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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2002
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 executive offices) (Zip Code)
(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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12 b-2 of the Exchange Act).
YES NO X
--- ---
Shares outstanding as of February 11, 2003: 2,593,670 shares Common Stock,
$.01 par value.
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
INDEX
-----
PART I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial
Condition as of December 31, 2002
and June 30, 2002 (Unaudited) 3
Consolidated Statements of Income
for the Three and Six Months Ended
December 31, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows
for the Six Months Ended December 31,
2002 and 2001 (Unaudited) 5
Consolidated Statements of Changes in
Stockholders' Equity for the Six Months
Ended December 31, 2002 (Unaudited) 7
Notes to Unaudited Consolidated
Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations for the Three and Six Months
Ended December 31, 2002 12
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 19
Item 4. Controls and Procedures 25
PART II. Other Information Page
- -------- ----------------- ----
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Certification of Chief Executive Officer 29
Certification of Chief Accounting Officer 30
2
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
(In thousands)
December 31, 2002 June 30, 2002
------------------ ------------------
Assets
------
Cash and due from banks $ 965 $ 879
Interest-earning demand deposits 2,031 2,298
Investment securities available-for-sale (amortized cost of
$2,981 and $8,375) 3,154 8,426
Investment securities held-to-maturity (market value of
$171,255 and $146,146) 167,564 142,958
Mortgage-backed securities available-for-sale (amortized cost of
$5,304 and $6,196) 5,586 6,450
Mortgage-backed securities held-to-maturity (market value of
$87,064 and $76,819) 86,515 76,093
Federal Home Loan Bank stock, at cost 8,688 8,281
Net loans receivable (allowance for loan losses of $2,776 and $2,758) 126,847 152,905
Accrued interest receivable 4,187 3,903
Premises and equipment 1,221 996
Deferred taxes and other assets 1,478 1,722
--------- ---------
TOTAL ASSETS $ 408,236 $ 404,911
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings Deposits:
Non-interest-bearing accounts $ 11,682 $ 12,615
NOW accounts 21,039 20,872
Savings accounts 40,958 41,620
Money market accounts 13,966 14,843
Certificates of deposit 78,215 84,709
--------- ---------
Total savings deposits 165,860 174,659
Federal Home Loan Bank advances 169,287 159,937
Other borrowings 38,184 33,731
Advance payments by borrowers for taxes and insurance 1,368 3,013
Accrued interest payable 1,703 1,698
Other liabilities 1,746 1,620
--------- ---------
TOTAL LIABILITIES 378,148 374,658
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;
3,730,258 and 3,729,858 shares issued 37 37
Additional paid-in capital 20,039 20,037
Treasury stock: 1,128,416 and 1,051,872 shares at cost,
respectively (16,351) (15,133)
Retained earnings, substantially restricted 26,117 25,183
Accumulated other comprehensive income 300 201
Unallocated shares - Recognition and Retention Plans (54) (72)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 30,088 30,253
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 408,236 $ 404,911
========= =========
See accompanying notes to consolidated financial statements.
3
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- --------------------------
2002 2001 2002 2001
INTEREST AND DIVIDEND INCOME: ---------- ---------- ---------- ----------
Loans $ 2,580 $ 3,489 $ 5,389 $ 7,040
Investment securities 1,728 1,628 3,470 3,510
Mortgage-backed securities 644 840 1,452 1,815
Interest-earning deposits with other
institutions 3 4 7 7
Federal Home Loan Bank stock 68 130 137 269
---------- ---------- ---------- ----------
Total interest and dividend income 5,023 6,091 10,455 12,641
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits 867 1,324 1,826 2,932
Borrowings 2,148 2,307 4,371 4,552
Advance payments by borrowers for taxes
and insurance 3 6 9 12
---------- ---------- ---------- ----------
Total interest expense 3,018 3,637 6,206 7,496
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,005 2,454 4,249 5,145
PROVISION FOR LOAN LOSSES --- 20 18 57
NET INTEREST INCOME AFTER PROVISION ---------- ---------- ---------- ----------
FOR LOAN LOSSES 2,005 2,434 4,231 5,088
---------- ---------- ---------- ----------
NON-INTEREST INCOME:
Service charges on deposits 96 107 196 211
Gain on sale of investments 1 --- 64 ---
---------- ---------- ---------- ----------
Other 75 74 154 144
---------- ---------- ---------- ----------
Total non-interest income 172 181 414 355
---------- ---------- ---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 609 618 1,211 1,245
Occupancy and equipment 95 93 183 183
Deposit insurance premium 8 8 15 17
Data processing 50 48 98 93
Correspondent bank service charges 37 41 77 84
Other 246 301 580 464
---------- ---------- ---------- ----------
Total non-interest expense 1,045 1,109 2,164 2,086
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,132 1,506 2,481 3,357
INCOME TAXES 351 397 701 1,008
---------- ---------- ---------- ----------
NET INCOME $ 781 $ 1,109 $ 1,780 $ 2,349
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic $ 0.30 $ 0.40 $ 0.67 $ 0.86
Diluted $ 0.30 $ 0.40 $ 0.67 $ 0.85
AVERAGE SHARES OUTSTANDING:
Basic 2,631,112 2,740,451 2,646,522 2,746,905
Diluted 2,636,633 2,752,157 2,651,926 2,757,951
See accompanying notes to consolidated financial statements.
4
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
December 31,
---------------------
2002 2001
OPERATING ACTIVITIES -------- ---------
Net income $ 1,780 $ 2,349
Adjustments to reconcile net income to cash provided by operating
activities:
Provision for loan and real estate owned losses 33 57
Gain on sale of investments (64) ---
Depreciation and amortization, net 62 62
Amortization of discounts, premiums and deferred loan fees 1,761 (299)
Amortization of ESOP, RRP and deferred and unearned
compensation 18 39
(Increase) decrease in accrued interest receivable (284) 794
Increase (decrease) in accrued interest payable 5 (221)
Decrease in accrued and deferred taxes (29) (110)
Other, net 115 (143)
-------- ---------
Net cash provided by operating activities 3,397 2,528
-------- ---------
INVESTING ACTIVITIES
Available-for-sale:
Purchases of investments and mortgage-backed securities (2,381) (17,165)
Proceeds from repayments of investments and mortgage-backed securities 8,093 1,512
Proceeds from sale of investments securities 639 ---
Held-to-maturity:
Purchases of investments and mortgage-backed securities (109,876) (151,814)
Proceeds from repayments of investments and mortgage-backed securities 73,241 145,709
Decrease (increase) in net loans receivable 25,884 12,850
Sale of real estate owned 220 ---
Purchase of Federal Home Loan Bank stock (407) (1,072)
Purchases of premises and equipment (288) (92)
Other, net --- 27
-------- ---------
Net cash used for investing activities (4,875) (10,045)
-------- ---------
5
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
December 31,
----------------------
2002 2001
FINANCING ACTIVITIES -------- --------
Net increase (decrease) in transaction and passbook accounts (2,305) 3,753
Net decrease in certificates of deposit (6,494) (7,414)
Net increase (decrease) in FHLB short-term advances 14,350 (11,236)
Net increase in other borrowings 4,453 11,713
Proceeds from FHLB long-term advances --- 17,279
Repayments of FHLB long-term advances (5,000) (3,000)
Net decrease in advance payments by borrowers for taxes and insurance (1,645) (1,696)
Net proceeds from issuance of common stock 2 46
Funds used for purchase of treasury stock (1,218) (530)
Cash dividends paid (846) (878)
-------- --------
Net cash provided by financing activities 1,297 8,037
-------- --------
(Decrease) increase in cash and cash equivalents (181) 520
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 3,177 2,993
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 2,996 $ 3,513
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits, escrows and borrowings $ 6,201 $ 7,717
Income taxes $ 780 $ 1,160
Non-cash item:
Pennsylvania Education Tax Credit $ 100 $ 100
See accompanying notes to consolidated financial statements.
6
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
Accumulated
Other Retained
Additional Unallocated Unallocated Compre- Earnings
Common Paid-In Treasury Shares Held Shares Held hensive Substantially
Stock Capital Stock by ESOP by RRP Income Restricted Total
-------- -------- -------- ------------ ----------- -------- ------------- --------
Balance at June 30, 2002 $ 37 $ 20,037 $(15,133) $ --- $ (72) $ 201 $ 25,183 $ 30,253
Comprehensive income:
Net Income 1,780 1,780
Other comprehensive
income:
Change in unrealized
holding gains on
securities, net of
income tax effect of
$51 99 99
--------
Comprehensive income 1,879
Purchase of shares for
treasury stock (1,218) (1,218)
Accrued compensation
expense for Recognition
and Retention Plans (RRP) 18 18
Exercise of stock options 2 2
Cash dividends declared
($0.32 per share) (846) (846)
-------- -------- -------- ------------ ----------- -------- ------------- --------
Balance at Dec. 31, 2002 $ 37 $ 20,039 $(16,351) $ --- $ (54) $ 300 $ 26,117 $ 30,088
======== ======== ======== ============ =========== ======== ============= ========
See accompanying notes to consolidated financial statements.
7
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q and therefore do not include
information or footnotes necessary for a complete presentation of financial
condition, results of operations, and cash flows in conformity with generally
accepted accounting principles. However, all adjustments (consisting only of
normal recurring adjustments) which, in the opinion of management, are necessary
for a fair presentation have been included. The results of operations for the
three and six months ended December 31, 2002, are not necessarily indicative of
the results which may be expected for the entire fiscal year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
On October 1, 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 147, Acquisitions of
Certain Financial Institutions, effective for all business combinations
initiated after October 1, 2002. This Statement addresses the financial
accounting and reporting for the acquisition of all or part of a financial
institution, except for a transaction between two or more mutual enterprises.
This Statement removes acquisitions of financial institutions, other than
transactions between two or more mutual enterprises, from the scope of FAS No.
72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and
FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings
and Loan Association or a Similar Institution Is Acquired in a Business
Combination Accounted for by the Purchase Method. The acquisition of all or part
of a financial institution that meets the definition of a business combination
shall be accounted for by the purchase method in accordance with FAS No. 141,
Business Combinations, and FAS No. 142, Goodwill and Other Intangible Assets.
This Statement also provides guidance on the accounting for the impairment or
disposal of acquired long-term customer-relationship intangible assets (such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets), including those acquired in transactions between two or more
mutual enterprises. The adoption of FAS No. 147 is not expected to have a
material effect on the Company's financial position or results of operations.
On December 31, 2002, the FASB issued FAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which amends FAS No. 123, Accounting
for Stock-Based Compensation. FAS No. 148 amends the disclosure requirements of
FAS No. 123 to require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. Under the provisions
of FAS No. 123, companies that adopted the preferable, fair value based method
were required to apply that method prospectively for new stock option awards.
This contributed to a "ramp-up" effect on stock-based compensation expense in
the first few years following adoption, which caused concern for companies and
investors because of the lack of consistency in reported results. To address
that concern, FAS No. 148 provides two additional methods of transition that
reflect an entity's full complement of stock-based compensation expense
immediately upon adoption, thereby eliminating the ramp-up effect. FAS No. 148
also improves the clarity and prominence of disclosures about the pro forma
effects of using the fair value based method of accounting for stock-based
compensation for all companies-regardless of the accounting method used-by
requiring that the data be presented more prominently and in a more
user-friendly format in the footnotes to the financial statements. In addition,
the statement improves the timeliness of those disclosures by requiring that
this information be included in interim as well as annual financial statements.
The transition guidance and annual disclosure provisions of FAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
8
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002.
In November 2002, the FASB issued Interpretation No.45, Guarantor's Accounting
and Disclosure requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. This interpretation
clarifies that a guarantor is required to disclose (a) the nature of the
guarantee, including the approximate term of the guarantee, how the guarantee
arose, and the events or circumstances that would require the guarantor to
perform under the guarantee; (b) the maximum potential amount of future payments
under the guarantee; (c) the carrying amount of the liability, if any, for the
guarantor's obligations under the guarantee; and (d) the nature and extent of
any recourse provisions or available collateral that would enable the guarantor
to recover the amounts paid under the guarantee. This interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken in issuing the
guarantee, including its ongoing obligation to stand ready to perform over the
term of the guarantee in the event that the specified triggering events or
conditions occur. The objective of the initial measurement of that liability is
the fair value of the guarantee at its inception. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002.
9
3. EARNINGS PER SHARE
------------------
The following table sets forth the computation of basic and diluted
earnings per share.
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Weighted average common shares
outstanding 3,730,258 3,711,964 3,730,084 3,711,321
Average treasury stock shares (1,099,146) (971,513) (1,083,562) (964,416)
Average unearned ESOP shares --- --- --- ---
----------- ----------- ----------- -----------
Weighted average common shares
and common stock equivalents
used to calculate basic earnings
per share 2,631,112 2,740,451 2,646,522 2,746,905
Additional common stock
equivalents (stock options) used
to calculate diluted earnings per
share 5,521 11,706 5,404 11,046
----------- ----------- ----------- -----------
Weighted average common shares
and common stock equivalents
used to calculate diluted earnings
per share 2,636,633 2,752,157 2,651,926 2,757,951
=========== =========== =========== ===========
Net income $ 781,465 $ 1,108,828 $ 1,781,310 $ 2,349,367
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.30 $ 0.40 $ 0.67 $ 0.86
Diluted $ 0.30 $ 0.40 $ 0.67 $ 0.85
=========== =========== =========== ===========
All options at December 31, 2002 and December 31, 2001 were included in the
computation of diluted earnings per share.
10
4. COMPREHENSIVE INCOME
--------------------
Other comprehensive income primarily reflects changes in net unrealized
gains/losses on available-for-sale securities. Total comprehensive income is
summarized as follows (dollars in thousands):
Three Months Ended December 31, Six Months Ended December 31,
2002 2001 2002 2001
----------------- ----------------- ------------------- -------------------
Net income $781 $1,109 $1,780 $2,349
Other comprehensive
income:
Unrealized gains
on available for
sale securities $44 $(4) $214 $124
Less:
Reclassification
adjustment for gain
included in net 1 --- 64 ---
income
------ ------ ------ -------- ------- -------- ------ --------
Other comprehensive
income before tax 43 (4) 150 124
Income tax expense
related to other
comprehensive income 15 (1) 51 42
------ -------- -------- --------
Other comprehensive
income, net of tax 28 (3) 99 82
------ -------- -------- --------
Comprehensive income $809 $1,106 $1,879 $2,431
====== ======== ======== ========
11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2002
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q, in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project" or similar expressions are intended to identify "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to forward
looking statements to reflect events or circumstances after the date of
statements or to reflect the occurrence of anticipated or unanticipated events.
GENERAL
WVS Financial Corp. ("WVS" or the "Company") is the parent holding company
of West View Savings Bank ("West View" or the "Savings Bank"). The Company was
organized in July 1993 as a Pennsylvania-chartered unitary bank holding company
and acquired 100% of the common stock of the Savings Bank in November 1993.
West View Savings Bank is a Pennsylvania-chartered, SAIF-insured stock
savings bank conducting business from six offices in the North Hills suburbs of
Pittsburgh. The Savings Bank converted to the stock form of ownership in
November 1993. The Savings Bank had no subsidiaries at December 31, 2002.
The operating results of the Company depend primarily upon its net interest
income, which is determined by the difference between income on interest-earning
assets, principally loans, mortgage-backed securities and investment securities,
and interest expense on interest-bearing liabilities, which consist primarily of
deposits and borrowings. The Company's net income is also affected by its
provision for loan losses, as well as the level of its non-interest income,
including loan fees and service charges, and its non-interest expenses, such as
compensation and employee benefits, income taxes, deposit insurance and
occupancy costs.
The Company's strategy focuses on community-based lending, growth of core
deposits, capital management, maintaining strong non-interest expense ratios,
and steadily increasing book value per share.
FINANCIAL CONDITION
The Company's assets totaled $408.2 million at December 31, 2002, as
compared to $404.9 million at June 30, 2002. The $3.3 million or 0.8% increase
in total assets was primarily comprised of a $29.3 million or 12.1% increase in
investment and mortgage-backed securities, including FHLB stock, which was
partially offset by a $26.1 million or 17.0% decrease in net loans receivable.
12
The Company's total liabilities increased $3.4 million or 0.9% to $378.1
million as of December 31, 2002, from $374.7 million as of June 30, 2002. The
$3.4 million increase in total liabilities was primarily comprised of a $9.4
million or 5.9% increase in FHLB advances, and a $4.5 million or 13.2% increase
in other borrowings, which were partially offset by a $8.8 million or 5.0%
decrease in total savings deposits, a $1.6 million or 54.6% decrease in advance
payments by borrowers for taxes and insurance due to the seasonal payment of
local real estate taxes. During the six months ended December 31, 2002, time
deposits decreased $6.5 million due to seasonal withdrawals of municipal time
deposits. Transaction and passbook accounts decreased $2.3 million. Management
believes that the decrease in transaction and savings balances were also
primarily attributable to seasonal withdrawals and draw downs of tax collector
and builder accounts.
Total stockholders' equity decreased $165 thousand or 0.5% to $30.1 million
as of December 31, 2002, from $30.3 million as of June 30, 2002. Capital
expenditures for the Company's stock repurchase program and cash dividends
totaled $1.2 million and $846 thousand, respectively, which were primarily
funded by net income of $1.8 million for the six months ended December 31, 2002.
RESULTS OF OPERATIONS
General. WVS reported net income of $781 thousand, or $0.30 diluted
earnings per share, and $1.8 million or $0.67 diluted earnings per share, for
the three and six months ended December 31, 2002, respectively. Net income
decreased by $328 thousand or 29.6% and diluted earnings per share decreased
$0.10 or 25.0% for the three months ended December 31, 2002, when compared to
the same period in 2001. The decrease in net income was primarily attributable
to a $449 thousand decrease in net interest income and a $9 thousand decrease in
non-interest income, which were partially offset by a $64 thousand decrease in
non-interest expense, a $46 thousand decrease in income tax expense, and a $20
thousand decrease in provision for loan losses. For the six months ended
December 31, 2002, net income decreased by $569 thousand or 24.2% and diluted
earnings per share decreased $0.18 or 21.2% when compared to the same period in
2001. The decrease was principally the result of a $896 thousand decrease in net
interest income and a $78 thousand increase in non-interest expense, which were
partially offset by a $307 thousand decrease in income tax expense, a $59
thousand increase in non-interest income, and a $39 thousand decrease in
provision for loan losses.
Net Interest Income. The Company's net interest income decreased by $449
thousand or 18.3% and $896 thousand or 17.4% for the three and six months ended
December 31, 2002, respectively, when compared to the same periods in 2001. The
decrease in net interest income for both the three and six month periods was
principally attributable to lower rates earned on Company assets due to lower
market interest rates which was partially offset by lower rates paid on deposits
and borrowings. The Company experienced higher levels of repayments on its loan,
investment, and mortgage-backed securities portfolios due to refinancing
activities for both the three and six months ended December 31, 2002.
Interest Income. Interest on net loans receivable decreased $909 thousand
or 26.1% and $1.7 million or 23.5% for the three and six months ended December
31, 2002, respectively, when compared to the same periods in 2001. The decrease
for the three months ended December 31, 2002 was attributable to a decrease of
$41.6 million in the average balance of net loans receivable outstanding and a
decrease of 30 basis points in the weighted average yield earned on net loans
receivable for the three months ended December 31, 2002, when compared to the
same period in 2001. The decrease for the six months ended December 31, 2002,
was attributable to a decrease of $38.0 million in the average balance of net
loans receivable outstanding and a 26 basis point decrease in the weighted
average yield earned on net loans receivable for the six months ended December
31, 2002, when compared to the same period in 2001. The decreases in the average
loan balance outstanding for both the three and six months ended December 31,
2002, were primarily attributable to increased levels of mortgage prepayments
and refinancings due to lower market rates on mortgages. As part of its
asset/liability management strategy, the Company has limited its origination of
longer-term fixed rate loans to mitigate its exposure to a rise in market
interest rates.
13
Interest on mortgage-backed securities ("MBS") decreased $196 thousand or
23.3% and $363 thousand or 20.0% for the three and six months ended December 31,
2002, respectively, when compared to the same periods in 2001. The decrease for
the three months ended December 31, 2002 was primarily attributable to a 175
basis point decrease in the weighted average yield earned on mortgage-backed
securities for the period, which was partially offset by a $7.0 million increase
in the average balance of mortgage-backed securities outstanding for the three
months ended December 31, 2002, when compared to the same period in 2001. The
decrease for the six months ended December 31, 2002, was principally
attributable to a 191 basis point decrease in the weighted average yield earned
on mortgage-backed securities for the period, which was partially offset by a
$11.0 million increase in the average balance of mortgage-backed securities
outstanding for the six months ended December 31, 2002, when compared to the
same period in 2001. The decrease in the weighted average yield earned on
mortgage-backed securities was consistent with market conditions for the three
and six months ended December 31, 2002, and reflects the higher proportion of
floating rate MBS in the portfolio. The increases in the average balances of
mortgage-backed securities during the three and six months ended December 31,
2002 were primarily attributable to the reinvestment of a portion of the
Company's loan payment proceeds into floating rate MBS.
Interest and dividend income on interest-bearing deposits with other
institutions, investment securities, and FHLB stock ("other investment
securities") increased by $37 thousand or 2.1% for the three months ended
December 31, 2002, when compared to the same period in 2001. The increase was
principally attributable to a $20.7 million increase in the average balance of
other investment securities outstanding for the three months ended December 31,
2002, when compared to the same period in 2001, which was partially offset by a
55 basis point decrease on the weighted average yield earned on other investment
securities when compared to the same period in 2001. Interest on other
investment securities decreased $172 thousand or 4.5% for the six months ended
December 31, 2002, when compared to the same period in 2001. The decrease for
the six months ended December 31, 2002, was primarily attributable to a 130
basis point decrease in the weighted average yield earned on other investment
securities for the period, which was partially offset by a $30.1 million
increase in the average balance of other investment securities outstanding for
the six months ended December 31, 2002, when compared to the same period in
2001. The decrease in the weighted average yield earned was consistent with
market conditions for the three and six months ended December 31, 2002. The
increase in the average balance of other investment securities outstanding
during the three and six months ended December 31, 2002, was principally
attributable to the reinvestment of a portion of the Company's loan payment
proceeds into shorter-term corporate bonds.
Interest Expense. Interest expense on deposits and escrows decreased $460
thousand or 34.6% and $1.1 million or 37.7% for the three and six months ended
December 31, 2002, respectively, when compared to the same period in 2001. The
decrease in interest expense on deposits and escrows for the three months ended
December 31, 2002, was attributable to a 221 basis point decrease in the
weighted average yield paid on deposits and escrows for the period, and a $3.2
million decrease in the average balance of interest-bearing deposits and escrows
for the three months ended December 31, 2002, when compared to the same period
in 2001. The decrease in interest expense on deposits and escrows for the six
months ended December 31, 2002, was attributable to a 132 basis point decrease
in the weighted average yield paid on deposits and escrows for the period and a
$3.2 million decrease in the average balance of interest-bearing deposits and
escrows for the six months ended December 31, 2002, when compared to the same
period in 2001. The average yield paid on interest-bearing deposits was
consistent with market conditions for the three and six months ended December
31, 2002. The decrease in the average balance of interest-bearing deposits and
escrows for the three and six months ended December 31, 2002 was primarily due
to seasonal withdrawals of municipal time deposits and seasonal withdrawals and
draw downs of transaction and savings balances by local tax collector and
builders.
Interest on FHLB advances and other borrowings decreased $159 thousand or
6.9% and $181 thousand or 4.0% for the three and six months ended December 31,
2002, respectively, when compared to the same periods in 2001. The decrease for
the three months ended December 31, 2002, was attributable to a $10.2 million
decrease in the average balance of FHLB advances and other borrowings
outstanding for the three months ended December 31, 2002 when compared to the
same period in 2001, and a 7 basis point decrease in the weighted average rate
paid on such borrowings for the three months ended December 31, 2002. The
decrease for the six months ended December 31, 2002, was principally
attributable to a 37 basis point decrease in the weighted average rate paid on
14
FHLB advances and other borrowings for the six months ended December 31, 2002
when compared to the same period in 2001, which was partially offset by a $5.9
million increase in the average balance of such borrowings outstanding for the
six months ended December 31, 2002, when compared to the same period in 2001.
The increase in the average balance of FHLB advances and other borrowings for
the six months ended December 31, 2002, was primarily to fund purchases of
investments and mortgage-backed securities. The weighted average rate paid
declined less than deposits due to longer average maturity of the Company's FHLB
advances outstanding.
Provision for Loan Losses. A provision for loan losses is charged to
earnings to maintain the total allowance at a level considered adequate by
management to absorb potential losses in the portfolio. Management's
determination of the adequacy of the allowance is based on an evaluation of the
portfolio considering past experience, current economic conditions, volume,
growth and composition of the loan portfolio, and other relevant factors.
The Company recorded no provision for loan losses for the three months
ended December 31, 2002, compared to $20 thousand for the same period in 2001.
For the six months ended December 31, 2002, the Company recorded a $18 thousand
provision compared to a $57 thousand for the same period in 2001. At December
31, 2002, the Company's total allowance for loan losses amounted to $2.8 million
or 2.0% of the Company's total loan portfolio, as compared to $2.8 million or
1.6% at December 31, 2001. The Company believes that its loan loss reserves are
prudent and warranted at this time due to the weakening of the national economy.
Non-Interest Income. Non-interest income decreased by $9 thousand or 5.0%
for the three months ended December 31, 2002, when compared to the same period
in 2001. The decrease was primarily attributable to decreases in service charge
income earned on transaction accounts. For the six months ended December 31,
2002, non-interest income increased $59 thousand or 16.6% when compared to the
same period in 2001. The increase was primarily attributable to gains on sales
of investments from the Company's investment portfolio.
Non-Interest Expense. Non-interest expense decreased $64 thousand or 5.8%
for the three months ended December 31, 2002, when compared to the same period
in 2001. The decrease was principally attributable to timing differences on
charitable contributions booked during the quarter ended September 30, 2002 as
compared to the quarter ended December 31, 2001, which were partially offset by
a $50 thousand increase in legal costs during the quarter, when compared to the
same period in 2001. For the six months ended December 31, 2002, non-interest
expense increased $78 thousand or 3.7% when compared to the same period in 2001.
The increase in non-interest expense for the six month period was primarily
attributable to legal and disposition costs associated with collections, past
due loans and liquidating collateral.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $3.4 million during the
six months ended December 31, 2002. Net cash provided by operating activities
was primarily comprised of $1.8 million of net income, and $1.8 million in
amortization of discounts, premiums and deferred loan fees, which was partially
offset by a $284 thousand increase in accrued interest receivables.
Funds used for investing activities totaled $4.9 million during the six
months ended December 31, 2002. Primary uses of funds during the six months
ended December 31, 2002, included $112.7 million for purchases of investment and
mortgage-backed securities, including Federal Home Loan Bank stock, and $288
thousand for purchases of equipment to upgrade the Bank's technology platform,
which were partially offset by $81.3 million of proceeds from repayments of
investments and mortgage-backed securities, a $25.9 million decrease in net
loans receivable, $639 thousand of proceeds from the sale of investment
securities, and $220 thousand of proceeds from the sale of other real estate
owned.
15
Funds provided by financing activities totaled $1.3 million for the six
months ended December 31, 2002. The primary financial sources included a $14.4
million increase in short-term FHLB advances and a $4.5 million increase in
other short-term borrowings, which were partially offset by a $10.4 million
decrease in deposits and escrows, a $5.0 million repayment of long-term FHLB
advances, $1.2 million in purchased treasury stock, and $846 thousand in cash
dividends paid on the Company's common stock. Management believes that it
currently is maintaining adequate liquidity and continues to better match
funding sources with lending and investment opportunities.
During the quarter ended December 31, 2002, the Company borrowed
approximately $14.3 million in various short-term borrowings from the FHLB with
a weighted average rate of 1.66%, and incurred $85.7 million in other short-term
borrowings with a weighted average rate of 1.41%. During the three months ended
December 31, 2002, the Company repaid $5.0 million of long-term FHLB advances
and $66.6 million of other short-term borrowings with weighted average rates of
2.45% and 1.54%, respectively.
The Company's primary sources of funds are deposits, amortization,
repayments and maturities of existing loans, mortgage-backed securities and
investment securities, funds from operations, and funds obtained through FHLB
advances and other borrowings. At December 31, 2002, the total approved loan
commitments outstanding amounted to $238 thousand. At the same date, commitments
under unused lines of credit amounted to $6.7 million and the unadvanced portion
of construction loans approximated $8.2 million. Certificates of deposit
scheduled to mature in one year or less at December 31, 2002, totaled $53.0
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 also has access to the Federal Reserve Bank discount
window. Management believes that the Company currently has adequate liquidity
available to respond to liquidity demands.
On January 2, 2003 the Company announced its Sixth Stock Buyback Program
totaling 130,000, or approximately 5%, of the Company's common shares. The
Company intends to fund this buyback primarily from internally generated cash
flow.
On January 28, 2003, the Company's Board of Directors declared a cash
dividend of $0.16 per share payable February 20, 2003, to shareholders of record
at the close of business on February 10, 2003. Dividends are subject to
determination and declaration by the Board of Directors, which take into account
the Company's financial condition, statutory and regulatory restrictions,
general economic conditions and other factors. There can be no assurance that
dividends will in fact be paid on the Common Stock in future periods or that, if
paid, such dividends will not be reduced or eliminated.
As of December 31, 2002, WVS Financial Corp. exceeded all regulatory
capital requirements and maintained Tier I and total risk-based capital equal to
$29.8 million or 12.5% and $32.6 million or 13.7%, respectively, of total
risk-weighted assets, and Tier I leverage capital of $29.8 million or 7.89% 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 December 31, 2002, totaled
approximately $4.3 million or 1.1% of total assets as compared to $5.3 million
or 1.3% of total assets at June 30, 2002. Nonperforming assets at December 31,
2002, consisted of: five commercial real estate loans totaling $3.6 million, two
16
construction and land development loans totaling $578 thousand, one
single-family loan totaling $67 thousand, one commercial loan totaling $22
thousand, and one home equity line of credit totaling $10 thousand.
The $1.0 million decrease in nonperforming assets during the six months
ended December 31, 2002 was comprised of a $520 thousand decrease in
single-family loans, a $420 thousand decrease in construction and land
development loans, a $180 thousand decrease in commercial loans, and a $235
thousand decrease in other real estate owned, which were partially offset by a
$300 thousand increase in commercial real estate loans.
The land acquisition and development loan classified as non-accrual at June
30, 2002 was released by the Bankruptcy Court and sold in July 2002. The Savings
Bank recovered the full principal balance plus approximately $36 thousand in
previously unaccrued interest.
As of June 30, 2002, the Company had one non-accruing commercial loan with
a principal balance of $198 thousand. The loan is secured by various commercial
business assets including photographic equipment and a truck, along with the
personal guarantees of both owners. In July 2002, the Company entered into a
loan work-out that provided for reduced monthly loan payments in exchange for
the pledging of additional unrelated business assets. The revised payment plan
went into effect in August 2002 and the borrowers are performing under the
modified terms, therefore the loan is no longer classified as non-accrual.
As of December 31, 2002, the Company had five commercial real estate loans
classified as non-accrual loans.
One of the commercial real estate loans is secured by a restaurant and real
estate located in Wexford, PA. The outstanding principal balance of this loan
totals $181 thousand and is part of a court supervised bankruptcy plan. In
brief, the original bankruptcy plan in November 1995 called for payments in
excess of the original loan terms to cure the deficiency within the next three
years. During the quarter ended June 30, 2002, the original court appointed
dispersing agent stopped making payments and is being investigated by the U.S.
Attorney's Office for bankruptcy fraud and money laundering. On July 31, 2002,
the United States Bankruptcy Court for the Western District of Pennsylvania
appointed a successor disbursing agent for the limited purpose of disbursing
funds currently held in escrow (rent payments) as well as regularly scheduled
payments due under the plan. The Savings Bank has not modified the original
terms of this loan, and we have been collecting payments since August 2002.
The Company has one non-accrual commercial real estate loan and one
non-accrual construction loan, to a retirement village located in the North
Hills area. Both loans became delinquent in fiscal 2000. The outstanding
principal balances total $3.8 million, of which $2.6 million is owned by the
Company and the remaining $1.2 million is secured by the Company for four
participating lenders. During the quarter ended December 31, 2002 the Bank
entered into Loan Modification Agreements with respect to these credits. Among
other things the obligor agreed to (i) resume monthly interest-only payments on
the $1.3 million loan and to secure third-party refinancing on or before July 1,
2003; (ii) resume monthly principal and interest payments on the $2.5 million
loan; (iii) consent to Judgment in Mortgage Foreclosure which will be
discontinued upon payment of the $1.3 million loan; and (iv) to release the
Savings Bank from any and all claims - including the litigation referenced in
"Part II - Other Information - Item #1, Litigation". Among other things, the
Savings Bank agreed to (i) modify certain interest rates, and (ii) forgive
accrued and uncollected interest, late charges and legal fees if the modified
payments are received and the full principal balance on both loans are repaid
according to their modified terms.
The Company has one non-accruing commercial real estate loan, with a
principal balance of $980 thousand, to a personal care home that was originally
part of the two retirement village loans discussed above. Due to the low
occupancy of the personal care home, and the related cash drain on the
retirement village, the Savings Bank "carved out" approximately $1 million of
loan debt from the retirement village, assigned that $1 million in debt to the
personal care home, and allowed one of the obligors - a geriatric physician - to
separately own and operate the personal care home as a separate facility. The
borrower was in compliance with a written loan work-out agreement until February
2002. Sporadic payments have been received since March 2002. The borrower
17
alleges insufficient operating cash, along with the loss of other income, to
service the debt. The Savings Bank also holds three other loans, totaling $366
thousand, secured by pledges of various real estate and chattel, to this same
borrower which were non-accrual as of September 30, 2002. During the quarter
ended December 31, 2002, the obligor filed for bankruptcy protection under
Chapter 11 of the Federal Bankruptcy Code. The Company has retained legal
counsel and is negotiating with the obligor to effect an orderly transfer of the
personal care home and related real property. The Company and its legal counsel
are also investigating other claims and remedies against other properties
pledged as collateral for these loans.
As of December 31, 2002, the Company has one non-accruing commercial real
estate loan with a principal balance of $103 thousand. The obligors have filed
for bankruptcy under Chapter 7 of the Federal Bankruptcy Code. In January 2003
the Bankruptcy Court entered an Order authorizing the listing for sale of the
real property securing the loan and also ordered interest only payments to begin
in February 2003.
The Company had one non-accrual single-family loan with a balance of $67
thousand and one non-accrual first mortgage home equity line of credit with a
balance of $10 thousand. Both loans are in the process of collection.
During the six months ended December 31, 2002, the Company collected and
recognized approximately $44 thousand in past due interest on its nonperforming
loans. Approximately $117 thousand of additional interest income would have been
recorded during the six months ended December 31, 2002, if the Company's
nonaccrual and restructured loans had been current in accordance with their
original loan terms and outstanding throughout the six months ended December 31,
2002. The Company continues to work with the borrowers in an attempt to cure the
defaults and is also pursuing various legal avenues in order to collect on these
loans.
18
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET AND LIABILITY MANAGEMENT
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Company's transactions are denominated
in US dollars with no specific foreign exchange exposure. The Savings Bank has
no agricultural loan assets and therefore would not have a specific exposure to
changes in commodity prices. Any impacts that changes in foreign exchange rates
and commodity prices would have on interest rates are assumed to be exogenous
and will be analyzed on an ex post basis.
-- ----
Interest rate risk ("IRR") is the exposure of a banking organization's
financial condition to adverse movements in interest rates. Accepting this risk
can be an important source of profitability and shareholder value, however,
excessive levels of IRR can pose a significant threat to the Company's earnings
and capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the Company's safety and soundness.
Evaluating a financial institution's exposure to changes in interest rates
includes assessing both the adequacy of the management process used to control
IRR and the organization's quantitative level of exposure. When assessing the
IRR management process, the Company seeks to ensure that appropriate policies,
procedures, management information systems and internal controls are in place to
maintain IRR at prudent levels with consistency and continuity. Evaluating the
quantitative level of IRR exposure requires the Company to assess the existing
and potential future effects of changes in interest rates on its consolidated
financial condition, including capital adequacy, earnings, liquidity, and, where
appropriate, asset quality.
Financial institutions derive their income primarily from the excess of
interest collected over interest paid. The rates of interest an institution
earns on its assets and owes on its liabilities generally are established
contractually for a period of time. Since market interest rates change over
time, an institution is exposed to lower profit margins (or losses) if it cannot
adapt to interest-rate changes. For example, assume that an institution's assets
carry intermediate- or long-term fixed rates and that those assets were funded
with short-term liabilities. If market interest rates rise by the time the
short-term liabilities must be refinanced, the increase in the institution's
interest expense on its liabilities may not be sufficiently offset if assets
continue to earn interest at the long-term fixed rates. Accordingly, an
institution's profits could decrease on existing assets because the institution
will either have lower net interest income or, possibly, net interest expense.
Similar risks exist when assets are subject to contractual interest-rate
ceilings, or rate sensitive assets are funded by longer-term, fixed-rate
liabilities in a decreasing-rate environment.
During the six months ended December 31, 2002, the level of market interest
rates remained at relatively low levels due to the Federal Reserve's
accommodative monetary policy and the weakness in the national economy. The
marked decline in equity market prices and reduced corporate earnings have
caused a considerable disintermediation from the equity to the fixed income
markets, further compounding the decline in market interest rates across the
yield curve. In November, 2002 the Federal Reserve further reduced the federal
funds rate by fifty basis points.
Due to the rapid decline in market interest rates, the Company's loan,
investment and mortgage-backed securities portfolios experienced much higher
than anticipated levels of prepayments. Principal repayments on the Company's
loan, investment and mortgage-backed securities portfolios for the six months
ended December 31, 2002, totaled $35.8 million, $43.2 million and $38.5 million
respectively.
In response to higher levels of liquidity the Company began to rebalance
its loan, investment and mortgage-backed securities portfolios. Due to the low
level of market interest rates, the Company continued to reduce its originations
of long-term fixed rate mortgages while continuing to offer consumer home equity
and construction loans. The Company's commercial loan exposure was also reduced
19
in recognition of the weaknesses in the national and local economies. The
Company continued to purchase investment grade corporate bonds in order to earn
a higher return with a shorter maturity profile and to reduce the prepayment
risk within the portfolio. Each of the aforementioned strategies also helped to
improve the interest-rate and liquidity risks associated with the Savings Bank's
customers' liquidity preference for shorter term deposit products.
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. The
Company intends to emphasize higher yielding home equity and small business
loans to existing customers and seasoned prospective customers.
During the quarter ended December 31, 2002, principal investment purchases
were comprised of: investment grade corporate bonds - $37.8 million with a
weighted average yield of approximately 3.62%; callable government agency bonds
- - $1.1 million with a weighted average yield of approximately 2.52%; and
collateralized mortgage obligations - $48.4 million with an original weighted
average yield of approximately 2.87%. Major investment proceeds received during
the quarter ended December 31, 2002 were: investment grade corporate bonds -
$17.1 million with a weighted average yield of approximately 3.65%; callable
government agency bonds - $5.0 million with a weighted average rate of
approximately 6.98%; and investment grade commercial paper - $3.6 million with a
weighted average yield of approximately 2.10%. In most cases, the initial spread
earned on government agency and investment grade corporate bond purchases
averaged approximately 210 basis points.
As of December 31, 2002, the implementation of these asset and liability
management initiatives resulted in the following:
1) the Company's liquidity profile has improved by reducing the
investment portfolio's stated final maturities as follows: less than 1
year: $79.1 million or 30.1%; 1-3 years: $16.2 million or 6.2%; 3-5
years: $0 million or 0.0%; over 5 years: $167.5 million or 63.7%;
2) $70.1 million or 76.4% of the Company's portfolio of mortgage-backed
securities (including collateralized mortgage obligations - "CMOs")
were comprised of floating rate instruments;
3) the maturity distribution of the Company's borrowings is as follows:
less than 1 year: $58.8 million or 28.3%; 1-3 years: $0 or 0.0%; 3-5
years: $4.2 million or 2.0%; over 5 years: $144.5 million or 69.7%;
and
4) an aggregate of $39.4 million or 31.1% of the Company's net loan
portfolio had adjustable interest rates or maturities of less than 12
months.
The effect of interest rate changes on a financial institution's assets and
liabilities may be analyzed by examining the "interest rate sensitivity" of the
assets and liabilities and by monitoring an institution's interest rate
sensitivity "gap". An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within a given time
period. A gap is considered positive (negative) when the amount of rate
sensitive assets (liabilities) exceeds the amount of rate sensitive liabilities
(assets). During a period of falling interest rates, a negative gap would tend
to result in an increase in net interest income. During a period of rising
interest rates, a positive gap would tend to result in an increase in net
interest income.
20
The following table sets forth certain information at the dates indicated
relating to the Company's interest-earning assets and interest-bearing
liabilities which are estimated to mature or are scheduled to reprice within one
year.
December 31, June 30,
----------- --------
2002 2002 2001
-------- -------- --------
(Dollars in Thousands)
Interest-earning assets maturing or
repricing within one year $265,881 $252,467 $155,928
Interest-bearing liabilities maturing or
repricing within one year 152,981 142,823 137,232
-------- -------- --------
Interest sensitivity gap $112,900 $109,644 $ 18,696
======== ======== ========
Interest sensitivity gap as a percentage of
total assets 27.6% 27.1% (4.7)%
Ratio of assets to liabilities
maturing or repricing within one year 173.8% 176.8% 113.6%
During the quarter ended December 31, 2002, the Company managed its one
year interest sensitivity gap by: (1) generally limiting incremental corporate
bond purchases to those with repricing dates within 2 years; and (2) purchasing
floating rate CMO's which reprice on a monthly basis.
21
The following table illustrates the Company's estimated stressed cumulative
repricing gap - the difference between the amount of interest-earning assets
and interest-bearing liabilities expected to reprice at a given point in time -
at December 31, 2002. The table estimates the impact of an upward or downward
change in market interest rates of 100 and 200 basis points.
Cumulative Stressed Repricing Gap
---------------------------------
Month 3 Month 6 Month 12 Month 24 Month 36 Month 60 Long Term
------- ------- -------- -------- -------- -------- ---------
(Dollars in Thousands)
Base Case Up 200 bp
- -------------------
Cummulative
Gap ($'s) 88,935 95,246 103,497 114,387 118,539 103,176 27,599
% of Total
Assets 21.7% 23.2% 25.3% 27.9% 28.9% 25.2% 6.7%
Base Case Up 100 bp
- -------------------
Cummulative
Gap($'s) 90,900 98,381 107,711 123,054 131,831 116,786 27,599
% of Total
Assets 22.2% 24.0% 26.3% 30.0% 32.2% 28.5% 6.7%
Base Case No Change
- -------------------
Cummulative
Gap($'s) 93,552 102,656 112,900 130,063 139,695 121,107 27,600
% of Total
Assets 22.8% 25.1% 27.6% 31.7% 34.1% 29.6% 6.7%
Base Case Down 100 bp
- ---------------------
Cummulative
Gap($'s) 94,454 103,861 113,928 132,658 140,586 121,470 27,599
% of Total
Assets 23.1% 25.3% 27.8% 32.4% 34.3% 29.6% 6.7%
Base Case Down 200 bp
- ---------------------
Cummulative
Gap($'s) 94,946 104,374 114,420 133,043 140,864 121,566 27,599
% of Total
Assets 23.2% 25.5% 27.9% 32.5% 34.4% 29.7% 6.7%
Beginning in the third quarter of fiscal 2001, the Company began to utilize
an income simulation model to measure interest rate risk and to manage interest
rate sensitivity. The Company believes that income simulation modeling may
enable the Company to better estimate the possible effects on net interest
income due to changing market interest rates. Other key model parameters
include: estimated prepayment rates on the Company's loan, mortgage-backed
securities and investment portfolios; savings decay rate assumptions; and the
repayment terms and embedded options of the Company's borrowings.
22
The following table presents the simulated impact of a 100 and 200 basis point
upward or downward shift in market interest rates on net interest income, return
on average equity, return on average assets and the market value of portfolio
equity at December 31, 2002.
Analysis of Sensitivity to Changes in Market Interest Rates
-----------------------------------------------------------
Modeled Change in Market Interest Rates
-------------------------------------------------------------------
Estimated impact on: -200 -100 0 +100 +200
- --------------------
Change in net interest income -19.5% -12.7% 0.0% 8.2% 15.1%
Return on average equity 7.53% 8.83% 11.25% 12.78% 14.07%
Return on average assets 0.55% 0.64% 0.83% 0.95% 1.05%
Market value of equity (in
thousands) $16,770 $17,690 $19,208 $19,260 $18,962
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 December 31,
2002.
Anticipated Transactions
- -----------------------------------------------------------
(Dollars in Thousands)
Undisbursed construction and
land development loans
Fixed rate $ 2,602
6.81%
Adjustable rate $ 5,564
5.41%
Undisbursed lines of credit
Adjustable rate $ 6,740
5.36%
Loan origination commitments
Fixed rate $ 153
6.50%
Adjustable rate $ 85
7.04%
Letters of credit
Adjustable rate $ 82
7.25%
-------
$15,226
=======
23
In the ordinary course of its construction lending business, the Savings
Bank enters into performance standby letters of credit. Typically, the standby
letters of credit are issued on behalf of a builder to a third party to ensure
the timely completion of a certain aspect of a construction project or land
development. At Decemter 31, 2002 the Savings Bank had three performance standby
letters of credit outstanding totaling approximately $82 thousand. Two of the
performance standby letters of credit are secured by deposits with the Savings
Bank, and the other is secured by real estate. All three performance standby
letters of credit will mature within twelve months. In the event that the
obligor is unable to perform its obligations as specified in the standby letter
of credit agreement, the Savings Bank would be obligated to disburse funds up to
the amount specified in the standby letter of credit agreement. The Savings Bank
maintains adequate collateral that could be liquidated to fund this contingent
obligation.
24
ITEM 4.
CONTROLS AND PROCEDURES
Within 90 days prior to the date of this Quarterly Report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Accounting Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based upon that evaluation,
the Chief Executive Officer and Chief Accounting Officer concluded that the
Company's disclosure controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
Disclosure controls and procedures are the controls and other procedures of
the Company that are designed to ensure that the information required to be
disclosed by the Company in its reports filed or submitted under the Securities
Exchange Act of 1934, as amended ("Exchange Act") is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in its reports filed under
the Exchange Act is accumulated and communicated to the Company's management,
including the principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
25
ITEM 1. Legal Proceedings
-----------------
The Savings Bank filed a Complaint in Mortgage Foreclosure (the
"Foreclosure") in March 2000 against the Development Group of Rose Valley
(the "Obligor"), an obligor on two impaired and non-accrual loans. The
Foreclosure was filed in the Court of Common Pleas of Allegheny County,
Pennsylvania to request a judicial sale of the underlying real properties
securing the mortgage loans due to nonpayment as per the terms of the
mortgage notes. In November 2001, the Obligor filed an Answer, New Matter
and Counterclaim to the Foreclosure. The counterclaims include breach of
contract, promissory estoppel, breach of duty of good faith and fair
dealing and tortuous interference with prospective and existing business
relations and seeks damages of approximately $5.2 million. In January 2002,
the Court dismissed the tortuous interference claim. In December 2002, the
Obligor withdrew its lawsuit, and released the Company from any and all
claims, in connection with the Loan Modifications discussed herein. See
Part I, Item 2, Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Three and Six Months Ended December 31,
2002, "Liquidity and Capital Resources".
ITEM 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable.
ITEM 3. Defaults Upon Senior Securities
--------------------------------
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
----------------------------------------------------
(a) An annual meeting of stockholders was held on October 29, 2002.
(b) Not applicable.
(c) Two matters were voted upon at the annual meeting held on October
29, 2002: 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, 2003.
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 David L. Aeberli 2,269,708 83,343
Margaret VonDerau 2,258,895 94,156
2 Election of Auditors 2,330,028 13,318 9,705
There were no broker non-votes cast with respect to any matter voted
upon.
(d) Not applicable.
ITEM 5. Other Information
-----------------
Not applicable.
26
ITEM 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) The following exhibits are filed as part of this Form 10-Q, and this
list includes the Exhibit Index.
Number Description Page
------ ----------------------------------------------------------- ------
99-1 Sarbanes-Oxley Act Certification of Chief Executive Officer E-1
99-2 Sarbanes-Oxley Act Certification of Chief Accounting Officer E-2
99-3 Independent Accountant's Report E-3
(b) None.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WVS FINANCIAL CORP.
February 13, 2003 BY: /s/ David J. Bursic
------------------------------------------
Date David J. Bursic
President and Chief Executive Officer
(Principal Executive Officer)
February 13, 2003 BY: /s/Keith A. Simpson
------------------------------------------
Date Keith A. Simpson
Vice-President and Chief Accounting
Officer
28
SECTION 302 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, David J. Bursic, certify that:
1. I have reviewed this quarterly report on Form 10-Q of WVS Financial Corp.
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and Audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ David J. Bursic
-------------------------------------
David J. Bursic
President and Chief Executive Officer
29
SECTION 302 CERTIFICATION OF THE CHIEF ACCOUNTING OFFICER
I, Keith A. Simpson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of WVS Financial Corp.
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and Audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 13, 2003
/s/ Keith A. Simpson
--------------------------------------------
Keith A. Simpson
Vice-President and Chief Accounting Officer
30