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, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-22444
WVS Financial Corp.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1710500
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9001 Perry Highway
Pittsburgh, Pennsylvania 15237
------------------------------- ----------
(Address of principal (Zip Code)
executive offices)
(412) 364-1911
-------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. YES [ X ] NO [ ]
Shares outstanding as of November 9, 1999: 3,022,532 shares Common
Stock, $.01 par value.
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999
and June 30, 1999 (Unaudited) 3
Consolidated Statements of Income for the
Three Months Ended September 30, 1999
and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows
for the Three Months Ended September 30,
1999 and 1998 (Unaudited) 5
Consolidated Statements of Changes in
Stockholders' Equity for the Three Months
Ended September 30, 1999 (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, 1999 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk for the Three Months Ended
September 30, 1999 16
PART II. OTHER INFORMATION PAGE
- -------- ----------------- ----
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
September 30, 1999 June 30, 1999
------------------ -------------
Assets
Cash and due from banks $ 890 $ 745
Interest-earning demand deposits 1,264 1,148
Investment securities available-for-sale
(amortized cost of $1,380 and $1,380) 1,358 1,402
Investment securities held-to-maturity
(market value of $106,650 and $87,850) 111,290 90,764
Mortgage-backed securities available-for-sale
(amortized cost of $8,475 and $9,342) 8,364 9,273
Mortgage-backed securities held-to-maturity
(market value of $67,882 and $62,167) 68,943 63,107
Federal Home Loan Bank stock, at cost 7,625 6,195
Net loans receivable (allowance for loan losses of $1,842
and $1,842) 175,590 170,327
Accrued interest receivable 2,854 3,105
Premises and equipment 1,126 1,154
Deferred taxes and other assets 1,353 1,188
--------- ---------
TOTAL ASSETS $ 380,657 $ 348,408
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Savings Deposits:
Non-interest-bearing accounts $ 2,389 $ 9,037
NOW accounts 23,454 16,668
Savings accounts 37,075 38,923
Money market accounts 11,842 12,610
Certificates of deposit 94,330 93,876
--------- ---------
Total savings deposits 169,090 171,114
Federal Home Loan Bank advances 152,500 116,900
Other borrowings 26,818 25,820
Advance payments by borrowers for taxes and insurance 1,223 3,130
Accrued interest payable 2,425 1,929
Other liabilities 1,970 1,577
--------- ---------
TOTAL LIABILITIES 354,026 320,470
--------- ---------
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands)
(continued)
September 30, 1999 June 30, 1999
------------------ -------------
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;
3,668,220 and 3,668,060 shares issued 37 37
Additional paid-in capital 19,143 19,062
Treasury stock (632,368 shares at cost) (9,638) (7,596)
Retained earnings, substantially restricted 17,669 17,024
Accumulated other comprehensive loss (88) (31)
Unallocated shares - Recognition and Retention Plans (300) (326)
Unallocated shares - Employee Stock Ownership Plan (192) (232)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 26,631 27,938
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 380,657 $ 348,408
========= =========
See accompanying notes to consolidated financial statements.
3
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands)
Three Months Ended
September 30,
-------------------------
1999 1998
---------- ----------
INTEREST AND DIVIDEND INCOME:
Loans $ 3,417 $ 3,189
Investment securities 1,853 1,481
Mortgage-backed securities 1,215 788
Interest-earning deposits with other institutions 8 15
Federal Home Loan Bank stock 116 81
---------- ----------
Total interest and dividend income 6,609 5,554
---------- ----------
INTEREST EXPENSE:
Deposits 1,582 1,689
Borrowings 2,181 1,342
Advance payments by borrowers for taxes and
insurance 6 7
---------- ----------
Total interest expense 3,769 3,038
---------- ----------
NET INTEREST INCOME: 2,840 2,516
PROVISION FOR LOAN LOSSES --- ---
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,840 2,516
---------- ----------
NON-INTEREST INCOME:
Service charges on deposits 76 61
Other 59 41
---------- ----------
Total non-interest income 135 102
---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 756 691
Occupancy and equipment 91 94
Deposit insurance premium 25 26
Data processing 44 46
Correspondent bank service charges 35 29
Other 160 175
---------- ----------
Total non-interest expense 1,111 1,061
---------- ----------
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands)
(continued)
Three Months Ended
September 30,
-------------------------
1999 1998
---------- ----------
INCOME BEFORE INCOME TAXES 1,864 1,557
INCOME TAXES 727 607
---------- ----------
NET INCOME $ 1,137 $ 950
========== ==========
EARNINGS PER SHARE:
Basic $ 0.37 $ 0.26
Diluted $ 0.37 $ 0.26
AVERAGE SHARES OUTSTANDING:
Basic 3,056,406 3,580,794
Diluted 3,084,253 3,612,446
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,
----------------------
1999 1998
-------- --------
OPERATING ACTIVITIES
Net income $ 1,137 $ 950
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization, net 29 29
Amortization of discounts, premiums and deferred loan fees --- (161)
Amortization of ESOP, RRP and deferred and unearned
compensation 146 88
Decrease (increase) in accrued interest receivable 251 (547)
Increase in accrued interest payable 495 260
Decrease in accrued and deferred taxes 74 36
Other, net 199 (43)
-------- --------
Net cash provided by operating activities 2,331 612
-------- --------
INVESTING ACTIVITIES
Available-for-sale:
Purchases of investments and mortgage-backed securities --- (14,136)
Proceeds from repayments of investments and mortgage-backed
securities 869 25,229
Held-to-maturity:
Purchases of investments and mortgage-backed securities (32,913) (54,094)
Proceeds from repayments of investments and mortgage-backed
securities 6,611 25,062
(Increase) decrease in net loans receivable (5,325) 3,813
Increase in FHLB stock (1,430) (424)
Other, net (18) ---
-------- --------
Net cash used for investing activities (32,206) (14,550)
-------- --------
See accompanying notes to consolidated financial statements.
5
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three Months Ended
September 30,
-----------------------
1999 1998
-------- --------
FINANCING ACTIVITIES
Net decrease in transaction and passbook accounts (2,477) (3,857)
Net increase in certificates of deposit 454 896
Net increase in FHLB advances 35,600 2,643
Net increase in other borrowings 998 16,764
Net decrease in advance payments by borrowers for taxes and
insurance (1,907) (2,356)
Net proceeds from issuance of common stock 1 230
Purchase of treasury stock (2,042) (749)
Cash dividends paid (491) (548)
-------- --------
Net cash provided by financing activities 30,136 13,023
-------- --------
Increase (decrease) in cash and cash equivalents 261 (915)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 1,893 2,506
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 2,154 $ 1,591
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits, escrows and borrowings $ 3,274 $ 2,778
Income taxes 625 585
See accompanying notes to consolidated financial statements.
6
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands)
Accum.
Unallocated Other Retained
Additional Unallocatd Shares Compre- Earnings-
Common Paid-in Treasury Shares Held Held hensive Substantially
Stock Capital Stock by ESOP by RRP Income Restricted Total
----- ------- ----- ------- ------ ------ ---------- -----
Balance at June 30, 1999 $37 $19,062 $(7,596) $(232) $(326) $(31) $ 17,024 $27,938
Comprehensive income:
Net income 1,137 1,137
Other comprehensive
income:
Change in unrealized
holding gains on
securities, net of income
tax of $29 (57) (57)
-------
Comprehensive income 1,080
Purchase of treasury stock (2,042) (2,042)
Release of earned
Employee Stock Ownership
Plan (ESOP) shares 80 40 120
Accrued compensation
expense for Recognition
and Retention Plans (RRP) 26 26
Exercise of Stock Options 1 1
Cash dividends declared
($0.16 per share) -- -- -- -- -- -- (492) (492)
--- ------- ------- ----- ----- ---- ------- -------
Balance at September 30,
1999 $37 $19,143 $(9,638) $(192) $(300) $(88) $17,669 $26,631
=== ======= ======= ===== ===== ==== ======= =======
Components of
comprehensive income:
Change in net unrealized
gain on investment
securities held for sale $(88)
----
TOTAL $(88)
====
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, 1999, are not
necessarily indicative of the results which may be expected for the
entire fiscal year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The statement provides accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring the
recognition of those items as assets or liabilities in the statement of
financial position, recorded at fair value. Statement No. 133 precludes
a held-to-maturity security from being designated as a hedged item,
however, at the date of initial application of this statement, an
entity is permitted to transfer any held-to-maturity security into the
available-for-sale or trading categories. The unrealized holding gain
or loss on such transferred securities shall be reported consistent
with the requirements of Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Such transfers do not raise
an issue regarding an entity's intent to hold other debt securities to
maturity in the future. In June 1999, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133 - an amendment
of FASB Statement No. 133." This Statement delayed the effective date
of Statement No. 133 for one year, to fiscal years beginning after June
15, 2000. Earlier adoption is permitted for any fiscal quarter that
begins after the issue date of Statement No. 133.
The Company does not believe the effect of the adoption of this
accounting statement will be material.
8
3. EARNINGS PER SHARE
------------------
The following table sets forth the computation of basic and diluted
earnings per share.
Three Months Ended
September 30,
----------------------------
1999 1998
----------- -----------
Weighted average common shares outstanding 3,668,110 3,657,120
Average Treasury Stock shares (566,794) (15,273)
Average unearned ESOP shares (44,910) (61,053)
----------- -----------
Weighted average common shares and common stock equivalents
used to calculate basic earnings per share 3,056,406 3,580,794
Additional common stock equivalents (stock options) used to
calculate diluted earnings per share 27,847 31,652
----------- -----------
Weighted average common shares and common stock equivalents
used to calculate diluted earnings per share 3,084,253 3,612,446
=========== ===========
Net income $ 1,136,861 $ 950,122
=========== ===========
Earnings per share:
Basic $ 0.37 $ 0.27
Diluted $ 0.37 $ 0.26
9
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
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, 1999.
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, maintaining
asset quality and generating consistent earnings growth.
FINANCIAL CONDITION
The Company's assets totaled $380.7 million at September 30, 1999 as
compared to $348.4 million at June 30, 1999. The $32.3 million or 9.3% increase
in total assets was primarily comprised of a $26.8 million or 15.7% increase in
investment and mortgage-backed securities, including Federal Home Loan Bank
("FHLB") stock, and a $5.3 million or 3.1% increase in net loans receivable.
The Company's total liabilities increased $33.6 million or 10.5% to
$354.0 million as of September 30, 1999 from $320.5 million as of June 30, 1999.
The $33.6 million increase in total liabilities was primarily comprised of a
$36.6 million or 25.7% increase in FHLB advances and other borrowings which was
partially offset by a $2.0 million or 1.2% decrease in deposits and a $1.9
million or 60.9% decrease in advance payments by borrowers for taxes and
insurance.
Total stockholders' equity decreased $1.3 million or 4.7% to $26.6
million as of September 30, 1999 from $27.9 million at June 30, 1999. Capital
expenditures for the Company's stock repurchase program and cash dividends
totaled $2.0 million and $492 thousand, respectively, which were partially
funded by Company net income of $1.1 million for the quarter ended September 30,
1999.
10
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:
1) expanding the Company's investment growth program in order to enhance
net interest income;
2) maintaining the Company's level of short-term liquid investments by
funding loan commitments and purchasing longer-term investment
securities;
3) emphasizing the growth of lower-cost savings and checking accounts; and
4) 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 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:
1) the average outstanding daily balance of total borrowings, computed
quarterly, may not exceed $195.0 million;
2) suitable investments shall be restricted to those meeting the credit
quality criteria outlined in the Company's investment policy;
3) each security purchased shall initially yield a minimum of one hundred
and twenty-five basis points above the incremental rate paid on
short-term borrowings, at the time of purchase; and
4) the Company's total borrowed funds position, allocated to the
investment growth program, may not exceed $200.0 million.
In most cases, the initial yield spread earned on investment security
purchases ranged from approximately 231 to 257 basis points.
During the quarter ended September 30, 1999, the Company increased its
mortgage-backed securities portfolio by $4.9 million or 6.81%. The increase for
the quarter was attributable to security purchases partially offset by principal
amortization. Mortgage-backed securities purchases for the quarter totaled
approximately $8.4 million with an estimated weighted average purchase yield of
7.64%. At September 30, 1999, the Company held $77.3 million of mortgage-backed
securities with an approximate yield of 6.77%. The mortgage-backed securities
purchases were made in order to mitigate the principal calls on the Company's
callable bond portfolio and to earn a higher yield with an expected average life
profile comparable to longer-term callable agency bonds.
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,
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 $4.0 million of callable agency bonds with
an estimated weighted average rate of 5.83% were called during the quarter ended
September 30, 1999. During the quarter ended September 30, 1999, the Company
purchased approximately $20.7 million of callable bonds with an approximate
weighted average yield to call and maturity of 8.20% and 7.84%, respectively.
The callable agency bond purchases, totaling $20.7 million, are summarized by
initial term to call as follows: $10.0 million within three months, $3.2 million
with greater than three months and within six months, $4.0 million with greater
than six months and within one year, $1.0 million with greater than twelve
months and within twenty-four months, and $2.5 million with greater than
twenty-four months and within thirty-six months.
11
During the quarter ended September 30, 1999, the Company borrowed
approximately $162.7 million in various borrowings from the FHLB with a weighted
average rate of 5.15% and incurred $116.5 million in other borrowings with a
weighted average rate of 5.28%. During the quarter ended September 30, 1999, the
Company repaid $127.1 million of FHLB advances and $115.6 million of other
borrowings.
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 selectively offer commercial real estate, land
acquisition and development, and shorter-term construction loans, primarily on
residential properties, to partially increase its loan asset sensitivity. Due to
relatively low fifteen and thirty year mortgage loan yields, the Company intends
to emphasize higher yielding commercial real estate, home equity and small
business loans to existing customers and seasoned prospective customers.
As of September 30, 1999, the implementation of these asset and
liability management initiatives resulted in the following:
1) an aggregate of $50.6 million or 28.8% of the Company's net loan
portfolio had adjustable interest rates or maturities of less than 12
months;
2) $16.3 million or 21.0% of the Company's portfolio of mortgage-backed
securities (including collateralized mortgage obligations - "CMOs")
were secured by floating rate securities; and
3) $106.3 million or 94.6% 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 "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 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 is
estimated at a negative 14.3% of total assets at September 30, 1999, as compared
to a negative 8.9% at June 30, 1999, in each instance, based on certain
assumptions by management with respect to the repricing of certain assets and
liabilities. At September 30, 1999, the Company's interest-earning assets
maturing or repricing within one year totaled $101.2 million while the Company's
interest-bearing liabilities maturing or repricing within one year totaled
$155.7 million, providing an excess of interest-earning liabilities over
interest-bearing assets of $54.6 million. At September 30, 1999, the percentage
of the Company's assets to liabilities maturing or repricing within one year was
65%.
RESULTS OF OPERATIONS
GENERAL. WVS reported net income of $1.1 million, or $0.37 per share
(basic and diluted), for the three months ended September 30, 1999, as compared
to $950 thousand or $0.26 per share (basic and diluted) for the same period in
1998. For the three months ended September 30, 1999, diluted earnings per share
increased $0.10 or 37.0%. Net income increased $187 thousand or 19.7% for the
three months ended September 30, 1999, when compared to the same period in 1998.
The increase was primarily the result of a $324 thousand increase in net
interest income and a $33 thousand increase in non-interest income, which were
partially offset by a $120 thousand increase in income tax expense and a $50
thousand increase in non-interest expense.
12
NET INTEREST INCOME. The Company's net interest income increased by
$324 thousand or 12.9% during the three months ended September 30, 1999, when
compared to the same period in 1998. The increase was principally attributable
to increases in the Company's investment, mortgage-backed securities and loan
portfolios which were primarily funded with FHLB advances.
INTEREST INCOME. Interest on net loans receivable increased by $228
thousand or 7.15% for the three months ended September 30, 1999, when compared
with the same period in 1998. The increase was attributable to an increase of
$16.7 million in the average balance of loans receivable outstanding which was
partially offset by an decrease in the weighted average yield earned on loans
receivable of 26 basis points for the three months ended September 30, 1999,
when compared to the same period in 1998. The increase in the average loan
balance outstanding was attributable to an increased level of mortgage
originations due to a stronger local demand for permanent mortgage financing and
an emphasis on multi-family, commercial and consumer loan products in order to
earn returns greater than those offered in the single-family residential
mortgage market.
Interest on mortgage-backed securities increased by $427 thousand or
54.2% for the three months ended September 30, 1999, when compared with the same
period in 1998. The increase was attributable to an increase of $26.6 million in
the average balance of mortgage-backed securities outstanding which was
partially offset by a decrease of 10 basis points in weighted average yield
earned during the three months ended September 30, 1999, when compared to the
same period in 1998. The Company has increased its purchases of mortgage-backed
securities in order to mitigate the principal calls on the Company's callable
bond portfolio and to earn a higher yield with an expected average life profile
comparable to longer-term callable agency bonds.
Interest and dividend income on interest-bearing deposits with other
institutions, investment securities and FHLB stock ("other investment
securities") increased $400 thousand or 25.4% for the three months ended
September 30, 1999, when compared to the same period in 1998. The increase was
principally attributable to an increase of $20.7 million in the average balance
of investment securities and a 20 basis point increase in the weighted average
yield earned on investment securities for the three months ended September 30,
1999, when compared to the same period in 1998. 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. The
increase in the weighted average yield earned was consistent with market
conditions for the three months ended September 30, 1999.
INTEREST EXPENSE. Interest expense on deposits and escrows decreased by
$108 thousand or 6.37% for the three months ended September 30, 1999, when
compared with the same period in 1998. The decrease was principally attributable
to a decrease in the weighted average yield paid of 35 basis points which was
partially offset by an increase of $3.7 million in the average balance of
deposits and escrows outstanding for the three months ended September 30, 1999,
when compared to the same period in 1998. The average yield paid on deposits
decreased due to the overall decline in market interest rates.
Interest expense on FHLB advances and other borrowings increased by
$839 thousand or 62.52% for the three months ended September 30, 1999, when
compared to the same period in 1998. The increase was primarily attributable to
a $64.6 million or 67.42% increase in the average balance of such borrowings
outstanding, partially offset by a 16 basis point decrease in the weighted
average rate paid. The increased amount of borrowings outstanding was used to
fund the Company's investment growth program and the decrease in the weighted
average rate paid was a result of the declining market rates.
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 periodic evaluation
of the loan portfolio considering past experience, current economic conditions,
volume, growth and composition of the loan portfolio and other relevant factors.
The Company did not record a provision for possible losses on loans for
the three months ended September 30, 1999, and September 30, 1998. The Company's
total allowance for loan losses at September 30, 1999, and June 30, 1999, both
amounted to $1.8 million or 1.0% and 1.1%, respectively, of the Company's total
loan portfolio.
13
NON-INTEREST INCOME. Total non-interest income increased $33 thousand
or 32.35% during the three months ended September 30, 1999, when compared to the
same period in 1998, primarily due to a $15 thousand increase in the service
charges on deposits and a $18 thousand increase in other income including ATM
fee and loan late charge income.
NON-INTEREST EXPENSE. Total non-interest expense increased $50 thousand
or 4.71% during the three months ended September 30, 1999, when compared to the
same period in 1998. Compensation and employee benefits increased $65 thousand
or 9.41% during the quarter ended September 30, 1999, when compared to the same
period in 1998. The increase was primarily attributable to a $55 thousand
increase in discretionary contributions to the Employee Stock Ownership Plan
("ESOP").
Other non-interest expense (e.g. director's compensation expense,
advertising, provision for loss on real estate owned, legal expense, transfer
agent expense, etc.) decreased $15 thousand or 4.71% during the quarter ended
September 30, 1999, when compared to the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $2.3 million during
the three months ended September 30, 1999. Net cash provided by operating
activities was primarily comprised of $1.1 million of net income, a $495
thousand increase in accrued interest payable and a $251 thousand decrease in
accrued interest receivable.
Funds used for investing activities totaled $32.2 million during the
three months ended September 30, 1999. Primary uses of funds during the three
months ended September 30, 1999, include $32.9 million used for purchases of
investment and mortgage-backed securities and a $5.3 million increase in net
loans receivable which were partially offset by $7.5 million of proceeds from
repayments of investment and mortgage-backed securities.
Funds provided by financing activities totaled $30.1 million for the
three months ended September 30, 1999. Primary sources of funding included a
$35.6 million increase in FHLB advances and a $1.0 million increase in other
borrowings. Primary uses of funds included: $2.0 million for treasury stock
purchases, a $2.0 million decrease in deposits, and a seasonal $1.9 million
decrease in loan customer escrows. During the quarter ended September 30, 1999,
the Company repurchased 134,065 shares of common stock. Management believes that
it currently is maintaining adequate liquidity and continues 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, 1999, the total approved loan
commitments outstanding amounted to $1.4 million. At the same date commitments
under unused lines of credit amounted to $10.3 million and the unadvanced
portion of construction loans approximated $19.0 million. Certificates of
deposit scheduled to mature in one year or less at September 30, 1999, totaled
$65.7 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 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 26, 1999, the Company's Board of Directors declared a cash
dividend of $0.16 per share payable November 18, 1999, to shareholders of record
at the close of business on November 8, 1999. 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.
14
As of September 30, 1999, WVS Financial Corp. exceeded all regulatory
capital requirements and maintained Tier I and total risk-based capital equal to
$26.7 million or 14.6% and $28.6 million or 15.6%, respectively, of total
risk-weighted assets, and Tier I leverage capital of $26.7 million or 7.3% 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, 1999, totaled
approximately $693 thousand or 0.19% of total assets as compared to $765
thousand or 0.22% of total assets as of June 30, 1999. Nonperforming assets at
September 30, 1999, consisted of $274 thousand in commercial real estate loans,
$236 thousand in real estate owned, $97 thousand in single-family loans, and $86
thousand in consumer loans. Approximately $1 thousand of additional interest
income would have been recorded during the three months ended September 30,
1999, if the Company's nonaccrual and restructured loans had been current in
accordance with their original loan terms and outstanding throughout the quarter
ended September 30, 1999.
YEAR 2000 COMPLIANCE
The Company outsources substantially all of its data processing
requirements and it is to a large extent dependent upon vendor cooperation for
systems used in its day-to-day business. The Company, in conjunction with its
vendors, is testing its computer systems and requiring representations from its
vendors that the products provided are or will be year 2000 compliant. The
Company has developed a plan of action to help ensure that its operational and
financial systems will not be adversely affected by year 2000 software/hardware
failures due to processing errors arising from calculations using the year 2000
date. All hardware and software products were believed to be compliant at
September 30, 1999. In the unlikely event that the systems tested do not, in
fact, operate properly when the year 2000 does arrive, all customer accounts,
deposits and loans as well as accounting systems will be maintained manually to
ensure business continuation while systems are being corrected. The Company has
not and does not expect to incur material expenditures to address the year 2000
issue. Based upon current estimates, the Company does not expect to incur more
than $75 thousand (pre-tax) in Year 2000 remediation expenses. Any year 2000
compliance failures, which are currently unknown, could result in additional
expenses or business disruption to the Company.
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.
15
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.
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.
An institution may use several techniques 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 monitoring of the Company's
asset/liability gap which was discussed in detail under "Asset and Liability
Management" commencing on page 11.
16
An institution could also manage interest rate risk by selling existing
assets, repaying certain liabilities or matching repricing periods for new
assets and liabilities (for example, by shortening terms of new loans or
investments). 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. 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.
Prepayments of assets carrying higher rates reduce the Company's interest income
and overall asset yields.
An institution might also invest in more complex financial instruments
intended to hedge, or otherwise change the interest rate risk of existing
assets, liabilities, or anticipated transactions. 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. The
Company has not purchased derivative financial instruments in the past and does
not presently intend to purchase such instruments in the near future.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of September 30,
1999, based on the information and assumptions in the notes. The Company's
assumptions are based on statistical data provided by a federal regulatory
agency in the Company's market area, and are believed to be reasonable. The
Company had no derivative financial instruments or trading portfolio as of
September 30, 1999. 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. 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. 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.
Substantially all of the Company's investment securities portfolio is comprised
of callable government agency securities. From a risk management perspective,
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.
Company borrowings were tabulated by contractual maturity dates and without
regard to any conversion or repricing dates.
17
EXPECTED MATURITY DATE-QUARTER ENDED SEPTEMBER 30,
-----------------------------------------------------------------
There- Fair
2000 2001 2002 2003 2004 after Total Value
------- ------- ------- ------- ------ ------- -------- --------
ON-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest-earning assets:
Loans receivable (1)(2)(3)(4)
Fixed rate $30,484 $18,945 $14,281 $12,476 $9,685 $50,162 $136,033 $135,297
Average interest rate 7.82% 7.60% 7.54% 7.54% 7.47% 7.40%
Adjustable rate 14,406 6,744 5,474 4,455 3,634 7,526 42,239 41,826
Average interest rate(5) 6.89% 6.17% 6.14% 6.11% 6.09% 6.17%
Mortgage-backed securities
Fixed rate 2 0 102 1,438 0 59,612 61,154 59,749
Average interest rate 6.45% 0.00% 7.12% 6.02% 0.00% 6.89%
Adjustable rate 0 0 0 0 0 16,264 16,264 16,497
Average interest rate(6) 0.00% 0.00% 0.00% 0.00% 0.00% 6.54%
Investments(7) 5,207 0 2,514 0 0 112,574 120,295 115,633
Average interest rate 8.25% 0.00% 8.09% 0.00% 0.00% 7.29%
Interest-bearing deposits 1,264 0 0 0 0 0 1,264 1,264
Average interest rate 5.50% 0.00% 0.00% 0.00% 0.00% 0.00%
------- ------- ------- ------- ------ ------- -------- --------
Total $51,363 $25,689 $22,371 $18,369 $13,319 $246,138 $377,249 $370,266
Interest-bearing liabilities:
Interest-bearing deposits
and escrows(8)(9)(10) $87,425 $18,091 $18,091 $10,107 $10,107 $26,492 $170,313 $170,198
Average interest rate 4.19% 3.72% 3.72% 3.44% 3.44% 1.94%
Borrowings 68,318 15,000 31,500 0 0 64,500 179,318 178,638
Average interest rate 5.30% 5.73% 5.75% 0.00% 0.00% 5.14%
------- ------- ------- ------- ------ ------- -------- --------
Total $155,743 $33,091 $49,591 $10,107 $10,107 $90,992 $349,631 $348,836
(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 41% 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 $6.5 million of investment securities expected to be
called by September 30, 2002.
(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.
18
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,
1999.
Anticipated Transactions
---------------------------------------------------
Undisbursed construction and
land development loans
Fixed rate $ 10,514
8.95%
Adjustable rate 8,516
7.78%
Undisbursed lines of credit
Adjustable rate 10,280
8.19%
Loan origination commitments
Fixed rate 1,618
7.82%
Adjustable rate 60
9.00%
Letters of credit
Adjustable rate 20
10.75%
Unfunded security commitments
Fixed rate (1) 555
8.41%
--------
$ 31,563
(1) Taxable equivalent yield.
19
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
---------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(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 PAGE
------ ----------- ----
27 Financial Data Schedule E-1
(b) Not Applicable.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WVS FINANCIAL CORP.
NOVEMBER 12, 1999 BY: /s/David J. Bursic
- ----------------- ------------------
Date David J. Bursic
President and
Chief Executive Officer
NOVEMBER 12, 1999 BY: /s/Janell A. Butorac
- ----------------- --------------------
Date Janell A. Butorac
Assistant Vice President
Principal Accounting Officer
21