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, 2008
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-22444
WVS Financial Corp.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1710500
- ---------------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9001 Perry Highway
Pittsburgh, Pennsylvania 15237
- ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
(412) 364-1911
----------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a Smaller reporting company [X]
smaller reporting
company)
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 11, 2009: 2,117,285 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, 2008 and June 30, 2008
(Unaudited) 3
Consolidated Statement of Income
for the Three and Six Months Ended
December 31, 2008 and 2007 (Unaudited) 4
Consolidated Statement of Changes in
Stockholders' Equity for the Six Months
Ended December 31, 2008 (Unaudited) 5
Consolidated Statement of Cash Flows
for the Six Months Ended December 31,
2008 and 2007 (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, 2008 15
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 22
Item 4. Controls and Procedures 28
Item 4T. Controls and Procedures 28
PART II. Other Information Page
- -------- ----------------- ----
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 31
Item 6. Exhibits 31
Signatures 32
2
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In thousands)
December 31, 2008 June 30, 2008
----------------- -------------
Assets
------
Cash and due from banks $ 677 $ 628
Interest-earning demand deposits 1,172 1,198
----------------- -------------
Total cash and cash equivalents 1,849 1,826
Certificates of deposit 23,025 9,398
Investment securities available-for-sale (amortized cost of
$500 and $ 7,994) 489 7,978
Investment securities held-to-maturity (market value of
$137,069 and $122,055) 135,649 120,559
Mortgage-backed securities available-for-sale (amortized cost of
$2,082 and $2,101) 2,138 2,215
Mortgage-backed securities held-to-maturity (market value of
$183,227 and $211,113) 209,427 213,690
Net loans receivable (allowance for loan losses of $977 and $956) 57,731 56,477
Accrued interest receivable 1,848 2,117
Federal Home Loan Bank stock, at cost 10,876 6,931
Premises and equipment 741 766
Other assets 979 1,152
----------------- -------------
TOTAL ASSETS $ 444,752 $ 423,109
================= =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings Deposits:
Non-interest-bearing accounts 13,600 11,780
NOW accounts 17,925 17,569
Savings accounts 31,413 32,025
Money market accounts 24,845 23,593
Certificates of deposit 58,879 64,251
Advance payments by borrowers for taxes and insurance 627 924
----------------- -------------
Total savings deposits 147,289 150,142
Federal Home Loan Bank advances: long-term 135,579 135,579
Federal Home Loan Bank advances: short-term -- --
Federal Reserve Bank short-term borrowings 126,785 80,600
Other short-term borrowings -- 20,000
Accrued interest payable 1,316 1,539
Other liabilities 2,110 3,101
----------------- -------------
TOTAL LIABILITIES 413,079 390,961
----------------- -------------
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;
3,805,636 and 3,805,636 shares issued 38 38
Additional paid-in capital 21,379 21,376
Treasury stock: 1,673,851 and 1,578,857 shares at cost,
Respectively (25,556) (24,041)
Retained earnings, substantially restricted 35,783 34,712
Accumulated other comprehensive income 30 64
Unallocated shares - Recognition and Retention Plans (1) (1)
----------------- -------------
TOTAL STOCKHOLDERS' EQUITY 31,673 32,148
----------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 444,752 $ 423,109
================= =============
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,
------------------------- -------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
INTEREST AND DIVIDEND INCOME:
Loans $ 1,010 $ 1,107 $ 2,037 $ 2,231
Investment securities 1,784 2,969 3,489 6,352
Mortgage-backed securities 2,003 2,294 3,978 4,227
Certificates of deposit 153 -- 239 --
Interest-earning deposits with other
institutions -- -- 1 2
Federal Home Loan Bank stock 47 127 137 223
----------- ----------- ----------- -----------
Total interest and dividend income 4,997 6,497 9,881 13,035
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits 593 1,056 1,299 2,194
Federal Home Loan Bank advances 1,990 2,401 3,938 4,760
Federal Reserve Bank short-term borrowings 65 -- 150 --
Other short-term borrowings 3 708 299 1,445
----------- ----------- ----------- -----------
Total interest expense 2,651 4,165 5,686 8,399
----------- ----------- ----------- -----------
NET INTEREST INCOME 2,346 2,332 4,195 4,636
PROVISION (RECOVERY) FOR LOAN LOSSES 27 11 21 (6)
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
(RECOVERY) FOR LOAN LOSSES 2,319 2,321 4,174 4,642
----------- ----------- ----------- -----------
NON-INTEREST INCOME:
Service charges on deposits 82 83 173 169
Investment securities gains -- -- -- 1
Other 74 62 150 131
----------- ----------- ----------- -----------
Total non-interest income 156 145 323 301
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 561 517 1,069 1,025
Occupancy and equipment 82 87 165 175
Data processing 62 65 125 127
Correspondent bank service charges 21 24 46 50
Other 236 262 531 519
----------- ----------- ----------- -----------
Total non-interest expense 962 955 1,936 1,896
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,513 1,511 2,561 3,047
INCOME TAXES 501 463 793 975
----------- ----------- ----------- -----------
NET INCOME $ 1,012 $ 1,048 $ 1,768 $ 2,072
=========== =========== =========== ===========
EARNINGS PER SHARE:
Basic $ 0.47 $ 0.46 $ 0.81 $ 0.91
Diluted $ 0.47 $ 0.46 $ 0.81 $ 0.91
AVERAGE SHARES OUTSTANDING:
Basic 2,159,271 2,261,544 2,175,524 2,272,527
Diluted 2,159,560 2,261,783 2,175,672 2,273,084
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, 2008 $ 38 $ 21,376 $ (24,041) $ 34,712 $ 64 $ (1) $ 32,148
Comprehensive income:
Net Income 1,768 1,768
Other comprehensive
income:
Change in unrealized
holding gains on
securities, net of
income tax effect of
$18 (34) (34)
--------
Comprehensive income 1,734
Purchase of 94,994 shares
of treasury stock (1,515) (1,515)
Exercise of stock options -- -- --
Effect of compensation
expense for stock options 3 3
Cash dividends declared
($0.32 per share) (697) (697)
Other, net -- -- -- -- -- -- --
------ ---------- ---------- ------------- ----------- ----------- --------
Balance at Dec. 31, 2008 $ 38 $ 21,379 $ (25,556) $ 35,783 $ 30 $ (1) $ 31,673
====== ========== ========== ============= =========== =========== ========
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,
-----------------------
2008 2007
--------- ---------
OPERATING ACTIVITIES
Net income $ 1,768 $ 2,072
Adjustments to reconcile net income to cash provided by operating
activities:
Provision (recovery) for loan losses 21 (6)
Depreciation 53 65
Investment securities gains -- (1)
Amortization of discounts, premiums and deferred loan fees (242) (135)
Accretion of discounts - commercial paper (262) (494)
Increase in accrued and deferred taxes 357 8
Decrease in accrued interest receivable 269 170
(Decrease) increase in accrued interest payable (223) 235
(Decrease) increase in deferred director compensation payable (805) 32
Other, net 33 11
--------- ---------
Net cash provided by operating activities 969 1,957
--------- ---------
INVESTING ACTIVITIES
Available-for-sale:
Purchases of investments securities -- (85,398)
Proceeds from repayments of investments and mortgage-backed securities 7,521 74,412
Proceeds from sale of mortgage-backed securities -- 49
Held-to-maturity:
Purchases of investment securities (109,748) (34,050)
Purchases of mortgage-backed securities -- (54,373)
Proceeds from repayments of investments 94,991 64,722
Proceeds from repayments of mortgage-backed securities 4,446 9,286
Proceeds from sale of investments and mortgage-backed securities -- 216
Purchases of certificates of deposit (16,256) --
Maturities/redemptions of certificates of deposit 2,623 --
(Increase) decrease in net loans receivable (1,291) 595
Purchase of Federal Home Loan Bank stock (13,242) (12,245)
Redemption of Federal Home Loan Bank stock 9,298 8,841
Acquisition of premises and equipment (28) (36)
Other, net -- --
--------- ---------
Net cash used for investing activities (21,686) (27,981)
--------- ---------
6
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
December 31,
--------------------
2008 2007
-------- --------
FINANCING ACTIVITIES
Net increase in transaction and savings accounts 2,436 11
Net decrease in certificates of deposit (5,372) (5,955)
Proceeds from Federal Home Loan Bank long-term advances -- 10,000
Repayments of Federal Home Loan Bank long-term advances -- (5,000)
Net increase in FHLB short-term advances -- 38,600
Net increase in Federal Reserve Bank short-term borrowings 46,185 --
Net decrease in other short-term borrowings (20,000) (10,107)
Net decrease in advance payments by borrowers for taxes and insurance (297) (320)
Cash dividends paid (697) (729)
Funds used for purchase of treasury stock (1,515) (1,136)
Net proceeds from exercise of stock options -- 205
-------- --------
Net cash provided by financing activities 20,740 25,569
-------- --------
Increase (decrease) in cash and cash equivalents 23 (455)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 1,826 2,675
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 1,849 $ 2,220
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits, escrows and borrowings $ 5,909 $ 8,164
Income taxes $ 421 $ 980
Non-cash items:
Unfunded Security Commitment -- $ 5,004
Due to Federal Reserve Bank $ 841 $ 1,260
Educational Improvement Tax Credit $ 135 $ 135
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, 2008, are
not necessarily indicative of the results which may be expected for the entire
fiscal year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In June 2008, the FASB ratified EITF Issue No. 08-4, Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjusted Conversion Ratios. This Issue provides transition guidance for
conforming changes made to EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjusted
Conversion Ratios, that resulted from EITF Issue No. 00-27, Application of Issue
No. 98-5 to Certain Convertible Instruments, and FAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liability and Equity.
The conforming changes are effective for financial statements issued for fiscal
years ending after December 15, 2008, with earlier application permitted. The
adoption of this FSP is not expected to have a material effect on the Company's
results of operations or financial position.
In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement). This FSP provides guidance on the accounting for certain types
of convertible debt instruments that may be settled in cash upon conversion.
Additionally, this FSP specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entity's nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. The FSP is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. The adoption of this FSP is not expected to have a
material effect on the Company's results of operations or financial position.
In February 2008, the FASB issued FSP No. FAS 140-3, Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions. This FSP
concludes that a transferor and transferee should not separately account for a
transfer of a financial asset and a related repurchase financing unless (a) the
two transactions have a valid and distinct business or economic purpose for
being entered into separately and (b) the repurchase financing does not result
in the initial transferor regaining control over the financial asset. The FSP is
effective for financial statements issued for fiscal years beginning on or after
November 15, 2008, and interim periods within those fiscal years. The adoption
of this FSP is not expected to have a material effect on the Company's results
of operations or financial position.
In February 2007, the FASB issued FSP No. FAS 158-1, Conforming Amendments
to the Illustrations in FASB Statements No. 87, No. 88, and No. 106 and to the
Related Staff Implementation Guides. This FSP provides conforming amendments to
the illustrations in FAS Statements No. 87, 88, and 106 and to related staff
implementation guides as a result of the issuance of FAS Statement No. 158. The
conforming amendments made by this FSP are effective as of the effective dates
of Statement No. 158. The unaffected guidance that this FSP codifies into
Statements No. 87, 88, and 106 does not contain new requirements and therefore
does not require a separate effective date or transition method. The adoption of
this FSP is not expected to have a material effect on the Company's results of
operations or financial position.
8
In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value
of a Financial Asset When the Market for That Asset Is Not Active. This FSP
clarifies the application of FAS Statement No. 157, Fair Value Measurements, in
a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. This FSP shall be effective upon
issuance, including prior periods for which financial statements have not been
issued. Revisions resulting from a change in the valuation technique or its
application shall be accounted for as a change in accounting estimate (FAS
Statement No. 154, Accounting Changes and Error Corrections). The disclosure
provisions of Statement 154 for a change in accounting estimate are not required
for revisions resulting from a change in valuation technique or its application.
The adoption of this FSP 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 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. In February 2008, the FASB issued
Staff Position No. 157-1, Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement
13, which removed leasing transactions accounted for under FAS No. 13 and
related guidance from the scope of FAS No. 157. Also in February 2008, the FASB
issued Staff Position No.157-2, Partial Deferral of the Effective Date of
Statement 157, which deferred the effective date of FAS No. 157 for all
nonfinancial assets and nonfinancial liabilities to fiscal years beginning after
November 15, 2008. The adoption of this standard is not expected to have a
material effect on the Company's results of operations or financial position.
In September 2006, the FASB issued FAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R). This Statement requires that employers
measure plan assets and obligations as of the balance sheet date. This
requirement is effective for fiscal years ending after December 15, 2008. The
other provisions of the Statement were effective as of the end of the fiscal
year ending after December 15, 2006, for public companies. 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.
In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, to require enhanced disclosures about
derivative instruments and hedging activities.
9
The new standard has revised financial reporting for derivative instruments and
hedging activities by requiring more transparency about how and why an entity
uses derivative instruments, how derivative instruments and related hedged items
are accounted for under FAS No. 133, Accounting for Derivative Instruments and
Hedging Activities; and how derivative instruments and related hedged items
affect an entity's financial position, financial performance, and cash flows.
FAS No. 161 requires disclosure of the fair values of derivative instruments and
their gains and losses in a tabular format. It also requires entities to provide
more information about their liquidity by requiring disclosure of derivative
features that are credit risk-related. Further, it requires cross-referencing
within footnotes to enable financial statement users to locate important
information about derivative instruments. FAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The adoption of this standard is
not expected to have a material effect on the Company's results of operations or
financial position.
In April 2008, the FASB issued FASB Staff Position No. 142-3,
Determination of the Useful Life of Intangible Assets ("FSP 142-3"). FSP 142-3
amends the factors that should be considered in developing assumptions about
renewal or extension used in estimating the useful life of a recognized
intangible asset under FAS No. 142, Goodwill and Other Intangible Assets. This
standard is intended to improve the consistency between the useful life of a
recognized intangible asset under FAS No. 142 and the period of expected cash
flows used to measure the fair value of the asset under FAS No. 141R and other
GAAP. FSP 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008. The measurement provisions of this standard
will apply only to intangible assets of the Company acquired after the effective
date. The adoption of this FSP is not expected to have a material effect on the
Company's results of operations or financial position.
In June 2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities, to clarify that instruments granted in share-based
payment transactions can be participating securities prior to the requisite
service having been rendered. A basic principle of the FSP is that unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
are to be included in the computation of EPS pursuant to the two-class method.
The provisions of this FSP are effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
years. All prior-period EPS data presented (including interim financial
statements, summaries of earnings, and selected financial data) are required to
be adjusted retrospectively to conform with the provisions of the FSP. The
adoption of this FSP is not expected to have a material effect on the Company's
results of operations or financial position.
In December 2008, the FASB issued FASB Staff Position (FSP) No. FAS
132(R)-1, Employers' Disclosures about Postretirement Benefit Plan Assets. This
FSP amends FASB Statement No. 132 (revised 2003), Employers' Disclosures about
Pensions and Other Postretirement Benefits, to improve an employer's disclosures
about plan assets of a defined benefit pension or other postretirement plan. The
disclosures about plan assets required by the FSP are to be provided for fiscal
years ending after December 15, 2009. The adoption of this FSP is not expected
to have a material effect on the Company's results of operations or financial
position.
10
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,
--------------------------- ---------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Weighted average common shares
outstanding 3,805,636 3,796,861 3,805,636 3,793,599
Average treasury stock shares (1,646,365) (1,535,317) (1,630,112) (1,521,072)
------------ ------------ ------------ ------------
Weighted average common shares
and common stock equivalents
used to calculate basic earnings
per share 2,159,271 2,261,544 2,175,524 2,272,527
Additional common stock
equivalents (stock options) used
to calculate diluted earnings
per share 289 239 148 557
------------ ------------ ------------ ------------
Weighted average common shares
and common stock equivalents
used to calculate diluted earnings
per share 2,159,560 2,261,783 2,175,672 2,273,084
============ ============ ============ ============
All options at December 31, 2008 and December 31, 2007 were included in
the computation of diluted earnings per share.
11
4. STOCK BASED COMPENSATION DISCLOSURE
-----------------------------------
In December 2004, the Financial Accounting Standards Board (FASB)
issued No. 123R (FAS No. 123R), Share-Based Payment which revised FAS No. 123,
Accounting for Stock-Based Compensation, and superseded Accounting Principles
Bulletin (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25)
and related interpretations. FAS No. 123R requires the grant-date fair value of
all share-based payment awards that are expected to vest, including employee
share options to be recognized as employee compensation expense over the
requisite service period. The Company adopted FAS No. 123R on July 1, 2005 and
applied the modified prospective transition method. Under this transition
method, the Company (1) did not restate any prior periods and (2) are
recognizing compensation expense for all share-based payment awards that were
outstanding, but not yet vested, as of December 31, 2008, based upon the same
estimated grant-date fair values and service periods used to prepare FAS No. 123
pro-forma disclosures.
The Company's 2008 Stock Incentive Plan (the Plan), which is
shareholder approved, permits the grant of share options to its directors and
employees for up to 152,000 share options. Option awards are generally granted
with an exercise price equal to the market price of the Company's stock at the
date of grant: those option awards generally vest based on five years of
continuous service and have ten year contractual terms.
During the periods ended December 31, 2008 and 2007, the Company
recorded $3 thousand and $0, respectively, in compensation expense related to
our share-based compensation awards. As of December 31, 2008, there was
approximately $79 thousand of unrecognized compensation cost related to unvested
share-based compensation awards granted in 2008. That cost is expected to be
recognized over the next five years.
FAS 123R requires that the cash flows from the tax benefits resulting
from tax deductions in excess of the compensation cost recognized for
stock-based awards (excess tax benefits) be classified as financing cash flows.
For purposes of computing results, the Company estimated the fair
values of stock options using the Black-Scholes option-pricing model. The model
requires the use of subjective assumptions that can materially affect fair value
estimates. The fair value of each option is amortized into compensation expense
on a straight line basis between the grant date for the option and each vesting
date. The fair value of each stock option granted was estimated using the
following weighted-average assumptions:
2008
Assumptions
-----------
Volatility 7.73%
Interest Rates 3.68%
Dividend Yields 3.94%
Weighted Average Life (in years) 5.00%
The Company had 87,500 non-vested stock options outstanding at December
31, 2008 and no unvested stock options outstanding at December 31, 2007. During
the six months ended December 31, 2008 and December 31, 2007, the Company issued
87,500 and 0 options, respectively.
The weighted average fair value of each stock option granted for 2008
was $0.94. There were no options exercised during the six months ended December
31, 2008 which were granted in 2008.
12
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,
----------------------------- ------------------------------
2008 2007 2008 2007
-------------- ------------ -------------- -------------
(Dollars in Thousands)
Net income $1,012 $1,048 $1,768 $2,072
Other comprehensive
income (loss):
Unrealized gains
(losses) on available
for sale securities $ (13) $14 $ (52) $59
Less:
Reclassification
adjustment for gain
included in net
income -- -- -- (1)
----- ------ --- ------ ----- ------ --- -------
Other comprehensive
gain (loss) before tax (13) 14 (52) 58
Income tax expense
(benefit) related to other
comprehensive income
(loss) (4) 5 (18) 20
------ ------ ------ -------
Other comprehensive gain
(loss) net of tax (9) 9 (34) 38
------ ------ ------ -------
Comprehensive income $1,003 $1,057 $1,734 $ 2,110
====== ====== ====== =======
6. FAIR VALUE MEASUREMENTS (SFAS NO. 157)
--------------------------------------
Effective July 1, 2008, the Company adopted SFAS No. 157, which, among
other things, requires enhanced disclosures about assets and liabilities carried
at fair value. SFAS No. 157 establishes a hierarchal disclosure framework
associated with the level of pricing observability utilized in measuring assets
and liabilities at fair value. The three broad levels defined by SFAS No. 157
hierarchy are as follows:
Level I: Quoted prices are available in active markets for identical assets
or liabilities as of the reported date.
Level II: Pricing inputs are other than quoted prices in active markets, which
are either directly or indirectly observable as of the reported
date. The nature of these assets and liabilities include items for
which quoted prices are available but traded less frequently, and
items that are fair valued using other financial instruments, the
parameters of which can be directly observed.
Level III: Assets and liabilities that have little to no pricing observability
as of the reported date. These items do not have two-way markets and
are measured using management's best estimate of fair value, where
the inputs into the determination of fair value require significant
management judgment or estimation.
13
The following table presents the assets reported on the consolidated
statements of financial condition at their fair value as of December 31, 2008 by
level within the fair value hierarchy. As required by SFAS No. 157, financial
assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement.
At December 31, 2008
----------------------------------------
Level I Level II Level III Total
------- -------- --------- -------
Assets:
Investment securities available for sale $ 489 $ -- $ -- $ 489
Mortgage-backed securities available for sale $ -- $ 2,138 $ -- $ 2,138
Total $ 489 $ 2,138 $ -- $ 2,627
14
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2008
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 bank 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; and
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.
15
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, 2008.
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 $444.8 million at December 31, 2008, as
compared to $423.1 million at June 30, 2008. The $21.7 million or 5.1% increase
in total assets was primarily comprised of a $15.1 million or 12.5% increase in
investment securities - held to maturity, a $13.6 million or 145.0% increase in
FDIC insured certificates of deposit, a $3.9 million or 56.9% increase in
Federal Home Loan Bank ("FHLB") stock, and a $1.3 million or 2.2% increase in
net loans receivable, which were partially offset by a $7.5 million or 93.9%
decrease in investment securities - available for sale, a $4.3 million or 2.0%
decrease in mortgage-backed securities - held to maturity, a $269 thousand or
12.7% decrease in accrued interest receivable, and a $173 thousand or 15.0%
decrease in deferred taxes and other assets. The increase in investment
securities - held to maturity was primarily attributable to purchases of $72.1
million of short-term investment grade commercial paper, $30.3 million of
fixed-rate U.S. Government agency bonds, $5.4 million of investment grade fixed
rate corporate bonds, and $2.0 million of investment grade floating-rate
corporate bonds, which were partially offset by $47.3 million of issuer
redemptions prior to maturity (i.e. calls) of fixed-rate U.S. Government agency
bonds, $45.4 million of maturities of short-term investment grade commercial
paper, and $2.3 million of maturities of investment grade corporate bonds. The
increase in FDIC insured certificates of deposit was attributable to an increase
of $16.2 million in bank certificates of deposit which was partially offset by
$2.6 million in maturities and early redemptions of bank certificates of
deposit. The increase in FHLB stock was attributable to higher levels of FHLB
borrowings during the six months ended December 31, 2008, and associated FHLB
stock purchase requirements. The decrease in investment securities - available
for sale was attributable to $7.5 million of maturities of short-term investment
grade commercial paper, while the decrease in mortgage-backed securities - held
to maturity was attributable primarily to principal payments received. See
"Asset and Liability Management".
The Company's total liabilities increased $22.1 million or 5.7% to $413.1
million as of December 31, 2008 from $391.0 million as of June 30, 2008. The
$22.1 million increase in total liabilities was primarily comprised of a $46.2
million or 57.3% increase in Federal Reserve Bank short-term borrowings, which
was partially offset by a $20.0 million or 100.0% decrease in other short-term
borrowings, a 2.8 million or 1.9% decrease in total savings deposits, a $991
thousand or 32.0% decrease in other liabilities and a $223 thousand or 14.5%
decrease in accrued interest payable. The respective changes in short-term
borrowings were primarily due to more competitive Federal Reserve Bank ("FRB")
pricing in contrast to the short-term repurchase agreement and FHLB markets.
Certificates of deposit decreased $5.4 million, savings accounts
16
decreased $612 thousand, and advance payments by borrowers for taxes and
insurance decreased $297 thousand, while demand deposits increased $2.2 million
and money market accounts increased $1.3 million. The change in money market
accounts and certificates of deposit may be in response to lower market yields
on certificates of deposit and increased liquidity preferences by depositors in
response to unsettled financial markets. Management believes that the changes in
savings accounts and advance payments by borrowers for taxes and insurance were
primarily attributable to seasonal payments of county, local and school real
estate taxes, and transactional needs. The change in other liabilities is
primarily attributable to decreases in deferred director compensation accounts
and clearing balances due to the Federal Reserve, which were partially offset by
increases in accrued income taxes payable and accrued contributions to the
Employee Stock Ownership Plan.
Total stockholders' equity decreased $475 thousand or 1.5% to $31.7
million as of December 31, 2008, from approximately $32.1 million as of June 30,
2008. Capital expenditures for the Company's stock repurchase program and cash
dividends totaled $1.5 million and $697 thousand, respectively, and accumulated
other comprehensive income decreased $34 thousand, which were partially offset
by net income of $1.8 million for the six months ended December 31, 2008. Book
value per share increased to $14.86 at December 31, 2008 from $14.44 at June 30,
2008.
RESULTS OF OPERATIONS
General. WVS reported net income of $1.0 million or $0.47 earnings per
share (basic and diluted) and $1.8 million or $0.81 earnings per share (basic
and diluted) for the three and six months ended December 31, 2008, respectively.
Net income decreased by $36 thousand or 3.4% and earnings per share (basic and
diluted) increased $0.01 or 2.2% for the three months ended December 31, 2008,
when compared to the same period in 2007. The decrease in net income was
primarily attributable to a $38 thousand increase in income tax expense, a $16
thousand increase in provisions for loan losses, and a $7 thousand increase in
non-interest expense, which were partially offset by a $14 thousand increase in
net interest income and an $11 thousand increase in non-interest income. For the
six months ended December 31, 2008, net income decreased $304 thousand or 14.7%
when compared to the same period in 2007. The decrease in net income was
primarily attributable to a $441 thousand decrease in net interest income, a $40
thousand increase in non-interest expense, and a $27 thousand increase in
provisions for loan losses, which were partially offset by a $182 thousand
decrease in income tax expense and a $22 thousand increase in non-interest
income.
Net Interest Income. The Company's net interest income increased by $14
thousand or 0.6% and decreased $441 thousand or 9.5% for the three and six
months ended December 31, 2008, respectively, when compared to the same periods
in 2007. For the three months ended December 31, 2008, approximately $63
thousand of the increase in net interest income can be attributed to the
favorable overall impact of declining market interest rates on the Company's
financial assets and liabilities, which was partially offset by a $23 thousand
decrease in net interest income attributable to lower overall balances in the
Company's financial assets and liabilities when compared to the same period in
2007. For the six months ended December 31, 2008, approximately $424 thousand of
the decrease in net interest income can primarily be attributed to decreases in
average balances of the Company's financial assets of approximately $7.0 million
and financial liabilities of approximately $7.5 million when compared to the
same period in 2007.
During the six months ended December 31, 2008, the Federal Open Market
Committee (FOMC) reduced its targeted federal funds level from 2.00% to a range
of 0.00% to 0.25%. See also "Asset and Liability Management."
Interest Income. Interest on investment securities decreased by $1.2
million or 39.9% and $2.9 million or 45.1% for the three and six months ended
December 31, 2008, when compared to the same periods in 2007. The decreases for
the three and six months ended December 31, 2008, were primarily attributable to
a $1.4 million and $3.0 million decrease, respectively, in interest income on
callable U.S. Government Agency bonds (principally due to issuer redemptions of
securities prior to scheduled maturities). The changes in interest income on the
various segments of the investment portfolio are primarily attributable to
changes in the average balances of the respective segments.
17
Interest on mortgage-backed securities decreased $291 thousand or 12.7%
and $249 thousand or 5.9% for the three and six months ended December 31, 2008,
respectively, when compared to the same periods in 2007. The decreases for the
three and six months ended December 31, 2008 were primarily attributable to
decreases of 203 basis points and 230 basis points, respectively, in the
weighted average yield earned on U.S. government agency floating-rate
mortgage-backed securities for the three and six months, decreases of 267 basis
points and 273 basis points, respectively, in the weighted-average yield earned
on private label mortgage-backed securities for the three and six months, which
were partially offset by $59.0 million and $75.8 million increases in the
average balance outstanding of U.S. Government floating-rate agency
mortgage-backed securities for the three and six months ended December 31, 2008,
respectively, when compared to the same periods in 2007. The decrease in the
weighted average yield earned on mortgage-backed securities was consistent with
lower short-term market interest rates for the three and six months ended
December 31, 2008, when compared to the same periods in 2007. The increase in
the average balances of U.S. government agency mortgage-backed securities during
the three and six months ended December 31, 2008 was primarily attributable to
purchases of floating rate U.S. government agency mortgage-backed securities
during the period. All mortgage-backed securities purchased during the period
were guaranteed by agencies of the U.S. government.
Interest on FDIC insured bank certificates of deposit increased $153
thousand or 100.0% and $239 thousand or 100.0% for the three and six months
ended December 31, 2008, when compared to the same periods in 2007. The Company
continued to purchase FDIC insured certificates of deposit due to favorable
funding spreads and lower levels of suitable other investments due to distressed
market conditions. The certificates have original maturity terms from five to
twenty-four months.
Interest on net loans receivable decreased $97 thousand or 8.8% and $194
thousand or 8.7% for the three and six months ended December 31, 2008, when
compared to the same periods in 2007. The decreases for the three and six months
ended December 31, 2008 were primarily attributable to decreases of 50 and 43
basis points, respectively, in the weighted average yield earned on net loans
receivable for the three and six months ended December 31, 2008, when compared
to the same periods in 2007, and a $1.3 million and $1.9 million decrease in the
average balance of net loans receivable outstanding, when compared to the same
periods in 2007. The decrease in the weighted average yield earned on net loans
receivable for the three and six months ended December 31, 2008, was primarily
attributable to rate reductions on the adjustable rate portion of the loan
portfolio due to lower market rates on which the adjustments are based. The
decrease in the average loan balances outstanding for the three and six months
ended December 31, 2008 were attributable to low levels of consumer confidence,
rising levels of unemployment, continued and deepening weakness in the economy,
an excess supply of existing homes available for sale, and lower levels of
housing starts. The Company continues to offer competitively priced mortgages
through its correspondent lending program, however, consumer demand has been
very weak.
Dividends on FHLB stock decreased $80 thousand or 63.0% and $86 thousand
or 38.6% for the three and six months ended December 31, 2008, when compared to
the same periods in 2007. The decreases for the three and six months ended
December 31, 2008 were attributable to 363 and 207 basis point decreases,
respectively, in the average yield earned on FHLB stock when compared to the
same periods in 2007, which were partially offset by increases in the average
balance of FHLB stock held for the three and six months ended December 31, 2008
of $1.3 million and $441 thousand, respectively, when compared to the same
periods in 2007. The increases in average balances of FHLB stock held resulted
from increased levels of FHLB borrowings and associated FHLB stock purchase
requirements during the periods. In December 2008, the FHLB of Pittsburgh
announced that it was suspending the payment of dividends and redemptions of
excess capital stock from members. The FHLB's stated purpose of these actions is
to build retained earnings to ensure adequate regulatory capital. The FHLB of
Pittsburgh anticipates providing further information to its members, along with
its December 31, 2008 quarterly earnings, sometime in February 2009.
Interest Expense. Interest paid on other short-term borrowings decreased
$705 thousand or 99.6% and $1.1 million or 79.3%, respectively, for the three
and six months ended December 31, 2008 when compared to the same periods in
2007. The decrease for the three months ended December 31, 2008 was primarily
attributable to a 414 basis point decrease in rates paid on other short-term
borrowings and a $55.8
18
million decrease in average balances of other short-term borrowings during the
period when compared to the same period in 2007. The decrease for the six months
ended December 31, 2008, was primarily attributable to a 297 basis point
decrease in rates paid on other short-term borrowings and a $28.6 million
decrease in average balances of other short-term borrowings during the period
when compared to the same period in 2007. The decrease in rates paid reflect
lower short-term market interest rates while the decrease in average balances of
other short-term borrowings is attributable to more favorable short-term
borrowing rates offered by the Federal Reserve Bank.
Interest expense on deposits and escrows decreased $463 thousand or 43.8%
and $895 thousand or 40.8% for the three and six months ended December 31, 2008,
when compared to the same period in 2007. The decrease in interest expense on
deposits for the three months ended December 31, 2008 was primarily attributable
to a 164 basis point decrease in the weighted average rate paid on time
deposits, a 234 basis point decrease in the weighted average rate paid on money
market accounts, and an $8.0 million decrease in the average balance of time
deposits, which were partially offset by a $3.3 million increase in the average
balance of money market accounts, when compared to the same period in 2007. The
decrease for the six months ended December 31, 2008, was primarily attributable
to a 150 basis point decrease in the weighted average rate paid on time
deposits, a 222 basis point decrease in the weighted average rate paid on money
market accounts, and a $9.3 million decrease in the average balance of time
deposits, which were partially offset by a $3.7 million increase in the average
balance of money market accounts, when compared to the same period in 2007. The
decrease in average yields of time deposits and money market accounts reflects
lower market rates for the three and six months ended December 31, 2008 while
the change in average balances for time deposits and money market accounts may
be in response to increased liquidity preferences by depositors in response to
unsettled financial markets.
Interest paid on FHLB advances decreased $411 thousand or 17.1% and $822
thousand or 17.3% for the three and six months ended December 31, 2008, when
compared to the same periods in 2007. The decrease for the three months ended
December 31, 2008 was attributable to a 390 basis point decrease in rates paid
on FHLB short-term advances, which was partially offset by a $11.3 million
increase in the average balance of FHLB short-term advances when compared to the
same period in 2007. The decrease for the six months ended December 31, 2008,
was primarily attributable to a 385 basis point decrease in rates paid on
short-term FHLB advances and a $5.9 million decrease in the average balance of
short-term FHLB advances, when compared to the same period in 2007. The decrease
in rates paid reflect lower short-term market interest rates.
Interest paid on FRB short-term borrowings increased $65 thousand or 100%
and $150 thousand or 100% for the three and six months ended December 31, 2008,
when compared to the same periods in 2007. The increase for the three and six
months ended December 31, 2008 was attributable to increases of $48.4 million
and $31.7 million, respectively, in the average balances of FRB short-term
borrowings. The increase in average balances of FRB short-term borrowings is
attributable to more favorable short-term borrowing rates offered by the Federal
Reserve Bank, when compared to other short-term funding sources.
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 provisions for loan losses of $27 thousand and $21
thousand for the three and six months ended December 31, 2008, respectively,
compared to a provision for loan losses of $11 thousand and a recovery for loan
losses of $6 thousand for the same periods in 2007. The increases for both
periods in fiscal 2009 can be primarily attributable to higher average loan
balances. At December 31, 2008, the Company's total allowance for loan losses
amounted to $977 thousand or 1.7% of the Company's total loan portfolio, as
compared to $956 thousand or 1.7% at June 30, 2008.
Non-Interest Income. Non-interest income increased by $11 thousand or 7.6%
and $22 thousand or 7.3% for the three and six months ended December 31, 2008,
respectively, when compared to the same
19
periods in 2007. The increase was primarily attributable to increased levels of
ATM and debit card fee income.
Non-Interest Expense. Non-interest expense increased $7 thousand or 0.7%
and $40 thousand or 2.1% for the three and six months ended December 31, 2008,
respectively, when compared to the same periods in 2007. The increase for the
three months ended December 31, 2008 was principally attributable to a $44
thousand increase in employee related costs, which were partially offset by a
decrease in charitable contributions eligible for PA tax credits when compared
to the same period in 2007. The increase for the six months ended December 31,
2008 was primarily attributable to increases in employee related costs, when
compared to the same period in 2007.
Income Tax Expense. Income tax expense increased $38 thousand or 8.2% for
the three months ended December 31, 2008, and decreased $182 thousand or 18.7%
for the six months ended December 31, 2008, when compared to the same periods in
2007. The increase for the three months ended December 31, 2008 was primarily
due to a decrease in the Company's deferred tax assets attributable to the
deferred director compensation plan, while the decrease for the six months ended
December 31, 2008 was attributable to lower levels of taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $969 thousand during the
six months ended December 31, 2008. Net cash provided by operating activities
was primarily comprised of $1.8 million of net income, a $357 thousand increase
in accrued and deferred taxes, and a $269 thousand decrease in accrued interest
receivable, which were partially offset by a $805 thousand decrease in deferred
director compensation accounts, $262 thousand in accretion of discounts on
commercial paper, $242 thousand in accretion of discounts, premiums and deferred
loan fees, and a $223 thousand decrease in accrued interest payable.
Funds used for investing activities totaled $21.7 million during the six
months ended December 31, 2008. Primary uses of funds during the six months
ended December 31, 2008, included purchases of investments, FHLB stock and
certificates of deposit totaling $109.7 million, $13.2 million and $16.3
million, respectively, and a $1.3 million increase in net loans receivable,
which were partially offset by maturities and repayments of investment
securities, mortgage-backed securities, FHLB stock and certificates of deposit
totaling $102.5 million, $4.5 million, $9.3 million, and $2.6 million,
respectively. Short-term investment grade commercial paper purchases included in
investment securities purchases totaled $72.1 million; and maturities of
short-term commercial paper totaled $52.9 million. Fixed rate U.S. Government
agency bonds purchased during the period totaled $30.3 million, while early
redemptions by issuers of fixed-rate callable U.S. Government agency bonds
during the six months totaled $47.3 million.
Funds provided by financing activities totaled $20.7 million for the six
months ended December 31, 2008. The primary sources included a $46.2 million
increase in FRB short-term borrowings which was partially offset by a $20.0
million decrease in other short-term borrowings, a $3.2 million decrease in
deposits, $1.5 million in treasury stock purchases and $697 thousand in cash
dividends paid on the Company's common stock. The increase in FRB short-term
borrowings reflects lower short-term rates available through the FRB compared to
other short-term funding sources. The $3.2 million decrease in total deposits
consisted of a $5.4 million decrease in time deposits, a $612 thousand decrease
in passbook accounts, and a $297 decrease in mortgage escrow accounts, which
were partially offset by a $2.2 million increase in demand deposits and a $1.3
million increase in money market deposits. The decrease in time deposits may be
attributable to customer disintermediation to other financial institutions
paying above market interest rates on CDs and approximately $1 million of state
and political subdivision time deposits not renewed by the Bank due to rate
considerations. The increase in money market balances may be attributable to
lower market yields on certificates of deposits and increased liquidity
preferences by depositors in response to unsettled financial markets. The
decreases in passbook and escrow accounts were 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.
20
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 FRB and other borrowings. At December 31, 2008, total approved loan
commitments outstanding amounted to approximately $413 thousand. At the same
date, commitments under unused lines of credit amounted to $4.7 million and the
unadvanced portion of construction loans approximated $11.5 million.
Certificates of deposit scheduled to mature in one year or less at December 31,
2008 totaled $44.0 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 FRB and other borrowings, to provide the cash utilized in
investing activities. Management believes that the Company currently has
adequate liquidity available to respond to liquidity demands.
On January 27, 2009, the Company's Board of Directors declared a cash
dividend of $0.16 per share payable February 19, 2009, to shareholders of record
at the close of business on February 9, 2009. 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.
On January 28, 2009, the Company announced its Tenth Stock Repurchase
Program. The Company's Tenth Stock Repurchase Program will total 106,000 shares
and will begin upon completion of its Ninth Stock Repurchase Program.
West View Savings Bank has elected to participate in the FDIC's
Transaction Account Guarantee Program. This program provides unlimited FDIC
deposit insurance on non-interest bearing bank checking accounts. Neither West
View Savings Bank, or the Company, have applied for funding under the U.S.
Treasury's Troubled Asset Relief Program.
As of December 31, 2008, WVS Financial Corp. exceeded all regulatory
capital requirements and maintained Tier I and total risk-based capital equal to
$31.6 million or 18.3% and $32.6 million or 18.9%, respectively, of total
risk-weighted assets, and Tier I leverage capital of $31.6 million or 7.39% 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, 2008 totaled
approximately $1.5 million or 0.3% of total assets as compared to $1.6 million
or 0.4% of total assets at June 30, 2008. Nonperforming assets at December 31,
2008 consisted of: one commercial real estate loan totaling $972 thousand, five
single-family real estate loans totaling $523 thousand, one home equity line of
credit totaling $19 thousand and one secured line of credit totaling $17
thousand. These loans are in various stages of collection activity.
The $59 thousand decrease in nonperforming assets during the six months
ended December 31, 2008 was attributable to the payoff in full of a $356
thousand non-performing speculative construction loan, which was partially
offset by the addition to non-accrual status of one single family real estate
loan totaling $293 thousand and one home equity line of credit totaling $19
thousand.
21
At December 31, 2008, 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, 2008. 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, 2008 the Company received and recognized $24 thousand of interest
income. The project is experiencing lower than desired levels of occupancy, and
the borrower is working to increase occupancy. The Company is in negotiations to
work-out this credit, however, at this time, the Company cannot predict the
final form or outcome of the work-out negotiations.
At December 31, 2008, the Company had one previously restructured loan
secured by undeveloped land totaling $314 thousand and one previously
restructured unsecured loan totaling $15 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 six months ended December 31, 2008, approximately $17 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, 2008. 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.
22
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, 2008, liquidity conditions in
the short-term credit (e.g. LIBOR, repurchase agreement, commercial paper)
markets continued to significantly deteriorate. The continued deterioration of
liquidity in the short-term credit markets can be traced to: losses at financial
institutions, particularly large money center and investment banks, a marked
slow-down in the U.S. economy and a marked "flight to quality" into short-term
U.S. Treasurys. The Company noticed several anomalies: 1) low, and at times
negative, short-term U.S. treasury yields; 2) a diversion between a decreasing
targeted U.S. Federal Funds rate and short-term LIBOR rates; and 3) a
significant increase in market rates for short-term commercial paper. During the
quarter ended December 31, 2008, the Company capitalized on these short-term
anomalies by: 1) increasing purchases of bank certificates of deposit, with
maturities generally within one year, to lock in attractive fixed rates of
return; and 2) increasing purchases of investment grade commercial paper to
capitalize on calendar year-end pricing pressures. Combined, these factors
contributed to a higher than anticipated level of net interest income for the
quarter ended December 31, 2008. Should these factors reverse, in whole or in
part, Company net interest income could decline. Management used a variety of
wholesale short-term borrowing sources for funding, including repurchase
agreements, FHLB advances, and various FRB programs.
The table below shows the targeted federal funds rate and the benchmark
two and ten year treasury yields at December 31, 2006, March 31, 2007, June 30,
2007, September 30, 2007, December 31, 2007, March 31, 2008, June 30, 2008,
September 30, 2008, and December 31, 2008. 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:
-------------------
Two (2) Ten (10)
Targeted Federal Year Year
Funds Treasury Treasury Shape of Yield Curve
---------------- -------- -------- --------------------
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
March 31, 2008 2.25% 1.62% 3.45% Positive
June 30, 2008 2.00% 2.63% 3.99% Positive
September 30, 2008 2.00% 2.00% 3.85% Positive
December 31, 2008 0.00% - 0.25% 0.76% 2.25% 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. Principal repayments on
the Company's loan, investment and mortgage-backed securities portfolios for the
six months ended December 31, 2008, totaled $9.7 million, $102.5 million and
$4.5 million, respectively. Included in the Company's investment repayments are
commercial paper maturities totaling $52.9 million, and issuer redemptions of
23
fixed rate U.S. Government agency bonds of $47.3 million. While the Company's
short-term borrowings are highly responsive to changes in market interest rates,
deposit rates typically occur on a lagged basis.
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, 2008 the Company adjusted its asset/liability mix in several ways.
Intermediate term callable U.S. Government Agency securities were purchased
early on during the six months ended December 31, 2008. As financial market
conditions deteriorated, the Company purchased short-term investment grade
commercial paper. With respect to short-term borrowings, the Company replaced
broker repurchase agreements ("other short-term borrowings") with FRB short-term
borrowings due to lower borrowing costs at the FRB.
Due to low levels of consumer confidence, rising levels of unemployment,
continued weakness in the economy, an excess supply of existing homes available
for sale, and lower levels of housing starts, the demand for mortgages has
fallen dramatically. The Company continues to offer competitively priced
mortgages through its correspondent lending program, however, consumer demand
has been very weak. 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. We expect that the housing market likely will continue to be weak
through calendar year 2009. 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 higher levels of liquidity due to
turmoil in the world financial markets. The Company also continued to purchase
intermediate term fixed rate callable U. S. Government Agency bonds and FDIC
insured bank certificates of deposit in order to earn a spread against the
Company's various deposits and borrowings while limiting interest rate risk
within the portfolio. 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 six months ended December 31, 2008, principal investment
purchases were comprised of: callable fixed rate U.S. Government agency bonds
with initial lock-out periods as follows: 0 - 3 months - $12.0 million with a
weighted average yield to call of approximately 9.19% and a weighted average
yield to maturity of 6.03%; 4 - 12 months - $15.6 million with a weighted
average yield to call of approximately 4.50%; and over 36 months - $2.6 million
with a weighted average yield to call of approximately 6.09%; short-term
investment grade commercial paper - $72.1 million with a weighted average yield
of 5.42%; investment grade fixed rate corporate bonds - $5.4 million with a
weighted average yield of 6.14%; and investment grade floating-rate corporate
bonds - $2.0 million with a weighted average initial rate of 3.19%. The Company
also purchased $16.2 million of FDIC bank insured certificates of deposit with a
weighted average yield of 3.97%. Major investment proceeds received during the
six months ended December 31, 2008 were: callable government agency bonds -
$47.3 million with a weighted average yield of approximately 5.91%; short-term
investment grade commercial paper - $52.9 million with a weighted average yield
of approximately 5.18%; mortgage-backed securities - $4.5 million; and
investment grade corporate bonds - $2.3 million with a weighted average yield of
4.39%. The Company also had $2.6 million in FDIC insured bank certificates of
deposit mature or be redeemed with a weighted average yield of approximately
3.68%.
As of December 31, 2008, the implementation of these asset and
liability management initiatives resulted in the following:
1) $209.4 million or 99.0% 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) $76.1 million or 55.9% 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 - $31.8 million; 3 - 6 months - $23.0 million; 6
- 12 months - $12.8 million; and 1 - 3 years - $8.5 million; These
24
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.
3) $26.9 million or 19.8% of the Company's investment portfolio was comprised
of investment grade commercial paper with maturities of less than 31 days.
4) $18.1 million or 13.3% of the Company's investment portfolio consisted of
investment grade fixed rate corporate bonds with maturities between one
and nine months;
5) $6.0 million or 4.4% of the Company's investment portfolio consisted of
investment grade floating rate corporate bonds which will reprice within
three months and will mature within five to eight months;
6) $23.0 million or 5.2% of the Company's total assets consisted of FDIC
insured bank certificates of deposit with remaining maturities ranging
from one to eighteen months;
7) An aggregate of $32.2 million or 55.8% 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: 3
months or less - $132.3 million or 50.4%; 1 - 3 years - $112.6 million or
42.9%; and over 5 years - $17.5 million or 6.7%.
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.
June 30,
December 31, --------------------------
2008 2008 2007
----------- ----------- -----------
(Dollars in Thousands)
Interest-earning assets maturing or
repricing within one year $ 334,984 $ 377,916 $ 206,136
Interest-bearing liabilities maturing or
repricing within one year 227,591 207,133 187,494
----------- ----------- -----------
Interest sensitivity gap $ 107,393 $ 170,783 $ 18,642
=========== =========== ===========
Interest sensitivity gap as a percentage of
total assets 24.15% 40.36% 4.57%
Ratio of assets to liabilities
maturing or repricing within one year 147.19% 182.45% 109.94%
During the six months ended December 31, 2008, the Company managed its one
year interest sensitivity gap by: (1) emphasizing loans with shorter-terms or
repricing frequencies; (2) investing in short-term investment grade commercial
paper; (3) investing in short-term FDIC insured bank certificates of deposits;
and, (4) adjusting its investment portfolio to include investment grade fixed
and floating rate corporate bonds.
25
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, 2008. 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) $99,736 $95,128 $100,625 $11,825 $(18,621) $8,844 $31,790
% of Total
Assets 22.4% 21.4% 22.6% 2.7% -4.2% 2.0% 7.1%
Base Case Up 100 bp
- -------------------
Cummulative
Gap ($'s) $100,260 $96,111 $102,139 $13,778 $(16,662) $10,875 $31,790
% of Total
Assets 22.5% 21.6% 23.0% 3.1% -3.7% 2.4% 7.1%
Base Case No Change
- -------------------
Cummulative
Gap ($'s) $102,184 $100,333 $107,393 $23,266 $(6,940) $19,313 $31,790
% of Total
Assets 23.0% 22.6% 24.1% 5.2% -1.6% 4.3% 7.1%
Base Case Down 100 bp
- ---------------------
Cummulative
Gap ($'s) $134,613 $156,221 $176,705 $97,066 $69,344 $63,836 $31,790
% of Total
Assets 30.3% 35.1% 39.7% 21.8% 15.6% 14.4% 7.1%
Base Case Down 200 bp
- ---------------------
Cummulative
Gap ($'s) $134,631 $156,254 $176,762 $97,142 $69,413 $63,844 $31,790
% of Total
Assets 30.3% 35.1% 39.7% 21.8% 15.6% 14.4% 7.1%
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.
26
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, 2008. This analysis was done
assuming that the interest-earning assets will average approximately $440
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, 2008.
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 -37.2% -39.4% 25.9% 52.1%
Return on average equity 0.97% 0.76% 4.66% 7.12% 9.55%
Return on average assets 0.07% 0.06% 0.33% 0.51% 0.69%
Market value of equity (in
thousands) $(4,089) $(808) $1,238 $6,273 $8,433
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,
2008.
Anticipated Transactions
--------------------------------------------------------
(Dollars in Thousands)
Undisbursed construction and
land development loans
Fixed rate $ 5,803
6.55%
Adjustable rate $ 5,732
4.85%
Undisbursed lines of credit
Adjustable rate $ 4,687
5.54%
Loan origination commitments
Fixed rate $ 413
7.38%
Letters of credit
Adjustable rate $ 571
4.25%
---------
$ 17,206
=========
27
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, 2008, the Savings Bank had five performance standby
letters of credit outstanding totaling approximately $284 thousand and two
financial letters of credit totaling $287 thousand. All performance letters of
credit are secured by developed property while the financial letters of credit
are secured by certificates of deposit. All of the letters of credit will mature
within twelve months. In the event that the obligor is unable to perform its
obligations as specified in the applicable letter of credit agreement, the
Savings Bank would be obligated to disburse funds up to the amount specified in
the letter of credit agreement. The Savings Bank maintains adequate collateral
that could be liquidated to fund these contingent obligations.
ITEM 4. CONTROLS AND PROCEDURES
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES
(a) Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting (as
defined in Rules 13a - 15(f) and 15d - 15(f) under the Securities
Exchange Act of 1934).
Management assessed the effectiveness of the Company's internal
control over financial reporting as of December 31, 2008. In making
this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control - Integrated Framework.
Based on this assessment, management believes that, as of December
31, 2008, the Company's internal control over financial reporting
was effective.
(b) No change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934) occurred during the first six months of fiscal
2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
28
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
------------
The following risk factors are added 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, 2008.
Our deposit insurance premium could be substantially higher in the future which
would have an adverse effect on our future earnings.
Under the Federal Deposit Insurance Act, the FDIC, absent extraordinary
circumstances, must establish and implement a plan to restore the deposit
insurance reserve ratio to 1.15% of insured deposits, over a five-year period,
at any time that the reserve ratio falls below 1.15%. The recent failures of a
large financial institution and several smaller ones have significantly
increased the Deposit Insurance Fund's loss provisions, resulting in a decline
in the reserve ratio to 1.01% as of June 30, 2008, 18 basis points below the
reserve ratio as of March 31, 2008. The FDIC expects a higher rate of insured
institution failures in the next few years, which may result in a continued
decline in the reserve ratio.
On October 7, 2008, the FDIC released a five-year recapitalization plan
and a proposal to raise premiums to recapitalize the fund. In order to implement
the restoration plan, the FDIC proposed to change both its risk-based assessment
system and its base assessment rates. Assessment rates would increase by seven
basis points across the range of risk weightings. Changes to the risk-based
assessment system would include increasing premiums for institutions that rely
on excessive amounts of brokered deposits, increasing premiums for excessive use
of secured liabilities, and lowering premiums for smaller institutions with very
high capital levels.
The actions of the U.S. Government for the purpose of stabilizing the financial
markets, or market response to those actions, may not achieve the intended
effect, and our results of operations could be adversely effected.
In response to the financial issues affecting the banking system and
financial markets and ongoing concern threats to investment banks and other
financial institutions, the U.S. Congress recently enacted the Emergency
Economic Stabilization Act of 2008 ("EESA"). The EESA provides the U.S.
Secretary of the Treasury with the authority to establish a Troubled Asset
Relief Program to purchase from financial institutions up to $700 billion of
residential or commercial mortgages and any securities, obligations or other
instruments that are based on or related to such mortgages, that in each case
was originated or issued on or before March 14, 2008, as well as any other
financial instrument that the U.S. Secretary of the Treasury, after consultation
with the Chairman of the Federal Reserve, determines the purchase of which is
necessary to promote financial market stability. As of the date hereof, the
Treasury has determined not to purchase troubled assets under the program. As
part of the EESA, the Treasury Department has developed a Capital Purchase
Program to purchase up to $250 billion in senior preferred stock from qualifying
financial institutions. The Capital Purchase Program was designed to strengthen
the capital and liquidity positions of viable institutions and to encourage
banks and thrifts to increase lending to creditworthy borrowers. EESA also
increased deposit insurance on most accounts from $100,000 to $250,000 until the
end of 2009.
Pursuant to the Federal Deposit Insurance Act, the FDIC also established a
Temporary Liquidity Guarantee Program that provides a guarantee for newly-issued
senior unsecured debt and non-interest bearing transactions deposit accounts at
eligible insured institutions. For non-interest bearing transaction deposit
accounts, a 10 basis point annual rate surcharge will be applied to deposit
amounts in excess of $250,000. We have elected not to participate in the Capital
Purchase Program but we have elected to participate in the Temporary Liquidity
Guarantee Program.
The U.S. Congress or federal banking regulatory agencies could adopt
additional regulatory requirements or restrictions in response to the threats to
the financial system and such changes may adversely affect the operations of
Company and the Savings Bank. In addition, the EESA may not have the intended
beneficial impact on the financial markets
29
or the banking industry. To the extent the market does not respond favorably to
the Troubled Asset Relief Program or the program does not function as intended,
our prospects and results of operations could be adversely effected.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) The following table sets forth information with respect to purchases
of common stock of the Company made by or on behalf of the Company
during the three months ended December 31, 2008.
- ------------------------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
- ------------------------------------------------------------------------------------------------
Total Number of Maximum Number of
Total Shares Purchased Shares that May Yet
Number of as Part of Publicly Be Repurchased
Shares Average Price Announced Plans or Under the Plans or
Period Purchased Paid per Share ($) Programs (1) Programs (2,3)
- ------------------------------------------------------------------------------------------------
10/01/08 - 10/31/08 0 -- 0 45,339
- ------------------------------------------------------------------------------------------------
11/01/08 - 11/30/08 7,000 15.90 7,000 38,339
- ------------------------------------------------------------------------------------------------
12/01/08 - 12/31/08 28,739 15.96 28,739 9,600
- ------------------------------------------------------------------------------------------------
Total 35,739 15.95 35,739 9,600
- ------------------------------------------------------------------------------------------------
- ----------
(1) All shares indicated were purchased under the Company's Ninth Stock
Repurchase Program.
(2) Ninth Stock Repurchase Program
(a) Announced August 14, 2007 and amended August 26, 2008.
(b) 125,000 common shares approved for repurchase announced
on August 14, 2007. Additional 40,000 shares approved
for repurchase and announced on August 26, 2008 for an
amended total of 165,000 shares approved for repurchase.
(c) No fixed date of expiration.
(d) This program has not expired and has 9,600 shares
remaining to be repurchased at December 31, 2008.
(e) Not applicable.
(3) Tenth Stock Repurchase Program
(a) Announced January 29, 2009.
(b) 106,000 common shares approved for repurchase and
authorized to begin upon completion of Ninth Stock
Repurchase Program.
(c) No fixed date of expiration.
(d) Not applicable.
(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 stockholders vote at the 2008 Annual Meeting of
Stockholders held on October 28, 2008 were previously reported.
30
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 E-1
Executive 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
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WVS FINANCIAL CORP.
February 13, 2009 BY: /s/ David J. Bursic
Date ------------------------------------------------------
David J. Bursic
President and Chief Executive Officer
(Principal Executive Officer)
February 13, 2009 BY: /s/ Keith A. Simpson
Date ------------------------------------------------------
Keith A. Simpson
Vice-President, Treasurer and Chief Accounting Officer
(Principal Accounting Officer)
32