WVFC WVS Financial Corporation

FINANCIAL

CORP.

- THE HOLDING COMPANY OF WEST VIEW SAVINGS BANK-

“Over 100 Years of Quality Banking”

2020

ANNUAL REPORT

TABLE OF CONTENTS

- THE HOLDING COMPANY OF WEST VIEW SAVINGS BANK-

To Our Shareholders:

Fiscal 2020 was a year of contrasts. The first half of fiscal 2020 started off strong in comparison to fiscal 2019. Net interest income and net income were higher in fiscal 2020. However, when the coronavirus struck during the March 2020 quarter, financial markets began to unravel, the national, state, and local economies went into lockdown, and the Federal Reserve drastically reduced interest rates – practically overnight. These conditions continued through fiscal year-end and continue today.

We produced net income of approximately $2.5 million in fiscal 2020. The Board was able to maintain the current dividend $0.40 per share and we currently plan on doing so in fiscal 2021. Credit quality continues to remain strong. During the pandemic, we worked with borrowers – commercial and retail – that were facing income disruptions. We granted partial loan payment deferrals when warranted, to better match the customers’ reduced ability to repay with their current income. Customers granted loan deferrals have begun to make catch-up payments as their businesses have improved and individuals returned back to work. We will continue to monitor credit quality and have not had a credit loss in over five years despite growing our loan portfolio from $64 million in fiscal 2016 to over $91 million in fiscal 2020. Our capital levels, including the allowance for loan losses, continue to grow to support the business and are consistent with being a well-capitalized bank.

Faced with the unthinkable in terms of the pandemic, the Board of Directors charged management to respond quickly and decisively to maintain essential customer services. Many financial institutions totally shut down their lobbies and bank buildings to customer traffic. Our buildings remained mostly open, and employees were kept safe and working by limiting in person transactions to the essential. In addition, our automated teller machines were fully stocked and technology fine-tuned to meet ever increasing electronic banking transactions. We streamlined our customer contact points, maintained a safe environment for customers and employees, and continued to deliver best in class customer service. Investments in technology, including new automated teller machines, an upgraded internal network, and a mobile banking app were key tools in maintaining customer access and engagement.

We want to thank our customers for their business and patience during the pandemic, and our employees for their dedicated and loyal service to our customers. While we cannot predict the future, please know that the Board, management, and our employees will continue to work hard to earn and keep your trust as shareholders each working day.

Town of McCandless • 9001 Perry Highway, Pittsburgh, Pennsylvania 15237

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WVS FINANCIAL CORP. AND SUBSIDIARY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

In the normal course of business, we, in an effort to help keep our shareholders and the public informed about our operations, may from time to time issue or make certain statements, either in writing or orally, that are or contain forward-looking statements, as that term is defined in the U.S. federal securities laws. Generally, these statements relate to business plans or strategies, projected or anticipated benefits from acquisitions made by or to be made by us, projections involving anticipated revenues, earnings, profitability or other aspects of operating results or other future developments in our affairs or the industry in which we conduct business. Forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology such as “anticipated,” “believe,” “expect,” “intend,” “plan,” “estimate” or similar expressions.

Although we believe that the anticipated results or other expectations reflected in our forward-looking statements are based on reasonable assumptions, we can give no assurance that those results or expectations will be attained. Forward-looking statements involve risks, uncertainties and assumptions (some of which are beyond our control), and as a result actual results may differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from forward-looking statements include, but are not limited to, the following, as well as those discussed elsewhere herein:

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You should not put undue reliance on any forward-looking statements. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new or future events except to the extent required by federal securities laws.

GENERAL

WVS Financial Corp. (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, FDIC-insured stock savings bank conducting business from six offices in the North Hills suburbs of Pittsburgh. The Savings Bank converted from the mutual to the stock form of ownership in November 1993. The Savings Bank had no subsidiaries at June 30, 2020.

The operating results of the Company depend primarily upon its net interest income, which is determined by the difference between income on interest-earning assets, principally loans, mortgage-backed securities and investment securities, and interest expense on interest-bearing liabilities, which consist primarily of deposits and borrowings. The Company’s net income is also affected by its provision for loan losses, as well as the level of its non-interest income, including loan fees and service charges, and its non-interest expenses, such as compensation and employee benefits, income taxes, deposit insurance and occupancy and equipment costs.

Effects of COVID-19 Pandemic

The Company’s business is dependent upon the willingness and ability of our employees and clients to conduct banking and other financial transactions. The outbreak of the novel coronavirus (COVID-19) pandemic has negatively impacted the global economy, disrupted global supply chains and increased unemployment levels. While the full effects of the pandemic remain unknown, the Company is committed to supporting its customers, employees and communities during this difficult time. The Company has given hardship relief assistance to customers, including the consideration of various loan payment deferral and fee waiver options, and encourages customers to reach out for assistance to support their individual circumstances. The pandemic could result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses, particularly if businesses remain closed, the impact on the global economy worsens, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize impairments on the securities we hold. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

The Company has responded to the circumstances surrounding the pandemic to support the safety and well-being of the employees, customers and shareholders by enacting the following measures:

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Cash Equivalents. Cash on hand and due from banks, and interest-earning demand deposits represent total cash and cash equivalents. Cash and cash equivalents decreased $1.9 million or 42.91% to $2.5 million at June 30, 2020 from $4.4 million at June 30, 2019. Changes in cash and cash equivalents are influenced by the timing of customer transaction account deposits, the redeployment of funds into other earning assets such as investments or loans, and the repayment of Company borrowings.

Certificates of Deposit. The level of certificates of deposit remained virtually unchanged totaling $1.8 million at both June 30, 2020 and June 30, 2019.

Investments. The Company’s investment portfolio is comprised of corporate bonds, foreign debt securities, commercial paper, obligations of state and political subdivisions, Federal Home Loan Bank (“FHLB”) stock and mortgaged-backed securities issued by U.S. Government Agencies and private-issuers. See Notes 4 and 5 to the Consolidated Financial Statements for additional information. The Company’s investment portfolio increased $2.7 million or 1.07% to $254.8 million at June 30, 2020 from $252.1 million at June 30, 2019.

Investment securities other than mortgage-backed securities, increased $14.4 million or 10.50% to $151.1 million at June 30, 2020 from $136.8 million at June 30, 2019. This change was due to the following purchases of securities, all of which were investment-grade: $20.3 million of floating rate corporate bonds, $8.1 million of U.S. dollar denominated floating rate foreign bonds and $26.3 million of commercial paper. These purchases were partially offset by $10.1 million in sales of corporate bonds, and early issuer redemptions and maturities as follows: $5.1 million of corporate bonds, $2.0 million of U.S. dollar denominated foreign bonds, $20.5 million in proceeds from maturities of commercial paper, $1.8 million of municipal bonds. Our investment in FHLB stock decreased $446 thousand or 6.36% to $6.6 million at June 30, 2020 from $7.0 million at June 30, 2019 due to lower levels of FHLB advances. Investment purchases were primarily funded with cash flows from our mortgage-backed securities portfolio. See “Quantitative and Qualitative Disclosures about Market Risk”.

Mortgage-backed securities decreased $11.2 million or 10.36% to $97.1 million at June 30, 2020 from $108.3 million at June 30, 2019. This decrease was due primarily to cash repayments on U.S. Government Agency floating rate mortgage-backed securities totaling $11.0 million and $192 thousand on the Company’s private-label floating-rate mortgage-backed securities portfolio. Net cash flows from the mortgage-backed securities segment were used primarily to fund loan growth and investment purchases.

Net Loans Receivable. Net loans receivable increased $444 thousand or 0.49% to $91.0 million at June 30, 2020, from $90.6 million at June 30, 2019. The increase in net loans was primarily attributable to a $1.3 million increase in single-family real estate loans, a $632 thousand increase in multi-family dwelling loans and a $405 thousand increase in commercial real estate loans, partially offset by decreases of $1.0 million in single family construction loans and a $407 thousand decrease in commercial loans not secured by real estate. The Company actively pursues 15, 20, and 30 year fixed-rate single-family residential real estate loans. The Company also makes available residential mortgage loans with interest rates which adjust pursuant to a designated index, although customer acceptance has been somewhat limited in the Savings Bank’s market area. We expect that the housing market will continue to modestly grow throughout fiscal 2021. The Company will continue to selectively offer commercial real estate, land acquisition and development, and shorter-term construction loans (primarily on residential properties), and commercial loans on business assets to increase interest income while managing credit and interest rate risk. The Company also offers higher yielding multi-family loans to existing, and seasoned prospective, customers. During fiscal 2020, the Company retained all of its loan originations. The Company also partners with the FHLB’s Mortgage Partnership Finance^® (“MPF”) Program to make purchase money and refinancing mortgages available to the public. These loans are originated through the Company who then assigns the loans to the MPF Program. This MPF Program relationship allows the Company to earn loan origination fee income while avoiding the interest rate risk of retaining long-term fixed rate mortgages with low interest rates on the Company’s balance sheet. Residential loan originations increased in fiscal 2018, 2019 and 2020, and we expect this trend to continue into fiscal 2021.

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Deposits. Total deposits increased approximately $4.9 million or 3.35% during the year ended June 30, 2020. Checking account deposits increased $4.4 million or 10.21% during the year ended June 30, 2020. Savings and money market accounts increased by $801 thousand or 1.83% and $1.8 million or 8.94%, respectively. The increase in checking, money market and savings accounts were likely attributable to customer preferences for liquid investments and government payments due to the COVID-19 pandemic. Advance payments by borrowers for taxes and insurance increased $191 thousand or 9.25% as a result of the increase in single family real estate loans during fiscal 2020 compared to fiscal 2019. Certificates of deposit decreased $2.3 million or 6.15%, primarily due to lower market rates paid on certificates of deposit in comparison to savings and money market accounts and a decrease in wholesale CDs issued. At June 30, 2020, the Savings Bank had $9.9 million in brokered certificates of deposits as compared to $10.5 million at June 30, 2019. In general, brokered deposits are considered more sensitive to changes in market interest rates and may be more likely to leave a bank than core deposits. See Note 13 to the Consolidated Financial Statements and “Quantitative and Qualitative Disclosures on Market Risk.”

Borrowed Funds. Borrowed funds decreased $4.7 million or 2.73% to $166.2 million during fiscal 2020. The Company’s borrowed funds are comprised of FHLB long-term advances and short-term borrowings. Short-term borrowings include FHLB short-term advances and other short-term borrowings such as broker repurchase agreements or borrowings from the Federal Reserve Bank of Cleveland (FRB).

At June 30, 2020, the Company had four FHLB long-term variable rate advances totaling $85.0 million, with a weighted-average interest rate of 1.00%, three FHLB long-term fixed rate advances totaling $15.0 million with a weighted-average interest rate of 3.03%, and FHLB short-term advances totaling $59.2 million with a weighted-average rate of 0.39%. Additionally, at June 30, 2020, the Company had a FRB Discount Window Borrowing of $7 million outstanding with a weighted-average rate of 0.25%. See Note 14 to the Consolidated Financial Statements. At June 30, 2019, the Company’s borrowed funds consisted of the same four FHLB long-term variable rate advances and FHLB fixed rate advances with weighted-average rates of 2.46% and 3.03%, respectively. In addition, FHLB short-term advances totaled $70.8 million with a weighted-average rate of 2.46%. See Notes 13 and 14 to the Consolidated Financial Statements.

The Company may also use a variety of short-term borrowing sources as part of its asset/liability management program. The actual short-term funding source used, at any given point in time, depends upon factors such as cost, terms, maturity terms and general market conditions.

Stockholders’ Equity. Total stockholders’ equity increased to $36.9 million at June 30, 2020, compared to $36.0 million at June 30, 2019. The change in stockholders’ equity was primarily attributable to Company net income of $2.5 million, which was partially offset by $707 thousand of cash dividends paid on the Company’s common stock, other comprehensive losses totaling $571 thousand, and $506 thousand paid for the purchase of Treasury stock. See the Consolidated Statement of Comprehensive Income and Note 6 to the Consolidated Financial Statements for a discussion of the components of other comprehensive loss. Book value per share (Tier 1 equity basis) increased from $18.54 at June 30, 2019 to $19.65 at June 30, 2020. On a common equity basis, book value per share increased from $18.55 at June 30, 2019 to $19.36 at June 30, 2020. The Company was able to maintain strong capital ratios during fiscal 2020. Our Tier 1 leverage ratio was 10.16% and total risk-based capital ratio was 18.88% at June 30, 2020, as compared to 10.20% and 19.38%, respectively, at June 30, 2019.

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General. The Company reported net income of $2.5 million, $2.8 million and $2.1 million for the fiscal years ended June 30, 2020, 2019 and 2018, respectively. The $305 thousand or 10.91% decrease in net income during fiscal 2020 was primarily attributable to a $551 thousand decrease in net interest income and a $53 thousand decrease in non-interest income, which were partially offset by a $10 thousand decrease in the provision for loan losses, a decrease of $227 thousand in non-interest expense and a $62 thousand decrease in income tax expense. The $670 thousand or 31.53% increase in net income during fiscal 2019 was primarily attributable to a $636 thousand increase in net interest income and a $196 thousand decrease in income tax expense, which were partially offset by a $30 thousand increase in the provision for loan losses, an increase of $77 thousand in non-interest expense and a $55 thousand decrease in non-interest income. Earnings per share totaled $1.41 (basic and diluted) for fiscal 2020 as compared to $1.57 and $1.16 for fiscal 2019 and 2018, respectively.

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Average Balances, Net Interest Income and Yields Earned and Rates Paid. The following average balance sheet table sets forth at and for the periods indicated information on the Company regarding: (1) the total dollar amounts of interest income on interest-earning assets and the resulting average yields; (2) the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs; (3) net interest income; (4) interest rate spread; (5) net interest-earning assets (interest-bearing liabilities); (6) the net yield earned on interest-earning assets; and (7) the ratio of total interest-earning assets to total interest-bearing liabilities.

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Rate/Volume Analysis. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Company’s interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume (change in volume multiplied by prior year rate), (2) changes in rate (change in rate multiplied by prior year volume), and (3) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.

Net Interest Income. Net interest income is determined by the Company’s interest rate spread (i.e. the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income decreased by $551 thousand or 7.67% in fiscal 2020 and increased $636 thousand or 9.72% in fiscal 2019. The decrease in fiscal 2020 was the result of a $1.6 million or 13.02% decrease in interest and dividend income, which was partially offset by a $1.0 million decrease in interest expense. The increase in fiscal 2019 was the result of a $2.4 million or 24.65% increase in interest and dividend income, which was partially offset by a $1.7 million or 55.95% increase in interest expense. Fiscal year 2020 was impacted by lower average yields on the Company’s floating rate investment and mortgage-backed securities while fiscal year 2019 was favorably impacted by higher average yields on the Company’s investment, mortgage-backed securities, and loan portfolios and by higher levels of net loans receivable.

Interest Income. Total interest income decreased by $1.6 million or 13.02% during fiscal 2020 and increased $2.4 million or 24.65% during fiscal 2019. The fiscal 2020 decrease was primarily attributable to lower average yields on the Company’s floating rate investment and mortgage-backed securities, FHLB stock and loan portfolio. The fiscal 2019 increase was primarily attributable to higher average yields on the Company’s investment and mortgage-backed securities, FHLB stock and loan portfolio when compared to the same period of 2018. Management continuously evaluates market opportunities, and associated borrowing costs, to contribute to net interest income. The Company believes that it has sufficient capital to grow its balance sheet as opportunities become available.

Interest income on net loans receivable increased $118 thousand or 3.53% during fiscal 2020 and increased $359 thousand or 12.03% during fiscal 2019. The increase in fiscal 2020 was primarily the result of a $3.7 million increase in the average balances of net loans outstanding, which more than offset a 3 basis point decrease in the weighted-average yield on the Company’s loan portfolio. During fiscal 2019, the increase was primarily attributable to a $6.5 million increase in the average balance of net loans outstanding and as well as a 13 basis point increase in the weighted-average yield on the Company’s loan portfolio. During fiscal

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2020, 2019 and 2018, the Company also enjoyed higher levels of single-family home purchase loans. Substantially all of our loan originations were fixed-rate with a mix of 15, 20 and 30 year terms.

Interest income on investment securities decreased $644 thousand or 14.48% during fiscal 2020 and increased $1.4 million or 46.48% during fiscal 2019. During fiscal 2020, the decrease was primarily due to a 68 basis point decrease in the average yield on these investments, partially offset by an increase of $10.3 million in the average balance of these investments. The increase in 2019 was primarily attributable to a $7.0 million increase in the average balance of investment grade corporate bonds and a 97 basis point increase in the weighted-average yield when compared to the same period of 2018. The increase in the average balance of investments outstanding during both 2020 and 2019 was attributable to the redeployment of mortgage-backed securities cash flows into floating rate corporate bonds. The changes in weighted-average yields in 2020 and 2019 were principally attributable to changes in the three-month dollar London Interbank Offered Rates (“LIBOR”) during these periods.

Interest income on mortgage-backed securities decreased by $1.0 million or 27.53% during fiscal 2020, compared to fiscal 2019. The decrease was primarily due to a 78 basis point decrease in the weighted-average yield earned on U.S. Government Agency mortgage-backed securities as well as $6.6 million decrease in the average balance of these securities. During 2019, interest income on mortgage-backed securities increased $615 thousand or 19.65% and increased $797 thousand or 34.16% during fiscal 2018. The increase for fiscal 2019 was primarily attributable to an 84 basis point increase in the weighted average yield earned on U.S. Government Agency mortgage-backed securities, which more than offset an $11.9 million decline in the average balance of U.S. Government Agency mortgage-backed securities. During fiscal 2020, 2019 and 2018, the U.S. Government Agency mortgage-backed securities sector offered relatively unattractive investment opportunities. The Company began to reinvest cash repayments of principal into floating rate investment securities and also increased its net loan portfolio. The average balances associated with the Company’s private label mortgage-backed securities (“PLMBS”) declined $105 thousand and $123 thousand during fiscal 2020 and fiscal 2019, respectively. The Company continues to reduce its exposure to private-label mortgage-backed securities due to the substandard investment performance associated with this segment. The decrease in weighted-average yields in 2020 was principally attributable to lower one-month dollar LIBOR when compared to the same period in 2019.

Dividend income on FHLB stock decreased $28 thousand or 5.76% during fiscal 2020, and increased $47 thousand or 10.71% during fiscal 2019. The decrease in 2020 was due to a 49 basis point decline in the weighted-average yield partially offset by a $56 thousand increase in the average balance of FHLB stock outstanding. During fiscal 2019, the change was the result of a 117 basis point increase in the weighted-average yield, which was partially offset by a $472 thousand decrease in the average balance. The Company’s average holdings of FHLB stock are directly related to its volume of outstanding FHLB advances.

Interest income on certificates of deposit increased by $25 thousand and decreased by $50 thousand during fiscal 2020 and fiscal 2019, respectively. The 2020 increase was attributable to a $1.2 million increase in the average balance of certificates of deposit, which was partially offset by a 25 basis point decrease in the average yield earned on certificates of deposit. The decrease in 2019 was primarily due to a $3.0 million decline in the average balance of certificates of deposit, which was partially offset by a 60 basis point increase in the weighted-average yield.

Interest Expense. Total interest expense decreased $1.0 million or 20.89% during fiscal 2020 and increased $1.7 million or 55.95% during fiscal 2019. For fiscal 2020, the decrease was primarily due to lower average market rates paid on both our FHLB long-term and short-term advances. The market rates paid on the FHLB short-term advances decreased 88 basis points during fiscal 2020 compared to fiscal 2019 and the market rates paid on the FHLB long-term advances decreased 63 basis points during the same period. Partially offsetting the decline in rates was a $25.5 million increase in the average balances of our long-term FHLB advances, and a $23.4 million reduction in the average balance of our FHLB short-term borrowings. The increase in fiscal 2019 was primarily due to higher average market rates paid on FHLB borrowings and time deposits, which were partially offset by lower average balances of FHLB advances outstanding when compared to the same period in 2018. In 2019, interest paid on FHLB long-term advances increased $2.0 million, when compared to 2018, primarily as a result of a $72.9 million increase in the average balances outstanding. Also during fiscal 2019, interest expense on FHLB short-term advances declined by $679 thousand as a result of a decrease of $85.8 million in the average balance outstanding, partially offset by an

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increase in the rate paid of 85 basis points. The changes in rates paid on FHLB borrowings for both periods were consistent with changes in short-term market interest rates, such as LIBOR.

Interest on other short-term borrowings increased $6 thousand in fiscal 2020, when compared to fiscal 2019. The increase in fiscal 2020 was attributable to FRB discount window borrowings outstanding compared to no such borrowings in fiscal 2019.

Interest expense on interest-bearing deposits increased $3 thousand in fiscal 2020 and increased $450 thousand or over 100% in fiscal 2019. The slight increase in fiscal 2020, compared to fiscal 2019, was primarily attributable to a 14 basis point decrease in the rate paid on time deposits partially offset by a $3.9 million increase in the average balance of time deposits. The increase in fiscal 2019, when compared to the same period of 2018, was primarily the result of an 81 basis point increase in the rate paid on time deposits and an $8.4 million increase in average balance of these same deposits. Terms associated with broker deposits were sometimes more favorable during fiscal 2017, 2018 and 2019 than terms offered on other short-term borrowings. The Company had $9.9 million and $10.5 million of brokered deposits outstanding at June 30, 2020 and 2019, respectively. Beginning in fiscal 2017 and continuing through fiscal 2020, the Company began to use brokered deposits in part of its asset/liability management strategy.    

Provision for Loan Losses. A provision for loan losses is charged, or accreted to earnings to bring the total allowance to a level considered adequate by management to absorb potential losses in the portfolio. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio considering past experience, current economic conditions, volume, growth, composition of the loan portfolio and other relevant factors. The Company recorded provision for loan losses totaling $70 thousand in fiscal 2020 and $80 thousand in fiscal 2019. The decrease in the provision in fiscal 2020 was attributable to lower levels of construction and land acquisition and development loans, partially offset by increased reserve factors related to the economic uncertainty as a result of the COVID-19 pandemic. See Note 9 to the Consolidated Financial Statements.    The increase in the provision in fiscal 2019 was primarily attributable to growth in the Company’s single-family owner occupied loan portfolio as well as an increase in the reserve factor associated with the loan segment from 0.46 basis points to 0.50 basis points.

Non-interest Income. Total non-interest income decreased $53 thousand or 12.77% in fiscal 2020 and decreased $55 thousand or 11.70% in fiscal 2019. The decrease in fiscal 2020 reflects a $60 thousand increase in other-than-temporary impairment losses on the Company’s legacy PLMBS portfolio, a $17 thousand decrease in ATM income and a $10 thousand decrease in service charges on deposit accounts. The decrease in fiscal 2019 is primarily attributable to a $14 thousand increase in other-than-temporary impairment losses on the Company’s legacy PLMBS portfolio, a $12 thousand decrease in service charges on deposit accounts and a $14 thousand decrease in ATM income.

Non-interest Expense. Total non-interest expense decreased $227 thousand or 5.99% in fiscal 2020, and increased $77 thousand or 2.07% during fiscal 2019. During fiscal 2020, the decrease was primarily due to lower employee post-retirement benefit costs, lower FDIC insurance premium expenses due to the FDIC Small Bank Assessment Credits and lower ATM program expenses. The increase in fiscal 2019 was primarily the result of increases in compensation expense and data processing expense of $148 thousand and $10 thousand, respectively.    These increases were partially offset by lower occupancy and equipment expenses as well as lower FDIC insurance premium expenses.

Income Taxes. Income taxes decreased $62 thousand during fiscal 2020 and decreased $196 thousand during fiscal 2019, respectively. The decrease in income tax expense for fiscal 2020 was primarily attributable to lower taxable income. The decrease in fiscal 2019 was primarily the result of the absence of the additional $133 thousand federal income tax expense due to the write-down of the Company’s net deferred tax assets associated with the Tax Cuts and Jobs Act of 2017, which was recorded in December 2017, partially offset by higher taxable income and the reduced federal tax rate effective January 1, 2018.    The Company’s combined effective tax rate was 25.9% for the year ended June 30, 2020 and 25.0% for the year ended June 30, 2019.

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity is often analyzed by reviewing the cash flow statement. Cash and cash equivalents decreased by $1.9 million during fiscal 2020 primarily due to $4.3 million net cash used for investing activities and $982 thousand net cash used for financing activities, which was partially offset by $3.4 million net cash provided by operating activities.

Funds used for investing activities totaled $4.3 million during fiscal 2020 as compared to $1.5 million during fiscal 2019. Primary uses of funds during fiscal 2020 included purchases of investments totaling $54.7 million, purchases of loans of $9.1 million, purchases of $6.7 million of FHLB stock and purchases of certificates of deposit totaling $2.8 million. Partially offsetting these uses of funds were repayments of investments and mortgage-backed securities totaling $29.4 million and $11.2 million, respectively, an $8.7 million decrease in net loans receivable, and $10.1 million in proceeds from sales of investment securities. During fiscal 2020, investment purchases were comprised primarily of floating rate investment grade corporate bonds.

Funds used for financing activities totaled $982 thousand for fiscal 2020 as compared to $329 thousand used for financing activities in fiscal 2019. Primary uses of funds for fiscal 2020 were:    $11.7 million reduction in FHLB short-term advances; $506 thousand for purchases of treasury stock and $707 thousand in cash dividends paid on the Company’s common stock. The primary source of funds provided for financing activities during fiscal 2020 was a $7.0 million increase in other short-term borrowings. Management has determined that it currently is maintaining adequate liquidity and continues to match funding sources with lending and investment opportunities.

Funds provided by operating activities totaled $3.4 million during fiscal 2020 as compared to $3.8 million during fiscal 2019. During fiscal 2020, net cash provided from operations was primarily due to $2.5 million of net income and a $475 thousand decrease in accrued interest receivable. In fiscal 2019, net cash provided by operating activities was primarily attributable to $2.8 million of net income and $443 thousand increase in accrued interest payable.

The Company’s primary sources of funds are deposits, repayments on existing loans, investment portfolio cash flow, funds from operations and funds obtained through various borrowings. At June 30, 2020, the total approved loan commitments outstanding amounted to $5.6 million. At the same date, commitments under unused lines of credit amounted to $5.2 million and the undisbursed portion of construction loans approximated $2.9 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2020, totaled $31.3 million. Management believes that a significant portion of our local maturing deposits will remain with the Company.

The Company’s contractual obligations at June 30, 2020 were as follows:

See also Note 15 of the Company’s Consolidated Financial Statements.

Historically, the Company used its sources of funds primarily to meet its ongoing commitments to pay maturing certificates of deposit and savings withdrawals, fund loan commitments and maintain a substantial portfolio of investment securities. The Company has been able to generate sufficient cash through FHLB

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advances, other borrowings and the retail and broker deposit markets to provide the cash utilized in investing and financing activities. Management believes that the Company currently has adequate liquidity available to respond to liquidity demands.

On July 27, 2020, the Company’s Board of Directors declared a cash dividend of $0.10 per share payable on August 20, 2020 to shareholders of record at the close of business on August 10, 2020. Dividends are subject to determination and declaration by the Board of Directors, which take into account the Company’s financial condition, statutory and regulatory restrictions, general economic conditions and other factors. There can be no assurance that dividends will in fact be paid on the common stock in the future or that, if paid, such dividends will not be reduced or eliminated in future periods.

The Company’s ratio of Tier 1 capital to risk weighted assets, common equity Tier 1 capital to risk weighted assets and total capital to risk weighted assets were 18.55%, 18.55%, and 18.88%, respectively, at June 30, 2020. The Company’s ratio of Tier 1 capital to average total assets was 10.16% at June 30, 2020.

Non-performing assets consist of non-accrual loans and real estate owned. A loan is placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed insufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued but uncollected interest is deducted from interest income. The Company normally does not accrue interest on loans past due 90 days or more, however, interest may be accrued if management believes that it will collect on the loan.

The Company had no non-performing assets at June 30, 2020. At June 30, 2019 the Company’s non-performing assets totaled approximately $225 thousand or 0.06% of total assets. The $225 thousand decrease in non-performing assets during the twelve months ended June 30, 2020 was due to the Company’s one non-performing single-family real estate loan being discharged from bankruptcy during the quarter ended September 2019.

Impact of Inflation and Changing Prices. The consolidated financial statements of the Company and related notes presented herein have been prepared in accordance with U.S. generally accepted accounting principles which require the measurement of financial condition and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services since such prices are affected by inflation to a larger degree than interest rates. In the current interest rate environment, liquidity and the maturity structure of the Company’s assets and liabilities are critical to the maintenance of acceptable performance levels.

Recent Accounting and Regulatory Pronouncements.    The Company’s discussion of recent accounting and regulatory pronouncements can be found in Note 1 to the Company’s Consolidated Financial Statements.

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QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. All of the Company’s transactions are denominated in US dollars with no specific foreign exchange exposure. The Savings Bank has no agricultural loan assets and therefore would not have a specific exposure to changes in commodity prices. Any impacts that changes in foreign exchange rates and commodity prices would have on interest rates are assumed to be exogenous and will be analyzed on an ex post basis.

Interest rate risk (“IRR”) is the exposure of a banking organization’s financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value, however excessive levels of IRR can pose a significant threat to the Company’s earnings and capital base. Accordingly, effective risk management that maintains IRR at prudent levels is essential to the Company’s safety and soundness.

Evaluating a financial institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process used to control IRR and the organization’s quantitative level of exposure. When assessing the IRR management process, the Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain IRR at prudent levels with consistency and continuity. Evaluating the quantitative level of IRR exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity, and, where appropriate, asset quality.

Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest-rate changes. For example, assume that an institution’s assets carry intermediate- or long-term fixed rates and that those assets were funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution’s profits could decrease on existing assets because the institution will either have lower net interest income or, possibly, net interest expense. Similar risks exist when assets are subject to contractual interest-rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate environment.

During the fiscal years 2013-2020, and into fiscal year 2021, intermediate and long-term market interest rates fluctuated considerably. Many central banks, including the Federal Reserve, continued above normal levels of monetary accommodation including quantitative easing and targeted asset purchase programs. The desired outcomes of these programs are to stimulate aggregate demand, reduce high levels of unemployment and to further lower market interest rates.

Throughout fiscal year 2020, the Company continued to adjust its asset/liability management tactics, increased total assets by $1.3 million and continued to manage its Tier 1 capital. The primary segments of asset growth for fiscal year 2020 were: investment securities available for sale - $14.9 million and net loans receivable - $444 thousand, which were partially offset by decreases in investment securities held to maturity - $500 thousand and mortgage-backed securities held to maturity - $11.2 million.    

Changes in intermediate and long-term market interest rates, the changing slope of the Treasury yield curve, and higher levels of interest rate volatility have impacted prepayments on the Company’s loan, investment and mortgage-backed securities portfolios. Principal repayments on the Company’s loan, investment, and mortgage-backed securities portfolios for the twelve months ended June 30, 2020, totaled $20.2 million, $29.4 million, and $11.2 million, respectively.

Despite stagnant global interest rates and Treasury yields the Company maintained its balance sheet and used proceeds from maturities/calls of corporate bonds, repayments on its mortgage-backed securities, and borrowings to purchase floating rate investment grade corporate bonds and to fund loan growth. In particular, the Company increased its investment securities – available for sale portfolio allocation from

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$132.8 million at June 30, 2019 to $147.6 million at June 30, 2020 and its net loans receivable from $90.6 million at June 30, 2019 to $91.0 million at June 30, 2020.

During the fiscal year ended June 30, 2020, the Company increased its loan portfolio by $444 thousand or 0.49% with a $1.3 million increase in single-family real estate loans, a $632 thousand increase in multi-family dwellings and a $405 thousand increase in commercial real estate loans, which were partially offset by a decrease of $1.0 million in single-family construction loans and a $407 thousand decrease in commercial loans. The Company also makes available for origination residential mortgage loans with interest rates adjusting pursuant to a designated index, although customer acceptance has been somewhat limited in the Savings Bank’s market area. We expect that the housing market will modestly grow throughout fiscal 2021. The Company will continue to selectively offer commercial real estate, land acquisition and development, and shorter-term construction loans (primarily on residential properties), and commercial loans on business assets to partially increase interest income while limiting credit and interest rate risk. The Company has also offered higher yielding commercial and small business loans to existing customers and seasoned prospective customers.

During fiscal 2020, principal investment purchases were comprised of: investment grade corporate bonds - $20.3 million with a weighted-average yield of approximately 2.97%, and U.S. dollar denominated investment-grade corporate bonds of large foreign issuers - $8.1 million with a weighted-average yield of approximately 2.95% and commercial paper - $26.3 million with a weighted-average yield of approximately 2.83%. All of the corporate bond purchases are floating rate and reprice quarterly based upon changes in the three-month LIBOR.

Investment proceeds received during fiscal 2020 included commercial paper - $20.5 million with a weighted-average yield of approximately 2.81%, corporate bonds - $5.1 million with a weighted-average yield of approximately 2.59%, corporate bonds of large foreign issuers - $2.0 million with a weighted- average yield of approximately 2.54%, taxable municipal bonds - $500 thousand with a weighted-average yield of approximately 2.65% and tax-exempt municipal bonds - $1.3 million with a weighted-average yield of approximately 1.25%.

As of June 30, 2020, the implementation of these asset and liability management initiatives resulted in the following:

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The effect of interest rate changes on a financial institution’s assets and liabilities may be analyzed by examining the “interest rate sensitivity” of the assets and liabilities and by monitoring an institution’s interest rate sensitivity “gap”. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within a given time period. A gap is considered positive (negative) when the amount of rate sensitive assets (liabilities) exceeds the amount of rate sensitive liabilities (assets). During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income. During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income.

As part of its asset/liability management strategy, the Company maintained an asset sensitive financial position due to unusually low market interest rates. An asset sensitive financial position may benefit earnings during a period of rising interest rates and reduce earnings during a period of declining interest rates.

The following table sets forth certain information at the dates indicated relating to the Company’s interest-earning assets and interest-bearing liabilities which are estimated to mature or are scheduled to reprice within one year.

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The following table illustrates the Company’s estimated stressed cumulative repricing gap – the difference between the amount of interest-earning assets and interest-bearing liabilities expected to reprice at a given point in time – at June 30, 2020. The table estimates the impact of an upward or downward change in market interest rates of 100 and 200 basis points.

The Company utilizes an income simulation model to measure interest rate risk and to manage interest rate sensitivity. The Company believes that income simulation modeling may enable the Company to better estimate the possible effects on net interest income due to changing market interest rates. Other key model parameters include: estimated prepayment rates on the Company’s loan, mortgage-backed securities and investment portfolios; savings decay rate assumptions; and the repayment terms and embedded options of the Company’s borrowings.

The following table presents the simulated impact of a 100 and 200 basis point upward or downward (parallel) shift in market interest rates on net interest income, return on average equity, return on average assets and the market value of portfolio equity at June 30, 2020. This analysis was done assuming that the interest-earning assets will average approximately $350 million and $351 million over a projected twelve and twenty-four month period, respectively, for the estimated impact on change in net interest

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income, return on average equity and return on average assets. The estimated changes in market value of equity were calculated using balance sheet levels at June 30, 2020. Actual future results could differ materially from our estimates primarily due to unknown future interest rate changes and the level of prepayments on our investment and loan portfolios and future FDIC regular and special assessments.

The table below provides information about the Company’s anticipated transactions comprised of firm loan commitments and other commitments, including undisbursed letters and lines of credit. The Company used no derivative financial instruments to hedge such anticipated transactions as of June 30, 2020.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of WVS Financial Corp.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of WVS Financial Corp. and subsidiary (the “Company”) as of June 30, 2020 and 2019; the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2020; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 1993.

S.R. Snodgrass, P.C. * 2009 Mackenzie Way, Suite 340, Cranberry Township, PA 16066* Phone: (724) 934-0344 * Facsimile: (724) 934-0345

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See accompanying notes to the consolidated financial statements.

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