financial Corp. and
West View Savings Bank
Margaret VonDerau
Senior Vice President, Treasurer and Secretary
WVS Financial Corp. and
West View Savings Bank
EXECUTIVE OFFICERS
James S. McKain, Jr.
Chairman
David J. Bursic
President and
Chief Executive Officer
Margaret VonDerau
Senior Vice President, Treasurer and
Corporate Secretary
Edward M. Wielgus
Senior Vice President and
Chief Lending Officer
The members of the Board of Directors serve in that capacity for both the
Company and the Savings Bank.
