UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-22444
WVS Financial Corp.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1710500
- ---------------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9001 Perry Highway
Pittsburgh, Pennsylvania 15237
- ---------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
(412) 364-1911
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES [X] NO [_]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12 b-2 of the Exchange
Act. (Check one):
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12 b-2 of the Exchange Act).
YES [_] NO [X]
Shares outstanding as of October 30, 2007: 2,260,205 shares Common
Stock, $.01 par value.
<page>
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
INDEX
-----
PART I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheet as of
September 30, 2007 and June 30, 2007
(Unaudited) 3
Consolidated Statement of Income
for the Three Months Ended
September 30, 2007 and 2006 (Unaudited) 4
Consolidated Statement of Changes in
Stockholders' Equity for the Three Months
Ended September 30, 2007 (Unaudited) 5
Consolidated Statement of Cash Flows
for the Three Months Ended September 30,
2007 and 2006 (Unaudited) 6
Notes to Unaudited Consolidated
Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations for the Three Months
Ended September 30, 2007 10
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 16
Item 4. Controls and Procedures 23
PART II. Other Information Page
- -------- ----------------- ----
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits 25
Signatures 26
2
<page>
<table>
<caption>
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In thousands)
September 30, 2007 June 30, 2007
------------------ ---------------
<s> <c> <c>
Assets
------
Cash and due from banks $ 1,046 $ 630
Interest-earning demand deposits 1,381 2,045
--------------- ---------------
Total cash and cash equivalents 2,427 2,675
Investment securities available-for-sale (amortized cost of
$19,425 and $8,957) 19,407 8,933
Investment securities held-to-maturity (market value of
$219,658 and $201,510) 218,409 202,664
Mortgage-backed securities available-for-sale (amortized cost of
$2,129 and $2,186) 2,226 2,246
Mortgage-backed securities held-to-maturity (market value of
$129,878 and $119,646) 130,832 119,271
Net loans receivable (allowance for loan losses of $969 and
$986) 59,561 60,350
Accrued interest receivable 3,599 3,714
Federal Home Loan Bank stock, at cost 10,899 6,340
Premises and equipment 806 813
Other assets 1,070 1,070
--------------- ---------------
TOTAL ASSETS $ 449,236 $ 408,076
=============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings Deposits:
Non-interest-bearing accounts $ 24,280 $ 12,363
NOW accounts 16,944 18,741
Savings accounts 30,532 32,937
Money market accounts 20,983 20,146
Certificates of deposit 70,542 74,177
Advance payments by borrowers for taxes and insurance 378 1,013
--------------- ---------------
Total savings deposits 163,659 159,377
Federal Home Loan Bank advances: long-term 135,579 130,579
Federal Home Loan Bank advances: short-term 86,325 --
Other borrowings 28,324 82,950
Accrued interest payable 1,921 1,669
Other liabilities 2,416 2,208
--------------- ---------------
TOTAL LIABILITIES $ 418,224 $ 376,783
--------------- ---------------
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;
3,790,336 and 3,790,336 shares issued 38 38
Additional paid-in capital 21,137 21,137
Treasury stock: 1,530,131 and 1,471,481 shares at cost,
Respectively (23,253) (22,286)
Retained earnings, substantially restricted 33,039 32,382
Accumulated other comprehensive income 52 23
Unallocated shares - Recognition and Retention Plans (1) (1)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY $ 31,012 $ 31,293
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 449,236 $ 408,076
=============== ===============
See accompanying notes to unaudited consolidated financial statements.
3
</table>
<page>
<table>
<caption>
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(In thousands, except per share data)
Three Months Ended
September 30,
----------------------------
2007 2006
------------ ------------
<s> <c> <c>
INTEREST AND DIVIDEND INCOME:
Loans $ 1,123 $ 1,052
Investment securities 3,383 2,566
Mortgage-backed securities 1,933 2,399
Interest-earning deposits with other institutions 2 4
Federal Home Loan Bank stock 96 97
------------ ------------
Total interest and dividend income 6,537 6,118
------------ ------------
INTEREST EXPENSE:
Deposits 1,138 968
Federal Home Loan Bank advances 2,358 1,908
Other borrowings 738 1,162
------------ ------------
Total interest expense 4,234 4,038
------------ ------------
NET INTEREST INCOME 2,303 2,080
RECOVERY FOR LOAN LOSSES (17) (9)
------------ ------------
NET INTEREST INCOME AFTER RECOVERY FOR 2,320 2,089
LOAN LOSSES ------------ ------------
NON-INTEREST INCOME:
Service charges on deposits 86 88
Investment securities gains 1 --
Other 70 64
------------ ------------
Total non-interest income 157 152
------------ ------------
NON-INTEREST EXPENSE:
Salaries and employee benefits 508 489
Occupancy and equipment 88 91
Data processing 63 63
Correspondent bank service charges 26 39
Other 257 220
------------ ------------
Total non-interest expense 942 902
------------ ------------
INCOME BEFORE INCOME TAXES 1,535 1,339
INCOME TAXES 512 435
------------ ------------
NET INCOME $ 1,023 $ 904
============ ============
EARNINGS PER SHARE:
Basic $ 0.45 $ 0.39
Diluted $ 0.45 $ 0.39
AVERAGE SHARES OUTSTANDING:
Basic 2,283,510 2,327,183
Diluted 2,284,384 2,329,120
See accompanying notes to unaudited consolidated financial statements.
4
</table>
<page>
<table>
<caption>
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
Accumulated
Retained Other
Additional Earnings Compre- Unallocated
Common Paid-In Treasury Substantially hensive Shares Held
Stock Capital Stock Restricted Income by RRP Total
----- ------- ----- ---------- ------ ------ -----
<s> <c> <c> <c> <c> <c> <c> <c>
Balance at June 30, 2007 $ 38 $ 21,137 $ (22,286) $ 32,382 $ 23 $ (1) $ 31,293
Comprehensive income:
Net Income 1,023 1,023
Other comprehensive
income:
Change in unrealized
holding gains on
securities, net of
income tax effect
of $15 29 29
-----------
Comprehensive income 1,052
Purchase of shares for
treasury stock (967) (967)
Accrued compensation
expense for Recognition
and Retention Plans (RRP) -- --
Exercise of stock options -- -- --
Cash dividends declared
($0.16 per share) (366) (366)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at Sept 30, 2007 $ 38 $ 21,137 $ (23,253) $ 33,039 $ 52 $ (1) $ 31,012
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
5
</table>
<page>
<table>
<caption>
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
September 30,
------------------------
2007 2006
---------- ----------
<s> <c> <c>
OPERATING ACTIVITIES
Net income $ 1,023 $ 904
Adjustments to reconcile net income to cash provided by operating
activities:
Recovery for loan losses (17) (9)
Depreciation 34 32
Investment securities gains 1 --
Amortization of discounts, premiums and deferred loan fees (23) (41)
Accretion of discounts - commercial paper (275) (7)
Increase in accrued and deferred taxes 77 27
Decrease (Increase) in accrued interest receivable 115 (489)
Increase in accrued interest payable 252 149
Other, net 32 673
---------- ----------
Net cash provided by operating activities 1,214 1,236
---------- ----------
INVESTING ACTIVITIES
Available-for-sale:
Purchases of investments and mortgage-backed securities (64,583) --
Proceeds from repayments of investments and mortgage-backed securities 54,403 8,009
Proceeds from sale of investment and mortgage-backed securities 49 --
Held-to-maturity:
Purchases of investments (21,929) (18,331)
Purchases of mortgage-backed securities (17,973) (4,998)
Proceeds from repayments of investments 6,204 6,009
Proceeds from repayments of mortgage-backed securities 6,205 12,617
Proceeds from sale of investments and mortgage-backed securities 216 --
Decrease (increase) in net loans receivable 801 (1,527)
Purchase of Federal Home Loan Bank stock (7,049) (753)
Redemption of Federal Home Loan Bank stock 2,490 1,944
Acquisition of premises and equipment (28) (7)
Other, net 3 --
---------- ----------
Net cash (used for) provided by investing activities (41,191) 2,963
---------- ----------
6
</table>
<page>
<table>
<caption>
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
September 30,
--------------------
2007 2006
-------- --------
<s> <c> <c>
FINANCING ACTIVITIES
Net increase in transaction and passbook accounts 8,633 8,336
Net (decrease) increase in certificates of deposit (3,635) 3,302
Net increase (decrease) in FHLB short-term advances 86,325 (23,150)
Net (decrease) increase in other borrowings (54,626) 15,452
Proceeds from Federal Home Loan Bank long-term advances 10,000 --
Repayments of Federal Home Loan Bank long-term advances (5,000) (5,000)
Net decrease in advance payments by borrowers for taxes and insurance (635) (691)
Cash dividends paid (366) (372)
Funds used for purchase of treasury stock (967) (245)
-------- --------
Net cash provided by (used for) financing activities 39,729 (2,368)
-------- --------
(Decrease) increase in cash and cash equivalents (248) 1,831
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 2,675 1,196
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 2,427 $ 3,027
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits, escrows and borrowings $ 3,932 $ 3,889
Income taxes 450 420
Non cash item
Due to Federal Reserve Bank 676 595
Neighborhood Assistance Act Tax Credit 36 --
See accompanying notes to unaudited consolidated financial statements.
7
</table>
<page>
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
U.S. generally accepted accounting principles. However, all adjustments
(consisting only of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation have been included. The
results of operations for the three months ended September 30, 2007, are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In September 2006, the FASB issued FAS No. 157, Fair Value
Measurements, which provides enhanced guidance for using fair value to measure
assets and liabilities. The standard applies whenever other standards require or
permit assets or liabilities to be measured at fair value. The Standard does not
expand the use of fair value in any new circumstances. FAS No. 157 is effective
for financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. Early adoption is permitted.
The adoption of this standard is not expected to have a material effect on the
Company's results of operations or financial position.
3. EARNINGS PER SHARE
------------------
The following table sets forth the computation of the weighted-average
common shares used to calculate basic and diluted earnings per share.
<table>
<caption>
Three Months Ended
September 30,
------------------------
2007 2006
---------- ----------
<s> <c> <c>
Weighted average common shares issued 3,790,336 3,769,838
Average treasury stock shares (1,506,826) (1,442,655)
---------- ----------
Weighted average common shares and common stock equivalents
used to calculate basic earnings per share 2,283,510 2,327,183
Additional common stock equivalents (stock options) used to
calculate diluted earnings per share 874 1,937
---------- ----------
Weighted average common shares and common stock equivalents
used to calculate diluted earnings per share 2,284,384 2,329,120
========== ==========
</table>
All options at September 30, 2007 and September 30, 2006 were included
in the computation of diluted earnings per share.
8
<page>
4. STOCK BASED COMPENSATION DISCLOSURE
-----------------------------------
The Company accounts for stock-based compensation in accordance with
Financial Accounting Standard (FAS) No. 123R. FAS 123R requires compensation
costs related to share-based payment transactions to be recognized in the
financial statements (with limited exceptions). The amount of compensation cost
is measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost is recognized over the period that an
employee provides service in exchange for the award. The Company did not have
any non-vested stock options outstanding during the periods ended September 30,
2007 and 2006. There were no options issued during the periods ended September
30, 2007 and 2006.
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 Month Ended September 30,
-----------------------------------------
2007 2006
------------------- -------------------
Net income $ 1,023 $ 904
Other comprehensive
income:
Unrealized gains
on available for sale
securities $ 45 $ 35
Less:
Reclassification
adjustment for
gain included in
net income (1) --
-------- -------- -------- --------
Other comprehensive gain
before tax 44 35
Income tax expense
related to other
comprehensive gain 15 12
-------- --------
Other comprehensive gain
net of tax 29 23
-------- --------
Comprehensive income $ 1,052 $ 927
======== ========
9
<page>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007
FORWARD LOOKING STATEMENTS
In the normal course of business, we, in an effort to help keep our
shareholders and the public informed about our operations, may from time to time
issue or make certain statements, either in writing or orally, that are or
contain forward-looking statements, as that term is defined in the U.S. federal
securities laws. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits from acquisitions made by or to be
made by us, projections involving anticipated revenues, earnings, profitability
or other aspects of operating results or other future developments in our
affairs or the industry in which we conduct business. Forward-looking statements
may be identified by reference to a future period or periods or by the use of
forward-looking terminology such as "anticipated," "believe," "expect,"
"intend," "plan," "estimate" or similar expressions.
Although we believe that the anticipated results or other expectations
reflected in our forward-looking statements are based on reasonable assumptions,
we can give no assurance that those results or expectations will be attained.
Forward-looking statements involve risks, uncertainties and assumptions (some of
which are beyond our control), and as a result actual results may differ
materially from those expressed in forward-looking statements. Factors that
could cause actual results to differ from forward-looking statements include,
but are not limited to, the following, as well as those discussed elsewhere
herein:
o our investments in our businesses and in related technology
could require additional incremental spending, and might not
produce expected deposit and loan growth and anticipated
contributions to our earnings;
o general economic or industry conditions could be less
favorable than expected, resulting in a deterioration in
credit quality, a change in the allowance for loan losses or a
reduced demand for credit or fee-based products and services;
o changes in the interest rate environment could reduce net
interest income and could increase credit losses;
o the conditions of the securities markets could change, which
could adversely affect, among other things, the value or
credit quality of our assets, the availability and terms of
funding necessary to meet our liquidity needs and our ability
to originate loans and leases;
o changes in the extensive laws, regulations and policies
governing financial holding companies and their subsidiaries
could alter our business environment or affect our operations;
o the potential need to adapt to industry changes in information
technology systems, on which we are highly dependent, could
present operational issues or require significant capital
spending;
o competitive pressures could intensify and affect our
profitability, including as a result of continued industry
consolidation, the increased availability of financial
services from non-banks, technological developments such as
the internet or bank regulatory reform;
o acquisitions may result in one-time changes to income, may not
produce revenue enhancements or cost savings at levels or
within time frames originally anticipated and may result in
unforeseen integration difficulties; and
10
<page>
o acts or threats of terrorism and actions taken by the United
States or other governments as a result of such acts or
threats, including possible military action, could further
adversely affect business and economic conditions in the
United States generally and in our principal markets, which
could have an adverse effect on our financial performance and
that of our borrowers and on the financial markets and the
price of our common stock.
You should not put undue reliance on any forward-looking statements.
Forward-looking statements speak only as of the date they are made, and we
undertake no obligation to update them in light of new or future events except
to the extent required by federal securities laws.
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, FDIC-insured stock
savings bank conducting business from six offices in the North Hills suburbs of
Pittsburgh. The Savings Bank converted to the stock form of ownership in
November 1993. The Savings Bank had no subsidiaries at September 30, 2007.
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.
FINANCIAL CONDITION
The Company's assets totaled $449.2 million at September 30, 2007, as
compared to $408.1 million at June 30, 2007. The $41.1 million or 10.1% increase
in total assets was primarily comprised of a $26.2 million or 12.4% increase in
investment securities, a $11.5 million or 9.5% increase in mortgage-backed
securities, and a $4.6 million or 71.9% increase in Federal Home Loan Bank
("FHLB") stock, which were partially offset by a $789 thousand or 1.3% decrease
in net loans receivable, a $248 thousand or 9.3% decrease in cash and cash
equivalents and a $115 thousand or 3.1% decrease in accrued interest receivable.
The increase in investment securities is attributable to purchases of
intermediate term fixed-rate callable U.S. government agency bonds and
short-term investment grade commercial paper. The increase in mortgage-backed
securities was primarily attributable to purchases of U.S. Government agency
floating rate collateralized mortgage obligations. The increase in FHLB stock
was attributable to higher levels of FHLB borrowings and associated FHLB stock
purchase requirements. See "Asset and Liability Management".
The Company's total liabilities increased $41.4 million or 11.0% to
$418.2 million as of September 30, 2007 from $376.8 million as of June 30, 2007.
The $41.4 million increase in total liabilities was primarily comprised of a
$86.3 million or 100.0% increase in short-term FHLB advances, a $5.0 million or
3.8% increase in long-term FHLB advances and a $4.3 million or 2.7% increase in
total savings deposits, which were partially offset by a $54.6 million or 65.9%
decrease in other short-term borrowings. Demand deposits increased $10.1
million, and money market accounts increased $837 thousand while certificates of
deposit decreased $3.6 million, savings accounts decreased $2.4 million and
advanced payments by borrowers for taxes and insurance decreased $635 thousand.
The increase in demand deposits was principally attributable to seasonal
increases in local real estate tax collector accounts. The decrease in
certicates of deposit were primarily due to the maturity of accounts held by
local governments. Management believes that the changes
11
<page>
in savings accounts and advance payments by borrowers for taxes and insurance
were primarily attributable to seasonal payments of local and school real estate
taxes.
Total stockholders' equity decreased $281 thousand or 0.9% to $31.0
million as of September 30, 2007, from approximately $31.3 million as of June
30, 2007. Capital expenditures for the Company's stock repurchase program and
cash dividends totaled $967 thousand and $366 thousand, respectively, which were
partially offset by net income of $1.0 million and a $29 thousand increase in
accumulated other comprehensive income for the three months ended September 30,
2007.
RESULTS OF OPERATIONS
General. WVS reported net income of $1.0 million or $0.45 diluted
earnings per share for the three months ended September 30, 2007. Net income
increased by $119 thousand or 13.2% and diluted earnings per share increased
$0.06 or 15.4% for the three months ended September 30, 2007, when compared to
the same period in 2006. The increase in net income was primarily attributable
to a $223 thousand increase in net interest income, a $8 thousand increase in
recoveries for loan losses and a $5 thousand increase in non-interest income,
which were partially offset by a $40 thousand increase in non-interest expense
and a $77 thousand increase in income tax expense.
Net Interest Income. The Company's net interest income increased by
$223 thousand or 10.7% for the three months ended September 30, 2007, when
compared to the same period in 2006. Approximately $193 thousand or 86.5% of the
increase in net interest income can be attributed to the impact of changing
market interest rates on interest earning asset and interest bearing
liabilities. The remaining $30 thousand or 13.5% increase in net interest income
can be attributed to changes in the average balances of interest-earning assets
and interest-bearing liabilities.
As part of its Asset/Liability Management strategy, the Company
increased its holdings of taxable investment securities, primarily fixed-rate
callable U.S. Government agency securities, and reduced its holding of
floating-rate mortgage-backed securities. Changes to the Company's
interest-bearing liabilities were two-fold. The Company's composition of
short-term borrowings shifted from short-term repurchase agreements with brokers
to short-term FHLB advances due to disruptions in the short-term funding
markets. The Company also noted a decrease in time deposits, partially due to
lower balances of local government time deposits during the quarter ended
September 30, 2007 as compared to the same period in 2006.
Interest Income. Interest on investment securities increased by $817
thousand or 31.8% for the three months ended September 30, 2007 when compared to
the same period in 2006. The increase was attributable to a $40.8 million
increase in the average balance of the Company's investment securities portfolio
and a 41 basis point increase in the weighted average yield earned on the
Company's investment securities. The increase in yields earned were consistent
with increases in market interest rates. The increases in average balances were
associated with the Company's reinvestment of proceeds into fixed-rate callable
U.S. Government Agency securities and short-term investment grade commercial
paper as part of the Company's Asset/Liability Management strategy.
Interest on net loans receivable increased $71 thousand or 6.7% for the
three months ended September 30, 2007, when compared to the same period in 2006.
The increase for the three months ended September 30, 2007 was primarily
attributable to an increase of $2.8 million in the average balance of net loans
receivable outstanding and an increase of 13 basis points in the weighted
average yield earned on net loans receivable for the three months ended
September 30, 2007, when compared to the same period in 2006. The increase in
the average loan balance outstanding for the three months ended September 30,
2007 was attributable in part to increases in new loan originations among
construction and commercial loan products. The Company has limited its portfolio
origination of longer-term fixed rate loans to mitigate its exposure to a rise
in market interest rates. The Company will continue to originate longer-term
fixed rate loans for sale on a correspondent basis to increase non-interest
income and to contribute to net income.
12
<page>
Interest on mortgage-backed securities decreased $466 thousand or 19.4%
for the three months ended September 30, 2007, when compared to the same period
in 2006. The decrease for the three months ended September 30, 2007 was
primarily attributable to a $31.9 million decrease in the average balance of
mortgage-backed securities outstanding for the period, which was partially
offset by a 11 basis point increase in the average yield earned on
mortgage-backed securities outstanding for the three months ended September 30,
2007 when compared to the same period in 2006. The increase in the weighted
average yield earned on mortgage-backed securities was consistent with higher
market interest rates for the three months ended September 30, 2007. The
decrease in the average balances of mortgage-backed securities during the three
months ended September 30, 2007 was primarily attributable to paydowns on the
floating rate mortgage-backed securities in the Company's portfolio.
Interest Expense. Interest paid on FHLB advances increased $450
thousand or 23.6% for the three months ended September 30, 2007 when compared to
the same period in 2006. The increase for the three months ended September 30,
2007 was primarily attributable to a $38.1 million increase in the average
balances of FHLB short-term advances that were used primarily to repay other
short-term borrowings.
Interest paid on other borrowings decreased $424 thousand or 36.5% for
the three months ended September 30, 2007 when compared to the same period in
2006. The decrease for the three months ended September 30, 2007 was
attributable to a $30.6 million decrease in the average balances of other
borrowings and a 25 basis point decrease in rates paid for the period. The
decrease in rates paid was consistent with decreases in short-term market
interest rates. The decrease in average balances is attributable to the
restructuring of the Company's short-term borrowings due to disruptions in the
short-term funding markets and favorable short-term borrowing rates offered by
the FHLB.
Interest expense on deposits and escrows increased $196 thousand or
4.9% for the three months ended September 30, 2007 when compared to the same
period in 2006. The increase in interest expense on deposits for the three
months ended September 30, 2007 was attributable to a 42 basis point increase in
the weighted average rate paid on money market and time deposits, a $7.5 million
increase in the average balance of money markets and certificates of deposit for
the three months ended September 30, 2007, when compared to the same period in
2006, and a $5.8 million increase in the average balances of borrowed funds
outstanding for the period. The average yield paid on money market and time
deposits reflects higher market interest rates for the three months ended
September 30, 2007.
Provision (Recovery) for Loan Losses. A provision (recovery) for loan
losses is charged (credited) 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 recovery for loan losses of $17 thousand for the
three months ended September 30, 2007 compared to a recovery for loan losses of
$9 thousand for the same period in 2006. The $8 thousand or 88.9% increase
during the quarter ended September 30, 2007 was primarily due to continued
paydowns of non-accrual loans and decreases in loan balances outstanding. At
September 30, 2007, the Company's total allowance for loan losses amounted to
$969 thousand or 1.6% of the Company's total loan portfolio, as compared to $986
thousand or 1.6% at June 30, 2007.
Non-Interest Income. Non-interest income increased by $5 thousand or
3.3% for the three months ended September 30, 2007 when compared to the same
period in 2006. The increase was primarily attributable to $6 thousand of
casualty insurance proceeds on an office building owned by the Company.
Non-Interest Expense. Non-interest expense increased $40 thousand or
4.4% for the three months ended September 30, 2007 when compared to the same
period in 2006. The increase was principally attributable to a $40 thousand
increase in contributions eligible for Pennsylvania Tax credits and a $20
thousand increase in payroll and benefit related costs, which were partially
offset by a $13 thousand decrease in correspondent bank service charges when
compared to the same period in 2006.
13
<page>
Income Tax Expense. Income tax expense increased $77 thousand or 17.7%
for the three months ended September 30, 2007 when compared to the same period
in 2006. The increase was primarily attributable to an increased level of
taxable income for the three months ended September 30, 2007 when compared to
the same period in 2006.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $1.2 million during
the three months ended September 30, 2007. Net cash provided by operating
activities was primarily comprised of $1.0 million of net income and a $252
thousand increase in accrued interest payable.
Funds used for investing activities totaled $41.2 million during the
three months ended September 30, 2007. Primary uses of funds during the three
months ended September 30, 2007, included purchases of investment,
mortgage-backed securities and FHLB Stock totaling $86.5 million, $18.0 million
and $7.0 million, respectively, which were partially offset by maturities and
repayments of investments, mortgage-backed securities and FHLB Stock totaling
$60.6 million, $6.2 million and $2.5 million, respectively, a $801 thousand
decrease in net loans receivable and $265 thousand from the sale of
mortgage-backed securities.
Funds provided by financing activities totaled $39.7 million for the
three months ended September 30, 2007. The primary sources included a $86.3
million increase in short-term FHLB advances, a $5.0 million increase in
long-term FHLB advances and a $4.3 million increase in deposits, which were
partially offset by a $54.6 million decrease in other short-term borrowings,
$967 thousand in treasury stock purchases and $366 thousand in cash dividends
paid on the Company's common stock. The shift in borrowed funds reflects
disruptions in the short-term funding market and the lower short-term rates
available through the Federal Home Loan Bank. The $4.3 million increase in total
deposits consisted of a $10.3 million increase in demand deposits primarily the
result of increases in balances for local tax collectors and a $837 thousand
increase in money market accounts, which were partially offset by a $3.6 million
decrease in time deposits primarily due to the maturity of cash management time
deposits held by local county governments, a $2.4 million decrease in passbook
accounts and a $635 thousand decrease in mortgage escrow accounts. The decreases
in passbook and escrow accounts are due primarily to the payments of local
property taxes by and for customers. Management believes that it currently is
maintaining adequate liquidity and continues to match funding sources with
lending and investment opportunities.
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 September 30, 2007, total approved loan
commitments outstanding amounted to approximately $105 thousand. At the same
date, commitments under unused lines of credit amounted to $5.9 million and the
unadvanced portion of construction loans approximated $13.4 million.
Certificates of deposit scheduled to mature in one year or less at September 30,
2007 totaled $53.8 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 Primary
Credit Program. Management believes that the Company currently has adequate
liquidity available to respond to liquidity demands.
On August 14, 2007, the Company's Board of Directors authorized its
Ninth Common Stock Buyback Program in the amount of 125,000 shares. See Issuer
Purchases of Equity Securities in Part II, Item 2 (c) of this Form 10-Q.
14
<page>
On October 30, 2007, the Company's Board of Directors declared a cash
dividend of $0.16 per share payable November 21, 2007, to shareholders of record
at the close of business on November 12, 2007. 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 September 30, 2007, WVS Financial Corp. exceeded all regulatory
capital requirements and maintained Tier I and total risk-based capital equal to
$30.9 million or 20.9% and $32.0 million or 21.5%, respectively, of total
risk-weighted assets, and Tier I leverage capital of $30.9 million or 7.25% of
average quarterly assets.
Nonperforming assets consist of nonaccrual loans and real estate owned.
A loan is placed on nonaccrual status when, in the judgment of management, the
probability of collection of interest is deemed insufficient to warrant further
accrual. When a loan is placed on nonaccrual status, previously accrued but
uncollected interest is deducted from interest income. The Company normally does
not accrue interest on loans past due 90 days or more, however, interest may be
accrued if management believes that it will collect on the loan.
The Company's nonperforming assets at September 30, 2007 totaled
approximately $1.1 million or 0.2% of total assets as compared to $1.2 million
or 0.3% of total assets at June 30, 2007. Nonperforming assets at September 30,
2007 consisted of: one commercial real estate loan totaling $972 thousand, two
single-family real estate loans totaling $138 thousand, and two lines of credit
totaling $17 thousand. These loans are in various stages of collection activity.
The $78 thousand decrease in nonperforming assets during the three
months ended September 30, 2007 was primarily attributable to the
reclassification of a $76 thousand single-family real estate loan from
non-performing to performing and the sale of the single-family real estate owned
property with a book value of approximately $2 thousand.
At September 30, 2007, the Company had one previously restructured and
non-performing commercial real estate loan to a retirement village located in
the North Hills totaling $972 thousand. The Savings Bank's outstanding principal
balance totaled $2.0 million at June 30, 2003. During the quarter ended
September 30, 2003, the Savings Bank redeemed $388 thousand of participating
interests. During the quarter ended December 31, 2003, the Bank sold a forty
percent participating interest to another financial institution at par resulting
in proceeds totaling $979 thousand. The Savings Bank's outstanding principal
balance totaled $972 thousand at June 30, 2007. The Company had recorded
interest received on this credit on a cost recovery basis until September 30,
2003 when it began to recognize interest income. During the quarter ended
September 30, 2007 the Company received and recognized $5 thousand of interest
income. The Company anticipates work-out negotiations on this credit during the
next fiscal quarter. At this time, the Company cannot predict the final form or
outcome of the work-out negotiations.
At September 30, 2007, the Company had one previously restructured loan
secured by undeveloped land totaling $331 thousand and one previously
restructured unsecured loan totaling $30 thousand to two borrowers. During the
fourth quarter of fiscal 2004, the Bankruptcy Court approved a secured claim
totaling $440 thousand and an unsecured claim totaling $76 thousand be paid in
accordance with a Bankruptcy Plan of Reorganization. All Court ordered plan
payments have been received in a timely manner. In accordance with generally
accepted accounting principles, the Company had recorded interest payments
received on a cost recovery basis until June 30, 2006 and is now recording
interest income.
During the three months ended September 30, 2007, approximately $12
thousand of interest income would have been recorded on loans accounted for on a
non-accrual basis if such loans had been current according to the original loan
agreements for the entire period. These amounts were not included in the
Company's interest income for the quarter ended September 30, 2007. 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.
15
<page>
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 quarter ended September 30, 2007 financial market
participants appeared to become more concerned about liquidity and counterparty
credit risk. Unsecured bank funding markets showed signs of stress, including
volatility in overnight lending rates, elevated term rates, and illiquidity in
term funding markets. On August 10, 2007, the Federal Reserve issued a statement
announcing that it was providing liquidity to facilitate the orderly functioning
of financial markets. The Federal Reserve indicated that it would provide
reserves as necessary through open market operations to promote trading in the
federal funds market at rates close to the target rate of 5.25%. The Federal
Reserve also noted that the discount window was available as a source of
funding.
On August 17, 2007, the Federal Reserve Open Market Committee (FOMC)
issued a statement noting that financial market conditions had deteriorated and
that tighter credit conditions and increased uncertainty had the potential to
restrain economic growth going forward. The FOMC judged that the downside risks
to growth had increased appreciably, indicated that it was monitoring the
situation, and stated that it was prepared to act as needed to mitigate the
adverse effects on the economy arising from the disruptions in financial
markets. Simultaneously, the Federal Reserve Board announced that, to promote
the
16
<page>
restoration of orderly conditions in financial markets, it had approved a 50
basis point reduction in the primary credit rate to 5.75%. The Board also
announced a change to the Reserve Banks' usual practices to allow the provision
of term financing for as long as thirty days, renewable by the borrower. In
addition, the Board noted that the Federal Reserve would continue to accept a
broad range of collateral for discount window loans, including home mortgages
and related assets, while maintaining existing collateral margins. On August 21,
2007 the Federal Reserve Bank of New York announced some temporary changes to
the terms and conditions of the System Open Market Account (SOMA) securities
lending program, including a reduction in the minimum fee. The effective federal
funds rate was somewhat below the target rate for a time over the intermeeting
period, as efforts to keep the funds rate near the target were hampered by
technical factors and financial market volatility. In the days leading up the
FOMC meeting, however, the funds rate traded closer to the target.
Short-term financial markets came under pressure during the quarter
ended September 30, 2007 amid heightened investor unease about exposures to
subprime mortgages and to structured credit products more generally. Rates on
asset-backed commercial paper and on low-rated unsecured commercial paper
soared, and some issuers, particularly asset-backed commercial paper programs
with investments in subprime mortgages, found it difficult to roll over maturing
paper. These developments led several programs to draw backup lines, exercise
options to extend the maturity of outstanding paper, or even default. As a
result, asset-backed commercial paper outstanding contracted substantially.
Investors sought the safety and liquidity of Treasury securities, and yields on
Treasury bills dropped sharply for a period; trading conditions in the bill
market were impaired at times. Meanwhile, banks took measures to conserve their
liquidity and were cautious about counterparties' exposures to asset-backed
commercial paper. Term interbank funding markets were significantly impaired,
with rates rising well above expected future overnight rates and traders
reporting a substantial drop in the availability of term funding. Pressures
eased a bit in mid-September 2007, but short-term financial markets remained
strained. The foreign exchange value of the dollar against other major
currencies fell, on balance.
Investors appeared to mark down significantly their expected path for
the federal funds rate during the intermeeting period, evidently in response to
the strains in money and credit markets and a few key data releases, including
weaker-than-expected reports on housing activity and employment. Yields on
nominal Treasury securities fell appreciably across the term structure.
TIPS-based inflation compensation at the five-year horizon was about unchanged,
while inflation compensation at longer horizons crept higher.
According to the minutes of the Federal Open Market Committee meeting
of September 18, 2007, all FOMC members favored an easing of the stance of
monetary policy. Members emphasized that because of the recent sharp change in
credit market conditions, the incoming data in many cases were of limited value
in assessing the likely evolution of economic activity and prices, on which the
Committee's policy decision must be based. Members judged that a lowering of the
target funds rate was appropriate to help offset the effects of tighter
financial conditions on the economic outlook. Without such policy action,
members saw a risk that tightening credit conditions and an intensifying housing
correction would lead to significant broader weakness in output and employment.
Similarly, the impaired functioning of financial markets might persist for some
time or possibly worsen, with negative implications for economic activity. In
order to help forestall some of the adverse effects on the economy that might
otherwise arise, all members agreed that a rate cut of 50 basis points at this
meeting was the most prudent course of action. Such a measure should not
interfere with an adjustment to realistic pricing of risk or with the gains and
losses that implied for participants in financial markets. With economic growth
likely to run below its potential for a while and with incoming inflation data
to the favorable side, the easing of policy seemed unlikely to affect adversely
the outlook for inflation.
The committee agreed that the statement to be released after the
meeting should indicate that the outlook for economic growth had shifted
appreciably since the Committee's last regular meeting but that the 50 basis
point easing in policy should help promote moderate growth over time. They also
agreed that the inflation situation seemed to have improved slightly and judged
that it was no longer appropriate to indicate that a sustained moderation in
inflation pressures had yet to be shown. Nonetheless, all agreed that some
inflation risks remained and that the statement should indicate that the
Committee would continue to monitor inflation developments carefully. Given the
heightened uncertainty about the economic outlook, the Committee decided to
refrain from providing an explicit assessment of the balance of risks, as such a
17
<page>
characterization could give the mistaken impression that the Committee was more
certain about the economic outlook than was in fact the case. Future actions
would depend on how economic prospects were affected by evolving market
developments and by other factors.
At conclusion of the discussion, the Committee voted to authorize and
direct the Federal Reserve Bank of New York, until it was instructed otherwise,
to execute transactions in the System Account in accordance with the following
domestic policy directive:
"The Federal Open Market Committee seeks monetary and financial
conditions that will foster price stability and promote sustainable growth in
output. To further its long-run objectives, the Committee in the immediate
future seeks conditions in reserve marks consistent with reducing the federal
funds rate to an average of around 4.75%."
The table below shows the targeted federal funds rate and the benchmark
two and ten year treasury yields at September 30, 2006, December 31, 2006, March
31, 2007, June 30, 2007 and September 30, 2007. The difference in yields on the
two and ten year Treasury's is often used to determine the steepness of the
yield curve and to assess the term premium of market interest rates.
<table>
<caption>
Yield on:
---------------------------------
Targeted Two (2) Year Ten (10) Year
Federal Funds Treasury Treasury Shape of Yield Curve
--------------- -------------- --------------- -----------------------
<s> <c> <c> <c> <c>
September 30, 2006 5.25% 4.71% 4.64% Inverted
December 31, 2006 5.25% 4.82% 4.71% Inverted
March 31, 2007 5.25% 4.58% 4.65% Slightly Positive
June 30, 2007 5.25% 4.87% 5.03% Slightly Positive
September 30, 2007 4.75% 3.97% 4.59% Moderately Positive
</table>
These changes in intermediate and long-term market interest rates, the
changing slope of the Treasury yield curve, and continued high levels of
interest rate volatility have impacted prepayments on the Company's loan,
investment and mortgage-backed securities portfolios and have caused a marked
compression of industry-wide net interest margins. Principal repayments on the
Company's loan, investment and mortgage-backed securities portfolios for the
three months ended September 30, 2007, totaled $7.0 million, $60.6 million and
$6.5 million, respectively.
The term premium of market interest rates is often used to determine
the relative merits of taking an additional interest rate risk and to gauge the
market's expectation of future interest rates. Due to changes in the term
premium of market interest rates experienced during the quarter ended September
30, 2007 the Company adjusted its asset/liability mix in several ways.
Intermediate term callable U.S. Government Agency securities were purchased
early on during the quarter ended September 30, 2007. As financial market
conditions deteriorated, the Company purchased floating rate U.S. Government
Agency collateralized mortgage obligations and short-term investment grade
commercial paper. With respect to short-term borrowings, the Company substituted
broker repurchase agreements ("other short-term borrowings") with FHLB
short-term borrowings due to market conditions in the short-term debt market.
Due to the term structure of market interest rates, the Company
continued to reduce its portfolio originations of long-term fixed rate mortgages
while continuing to offer such loans on a correspondent basis. 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 interest income while limiting interest rate
risk. The Company has also emphasized higher yielding home equity and small
business loans to existing customers and seasoned prospective customers.
18
<page>
The Company purchased short-term investment grade commercial paper to
provide liquidity for short-term demand deposits by local tax collectors. The
Company also continued to purchase intermediate term fixed rate callable U. S.
Government Agency bonds in order to earn a spread against the Company's
long-term FHLB advances while limiting interest rate risk within the portfolio.
The Company also purchased floating rate U.S. Government Agency collateralized
mortgage obligations to provide current income and in response to lower
intermediate and long-term market interest rates. Each of the aforementioned
strategies also helped to better match the interest-rate and liquidity risks
associated with the Savings Bank's customers' liquidity preference for shorter
term money market and time deposit products.
During the quarter ended September 30, 2007, principal investment
purchases were comprised of: short-term investment grade commercial paper -
$64.6 million with a weighted average yield of 6.13%; callable fixed rate U.S.
Government Agency bonds with initial lock-out periods as follows: 0-3 months -
$16.9 million with a weighted average yield to call of approximately 6.15%; 3 -
6 months - $5.0 million with a weighted average yield to call of approximately
6.01%; and floating rate collateralized mortgage obligations which reprice
monthly - $18.0 million with an original weighted average yield of approximately
6.18%. Major investment proceeds received during the quarter ended September 30,
2007 were: short-term investment grade commercial paper - $60.6 million with a
weighted average yield of approximately 5.95%; and mortgage-backed securities -
$6.5 million.
As of September 30, 2007, the implementation of these asset and
liability management initiatives resulted in the following:
1) $130.8 million or 98.3% of the Company's portfolio of mortgage-backed
securities (including collateralized mortgage obligations - "CMOs")
were comprised of floating rate instruments that reprice on a monthly
basis.
2) $25.0 million or 10.5% of the Company's investment portfolio was
comprised of fixed to floating rate U.S. Government Agency bonds which
will mature or reprice as follows: $10 million of these bonds were
redeemed on October 1, 2007, $15 million are expected to mature or
reprice in April 2008.
3) $178.4 million or 75.0% of the Company's investment portfolio was
comprised of fixed-rate callable U.S. Government Agency bonds which are
callable as follows: 3 months or less - $59.6 million; 3 - 6 months -
$30.4 million; 6 - 12 months - $61.4 million; 1 - 2 years - $24.1
million; and over 2 years - $3.0 million. These bonds may or may not
actually be redeemed prior to maturity (i.e. called) depending upon the
level of market interest rates at their respective call dates.
4) $18.9 million or 7.9% of the Company's investment portfolio was
comprised of investment grade commercial paper with maturities of less
than 90 days.
5) $4.7 million or 2.0% of the Company's investment portfolio was
comprised of U.S. Government Agency Step-up bonds which will reprice as
follows: less than 3 months - $4.7 million from 4.70% to 6.00%. These
bonds may or may not actually be redeemed prior to maturity (i.e.
called) depending upon the level of market interest rates at their
respective call dates.
6) An aggregate of $32.7 million or 53.9% of the Company's net loan
portfolio had adjustable interest rates or maturities of less than 12
months; and
7) The maturity distribution of the Company's borrowings is as follows: 1
month or less - $107.6 million or 43.0%; 1 - 3 months - $4.0 million or
1.6%; 3 - 6 months - $3.0 million or 1.2%; 1 - 3 years - $51.1 million
or 20.4%; 3 - 5 years - $67.0 million or 26.8%; and over 5 years -
$17.5 million or 7.0%.
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.
19
<page>
As part of its asset/liability management strategy, the Company
maintained an asset sensitive financial position. An asset sensitive financial
position may benefit earnings during a period of rising interest rates and
reduce earnings during a period of declining interest rates.
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.
<table>
<caption>
September 30, June 30,
------------ ----------------------------
2007 2007 2006
------------ ------------ ------------
(Dollars in Thousands)
<s> <c> <c> <c>
Interest-earning assets maturing or
repricing within one year $ 247,182 $ 206,136 $ 273,884
Interest-bearing liabilities maturing or
repricing within one year 214,072 187,494 194,509
------------ ------------ ------------
Interest sensitivity gap $ 33,110 $ 18,642 $ 79,375
============ ============ ============
Interest sensitivity gap as a percentage of
total assets 7.37% 4.57% 32.5%
Ratio of assets to liabilities
maturing or repricing within one year 115.47% 109.94% 175.6%
</table>
During the quarter ended September 30, 2007, the Company managed its
one year interest sensitivity gap by: (1) limiting the portfolio origination of
long-term fixed rate mortgages; (2) emphasizing loans with shorter-terms or
repricing frequencies; (3) purchasing floating rate U.S. Government Agency CMO's
which reprice on a monthly basis; and (4) adjusting its investment portfolio to
include intermediate term U.S. Government Agency bonds with more varied call
dates, and (5) modestly higher holdings of short-term investment grade
commercial paper.
20
<page>
The following table illustrates the Company's estimated stressed
cumulative repricing gap - the difference between the amount of interest-earning
assets and interest-bearing liabilities expected to reprice at a given point in
time - at September 30, 2007. The table estimates the impact of an upward or
downward change in market interest rates of 100 and 200 basis points.
<table>
<caption>
Cumulative Stressed Repricing Gap
---------------------------------
Month 3 Month 6 Month 12 Month 24 Month 36 Month 60 Long Term
------- ------- -------- -------- -------- -------- ---------
(Dollars in Thousands)
<s> <c> <c> <c> <c> <c> <c> <c>
Base Case Up 200 bp
- -------------------
Cummulative
Gap ($'s) 27,301 13,220 7,624 (6,680) (54,337) (107,235) 19,821
% of Total
Assets 6.1% 2.9% 1.7% -1.5% -12.1% -23.9% 4.4%
Base Case Up 100 bp
- -------------------
Cummulative
Gap ($'s) 27,522 13,631 8,311 (5,815) (53,434) (106,254) 19,821
% of Total
Assets 6.1% 3.0% 1.9% -1.3% -11.9% -23.7% 4.4%
Base Case No Change
- -------------------
Cummulative
Gap ($'s) 36,989 28,823 33,110 34,270 62,302 19,366 19,821
% of Total
Assets 8.2% 6.4% 7.4% 7.6% 13.9% 4.3% 4.4%
Base Case Down 100 bp
- ---------------------
Cummulative
Gap ($'s) 81,184 99,625 157,505 169,227 128,120 60,716 19,821
% of Total
Assets 18.1% 22.2% 35.1% 37.7% 28.5% 13.5% 4.4%
Base Case Down 200 bp
- ---------------------
Cummulative
Gap ($'s) 83,417 103,426 162,198 174,210 132,393 61,743 19,821
% of Total
Assets 18.6% 23.0% 36.1% 38.8% 29.5% 13.7% 4.4%
</table>
The Company utilizes 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.
21
<page>
The following table presents the simulated impact of a 100 and 200
basis point upward or downward (parallel) shift in market interest rates on net
interest income, return on average equity, return on average assets and the
market value of portfolio equity at September 30, 2007. This analysis was done
assuming that the interest-earning assets will average approximately $415
million over a projected twelve month period for the estimated impact on change
in net interest income, return on average equity and return on average assets.
The estimated changes in market value of equity were calculated using balance
sheet levels at September 30, 2007.
Analysis of Sensitivity to Changes in Market Interest Rates
-----------------------------------------------------------
<table>
<caption>
Modeled Change in Market Interest Rates
----------------------------------------------------
Estimated impact on: -200 -100 0 +100 +200
- --------------------
<s> <c> <c> <c> <c> <c>
Change in net interest income -16.1% -6.4% 0.00% 1.0% -5.7%
Return on average equity 10.06% 11.75% 13.00% 12.99% 11.86%
Return on average assets 0.75% 0.88% 0.98% 0.95% 0.86%
Market value of equity (in
thousands) $29,871 $35,225 $37,557 $29,510 $13,466
</table>
The table below provides information about the Company's anticipated
transactions comprised of firm loan commitments and other commitments, including
undisbursed letters and lines of credit. The Company used no derivative
financial instruments to hedge such anticipated transactions as of September 30,
2007.
Anticipated Transactions
------------------------------------------------------
(Dollars in Thousands)
Undisbursed construction and
land development loans
Fixed rate $ 7,029
8.22%
Adjustable rate $ 6,338
8.64%
Undisbursed lines of credit
Adjustable rate $ 5,906
8.45%
Loan origination commitments
Fixed rate $ 105
6.88%
Letters of credit
Adjustable rate $ 450
8.25%
-------
$19,828
=======
22
<page>
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 September 30, 2007, the Savings Bank had six performance
standby letters of credit outstanding totaling approximately $450 thousand. All
letters of credit are secured by developed property. Five of the letters of
credit will mature within twelve months, and one will mature within twenty four
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.
ITEM 4. CONTROLS AND PROCEDURES
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
(a) Our management evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) as of September 30, 2007. Based on
such evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934)
occurred during the quarter ended September 30, 2007 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
23
<page>
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 1A. Risk Factors
------------
There are no material changes to the risk factors included in Item 1A
of the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2007.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) The following table sets forth information with respect to
purchases of common stock of the Company made by or on behalf of
the Company during the three months ended September 30, 2007.
<table>
<caption>
-----------------------------------------------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
-----------------------------------------------------------------------------------------------------------------------
Total Number of Maximum Number of
Total Shares Purchased Shares that May Yet
Number of as Part of Publicly Be Repurchased
Shares Average Price Announced Plans or Under the Plans or
Period Purchased Paid per Share ($) Programs (1) Programs (2,3)
-----------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
07/01/07 - 07/31/07 22,150 16.48 22,150 24,820
-----------------------------------------------------------------------------------------------------------------------
08/01/07 - 08/31/07 29,500 16.48 29,500 120,320
-----------------------------------------------------------------------------------------------------------------------
09/01/07 - 09/30/07 7,000 16.50 7,000 113,320
-----------------------------------------------------------------------------------------------------------------------
Total 58,650 16.48 58,650 113,320
-----------------------------------------------------------------------------------------------------------------------
</table>
- --------------------
(1) All shares indicated were purchased under the Company's Eighth and
Ninth Stock Repurchase Program.
(2) Eighth Stock Repurchase Program
(a) Announced September 27, 2005.
(b) 125,000 common shares approved for repurchase.
(c) No fixed date of expiration.
(d) This program was completed on August 24, 2007.
(e) Not applicable.
(3) Ninth Stock Repurchase Program
(a) Announced August 14, 2007.
(b) 125,000 common shares approved for repurchase.
(c) No fixed date of expiration.
(d) This program has not expired and has 113,320 shares
remaining to be repurchased at September 30, 2007.
(e) Not applicable.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
24
<page>
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Company's 2007 Annual Meeting of Stockholders was held on
October 30, 2007.
(b) Not applicable.
(c) Two matters were voted upon at the annual meeting held on October
30, 2007: 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 Registered Public
Accounting Firm for the fiscal year ending June 30, 2008.
Each of the two proposals received stockholder approval. There were
2,267,205 shares outstanding on the record date eligible to vote at
the meeting and 1,928,705 shares were present in person or by proxy
at the meeting. The voting record with respect to each item voted
upon is enumerated below:
Item Nominee
Number (if Applicable) For Against Abstain
------ --------------- --- ------- -------
1 John W. Grace 1,874,684 54,021
Lawrence M. Lehman 1,875,684 53,021
2 Ratification of Auditors 1,918,484 8,782 1,439
There were no broker non-votes with respect to any matter voted
upon.
(d) Not applicable.
ITEM 5. Other Information
-----------------
(a) Not applicable.
(b) Not applicable.
ITEM 6. Exhibits
--------
The following exhibits are filed as part of this Form 10-Q, and this
list includes the Exhibit Index.
Number Description Page
- ------ ---------------------------------------------------------------- ----
31.1 Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive E-1
Officer
31.2 Rule 13a-14(a) / 15d-14(a) Certification of the Chief E-2
Accounting Officer
32.1 Section 1350 Certification of the Chief Executive Officer E-3
32.2 Section 1350 Certification of the Chief Accounting Officer E-4
99 Report of Independent Registered Public Accounting Firm E-5
25
<page>
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.
October 30, 2007 BY: /s/ David J. Bursic
----------------------------------------
Date David J. Bursic
President and Chief Executive Officer
(Principal Executive Officer)
October 30, 2007 BY: /s/ Keith A. Simpson
----------------------------------------
Date Keith A. Simpson
Vice-President, Treasurer and
Chief Accounting Officer
(Principal Accounting Officer)
26