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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended: June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission File No.: 0-22444
WVS Financial Corp.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1710500
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9001 Perry Highway
Pittsburgh, Pennsylvania 15237
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (412) 364-1911
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.01 per share)
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of September 16, 1997, the aggregate value of the 1,448,594 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
299,326 shares held by all directors and officers of the Registrant as a group,
was approximately $39.9 million. This figure is based on the last known trade
price of $27.50 per share of the Registrant's Common Stock on September 11,
1997.
Number of shares of Common Stock outstanding as of September 16, 1997: 1,747,920
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the fiscal year ended June
30, 1997 are incorporated into Parts I, II and IV. (2) Portions of the
definitive proxy statement for the 1997 Annual Meeting of Stockholders are
incorporated into Part III.
PART I.
Item 1. Business.
WVS Financial Corp. ("WVS" or the "Company") is the parent holding company
of West View Savings Bank ("West View" or the "Savings Bank"). The Company was
organized in July 1993 as a Pennsylvania-chartered unitary bank holding company
and acquired 100% of the common stock of the Savings Bank in November 1993.
West View Savings Bank is a Pennsylvania-chartered, SAIF-insured stock
savings bank conducting business from six offices in the North Hills suburbs of
Pittsburgh. Originally organized under Pennsylvania law in 1908 as West View
Building Loan Association, West View changed its name to West View Savings and
Loan Association in 1954. In June 1992, West View converted from a
Pennsylvania-chartered mutual savings and loan association to a
Pennsylvania-chartered mutual savings bank. The Savings Bank converted to the
stock form of ownership in November 1993. The Savings Bank had no subsidiaries
at June 30, 1997.
Lending Activities
General. At June 30, 1997, the Company's net portfolio of loans receivable
totaled $158.1 million, as compared to $149.0 million at June 30, 1996. Net
loans receivable comprised 53.6% of Company total assets and 92.5% of total
deposits at June 30, 1997, as compared to 57.4% and 87.2%, respectively, at June
30, 1996. The principal categories of loans in the Company's portfolio are
single-family and multi-family residential real estate loans, commercial real
estate loans, construction loans, land acquisition and development loans and
consumer loans. Substantially all of the Company's mortgage loan portfolio
consists of conventional mortgage loans, which are loans that are neither
insured by the Federal Housing Administration ("FHA") nor partially guaranteed
by the Department of Veterans Affairs ("VA").
Historically, the Company's lending activities have been concentrated in
single-family residential loans secured by properties located in its primary
market area of northern Allegheny County, southern Butler County and eastern
Beaver County, Pennsylvania. During fiscal 1997, the Company's single-family
real estate loans increased by $6.9 million or 6.3% primarily due to weaker
consumer demand for home purchase and refinancing activity and the Company's
decision not to directly match aggressive local market pricing. Commercial real
estate loans increased $1.6 million or 12.2% during fiscal 1997 principally due
to the Company's renewed focus on this market segment. The Company's land
acquisition and development lending, and construction lending, decreased $3.9
million or 13.8% during fiscal 1997. The decrease was principally due to the
repayment of later stage construction development and the Company's desire to
reduce its exposure to such loans in light of a slow-down in the final sales of
such projects. Land acquisition and development lending, and speculative
construction lending to builders is generally considered to involve a higher
level of risk as compared to single-family residential lending. The Company
believes that its underwriting standards are prudent and consistent with safe
and sound banking practices.
On occasion, the Company has also purchased whole loans and loan
participations secured by properties located outside of its primary market area
but predominantly in Pennsylvania. The Company believes that all of its mortgage
loans are secured by properties located in Pennsylvania. Moreover, substantially
all of the Company's non-mortgage loan portfolio consists of loans made to
residents and businesses located in the Company's primary market area.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") imposed limitations on the aggregate amount of loans that a savings
institution could make to any one borrower, including related entities. Under
FIRREA, the permissible amount of loans-to-one borrower follows the national
bank standard for all loans made by savings institutions, which generally does
not permit loans-to-one borrower to exceed 15% of unimpaired capital and
surplus. Loans in an amount equal to an additional 10% of unimpaired capital and
surplus also may be made to a borrower if the loans are fully secured by readily
marketable securities. At June 30, 1997, the Savings Bank's limit on
loans-to-one borrower under FIRREA was approximately $3.9 million. The Company's
general policy has been to limit loans-to-one borrower, including related
entities, to $2.0 million although this general limit may be exceeded based on
the merit of a particular credit. At June 30, 1997, the Company's five largest
loans or groups of loans-to-one borrower, including related entities, ranged
from an aggregate of $1.8 million to $3.2 million, and are secured primarily by
real estate located in the Company's primary market area.
Loan Portfolio Composition. The following table sets forth the composition
of the Company's net loans receivable portfolio by type of loan at the dates
indicated.
At June 30,
---------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
(Dollars in Thousands)
Real estate loans:
Single-family $116,663 67.25% $109,776 65.16% $ 92,710 63.17% $ 85,661 60.06% $ 83,572 63.33%
Multi-family 3,499 2.02 3,235 1.92 2,303 1.57 2,931 2.05 3,245 2.46
Commercial 14,669 8.46 13,088 7.77 12,138 8.27 9,087 6.37 9,083 6.88
Construction 16,969 9.78 19,269 11.44 21,106 14.38 27,341 19.17 17,949 13.60
Land acquisition
& development 7,412 4.27 9,004 5.35 4,671 3.18 4,601 3.23 4,435 3.37
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
159,212 91.78 154,372 91.64 132,928 90.57 129,621 90.88 118,284 89.64
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Home equity 12,258 7.06 11,963 7.10 12,477 8.50 11,601 8.13 11,925 9.04
Education 516 0.30 590 0.35 394 0.27 353 0.25 746 0.57
Other 1,403 0.81 1,484 0.88 905 0.61 863 0.61 663 0.50
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer
loans 14,177 8.17 14,037 8.33 13,776 9.38 12,817 8.99 13,334 10.11
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial loans 91 0.05 40 0.02 --- --- --- --- --- ---
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial lease
financings 2 0.00 14 0.01 68 0.05 184 0.13 317 0.25
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
173,482 100.00% 168,463 100.00% 146,772 100.00% 142,622 100.00% 131,935 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Less:
Undisbursed loan
proceeds (12,505) (16,651) (10,794) (16,508) (10,136)
Net deferred loan
origination fees (834) (837) (799) (881) (1,004)
Allowance for
loan losses (2,009) (1,964) (1,836) (1,633) (1,447)
-------- -------- -------- -------- --------
Net loans receivable $158,134 $149,011 $133,343 $123,600 $119,348
======== ======== ======== ======== ========
Contractual Maturities. The following table sets forth the scheduled
contractual maturities of the Company's loans and mortgage-backed securities at
June 30, 1997. The amounts shown for each period do not take into account loan
prepayments and normal amortization of the Company's loan portfolio.
Real Estate Loans
Land
acquisition
and
Single-family Multi-family Non-residential Construction development
------------- ------------ --------------- ------------ -----------
(Dollars in Thousands)
Amounts due in:
One year or less $ 1,433 $ 1,542 $ 828 $ 11,931 $ 3,395
After one year through
five years 4,237 49 1,558 -- 3,983
After five years 110,993 1,908 12,283 5,038 34
-------- -------- -------- -------- --------
Total(1) $116,663 $ 3,499 $ 14,669 $ 16,969 $ 7,412
======== ======== ======== ======== ========
Consumer
loans and Mortgage-
commercial backed
loans & leases securities Total
-------------- ---------- -----
(Dollars in Thousands)
Amounts due in:
One year or less $ 878 $ 103 $ 20,110
After one year through
five years 9,900 1,882 21,609
After five years 3,492 35,505 169,253
-------- -------- --------
Total(1) $ 14,270 $ 37,490 $210,972
======== ======== ========
(1) Does not include adjustments relating to loans in process, the allowance for
loan losses, accrued interest, deferred fee income and unearned discounts.
Interest rate terms on amounts due after one year:
Real Estate Loans
Land
acquisition
and
Single-family Multi-family Non-residential Construction development
------------- ------------ --------------- ------------ -----------
(Dollars in Thousands)
Fixed $ 92,689 $ 1,341 $ 7,861 $ 4,405 $ 1,978
Adjustable 22,541 616 5,980 633 2,039
-------- -------- -------- -------- --------
Total $115,230 $ 1,957 $ 13,841 $ 5,038 $ 4,017
======== ======== ======== ======== ========
Consumer
loans and Mortgage-
commercial backed
loans & leases securities Total
-------------- ---------- -----
(Dollars in Thousands)
Fixed $ 7,835 $ 18,405 $134,514
Adjustable 5,557 18,982 56,348
-------- -------- --------
Total $ 13,392 $ 37,387 $190,862
======== ======== ========
Scheduled contractual principal repayments do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their average contractual terms because of prepayments and, in the case of
conventional mortgage loans, due-on-sale clauses, which generally give the
Company the right to declare a loan immediately due and payable in the event,
among other things, that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends to
increase when current mortgage loan rates are substantially higher than rates on
existing mortgage loans and, conversely, decrease when rates on existing
mortgages are substantially higher than current mortgage loan rates (due to
refinancings of adjustable-rate and fixed-rate loans at lower rates).
As further discussed below, the Company has from time to time renewed
commercial real estate loans and speculative construction (single-family) loans
due to slower than expected sales of the underlying collateral. Commercial real
estate loans are generally renewed at a contract rate that is the greater of the
market rate at the time of the renewal or the original contract rate. Loans
secured by speculative single-family construction or developed lots are
generally renewed for an additional six month term with monthly payments of
interest. Subsequent renewals, if necessary, are generally granted for an
additional six month term; principal amortization may also be required. Land
acquisition and development loans are generally renewed for an additional twelve
month term with monthly payments of interest.
At June 30, 1997, the Company had approximately $4.9 million of renewed
commercial real estate and construction loans, all of which were performing. The
$4.9 million in aggregate disbursed principal that has been renewed is comprised
of: single-family speculative construction loans - $943 thousand, developed
residential lots - $721 thousand, acquisition and development loans - $2.8
million, and a participation in a land development project for upscale
residential housing totaling $407 thousand. Management believes that the
previously discussed whole loans will self-liquidate during the normal course of
business, though some additional rollovers may be necessary. All of the loans
that have been rolled over, as discussed above, are in compliance with all loan
terms, including the receipt of all required payments, and are considered
performing loans. The Company had no loans scheduled to mature in the one year
period ending June 30, 1997 which were non-performing. See "-Multi-Family
Residential, Commercial Real Estate and Construction Loans" and "-Non-Performing
Assets".
Origination, Purchase and Sale of Loans. Applications for residential
real estate loans and consumer loans are obtained at all of the Company's
offices. Applications for commercial real estate loans are taken only at the
Company's Franklin Park office. Residential loan applications are primarily
attributable to existing customers, builders, walk-in customers and referrals
from both real estate brokers and existing customers. Commercial real estate
loan applications are obtained primarily by referrals from former and existing
borrowers. Consumer loans are primarily obtained through existing and walk-in
customers.
All processing and underwriting of real estate and commercial business
is performed solely at the Company's loan division at the Franklin Park office.
The Company believes this centralized approach to approving such loan
applications allows it to process and approve such applications faster and with
greater efficiency. The Company also believes that this approach increases its
ability to service the loans. All loan applications are required to be approved
by the Company's Loan Committee, comprised of both outside directors and
management, which meets weekly.
Historically, the Company has originated substantially all of the loans
retained in its portfolio. Substantially all of the residential real estate
loans originated by the Company have been under terms, conditions and
documentation which permit their sale to the Federal National Mortgage
Association ("FNMA") and other investors in the secondary market. Although the
Company has not been a seller of loans in the secondary market, the Company is
on the FNMA approved list of sellers/servicers. The Company has held the loans
it originates in its own portfolio until maturity, due, in part, to competitive
pricing conditions in the marketplace for origination by nationwide lenders and
portfolio lenders.
The Company has not been an aggressive purchaser of loans. However, the
Company may purchase whole loans or loan participations in those instances where
demand for new loan originations in the Company's market area is insufficient or
to increase the yield earned on the loan portfolio. Such loans are generally
presented to the Company from contacts primarily at other financial
institutions, particularly those which have previously done business with the
Company. At June 30, 1997, $6.3 million or 3.6% of the Company's total loans
receivable consisted of whole loans and participation interests in loans
purchased from other financial institutions, of which $2.1 million or 33%
consisted of loans secured by commercial real estate, $2.2 million or 35%
consisted of pools of low to moderate income single-family residences, $1.6
million or 25% consisted of a multi-family apartment complex loan, and $407
thousand or 7% consisted of a land development loan. During fiscal 1997,
purchases of whole loans and participations decreased by $1.6 million, to a
total of $1.1 million, as compared to fiscal 1996. The $1.1 million purchase was
comprised primarily of low to moderate income single-family residential loans.
The Company requires that all purchased loans be underwritten in
accordance with its underwriting guidelines and standards. The Company reviews
loans, particularly scrutinizing the borrower's ability to repay the obligation,
the appraisal and the loan-to-value ratio. Servicing of loans or loan
participations purchased by the Company generally is performed by the seller,
with a portion of the interest being paid by the borrower retained by the seller
to cover servicing costs. At June 30, 1997, approximately $3.8 million or 2.2%
of the Company's total loans receivable were being serviced for the Company by
others.
The following table shows origination, purchase and sale activity of
the Company with respect to loans on a consolidated basis during the periods
indicated.
At or For the Year Ended June 30,
--------------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars in Thousands)
Net loans receivable beginning balance ...... $ 149,011 $ 133,343 $ 123,600
Real estate loan originations:
Single-family(1) ......................... 15,643 25,181 18,481
Multi-family(2) .......................... 575 1,984 85
Commercial ............................... 2,000 1,731 4,388
Construction ............................. 9,044 10,792 10,776
Land acquisition and development ......... 1,384 4,219 1,921
--------- --------- ---------
Total real estate loan originations ... 28,646 43,907 35,651
--------- --------- ---------
Home equity ................................. 3,160 2,589 4,122
Education ................................... 323 -- --
Commercial .................................. 533 40 --
Other ....................................... 207 287 616
--------- --------- ---------
Total loan originations ............... 32,869 46,823 40,389
--------- --------- ---------
Disbursements against available credit lines:
Home equity .............................. 4,608 4,693 3,998
Other .................................... 28 28 47
Purchase of whole loans and participations .. 1,145 2,653 250
--------- --------- ---------
Total originations and purchases ...... 38,650 54,197 44,684
--------- --------- ---------
Less:
Loan principal repayments ................ 33,569 32,460 40,542
Sales of whole loans and participations .. -- -- --
Transferred to real estate owned ......... 73 51 --
Change in loans in process ............... (4,147) 5,857 (5,714)
Other, net(3) ............................ 32 161 113
--------- --------- ---------
Net increase .......................... $ 9,123 $ 15,668 $ 9,743
========= ========= =========
Net loans receivable ending balance ......... $ 158,134 $ 149,011 $ 133,343
========= ========= =========
- ------------
(1) Consists of loans secured by 1-4 family properties.
(2) Consists of loans secured by five or more family properties.
(3) Includes reductions for net deferred loan origination fees and the allowance
for losses.
Real Estate Lending Standards. All financial institutions are required
to adopt and maintain comprehensive written real estate lending policies that
are consistent with safe and sound banking practices. These lending policies
must reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies adopted by the federal banking agencies in December 1992
("Guidelines"). The Guidelines set forth uniform regulations prescribing
standards for real estate lending. Real estate lending is defined as extension
of credit secured by liens on interests in real estate or made for the purpose
of financing the construction of a building or other improvements to real
estate, regardless of whether a lien has been taken on the property.
The policies must address certain lending considerations set forth in
the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the institution's board of
directors at least annually. The LTV ratio framework, with a LTV ratio being the
total amount of credit to be extended divided by the appraised value of the
property at the time the credit is originated, must be established for each
category of real estate loans. If not a first lien, the lender must combine all
senior liens when calculating this ratio. The Guidelines, among other things,
establish the following supervisory LTV limits: raw land (65%); land development
(75%); construction (commercial, multi-family and non-residential) (80%);
improved property (85%); and one-to-four family residential (owner occupied) (no
maximum ratio; however any LTV ratio in excess of 90% should require appropriate
insurance or readily marketable collateral). Consistent with its conservative
lending philosophy, the Company's LTV limits are generally more restrictive than
those in the Guidelines: raw land (60%); land development (70%); construction
(commercial - 70%; multi-family - 75%; speculative residential - 80%); and
residential properties (95% in the case of one-to-four family owner-occupied
residences and 75% on larger family non owner-occupied residences).
Single-Family Residential Real Estate Loans. Historically, savings
institutions such as the Company have concentrated their lending activities on
the origination of loans secured primarily by first mortgage liens on existing
single-family residences. At June 30, 1997, $116.7 million or 67.3% of the
Company's total loan portfolio consisted of single-family residential real
estate loans, substantially all of which are conventional loans. Single-family
loan originations totaled $15.6 million and decreased $9.6 million or 38.1%
during the fiscal year ended June 30, 1997 when compared to the same period in
1996. The decrease in single-family originations is due primarily to weaker
consumer demand for home purchase and refinance activity and the Company's
decision not to directly match aggressive local market pricing.
The Company historically has and continues to emphasize the origination
of fixed-rate loans with terms of up to 30 years. Although such loans are
originated with the expectation that they will be maintained in portfolio, these
loans are originated generally under terms, conditions and documentation which
permit their sale in the secondary market. The Company also makes available
single-family residential adjustable-rate mortgages ("ARMs") which provide for
periodic adjustments to the interest rate, but such loans have never been as
widely accepted in the Company's market area as the fixed-rate mortgage loan
products. The ARMs currently offered by the Company have up to 30-year terms and
an interest rate which adjusts in accordance with one of several indices.
Consumer response to adjustable rate loans has been limited due to the
appreciable decline in long-term interest rates experienced during the first
half of fiscal 1996.
At June 30, 1997, approximately $94.1 million or 80.6% of the
single-family residential loans in the Company's loan portfolio consisted of
loans which provide for fixed rates of interest. Although these loans generally
provide for repayments of principal over a fixed period of 15 to 30 years, it is
the Company's experience that because of prepayments and due-on-sale clauses,
such loans generally remain outstanding for a substantially shorter period of
time.
The Company is permitted to lend up to 95% of the appraised value of
real property securing a residential loan; however, if the amount of a
residential loan originated or refinanced exceeds 95% of the appraised value,
the Company is required by state banking regulations to obtain private mortgage
insurance on the portion of the principal amount that exceeds 75% of the
appraised value of the security property. Pursuant to underwriting guidelines
adopted by the Board of Directors, private mortgage insurance is generally
obtained on residential loans for which loan-to-value ratios exceed 80%.
Property appraisals on the real estate and improvements securing the
Company's single-family residential loans are made by independent appraisers
approved by the Board of Directors. Appraisals are performed in accordance with
federal regulations and policies. The Company obtains title insurance policies
on most first mortgage real estate loans originated by it. If title insurance is
not obtained or is unavailable, the Company obtains an abstract of title and
title opinion. Borrowers also must obtain hazard insurance prior to closing and,
when required by the United States Department of Housing and Urban Development,
flood insurance. Borrowers may be required to advance funds, with each monthly
payment of principal and interest, to a loan escrow account from which the
Company makes disbursements for items such as real estate taxes and mortgage
insurance premiums as they become due.
Multi-Family Residential, Commercial Real Estate and Construction
Loans. The Company originates mortgage loans for the acquisition and refinancing
of existing multi-family residential and commercial real estate properties. At
June 30, 1997, $3.5 million or 2.0% of the Company's total loan portfolio
consisted of loans secured by existing multi-family residential real estate
properties and $14.7 million or 8.5% of such loan portfolio consisted of loans
secured by existing commercial real estate properties.
The majority of the Company's multi-family residential loans are
secured primarily by 5 to 20 unit apartment buildings, while commercial real
estate loans are secured by office buildings, hotels, small retail
establishments and churches. These types of properties constitute the majority
of the Company's commercial real estate loan portfolio. The Company's
multi-family residential and commercial real estate loan portfolio consists
primarily of loans secured by properties located in its primary market area.
Although terms vary, multi-family residential and commercial real
estate loans generally are amortized over a period of up to 15 years (although
some loans amortize over a twenty year period) and mature in five to fifteen
years. The Company will originate these loans either with fixed interest rates
or with interest rates which adjust in accordance with a designated index, which
generally is negotiated at the time of origination. Loan-to-value ratios on the
Company's commercial real estate loans are currently limited to 75% or lower. As
part of the criteria for underwriting multi-family residential and commercial
real estate loans, the Company generally imposes a debt coverage ratio (the
ratio of net cash from operations before payment of the debt service to debt
service) of at least 100%. It is also the Savings Bank's general policy to
obtain personal guarantees on its multi-family residential and commercial real
estate loans from the principals of the borrower and, when this cannot be
obtained, to impose more stringent loan-to-value, debt service and other
underwriting requirements.
At June 30, 1997, the Company's multi-family residential and commercial
real estate loan portfolio consisted of approximately 87 loans with an average
principal balance of $209 thousand. At June 30, 1997, the Company had one
commercial real estate loan that was not accruing interest.
In recent years, the Company has been increasingly active in
originating loans to construct primarily single-family residences, and, to a
much lesser extent, loans to acquire and develop real estate for construction of
residential properties. These construction lending activities generally are
limited to the Company's primary market area. At June 30, 1997, construction
loans amounted to approximately $17.0 million or 9.8% of the Company's total
loan portfolio. As of such date, the Company's portfolio of construction loans
consisted of $13.4 million of loans for the construction of single-family
residential real estate and $3.6 million of loans for the construction of
commercial real estate. Construction loan originations totaled $9.0 million and
decreased by $1.8 million or 16.7% during the fiscal year ended June 30, 1997
when compared to the same period in 1996. Construction loan originations
declined during fiscal 1997 primarily due to an excess supply in the new
construction market and the Company's desire to limit its exposure to this
market segment to current investment levels.
Construction loans are made to individuals for the purpose of
constructing a personal residence. In such circumstances, the Company will
underwrite such loans on a construction/permanent mortgage loan basis. At June
30, 1997, approximately 51.4% of total outstanding construction loans were made
to local real estate builders and developers with whom the Company has worked
for a number of years for the purpose of constructing primarily single-family
residential developments, with the remaining 48.6% of total construction loans
made to individuals for the purpose of constructing a personal residence. Upon
application, credit review and analysis of personal and corporate financial
statements, the Company will grant local builders with whom it has done business
lines of credit up to designated amounts. These credit lines may be used for the
purpose of construction of speculative (or unsold) residential properties. In
some instances, lines of credit will also be granted for purposes of acquiring
finished residential lots and developing speculative residential properties
thereon. Such lines generally have not exceeded $1.0 million, with the largest
line totaling $1.4 million. Once approved for a construction line, a developer
must still submit plans and specifications and receive the Company's
authorization, including an appraisal of the collateral satisfactory to the
Company, in order to begin utilizing the line for a particular project. As of
June 30, 1997, the Company also had $7.4 million or 4.3% of the total loan
portfolio invested in land development loans, which consisted of 35 loans to 24
developers.
Construction loans generally have maturities of 18 months, including
one 6 month extension, with payments being made monthly on an interest-only
basis. Thereafter, the permanent financing arrangements will generally provide
for either an adjustable or fixed interest rate, consistent with the Company's
policies with respect to residential and commercial real estate financing. For a
discussion of the Company's policy with respect to renewing a speculative
construction loan at the expiration of its term if the underlying property has
not been sold, see "-Contractual Maturities".
The Company intends to maintain its involvement in construction lending
within its primary market area. Such loans afford the Company the opportunity to
increase the interest rate sensitivity of its loan portfolio. Commercial real
estate and construction lending is generally considered to involve a higher
level of risk as compared to single-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developers and managers.
Moreover, a construction loan can involve additional risks because of the
inherent difficulty in estimating both a property's value at completion of the
project and the estimated cost (including interest) of the project. The nature
of these loans is such that they are generally more difficult to evaluate and
monitor. In addition, speculative construction loans to a builder are not
necessarily pre-sold and thus pose a greater potential risk to the Company than
construction loans to individuals on their personal residences.
The Company has attempted to minimize the foregoing risks by, among
other things, limiting the extent of its commercial real estate lending
generally and by limiting its construction lending to primarily residential
properties. In addition, the Savings Bank has adopted underwriting guidelines
which impose stringent loan-to-value, debt service and other requirements for
loans which are believed to involve higher elements of credit risk, by generally
limiting the geographic area in which the Savings Bank will do business to its
primary market area and by working with builders with whom it has established
relationships.
Consumer Loans. The Company offers consumer loans, although such
lending activity has not historically been a large part of its business. At June
30, 1997, $14.2 million or 8.2% of the Company's total loan portfolio consisted
of consumer loans. The consumer loans offered by the Company include home equity
loans, home equity lines of credit, education loans, automobile loans, deposit
account secured loans and personal loans. Most of the Company's consumer loans
are secured by real estate and are primarily obtained through existing and
walk-in customers.
The Company will originate either a fixed-rate, fixed term home equity
loan, or a home equity line of credit with a variable rate. At June 30, 1997,
approximately 54.7% of the Company's home equity loans were at a fixed rate for
a fixed term. Although there have been a few exceptions with greater loan to
value ratios, substantially all of such loans are originated with a loan to
value ratio which, when coupled with the outstanding first mortgage loan, does
not exceed 80%.
Commercial Loans and Lease Financings. At June 30, 1997, $93 thousand
or less than 1% of the Company's total loan portfolio consisted of commercial
loan and lease financings. During fiscal 1991, the Company began to purchase
participation interests in pools of leases of general commercial chattel. The
Company ceased purchasing participation interests in fiscal 1992 based on
management's belief that the quality of the pools were not as good as those it
had invested in previously and because some of the participation interests in
pools it had acquired started to experience some losses. Commercial loans, which
include loans secured by accounts receivable, business inventory and equipment,
and similar collateral totaled $91 thousand or less than 1% of the Company's
total loan portfolio. The Company intends to selectively develop this line of
business in order to increase interest income and to possibly attract
compensating deposit account balances. Due to the higher risks associated with
commercial loans not secured by real estate, future commercial loan originations
will be modest.
Loan Fee Income. In addition to interest earned on loans, the Company
receives income from fees in connection with loan originations, loan
modifications, late payments, prepayments and for miscellaneous services related
to its loans. Income from these activities varies from period to period with the
volume and type of loans made and competitive conditions.
The Company charges loan origination fees which are calculated as a
percentage of the amount borrowed. Loan origination and commitment fees and all
incremental direct loan origination costs are deferred and recognized over the
contractual remaining lives of the related loans on a level yield basis.
Discounts and premiums on loans purchased are accreted and amortized in the same
manner. In accordance with FASB 91, the Company has recognized $229 thousand,
$216 thousand and $248 thousand of deferred loan fees during fiscal 1997, 1996
and 1995, respectively, in connection with loan refinancings, payoffs and
ongoing amortization of outstanding loans. The increase in loan origination fee
income for fiscal 1997 was primarily attributable to a higher volume of loans
originated with loan origination fees.
Non-Performing Loans, Real Estate Owned and Troubled Debt
Restructurings. When a borrower fails to make a required payment on a loan, the
Company attempts to cure the deficiency by contacting the borrower and seeking
payment. Contacts are generally made on the fifteenth day after a payment is
due. In most cases, deficiencies are cured promptly. If a delinquency extends
beyond 15 days, the loan and payment history is reviewed and efforts are made to
collect the loan. While the Company generally prefers to work with borrowers to
resolve such problems, when the account becomes 90 days delinquent, the Company
does institute foreclosure or other proceedings, as necessary, to minimize any
potential loss.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
The Company normally does not accrue interest on loans past due 90 days or more.
The Company will continue to accrue interest on education loans past due 90 days
or more because of the repayment guarantee provided by the Federal government.
The Company may also continue to accrue interest if, in the opinion of
management, it believes it will collect on the loan.
Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired, it is recorded at the lower of cost or fair value at
the date of acquisition and any write-down resulting therefrom is charged to the
allowance for losses on real estate owned. All costs incurred in maintaining the
Company's interest in the property are capitalized between the date the loan
becomes delinquent and the date of acquisition. After the date of acquisition,
all costs incurred in maintaining the property are expensed and costs incurred
for the improvement or development of such property are capitalized.
The following table sets forth the amounts and categories of the
Company's non-performing assets at the dates indicated.
At June 30,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------ ------ ------ ------
(Dollars in Thousands)
Non-accruing loans:
Real estate:
Single-family .................... $ -- $ 100 $ 185 $ 106 $ 61
Multi-family ..................... -- -- 561 581 --
Commercial(1) .................... 274 274 274 271 --
Consumer ............................ -- -- -- -- 3
Commercial loans & leases ........... -- 3 9 -- --
------- ------ ------ ------ ------
Total non-accrual loans ............. 274 377 1,029 958 64
------- ------ ------ ------ ------
Accruing loans greater than
90 days delinquent ............... -- -- -- 4 98
------- ------ ------ ------ ------
Total non-performing loans ..... $ 274 $ 377 $1,029 $ 962 $ 162
------- ------ ------ ------ ------
Real estate owned ................... -- -- -- 25 --
------- ------ ------ ------ ------
Total non-performing assets .... $ 274 $ 377 $1,029 $ 987 $ 162
======= ====== ====== ====== ======
Troubled debt restructurings ........ $ -- $ 603 $ 930 $ 944 $ 956
======= ====== ====== ====== ======
Total non-performing loans and
troubled debt restructurings as a
percentage of net loans receivable 0.17% 0.66% 1.47% 1.54% 0.94%
======= ====== ====== ====== ======
Total non-performing assets
to total assets .................. 0.09% 0.15% 0.45% 0.45% 0.08%
======= ====== ====== ====== ======
Total non-performing assets
and troubled debt restructurings
as a percentage of total assets .. 0.09% 0.38% 0.86% 0.87% 0.53%
======= ====== ====== ====== ======
- -----------
(1) At June 30, 1997, non-accrual commercial real estate loans consisted of one
loan.
The $103 thousand decrease in non-accrual loans during fiscal 1997 is
primarily comprised of a $100 thousand decrease in non-accrual single-family
real estate loans.
At June 30, 1997, the Company had one performing restructured
multi-family loan with a total outstanding principal balance of $599 thousand.
The loan is secured by an eight unit apartment building and one single-family
residence located in Oakmont Borough. Though originally appraised for $840
thousand in 1991, a revised appraisal report dated September 1995 has indicated
an appraised value of approximately $475 thousand. Though no charge-offs have
been recorded to date, the loan has been internally classified as substandard
due to payment history and collateral value. The Company believes that it has an
adequate valuation allowance with respect to this loan.
At June 30, 1997, the Company had one land development participation
loan, with an outstanding principal balance of $383 thousand, that was granted a
third extension. The loan, which was originated to finance the development of a
45 lot upscale residential subdivision, provides for interest only payments,
floats monthly at a net participant rate of prime plus seven-eighths of one
percent, and matures in March 2000. At June 30, 1997, 21 lots remained unsold.
The third extension was granted due to the continued weak market demand for lots
within the subdivision. In exchange for granting the extension, loan
participants, including the Company, received a renewal fee of 0.75% of the
loan's outstanding principal balance and a lot release price paid to the
participants of 75% with a minimum amount of $175 thousand per lot. If the loan
is paid off prior to maturity, a pro-rated refund of the renewal fee will be
issued to the borrower. Management believes that the loan is presently
well-secured based upon an approximate 19.5% loan to value first-lien position
and the obligor's strong net-worth and paying capacity. The loan has been
internally classified substandard due to the low level of lot sale activity.
As of June 30, 1997, the Company had one non-accruing commercial real
estate loan with an outstanding principal balance of $274 thousand that was over
90 days delinquent. The Company stopped accruing interest on the loan as of
September 1993. The loan is secured by a restaurant and real estate which is
located in Wexford, PA. The property was appraised for $395 thousand in June
1988. Since such date, an addition to the restaurant has been constructed. The
obligors on this loan are the two former principal owners of the restaurant. The
restaurant and the two obligors on this loan have filed under Chapter 7 of the
Federal Bankruptcy Code. Through June 30, 1997 the Company was unable to obtain
relief from stay to proceed with a foreclosure action against the property. A
third party has acquired the restaurant business and property in a Bankruptcy
Court supervised restructuring plan by, among other things, agreeing to make
certain periodic payments into the bankruptcy estate. The Bankruptcy Court has
not as of yet approved the bankruptcy plan. The Company, however, is presently
receiving interest only payments at a modified rate of 8%, as opposed to the
original contract rate of 9%. Under terms of the pending but as of yet
unapproved bankruptcy restructuring plan, the Company has agreed, among other
things, to a reduction in the contract rate of interest to 8% and certain
repayment modifications.
In addition to the foregoing, at June 30, 1997 the Company had a 7.9%
or $907 thousand participation interest in a first mortgage loan on a 12 1/2
acre property in Allegheny County, Pennsylvania which includes a 194 room
Sheraton hotel and restaurant and an 8,100 square foot office building. The
Company acquired its interest in 1984. The loan, which was originated to acquire
the property and construct the hotel, matures in March 1999 and provides for
principal and interest payments at 8.2% based on a 30-year amortization
schedule. The borrower is current in its payments but the loan continues to be
monitored due to the nature of the hotel industry in general and a decrease in
the capital accounts of the general partners.
During fiscal 1997, 1996 and 1995, approximately $15 thousand, $9
thousand and $42 thousand, respectively, of interest would have been recorded on
loans accounted for on a non-accrual basis and troubled debt restructurings if
such loans had been current according to the original loan agreements for the
entire period. These amounts were not included in the Company's interest income
for the respective periods. The amount of interest income on loans accounted for
on a non-accrual basis and troubled debt restructurings that was included in
income during the same periods amounted to approximately $20 thousand, $75
thousand and $144 thousand, respectively.
Allowances for Loan Losses. The allowance for loan losses is
established through provisions for loan losses charged against income. Loans
deemed to be uncollectible are charged against the allowance account. Subsequent
recoveries, if any, are credited to the allowance. The allowance is maintained
at a level believed adequate by management to absorb estimated potential loan
losses. Management's determination of the adequacy of the allowance is based on
periodic evaluations of the loan portfolio considering past experience, current
economic conditions, composition of the loan portfolio and other relevant
factors. This evaluation is inherently subjective, as it requires material
estimates that may be susceptible to significant change.
Effective December 21, 1993, the FDIC, in conjunction with the Office
of the Comptroller of the Currency, the Office of Thrift Supervision and the
Federal Reserve Board, adopted an Interagency Policy Statement on the Allowance
for Loan and Lease Losses ("Policy Statement"). The Policy Statement, which
effectively supersedes previous FDIC proposed guidance, includes guidance (i) on
the responsibilities of management for the assessment and establishment of an
adequate allowance and (ii) for the agencies' examiners to use in evaluating the
adequacy of such allowance and the policies utilized to determine such
allowance. The Policy Statement also sets forth quantitative measures for the
allowance with respect to assets classified substandard and doubtful, described
below, and with respect to the remaining portion of an institution's loan
portfolio. Specifically, the Policy Statement sets forth the following
quantitative measures which examiners may use to determine the reasonableness of
an allowance: (i) 50% of the portfolio that is classified doubtful; (ii) 15% of
the portfolio that is classified substandard and (iii) for the portions of the
portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming twelve months based on facts
and circumstances available on the evaluation date. While the Policy Statement
sets forth this quantitative measure, such guidance is not intended as a "floor"
or "ceiling".
Federal regulations require that each insured savings institution
classify its assets on a regular basis. In addition, in connection with
examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard", "doubtful" and "loss".
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of those
classified as substandard with the added characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified as loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. Another
category designated "asset watch" is also utilized by the Bank for assets which
do not currently expose an insured institution to a sufficient degree of risk to
warrant classification as substandard, doubtful or loss. Assets classified as
substandard or doubtful require the institution to establish general allowances
for loan losses. If an asset or portion thereof is classified as loss, the
insured institution must either establish specific allowances for loan losses in
the amount of 100% of the portion of the asset classified loss, or charge-off
such amount. General loss allowances established to cover possible losses
related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital.
The Company's general policy is to internally classify its assets on a
regular basis and establish prudent general valuation allowances that are
adequate to absorb losses that have not been identified but that are inherent in
the loan portfolio. The Company maintains general valuation allowances that it
believes are adequate to absorb losses in its loan portfolio that are not
clearly attributable to specific loans. The Company's general valuation
allowances are within the following ranges: (i) 0% to 5% of assets subject to
special mention; (ii) 5% to 25% of assets classified substandard; and (iii) 50%
to 100% of assets classified doubtful. Any loan classified as loss is charged
off. To further monitor and assess the risk characteristics of the loan
portfolio, loan delinquencies are reviewed to consider any developing problem
loans. Based upon the procedures in place, considering the Company's past
charge-offs and recoveries and assessing the current risk elements in the
portfolio, management believes the allowance for loan losses at June 30, 1997 is
adequate.
The Company has consistently added to the allowance for possible loan
losses during the past three fiscal years. The allowance for loan losses
increased from $1.96 million at June 30, 1996 to approximately $2.00 million at
June 30, 1997. These increases reflect a number of factors, the most significant
of which is the industry trend towards greater emphasis on the allowance method
of providing for loan losses and the specific charge-off method.
The following table summarizes changes in the Company's allowance for
loan losses and other selected statistics for the periods indicated.
At June 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in Thousands)
Average net loans ........................ $153,726 $141,643 $133,517 $118,302 $124,530
======== ======== ======== ======== ========
Allowance balance (at beginning of period) $ 1,964 $ 1,836 $ 1,634 $ 1,447 $ 864
Provision for loan losses ................ 60 150 211 211 666
Charge-offs:
Real estate:
Single-family ........................ 15 25 -- 6 11
Multi-family ......................... -- -- -- -- --
Commercial ........................... -- -- -- -- 46
Construction ......................... -- -- -- -- --
Land acquisition and development ........ -- -- -- -- --
Consumer:
Home equity .......................... -- -- -- -- --
Education ............................ -- -- -- -- --
Other ................................ -- -- -- 4 15
Commercial loans and leases .............. 3 4 12 18 14
-------- -------- -------- -------- --------
Total charge-offs ....................... 18 29 12 28 86
-------- -------- -------- -------- --------
Recoveries:
Real estate:
Single-family ....................... 1 -- -- -- --
Multi-family ........................ -- -- -- -- --
Commercial .......................... -- -- -- -- --
Construction ........................ -- -- -- -- --
Land acquisition and development ........ -- -- -- -- --
Consumer:
Home equity .......................... -- -- -- -- --
Education ............................ -- -- -- -- --
Other ................................ -- 1 1 3 2
Commercial loans and leases ............. 2 6 2 1 1
-------- -------- -------- -------- --------
Total recoveries ..................... 3 7 3 4 3
-------- -------- -------- -------- --------
Net loans charged-off .................... 15 22 9 24 83
Transfer to real estate owned loss reserve -- -- -- -- --
-------- -------- -------- -------- --------
Allowance balance (at end of period) ..... $ 2,009 $ 1,964 $ 1,836 $ 1,634 $ 1,447
======== ======== ======== ======== ========
At June 30,
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in Thousands)
Allowance for loan losses as a
percent of total loans receivable ..... 1.16% 1.17% 1.25% 1.15% 1.10%
======== ======== ======== ======== ========
Net loans charged off as a
percentage of average net loans ....... 0.01% 0.02% 0.01% 0.02% 0.07%
======== ======== ======== ======== ========
Allowance for loan losses to
non-performing loans .................. 733.21% 520.95% 178.43% 169.85% 893.21%
======== ======== ======== ======== ========
Net loans charged-off to
allowance for loan losses ............. 0.75% 1.12% 0.49% 1.47% 5.74%
======== ======== ======== ======== ========
Recoveries to charge-offs ................ 16.67% 24.14% 25.00% 14.29% 3.49%
======== ======== ======== ======== ========
The following table presents the allocation of the allowances for loan
losses by loan category at the dates indicated.
At June 30,
----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------- ------------------
% of Total % of Total % of Total % of Total % of Total
Loans by Loans by Loans by Loans by Loans by
Amount Category Amount Category Amount Category Amount Category Amount Category
(Dollars in Thousands)
Real estate loans:
Single-family .. $ 175 67.25% $ 161 65.16% $ 146 63.17% $ 124 60.06% $ 128 63.33%
Multi-family ... 142 2.02 141 1.92 12 1.57 18 2.05 16 2.46
Commercial ..... 449 8.46 469 7.77 593 8.27 546 6.37 554 6.88
Construction ... 58 9.78 38 11.44 49 14.38 71 19.17 28 13.60
Land acquisition
and development 59 4.27 69 5.35 31 3.18 36 3.23 37 3.37
Unallocated .... 722 -- 711 -- 693 -- 577 -- 465 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total real
estate loans . 1,605 91.78 1,589 91.64 1,524 90.57 1,372 90.88 1,228 89.64
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Consumer loans:
Home equity .... 123 7.06 120 7.10 124 8.50 116 8.13 120 9.04
Education ...... 5 0.30 6 0.35 4 0.27 4 0.25 7 0.57
Other .......... 10 0.81 10 0.88 14 0.61 15 0.61 14 0.50
Unallocated .... 258 -- 215 -- 127 -- 83 -- 60 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total consumer
loans ........ 396 8.17 351 8.33 269 9.38 218 8.99 201 10.11
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Commercial loans .... 5 0.05 2 0.02 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Commercial lease
financings ........ 3 0.00 22 0.01 43 0.05 44 0.13 18 0.25
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$2,009 100.00% $1,964 100.00% $1,836 100.00% $1,634 100.00% $1,447 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Management believes that the reserves it has established are adequate
to cover any potential losses in the Company's loan and real estate owned
portfolios. However, future adjustments to these reserves may be necessary, and
the Company's results of operations could be adversely affected if circumstances
differ substantially from the assumptions used by management in making its
determinations in this regard.
Mortgage-Backed Securities
Mortgage-backed securities ("MBS") include mortgage pass-through
certificates ("PCs") and collateralized mortgage obligations ("CMOs"). With a
pass-through security, investors own an undivided interest in the pool of
mortgages that collateralize the PCs; principal and interest is passed through
to the investor as it is generated by the mortgages underlying the pool. PCs may
be insured or guaranteed by the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage Association ("FNMA") and the Government
National Mortgage Association ("GNMA") or privately issued with varying degrees
of credit enhancements. A CMO reallocates mortgage pool cash flow to a series of
bonds (called traunches) with varying stated maturities, estimated average
lives, coupon rates and prepayment characteristics.
At June 30, 1997, the Company's mortgage-backed securities portfolio
totaled $37.5 million as compared to $42.1 million at June 30, 1996. The $4.6
million or 10.9% decrease in MBS balances outstanding during fiscal 1997 was
primarily attributable to the sale of approximately $1.6 million of low balance
MBS pools and the reinvestment of MBS principal and interest cash flows in
higher yielding callable government agency securities. At June 30, 1997
approximately $18.9 million or 50.3% (book value) of the Company's portfolio of
mortgage-backed securities, including CMOs, were comprised of adjustable or
floating rate instruments, as compared to $21.2 million or 49.9% at June 30,
1996. Substantially all of the Company's floating rate mortgage-backed
securities adjust monthly based upon changes in certain short-term market
indexes (e.g. LIBOR, Prime, etc.).
The following tables set forth the amortized cost and market values of
the Company's mortgage-backed securities available for sale and held to maturity
as of the periods indicated.
MBS Available for Sale at June 30 1997 1996 1995
- --------------------------------- ---- ---- ----
(Dollars in Thousands)
FHLMC PCs $ 931 $ 2,880 $ ---
GNMA PCs 1,306 1,580 ---
FNMA PCs 10,708 11,359 ---
CMOs - agency collateral 5,472 6,956 ---
CMOs - other --- --- ---
------- ------- --------
Total amortized cost $18,417 $22,775 $ 0
======= ======= ========
Total market value $18,280 $22,428 $ 0
======= ======= ========
MBS Held to Maturity at June 30 1997 1996 1995
- ------------------------------- ---- ---- ----
(Dollars in Thousands)
FHLMC PCs $ 351 $ 450 $ 4,881
GNMA PCs 1,219 1,268 2,095
FNMA PCs 194 269 984
CMOs - agency collateral 16,728 16,878 14,695
CMOs - other 718 825 ---
------- ------- -------
Total amortized cost $19,210 $19,690 $22,655
======= ======= =======
Total market value $19,381 $19,733 $22,892
======= ======= =======
The Company believes that its present MBS available-for-sale allocation
of $18.3 million or 48.8% of the carrying value of the MBS portfolio, is
adequate to meet anticipated future liquidity requirements and to reposition its
balance sheet and asset/liability mix should it wish to do so in the future.
The following table sets forth the amortized cost, contractual
maturities and weighted average yields of the Company's mortgage-backed
securities, including CMOs, at June 30, 1997.
At June 30, 1997
--------------------------------------------------------------------
After After
One Year One to Five to Over
or Less Five Years Ten Years Ten Years Total
------- ---------- --------- --------- -----
(Dollars in Thousands)
MBS available for sale $ 103 $ 1,811 $ 2,782 $ 13,721 $18,417
5.86% 6.37% 6.02% 7.14% 6.89%
MBS held to maturity . $ -- $ 75 $ -- $ 19,135 $19,210
0% 8.14% 0% 7.02% 7.03%
Total ................ $ 103 $ 1,886 $ 2,782 $ 32,856 $37,627
======= ======= ========= ========== =======
Weighted average yield 5.86% 6.44% 6.02% 7.07% 6.96%
======= ======= ========= ========== =======
Due to prepayments of the underlying loans, and the prepayment characteristics
of the CMO traunches, the actual maturities of the Company's mortgage-backed
securities are expected to be substantially less than the scheduled maturities.
As a result of the volatility of market interest rates experienced during fiscal
1997, Management maintained an approximately equal weighting between fixed rate
and variable rate MBS products.
Investment Securities
The Company may invest in various types of securities, including
corporate debt and equity securities, U.S. Government and government agency
obligations, securities of various federal, state and municipal agencies,
commercial paper, bankers' acceptances, federal funds, and interest-bearing
deposits with other financial institutions.
The Company's investment activities are directly monitored by the
Company's Investment Committee under policy guidelines adopted by the Board of
Directors. In recent years, the general objective of the Company's investment
policy has been to manage the Company's GAP and generally to increase
interest-earning assets. As reflected in the table below, the Company during
fiscal 1997 continued to increase its holdings of U.S. Government and agency
obligations, which amounted to $84.1 million or 91.9% of the total investment
portfolio at June 30, 1997 as compared to $54.2 million or 88.7% of the total
investment portfolio at June 30, 1996. Approximately $81.9 million or 89.5% of
the Company's total investment portfolio at June 30, 1997 was comprised of U.S.
Government agency securities with longer-terms to maturity and optional
principal redemption features ("callable bonds"). By increasing its holdings of
callable longer-term securities, the Company has been able to earn higher levels
of net interest income, while improving the credit quality of its investment
portfolio. While a substantial portion of the Company's investment portfolio is
funded with short-term borrowings, such borrowings can be repaid if all, or a
portion of, the Company's callable agency bonds are redeemed prior to maturity.
The following tables set forth the amortized cost and market values of
the Company's investment securities portfolio at the dates indicated.
Investment Securities Available for Sale at June 30,
1997 1996 1995
------ ------ -------
(Dollars in Thousands)
Corporate debt obligations ................ $ -- $ -- $ --
U.S. Government and agency securities ..... 2,192 2,193 --
------ ------ -------
Total amortized cost ...................... 2,192 2,193 --
Equity securities ......................... 1,497 -- --
------ ------ -------
Total amortized cost ...................... $3,689 $2,193 $ --
====== ====== =======
Total market value ........................ $3,553 $1,981 $ --
====== ====== =======
Investment Securities Held to Maturity at June 30,
1997 1996 1995
------ ------ -------
(Dollars in Thousands)
Corporate debt obligations .............. $ 2,145 $ 4,956 $16,453
U.S. Government and agency securities ... 81,850 51,981 45,072
State and municipal securities .......... -- 300 --
------- ------- -------
83,995 57,237 61,525
FHLB stock .............................. 3,927 1,900 1,153
------- ------- -------
Total amortized cost .................... $87,922 $59,137 $62,678
======= ======= =======
Total market value ...................... $87,816 $58,571 $63,127
======= ======= =======
No investment securities owned by the Company at June 30, 1997 had a
carrying value greater than 10% of the Company's stockholders' equity at such
date, other than securities issued by United States Government agencies and
corporations.
Information regarding the amortized cost, contractual maturities and
weighted average yields of the Company's investment portfolio at June 30, 1997
is presented below.
At June 30, 1997
-----------------------------------------------------------------------
After After
Investment Securities One Year One to Five to Over
Available for Sale or Less Five Years Ten Years Ten Years Total
------------------ ------- ---------- --------- --------- -----
(Dollars in Thousands)
Corporate debt obligations $ -- $ -- $ -- $ -- $ --
0% 0% 0% 0% 0%
U.S. Government and agency
securities ............ $ -- $ -- $ -- $2,192 $2,192
0% 0% 0% 6.23% 6.23%
Total .................... $ -- $ -- $ -- $2,192 $2,192
====== ====== ====== ====== ======
Weighted average yield ... 0% 0% 0% 6.23% 6.23%
====== ====== ====== ====== ======
Equity securities ........ $ -- $ -- $ -- $1,497 $1,497
------ ------ ------ ------ ------
Total .................... $ -- $ -- $ -- $3,689 $3,689
====== ====== ====== ====== ======
At June 30, 1997
--------------------------------------------------------------------
After After
Investment Securities One Year One to Five to Over
Held to Maturity or Less Five Years Ten Years Ten Years Total
---------------- ------- ---------- --------- --------- -----
(Dollars in Thousands)
Corporate debt obligations $1,645 $ 500 $ --- $ --- $ 2,145
7.29% 6.40% 0% 0% 7.08%
U.S. Government and agency
securities $ --- $1,500 $47,732 $32,618 $81,850
0% 6.82% 7.47% 8.21% 7.75%
Total $1,645 $2,000 $47,732 $32,618 $83,995
====== ====== ======= ======= =======
Weighted average yield 7.29% 6.71% 7.47% 8.21% 7.74%
===== ===== ====== ====== ======
Information regarding the amortized cost, earliest call dates and
weighted average yield of the Company's investment portfolio at June 30, 1997 is
presented below. All Company investments in callable bonds were classified as
held-to-maturity at June 30, 1997.
At June 30, 1997
-------------------------------------------------------------------
After After
One Year One to Five to Over
or Less Five Years Ten Years Ten Years Total
------- ---------- --------- --------- -----
(Dollars in Thousands)
Corporate debt obligations $ 1,645 $ 500 $-- $ -- $ 2,145
7.29% 6.40% 0% 0% 7.08%
U.S. Government and agency
securities ............ $57,878 $23,972 $-- $ 2,192 $84,042
7.84% 7.56% 0% 6.23% 7.72%
Total .................... $59,523 $24,472 $-- $ 2,192 $86,187
======= ======= ==== ======= =======
Weighted average yield ... 7.82% 7.54% 0% 6.23% 7.70%
======= ======= ==== ======= =======
Equity securities ........ $ -- $ -- $-- $ 1,497 $ 1,497
------- ------- ---- ------- -------
Total .................... $59,523 $24,472 $-- $ 3,689 $87,684
======= ======= ==== ======= =======
The Company to date has not engaged, and does not intend to engage in
the immediate future, in trading investment securities.
Sources of Funds
The Company's principal source of funds for use in lending and for
other general business purposes has traditionally come from deposits obtained
through the Company's home and branch offices. Funding is also derived from
Federal Home Loan Bank advances, short-term borrowings, amortization and
prepayments of outstanding loans and mortgage-backed securities and from
maturing investment securities.
Deposits. The Company's deposits totaled $170.9 million at June 30,
1997 as compared to $170.8 million at June 30, 1996. The $36 thousand increase
was attributable to an approximate $1.0 million increase in core deposits offset
by a $949 thousand decrease in certificates of deposit. In order to mitigate the
decline in time deposits, and to attract new and lower cost core deposits, the
Company continued to offer a no minimum balance, "free", checking account
product. Current deposit products include regular savings accounts, demand
accounts, negotiable order of withdrawal (NOW) accounts, money market deposit
accounts, and certificates of deposit ranging in terms from 30 days to ten
years. Included among these deposit products are certificates of deposit with
negotiable interest rates and balances of $100,000 or more, which amounted to
$11.1 million or 6.5% of the Company's total deposits at June 30, 1997 as
compared to $9.7 million or 5.7% at June 30, 1996. The Company's deposit
products also include Individual Retirement Account certificates ("IRA
certificates").
The Company's deposits are obtained primarily from residents of
northern Allegheny, southern Butler and eastern Beaver counties, Pennsylvania.
The Company attracts deposit accounts by offering a wide variety of accounts,
competitive interest rates, and convenient office locations and service hours.
The Company utilizes traditional marketing methods to attract new customers and
savings deposits, including print media advertising and direct mailings. The
Company does not advertise for deposits outside of its local market area or
utilize the services of deposit brokers, and Management believes that an
insignificant number of deposit accounts were held by non-residents of
Pennsylvania at June 30, 1997. The Company has drive-up banking facilities and
automated teller machines ("ATMs") at its McCandless, Franklin Park and
Cranberry Township offices. The Company participates in the MAC(R) and CIRRUS(R)
ATM networks.
The Company has been competitive in the types of accounts and in
interest rates it has offered on its deposit products and continued to price its
savings products nearer to the market average rate as opposed to the upper range
of market offering rates. The Company has continued to emphasize the retention
of core deposits, particularly demand deposits. Financial institutions
generally, including the Company, have experienced a certain degree of depositor
disintermediation to other investment alternatives. Management believes that the
degree of disintermediation experienced by the Company has not had a material
impact on overall liquidity.
The following table sets forth the average balance of the Company's
deposits and the average rates paid thereon for the past three years. Average
balances are derived from month-end balances.
At June 30,
-----------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Regular savings and club
accounts ................ $ 36,330 2.61% $ 37,560 2.66% $ 46,805 2.74%
NOW accounts ................ 14,398 0.88 14,483 1.35 14,951 1.75
Money market deposit
accounts ................ 12,045 2.63 11,438 2.64 13,537 2.62
Certificate of deposit
accounts ................ 99,773 5.66 102,263 5.76 94,430 5.55
Escrows ..................... 2,471 1.82 2,536 1.81 2,257 1.68
-------- -------- --------
Total interest-bearing
deposits and escrows .. 165,017 4.29 168,280 4.42 171,980 4.16
Non-interest-bearing checking
accounts ................ 6,459 -- 4,559 -- 3,583 --
-------- -------- --------
Total deposits and
escrows ............... $171,476 4.13% $172,839 4.30% $175,563 4.07%
======== ==== ======== ==== ======== ====
The following table sets forth the net deposit flows of the Company
during the periods indicated.
Year Ended June 30,
---------------------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in Thousands)
(Decrease) before interest credited $ (7,011) $ (5,339) $(18,490)
Interest credited 7,047 7,396 6,947
-------- -------- --------
Net deposit (decrease) increase $ 36 $ 2,057 $(11,543)
======== ======== ========
The following table sets forth maturities of the Company's time
deposits of $100,000 or more at June 30, 1997 by time remaining to maturity.
Amounts
-------
(Dollars in Thousands)
Three months or less $ 2,852
Over three months through six months 2,105
Over six months through twelve months 1,931
Over twelve months 4,173
---------
$11,061
Borrowings. Borrowings are comprised of Federal Home Loan Bank advances
and repurchase agreements with securities brokers with original maturities of
ninety-two days or less. At June 30, 1997, borrowings totaled $84.6 million as
compared to $48.7 million at June 30, 1996. The $35.9 million or 73.7% increase
was primarily used to fund the Company's purchase of investment and
mortgage-backed securities during fiscal 1997. The Company believes that the
judicious use of borrowings has allowed it to pursue a strategy of increasing
net interest income by purchasing investment securities with lower total cost
wholesale funding. Wholesale funding also provides the Company with a larger
degree of control with respect to the term structure of its liabilities than
traditional retail deposits. The Company also avoids the additional cost
associated with federal deposit insurance premiums through the utilization of
borrowings, as opposed to retail deposits.
Competition
The Company faces significant competition in attracting deposits. Its
most direct competition for deposits has historically come from commercial banks
and other savings institutions located in its market area. The Company also
faces additional significant competition for investors' funds from other
financial intermediaries. The Company competes for deposits principally by
offering depositors a variety of deposit programs, convenient branch locations,
hours and other services. The Company does not rely upon any individual group or
entity for a material portion of its deposits.
The Company's competition for real estate loans comes principally from
mortgage banking companies, other savings institutions, commercial banks and
credit unions. The Company competes for loan originations primarily through the
interest rates and loan fees it charges, the efficiency and quality of services
it provides borrowers, referrals from real estate brokers and builders, and the
variety of its products. Factors which affect competition include the general
and local economic conditions, current interest rate levels and volatility in
the mortgage markets.
Employees
The Savings Bank had 50 full-time employees and 11 part-time employees
as of June 30, 1997. None of these employees is represented by a collective
bargaining agent. The Savings Bank believes that it enjoys excellent relations
with its personnel.
REGULATION AND SUPERVISION
The Company
General. The Company, as a bank holding company, is subject to
regulation and supervision by the Federal Reserve Board and by the Pennsylvania
Department of Banking (the "Department"). The Company is required to file
annually a report of its operations with, and is subject to examination by, the
Federal Reserve Board and the Department.
BHCA Activities and Other Limitations. The Bank Holding Company Act of
1956, as amended ("BHCA") prohibits a bank holding company from acquiring direct
or indirect ownership or control of more than 5% of the voting shares of any
bank, or increasing such ownership or control of any bank, without prior
approval of the Federal Reserve Board. The BHCA also generally prohibits a bank
holding company from acquiring any bank located outside of the state in which
the existing bank subsidiaries of the bank holding company are located unless
specifically authorized by applicable state law. No approval under the BHCA is
required, however, for a bank holding company already owning or controlling 50%
of the voting shares of a bank to acquire additional shares of such bank.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include operating a mortgage company, finance company, credit card
company, factoring company, trust company or savings association; performing
certain data processing operations; providing limited securities brokerage
services; acting as an investment or financial advisor; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; providing tax planning and preparation
services; operating a collection agency; and providing certain courier services.
The Federal Reserve Board also has determined that certain other activities,
including real estate brokerage and syndication, land development, property
management and underwriting of life insurance not related to credit
transactions, are not closely related to banking and a proper incident thereto.
Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill. Tier II capital
generally consists of hybrid capital instruments; perpetual preferred stock
which is not eligible to be included as Tier I capital; term subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
the bulk of assets which are typically held by a bank holding company, including
multi-family residential and commercial real estate loans, commercial business
loans and consumer loans. Single-family residential first mortgage loans which
are not (90 days or more) past-due or non-performing and which have been made in
accordance with prudent underwriting standards are assigned a 50% level in the
risk-weighing system, as are certain privately-issued mortgage-backed securities
representing indirect ownership of such loans. Off-balance sheet items also are
adjusted to take into account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board requires bank holding companies to maintain a minimum leverage capital
ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose
does not include goodwill and any other intangible assets and investments that
the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio
requirement is the minimum for the top-rated bank holding companies without any
supervisory, financial or operational weaknesses or deficiencies or those which
are not experiencing or anticipating significant growth. Other bank holding
companies will be expected to maintain Tier I leverage capital ratios of at
least 4.0% to 5.0% or more, depending on their overall condition.
The Company is in compliance with the above-described Federal Reserve
Board regulatory capital requirements.
Commitments to Affiliated Institutions. Under Federal Reserve Board
policy, the Company is expected to act as a source of financial strength to the
Savings Bank and to commit resources to support the Savings Bank in
circumstances when it might not do so absent such policy. The legality and
precise scope of this policy is unclear, however, in light of recent judicial
precedent.
The Savings Bank
General. The Savings Bank is subject to extensive regulation and
examination by the Department and by the FDIC, which insures its deposits to the
maximum extent permitted by law, and is subject to certain requirements
established by the Federal Reserve Board. The federal and state laws and
regulations which are applicable to banks regulate, among other things, the
scope of their business, their investments, their reserves against deposits, the
timing of the availability of deposited funds and the nature and amount of and
collateral for certain loans. The laws and regulations governing the Savings
Bank generally have been promulgated to protect depositors and not for the
purpose of protecting stockholders.
FDIC Insurance Premiums. The Savings Bank currently pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups which is
based solely on the level of an institution's capital - "well capitalized",
"adequately capitalized" and "undercapitalized"- which is defined in the same
manner as the regulations establishing the prompt corrective action system under
Section 38 of the Federal Deposit Insurance Act ("FDIA"), as discussed below.
These three groups are then divided into three subgroups which reflect varying
levels of supervisory concern, from those which are considered to be healthy to
those which are considered to be of substantial supervisory concern. The matrix
so created results in nine assessment risk classifications, with rates ranging
from 0.00% for well capitalized, healthy institutions to 0.27% for
undercapitalized institutions with substantial supervisory concerns. The Savings
Bank is a "well-capitalized" institution as of June 30, 1997.
On September 30, 1996 the President signed the Deposit Insurance Funds
Act of 1996 (the "Funds Act") into law. The Funds Act called for a Special
Assessment on SAIF-assessable deposits as of March 31, 1995 to capitalize the
SAIF to its designated reserve ratio of 1.25%. The Company recorded a pre-tax
charge of approximately $1.1 million during the quarter ended September 30, 1996
using an FDIC estimated assessment rate of $0.657 for every $100 of assessable
deposits. During the quarter ended December 31, 1996, the Company accrued a $102
thousand refund of prepaid federal deposit insurance premiums as a result of the
capitalization of the SAIF. The Funds Act also provides for a Financing
Corporation ("FICO") debt service assessment. The current FICO debt service
assessment annual rate for SAIF members is 6.3 basis points (or 6.3 (cents) per
$100 of assessable deposits).
Capital Requirements. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like the Savings Bank, are not members of the Federal Reserve System.
These requirements are substantially similar to those adopted by the Federal
Reserve Board regarding bank holding companies, as described above.
The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, highest-rated banks are those that the FDIC determines are
not anticipating or experiencing significant growth and have well diversified
risk, including no undue interest rate risk exposure, excellent asset quality,
high liquidity, good earnings and, in general, which are considered a strong
banking organization, rated composite 1 under the Uniform Financial Institutions
Rating System.
A bank which has less than the minimum leverage capital requirement
shall, within 60 days of the date as of which it fails to comply with such
requirement, submit to its FDIC regional director for review and approval, a
reasonable plan describing the means and timing by which the bank shall achieve
its minimum leverage capital requirement. A bank which fails to file such plan
with the FDIC is deemed to be operating in an unsafe and unsound manner, and
could subject the bank to a cease-and-desist order from the FDIC. The FDIC's
regulation also provides that any insured depository institution with a ratio of
Tier I capital to total assets that is less than 2.0% is deemed to be operating
in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and is
subject to potential termination of deposit insurance. However, such an
institution will not be subject to an enforcement proceeding thereunder solely
on account of its capital ratios if it has entered into and is in compliance
with a written agreement with the FDIC to increase its Tier I leverage capital
ratio to such level as the FDIC deems appropriate and to take such other action
as may be necessary for the institution to be operated in a safe and sound
manner. The FDIC capital regulation also provides, among other things, for the
issuance by the FDIC or its designee(s) of a capital directive, which is a final
order issued to a bank that fails to maintain minimum capital to restore its
capital to the minimum leverage capital requirement within a specified time
period. Such directive is enforceable in the same manner as a final
cease-and-desist order.
Miscellaneous
The Savings Bank is subject to certain restrictions on loans to the
Company, on investments in the stock or securities thereof, on the taking of
such stock or securities as collateral for loans to any borrower, and on the
issuance of a guarantee or letter of credit on behalf of the Company. The
Savings Bank is also subject to certain restrictions on most types of
transactions with the Company, requiring that the terms of such transactions be
substantially equivalent to terms of similar transactions with non-affiliated
firms. In addition, there are various limitations on the distribution of
dividends to the Company by the Savings Bank.
The foregoing references to laws and regulations which are applicable
to the Company and the Savings Bank are brief summaries thereof which do not
purport to be complete and which are qualified in their entirety by reference to
such laws and regulations.
FEDERAL AND STATE TAXATION
General. The Company and the Savings Bank are subject to the generally
applicable corporate tax provisions of the Internal Revenue Code of 1986 (the
"Code"), as well as certain additional provisions of the Code which apply to
thrift and other types of financial institutions. The following discussion of
tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to the Company and the
Savings Bank.
Fiscal Year. The Company currently files a consolidated federal income
tax return on the basis of the calendar year ending on December 31.
Method of Accounting. The Company maintains its books and records for
federal income tax purposes using the accrual method of accounting. The accrual
method of accounting generally requires that items of income be recognized when
all events have occurred that establish the right to receive the income and the
amount of income can be determined with reasonable accuracy and that items of
expense be deducted at the later of (i) the time when all events have occurred
that establish the liability to pay the expense and the amount of such liability
can be determined with reasonable accuracy or (ii) the time when economic
performance with respect to the item of expense has occurred.
Bad Debt Reserves. Under Section 593 of the Internal Revenue Code of
1986 (the "Code"), thrift institutions such as the Savings Bank, which meet
certain definitional tests primarily relating to their assets and the nature of
their business, are permitted to establish a tax reserve for bad debts and to
make annual additions thereto, which additions may, within specified
limitations, be deducted in arriving at their taxable income. The Savings Bank's
deduction with respect to "qualifying loans", which are generally loans secured
by certain interests in real property, may currently be computed using an amount
based on the Savings Bank's actual loss experience (the "experience method"), or
a percentage equal to 8.0% of the Savings Bank's taxable income (the "percentage
of taxable income method"), computed without regard to this deduction and with
additional modifications and reduced by the amount of any permitted addition to
the non-qualifying reserve. The Savings Bank has generally used the percentage
of taxable income method in the past.
The Small Business Jobs Protection Act of 1996, adopted in August 1996,
generally (i) repeals the provision of the Code which authorizes use of the
percentage of taxable income method by qualifying savings institutions to
determine deductions for bad debts, effective for taxable years beginning after
1995, and (ii) requires that a savings institution recapture for tax purposes
(i.e. take into income) over a six-year period its applicable excess reserves,
which for a savings institution such as West View which is a "small bank", as
defined in the Code, generally is the excess of the balance of its bad debt
reserves as of the close of its last taxable year beginning before January 1,
1996 over the balance of such reserves as of the close of its last taxable year
beginning before January 1, 1988, which recapture would be suspended for any tax
year that begins after December 31, 1995 and before January 1, 1998 (thus a
maximum of two years) in which a savings institution originates an amount of
residential loans which is not less than the average of the principal amount of
such loans made by a savings institution during its six most recent taxable
years beginning before January 1, 1996. As an institution with less than $500.0
million in assets, the Savings Bank can elect to either use the experience
method available to commercial banks of this size or it can adopt the specific
charge-off method applicable to "large banks" (banks with total assets in excess
of $500.0 million). The amount of tax bad debt reserves subject to recapture is
approximately $1.2 million. In accordance with FASB No. 109, deferred income
taxes have previously been provided on this amount, therefore no financial
statement expense should be recorded as a result of this recapture. The
Company's supplemented bad debt reserve of approximately $3.8 million is not
subject to recapture. The Company does not believe that these provisions will
have a material adverse effect on the Company's financial condition or
operations.
The above-referenced legislation also repeals certain provisions of the
Code that only apply to thrift institutions to which Section 593 applies: (i)
the denial of a portion of certain tax credits to a thrift institution; (ii) the
special rules with respect to the foreclosure of property securing loans of a
thrift institution; (iii) the reduction in the dividends received deduction of a
thrift institution; and (iv) the ability of a thrift institution to use a net
operating loss to offset its income from a residual interest in a real estate
mortgage investment conduit. It is not anticipated that the repeal of these
provisions will have a material adverse effect on the Company's financial
condition or operations.
Audit by IRS. The Company's consolidated federal income tax returns for
taxable years through December 31, 1993 have been closed for the purpose of
examination by the Internal Revenue Service.
State Taxation. The Company is subject to the Pennsylvania Corporate
Net Income Tax and Capital Stock and Franchise Tax. The Pennsylvania Corporate
Net Income Tax rate was reduced from 10.99% to 9.99% effective January 1, 1995
and is imposed on the Company's unconsolidated taxable income for federal
purposes with certain adjustments. In general, the Capital Stock Tax is a
property tax imposed at the rate of 12.75% of a corporation's capital stock
value, which is determined in accordance with a fixed formula based upon average
net income and net worth.
The Savings Bank is taxed under the Pennsylvania Mutual Thrift
Institutions Tax Act (enacted on December 13, 1988 and amended in July 1989)
(the "MTIT"), as amended to include thrift institutions having capital stock.
Pursuant to the MTIT, the Savings Bank's current tax rate is 11.5%. The MTIT
exempts the Savings Bank from all other taxes imposed by the Commonwealth of
Pennsylvania for state income tax purposes and from all local taxation imposed
by political subdivisions, except taxes on real estate and real estate
transfers. The MTIT is a tax upon net earnings, determined in accordance with
generally accepted accounting principles ("GAAP") with certain adjustments. The
MTIT, in computing GAAP income, allows for the deduction of interest earned on
state and federal securities, while disallowing a percentage of a thrift's
interest expense deduction in the proportion of those securities to the overall
investment portfolio. Net operating losses, if any, thereafter can be carried
forward three years for MTIT purposes.
Item 2. Properties.
The following table sets forth certain information with respect to the
offices and other properties of the Company at June 30, 1997.
Net Book
Value of
Description/Address Leased/Owned Property
------------------- ------------ --------
(Dollars in Thousands)
McCandless Office Owned $171
9001 Perry Highway
Pittsburgh, PA 15237
West View Boro Office Owned 12
456 Perry Highway
Pittsburgh, PA 15229
Cranberry Township Office Owned 294
20531 Perry Highway
Cranberry Township, PA 16066
Sherwood Oaks Office Leased(1) ---
100 Norman Drive
Cranberry Township, PA 16066
Bellevue Boro Office Leased(2) 18
572 Lincoln Avenue
Pittsburgh, PA 15202
Franklin Park Boro Office Owned 613
2566 Brandt School Road
Wexford, PA 15090
Wexford Loan Production Office Leased(3) ---
10521 Perry Highway
Wexford, PA 15090
(1) The Company operates this office out of a retirement community. The lease
expires in June 2000.
(2) The lease is for a period of 15 years ending in September 2006 with an
option for the Company to renew the lease for an additional five years.
(3) The lease is for a period to end December 1997.
Item 3. Legal Proceedings.
The information required herein is incorporated by reference from page
43 of the Company's 1997 Annual Report, Note 12 of Notes to Consolidated
Financial Statements, "Litigation".
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information required herein is incorporated by reference from page
57 of the Company's 1997 Annual Report.
Item 6. Selected Financial Data.
The information required herein is incorporated by reference from pages
2 to 3 of the Company's 1997 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required herein is incorporated by reference from pages
4 to 24 of the Company's 1997 Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required herein is incorporated by reference from pages
11 to 15 of the Company's 1997 Annual Report.
Item 8. Financial Statements and Supplementary Data.
The information required herein is incorporated by reference from pages
25 to 56 of the Company's 1997 Annual Report.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.
Not applicable.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
The information required herein is incorporated by reference from pages
2 to 5 of the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders dated September 26, 1997 ("Proxy Statement").
Item 11. Executive Compensation.
The information required herein is incorporated by reference from pages
8 to 12 of the Company's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference from pages
6 to 8 of the Company's Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from page
13 of the Company's Proxy Statement.
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this report.
(1) The following documents are filed as part of this report and are
incorporated herein by reference from the Company's 1997 Annual Report.
Report of Independent Auditors.
Consolidated Statements of Financial Condition at June 30, 1997 and
1996.
Consolidated Statements of Income for the Years Ended June 30, 1997,
1996 and 1995.
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended June 30,
1997, 1996 and 1995.
Notes to the Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission ("SEC") are
omitted because they are not applicable or the required information is included
in the Consolidated Financial Statements or notes thereto.
(3)(a)The following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit Index.
No. Description Page
--- ----------- ----
3.1 Articles of Incorporation *
3.2 By-Laws *
4 Stock Certificate of WVS Financial Corp. *
10.1 WVS Financial Corp. Recognition Plans and
Trusts for Executive Officers,
Directors and Key Employees** *
10.2 WVS Financial Corp. 1993 Stock Incentive Plan** *
10.3 WVS Financial Corp. 1993 Directors' Stock
Option Plan** *
10.4 WVS Financial Corp. Employee Stock Ownership
Plan and Trust** *
10.5 Amended West View Savings Bank Employee
Profit Sharing Plan** *
10.6 Employment Agreements between WVS Financial
Corp. and Robert Sinewe, Margaret
VonDerau, David Bursic and Edward
Wielgus** E-1
10.7 Directors Deferred Compensation Program** *
11 Statement Re Computation of Per Share Earnings E-41
13 1997 Annual Report to Stockholders E-42
21 Subsidiaries of the Registrant - Reference is
made to Item 1. "Business" for the
required information
23 Consent of Independent Auditors E-105
27 Financial Data Schedule E-106
* Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 33-67506) filed by the Company with the SEC on August 16,
1993, as amended.
** Management contract or compensatory plan or arrangement.
(3)(b)Reports filed on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WVS FINANCIAL CORP.
September 25, 1997 By: /s/Robert C. Sinewe
-------------------
Robert C. Sinewe
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/Robert C. Sinewe September 25, 1997
- -------------------
Robert C. Sinewe, Director, President and
Chief Executive Officer (Principal
Executive Officer)
/s/James S. McKain Jr. September 25, 1997
- ----------------------
James S. McKain Jr., Chairman of the Board
/s/David J. Bursic
- ------------------ September 25, 1997
David J. Bursic, Vice President, Treasurer
and Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/David L. Aeberli
- ------------------- September 25, 1997
David L. Aeberli, Director
/s/Arthur H. Brandt
- ------------------- September 25, 1997
Arthur H. Brandt, Director
/s/William J. Hoegel
- -------------------- September 25, 1997
William J. Hoegel, Director
/s/Donald E. Hook
- ----------------- September 25, 1997
Donald E. Hook, Director
/s/James H. Ritchie
- ------------------- September 25, 1997
James H. Ritchie, Director
/s/John M. Seifarth
- ------------------- September 25, 1997
John M. Seifarth, Director
/s/Margaret VonDerau
- --------------------- September 25, 1997
Margaret VonDerau, Director, Senior
Vice President and Corporate Secretary