UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 [ ] Smaller reporting company [X]
(Do not check if a 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 May 01, 2008: 2,225,676 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
March 31, 2008 and June 30, 2007
(Unaudited) 3
Consolidated Statement of Income
for the Three and Nine Months Ended
March 31, 2008 and 2007 (Unaudited) 4
Consolidated Statement of Changes in
Stockholders' Equity for the Nine Months
Ended March 31, 2008 (Unaudited) 5
Consolidated Statement of Cash Flows
for the Nine Months Ended March 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 Nine Months
Ended March 31, 2008 11
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 18
Item 4. Controls and Procedures 25
Item 4T. Controls and Procedures 25
PART II. Other Information Page
-------- ----------------- ----
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 27
Item 6. Exhibits 27
Signatures 28
2
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In thousands)
March 31, 2008 June 30, 2007
--------------- ---------------
Assets
------
Cash and due from banks $ 518 $ 630
Interest-earning demand deposits 1,393 2,045
--------------- ---------------
Total cash and cash equivalents 1,911 2,675
Certificates of deposit 7,221 --
Investment securities available-for-sale (amortized cost of
$25,418 and $8,957) 25,421 8,933
Investment securities held-to-maturity (market value of
$121,981 and $201,510) 119,806 202,664
Mortgage-backed securities available-for-sale (amortized cost of
$2,111 and $2,186) 2,232 2,246
Mortgage-backed securities held-to-maturity (market value of
$207,549 and $119,646) 208,926 119,271
Net loans receivable (allowance for loan losses of $978 and
$986) 57,485 60,350
Accrued interest receivable 2,219 3,714
Federal Home Loan Bank stock, at cost 11,670 6,340
Premises and equipment 796 813
Other assets 1,125 1,070
--------------- ---------------
TOTAL ASSETS $ 438,812 $ 408,076
=============== ===============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings Deposits:
Non-interest-bearing accounts $ 12,012 $ 12,363
NOW accounts 17,371 18,741
Savings accounts 30,346 32,937
Money market accounts 23,251 20,146
Certificates of deposit 67,869 74,177
Advance payments by borrowers for taxes and insurance 727 1,013
--------------- ---------------
Total savings deposits 151,576 159,377
Federal Home Loan Bank advances: long-term 135,579 130,579
Federal Home Loan Bank advances: short-term 114,325 --
Other short-term borrowings -- 82,950
Accrued interest payable 1,701 1,669
Other liabilities 3,741 2,208
--------------- ---------------
TOTAL LIABILITIES $ 406,922 $ 376,783
--------------- ---------------
Stockholders' equity:
Preferred stock:
5,000,000 shares, no par value per share, authorized; none
Outstanding $ -- $ --
Common stock:
10,000,000 shares, $.01 par value per share, authorized;
3,804,533 and 3,790,336 shares issued 38 38
Additional paid-in capital 21,360 21,137
Treasury stock: 1,570,916 and 1,471,481 shares at cost,
Respectively (23,914) (22,286)
Retained earnings, substantially restricted 34,330 32,382
Accumulated other comprehensive income 77 23
Unallocated shares - Recognition and Retention Plans (1) (1)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY $ 31,890 $ 31,293
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 438,812 $ 408,076
=============== ===============
See accompanying notes to unaudited consolidated financial statements.
3
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
INTEREST AND DIVIDEND INCOME:
Loans $ 1,077 $ 1,120 $ 3,308 $ 3,218
Investment securities 2,245 2,708 8,596 8,135
Mortgage-backed securities 2,231 2,110 6,457 6,766
Certificates of deposit 17 -- 18 --
Interest-earning deposits with other
institutions 1 2 3 7
Federal Home Loan Bank stock 119 111 342 274
----------- ----------- ----------- -----------
Total interest and dividend income 5,690 6,051 18,724 18,400
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits 948 1,054 3,143 3,068
Federal Home Loan Bank advances 2,374 1,829 7,133 5,932
Other short-term borrowings 278 984 1,723 3,227
----------- ----------- ----------- -----------
Total interest expense 3,600 3,867 11,999 12,227
----------- ----------- ----------- -----------
NET INTEREST INCOME 2,090 2,184 6,725 6,173
PROVISION (RECOVERY) FOR LOAN LOSSES (57) 34 (64) 25
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
(RECOVERY) FOR LOAN LOSSES 2,147 2,150 6,789 6,148
----------- ----------- ----------- -----------
NON-INTEREST INCOME:
Service charges on deposits 80 86 249 267
Investment securities gains -- -- 1 --
Other 58 66 190 198
----------- ----------- ----------- -----------
Total non-interest income 138 152 440 465
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 520 499 1,545 1,483
Occupancy and equipment 88 94 264 289
Data processing 63 63 190 190
Correspondent bank service charges 26 25 76 90
Other 151 151 670 573
----------- ----------- ----------- -----------
Total non-interest expense 848 832 2,745 2,625
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,437 1,470 4,484 3,988
INCOME TAXES 475 515 1,450 1,291
----------- ----------- ----------- -----------
NET INCOME $ 962 $ 955 $ 3,034 $ 2,697
=========== =========== =========== ===========
EARNINGS PER SHARE:
Basic $ 0.43 $ 0.41 $ 1.34 $ 1.16
Diluted $ 0.43 $ 0.41 $ 1.34 $ 1.16
AVERAGE SHARES OUTSTANDING:
Basic 2,238,670 2,322,962 2,261,324 2,320,227
Diluted 2,238,758 2,324,278 2,261,724 2,322,059
See accompanying notes to unaudited consolidated financial statements.
4
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
Accumulated
Retained Other
Additional Earnings Compre- Unallocated
Common Paid-In Treasury Substantially hensive Shares Held
Stock Capital Stock Restricted Income by RRP Total
----- ------- ----- ---------- ------ ------ -----
Balance at June 30, 2007 $ 38 $ 21,137 $ (22,286) $ 32,382 $ 23 $ (1) $ 31,293
Comprehensive income:
Net Income 3,034 3,034
Other comprehensive
income:
Change in unrealized
holding gains on
securities, net of
income tax effect of
$28 54 54
----------
Comprehensive income 3,088
Purchase of 99,435 shares
for treasury stock (1,628) (1,628)
Exercise of 14,197 stock
options -- 219 219
Cash dividends declared
($0.48 per share) (1,086) (1,086)
Other, net 4 4
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 2008 $ 38 $ 21,360 $ (23,914) $ 34,330 $ 77 $ (1) $ 31,890
========== ========== ========== ========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
5
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended
March 31,
----------------------
2008 2007
--------- ---------
OPERATING ACTIVITIES
Net income $ 3,034 $ 2,697
Adjustments to reconcile net income to cash provided by operating
activities:
(Recovery) Provision for loan losses (64) 25
Depreciation 94 105
Investment securities gains (1) --
Amortization of discounts, premiums and deferred loan fees (273) (143)
Accretion of discounts - commercial paper (712) (13)
Increase in accrued and deferred taxes 428 379
Decrease (Increase) in accrued interest receivable 1,495 (154)
Increase in accrued interest payable 32 238
Other, net 98 60
--------- ---------
Net cash provided by operating activities 4,131 3,194
--------- ---------
INVESTING ACTIVITIES
Available-for-sale:
Purchases of investments securities (138,620) (3,992)
Proceeds from repayments of investments and mortgage-backed securities 122,603 8,032
Proceeds from sale of mortgage-backed securities 49 --
Held-to-maturity:
Purchases of investment securities (43,030) (91,303)
Purchases of mortgage-backed securities (103,353) (4,998)
Proceeds from repayments of investments 126,313 98,943
Proceeds from repayments of mortgage-backed securities 13,643 30,101
Proceeds from sale of investments and mortgage-backed securities 216 --
Purchases of certificates of deposit (7,221) --
Decrease (increase) in net loans receivable 2,904 (4,886)
Purchase of Federal Home Loan Bank stock (18,841) (4,063)
Redemption of Federal Home Loan Bank stock 13,511 5,423
Acquisition of premises and equipment (77) (83)
Other, net 3 --
--------- ---------
Net cash provided by (used for) investing activities (31,900) 33,174
--------- ---------
6
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended
March 31,
----------------------
2008 2007
--------- ---------
FINANCING ACTIVITIES
Net decrease in transaction and savings accounts (281) (676)
Net (decrease) increase in certificates of deposit (6,308) 6,602
Net increase (decrease) in FHLB short-term advances 114,325 (23,150)
Net decrease in other borrowings (82,950) (11,548)
Proceeds from Federal Home Loan Bank long-term advances 10,000 --
Repayments of Federal Home Loan Bank long-term advances (5,000) (5,000)
Net decrease in advance payments by borrowers for taxes and insurance (286) (279)
Cash dividends paid (1,086) (1,114)
Funds used for purchase of treasury stock (1,628) (534)
Net proceeds from exercise of stock options 219 256
--------- ---------
Net cash provided by (used for) financing activities 27,005 (35,443)
--------- ---------
(Decrease) increase in cash and cash equivalents (764) 925
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 2,675 1,196
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 1,911 $ 2,121
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits, escrows and borrowings $ 11,967 $ 11,989
Income taxes $ 1,048 $ 920
Non cash items:
Due to Federal Reserve Bank $ 1,520 $ 1,062
Educational Improvement Tax Credit $ 135 $ 42
See accompanying notes to unaudited consolidated financial statements.
7
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore do not
include information or footnotes necessary for a complete presentation of
financial condition, results of operations, and cash flows in conformity with
U.S. generally accepted accounting principles. However, all adjustments
(consisting only of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation have been included. The
results of operations for the three and nine months ended March 31, 2008, are
not necessarily indicative of the results which may be expected for the entire
fiscal year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In September 2006, the FASB issued FAS No. 157, Fair Value
Measurements, which provides enhanced guidance for using fair value to measure
assets and liabilities. The standard applies whenever other standards require or
permit assets or liabilities to be measured at fair value. The Standard does not
expand the use of fair value in any new circumstances. FAS No. 157 is effective
for financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. Early adoption is permitted.
The adoption of this standard is not expected to have a material effect on the
Company's results of operations or financial position.
In December 2007, the FASB issued FAS No. 141 (revised 2007), Business
Combinations ("FAS 141(R)"), which establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in an acquiree, including the recognition and measurement of goodwill
acquired in a business combination. FAS No. 141(R) is effective for fiscal years
beginning on or after December 15, 2008. Earlier adoption is prohibited. The
adoption of this standard is not expected to have a material effect on the
Company's results of operations or financial position.
In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements -- an amendment of ARB No. 51. FAS No. 160
amends ARB No. 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which
is sometimes referred to as minority interest, is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. Among other requirements, this statement requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. It also
requires disclosure, on the face of the consolidated income statement, of the
amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. FAS No. 160 is effective for fiscal years beginning on
or after December 15, 2008. Earlier adoption is prohibited. The adoption of this
standard is not expected to have a material effect on the Company's results of
operations or financial position.
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. 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
8
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.
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 Nine Months Ended
March 31, March 31,
------------------------ ------------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
Weighted average common shares
outstanding 3,804,121 3,785,629 3,797,081 3,775,025
Average treasury stock shares (1,565,451) (1,462,667) (1,535,757) (1,454,798)
---------- ---------- ---------- ----------
Weighted average common shares
and common stock equivalents
used to calculate basic earnings
per share 2,238,670 2,322,962 2,261,324 2,320,227
Additional common stock
equivalents (stock options) used
to calculate diluted earnings per
share 88 1,316 400 1,832
---------- ---------- ---------- ----------
Weighted average common shares
and common stock equivalents
used to calculate diluted earnings
per share 2,238,758 2,324,278 2,261,724 2,322,059
========== ========== ========== ==========
All options at March 31, 2008 and March 31, 2007 were included in the
computation of diluted earnings per share.
4. STOCK BASED COMPENSATION DISCLOSURE
-----------------------------------
The Company accounts for stock-based compensation in accordance with
Financial Accounting Standard (FAS) No. 123R. FAS 123R requires compensation
costs related to share-based payment transactions to be recognized in the
financial statements (with limited exceptions). The amount of compensation cost
is measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost is recognized over the period that an
employee provides service in exchange for the award. The Company did not have
any non-vested stock options outstanding during the periods ended March 31, 2008
and 2007. There were no options issued during the periods ended March 31, 2008
and 2007.
9
5. COMPREHENSIVE INCOME
--------------------
Other comprehensive income primarily reflects changes in net unrealized
gains/losses on available-for-sale securities. Total comprehensive income is
summarized as follows (dollars in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------------------- -----------------------------------------
2008 2007 2008 2007
------------------- ------------------- ------------------- -------------------
(Dollars in Thousands)
Net income $ 962 $ 955 $ 3,034 $ 2,697
Other comprehensive
income:
Unrealized gains
on available
for sale
securities $ 24 $ 6 $ 83 $ 24
Less:
Reclassification
adjustment for gain
included in net
income -- -- (1) --
-------- -------- -------- -------- -------- -------- -------- --------
Other comprehensive
gain before tax 24 6 82 24
Income tax expense
related to other
comprehensive income 8 2 28 8
-------- -------- -------- --------
Other comprehensive gain
net of tax 16 4 54 16
-------- -------- -------- --------
Comprehensive income $ 978 $ 959 $ 3,088 $ 2,713
======== ======== ======== ========
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 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
financial holding companies and their subsidiaries could alter our
business environment or affect our operations;
o the potential need to adapt to industry changes in information
technology systems, on which we are highly dependent, could present
operational issues or require significant capital spending;
o competitive pressures could intensify and affect our profitability,
including as a result of continued industry consolidation, the
increased availability of financial services from non-banks,
technological developments such as the internet or bank regulatory
reform; 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
11
markets, which could have an adverse effect on our financial
performance and that of our borrowers and on the financial markets
and the price of our common stock.
You should not put undue reliance on any forward-looking statements.
Forward-looking statements speak only as of the date they are made, and we
undertake no obligation to update them in light of new or future events except
to the extent required by federal securities laws.
GENERAL
WVS Financial Corp. ("WVS" or the "Company") is the parent holding
company of West View Savings Bank ("West View" or the "Savings Bank"). The
Company was organized in July 1993 as a Pennsylvania-chartered unitary bank
holding company and acquired 100% of the common stock of the Savings Bank in
November 1993.
West View Savings Bank is a Pennsylvania-chartered, FDIC-insured stock
savings bank conducting business from six offices in the North Hills suburbs of
Pittsburgh. The Savings Bank converted to the stock form of ownership in
November 1993. The Savings Bank had no subsidiaries at March 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 $438.8 million at March 31, 2008, as
compared to $408.1 million at June 30, 2007. The $30.7 million or 7.5% increase
in total assets was primarily comprised of a $89.6 million or 73.8% increase in
mortgage-backed securities, a $16.5 million or 184.6% increase in investments
securities available for sale, a $7.2 million or 100.0% increase in certificates
of deposit and a $5.3 million or 84.1% increase in Federal Home Loan Bank
("FHLB") stock, which were partially offset by a $82.9 million or 40.9% decrease
in investment securities - held to maturity, a $2.9 million or 4.7% decrease in
net loans receivable, a $1.5 million or 40.3% decrease in accrued interest
receivable and a $764 thousand or 28.6% decrease in cash and cash equivalents.
The increase in mortgage-backed securities was primarily attributable to
purchases of U.S. Government agency floating rate collateralized mortgage
obligations. The increase in investment securities - available for sale was
comprised of purchases of short-term investment grade commercial paper. The
increase in certificates of deposit was attributable to investments in bank
certificates of deposit. The increase in FHLB stock was attributable to higher
levels of FHLB borrowings and associated FHLB stock purchase requirements. The
decrease in investment securities - held to maturity was primarily attributable
to $118.2 million of issuer redemptions prior to maturity (i.e. calls) of fixed
rate, fixed to floating rate and step-up U.S. Government agency bonds which were
partially offset by purchases of $21.9 million of intermediate term U.S.
Government agency bonds and $21.1 million of investment grade corporate bonds.
See "Asset and Liability Management".
The Company's total liabilities increased $30.1 million or 8.0% to
$406.9 million as of March 31, 2008 from $376.8 million as of June 30, 2007. The
$30.1 million increase in total liabilities was primarily comprised of a $114.3
million or 100.0% increase in short-term FHLB advances, a $5.0 million or 3.8%
increase in long-term FHLB advances and a $1.5 million or 69.4% increase in
other liabilities, which were partially offset by a $82.9 million or 100.0%
decrease in other short-term borrowings and a $7.8 million or 4.9% decrease in
total savings deposits. The respective changes in short-term borrowings were
primarily due to more competitive FHLB pricing in contrast to the short-term
repurchase agreement market. Certificates of deposit decreased $6.3 million,
savings accounts decreased $2.6 million, demand deposits decreased $1.7 million
and advance
12
payments by borrowers for taxes and insurance decreased $286 thousand, while
money market accounts increased $3.1 million. The decrease in certificates of
deposits was primarily due to the maturity of accounts held by local
governments. The change in money market accounts 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 increases in clearing balances due to
the Federal Reserve and accrued income taxes payable.
Total stockholders' equity increased $597 thousand or 1.9% to $31.9
million as of March 31, 2008, from approximately $31.3 million as of June 30,
2007. Capital expenditures for the Company's stock repurchase program and cash
dividends totaled $1.6 million and $1.1 million, respectively, which were more
than offset by net income of $3.0 million, a $219 thousand increase in
additional paid in capital primarily from the exercise of stock options and a
$54 thousand increase in accumulated other comprehensive income for the nine
months ended March 31, 2008.
RESULTS OF OPERATIONS
General. WVS reported net income of $962 thousand or $0.43 diluted
earnings per share and $3.0 million or $1.34 diluted earnings per share for the
three and nine months ended March 31, 2008, respectively. Net income increased
by $7 thousand or 0.7% and diluted earnings per share increased $0.02 or 4.9%
for the three months ended March 31, 2008, when compared to the same period in
2007. The increase in net income was primarily attributable to a $91 thousand
change in the provision for loan losses and a $40 thousand decrease in income
tax expense which were partially offset by a $94 thousand decrease in net
interest income, a $16 thousand increase in non-interest expense and a $14
thousand decrease in non-interest income. For the nine months ended March 31,
2008, net income increased $337 thousand or 12.5% and diluted earnings per share
increased $0.18 or 15.5% when compared to the same period in 2007. The increase
for the nine month period was primarily the result of a $552 thousand increase
in net interest income, and a $89 thousand change in provisions for loan losses,
which were partially offset by a $159 thousand increase in income tax expense, a
$120 thousand increase in non-interest expense and a $25 thousand decrease in
non-interest income.
Net Interest Income. The Company's net interest income decreased by $94
thousand or 4.3% for the three months ended March 31, 2008, and increased $552
thousand or 8.9% for the nine months ended March 31, 2008, when compared to the
same periods in 2007. For the three months ended March 31, 2008, approximately
$199 thousand of the decrease in net interest income can be attributed to the
impact of changing market interest rates on interest-earning assets and
interest-bearing liabilities, which was offset by approximately $105 thousand
increase in net interest income due to increases in average balances of
interest-earning asset and interest-bearing liabilities. For the nine months
ended March 31, 2008, approximately $292 thousand or 52.9% of the increase in
net interest income can be attributed to increases in average balances
outstanding of interest-earning assets and interest-bearing liabilities, while
the remaining $260 thousand or 47.1% of the increase can be attributed to the
impact of changing market interest rates on interest-earning assets and
interest-bearing liabilities.
During the nine months ended March 31, 2008, the Federal Open Market
Committee (FOMC) reduced its targeted federal funds level from 5.25% at June 30,
2007 to 2.25% at March 31, 2008. During the six months ending March 31, 2008 the
Company also observed a marked upward deviation in the three-month LIBOR as
compared to the U.S. federal funds rate. Market participants attributed this
upward deviation to liquidity imbalances in LIBOR markets. During this anomalous
period the Company benefited by earning a higher than anticipated yield on its
LIBOR floating rate CMO portfolio, while enjoying lower costs of short-term
funding which were more closely aligned with the targeted federal funds rate.
See also Asset and Liability Management.
Interest Income. Interest on investment securities decreased by $463
thousand or 17.1% and increased $461 thousand or 5.7% for the three and nine
months ended March 31, 2008, respectively, when
13
compared to the same periods in 2007. The decrease for the three months ended
March 31, 2008, was primarily attributable to a $843 thousand decrease in
interest income on U.S. Government Agency bonds, (principally due to issuer
redemptions of securities prior to scheduled maturities), a $26 thousand
decrease in interest income on tax-free municipal bonds and a $2 thousand
decrease in interest earned on other investment securities, which were partially
offset by a $217 thousand increase in income on commercial paper and a $191
thousand increase in income on corporate bonds. The changes in interest income
on the various segments of the investment portfolio are primarily attributable
to change in the average balances of the respective segments. The increase for
the nine months ended March 31, 2008 was primarily attributable to a $714
thousand increase in income on commercial paper and a $218 thousand increase in
income on corporate bonds, which were partially offset by a $400 thousand
decrease in income on U.S. government agency bonds, a $58 thousand decrease in
income on tax-free municipal bonds and a $5 thousand decrease in income on other
investment securities. The increase in income on commercial paper and corporate
bonds was primarily attributable to increases in average balances, while the
decrease in income on the U.S. government agency bonds was attributable to a
decrease in the average balance due to issuer redemptions of securities prior to
scheduled maturities which was partially offset by an increase in the weighted
average yield earned on the remaining U.S. government agency bonds held in the
portfolio.
Interest on net loans receivable decreased $43 thousand or 3.8% for the
three months ended March 31, 2008, and increased $90 thousand or 2.8% for the
nine months ended March 31, 2008, respectively, when compared to the same
periods in 2007. The decrease for the three months ended March 31, 2008 was
primarily attributable to a decrease of 29 basis points in the weighted average
yield earned on net loans receivable for the three months ended March 31, 2008,
when compared to the same period in 2007. The increase for the nine months ended
March 31, 2008 was attributable to a $1.6 million increase in the average
balance of net loans receivable outstanding, when compared to the same period in
2007. The decrease in the weighted average yield earned on net loans receivable
for the three months ended March 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 increase in the average
loan balance outstanding for the nine months ended March 31, 2008 was
attributable in part to increases in new loan originations among construction
and commercial loan products. The Company has limited its portfolio origination
of longer-term fixed rate loans to mitigate its exposure to a rise in market
interest rates. The Company will continue to originate longer-term fixed rate
loans for sale on a correspondent basis to increase non-interest income and to
contribute to net income.
Interest on mortgage-backed securities increased $121 thousand or 5.7%
for the three months ended March 31, 2008, and decreased $309 thousand or 4.6%
for the nine months ended March 31, 2008, respectively, when compared to the
same periods in 2007. The increase for the three months ended March 31, 2008 was
primarily attributable to a $55.0 million increase in the average balance of
U.S. government agency mortgage-backed securities outstanding for the period,
which was partially offset by a 130 basis point decrease in the weighted average
yield earned on U.S. government agency mortgage-backed securities, a 173 basis
point decrease in the weighted-average yield earned on private label
mortgage-backed securities, and a $4.5 million decrease on the average balance
outstanding of private label mortgage-backed securities for the three months
ended March 31, 2008, when compared to the same period in 2007. The decrease for
the nine months ended March 31, 2008, was attributable to a 62 basis point
decrease in the weighted average yield earned on U.S. government mortgage-backed
securities, a 69 basis point decrease in the weighted average yield earned on
private label mortgage-backed securities and a $6.3 million decrease in the
average balance outstanding of private label mortgage-backed securities, which
were partially offset by a $15.6 million increase in the average balance
outstanding of U.S. government agency mortgage-backed securities, when compared
to the same period in 2007. The decrease in the weighted average yield earned on
mortgage-backed securities was consistent with lower market interest rates for
the three and nine months ended March 31, 2008. The increase in the average
balances of U.S. government agency mortgage-backed securities during the three
and nine months ended March 31, 2008 was primarily attributable to purchases of
floating rate U.S. government agency mortgage-backed securities during the
period, while the decrease in average balances of private label mortgage-backed
securities for the three and nine months ended March 31, 2008 reflects principal
paydowns during the period. All mortgage-backed securities purchased during both
periods were guaranteed by agencies of the U.S. government.
14
Dividends on FHLB stock increased $8 thousand or 7.2% and $68 thousand
or 24.8% for the three and nine months ended March 31, 2008, respectively, when
compared to the same periods in 2007. The increase for the three months ended
March 31, 2008 was attributable to a $3.3 million increase in the average
balance of FHLB stock which was partially offset by a 198 basis point decrease
in the yield earned on FHLB stock held when compared to the same period in 2007.
The increase for the nine months ended March 31, 2008 was attributable to a $2.3
million increase in the average balance of FHLB stock held, which was partially
offset by a 31 basis point decrease in the average yield earned on FHLB stock
held when compared to the same period in 2007. The increase in average balances
of FHLB stock held resulted from higher levels of FHLB borrowings which
necessitated purchases of the FHLB stock.
During the three months ended March 31, 2008, the Company began
investing in FDIC insured bank certificates of deposit. Income during the three
months ended March 31, 2008 totaled approximately $17 thousand dollars. The
certificates ranged in maturity terms from five to twenty-four months.
Interest Expense. Interest paid on FHLB advances increased $545
thousand or 29.8% and $1.2 million or 20.2% for the three and nine months ended
March 31, 2008, respectively, when compared to the same periods in 2007. The
increase for the three months ended March 31, 2008 was attributable to a $69.4
million increase in the average balance of FHLB short-term advances and a $2.0
million increase in the average balance of FHLB long-term advances, which were
partially offset by a 2 basis point decrease in rates paid on FHLB long-term
advances and a 272 basis point decrease in rates paid on FHLB short-term
advances when compared to the same period in 2007. The increase for the nine
months ended March 31, 2008 was attributable to $42.5 million increase in the
average balances of FHLB short-term advances and a $726 thousand increase in the
average balance of FHLB long-term advances which were partially offset by a 125
basis point decrease in rates paid on FHLB short-term advances and a 6 basis
point decrease in rates paid on FHLB long-term advances. The increases in the
average balances of FHLB short-term advances were primarily used to repay other
short-term borrowings, while the decreases in rates paid reflect lower
short-term market interest rates.
Interest paid on other borrowings decreased $706 thousand or 71.7% and
$1.5 million or 46.6% for the three and nine months ended March 31, 2008,
respectively, when compared to the same periods in 2007. The decrease for the
three months ended March 31, 2008 was attributable to a $46.5 million decrease
in the average balances of other borrowings and a 127 basis point decrease in
rates paid for the period. The decrease for the nine months ended March 31, 2008
was attributable to a $32.0 million decrease in the average balance of other
borrowings and a 57 basis point decrease in rates paid for the period. The
decrease in rates paid were consistent with the decreases in short-term market
interest rates for both periods. The decrease in average balances of other
borrowings is attributable to more favorable short-term borrowing rates offered
by the FHLB.
Interest expense on deposits and escrows decreased $106 thousand or
10.1% for the three months ended March 31, 2008, and increased $75 thousand or
2.4% for the nine months ended March 31, 2008, respectively, when compared to
the same periods in 2007. The decrease in interest expense on deposits for the
three months ended March 31, 2008 was primarily attributable to a $5.0 million
decrease in the average balance of time deposits, a 92 basis point decrease in
the weighted average rate paid on money markets, and a 25 basis point decrease
in the weighted average rate paid on time deposits, which were partially offset
by a $5.9 million increase in the average balance of money markets for the three
months ended March 31, 2008, when compared to the same period in 2007. The
increase for the nine months ended March 31, 2008 was primarily attributable to
a $4.8 million increase in the average balance of money markets, and a 12 basis
point increase in the weighted average rates paid on time deposits, which were
partially offset by a $1.6 million decrease in the average balance of time
deposits, a 27 basis point decrease in the weighted average rate paid on money
markets, and a $3.2 million decrease in the average balance of savings accounts,
when compared to the same period in 2007. The decrease in average balances of
time deposits reflects maturities of time deposits for local governments, while
the decrease in average yield on the money markets reflect lower market rates
for the three and nine months ended March 31, 2008.
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
15
absorb potential losses in the portfolio. Management's determination of the
adequacy of the allowance is based on an evaluation of the portfolio considering
past experience, current economic conditions, volume, growth and composition of
the loan portfolio, and other relevant factors.
The Company recorded a recovery for loan losses of $57 thousand for the
three months ended March 31, 2008 compared to a provision for loan losses of $34
thousand for the same period in 2007. The $91 thousand change during the quarter
ended March 31, 2008 was primarily due to slightly lower levels of non-accrual
loans and a $55 thousand recovery on a previously charged-off commercial real
estate loan. For the nine months ended March 31, 2008, the Company recorded a
recovery of $64 thousand compared to a provision of $25 thousand for the same
period in 2007. At March 31, 2008, the Company's total allowance for loan losses
amounted to $978 thousand or 1.7% of the Company's total loan portfolio, as
compared to $986 thousand or 1.6% at June 30, 2007.
Non-Interest Income. Non-interest income decreased by $14 thousand or
9.2% and $25 thousand or 5.4% for the three and nine months ended March 31,
2008, respectively, when compared to the same periods in 2007. The decreases
were primarily attributable to lower levels of service charges on deposit
accounts.
Non-Interest Expense. Non-interest expense increased $16 thousand or
1.9% and $120 thousand or 4.6% for the three and nine months ended March 31,
2008, respectively, when compared to the same periods in 2007. The increase for
the three months ended March 31, 2008 was principally attributable to a $21
thousand increase in payroll and benefit related costs, which were partially
offset by a $6 thousand decrease in occupancy and equipment costs when compared
to the same period in 2007. The increase for the nine months ended March 31,
2008 was primarily attributable to a $103 thousand increase in charitable
contributions eligible for Pennsylvania Tax credits and a $62 thousand increase
in payroll and benefit related costs which were partially offset by a $25
thousand decrease in occupancy and equipment costs and a $14 thousand decrease
in correspondent bank service charges when compared to the same period in 2007.
Income Tax Expense. Income tax expense decreased $40 thousand or 7.8%
for the three months ended March 31, 2008 and increased $159 thousand or 12.3%
for the nine months ended March 31, 2008, respectively, when compared to the
same periods in 2007. The decrease for the three months ended March 31, 2008 was
primarily due to lower levels of taxable income, while the increase for the nine
months ended March 31, 2008 was attributable to higher levels of taxable income
when compared to the same periods in 2007.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $4.1 million during
the nine months ended March 31, 2008. Net cash provided by operating activities
was primarily comprised of $3.0 million of net income, a $1.5 million decrease
in accrued interest receivable, a $428 increase in accrued and deferred income
taxes and $94 thousand in fixed asset depreciation, which were partially offset
by $712 thousand in accretion of discounts on commercial paper and $273 thousand
in amortization of discounts, premiums and deferred loan fees.
Funds used for investing activities totaled $31.9 million during the
nine months ended March 31, 2008. Primary uses of funds during the nine months
ended March 31, 2008, included purchases of investment securities,
mortgage-backed securities, FHLB stock and certificates of deposit totaling
$181.7 million, $103.4 million, $18.8 million and $7.2 million, respectively,
which were partially offset by maturities and repayments of investments,
mortgage-backed securities and FHLB stock totaling $248.9 million, $13.7 million
and $13.5 million, respectively, a $2.9 million decrease in net loans receivable
and $265 thousand from the sale of mortgage-backed securities. Short-term
investment grade commercial paper purchases, included in investment securities
available for sale, totaled $138.6 million; and maturities of short-term
commercial paper totaled $129.1 million.
Funds provided by financing activities totaled $27.0 million for the
nine months ended March 31, 2008. The primary sources included a $114.3 million
increase in short-term FHLB advances and a $5.0
16
million increase in long-term FHLB advances which were partially offset by a
$82.9 million decrease in other short-term borrowings, a $7.8 million decrease
in deposits, $1.6 million in treasury stock purchases and $1.1 million in cash
dividends paid on the Company's common stock. The decrease in other short-term
borrowings reflects lower short-term rates available through the Federal Home
Loan Bank. The $7.8 million decrease in total deposits consisted of a $6.3
million decrease in time deposits primarily due to the maturity of cash
management time deposits held by local county governments, a $2.6 million
decrease in passbook accounts, a $1.7 decrease in demand deposits and a $286
thousand decrease in mortgage escrow accounts, which were partially offset by a
$3.1 million increase in money market deposits. 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.
The Company's primary sources of funds are deposits, amortization,
repayments and maturities of existing loans, mortgage-backed securities and
investment securities, funds from operations, and funds obtained through FHLB
advances and other borrowings. At March 31, 2008, total approved loan
commitments outstanding amounted to approximately $554 thousand. At the same
date, commitments under unused lines of credit amounted to $5.4 million and the
unadvanced portion of construction loans approximated $12.1 million.
Certificates of deposit scheduled to mature in one year or less at March 31,
2008 totaled $54.1 million. Management believes that a significant portion of
maturing deposits will remain with the Company.
Historically, the Company used its sources of funds primarily to meet
its ongoing commitments to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain a substantial portfolio of
investment securities. The Company has been able to generate sufficient cash
through the retail deposit market, its traditional funding source, and through
FHLB advances and other borrowings, to provide the cash utilized in investing
activities. The Company also has access to the Federal Reserve Bank Primary
Credit Program. Management believes that the Company currently has adequate
liquidity available to respond to liquidity demands.
On April 29, 2008, the Company's Board of Directors declared a cash
dividend of $0.16 per share payable May 22, 2008, to shareholders of record at
the close of business on May 12, 2008. Dividends are subject to determination
and declaration by the Board of Directors, which take into account the Company's
financial condition, statutory and regulatory restrictions, general economic
conditions and other factors. There can be no assurance that dividends will in
fact be paid on the Common Stock in future periods or that, if paid, such
dividends will not be reduced or eliminated.
As of March 31, 2008, WVS Financial Corp. exceeded all regulatory
capital requirements and maintained Tier I and total risk-based capital equal to
$31.8 million or 19.0% and $32.8 million or 19.6%, respectively, of total
risk-weighted assets, and Tier I leverage capital of $31.8 million or 7.59% 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 March 31, 2008 totaled
approximately $1.6 million or 0.4% of total assets as compared to $1.2 million
or 0.3% of total assets at June 30, 2007. Nonperforming assets at March 31, 2008
consisted of: one commercial real estate loan totaling $972 thousand, one
speculative construction loan totaling $358 thousand, three single-family real
estate loans totaling $229 thousand, two single-family real estate junior liens
totaling $41 thousand and two home equity lines of credit totaling $17 thousand.
These loans are in various stages of collection activity.
17
The $413 thousand increase in nonperforming assets during the nine
months ended March 31, 2008 was primarily attributable to the reclassification
to non-performing of a $358 thousand speculative construction loan, a $93
thousand single-family real estate loan and two single-family real estate junior
liens totaling $41 thousand, which were partially offset by the reclassification
of a $76 thousand single-family real estate loan from non-performing to
performing, the sale of the single-family real estate owned property with a book
value of approximately $2 thousand, and paydowns on non-performing loans of
approximately $2 thousand.
At March 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, 2007. The Company had recorded
interest received on this credit on a cost recovery basis until September 30,
2003 when it began to recognize interest income. During the nine months ended
March 31, 2008 the Company received and recognized $34 thousand of interest
income. The Company anticipates work-out negotiations on this credit during the
next fiscal quarter. At this time, the Company cannot predict the final form or
outcome of the work-out negotiations.
At March 31, 2008, the Company had one previously restructured loan
secured by undeveloped land totaling $325 thousand and one previously
restructured unsecured loan totaling $24 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 nine months ended March 31, 2008, approximately $40 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 nine months ended March 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.
18
Evaluating a financial institution's exposure to changes in interest
rates includes assessing both the adequacy of the management process used to
control IRR and the organization's quantitative level of exposure. When
assessing the IRR management process, the Company seeks to ensure that
appropriate policies, procedures, management information systems and internal
controls are in place to maintain IRR at prudent levels with consistency and
continuity. Evaluating the quantitative level of IRR exposure requires the
Company to assess the existing and potential future effects of changes in
interest rates on its consolidated financial condition, including capital
adequacy, earnings, liquidity, and, where appropriate, asset quality.
Financial institutions derive their income primarily from the excess of
interest collected over interest paid. The rates of interest an institution
earns on its assets and owes on its liabilities generally are established
contractually for a period of time. Since market interest rates change over
time, an institution is exposed to lower profit margins (or losses) if it cannot
adapt to interest-rate changes. For example, assume that an institution's assets
carry intermediate or long-term fixed rates and that those assets were funded
with short-term liabilities. If market interest rates rise by the time the
short-term liabilities must be refinanced, the increase in the institution's
interest expense on its liabilities may not be sufficiently offset if assets
continue to earn interest at the long-term fixed rates. Accordingly, an
institution's profits could decrease on existing assets because the institution
will either have lower net interest income or, possibly, net interest expense.
Similar risks exist when assets are subject to contractual interest-rate
ceilings, or rate sensitive assets are funded by longer-term, fixed-rate
liabilities in a decreasing-rate environment.
During the three months ending March 31, 2008, FOMC participants
consistently noted that incoming information pointed to a markedly weaker
outlook for consumer spending. The decline in housing had steepened, and
consumer outlays appeared to be softening more than anticipated, perhaps
indicating some spill over from the housing correction to other components of
consumer spending. These developments, together with continued strains in the
financial markets, suggested that growth in late 2007 and during 2008 was likely
to be much more sluggish than FOMC participants had previously anticipated.
FOMC participants discussed in detail at their January 2008 meeting the
resurgence of stresses in financial markets in November. Performance of
mortgage-related assets deteriorated further, increasing the losses being borne
by a number of major financial firms. Heightened worries about counterparty
credit risk, balance sheet constraints and liquidity pressures affected
interbank funding markets and commercial paper markets, where spreads over
risk-free rates were, in some cases, higher than those seen in August 2007.
Spreads on conforming mortgage products also widened after reports of losses at
the housing-related government-sponsored enterprises, depository institutions
and other financial intermediaries.
At their December 2007 meeting, the FOMC voted to establish a temporary
Term Auction Facility (TAF). The TAF is to provide term funding to eligible
depository institutions through an auction mechanism. Also, the TAF accepts a
broader range of collateral than used for open market operations. The Company
had no TAF related borrowings during the quarter ended March 31, 2008.
At their meetings held in January and March 2008, FOMC members voted to
reduce the targeted federal funds rate by one hundred twenty-five (125) and
seventy-five (75) basis points, respectively. Reductions were also made to the
Federal Reserve Discount Rate of one hundred twenty-five (125) and one hundred
(100) basis points, respectively.
19
The table below shows the targeted federal funds rate and the benchmark
two and ten year treasury yields at September 30, 2006, December 31, 2006, March
31, 2007, June 30, 2007, September 30, 2007, December 31, 2007 and March 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:
--------------------------------
Targeted Two (2) Ten (10) Shape of Yield
Federal Year Year Curve
Funds Treasury Treasury
--------------- -------------- --------------------------------------
September 30, 2006 5.25% 4.71% 4.64% Inverted
December 31, 2006 5.25% 4.82% 4.71% Inverted
March 31, 2007 5.25% 4.58% 4.65% Slightly Positive
June 30, 2007 5.25% 4.87% 5.03% Slightly Positive
September 30, 2007 4.75% 3.97% 4.59% Moderately Positive
December 31, 2007 4.25% 3.05% 4.04% Positive
March 31, 2008 2.25% 1.62% 3.45% Positive
These changes in intermediate and long-term market interest rates, the
changing slope of the Treasury yield curve, and continued high levels of
interest rate volatility have impacted prepayments on the Company's loan,
investment and mortgage-backed securities portfolios and have caused a marked
compression of industry-wide net interest margins. Principal repayments on the
Company's loan, investment and mortgage-backed securities portfolios for the
nine months ended March 31, 2008, totaled $16.2 million, $248.9 million and
$13.9 million, respectively. Included in the Company's investment repayments are
commercial paper maturities totaling $129.1 million.
The term premium of market interest rates is often used to determine
the relative merits of taking an additional interest rate risk and to gauge the
market's expectation of future interest rates. Due to changes in the term
premium of market interest rates experienced during the nine months ended March
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 quarter ended September 30, 2007. As financial market
conditions deteriorated, the Company purchased floating rate U.S. Government
Agency collateralized mortgage obligations, short-term investment grade
commercial paper and investment grade corporate bonds. With respect to
short-term borrowings, the Company replaced broker repurchase agreements ("other
short-term borrowings") with FHLB short-term borrowings due to lower borrowing
costs at the FHLB.
Due to the term structure of market interest rates, the Company
continued to reduce its portfolio originations of long-term fixed rate mortgages
while continuing to offer such loans on a correspondent basis. The Company also
makes available for origination residential mortgage loans with interest rates
which adjust pursuant to a designated index, although customer acceptance has
been somewhat limited in the Savings Bank's market area. The Company will
continue to selectively offer commercial real estate, land acquisition and
development, and shorter-term construction loans, primarily on residential
properties, to partially increase interest income while limiting interest rate
risk. The Company has also emphasized higher yielding home equity and small
business loans to existing customers and seasoned prospective customers.
The Company purchased short-term investment grade commercial paper to
earn a favorable financing spread and to provide 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 began to purchase investment grade corporate bonds and FDIC insured bank
certificates of deposit in order to earn a spread against the Company's various
borrowings while limiting interest rate risk within the portfolio. The Company
also purchased floating rate U.S. Government Agency collateralized mortgage
obligations to provide current income and in response to lower intermediate and
long-term market interest rates. Each of the aforementioned strategies also
helped to better match the interest-rate and liquidity risks associated with the
Savings Bank's customers' liquidity preference for shorter term money market and
time deposit products.
20
During the quarter ended March 31, 2008, principal investment purchases
were comprised of: floating rate collateralized mortgage obligations which
reprice monthly - $44.0 million with an original weighted average yield of
approximately 5.03%; short-term investment grade commercial paper - $53.2
million with a weighted average yield of 3.62%; fixed rate investment grade
corporate bonds - $9.0 million with a weighted average yield of 3.88%. The
Company also purchased $7.2 million of FDIC bank insured certificates of deposit
with a weighted average yield of 3.53%. Major investment proceeds received
during the quarter ended March 31, 2008 were: callable government agency bonds -
$60.0 million with a weighted average yield of approximately 5.75%; short-term
investment grade commercial paper - $48.5 million with a weighted average yield
of approximately 4.55%; mortgage-backed securities - $4.4 million; and tax-free
municipal bonds - $1.3 million with a weighted average yield of 3.60%.
As of March 31, 2008, the implementation of these asset and liability
management initiatives resulted in the following:
1) $208.9 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) $90.0 million or 61.9% 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 - $28.4 million; 3 - 6
months - $34.5 million; 6 - 12 months - $21.1 million; and 1 - 2
years - $6.0 million; These bonds may or may not actually be
redeemed prior to maturity (i.e. called) depending upon the level of
market interest rates at their respective call dates.
3) $24.9 million or 17.1% of the Company's investment portfolio was
comprised of investment grade commercial paper with maturities of
less than 90 days.
4) $15.4 million or 10.6% of the Company's investment portfolio
consisted of investment grade fixed rate corporate bonds with
maturities between three and eighteen months;
5) $5.7 million or 3.9% of the Company's investment portfolio consisted
of investment grade floating rate corporate bonds which will reprice
within three months and will mature within nine to fourteen months;
6) $7.2 million or 1.6% of the Company's total assets consisted of FDIC
insured bank certificates of deposit with maturities ranging from
five to twenty-four months;
7) An aggregate of $33.2 million or 57.7% of the Company's net loan
portfolio had adjustable interest rates or maturities of less than
12 months; and
8) The maturity distribution of the Company's borrowings is as follows:
1 month or less - $114.3 million or 45.8%; 6 - 12 months - $5.5
million or 2.2%; 1 - 3 years - $90.6 million or 36.2%; 3 - 5 years -
$22.0 million or 8.8%; and over 5 years - $17.5 million or 7.0%.
The effect of interest rate changes on a financial institution's assets
and liabilities may be analyzed by examining the "interest rate sensitivity" of
the assets and liabilities and by monitoring an institution's interest rate
sensitivity "gap". An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within a given time
period. A gap is considered positive (negative) when the amount of rate
sensitive assets (liabilities) exceeds the amount of rate sensitive liabilities
(assets). During a period of falling interest rates, a negative gap would tend
to result in an increase in net interest income. During a period of rising
interest rates, a positive gap would tend to result in an increase in net
interest income.
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.
21
The following table sets forth certain information at the dates
indicated relating to the Company's interest-earning assets and interest-bearing
liabilities which are estimated to mature or are scheduled to reprice within one
year.
March 31, June 30,
---------- ------------------------
2008 2007 2006
---------- ---------- ----------
(Dollars in Thousands)
Interest-earning assets maturing or $ 387,271 $ 206,136 $ 273,884
repricing within one year
Interest-bearing liabilities maturing or
repricing within one year 222,819 187,494 194,509
---------- ---------- ----------
Interest sensitivity gap $ 164,452 $ 18,642 $ 79,375
========== ========== ==========
Interest sensitivity gap as a percentage of
total assets 37.48% 4.57% 32.5%
Ratio of assets to liabilities
maturing or repricing within one year 173.81% 109.94% 175.6%
During the quarter ended March 31, 2008, the Company managed its one
year interest sensitivity gap by: (1) limiting the portfolio origination of
long-term fixed rate mortgages; (2) emphasizing loans with shorter-terms or
repricing frequencies; (3) purchasing floating rate U.S. Government Agency CMO's
which reprice on a monthly basis; and (4) adjusting its investment portfolio to
include investment grade fixed and floating rate corporate bonds, (5) higher
holdings of short-term investment grade commercial paper, and (6) investing in
shorter-term FDIC insured bank certificates of deposit.
22
The following table illustrates the Company's estimated stressed
cumulative repricing gap - the difference between the amount of interest-earning
assets and interest-bearing liabilities expected to reprice at a given point in
time - at March 31, 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 ($'s) 105,495 92,178 76,092 76,387 (16,528) (21,126) 33,639
% of Total
Assets 24.0% 21.0% 17.3% 17.4% -3.8% -4.8% 7.7%
Base Case Up 100 bp
-------------------
Cummulative
Gap ($'s) 118,023 110,537 94,890 125,732 50,937 29,155 33,639
% of Total
Assets 26.9% 25.2% 21.6% 28.7% 11.6% 6.6% 7.7%
Base Case No Change
-------------------
Cummulative
Gap ($'s) 135,609 158,018 164,452 174,058 81,895 59,616 33,639
% of Total
Assets 30.9% 36.0% 37.5% 39.7% 18.7% 13.6% 7.7%
Base Case Down 100 bp
---------------------
Cummulative
Gap ($'s) 137,270 160,884 169,037 180,528 88,304 63,678 33,639
% of Total
Assets 31.3% 36.7% 38.5% 41.1% 20.1% 14.5% 7.7%
Base Case Down 200 bp
---------------------
Cummulative
Gap ($'s) 137,358 161,007 169,221 180,585 88,358 63,678 33,639
% of Total
Assets 31.3% 36.7% 38.6% 41.2% 20.1% 14.5% 7.7%
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.
23
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 March 31, 2008. This analysis was done
assuming that the interest-earning assets will average approximately $421
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 March 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 -49.9% -24.7% 36.2% 57.7%
Return on average equity 1.85% 5.36% 8.68% 13.39% 16.06%
Return on average assets 0.14% 0.40% 0.66% 0.95% 1.12%
Market value of equity (in
thousands) $26,442 $28,818 $25,615 $18,882 $8,460
The table below provides information about the Company's anticipated
transactions comprised of firm loan commitments and other commitments, including
undisbursed letters and lines of credit. The Company used no derivative
financial instruments to hedge such anticipated transactions as of March 31,
2008.
Anticipated Transactions
--------------------------------------------------
(Dollars in Thousands)
Undisbursed construction and
land development loans
Fixed rate $ 6,096
7.90%
Adjustable rate $ 5,957
6.67%
Undisbursed lines of credit
Adjustable rate $ 5,427
6.34%
Loan origination commitments
Fixed rate $ 394
6.69%
Adjustable rate $ 160
7.38%
Letters of credit
Adjustable rate $ 457
6.25%
----------
$ 18,491
==========
24
In the ordinary course of its construction lending business, the
Savings Bank enters into performance standby letters of credit. Typically, the
standby letters of credit are issued on behalf of a builder to a third party to
ensure the timely completion of a certain aspect of a construction project or
land development. At March 31, 2008, the Savings Bank had six performance
standby letters of credit outstanding totaling approximately $307 thousand and
one financial letter of credit totaling $150 thousand. All performance letters
of credit are secured by developed property while the financial letter of credit
is 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) Our management evaluated, with the participation of our Chief
Executive Officer and Chief Accounting Officer, the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) as of March 31, 2008. Based on such
evaluation, our Chief Executive Officer and Chief Accounting Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934)
occurred during the quarter ended March 31, 2008 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
25
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
The Company is involved with various legal actions arising in the
ordinary course of business. Management believes the outcome of these matters
will have no material effect on the consolidated operations or consolidated
financial condition of WVS Financial Corp.
ITEM 1A. Risk Factors
------------
There are no material changes to the risk factors included in Item 1A
of the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2007.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) The following table sets forth information with respect to
purchases of common stock o f the Company made by or on behalf of
the Company during the three months ended March 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)
-----------------------------------------------------------------------------------------------------------
01/01/08 - 01/31/08 30,299 16.24 30,299 72,535
-----------------------------------------------------------------------------------------------------------
02/01/08 - 02/29/08 -- 0.00 -- 72,535
-----------------------------------------------------------------------------------------------------------
03/01/08 - 03/31/08 -- 0.00 -- 72,535
-----------------------------------------------------------------------------------------------------------
Total 30,299 16.24 30,299 72,535
-----------------------------------------------------------------------------------------------------------
--------------------
(1) All shares indicated were purchased under the Company's Ninth Stock
Repurchase Program.
(2) Ninth Stock Repurchase Program
(a) Announced August 14, 2007.
(b) 125,000 common shares approved for repurchase.
(c) No fixed date of expiration.
(d) This program has not expired and has 72,535 shares remaining to
be repurchased at March 31, 2008.
(e) Not applicable.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
26
ITEM 5. Other Information
-----------------
(a) Not applicable.
(b) Not applicable.
ITEM 6. Exhibits
--------
The following exhibits are filed as part of this Form 10-Q, and this
list includes the Exhibit Index.
Number Description Page
------ ---------------------------------------------------------------- ----
31.1 Rule 13a-14(a) / 15d-14(a) Certification of the Chief Executive E-1
Officer
31.2 Rule 13a-14(a) / 15d-14(a) Certification of the Chief E-2
Accounting Officer
32.1 Section 1350 Certification of the Chief Executive Officer E-3
32.2 Section 1350 Certification of the Chief Accounting Officer E-4
99 Report of Independent Registered Public Accounting Firm E-5
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WVS FINANCIAL CORP.
May 9, 2008 BY: /s/ David J. Bursic
----------------------------------------------
Date David J. Bursic
President and Chief Executive Officer
(Principal Executive Officer)
May 9, 2008 BY: /s/ Keith A. Simpson
----------------------------------------------
Date Keith A. Simpson
Vice-President, Treasurer and Chief Accounting
Officer
(Principal Accounting Officer)
28