TABLE OF CONTENTS
Page
Number
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Stockholders' Letter 1
Selected Financial and Other Data 2
Management's Discussion and Analysis 4
Report of Independent Registered Public Accounting Firm 18
Consolidated Balance Sheet 19
Consolidated Statement of Income 20
Consolidated Statement of Changes in Stockholders' Equity 21
Consolidated Statement of Cash Flows 22
Notes to the Consolidated Financial Statements 23
Common Stock Market Price and Dividend Information 50
Corporate Information 51
To Our Stockholders:
In an effort to contain inflation, the Federal Reserve Board's Open Market
Committee increased its targeted federal funds rate by one-quarter of a percent
eight times during fiscal 2006. The fiscal 2006 increases were in addition to
eight identical increases during fiscal 2005. Within the past two fiscal years,
these sixteen combined increases, coupled with higher energy prices, have caused
a marked slow-down in the housing market and considerably slowed consumer
purchase activity and sentiment. Intermediate and longer-term market interest
rates have not moved in tandem with the changes in short-term market interest
rates. These changes in short, intermediate and long-term market interest rates
and the flattening of the Treasury yield curve have caused a marked compression
in industry-wide net interest margins and net income.
During Fiscal 2006, WVS Financial Corp. achieved solid gains despite a slowing
economy, higher short-term and historically low intermediate and long-term
market interest rates. Company net interest income increased $758 thousand while
income before income tax expense increased $597 thousand. Net income for fiscal
2006 totaled $2.85 million - roughly even with the prior fiscal year. Income tax
expense more than doubled to $1.29 million primarily due to early redemptions of
tax-exempt bonds and the elimination of a deferred tax asset. Book value per
share, after the payment of cash dividends and stock repurchases, continued to
grow and totaled $12.60 per share at June 30, 2006. Return on stockholder's
equity was a strong 9.87%.
The Company's Eighth Stock Buyback continues to progress well. Stock buybacks
add liquidity to your investment and promote an active secondary market in our
stock. We continue to receive positive comments about our stock buybacks from
our NASDAQ market makers. Since our stock buybacks began in Fiscal 1999 the
Company has returned more than $21 million to stockholders by repurchasing
1,434,606 shares or about 38% of our issued shares. The Company has returned
more money to stockholders through stock buybacks alone than was originally
raised by selling stock to the public.
We would like to extend our thanks to each stockholder for your continued
support and trust. Please continue to recommend West View Savings Bank to your
family, friends and neighbors.
/s/ DAVID J. BURSIC /s/ DONALD E. HOOK
DAVID J. BURSIC DONALD E. HOOK
President and Chairman of the Board
Chief Executive Officer
FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED
FINANCIAL AND OTHER DATA
As of or For the Year Ended June 30,
---------------------------------------------------------------------------
2006 2005 2004 2003 2002
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands, except per share data)
Selected Financial Data:
Total assets $ 421,742 $ 421,044 $ 433,624 $ 367,188 $ 404,911
Net loans receivable 55,702 60,151 67,968 91,669 152,905
Mortgage-backed securities 155,753 162,151 75,590 111,879 82,543
Investment securities 196,421 183,066 273,589 147,482 151,384
Savings deposit accounts 150,701 163,589 159,318 169,316 174,659
FHLB advances 161,729 155,036 149,736 153,390 159,937
Other borrowings 76,048 69,680 91,639 9,453 33,731
Stockholders' equity 29,418 29,201 29,199 30,618 30,253
Non-performing assets, troubled debt
restructurings and potential
problem loans(2) 1,695 2,171 2,171 3,481 5,279
Selected Operating Data:
Interest income $ 22,248 $ 17,874 $ 16,006 $ 19,231 $ 23,760
Interest expense 15,460 11,844 10,987 11,810 14,025
----------- ----------- ----------- ----------- -----------
Net interest income 6,788 6,030 5,019 7,421 9,735
(Recovery) Provision for loan losses (161) (46) (794) (228) 57
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 6,949 6,076 5,813 7,649 9,678
Non-interest income 705 992 715 725 687
Non-interest expense 3,521 3,532 3,607 3,956 4,104
----------- ----------- ----------- ----------- -----------
Income before income tax expense 4,133 3,536 2,921 4,418 6,261
Income tax expense 1,287 627 619 1,070 1,813
----------- ----------- ----------- ----------- -----------
Net income $ 2,846 $ 2,909 $ 2,302 $ 3,348 $ 4,448
=========== =========== =========== =========== ===========
Per Share Information:
Basic earnings $ 1.21 $ 1.20 $ 0.91 $ 1.28 $ 1.63
Diluted earnings $ 1.21 $ 1.19 $ 0.90 $ 1.28 $ 1.63
Dividends per share $ 0.64 $ 0.64 $ 0.64 $ 0.64 $ 0.64
Dividend payout ratio 52.89% 53.33% 70.33% 50.00% 39.26%
Book value per share at period end $ 12.60 $ 12.20 $ 11.84 $ 11.86 $ 11.30
Average shares outstanding:
Basic 2,357,217 2,432,267 2,535,796 2,617,576 2,723,891
Diluted 2,359,996 2,437,647 2,544,404 2,624,395 2,732,491
2
As of or For the Year Ended June 30,
----------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Selected Operating Ratios(1):
Average yield earned on interest-
earning assets(3) 5.29% 4.61% 4.28% 5.36% 6.41%
Average rate paid on interest-
bearing liabilities 4.01 3.27 3.13 3.57 4.13
Average interest rate spread(4) 1.28 1.34 1.14 1.79 2.28
Net interest margin(4) 1.67 1.68 1.48 2.19 2.74
Ratio of interest-earning assets to
interest-bearing liabilities 110.48 111.45 111.76 112.56 112.34
Non-interest expense as a percent of
average assets 0.82 0.87 0.91 1.05 1.07
Return on average assets 0.66 0.71 0.58 0.89 1.16
Return on average equity 9.87 10.03 7.64 10.97 14.85
Ratio of average equity to average
assets 6.70 7.10 7.60 8.10 7.78
Full-service offices at end of period 5 5 5 5 5
Asset Quality Ratios(1):
Non-performing and potential problem
loans and troubled debt restructurings
as a percent of net total loans(2) 3.03% 3.49% 3.19% 3.80% 3.30%
Non-performing assets as a percent
of total assets(2) 0.08 0.25 0.19 0.95 1.30
Non-performing assets, troubled debt
restructurings and potential
problem loans as a percent of
total assets 0.40 0.52 0.50 0.95 1.30
Allowance for loan losses as a
percent of total loans receivable 1.69 1.83 1.97 2.68 1.77
Allowance for loan losses as a
percent of non-performing loans 310.71 113.58 163.48 72.68 54.68
Charge-offs to average loans
receivable outstanding during the
period 0.01 0.37 0.68 0.00 0.04
Capital Ratios(1):
Tier 1 risk-based capital ratio 22.12% 20.99% 18.65% 14.30% 13.42%
Total risk-based capital ratio 22.88 21.80 19.62 15.57 14.66
Tier 1 leverage capital ratio 6.78 7.14 6.92 8.42 7.69
----------------
(1) Consolidated asset quality ratios and capital ratios are end of period
ratios, except for charge-offs to average net loans. With the exception of
end of period ratios, all ratios are based on average monthly balances
during the indicated periods.
(2) Non-performing assets consist of non-performing loans and real estate owned
("REO"). Non-performing loans consist of non-accrual loans and accruing
loans greater than 90 days delinquent, while REO consists of real estate
acquired through foreclosure and real estate acquired by acceptance of a
deed in lieu of foreclosure. Potential problem loans include loans where
management has some doubt as to the ability of the borrower to comply with
present loan repayment terms.
(3) Interest and yields on tax-exempt loans and securities (tax-exempt for
federal income tax purposes) are shown on a fully taxable equivalent basis.
(4) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities, and net interest margin represents net
interest income as a percent of average interest-earning assets.
3
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD LOOKING STATEMENTS
When used in this Annual Report, or, in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project" or similar expressions are intended to identify "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to forward
looking statements to reflect events or circumstances after the date of
statements or to reflect the occurrence of anticipated or unanticipated events.
GENERAL
WVS Financial Corp. ("WVS" or the "Company") is the parent holding company of
West View Savings Bank ("West View" or the "Savings Bank"). The Company was
organized in July 1993 as a Pennsylvania-chartered unitary bank holding company
and acquired 100% of the common stock of the Savings Bank in November 1993.
West View Savings Bank is a Pennsylvania-chartered, SAIF-insured stock savings
bank conducting business from six offices in the North Hills suburbs of
Pittsburgh. The Savings Bank converted to the stock form of ownership in
November 1993. The Savings Bank had no subsidiaries at June 30, 2006.
The operating results of the Company depend primarily upon its net interest
income, which is determined by the difference between income on interest-earning
assets, principally loans, mortgage-backed securities and investment securities,
and interest expense on interest-bearing liabilities, which consist primarily of
deposits and borrowings. The Company's net income is also affected by its
provision for loan losses, as well as the level of its non-interest income,
including loan fees and service charges, and its non-interest expenses, such as
compensation and employee benefits, income taxes, deposit insurance and
occupancy costs.
The Company's strategic focus includes:
Strong Net Income - During fiscal 2006, Company net income totaled $2.8 million.
Income before income tax expense increased $597 thousand or 16.9% due to higher
levels of net interest income and recoveries for loan losses. Company retained
earnings grew by $1.3 million and exceeded $30 million at fiscal year end.
Enhancing Stockholder Value - During fiscal 2006, the Company returned over $2.5
million to stockholders via cash dividends and stock repurchases. Book value per
share increased to $12.60 from $12.20. The Company's stock continues to trade at
a premium to book value.
4
Commitment to Capital Management - Return on average stockholders' equity was
9.87%. The Company has returned more than $21 million through the repurchase of
1,434,606 shares or approximately 38% of our issued shares. Through our Eighth
Stock Buyback Program, the Company has returned more money to stockholders via
share repurchases alone than was originally raised by selling stock to the
public.
Interest Rate Risk Management - During the past fiscal year, the Federal Reserve
has increased its targeted federal funds rate eight times - from 3.25% to 5.25%.
Intermediate and long-term rates remain stubbornly low. The Company has
positioned itself well for this rise in short-term rates by actively managing
its asset/liability mix. Net interest income increased $758 thousand or 12.6%,
favorably impacting Company net income.
Investments in Technology - During fiscal 2006, the Bank completed its core
systems migration. Over the past three fiscal years, the Company has added new
P.C. based platforms, internet banking, on-line bill paying and expanded our ATM
system by joining the STAR network to provide our customers with around the
clock convenience that technology and the internet have ushered in. Most
importantly, we understand that many customers want a local touch, a place to
go, and a teller to hand back the receipt now and then.
Community Based Lending - Due to low market interest rates, West View has
limited origination of thirty year mortgage loans to be held in the portfolio.
Thirty year mortgage loans continue to be originated on a correspondent basis.
Portfolio loan originations have focused on multi-family and commercial real
estate loans, construction loans, land acquisition and development loans,
consumer loans and small business loans for business equipment and inventory.
Strong Non-interest Expense Ratios - For the fiscal years ended June 30, 2006,
2005 and 2004, the Company's ratios of non-interest expense to average assets
were 0.82%, 0.87% and 0.91%, respectively. Investments in technology have
allowed each employee to be more productive and to offer more competitively
priced products and services to our loan and deposit customers.
CHANGES IN FINANCIAL CONDITION
Condensed Balance Sheet
-----------------------
June 30, Change
---------------------
2006 2005 Dollars Percentage
---- ---- ------- ----------
(Dollars in Thousands)
Cash and interest-earning
Deposits $ 1,196 $ 3,566 $ (2,370) -66.5%
Investments (1) 360,035 352,986 7,049 2.0
Net loans receivable 55,702 60,151 (4,449) 7.4
Total assets 421,742 421,044 698 0.2
Deposits 151,713 164,706 (12,993) -7.9
Borrowed funds 237,777 224,716 13,061 5.8
Total liabilities 392,324 391,843 481 0.1
Stockholders' equity 29,418 29,201 217 0.7
---------------
(1) Includes Federal Home Loan Bank stock.
5
Cash and Interest-Earning Deposits. Cash on hand and interest-earning deposits
represent cash equivalents. Cash equivalents decreased $2.4 million or 66.5% to
$1.2 million at June 30, 2006 from $3.6 million at June 30, 2005. Changes in
cash equivalents are influenced by the timing of customer transaction deposits,
the redeployment of funds into other earning assets such as investments or
loans, and the repayment of Company borrowings.
Investments. The Company's investment and mortgage-backed portfolios increased
$7.0 million or 2.0% to $360.0 million at June 30, 2006 from $353.0 million at
June 30, 2005. Investment securities increased $13.5 million or 7.1% to $204.3
million at June 30, 2006. This increase was due primarily to purchases of U.S.
Government Agency securities, funded by calls of lower rate U.S. Government
Agency securities. Mortgage-backed securities decreased $6.4 million or 3.9% to
$155.8 million at June 30, 2006. This decrease was due primarily to repayments
of floating rate mortgage-backed securities and the redeployment of those
proceeds into investment securities. See "Quantitative and Qualitative
Disclosures about Market Risk" beginning on page 13.
Net Loans Receivable. Net loans receivable decreased $4.4 million or 7.4% to
$55.7 million at June 30, 2006. The decrease in loans receivable was principally
the result of principal repayments on the loan portfolio and residual levels of
refinancing activity due to historically low mortgage interest rates. As part of
its asset/liability management strategy, the Company chose to invest
substantially all of these proceeds into fixed rate U.S. Government Agency
securities and floating rate mortgage-backed securities. The Bank has also
partnered with SCORE (Service Corps of Retired Executives) Pittsburgh to better
serve new business owners and existing Bank business customers with access to
business counseling services.
Deposits. Total deposits decreased $13.0 million or 7.9% to $151.7 million at
June 30, 2006. Transaction accounts decreased approximately $7.9 million or
21.2%. Certificates of deposit increased approximately $429 thousand or 0.6%.
Savings accounts decreased $7.5 million or 16.9% and money market accounts
increased $2.9 million or 21.6%.
Borrowed Funds. Borrowed funds increased $13.1 million or 5.8% to $237.8 million
at June 30, 2006. Other short-term borrowings increased $6.4 million or 9.2% to
$76.0 million, FHLB long-term advances decreased $4.2 million or 2.9% to $138.6
million and FHLB short-term advances increased $10.8 million or 88.2% to $23.2
million. The Company repositioned its borrowing mix as part of its
assets/liability management program.
Stockholders' Equity. Total stockholders' equity increased $217 thousand or 0.7%
to $29.4 million at June 30, 2006. Company earnings of $2.8 million were
partially offset by $1.5 million of cash dividends paid on the Company's common
stock and $1.1 million was used to repurchase 66,098 shares of the Company's
common stock. The Company believes that the repurchase of its common stock
represented an attractive investment opportunity and favorably added to
secondary market liquidity.
6
RESULTS OF OPERATIONS
Condensed Statements of Income
------------------------------
Year Ended Year Ended Year Ended
June 30, June 30, June 30,
2006 Change 2005 Change 2004
------- ------ ------- ------ -------
(Dollars in Thousands)
Interest income $22,248 $4,374 $17,874 $1,868 $16,006
24.5% 11.7%
Interest expense $15,460 $3,616 $11,844 $857 $10,987
30.5% 7.8%
Net interest income $6,788 $758 $6,030 $1,011 $5,019
12.6% 20.1%
Provision for loan losses ($161) ($115) ($46) $748 ($794)
-250.0% 94.2%
Non-interest income $705 ($287) $992 $277 $715
-28.9% 38.7%
Non-interest expense $3,521 ($11) $3,532 ($75) $3,607
-0.3% -2.1%
Income tax expense $1,287 $660 $627 $8 $619
105.3% 1.3%
Net income $2,846 ($63) $2,909 $607 $2,302
-2.2% 26.4%
General. WVS reported net income of $2.8 million, $2.9 million and $2.3 million
for the fiscal years ended June 30, 2006, 2005 and 2004, respectively. The $63
thousand or 2.2% decrease in net income during fiscal 2006 was primarily the
result of a $758 thousand increase in net interest income, a $115 thousand
increase in recoveries for loan losses and a $11 thousand decrease in
non-interest expense which were more than offset by a $660 thousand increase in
income tax expense, and a $287 thousand decrease in non-interest income.
Earnings per share totaled $1.21 (basic and diluted) for fiscal 2006 as compared
to $1.20 (basic) and $1.19 (diluted) for fiscal 2005. The increase in earnings
per share was due to a reduction in the weighted average number of shares
outstanding due to the Company's stock repurchases during fiscal 2006.
7
Average Balances, Net Interest Income and Yields Earned and Rates Paid. The
following average balance sheet table sets forth at and for the periods
indicated, information on the Company regarding: (1) the total dollar amounts of
interest income on interest-earning assets and the resulting average yields; (2)
the total dollar amounts of interest expense on interest-bearing liabilities and
the resulting average costs; (3) net interest income; (4) interest rate spread;
(5) net interest-earning assets (interest-bearing liabilities); (6) the net
yield earned on interest-earning assets; and (7) the ratio of total
interest-earning assets to total interest-bearing liabilities.
For the Years Ended June 30,
--------------------------------------------------------------------------------------------
2006 2005 2004
---------------------------- ----------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Interest-earning assets:
Net loans receivable(1) $ 58,274 $ 4,009 6.88% $ 63,725 $ 4,206 6.60% $ 76,513 $ 5,180 6.77%
Mortgage-backed securities 169,844 8,919 5.25 103,307 3,981 3.85 84,770 2,347 2.77
Investments - taxable 177,031 8,292 4.68 200,688 7,873 3.92 191,544 6,709 3.50
Investments - tax-free(2) 13,276 737 8.00 27,142 1,626 8.74 29,588 1,641 8.08
FHLB stock 7,033 276 3.92 7,594 178 2.34 7,797 120 2.01
Interest-bearing deposits 924 15 1.62 1,818 10 0.55 2,079 9 0.43
-------- -------- -------- -------- -------- --------
Total interest-earning assets 426,382 22,248 5.29% 404,274 17,874 4.61% 392,291 16,006 4.28%
-------- ======== -------- ======== -------- ========
Non-interest-earning assets 3,897 3,849 3,949
-------- -------- --------
Total assets $430,279 $408,123 $396,240
======== ======== ========
Interest-bearing liabilities:
Interest-bearing deposits
and escrows $142,327 $ 3,123 2.19% $146,366 $ 2,238 1.53% $151,577 $ 2,321 1.53%
FHLB long-term advances 141,558 7,828 5.53 147,780 8,040 5.44 149,930 8,112 5.41
FHLB short-term advances 2,421 106 4.38 3,021 79 2.62 642 8 1.25
Other short-term borrowings 99,634 4,403 4.42 65,579 1,487 2.27 48,867 546 1.12
-------- -------- -------- -------- -------- --------
Total interest-bearing 385,940 15,460 4.01% 362,746 11,844 3.27% 351,016 10,987 3.13%
-------- ======== -------- ======== -------- ========
liabilities
Non-interest-bearing accounts 12,513 12,774 12,542
-------- -------- --------
Total interest-bearing
liabilities and non-interest
-bearing accounts 398,453 375,520 363,558
Non-interest-bearing liabilities 2,976 3,609 2,563
-------- -------- --------
Total liabilities 401,429 379,129 366,121
Equity 28,850 28,994 30,119
-------- -------- --------
Total liabilities and equity $430,279 $408,123 $396,240
======== ======== ========
Net interest income $ 6,788 $ 6,030 $ 5,019
======== ======== ========
Interest rate spread 1.28% 1.34% 1.15%
======== ======== ========
Net yield on interest-earning assets(3) 1.67% 1.68% 1.48%
======== ======== ========
Ratio of interest-earning assets to
interest-bearing liabilities 110.48% 111.45% 111.76%
======== ======== ========
----------------
(1) Includes non-accrual loans.
(2) Yields on tax-exempt securities (tax-exempt for federal income tax
purposes) are shown on a fully taxable equivalent basis utilizing a
calculation that reflects the tax-exempt coupon, a 20% interest expense
disallowance and a federal tax rate of 34%.
(3) Net interest income divided by average interest-earning assets.
8
Rate/Volume Analysis. The following table describes the extent to which changes
in interest rates and changes in volume of interest-related assets and
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (1) changes in volume (change in volume multiplied by prior year rate), (2)
changes in rate (change in rate multiplied by prior year volume), and (3) total
change in rate and volume. The combined effect of changes in both rate and
volume has been allocated proportionately to the change due to rate and the
change due to volume.
Year Ended June 30,
--------------------------------------------------------------------------------
2006 vs. 2005 2005 vs. 2004
-------------------------------------- --------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
------------------------ Increase ------------------------ Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Interest-earning assets:
Net loans receivable $ (370) $ 173 $ (197) $ (847) $ (127) $ (974)
Mortgage-backed securities 3,156 1,782 4,938 590 1,044 1,634
Investments - taxable (994) 1,413 419 333 831 1,164
Investments - tax-free (709) (180) (889) (202) 187 (15)
FHLB stock (14) 112 98 32 26 58
Interest-bearing deposits (6) 11 5 (1) 2 1
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 1,063 3,311 4,374 (95) 1,963 1,868
Interest-bearing liabilities:
Interest-bearing deposits and
Escrows 28 857 885 (200) 117 (83)
FHLB long-term borrowings (343) 131 (212) (117) 45 (72)
FHLB short-term borrowings (17) 44 27 54 17 71
Other short-term borrowings 1,033 1,883 2,916 235 706 941
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 702 2,915 3,616 (28) 885 857
---------- ---------- ---------- ---------- ---------- ----------
Change in net interest income $ 361 $ 396 $ 758 $ (67) $ 1,078 $ 1,011
========== ========== ========== ========== ========== ==========
Net Interest Income. Net interest income is determined by the Company's interest
rate spread (i.e. the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities. Net interest income increased by $758 thousand or 12.6% in fiscal
2006 and $1.0 million or 20.1% in fiscal 2005. The increase in fiscal 2006 was
the result of an increase in interest and dividend income of $4.4 million or
24.5%, which was partially offset by an increase in interest expense of $3.6
million or 30.5%. The increase in fiscal 2005 was the result of an increase in
interest and dividend income of $1.8 million or 11.7%, which was partially
offset by an increase in interest expense of $857 thousand or 7.8%.
Interest Income. Total interest income increased by $4.4 million or 24.5% during
fiscal 2006 and increased by $1.9 million or 11.7% during fiscal 2005. The
increase in fiscal 2006 was primarily the result of increased yields on the
Company's interest-earning assets and increases in the average balances of the
mortgage-backed securities portfolio which were partially offset by decreases in
the average balances of the investment and loan portfolios. The increase in
fiscal 2005 was primarily a result of increased yields and average balances on
the investment and mortgage-backed securities portfolios which were partially
offset by a decrease in the average balance and weighted average yield earned on
the loan portfolio.
Interest income on investment securities and FHLB stock decreased $372 thousand
or 3.8% during fiscal 2006 and increased $1.2 million or 14.3% during fiscal
2005. The decrease in fiscal 2006 was primarily the result of a $38.1 million
decrease in the average balance of investments outstanding which was partially
offset by a 61 basis point increase in the weighted average yield on the
Company's investment securities portfolio. The increase in fiscal 2005 was
primarily attributable to a 40 basis point increase in the weighted average
yield on the Company's investment securities and a $6.5 million increase in the
average balance of the investment securities outstanding.
Interest income on mortgage-backed securities increased $4.9 million or 124.0%
during fiscal 2006 and increased $1.6 million or 69.6% during fiscal 2005. The
increase in fiscal 2006 was primarily attributable to a
9
$66.6 million increase in the average balance of the mortgage-backed securities
portfolio and a 140 basis point increase in the weighted average yield on the
mortgage-backed securities portfolio. The increase in fiscal 2005 was primarily
attributable to a 108 basis point increase in the weighted average yield on the
Company's mortgage-backed securities portfolio and a $18.5 million increase in
the average balance of the mortgage-backed securities portfolio.
Interest income on net loans receivable decreased $197 thousand or 4.7% during
fiscal 2006 and decreased $974 thousand or 18.8% during fiscal 2005. The
decrease in fiscal 2006 was primarily attributable to a $5.6 million decrease in
the average balance of net loans outstanding which was partially offset by a 28
basis point increase in the yield earned on the Company's loan portfolio. The
decrease in fiscal 2005 was primarily attributable to a $12.8 million decrease
in the average balance of net loans outstanding and a 17 basis point decrease in
the weighted average yield on the Company's loan portfolio. As part of its
asset/liability management strategy, the Company previously limited its
origination of longer-term fixed rate loans to mitigate its exposure to a rise
in market interest rates. The Company continued to offer longer-term fixed rate
loans on a correspondent basis during fiscal 2006 and 2005.
Interest Expense. Total interest expense increased $3.6 million or 30.5% during
fiscal 2006 and increased by $857 thousand or 7.8% during fiscal 2005. The
increase in fiscal 2006 was primarily attributable to higher rates paid on
interest-bearing liabilities due to the Federal Reserve's continued tightening
of monetary policy and higher levels of interest-bearing liabilities. The
increase in fiscal 2005 was attributable to higher average levels of
interest-bearing liabilities and higher rates paid on such liabilities due to
the Federal Reserve's tightening of monetary policy.
Interest expense on borrowings increased $2.7 million or 28.4% during fiscal
2006 and increased $940 thousand or 10.8% during fiscal 2005. The increase in
fiscal 2006 was primarily attributable to a 62 basis point increase in the
weighted average yield on the Company's borrowings and a $27.2 million increase
in the average balances of borrowings outstanding. The increase in the average
yield on borrowings outstanding reflects higher short-term interest rates. The
increase in the average balances outstanding was due to a $34.1 million increase
in the average balances of other short-term borrowings which was partially
offset by a $6.2 million decrease in the average balance of long-term FHLB
advances and a $600 thousand decrease in the average balance of short-term FHLB
advances. The increase in fiscal 2005 was primarily attributable to a $16.9
million increase in the average balance of borrowings outstanding and a 9 basis
point increase in the weighted average yield on the Company's borrowings. The
increase in the average balances outstanding was due to a $16.7 million increase
in the average balance of other short-term borrowings and a $2.4 million
increase in the average balance of short-term FHLB advances, which were
partially offset by a $2.2 million decrease in the average balance of long-term
FHLB advances. During both fiscal 2006 and 2005, the Company's borrowings were
primarily longer-term with fixed rates of interest.
Interest expense on interest-bearing deposits and escrows increased $885
thousand or 39.5% in fiscal 2006 and decreased $83 thousand or 3.6% in fiscal
2005. The increase in fiscal 2006 was primarily attributable to a 66 basis point
increase in the weighted average yield paid on deposits and a $3.0 million
increase in the average balances of money market and time deposits, which were
partially offset by a $7.1 million decrease in the average balance of savings
accounts and interest-bearing checking accounts. The decrease in fiscal 2005 was
primarily attributable to a $5.2 million decrease in the average balance of
interest bearing deposits.
Recovery for Loan Losses. A provision for loan losses is charged to earnings to
bring the total allowance to a level considered adequate by management to absorb
potential losses in the portfolio. Management's determination of the adequacy of
the allowance is based on periodic evaluations of the loan portfolio considering
past experience, current economic conditions, volume, growth, composition of the
loan portfolio and other relevant factors. The Company recorded a credit
provision (i.e. recovery) for loan losses of $161 thousand in fiscal 2006,
compared to a credit provision of $46 thousand in fiscal 2005. The increase in
the credit provision for fiscal 2006 was primarily attributable to continued
paydowns of non-accrual loans and a reallocation of $35 thousand of its
allowance for loan loss attributable to off-balance sheet liabilities (builder
letters of credit and undisbursed lines of credit) to a separate reserve account
for financial reporting purposes. The decrease in the credit provision for
fiscal 2005 was primarily attributable to reduced levels of non-performing loans
and net loans receivable.
10
Non-interest Income. Total non-interest income decreased by $287 thousand or
28.9% in fiscal 2006 and increased by $277 thousand or 38.7% in fiscal 2005. The
decrease in fiscal 2006 was primarily attributable to a $306 thousand decrease
in pre-tax securities gains, which was partially offset by a $19 thousand
increase in deposit account fee income. The increase in fiscal 2005 was
primarily attributable to an increase of $316 thousand in pre-tax securities
gains, which was partially offset by decreased deposit account fee income.
Non-interest Expense. Total non-interest expense decreased $11 thousand or 0.3%
and decreased $75 thousand or 2.1% during fiscal 2006 and 2005, respectively.
The decrease in fiscal 2006 was primarily attributable to a decrease in fixed
asset depreciation which was partially offset by a reallocation of a portion of
the Company's allowance for loan loss attributable to off-balance sheet
liabilities as discussed above. The decrease in fiscal 2005 was primarily
attributable to decreases in legal expenses and costs associated with the
work-out of non-performing assets, payroll and benefit related costs, real
estate owned expenses and ATM network expenses, which were partially offset by
increases in data processing expenses and fixed asset costs.
Income Taxes. Income taxes increased $660 thousand or 105.3% during fiscal 2006
and increased $8 thousand or 1.3% during fiscal 2005. The increases in both
fiscal 2006 and 2005 were primarily attributable to higher levels of taxable
income, lower levels of federal tax-exempt income, and the elimination of a
deferred tax asset associated with a credit for the federal alternative minimum
tax which were partially offset by higher levels of interest on FHLB
obligations, which are not taxable for Pennsylvania Mutual Thrift Tax purposes.
The Company's effective tax rate was 31.1% at June 30, 2006 and 17.7% at June
30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is often analyzed by reviewing the cash flow statement. Cash and cash
equivalents decreased by $2.4 million during fiscal 2006 primarily due to $2.4
million of net cash used for financing activities and $2.4 million of net cash
used for investing activities, which were partially offset by $2.5 million of
net cash provided by operating activities.
Funds provided by operating activities totaled $2.5 million during fiscal 2006
as compared to $3.8 million during fiscal 2005. Net cash provided by operating
activities was primarily comprised of $2.8 million of net income, a $191
thousand increase in accrued interest payable and a $161 thousand net recovery
for loan losses which were partially offset by a $864 thousand increase in
accrued interest receivable.
Funds used for investing activities totaled $2.4 million during fiscal 2006 as
compared to $12.0 million provided by investing activities during fiscal 2005.
Primary uses of funds during fiscal 2006 include $217.6 million in purchases of
investment and mortgage-backed securities (including FHLB stock), which were
partially offset by $210.6 million in repayments and sales of investments and
mortgage-backed securities (including FHLB stock) and a $4.6 million decrease in
net loans receivable. The investment purchases were primarily comprised of fixed
rate callable U.S. Government agency bonds. The mortgage-backed securities
purchases were floating rate instruments that generally reprice on a monthly
basis.
Funds used for financing activities totaled $2.4 million for fiscal 2006 as
compared to $15.3 million used for financing activities in fiscal 2005. Primary
uses of funds for fiscal 2006 were a $13.0 million decrease in deposits, a $4.2
million decrease in FHLB long-term borrowings, $1.5 million in cash dividends
and $1.1 million in common stock repurchases, which were partially offset by a
$10.8 million increase in FHLB short-term advances and a $6.4 million increase
in other short-term borrowings. During fiscal 2006 the Company purchased 66,098
shares of Company common stock for approximately $1.1 million. Management has
determined that it currently is maintaining adequate liquidity and continues to
better match funding sources with lending and investment opportunities.
The Company's primary sources of funds are deposits, amortization, prepayments
and maturities of existing loans, mortgage-backed securities and investment
securities, funds from operations, and funds obtained
11
through FHLB advances and other borrowings. At June 30, 2006, the total approved
loan commitments outstanding amounted to $762 thousand. At the same date,
commitments under unused letters and lines of credit amounted to $8.4 million
and the unadvanced portion of construction loans approximated $9.5 million.
Certificates of deposit scheduled to mature in one year or less at June 30,
2006, totaled $42.9 million. Management believes that a significant portion of
maturing deposits will remain with the Company.
The Company's contractual obligations at June 30, 2006 were as follows:
Contractual Obligations
(Dollars in Thousands)
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
-------- ------- --------- --------- ---------
Long-term debt $138,579 $ - $ 13,500 $ 112,579 $ 12,500
Operating lease obligations 39 23 16 - -
$138,618 $ 23 $ 13,516 $ 112,579 $ 12,500
See also Note 13 of the Company's Consolidated Financial Statements.
Historically, the Company used its sources of funds primarily to meet its
ongoing commitments to pay maturing certificates of deposit and savings
withdrawals, fund loan commitments and maintain a substantial portfolio of
investment securities. The Company has been able to generate sufficient cash
through FHLB advances and other borrowings and through the retail deposit market
to provide the cash utilized in investing activities. The Company has access to
the Federal Reserve Bank Primary Credit Program. Management believes that the
Company currently has adequate liquidity available to respond to liquidity
demands.
On July 25, 2006, the Company's Board of Directors declared a cash dividend of
$0.16 per share payable on August 17, 2006 to shareholders of record at the
close of business on August 7, 2006. Dividends are subject to determination and
declaration by the Board of Directors, which take into account the Company's
financial condition, statutory and regulatory restrictions, general economic
conditions and other factors. There can be no assurance that dividends will in
fact be paid on the common stock in the future or that, if paid, such dividends
will not be reduced or eliminated in future periods.
As of June 30, 2006, WVS Financial Corp. exceeded all regulatory capital
requirements and maintained Tier I and total risk-based capital equal to $29.4
million or 22.1% and $30.4 million or 22.9%, respectively, of total
risk-weighted assets; and Tier I leverage capital of $29.4 million or 6.8% of
average total assets.
Non-performing assets consist of non-accrual loans and real estate owned. A loan
is placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed insufficient to warrant further
accrual. When a loan is placed on non-accrual status, previously accrued but
uncollected interest is deducted from interest income. Non-performing assets
decreased $739 thousand or 69.9% to $318 thousand or 0.08% of total assets, at
June 30, 2006. The decrease was primarily the result of $912 thousand in loans
reclassified as performing due to improved economic performance, $10 thousand
transferred to real estate owned, $7 thousand in charged off loans, and $1
thousand in repayments, which were partially offset by $251 thousand in loans
classified as non-performing.
Impact of Inflation and Changing Prices. The consolidated financial statements
of the Company and related notes presented herein have been prepared in
accordance with U.S. generally accepted accounting principles which require the
measurement of financial condition and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services since such prices are affected by inflation to a
larger degree than interest rates. In the current interest rate environment,
liquidity
12
and the maturity structure of the Company's assets and liabilities are critical
to the maintenance of acceptable performance levels.
Recent Accounting and Regulatory Pronouncements. The Company's discussion of
recent accounting and regulatory pronouncements can be found in Note 1 of the
Company's Consolidated Financial Statements.
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Company's transactions are denominated
in US dollars with no specific foreign exchange exposure. The Savings Bank has
no agricultural loan assets and therefore would not have a specific exposure to
changes in commodity prices. Any impacts that changes in foreign exchange rates
and commodity prices would have on interest rates are assumed to be exogenous
and will be analyzed on an ex post basis.
-- ----
Interest rate risk ("IRR") is the exposure of a banking organization's financial
condition to adverse movements in interest rates. Accepting this risk can be an
important source of profitability and shareholder value, however excessive
levels of IRR can pose a significant threat to the Company's earnings and
capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the Company's safety and soundness.
Evaluating a financial institution's exposure to changes in interest rates
includes assessing both the adequacy of the management process used to control
IRR and the organization's quantitative level of exposure. When assessing the
IRR management process, the Company seeks to ensure that appropriate policies,
procedures, management information systems and internal controls are in place to
maintain IRR at prudent levels with consistency and continuity. Evaluating the
quantitative level of IRR exposure requires the Company to assess the existing
and potential future effects of changes in interest rates on its consolidated
financial condition, including capital adequacy, earnings, liquidity, and, where
appropriate, asset quality.
Financial institutions derive their income primarily from the excess of interest
collected over interest paid. The rates of interest an institution earns on its
assets and owes on its liabilities generally are established contractually for a
period of time. Since market interest rates change over time, an institution is
exposed to lower profit margins (or losses) if it cannot adapt to interest-rate
changes. For example, assume that an institution's assets carry intermediate- or
long-term fixed rates and that those assets were funded with short-term
liabilities. If market interest rates rise by the time the short-term
liabilities must be refinanced, the increase in the institution's interest
expense on its liabilities may not be sufficiently offset if assets continue to
earn at the long-term fixed rates. Accordingly, an institution's profits could
decrease on existing assets because the institution will either have lower net
interest income or, possibly, net interest expense. Similar risks exist when
assets are subject to contractual interest-rate ceilings, or rate sensitive
assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate
environment.
During fiscal 2006, the Federal Open Market Committee increased its targeted
federal funds rate by two hundred basis points from 3.25% at June 30, 2005 to
5.25% at June 30, 2006. The benchmark two and ten year treasury yields were
5.16% and 5.15% respectively at June 30, 2006, as compared to 3.66% and 3.94%
respectively at June 30, 2005. These changes in short, intermediate and
long-term market interest rates and the flattening of the Treasury yield curve
have precipitated continued prepayments in the Company's loan, investment and
mortgage-backed securities portfolios and a marked compression of industry-wide
net interest margins.
Principal repayments on the Company's loan, investment and mortgage-backed
securities portfolios for the fiscal year ended June 30, 2006, totaled $25.5
million, $106.9 million and $97.8 million, respectively. In response to higher
levels of liquidity the Company rebalanced its loan, investment and
mortgage-backed securities portfolios.
13
Due to the term structure of market interest rates, the Company continued to
reduce its portfolio originations of long-term fixed rate mortgages while
continuing to offer such loans on a correspondent basis. The Company also makes
available for origination residential mortgage loans with interest rates which
adjust pursuant to a designated index, although customer acceptance has been
somewhat limited in the Savings Bank's market area. The Company will continue to
selectively offer commercial real estate, land acquisition and development, and
shorter-term construction loans, primarily on residential properties, to
partially increase interest income while limiting interest rate risk. The
Company has also emphasized higher yielding home equity and small business loans
to existing customers and seasoned prospective customers.
The Company purchased fixed rate callable U. S. Government Agency bonds in order
to earn a spread against the Company's long-term FHLB advances while limiting
interest rate risk within the portfolio. Within the mortgage-backed securities
portfolio, the Company continued to purchase floating rate securities in order
to provide current income and in response to rising short-term market interest
rates. Each of the aforementioned strategies also helped to better match the
interest-rate and liquidity risks associated with the Savings Bank's customers'
liquidity preference for shorter term deposit products.
During fiscal 2006 principal investment purchases were comprised of: floating
rate collateralized mortgage obligations which reprice monthly - $91.4 million
with an original weighted average yield of 4.61%; callable fixed rate government
agency bonds with initial lock-out periods as follows: 0 - 12 months - $35.7
million with a weighted average yield to call of approximately 6.76%, 13 - 24
months - $28.6 million with a weighted average yield to call of approximately
6.04%, 25 - 36 months - $19.0 million with a weighted average yield to call of
approximately 6.11% and over 36 months - $3.0 million with a weighted average
yield to call of approximately 6.0%; and callable fixed to floating rate
government agency bonds which will reprice within twenty-four to thirty-three
months - $25.0 million with a weighted average yield of approximately 5.07%.
Major investment proceeds received during fiscal 2006 were: mortgage-backed
securities - $97.8 million; callable government agency bonds - $85.0 million
with a weighted average yield of approximately 3.63%; tax-free municipal bonds -
$12.4 million with a weighted average yield of approximately 5.89%; corporate
demand notes - $7.3 million with a weighted average semiannual yield of 4.34%;
and taxable municipal bonds - $120 thousand with a weighted average yield of
6.61%.
As of June 30, 2006, the implementation of these asset and liability management
initiatives resulted in the following:
1) $153.5 million or 98.5% of the Company's portfolio of mortgage-backed
securities (including collateralized mortgage obligations - "CMOs")
were comprised of floating rate instruments that reprice on a monthly
basis.
2) $73.0 million or 35.7% of the Company's investment portfolio was
comprised of fixed to floating rate U.S. Government Agency bonds which
will reprice as follows: 3 months or less - $5.0 million; 3 - 6 months
- $28.0 million; 6 - 12 months - $15.0 million; and over 1 year -
$25.0 million. Management currently believes that these bonds are
likely to be repaid during the intervals shown.
3) $86.4 million or 42.3% of the Company's investment portfolio was
comprised of fixed-rate callable U.S. Government Agency bonds which
are callable as follows: 3 months or less - $9.9 million; 3 - 6 months
- $20.3 million; 6 - 12 months - $20.6 million; 1 - 2 years - $13.5
million; and over 2 years - $22.1 million. These bonds may or may not
actually be redeemed prior to maturity (i.e. called) depending upon
the level of market interest rates at their respective call dates.
4) $15.2 million or 7.4% of the Company's investment portfolio was
comprised of U.S. Government Agency Step-up bonds which will reprice
as follows: 6 - 12 months - $8.5 million from 4.00% to 7.00%, $2.0
million from 4.40% to 7.00%; and 1 - 2 years - $4.7 million from 4.70%
to 6.00%. Management believes that substantially all of these bonds
are likely to be repaid during the intervals shown.
5) An aggregate of $31.1 million or 55.8% of the Company's net loan
portfolio had adjustable interest rates or maturities of less than 12
months; and
6) The maturity distribution of the Company's borrowings is as follows: 1
month or less - $99.2 million or 41.7%; 1 - 3 years - $13.5 million or
5.7%; 3 - 5 years - $112.6 million or 47.3%; and over 5 years - $12.5
million or 5.3%.
14
The effect of interest rate changes on a financial institution's assets and
liabilities may be analyzed by examining the "interest rate sensitivity" of the
assets and liabilities and by monitoring an institution's interest rate
sensitivity "gap". An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within a given time
period. A gap is considered positive (negative) when the amount of rate
sensitive assets (liabilities) exceeds the amount of rate sensitive liabilities
(assets). During a period of falling interest rates, a negative gap would tend
to result in an increase in net interest income. During a period of rising
interest rates, a positive gap would tend to result in an increase in net
interest income.
The following table sets forth certain information at the dates indicated
relating to the Company's interest-earning assets and interest-bearing
liabilities which are estimated to mature or are scheduled to reprice within one
year.
June 30,
--------------------------------
2006 2005 2004
-------- -------- --------
(Dollars in Thousands)
Interest-earning assets maturing or
repricing within one year $273,884 $318,015 $288,451
Interest-bearing liabilities maturing or
repricing within one year 194,509 181,085 171,655
-------- -------- --------
Interest sensitivity gap $ 79,375 $136,930 $116,796
======== ======== ========
Interest sensitivity gap as a percentage of
total assets 18.82% 32.5% 26.9%
Ratio of assets to liabilities
maturing or repricing within one year 140.81% 175.6% 168.0%
During fiscal 2006, the Company managed its one year interest sensitivity gap
by: (1) limiting the portfolio origination of long-term fixed rate mortgages;
(2) emphasizing loans with shorter terms or repricing frequencies; (3)
purchasing investments with call protection of 2 years or more; and (4)
purchasing floating rate CMO's which reprice on a monthly basis.
15
The following table illustrates the Company's estimated stressed cumulative
repricing gap - the difference between the amount of interest-earning assets and
interest-bearing liabilities expected to reprice at a given point in time - at
June 30, 2006. The table estimates the impact of an upward or downward change in
market interest rates of 100 and 200 basis points.
Cumulative Stressed Repricing Gap
---------------------------------
Month 3 Month 6 Month 12 Month 24 Month 36 Month 60 Long Term
------- ------- -------- -------- -------- -------- ---------
(Dollars in Thousands)
Base Case Up 200 bp
-------------------
Cummulative
Gap ($'s) (82,423) (60,013) (64,152) (54,200) (56,770) (68,692) 26,500
% of Total
Assets -19.5% -14.2% -15.2% -12.9% -13.5% -16.3% 6.3%
Base Case Up 100 bp
-------------------
Cummulative
Gap ($'s) (28,604) 5,763 1,773 (4,436) (6,878) (67,646) 26,500
% of Total
Assets -6.8% 1.4% 0.4% -1.1% -1.6% -16.0% 6.3%
Base Case No Change
-------------------
Cummulative
Gap ($'s) 46,259 82,977 79,375 71,124 67,744 (43,674) 26,500
% of Total
Assets 11.4% 19.7% 18.8% 16.9% 15.4% -10.4% 6.3%
Base Case Down 100 bp
-------------------
Cummulative
Gap ($'s) 62,591 118,590 136,469 143,418 151,751 46,585 26,500
% of Total
Assets 14.8% 28.1% 32.4% 34.0% 36.0% 11.0% 6.3%
Base Case Down 200 bp
-------------------
Cummulative
Gap ($'s) 89,491 132,420 151,229 151,230 159,529 52,715 26,500
% of Total
Assets 21.2% 31.4% 35.9% 35.9% 37.8% 12.5% 6.3%
Beginning in the third quarter of fiscal 2001, the Company began to utilize an
income simulation model to measure interest rate risk and to manage interest
rate sensitivity. The Company believes that income simulation modeling may
enable the Company to better estimate the possible effects on net interest
income due to changing market interest rates. Other key model parameters
include: estimated prepayment rates on the Company's loan, mortgage-backed
securities and investment portfolios; savings decay rate assumptions; and the
repayment terms and embedded options of the Company's borrowings.
16
The following table presents the simulated impact of a 100 and 200 basis point
upward or downward shift in market interest rates and the estimated impact on
net interest income, return on average equity, return on average assets and the
market value of portfolio equity. This analysis was done assuming that the
interest-earning asset and interest-bearing liability levels at the end of each
fiscal year remained constant.
Analysis of Sensitivity to Changes in Market Interest Rates
-----------------------------------------------------------
Modeled Change in Market Interest Rates
----------------------------------------------------------------------------------------------------------
June 30, 2006 June 30, 2005
---------------------------------------------------- ---------------------------------------------------
Estimated impact on: -200 -100 0 +100 +200 -200 -100 0 +100 +200
-------------------- ---- ---- - ---- ---- ---- ---- - ---- ----
Change in net
interest income -28.0% -11.0% 0.00% -11.4% -46.1% -88.1% -26.6% 0.00% 17.6% 38.0%
Return on average
equity 7.83% 10.74% 12.59% 10.69% 4.65% -5.26% 4.42% 8.33% 10.83% 13.69%
Return on average
assets 0.59% 0.78% 0.92% 0.78% 0.32% -0.34% 0.30% 0.58% 0.76% 0.97%
Market value of
equity (in thousands) $28,869 $33,371 $33,690 $25,363 $ 5,881 $11,310 $18,758 $24,370 $23,484 $15,770
The table below provides information about the Company's anticipated
transactions comprised of firm loan commitments and other commitments, including
undisbursed letters and lines of credit. The Company used no derivative
financial instruments to hedge such anticipated transactions as of June 30,
2006.
Anticipated Transactions
--------------------------------------------------------------------
(Dollars in Thousands)
Undisbursed construction and development loans
Fixed rate $ 5,571
7.58%
Adjustable rate $ 3,941
8.94%
Undisbursed lines of credit
Adjustable rate $ 7,662
7.85%
Loan origination commitments
Fixed rate $ 762
7.19%
Letters of credit
Adjustable rate $ 694
9.27%
------------
$ 18,630
============
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
WVS Financial Corp.
We have audited the accompanying consolidated balance sheet of WVS Financial
Corp. and subsidiary as of June 30, 2006 and 2005, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended June 30, 2006. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WVS Financial Corp.
and subsidiary as of June 30, 2006 and 2005, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 2006, in conformity with U.S. generally accepted accounting principles.
/s/ S.R. Snodgrass, A.C.
Wexford, PA
July 28, 2006
18
WVS FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
June 30,
2006 2005
--------- ---------
ASSETS
Cash and due from banks $ 1,099 $ 900
Interest-earning demand deposits 97 2,666
--------- ---------
Total cash and cash equivalents 1,196 3,566
Investment securities available for sale (amortized
cost of $8,497 and $9,155) 8,469 9,155
Investment securities held to maturity (market value
of $185,680 and $174,323) 187,952 173,911
Mortgage-backed securities available for sale
(amortized cost of $2,229 and $2,893) 2,292 3,120
Mortgage-backed securities held to maturity
(market value of $152,706 and $159,566) 153,461 159,031
Net loans receivable (allowance for loan losses of
$957 and $1,121) 55,702 60,151
Accrued interest receivable 2,921 2,057
Federal Home Loan Bank stock, at cost 7,861 7,769
Premises and equipment 864 939
Other assets 1,024 1,345
--------- ---------
TOTAL ASSETS $ 421,742 $ 421,044
========= =========
LIABILITIES
Deposits $ 151,713 $ 164,706
Federal Home Loan Bank advances: long-term 138,579 142,736
Federal Home Loan Bank advances: short-term 23,150 12,300
Other borrowings 76,048 69,680
Accrued interest payable 1,451 1,260
Other liabilities 1,383 1,161
--------- ---------
TOTAL LIABILITIES 392,324 391,843
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 shares authorized;
none outstanding -- --
Common stock, par value $0.01; 10,000,000 shares authorized;
3,769,838 and 3,762,618 shares issued 38 38
Additional paid-in capital 20,817 20,726
Treasury stock (1,434,606 and 1,368,508 shares at cost) (21,679) (20,594)
Retained earnings - substantially restricted 30,221 28,885
Accumulated other comprehensive income 23 149
Unallocated shares - Recognition and Retention Plans (2) (3)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 29,418 29,201
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 421,742 $ 421,044
========= =========
See accompanying notes to the consolidated financial statements.
19
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)
Year Ended June 30,
2006 2005 2004
----------- ----------- -----------
INTEREST AND DIVIDEND INCOME
Loans $ 4,009 $ 4,206 $ 5,180
Investment securities 9,029 9,499 8,350
Mortgage-backed securities 8,919 3,981 2,347
Interest-earning demand deposits 15 10 9
Federal Home Loan Bank stock 276 178 120
----------- ----------- -----------
Total interest and dividend income 22,248 17,874 16,006
----------- ----------- -----------
INTEREST EXPENSE
Deposits 3,123 2,238 2,321
Federal Home Loan Bank advances 7,934 8,119 8,120
Other borrowings 4,403 1,487 546
----------- ----------- -----------
Total interest expense 15,460 11,844 10,987
----------- ----------- -----------
NET INTEREST INCOME 6,788 6,030 5,019
Recovery for loan losses (161) (46) (794)
----------- ----------- -----------
NET INTEREST INCOME AFTER
RECOVERY FOR LOAN LOSSES 6,949 6,076 5,813
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposits 380 361 385
Investment securities gains 30 336 20
Other 295 295 310
----------- ----------- -----------
Total noninterest income 705 992 715
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits 1,970 1,971 1,992
Occupancy and equipment 387 438 433
Data processing 271 267 231
Correspondent bank charges 132 134 142
Other 761 722 809
----------- ----------- -----------
Total noninterest expense 3,521 3,532 3,607
----------- ----------- -----------
Income before income taxes 4,133 3,536 2,921
Income taxes 1,287 627 619
----------- ----------- -----------
NET INCOME $ 2,846 $ 2,909 $ 2,302
=========== =========== ===========
EARNINGS PER SHARE:
Basic $ 1.21 $ 1.20 $ 0.91
Diluted 1.21 1.19 0.90
AVERAGE SHARES OUTSTANDING:
Basic 2,357,217 2,432,267 2,535,796
Diluted 2,359,996 2,437,647 2,544,404
See accompanying notes to the consolidated financial statements.
20
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
Retained
Earnings- Accumulated
Additional Substan- Unallocated Other
Common Paid-in Treasury tially Shares Held Comprehensive
Stock Capital Stock Restricted by RRP Income (Loss) Total
--------- --------- --------- ---------- --------- ------------ ---------
Balance June 30, 2003 $ 37 $ 20,212 $ (16,767) $ 26,857 $ (50) $ 329 $ 30,618
--------- --------- --------- --------- --------- ------------ ---------
Net income 2,302 2,302
Unrealized loss on available-
for-sale securities, net of taxes of $25 (48) (48)
Tax benefit from stock grants issued
under RRPs 27 27
Accrued compensation expense for RRPs 5 5
Cancellation of unallocated RRP shares 40 40
Exercise of stock options 1 488 489
Purchase of treasury stock (2,610) (2,610)
Cash dividends declared ($0.64 per share) (1,624) (1,624)
--------- --------- --------- --------- --------- ------------ ---------
Balance June 30, 2004 38 20,727 (19,377) 27,535 (5) 281 29,199
Net income 2,909 2,909
Unrealized loss on available-
for-sale securities, net of taxes of $68 (132) (132)
Purchase of treasury stock (1,217) (1,217)
Cash dividends declared ($0.64 per share) (1,559) (1,559)
Other, net (1) 2 1
--------- --------- --------- --------- --------- ------------ ---------
Balance June 30, 2005 38 20,726 (20,594) 28,885 (3) 149 29,201
Net income 2,846 2,846
Unrealized loss on available-
for-sale securities, net of tax benefit of $65 (126) (126)
Exercise of stock options 91 91
Purchase of treasury stock (1,085) (1,085)
Cash dividends declared ($0.64 per share) (1,510) (1,510)
Other, net 1 1
--------- --------- --------- --------- --------- ------------ ---------
Balance June 30, 2006 $ 38 $ 20,817 $ (21,679) $ 30,221 $ (2) $ 23 $ 29,418
========= ========= ========= ========= ========= ============ =========
See accompanying notes to the consolidated financial statements.
21
WVS FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Year Ended June 30,
2006 2005 2004
--------- --------- ---------
OPERATING ACTIVITIES
Net income $ 2,846 $ 2,909 $ 2,302
Adjustments to reconcile net income to net cash
provided by operating activities:
Recovery for loan losses (161) (46) (794)
Depreciation 154 193 188
Investment securities gains (30) (336) (20)
Amortization (accretion) of discounts, premiums, and
deferred loan fees (234) (415) 1,166
Purchase of trading securities -- -- (999)
Sale of trading securities -- 1,000 --
Deferred income taxes 181 73 171
Decrease (increase) in accrued interest receivable (864) 399 344
Increase (decrease) in accrued interest payable 191 63 (252)
Other, net 377 (43) 20
--------- --------- ---------
Net cash provided by operating activities 2,460 3,797 2,126
--------- --------- ---------
INVESTING ACTIVITIES
Available for sale:
Purchase of investment and mortgage-backed
securities (8,690) (26,145) (23,890)
Proceeds from repayments of investment and
mortgage-backed securities 9,395 20,364 45,852
Proceeds from sales of investment and
mortgage-backed securities 1,016 1,409 251
Held to maturity:
Purchase of investment and mortgage-backed
securities (202,891) (368,064) (401,567)
Proceeds from repayments of investment and
mortgage-backed securities 194,306 377,002 288,489
Net decrease in net loans receivable 4,581 7,733 23,751
Purchase of Federal Home Loan Bank stock (5,994) (8,761) (1,584)
Redemption of Federal Home Loan Bank stock 5,902 8,524 1,849
Acquisition of premises and equipment (79) (55) (34)
Other, net 60 -- 572
--------- --------- ---------
Net cash provided by (used for) investing activities (2,394) 12,007 (66,311)
--------- --------- ---------
FINANCING ACTIVITIES
Net Increase (decrease) in deposits (12,993) 4,143 (10,363)
Net increase (decrease) in Federal Home Loan Bank short-term advances 10,850 12,300 (3,875)
Net increase (decrease) in other borrowings 6,368 (21,959) 82,186
Proceeds from Federal Home Loan Bank long-term advances -- -- 500
Repayments of Federal Home Loan Bank long-term advances (4,157) (7,000) (279)
Net proceeds from exercise of stock options 91 -- 489
Cash dividends paid (1,510) (1,559) (1,624)
Purchase of treasury stock (1,085) (1,217) (2,610)
--------- --------- ---------
Net cash provided by (used for) financing activities (2,436) (15,292) 64,424
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (2,370) 512 239
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,566 3,054 2,815
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,196 $ 3,566 $ 3,054
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 15,269 $ 11,782 $ 11,238
Taxes 915 655 363
See accompanying notes to the consolidated financial statements.
22
WVS FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
WVS Financial Corp. ("WVS" or the "Company") is a
Pennsylvania-chartered unitary bank holding company which owns 100
percent of the common stock of West View Savings Bank ("West View" or
the "Savings Bank"). The operating results of the Company depend
primarily upon the operating results of the Savings Bank and, to a
lesser extent, income from interest-earning assets such as investment
securities.
West View is a Pennsylvania-chartered, SAIF-insured stock savings bank
conducting business from six offices in the North Hills suburbs of
Pittsburgh. The Savings Bank's principal sources of revenue originate
from its portfolio of residential real estate and commercial mortgage
loans as well as income from investment and mortgage-backed securities.
The Company is supervised by the Board of Governors of the Federal
Reserve System, while the Savings Bank is subject to regulation and
supervision by the Federal Deposit Insurance Corporation ("FDIC") and
the Pennsylvania Department of Banking.
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of WVS and
its wholly owned subsidiary, West View. All intercompany transactions
have been eliminated in consolidation. The accounting and reporting
policies of WVS and West View conform to U.S. generally accepted
accounting principles. The Company's fiscal year-end for financial
reporting is June 30. For regulatory and income tax reporting purposes,
WVS reports on a December 31 calendar year basis.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the balance sheet date and
revenues and expenses for that period. Actual results could differ
significantly from those estimates.
Investment and Mortgage-Backed Securities
-----------------------------------------
Investment securities are classified at the time of purchase as
securities held to maturity or securities available for sale based on
management's ability and intent. Debt and mortgage-backed securities
acquired with the ability and intent to hold to maturity are stated at
cost adjusted for amortization of premium and accretion of discount,
which are computed using the level-yield method and recognized as
adjustments of interest income. Amortization rates for mortgage-backed
securities are periodically adjusted to reflect changes in the
prepayment speeds of the underlying mortgages. Certain other debt,
equity, and mortgage-backed securities have been classified as
available for sale to serve principally as a source of liquidity.
Unrealized holding gains and losses for available-for-sale securities
are reported as a separate component of stockholders' equity, net of
tax, until realized. Realized securities gains and losses are computed
using the specific identification method. Interest and dividends on
investment and mortgage-backed securities are recognized as income when
earned.
Common stock of the Federal Home Loan Bank (the "FHLB") represents
ownership in an institution, which is wholly owned by other financial
institutions. This equity security is accounted for at cost and
reported separately on the accompanying Consolidated Balance Sheet.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Trading Securities
------------------
Trading securities are held for resale in anticipation of short-term
(generally 90 days or less) fluctuations in market prices. Trading
securities are stated at fair value. Realized and unrealized gains and
losses are included in noninterest income as investment securities
gains.
Net Loans Receivable
--------------------
Net loans receivable are reported at their principal amount, net of the
allowance for loan losses and deferred loan fees. Interest on mortgage,
consumer, and commercial loans is recognized on the accrual method. The
Company's general policy is to stop accruing interest on loans when,
based upon relevant factors, the collection of principal or interest is
doubtful, regardless of the contractual status. Interest received on
nonaccrual loans is recorded as income or applied against principal
according to management's judgment as to the collectibility of such
principal.
Loan origination and commitment fees, and all incremental direct loan
origination costs, are deferred and recognized over the contractual
remaining lives of the related loans on a level-yield basis.
Allowance for Loan Losses
-------------------------
The allowance for loan losses represents the amount which management
estimates is adequate to provide for probable losses inherent in its
loan portfolio. The allowance method is used in providing for loan
losses. Accordingly, all loan losses are charged to the allowance, and
all recoveries are credited to it. The allowance for loan losses is
established through a provision for loan losses charged to operations.
The provision for loan losses is based on management's periodic
evaluation of individual loans, economic factors, past loan loss
experience, changes in the composition and volume of the portfolio, and
other relevant factors. The estimates used in determining the adequacy
of the allowance for loan losses, including the amounts and timing of
future cash flows expected on impaired loans, are particularly
susceptible to changes in the near term.
Impaired loans are commercial and commercial real estate loans for
which it is probable the Company will not be able to collect all
amounts due according to the contractual terms of the loan agreement.
The Company individually evaluates such loans for impairment and does
not aggregate loans by major risk classifications. The definition of
"impaired loans" is not the same as the definition of "nonaccrual
loans," although the two categories overlap. The Company may choose to
place a loan on nonaccrual status due to payment delinquency or
uncertain collectibility, while not classifying the loan as impaired if
the loan is not a commercial or commercial real estate loan. Factors
considered by management in determining impairment include payment
status and collateral value. The amount of impairment for these types
of impaired loans is determined by the difference between the present
value of the expected cash flows related to the loan, using the
original interest rate, and its recorded value, or as a practical
expedient in the case of collateralized loans, the difference between
the fair value of the collateral and the recorded amount of the loans.
When foreclosure is probable, impairment is measured based on the fair
value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans
are large groups of smaller-balance homogeneous loans and are measured
for impairment collectively. Loans that experience insignificant
payment delays, which are defined as 90 days or less, generally are not
classified as impaired. Management determines the significance of
payment delays on a case-by-case basis taking into consideration all
circumstances surrounding the loan and the borrower, including the
length of the delay, the borrower's prior payment record, and the
amount of shortfall in relation to the principal and interest owed.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate Owned
-----------------
Real estate owned acquired through foreclosure is carried at the lower
of cost or fair value minus estimated costs to sell. Costs relating to
development and improvement of the property are capitalized, whereas
costs of holding such real estate are expensed as incurred. Valuation
allowances for estimated losses are provided when the carrying value of
the real estate acquired exceeds the fair value.
Premises and Equipment
----------------------
Premises and equipment are stated at cost, less accumulated
depreciation. Depreciation is principally computed on the straight-line
method over the estimated useful lives of the related assets, which
range from 3 to 10 years for furniture and equipment and 25 to 50 years
for building premises. Leasehold improvements are amortized over the
shorter of their estimated useful lives or their respective lease
terms, which range from 7 to 15 years. Expenditures for maintenance and
repairs are charged against income as incurred. Costs of major
additions and improvements are capitalized.
Income Taxes
------------
Deferred tax assets and liabilities are computed based on the
difference between the financial statement and the income tax basis of
assets and liabilities using the enacted marginal tax rates. Deferred
income taxes or benefits are based on the changes in the deferred tax
asset or liability from period to period.
The Company files a consolidated federal income tax return. Deferred
tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which such items are expected to
be realized or settled. As changes in tax rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for
income taxes.
Earnings Per Share
------------------
The Company provides dual presentation of basic and diluted earnings
per share. Basic earnings per share are calculated by dividing net
income available to common stockholders by the weighted-average number
of common shares outstanding during the period. Diluted earnings per
share are calculated by dividing net income available to common
stockholders, adjusted for the effects of any dilutive securities, by
the weighted-average number of common shares outstanding, adjusted for
the effects of any dilutive securities.
Stock Options
-------------
The Company accounts for stock-based compensation in accordance with
Financial Accounting Standard (FAS) No. 123R. FAS 123R requires
compensation costs related to share-based payment transactions to be
recognized in the financial statements (with limited exceptions). The
amount of compensation cost is measured based on the grant-date fair
value of the equity or liability instruments issued. Compensation cost
is recognized over the period that an employee provides service in
exchange for the award. The Company did not have any non-vested stock
options outstanding during the periods ended June 30, 2006, 2005, and
2004. There were no options issued during the periods ended June 30,
2006 and 2005.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
--------------------
The Company is required to present comprehensive income and its
components in a full set of general- purpose financial statements for
all periods presented. Other comprehensive income is composed
exclusively of net unrealized holding gains (losses) on its
available-for-sale securities portfolio. The Company has elected to
report the effects of its other comprehensive income as part of Note 3.
Cash Flow Information
---------------------
Cash and cash equivalents include cash and due from banks and
interest-earning demand deposits.
Reclassification of Comparative Figures
---------------------------------------
Certain comparative amounts for prior years have been reclassified to
conform to current year presentations. Such reclassifications did not
affect net income or stockholders' equity.
Recent Accounting Pronouncements
--------------------------------
In February 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting ("FAS") No. 155, Accounting
for Certain Hybrid Instruments, as an amendment of FASB Statements No.
133 and 140. FAS No. 155 allows financial instruments that have
embedded derivatives to be accounted for as a whole (eliminating the
need to bifurcate the derivative from its host) if the holder elects to
account for the whole instrument on a fair value basis. This statement
is effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September
15, 2006. The adoption of this standard is not expected to have a
material effect on the Company's results of operations or financial
position.
In March 2006, the FASB issued FAS No. 156, Accounting for Servicing of
Financial Assets. This Statement, which is an amendment to FAS No. 140,
will simplify the accounting for servicing assets and liabilities, such
as those common with mortgage securitization activities. Specifically,
FAS No. 156 addresses the recognition and measurement of separately
recognized servicing assets and liabilities and provides an approach to
simplify efforts to obtain hedge-like (offset) accounting. FAS No. 156
also clarifies when an obligation to service financial assets should be
separately recognized as a servicing asset or a servicing liability,
requires that a separately recognized servicing asset or servicing
liability be initially measured at fair value, if practicable, and
permits an entity with a separately recognized servicing asset or
servicing liability to choose either of the amortization or fair value
methods for subsequent measurement. The provisions of FAS No. 156 are
effective as of the beginning of the first fiscal year that begins
after September 15, 2006. The adoption of this standard is not expected
to have a material effect on the Company's results of operations or
financial position.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation
of FAS No. 109, Accounting for Income Taxes, and it seeks to reduce the
diversity in practice associated with certain aspects of measurement
and recognition in accounting for income taxes. In addition, FIN No. 48
requires expanded disclosure with respect to the uncertainty in income
taxes and is effective for fiscal years beginning after December 15,
2006. The Company is currently evaluating the impact the adoption of
the standard will have on the Company's results of operations.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
2. EARNINGS PER SHARE
The following table sets forth the computation of the weighted-average common
shares used to calculate basic and diluted earnings per share.
2006 2005 2004
---------- ---------- ----------
Weighted-average common shares
issued 3,765,511 3,762,892 3,747,821
Average treasury stock shares (1,408,294) (1,330,625) (1,212,025)
---------- ---------- ----------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 2,357,217 2,432,267 2,535,796
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 2,779 5,380 8,608
---------- ---------- ----------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 2,359,996 2,437,647 2,544,404
========== ========== ==========
There are no convertible securities that would affect the numerator in
calculating basic and diluted earnings per share; therefore, net income
as presented on the Consolidated Statement of Income is used.
3. COMPREHENSIVE INCOME
Other comprehensive income primarily reflects changes in net unrealized
gains (losses) on available-for-sale securities. Total comprehensive
income for the years ended June 30 is summarized as follows:
2006 2005 2004
------- ------- -------
Net Income $ 2,846 $ 2,909 $ 2,302
Other comprehensive income:
Unrealized losses on available-for-sale securities (221) (536) (93)
Reclassification adjustment for gains included
in net income 30 336 20
------- ------- -------
Other comprehensive loss before tax (191) (200) (73)
Income tax benefit related to other
comprehensive loss (65) (68) (25)
------- ------- -------
Other comprehensive loss, net of tax (126) (132) (48)
------- ------- -------
Comprehensive income $ 2,720 $ 2,777 $ 2,254
======= ======= =======
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
4. INVESTMENT SECURITIES
The amortized cost and estimated market values of investments are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
2006
----
AVAILABLE FOR SALE
Corporate debt securities $ 8,497 $ -- $ (28) $ 8,469
----------- ----------- ----------- -----------
Total $ 8,497 $ -- $ (28) $ 8,469
=========== =========== =========== ===========
HELD TO MATURITY
U.S. Government agency securities $ 175,755 $ 21 $ (2,771) $ 173,005
Obligations of states and political
subdivisions 12,197 482 (4) 12,675
----------- ----------- ----------- -----------
Total $ 187,952 $ 503 $ (2,775) $ 185,680
=========== =========== =========== ===========
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
2005
----
AVAILABLE FOR SALE
Corporate debt securities $ 9,155 $ -- $ -- $ 9,155
----------- ----------- ----------- -----------
Total $ 9,155 $ -- $ -- $ 9,155
=========== =========== =========== ===========
HELD TO MATURITY
U.S. Government agency securities $ 149,360 $ 77 $ (493) $ 148,944
Obligations of states and political
subdivisions 24,551 848 (20) 25,379
----------- ----------- ----------- -----------
Total $ 173,911 $ 925 $ (513) $ 174,323
=========== =========== =========== ===========
In 2006, 2005, and 2004, the Company recorded realized investment
security gains, and unrealized holding gains and losses for trading
securities of $30, $336, and $20. Proceeds from sales of investment
securities during 2006, 2005, and 2004 were $1,016, $1,409, and $251.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
4. INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market values of debt securities at
June 30, 2006, by contractual maturity, are shown below. Expected
maturities may differ from the contractual maturities because issuers
may have the right to call securities prior to their final maturities.
Due after Due after
Due in one five
one year through through Due after
or less five years ten years ten years Total
-------- ---------- --------- --------- --------
AVAILABLE FOR SALE
Amortized cost $ 8,497 -- $ -- $ -- $ 8,497
-------- -------- -------- -------- --------
Estimated market value 8,469 -- -- -- 8,469
HELD TO MATURITY
Amortized cost $ -- $ 854 $ 49,094 $138,004 $187,952
Estimated market value -- 875 48,538 136,267 185,680
Investment securities with amortized costs of $88,229 and $101,208 and
estimated market values of $86,703 and $100,951 at June 30, 2006 and
2005, respectively, were pledged to secure public deposits, repurchase
agreements, and for other purposes as required by law.
5. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market values of mortgage-backed
securities are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
2006
----
AVAILABLE FOR SALE
Fannie Mae $ -- $ -- $ -- $ --
Government National Mortgage
Association certificates 2,171 61 -- 2,232
Freddie Mac -- -- -- --
Collateralized mortgage obligations 58 2 -- 60
---------- ---------- ---------- ----------
Total $ 2,229 $ 63 $ -- $ 2,292
========== ========== ========== ==========
HELD TO MATURITY
Fannie Mae $ -- $ -- $ -- $ --
Government National Mortgage
Association certificates -- -- -- --
Freddie Mac -- -- -- --
Collateralized mortgage obligations 153,461 216 (971) 152,706
---------- ---------- ---------- ----------
Total $ 153,461 $ 216 $ (971) $ 152,706
========== ========== ========== ==========
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
5. MORTGAGE-BACKED SECURITIES (Continued)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
2005
----
AVAILABLE FOR SALE
Fannie Mae $ 449 $ 25 $ -- $ 474
Government National Mortgage
Association certificates 2,333 196 -- 2,529
Freddie Mac 44 1 -- 45
Collateralized mortgage obligations 67 5 -- 72
---------- ---------- ---------- ----------
Total $ 2,893 $ 227 $ -- $ 3,120
========== ========== ========== ==========
HELD TO MATURITY
Fannie Mae $ 16 $ 1 $ -- $ 17
Government National Mortgage
Association certificates 370 25 -- 395
Freddie Mac 9 1 -- 10
Collateralized mortgage obligations 158,636 525 (17) 159,144
---------- ---------- ---------- ----------
Total $ 159,031 $ 552 $ (17) $ 159,566
========== ========== ========== ==========
The amortized cost and estimated market value of mortgage-backed securities at
June 30, 2006, by contractual maturity, are shown below. Expected maturities may
differ from the contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Due in Due after Due after
one year one through five through Due after
or less five years ten years ten years Total
------------ ------------ ------------ ------------ ------------
AVAILABLE FOR SALE
Amortized cost $ -- $ -- $ -- $ 2,229 $ 2,229
Estimated market value -- -- -- 2,292 2,292
HELD TO MATURITY
Amortized cost $ -- $ -- $ -- $ 153,461 $ 153,461
Estimated market value -- -- -- 152,706 152,706
At June 30, 2006 and 2005, mortgage-backed securities with an amortized cost of
$138,349 and $112,047 and estimated market values of $137,827 and $112,730, were
pledged to secure borrowings with the Federal Home Loan Bank.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
6. UNREALIZED LOSSES ON SECURITIES
The following table shows the Company's gross unrealized losses and fair value,
aggregated by category and length of time that the individual securities have
been in a continuous unrealized loss position, at June 30, 2006 and 2005.
2006
-----------------------------------------------------------------------------------------
Less Than Twelve Months Twelve Months or Greater Total
-----------------------------------------------------------------------------------------
Estimated Gross Estimated Gross Estimated Gross
Market Unrealized Market Unrealized Market Unrealized
Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
U.S. government agencies
securities $ 104,620 $ (1,929) $ 38,389 $ (842) $ 143,009 $ (2,771)
Obligations of states and
political subdivisions -- -- 1,315 (4) 1,315 (4)
Corporate debt securities 472 (28) -- -- 472 (28)
Collateralized mortgage
obligations 101,260 (648) 18,316 (323) 119,576 (971)
------------ ------------ ------------ ------------ ------------ ------------
Total $ 206,352 $ (2,605) $ 58,020 $ (1,169) $ 264,372 $ (3,774)
============ ============ ============ ============ ============ ============
2005
-----------------------------------------------------------------------------------------
Less Than Twelve Months Twelve Months or Greater Total
-----------------------------------------------------------------------------------------
Estimated Gross Estimated Gross Estimated Gross
Market Unrealized Market Unrealized Market Unrealized
Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
U.S. government agencies
securities $ 113,715 $ (493) $ -- $ -- $ 113,715 $ (493)
Obligations of states and
political subdivisions -- -- 1,316 (20) 1,316 (20)
Collateralized mortgage
obligations 43,107 (16) 277 (1) 43,384 (17)
------------ ------------ ------------ ------------ ------------ ------------
Total $ 156,822 $ (509) $ 1,593 $ (21) $ 158,415 $ (530)
============ ============ ============ ============ ============ ============
The policy of the Company is to recognize an other-than-temporary impairment of
securities where the fair value has been significantly below cost for three
consecutive quarters. For fixed-maturity investments with unrealized losses due
to interest rates where the Company has the positive intent and ability to hold
the investment for a period of time sufficient to allow a market recovery,
declines in value below cost are not assumed to be other than temporary. There
are 64 positions that are temporarily impaired at June 30, 2006. The Company
reviews its position quarterly and has asserted that at June 30, 2006, the
declines outlined in the above table represent temporary declines and the
Company does have the intent and ability to hold those securities to maturity or
to allow a market recovery.
The Company has concluded that any impairment of its investment securities
portfolio is not other than temporary but is the result of interest rate
changes, sector credit changes, or Company-specific rating changes that are not
expected to result in the noncollection of principal and interest during the
period.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
7. NET LOANS RECEIVABLE
Major classifications of loans are summarized as follows:
2006 2005
------- -------
First mortgage loans:
1 - 4 family dwellings $17,702 $20,680
Construction 20,964 22,065
Land acquisition and development 3,221 5,884
Multi-family dwellings 4,339 4,960
Commercial 7,574 8,561
------- -------
53,800 62,150
------- -------
Consumer loans:
Home equity 6,483 6,504
Home equity lines of credit 2,961 3,578
Other 962 1,089
------- -------
10,406 11,171
------- -------
Commercial loans 2,050 915
------- -------
Less:
Undisbursed construction and land development 9,512 12,882
Net deferred loan fees 85 82
Allowance for loan losses 957 1,121
------- -------
10,554 14,085
------- -------
Net loans receivable $55,702 $60,151
======= =======
The Company's primary business activity is with customers located
within its local trade area of Northern Allegheny and Southern Butler
counties. The Company has concentrated its lending efforts by granting
residential and construction mortgage loans to customers throughout its
immediate trade area. The Company also selectively funds and
participates in commercial and residential mortgage loans outside of
its immediate trade area, provided such loans meet the Company's credit
policy guidelines. At June 30, 2006 and 2005, the Company had
approximately $15 million and $14 million, respectively, of outstanding
loans for land development and construction in the local trade area.
Although the Company had a diversified loan portfolio at June 30, 2006
and 2005, loans outstanding to individuals and businesses are dependent
upon the local economic conditions in its immediate trade area.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
7. NET LOANS RECEIVABLE (Continued)
Total nonaccrual loans and troubled debt restructurings and the related
interest income recognized for the years ended June 30 are as follows:
2006 2005 2004
------ ------ ------
Principal outstanding $ 308 $2,101 $2,181
------ ------ ------
Interest income that would
have been recognized 23 150 123
Interest income recognized 10 99 94
------ ------ ------
Interest income foregone $ 13 $ 51 $ 29
====== ====== ======
The following table is a summary of the loans considered to be impaired
as of June 30:
2006 2005 2004
------ ------ ------
Impaired loans with an allocated allowance $ -- $ -- $1,900
Impaired loans without an allocated allowance -- -- --
------ ------ ------
Total impaired loans $ -- $ -- $1,900
====== ====== ======
Allocated allowance on impaired loans $ -- $ -- $ 762
Average impaired loans -- -- 1,836
Income recognized on impaired loans -- -- 89
Certain officers, directors, and their associates were customers of,
and had transactions with, the Company in the ordinary course of
business. A summary of loan activity for those directors, executive
officers, and their associates with aggregate loan balances outstanding
of at least $60,000 during the years ended June 30 are as follows:
2006 2005
------ ------
Balance, July 1 $ 512 $ 316
Additions 152 631
Amounts collected (291) (435)
------ ------
Balance, June 30 $ 373 $ 512
====== ======
8. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
2006 2005 2004
------- ------- -------
Balance, July 1 $ 1,121 $ 1,370 $ 2,530
Add:
Recovery for loan losses (161) (46) (794)
Recoveries 4 34 158
Less:
Loans charged off 7 237 524
------- ------- -------
Balance, June 30 $ 957 $ 1,121 $ 1,370
======= ======= =======
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
9. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
2006 2005
------ ------
Investment and mortgage-backed securities $2,633 $1,758
Loans receivable 288 299
------ ------
Total $2,921 $2,057
====== ======
10. FEDERAL HOME LOAN BANK STOCK
The Savings Bank is a member of the FHLB System. As a member, West View
maintains an investment in the capital stock of the FHLB of Pittsburgh
in an amount not less than 65 basis points of the outstanding unused
FHLB borrowing capacity and 4.65 percent of its outstanding FHLB
borrowings, as calculated throughout the year.
11. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as
follows:
2006 2005
------ ------
Land and improvements $ 246 $ 246
Buildings and improvements 1,994 1,992
Furniture, fixtures, and equipment 928 851
------ ------
3,168 3,089
Less accumulated depreciation 2,304 2,150
------ ------
Total $ 864 $ 939
====== ======
Depreciation charged to operations was $154, $193, and $188 for the years ended
June 30, 2006, 2005, and 2004, respectively.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
12. DEPOSITS
Deposit accounts are summarized as follows:
2006 2005
----------------------- -----------------------
Percent of Percent of
Amount Portfolio Amount Portfolio
---------- ---------- ---------- ----------
Non-interest-earning checking $ 11,315 7.5% $ 11,926 7.2%
Interest-earning checking 18,083 11.9 25,396 15.4
Savings accounts 36,851 24.3 44,323 26.9
Money market accounts 16,562 10.9 13,625 8.3
Advance payments by borrowers
for taxes and insurance 1,012 0.7 1,117 0.7
---------- ---------- ---------- ----------
83,823 55.3 96,387 58.5
---------- ---------- ---------- ----------
Savings certificates:
2.00% or less -- -- 16,044 9.7
2.01 - 4.00% 31,786 20.9 44,895 27.3
4.01 - 6.00% 35,945 23.7 6,605 4.0
6.01 - 6.95% 159 0.1 775 0.5
---------- ---------- ---------- ----------
67,890 44.7 68,319 41.5
---------- ---------- ---------- ----------
Total $ 151,713 100.0% $ 164,706 100.0%
========== ========== ========== ==========
The maturities of savings certificates at June 30, 2006, are summarized
as follows:
Within one year $ 42,855
Beyond one year but within two years 14,585
Beyond two years but within three years 4,653
Beyond three years 5,797
----------
Total $ 67,890
==========
Savings certificates with balances of $100,000 or more amounted to
$10,999 and $13,513 on June 30, 2006 and 2005, respectively.
Interest expense by deposit category for the years ended June 30 are as
follows:
2006 2005 2004
------ ------ ------
Interest-earning checking accounts $ 11 $ 14 $ 32
Savings accounts 280 311 334
Money market accounts 413 166 109
Savings certificates 2,408 1,734 1,831
Advance payments by borrowers for taxes
and insurance 11 13 15
------ ------ ------
Total $3,123 $2,238 $2,321
====== ====== ======
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
13. FEDERAL HOME LOAN BANK ADVANCES
The following table presents contractual maturities of FHLB long-term
advances as of June 30:
Weighted- Stated interest
Maturity range average rate range
Description from to interest rate from to 2006 2005
----------------- ---------- ------- --------------- -------- -------- -------------- -------------
Convertible 02/20/08 06/22/16 5.47% 4.96% 6.10% $ 137,500 $ 137,500
Fixed rate 03/12/09 05/03/10 3.24 2.91 3.53 1,079 5,236
------------- -------------
$ 138,579 $ 142,736
============= =============
Maturities of FHLB long-term advances at June 30, 2006, are summarized
as follows:
Weighted-
Maturing During Average
Fiscal Year Ended Interest
June 30: Amount Rate
-------------------------- ---------------- -----------------
2008 $ 3,000 5.48%
2009 10,500 4.99
2010 20,579 5.86
2011 and thereafter 104,500 5.42
----------------
Total $ 138,579 5.45%
================
The terms of the convertible advances reset to the three-month London
Interbank Offered Rate ("LIBOR") and have various spreads and call
dates ranging from three months to seven years. The FHLB has the right
to convert from a fixed rate to a predetermined floating rate on its
conversion date or quarterly thereafter. Should the advance be
converted, the Company has the right to pay off the advance without
penalty. The FHLB advances are secured by the Company's FHLB stock and
investment securities and are subject to substantial prepayment
penalties.
The Company also utilized revolving and short-term FHLB advances.
Short-term FHLB advances generally mature within 90 days, while
revolving FHLB advances may be repaid by the Company without penalty.
The following table presents information regarding such advances as of
June 30:
2006 2005
------- -------
FHLB revolving and short-term advances:
Ending balance $23,150 $12,300
Average balance during the year 2,421 3,021
Maximum month-end balance during the year 24,800 35,400
Average interest rate during the year 4.37% 2.63%
Weighted-average rate at year-end 5.32% 3.31%
At June 30, 2006, the Company had remaining borrowing capacity with the
FHLB of approximately $40 million.
The FHLB advances are secured by the Company's FHLB stock and
investment and mortgage-backed securities held in safekeeping at the
FHLB, and are subject to substantial prepayment penalties.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
14. OTHER BORROWINGS
Other borrowings include securities sold under agreements to repurchase
with securities brokers. The outstanding repurchase agreements
generally mature within 1 to 90 days from the transaction date and
qualifying collateral has been delivered. The Company pledged
investment securities with a carrying value of $78,259 and $69,775 at
June 30, 2006 and 2005, respectively, as collateral for the repurchase
agreements as explained in Note 4. The following table presents
information regarding other borrowings as of June 30:
2006 2005
-------- --------
Ending balance $ 76,048 $ 69,680
Average balance during the year 99,633 65,578
Maximum month-end balance during the year 122,185 117,976
Average interest rate during the year 4.42% 2.27%
Weighted-average rate at year-end 5.35% 3.29%
15. COMMITMENTS AND CONTINGENT LIABILITIES
Loan Commitments
In the normal course of business, there are various commitments that
are not reflected in the Bank's financial statements. These instruments
involve, to varying degrees, elements of credit and interest rate risk
in excess of the amount recognized in the consolidated balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by
the other parties to the financial instruments is represented by the
contractual amounts as disclosed. Losses, if any, are charged to the
allowance for loan losses. Management minimizes its exposure to credit
loss under these commitments by subjecting them to credit approval,
review procedures, and collateral requirements as deemed necessary.
Various loan commitments totaling $18,630 and $20,473 at June 30, 2006
and 2005, respectively, represent financial instruments with
off-balance sheet risk. The commitments outstanding at June 30, 2006,
contractually mature in less than one year.
Loan commitments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the
Consolidated Balance Sheet. The same credit policies are used in making
commitments and conditional obligations as for on-balance sheet
instruments. Generally, collateral, usually in the form of real estate,
is required to support financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the loan
agreement. These commitments are composed primarily of the undisbursed
portion of construction and land development loans (Note 7),
residential, commercial real estate, and consumer loan originations.
The exposure to loss under these commitments is limited by subjecting
them to credit approval and monitoring procedures. Substantially all
commitments to extend credit are contingent upon customers maintaining
specific credit standards at the time of the loan funding. Management
assesses the credit risk associated with certain commitments to extend
credit in determining the level of the allowance for loan losses.
Litigation
The Company is involved with various legal actions arising in the
ordinary course of business. Management believes the outcome of these
matters will have no material effect on the consolidated operations or
financial condition of WVS.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
16. REGULATORY CAPITAL
Federal regulations require the Company and Savings Bank to maintain
minimum amounts of capital. Specifically, each is required to maintain
certain minimum dollar amounts and ratios of Total and Tier I Capital
to Risk-Weighted Assets and of Tier I Capital to Average Total Assets.
In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") established five capital
categories ranging from well capitalized to critically
undercapitalized. Should any institution fail to meet the requirements
to be considered adequately capitalized, it would become subject to a
series of increasingly restrictive regulatory actions.
As of June 30, 2006 and 2005, the FDIC categorized the Savings Bank as
well capitalized under the regulatory framework for prompt corrective
action. To be classified as a well capitalized financial institution,
Total Risk-Based, Tier 1 Risk-Based, and Tier 1 Leverage Capital Ratios
must be at least 10 percent, 6 percent, and 5 percent, respectively.
The Company's and Savings Bank's actual capital ratios are presented in
the following tables, which show that both met all regulatory capital
requirements.
June 30, 2006
-----------------------------------------
WVS West View
------------------- -------------------
Amount Ratio Amount Ratio
-------- -------- -------- --------
Total Capital (to Risk-Weighted Assets)
---------------------------------------
Actual $ 30,382 22.88% $ 28,786 21.69%
To Be Well Capitalized 13,279 10.00 13,273 10.00
For Capital Adequacy Purposes 10,623 8.00 10,619 8.00
Tier I Capital (to Risk-Weighted Assets)
----------------------------------------
Actual $ 29,377 22.12% $ 27,781 20.93%
To Be Well Capitalized 7,967 6.00 7,964 6.00
For Capital Adequacy Purposes 5,311 4.00 5,309 4.00
Tier I Capital (to Average Total Assets)
----------------------------------------
Actual $ 29,377 6.78% $ 27,781 6.40%
To Be Well Capitalized 21,679 5.00 21,713 5.00
For Capital Adequacy Purposes 17,343 4.00 17,370 4.00
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
16. REGULATORY CAPITAL (Continued)
June 30, 2005
-------------------------------------
WVS West View
----------------- -----------------
Amount Ratio Amount Ratio
------- ----- ------- -----
Total Capital (to Risk-Weighted Assets)
---------------------------------------
Actual $30,172 21.80% $28,417 20.74%
To Be Well Capitalized 13,838 10.00 13,702 10.00
For Capital Adequacy Purposes 11,070 8.00 10,961 8.00
Tier I Capital (to Risk-Weighted Assets)
----------------------------------------
Actual $29,051 20.99% $27,296 19.92%
To Be Well Capitalized 8,303 6.00 8,221 6.00
For Capital Adequacy Purposes 5,535 4.00 5,481 4.00
Tier I Capital (to Average Total Assets)
----------------------------------------
Actual $29,051 7.14% $27,296 6.73%
To Be Well Capitalized 20,357 5.00 20,283 5.00
For Capital Adequacy Purposes 16,285 4.00 16,227 4.00
Prior to the enactment of the Small Business Job Protection Act, the
Company accumulated approximately $3.9 million of retained earnings,
which represent allocations of income to bad debt deductions for tax
purposes only. Since there is no amount that represents the accumulated
bad debt reserves subsequent to 1987, no provision for federal income
tax has been made for such amount. If any portion of this amount is
used other than to absorb loan losses (which is not anticipated), the
amount will be subject to federal income tax at the current corporate
rate.
17. STOCK BENEFIT PLANS
Stock Option Plan
The Company maintains a Stock Option Plan for the directors, officers,
and employees. An aggregate of 347,258 shares of authorized but
unissued common stock of WVS was reserved for future issuance under
this Plan. The stock options typically have an expiration term of ten
years, subject to certain extensions and early terminations. The per
share exercise price of an incentive stock option shall at a minimum
equal the fair market value of a share of common stock on the date the
option is granted. The per share exercise price of a compensatory stock
option granted shall at least equal the greater of par value or 85
percent of the fair market value of a share of common stock on the date
the option is granted. Proceeds from the exercise of the stock options
are credited to common stock for the aggregate par value and the excess
is credited to paid-in capital.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
17. STOCK BENEFIT PLANS (Continued)
Stock Option Plan (Continued)
The following table presents information related to the outstanding
options:
Officers' and Weighted-
Employees' Directors' Average
Stock Stock Exercise
Options Options Price
---------- ---------- ----------
Outstanding, June 30, 2003 73,420 5,214 $ 15.07
Granted -- --
Exercised (34,028) (800) 15.19
Forfeited (80) -- 5.00
---------- ----------
Outstanding, June 30, 2004 39,312 4,414 $ 14.99
Granted -- --
Exercised -- --
Foreited -- --
---------- ----------
Outstanding, June 30, 2005 39,312 4,414 $ 14.99
Granted -- --
Exercised (7,320) -- 12.41
Forfeited -- --
---------- ----------
Outstanding, June 30, 2006 31,992 4,414 $ 15.51
========== ==========
Exercisable at year-end 31,992 4,414 $ 15.51
========== ==========
Available for future grant -- --
========== ==========
At June 30, 2006, for officers and employees there were 31,992 options
outstanding, exercisable at a weighted-average exercise price of
$15.63, and a weighted-average remaining contractual life of 1.42
years.
There were also 4,414 options outstanding and exercisable for directors
with a weighted-average exercise price of $14.70, and a
weighted-average remaining contractual life of 3.33 years.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
17. STOCK BENEFIT PLANS (Continued)
Recognition and Retention Plans ("RRP")
-------------------------------
The Company also maintains an RRP for substantially all officers,
employees, and directors of the Company. The objective of the RRPs is
to enable the Company to retain its corporate officers, key employees,
and directors who have the experience and ability necessary to manage
WVS and the Savings Bank. Officers and key employees of the Company who
were selected by members of a Board-appointed committee are eligible to
receive benefits under the RRPs. Non-employee directors of the Company
are eligible to participate in the RRP for directors.
An aggregate of 300,000 shares of common stock of WVS were acquired at
conversion for future issuance under these plans, of which 60,000
shares are subject to the RRP for directors and 240,000 shares are
subject to the RRP for officers and key employees.
The RRP expired during 2004 and all unissued shares were retired. RRP
costs are accrued to operations and added back to stockholders' equity
over a four- to ten-year vesting period. Net compensation expense
attributed to the RRPs amounted to $1, $1, and $5 for the years ended
June 30, 2006, 2005, and 2004.
Employee Stock Ownership Plan ("ESOP")
--------------------------------------
WVS maintains an ESOP for the benefit of officers and Savings Bank
employees who have met certain eligibility requirements related to age
and length of service. Compensation expense for the ESOP was $100,
$100, and $100 for the years ended June 30, 2006, 2005, and 2004,
respectively. Total ESOP shares as of June 30, 2006 and 2005, were
220,264 and 232,031, respectively.
18. DIRECTOR, OFFICER, AND EMPLOYEE BENEFITS
Profit Sharing Plan
The Company maintains a non-contributory profit sharing 401(k) plan
(the "Plan") for its officers and employees who have met the age and
length of service requirements. The Plan is a defined contribution plan
with the contributions based on a percentage of salaries of the Plan
participants. The Company made no contributions to the Plan for the
three years ended June 30, 2006, 2005, and 2004.
Directors' Deferred Compensation Plan
The Company maintains a deferred compensation plan (the "Plan") for
directors who elect to defer all or a portion of their directors' fees.
Deferred fees are paid to the participants in installments commencing
in the year following the year the individual is no longer a member of
the Board of Directors.
The Plan allows for the deferred amounts to be paid in shares of common
stock at the prevailing market price on the date of distribution. For
fiscal years ended June 30, 2006, 2005, and 2004, 25,841, 29,979, and
39,539 shares, respectively, were held by the Plan.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
19. INCOME TAXES
The provision for income taxes consists of:
2006 2005 2004
------ ------ ------
Currently payable:
Federal $ 978 $ 475 $ 366
State 128 79 82
------ ------ ------
1,106 554 448
Deferred 181 73 171
------ ------ ------
Total $1,287 $ 627 $ 619
====== ====== ======
The following temporary differences gave rise to the net deferred tax assets at
June 30:
2006 2005
------ ------
Deferred tax assets:
Allowance for loan losses $ 325 $ 381
Deferred compensation 324 294
Reserve for uncollected interest 183 183
Reserve for off-balance sheet commitments 16 --
Alternative minimum tax credit -- 206
Other 60 50
------ ------
Total gross deferred tax assets 908 1,114
------ ------
Deferred tax liabilities:
Net unrealized gain on securities available for sale 35 77
Deferred origination fees, net 188 200
Depreciation reserve 42 55
Other 1 1
------ ------
Total gross deferred tax liabilities 266 333
------ ------
Net deferred tax assets $ 642 $ 781
====== ======
No valuation allowance was established at June 30, 2006 and 2005, in view of the
Company's ability to carryback to taxes paid in previous years, future
anticipated taxable income, which is evidenced by the Company's earnings
potential, and deferred tax liabilities at June 30.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
19. INCOME TAXES (Continued)
The following is a reconciliation between the actual provision for
income taxes and the amount of income taxes which would have been
provided at federal statutory rates for the years ended June 30:
2006 2005 2004
------------------ ------------------ ------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------- ------- ------- ------- ------- -------
Provision at statutory rate $ 1,405 34.0% $ 1,202 34.0% $ 993 34.0%
State income tax, net of federal
tax benefit 84 2.0 52 1.5 54 1.9
Tax exempt income (251) (6.1) (553) (15.6) (558) (19.1)
Other, net 49 1.2 (74) (2.2) 130 4.4
------- ------- ------- ------- ------- -------
Actual tax expense and
effective rate $ 1,287 31.1% $ 627 17.7% $ 619 21.2%
======= ======= ======= ======= ======= =======
The Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax,
which is calculated at 11.5 percent of earnings.
20. REGULATORY MATTERS
Cash and Due From Banks
The Federal Reserve requires the Savings Bank to maintain certain
reserve balances. The required reserves are computed by applying
prescribed ratios to the Savings Bank's average deposit transaction
account balances. As of June 30, 2006 and 2005, the Savings Bank had
required reserves of $667 and $923, respectively. The required reserves
are held in the form of vault cash and a non-interest-bearing
depository balance maintained directly with the Federal Reserve.
Loans
Federal law prohibits the Company from borrowing from the Savings Bank
unless the loans are secured by specific obligations. Further, such
secured loans are limited in amount to 10 percent of the Savings Bank's
capital surplus.
Dividend Restrictions
The Savings Bank is subject to the Pennsylvania Banking Code, which
restricts the availability of surplus for dividend purposes. At June
30, 2006, surplus funds of $3,363 were not available for dividends.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values at June 30 are as
follows:
2006 2005
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
FINANCIAL ASSETS
Cash and cash equivalents $ 1,196 $ 1,196 $ 3,566 $ 3,566
Investment securities 196,421 194,149 183,066 183,478
Mortgage-backed securities 155,753 154,998 162,151 162,686
Net loans receivable 55,702 54,280 60,151 62,297
Accrued interest receivable 2,921 2,921 2,057 2,057
FHLB stock 7,861 7,861 7,769 7,769
FINANCIAL LIABILITIES
Deposits $ 151,713 $ 151,263 $ 164,706 $ 164,593
FHLB advances 161,729 161,748 155,036 159,511
Other borrowings 76,048 76,048 69,680 69,680
Accrued interest payable 1,451 1,451 1,260 1,260
Financial instruments are defined as cash, evidence of an ownership
interest in an entity, or a contract which creates an obligation or
right to receive or deliver cash or another financial instrument from
or to a second entity on potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument
could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. If a quoted market price is
available for a financial instrument, the estimated fair value would be
calculated based upon the market price per trading unit of the
instrument.
If no readily available market exists, the fair value estimates for
financial instruments should be based upon management's judgment
regarding current economic conditions, interest rate risk, expected
cash flows, future estimated losses, and other factors, as determined
through various option pricing formulas or simulation modeling. As many
of these assumptions result from judgments made by management based
upon estimates, which are inherently uncertain, the resulting estimated
values may not be indicative of the amount realizable in the sale of a
particular financial instrument. In addition, changes in the
assumptions on which the estimated values are based may have a
significant impact on the resulting estimated values.
As certain assets and liabilities, such as deferred tax assets,
premises and equipment, and many other operational elements of WVS, are
not considered financial instruments, but have value, this estimated
fair value of financial instruments would not represent the full market
value of WVS.
Estimated fair values have been determined by WVS using the best
available data, as generally provided in internal Savings Bank reports
and regulatory reports, using an estimation methodology suitable for
each category of financial instruments. The estimation methodologies
used are as follows:
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Cash and Cash Equivalents, Accrued Interest Receivable and Payable, and
-----------------------------------------------------------------------
Other Borrowings
----------------
The fair value approximates the current book value.
Investment Securities, Mortgage-Backed Securities, and FHLB Stock
-----------------------------------------------------------------
The fair value of investment and mortgage-backed securities is equal to
the available quoted market price. If no quoted market price is
available, fair value is estimated using the quoted market price for
similar securities. Since the FHLB stock is not actively traded on a
secondary market and held exclusively by member financial institutions,
the estimated fair market value approximates the carrying amount.
Net Loans Receivable and Deposits
---------------------------------
Fair value for consumer mortgage loans is estimated using market quotes
or discounting contractual cash flows for prepayment estimates.
Discount rates were obtained from secondary market sources, adjusted to
reflect differences in servicing, credit, and other characteristics.
The estimated fair values for consumer, fixed-rate commercial, and
multi-family real estate loans are estimated by discounting contractual
cash flows for prepayment estimates. Discount rates are based upon
rates generally charged for such loans with similar credit
characteristics.
The estimated fair value for nonperforming loans is the appraised value
of the underlying collateral adjusted for estimated credit risk.
Demand, savings, and money market deposit accounts are reported at book
value. The fair value of certificates of deposit is based upon the
discounted value of the contractual cash flows. The discount rate is
estimated using average market rates for deposits with similar average
terms.
FHLB Advances
-------------
The fair values of fixed-rate advances are estimated using discounted
cash flows, based on current incremental borrowing rates for similar
types of borrowing arrangements. The carrying amount on variable rate
advances approximates their fair value.
Commitments to Extend Credit
----------------------------
These financial instruments are generally not subject to sale, and
estimated fair values are not readily available. The carrying value,
represented by the net deferred fee arising from the unrecognized
commitment, and the fair value, determined by discounting the remaining
contractual fee over the term of the commitment using fees currently
charged to enter into similar agreements with similar credit risk, are
not considered material for disclosure. The contractual amounts of
unfunded commitments are presented in Note 15 to these financial
statements.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
22. PARENT COMPANY
Condensed financial information of WVS Financial Corp. is as follows:
CONDENSED BALANCE SHEET
June 30,
2006 2005
------- -------
ASSETS
Interest-earning deposits with subsidiary bank $ 1,561 $ 402
Investment securities available for sale 2 1,333
Investment in subsidiary bank 27,822 27,446
Accrued interest receivable and other assets 53 28
------- -------
TOTAL ASSETS $29,438 $29,209
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 20 $ 8
Stockholders' equity 29,418 29,201
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,438 $29,209
======= =======
Year Ended June 30,
2006 2005 2004
------- ------- -------
INCOME
Loans $ -- $ -- $ 2
Investment and mortgage-backed securities 16 52 89
Dividend from subsidiary 2,400 1,600 1,300
Investment securities gains, net -- 332 20
Interest-earning deposits with subsidiary bank 27 3 10
------- ------- -------
Total income 2,443 1,987 1,421
------- ------- -------
OTHER OPERATING EXPENSE 98 101 104
------- ------- -------
Income before equity in undistributed
earnings of subsidiary 2,345 1,886 1,317
Equity in undistributed earnings of subsidiary 501 1,114 983
------- ------- -------
Income before income taxes 2,846 3,000 2,300
Income tax expense (benefit) -- 91 (2)
------- ------- -------
NET INCOME $ 2,846 $ 2,909 $ 2,302
======= ======= =======
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
21. PARENT COMPANY (Continued)
Year Ended June 30,
2006 2005 2004
------- ------- -------
OPERATING ACTIVITIES
Net income $ 2,846 $ 2,909 $ 2,302
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed net income of subsidiary (501) (1,114) (983)
Investment securities gains -- (332) (20)
Amortization (accretion) of investment discounts
and premiums, net -- -- (3)
Other, net (13) 62 119
------- ------- -------
Net cash provided by operating activities 2,332 1,525 1,415
------- ------- -------
INVESTING ACTIVITIES
Available for sale:
Purchase of investment and
mortgage-backed securities (611) (1,550) (3,321)
Proceeds from repayments of investment and
mortgage-backed securities 1,942 1,422 5,183
Proceeds from sales of investment securities -- 913 251
Held to maturity:
Purchases of investment and mortgage-backed
securities -- -- (3,199)
Proceeds from repayments of investment and
mortgage-backed securities -- -- 3,451
Net decrease in loans receivable -- -- 115
------- ------- -------
Net cash provided by investing activities 1,331 785 2,480
------- ------- -------
FINANCING ACTIVITIES
Net proceeds from exercise of stock options 91 -- 489
Cash dividends paid (1,510) (1,559) (1,624)
Purchases of treasury stock (1,085) (1,217) (2,610)
------- ------- -------
Net cash used for financing activities (2,504) (2,776) (3,745)
------- ------- -------
Increase (decrease) in cash and cash equivalents 1,159 (466) 150
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR 402 868 718
------- ------- -------
CASH AND CASH EQUIVALENTS
END OF YEAR $ 1,561 $ 402 $ 868
======= ======= =======
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
23. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
Three Months Ended
--------------------------------------------------------
September December March June
2005 2005 2006 2006
----------- ----------- ----------- -----------
Total interest and dividend income $ 4,840 $ 5,293 $ 5,954 $ 6,162
Total interest expense 3,385 3,784 4,091 4,200
----------- ----------- ----------- -----------
Net interest income 1,455 1,509 1,863 1,962
Provision (recovery) for loan losses (66) (45) (38) (12)
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 1,521 1,554 1,901 1,974
Total noninterest income 207 167 171 160
Total noninterest expense 889 868 872 893
----------- ----------- ----------- -----------
Income before income taxes 839 853 1,200 1,241
Income taxes 231 243 412 401
----------- ----------- ----------- -----------
Net income $ 608 $ 610 $ 788 $ 840
=========== =========== =========== ===========
Per share data:
Net income
Basic $ 0.25 $ 0.26 $ 0.34 $ 0.36
Diluted 0.25 0.26 0.34 0.36
Average shares outstanding
Basic 2,387,653 2,356,470 2,346,959 2,337,349
Diluted 2,391,294 2,359,671 2,348,619 2,339,962
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
23. SELECTED QUARTERLY FINANCIAL DATA (unaudited) (Continued)
Three Months Ended
-------------------------------------------------------
September December March June
2004 2004 2005 2005
----------- ----------- ----------- -----------
Total interest and dividend income $ 4,430 $ 4,405 $ 4,509 $ 4,530
Total interest expense 2,752 2,977 3,018 3,097
----------- ----------- ----------- -----------
Net interest income 1,678 1,428 1,491 1,433
Provision (recovery) for loan losses 78 (7) (5) (112)
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 1,600 1,435 1,496 1,545
Total noninterest income 408 266 159 159
Total noninterest expense 878 903 891 860
----------- ----------- ----------- -----------
Income before income taxes 1,130 798 764 844
Income taxes 296 209 200 (78)
----------- ----------- ----------- -----------
Net income $ 834 $ 589 $ 564 $ 922
=========== =========== =========== ===========
Per share data:
Net income
Basic $ 0.34 $ 0.24 $ 0.23 $ 0.38
Diluted 0.34 0.24 0.23 0.38
Average shares outstanding
Basic 2,453,189 2,445,349 2,430,679 2,399,463
Diluted 2,458,926 2,451,242 2,435,935 2,404,097
49
COMMON STOCK MARKET PRICE AND DIVIDEND INFORMATION
WVS Financial Corp.'s common stock is traded on the Nasdaq Global MarketSM under
the symbol "WVFC".
The following table sets forth the high and low market prices of a share of
common stock, and cash dividends declared per share, for the periods indicated.
Market Price
---------------------- Cash Dividends
Quarter Ended High Low Declared
---------------- ------- ------- --------------
June 2006 $18.080 $16.400 $0.16
March 2006 17.750 16.000 0.16
December 2005 16.870 16.000 0.16
September 2005 17.000 15.660 0.16
June 2005 $17.250 $16.600 $0.16
March 2005 18.140 16.250 0.16
December 2004 18.100 16.000 0.16
September 2004 18.000 16.000 0.16
There were ten Nasdaq Market Makers in the Company's common stock as of June 30,
2006: Boenning & Scattergood Inc.; Sandler O'Neill & Partners; Boston Stock
Exchange; Ryan Beck & Co., Inc.; Morgan Stanley & Co., Inc; UBS Securities LLC;
Hill, Thompson, Magid and Co.; BNY Brokerage Inc.; Citigroup Global Markets and
Knight Equity Markets, L.P.
According to the records of the Company's transfer agent, there were
approximately 712 shareholders of record at September 13, 2006. This does not
include any persons or entities who hold their stock in nominee or "street name"
through various brokerage firms.
Dividends are subject to determination and declaration by the Board of
Directors, which takes into account the Company's financial condition, statutory
and regulatory restrictions, general economic condition and other factors.
50
WVS FINANCIAL CORP.
CORPORATE INFORMATION
--------------------------------------------------------------------------------
CORPORATE OFFICES
WVS FINANCIAL CORP. o WEST VIEW SAVINGS BANK
9001 Perry Highway Pittsburgh, PA 15237
412-364-1911
COMMON STOCK BOARD OF DIRECTORS
The common stock of WVS Financial Corp. is
traded on The Nasdaq Global MarketSM under the David L. Aeberli
symbol "WVFC". Funeral Director
McDonald-Aeberli Funeral Home, Inc.
TRANSFER AGENT & REGISTRAR
Registrar and Transfer Company Arthur H. Brandt
10 Commerce Drive Former President and CEO
Cranford, NJ 07016 Brandt Excavating, Inc. and
1-800-368-5948 Brandt Paving, Inc.
CORPORATE SECRETARY AND David J. Bursic
INVESTOR RELATIONS President and Chief Executive Officer
Pamela M. Tracy WVS Financial Corp. and
412-364-1911 West View Savings Bank
Donald E. Hook
SPECIAL COUNSEL Chairman
Elias, Matz, Tiernan & Herrick L.L.P. Pittsburgh Cut Flower Co.
Washington, DC
Lawrence M. Lehman
Sole Proprietor
WEST VIEW SAVINGS BANK Newton-Lehman Insurance Agency
9001 Perry Highway
Pittsburgh, PA 15237 Margaret VonDerau
412-364-1911 Former Senior Vice President
and Corporate Secretary
WEST VIEW OFFICE WVS Financial Corp. and
456 Perry Highway West View Savings Bank
412-931-2171
CRANBERRY OFFICE EXECUTIVE OFFICERS
20531 Perry Highway
412-931-6080/724-776-3480 Donald E. Hook
Chairman
FRANKLIN PARK OFFICE
2566 Brandt School Road David J. Bursic
724-935-7100 President and
Chief Executive Officer
BELLEVUE OFFICE
572 Lincoln Avenue Jonathan D. Hoover
412-761-5595 Vice President of Bank Operations
SHERWOOD OAKS OFFICE Bernard P. Lefke
Serving Sherwood Oaks Vice President of Savings
Cranberry Twp.
Keith A. Simpson
LENDING DIVISION Vice President, Treasurer and
2566 Brandt School Road Chief Accounting Officer
724-935-7400
The members of the Board of Directors serve in that capacity for both the
Company and the Savings Bank.
51