UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 February 05, 2008: 2,233,617 shares Common
Stock, $.01 par value.
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
INDEX
-----
PART I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheet as of
December 31, 2007 and June 30, 2007
(Unaudited) 3
Consolidated Statement of Income
for the Three and Six Months Ended
December 31, 2007 and 2006 (Unaudited) 4
Consolidated Statement of Changes in
Stockholders' Equity for the Six Months
Ended December 31, 2007 (Unaudited) 5
Consolidated Statement of Cash Flows
for the Six Months Ended December 31,
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 and Six Months
Ended December 31, 2007 11
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 18
Item 4. Controls and Procedures 24
PART II. Other Information Page
- -------- ----------------- ----
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits 26
Signatures 27
2
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In thousands)
December 31, 2007 June 30, 2007
----------------- ---------------
Assets
------
Cash and due from banks $ 660 $ 630
Interest-earning demand deposits 1,560 2,045
--------------- ---------------
Total cash and cash equivalents 2,220 2,675
Investment securities available-for-sale (amortized cost of
$20,464 and $8,957) 20,452 8,933
Investment securities held-to-maturity (market value of
$173,896 and $201,510) 172,074 202,664
Mortgage-backed securities available-for-sale (amortized cost of
$2,120 and $2,186) 2,225 2,246
Mortgage-backed securities held-to-maturity (market value of
$167,379 and $119,646) 169,195 119,271
Net loans receivable (allowance for loan losses of $980 and
$986) 59,749 60,350
Accrued interest receivable 3,544 3,714
Federal Home Loan Bank stock, at cost 9,744 6,340
Premises and equipment 784 813
Other assets 1,090 1,070
--------------- ---------------
TOTAL ASSETS $ 441,077 $ 408,076
=============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings Deposits:
Non-interest-bearing accounts $ 12,735 $ 12,363
NOW accounts 18,588 18,741
Savings accounts 30,344 32,937
Money market accounts 21,867 20,146
Certificates of deposit 68,222 74,177
Advance payments by borrowers for taxes and insurance 693 1,013
--------------- ---------------
Total savings deposits 152,499 159,377
Federal Home Loan Bank advances: long-term 135,579 130,579
Federal Home Loan Bank advances: short-term 38,600 --
Other borrowings 72,843 82,950
Accrued interest payable 1,904 1,669
Other liabilities 7,955 2,208
--------------- ---------------
TOTAL LIABILITIES $ 409,330 $ 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;
3,803,430 and 3,790,336 shares issued 38 38
Additional paid-in capital 21,346 21,137
Treasury stock: 1,540,617 and 1,471,481 shares at cost,
respectively (23,422) (22,286)
Retained earnings, substantially restricted 33,725 32,382
Accumulated other comprehensive income 61 23
Unallocated shares - Recognition and Retention Plans (1) (1)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY $ 31,747 $ 31,293
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 441,077 $ 408,076
=============== ===============
See accompanying notes to unaudited consolidated financial statements.
3
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(In thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
INTEREST AND DIVIDEND INCOME:
Loans $ 1,107 $ 1,046 $ 2,231 $ 2,098
Investment securities 2,969 2,860 6,352 5,426
Mortgage-backed securities 2,294 2,257 4,227 4,656
Interest-earning deposits with other
institutions -- 1 2 5
Federal Home Loan Bank stock 127 66 223 163
----------- ----------- ----------- -----------
Total interest and dividend income 6,497 6,230 13,035 12,348
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits 1,056 1,047 2,194 2,015
Federal Home Loan Bank advances 2,401 2,195 4,760 4,103
Other short-term borrowings 708 1,080 1,445 2,242
----------- ----------- ----------- -----------
Total interest expense 4,165 4,322 8,399 8,360
----------- ----------- ----------- -----------
NET INTEREST INCOME 2,332 1,908 4,636 3,988
PROVISION (RECOVERY) FOR LOAN LOSSES 11 -- (6) (9)
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
(RECOVERY) FOR LOAN LOSSES 2,321 1,908 4,642 3,997
----------- ----------- ----------- -----------
NON-INTEREST INCOME:
Service charges on deposits 83 93 169 181
Investment securities gains -- -- 1 --
Other 62 68 131 132
----------- ----------- ----------- -----------
Total non-interest income 145 161 301 313
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 517 494 1,025 984
Occupancy and equipment 87 103 175 194
Data processing 65 64 127 127
Correspondent bank service charges 24 27 50 65
Other 262 202 519 422
----------- ----------- ----------- -----------
Total non-interest expense 955 890 1,896 1,792
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,511 1,179 3,047 2,518
INCOME TAXES 463 342 975 776
----------- ----------- ----------- -----------
NET INCOME $ 1,048 $ 837 $ 2,072 $ 1,742
=========== =========== =========== ===========
EARNINGS PER SHARE:
Basic $ 0.46 $ 0.36 $ 0.91 $ 0.75
Diluted $ 0.46 $ 0.36 $ 0.91 $ 0.75
AVERAGE SHARES OUTSTANDING:
Basic 2,261,544 2,310,596 2,272,527 2,318,890
Diluted 2,261,783 2,312,838 2,273,084 2,320,980
See accompanying notes to unaudited consolidated financial statements.
4
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
------------ ------------ ------------ ------------- ------------ ------------ ------------
Balance at June 30, 2007 $ 38 $ 21,137 $ (22,286) $ 32,382 $ 23 $ (1) $ 31,293
Comprehensive income:
Net Income 2,072 2,072
Other comprehensive
income:
Change in unrealized
holding gains on
securities, net of
income tax effect
of $20 38 38
------------
Comprehensive income 2,110
Purchase of 69,136 shares for
treasury stock (1,136) (1,136)
Accrued compensation
expense for Recognition
and Retention Plans (RRP) -- --
Exercise of 13,094 stock options -- 205 205
Cash dividends declared
($0.32 per share) (729) (729)
Other 4 4
------------ ------------ ------------ ------------- ------------ ------------ ------------
Balance at Dec. 31, 2007 $ 38 $ 21,346 $ (23,422) $ 33,725 $ 61 $ (1) $ 31,747
============ ============ ============ ============= ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
5
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
December 31,
--------------------
2007 2006
-------- --------
OPERATING ACTIVITIES
Net income $ 2,072 $ 1,742
Adjustments to reconcile net income to cash provided by operating
activities:
Recovery for loan losses (6) (9)
Depreciation 65 70
Investment securities gains (1) --
Amortization of discounts, premiums and deferred loan fees (135) (86)
Accretion of discounts - commercial paper (494) (7)
Increase (decrease) in accrued and deferred taxes 8 (138)
Decrease (increase) in accrued interest receivable 170 (730)
Increase in accrued interest payable 235 316
Other, net 43 138
-------- --------
Net cash provided by operating activities 1,957 1,296
-------- --------
INVESTING ACTIVITIES
Available-for-sale:
Purchases of investments securities (85,398) --
Proceeds from repayments of investments and mortgage-backed securities 74,412 8,019
Proceeds from sale of mortgage-backed securities 49 --
Held-to-maturity:
Purchases of investments (34,050) (65,710)
Purchases of mortgage-backed securities (54,373) (4,998)
Proceeds from repayments of investments 64,722 47,563
Proceeds from repayments of mortgage-backed securities 9,286 22,123
Proceeds from sale of investments and mortgage-backed securities 216 --
Decrease (increase) in net loans receivable 595 (1,788)
Purchase of Federal Home Loan Bank stock (12,245) (3,936)
Redemption of Federal Home Loan Bank stock 8,841 5,218
Acquisition of premises and equipment (36) (51)
Other, net -- --
-------- --------
Net cash provided by (used for) investing activities (27,981) 6,440
-------- --------
6
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
December 31,
--------------------
2007 2006
-------- --------
FINANCING ACTIVITIES
Net increase (decrease) in transaction and savings accounts 11 (1,169)
Net (decrease) increase in certificates of deposit (5,955) 7,513
Net increase (decrease) in FHLB short-term advances 38,600 (23,150)
Net (decrease) increase in other borrowings (10,107) 16,852
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 (320) (396)
Cash dividends paid (729) (742)
Funds used for purchase of treasury stock (1,136) (419)
Net proceeds from exercise of stock options 205 --
-------- --------
Net cash provided by (used for) financing activities 25,569 (6,511)
-------- --------
(Decrease) increase in cash and cash equivalents (455) 1,225
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 2,675 1,196
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 2,220 $ 2,421
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits, escrows and borrowings $ 8,164 $ 8,044
Income taxes $ 980 $ 920
Non cash items:
Unfunded Security Commitment $ 5,004 --
Due to Federal Reserve Bank $ 1,260 $ 935
Educational Improvement Tax Credit $ 135 $ 42
See accompanying notes to unaudited 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
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 and six months ended December 31, 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.
In December 2007, the FASB issued FAS No. 141 (revised 2007), Business
Combinations ("FAS 141(R)"), which establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in an acquiree, including the recognition and measurement of goodwill
acquired in a business combination. FAS No. 141(R) is effective for fiscal years
beginning on or after December 15, 2008. Earlier adoption is prohibited. The
adoption of this standard is not expected to have a material effect on the
Company's results of operations or financial position.
In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements -- an amendment of ARB No. 51. FAS No. 160
amends ARB No. 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which
is sometimes referred to as minority interest, is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. Among other requirements, this statement requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. It also
requires disclosure, on the face of the consolidated income statement, of the
amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. FAS No. 160 is effective for fiscal years beginning on
or after December 15, 2008. Earlier adoption is prohibited. The adoption of this
standard is not expected to have a material effect on the Company's results of
operations or financial position.
8
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.
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Weighted average common shares
outstanding 3,796,861 3,769,838 3,793,599 3,769,838
Average treasury stock shares (1,535,317) (1,459,242) (1,521,072) (1,450,948)
---------- ---------- ---------- ----------
Weighted average common shares
and common stock equivalents
used to calculate basic earnings
per share 2,261,544 2,310,596 2,272,527 2,318,890
Additional common stock
equivalents (stock options) used
to calculate diluted earnings per
share 239 2,242 557 2,090
---------- ---------- ---------- ----------
Weighted average common shares
and common stock equivalents
used to calculate diluted earnings
per share 2,261,783 2,312,838 2,273,084 2,320,980
========== ========== ========== ==========
All options at December 31, 2007 and December 31, 2006 were included in
the computation of diluted earnings per share.
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 December 31,
2007 and 2006. There were no options issued during the periods ended December
31, 2007 and 2006.
9
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 Six Months Ended
December 31, December 31,
--------------------------------- ---------------------------------
2007 2006 2007 2006
--------------- --------------- --------------- ---------------
(Dollars in Thousands)
Net income $1,048 $ 837 $2,072 $1,742
Other comprehensive
income (loss):
Unrealized gains
(losses) on
available for sale $ 14 $ (17) $ 59 $ 18
securities
Less:
Reclassification
adjustment for gain
included in net
income -- -- (1) --
------ ------ ------ ------ ------ ------ ------ ------
Other comprehensive
gain (loss) before tax 14 (17) 58 18
Income tax (benefit)
expense related to other
comprehensive income 5 (6) 20 6
(loss) ------ ------ ------ ------
Other comprehensive gain
(loss), net of tax 9 (11) 38 12
------ ------ ------ ------
Comprehensive income $1,057 $ 826 $2,110 $1,754
====== ====== ====== ======
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 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 charges 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
11
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 December 31, 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 $441.1 million at December 31, 2007, as
compared to $408.1 million at June 30, 2007. The $33.0 million or 8.1% increase
in total assets was primarily comprised of a $49.9 million or 41.1% increase in
mortgage-backed securities, an $11.5 million or 128.9% increase in investments
securities available for sale and a $3.4 million or 53.7% increase in Federal
Home Loan Bank ("FHLB") stock, which were partially offset by a $30.6 million or
15.1% decrease in investment securities - held to maturity, a $601 thousand or
1.0% decrease in net loans receivable, a $455 thousand or 17.0% decrease in cash
and cash equivalents and a $170 thousand or 4.6% decrease in accrued interest
receivable. The increase in mortgage-backed securities was primarily
attributable to purchases of U.S. Government agency floating rate collateralized
mortgage obligations. The increase in investment securities - available for sale
was comprised of purchases of short-term investment grade commercial paper. The
increase in FHLB stock was attributable to higher levels of FHLB borrowings and
associated FHLB stock purchase requirements. The decrease in investment
securities - held to maturity is attributable to calls of fixed to floating rate
and step-up U.S. Government agency bonds which were partially offset by
purchases of investment grade corporate bonds. See "Asset and Liability
Management".
The Company's total liabilities increased $32.5 million or 8.6% to
$409.3 million as of December 31, 2007 from $376.8 million as of June 30, 2007.
The $32.5 million increase in total liabilities was primarily comprised of a
$38.6 million or 100.0% increase in short-term FHLB advances, a $5.7 million or
260.3% increase in other liabilities, a $5.0 million or 3.8% increase in
long-term FHLB advances and a $235 thousand or 14.1% increase in accrued
interest payable, which were partially offset by a $10.1 million or 12.2%
decrease in other short-term borrowings and a $6.9 million or 4.3% decrease in
total savings deposits. The respective changes in short-term borrowings were
primarily due to more competitive FHLB pricing in contrast to the short-term
repurchase agreement market. Certificates of deposit decreased $6.0 million,
12
savings accounts decreased $2.6 million and advance payments by borrowers for
taxes and insurance decreased $320 thousand, while money market accounts
increased $1.7 million and demand deposits increased $219 thousand. The decrease
in certificates of deposits was primarily due to the maturity of accounts held
by local governments. The change in other liabilities is primarily attributable
to $5.0 million of U.S. Government agency mortgage-backed securities purchased
pending settlement. Management believes that the changes 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 increased $454 thousand or 1.5% to $31.7
million as of December 31, 2007, from approximately $31.3 million as of June 30,
2007. Capital expenditures for the Company's stock repurchase program and cash
dividends totaled $1.1 million and $729 thousand, respectively, which were more
than offset by net income of $2.1 million, a $209 thousand increase in
additional paid in capital primarily from the exercise of stock options and a
$38 thousand increase in accumulated other comprehensive income for the six
months ended December 31, 2007.
RESULTS OF OPERATIONS
General. WVS reported net income of $1.0 million or $0.46 diluted
earnings per share and $2.1 million or $0.91 diluted earnings per share for the
three and six months ended December 31, 2007, respectively. Net income increased
by $211 thousand or 25.2% and diluted earnings per share increased $0.10 or
27.8% for the three months ended December 31, 2007, when compared to the same
period in 2006. The increase in net income was primarily attributable to a $424
thousand increase in net interest income, which was partially offset by a $121
thousand increase in income tax expense, a $65 thousand increase in non-interest
expense, a $16 thousand decrease in non-interest income and an $11 thousand
increase in the provision for loan losses. For the six months ended December 31,
2007, net income increased $330 thousand or 18.9% and diluted earnings per share
increased $0.16 or 21.3% when compared to the same period in 2006. The increase
for the six month period was primarily the result of a $648 thousand increase in
net interest income, which was partially offset by a $199 thousand increase in
income tax expense, a $104 thousand increase in non-interest expense, a $12
thousand decrease in non-interest income and a $3 thousand decrease in
recoveries for loan losses.
Net Interest Income. The Company's net interest income increased by
$424 thousand or 22.2% and $648 thousand or 16.2% for the three and six months
ended December 31, 2007, when compared to the same periods in 2006.
Approximately $399 thousand or 94.1% and $588 thousand or 90.7% of the increases
in net interest income for the three and six months ended December 31, 2007,
respectively, can be attributed to the impact of changing market interest rates
on interest earning assets and interest bearing liabilities. The remaining $25
thousand or 5.9% and $60 thousand or 9.3% increase in net interest income for
the three and six months ended December 31, 2007, respectively, can be
attributed to changes in the average balances of interest-earning assets and
interest-bearing liabilities.
During the six months ended December 31, 2007, the Federal Open Market
Committee (FOMC) reduced its targeted federal funds level from 5.25% at June 30,
2007 to 4.25% at December 31, 2007. During the three months ending December 31,
2007 the Company also observed a marked upward deviation in the three-month
LIBOR as compared to the U.S. federal funds rate. Market participants attributed
this upward deviation to liquidity imbalances in LIBOR markets. During the
latter part of the three months ended December 31, 2007 the Federal Reserve and
various European central banks began to co-ordinate open market operations with
the goal of reducing the LIBOR and fed funds spread. During this anomalous
period the Company benefited by earning a higher than anticipated yield on its
LIBOR floating rate CMO portfolio, while enjoying lower costs of short-term
funding. See also Asset and Liability Management.
Interest Income. Interest on investment securities increased by $109
thousand or 3.8% and $926 thousand or 17.1% for the three and six months ended
December 31, 2007, respectively, when compared to the same periods in 2006. The
increase for the three months ended December 31, 2007 was attributable to a 51
basis point increase in the weighted average yield earned on the Company's
investment securities, which was partially offset by a $10.3 million decrease in
the average balance of the Company's investment securities portfolio. The
13
increase for the six months ended December 31, 2007 was attributable to a 46
basis point increase in the weighted average yield earned on the Company's
investment securities and a $15.2 million increase in the average balance of the
Company's investment securities portfolio. The decrease in average balances of
investment securities for the three months ended December 31, 2007 was
associated with issuer calls of U.S. Government Agency securities, while the
increase in average balances for the six months ended December 31, 2007 reflects
higher holdings of investment securities when compared to the same period in
2006.
Interest on net loans receivable increased $61 thousand or 5.8% and
$133 thousand or 6.3% for the three and six months ended December 31, 2007,
respectively, when compared to the same periods in 2006. The increase for the
three months ended December 31, 2007 was primarily attributable to an increase
of $2.1 million in the average balance of net loans receivable outstanding and
an increase of 16 basis points in the weighted average yield earned on net loans
receivable for the three months ended December 31, 2007, when compared to the
same period in 2006. The increase for the six months ended December 31, 2007 was
attributable to a $2.4 million increase in the average balance of net loans
receivable outstanding and an increase of 15 basis points in the weighted
average yield earned on net loans receivable, when compared to the same period
in 2006. The increase in the average loan balance outstanding for the three and
six months ended December 31, 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.
Interest on mortgage-backed securities increased $37 thousand or 1.6%
and decreased $429 thousand or 9.2% for the three and six months ended December
31, 2007, respectively, when compared to the same periods in 2006. The increase
for the three months ended December 31, 2007 was primarily attributable to a
$9.8 million increase in the average balance of mortgage-backed securities
outstanding for the period, which was partially offset by a 30 basis point
decrease in the average yield earned on mortgage-backed securities outstanding
for the three months ended December 31, 2007 when compared to the same period in
2006. The decrease for the six months ended December 31, 2007, was attributable
to a $11.1 million decrease in the average balance of mortgage-backed securities
outstanding for the period and a 12 basis point decrease in the weighted average
yield earned on mortgage-backed securities for the six months ended December 31,
2007, when compared to the same period in 2006. The decrease in the weighted
average yield earned on mortgage-backed securities was consistent with lower
market interest rates for the three and six months ended December 31, 2007. The
increase in the average balances of mortgage-backed securities during the three
months ended December 31, 2007 was primarily attributable to purchases of
floating rate mortgage-backed securities during the period, while the decrease
in average balances of mortgage-backed securities for the six months ended
December 31, 2007 reflects lower balances held during the period when compared
to the same period in 2006. All mortgage-backed securities purchased during both
periods were guaranteed by agencies of the U.S. government.
Dividends on FHLB stock increased $61 thousand or 92.4% and $60
thousand or 36.8% for the three and six months ended December 31, 2007,
respectively, when compared to the same periods in 2006. The increase for the
three months ended December 31, 2007 was attributable to a 188 basis point
increase in the yield earned on FHLB stock held and a $1.9 million increase in
the average balance of FHLB stock when compared to the same period in 2006. The
increase for the six months ended December 31, 2007 was attributable to a $1.7
million increase in the average balance of FHLB stock held and a 45 basis point
increase in the average yield earned on FHLB stock held when compared to the
same period in 2006. The increase in average balances of FHLB stock held
resulted from higher levels of FHLB borrowings which necessitated purchases of
the stock.
Interest Expense. Interest paid on FHLB advances increased $206
thousand or 9.4% and $657 thousand or 16.0% for the three and six months ended
December 31, 2007, respectively, when compared to the same periods in 2006. The
increase for the three months ended December 31, 2007 was attributable to a
$20.4 million increase in the average balance of FHLB short-term advances and a
$2.0 million increase in the average balance of FHLB long-term advances, which
were partially offset by a 62 basis point decrease in rates paid on FHLB
14
short-term advances and a 8 basis point decrease in rates paid on FHLB long-term
advances when compared to the same period in 2006. The increase for the six
months ended December 31, 2007 was attributable to $29.3 million increase in the
average balances of FHLB short-term advances which was partially offset by a 7
basis point decrease in rates paid on FHLB long-term advances and a 42 basis
point decrease in rates paid on FHLB short-term advances. The increases in the
average balances of FHLB short-term advances were primarily used to repay other
short-term borrowings, while the decreases in rates paid reflect decrease in
lower short-term market interest rates.
Interest paid on other borrowings decreased $372 thousand or 34.4% and
$797 thousand or 35.6% for the three and six months ended December 31, 2007,
respectively, when compared to the same periods in 2006. The decrease for the
three months ended December 31, 2007 was attributable to a $19.2 million
decrease in the average balances of other borrowings and a 73 basis point
decrease in rates paid for the period. The decrease for the six months ended
December 31, 2007 was attributable to a $24.9 decrease in the average balance of
other borrowings and a 41 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 of other borrowings is
attributable to more favorable short-term borrowing rates offered by the FHLB.
Interest expense on deposits and escrows increased $9 thousand or 0.9%
and $179 thousand or 8.9% for the three and six months ended December 31, 2007,
respectively, when compared to the same periods in 2006. The increase in
interest expense on deposits for the three months ended December 31, 2007 was
primarily attributable to a $5.3 million increase in the average balance of
money markets and a 13 basis point increase in the weighted average rate paid on
certificates of deposit which were partially offset by a $4.4 million decrease
in the average balance of time deposits for the three months ended December 31,
2007, when compared to the same period in 2006. The increase for the six months
ended December 31, 2007 was primarily attributable to a 31 basis point increase
in the weighted average rates paid on time deposits and a $4.2 million increase
in the average balance of money markets, which were partially offset by a $3.7
million decrease in the average balance of savings accounts, when compared to
the same period in 2006. The average yield paid on time deposits reflects higher
market interest rates for the three and six months ended December 31, 2007,
while the decrease in average balances of time deposits reflects maturities of
time deposits for local governments.
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 provision for loan losses of $11 thousand for
the three months ended December 31, 2007 compared to no provision for loan
losses for the same period in 2006. The $11 thousand increase during the quarter
ended December 31, 2007 was primarily due to slightly higher levels of
non-accrual loans. For the six months ended December 31, 2007, the Company
recorded a recovery of $6 thousand compared to a recovery of $9 thousand for the
same period in 2006. At December 31, 2007, the Company's total allowance for
loan losses amounted to $980 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 decreased by $16 thousand or
9.9% and $12 thousand or 3.8% for the three and six months ended December 31,
2007, respectively, when compared to the same periods in 2006. The decreases
were primarily attributable to lower levels of service charges on deposit
accounts.
Non-Interest Expense. Non-interest expense increased $65 thousand or
7.3% and $104 thousand or 5.8% for the three and six months ended December 31,
2007, respectively, when compared to the same periods in 2006. The increase for
the three months ended December 31, 2007 was principally attributable to a $65
thousand increase in charitable contributions eligible for Pennsylvania Tax
credits and a $23 thousand increase in payroll and benefit related costs, which
were partially offset by a $16 thousand decrease in occupancy and equipment
15
costs when compared to the same period in 2006. The increase for the six months
ended December 31, 2007 was primarily attributable to a $105 thousand increase
in contributions eligible for Pennsylvania Tax credits and a $41 thousand
increase in payroll and benefit related costs which were partially offset by a
$19 thousand decrease in occupancy and equipment costs and a $15 thousand
decrease in correspondent bank service charges when compared to the same period
in 2006.
Income Tax Expense. Income tax expense increased $121 thousand or 35.4%
and $199 thousand or 25.6% for the three and six months ended December 31, 2007,
respectively, when compared to the same periods in 2006. The increases were
primarily attributable to an increased level of taxable income for the three and
six months ended December 31, 2007 when compared to the same period in 2006.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $2.0 million during
the six months ended December 31, 2007. Net cash provided by operating
activities was primarily comprised of $2.1 million of net income, a $235
thousand increase in accrued interest payable, and a $170 decrease in accrued
interest receivable which were partially offset by $494 thousand in accretion of
discounts on commercial paper, $135 thousand in amortization of discounts,
premiums and deferred loan fees, and $65 thousand in fixed asset depreciation.
Funds used for investing activities totaled $28.0 million during the
six months ended December 31, 2007. Primary uses of funds during the six months
ended December 31, 2007, included purchases of investment, mortgage-backed
securities and FHLB stock totaling $119.4 million, $54.4 million and $12.2
million, respectively, which were partially offset by maturities and repayments
of investments, mortgage-backed securities and FHLB stock totaling $139.2
million, $9.3 million and $8.8 million, respectively, a $595 thousand decrease
in net loans receivable and $265 thousand from the sale of mortgage-backed
securities. Short-term investment grade commercial paper purchases totaled $85.4
million; and maturities of short-term commercial paper totaled $80.6 million.
Funds provided by financing activities totaled $25.6 million for the
six months ended December 31, 2007. The primary sources included a $38.6 million
increase in short-term FHLB advances and a $5.0 million increase in long-term
FHLB advances which were partially offset by a $10.1 million decrease in other
short-term borrowings, a $6.9 million decrease in deposits, $1.1 million in
treasury stock purchases and $729 thousand in cash dividends paid on the
Company's common stock. The shift in borrowed funds reflects lower short-term
rates available through the Federal Home Loan Bank. The $6.9 million decrease in
total deposits consisted of a $6.0 million decrease in time deposits primarily
due to the maturity of cash management time deposits held by local county
governments, a $2.6 million decrease in passbook accounts, and a $320 decrease
in mortgage escrow accounts, which were partially offset by a $1.7 million
increase in money market deposits and a $219 thousand increase in demand
deposits. 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 December 31, 2007, total approved loan
commitments outstanding amounted to approximately $22 thousand. At the same
date, commitments under unused lines of credit amounted to $5.7 million and the
unadvanced portion of construction loans approximated $12.5 million.
Certificates of deposit scheduled to mature in one year or less at December 31,
2007 totaled $55.0 million. Management believes that a significant portion of
maturing deposits will remain with the Company.
Historically, the Company used its sources of funds primarily to meet
its ongoing commitments to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain a substantial portfolio of
investment securities. The Company has been able to generate sufficient cash
through the retail deposit market, its traditional funding source, and through
FHLB advances and other borrowings, to provide the cash utilized in investing
activities. The Company also has access to the Federal Reserve Bank Primary
16
Credit Program. Management believes that the Company currently has adequate
liquidity available to respond to liquidity demands.
On January 28, 2008, the Company's Board of Directors declared a cash
dividend of $0.16 per share payable February 21, 2008, to shareholders of record
at the close of business on February 11, 2008. Dividends are subject to
determination and declaration by the Board of Directors, which take into account
the Company's financial condition, statutory and regulatory restrictions,
general economic conditions and other factors. There can be no assurance that
dividends will in fact be paid on the Common Stock in future periods or that, if
paid, such dividends will not be reduced or eliminated.
As of December 31, 2007, WVS Financial Corp. exceeded all regulatory
capital requirements and maintained Tier I and total risk-based capital equal to
$31.7 million or 20.1% and $32.7 million or 20.7%, respectively, of total
risk-weighted assets, and Tier I leverage capital of $31.7 million or 7.42% of
average quarterly assets.
Nonperforming assets consist of nonaccrual loans and real estate owned.
A loan is placed on nonaccrual status when, in the judgment of management, the
probability of collection of interest is deemed insufficient to warrant further
accrual. When a loan is placed on nonaccrual status, previously accrued but
uncollected interest is deducted from interest income. The Company normally does
not accrue interest on loans past due 90 days or more, however, interest may be
accrued if management believes that it will collect on the loan.
The Company's nonperforming assets at December 31, 2007 totaled
approximately $1.5 million or 0.3% of total assets as compared to $1.2 million
or 0.3% of total assets at June 30, 2007. Nonperforming assets at December 31,
2007 consisted of: one commercial real estate loan totaling $972 thousand, one
speculative construction loan totaling $354 thousand, two single-family real
estate loans totaling $137 thousand, one single-family real estate junior lien
totaling $26 thousand, two home equity lines of credit totaling $17 thousand and
one unsecured line of credit totaling $3 thousand. These loans are in various
stages of collection activity.
The $304 thousand increase in nonperforming assets during the six
months ended December 31, 2007 was primarily attributable to the
reclassification to non-performing of a $354 thousand speculative construction
loan, a $26 thousand single-family real estate junior lien, and a $3 thousand
unsecured line of credit which was partially offset by the reclassification of a
$76 thousand single-family real estate loan from non-performing to performing,
the sale of the single-family real estate owned property with a book value of
approximately $2 thousand, and paydowns on non-performing loans of approximately
$1 thousand.
At December 31, 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 six months ended
December 31, 2007 the Company received and recognized $16 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 December 31, 2007, the Company had one previously restructured loan
secured by undeveloped land totaling $328 thousand and one previously
restructured unsecured loan totaling $27 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.
17
During the six months ended December 31, 2007, approximately $34
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 six months ended December 31, 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.
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 three months ending December 31, 2007, FOMC participants
generally noted that incoming information pointed to a somewhat weaker outlook
for consumer spending. The decline in housing had steepened, and consumer
outlays appeared to be softening more than anticipated, perhaps indicating some
spill over from the housing correction to other components of consumer spending.
These developments, together with renewed strains in the financial markets,
suggested that growth in late 2007 and during 2008 was likely to be more
sluggish than FOMC participants had previously anticipated.
18
FOMC participants discussed in detail at their December 2007 meeting
the resurgence of stresses in financial markets in November. Performance of
mortgage-related assets deteriorated further, potentially increasing the losses
being borne by a number of major financial firms. Heightened worries about
counterparty credit risk, balance sheet constraints and liquidity pressures
affected interbank funding markets and commercial paper markets, where spreads
over risk-free rates were, in some cases, higher than those seen in August 2007.
Spreads on conforming mortgage products also widened after reports of losses at
the housing-related government-sponsored enterprises.
At their meetings held in October and December 2007, FOMC members voted
to reduce the targeted federal funds rate by twenty-five (25) basis points at
each meeting. Identical reductions were made to the Federal Reserve Discount
Rate.
At their December 2007 meeting, the FOMC also voted to establish a
temporary Term Auction Facility (TAF). The TAF is to provide term funding to
eligible depository institutions through an auction mechanism. Also, the TAF
will accept a broader range of collateral than used for open market operations.
On January 22, 2008, the FOMC decided to lower its targeted federal
funds rate by seventy-five (75) basis points approximately one week prior to a
scheduled FOMC meeting to be held on January 29 -30, 2008. The FOMC noted a
deepening of the housing correction as well as some softening in labor markets.
The FOMC also noted that appreciable downside risks to growth remain.
On January 30, 2008, the FOMC decided to lower its targeted federal
funds rate by fifty (50) basis points to 3.00%. The FOMC noted that financial
markets remain under considerable stress and credit has tightened further for
some households. The FOMC also noted that recent economic information indicates
a deepening of the housing contraction as well as some softening in labor
markets.
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, September 30, 2007 and December 31, 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.
Yield on:
---------------------------------
Targeted Two (2) Year Ten (10) Year Shape of Yield
Federal Funds Treasury Treasury Curve
--------------- -------------- ----------------------------------------
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
December 31, 2007 4.25% 3.05% 4.04% Positive
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 six
months ended December 31, 2007, totaled $10.3 million, $139.1 million and $9.6
million, respectively. Included in the Company's investment repayments are
commercial paper maturities totaling $80.6 million.
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 six months ended
December 31, 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
19
market conditions deteriorated, the Company purchased floating rate U.S.
Government Agency collateralized mortgage obligations, short-term investment
grade commercial paper and investment grade corporate bonds. With respect to
short-term borrowings, the Company substituted broker repurchase agreements
("other short-term borrowings") with FHLB short-term borrowings due to lower
borrowing costs at the FHLB.
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.
The Company purchased short-term investment grade commercial paper to
earn a favorable financing spread and 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 and began to
purchase investment grade corporate 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 December 31, 2007, principal investment
purchases were comprised of: floating rate collateralized mortgage obligations
which reprice monthly - $41.4 million with an original weighted average yield of
approximately 5.76% short-term investment grade commercial paper - $20.8 million
with a weighted average yield of 5.56%; fixed rate investment grade corporate
bonds - $6.5 million with a weighted average yield of 5.08%; and floating rate
investment grade corporate bonds - $5.7 million with an original weighted
average rate of 5.04%. Major investment proceeds received during the quarter
ended December 31, 2007 were: callable government agency bonds - $58.2 million
with a weighted average yield of approximately 5.85%; short-term investment
grade commercial paper - $20.0 million with a weighted average yield of
approximately 6.23%; and mortgage-backed securities - $3.1 million; and tax-free
municipal bonds - $275 thousand with a weighted average yield of 5.93%.
As of December 31, 2007, the implementation of these asset and
liability management initiatives resulted in the following:
1) $169.2 million or 98.7% 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) $15.0 million or 7.8% of the Company's investment portfolio was
comprised of fixed to floating rate U.S. Government Agency bonds which
are expected to mature or reprice in April 2008.
3) $149.9 million or 77.9% 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 - $61.4 million; 3 - 6
months - $27.0 million; 6 - 12 months - $48.2 million; 1 - 2 years -
$10.3 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) $19.9 million or 10.3% of the Company's investment portfolio was
comprised of investment grade commercial paper with maturities of less
than 90 days.
5) $6.4 million or 3.3% of the Company's investment portfolio consisted
of investment grade fixed rate corporate bonds with maturities between
fifteen and sixteen months;
6) $5.7 million or 3.0% of the Company's investment portfolio consisted
of investment grade floating rate corporate bonds which will reprice
within three months and will mature within twelve to seventeen months;
20
7) An aggregate of $33.5 million or 55.1% of the Company's net loan
portfolio had adjustable interest rates or maturities of less than 12
months; and
8) The maturity distribution of the Company's borrowings is as follows: 1
month or less - $108.4 million or 43.9%; 1 - 3 months - $3.0 million
or 1.2%; 1 - 3 years - $86.1 million or 34.9%; 3 - 5 years - $32.0
million or 12.9%; and over 5 years - $17.5 million or 7.1%.
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.
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.
December 31, June 30,
----------- --------------------
2007 2007 2006
-------- -------- --------
(Dollars in Thousands)
Interest-earning assets maturing or
repricing within one year $376,149 $206,136 $273,884
Interest-bearing liabilities maturing or
repricing within one year 213,416 187,494 194,509
-------- -------- --------
Interest sensitivity gap $162,733 $ 18,642 $ 79,375
======== ======== ========
Interest sensitivity gap as a percentage of
total assets 36.89% 4.57% 32.5%
Ratio of assets to liabilities
maturing or repricing within one year 176.25% 109.94% 175.6%
During the quarter ended December 31, 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 investment grade fixed and floating rate corporate bonds, and (5) higher
holdings of short-term investment grade commercial paper.
21
The following table illustrates the Company's estimated stressed
cumulative repricing gap - the difference between the amount of interest-earning
assets and interest-bearing liabilities expected to reprice at a given point in
time - at December 31, 2007. 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 ($'s) 78,678 59,069 40,192 33,815 (48,483) (76,087) 36,162
% of Total
Assets 17.8% 13.4% 9.1% 7.7% -11.0% -17.3% 8.2%
Base Case Up 100 bp
- -------------------
Cummulative
Gap ($'s) 78,916 59,518 43,907 43,405 (29,929) (53,957) 36,162
% of Total
Assets 17.9% 13.5% 10.0% 9.8% -6.8% -12.2% 8.2%
Cummulative
Gap ($'s) 124,420 132,478 162,733 168,056 91,811 59,658 36,162
% of Total
Assets 28.2% 30.0% 36.9% 38.1% 20.8% 13.5% 8.2%
Base Case Down 100 bp
- ---------------------
Cummulative
Gap ($'s) 127,552 136,992 168,472 174,571 98,748 65,666 36,162
% of Total
Assets 28.9% 31.1% 38.2% 39.6% 22.4% 14.9% 8.2%
Base Case Down 200 bp
- ---------------------
Cummulative
Gap ($'s) 130,806 142,327 174,294 180,687 103,700 66,791 36,162
% of Total
Assets 29.7% 32.3% 39.5% 41.0% 23.5% 15.1% 8.2%
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.
22
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 December 31, 2007. This analysis was done
assuming that the interest-earning assets will average approximately $411
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 December 31, 2007.
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 -33.6% -15.6% 7.2% 11.1%
Return on average equity 6.78% 9.85% 12.44% 13.62% 14.23%
Return on average assets 0.51% 0.75% 0.96% 1.06% 1.11%
Market value of equity (in
thousands) $ 25,229 $ 29,958 $ 31,435 $ 28,248 $ 14,962
The table below provides information about the Company's anticipated
transactions comprised of firm loan commitments and other commitments, including
undisbursed letters and lines of credit. The Company used no derivative
financial instruments to hedge such anticipated transactions as of December 31,
2007.
Anticipated Transactions
---------------------------------------------------------
(Dollars in Thousands)
Undisbursed construction and
land development loans
Fixed rate $ 6,055
8.22%
Adjustable rate $ 6,403
8.03%
Undisbursed lines of credit
Adjustable rate $ 5,687
8.38%
Loan origination commitments
Fixed rate $ 22
6.50%
Letters of credit
Adjustable rate $ 277
8.25%
----------
$ 18,444
==========
23
In the ordinary course of its construction lending business, the
Savings Bank enters into performance standby letters of credit. Typically, the
standby letters of credit are issued on behalf of a builder to a third party to
ensure the timely completion of a certain aspect of a construction project or
land development. At December 31, 2007, the Savings Bank had six performance
standby letters of credit outstanding totaling approximately $277 thousand. All
letters of credit are secured by developed property. Four of the letters of
credit will mature within twelve months, and two 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 Accounting 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 December 31, 2007. Based on
such evaluation, our Chief Executive Officer and Chief Accounting 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 December 31, 2007 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
24
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 December 31, 2007.
----------------------------------------------------------------------------------------------------
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)
----------------------------------------------------------------------------------------------------
10/01/07 - 10/31/07 -- 0.00 -- 113,320
----------------------------------------------------------------------------------------------------
11/01/07 - 11/30/07 10,486 16.15 10,486 102,834
----------------------------------------------------------------------------------------------------
12/01/07 - 12/31/07 -- 0.00 -- 102,834
----------------------------------------------------------------------------------------------------
Total 10,486 16.15 10,486 102,834
----------------------------------------------------------------------------------------------------
- --------------------
(1) All shares indicated were purchased under the Company's Ninth Stock
Repurchase Program.
(2) 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 102,834 shares
remaining to be repurchased at December 31, 2007.
(e) Not applicable.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The results of the stockholder vote at the 2007 Annual Meeting of
Stockholders held on October 30, 2007 were previously reported.
25
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
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WVS FINANCIAL CORP.
February 07, 2008 BY: /s/ David J. Bursic
-------------------------------------
Date David J. Bursic
President and Chief Executive Officer
(Principal Executive Officer)
February 07, 2008 BY: /s/ Keith A. Simpson
-------------------------------------
Date Keith A. Simpson
Vice-President, Treasurer and Chief
Accounting Officer
(Principal Accounting Officer)
27