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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: June 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No.: 0-22444
WVS Financial Corp.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1710500
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9001 Perry Highway
Pittsburgh, Pennsylvania 15237
- --------------------------------- ----------------------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (412) 364-1911
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.01 per share)
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |_| No |X|
As of December 31, 2003, the aggregate value of the 2,067,977 shares of Common
Stock of the registrant issued and outstanding on such date, which excludes
477,928 shares held by all directors and officers of the registrant as a group,
was approximately $36.2 million. This figure is based on the last known trade
price of $17.50 per share of the registrant's Common Stock on December 31, 2003.
Number of shares of Common Stock outstanding as of September 22, 2004: 2,446,624
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year ended
June 30, 2004 are incorporated into Parts II and IV.
(2) Portions of the definitive proxy statement for the 2004 Annual Meeting of
Stockholders are incorporated into Part III.
PART I.
Item 1. Business.
- ------- ---------
WVS Financial Corp. ("WVS" or the "Company") is the parent holding company
of West View Savings Bank ("West View" or the "Savings Bank"). The Company was
organized in July 1993 as a Pennsylvania-chartered unitary bank holding company
and acquired 100% of the common stock of the Savings Bank in November 1993.
West View Savings Bank is a Pennsylvania-chartered, SAIF-insured stock
savings bank conducting business from six offices in the North Hills suburbs of
Pittsburgh. The Savings Bank converted to the stock form of ownership in
November 1993. The Savings Bank had no subsidiaries at June 30, 2004.
Lending Activities
General. At June 30, 2004, the Company's net portfolio of loans receivable
totaled $68.0 million, as compared to $91.7 million at June 30, 2003. Net loans
receivable comprised 15.7% of Company total assets and 42.3% of total deposits
at June 30, 2004, as compared to 25.0% and 53.6%, respectively, at June 30,
2003. The principal categories of loans in the Company's portfolio are
single-family and multi-family residential real estate loans, commercial real
estate loans, construction loans, consumer loans, land acquisition and
development loans and commercial loans. Substantially all of the Company's
mortgage loan portfolio consists of conventional mortgage loans, which are loans
that are neither insured by the Federal Housing Administration ("FHA") nor
partially guaranteed by the Department of Veterans Affairs ("VA"). Historically,
the Company's lending activities have been concentrated in single-family
residential loans secured by properties located in its primary market area of
northern Allegheny County, southern Butler County and eastern Beaver County,
Pennsylvania.
On occasion, the Company has also purchased whole loans and loan
participations secured by properties located outside of its primary market area
but predominantly in Pennsylvania. The Company believes that substantially all
of its mortgage loans are secured by properties located in Pennsylvania.
Moreover, substantially all of the Company's non-mortgage loan portfolio
consists of loans made to residents and businesses located in the Company's
primary market area.
Federal regulations impose limitations on the aggregate amount of loans
that a savings institution can make to any one borrower, including related
entities. The permissible amount of loans-to-one borrower follows the national
bank standard for all loans made by savings institutions, which generally does
not permit loans-to-one borrower to exceed 15% of unimpaired capital and
surplus. Loans in an amount equal to an additional 10% of unimpaired capital and
surplus also may be made to a borrower if the loans are fully secured by readily
marketable securities. At June 30, 2004, the Savings Bank's limit on
loans-to-one borrower was approximately $3.9 million. The Company's general
policy has been to limit loans-to-one borrower, including related entities, to
$2.0 million although this general limit may be exceeded based on the merit of a
particular credit. At June 30, 2004, the Company's five largest loans or groups
of loans-to-one borrower, including related entities, ranged from an aggregate
of $1.8 million to $3.1 million, and are secured primarily by real estate
located in the Company's primary market area.
2
Loan Portfolio Composition. The following table sets forth the composition
of the Company's net loans receivable portfolio by type of loan at the dates
indicated.
At June 30,
--------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------- ------------------- ------------------- ------------------- -------------------
Amount % Amount % Amount % Amount % Amount %
------ --- ------ --- ------ --- ------ --- ------ ---
(Dollars in Thousands)
Real estate loans:
Single-family $ 25,825 32.52% $ 43,255 40.91% $ 89,889 53.69% $105,623 51.50% $105,964 52.49%
Multi-family 4,761 5.99 5,196 4.92 6,173 3.69 6,920 3.37 6,077 3.01
Commercial 9,950 12.53 17,949 16.98 25,439 15.19 34,955 17.05 32,847 16.27
Construction 18,070 22.76 16,942 16.03 19,965 11.92 28,157 13.73 26,935 13.34
Land acquisition
and development 7,947 10.01 7,437 7.03 6,691 4.00 6,343 3.09 7,510 3.72
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate
Loans 66,553 83.81 90,779 85.87 148,157 88.49 181,998 88.74 179,333 88.83
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Home equity 11,018 13.88 12,374 11.70 16,319 9.75 19,142 9.33 18,558 9.19
Education -- 0.00 -- 0.00 1 0.00 31 0.02 57 0.03
Other 870 1.09 1,069 1.01 1,514 0.90 2,092 1.02 2,062 1.02
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer
Loans 11,888 14.97 13,443 12.71 17,834 10.65 21,265 10.37 20,677 10.24
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial loans 968 1.22 1,499 1.42 1,447 0.86 1,819 0.89 1,879 0.93
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial lease
Financings -- 0.00 -- 0.00 -- 0.00 -- 0.00 -- 0.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
79,409 100.00% 105,721 100.00% 167,438 100.00% 205,082 100.00% 201,889 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Undisbursed loan
Proceeds (9,956) (11,348) (11,311) (16,481) (15,820)
Net deferred loan
Origination fees (115) (174) (464) (659) (801)
Allowance for loan
Losses (1,370) (2,530) (2,758) (2,763) (1,973)
-------- -------- -------- -------- --------
Net loans
Receivable $ 67,968 $ 91,669 $152,905 $185,179 $183,295
======== ======== ======== ======== ========
Contractual Maturities. The following table sets forth the scheduled
contractual maturities of the Company's loans and mortgage-backed securities at
June 30, 2004. The amounts shown for each period do not take into account loan
prepayments and normal amortization of the Company's loan portfolio.
Real Estate Loans
--------------------------------------------------------------
Land Consumer
acquisition loans and Mortgage-
Single- Multi- and commercial backed
family family Commercial Construction development loans securities Total
------ ------ ---------- ------------ ----------- ----- ---------- -----
(Dollars in Thousands)
Amounts due in:
One year or less $ 1,637 $ -- $ 1,026 $ 15,941 $ 3,247 $ 778 $ -- $ 22,629
After one year through
Five years 2,159 17 2,256 1,917 4,661 2,791 44 13,845
After five years 22,029 4,744 6,668 212 39 9,287 75,546 118,525
-------- -------- -------- -------- -------- -------- -------- --------
Total(1) $ 25,825 $ 4,761 $ 9,950 $ 18,070 $ 7,947 $ 12,856 $ 75,590 $154,999
======== ======== ======== ======== ======== ======== ======== ========
Interest rate terms on amounts due after one year:
Fixed $ 20,740 $ 483 $ 5,850 $ 1,804 $ 466 $ 7,349 $ 6,047 $ 42,739
Adjustable 3,448 4,278 3,074 325 4,234 4,729 69,543 89,631
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 24,188 $ 4,761 $ 8,924 $ 2,129 $ 4,700 $ 12,078 $ 75,590 $132,370
======== ======== ======== ======== ======== ======== ======== ========
- ----------
(1) Does not include adjustments relating to loans in process, the allowance
for loan losses, accrued interest, deferred fee income and unearned
discounts.
3
Scheduled contractual principal repayments do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their average contractual terms because of prepayments and due-on-sale clauses.
The average life of mortgage loans tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than current mortgage loan rates (due to refinancings of adjustable-rate and
fixed-rate loans at lower rates).
As further discussed below, the Company has from time to time renewed
commercial real estate loans and speculative construction (single-family) loans
due to slower than expected sales of the underlying collateral. Commercial real
estate loans are generally renewed at a contract rate that is the greater of the
market rate at the time of the renewal or the original contract rate. Loans
secured by speculative single-family construction or developed lots are
generally renewed for an additional six month term with monthly payments of
interest. Subsequent renewals, if necessary, are generally granted for an
additional six month term; principal amortization may also be required. Land
acquisition and development loans are generally renewed for an additional twelve
month term with monthly payments of interest.
At June 30, 2004, the Company had approximately $4.7 million of renewed
commercial real estate and construction loans. The $4.7 million in aggregate
disbursed principal that has been renewed is comprised of: construction and
business lines of credit totaling $2.7 million and land acquisition and
single-family speculative construction loans totaling $2.0 million. Management
believes that the previously discussed whole loans will self-liquidate during
the normal course of business, though some additional rollovers may be
necessary. All of the loans that have been rolled over, as discussed above, are
in compliance with all loan terms, including the receipt of all required
payments, and are considered performing loans.
Origination, Purchase and Sale of Loans. Applications for residential real
estate loans and consumer loans are obtained at all of the Company's offices.
Applications for commercial real estate loans are taken only at the Company's
Franklin Park office. Loan applications are primarily attributable to existing
customers, builders, walk-in customers and referrals from both real estate loan
brokers and existing customers.
All processing and underwriting of real estate and commercial business
loans is performed solely at the Company's loan division at the Franklin Park
office. The Company believes this centralized approach to approving such loan
applications allows it to process and approve such applications faster and with
greater efficiency. The Company also believes that this approach increases its
ability to service the loans. The Savings Bank's Director of Retail Lending, and
its Manager of Commercial Lending, have individual lending authorities ranging
from $5 thousand (unsecured loans) to $300 thousand (loans secured by first
mortgage liens). On a joint basis, the aforementioned individuals would have a
combined lending authority ranging from $7.5 thousand (unsecured) to $500
thousand (loans secured by a first mortgage). With the approval of the Savings
Bank's President, the individual lending authorities range from $25 thousand
(unsecured), $500 thousand (loans secured by non-real estate collateral), $750
thousand (first and second mortgages) and $2 million on secured builder lines of
credit. All loan applications are required to be ratified by the Company's Loan
Committee, comprised of both outside directors and management, which meets at
least monthly.
Historically, the Company has originated substantially all of the loans
retained in its portfolio. Substantially all of the residential real estate
loans originated by the Company have been under terms, conditions and
documentation which permit their sale to the Federal National Mortgage
Association and other investors in the secondary market. Although West View has
not been a frequent seller of loans in the secondary market, the Savings Bank is
on the Federal National Mortgage Association approved list of sellers/servicers.
The Company has held most of the loans it originates in its own portfolio until
maturity, due, in part, to competitive pricing conditions in the marketplace for
origination by nationwide lenders and portfolio lenders. During fiscal 2004, the
Company sold a $979 thousand participation interest in a commercial real estate
loan and a $17 thousand home equity line of credit. The Company retained
servicing rights with respect to the commercial real estate loan participation
sold.
4
The Company has not been an aggressive purchaser of loans. However, the
Company may purchase whole loans or loan participations in those instances where
demand for new loan originations in the Company's market area is insufficient or
to increase the yield earned on the loan portfolio. Such loans are generally
presented to the Company from contacts primarily at other financial
institutions, particularly those which have previously done business with the
Company. At June 30, 2004, $1.2 million or 1.8% of the Company's net loans
receivable consisted of single-family mortgage whole loans purchased from
another financial institution.
The Company requires that all purchased loans be underwritten in
accordance with its underwriting guidelines and standards. The Company reviews
loans, particularly scrutinizing the borrower's ability to repay the obligation,
the appraisal and the loan-to-value ratio. Servicing of loans or loan
participations purchased by the Company generally is performed by the seller,
with a portion of the interest being paid by the borrower retained by the seller
to cover servicing costs. At June 30, 2004, $1.1 million or 1.6% of the
Company's total loans receivable were being serviced for the Company by others.
The following table shows origination, purchase and sale activity of the
Company with respect to loans on a consolidated basis during the periods
indicated.
At or For the Year Ended June 30,
--------------------------------------
2004 2003 2002
---- ---- ----
(Dollars in Thousands)
Net loans receivable beginning balance $ 91,669 $ 152,905 $ 185,179
Real estate loan originations
Single-family(1) 2,202 1,220 5,313
Multi-family(2) 1,319 -- 40
Commercial 1,433 1,209 578
Construction 10,730 8,971 13,634
Land acquisition and development 982 2,471 3,695
--------- --------- ---------
Total real estate loan originations 16,666 13,871 23,260
--------- --------- ---------
Home equity 3,186 2,833 3,950
Education -- 2 333
Commercial -- 250 215
Other 258 189 370
--------- --------- ---------
Total loan originations 20,110 17,145 28,128
--------- --------- ---------
Disbursements against available credit lines:
Home equity 3,215 3,242 3,472
Other 466 685 250
Purchase of whole loans and participations 388 302 --
--------- --------- ---------
Total originations and purchases 24,179 21,374 31,850
--------- --------- ---------
Less:
Loan principal repayments 47,376 83,087 66,054
Sales of whole loans (3) 17 3 2,988
Sales of participation interests (4) 979 -- --
Transferred to real estate owned 550 -- 500
Change in loans in process 179 37 (5,170)
Other, net(5) (1,221) (517) (248)
--------- --------- ---------
Net decrease $ (23,701) $ (61,236) $ (32,274)
--------- --------- ---------
Net loans receivable ending balance $ 67,968 $ 91,669 $ 152,905
========= ========= =========
- ----------
(1) Consists of loans secured by one-to-four family properties.
(2) Consists of loans secured by five or more family properties.
(3) Loans sold included servicing rights.
(4) As of June 30, 2004, loans serviced for others totaled approximately $1.0
million.
(5) Includes reductions for net deferred loan origination fees and the
allowance for loan losses.
5
Real Estate Lending Standards. All financial institutions are required to
adopt and maintain comprehensive written real estate lending policies that are
consistent with safe and sound banking practices. These lending policies must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies ("Guidelines") adopted by the federal banking agencies in December
1992. The Guidelines set forth uniform regulations prescribing standards for
real estate lending. Real estate lending is defined as an extension of credit
secured by liens on interests in real estate or made for the purpose of
financing the construction of a building or other improvements to real estate,
regardless of whether a lien has been taken on the property.
The policies must address certain lending considerations set forth in the
Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the Board of Directors at least
annually. The LTV ratio framework, with a LTV ratio being the total amount of
credit to be extended divided by the appraised value of the property at the time
the credit is originated, must be established for each category of real estate
loans. If not a first lien, the lender must combine all senior liens when
calculating this ratio. The Guidelines, among other things, establish the
following supervisory LTV limits: raw land (65%); land development (75%);
construction (commercial, multi-family and non-residential) (80%); improved
property (85%); and one-to-four family residential (owner-occupied) (no maximum
ratio; however any LTV ratio in excess of 80% should require appropriate
insurance or readily marketable collateral). Consistent with its conservative
lending philosophy, the Company's LTV limits are generally more restrictive than
those in the Guidelines: raw land (60%); land development (70%); construction
(commercial - 70%; multi-family - 75%; speculative residential - 80%); and
residential properties (75% on larger family non-owner-occupied residences).
Single-Family Residential Real Estate Loans. Historically, savings
institutions such as the Company have concentrated their lending activities on
the origination of loans secured primarily by first mortgage liens on existing
single-family residences. At June 30, 2004, $25.8 million or 32.5% of the
Company's total loan portfolio consisted of single-family residential real
estate loans, substantially all of which are conventional loans. Single-family
loan originations totaled $2.2 million and increased $1.0 million or 83.3%
during the fiscal year ended June 30, 2004, when compared to the same period in
2003. Due to low levels of market interest rates, the Company continued to
reduce its portfolio originations of long-term fixed rate mortgages, while
continuing to offer consumer home equity and construction loans.
The Company historically has originated fixed-rate loans with terms of up
to 30 years. Although such loans are originated with the expectation that they
will be maintained in the portfolio, these loans are originated generally under
terms, conditions and documentation that permit their sale in the secondary
market. The Company also makes available single-family residential
adjustable-rate mortgages ("ARMs"), which provide for periodic adjustments to
the interest rate, but such loans have never been as widely accepted in the
Company's market area as the fixed-rate mortgage loan products. The ARMs
currently offered by the Company have up to 30-year terms and an interest rate,
which adjusts in accordance with one of several indices.
At June 30, 2004, approximately $22.4 million or 86.6% of the
single-family residential loans in the Company's loan portfolio consisted of
loans which provide for fixed rates of interest. Although these loans generally
provide for repayments of principal over a fixed period of 15 to 30 years, it is
the Company's experience that because of prepayments and due-on-sale clauses,
such loans generally remain outstanding for a substantially shorter period of
time.
The Company is permitted to lend up to 100% of the appraised value of real
property securing a residential loan; however, if the amount of a residential
loan originated or refinanced exceeds 95% of the appraised value, the Company is
required by state banking regulations to obtain private mortgage insurance on
the portion of the principal amount that exceeds 75% of the appraised value of
the security property. Pursuant to underwriting guidelines adopted by the Board
of Directors, private mortgage insurance is obtained on residential loans for
which loan-to-value ratios exceed 80% according to the following schedule: loans
exceeding 80% but less than 90% - 25% coverage; loans exceeding 90% but less
than 95% - 30% coverage; and loans exceeding 95% through 100% - 35% coverage. No
loans are made in excess of 100% of appraised value.
6
Property appraisals on the real estate and improvements securing the
Company's single-family residential loans are made by independent appraisers
approved by the Board of Directors. Appraisals are performed in accordance with
federal regulations and policies. The Company obtains title insurance policies
on most of the first mortgage real estate loans originated. If title insurance
is not obtained or is unavailable, the Company obtains an abstract of title and
a title opinion. Borrowers also must obtain hazard insurance prior to closing
and, when required by the United States Department of Housing and Urban
Development, flood insurance. Borrowers may be required to advance funds, with
each monthly payment of principal and interest, to a loan escrow account from
which the Company makes disbursements for items such as real estate taxes and
mortgage insurance premiums as they become due.
Multi-Family Residential and Commercial Real Estate Loans. The Company
originates mortgage loans for the acquisition and refinancing of existing
multi-family residential and commercial real estate properties. At June 30,
2004, $4.8 million or 6.0% of the Company's total loan portfolio consisted of
loans secured by existing multi-family residential real estate properties, which
represented a decrease of $435 thousand or 8.4% from fiscal 2003. Of the $4.8
million, approximately $4.3 million or 89.6% provide for an adjustable rate of
interest, while approximately $482 thousand or 10.4% are fixed rate loans.
At June 30, 2004, $10.0 million or 12.5% of the loan portfolio consisted
of loans secured by existing commercial real estate properties, which
represented a decrease of $8.0 million or 44.6% from fiscal 2003. Of the $10.0
million, approximately $3.9 million or 39.0% provide for an adjustable rate of
interest, while approximately $6.1 million or 61.0% are fixed rate loans. During
fiscal 2004, the Company chose not to emphasize originations of commercial real
estate loans to reduce credit risk associated with the national and local
economic weaknesses.
The majority of the Company's multi-family residential loans are secured
primarily by 5 to 20 unit apartment buildings, while commercial real estate
loans are secured by office buildings, hotels, small retail establishments and
churches. These types of properties constitute the majority of the Company's
commercial real estate loan portfolio. The Company's multi-family residential
and commercial real estate loan portfolio consists primarily of loans secured by
properties located in its primary market area.
Although terms vary, multi-family residential and commercial real estate
loans generally are amortized over a period of up to 15 years (although some
loans amortize over a twenty year period) and mature in 5 to 15 years. The
Company will originate these loans either with fixed or adjustable interest
rates which generally is negotiated at the time of origination. Loan-to-value
ratios on the Company's commercial real estate loans are currently limited to
75% or lower. As part of the criteria for underwriting multi-family residential
and commercial real estate loans, the Company generally imposes a debt coverage
ratio (the ratio of net cash from operations before payment of the debt service
to debt service) of at least 100%. It is also the Savings Bank's general policy
to obtain personal guarantees on its multi-family residential and commercial
real estate loans from the principals of the borrower and, when this cannot be
obtained, to impose more stringent loan-to-value, debt service and other
underwriting requirements.
At June 30, 2004, the Company's multi-family residential and commercial
real estate loan portfolio consisted of approximately 53 loans with an average
principal balance of $278 thousand. At June 30, 2004, the Company had two
commercial real estate loans to two borrowers, totaling $1.3 million, that were
not accruing interest. During the year ended June 30, 2004, $88 thousand was
collected and recognized on a cash basis.
Construction Loans. In recent years, the Company has been active in
originating loans to construct primarily single-family residences, and, to a
much lesser extent, loans to acquire and develop real estate for construction of
residential properties. These construction lending activities generally are
limited to the Company's primary market area. At June 30, 2004, construction
loans amounted to approximately $18.1 million or 22.8% of the Company's total
loan portfolio, which represented a increase of $1.2 million or 6.7% from fiscal
2003. The increase was principally due to increased levels of new home
construction. As of June 30, 2004, the Company's portfolio of construction loans
consisted of $17.2 million of loans for the construction of single-family
residential real estate and $890 thousand of loans for the construction of
multi-family residential real estate. Construction loan originations totaled
$10.7 million and increased by $1.8 million or 19.6% during the fiscal year
ended June 30, 2004, when compared to the same period in 2003.
7
Construction loans are made for the purpose of constructing a personal
residence. In such circumstances, the Company will underwrite such loans on a
construction/permanent mortgage loan basis. At June 30, 2004, approximately
92.1% of total outstanding construction loans were made to local real estate
builders and developers with whom the Company has worked for a number of years
for the purpose of constructing primarily single-family residential
developments, 3.0% of total construction loans were made to individuals for the
purpose of constructing a personal residence and 4.9% of total construction
loans were made to a developer for the purpose of constructing a six unit
apartment building. Upon application, credit review and analysis of personal and
corporate financial statements, the Company will grant local builders lines of
credit up to designated amounts. These credit lines may be used for the purpose
of construction of speculative (or unsold) residential properties. In some
instances, lines of credit will also be granted for purposes of acquiring
finished residential lots and developing speculative residential properties
thereon. Such lines generally have not exceeded $1.0 million, with the largest
line totaling approximately $1.2 million. Once approved for a construction line,
a developer must still submit plans and specifications and receive the Company's
authorization, including an appraisal of the collateral satisfactory to the
Company, in order to begin utilizing the line for a particular project. As of
June 30, 2004, the Company also had $7.9 million or 10.0% of the total loan
portfolio invested in land development loans, which consisted of 20 loans to 17
developers.
Speculative construction loans generally have maturities of 18 months,
including one 6 month extension, with payments being made monthly on an
interest-only basis. Thereafter, the permanent financing arrangements will
generally provide for either an adjustable or fixed interest rate, consistent
with the Company's policies with respect to residential and commercial real
estate financing.
The Company intends to maintain its involvement in construction lending
within its primary market area. Such loans afford the Company the opportunity to
increase the interest rate sensitivity of its loan portfolio. Commercial real
estate and construction lending is generally considered to involve a higher
level of risk as compared to single-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developers and managers.
Moreover, a construction loan can involve additional risks because of the
inherent difficulty in estimating both a property's value at completion of the
project and the estimated cost (including interest) of the project. The nature
of these loans is such that they are generally more difficult to evaluate and
monitor. In addition, speculative construction loans to a builder are not
necessarily pre-sold and thus pose a greater potential risk to the Company than
construction loans to individuals on their personal residences.
The Company has attempted to minimize the foregoing risks by, among other
things, limiting the extent of its commercial real estate lending generally and
by limiting its construction lending to primarily residential properties. In
addition, the Savings Bank has adopted underwriting guidelines which impose
stringent loan-to-value, debt service and other requirements for loans which are
believed to involve higher elements of credit risk, by generally limiting the
geographic area in which the Savings Bank will do business to its primary market
area and by working with builders with whom it has established relationships.
Consumer Loans. The Company offers consumer loans, although such lending
activity has not historically been a large part of its business. At June 30,
2004, $11.9 million or 15.0% of the Company's total loan portfolio consisted of
consumer loans, which represented a decrease of $1.6 million or 11.6% from
fiscal 2003. The consumer loan portfolio, like the mortgage loan portfolio,
decreased due to the low levels of market interest rates and an increase in loan
refinances. The consumer loans offered by the Company include home equity loans,
home equity lines of credit, automobile loans, deposit account secured loans and
personal loans. Approximately 92.7% of the Company's consumer loans are secured
by real estate and are primarily obtained through existing and walk-in
customers.
The Company will originate either a fixed-rate, fixed term home equity
loan, or a home equity line of credit with a variable rate. At June 30, 2004,
approximately 64.3% of the Company's home equity loans were at a fixed rate for
a fixed term. Although there have been a few exceptions with greater
loan-to-value ratios, substantially all of such loans are originated with a
loan-to-value ratio which, when coupled with the outstanding first mortgage
loan, does not exceed 80%.
Commercial Loans. At June 30, 2004, $968 thousand or 1.2% of the Company's
total loan portfolio consisted of commercial loans, which include loans secured
by accounts receivable, business inventory and equipment, and similar
collateral. The $531 thousand or 35.4% decrease from fiscal 2003 was principally
due
8
to the normal amortization of the commercial loan portfolio. The Company is
continuing to develop this line of business in order to increase interest income
and to attract compensating deposit account balances.
Loan Fee Income. In addition to interest earned on loans, the Company may
receive income from fees in connection with loan originations, loan
modifications, late payments, prepayments and for miscellaneous services related
to its loans. Income from these activities varies from period to period with the
volume and type of loans made and competitive conditions.
The Company's loan origination fees are generally calculated as a
percentage of the amount borrowed. 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.
Discounts and premiums on loans purchased are accreted and amortized in the same
manner. In accordance with SFAS 91, the Company has recognized $172 thousand,
$332 thousand and $285 thousand of deferred loan fees during fiscal 2004, 2003
and 2002, respectively, in connection with loan refinancings, payoffs and
ongoing amortization of outstanding loans. The decreases in loan origination fee
income for fiscal year 2004 was principally attributable to a higher volume of
loan refinancings with lower or no loan origination fees. Loans previously
originated lower or no loan origination fees will reduce the recognition of
associated deferred fee balances.
Non-Performing Loans, Real Estate Owned and Troubled Debt Restructurings.
When a borrower fails to make a required payment on a loan, the Company attempts
to cure the deficiency by contacting the borrower and seeking payment. Contacts
are generally made on the fifteenth day after a payment is due. In most cases,
deficiencies are cured promptly. If a delinquency extends beyond 15 days, the
loan and payment history is reviewed and efforts are made to collect the loan.
While the Company generally prefers to work with borrowers to resolve such
problems, when the account becomes 90 days delinquent, the Company does
institute foreclosure or other proceedings, as necessary, to minimize any
potential loss.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
The Company normally does not accrue interest on loans past due 90 days or more.
The Company may continue to accrue interest if, in the opinion of management, it
believes it will collect on the loan.
Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired, it is recorded at the lower of cost or fair value at
the date of acquisition and any write-down resulting therefrom is charged to the
allowance for losses on real estate owned. All costs incurred in maintaining the
Company's interest in the property are capitalized between the date the loan
becomes delinquent and the date of acquisition. After the date of acquisition,
all costs incurred in maintaining the property are expensed and costs incurred
for the improvement or development of such property are capitalized.
9
The following table sets forth the amounts and categories of the Company's
non-performing assets at the dates indicated.
At June 30,
------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
Real estate:
Single-family(1) $ 281 $ 59 $ 582 $ 201 $ 67
Commercial(2) 4 3,342 3,267 3,326 2,344
Construction -- -- 520 1,355 1,520
Land Acquisition and Development (3) 427 58 477 -- --
Consumer (4) 71 -- -- 134 113
Commercial loans and leases(5) 45 22 198 -- 6
------ ------ ------ ------ ------
Total non-accrual loans 828 3,481 5,044 5,016 4,050
------ ------ ------ ------ ------
Accruing loans greater than 90 days
Delinquent -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing loans $ 828 $3,481 $5,044 $5,016 $4,050
------ ------ ------ ------ ------
Real estate owned -- -- 235 -- --
------ ------ ------ ------ ------
Total non-performing assets $ 828 $3,481 $5,279 $5,016 $4,050
====== ====== ====== ====== ======
Troubled debt restructurings(6) $1,343 $2,497 $ -- $ -- $ --
====== ====== ====== ====== ======
Total non-performing loans and troubled
debt restructurings as a percentage of
net loans receivable 3.19% 4.36% 3.30% 2.71% 2.21%
====== ====== ====== ====== ======
Total non-performing assets to total assets 0.19% 0.95% 1.30% 1.27% 0.99%
====== ====== ====== ====== ======
Total non-performing assets and troubled
debt restructurings as a percentage of
total assets 0.50% 1.09% 1.30% 1.27% 0.99%
====== ====== ====== ====== ======
- ----------
(1) At June 30, 2004, non-accrual single-family residential real estate loans
consisted of four loans.
(2) At June 30, 2004, non-accrual commercial real estate loans consisted of
one loan.
(3) At June 30, 2004, non-accrual land acquisition and development loans
consisted of one loan.
(4) At June 30, 2004, non-accrual consumer loans consisted of one loan.
(5) At June 30, 2004, non-accrual commercial loans and leases consisted of one
loan.
(6) At June 30, 2004, trouble debt restructurings consisted of one loan.
The $2.7 million decrease in nonperforming assets during the twelve months
ended June 30, 2004 was primarily attributable to: the $1.4 million
reclassification of a commercial real estate loan from non-performing to
restructured, a $591 thousand net reduction from the purchase and subsequent
resale of related participating interests, a $509 thousand reduction related to
the sale of a personal care home and a $489 thousand charge off related to a
bankruptcy discussed below, which was partially offset by a $222 thousand
increase in non-performing single-family real estate loans.
The Company has one accruing commercial loan participation interest that
has been granted a ninety day maturity extension with a principal balance of
$795 thousand. The loan is collateralized by a first mortgage loan on a
full-service hotel located within the Company's market area. The Company bought
a 7.4% participating interest from another local lender in July 1999. Weaknesses
in the national and local economies, along with cut backs in corporate travel,
have caused occupancy and average room rates to decline significantly. During
the fourth quarter of fiscal 2004, the Company recorded general valuation
allowances totaling approximately $79 thousand or 10% of the outstanding balance
of the loan. The Company believes that this action was prudent given a reduction
in appraised value from $20.2 million (at April 1999) to $12.0 million (at March
2003), subsequent declines in room rentals and operating income, and reduced
debt coverage ratios since the March 2003 appraisal. The ninety day extension
was granted at the request of the lead lender in order to give the borrowers
time to explore refinancing options.
The Company has one restructured commercial real estate loan to a
retirement village located in the North Hills. The Savings Bank's outstanding
principal balance totaled $2.0 million at June 30, 2003. During the quarter
ended September 30, 2003, the Savings Bank redeemed $388 thousand of
participating interests. During the quarter ended December 31, 2003, the Bank
sold a forty percent participating interest to another financial institution at
par resulting in proceeds totaling $979 thousand. The Savings Bank's outstanding
principal balance totaled $1.3 million at June 30, 2004. The Company had
recorded interest received on this credit on a cost recovery basis until
September 30, 2003 and is now recording interest income on a cash basis.
At June 30, 2004, the Company had one loan secured by undeveloped land
totaling $427 thousand and one unsecured loan totaling $71 thousand to two
borrowers. These loans represent two adjudicated Bankruptcy Court Claims in
connection with a previously reported loan to a personal care home. During
fiscal 2004, the personal care home was sold for net proceeds of approximately
$50 thousand. During the fourth quarter of fiscal 2004, the Bankruptcy Court
approved a secured claim totaling $440 thousand, and an unsecured claim totaling
$76 thousand, be paid in accordance with a Bankruptcy Plan of Reorganization.
All
10
Court ordered plans have been received in a timely manner. In accordance with
generally accepted accounting principals, payments received are being applied on
a cost recovery basis.
The Company had four non-accrual single-family real estate loans totaling
approximately $281 thousand at June 30, 2004. Subsequent to June 30, 2004, two
of these single-family loans totaling $140 thousand were paid off in full. The
other two loans are in various stages of collection activity.
During fiscal 2004, 2003 and 2002, approximately $123 thousand, $256
thousand and $408 thousand, respectively, of interest would have been recorded
on loans accounted for on a non-accrual basis and troubled debt restructurings
if such loans had been current according to the original loan agreements for the
entire period. These amounts were not included in the Company's interest income
for the respective periods. The amount of interest income on loans accounted for
on a non-accrual basis and troubled debt restructurings that was included in
income during the same periods amounted to approximately $94 thousand, $26
thousand and $162 thousand, respectively.
Allowances for Loan Losses. The allowance for loan losses is established
through provisions for loan losses charged against income. Loans deemed to be
uncollectible are charged against the allowance account. Subsequent recoveries,
if any, are credited to the allowance. The allowance is maintained at a level
believed adequate by management to absorb estimated potential loan losses.
Management's determination of the adequacy of the allowance is based on periodic
evaluations of the loan portfolio considering past experience, current economic
conditions, composition of the loan portfolio and other relevant factors. This
evaluation is inherently subjective, as it requires material estimates that may
be susceptible to significant change.
Effective December 21, 1993, the FDIC, in conjunction with the Office of
the Comptroller of the Currency, the Office of Thrift Supervision and the
Federal Reserve Board, adopted an Interagency Policy Statement on the Allowance
for Loan and Lease Losses ("Policy Statement"). The Policy Statement, which
effectively supersedes previous FDIC proposed guidance, includes guidance (1) on
the responsibilities of management for the assessment and establishment of an
adequate allowance and (2) for the agencies' examiners to use in evaluating the
adequacy of such allowance and the policies utilized to determine such
allowance. The Policy Statement also sets forth quantitative measures for the
allowance with respect to assets classified substandard and doubtful, described
below, and with respect to the remaining portion of an institution's loan
portfolio. Specifically, the Policy Statement sets forth the following
quantitative measures which examiners may use to determine the reasonableness of
an allowance: (1) 50% of the portfolio that is classified doubtful; (2) 15% of
the portfolio that is classified substandard; and (3) for the portions of the
portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming twelve months based on facts
and circumstances available on the evaluation date. While the Policy Statement
sets forth this quantitative measure, such guidance is not intended as a "floor"
or "ceiling".
Federal regulations require that each insured savings institution classify
its assets on a regular basis. In addition, in connection with examinations of
insured institutions, federal examiners have authority to identify problem
assets and, if appropriate, classify them. There are three classifications for
problem assets: "substandard", "doubtful" and "loss". Substandard assets have
one or more defined weaknesses and are characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of those classified as
substandard with the added characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable, and there is a high possibility of loss. An asset
classified as loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Another category
designated "asset watch" is also utilized by the Bank for assets which do not
currently expose an insured institution to a sufficient degree of risk to
warrant classification as substandard, doubtful or loss. Assets classified as
substandard or doubtful require the institution to establish general allowances
for loan losses. If an asset or portion thereof is classified as loss, the
insured institution must either establish specific allowances for loan losses in
the amount of 100% of the portion of the asset classified loss, or charge-off
such amount. General loss allowances established to cover possible losses
related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital.
11
The Company's general policy is to internally classify its assets on a
regular basis and establish prudent general valuation allowances that are
adequate to absorb losses that have not been identified but that are inherent in
the loan portfolio. The Company maintains general valuation allowances that it
believes are adequate to absorb losses in its loan portfolio that are not
clearly attributable to specific loans. The Company's general valuation
allowances are within the following ranges: (1) 0% to 5% of assets subject to
special mention; (2) 5% to 100% of assets classified substandard; and (3) 50% to
100% of assets classified doubtful. Any loan classified as loss is charged-off.
To further monitor and assess the risk characteristics of the loan portfolio,
loan delinquencies are reviewed to consider any developing problem loans. Based
upon the procedures in place, considering the Company's past charge-offs and
recoveries and assessing the current risk elements in the portfolio, management
believes the allowance for loan losses at June 30, 2004, is adequate.
The allowance for loan losses at June 30, 2004 decreased $1.2 million to
$1.4 million. The decrease in the provision for loan loss was principally
attributable to reduced levels of net loans receivable, the sale of
participating interest in a commercial real estate loan and collection on past
due loans. The Company believes that the loan loss reserve levels are prudent
and warranted at this time due to the weakening of the national economy. The
increases in prior years reflected a number of factors, the most significant of
which were the Company's level of non-performing assets and the industry trend
towards greater emphasis on the allowance method of providing for loan losses.
12
The following table summarizes changes in the Company's allowance for loan
losses and other selected statistics for the periods indicated.
At June 30,
-------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in Thousands)
Average net loans $ 74,656 $ 125,221 $ 173,023 $ 185,895 $ 177,557
========= ========= ========= ========= =========
Allowance balance (at beginning of period) $ 2,530 $ 2,758 $ 2,763 $ 1,973 $ 1,842
Provision for loan losses (794) (228) 57 788 150
Charge-offs:
Real estate:
Single-family -- -- -- -- --
Multi-family -- -- -- -- --
Commercial 524 -- -- 10 --
Construction -- -- -- -- --
Land acquisition and development -- -- -- -- --
Consumer:
Home equity -- -- 25 -- --
Education -- -- -- -- --
Other -- -- 43 -- 19
Commercial loans and leases -- -- -- 7 --
--------- --------- --------- --------- ---------
Total charge-offs 524 -- 68 17 19
--------- --------- --------- --------- ---------
Recoveries:
Real estate:
Single-family -- -- -- -- --
Multi-family -- -- -- -- --
Commercial 158 -- -- -- --
Construction -- -- -- -- --
Land acquisition and development -- -- -- -- --
Consumer:
Home equity -- -- -- -- --
Education -- -- -- -- --
Other -- -- 6 19 --
Commercial loans and leases -- -- -- -- --
--------- --------- --------- --------- ---------
Total recoveries 158 -- 6 19 --
--------- --------- --------- --------- ---------
Net loans charged-off 366 -- 62 (2) 19
Transfer to real estate owned loss reserve -- -- -- -- --
--------- --------- --------- --------- ---------
Allowance balance (at end of period) $ 1,370 $ 2,530 $ 2,758 $ 2,763 $ 1,973
========= ========= ========= ========= =========
Allowance for loan losses as a percentage of
total loans receivable 1.97% 2.68% 1.77% 1.47% 1.06%
========= ========= ========= ========= =========
Net loans charged-off as a percentage of
average net loans 0.49% 0.00% 0.04% 0.01% 0.01%
========= ========= ========= ========= =========
Allowance for loan losses to non-performing
loans 165.46% 72.68% 54.68% 55.08% 48.72%
========= ========= ========= ========= =========
Net loans charged-off to allowance for loan
losses 26.72% 0.00% 2.25% (0.07)% 0.96%
========= ========= ========= ========= =========
Recoveries to charge-offs 30.15% 0.00% 8.82% 111.76% 0.00%
========= ========= ========= ========= =========
13
The following table presents the allocation of the allowances for loan
losses by loan category at the dates indicated.
At June 30,
--------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
% of Total Loans by % of Total Loans by % of Total Loans by % of Total Loans by % of Total Loans by
Amount Category Amount Category Amount Category Amount Category Amount Category
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Real estate loans:
Single-family $ 82 32.52% $ 75 40.91% $ 191 53.69% $ 180 51.50% $ 167 52.49%
Multi-family 18 5.99 26 4.92 31 3.69 35 3.37 30 3.01
Commercial 597 12.53 1,944 16.98 1,745 15.19 1,721 17.05 704 16.27
Construction 30 22.76 33 16.03 300 11.92 407 13.73 287 13.34
Land acquisition
and development 302 10.01 73 7.03 66 4.00 41 3.09 57 3.72
Unallocated -- 0.00 -- 0.00 10 0.00 -- 0.00 363 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total real estate
loans 1,029 83.81 2,151 85.87 2,343 88.49 2,384 88.74 1,608 88.83
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Consumer loans:
Home equity 117 13.88 124 11.70 165 9.75 231 9.33 184 9.19
Education -- 0.00 -- 0.00 -- 0.00 -- 0.02 1 0.03
Other 78 1.09 22 1.01 28 0.90 73 1.02 80 1.02
Unallocated -- 0.00 -- 0.00 -- 0.00 -- 0.00 -- 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total consumer
loans 195 14.97 146 12.71 193 10.65 304 10.37 265 10.24
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Commercial loans:
Commercial loans 116 1.22 200 1.42 187 0.86 75 0.89 100 0.93
Unallocated -- 0.00 -- 0.00 -- 0.00 -- 0.00 -- 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total commercial
loans 116 14.97 200 1.42 187 0.86 75 0.89 100 0.93
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Commercial lease
financings -- 0.00 -- 0.00 -- 0.00 -- 0.00 -- 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Off balance-sheet
items 30 0.00 33 0.00 35 0.00 -- 0.00 -- 0.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 1,370 100.00% $ 2,530 100.00% $ 2,758 100.00% $ 2,763 100.00% $ 1,973 100.00%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
The Company determines its allowance for loan losses in accordance with
generally accepted accounting principles. The Company uses a systematic
methodology as required by Financial Reporting Release No. 28 and the various
Federal Financial Institutions Examination Council guidelines. The Company also
endeavors to adhere to SEC Staff Accounting Bulletin No. 102 in connection with
loan loss allowance methodology and documentation issues.
Our methodology used to determine the allocated portion of the allowance
is as follows. For groups of homogenous loans, we apply a loss rate to the
groups' aggregate balance. Our group loss rate reflects our historical loss
experience. We may adjust these group rates to compensate for changes in
environmental factors; but our adjustments have not been frequent due to a
relatively stable charge-off experience. The Company also monitors industry loss
experience on similar loan portfolio segments. We then identify loans for
individual evaluation under SFAS 114. If the individually identified loans are
performing, we apply a segment specific loss rate adjusted for relevant
environmental factors, if necessary, for those loans reviewed individually and
considered individually impaired, we use one of the three methods for measuring
impairment mandated by SFAS 114. Generally the fair value of collateral is used
since to date out impaired loans are real estate based. In connection with the
fair value of collateral measurement, the Company generally would use an
independent appraisal and determine costs to sell. The Company's appraisals for
commercial income based loans, such as commercial real estate loans, now assess
value based upon the operating cash flows of the business as opposed to merely
"as built" values. The Company then validates the reasonableness of our
calculated allowances by: (1) reviewing trends in loan volume, delinquencies,
restructurings and concentrations; (2) review prior period (historical)
charge-offs and recoveries; and (3) present the results of this process,
quarterly, to the Asset Classification Committee and the Bank's Board of
Directors. We then tabulate, format and summarize the current loan loss
allowance balance for financial and regulatory reporting purposes.
The Company had no unallocated loss allowance balance at June 30, 2004. In
prior fiscal years, an unallocated loss allowance balance was maintained for
real estate, consumer and small commercial loans. With respect to real estate
loans, the Company believed that it was prudent to maintain a certain level of
unallocated loss allowances as the Bank grew its commercial real estate and
construction segments. At the time the Company's historical loss experience with
these two segments was somewhat limited. Management
14
believed that risks were inherent within those segments but was uncertain as to
the degree of loss. A reasonable estimate, using industry loss factors, was
utilized. The same rationale applied to the unallocated allowance for consumer
loans. The Company had no unallocated consumer loan allowances for the past four
fiscal years.
The following table summarizes the calculations of required allowance for
loan losses by loan category as of June 30, 2004.
Allowance
for
Group Rate Loan Loss
--------------- -------------
Homogenous loans:
Single-family 0.0015 $ 38
Multi-family 0.0050 18
Commercial real estate 0.0100 73
Construction/land acquisition
and development 0.0015 - 0.0100 (1) 97
Secured consumer 0.0100 120
Unsecured consumer 0.0500 3
Commercial loans 0.0500 48
Off balance-sheet items (2) 0.0100 30
Unallocated --
Individually evaluated loans:
Single-family 44
Multi-family --
Commercial real estate 524
Construction/land acquisition
and development 235
Secured consumer --
Unsecured consumer 72
Commercial loans 68
Off balance-sheet items --
Total allowance for loan losses:
Single-family 82
Multi-family 18
Commercial real estate 597
Construction/land acquisition
and development 332
Secured consumer 120
Unsecured consumer 75
Commercial loans 116
Off balance-sheet items 30
Unallocated --
-------
Total allowance for loan losses $ 1,370
=======
- ----------
(1) The rate applied ranges from 0.0015 to 0.0100 depending upon the
underlying collateral, loan type (permanent vs. construction), historical
loss experience, industry loss experience on similar loan segments,
delinquency trends, loan volumes and concentrations, and other relevant
economic and environmental factors.
(2) The 1.00% rate is applied to the credit equivalent amount of the
off-balance sheet item. Various off- balance sheet items have different
risk weightings and credit conversion factors.
15
Management believes that the reserves it has established are adequate to
cover potential losses in the Company's loan portfolio. However, future
adjustments to these reserves may be necessary, and the Company's results of
operations could be adversely affected if circumstances differ substantially
from the assumptions used by management in making its determinations in this
regard.
Mortgage-Backed Securities
Mortgage-backed securities ("MBS") include mortgage pass-through
certificates ("PCs") and collateralized mortgage obligations ("CMOs"). With a
pass-through security, investors own an undivided interest in the pool of
mortgages that collateralize the PCs. Principal and interest is passed through
to the investor as it is generated by the mortgages underlying the pool. PCs may
be insured or guaranteed by the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage Association ("FNMA") and the Government
National Mortgage Association ("GNMA"). CMOs may also be privately issued with
varying degrees of credit enhancements. A CMO reallocates mortgage pool cash
flow to a series of bonds (called traunches) with varying stated maturities,
estimated average lives, coupon rates and prepayment characteristics. All of the
Company's CMOs are rated in the highest category by at least two national rating
services.
At June 30, 2004, the Company's MBS portfolio totaled $75.6 million as
compared to $111.9 million at June 30, 2003. The $36.3 million or 32.4% decrease
in MBS balances outstanding during fiscal 2004 was primarily attributable to
principal repayments on CMOs which were partially offset by purchases of
floating rate CMOs. At June 30, 2004, approximately $69.5 million or 91.9% (book
value) of the Company's portfolio of MBS, including CMOs, were comprised of
adjustable or floating rate instruments, as compared to $97.4 million or 87.1%
at June 30, 2003. Substantially all of the Company's floating rate MBS adjust
monthly based upon changes in certain short-term market indices (e.g. LIBOR,
Prime, etc.).
The following tables set forth the amortized cost and estimated market
values of the Company's MBSs available for sale and held to maturity as of the
periods indicated.
2004 2003 2002
---- ---- ----
MBS Available for Sale at June 30, (Dollars in Thousands)
- ----------------------------------
FHLMC PCs $ 45 $ 47 $ 48
GNMA PCs 2,411 2,510 2,627
FNMA PCs 686 1,494 3,228
CMOs - agency collateral 92 168 293
CMOs - single-family whole loan collateral -- -- --
-------- -------- --------
Total amortized cost $ 3,234 $ 4,219 $ 6,196
======== ======== ========
Total estimated market value $ 3,357 $ 4,387 $ 6,450
======== ======== ========
MBS Held to Maturity at June 30,
- --------------------------------
FHLMC PCs $ 17 $ 36 $ 60
GNMA PCs 591 2,603 4,069
FNMA PCs 19 29 35
CMOs - agency collateral 57,131 47,516 55,587
CMOs - single-family whole loan collateral 14,475 57,308 16,342
-------- -------- --------
Total amortized cost $ 72,233 $107,492 $ 76,093
======== ======== ========
Total estimated market value $ 72,099 $107,914 $ 76,819
======== ======== ========
The Company believes that its present MBS available for sale allocation of
$3.2 million or 4.3% of the carrying value of the MBS portfolio, is adequate to
meet anticipated future liquidity requirements and to reposition its balance
sheet and asset/liability mix should it wish to do so in the future.
16
The following table sets forth the amortized cost, contractual maturities
and weighted average yields of the Company's MBSs, including CMOs, at June 30,
2004.
One Year After One to After Five to Over Ten
or Less Five Years Ten Years Years Total
------- ---------- --------- ----- -----
(Dollars in Thousands)
MBS Available for Sale $ -- $ 18 $ -- $ 3,216 $ 3,234
0.00% 9.00% 0.00% 7.29% 7.30%
MBS Held to Maturity $ -- $ 26 $ -- $ 72,207 $ 72,233
0.00% 9.00% 0.00% 2.83% 2.83%
-------- -------- -------- -------- --------
Total $ -- $ 44 $ -- $ 75,423 $ 75,467
======== ======== ======== ======== ========
Weighted average yield 0.00% 9.00% 0.00% 3.02% 3.02%
======== ======== ======== ======== ========
Due to prepayments of the underlying loans, and the prepayment
characteristics of the CMO traunches, the actual maturities of the Company's MBS
are expected to be substantially less than the scheduled maturities.
The following table sets forth information with respect to the MBS owned
by the Company at June 30, 2004 which had a carrying value greater than 10% of
the Company's stockholders' equity at such date, other than securities issued by
the United States Government or United States Government agencies and
corporations. All MBS owned by the Company have been assigned a triple A
investment grade rating.
Estimated
Name of Issuer Carrying Value Market Value
- -------------- -------------- ------------
(Dollars in Thousands)
Mastr Asset Securitization Trust $ 6,341 $ 6,316
Washington Mutual Mortgage Securities Corp. 3,716 3,683
-------- --------
$ 10,057 $ 9,999
======== ========
Investment Securities
The Company may invest in various types of securities, including corporate
debt and equity securities, U.S. Government and U.S. Government agency
obligations, securities of various federal, state and municipal agencies, FHLB
stock, commercial paper, bankers' acceptances, federal funds and
interest-bearing deposits with other financial institutions.
The Company's investment activities are directly monitored by the
Company's Finance Committee under policy guidelines adopted by the Board of
Directors. In recent years, the general objective of the Company's investment
policy has been to manage the Company's interest rate sensitivity gap and
generally to increase interest-earning assets. As reflected in the table below,
the Company increased significantly its position of U.S. Government Agency
obligations. The Company purchased approximately $263.0 million of U.S.
Government Agency obligations during fiscal 2004. Outstanding balances totaled
$223.8 million or 79.6% of the total investment portfolio at June 30, 2004, as
compared to $24.1 million or 15.6% of the total investment portfolio at June 30,
2003. At June 30, 2004, approximately $222.5 million or 99.4% of the Company's
U.S. Government Agency portfolio was comprised of U.S. Government Agency
securities with longer-terms to maturity and optional principal redemption
features ("callable bonds"). The Company purchased approximately $5.2 million of
investment grade corporate debt securities during fiscal year 2004 and held
approximately $16.3 million or 5.8% of the total investment portfolio in
corporate debt obligations. All Company owned corporate debt obligations have
been rated investment grade by at least two nationally recognized independent
rating services.
17
The following tables set forth the amortized cost and estimated market
values of the Company's investment securities portfolio at the dates indicated.
2004 2003 2002
---- ---- ----
Investment Securities Available for Sale at June 30, (Dollars in Thousands)
- ----------------------------------------------------
Trust preferred securities $ -- $ 128 $ 860
Corporate debt obligations 2,532 7,428 6,495
Commercial paper -- 15,442 --
Obligations of states and political subdivisions -- 1,000 --
--------- --------- ---------
Total amortized cost 2,532 23,998 7,355
Equity securities 1,581 1,312 1,020
--------- --------- ---------
Total amortized cost $ 4,113 $ 25,310 $ 8,375
========= ========= =========
Total estimated market value $ 4,416 $ 25,641 $ 8,426
========= ========= =========
Investment Securities Held to Maturity at June 30,
- --------------------------------------------------
Corporate debt obligations $ 13,772 $ 66,978 $ 58,415
U.S. Government agency securities 223,808 24,097 55,216
Commercial paper -- 1,099 --
Obligations of states and political subdivisions 31,593 29,667 29,327
--------- --------- ---------
269,173 121,841 142,958
FHLB stock 7,532 7,797 8,281
--------- --------- ---------
Total amortized cost $ 276,705 $ 129,638 $ 151,239
========= ========= =========
Total estimated market value $ 278,635 $ 133,833 $ 154,427
========= ========= =========
18
Information regarding the amortized cost, contractual maturities and
weighted average yields of the Company's investment portfolio at June 30, 2004
is presented below.
Investment Securities One Year After One to After Five to Over Ten
Available for Sale or Less Five Years Ten Years Years Total
- ------------------ ------- ---------- --------- ----- -----
(Dollars in Thousands)
Corporate debt obligations $ 2,532 $ -- $ -- $ -- $ 2,532
4.35% 0.00% 0.00% 0.00% 4.35%
Equity securities $ -- $ -- $ -- $ 1,581 $ 1,581
0.00% 0.00% 0.00% 5.23% 5.23%
--------- --------- --------- --------- ---------
Total $ 2,532 $ -- $ -- $ 1,581 $ 4,113
========= ========= ========= ========= =========
Weighted average yield 4.35% 0.00% 0.00% 5.23% 4.69%
========= ========= ========= ========= =========
Investment Securities One Year After One to After Five to Over Ten
Held to Maturity or Less Five Years Ten Years Years Total
- ---------------- ------- ---------- --------- ----- -----
Corporate debt obligations $ 13,772 $ -- $ -- $ -- $ 13,772
4.31% 0.00% 0.00% 0.00% 4.31%
U.S. Government Agency
securities $ -- $ -- $ -- $ 223,808 $ 223,808
0.00% 0.00% 0.00% 4.42% 4.42%
Obligations of states and political
subdivisions (1) $ 301 $ -- $ 2,062 $ 29,230 $ 31,593
2.79% 0.00% 6.44% 9.84% 9.55%
--------- --------- --------- --------- ---------
Total $ 14,073 $ -- $ 2,062 $ 253,038 $ 269,173
========= ========= ========= ========= =========
Weighted average yield 4.28% 0.00% 6.44% 5.04% 5.01%
========= ========= ========= ========= =========
- ----------
(1) Tax exempt obligations of states and political subdivisions are calculated
on a taxable equivalent basis utilizing a federal tax rate of 34%.
19
Information regarding the amortized cost, earliest call dates and weighted
average yield of the Company's investment portfolio at June 30, 2004, is
presented below. All Company investments in callable U.S. Government Agency
bonds were classified as held to maturity at June 30, 2004.
One Year After One to After Five to Over Ten
or Less Five Years Ten Years Years Total
------- ---------- --------- ----- -----
Corporate debt obligations $ 16,304 $ -- $ -- $ -- $ 16,304
4.32% 0.00% 0.00% 0.00% 4.32%
U.S. Government Agency
securities $ 222,468 $ -- $ -- $ 1,340 $ 223,808
4.44% 0.00% 0.00% 1.63% 4.42%
Obligations of states and political
subdivisions (1) $ 7,114 $ 17,778 $ 6,701 $ -- $ 31,593
11.98% 8.95% 8.56% 0.00% 9.55%
--------- --------- --------- --------- ---------
Total debt obligations $ 245,886 $ 17,778 $ 6,701 $ 1,340 $ 271,705
========= ========= ========= ========= =========
Weighted average yield 4.65% 8.95% 8.56% 1.63% 5.01%
========= ========= ========= ========= =========
Equity securities $ -- $ -- $ -- $ -- $ 1,581
--------- --------- --------- --------- ---------
Total $ 245,886 $ 17,778 $ 6,701 $ 1,340 $ 273,286
========= ========= ========= ========= =========
- ----------
(1) Tax exempt obligations of states and political subdivisions are calculated
on a taxable equivalent basis utilizing a federal tax rate of 34%.
At June 30, 2004, the Company classified $993 million of U.S. Treasury
securities as trading investment securities. See Note 1 to the consolidated
financial statements.
20
The following table sets forth information with respect to the investment
securities owned by the Company at June 30, 2004 which had a carrying value
greater than 10% of the Company's stockholders' equity at such date, other than
securities issued by the United States Government and United States Government
agencies and corporations. All investment securities owned by the Company,
including those shown below, have been assigned an investment grade rating by at
least two national rating services.
Estimated
Name of Issuer Carrying Value Market Value
-------------- -------------- ------------
(Dollars in Thousands)
Pittston Area School District $ 5,222 $ 5,476
CINERGY Corp Debenture 3,509 3,523
Sempra Energy 3,260 3,260
Diamler-Chrysler Corp. 3,023 3,025
New Castle PA School District 2,977 3,186
------- -------
$17,991 $18,470
======= =======
Sources of Funds
The Company's principal source of funds for use in lending and for other
general business purposes has traditionally come from deposits obtained through
the Company's home and branch offices. Funding is also derived from FHLB
advances, short-term borrowings, amortization and prepayments of outstanding
loans and MBS and from maturing investment securities.
Deposits. The Company's deposits totaled $160.6 million at June 30, 2004,
as compared to $170.9 million at June 30, 2003. The $10.3 million decrease was
primarily attributable to an approximate $14.6 million decrease in certificates
of deposits, a $465 thousand decrease in money market accounts and a $365
thousand decrease in escrows, which was partially offset by a $5.1 million
increase in core deposits. In order to attract new and lower cost core deposits,
the Company continued to promote a no minimum balance, "free", checking account
product and began to offer Internet Banking. Current deposit products include
regular savings accounts, demand accounts, negotiable order of withdrawal
("NOW") accounts, money market deposit accounts and certificates of deposit
ranging in terms from 30 days to 10 years. Included among these deposit products
are certificates of deposit with negotiable interest rates and balances of
$100,000 or more, which amounted to $6.9 million or 4.3% of the Company's total
deposits at June 30, 2004, as compared to $14.2 million or 8.3% at June 30,
2003. The Company's deposit products also include Individual Retirement Account
certificates ("IRA certificates").
The Company's deposits are obtained primarily from residents of northern
Allegheny, southern Butler and eastern Beaver counties, Pennsylvania. The
Company utilizes various marketing methods to attract new customers and savings
deposits, including print media advertising and direct mailings. The Company
does not advertise for deposits outside of its local market area or utilize the
services of deposit brokers, and management believes that an insignificant
number of deposit accounts were held by non-residents of Pennsylvania at June
30, 2004. The Company has drive-up banking facilities and automated teller
machines ("ATMs") at its McCandless, Franklin Park, Bellevue and Cranberry
Township offices. The Company also has an ATM machine at its West View Office.
The Company participates in the STAR(R) and CIRRUS(R) ATM networks. The Company
also participates in a new ATM program called the Freedom ATM AllianceSM. The
Freedom ATM AllianceSM allows West View Savings Bank customers to use other
Pittsburgh area Freedom ATM AllianceSM affiliates' ATMs without being surcharged
and vice versa. The Freedom ATM AllianceSM was organized to help smaller local
banks compete with larger national banks that have large ATM networks.
The Company has been competitive in the types of accounts and in interest
rates it has offered on its deposit products and continued to price its savings
products nearer to the market average rate as opposed to the upper range of
market offering rates. The Company has continued to emphasize the retention and
growth of core deposits, particularly demand deposits. 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.
21
The following table sets forth the average balance of the Company's
deposits and the average rates paid thereon for the past three years. Average
balances were derived from daily average balances.
At June 30,
---------------------------------------------------------------
2004 2003 2002
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Regular savings and club
accounts $ 44,091 0.76% $ 41,906 1.21% $ 38,277 1.92%
NOW accounts 19,948 0.16 19,775 0.21 19,463 0.31
Money market deposit
accounts 13,839 0.79 14,334 1.28 13,460 1.91
Certificate of deposit accounts 72,800 2.52 80,208 3.18 90,022 4.44
Escrows 899 1.67 1,548 1.55 2,116 1.56
-------- ----- -------- ----- -------- -----
Total interest-bearing
deposits and escrows 151,577 1.53 157,771 2.10 163,338 3.11
Non-interest-bearing checking
accounts 12,542 0.00 12,149 0.00 11,814 0.00
-------- ----- -------- ----- -------- -----
Total deposits and escrows $164,119 1.42% $169,920 1.95% $175,152 2.90%
======== ===== ======== ===== ======== =====
The following table sets forth the net deposit flows of the Company during
the periods indicated.
Year Ended June 30,
--------------------------------------
2004 2003 2002
---- ---- ----
(Dollars in Thousands)
Increase(decrease) before interest
credited $ (12,952) $ (10,245) $ (9,365)
Interest credited 2,589 3,499 5,698
--------- --------- ---------
Net deposit increase (decrease) $ (10,363) $ (6,746) $ (3,667)
========= ========= =========
The following table sets forth maturities of the Company's certificates of
deposit of $100,000 or more at June 30, 2004, by time remaining to maturity.
Amounts
-------
(Dollars in Thousands)
Three months or less $ 1,429
Over three months through six months 1,414
Over six months through twelve months 2,126
Over twelve months 1,975
-------
$ 6,944
=======
Borrowings. Borrowings are comprised of FHLB advances with various terms
and repurchase agreements with securities brokers with original maturities of
ninety-two days or less. At June 30, 2004, borrowings totaled $241.4 million as
compared to $162.8 million at June 30, 2003. The $78.6 million or 48.2% increase
was primarily due to purchases of investment and mortgage-backed securities. For
a detailed discussion of the Company's asset and liability management
activities, please see the "Quantitative and Qualitative Disclosures about
Market Risk" section of the Company's fiscal year 2004 Annual Report. Wholesale
funding also provides the Company with a larger degree of control with respect
to the term structure of its liabilities than traditional retail deposits. By
utilizing borrowings, as opposed to retail certificates of deposit, the Company
also avoids the additional operating costs associated with increasing its branch
network and associated federal deposit insurance premiums.
Competition
The Company faces significant competition in attracting deposits. Its most
direct competition for deposits has historically come from commercial banks and
other savings institutions located in its market area. The Company also faces
additional significant competition for investors' funds from other financial
intermediaries. The Company competes for deposits principally by offering
depositors a variety of deposit
22
programs, competitive interest rates, convenient branch locations, hours and
other services. The Company does not rely upon any individual group or entity
for a material portion of its deposits.
The Company's competition for real estate loans comes principally from
mortgage banking companies, other savings institutions, commercial banks and
credit unions. The Company competes for loan originations primarily through the
interest rates and loan fees it charges, the efficiency and quality of services
it provides borrowers, referrals from real estate brokers and builders, and the
variety of its products. Factors which affect competition include the general
and local economic conditions, current interest rate levels and volatility in
the mortgage markets.
Employees
The Company had 36 full-time employees and 15 part-time employees as of
June 30, 2004. None of these employees is represented by a collective bargaining
agent. The Company believes that it enjoys excellent relations with its
personnel.
23
REGULATION AND SUPERVISION
The Company
General. The Company, as a bank holding company, is subject to regulation
and supervision by the Federal Reserve Board and by the Pennsylvania Department
of Banking (the "Department"). The Company is required to file annually a report
of its operations with, and is subject to examination by, the Board of Governors
of the Federal Reserve System ("Federal Reserve Board") and the Department.
Sarbanes-Oxley Act of 2002. On July 3, 2002, President George W. Bush
signed into law the Sarbanes-Oxley Act of 2002, which generally establishes a
comprehensive framework to modernize and reform the oversight of public company
auditing, improve the quality and transparency of financial reporting by those
companies and strengthen the independence of auditors.
BHCA Activities and Other Limitations. The Bank Holding Company Act of
1956, as amended ("BHCA") prohibits a bank holding company from acquiring direct
or indirect ownership or control of more than 5% of the voting shares of any
bank, or increasing such ownership or control of any bank, without prior
approval of the Federal Reserve Board. The BHCA also generally prohibits a bank
holding company from acquiring any bank located outside of the state in which
the existing bank subsidiaries of the bank holding company are located unless
specifically authorized by applicable state law. No approval under the BHCA is
required, however, for a bank holding company already owning or controlling 50%
of the voting shares of a bank to acquire additional shares of such bank.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include operating a mortgage company, finance company, credit card
company, factoring company, trust company or savings association; performing
certain data processing operations; providing limited securities brokerage
services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier services.
The Federal Reserve Board also has determined that certain other activities,
including real estate brokerage and syndication, land development, property
management and underwriting of life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.
Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill. Tier II capital
generally consists of hybrid capital instruments; perpetual preferred stock
which is not eligible to be included as Tier I capital; term subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
the bulk of assets which are typically held by a bank holding company, including
multi-family residential and commercial real estate loans, commercial business
loans and consumer loans. Single-family residential first mortgage loans which
are not (90 days or more) past-due or non-performing and which have been made in
accordance with prudent underwriting standards are assigned a 50% level in the
risk-weighting system, while certain privately-issued MBS representing indirect
ownership
24
of such loans are assigned a 20% level in the risk-weighting system. Off-balance
sheet items also are adjusted to take into account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board requires bank holding companies to maintain a minimum leverage capital
ratio of Tier I capital to total assets of 3%. Total assets for this purpose
does not include goodwill and any other intangible assets and investments that
the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3% Tier I leverage capital ratio
requirement is the minimum for the top-rated bank holding companies without any
supervisory, financial or operational weaknesses or deficiencies or those which
are not experiencing or anticipating significant growth. Other bank holding
companies will be expected to maintain Tier I leverage capital ratios of at
least 4% to 5% or more, depending on their overall condition.
The Company is in compliance with the above-described Federal Reserve
Board regulatory capital requirements.
Commitments to Affiliated Institutions. Under Federal Reserve Board
policy, the Company is expected to act as a source of financial strength to the
Savings Bank and to commit resources to support the Savings Bank in
circumstances when it might not do so absent such policy. The legality and
precise scope of this policy is unclear, however, in light of recent judicial
precedent.
The Savings Bank
General. The Savings Bank is subject to extensive regulation and
examination by the Department and by the FDIC, which insures its deposits to the
maximum extent permitted by law, and is subject to certain requirements
established by the Federal Reserve Board. The federal and state laws and
regulations which are applicable to banks regulate, among other things, the
scope of their business, their investments, their reserves against deposits, the
timing of the availability of deposited funds and the nature and amount of and
collateral for certain loans. The laws and regulations governing the Savings
Bank generally have been promulgated to protect depositors and not for the
purpose of protecting stockholders.
FDIC Insurance Premiums. The Savings Bank currently pays deposit insurance
premiums to the FDIC on a risk-based assessment system established by the FDIC
for all SAIF-member institutions. Under applicable regulations, institutions are
assigned to one of three capital groups which is based solely on the level of an
institution's capital - "well capitalized", "adequately capitalized" and
"undercapitalized"- which is defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the Federal
Deposit Insurance Act ("FDIA"), as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates ranging from 0.00%
for well capitalized, healthy institutions to 0.27% for undercapitalized
institutions with substantial supervisory concerns. The Savings Bank is a "well
capitalized" institution as of June 30, 2004.
Capital Requirements. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
which, like the Savings Bank, are not members of the Federal Reserve System.
These requirements are substantially similar to those adopted by the Federal
Reserve Board regarding bank holding companies, as described above.
The FDIC's capital regulations establish a minimum 3% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4% to 5% or more. Under the FDIC's
regulation, highest-rated banks are those that the FDIC determines are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and, in general, which are considered a strong banking
organization and rated composite 1 under the Uniform Financial Institutions
Rating System.
A bank which has less than the minimum leverage capital requirement shall,
within 60 days of the date as of which it fails to comply with such requirement,
submit to its FDIC regional director for review and approval, a reasonable plan
describing the means and timing by which the bank shall achieve its minimum
leverage capital requirement. A bank which fails to file such plan with the FDIC
is deemed to be operating in an unsafe and unsound manner, and could subject the
bank to a cease-and-desist order from the FDIC. The
25
FDIC's regulation also provides that any insured depository institution with a
ratio of Tier I capital to total assets that is less than 2% is deemed to be
operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA
and is subject to potential termination of deposit insurance. However, such an
institution will not be subject to an enforcement proceeding thereunder solely
on account of its capital ratios if it has entered into and is in compliance
with a written agreement with the FDIC to increase its Tier I leverage capital
ratio to such level as the FDIC deems appropriate and to take such other action
as may be necessary for the institution to be operated in a safe and sound
manner. The FDIC capital regulation also provides, among other things, for the
issuance by the FDIC or its designee(s) of a capital directive, which is a final
order issued to a bank that fails to maintain minimum capital to be restored to
the minimum leverage capital requirement within a specified time period. Such
directive is enforceable in the same manner as a final cease-and-desist order.
Miscellaneous
The Savings Bank is subject to certain restrictions on loans to the
Company, on investments in the stock or securities thereof, on the taking of
such stock or securities as collateral for loans to any borrower, and on the
issuance of a guarantee or letter of credit on behalf of the Company. The
Savings Bank is also subject to certain restrictions on most types of
transactions with the Company, requiring that the terms of such transactions be
substantially equivalent to terms of similar transactions with non-affiliated
firms. In addition, there are various limitations on the distribution of
dividends to the Company by the Savings Bank.
The foregoing references to laws and regulations which are applicable to
the Company and the Savings Bank are brief summaries thereof which do not
purport to be complete and which are qualified in their entirety by reference to
such laws and regulations.
26
FEDERAL AND STATE TAXATION
General. The Company and the Savings Bank are subject to the generally
applicable corporate tax provisions of the Internal Revenue Code of 1986 (the
"Code"), as well as certain provisions of the Code which apply to thrift and
other types of financial institutions. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Company and the Savings Bank.
Fiscal Year. The Company currently files a consolidated federal income tax
return on the basis of the calendar year ending on December 31.
Method of Accounting. The Company maintains its books and records for
federal income tax purposes using the accrual method of accounting. The accrual
method of accounting generally requires that items of income be recognized when
all events have occurred that establish the right to receive the income and the
amount of income can be determined with reasonable accuracy and that items of
expense be deducted at the later of (1) the time when all events have occurred
that establish the liability to pay the expense and the amount of such liability
can be determined with reasonable accuracy or (2) the time when economic
performance with respect to the item of expense has occurred.
Bad Debt Reserves. Historically under Section 593 of the Code, thrift
institutions such as the Savings Bank, which met certain definitional tests
primarily relating to their assets and the nature of their business, were
permitted to establish a tax reserve for bad debts and to make annual additions
within specified limitations which may have been deducted in arriving at their
taxable income. The Savings Bank's deduction with respect to "qualifying loans",
which are generally loans secured by certain interests in real property, may
currently be computed using an amount based on the Savings Bank's actual loss
experience (the "experience method").
The Small Business Job Protection Act of 1996, adopted in August 1996,
generally (1) repealed the provision of the Code which authorized use of the
percentage of taxable income method by qualifying savings institutions to
determine deductions for bad debts, effective for taxable years beginning after
1995, and (2) required that a savings institution recapture for tax purposes
(i.e. take into income) over a six-year period its applicable excess reserves.
For a savings institution such as West View which is a "small bank", as defined
in the Code, generally this is the excess of the balance of its bad debt
reserves as of the close of its last taxable year beginning before January 1,
1996, over the balance of such reserves as of the close of its last taxable year
beginning before January 1, 1988. Any recapture would be suspended for any tax
year that began after December 31, 1995, and before January 1, 1998 (thus a
maximum of two years), in which a savings institution originated an amount of
residential loans which was not less than the average of the principal amount of
such loans made by a savings institution during its six most recent taxable
years beginning before January 1, 1996. The amount of tax bad debt reserves
subject to recapture is approximately $1.2 million, which was being recaptured
ratably over a six-year period ending December 31, 2003. In accordance with FASB
No. 109, deferred income taxes have previously been provided on this amount,
therefore no financial statement expense has been recorded as a result of this
recapture. The Company's supplemental bad debt reserve of approximately $3.8
million is not subject to recapture.
The above-referenced legislation also repealed certain provisions of the
Code that only apply to thrift institutions to which Section 593 applies: (1)
the denial of a portion of certain tax credits to a thrift institution; (2) the
special rules with respect to the foreclosure of property securing loans of a
thrift institution; (3) the reduction in the dividends received deduction of a
thrift institution; and (4) the ability of a thrift institution to use a net
operating loss to offset its income from a residual interest in a real estate
mortgage investment conduit. The repeal of these provisions did not have a
material adverse effect on the Company's financial condition or operations.
Audit by IRS. The Company's consolidated federal income tax returns for
taxable years through December 31, 2000, have been closed for the purpose of
examination by the Internal Revenue Service.
State Taxation. The Company is subject to the Pennsylvania Corporate Net
Income Tax and Capital Stock and Franchise Tax. The Pennsylvania Corporate Net
Income Tax rate is 9.99% and is imposed on the Company's unconsolidated taxable
income for federal purposes with certain adjustments. In general, the Capital
Stock Tax is a property tax imposed at the rate of 0.699% of a corporation's
capital stock
27
value, which is determined in accordance with a fixed formula based upon average
net income and consolidated net worth.
The Savings Bank is taxed under the Pennsylvania Mutual Thrift
Institutions Tax Act (enacted on December 13, 1988, and amended in July 1989)
(the "MTIT"), as amended to include thrift institutions having capital stock.
Pursuant to the MTIT, the Savings Bank's current tax rate is 11.5%. The MTIT
exempts the Savings Bank from all other taxes imposed by the Commonwealth of
Pennsylvania for state income tax purposes and from all local taxation imposed
by political subdivisions, except taxes on real estate and real estate
transfers. The MTIT is a tax upon net earnings, determined in accordance with
generally accepted accounting principles ("GAAP") with certain adjustments. The
MTIT, in computing GAAP income, allows for the deduction of interest earned on
state and federal securities, while disallowing a percentage of a thrift's
interest expense deduction in the proportion of those securities to the overall
investment portfolio. Net operating losses, if any, thereafter can be carried
forward three years for MTIT purposes.
28
Item 2. Properties.
- ------- -----------
The following table sets forth certain information with respect to the
offices and other properties of the Company at June 30, 2004.
Description/Address Leased/Owned
------------------- ------------
McCandless Office Owned
9001 Perry Highway
Pittsburgh, PA 15237
West View Boro Office Owned
456 Perry Highway
Pittsburgh, PA 15229
Cranberry Township Office Owned
20531 Perry Highway
Cranberry Township, PA 16066
Sherwood Oaks Office Leased(1)
100 Norman Drive
Cranberry Township, PA 16066
Bellevue Boro Office Leased(2)
572 Lincoln Avenue
Pittsburgh, PA 15202
Franklin Park Boro Office Owned
2566 Brandt School Road
Wexford, PA 15090
----------
(1) The Company operates this office out of a retirement
community. The lease expires in June 2006.
(2) The lease is for a period of 15 years ending in September 2006
with an option for the Company to renew the lease for an
additional five years.
Item 3. Legal Proceedings.
- ------- ------------------
The Company is involved with various legal actions arising in the
ordinary course of business. Management believes the outcome of these
matters will have no material effect on the consolidated operations or
consolidated financial condition of WVS Financial Corp.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
Not applicable.
29
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------- ----------------------------------------------------------------------
(a) The information required herein is incorporated by reference on
page 49 of the Company's 2004 Annual Report.
(b) Not applicable.
(c) The following table sets forth information with respect to
purchases of common stock of the Company made by or on behalf of
the Company during the three months ended June 30, 2004.
----------------------------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
----------------------------------------------------------------------------------------------------
Total Number of Maximum Number of
Total Shares Purchased as Shares that may yet
Number of part of Publicly be Repurchased
Shares Average Price Announced Plans or Under the Plans or
Period Purchased Paid per Share ($) Programs (1) Programs (2)(3)
----------------------------------------------------------------------------------------------------
04/01/04 - 04/30/04 17,400 18.95 17,400 110,185
----------------------------------------------------------------------------------------------------
05/01/04 - 05/31/04 1,278 18.04 1,278 108,907
----------------------------------------------------------------------------------------------------
06/01/04 - 06/30/04 12,000 17.56 12,000 96,907
----------------------------------------------------------------------------------------------------
Total 30,678 18.37 30,678 96,907
----------------------------------------------------------------------------------------------------
----------
(1) All shares indicated were purchased under the Company's Sixth
and Seventh Stock Repurchase Programs.
(2) Sixth Stock Repurchase Program
(a) Announced January 2, 2003.
(b) 130,000 common shares approved for repurchase.
(c) No fixed date of expiration.
(d) This Program was completed on April 27, 2004.
(e) Not applicable.
(3) Seventh Stock Repurchase Program
(a) Announced February 24, 2004.
(b) 125,000 common shares approved for repurchase.
(c) No fixed date of expiration.
(d) This Program has not expired and has 96,907 shares
remaining to be purchased at June 30, 2004.
(e) Not applicable.
Item 6. Selected Financial Data.
- ------- ------------------------
The information required herein is incorporated by reference from
pages 2 to 3 of the Company's 2004 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ----------------------------------------------------------------------
Results of Operations.
----------------------
The information required herein is incorporated by reference from
pages 4 to 16 of the Company's 2004 Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- -------- -----------------------------------------------------------
The information required herein is incorporated by reference from
pages 13 to 16 of the Company's 2004 Annual Report.
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
The information required herein is incorporated by reference from
pages 17 to 48 of the Company's 2004 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure.
---------------------
Not applicable.
30
Item 9A. Controls and Procedures.
- -------- ------------------------
Our management evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) as of June
30, 2004. Based on such evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls
and procedures are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act
of 1934) occurred during the fourth fiscal quarter of fiscal 2004 that
has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
Item 9B. Other Information.
- -------- ------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------- ---------------------------------------------------
The information required herein is incorporated by reference from
pages 2 to 8 of the Company's Proxy Statement for the 2004 Annual
Meeting of Stockholders dated September 24, 2004 ("Proxy Statement").
The Company has adopted a Code of Ethics for its employees and
directors and executive officers, a copy of which has been filed as an
exhibit to this Annual Report on Form 10-K.
Item 11. Executive Compensation.
- -------- -----------------------
The information required herein is incorporated by reference from
pages 11 to 16 of the Company's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
- -------- ------------------------------------------------------------------
Related Stockholder Matters.
----------------------------
The security ownership of certain beneficial owners and management
information required herein is incorporated by reference from pages 9
to 10 of the Company's Proxy Statement. For the related stockholder
matters information required herein, see "Equity Compensation Plan
Information" on page 12 of the Company's Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
The information required herein is incorporated by reference on page
16 of the Company's Proxy Statement.
Item 14. Principal Accounting Fees and Services.
- -------- ---------------------------------------
The information required herein is incorporated by reference on page 6
of the Company's Proxy Statement.
PART IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------- ----------------------------------------------------------------
(a) Documents filed as part of this report.
31
(1) The following documents are filed as part of this report and
are incorporated herein by reference from the Company's 2004
Annual Report.
Report of Independent Auditors.
Consolidated Balance Sheet at June 30, 2004 and 2003.
Consolidated Statement of Income for the Years Ended June 30,
2004, 2003 and 2002.
Consolidated Statement of Changes in Stockholders' Equity for
the Years Ended June 30, 2004, 2003 and 2002.
Consolidated Statement of Cash Flows for the Years Ended June
30, 2004, 2003 and 2002.
Notes to the Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange
Commission ("SEC") are omitted because they are not applicable
or the required information is included in the Consolidated
Financial Statements or notes thereto.
(3) The following exhibits are filed as part of this Form 10-K,
and this list includes the Exhibit Index.
No. Description Page
---- ----------------------------- ----
3.1 Articles of Incorporation *
3.2 By-Laws *
4 Stock Certificate of WVS Financial Corp. *
10.1 WVS Financial Corp. Recognition Plans and Trusts for
Executive Officers, Directors and Key Employees** *
10.2 WVS Financial Corp. 1993 Stock Incentive Plan** *
10.3 WVS Financial Corp. 1993 Directors' Stock Option Plan** *
10.4 WVS Financial Corp. Employee Stock Ownership Plan and Trust** *
10.5 Amended West View Savings Bank Employee Profit Sharing Plan** *
10.6 Employment Agreements between WVS Financial Corp. and
David Bursic ** ***
10.7 Directors Deferred Compensation Program** *
13 2004 Annual Report to Stockholders E-1
14.1 Ethics Policy E-57
14.2 Code of Ethics for Senior Financial Officers E-61
21 Subsidiaries of the Registrant - Reference is made to
Item 1. "Business" for the required information 2
23 Consent of Independent Registered Public Accounting Firm E-62
31.1 Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive Officer E-63
31.2 Rule 13a-14(a) / 15d-14(a) Certification of the Chief Accounting Officer E-64
32.1 Section 1350 Certification of the Chief Executive Officer E-65
32.2 Section 1350 Certification of the Chief Accounting Officer E-66
* Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 33-67506) filed by the Company with the SEC on August
16, 1993, as amended.
** Management contract or compensatory plan or arrangement.
*** Incorporated by reference from the Form 10-Q for the quarter ended
September 30, 1998 filed by the Company with the SEC on November 13, 1998.
(b) The Company filed a Current Report on Form 8-K dated April 30, 2004,
reporting under Item 12 earnings for the three and nine months
ending March 31, 2004. The Company included as an exhibit to the
Form 8-K the press release dated April 30, 2004.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WVS FINANCIAL CORP.
September 24, 2004 By: /s/ David J. Bursic
-------------------------------------
David J. Bursic
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ David J. Bursic
- -----------------------------------------
David J. Bursic, Director, President and September 24, 2004
Chief Executive Officer
(Principal Executive Officer)
/s/ Keith A. Simpson
- -----------------------------------------
Keith A. Simpson, Vice President, September 24, 2004
Treasurer and Chief Accounting Officer
(Principal Accounting Officer)
/s/ Donald E. Hook
- -----------------------------------------
Donald E. Hook, September 24, 2004
Chairman of the Board of Directors
/s/ David L. Aeberli
- -----------------------------------------
David L. Aeberli, Director September 24, 2004
/s/ Arthur H. Brandt
- -----------------------------------------
Arthur H. Brandt, Director September 24, 2004
/s/ Lawrence M. Lehman
- -----------------------------------------
Lawrence M. Lehman, Director September 24, 2004
/s/ John M. Seifarth
- -----------------------------------------
John M. Seifarth, Director September 24, 2004
/s/ Margaret VonDerau
- -----------------------------------------
Margaret VonDerau, Director September 24, 2004
33