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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 March 31, 2003
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 May 12, 2003: 2,582,259 shares common Stock, $.01
par value.
26
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
INDEX
-----
PART I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheet as of
March 31, 2003 and June 30, 2002
(Unaudited) 3
Consolidated Statements of Income
for the Three and Nine Months Ended
March 31, 2003 and 2002 (Unaudited) 4
Consolidated Statements of Cash Flows
for the Nine Months Ended March 31,
2003 and 2002 (Unaudited) 5
Consolidated Statements of Changes in
Stockholders' Equity for the Nine Months
Ended March 31, 2003 (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 Nine Months
Ended March 31, 2003 13
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 20
Item 4. Controls and Procedures 26
PART II. Other Information Page
- -------- ----------------- ----
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
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 BALANCE SHEET
(UNAUDITED)
(In thousands)
March 31, 2003 June 30, 2002
------------------- --------------
Assets
------
Cash and due from banks $ 988 $ 879
Interest-earning demand deposits 3,372 2,298
Investment securities available-for-sale (amortized cost of
$4,077 and $8,375) 4,274 8,426
Investment securities held-to-maturity (market value of
$134,906 and $146,146) 131,335 142,958
Mortgage-backed securities available-for-sale (amortized cost of
$4,637 and $6,196) 4,858 6,450
Mortgage-backed securities held-to-maturity (market value of
$101,674 and $76,819) 101,146 76,093
Federal Home Loan Bank stock, at cost 8,688 8,281
Net loans receivable (allowance for loan losses of $2,687 and
$2,758) 107,819 152,905
Accrued interest receivable 3,036 3,903
Premises and equipment 1,271 996
Deferred taxes and other assets 1,455 1,722
------------- --------------
TOTAL ASSETS $ 368,242 $ 404,911
============= ==============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings Deposits:
Non-interest-bearing accounts $ 11,085 $ 12,615
NOW accounts 20,034 20,872
Savings accounts 42,718 41,620
Money market accounts 14,225 14,843
Certificates of deposit 76,953 84,709
------------- --------------
Total savings deposits 165,015 174,659
Federal Home Loan Bank advances 151,487 159,937
Other borrowings 11,424 33,731
Advance payments by borrowers for taxes and insurance 1,343 3,013
Accrued interest payable 1,479 1,698
Other liabilities 7,369 1,620
------------- --------------
TOTAL LIABILITIES 338,117 374,658
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;
3,733,786 and 3,729,858 shares issued 37 37
Additional paid-in capital 20,083 20,037
Treasury stock: 1,147,316 and 1,051,872 shares at cost,
Respectively (16,654) (15,133)
Retained earnings, substantially restricted 26,434 25,183
Accumulated other comprehensive income 276 201
Unallocated shares - Recognition and Retention Plans (51) (72)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 30,125 30,253
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 368,242 $ 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 Nine Months Ended
March 31, March 31,
----------------------------- ---------------------------
2003 2002 2003 2002
INTEREST AND DIVIDEND INCOME: -------------- ----------- ---------- -----------
Loans $ 2,227 $ 3,162 $ 7,617 $ 10,201
Investment securities 1,675 1,613 5,146 5,123
Mortgage-backed securities 663 700 2,115 2,516
Interest-earning deposits with other
institutions 1 3 8 11
Federal Home Loan Bank stock 70 96 206 364
---------- ----------- ---------- -----------
Total interest and dividend income 4,636 5,574 15,092 18,215
---------- ----------- ---------- -----------
INTEREST EXPENSE:
Deposits 752 1,103 2,578 4,035
Borrowings 2,083 2,208 6,454 6,759
Advance payments by borrowers for taxes
and insurance 6 10 16 23
---------- ----------- ---------- -----------
Total interest expense 2,841 3,321 9,048 10,817
---------- ----------- ---------- -----------
NET INTEREST INCOME 1,795 2,253 6,044 7,398
PROVISION FOR LOAN LOSSES (89) --- (71) 57
---------- ----------- ---------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,884 2,253 6,115 7,341
---------- ----------- ---------- -----------
NON-INTEREST INCOME:
Service charges on deposits 82 97 278 308
Gain on sale of investments --- --- 64 ---
Other 70 69 224 212
---------- ----------- ---------- -----------
Total non-interest income 152 166 566 520
---------- ----------- ---------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 613 607 1,824 1,852
Occupancy and equipment 107 98 291 281
Deposit insurance premium 8 8 23 25
Data processing 56 49 155 142
Correspondent bank service charges 37 38 113 122
Other 154 178 733 641
---------- ----------- ---------- -----------
Total non-interest expense 975 978 3,139 3,063
---------- ----------- ---------- -----------
INCOME BEFORE INCOME TAXES 1,061 1,441 3,542 4,798
INCOME TAXES 329 476 1,029 1,483
---------- ----------- ---------- -----------
NET INCOME $ 732 $ 965 $ 2,513 $ 3,315
========== =========== ========== ===========
EARNINGS PER SHARE:
Basic $ 0.28 $ 0.36 $ 0.96 $ 1.21
Diluted $ 0.28 $ 0.35 $ 0.95 $ 1.21
AVERAGE SHARES OUTSTANDING:
Basic 2,593,546 2,714,480 2,629,122 2,736,254
Diluted 2,598,775 2,720,976 2,634,468 2,745,783
See accompanying notes to consolidated financial statements.
4
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended
March 31,
--------------------------
2003 2002
OPERATING ACTIVITIES ------------ ---------
Net income $ 2,513 $ 3,315
Adjustments to reconcile net income to cash provided by operating
activities:
Provision for loan and real estate owned losses (71) 57
Gain on sale of investments (64) ---
Depreciation and amortization, net 109 92
Amortization of discounts, premiums and deferred loan fees 2,608 61
Amortization of ESOP, RRP and deferred and unearned
compensation 21 50
Decrease in accrued interest receivable 867 752
Decrease in accrued interest payable (219) (667)
Decrease in accrued and deferred taxes 221 343
Other, net (242) (131)
---------- ---------
Net cash used for operating activities 5,743 3,872
---------- ---------
INVESTING ACTIVITIES
Available-for-sale:
Purchases of investments and mortgage-backed securities (3,481) (19,960)
Proceeds from repayments of investments and mortgage-backed securities 8,762 21,375
Proceeds from sale of investments securities 639 ---
Held-to-maturity:
Purchases of investments and mortgage-backed securities (176,725) (259,520)
Proceeds from repayments of investments and mortgage-backed securities 166,702 239,699
Decrease in net loans receivable 44,921 23,241
Sale of real estate owned 220 27
Purchase of Federal Home Loan Bank stock (407) (602)
Purchases of premises and equipment (383) (95)
---------- ---------
Net cash provided by investing activities 40,248 4,165
---------- ---------
5
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended
March 31,
---------------------------
2003 2002
FINANCING ACTIVITIES --------- ----------
Net increase (decrease) in transaction and passbook accounts (1,888) 8,116
Net decrease in certificates of deposit (7,756) (14,247)
Net increase (decrease) in FHLB short-term advances 2,550 (986)
Net increase in other borrowings (22,307) (11,582)
Proceeds from FHLB long-term advances --- 23,279
Repayments of FHLB long-term advances (11,000) (10,000)
Net decrease in advance payments by borrowers for taxes and insurance (1,670) (755)
Net proceeds from issuance of common stock 46 159
Funds used for purchase of treasury stock (1,521) (1,130)
Cash dividends paid (1,262) (1,315)
--------- ----------
Net cash used for financing activities (44,808) (8,461)
--------- ----------
Increase (decrease) in cash and cash equivalents 1,183 (424)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 3,177 2,993
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 4,360 $ 2,569
========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits, escrows and borrowings $ 9,267 $ 11,484
Income taxes $ 846 $ 1,160
Non-cash item:
Pennsylvania Education Tax Credit $ 100 $ 100
Mortgage Loan Transferred to Other Real Estate Owned --- $ 388
See accompanying notes to consolidated financial statements.
6
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
Additional Unallocated
Common Paid-In Treasury Shares Held
Stock Capital Stock by ESOP
---------- ---------- ---------- ----------
Balance at June 30, 2002 $ 37 $ 20,037 $ (15,133) $ ---
Comprehensive income:
Net Income
Other comprehensive
income:
Change in unrealized
holding gains on
securities, net of
income tax effect
of $38
Comprehensive income
Purchase of shares for
treasury stock (1,521)
Accrued compensation
expense for Recognition
and Retention Plans (RRP)
Exercise of stock options 46
Cash dividends declared
($0.48 per share)
---------- ---------- ---------- ------------
Balance at March 31, 2003 $ 37 $ 20,083 $ (16,654) $ ---
========== ========== ========== ============
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
Retained
Unallocated Accumulated Earnings
Shares Held Other Compre- Substantially
by RRP hensive Income Restricted Total
- ------------ --------------- ------------- -------
Balance at June 30, 2002 $ $ (72) $ 201 $ 25,183 $30,253
Comprehensive income:
Net Income 2,513 2,513
Other comprehensive
income:
Change in unrealized
holding gains on
securities, net of
income tax effect
of $38 75 75
-------
Comprehensive income 2,588
Purchase of shares for
treasury stock (1,521)
Accrued compensation
expense for Recognition
and Retention Plans (RRP) 21 21
Exercise of stock options 46
Cash dividends declared (1,262) (1,262)
($0.48 per share)
- ------------ --------------- ------------- -------
Balance at March 31, 2003 $ $ (51) $ 276 $ 26,434 $30,125
= ============ =============== ============= =======
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 nine months ended March 31, 2003, 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.
8
The transition guidance and annual disclosure provisions of FAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
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. See Note 4 of this Form
10-Q.
In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under FAS
No. 133. The amendments set forth in FAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, this statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in FAS No. 133. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. FAS No. 149 amends certain other existing pronouncements. Those
changes will result in more consistent reporting of contracts that are
derivatives in their entirety or that contain embedded derivatives that warrant
separate accounting. This statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this statement that relate to FAS No. 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after June 30, 2003.
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.
In January, 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, in an effort to expand upon and strengthen existing
accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The objective of this interpretation is not to restrict the use of variable
interest entities but to improve financial reporting by companies involved with
variable interest entities. Until now, one company generally has included
another entity in its consolidated financial statements only if it controlled
the entity through voting interests. This interpretation changes that by
requiring a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. The consolidation requirements of this interpretation apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The adoption of
this interpretation has not and is not expected to have a material effect on the
Company's financial position or results of operations.
9
3. EARNINGS PER SHARE
------------------
The following table sets forth the computation of basic and diluted
earnings per share.
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------- ----------------------------------
2003 2002 2003 2002
-------------- --------------- ---------------- ----------------
Weighted average common shares
outstanding 3,732,233 3,722,989 3,730,790 3,715,153
Average treasury stock shares (1,138,687) (1,008,509) (1,101,668) (978,899)
Average unearned ESOP shares --- --- --- ---
-------------- --------------- ---------------- ----------------
Weighted average common shares
and common stock equivalents
used to calculate basic earnings
per share 2,593,546 2,714,480 2,629,122 2,736,254
Additional common stock
equivalents (stock options) used
to calculate diluted earnings per
share 5,229 6,496 5,346 9,529
-------------- --------------- ---------------- ----------------
Weighted average common shares
and common stock equivalents
used to calculate diluted earnings
per share 2,598,775 2,720,976 2,634,468 2,745,783
============== =============== ================ ================
Net income $ 731,747 $ 965,123 $ 2,513,057 $ 3,314,490
============== =============== ================ ================
Earnings per share:
Basic $ 0.28 $ 0.36 $ 0.96 $ 1.21
Diluted $ 0.28 $ 0.35 $ 0.95 $ 1.21
============== =============== ================ ================
All options at March 31, 2003 and March 31, 2002 were included in the
computation of diluted earnings per share.
10
4. STOCK BASED COMPENSATION DISCLOSURE
-----------------------------------
Pro forma information regarding net income and earnings per share as
required by FAS No.123, has been determined as if the Company had accounted for
its stock options using that method. The fair value for these options was
estimated at the date of the grants using the Black-Scholes option pricing
model.
In management's opinion, existing stock option valuation models do not
provide a reliable single measure of the fair value of employee stock options
that have vesting provisions and are not transferable. In addition, option
valuation models require input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, the existing models may not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For the purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The following
table represents the effect on net income and earnings per share had the
stock-based employee compensation expense been recognized:
Three Months Ended March 31, Nine Months Ended March 31,
2003 2002 2003 2002
--------- ------------ --------- ---------
Net income, as reported: $ 732 $ 965 $ 2,513 $ 3,315
Less proforma expense related
to stock options --- --- 10 31
-------- ------------ --------- ----------
Proforma net income $ 732 $ 965 $ 2,503 $ 3,284
======= ============ ========= ==========
Basic net income per common share:
As reported $ 0.28 $ 0.36 $ 0.96 $ 1.21
Pro forma 0.28 0.36 0.95 1.20
Diluted net income per common share:
As reported $ 0.28 $ 0.35 $ 0.95 $ 1.21
Pro forma 0.28 0.35 0.95 1.20
11
5. 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 March 31, Nine Months Ended March 31,
2003 2002 2003 2002
------------------ --------------------- --------------------- --------------------
Net income $732 $965 $2,513 $3,315
Other comprehensive
income (loss) before tax:
Unrealized gains (losses)
on available for sale
securities $(37) $(68) $177 $56
Less:
Reclassification
adjustment for
gain included in
net income --- --- 64 ---
------- ------- ------- --------- ------- --------- ---------- ----------
Other
comprehensive
income (loss) before tax (37) (68) 113 56
Income tax expense (benefit)
related to other
comprehensive
income (loss) (13) (23) 38 19
------- --------- --------- ----------
Other comprehensive
income (loss), net of tax (24) (45) 75 37
------- --------- --------- ----------
Comprehensive income $708 $920 $2,588 $3,352
======= ========= ========= ==========
12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2003
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 March 31, 2003.
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 $368.2 million at March 31, 2003, as compared
to $404.9 million at June 30, 2002. The $36.7 million or 9.1% decrease in total
assets was primarily comprised of a $45.1 million or 29.5% decrease in net loans
receivable, and a $15.4 million or 9.6% decrease in investment securities,
including FHLB stock, which were partially offset by a $23.5 million or 28.4%
increase in mortgage-backed securities.
13
The Company's total liabilities decreased $36.6 million or 9.8% to $338.1
million as of March 31, 2003, from $374.7 million as of June 30, 2002. The $36.5
million decrease in total liabilities was primarily comprised of a $22.3 million
or 66.2% decrease in other short-term borrowings, a $9.6 million or 5.5%
decrease in total savings deposits, a $8.4 million or 5.3% decrease in FHLB
advances, and a $1.7 million or 55.4% decrease in advance payments by borrowers
for taxes and insurance due to the seasonal payment of county real estate taxes,
which were partially offset by a $5.7 million increase in other liabilities. The
increase in other liabilities was primarily attributable to unfunded security
purchase commitments that were funded in April 2003. During the nine months
ended March 31, 2003, time deposits decreased $7.8 million due to seasonal
withdrawals of municipal time deposits. Transaction and passbook accounts
decreased $1.9 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 $128 thousand or 0.4% to $30.1 million
as of March 31, 2003, from approximately $30.3 million as of June 30, 2002.
Capital expenditures for the Company's stock repurchase program and cash
dividends totaled $1.5 million and $1.3 million, respectively, which were
primarily funded by net income of $2.5 million for the nine months ended March
31, 2003.
RESULTS OF OPERATIONS
General. WVS reported net income of $732 thousand, or $0.28 diluted
earnings per share, and $2.5 million or $0.95 diluted earnings per share, for
the three and nine months ended March 31, 2003, respectively. Net income
decreased by $233 thousand or 24.1% and diluted earnings per share decreased
$0.07 or 20.0% for the three months ended March 31, 2003, when compared to the
same period in 2002. The decrease in net income was primarily attributable to a
$458 thousand decrease in net interest income and a $14 thousand decrease in
non-interest income, which were partially offset by a $147 thousand decrease in
income tax expense, a $89 thousand decrease in provision for loan losses , and a
$3 thousand decrease in non-interest expense. For the nine months ended March
31, 2003, net income decreased by $802 thousand or 24.2% and diluted earnings
per share decreased $0.26 or 21.5% when compared to the same period in 2002. The
decrease was principally the result of a $1.4 million decrease in net interest
income and a $76 thousand increase in non-interest expense, which were partially
offset by a $454 thousand decrease in income tax expense, a $128 thousand
decrease in provision for loan losses, and a $46 thousand increase in
non-interest expense.
Net Interest Income. The Company's net interest income decreased by $458
thousand or 20.3% and $1.4 million or 18.3% for the three and nine months ended
March 31, 2003, respectively, when compared to the same periods in 2002. The
decrease in net interest income for both the three and nine month periods was
principally attributable to lower rates earned on Company assets due to lower
market interest rates, and lower average balances of net loans receivable, which
were 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 nine months ended March 31, 2003.
Interest Income. Interest on net loans receivable decreased $935 thousand
or 29.6% and $2.6 million or 25.3% for the three and nine months ended March 31,
2003, respectively, when compared to the same periods in 2002. The decrease for
the three months ended March 31, 2003 was attributable to a decrease of $49.3
million in the average balance of net loans receivable outstanding and a
decrease of 2 basis points in the weighted average yield earned on net loans
receivable for the three months ended March 31, 2003, when compared to the same
period in 2002. The decrease for the nine months ended March 31, 2003, was
attributable to a decrease of $41.7 million in the average balance of net loans
receivable outstanding and a 19 basis point decrease in the weighted average
yield earned on net loans receivable for the nine months ended March 31, 2003,
when compared to the same period in 2002. The decreases in the average loan
balance outstanding for both the three and nine months ended March 31, 2003,
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. The Company will begin to originate longer-term fixed rate loans
for sale on a correspondent basis to increase non-interest income and to
contribute to net income.
14
Interest on mortgage-backed securities ("MBS") decreased $37 thousand or
5.3% and $401 thousand or 15.9% for the three and nine months ended March 31,
2003, respectively, when compared to the same periods in 2002. The decrease for
the three months ended March 31, 2003 was primarily attributable to a 155 basis
point decrease in the weighted average yield earned on mortgage-backed
securities for the period, which was partially offset by a $24.9 million
increase in the average balance of mortgage-backed securities outstanding for
the three months ended March 31, 2003, when compared to the same period in 2002.
The decrease for the nine months ended March 31, 2003, was principally
attributable to a 184 basis point decrease in the weighted average yield earned
on mortgage-backed securities for the period, which was partially offset by a
$16.0 million increase in the average balance of mortgage-backed securities
outstanding for the nine months ended March 31, 2003, when compared to the same
period in 2002. The decrease in the weighted average yield earned on
mortgage-backed securities was consistent with market conditions for the three
and nine months ended March 31, 2003, 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 nine months ended March 31, 2003
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 $34 thousand or 2.0% for the three months ended March
31, 2003, when compared to the same period in 2002. The increase was principally
attributable to a $13.5 million increase in the average balance of other
investment securities outstanding for the three months ended March 31, 2003,
when compared to the same period in 2002, which was partially offset by a 32
basis point decrease on the weighted average yield earned on other investment
securities when compared to the same period in 2002. Interest on other
investment securities decreased $138 thousand or 2.5% for the nine months ended
March 31, 2003, when compared to the same period in 2002. The decrease for the
nine months ended March 31, 2003, was primarily attributable to a 92 basis point
decrease in the weighted average yield earned on other investment securities for
the period, which was partially offset by a $24.2 million increase in the
average balance of other investment securities outstanding for the nine months
ended March 31, 2003, when compared to the same period in 2002. The decrease in
the weighted average yield earned was consistent with market conditions for the
three and nine months ended March 31, 2003. The increase in the average balance
of other investment securities outstanding during the three and nine months
ended March 31, 2003, 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 $355
thousand or 31.9% and $1.5 million or 36.1% for the three and nine months ended
March 31, 2003, respectively, when compared to the same period in 2002. The
decrease in interest expense on deposits and escrows for the three months ended
March 31, 2003, was attributable to a 75 basis point decrease in the weighted
average yield paid on deposits and escrows for the period, and a $9.7 million
decrease in the average balance of interest-bearing deposits and escrows for the
three months ended March 31, 2003, when compared to the same period in 2002. The
decrease in interest expense on deposits and escrows for the nine months ended
March 31, 2003, was attributable to a 112 basis point decrease in the weighted
average yield paid on deposits and escrows for the period and a $5.4 million
decrease in the average balance of interest-bearing deposits and escrows for the
nine months ended March 31, 2003, when compared to the same period in 2002. The
average yield paid on interest-bearing deposits was consistent with market
conditions for the three and nine months ended March 31, 2003. The decrease in
the average balance of interest-bearing deposits and escrows for the three and
nine months ended March 31, 2003 was primarily due to seasonal withdrawals of
municipal time deposits and seasonal withdrawals and draw downs of transaction
and savings balances by local tax collectors and builders.
Interest on FHLB advances and other borrowings decreased $125 thousand or
5.7% and $305 thousand or 4.5% for the three and nine months ended March 31,
2003, respectively, when compared to the same periods in 2002. The decrease for
the three months ended March 31, 2003, was attributable to a 28 basis point
decrease in the weighted average rate paid on FHLB advances and other borrowings
15
for the period, and a $429 thousand decrease in the average balance of such
borrowings for the three months ended March 31, 2003, when compared to the same
period in 2002. The decrease for the nine months ended March 31, 2003, was
principally attributable to a 34 basis point decrease in the weighted average
rate paid on FHLB advances and other borrowings for the nine months ended March
31, 2003 when compared to the same period in 2002, which was partially offset by
a $3.8 million increase in the average balance of such borrowings outstanding
for the nine months ended March 31, 2003, when compared to the same period in
2002. The increase in the average balance of FHLB advances and other borrowings
for the nine months ended March 31, 2003, was primarily used to fund purchases
of investments and mortgage-backed securities. The weighted average rate paid on
FHLB advances and other borrowings 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 a credit provision for loan losses of $89 thousand for
the three months ended March 31, 2003, compared to no provision for the same
period in 2002. For the nine months ended March 31, 2003, the Company reduced
provisions for loan loss by $71 thousand compared to a $57 thousand provision
for the same period in 2002. The decrease in the provision for loan losses is
due to reduced levels of net loans receivable and collections on past due loans.
At March 31, 2003, the Company's total allowance for loan losses amounted to
$2.7 million or 2.4% of the Company's total loan portfolio, as compared to $2.8
million or 1.7% at March 31, 2002. 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 $14 thousand or 8.4%
for the three months ended March 31, 2003, when compared to the same period in
2002. The decrease was primarily attributable to decreases in service charge
income earned on transaction accounts. For the nine months ended March 31, 2003,
non-interest income increased $46 thousand or 8.8% when compared to the same
period in 2002. The increase was primarily attributable to a $64 thousand gain
on sale of investments from the Company's investment portfolio, and a $13
thousand increase in ATM fee income, which was partially offset by a $31
thousand decrease in service charge income earned on transaction accounts.
Non-Interest Expense. Non-interest expense decreased $3 thousand or 0.3%
for the three months ended March 31, 2003, when compared to the same period in
2002. The decrease was principally attributable to a $18 thousand decrease in
expenses on transaction accounts and a $16 thousand decrease in legal and
disposition costs associated with collecting past due loans and liquidating
collateral, which were partially offset by a $9 thousand increase in
depreciation expense relating to the Company's purchases to upgrade the Bank's
technology platform in December 2002, and a $6 thousand increase in employee
health insurance and training expense, when compared to the same period on 2002.
For the nine months ended March 31, 2003, non-interest expense increased $76
thousand or 2.5%, when compared to the same period in 2002. The increase was
principally attributable to a $66 thousand increase in legal and disposition
costs associated with collections, past due loans, and liquidation collateral, a
$13 thousand increase in data processing expense, and a $10 thousand increase in
depreciation expense, which were partially offset by a $28 thousand decrease in
employee recognition and retention plan expense.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $5.7 million during the
nine months ended March 31, 2003. Net cash provided by operating activities was
primarily comprised of $2.6 million in amortization of discounts, premiums and
deferred loan fees, $2.5 million of net income, and a $867 thousand decrease in
accrued interest receivables, which were partially offset by a $219 thousand
decrease in accrued interest payables, a $64 thousand gain on sale of
investments, and a $71 thousand decrease in provision for loan losses.
16
Funds provided by investing activities totaled $40.2 million during the
nine months ended March 31, 2003. Primary sources of funds during the nine
months ended March 31, 2003, included $176.1 million from repayments and sales
of investment and mortgage-backed securities, and a $44.9 million decrease in
net loans receivable, which were partially offset by $180.6 million for
purchases of investment and mortgage-backed securities, including Federal Home
Loan Bank stock and $383 thousand for purchases of equipment to upgrade the
Bank's technology platform, and $220 thousand of proceeds from the sale of other
real estate owned.
Funds used for financing activities totaled $44.8 million for the nine
months ended March 31, 2003. The primary uses included a $22.3 million decrease
in other short-term borrowings, a $11.3 million decrease in deposits and
escrows, an $11.0 million repayment of long-term FHLB advances, $1.5 million in
purchased treasury stock, and $1.3 million in cash dividends paid on the
Company's common stock, which were offset by a $2.6 million increase in
short-term FHLB advances. 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 March 31, 2003, the Company repaid approximately
$11.8 million in various short-term borrowings from the FHLB with a weighted
average rate of 1.66%, and incurred $152.5 million in other short-term
borrowings with a weighted average rate of 1.31%. During the three months ended
March 31, 2003, the Company repaid $6.0 million of long-term FHLB advances and
$179.3 million of other short-term borrowings with weighted average rates of
2.49% and 1.32%, 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 March 31, 2003, the total approved loan
commitments outstanding amounted to $806 thousand. At the same date, commitments
under unused lines of credit amounted to $6.7 million, the unadvanced portion of
construction loans approximated $9.4 million and commitments to fund security
purchases totaled $5.8 million. Certificates of deposit scheduled to mature in
one year or less at March 31, 2003, totaled $53.6 million. Management believes
that a significant portion of maturing deposits will remain with the Company.
Historically, the Company used its sources of funds primarily to meet its
ongoing commitments to pay maturing 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 April 29, 2003, the Company's Board of Directors declared a cash
dividend of $0.16 per share payable May 22, 2003, to shareholders of record at
the close of business on May 12, 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 March 31, 2003, WVS Financial Corp. exceeded all regulatory capital
requirements and maintained Tier I and total risk-based capital equal to $29.8
million or 14.5% and $32.5 million or 15.6%, respectively, of total
risk-weighted assets, and Tier I leverage capital of $29.8 million or 7.97% of
average quarterly assets.
17
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 March 31, 2003, totaled approximately
$4.2 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 March 31, 2003, consisted
of: five commercial real estate loans totaling $3.6 million, two construction
and land development loans totaling $578 thousand, one commercial loan totaling
$22 thousand, and one consumer loan totaling $1 thousand.
The $1.1 million decrease in nonperforming assets during the nine months
ended March 31, 2003 was comprised of a $582 thousand decrease in single-family
loans, a $419 thousand decrease in construction and land development loans, a
$176 thousand decrease in commercial loans, and a $235 thousand decrease in
other real estate owned, which were partially offset by a $329 thousand increase
in commercial real estate loans and a $1 thousand increase in consumer 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. As of March 31, 2003, the borrowers were
performing under the modified terms, and the loan was no longer classified as
non-accrual.
As of March 31, 2003, 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 $172 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 has been collecting payments since August 2002.
The Company has one non-accrual commercial real estate loan and one
construction loan that was returned to accrual status, 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 serviced by the Company
for four participating lenders. During the quarter ended December 31, 2002 the
Savings 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
18
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. During the
quarter ended March 31, 2003, the Company returned the construction loan to
accrual status due to timely repayments under the modified terms and its first
lien position. The Company is recording its share of interest received on the
non-accrual commercial real estate loan on a cost recovery basis.
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
alleges insufficient operating cash, along with the loss of other income, to
service the debt. The Savings Bank also holds three other loans, totaling $362
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, has obtained possession of the personal care home and related real
property, and anticipates a foreclosure sale in July 2003. The Company and its
legal counsel are also investigating other claims and remedies against other
properties pledged as collateral for these loans.
As of March 31, 2003, 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, ordered interest only payments to begin in
February 2003 and granted Relief from the Automatic Stay to Foreclosure
effective June 2003. As of March 31, 2003, the Savings Bank had yet to receive
the specified interest-only payments ordered by the Bankruptcy Court and is
pursuing those monies due through counsel.
During the nine months ended March 31, 2003, the Company collected and
recognized approximately $56 thousand in past due interest on its nonperforming
loans. Approximately $177 thousand of additional interest income would have been
recorded during the nine months ended March 31, 2003, if the Company's
nonaccrual and restructured loans had been current in accordance with their
original loan terms and outstanding throughout the nine months ended March 31,
2003. 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.
19
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 nine months ended March 31, 2003, 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.
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 nine months
ended March 31, 2003, totaled $56.5 million, $106.1 million and $69.7 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
in recognition of the weaknesses in the national and local economies. The
20
Company continued to purchase investment grade corporate bonds and floating rate
CMOs 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 March 31, 2003, principal investment purchases
were comprised of: investment grade corporate bonds - $14.5 million with a
weighted average yield of approximately 4.18%; callable government agency bonds
- - $12.0 million with a weighted average yield of approximately 2.98%; investment
grade commercial paper - $1.1 million with a weighted average yield of
approximately 1.80%; tax-free municipal bonds - $300 thousand with a weighted
average yield of approximately 2.71%;and collateralized mortgage obligations -
$40.1 million with an original weighted average yield of approximately 2.71%.
Major investment proceeds received during the quarter ended March 31, 2003 were:
investment grade corporate bonds - $34.1 million with a weighted average yield
of approximately 3.49%; and callable government agency bonds - $28.9 million
with a weighted average rate of approximately 8.06%. In most cases, the initial
spread earned on government agency and investment grade corporate bond purchases
averaged approximately 220 basis points.
As of March 31, 2003, the implementation of these asset and liability
management initiatives resulted in the following:
1) the Company's liquidity profile remains high with the investment
portfolio's stated final maturities as follows: less than 1 year:
$56.7 million or 23.5%; 1-3 years: $20.5 million or 8.4%; over 5
years: $164.4 million or 68.1%;
2) $89.0 million or 83.9% 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: $14.3 million or 8.7%; 1-3 years: $4.0 or 2.5%; 3-5
years: $3.2 million or 1.9%; over 5 years: $141.5 million or 86.9%;
and
4) an aggregate of $37.8 million or 35.1% 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.
21
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.
March 31, June 30,
-------- --------
2003 2002 2001
---- ---- ----
(Dollars in Thousands)
Interest-earning assets maturing or
repricing within one year $253,187 $252,467 $155,928
Interest-bearing liabilities maturing or
repricing within one year 129,168 142,823 137,232
-------- ---------- ---------
Interest sensitivity gap $124,019 $109,644 $ 18,696
========= ========== =========
Interest sensitivity gap as a percentage of
total assets 33.6% 27.1% (4.7)%
Ratio of assets to liabilities
maturing or repricing within one year 196.0% 176.8% 113.6%
During the quarter ended March 31, 2003, 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.
22
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
March 31, 2003. 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 ($'s) 105,100 101,333 93,709 109,694 119,578 129,647 34,004
% of Total
Assets 28.5% 27.4% 25.4% 29.7% 32.4% 35.1% 9.2%
Base Case Up 100 bp
- -------------------
Cummulative
Gap ($'s) 109,720 109,486 106,559 139,167 156,536 163,740 34,004
% of Total
Assets 29.7% 29.7% 28.9% 37.7% 42.4% 44.3% 9.2%
Base Case No Change
- -------------------
Cummulative
Gap ($'s) 121,383 124,139 124,019 161,087 174,649 175,846 34,004
% of Total
Assets 32.9% 33.6% 33.6% 43.6% 47.3% 47.6% 9.2%
Base Case Down 100 bp
- -------------------
Cummulative
Gap ($'s) 123,956 128,107 128,984 167,499 178,802 178,471 34,004
% of Total
Assets 33.6% 34.7% 34.9% 45.4% 48.4% 48.3% 9.2%
Base Case Down 200 bp
- -------------------
Cummulative
Gap ($'s) 124,619 133,082 134,139 169,065 179,663 178,885 34,004
% of Total
Assets 33.8% 36.0% 36.3% 45.8% 48.7% 48.4% 9.2%
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.
23
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 March 31, 2003.
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 -38.5% -27.2% 0.0% 19.1% 38.6%
Return on average equity 1.97% 3.53% 7.21% 9.72% 12.26%
Return on average assets 0.16% 0.28% 0.59% 0.80% 1.02%
Market value of equity (in
thousands) $(1,200) $7,515 $15,157 $20,391 $22,870
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 March 31,
2003.
Anticipated Transactions
- ------------------------------------------------------------------
(Dollars in Thousands)
Undisbursed construction and
land development loans
Fixed rate $ 2,347
4.35%
Adjustable rate $ 7,026
5.31%
Undisbursed lines of credit
Adjustable rate $ 6,683
4.83%
Loan origination commitments
Fixed rate $ 646
5.75%
Adjustable rate $ 160
4.02%
Letters of credit
Adjustable rate $ 51
7.25%
-----------
$ 16,913
===========
24
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 March 31, 2003 the Savings Bank had three performance standby
letters of credit outstanding totaling approximately $51 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.
25
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.
26
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
The Company is involved with various legal actions arising in the ordinary
course of business. Management believes the outcome of these matters will have
no material effect on the consolidated operations or consolidated financial
condition of WVS Financial Corp.
ITEM 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable.
ITEM 3. Defaults Upon Senior Securities
--------------------------------
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
ITEM 5. Other Information
-----------------
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following 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) The Company filed a Current Report on Form 8-K dated January 2, 2003,
reporting under Item 5 that the Company's Board of Directors
authorized the repurchase of up to 130,000 shares, or approximately
5%, of the Company's outstanding common stock. The Company included as
an exhibit to the Form 8-K the press release issued January 2, 2003.
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.
May 15, 2003 BY: /s/ David J. Bursic
----------------------------------------
Date David J. Bursic
President and Chief Executive Officer
(Principal Executive Officer)
May 15, 2003 BY: /s/ Keith A. Simpson
-----------------------------------------
Date Keith A. Simpson
Vice-President, Treasurer and Chief
Accounting Officer
(Principal 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: May 15, 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: May 15, 2003
/s/ Keith A. Simpson
---------------------------------------------
Keith A. Simpson
Vice-President and Chief Accounting Officer
30