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 September 30, 2001
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.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1710500
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9001 Perry Highway
Pittsburgh, Pennsylvania 15237
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 364-1911
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(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 November 13, 2001: 2,742,664 shares Common
Stock, $.01 par value.
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
INDEX
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PART I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial
Condition as of September 30, 2001
and June 30, 2001 (Unaudited) 3
Consolidated Statements of Income
for the Three Months Ended
September 30, 2001 and 2000 (Unaudited) 4
Consolidated Statements of Cash Flows
for the Three Months Ended September 30,
2001 and 2000 (Unaudited) 5
Consolidated Statements of Changes in
Stockholders' Equity for the Three Months
Ended September 30, 2001 (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 Months
Ended September 30, 2001 10
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 15
PART II. Other Information Page
- -------- ----------------- ----
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
-- Signatures 20
2
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
(In thousands)
September 30, 2001 June 30, 2001
------------------ ---------------
Assets
------
Cash and due from banks $ 937 $ 696
Interest-earning demand deposits 2,661 2,297
Investment securities available-for-sale (amortized cost of
$3,455 and $1,380) 3,478 1,379
Investment securities held-to-maturity (market value of
$110,432 and $129,191) 107,061 128,213
Mortgage-backed securities available-for-sale (amortized cost of
$7,901 and $8,386) 8,170 8,551
Mortgage-backed securities held-to-maturity (market value of
$51,717 and $56,082) 50,616 55,582
Federal Home Loan Bank stock, at cost 8,187 8,150
Net loans receivable (allowance for loan losses of $2,763) 178,489 185,179
Accrued interest receivable 2,962 3,837
Premises and equipment 1,058 1,001
Deferred taxes and other assets 1,461 1,555
--------- ---------
TOTAL ASSETS $ 365,080 $ 396,440
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings Deposits:
Non-interest-bearing accounts $ 11,377 $ 11,634
NOW accounts 18,295 18,411
Savings accounts 37,081 36,589
Money market accounts 12,162 12,095
Certificates of deposit 92,245 99,300
--------- ---------
Total savings deposits 171,160 178,029
Federal Home Loan Bank advances 155,657 161,494
Other borrowings 1,000 20,660
Advance payments by borrowers for taxes and insurance 1,134 3,310
Accrued interest payable 2,289 2,441
Other liabilities 4,390 1,861
--------- ---------
TOTAL LIABILITIES 335,630 367,795
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;
3,711,728 and 3,708,590 shares issued 37 37
Additional paid-in capital 19,780 19,742
Treasury stock: 963,644 and 955,144 shares at cost, respectively (13,729) (13,589)
Retained earnings, substantially restricted 23,278 22,478
Accumulated other comprehensive income 193 108
Unallocated shares - Recognition and Retention Plans (109) (131)
Unallocated shares - Employee Stock Ownership Plan -- --
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 29,450 28,645
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 365,080 $ 396,440
========= =========
See accompanying notes to consolidated financial statements.
3
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)
Three Months Ended
September 30,
--------------------------
2001 2000
---------- ----------
INTEREST AND DIVIDEND INCOME:
Loans $ 3,544 $ 3,701
Investment securities 1,882 2,414
Mortgage-backed securities 975 1,290
Interest-earning deposits with other institutions 4 8
Federal Home Loan Bank stock 139 104
---------- ----------
Total interest and dividend income 6,544 7,517
---------- ----------
INTEREST EXPENSE:
Deposits 1,608 1,673
Borrowings 2,245 3,309
Advance payments by borrowers for taxes and insurance 6 6
---------- ----------
Total interest expense 3,859 4,988
---------- ----------
NET INTEREST INCOME 2,685 2,529
PROVISION FOR LOAN LOSSES 37 --
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,648 2,529
---------- ----------
NON-INTEREST INCOME:
Service charges on deposits 104 91
Other 76 82
---------- ----------
Total non-interest income 180 173
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 627 608
Occupancy and equipment 89 87
Deposit insurance premium 8 9
Data processing 45 58
Correspondent bank service charges 44 38
Other 163 156
---------- ----------
Total non-interest expense 976 956
---------- ----------
INCOME BEFORE INCOME TAXES 1,852 1,746
INCOME TAXES 611 646
---------- ----------
NET INCOME $ 1,241 $ 1,100
========== ==========
EARNINGS PER SHARE:
Basic $ 0.45 $ 0.39
Diluted $ 0.45 $ 0.38
AVERAGE SHARES OUTSTANDING:
Basic 2,753,358 2,858,302
Diluted 2,763,744 2,873,787
See accompanying notes to consolidated financial statements.
4
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
September 30,
-----------------------
2001 2000
-------- --------
OPERATING ACTIVITIES
Net income $ 1,241 $ 1,100
Adjustments to reconcile net income to cash provided by operating
activities:
Provision for loan and real estate owned losses 37 --
Depreciation and amortization, net 29 27
Amortization of discounts, premiums and deferred loan fees (120) (48)
Amortization of ESOP, RRP and deferred and unearned
compensation 22 23
Decrease in accrued interest receivable 875 992
(Decrease) increase in accrued interest payable (152) 1,185
Increase in accrued and deferred taxes 635 229
Other, net (117) (17)
-------- --------
Net cash provided by operating activities 2,450 3,491
-------- --------
INVESTING ACTIVITIES
Available-for-sale:
Purchases of investments and mortgage-backed securities (2,073) --
Proceeds from repayments of investments and mortgage-backed securities 486 386
Held-to-maturity:
Purchases of investments and mortgage-backed securities (44,383) --
Proceeds from repayments of investments and mortgage-backed securities 72,742 1,570
Decrease (increase) in net loans receivable 6,587 (704)
Hand money received on real estate owned 5 --
Increase in FHLB stock (37) (1,547)
Purchases of premises and equipment (87) (3)
-------- --------
Net cash provided by (used for) investing activities 33,240 (298)
-------- --------
5
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
September 30,
-------------------
2001 2000
-------- -------
FINANCING ACTIVITIES
Net increase (decrease) in transaction and passbook accounts 186 (1,129)
Net (decrease) increase in certificates of deposit (7,055) 635
Net (decrease) increase in FHLB advances (5,837) 30,950
Net (decrease) in other borrowings (19,660) (30,373)
Net decrease in advance payments by borrowers for taxes and insurance (2,176) (2,215)
Net proceeds from issuance of common stock 38 21
Funds used for purchase of treasury stock (140) (424)
Cash dividends paid (441) (457)
-------- -------
Net cash used for financing activities (35,085) (2,992)
-------- -------
Increase in cash and cash equivalents 605 201
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 2,993 2,915
-------- -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 3,598 $ 3,116
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits, escrows and borrowings $ 4,011 $ 3,803
Income taxes $ 20 $ 462
See accompanying notes to consolidated financial statements.
6
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
Accumulated
Other Retained
Additional Unallocated Unallocated Compre- Earnings
Common Paid-In Treasury Shares Held Shares Held hensive Substantially
Stock Capital Stock by ESOP by RRP Income Restricted Total
----- ------- ----- ------- ---------- ------ -------------- --------
Balance at June 30, 2001 $ 37 $19,742 $(13,589) $ --- $ (131) $ 108 $22,478 $28,645
Comprehensive income:
Net Income 1,241 1,241
Other comprehensive
income:
Change in unrealized
holding gains on
securities, net of
income tax effect of
$ 44 85 85
-------
Comprehensive income 1,326
Purchase of shares for
treasury stock (140) (140)
Accrued compensation
expense for Recognition
and Retention Plans (RRP) 22 22
Exercise of stock options 38 38
Cash dividends declared
($0.16 per share) (441) (441)
------ ------- -------- ------- ------ ------ ------- -------
Balance at Sept. 30, 2001 $ 37 $19,780 $(13,729) $ --- $ (109) $ 193 $23,278 $29,450
====== ======= ======== ======= ====== ====== ======= =======
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 months ended
September 30, 2001, are not necessarily indicative of the results
which may be expected for the entire fiscal year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In July 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 141,
Business Combinations, effective for all business combinations
initiated after June 30, 2001, as well as all business
combinations accounted for by the purchase method that are
completed after June 30, 2001. The new statement requires that
the purchase method of accounting be used for all business
combinations and prohibits the use of the pooling-of-interests
method. The adoption of Statement No. 141 is not expected to have
a material effect on the Company's financial position or results
of operations.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. The
new statement changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus,
amortization of goodwill, including goodwill recorded in past
business combinations, will cease upon adoption of this
Statement. The adoption of Statement No. 142 is not expected to
have a material effect on the Company's financial position or
results of operations.
8
3. EARNINGS PER SHARE
------------------
The following table sets forth the computation of basic and
diluted earnings per share.
Three Months Ended
September 30,
-----------------------------
2001 2000
----------- -----------
Weighted average common shares outstanding 3,710,677 3,688,078
Average treasury stock shares (957,319) (829,776)
Average unearned ESOP shares -- --
----------- -----------
Weighted average common shares and common stock equivalents
used to calculate basic earnings per share 2,753,358 2,858,302
Additional common stock equivalents (stock options) used to
calculate diluted earnings per share 10,386 15,485
----------- -----------
Weighted average common shares and common stock equivalents
used to calculate diluted earnings per share 2,763,744 2,873,787
=========== ===========
Net income $ 1,240,538 $ 1,100,472
=========== ===========
Earnings per share:
Basic $ 0.45 $ 0.39
Diluted $ 0.45 $ 0.38
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q or, in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases or
other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project" or similar expressions are intended to identify "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
forward looking statements to reflect events or circumstances after the date of
statements or to reflect the occurrence of anticipated or unanticipated events.
GENERAL
WVS Financial Corp. ("WVS" or the "Company") is the parent
holding company of West View Savings Bank ("West View" or the "Savings Bank").
The Company was organized in July 1993 as a Pennsylvania-chartered unitary bank
holding company and acquired 100% of the common stock of the Savings Bank in
November 1993.
West View Savings Bank is a Pennsylvania-chartered, SAIF-insured
stock savings bank conducting business from six offices in the North Hills
suburbs of Pittsburgh. The Savings Bank converted to the stock form of ownership
in November 1993. The Savings Bank had no subsidiaries at September 30, 2001.
The operating results of the Company depend primarily upon its
net interest income, which is determined by the difference between income on
interest-earning assets, principally loans, mortgage-backed securities and
investment securities, and interest expense on interest-bearing liabilities,
which consist primarily of deposits and borrowings. The Company's net income is
also affected by its provision for loan losses, as well as the level of its
non-interest income, including loan fees and service charges, and its
non-interest expenses, such as compensation and employee benefits, income taxes,
deposit insurance and occupancy costs.
The Company's strategy focuses on community-based lending, growth
of core deposits, generating consistent earnings growth, capital management and
maintaining strong non-interest expense ratios.
10
FINANCIAL CONDITION
The Company's assets totaled $365.1 million at September 30,
2001, as compared to $396.4 million at June 30, 2001. The $31.3 million or 7.9%
decrease in total assets was primarily comprised of a $24.4 million or 12.1%
decrease in investment and mortgage-backed securities, including FHLB Stock, a
$6.7 million or 3.6% decrease in net loans receivable, and a $875 thousand or
22.8% decrease in accrued interest receivable, which were partially offset by a
$605 thousand or 20.2% increase in cash and interest-earning demand deposits.
The Company's total liabilities decreased $32.2 million or 8.8%
to $335.6 million as of September 30, 2001, from $367.8 million as of June 30,
2001. The $32.2 million decrease in total liabilities was primarily comprised of
a $19.7 million or 95.2% decrease in other borrowings, a $6.9 million decrease
in total savings deposits, a $5.8 million or 3.6% decrease in FHLB advances, and
a $2.2 million or 65.7% decrease in advance payments by borrowers for taxes and
insurance due to the seasonal payment of local real estate taxes, which was
partially offset by a $2.5 million or 135.9% increase in other liabilities,
principally unfunded security purchase commitments. Approximately $5.3 million
of the $6.9 million decrease in total savings was attributable to the Company's
decision to reduce its offerings of municipal cash management time deposits due
to increased cash flows in the Company's investment and loan portfolios.
Total stockholders' equity increased $805 thousand or 2.8% to
$29.4 million as of September 30, 2001, from $28.6 million as of June 30, 2001.
Capital expenditures for the Company's stock repurchase program and cash
dividends totaled $140 thousand and $441 thousand, respectively, which were
entirely funded by net income of $1.2 million for the three months ended
September 30, 2001.
RESULTS OF OPERATIONS
General. WVS reported net income of $1.2 million, or $0.45
diluted earnings per share for the three months ended September 30, 2001. Net
income increased by $141 thousand or 12.8% and diluted earnings per share
increased $0.07 or 18.4% for the three months ended September 30, 2001, when
compared to the same period in 2000. The increase in net income was primarily
attributable to a $156 thousand increase in net interest income, and a $35
thousand decrease in income tax expense, which were partially offset by a $37
thousand increase in provisions for loan losses and a $20 thousand increase in
non-interest expense.
Net Interest Income. The Company's net interest income
increased by $156 thousand or 6.2% for the three months ended September 30,
2001, when compared to the same period in 2000. The increase was principally
attributable to decreases in the Company's wholesale borrowing costs which was
partially offset by a decrease in interest on investment and mortgage-backed
securities, including FHLB stock.
Interest Income. Interest and dividend income on
interest-bearing deposits with other institutions, investment securities and
FHLB stock ("other investment securities") decreased by $501 thousand or 19.8%
for the three months ended September 30, 2001, when compared to the same period
in 2000. The decrease was primarily attributable to a $19.3 million decrease in
the average balance of investment securities outstanding and a 29 basis point
decrease in the weighted average yield earned on investment securities for the
three months ended September 30, 2001, when compared to the same period in 2000.
The decrease in the average balance of investment securities during the three
month period ended September 30, 2001 was principally attributable to issuer
redemptions of higher rate investment securities due to the decrease in market
interest rates. The decrease in the weighted average yield earned was consistent
with market conditions for the three months ended September 30, 2001.
Interest on net loans receivable decreased by $157 thousand or
4.2% for the three months ended September 30, 2001, when compared to the same
period in 2000. The decrease was attributable to a decrease of $167 thousand in
the average balance of net loans receivable outstanding and a decrease of 33
11
basis points in the weighted average yield earned on net loans receivable for
the three months ended September 30, 2001, when compared to the same period in
2000. The decreases in the average loan balance outstanding for the three months
ended September 30, 2001, was primarily attributable to an increased level of
mortgage prepayments and refinancing due to lower market rates on mortgages. The
Company's weighted average loan yield was also impacted by a $3.8 million
increase in nonaccrual commercial real estate loans at September 30, 2001, when
compared to the same period in 2000.
Interest on mortgage-backed securities decreased by $315
thousand or 24.4% for the three months ended September 30, 2001, when compared
to the same period in 2000. The decrease was attributable to a 80 basis point
decrease in the weighted average yield earned on mortgage-backed securities, and
a $10.8 million decrease in the average balance of mortgage-backed securities
for the three months ended September 30, 2001, when compared to the same period
in 2000. The decrease in the average balance of mortgage-backed securities was
primarily attributable to increased levels of prepayments and refinancings due
to lower mortgage market rates.
Interest Expense. Interest expense on deposits and escrows
decreased by $65 thousand or 3.9% for the three months ended September 30, 2001,
when compared to the same period in 2000. The decrease in interest expense on
deposits and escrows was principally attributable to a 31 basis point decrease
in the average yield paid on deposits and escrows, which was partially offset by
a $6.0 million increase in the average balance of interest-bearing deposits and
escrows for the three months ended September 30, 2001, when compared to the same
period in 2000. The average yield paid on interest-bearing deposits and escrows
decreased due to lower rates paid on time deposits and NOW accounts.
Interest expense on FHLB advances and other borrowings
decreased by $1.1 million or 32.2% for the three months ended September 30,
2001, when compared to the same period in 2000. The decrease was primarily
attributable to a $39.0 million or 19.3% decrease in the average balance of such
borrowings outstanding, and a 105 basis point decrease in the weighted average
rate paid on such borrowings for the three months ended September 30, 2001. The
reduction of borrowings outstanding was funded by issuer redemptions of higher
rate investment securities in the Company's portfolio.
Provision for Loan Losses. A provision for loan losses is
charged to earnings to maintain the total allowance at 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 considering past experience, current economic conditions, volume,
growth and composition of the loan portfolio, and other relevant factors.
The Company recorded a $37 thousand provision for possible
losses on loans for the three months ended September 30, 2001. At September 30,
2001, the Company's total allowance for loan losses amounted to $2.8 million or
1.5% of the Company's total loan portfolio, as compared to $2.0 million or 1.1%
at September 30, 2000. The Company believes that the additional loan loss
reserves are prudent and warranted at this time due to the weakening of the
national economy and the current work-out status of the Company's nonperforming
loans.
Non-Interest Income. Total non-interest income increased by $7
thousand or 4.0% for the three months ended September 30, 2001, when compared to
the same period in 2000. The increase in non-interest income for the three
months ended September 30, 2001, was primarily attributable to increases in
deposit related service fee income.
Non-Interest Expense. Total non-interest expense increased $20
thousand or 2.1% for the three months ended September 30, 2001 when compared to
the same period in 2000.
Compensation and employee benefits expense increased $19
thousand or 3.1% for the three months ended September 30, 2001, when compared to
the same period in 2000. The increase for the three
12
months ended September 30, 2001 was primarily attributable to cost of living
adjustments in employee salaries and benefits.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $2.5 million
during the three months ended September 30, 2001. Net cash provided by operating
activities was primarily comprised of $1.2 million of net income, an $875
thousand decrease in accrued interest receivable, and a $635 thousand increase
in accrued and deferred taxes, which were partially offset by a $152 thousand
decrease in accrued interest payable.
Funds provided by investing activities totaled $33.2 million
during the three months ended September 30, 2001. Primary sources of funds
during the three months ended September 30, 2001, included $73.2 million of
proceeds from repayments of investment and mortgage-backed securities, and a
$6.6 million decrease in net loans receivable, which were partially offset by
$46.5 million for purchases of investments and mortgage-backed securities,
including Federal Home Loan Bank stock. During the quarter ended September 30,
2001, principal investment purchases were comprised of: investment grade
commercial paper - $37.9 million with a weighted average yield of approximately
3.92%; and investment grade corporate bonds - $8.6 million with a weighted
average yield of approximately 4.06%. Major investment proceeds received during
the quarter ended September 30, 2001 were: callable government agency bonds -
$38.3 million with a weighted average rate of approximately 6.94%; and
investment grade commercial paper - $25.6 million with a weighted average yield
of approximately 4.30%. In most cases, the initial spread earned on investment
security purchases averaged approximately 23.2 basis points.
At September 30, 2001, the Company held $58.8 million of
mortgage-backed securities with an approximate weighted average yield of 6.2%.
The mortgage-backed securities purchases were made in order to mitigate the
principal redemptions on the Company's callable bond portfolio and earn a higher
yield with an expected average life profile comparable to longer-term callable
agency bonds. In order to mitigate risk associated with a general rise in market
interest rates, approximately $15.8 million or 26.9% of the Company's
mortgage-backed securities portfolio were floating rate with a weighted average
yield of approximately 4.4%.
Funds used for financing activities totaled $35.1 million for the
three months ended September 30, 2001. The primary financial use included a
$19.7 million decrease in other short-term borrowings, a $9.0 million decrease
in deposits and escrows, a $5.8 million decrease in FHLB advances, $441 thousand
in cash dividends paid on the Company's common stock, and $140 thousand in
purchased treasury stock. Management believes that it currently is maintaining
adequate liquidity and continues to better match funding sources with lending
and investment opportunities.
During the quarter ended September 30, 2001, the Company borrowed
approximately $48.9 million in various borrowings from the FHLB with a weighted
average rate of 3.76%, and incurred $25.0 million in other borrowings with a
weighted average rate of 3.62%. During the three months ended September 30,
2001, the Company repaid $54.8 million of FHLB advances and $44.7 million of
other borrowings.
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 FHLB advances and other borrowings. At September 30, 2001, the total
approved loan commitments outstanding amounted to $4.1 million. At the same
date, commitments under unused lines of credit amounted to $7.5 million and the
unadvanced portion of construction loans approximated $14.8 million.
Certificates of deposit scheduled to mature in one year or less at September 30,
2001, totaled $67.8 million. Management believes that a significant portion of
maturing deposits will remain with the Company.
13
Historically, the Company used its sources of funds primarily to
meet its ongoing commitments to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain a substantial portfolio of
investment securities. During the quarter ended September 30, 2001, the Company
experienced abnormally large issuer redemptions in its government agency
investment securities portfolio due to a 75 point reduction in the federal funds
rate, and a general downward trend in market interest rates. In response to this
phenomenon, the Company paid down a substantial portion of its short-term
borrowings and purchased investment grade commercial paper and corporate bonds
in order to partially mitigate the issuer redemptions of government agency
bonds. 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 October 30, 2001, the Company's Board of Directors declared a
cash dividend of $0.16 per share payable November 15, 2001, to shareholders of
record at the close of business on November 5, 2001. 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 or that, if paid, such
dividends will not be reduced or eliminated in future periods.
As of September 30, 2001, WVS Financial Corp. exceeded all
regulatory capital requirements and maintained Tier I and total risk-based
capital equal to $29.3 million or 14.0% and $31.9 million or 15.3%,
respectively, of total risk-weighted assets, and Tier I leverage capital of
$29.3 million or 7.75% of average quarterly assets.
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 September 30, 2001, totaled
approximately $4.9 million or 1.3% of total assets as compared to $5.0 million
or 1.3% at June 30, 2001. Nonperforming assets at September 30, 2001, consisted
of $3.3 million in commercial real estate loans, $1.4 million in construction
and land development loans, $224 thousand in single-family loans, $23 thousand
in commercial loans, and $4 thousand in consumer loans. During the three months
ended September 30, 2001, the Company collected and recognized approximately $49
thousand in past due interest on its nonperforming loans. Approximately $65
thousand of additional interest income would have been recorded during the three
months ended September 30, 2001, if the Company's nonaccrual and restructured
loans had been current in accordance with their original loan terms and
outstanding throughout the three months ended September 30, 2001. The Company
continues to work with the borrowers in an attempt to cure the defaults and is
also pursuing various legal avenues in order to collect on these loans.
14
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET AND LIABILITY MANAGEMENT
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.
As of September 30, 2001, the Company's asset and liability
management initiatives resulted in the following:
1) an aggregate of $47.9 million or 26.8% of the Company's net loan portfolio
had adjustable interest rates or maturities of less than 12 months;
2) $15.8 million or 26.9% of the Company's portfolio of mortgage-backed
securities (including collateralized mortgage obligations - "CMOs") were
secured by floating rate securities; and
3) the term structure of the Company's borrowings as of September 30, 2001 has
been extended as follows: 1-3 years: $8.0 million or 5.1%; 3-5 years: $4.2
million or 2.7%; over 5 years: $144.5 million or 92.2%.
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.
15
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.
September 30, June 30,
------------- -----------------------------
2001 2001 2000
--------- ---------- ----------
(Dollars in Thousands)
Interest-earning assets maturing or
repricing within one year $ 197,887 $ 155,928 $ 86,215
Interest-bearing liabilities maturing or
repricing within one year 123,578 137,232 275,814
--------- ---------- ----------
Interest sensitivity gap $ 74,304 $ 18,696 $ (189,599)
========= ========== ==========
Interest sensitivity gap as a percentage of
total assets 22.0% 4.7% (46.3)%
Ratio of assets to liabilities
maturing or repricing within one year 160.1% 113.6% 31.3%
During the quarter ended September 30, 2001, the Company markedly
improved its one year interest sensitivity gap by: (1) extending the term
structure of a portion of the Company's borrowings; (2) reducing the amount of
short-term borrowings; (3) increasing the amount of short-term commercial paper
investments; and (4) generally limiting incremental corporate bond purchases to
those with repricing dates within 2 years.
16
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 September 30, 2001. The table estimates the impact of an upward or
downward change in market interest rates of 100 and 200 basis points.
Stressed Repricing Gap
----------------------
Long Term
& Non
Month 3 Month 6 Month 12 Month 24 Month 36 Month 60 sensitive
------- ------- -------- -------- -------- -------- ---------
(Dollars in Thousands)
Base Case Up 200 bp
- -------------------
Cummulative
Gap ($'s) -16,768 -30,399 -45,529 -62,281 -68,974 -60,289 0
% of Total
Assets -4.6% -8.3% -12.4% -17.0% -18.8% -16.4% 0.0%
Base Case Up 100 bp
- -------------------
Cummulative
Gap ($'s) 55,050 42,719 32,481 35,617 40,331 67,498 0
% of Total
Assets 15.0% 11.7% 8.9% 9.7% 11.0% 18.4% 0.0%
Base Case No Change
- -------------------
Cummulative
Gap ($'s) 74,902 71,179 74,304 83,386 89,955 123,033 0
% of Total
Assets 20.4% 19.4% 20.3% 22.7% 24.5% 33.6% 0.0%
Base Case Down 100 bp
- ---------------------
Cummulative
Gap ($'s) 81,266 82,229 87,824 95,689 101,488 131,642 0
% of Total
Assets 22.2% 22.4% 24.0% 26.1% 27.7% 35.9% 0.0%
Base Case Down 200 bp
- ---------------------
Cummulative
Gap ($'s) 87,394 90,802 96,862 106,832 113,094 141,911 0
% of Total
Assets 23.8% 24.8% 26.4% 29.1% 30.9% 38.7% 0.0%
Beginning in the third quarter of fiscal 2001, the Company began
to utilize an income simulation model to measure interest rate risk and to
manage interest rate sensitivity. The Company believes that income simulation
modeling may enable the Company to more accurately 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.
17
The following table presents the simulated impact of a 100 and 200 basis point
upward or downward 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 September 30, 2001.
Analysis of Sensitivity to Changes in Market Interest Rates
-----------------------------------------------------------
Modeled Change in Market Interest Rates
-------------------------------------------------------------------
Estimated impact on: -200 -100 0 +100 +200
- --------------------
Change in net interest income -37.5% -19.1% 0.0% 17.5% 12.3%
Return on average equity 5.76% 9.57% 13.41% 16.81% 15.80%
Return on average assets 0.47% 0.79% 1.12% 1.37% 1.28%
Market value of equity (in $18,220 $27,173 $33,795 $39,580 $25,305
thousands)
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
September 30, 2001.
Anticipated Transactions
------------------------------------------------------------
(Dollars in Thousands)
Undisbursed construction and
land development loans
Fixed rate $ 6,310
7.77%
Adjustable rate $ 8,486
7.75%
Undisbursed lines of credit
Adjustable rate $ 7,508
6.93%
Loan origination commitments
Fixed rate $ 3,968
7.54%
Adjustable rate $ 170
8.40%
Letters of credit
Adjustable rate $ 277
9.00%
--------
$ 26,719
========
18
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
The Company is involved with various legal actions arising in
the ordinary course of business. Management believes the
outcome of these matters will have no material effect on the
consolidated operations or consolidated financial condition of
WVS Financial Corp.
ITEM 2. Changes in Securities and Use of Proceeds
-----------------------------------------
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
------ ------------------------------- ----
99 Independent Accountant's Report E-1
19
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.
November 14, 2001 BY: /s/ David J. Bursic
----------------------------------------
Date David J. Bursic
President and Chief Executive Officer
(Principal Executive Officer)
November 14, 2001 BY: /s/ Keith A. Simpson
----------------------------------------
Date Keith A. Simpson
Controller
20