UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
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 Number: 0-22444
WVS Financial Corp.
--------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1710500
-------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9001 Perry Highway
Pittsburgh, Pennsylvania 15237
---------------------------- -------------------------------
(Address of principal (Zip Code)
executive offices)
(412) 364-1911
----------------------------
(Registrant's telephone number,
including area code)
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 requirement for the past 90 days. YES X NO
--- ---
Shares outstanding as of February 5, 1997 : 1,737,250 shares Common Stock,
$.01 par value.
WVS FINANCIAL CORP. AND SUBSIDIARY
INDEX
PART I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial
Condition as of December 31, 1996
and June 30, 1996 (Unaudited) 3
Consolidated Statements of Income
for the Three and Six Months Ended
December 31, 1996 and 1995 (Unaudited) 4
Consolidated Statements of Cash Flows
for the Six Months Ended December 31,
1996 and 1995 (Unaudited) 5
Consolidated Statements of Changes in
Stockholders' Equity for the Six Months
Ended December 31, 1996 (Unaudited) 7
Notes to Unaudited Consolidated
Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations for the Three and Six Months
Ended December 31, 1996 10
PART II Other Information Page
- ------- ----------------- ----
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
(in thousands)
December 31, June 30,
1996 1996
------------ --------
Assets
Cash and due from banks $ 672 $ 508
Interest-earning demand deposits 3,668 2,219
Investment securities available-for-sale
(amortized cost of $3,031 and $2,193) 2,906 1,981
Investment securities held-to-maturity
(market value of $70,909 and $56,671) 71,103 57,237
Mortgage-backed securities available-for-sale
(amortized cost of $20,207 and $22,775) 20,077 22,428
Mortgage-backed securities held-to-maturity
(market value of $19,531 and $19,733) 19,443 19,690
Federal Home Loan Bank stock, at cost 3,168 1,900
Net loans receivable 150,134 149,011
Accrued interest receivable 2,574 2,373
Real estate owned --- ---
Premises and equipment 1,302 1,327
Deferred taxes and other assets 873 948
-------- --------
TOTAL ASSETS $275,920 $259,622
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Non-interest-bearing accounts $ 5,598 $ 6,259
NOW accounts 14,357 14,252
Savings accounts 36,159 37,976
Money market accounts 12,735 11,682
Certificates of deposit 99,159 100,674
-------- --------
Total deposits 168,008 170,843
Federal Home Loan Bank advances 62,857 38,000
Other borrowings 5,236 10,652
Advance payments by borrowers for taxes and insurance 2,226 3,772
Accrued interest payable 1,704 1,425
Other liabilities 784 892
-------- --------
TOTAL LIABILITIES 240,815 225,584
-------- --------
Stockholders' equity:
Preferred stock:
5,000,000 shares, no par value per share,
authorized; none outstanding --- ---
Common stock:
10,000,000 shares, $.01 par value per share, authorized;
1,736,960 and 1,736,760 shares issued and outstanding 17 17
Additional paid-in-capital 16,997 16,947
Retained earnings, substantially restricted 19,535 18,861
Unallocated shares - Recognition and Retention Plans (733) (835)
Unallocated shares - Employee Stock Ownership Plan (543) (584)
-------- --------
35,273 34,406
Unrealized loss on available-for-sale securities (168) (368)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 35,105 34,038
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $275,920 $259,622
-------- --------
-------- --------
See accompanying notes to consolidated financial statements
3
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands)
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ----------------
1996 1995 1996 1995
-------- -------- ------- -------
INTEREST AND DIVIDEND INCOME:
Loans $ 3,080 $ 2,966 $ 6,163 $ 5,815
Investment securities 1,464 1,282 2,674 2,555
Mortgage-backed securities 679 330 1,390 672
Interest-earning deposits with other institutions 26 26 54 52
Federal Home Loan Bank stock 49 20 82 40
----------- ---------- ---------- ---------
Total interest and dividend income 5,298 4,624 10,363 9,134
----------- ---------- ---------- ---------
INTEREST EXPENSE:
Deposits 1,767 1,908 3,539 3,779
Borrowings 1,006 353 1,753 669
Advance payments by borrowers for taxes and insurance 7 8 16 15
----------- ---------- ---------- ---------
Total interest expense 2,780 2,269 5,308 4,463
----------- ---------- ---------- ---------
NET INTEREST INCOME 2,518 2,355 5,055 4,671
PROVISION FOR LOAN LOSSES 30 37 60 75
----------- ---------- ---------- ---------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 2,488 2,318 4,995 4,596
----------- ---------- ---------- ---------
NON-INTEREST INCOME:
Service charges on deposits 56 49 103 98
Investment securities gains --- --- 26 ---
Other 41 38 77 69
----------- ---------- ---------- ---------
Total non-interest income 97 87 206 167
----------- ---------- ---------- ---------
NON-INTEREST EXPENSE:
Unusual item-Shareholder litigation settlement --- (246) --- (246)
Unusual item-Shareholder litigation costs --- (140) --- (139)
Salaries and employee benefits 694 626 1,330 1,245
Occupancy and equipment 109 104 208 206
Deposit insurance premium - 101 1,239 200
Data processing 43 44 85 88
Correspondent bank service charges 30 28 58 55
Other 203 207 361 345
----------- ---------- ---------- ---------
Total non-interest expense 1,079 724 3,281 1,754
----------- ---------- ---------- ---------
INCOME BEFORE INCOME TAXES 1,506 1,681 1,920 3,009
INCOME TAXES 594 448 758 1,001
----------- ---------- ---------- ---------
NET INCOME $ 912 $ 1,233 $ 1,162 $ 2,008
----------- ---------- ---------- ---------
----------- ---------- ---------- ---------
EARNINGS PER SHARE:
Primary $ 0.52 $ 0.71 $ 0.67 $ 1.16
Fully Diluted $ 0.52 $ 0.71 $ 0.66 $ 1.16
AVERAGE SHARES OUTSTANDING:
Primary 1,749,039 1,729,776 1,745,518 1,726,290
Fully Diluted 1,753,025 1,730,561 1,748,482 1,729,741
See accompanying notes to consolidated financial statements.
4
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Six Months Ended December 31,
----------------------------
1996 1995
---------- ---------
OPERATING ACTIVITIES
Net income $ 1,162 $ 2,008
Adjustments to reconcile net income to cash provided
by operating activities:
Provision for loan and real estate owned losses 60 75
Gain on sale of Real Estate Owned (8) ---
Gain on sale of mortgage-backed securities (26) ---
Depreciation and amortization, net 70 69
Amortization of discounts, premiums and deferred
loan fees 38 (41)
Amortization of ESOP, RRP and deferred and
unearned compensation 190 176
Increase in accrued interest receivable (201) (267)
Increase in accrued interest payable 279 190
Decrease in accrued and deferred taxes 43 238
Other, net (175) (492)
--------- ---------
Net cash provided by operating activities 1,432 1,956
--------- ---------
INVESTING ACTIVITIES
Available-for-sale:
Purchases of investments and mortgage-
backed securities (839) (247)
Proceeds from repayments of investments
and mortgage-backed securities 921 99
Proceeds from sale of investments and
mortgage-backed securities 1,665 ---
Held-to-maturity:
Purchases of investments and mortgage-
backed securities (44,513) (34,046)
Proceeds from repayments of investments
and mortgage-backed securities 30,981 37,736
Increase in net loans receivable (1,366) (7,142)
Sale of real estate owned 72 ---
Increase in FHLB stock (1,268) ---
Purchases of premises and equipment (45) (3)
--------- ---------
Net cash used for investing activities (14,392) (3,603)
--------- ---------
See accompanying notes to consolidated financial statements.
5
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Six Months Ended December 31,
-----------------------------
1996 1995
------------ ------------
FINANCING ACTIVITIES
Net decrease in transaction and passbook accounts (1,320) (2,698)
Net (decrease) increase in certificates of deposit (1,515) 5,359
Net increase (decrease) in borrowings 19,441 (1,031)
Net decrease in advance payments by borrowers
for taxes and insurance (1,547) (964)
Net proceeds from issuance of common stock 2 ---
Cash dividends paid (488) (259)
------------ ------------
Net cash provided by financing activities 14,573 407
------------ ------------
Increase (decrease) in cash and cash equivalents 1,613 (1,240)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD 2,727 4,218
------------ ------------
CASH AND CASH EQUIVALENTS AT END
OF THE PERIOD $ 4,340 $ 2,978
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits, escrows and
borrowings $ 5,029 $ 4,273
Income taxes 889 943
Noncash item:
Foreclosed mortgage loans transferred
to real estate owned 64 15
See accompanying notes to consolidated financial statements.
6
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
Retained
Additional Unallocated Unallocated Net Unrealized Earnings-
Common Paid-in Shares Held Shares Held Loss on Substantially
Stock Capital by ESOP by RRP Securities Restricted Total
------ ---------- ----------- ----------- -------------- ------------- -----
Balance at June 30, 1996 $ 17 $ 16,947 $ (584) $ (835) $(368) $ 18,861 $34,038
Release of earned
Employee Stock Ownership
Plan (ESOP) shares 48 41 89
Accrued compensation
expense for Recognition
and Retention Plans (RRP) 102 102
Exercise of Stock Options 2 2
Change in unrealized
loss, net of income
taxes of $103 200 200
Cash dividends declared
($0.30 per share) (488) (488)
Net income 1,162 1,162
------ ----------- -------- -------- ------ ---------- -------
Balance at
December 31, 1996 $ 17 $ 16,997 $ (543) $ (733) $(168) $ 19,535 $35,105
------ ----------- -------- -------- ------ ---------- -------
------ ----------- -------- -------- ------ ---------- -------
See accompanying notes to consolidated financial statements.
7
WVS FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore
do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations, and cash
flows in conformity with generally accepted accounting principles.
However, all adjustments (consisting only of normal recurring
adjustments) which, in the opinion of management, are necessary for a
fair presentation have been included. The results of operations for the
three and six months ended December 31, 1996 are not necessarily
indicative of the results which may be expected for the entire fiscal
year.
2. EARNINGS PER SHARE
Primary earnings per share amounts are calculated based on the weighted
average number of shares actually outstanding, less average unearned
ESOP shares, plus the shares that would be outstanding assuming the
exercise of dilutive stock options which are considered to be common
stock equivalents. The number of shares that would be issued from the
exercise of the stock options has been reduced by the number of shares
that could have been purchased from the proceeds at the average market
price of the Company's common stock. The number of shares used in the
computation of primary earnings per share totaled 1,749,039 and
1,745,518, respectively, for the three and six months ended December 31,
1996.
Fully diluted earnings per share amounts are calculated based on an
increased number of shares that would be outstanding assuming the
exercise of dilutive stock options. The number of additional shares
that would be issued from the exercise of the stock options has been
reduced by the number of shares that could have been purchased from the
proceeds at the end of period market price of the Company's common
stock. The number of shares used in the computation of fully diluted
earnings per share totaled 1,753,025 and 1,748,482, respectively, for
the three and six months ended December 31, 1996.
8
3. LITIGATION
A settlement was entered into during the fourth quarter of fiscal 1995
in connection with the class action lawsuit filed by Jeffrey Carberry,
et. al., in the United States District Court for the Western District of
Pennsylvania against the Company and the Savings Bank. The lawsuit
alleged, among other things, antitrust and securities laws violations in
connection with the Savings Bank's mutual - to - stock conversion. The
Company entered into the settlement to, among other reasons, avoid the
cost of and disruption of the continuing litigation. During the quarter
and fiscal year ended June 30, 1995, the Company established a provision
for the settlement of litigation totaling $491,000. On January 16,
1996, the Company received an executed Release of Claims (the "Release")
in connection with this lawsuit. The Release fully and finally
discharged all Defendants from all claims, causes of action and disputes
of any kind that the class members directly or indirectly had with
respect to the Plaintiff's claims. Also on January 16, 1996, the
Company's insurance carrier entered into a settlement with regard to
coverage for claims and costs of defense arising from the previously
settled class action lawsuit. The insurance carrier agreed to pay the
Savings Bank, as designee of the officers and directors, the sum of
approximately $391,000 to reimburse the Company and the Savings Bank for
litigation defense and settlement costs incurred or accrued through
December 1, 1995. In addition, the insurance carrier agreed to pay 50%
of the amount of future defense costs and expenses relating to the
Carberry lawsuit that may arise after December 1, 1995, for a one year
period beginning January 15, 1996.
On March 27, 1995, the United States District Court for the Western
District of Pennsylvania entered an Opinion and Orders dismissing in its
entirety a lawsuit brought by Plaintiff William S. Karn, who is a
depositor of the Savings Bank and a shareholder of the Company, which
alleged, among other things, antitrust and securities laws violations in
connection with the Savings Bank's mutual - to -stock conversion. The
court also dismissed this same Plaintiff's federal claims in a second
and substantially similar lawsuit while remanding to the Court of Common
Pleas of Allegheny County any cognizable state law claims. This
Plaintiff has filed Motion to Amend Judgment with the Court on the
Opinion and Orders and a Memorandum Response in Opposition has been
filed. On August 28, 1995, the Court denied the Plaintiff's motion to
Amend Judgment.
The Company is involved with various other legal actions arising in the
ordinary course of business. Management believes the outcome of these
matters will have no material effect on the consolidated operations or
consolidated financial condition of WVS.
9
WVS FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1996
GENERAL
WVS Financial Corp. ("WVS" or the "Company") is the parent holding company
of West View Savings Bank ("West View" or the "Savings Bank"). The Company was
organized in July 1993 as a Pennsylvania-chartered unitary bank holding company
and acquired 100% of the common stock of the Savings Bank in November 1993.
West View Savings Bank is a Pennsylvania-chartered, SAIF-insured stock
savings bank conducting business from six offices in the North Hills suburbs of
Pittsburgh. Originally organized under Pennsylvania law in 1908 as West View
Building Loan Association, West View changed its name to West View Savings and
Loan Association in 1954. In June 1992, West View converted from a
Pennsylvania-chartered mutual savings and loan association to a
Pennsylvania-chartered mutual savings bank. The Savings Bank converted to the
stock form of ownership in November 1993. The Savings Bank had no subsidiaries
at December 31, 1996.
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. The Company's net income is also affected by its provision for loan
losses, as well as the level of its non-interest income, including loan fees and
service charges, and its non-interest expenses, such as compensation and
employee benefits, income taxes, deposit insurance and occupancy costs.
The Company's strategy focuses on traditional thrift lending, maintaining
asset quality and increasing core earnings.
FINANCIAL CONDITION
The Company's assets totaled $275.9 million at December 31, 1996 as
compared to $259.6 million at June 30, 1996. The $16.3 million or 6.28%
increase in total assets was accompanied by a $15.2 million increase in total
liabilities and a $1.1 million increase in
10
stockholders' equity for the six months ended December 31, 1996. The growth
in total assets of $16.3 million was primarily comprised of a $13.5 million
or 13.1% increase in investment and mortgage-backed securities (including
Federal Home Loan Bank ("FHLB") stock), a $1.5 million or 68.2% increase in
interest-earning demand deposits, and a $1.1 million or 0.7% increase in net
loans receivable. The Company's total liabilities increased $15.2 million or
6.7% to $240.8 million as of December 31, 1996 from $225.6 million as of June
30, 1996. The $15.2 million increase in total liabilities was primarily
comprised of a $19.4 million or 39.8% increase in Federal Home Loan Bank
advances and other borrowings which was partially offset by a $2.8 million or
1.6% decrease in deposits and a $1.6 million or 42.1% decrease in advance
payments by borrowers for taxes and insurance. Total stockholders' equity
increased $1.1 million or 3.2% to $35.1 million as of December 31, 1996 from
$34.0 million as of June 30, 1996, primarily due to $1.2 million of Company
net income for the six months ended December 31, 1996.
ASSET AND LIABILITY MANAGEMENT. The Company continued a strategy designed
to manage the interest rate sensitivity of its financial assets to its financial
liabilities. The primary elements of this strategy include: (i) expanding the
Company's investment arbitrage program in order to enhance net interest income;
(ii) reducing the Company's level of short-term liquid investments by funding
loan commitments and purchasing longer-term investment securities; (iii)
emphasizing the retention of lower-cost savings accounts and other core
deposits; (iv) pricing the Company's certificates of deposit and loan products
nearer to the market average rate as opposed to the upper range of market
offered rates.
The Company has expanded its investment arbitrage program, originally
initiated in the third quarter of fiscal 1994, throughout fiscal 1997 in order
to realize additional net interest income. Under this strategy, a longer-term
callable or noncallable investment security, or mortgage-backed security, is
purchased and funded through the use of short-term non-deposit liabilities, such
as Federal Home Loan Bank ("FHLB") of Pittsburgh advances or other borrowings.
With this strategy, the Company increases its net interest income, but also
faces the risk, during periods of rising market interest rates, such as have
been experienced during the second half of fiscal 1996 and the first quarter of
fiscal 1997, that it may experience a decline in net interest income if the rate
paid on its short-term borrowings rises above the rate earned on the investment
security purchased. In order to mitigate this exposure, the Board has placed
certain restrictions on the investment arbitrage program, including: (i) the
average outstanding daily balance of short-term borrowings, computed quarterly,
may not exceed approximately $75.0 million; (ii) suitable investments shall be
confined to those meeting the credit quality criteria outlined in the Company's
investment policy; and (iii) each security purchased shall initially yield a
minimum of seventy-five basis points above the incremental rate paid on
short-term borrowings, at the time of purchase.
11
The Company has continued to aggressively purchase bonds with optional
principal redemption features ("callable bonds") in order to capture additional
net interest income. Callable bonds generally provide investors with higher
rates of return than noncallable bonds because the issuer has the option to
redeem the bonds before maturity. While this strategy affords WVS the current
opportunity to improve its net interest income, during a period of declining
interest rates, such as has been experienced during the quarter ended December
31, 1996, the Company would be exposed to the risk that the investment will be
redeemed prior to its final stated maturity. In order to mitigate this risk,
the Company has funded its purchases of callable bonds primarily with short-term
borrowings. Approximately $11.1 million of callable agency bonds with an
estimated weighted average rate of 8.1% were called during the quarter ended
December 31, 1996. During the quarter ended December 31, 1996, the Company
purchased approximately $18.0 million of callable bonds with an approximate
weighted average yield to call and maturity of 7.7% and 7.6%, respectively. The
Company sought to mitigate its prepayment risk by purchasing callable bonds with
longer terms to the initial call date. Callable agency bond purchases totaling
$18.0 million are summarized by initial term to call, as follows: $3.0 million
within three months and $15.0 million with greater than twelve months and within
thirty-six months. In addition, during the six months ended December 31, 1996,
the Company sold approximately $1.7 million of adjustable rate mortgage-backed
securities with an approximate weighted average yield of 6.6% at a gain of $26
thousand.
The Company also makes available for origination residential mortgage loans
with interest rates which adjust pursuant to a designated index, although
customer acceptance has been somewhat limited in the Savings Bank's market
area. The Company will continue to offer land acquisition and development and
shorter-term construction loans, primarily on residential properties, to
partially increase its loan asset sensitivity.
During the six months ended December 31, 1996, the Company lengthened the
maturity structure of a portion of its borrowings in order to lock in a
favorable cost of funds on a longer term basis. The Company borrowed
approximately $49.9 million from the FHLB as follows: $43.5 million of
convertible advances, with terms ranging from three years to five years at a
weighted average rate of 5.66% and $6.4 million of various fixed rate advances
with terms ranging from eighteen to twenty-four months with a weighted average
rate of 6.08%. During the six months ended December 31, 1996, the Company
repaid $25 million of short-term FHLB advances and $5.5 million of other
borrowings. Convertible advances generally provide for a fixed rate of interest
for a portion of the term of the advance, an ability for the FHLB to convert the
advance from a fixed rate to an adjustable rate at some predetermined time
during the remaining term of advance (the "conversion" feature), and a
concurrent opportunity for the Company to prepay the advance with no prepayment
penalty in the event that the FHLB elects to exercise the conversion feature.
As of December 31, 1996, the implementation of these asset and liability
management initiatives resulted in the following: (i) an aggregate of $46.2
million or 30.8%
12
of the Company's net loan portfolio had adjustable interest rates or
maturities of less than 12 months; (ii) $18.5 million or 46.8% of the
Company's portfolio of mortgage-backed securities (including CMOs) were
secured by floating rate securities; (iii) $4.5 million or 6.1% of the
Company's investment securities portfolio had scheduled maturities of one
year or less; and (iv) $66.5 million or 89.9% of the Company's investment
securities portfolio was comprised of callable bonds.
The effect of interest rate changes on a financial institution's assets
and liabilities may be analyzed by examining the extent to which such assets
and liabilities are "interest rate sensitive" 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 when the
amount of rate sensitive assets exceeds the amount of rate sensitive
liabilities. A gap is considered negative when the amount of interest
sensitive liabilities exceeds the amount of interest sensitive assets.
During a period of falling interest rates, a positive gap would tend to
adversely affect net interest income, while 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, while a negative gap would tend to adversely affect net
interest income.
The Company's one year cumulative interest rate sensitivity gap amounted to
a negative 10.9% of total assets at December 31, 1996 as compared to a negative
18.0% at June 30, 1996, in each instance, based on certain assumptions by
management with respect to the repricing of certain assets and liabilities. At
December 31, 1996, the Company's interest-earning assets maturing or repricing
within one year totaled $88.7 million while the Company's interest-bearing
liabilities maturing or repricing within one year totaled $118.7 million,
providing a deficiency of interest-earning assets over interest-bearing
liabilities of $30.0 million. At December 31, 1996, the percentage of the
Company's assets to liabilities maturing or repricing within one year was 74.7%.
RESULTS OF OPERATIONS
General. WVS reported net income of $912 thousand and $1.2 million for the
three and six months ended December 31, 1996, respectively. Net income
decreased by $321 thousand or 26.0% for the three months ended December 31, 1996
when compared to the same period in 1995. The decrease was primarily the result
of a $355 thousand increase in non-interest expense and a $146 thousand increase
in income tax expense, which was partially offset by a $163 thousand increase in
net interest income, a $10 thousand increase in non-interest income and a $7
thousand decrease in the provision for loan losses. Net income decreased by
$846 thousand or 42.1% for the six months ended December 31, 1996 when compared
to the same period in 1995. The $846 thousand or
13
42.1% decrease in net income was principally the result of a $1.5 million
increase in non-interest expense, partially offset by a $384 thousand or 8.2%
increase in net interest income and a $243 thousand decrease in income tax
expense. The increase in non-interest expense for the six months ended
December 31, 1996 was primarily attributable to one-time items, including a
$1.0 million net increase in federal deposit premiums to recapitalize the
Savings Association Insurance Fund ("SAIF"), and insurance recoveries in 1995
totaling $391 thousand for litigation settlement and defense costs. The $384
thousand increase in net interest income for the six months ended December
31, 1996 was chiefly attributable to increases in interest earned on
investment and mortgage-backed securities and net loans receivable of $879
thousand and $348 thousand, respectively, and a $240 thousand decrease in
interest expense on deposits, partially offset by a $1.1 million increase in
interest expense on Federal Home Loan Bank Advances and other borrowings.
Net Interest Income. The Company's net interest income increased by $163
thousand or 6.9% for the three months ended December 31, 1996 when compared to
the same period in 1995. The increase resulted from a $674 thousand or 14.6%
increase in interest income which was partially offset by a $511 thousand or
22.5% increase in interest expense. For the six months ended December 31, 1996,
net interest income increased by $384 thousand or 8.2%, when compared to the
same period in 1995. The increase resulted from a $1.229 million or 13.5%
increase in interest income which was partially offset by an $845 thousand or
18.9% increase in interest expense.
Interest Income. Interest on net loans receivable increased by $114
thousand or 3.8% for the three months ended December 31, 1996 when compared to
the same period in 1995. The increase was attributable to an increase of $10.7
million in the average balance of net loans receivable outstanding which was
partially offset by a decrease in the weighted average yield earned on net loans
receivable of 29 basis points for the three months ended December 31, 1996 when
compared to the same period in 1995. Interest on net loans receivable increased
by $348 thousand or 5.8% for the six months ended December 31, 1996 when
compared to the same period in 1995. The increase was attributable to a $13.3
million increase in the average balance of outstanding loans which was partially
offset by a 28 basis point decrease in the weighted average yield earned on
outstanding loans for the six months ended December 31, 1996. The increases in
the average loan balance outstanding for the three and six months ended December
31, 1996 were primarily attributable to higher levels of real estate and
consumer loan originations.
Interest on mortgage-backed securities increased by $349 thousand or 105.8%
for the three months ended December 31, 1996 when compared to the same period in
1995. The increase was attributable to a $19.8 million increase in the average
balance of mortgage-backed securities outstanding, and to a 22 basis point
increase in the weighted average yield earned on mortgage-backed securities for
the three months ended December 31, 1996 when compared to the same period in
1995. Interest on mortgage-backed securities increased $718 thousand or 106.9%
for the six months ended December 31, 1996. The increase was primarily
attributable to a $20.1 million increase in the average
14
balance of mortgage-backed securities outstanding and to a 28 basis point
increase in the weighted average yield earned on mortgage-backed securities
for the six months ended December 31, 1996 when compared to the same period
in 1995. The increase in the average balance of mortgage-backed securities
outstanding was due to purchases of both adjustable and fixed rate mortgage
pass-through securities and collateralized mortgage obligations under the
Company's investment arbitrage program. The increase in the weighted average
yield earned, during both periods, was principally attributable to higher
yields earned on the adjustable rate portion of the mortgage-backed
securities portfolio that repriced to higher market-based interest rates,
and, to a lesser extent, lower levels of premium amortization due to slower
rates of principal repayment, when compared to the same period in 1995.
Interest and dividend income on interest-bearing deposits with other
institutions, investment securities and FHLB Stock ("other investment
securities") increased by $211 thousand or 15.9% for the three months ended
December 31, 1996 when compared to the same period in 1995. The increase was
attributable to a $15.6 million increase in the average balance of other
investment securities outstanding which more than offset a 45 basis point
decrease in the weighted average yield earned on other investment securities for
the three months ended December 31, 1996 when compared to the same period in
1995. Interest on other investment securities increased $163 thousand or 6.2%
for the six months ended December 31, 1996 when compared to the same period in
1995. The increase in interest income on other investment securities was
attributable to a $6.3 million increase in the average balance of other
investment securities outstanding which more than offset a 19 basis point
decrease in the weighted average yield earned on other investment securities for
the six months ended December 31, 1996 when compared to the same period in 1995.
The increases in the average balance of other investment securities during both
three and six month periods ended December 31, 1996 was principally attributable
to purchases of callable government agency securities associated with the
Company's investment arbitrage program. The decrease in the weighted average
yield on other investment securities was primarily attributable to lower market
interest rates during both periods.
Interest Expense. Interest expense on deposits and escrows decreased by
$142 thousand or 7.4% and decreased by $239 thousand or 6.3% for the three and
six months ended December 31, 1996, respectively, when compared to the same
periods in 1995. The decrease in interest expense on deposits and escrows was
principally attributable to a $4.9 million decrease in the average balance of
interest-bearing deposits and escrows for the three months ended December 31,
1996 when compared to the same period in 1995. For the six months ended
December 31, 1996, the decrease in interest expense on deposits and escrows was
primarily attributable to an 18 basis point decrease in the average yield paid
on deposits and escrows due to lower market interest rates, when compared to the
same period in 1995.
15
Interest expense on other borrowings increased by $653 thousand and
increased by $1.084 million for the three and six months ended December 31,
1996, respectively, when compared to the same periods in 1995. The increase
associated with both periods is primarily attributable to funding the Company's
investment arbitrage program.
Provision for Loan Losses. A provision for loan losses is charged to
earnings to bring the total allowance to a level considered adequate by
management to absorb potential losses in the portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio, past loan loss experience, current economic conditions, volume,
growth and composition of the loan portfolio, and other relevant factors.
The Company's provision for loan losses decreased by $7 thousand and $15
thousand for the three and six months ended December 31, 1996, respectively,
when compared to the same periods in 1995. As a result of the provision during
the six months ended December 31, 1996, the Company's total allowance for loan
losses amounted to $2.0 million or 1.20% of the Company's total loan portfolio
as compared to $1.964 million, or 1.17% at June 30, 1996.
Non-Interest Income. Total non-interest income increased by $10 thousand
and $39 thousand for the three and six months ended December 31, 1996,
respectively, when compared to the same periods in 1995. The increase in
non-interest income for the three months ended December 31, 1996 was primarily
attributable to increased service charges on transaction accounts. The increase
in non-interest income for the six months ended December 31, 1996 was
principally attributable to a $26 thousand gain from the sale of securities.
Non-Interest Expense. Total non-interest expense increased $355 thousand
or 49.0% and increased $1.5 million or 83.3% for the three and six months ended
December 31, 1996, respectively, when compared to the same periods in 1995.
Shareholder litigation settlement and defense costs decreased $386 thousand
or 100.0% and decreased $385 thousand or 100.0% for the three and six months
ended December 31, 1996, respectively, when compared to the same periods in
1995. The decreases for both periods were primarily attributable to $391
thousand of non-taxable insurance proceeds resulting from previously disclosed
and settled shareholder litigation and defense costs accrued during the quarter
ended December 31, 1995.
Federal deposit insurance premiums decreased $101 thousand or 100.0% and
increased $1.039 million or 519.5% for the three and six months ended December
31, 1996, respectively, when compared to the same periods in 1995. The decrease
for the quarter ended December 31, 1996 was primarily attributable to a one-time
$102 thousand refund of prepaid SAIF premiums. The increase for the six months
ended December 31,
16
1996 was principally attributable to a $1.1 million one-time charge to
recaptialize the SAIF as required by federal law.
Compensation and employee benefits expense increased $68 thousand or
10.94% and increased $85 thousand or 6.8% for the three and six months ended
December 31, 1996, respectively, when compared to the same periods in 1995. The
increase for the three months ended December 31, 1996 was primarily attributable
to a $31 thousand increase in employee profit sharing expense, a $14 thousand
increase in Employee Stock Ownership Plan ("ESOP") amortization and a $13
thousand increase in employee compensation. The increase for the six months
ended December 31, 1996 was principally attributable to a $35 thousand increase
in employee profit sharing plan expense, a $29 thousand increase in employee
compensation and a $22 thousand increase in ESOP amortization.
Income Tax Expense. Income tax expense increased by $146 thousand or 32.6%
and decreased by $243 thousand or 24.3% for the three and six months ended
December 31, 1996, respectively, when compared to the same periods in 1995. The
change in income tax expense, for both periods, was attributable to varying
levels of taxable income during the three and six months ended December 31,
1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $1.4 million during the
six months ended December 31, 1996. Net cash provided by operating activities
was primarily comprised of $1.2 million of net income.
Funds used for investing activities totaled $14.4 million during the six
months ended December 31, 1996. Primary uses of funds during the six months
ended December 31, 1996 include $13.1 million used for net purchases of
investment securities and FHLB stock, and a $1.4 million increase in net loans
receivable.
Funds provided by financing activities totaled $14.6 million for the six
months ended December 31, 1996. Primary sources of funding include a $19.4
million increase in Federal Home Loan Bank advances and other borrowings used to
fund loan commitments and investment security purchases partially offset by a
$2.8 million decrease in deposits and a $1.5 million decrease in advance
payments by borrowers for taxes and insurance and $487 thousand in cash
dividends paid. 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.
As of December 31, 1996, $68.8 million or 41.0% of the Company's total deposits
consisted of core deposits.
17
Management has determined that it currently is maintaining adequate liquidity
and is seeking to better match funding sources with lending and investment
opportunities.
The Company's primary sources of funds are deposits, amortization,
prepayments and maturities of existing loans, mortgage-backed securities and
investment securities, funds from operations, and funds obtained through Federal
Home Loan Bank advances and other borrowings. At December 31, 1996, the total
approved loan commitments outstanding amounted to $3.3 million. At the same
date, commitments under unused lines of credit amounted to $6.1 million, the
unadvanced portion of construction loans approximated $13.1 million, and
commitments to purchase when-issued investments totaled $2.0 million.
Certificates of deposit scheduled to mature in one year or less at December 31,
1996 totaled $59.6 million. Management believes that a significant portion of
maturing deposits will remain with the Company.
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 the retail deposit market, its traditional funding source, and through
FHLB advances and other borrowings, to provide the cash utilized in investing
activities. The Company has established a $12.0 million line of credit with the
FHLB, which is scheduled to mature on March 25, 1997 and is subject to various
conditions, including the pledging and delivery of acceptable collateral. The
primary purpose of the line of credit is to serve as a back-up liquidity
facility for the Company, however, the Company may from time to time utilize the
line of credit to purchase investment securities and fund other commitments. In
addition, the Company has access to the Federal Reserve Bank discount window.
Management believes that the Company currently has adequate liquidity available
to respond to liquidity demands.
On January 28, 1997 the Company's Board of Directors declared a cash
dividend of $0.20 per share payable February 24, 1997 to shareholders of
record at the close of business on February 10, 1997. Dividends will be subject
to determination and declaration by the Board of Directors, which will 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 or that, if
paid, such dividends will not be reduced or eliminated in future periods.
As of December 31, 1996, WVS Financial Corp. exceeded all regulatory
capital requirements and maintained Tier I and total risk-based capital equal to
$35.3 million or 27.5% and $36.9 million or 28.7%, respectively, of total
risk-weighted assets, and Tier I leverage capital of $35.3 million or 12.7% of
average quarterly assets.
Effective July 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosure". SFAS No. 114
provides
18
guidelines for measuring impairment losses on loans. A loan is considered
impaired when, based upon current information and events, it is possible that
the Company will be unable to collect all principal and interest amounts due
according to the contractual terms of a loan agreement. SFAS No. 118 amends
SFAS No. 114 to permit a creditor to use existing methods for recognizing
interest income on impaired loans. At December 31, 1996, impaired loans
totaled $875 thousand of which $274 thousand was considered nonaccrual.
Approximately $131 thousand of the related allowance for loan losses has been
allocated to the impaired loans. The average recorded investment in impaired
loans during the six months ended December 31, 1996 was approximately $876
thousand. For the six months ended December 31, 1996, interest income
totaling $35 thousand was recognized on impaired loans on both the accrual
and cash basis of income recognition.
Nonperforming assets consist of nonaccrual loans and real estate owned. A
loan is placed on nonaccrual 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 nonaccrual 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's nonperforming assets at December 31, 1996 totaled
approximately $311 thousand or 0.11% of total assets as compared to $377
thousand or 0.15% of total assets as of June 30, 1996. Nonperforming assets at
December 31, 1996 consisted of $274 thousand in commercial real estate loans and
$37 thousand in single-family loans. Approximately $3 thousand of additional
interest income would have been recorded during the six months ended December
31, 1996, if the Company's nonaccrual and restructured loans had been current in
accordance with their original loan terms and outstanding throughout the quarter
year ended December 31, 1996.
On September 30, 1996 the President signed the Deposit Insurance Funds Act
of 1996 (the "Funds Act") into law. The Funds Act calls for a Special
Assessment on SAIF-assessable deposits as of March 31, 1995 to capitalize the
SAIF to its designated reserve ratio of 1.25%. The Company recorded a pre-tax
charge of approximately $1.1 million during the quarter ended September 30, 1996
using an FDIC estimated assessment rate of $.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. For the three months ended March 31, 1997,
the Company anticipates that its Financing Corporation ("FICO") quarterly
payment will total $27 thousand.
19
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
See discussion contained in Note 3 of Notes to Unaudited
Consolidated Financial Statements.
ITEM 2. Changes in Securities
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed as part of this form 10-Q,
and this list includes the Exhibit Index.
Number Description Page
----- ----------- ----
11 Statement re E-1
computation of
per share earnings
(b) Not applicable.
20
SIGNATURES
Pursuant to the requirements 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.
February 5, 1997 BY: /s/ Robert C. Sinewe
-------------------------------
Date Robert C. Sinewe
President and Chief Executive
Officer
February 5, 1997 BY: /s/ David J. Bursic
-------------------------------
Date David J. Bursic
Vice President, Treasurer and
Chief Financial Officer
21