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, 1997
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
-------------------------------- ---------------------
(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 November 12, 1997: 1,748,240 shares Common
Stock, $.01 par value.
WVS FINANCIAL CORP. AND SUBSIDIARY
INDEX
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial
Condition as of September 30, 1997
and June 30, 1997 (Unaudited)
Consolidated Statements of Income
for the Three Months Ended
September 30, 1997 and 1996 (Unaudited)
Consolidated Statements of Cash Flows
for the Three Months Ended September 30,
1997 and 1996 (Unaudited)
Consolidated Statements of Changes in
Stockholders' Equity for the Three Months
Ended September 30, 1997 (Unaudited)
Notes to Unaudited Consolidated
Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations for the Three Months Ended
September 30, 1997
Item 3. Quantitative and Qualitative Disclosures About
Market Risk for the Three Months Ended
September 30, 1997
PART II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of
Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
(in thousands)
September 30, June 30,
1997 1997
Assets
Cash and due from banks ................................ $ 619 $ 667
Interest-earning demand deposits ....................... 1,027 1,904
Investment securities available-for-sale
(amortized cost of $6,527 and $3,689) ............... 6,515 3,553
Investment securities held-to-maturity
(market value of $68,977 and $83,889) ............... 68,701 83,995
Mortgage-backed securities available-for-sale
(amortized cost of $17,383 and $18,417) ............. 17,443 18,280
Mortgage-backed securities held-to-maturity
(market value of $19,325 and $19,381) ............... 19,013 19,210
Federal Home Loan Bank stock, at cost .................. 3,672 3,927
Net loans receivable ................................... 160,470 158,134
Accrued interest receivable ............................ 2,688 2,809
Real estate owned ...................................... -- --
Premises and equipment ................................. 1,266 1,298
Deferred taxes and other assets ........................ 821 916
--------- ---------
TOTAL ASSETS ................................. $ 282,235 $ 294,693
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Savings Deposits:
Non-interest-bearing accounts ....................... $ 6,504 $ 7,283
NOW accounts ........................................ 13,581 15,177
Savings accounts .................................... 36,272 36,591
Money market accounts ............................... 11,245 12,103
Certificates of deposit ............................. 97,854 99,725
--------- ---------
Total savings deposits .............................. 165,456 170,879
Federal Home Loan Bank advances ........................ 68,832 77,857
Other borrowings ....................................... 9,782 6,784
Advance payments by borrowers for taxes and insurance .. 1,106 3,531
Accrued interest payable ............................... 2,132 1,768
Other liabilities ...................................... 1,050 985
--------- ---------
TOTAL LIABILITIES ............................ 248,358 261,804
--------- ---------
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
(in thousands)
September 30, June 30,
1997 1997
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; 1,747,920 and 1,747,280 shares issued and
and outstanding....................................... 17 17
Additional paid-in capital ............................. 17,315 17,236
Retained earnings, substantially restricted ............ 17,506 16,900
Unallocated shares - Recognition and Retention Plans ... (580) (631)
Unallocated shares - Employee Stock Ownership Plan ..... (413) (453)
--------- ---------
33,845 33,069
Unrealized gain (loss) on available-for-sale securities 32 (180)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY .......................... 33,877 32,899
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ... $ 282,235 $ 294,693
========= =========
See accompanying notes to consolidated financial statements.
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands)
Three Months Ended
September 30,
1997 1996
---------- ----------
INTEREST AND DIVIDEND INCOME:
Loans ............................................... $ 3,266 $ 3,083
Investment securities ............................... 1,568 1,210
Mortgage-backed securities .......................... 641 711
Interest-earning deposits with other institutions ... 14 28
Federal Home Loan Bank stock ........................ 61 33
---------- ----------
Total interest and dividend income ............. 5,550 5,065
---------- ----------
INTEREST EXPENSE:
Deposits ............................................ 1,784 1,773
Borrowings .......................................... 1,178 747
Advance payments by borrowers for taxes and insurance 7 8
---------- ----------
Total interest expense ......................... 2,969 2,528
---------- ----------
NET INTEREST INCOME ...................................... 2,581 2,537
PROVISION FOR LOAN LOSSES ................................ -- 30
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ...... 2,581 2,507
---------- ----------
NON-INTEREST INCOME:
Service charges on deposits ......................... 52 48
Investment securities gains ......................... -- 26
Other ............................................... 38 36
---------- ----------
Total non-interest income ...................... 90 110
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WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands)
Three Months Ended
September 30,
1997 1996
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits ...................... 757 636
Occupancy and equipment ............................. 102 100
Deposit insurance premium ........................... 27 1,239
Data processing ..................................... 43 42
Correspondent bank service charges .................. 31 28
Other ............................................... 166 158
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Total non-interest expense ..................... 1,126 2,203
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INCOME BEFORE INCOME TAXES ............................... 1,545 414
INCOME TAXES ............................................. 610 164
---------- ----------
NET INCOME ............................................... $ 935 $ 250
========== ==========
EARNINGS PER SHARE:
Primary ............................................. $ 0.53 $ 0.14
Fully Diluted ....................................... $ 0.53 $ 0.14
AVERAGE SHARES OUTSTANDING:
Primary ............................................. 1,773,670 1,741,995
Fully Diluted ....................................... 1,776,386 1,743,938
See accompanying notes to consolidated financial statements.
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three Months Ended
September 30,
1997 1996
OPERATING ACTIVITIES
Net income ........................................................ $ 935 $ 250
Adjustments to reconcile net income to cash provided by operating
activities:
Provision for loan and real estate owned losses ................ -- 30
Gain on sale of Real Estate Owned .............................. -- (8)
Gain on sale of mortgage-backed securities ..................... -- (26)
Depreciation and amortization, net ............................. 33 33
Amortization of discounts, premiums and deferred loan fees ..... 11 17
Amortization of ESOP, RRP and deferred and unearned compensation 161 93
Decrease in accrued interest receivable ........................ 121 234
Increase in accrued interest payable ........................... 364 108
Increase (decrease) in accrued and deferred taxes .............. 94 (479)
Other, net ..................................................... (42) 991
-------- --------
Net cash provided by operating activities ................... 1,677 1,243
-------- --------
INVESTING ACTIVITIES
Available-for-sale:
Purchases of investments and mortgage-backed securities ........ (2,838) (490)
Proceeds from repayments of investments and mortgage-backed
securities ................................................... 1,037 432
Proceeds from sale of investments and mortgage-backed securities -- 1,665
Held-to-maturity:
Purchases of investments and mortgage-backed securities ........ (15,571) (18,183)
Proceeds from repayments of investments and mortgage-backed
securities ..................................................... 31,088 10,033
Increase in net loans receivable .................................. (2,377) (459)
Sale of real estate owned ......................................... -- 47
Decrease (increase) in FHLB stock ................................. 255 (468)
Purchases of premises and equipment ............................... (1) (18)
-------- --------
Net cash provided by (used for) investing activities ........ 11,593 (7,441)
-------- --------
See accompanying notes to consolidated financial statements.
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three Months Ended
September 30,
1997 1996
-------- --------
FINANCING ACTIVITIES
Net decrease in transaction and passbook accounts ................... (3,552) (2,511)
Net decrease in certificates of deposit ............................. (1,871) (598)
Net increase (decrease) in FHLB borrowings .......................... (9,025) 9,357
Net increase in other borrowings .................................... 2,998 1,142
Net decrease in advance payments by borrowers for taxes and insurance (2,425) (2,510)
Net proceeds from issuance of common stock .......................... 9 2
Cash dividends paid ................................................. (329) (162)
-------- --------
Net cash (used) provided by financing activities .............. (14,195) 4,720
-------- --------
Decrease in cash and cash equivalents ......................... (925) (1,478)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD ................ 2,571 2,727
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD ...................... $ 1,646 $ 1,249
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits, escrows and borrowings .................. $ 2,605 $ 2,420
Income taxes .................................................. 625 655
Noncash item:
Foreclosed mortgage loans transferred to real estate owned .... -- 64
See accompanying notes to consolidated financial statements.
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
Net
Unrealized Retained
Additional Unallocated Unallocated Gain Earnings-
Common Paid-in Shares Held Shares Held (Loss) on Substantially
Stock Capital by ESOP by RRP Securities Restricted Total
----- ------- ------- ------ ---------- ---------- -----
Balance at June 30, 1997 $ 17 $17,236 $ (453) $ (631) $ (180) $16,900 $32,889
Release of earned Employee
Stock Ownership Plan (ESOP)
shares 70 40 110
Accrued compensation expense
for Recognition and
Retention Plans (RRP) 51 51
Exercise of Stock Options 9 9
Change in unrealized loss,
net of income taxes of $110 212 212
Cash dividends declared
($0.20 per share) (329) (329)
Net income 935 935
Balance at September 30, 1997
------- ------- ----------- ----------- ----------- ------- -------
$ 17 $17,315 $ (413) $ (580) $ 32 $17,506 $33,877
======= ======= =========== =========== =========== ======= =======
See accompanying notes to consolidated financial statements.
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, 1997 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 1,773,670 for the
three months ended September 30, 1997.
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 1,776,386 for the three months ended
September 30, 1997.
3. LITIGATION
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.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share", effective for financial statements issued for periods ending
after December 15, 1997. The new standard specifies the computation,
presentation and disclosure requirements for earnings per share for
entities with publicly held common stock. The Company does not
anticipate adoption to have material impact on presentation and
disclosure for earnings per share.
In July 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income". Statement No. 130 is effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for
reporting and presentation of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. It requires that all items are required to be
recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is presented with the
same prominence as other financial statements. Statement No. 130
requires that companies (i) classify items of other comprehensive
income by their nature in a financial statement and (ii) display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section
of the statement of financial condition. Reclassification of financial
statements for earlier periods provided for comprehensive purposes is
required.
WVS FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
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 September 30,1997.
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 $282.2 million at September 30, 1997 as
compared to $294.7 million at June 30, 1997. The $12.5 million or 4.2% decline
in total assets was primarily comprised of a $13.6 million or 10.6% decrease in
investment and mortgage-backed securities, including Federal Home Loan Bank
("FHLB") stock, which was partially offset by a $121 thousand or 4.3% decrease
in accrued interest receivable. The Company's total liabilities decreased $13.4
million or 5.1% to $248.4 million as of September 30, 1997 from $261.8 million
as of June 30, 1997. The $13.4 million decrease in total liabilities was
primarily comprised of a $6.0 million or 7.1% decrease in Federal Home Loan Bank
advances and other borrowings and a $5.4 million or 3.2% decrease in deposits.
Total stockholders' equity increased $1.0 million or 3.0% to $33.9 million as of
September 30, 1997 from $32.9 million as of June 30, 1997, primarily due to $935
thousand of Company net income for the quarter ended September 30, 1997.
ASSET AND LIABILITY MANAGEMENT. The Company continued a strategy
designed to reduce 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 growth program in order to enhance net
interest income; (ii) maintaining 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 continued its investment growth program, originally
initiated in the third quarter of fiscal 1994, 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 FHLB advances and
short-term borrowings. With this strategy, the Company increases its net
interest income, but also faces the risk, during periods of rising market
interest rates, that it may experience a decline in net interest income if the
rate paid on its various 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 growth program, including: (i) the
average outstanding daily balance of total borrowings, computed quarterly, may
not exceed approximately $85.0 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. In most cases, the initial yield
spread earned on investment security purchases exceeded approximately two
hundred basis points.
The Company has continued to 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 was experienced during the quarter ended September 30, 1997, 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 a
significant portion of its purchases of callable bonds with short-term
borrowings. Approximately $29.3 million of callable agency bonds with an
estimated weighted average rate of 7.7% were called during the quarter ended
September 30, 1997. During the quarter ended September 30, 1997, the Company
purchased approximately $14.6 million of callable bonds with an approximate
weighted average yield to call and maturity of 7.9% and 7.6%, respectively. The
callable agency bond purchases, totaling $14.6 million, are summarized by
initial term to call as follows: $3.6 million within three months, $1.0 million
with greater than three months and within six months, $8.0 million with greater
than six months and within twelve months and $2.0 million within twenty-four
months.
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 quarter ended September 30, 1997, the Company repaid
approximately $9.0 million of FHLB advances with a weighted average rate of
5.56% and increased other borrowings by approximately $3.0 million with a
weighted average rate of 5.67%. Due to a decline in market interest rates
experienced during the quarter ended September 30, 1997, and the associated
increase in the amount of investment securities redeemed, the Company shortened
the maturity structure of its incremental borrowings to reduce its cost of funds
and to better match the maturities of its borrowings with the possible early
repayment of a portion of its investment portfolio.
As of September 30, 1997, the implementation of these asset and
liability management initiatives resulted in the following: (i) an aggregate of
$49.8 million or 31.0% of the Company's net loan portfolio had adjustable
interest rates or maturities of less than 12 months; (ii) $18.8 million or 51.6%
of the Company's portfolio of mortgage-backed securities (including CMOs) were
secured by floating rate securities; (iii) $3.8 million or 5.1% of the Company's
investment securities portfolio had scheduled maturities of one year or less;
and (iv) $67.2 million or 89.4% 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 13.1% of total assets at September 30, 1997 as compared
to a negative 13.3% at June 30, 1997, in each instance, based on certain
assumptions by management with respect to the repricing of certain assets and
liabilities. At September 30, 1997, the Company's interest-earning assets
maturing or repricing within one year totaled $96.7 million while the Company's
interest-bearing liabilities maturing or repricing within one year totaled
$133.8 million, providing a deficiency of interest-earning assets over
interest-bearing liabilities of $37.1 million. At September 30, 1997, the
percentage of the Company's assets to liabilities maturing or repricing within
one year was 72.3%.
RESULTS OF OPERATIONS
General. WVS reported net income of $935 thousand, or $0.53 per share
(primary and fully diluted), for the three months ended September 30, 1997 as
compared to $250 thousand or $0.14 per share for the same period in 1996. Net
income increased $685 thousand or 274.0% for the three months ended September
30, 1997 when compared to the same period in 1996. The increase was primarily
attributable to $1.1 million decrease in non-interest expense associated with a
$1.1 million one-time charge to recapitalize the Savings Association Insurance
Fund ("SAIF") as required by federal law, during the quarter ended September 30,
1996, a $44 thousand increase in net interest income and a $30 thousand decrease
in the provision for loan losses, which was offset by a $446 thousand increase
in income tax expense and a $20 thousand decrease in non-interest income.
Excluding the one-time SAIF charge, first quarter net income would have totaled
approximately $941 thousand or $0.54 per share on both a primary and fully
diluted basis. The SAIF recapitalization charge is expected to significantly
reduce future FDIC insurance costs.
Net Interest Income. The Company's net interest income increased by $44
thousand or 1.7% during the three months ended September 30, 1997, when compared
to the same period in 1996. The increase resulted from a $485 thousand or 9.6%
increase in total interest income which was partially offset by a $441 thousand
or 17.4% increase in total interest expense for the three months ended September
30, 1997, when compared to the same period in the prior year.
Interest Income. Interest on net loans receivable increased by $183
thousand or 5.9% for the three months ended September 30, 1997 when compared
with the same period in 1996. The increase was attributable to an increase of
$10.8 million in the average balance of loans receivable outstanding which more
than offset a decrease in the weighted average yield earned on loans receivable
of 9 basis points for the three months ended September 30, 1997 when compared to
the same period in 1996. The increase in the average loan balance outstanding
was attributable to higher levels of real estate and consumer loan originations
during the peak summer lending season.
Interest on mortgage-backed securities decreased by $70 thousand or
9.8% for the three months ended September 30, 1997 when compared with the same
period in 1996. The decrease was attributable to a decrease of $4.0 million in
the average balance of mortgage-backed securities outstanding during the three
months ended September 30, 1997 when compared to the same period in 1996. The
decrease in the average balance of mortgage-backed securities outstanding was
due to the sale of approximately $1.7 million of mortgage-backed securities
during the three months ended September 30, 1996, and periodic principal
repayments.
Interest and dividend income on interest-bearing deposits with other
institutions, investment securities and FHLB stock ("other investment
securities") increased $372 thousand or 29.3% for the three months ended
September 30, 1997 when compared to the same period in 1996. The increase was
attributable to an increase of $15.6 million in the average balance of other
investment securities outstanding and an increase in the weighted average yield
earned on other investment securities of 43 basis points for the three months
ended September 30, 1997 when compared to the same period in 1996. The increase
in the average balance of other investment securities was principally
attributable to purchases of investment securities under the Company's
investment growth program.
Interest Expense. Interest expense on deposits and escrows increased by
$11 thousand or 0.6% for the three months ended September 30, 1997 when compared
with the same period in 1996. The increase was principally attributable to an
increase in the weighted average yield paid of 5 basis points which was
partially offset by a decrease of $1.1 million in the average balance of
deposits and escrows outstanding for the three months ended September 30, 1997
when compared to the same period in 1996. The average yield paid on deposits
increased due to higher rates paid on time deposits.
Interest expense on FHLB advances and other borrowings increased by
$431 thousand or 57.7% for the three months ended September 30, 1997 when
compared to the same period in 1996. The increase was primarily attributable to
a $24.7 million or 44.0% increase in the average balance of such borrowings
outstanding. The increased amount of borrowings outstanding was used to fund
the Company's investment growth program.
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, past loan loss experience, current economic conditions, volume,
growth and composition of the loan portfolio, and other relevant factors.
The Company's provision for possible losses on loans decreased $30
thousand or 100.0% for the three months ended September 30, 1997 when compared
to the same period in 1996. The Company's total allowance for loan losses at
September 30, 1997 amounted to $2.0 million or 1.1% of the Company's total loan
portfolio, as compared to $2.0 million or 1.2% at June 30, 1997.
Non-Interest Income. Total non-interest income decreased $20 thousand
or 18.2% during the three months ended September 30, 1997 when compared to the
same period in 1996, primarily due to a $26 thousand decrease in the gain on
sale of investment securities, which was partially offset by a $4 thousand
increase in service charges on deposits.
Non-Interest Expense. Total non-interest expense decreased $1.1 million
or 48.9% during the three months ended September 30, 1997 when compared to the
same period in 1996.
Federal deposit insurance premiums decreased $1.2 million during the
quarter ended September 30, 1997 when compared to the same period in 1996. The
decrease was attributable to the absence of a $1.1 million one-time charge to
recapitalize the SAIF, as required by federal law, incurred during the quarter
ended September 30, 1996.
Compensation and employee benefits increased $121 thousand or 19.0%
during the quarter ended September 30, 1997 when compared to the same period in
1996. The increase was primarily attributable to a $72 thousand increase in
Employee Stock Ownership Plan ("ESOP") amortization and a $37 thousand increase
relating to employee compensation adjustments.
Other non-interest expense (e.g. director's compensation expense,
advertising, provision for loss on real estate owned, legal expense, transfer
agent expense, etc.) increased $14 thousand or 4.3% during the quarter ended
September 30, 1997 when compared to the same period in 1996.
Income Tax Expense. Income tax expense increased by $446 thousand or
272.0% during the three months ended September 30, 1997, when compared to the
same period in 1996. The increase in income tax expense is primarily
attributable to a $1.1 million or 273.2% increase in income before taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $1.7 million during
the three months ended September 30, 1997. Net cash provided by operating
activities was primarily comprised of $935 thousand of net income and a $364
thousand increase in accrued interest payable.
Funds provided by investing activities totaled $11.6 million during the
three months ended September 30, 1997. Primary sources of funds during the three
months ended September 30, 1997 include $32.1 million of proceeds from
repayments of investment and mortgage-backed securities which was partially
offset by $18.4 million used for purchases of investment securities and a $2.4
million increase in net loans receivable.
Funds used by financing activities totaled $14.2 million for the three
months ended September 30, 1997. Primary financial uses include a $9.0 million
decrease in Federal Home Loan Bank advances, a $5.4 million decrease in deposits
and a $2.4 million decrease in advance payments by borrowers for taxes and
insurance, which was partially offset by a $3.0 million increase in other
borrowings. 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 September 30, 1997, $67.6 million or 40.9% of the Company's total deposits
consisted of core deposits. 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
short-term borrowings. At September 30, 1997, the total approved loan
commitments outstanding amounted to $3.9 million. At the same date commitments
under unused lines of credit amounted to $6.3 million and the unadvanced portion
of construction loans approximated $11.8 million. Certificates of deposit
scheduled to mature in one year or less at September 30, 1997 totaled $59.7
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 savings certificates 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 $15.0 million line of credit with the
FHLB, which is scheduled to mature on March 25, 1998 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 October 28, 1997 the Company's Board of Directors declared a cash
dividend of $0.30 per share payable November 20, 1997 to shareholders of record
at the close of business on November 10, 1997. 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
future 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, 1997, WVS Financial Corp. exceeded all regulatory
capital requirements and maintained Tier I and total risk-based capital equal to
$33.8 million or 24.9% and $35.6 million or 26.1%, respectively, of total
risk-weighted assets, and Tier I leverage capital of $33.8 million or 11.7% 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, 1997 totaled
approximately $545 thousand or 0.19% of total assets as compared to $274
thousand or 0.09% of total assets as of June 30, 1997. Nonperforming assets at
September 30, 1997 consisted of $480 thousand in commercial real estate loans,
$1 thousand in single-family loans, and $64 thousand in consumer loans.
Approximately $2 thousand of additional interest income would have been recorded
during the three months ended September 30, 1997, 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 September 30, 1997.
QUANTITATIVE 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 U.S. 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.
The Federal Reserve Board, together with the Office of the Comptroller
of the Currency and the Federal Deposit Insurance Corporation, adopted a Joint
Agency Policy Statement on Interest-Rate Risk, effective June 26, 1996. The
policy statement provides guidance to examiners and bankers on sound practices
for managing interest rate risk, which will form the basis for ongoing
evaluation of the adequacy of interest-rate risk management at supervised
institutions. The policy statement also outlines fundamental elements of sound
management that have been identified in prior Federal Reserve guidance and
discusses the importance of these elements in the context of managing
interest-rate risk. Specifically, the guidance emphasizes the need for active
board of director and senior management oversight and a comprehensive
risk-management process that effectively identifies, measures, and controls
interest-rate risk. 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.
Several techniques might be used by an institution to minimize
interest-rate risk. One approach used by the Company is to periodically analyze
its assets and liabilities and make future financing and investment decisions
based on payment streams, interest rates, contractual maturities, and estimated
sensitivity to actual or potential changes in market interest rates. Such
activities fall under the broad definition of asset/liability management. The
Company's primary asset/liability management technique is the measurement of the
Company's asset/liability gap-that is, the difference between the cash flow
amounts of interest-sensitive assets and liabilities that will be refinanced (or
repriced) during a given period. For example, if the asset amount to be repriced
exceeds the corresponding liability amount for a certain day, month, year, or
longer period, the institution is in an asset-sensitive gap position. In this
situation, net interest income would increase if market interest rates rose or
decrease if market interest rates fell. If, alternatively, more liabilities than
assets will reprice, the institution is in a liability-sensitive position.
Accordingly, net interest income would decline when rates rose and increase when
rates fell. Also, these examples assume that interest-rate changes for assets
and liabilities are of the same magnitude, whereas actual interest-rate changes
generally differ in magnitude for assets and liabilities.
An institution could also manage interest-rate risk by: selling
existing assets or repaying certain liabilities; matching repricing periods for
new assets and liabilities for example, by shortening terms of new loans or
investments; hedging existing assets, liabilities, or anticipated transactions.
An institution might also invest in more complex financial instruments intended
to hedge or otherwise change interest-rate risk. Interest-rate swaps, futures
contracts, options on futures, and other such derivative financial instruments
often are used for this purpose. Because these instruments are sensitive to
interest-rate changes, they require management expertise to be effective.
Financial institutions are also subject to prepayment risk in falling rate
environments. For example, mortgage loans and other financial assets may be
prepaid by a debtor so that the debtor may refund its obligations at new, lower
rates. The Company has not purchased derivative financial instruments in the
past and does not presently intend to purchase such instruments in the near
future. Prepayments of assets carrying higher rates reduce the Company's
interest income and overall asset yields. A large portion of an institution's
liabilities may be short term or due on demand, while most of its assets may be
invested in long-term loans or investments. Accordingly, the Company seeks to
have in place sources of cash to meet short-term demands. These funds can be
obtained by increasing deposits, borrowing, or selling assets. Also, FHLB
advances and wholesale borrowings have become increasingly important sources of
liquidity for the Company.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of September 30,
1997 based on the information and assumptions set forth in the notes. The
Company believes that the assumptions utilized, which are based on statistical
data provided by a federal regulatory agency in the Company's market area, are
reasonable. The Company had no derivative financial instruments, or trading
portfolio, as of September 30, 1997. The expected maturity date values for loans
receivable, mortgage-backed securities, and investment securities were
calculated by adjusting the instrument's contractual maturity date for
expectations of prepayments, as set forth in the notes. Similarly, expected
maturity date values for interest-bearing core deposits were calculated based
upon estimates of the period over which the deposits would be outstanding as set
forth in the notes. With respect to the Company's adjustable rate instruments,
expected maturity date values were measured by adjusting the instrument's
contractual maturity date for expectations of prepayments, as set forth in the
notes. From a risk management perspective, however, the Company believes that
repricing dates, as opposed to expected maturity dates, may be a more relevant
metric in analyzing the value of such instruments. Similarly, substantially all
of the Company's investment securities portfolio is comprised of callable
government agency securities. Company borrowings were tabulated by contractual
maturity dates and without regard to any conversion or repricing dates.
EXPECTED MATURITY DATE-QUARTER ENDED SEPTEMBER 30,
There- Fair
1998 1999 2000 2001 2002 after Total Value
------- ------- ------- ------- ------- -------- -------- --------
ON-BALANCE SHEET
FINANCIAL INSTRUMENTS
Interest-earning assets:
Loans receivable (1)(2)(3)(4)
Fixed rate $25,879 $17,330 $13,305 $11,338 $8,602 $41,873 $118,327 $119,468
Average interest rate 8.24% 7.99% 7.91% 7.86% 7.77% 7.57%
Adjustable rate 8,559 7,250 6,130 5,173 4,356 12,940 44,408 46,995
Average interest rate(5) 8.07% 8.07% 8.08% 8.09% 8.10% 7.78%
Mortgage-backed securities
Fixed rate 1,035 937 407 1,621 232 13,395 17,627 18,441
Average interest rate 6.19% 7.02% 6.36% 7.59% 7.44% 7.03%
Adjustable rate --- --- --- --- --- 18,769 18,769 18,327
Average interest rate(6) 0.00% 0.00% 0.00% 0.00% 0.00% 6.86%
Investments(7) 11,008 500 --- 500 --- 66,892 78,900 79,164
Average interest rate 7.27% 6.40% 0.00% 6.41% 0.00% 7.57%
Interest-bearing deposits 1,027 --- --- --- --- --- 1,027 1,027
Average interest rate 6.31% 0.00% 0.00% 0.00% 0.00% 0.00%
------- ------- ------- ------- ------- -------- -------- --------
Total $47,508 $26,017 $19,842 $18,632 $13,190 $153,869 $279,058 $283,422
Interest-bearing liabilities:
Interest-bearing deposits
and escrows(8)(9)(10) $86,523 $22,480 $23,673 $ 7,936 $ 7,936 $ 22,211 $166,562 $166,721
Average interest rate 4.57% 4.46% 4.41% 3.65% 3.65% 2.22%
Borrowings 19,114 8,000 8,000 --- 53,500 --- 78,614 78,283
Average interest rate 5.80% 5.89% 5.89% 0.00% 5.74% 0.00%
------- ------- ------- ------- ------- -------- -------- --------
Total $105,637 $30,480 $31,673 $ 7,936 $61,436 $ 22,211 $245,176 $245,004
(1) Net of undisbursed loan proceeds and does not include net deferred loan fees
or the allowance for loan losses.
(2) For single-family residential loans, assumes annual amortization and
prepayment rate at 15% for adjustable rate loans, and 11% to 37% for fixed rate
loans. For multi-family residential loans and other loans, assumes amortization
and prepayment rate of 12%.
(3) For second mortgage loans, assumes annual amortization and prepayment rate
of 18%.
(4) Consumer loans assumes amortization and prepayment rate of 13%.
(5) Substantially all of the Company's adjustable rate loans reprice on an
annual basis based upon changes in the one-year constant maturity treasury index
with various market based annual and lifetime interest rate caps and floors.
(6) Substantially all of the Company's adjustable rate mortgage-backed
securities reprice on a monthly basis based upon changes in the one month LIBOR
index with various lifetime caps and floors.
(7) Totals include the Company's investment in Federal Home Loan Bank stock.
Amounts adjusted to reflect investment securities called through October 31,
1997 totaling approximately $7,165.
(8) For regular savings accounts, assumes an annual decay rate of 17% for three
years or less, 16% for more than three through five years and 14% for more than
five years.
(9) For NOW accounts, assumes an annual decay rate of 37% for one year or less,
32% for more than one through three years and 17% for more than three years.
(10) For money market deposit accounts, assumes an annual decay rate of 79% for
one year or less and 31% for more than one year.
The Company's investment securities decreased from $91.2 million at
June 30, 1997 to $79.2 million at September 30, 1997. The $12.0 million or 13.2%
decrease was primarily attributable to $29.1 million of callable government
agency bonds called during the quarter ended September 30, 1997. Investment
security purchases during the quarter ended September 30, 1997 totaled $14.6
million. The Savings Bank's interest-bearing deposits and escrows decreased from
$174.4 million at June 30, 1997 to $166.7 million at September 30, 1997. The
$7.7 million or 4.4% decrease was primarily attributable to customer withdrawals
for local real estate taxes, and to a lesser extent, competition for time
deposits in the local market. Borrowings decreased from $84.0 million at June
30, 1997 to $78.3 million at September 30, 1997. The $5.7 million or 6.8%
decrease was primarily attributable to the Company's repayment of such
borrowings in response to the large volume of callable government agency
redemptions discussed above. The Company intends to continue to pursue its
investment growth program, as market conditions permit, according to parameters
discussed under "Asset and Liability Management".
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,
1997.
Anticipated Transactions
------------------------
Undisbursed construction and
land development loans
Fixed rate ........... $ 4,244
8.89%
Adjustable rate ...... 7,542
9.43%
Undisbursed lines of credit
Adjustable rate ...... 6,205
8.65%
Loan origination commitments
Fixed rate ........... 1,157
8.75%
Adjustable rate ...... 2,730
8.64%
Letters of credit
Adjustable rate ...... 82
11.50%
-------
$21,960
The Company believes that there were no material changes to the
Company's anticipated transactions during the quarter ended September 30, 1997.
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
(a) An annual meeting of stockholders was held on October 28,
1997.
(b) Not applicable.
(c) Two matters were voted upon at the annual stockholder
meeting held on October 28, 1997: Item 1: Proposal to
elect two directors for a four-year term or until their
successors are elected and qualified; Item 2: Proposal to
ratify the appointment by the Board of Directors of S. R.
Snodgrass, A.C. as the Company's independent auditors for
the fiscal year ending June 30, 1998.
Each of the two proposals received stockholder approval.
The voting record with respect to each item voted upon is
enumerated below:
Item Nominee
Number (If Applicable) FOR AGAINST ABSTAIN
------ --------------- --- ------- -------
1 James S. McKain, Jr. 1,536,908 3,094 0
James H. Ritchie 1,540,441 2,694 0
2 Election of Auditors 1,533,931 2,537 6,667
There were no broker non-votes cast with respect to any matter
voted upon.
(d) 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
11 Statement re
computation of
per share earnings
27 Financial Data
Schedule
(b) Not applicable.
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.
Date: November 12, 1997 BY: /s/ Robert C. Sinewe
--------------------
Robert C. Sinewe
President and Chief
Executive Officer
Date: November 12, 1997 BY: /s/ David J. Bursic
-------------------
David J. Bursic
Senior Vice President, Treasurer
and Chief Financial Officer