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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No.: 0-22444
WVS Financial Corp.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1710500
- ------------------------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9001 Perry Highway
Pittsburgh, Pennsylvania 15237
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(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)
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(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. ___
As of September 24, 1999, the aggregate value of the 2,412,564 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
626,208 shares held by all directors and officers of the Registrant as a group,
was approximately $36.3 million. This figure is based on the last known trade
price of $15.0625 per share of the Registrant's Common Stock on September 24,
1999.
Number of shares of Common Stock outstanding as of September 24, 1999: 3,038,772
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, 1999 are incorporated into Parts I, II and IV.
(2) Portions of the definitive proxy statement for the 1999 Annual Meeting of
Stockholders are incorporated into Part III.
PART I.
Item 1. Business.
- ------- ---------
WVS Financial Corp. ("WVS" or the "Company") is the parent holding company
of West View Savings Bank ("West View" or the "Savings Bank"). The Company was
organized in July 1993 as a Pennsylvania-chartered unitary bank holding company
and acquired 100% of the common stock of the Savings Bank in November 1993.
West View Savings Bank is a Pennsylvania-chartered, SAIF-insured stock
savings bank conducting business from six offices in the North Hills suburbs of
Pittsburgh. The Savings Bank converted to the stock form of ownership in
November 1993. The Savings Bank had no subsidiaries at June 30, 1999.
Lending Activities
General. At June 30, 1999, the Company's net portfolio of loans
receivable totaled $170.3 million, as compared to $157.7 million at June 30,
1998. Net loans receivable comprised 48.9% of Company total assets and 97.8% of
total deposits at June 30, 1999, as compared to 53.1% and 92.3%, respectively,
at June 30, 1998. The principal categories of loans in the Company's portfolio
are single-family and multi-family residential real estate loans, commercial
real estate loans, construction loans, consumer loans and land acquisition and
development loans. Substantially all of the Company's mortgage loan portfolio
consists of conventional mortgage loans, which are loans that are neither
insured by the Federal Housing Administration ("FHA") nor partially guaranteed
by the Department of Veterans Affairs ("VA"). Historically, the Company's
lending activities have been concentrated in single-family residential loans
secured by properties located in its primary market area of northern Allegheny
County, southern Butler County and eastern Beaver County, Pennsylvania.
On occasion, the Company has also purchased whole loans and loan
participations secured by properties located outside of its primary market area
but predominantly in Pennsylvania. The Company believes that all of its mortgage
loans are secured by properties located in Pennsylvania. Moreover, substantially
all of the Company's non-mortgage loan portfolio consists of loans made to
residents and businesses located in the Company's primary market area.
Federal Regulations impose limitations on the aggregate amount of loans
that a savings institution can make to any one borrower, including related
entities. The permissible amount of loans-to-one borrower follows the national
bank standard for all loans made by savings institutions, which generally does
not permit loans-to-one borrower to exceed 15% of unimpaired capital and
surplus. Loans in an amount equal to an additional 10% of unimpaired capital and
surplus also may be made to a borrower if the loans are fully secured by readily
marketable securities. At June 30, 1999, the Savings Bank's limit on
loans-to-one borrower was approximately $4.0 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, 1999, the Company's five largest loans or groups
of loans-to-one borrower, including related entities, ranged from an aggregate
of $2.6 million to $4.8 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,
----------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------- ------------------- ------------------- ------------------ ------------------
Amount % Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ - ------ -
(Dollars in thousands)
Real estate loans:
Single-family $103,035 54.43% $104,849 61.06% $116,663 67.25% $109,776 65.16% $92,710 63.17%
Multi-family 5,925 3.12 4,012 2.34 3,499 2.02 3,235 1.92 2,303 1.57
Commercial 28,546 15.08 21,021 12.24 14,669 8.46 13,088 7.77 12,138 8.27
Construction 23,810 12.58 17,779 10.35 16,969 9.78 19,269 11.44 21,106 14.38
Land acquisition
and development 7,646 4.04 7,233 4.21 7,412 4.27 9,004 5.35 4,671 3.18
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
Total real estate
loans 168,962 89.25 154,894 90.20 159,212 91.78 154,372 91.64 132,928 90.57
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
Consumer loans:
Home equity 16,467 8.70 13,613 7.93 12,258 7.06 11,963 7.10 12,477 8.50
Education 11 0.01 591 0.34 516 0.30 590 0.35 394 0.27
Other 2,153 1.14 2,336 1.36 1,403 0.81 1,484 0.88 905 0.61
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
Total consumer
loans 18,631 9.85 16,540 9.63 14,177 8.17 14,037 8.33 13,776 9.38
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
Commercial loans 1,720 0.90 290 0.17 91 0.05 40 0.02 --- ---
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
Commercial lease
financings --- 0.00 --- 0.00 2 0.00 14 0.01 68 0.05
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
189,313 100.00% 171,724 100.00% 173,482 100.00% 168,463 100.00% 146,772 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== ------- ======
Less:
Undisbursed loan
proceeds (16,327) (11,312) (12,505) (16,651) (10,794)
Net deferred loan
origination fees (817) (815) (834) (837) (799)
Allowance for loan
losses (1,842) (1,860) (2,009) (1,964) (1,836)
-------- -------- -------- -------- --------
Net loans
receivable $170,327 $157,737 $158,134 $149,011 $133,343
======== ======== ======== ======== ========
Contractual Maturities. The following table sets forth the scheduled
contractual maturities of the Company's loans and mortgage-backed securities at
June 30, 1999. The amounts shown for each period do not take into account loan
prepayments and normal amortization of the Company's loan portfolio.
Real Estate Loans
-----------------------------------------------------------------
Land Consumer
acquisition loans and Mortgage-
Single- Multi- and commercial backed
family family Commercial Construction development loans securities Total
------ ------ ---------- ------------ ----------- ----- ---------- -----
(Dollars in thousands)
Amounts due in:
One year or less $ 319 $ --- $ 1,522 $ 10,764 $ 2,418 $ 535 $ 55 $ 15,613
After one year through
five years 1,533 210 1,033 5,286 4,680 6,897 1,663 21,302
After five years 101,183 5,715 25,991 7,760 548 12,919 70,662 224,778
-------- ------- ------- ------- ------- ------- ------- --------
Total(1) $103,035 $ 5,925 $28,546 $23,810 $ 7,646 $20,351 $72,380 $261,693
======== ======= ======= ======= ======= ======= ======= ========
Interest rate terms on amounts due after one year:
Fixed $ 88,338 $4,649 $16,936 $4,521 $1,225 $12,791 $55,910 $184,420
Adjustable 14,378 1,276 10,088 8,525 4,003 7,025 16,415 61,710
-------- ------- ------- ------- ------- ------- ------- --------
Total $102,716 $5,925 $27,024 $13,046 $5,228 $19,816 $72,325 $246,080
======== ====== ======= ======= ====== ======= ======= ========
- -------------
(1) Does not include adjustments relating to loans in process, the allowance for
loan losses, accrued interest, deferred fee income and unearned discounts.
Scheduled contractual principal repayments do not reflect the actual
maturities of loans. The average maturity of loans is substantially less than
their average contractual terms because of prepayments and due-on-sale clauses.
The average life of mortgage loans tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than current mortgage loan rates (due to refinancings of adjustable-rate and
fixed-rate loans at lower rates).
As further discussed below, the Company has from time to time renewed
commercial real estate loans and speculative construction (single-family) loans
due to slower than expected sales of the underlying collateral. Commercial real
estate loans are generally renewed at a contract rate that is the greater of the
market rate at the time of the renewal or the original contract rate. Loans
secured by speculative single-family construction or developed lots are
generally renewed for an additional six month term with monthly payments of
interest. Subsequent renewals, if necessary, are generally granted for an
additional six month term; principal amortization may also be required. Land
acquisition and development loans are generally renewed for an additional twelve
month term with monthly payments of interest.
At June 30, 1999, the Company had approximately $10.0 million of
renewed commercial real estate and construction loans, all of which were
performing. The $10.0 million in aggregate disbursed principal that has been
renewed is comprised of: construction lines of credit totaling $8.3 million;
commercial real estate loans totaling $1.1 million; land acquisition and
single-family speculative construction loans totaling $284 thousand; business
lines of credit totaling $210 thousand; and developed residential lots totaling
$97 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.
Origination, Purchase and Sale of Loans. Applications for residential
real estate loans and consumer loans are obtained at all of the Company's
offices. Applications for commercial real estate loans are taken only at the
Company's Franklin Park office. Loan applications are primarily attributable to
existing customers, builders, walk-in customers and referrals from both real
estate brokers and existing 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 and other investors in the secondary market. Although the Company
has not been a frequent seller of loans in the secondary market, the Company is
on the Federal National Mortgage Association approved list of sellers/servicers.
The Company has held most of the loans it originates in its own portfolio until
maturity, due, in part, to competitive pricing conditions in the marketplace for
origination by nationwide lenders and portfolio lenders. During fiscal 1999, the
Company sold four pools of mortgages with an approximate combined principal
balance of $400 thousand, and participations in a large commercial loan with an
approximate combined principal balance of $1.1 million.
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, 1999, $6.1 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 $2.3 million or 37.1%
consisted of loans secured by commercial real estate and $3.8 million or 62.9%
consisted of single-family mortgage pools. During fiscal 1999, purchases of
whole loans and participations increased by $2.3 million, to a total of $3.4
million, as compared to fiscal 1998.
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, 1999, $6.1 million or 3.6% of the
Company's total loans receivable were being serviced for the Company by others.
The following table shows origination, purchase and sale activity of
the Company with respect to loans on a consolidated basis during the periods
indicated.
At or For the Year Ended June 30,
--------------------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
Net loans receivable beginning balance $157,737 $158,134 $149,011
Real estate loan originations
Single-family(1) 13,638 4,979 15,643
Multi-family(2) 2,715 1,729 575
Commercial 10,723 6,484 2,000
Construction 14,230 10,796 9,044
Land acquisition and development 3,100 2,936 1,384
-------- -------- --------
Total real estate loan originations 44,406 26,924 28,646
-------- -------- --------
Home equity 7,293 4,572 3,160
Education 373 379 323
Commercial 864 216 533
Other 890 788 207
-------- -------- --------
Total loan originations 53,826 32,879 32,869
-------- -------- --------
Disbursements against available credit lines:
Home equity 4,663 5,785 4,608
Other 893 82 28
Purchase of whole loans and participations 3,479 1,115 1,145
-------- -------- --------
Total originations and purchases 62,861 39,861 38,650
-------- -------- --------
Less:
Loan principal repayments 43,597 37,622 33,569
Sales of whole loans and participations 1,469 3,964 ---
Transferred to real estate owned 207 --- 73
Change in loans in process 5,015 (1,193) (4,147)
Other, net(3) (17) (135) 32
-------- -------- --------
Net increase (decrease) $12,590 $ (397) $ 9,123
-------- -------- --------
Net loans receivable ending balance $170,327 $157,737 $158,134
======== ======== ========
- -------------
(1) Consists of loans secured by one-to-four 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 ("Guidelines") adopted by the federal banking agencies in December
1992. The Guidelines set forth uniform regulations prescribing standards for
real estate lending. Real estate lending is defined as an extension of credit
secured by liens on interests in real estate or made for the purpose of
financing the construction of a building or other improvements to real estate,
regardless of whether a lien has been taken on the property.
The policies must address certain lending considerations set forth in
the Guidelines, including loan-to-value ("LTV") limits, loan administration
procedures, underwriting standards, portfolio diversification standards, and
documentation, approval and reporting requirements. These policies must also be
appropriate to the size of the institution and the nature and scope of its
operations, and must be reviewed and approved by the Board of Directors at least
annually. The LTV ratio framework, with a LTV ratio being the total amount of
credit to be extended divided by the appraised value of the property at the time
the credit is originated, must be established for each category of real estate
loans. If not a first lien, the lender must combine all senior liens when
calculating this ratio. The Guidelines, among other things, establish the
following supervisory LTV limits: raw land (65%); land development (75%);
construction (commercial, multi-family and non-residential) (80%); improved
property (85%); and one-to-four family residential (owner-occupied) (no maximum
ratio; however any LTV ratio in excess of 75% 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, 1999, $103.0 million or 54.4% 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 $13.6 million and increased $8.7 million or 173.9%
during the fiscal year ended June 30, 1999, when compared to the same period in
1998. The increase in single-family originations was primarily due to higher
cyclical mortgage refinancing activity and a stronger local demand for permanent
mortgage financing.
The Company historically has emphasized 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 the portfolio, these loans are
originated generally under terms, conditions and documentation that permit their
sale in the secondary market. The Company also makes available single-family
residential adjustable-rate mortgages ("ARMs"), which provide for periodic
adjustments to the interest rate, but such loans have never been as widely
accepted in the Company's market area as the fixed-rate mortgage loan products.
The ARMs currently offered by the Company have up to 30-year terms and an
interest rate, which adjusts in accordance with one of several indices. Consumer
response to adjustable rate loans has been limited due to the continued decline
in long-term interest rates experienced during most of fiscal 1999.
At June 30, 1999, approximately $88.7 million or 86.0% 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 obtained on
residential loans for which loan-to-value ratios exceed 80% according to the
following schedule: loans exceeding 80% but less than 90% - 25% coverage; and
loans exceeding 90% but less than 95% - 30% coverage. No loans are made in
excess of 95% of appraised value.
Property appraisals on the real estate and improvements securing the
Company's single-family residential loans are made by independent appraisers
approved by the Board of Directors. Appraisals are performed in accordance with
federal regulations and policies. The Company obtains title insurance policies
on most of the first mortgage real estate loans originated. If title insurance
is not obtained or is unavailable, the Company obtains an abstract of title and
a title opinion. Borrowers also must obtain hazard insurance prior to closing
and, when required by the United States Department of Housing and Urban
Development, flood insurance. Borrowers may be required to advance funds, with
each monthly payment of principal and interest, to a loan escrow account from
which the Company makes disbursements for items such as real estate taxes and
mortgage insurance premiums as they become due.
Multi-Family Residential and Commercial Real Estate Loans. The Company
originates mortgage loans for the acquisition and refinancing of existing
multi-family residential and commercial real estate properties. At June 30,
1999, $5.9 million or 3.1% of the Company's total loan portfolio consisted of
loans secured by existing multi-family residential real estate properties, which
represented an increase of $1.9 million or 47.7% from fiscal 1998. At June 30,
1999, $28.5 million or 15.1% of the loan portfolio consisted of loans secured by
existing commercial real estate properties, which represented an increase of
$7.5 million or 35.8% from fiscal 1998. Both increases were primarily due to
higher volumes of loan originations during fiscal 1999. During fiscal 1999, the
Company chose to emphasize originations of multi-family and commercial real
estate loans in order to earn returns greater than those offered in the
single-family residential mortgage market.
The majority of the Company's multi-family residential loans are
secured primarily by 5 to 20 unit apartment buildings, while commercial real
estate loans are secured by office buildings, hotels, small retail
establishments and churches. These types of properties constitute the majority
of the Company's commercial real estate loan portfolio. The Company's
multi-family residential and commercial real estate loan portfolio consists
primarily of loans secured by properties located in its primary market area.
Although terms vary, multi-family residential and commercial real
estate loans generally are amortized over a period of up to 15 years (although
some loans amortize over a twenty year period) and mature in 5 to 15 years. The
Company will originate these loans either with fixed or adjustable interest
rates which generally is negotiated at the time of origination. Loan-to-value
ratios on the Company's commercial real estate loans are currently limited to
75% or lower. As part of the criteria for underwriting multi-family residential
and commercial real estate loans, the Company generally imposes a debt coverage
ratio (the ratio of net cash from operations before payment of the debt service
to debt service) of at least 100%. It is also the Savings Bank's general policy
to obtain personal guarantees on its multi-family residential and commercial
real estate loans from the principals of the borrower and, when this cannot be
obtained, to impose more stringent loan-to-value, debt service and other
underwriting requirements.
At June 30, 1999, the Company's multi-family residential and commercial
real estate loan portfolio consisted of approximately 106 loans with an average
principal balance of $323 thousand. At June 30, 1999, the Company had one
commercial real estate loan totaling $274 thousand that was not accruing
interest.
Construction Loans. In recent years, the Company has been active in
originating loans to construct primarily single-family residences, and, to a
much lesser extent, loans to acquire and develop real estate for construction of
residential properties. These construction lending activities generally are
limited to the Company's primary market area. At June 30, 1999, construction
loans amounted to approximately $23.8 million or 12.6% of the Company's total
loan portfolio, which represented an increase of $6.1 million or 33.9% from
fiscal 1998. The increase was principally due to increased levels of new home
construction and in order to earn a higher rate of return than was available in
the single-family residential mortgage market. As of June 30, 1999, the
Company's portfolio of construction loans consisted of $17.7 million of loans
for the construction of single-family residential real estate, $5.7 million of
loans for the construction of commercial real estate, and $400 thousand of loans
for the construction of multi-family residential real estate. Construction loan
originations totaled $14.2 million and increased by $3.4 million or 31.8% during
the fiscal year ended June 30, 1999, when compared to the same period in 1998.
Construction loans are made for the purpose of constructing a personal
residence. In such circumstances, the Company will underwrite such loans on a
construction/permanent mortgage loan basis. At June 30, 1999, approximately
87.8% 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 12.2% 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 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 $1.5 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, 1999, the Company also had $7.6 million or 4.0% of the total loan
portfolio invested in land development loans, which consisted of 15 loans to 13
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, 1999, $18.6 million or 9.9% of the Company's total loan portfolio consisted
of consumer loans, which represented an increase of $2.1 million or 12.7% from
fiscal 1998 primarily due to higher volumes of loan originations. During fiscal
1999, the Company chose to emphasize originations of consumer loans in order to
earn returns greater than those offered in the single-family residential
mortgage market and to shorten the average life of the loan portfolio due to
relatively low market interest rates. 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, 1999,
approximately 63.6% of the Company's home equity loans were at a fixed rate for
a fixed term. Although there have been a few exceptions with greater
loan-to-value ratios, substantially all of such loans are originated with a
loan-to-value ratio which, when coupled with the outstanding first mortgage
loan, does not exceed 80%.
Commercial Loans. At June 30, 1999, $1.7 million or less than 1% of the
Company's total loan portfolio consisted of commercial loans, which include
loans secured by accounts receivable, business inventory and equipment, and
similar collateral. The $1.4 million or 493.1% increase from fiscal 1998 was
principally due to higher volumes of loan originations. The Company is
selectively developing this line of business in order to increase interest
income and to attract compensating deposit account balances.
Loan Fee Income. In addition to interest earned on loans, the Company
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 that 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 $341 thousand,
$205 thousand and $229 thousand of deferred loan fees during fiscal 1999, 1998
and 1997, respectively, in connection with loan refinancings, payoffs and
ongoing amortization of outstanding loans. The increase in loan origination fee
income for fiscal 1999 was principally attributable to a higher volume of loan
refinancings which permitted the acceleration of associated deferred fee
balances.
Non-Performing Loans, Real Estate Owned and Troubled Debt
Restructurings. When a borrower fails to make a required payment on a loan, the
Company attempts to cure the deficiency by contacting the borrower and seeking
payment. Contacts are generally made on the fifteenth day after a payment is
due. In most cases, deficiencies are cured promptly. If a delinquency extends
beyond 15 days, the loan and payment history is reviewed and efforts are made to
collect the loan. While the Company generally prefers to work with borrowers to
resolve such problems, when the account becomes 90 days delinquent, the Company
does institute foreclosure or other proceedings, as necessary, to minimize any
potential loss.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
The Company normally does not accrue interest on loans past due 90 days or more.
The Company 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,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
Non-accruing loans:
Real estate:
Single-family(1) $ 189 $ 52 $ --- $ 100 $ 185
Multi-family --- --- --- --- 561
Commercial(2) 274 481 274 274 274
Consumer(3) 77 70 --- --- ---
Commercial loans and leases(4) 7 --- --- 3 9
------ ------ ------ ------ ------
Total non-accrual loans 547 603 274 377 1,029
------ ------ ------ ------ ------
Accruing loans greater than 90 days
delinquent --- --- --- --- ---
------ ------ ------ ------ ------
Total non-performing loans $ 547 $ 603 $ 274 $ 377 $1,029
------ ------ ------ ------ ------
Real estate owned 218 --- --- --- ---
------ ------ ------ ------ ------
Total non-performing assets $ 765 $ 603 $ 274 $ 377 $1,029
====== ====== ====== ====== ======
Troubled debt restructurings $ --- $ --- $ --- $ 603 $ 930
====== ====== ====== ====== ======
Total non-performing loans and troubled
debt restructurings as a percentage of
net loans receivable 0.32% 0.38% 0.17% 0.66% 1.47%
====== ====== ====== ====== ======
Total non-performing assets to total assets 0.22% 0.20% 0.09% 0.15% 0.45%
====== ====== ====== ====== ======
Total non-performing assets and troubled
debt restructurings as a percentage of
total assets 0.22% 0.20% 0.09% 0.38% 0.86%
====== ====== ====== ====== ======
- --------------
(1) At June 30, 1999, non-accrual single-family residential real estate loans
consisted of five loans.
(2) At June 30, 1999, non-accrual commercial real estate loans consisted of one
loan.
(3) At June 30, 1999, non-accrual consumer loans consisted of one loan.
(4) At June 30, 1999, non-accrual commercial loans consisted of one loan.
The $56 thousand decrease in non-accrual loans during fiscal 1999 is
comprised of a $207 thousand decrease in non-accrual commercial real estate
loans, partially offset by a $7 thousand increase in non-accrual consumer loans
and a $137 thousand increase in non-accrual single-family real estate loans.
At June 30, 1999, the Company had one performing restructured
multi-family loan with a total outstanding principal balance of $587 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 collateral value. Partner ownership has shifted on this property and the
Company has been receiving normal principal and interest payments for over three
years. The Company expects the loan to remain current and to possibly be
refinanced in the future. The Company believes that it has an adequate valuation
allowance with respect to this loan.
As of June 30, 1999, the Company had five non-accruing single-family
residential real estate loans which totaled approximately $189 thousand. During
July 1999, one of these loans with a principal balance of approximately $92
thousand was paid off in full. The Company expects that the remaining loans will
be worked out in the normal course of business.
As of June 30, 1999, the Company had one non-accruing commercial real
estate loan with a principal balance totaling $274 thousand. 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. 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. All payments due under the plan have been received to date.
As of June 30, 1999, the Company had one non-accruing commercial loan
with an outstanding principal balance of $7 thousand that was over 90 days
delinquent. The Company has initiated legal action to force the sale of the
collateral of this participation loan.
As of June 30, 1999, the Company had one non-accruing consumer loan
with an outstanding principal balance of $77 thousand that was over 90 days
delinquent. The Company is currently in proceedings with the debtor's estate,
which consists of a house and a business property.
During fiscal 1999, 1998 and 1997, approximately $42 thousand, $64
thousand and $35 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 $41 thousand, $44
thousand and $20 thousand, respectively.
Allowances for Loan Losses. The allowance for loan losses is
established through provisions for loan losses charged against income. Loans
deemed to be uncollectible are charged against the allowance account. Subsequent
recoveries, if any, are credited to the allowance. The allowance is maintained
at a level believed adequate by management to absorb estimated potential loan
losses. Management's determination of the adequacy of the allowance is based on
periodic evaluations of the loan portfolio considering past experience, current
economic conditions, composition of the loan portfolio and other relevant
factors. This evaluation is inherently subjective, as it requires material
estimates that may be susceptible to significant change.
Effective December 21, 1993, the FDIC, in conjunction with the Office
of the Comptroller of the Currency, the Office of Thrift Supervision and the
Federal Reserve Board, adopted an Interagency Policy Statement on the Allowance
for Loan and Lease Losses ("Policy Statement"). The Policy Statement, which
effectively supersedes previous FDIC proposed guidance, includes guidance (1) on
the responsibilities of management for the assessment and establishment of an
adequate allowance and (2) for the agencies' examiners to use in evaluating the
adequacy of such allowance and the policies utilized to determine such
allowance. The Policy Statement also sets forth quantitative measures for the
allowance with respect to assets classified substandard and doubtful, described
below, and with respect to the remaining portion of an institution's loan
portfolio. Specifically, the Policy Statement sets forth the following
quantitative measures which examiners may use to determine the reasonableness of
an allowance: (1) 50% of the portfolio that is classified doubtful; (2) 15% of
the portfolio that is classified substandard; and (3) for the portions of the
portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming twelve months based on facts
and circumstances available on the evaluation date. While the Policy Statement
sets forth this quantitative measure, such guidance is not intended as a "floor"
or "ceiling".
Federal regulations require that each insured savings institution
classify its assets on a regular basis. In addition, in connection with
examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard", "doubtful" and "loss".
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of those
classified as substandard with the added characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified as loss is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted. Another
category designated "asset watch" is also utilized by the Bank for assets which
do not currently expose an insured institution to a sufficient degree of risk to
warrant classification as substandard, doubtful or loss. Assets classified as
substandard or doubtful require the institution to establish general allowances
for loan losses. If an asset or portion thereof is classified as loss, the
insured institution must either establish specific allowances for loan losses in
the amount of 100% of the portion of the asset classified loss, or charge-off
such amount. General loss allowances established to cover possible losses
related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital.
The Company's general policy is to internally classify its assets on a
regular basis and establish prudent general valuation allowances that are
adequate to absorb losses that have not been identified but that are inherent in
the loan portfolio. The Company maintains general valuation allowances that it
believes are adequate to absorb losses in its loan portfolio that are not
clearly attributable to specific loans. The Company's general valuation
allowances are within the following ranges: (1) 0% to 5% of assets subject to
special mention; (2) 5% to 25% of assets classified substandard; and (3) 50% to
100% of assets classified doubtful. Any loan classified as loss is charged-off.
To further monitor and assess the risk characteristics of the loan portfolio,
loan delinquencies are reviewed to consider any developing problem loans. Based
upon the procedures in place, considering the Company's past charge-offs and
recoveries and assessing the current risk elements in the portfolio, management
believes the allowance for loan losses at June 30, 1999, is adequate.
The allowance for loan losses at June 30, 1999 decreased $18 thousand
to $1.84 million due to net charge-offs. The allowance for loan losses at June
30, 1998 decreased $149 thousand to $1.86 million due primarily to the reversal
of previously established loan loss reserves attributable to the payoff of a
commercial loan participation. Previously, the Company had consistently added to
the allowance for possible loan losses. The increases in prior years reflected a
number of factors, the most significant of which was the industry trend towards
greater emphasis on the allowance method of providing for loan losses and the
specific charge-off method.
The Company transferred a $207 thousand non-accrual loan balance to
real estate owned during fiscal 1999. The loan was acquired by the Company in
fiscal 1992 through the acquisition of Home Savings Association. The Company
stopped accruing interest on the loan in fiscal 1998. The loan was secured by a
tavern and restaurant which the Company acquired through sheriff's sale during
June 1999. The Company intends to liquidate this asset in an orderly manner.
The following table summarizes changes in the Company's allowance for
loan losses and other selected statistics for the periods indicated.
At June 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in thousands)
Average net loans $ 158,651 $ 163,046 $ 153,726 $ 141,643 $ 133,517
========= ========= ========= ========= =========
Allowance balance (at beginning of period) $ 1,860 $ 2,009 $ 1,964 $ 1,836 $ 1,634
Provision for loan losses --- (120) 60 150 211
Charge-offs:
Real Estate:
Single-family 5 1 15 25 ---
Multi-family --- --- --- --- ---
Commercial --- --- --- --- ---
Construction --- --- --- --- ---
Land acquisition and development --- --- --- --- ---
Consumer:
Home equity 15 15 --- --- ---
Education --- --- --- --- ---
Other --- 23 --- --- ---
Commercial loans and leases --- --- 3 4 12
--------- --------- --------- --------- ---------
Total charge-offs 20 39 18 29 12
--------- --------- --------- --------- ---------
Recoveries:
Real estate:
Single-family 1 8 1 --- ---
Multi-family --- --- --- --- ---
Commercial --- --- --- --- ---
Construction --- --- --- --- ---
Land acquisition and development --- --- --- --- ---
Consumer:
Home equity 1 --- --- --- ---
Education --- --- --- --- ---
Other --- 1 --- 1 1
Commercial loans and leases --- 1 2 6 2
--------- --------- --------- --------- ---------
Total recoveries 2 10 3 7 3
--------- --------- --------- --------- ---------
Net loans charged-off 18 29 15 22 9
Transfer to real estate owned loss reserve --- --- --- --- ---
--------- --------- --------- --------- ---------
Allowance balance (at end of period) $ 1,842 $ 1,860 $ 2,009 $ 1,964 $ 1,836
========= ========= ========= ========= =========
Allowance for loan losses as a percentage
of total loans receivable 1.07% 1.08% 1.16% 1.17% 1.25%
========= ========= ========= ========= =========
Net loans charged-off as a percentage of
average net loans 0.02% 0.02% 0.01% 0.02% 0.01%
========= ========= ========= ========= =========
Allowance for loan losses to non-performing
loans 336.75% 308.46% 733.21% 520.95% 178.43%
========= ========= ========= ========= =========
Net loans charged-off to allowance for loan
losses 0.98% 1.56% 0.75% 1.12% 0.49%
========= ========= ========= ========= =========
Recoveries to charge-offs 11.12% 25.64% 16.67% 24.14% 25.00%
========= ========= ========= ========= =========
The following table presents the allocation of the allowances for loan
losses by loan category at the dates indicated.
At June 30,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ------------------- ------------------- -------------------
% of Total Loans by % of Total Loans by % of Total Loans by % of Total Loans by % of Total Loans by
Amount Category Amount Category Amount Category Amount Category Amount Category
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Real estate loans:
Single-family $ 174 54.43% $ 164 61.06% $ 175 67.25% $ 161 65.16% $ 146 63.17%
Multi-family 152 3.12 143 2.34 142 2.02 141 1.92 12 1.57
Commercial 283 15.08 423 12.24 449 8.46 468 7.77 593 8.27
Construction 85 12.58 52 10.35 58 9.78 38 11.44 49 14.38
Land acquisition
and development 57 4.04 59 4.21 59 4.27 69 5.35 31 3.18
Unallocated 695 0.00 652 0.00 722 0.00 711 0.00 693 0.00
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate
loans 1,446 89.25 1,493 90.20 1,605 91.78 1,589 91.64 1,524 90.57
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Consumer loans:
Home equity 202 8.70 168 7.93 123 7.06 120 7.10 124 8.50
Education 0 0.01 5 0.34 5 0.30 6 0.35 4 0.27
Other 24 1.14 17 1.36 10 0.81 10 0.88 14 0.61
Unallocated 77 0.00 167 0.00 258 0.00 215 0.00 127 0.00
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total consumer
loans 303 9.85 357 9.63 396 8.17 351 8.33 269 9.38
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Commercial loans:
Commercial loans 86 0.90 10 0.17 5 0.05 2 0.02 -- 0.00
Unallocated 7 0.00 -- 0.00 -- 0.00 -- 0.00 -- 0.00
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total commercial
loans 93 0.90 10 0.17 5 0.05 2 0.02 -- 0.00
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Commercial lease
financings -- 0.00 -- 0.00 3 0.00 22 0.01 43 0.05
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
$ 1,842 100.00% $ 1,860 100.00% $ 2,009 100.00% $ 1,964 100.00% $ 1,836 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
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"). CMOs may also be privately issued with
varying degrees of credit enhancements. A CMO reallocates mortgage pool cash
flow to a series of bonds (called traunches) with varying stated maturities,
estimated average lives, coupon rates and prepayment characteristics. All of the
Company's CMOs are rated in the highest category by at least two national rating
services.
At June 30, 1999, the Company's MBS portfolio totaled $72.4 million as
compared to $46.3 million at June 30, 1998. The $26.1 million or 56.3% increase
in MBS balances outstanding during fiscal 1999 was primarily attributable to
increased MBS purchases made in order to mitigate the principal calls on the
Company's callable bond portfolio and earn a higher yield with an expected
average life profile comparable to longer-term callable agency bonds. At June
30, 1999, approximately $16.4 million or 22.7% (book value) of the Company's
portfolio of MBS, including CMOs, were comprised of adjustable or floating rate
instruments, as compared to $17.8 million or 38.5% at June 30, 1998.
Substantially all of the Company's floating rate MBS adjust monthly based upon
changes in certain short-term market indices (e.g. LIBOR, Prime, etc.).
The following tables set forth the amortized cost and estimated market
values of the Company's MBSs available for sale and held to maturity as of the
periods indicated.
1999 1998 1997
--------- -------- ---------
MBS Available for Sale at June 30, (Dollars in thousands)
- ----------------------------------
FHLMC PCs $ 214 $ 308 $ 931
GNMA PCs 766 11,022 1,306
FNMA PCs 6,632 9,178 10,708
CMOs - agency collateral 878 2,584 5,472
CMOs - single-family whole loan collateral 852 5,750 ---
--------- -------- ---------
Total amortized cost $ 9,342 $ 18,842 $ 18,417
========= ======== =========
Total estimated market value $ 9,273 $ 19,041 $ 18,280
========= ======== =========
MBS Held to Maturity at June 30,
- --------------------------------
FHLMC PCs $ 146 $ 246 $ 351
GNMA PCs 1,107 1,156 1,219
FNMA PCs 103 151 194
CMOs - agency collateral 18,847 15,810 16,728
CMOs - single-family whole loan collateral 42,904 9,910 718
--------- -------- ---------
Total amortized cost $ 63,107 $ 27,273 $ 19,210
========= ======== =========
Total estimated market value $ 62,167 $ 27,777 $ 19,381
========= ======== =========
The Company believes that its present MBS available for sale allocation
of $9.3 million or 12.8% 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 MBSs, including CMOs, at
June 30, 1999.
One Year or After One to After Five to Over Ten
Less Five Years Ten Years Years Total
----------- ------------ -------------- -------- -----
(Dollars in thousands)
MBS available for sale $ 55 $ 1,670 $ 66 $ 7,551 $ 9,342
6.42% 6.07% 9.10% 6.99% 6.83%
MBS held to maturity $ --- $ 32 $ 140 $62,935 $63,107
0.00% 8.00% 9.17% 6.59% 6.60%
------- ------- ------- ------- -------
Total $ 55 $ 1,702 $ 206 $70,486 $72,449
======= ======= ======= ======= =======
Weighted average yield 6.42% 6.11% 9.15% 6.64% 6.63%
======= ======= ======= ======= =======
Due to prepayments of the underlying loans, and the prepayment
characteristics of the CMO traunches, the actual maturities of the Company's MBS
are expected to be substantially less than the scheduled maturities. As a result
of the decline of market interest rates experienced during most of fiscal 1999,
the Company continued to shift more weighting from variable rate MBS products to
fixed rate MBS products.
The following table sets forth information with respect to the MBS
owned by the Company at June 30, 1999, which had a carrying value greater than
10% of the Company's stockholders' equity at such date, other than securities
issued by the United States Government and United States Government agencies and
corporations. All such securities have been assigned a triple A investment grade
rating.
Estimated Market Weighted
Name of Issuer Carrying Value Value Average Yield
- -------------- -------------- ---------------- -------------
(Dollars in thousands)
Norwest Asset Securities Corp. CMO $ 7,200 $ 6,713 6.55%
Countrywide Home Loan CMO 5,696 5,571 6.77
Structured Asset Mortgage Investment Inc.
CMO 4,416 4,271 6.72
Residential Funding CMO 4,266 4,199 6.65
Citicorp Mortgage Security CMO 4,109 4,027 6.74
Countrywide Home Loan CMO 3,471 3,383 6.68
Residential Funding CMO 2,906 2,848 6.65
Countrywide Home Loan CMO 2,889 2,828 6.86
-------- --------
$ 34,953 $ 33,840 6.69%
======== ======== ====
Investment Securities
The Company may invest in various types of securities, including
corporate debt and equity securities, U.S. Government and U.S. Government agency
obligations, securities of various federal, state and municipal agencies, FHLB
stock, commercial paper, bankers' acceptances, federal funds and
interest-bearing deposits with other financial institutions.
The Company's investment activities are directly monitored by the
Company's 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 interest rate sensitivity gap and
generally to increase interest-earning assets. As reflected in the table below,
the Company continued to hold a significant portion of its investment portfolio
in U.S. Government and agency obligations, which amounted to $88.7 million or
90.2% of the total investment portfolio at June 30, 1999, as compared to $63.7
million or 74.1% of the total investment portfolio at June 30, 1998. All $88.7
million or 100.0% of the Company's U.S. Government agencies portfolio at June
30, 1999 was comprised of U.S. Government agency securities with longer-terms to
maturity and optional principal redemption features ("callable bonds"). As part
of the Company's continuing investment growth program, the Company has increased
its holdings of both investment and MBS. A substantial portion of the Company's
investment portfolio is funded with FHLB advances. Such advances 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 estimated market
values of the Company's investment securities portfolio at the dates indicated.
1999 1998 1997
-------- -------- ------
Investment Securities Available for Sale at June 30, (Dollars in thousands)
- ----------------------------------------------------
Corporate debt obligations $ --- $ 15,419 $ ---
U.S. Government agency securities --- --- 2,192
-------- -------- ------
Total amortized cost --- 15,419 2,192
Equity securities 1,380 2,062 1,497
-------- -------- ------
Total amortized cost $ 1,380 $ 17,481 $3,689
======== ======== =======
Total estimated market value $ 1,402 $ 17,519 $3,553
======== ======== =======
Investment Securities Held to Maturity at June 30,
- --------------------------------------------------
Corporate debt obligations $ --- $ --- $ 2,145
U.S. Government agency securities 88,714 63,749 81,850
State and municipal securities 2,050 --- ---
-------- -------- ------
90,764 63,749 83,995
FHLB stock 6,195 4,675 3,927
-------- -------- ------
Total amortized cost $ 96,959 $ 68,424 $87,922
======== ======== =======
Total estimated market value $ 94,045 $ 68,670 $87,816
======== ======== =======
Information regarding the amortized cost, contractual maturities and
weighted average yields of the Company's investment portfolio at June 30, 1999
is presented below.
Investment Securities One Year or After One to After Five Over Ten
Available for Sale Less Five Years to Ten Years Years Total
- ------------------ ----------- ------------ ------------ -------- -----
(Dollars in thousands)
Equity securities $ --- $ --- $ --- $1,380 $ 1,380
======= ======= ======= ======= =======
Investment Securities
Held to Maturity
- ----------------
U.S. Government agency securities $ --- $ --- $ 8,685 $80,029 $88,714
0.00% 0.00% 6.06% 7.09% 6.98%
State and municipal securities (1) $ 1,215 $ --- $ --- $ 835 $ 2,050
5.73% 0.00% 0.00% 7.94% 6.63%
------- ------- ------- ------- -------
Total $ 1,215 $ --- $ 8,685 $80,864 $90,764
======= ======= ======= ======= =======
Weighted average yield 5.73% 0.00% 6.06% 7.10% 6.98%
======= ======= ======= ======= =======
- ----------
(1) State and municipal security yields are calculated on a taxable equivalent
basis.
Information regarding the amortized cost, earliest call dates and
weighted average yield of the Company's investment portfolio at June 30, 1999,
is presented below. All Company investments in callable bonds were classified as
held to maturity at June 30, 1999.
One Year or After One to After Five Over Ten
Less Five Years to Ten Years Years Total
----------- ------------ ------------ -------- -----
(Dollars in thousands)
U.S. Government agency securities $72,897 $ 2,997 $ --- $12,820 $88,714
7.02% 7.07% 0.00% 6.73% 6.98%
State and municipal securities (1) $ 1,215 $ --- $ 835 $ --- $ 2,050
5.73% 0.00% 7.94% 0.00% 6.63%
------- --------- -------- ------- -------
Total debt obligations $74,112 $ 2,997 $ 835 $12,820 $90,764
======= ========= ======== ======= =======
Weighted average yield 7.00% 7.07% 7.94% 6.73% 6.98%
======= ========= ======== ======= =======
Equity securities $ --- $ --- $ --- $ 1,380 $ 1,380
------- --------- -------- ------- -------
Total $74,112 $ 2,997 $ 835 $14,200 $92,144
======= ========= ======== ======= =======
- ----------
(1) State and municipal security yields are calculated on a taxable equivalent
basis.
The Company to date has not engaged, and does not intend to engage in
the immediate future, in trading investment securities.
The Company did not have any investment securities at June 30, 1999
which had a carrying value greater than 10% of the Company's stockholders'
equity at such date, other than securities issued by the U.S. Government and
U.S. Government agencies and corporations.
Sources of Funds
The Company's principal source of funds for use in lending and for
other general business purposes has traditionally come from deposits obtained
through the Company's home and branch offices. Funding is also derived from FHLB
advances, short-term borrowings, amortization and prepayments of outstanding
loans and MBS and from maturing investment securities.
Deposits. The Company's deposits totaled $174.2 million at June 30,
1999, as compared to $171.0 million at June 30, 1998. The $3.3 million increase
was primarily attributable to an approximate $3.1 million increase in core
deposits. In order to attract new and lower cost core deposits, the Company
continued to promote a no minimum balance, "free", checking account product.
Current deposit products include regular savings accounts, demand accounts,
negotiable order of withdrawal ("NOW") accounts, money market deposit accounts
and certificates of deposit ranging in terms from 30 days to 10 years. Included
among these deposit products are certificates of deposit with negotiable
interest rates and balances of $100,000 or more, which amounted to $10.9 million
or 6.3% of the Company's total deposits at June 30, 1999, as compared to $10.3
million or 6.0% at June 30, 1998. The Company's deposit products also include
Individual Retirement Account certificates ("IRA certificates").
The Company's deposits are obtained primarily from residents of
northern Allegheny, southern Butler and eastern Beaver counties, Pennsylvania.
The Company utilizes 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, 1999. The Company has drive-up banking facilities and
automated teller machines ("ATMs") at its McCandless, Franklin Park, Bellevue
and Cranberry Township offices. The Company participates in the MAC(R) and
CIRRUS(R) ATM networks. The Company also participates in a new ATM program
called the Freedom ATM AllianceSM. The Freedom ATM AllianceSM allows West View
Savings Bank customers to use other Pittsburgh area Freedom ATM AllianceSM
affiliates' ATMs without being surcharged and vice versa. The Freedom ATM
AllianceSM was organized to help smaller local banks compete with larger
national banks that have large ATM networks.
The Company has been competitive in the types of accounts and in
interest rates it has offered on its deposit products and continued to price its
savings products nearer to the market average rate as opposed to the upper range
of market offering rates. The Company has continued to emphasize the retention
and growth of core deposits, particularly demand deposits. Financial
institutions generally, including the Company, have experienced a certain degree
of depositor disintermediation to other investment alternatives. Management
believes that the degree of disintermediation experienced by the Company has not
had a material impact on overall liquidity.
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 for fiscal 1999 and 1998 were derived from daily average balances.
Fiscal 1997 average balances were derived from month-end average balances.
At June 30,
-------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
(Dollars in thousands)
Regular savings and club
accounts $ 36,882 2.54% $ 36,576 2.62% $ 36,330 2.61%
NOW accounts 15,921 0.63 14,998 0.91 14,398 0.88
Money market deposit accounts 11,927 2.64 11,711 2.64 12,045 2.63
Certificate of deposit accounts 94,197 5.46 96,140 5.72 99,773 5.66
Escrows 2,262 1.81 2,430 1.81 2,471 1.82
-------- ---- -------- ---- -------- ----
Total interest-bearing
deposits and escrows 161,189 4.27 161,855 4.29 165,017 4.29
Non-interest-bearing checking
accounts 8,306 0.00 7,073 0.00 6,459 0.00
-------- ---- -------- ---- -------- ----
Total deposits and escrows $169,495 4.06% $168,928 4.11% $171,476 4.13%
======== ==== ======== ==== ======== ====
The following table sets forth the net deposit flows of the Company
during the periods indicated.
Year Ended June 30,
----------------------------------
1999 1998 1997
------- -------- -------
(Dollars in thousands)
(Decrease) before interest credited $(3,330) $(10,057) $(7,011)
Interest credited 6,592 6,848 7,047
------- -------- -------
Net deposit increase (decrease) $ 3,262 $ (3,209) $ 36
======= ======== =======
The following table sets forth maturities of the Company's time
deposits of $100,000 or more at June 30, 1999 by time remaining to maturity.
Amounts
-------
(Dollars in thousands)
Three months or less $ 2,131
Over three months through six months 2,007
Over six months through twelve months 2,796
Over twelve months 4,014
-------
$10,948
=======
Borrowings. Borrowings are comprised of FHLB advances with various
terms and repurchase agreements with securities brokers with original maturities
of ninety-two days or less. At June 30, 1999, borrowings totaled $142.7 million
as compared to $89.7 million at June 30, 1998. The $53.0 million or 59.0%
increase was primarily used to meet ongoing commitments to fund loan commitments
and fund the Company's purchase of investments and MBS during fiscal 1999. The
Company believes that the judicious use of borrowings has allowed it to pursue a
strategy of increasing net interest income by purchasing assets 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 increasing its branch network and with federal deposit insurance
premiums through the utilization of borrowings, as opposed to retail time
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, competitive interest rates,
convenient branch locations, hours and other services. The Company does not rely
upon any individual group or entity for a material portion of its deposits.
The Company's competition for real estate loans comes principally from
mortgage banking companies, other savings institutions, commercial banks and
credit unions. The Company competes for loan originations primarily through the
interest rates and loan fees it charges, the efficiency and quality of services
it provides borrowers, referrals from real estate brokers and builders, and the
variety of its products. Factors which affect competition include the general
and local economic conditions, current interest rate levels and volatility in
the mortgage markets.
Employees
The Company had 51 full-time employees and 7 part-time employees as of
June 30, 1999. None of these employees is represented by a collective bargaining
agent. The Company 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-weighting system, as are certain privately-issued MBS 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%. Total assets for this purpose
does not include goodwill and any other intangible assets and investments that
the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3% Tier I leverage capital ratio
requirement is the minimum for the top-rated bank holding companies without any
supervisory, financial or operational weaknesses or deficiencies or those which
are not experiencing or anticipating significant growth. Other bank holding
companies will be expected to maintain Tier I leverage capital ratios of at
least 4% to 5% or more, depending on their overall condition.
The Company is in compliance with the above-described Federal Reserve
Board regulatory capital requirements.
Commitments to Affiliated Institutions. Under Federal Reserve Board
policy, the Company is expected to act as a source of financial strength to the
Savings Bank and to commit resources to support the Savings Bank in
circumstances when it might not do so absent such policy. The legality and
precise scope of this policy is unclear, however, in light of recent judicial
precedent.
The Savings Bank
General. The Savings Bank is subject to extensive regulation and
examination by the Department and by the FDIC, which insures its deposits to the
maximum extent permitted by law, and is subject to certain requirements
established by the Federal Reserve Board. The federal and state laws and
regulations which are applicable to banks regulate, among other things, the
scope of their business, their investments, their reserves against deposits, the
timing of the availability of deposited funds and the nature and amount of and
collateral for certain loans. The laws and regulations governing the Savings
Bank generally have been promulgated to protect depositors and not for the
purpose of protecting stockholders.
FDIC Insurance Premiums. The Savings Bank currently pays deposit
insurance premiums to the FDIC on a risk-based assessment system established by
the FDIC for all SAIF-member institutions. Under applicable regulations,
institutions are assigned to one of three capital groups which is based solely
on the level of an institution's capital - "well capitalized", "adequately
capitalized" and "undercapitalized"- which is defined in the same manner as the
regulations establishing the prompt corrective action system under Section 38 of
the Federal Deposit Insurance Act ("FDIA"), as discussed below. These three
groups are then divided into three subgroups which reflect varying levels of
supervisory concern, from those which are considered to be healthy to those
which are considered to be of substantial supervisory concern. The matrix so
created results in nine assessment risk classifications, with rates ranging from
0.00% for well capitalized, healthy institutions to 0.27% for undercapitalized
institutions with substantial supervisory concerns. The Savings Bank is a "well
capitalized" institution as of June 30, 1999.
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 the 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(cent) 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% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4% to 5% or more. Under the FDIC's
regulation, highest-rated banks are those that the FDIC determines are not
anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and, in general, which are considered a strong banking
organization and rated composite 1 under the Uniform Financial Institutions
Rating System.
A bank which has less than the minimum leverage capital requirement
shall, within 60 days of the date as of which it fails to comply with such
requirement, submit to its FDIC regional director for review and approval, a
reasonable plan describing the means and timing by which the bank shall achieve
its minimum leverage capital requirement. A bank which fails to file such plan
with the FDIC is deemed to be operating in an unsafe and unsound manner, and
could subject the bank to a cease-and-desist order from the FDIC. The FDIC's
regulation also provides that any insured depository institution with a ratio of
Tier I capital to total assets that is less than 2% is deemed to be operating in
an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and is
subject to potential termination of deposit insurance. However, such an
institution will not be subject to an enforcement proceeding thereunder solely
on account of its capital ratios if it has entered into and is in compliance
with a written agreement with the FDIC to increase its Tier I leverage capital
ratio to such level as the FDIC deems appropriate and to take such other action
as may be necessary for the institution to be operated in a safe and sound
manner. The FDIC capital regulation also provides, among other things, for the
issuance by the FDIC or its designee(s) of a capital directive, which is a final
order issued to a bank that fails to maintain minimum capital to be restored to
the minimum leverage capital requirement within a specified time period. Such
directive is enforceable in the same manner as a final cease-and-desist order.
Miscellaneous
The Savings Bank is subject to certain restrictions on loans to the
Company, on investments in the stock or securities thereof, on the taking of
such stock or securities as collateral for loans to any borrower, and on the
issuance of a guarantee or letter of credit on behalf of the Company. The
Savings Bank is also subject to certain restrictions on most types of
transactions with the Company, requiring that the terms of such transactions be
substantially equivalent to terms of similar transactions with non-affiliated
firms. In addition, there are various limitations on the distribution of
dividends to the Company by the Savings Bank.
The foregoing references to laws and regulations which are applicable
to the Company and the Savings Bank are brief summaries thereof which do not
purport to be complete and which are qualified in their entirety by reference to
such laws and regulations.
FEDERAL AND STATE TAXATION
General. The Company and the Savings Bank are subject to the generally
applicable corporate tax provisions of the Internal Revenue Code of 1986 (the
"Code"), as well as certain provisions of the Code which apply to thrift and
other types of financial institutions. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Company and the Savings Bank.
Fiscal Year. The Company currently files a consolidated federal income
tax return on the basis of the calendar year ending on December 31.
Method of Accounting. The Company maintains its books and records for
federal income tax purposes using the accrual method of accounting. The accrual
method of accounting generally requires that items of income be recognized when
all events have occurred that establish the right to receive the income and the
amount of income can be determined with reasonable accuracy and that items of
expense be deducted at the later of (1) the time when all events have occurred
that establish the liability to pay the expense and the amount of such liability
can be determined with reasonable accuracy or (2) the time when economic
performance with respect to the item of expense has occurred.
Bad Debt Reserves. Historically under Section 593 of the Code, thrift
institutions such as the Savings Bank, which met certain definitional tests
primarily relating to their assets and the nature of their business, were
permitted to establish a tax reserve for bad debts and to make annual additions
within specified limitations which may have been deducted in arriving at their
taxable income. The Savings Bank's deduction with respect to "qualifying loans",
which are generally loans secured by certain interests in real property, may
currently be computed using an amount based on the Savings Bank's actual loss
experience (the "experience method").
The Small Business Job Protection Act of 1996, adopted in August 1996,
generally (1) repealed the provision of the Code which authorized use of the
percentage of taxable income method by qualifying savings institutions to
determine deductions for bad debts, effective for taxable years beginning after
1995, and (2) required that a savings institution recapture for tax purposes
(i.e. take into income) over a six-year period its applicable excess reserves.
For a savings institution such as West View which is a "small bank", as defined
in the Code, generally this is the excess of the balance of its bad debt
reserves as of the close of its last taxable year beginning before January 1,
1996, over the balance of such reserves as of the close of its last taxable year
beginning before January 1, 1988. Any recapture would be suspended for any tax
year that began after December 31, 1995, and before January 1, 1998 (thus a
maximum of two years), in which a savings institution originated an amount of
residential loans which was not less than the average of the principal amount of
such loans made by a savings institution during its six most recent taxable
years beginning before January 1, 1996. The amount of tax bad debt reserves
subject to recapture is approximately $1.2 million, which is being recaptured
ratably over a six-year period ending December 31, 2003. In accordance with FASB
No. 109, deferred income taxes have previously been provided on this amount,
therefore no financial statement expense has been recorded as a result of this
recapture. The Company's supplemental bad debt reserve of approximately $3.8
million is not subject to recapture.
The above-referenced legislation also repealed certain provisions of
the Code that only apply to thrift institutions to which Section 593 applies:
(1) the denial of a portion of certain tax credits to a thrift institution; (2)
the special rules with respect to the foreclosure of property securing loans of
a thrift institution; (3) the reduction in the dividends received deduction of a
thrift institution; and (4) the ability of a thrift institution to use a net
operating loss to offset its income from a residual interest in a real estate
mortgage investment conduit. The repeal of these provisions did not have a
material adverse effect on the Company's financial condition or operations.
Audit by IRS. The Company's consolidated federal income tax returns for
taxable years through December 31, 1995, have been closed for the purpose of
examination by the Internal Revenue Service.
State Taxation. The Company is subject to the Pennsylvania Corporate
Net Income Tax and Capital Stock and Franchise Tax. The Pennsylvania Corporate
Net Income Tax rate is 9.99% and is imposed on the Company's unconsolidated
taxable income for federal purposes with certain adjustments. In general, the
Capital Stock Tax is a property tax imposed at the rate of 1.099% of a
corporation's capital stock value, which is determined in accordance with a
fixed formula based upon average net income and consolidated net worth.
The Savings Bank is taxed under the Pennsylvania Mutual Thrift
Institutions Tax Act (enacted on December 13, 1988, and amended in July 1989)
(the "MTIT"), as amended to include thrift institutions having capital stock.
Pursuant to the MTIT, the Savings Bank's current tax rate is 11.5%. The MTIT
exempts the Savings Bank from all other taxes imposed by the Commonwealth of
Pennsylvania for state income tax purposes and from all local taxation imposed
by political subdivisions, except taxes on real estate and real estate
transfers. The MTIT is a tax upon net earnings, determined in accordance with
generally accepted accounting principles ("GAAP") with certain adjustments. The
MTIT, in computing GAAP income, allows for the deduction of interest earned on
state and federal securities, while disallowing a percentage of a thrift's
interest expense deduction in the proportion of those securities to the overall
investment portfolio. Net operating losses, if any, thereafter can be carried
forward three years for MTIT purposes.
Item 2. Properties.
- ------- -----------
The following table sets forth certain information with respect to the
offices and other properties of the Company at June 30, 1999.
Net Book
Value of
Description/Address Leased/Owned Property
------------------- ------------ --------
(Dollars in thousands)
McCandless Office Owned $156
9001 Perry Highway
Pittsburgh, PA 15237
West View Boro Office Owned 9
456 Perry Highway
Pittsburgh, PA 15229
Cranberry Township Office Owned 250
20531 Perry Highway
Cranberry Township, PA 16066
Sherwood Oaks Office Leased (1) ---
100 Norman Drive
Cranberry Township, PA 16066
Bellevue Boro Office Leased (2) 14
572 Lincoln Avenue
Pittsburgh, PA 15202
Franklin Park Boro Office Owned 560
2566 Brandt School Road
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.
Item 3. Legal Proceedings.
- ------- ------------------
The information required herein is incorporated by reference from page
45 of the Company's 1999 Annual Report, Note 14 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
54 of the Company's 1999 Annual Report.
Item 6. Selected Financial Data.
- ------- ------------------------
The information required herein is incorporated by reference from
pages 2 to 3 of the Company's 1999 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 20 of the Company's 1999 Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- -------- -----------------------------------------------------------
The information required herein is incorporated by reference from
pages 15 to 18 of the Company's 1999 Annual Report.
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
The information required herein is incorporated by reference from
pages 21 to 53 of the Company's 1999 Annual Report.
PART III
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure.
- ------- --------------------------------------------------------------------
Not applicable.
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 1999 Annual
Meeting of Stockholders dated September 24, 1999 ("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
12 to 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 1999
Annual Report.
Report of Independent Auditors.
Consolidated Statements of Financial Condition at June 30, 1999
and 1998.
Consolidated Statements of Income for the Years Ended June 30,
1999, 1998 and 1997.
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended June 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years Ended June
30, 1999, 1998 and 1997.
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
David Bursic, Margaret VonDerau and Edward Wielgus ** ***
10.7 Directors Deferred Compensation Program** *
13 1999 Annual Report to Stockholders E-1
21 Subsidiaries of the Registrant - Reference is made to
Item 1. "Business" for the required information
23 Consent of Independent Auditors E-59
27 Financial Data Schedule E-60
* Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 33-67506) filed by the Company with the SEC on August
16, 1993, as amended.
** Management contract or compensatory plan or arrangement.
***Incorporated by reference from the September 1998 Form 10-Q filed by the
Company with the SEC on November 13, 1998.
(3)(b)The Company filed a Current Report on Form 8-K, dated May
25, 1999, reporting under Item 5 that the Company's Board of
Directors authorized the repurchase of up to 190,000 shares, or
approximately five percent, of the Company's outstanding common
stock. Repurchases are authorized to be made during the next
twelve months as market conditions warrant. All repurchased shares
will be held as treasury stock and may be reserved for issuance
pursuant to the Company's stock benefit plans.
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 28, 1999 By: /s/ David J. Bursic
--------------------
David J. Bursic
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ David J. Bursic
- --------------------
David J. Bursic, Director, President and September 28, 1999
Chief Executive Officer
(Principal Executive Officer)
/s/William J. Hoegel
- --------------------
William J. Hoegel, September 28, 1999
Chairman of the Board
/s/Margaret VonDerau
- ---------------------
Margaret VonDerau, Director, September 28, 1999
Senior Vice President, Treasurer
and Corporate Secretary
/s/ Janell A. Butorac
- ---------------------
Janell A. Butorac, September 28, 1999
Assistant Vice President
(Principal Accounting Officer)
/s/David L. Aeberli
- -------------------
David L. Aeberli, Director September 28, 1999
/s/Arthur H. Brandt
- -------------------
Arthur H. Brandt, Director September 28, 1999
/s/ Donald E. Hook
- ------------------
Donald E. Hook, Director September 28, 1999
/s/ John M. Seifarth
- --------------------
John M. Seifarth, Director September 28, 1999