UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1710500
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9001 Perry Highway
Pittsburgh, Pennsylvania 15237
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(Address of principal executive offices) (Zip Code)
(412) 364-1911
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, 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 November 06, 2008: 2,167,524 shares Common Stock,
$.01 par value.
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
INDEX
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PART I. Financial Information Page
------- --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2008 and June
30, 2008 (Unaudited) 3
Consolidated Statement of Income for the Three Months Ended
September 30, 2008 and 2007 (Unaudited) 4
Consolidated Statement of Changes in Stockholders' Equity for
the Three Months Ended September 30, 2008 (Unaudited) 5
Consolidated Statement of Cash Flows for the Three Months
Ended September 30, 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 Months Ended
September 30, 2008 12
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 27
Item 5. Other Information 27
Item 6. Exhibits 27
Signatures 28
2
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In thousands)
September 30, 2008 June 30, 2008
------------------ -------------
Assets
------
Cash and due from banks $ 826 $ 628
Interest-earning demand deposits 1,458 1,198
------------------ -------------
Total cash and cash equivalents 2,284 1,826
Certificates of deposit 10,884 9,398
Investment securities available-for-sale (amortized cost of
$500 and $ 7,994) 483 7,978
Investment securities held-to-maturity (market value of
$111,835 and $122,055) 112,437 120,559
Mortgage-backed securities available-for-sale (amortized cost of
$2,092 and $2,101) 2,166 2,215
Mortgage-backed securities held-to-maturity (market value of
$204,478 and $211,113) 210,548 213,690
Net loans receivable (allowance for loan losses of $950 and
$956) 57,503 56,477
Accrued interest receivable 2,163 2,117
Federal Home Loan Bank stock, at cost 10,630 6,931
Premises and equipment 766 766
Other assets 1,267 1,152
------------------ -------------
TOTAL ASSETS $ 411,131 $ 423,109
================== =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings Deposits:
Non-interest-bearing accounts 12,648 11,780
NOW accounts 16,558 17,569
Savings accounts 31,433 32,025
Money market accounts 25,153 23,593
Certificates of deposit 62,802 64,251
Advance payments by borrowers for taxes and insurance 385 924
------------------ -------------
Total savings deposits 148,979 150,142
Federal Home Loan Bank advances: long-term 135,579 135,579
Federal Home Loan Bank advances: short-term 85,069 --
Federal Reserve Bank short-term borrowings -- 80,600
Other short-term borrowings 4,441 20,000
Accrued interest payable 1,407 1,539
Other liabilities 4,072 3,101
------------------ -------------
TOTAL LIABILITIES 379,547 390,961
------------------ -------------
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 21,376 21,376
Treasury stock: 1,638,112 and 1,578,857 shares at cost,
Respectively (24,986) (24,041)
Retained earnings, substantially restricted 35,119 34,712
Accumulated other comprehensive income 38 64
Unallocated shares - Recognition and Retention Plans (1) (1)
------------------ -------------
TOTAL STOCKHOLDERS' EQUITY 31,584 32,148
------------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 411,131 $ 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
September 30,
--------------------------
2008 2007
----------- -----------
INTEREST AND DIVIDEND INCOME:
Loans $ 1,026 $ 1,123
Investment securities 1,705 3,383
Mortgage-backed securities 1,976 1,933
Certificates of deposit 85 --
Interest-earning deposits with other institutions 1 2
Federal Home Loan Bank stock 91 96
----------- -----------
Total interest and dividend income 4,884 6,537
----------- -----------
INTEREST EXPENSE:
Deposits 705 1,138
Federal Home Loan Bank advances 1,949 2,358
Federal Reserve Bank short-term borrowings 85 --
Other short-term borrowings 296 738
----------- -----------
Total interest expense 3,035 4,234
----------- -----------
NET INTEREST INCOME 1,849 2,303
RECOVERY FOR LOAN LOSSES (6) (17)
----------- -----------
NET INTEREST INCOME AFTER RECOVERY FOR LOAN LOSSES 1,855 2,320
----------- -----------
NON-INTEREST INCOME:
Service charges on deposits 91 86
Investment securities gains -- 1
Other 76 70
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Total non-interest income 167 157
----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 508 508
Occupancy and equipment 82 88
Data processing 63 63
Correspondent bank service charges 25 26
Other 295 257
----------- -----------
Total non-interest expense 973 942
----------- -----------
INCOME BEFORE INCOME TAXES 1,049 1,535
INCOME TAXES 292 512
----------- -----------
NET INCOME $ 757 $ 1,023
=========== ===========
EARNINGS PER SHARE:
Basic $ 0.35 $ 0.45
Diluted $ 0.35 $ 0.45
AVERAGE SHARES OUTSTANDING:
Basic 2,191,776 2,283,510
Diluted 2,191,783 2,284,384
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 757 757
Other comprehensive
income:
Change in unrealized
holding gains on
securities, net of
income tax effect of
$13 (26) (26)
-------
Comprehensive income 731
Purchase of 59,255 shares
of treasury stock (945) (945)
Exercise of stock
options -- -- --
Cash dividends declared
($0.16 per share) (350) (350)
Other, net --
------ ---------- -------- ------------- ----------- ----------- -------
Balance at Sept. 30, 2008 $ 38 $ 21,376 $(24,986) $ 35,119 $ 38 $ (1) $31,584
====== ========== ======== ============= =========== =========== =======
See accompanying notes to unaudited consolidated financial statements.
5
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
September 30,
---------------------
2008 2007
--------- ---------
OPERATING ACTIVITIES
Net income $ 757 $ 1,023
Adjustments to reconcile net income to cash provided by operating activities:
Recovery for loan losses (6) (17)
Depreciation 26 34
Investment securities gains -- (1)
Amortization of discounts, premiums and deferred loan fees (118) (28)
Accretion of discounts - commercial paper (27) (275)
(Decrease) increase in accrued and deferred taxes (82) 77
(Increase) decrease in accrued interest receivable (46) 115
(Decrease) increase in accrued interest payable (132) 252
Other, net (90) 34
--------- ---------
Net cash provided by operating activities 282 1,214
--------- ---------
INVESTING ACTIVITIES
Available-for-sale:
Purchases of investments securities -- (64,583)
Proceeds from repayments of investments and mortgage-backed securities 7,512 54,403
Proceeds from sale of mortgage-backed securities -- 49
Held-to-maturity:
Purchases of investment securities (28,367) (21,929)
Purchases of mortgage-backed securities -- (17,973)
Proceeds from repayments of investments 36,581 6,204
Proceeds from repayments of mortgage-backed securities 3,197 6,205
Proceeds from sale of investments and mortgage-backed securities -- 216
Purchases of certificates of deposit (3,072) --
Maturities/redemptions of certificates of deposit 1,584 --
(Increase) decrease in net loans receivable (1,029) 801
Purchase of Federal Home Loan Bank stock (11,174) (7,049)
Redemption of Federal Home Loan Bank stock 7,475 2,490
Acquisition of premises and equipment (25) (28)
Other, net -- 3
--------- ---------
Net cash provided by (used for) investing activities 12,682 (41,191)
--------- ---------
6
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
September 30,
---------------------
2008 2007
--------- ---------
FINANCING ACTIVITIES
Net increase in transaction and savings accounts 1,867 8,633
Net decrease in certificates of deposit (1,449) (3,635)
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 85,069 86,325
Net decrease in Federal Reserve Bank short-term borrowings (80,600) --
Net decrease in other short-term borrowings (15,559) (54,626)
Net decrease in advance payments by borrowers for taxes and insurance (539) (635)
Cash dividends paid (350) (366)
Funds used for purchase of treasury stock (945) (967)
Net proceeds from exercise of stock options -- --
--------- ---------
Net cash (used for) provided by financing activities (12,506) 39,729
--------- ---------
Increase (decrease) in cash and cash equivalents 458 (248)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 1,826 2,675
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 2,284 $ 2,427
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits, escrows and borrowings $ 3,167 $ 3,932
Income taxes 361 450
Non cash items:
Due to Federal Reserve Bank 2,264 676
Educational Improvement Tax Credit 90 36
Neighborhood Assistance Act Tax Credit 1 --
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 months ended September 30, 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.
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
September 30,
2008 2007
---------- ----------
Weighted average common shares issued 3,805,636 3,790,336
Average treasury stock shares (1,613,860) (1,506,826)
---------- ----------
Weighted average common shares and common stock equivalents
used to calculate basic earnings per share 2,191,776 2,283,510
Additional common stock equivalents (stock options) used to
calculate diluted earnings per share 7 874
---------- ----------
Weighted average common shares and common stock equivalents
used to calculate diluted earnings per share 2,191,783 2,284,384
========== ==========
All options at September 30, 2008 and September 30, 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 September 30,
2008 and 2007. There were no options issued during the periods ended September
30, 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 Month Ended September 30,
-------------------------------
2008 2007
------------- --------------
Net income $ 757 $ 1,023
Other comprehensive income:
Unrealized (losses) gains
on available for sale
securities $ (40) $ 45
Less:
Reclassification
adjustment for
gain included in
net income -- (1)
----- ----- ---- -------
Other comprehensive (loss) gain
before tax effect (40) 44
Income tax effect
related to other
comprehensive (loss) gain (14) 15
----- -------
Other comprehensive (loss)
gain net of tax (26) 29
----- -------
Comprehensive income $ 731 $ 1,052
===== =======
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.
10
The following table presents the assets reported on the consolidated
statements of financial condition at their fair value as of September 30, 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.
September 30, 2008
----------------------------------------
Level I Level II Level III Total
------- -------- --------- -------
Assets:
Securities available for sale $ -- $ 2,166 $ -- $ 2,166
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 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
12
markets, which could have an adverse effect on our financial
performance and that of our borrowers and on the financial
markets and the price of our common stock.
You should not put undue reliance on any forward-looking statements.
Forward-looking statements speak only as of the date they are made, and we
undertake no obligation to update them in light of new or future events except
to the extent required by federal securities laws.
GENERAL
WVS Financial Corp. ("WVS" or the "Company") is the parent holding company
of West View Savings Bank ("West View" or the "Savings Bank"). The Company was
organized in July 1993 as a Pennsylvania-chartered unitary bank holding company
and acquired 100% of the common stock of the Savings Bank in November 1993.
West View Savings Bank is a Pennsylvania-chartered, FDIC-insured stock
savings bank conducting business from six offices in the North Hills suburbs of
Pittsburgh. The Savings Bank converted to the stock form of ownership in
November 1993. The Savings Bank had no subsidiaries at September 30, 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 $411.1 million at September 30, 2008, as
compared to $423.1 million at June 30, 2008. The $12.0 million or 2.8% decrease
in total assets was primarily comprised of a $8.1 million or 6.7% decrease in
investment securities - held to maturity, a $7.5 million or 93.4% decrease in
investment securities - available for sale, and a $3.1 million or 1.5% decrease
in mortgage-backed securities - held to maturity, which were partially offset by
a $3.7 million or 53.4% increase in Federal Home Loan Bank ("FHLB") stock, a
$1.5 million or 15.8% increase in FDIC insured certificates of deposit, a $1.0
million increase in net loans receivable, a $458 thousand increase in cash and
cash equivalents, and a $115 thousand or 10.0% increase in deferred taxes and
other assets. The decrease in investment securities - held to maturity was
primarily attributable to $36.0 million of issuer redemptions prior to maturity
(i.e. calls) of fixed rate U.S. Government agency bonds, which was partially
offset by purchases of $15.8 million of fixed-rate U.S. Government agency bonds
and $12.6 million of short-term investment grade commercial paper. The decrease
in investment securities - available for sale was due to $7.5 million in
maturities of short-term investment grade commercial paper. The increase in FHLB
stock was attributable to higher levels of FHLB borrowings and associated FHLB
stock purchase requirements. The increase in FDIC insured certificates of
deposit was attributable to an increase of $3.1 million in bank certificates of
deposit, which was partially offset by $1.6 million in maturities and early
redemptions of bank certificates of deposit. See "Asset and Liability
Management".
The Company's total liabilities decreased $11.5 million or 2.9% to $379.5
million as of September 30, 2008 from $391.0 million as of June 30, 2008. The
$11.5 million decrease in total liabilities was primarily comprised of a $80.6
million or 100.0% decrease in short-term Federal Reserve Bank borrowings, a
$15.6 million or 77.8% decrease in other short-term borrowings and a $1.2
million or 0.8% decrease in total savings deposits, which were partially offset
by a $85.1 million or 100.0% increase in FHLB short-term borrowings and a $971
thousand or 31.3% increase in other liabilities. The respective changes in
short-term borrowings were primarily due to more competitive FHLB pricing in
contrast to the short-term repurchase agreement and Federal Reserve Bank ("FRB")
markets. Certificates of deposit decreased $1.5 million, savings accounts
13
decreased $592 thousand, advance payments by borrowers for taxes and insurance
decreased $539 thousand, and demand deposits decreased $143 thousand, while
money market accounts increased $1.6 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 increases in clearing balances due to the Federal
Reserve and accrued income taxes payable.
Total stockholders' equity decreased $564 thousand or 1.8% to $31.6
million as of September 30, 2008, from approximately $32.1 million as of June
30, 2008. Capital expenditures for the Company's stock repurchase program and
cash dividends totaled $945 thousand and $350 thousand, respectively, and
accumulated other comprehensive income decreased $26 thousand, which were
partially offset by net income of $757 thousand for the three months ended
September 30, 2008.
RESULTS OF OPERATIONS
General. WVS reported net income of $757 thousand or $0.35 diluted
earnings per share for the three months ended September 30, 2008. Net income
decreased by $266 thousand or 26.0% and diluted earnings per share decreased
$0.10 or 22.2% for the three months ended September 30, 2008, when compared to
the same period in 2007. The decrease in net income was primarily attributable
to a $454 thousand decrease in net interest income, a $31 thousand increase in
non-interest expense and an $11 thousand decrease in recovery for loan losses,
which were partially offset by a $220 thousand decrease in income tax expense
and a $10 thousand increase in non-interest income.
Net Interest Income. The Company's net interest income decreased by $454
thousand or 19.7% for the three months ended September 30, 2008, when compared
to the same period in 2007. For the three months ended September 30, 2008,
approximately $750 thousand of the decrease in net interest income can be
primarily attributed to decreases in average balances of the Company's U.S.
Government agency fixed-rate bonds portfolio which was partially offset by
higher holdings of floating rate agency mortgage-backed securities. This $750
thousand decrease was offset by a $296 thousand increase in net interest income
primarily due to higher realized yields on the Company's corporate and
government agency fixed-rate bond portfolio.
During the three months ended September 30, 2008, the Federal Open Market
Committee (FOMC) held its targeted federal funds level at 2.00%. During the
three months ending September 30, 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 $1.7
million or 49.6% for the three months ended September 30, 2008, when compared to
the same period in 2007. The decrease for the three months ended September 30,
2008, was primarily attributable to a $1.6 million decrease in interest income
on 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.
Interest on net loans receivable decreased $97 thousand or 8.6% for the
three months ended September 30, 2008, when compared to the same period in 2007.
The decrease for the three months ended September 30, 2008 was primarily
attributable to a decrease of 36 basis points in the weighted average yield
earned on net loans receivable for the three months ended September 30, 2008,
when compared to the same period in 2007, and a $2.4 million decrease 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
14
loans receivable for the three months ended September 30, 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 balance outstanding for the three months ended
September 30, 2008 was attributable in part to reduced levels of 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.
Dividends on FHLB stock decreased $5 thousand or 5.2% for the three months
ended September 30, 2008, when compared to the same period in 2007. The decrease
for the three months ended September 30, 2008 was attributable to a $432
thousand decrease in the average balance of FHLB stock when compared to the same
period in 2007. The decrease in average balances of FHLB stock held resulted
from decreased levels of FHLB borrowings and associated redemptions of the FHLB
stock.
Interest on FDIC insured bank certificates of deposit increased $85
thousand or 100.0% for the three months ended September 30, 2008, when compared
to the same period in 2007. The Company began investing in FDIC insured
certificates of deposit during the quarter ended March 31, 2008. The
certificates ranged in maturity terms from five to twenty-four months.
Interest on mortgage-backed securities increased $43 thousand or 2.2% for
the three months ended September 30, 2008, when compared to the same period in
2007. The increase for the three months ended September 30, 2008 was primarily
attributable to a $93.3 million increase in the average balance of U.S.
government agency floating-rate mortgage-backed securities outstanding for the
period, which was partially offset by a 267 basis point decrease in the weighted
average yield earned on U.S. government agency floating-rate mortgage-backed
securities, a 276 basis point decrease in the weighted-average yield earned on
private label mortgage-backed securities, and a $374 thousand decrease on the
average balance outstanding of private label mortgage-backed securities for the
three months ended September 30, 2008, when compared to the same period 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 months
ended September 30, 2008. The increase in the average balances of U.S.
government agency mortgage-backed securities during the three months ended
September 30, 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 months ended September 30, 2008 reflects principal paydowns during the
period. All mortgage-backed securities purchased during the period were
guaranteed by agencies of the U.S. government.
Interest Expense. Interest paid on other short-term borrowings decreased
$442 thousand or 59.9% for the three months ended September 30, 2008 when
compared to the same period in 2007. The decrease for the three months ended
September 30, 2008 was primarily attributable to a 317 basis point decrease in
rates paid on other short-term borrowings and a $1.4 million decrease in average
balances of other short-term borrowings during the period. 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 FHLB and Federal Reserve
Bank.
Interest expense on deposits and escrows decreased $433 thousand or 38.1%
for the three months ended September 30, 2008, when compared to the same period
in 2007. The decrease in interest expense on deposits for the three months ended
September 30, 2008 was primarily attributable to a 137 basis point decrease in
the weighted average rate paid on time deposits, a 208 basis point decrease in
the weighted average rate paid on money markets, and a $10.6 million decrease in
the average balance of time deposits, which were partially offset by a $4.2
million increase in the average balance of money markets, when compared to the
same period in 2007. The decrease in average yields of time deposits and money
markets reflects lower market rates for the three months ended September 30,
2008 while the change in average balances for time deposits and money markets
may be in response to increased liquidity preferences by depositors in response
to unsettled financial markets.
15
Interest paid on FHLB advances decreased $409 thousand or 17.4% for the
three months ended September 30, 2008, when compared to the same period in 2007.
The decrease for the three months ended September 30, 2008 was attributable to a
$23.1 million decrease in the average balance of FHLB short-term advances and a
320 basis point decrease in rates paid on FHLB short-term advances, which was
partially offset by a $2.6 million increase in the average balance of FHLB
long-term advances when compared to the same period in 2007. The decreases in
the average balances of FHLB short-term advances was primarily attributable to
more favorable short-term borrowing rates offered by the Federal Reserve Bank,
while the decrease in rates paid reflect lower short-term market interest rates.
Interest paid on FRB short-term borrowings increased $85 thousand or 100%
for the three months ended September 30, 2008, when compared to the same period
in 2007. The increase for the three months ended September 30, 2008 was
attributable to a $15.0 million increase 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.
Provision (Recovery) for Loan Losses. A provision (recovery) for loan
losses is charged (credited) to earnings to maintain the total allowance at a
level considered adequate by management to absorb potential losses in the
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio considering past experience, current economic
conditions, volume, growth and composition of the loan portfolio, and other
relevant factors.
The Company recorded a recovery for loan losses of $6 thousand for the
three months ended September 30, 2008 compared to a recovery for loan losses of
$17 thousand for the same period in 2007. At September 30, 2008, the Company's
total allowance for loan losses amounted to $950 thousand or 1.6% 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 $10 thousand or 6.4%
for the three months ended September 30, 2008, when compared to the same period
in 2007. The increase was primarily attributable to increased levels of service
charges on deposit accounts and increased levels of ATM and debit card fee
income.
Non-Interest Expense. Non-interest expense increased $31 thousand or 3.3%
for the three months ended September 30, 2008, when compared to the same period
in 2007. The increase for the three months ended September 30, 2008 was
principally attributable to a $60 thousand increase in charitable contributions
eligible for PA tax credits, which were partially offset by a $18 thousand
decrease in legal expense and a $13 thousand decrease in advertising costs when
compared to the same period in 2007.
Income Tax Expense. Income tax expense decreased $220 thousand or 43.0%
for the three months ended September 30, 2008, when compared to the same period
in 2007. The decrease for the three months ended September 30, 2008 was
primarily due to PA educational improvement tax credits recognized on charitable
contributions and lower levels of taxable income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $282 thousand during the
three months ended September 30, 2008. Net cash provided by operating activities
was primarily comprised of $757 thousand of net income, which was partially
offset by a $132 thousand decrease in accrued interest payable, a $145 thousand
in accretion of discounts, premiums and deferred loan fees, $82 thousand
decrease in accrued and deferred income taxes, and a $46 thousand increase in
accrued interest receivable.
Funds provided by investing activities totaled $12.7 million during the
three months ended September 30, 2008. Primary sources of funds during the three
months ended September 30, 2008, included maturities and repayments of
investment securities, FHLB stock, mortgage-backed securities and certificates
of deposit totaling $44.1 million, $7.5 million, $3.2 million and $1.6 million,
respectively, and a $1.0 million increase in net loans receivable, which were
partially offset by purchases of investments, FHLB stock and certificates of
deposit totaling $28.4 million, $11.2 million and $3.1 million, respectively.
Short-term
16
investment grade commercial paper purchases, included in investment securities
purchases, totaled $12.6 million; and maturities of short-term commercial paper
totaled $7.5 million.
Funds used for financing activities totaled $12.5 million for the three
months ended September 30, 2008. The primary uses included an $80.6 million
decrease in short-term FRB borrowings, a $15.6 million decrease in other
short-term borrowings, a $1.2 million decrease in deposits, $945 thousand in
treasury stock purchases and $350 thousand in cash dividends paid on the
Company's common stock, which were partially offset by a $85.1 million increase
in FHLB short-term advances. The decrease in other short-term borrowings
reflects lower short-term rates available through the Federal Home Loan Bank.
The $1.2 million decrease in total deposits consisted of a $1.4 million decrease
in time deposits, a $592 thousand decrease in passbook accounts, a $539 decrease
in mortgage escrow accounts and a $143 thousand decrease in demand deposits,
which were partially offset by a $1.6 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
and FRB advances and other borrowings. At September 30, 2008, total approved
loan commitments outstanding amounted to approximately $695 thousand. At the
same date, commitments under unused lines of credit amounted to $5.9 million and
the unadvanced portion of construction loans approximated $10.2 million.
Certificates of deposit scheduled to mature in one year or less at September 30,
2008 totaled $46.7 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 October 28, 2008, the Company's Board of Directors declared a cash
dividend of $0.16 per share payable November 20, 2008, to shareholders of record
at the close of business on November 10, 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 September 30, 2008, WVS Financial Corp. exceeded all regulatory
capital requirements and maintained Tier I and total risk-based capital equal to
$31.5 million or 21.1% and $32.5 million or 21.8%, respectively, of total
risk-weighted assets, and Tier I leverage capital of $31.5 million or 7.69% of
average quarterly assets.
Nonperforming assets consist of nonaccrual loans and real estate owned. A
loan is placed on nonaccrual status when, in the judgment of management, the
probability of collection of interest is deemed insufficient to warrant further
accrual. When a loan is placed on nonaccrual status, previously accrued but
uncollected interest is deducted from interest income. The Company normally does
not accrue interest on loans past due 90 days or more, however, interest may be
accrued if management believes that it will collect on the loan.
The Company's nonperforming assets at September 30, 2008 totaled
approximately $1.2 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 September 30,
2008 consisted of: one commercial real estate loan totaling $972 thousand, four
17
single-family real estate loans totaling $231 thousand, two home equity lines of
credit totaling $5 thousand and one secured line of credit totaling $17
thousand. These loans are in various stages of collection activity.
The $356 thousand decrease in nonperforming assets during the three months
ended September 30, 2008 was attributable to the payoff in full of a $356
thousand non-performing speculative construction loan.
At September 30, 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 three months ended
September 30, 2008 the Company received and recognized $10 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 September 30, 2008, the Company had one previously restructured loan
secured by undeveloped land totaling $318 thousand and one previously
restructured unsecured loan totaling $18 thousand to two borrowers. During the
fourth quarter of fiscal 2004, the Bankruptcy Court approved a secured claim
totaling $440 thousand and an unsecured claim totaling $76 thousand be paid in
accordance with a Bankruptcy Plan of Reorganization. All Court ordered plan
payments have been received in a timely manner. In accordance with generally
accepted accounting principles, the Company had recorded interest payments
received on a cost recovery basis until June 30, 2006 and is now recording
interest income.
During the three months ended September 30, 2008, approximately $9
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 three months ended September 30, 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 September 30, 2008, liquidity conditions in
the short-term credit (e.g. LIBOR, repurchase agreement, commercial paper)
markets significantly deteriorated. The deterioration of liquidity in the
short-term credit markets can be traced to: the bankruptcy of Lehman Brothers,
the collapse of AIG and the inability of several large money market funds to
honor redemption requests at par value. Management utilized FHLB and the FRB
discount window periodically due to advantageous pricing and will continue to
monitor the Federal Reserve's Term Auction Facility should an appropriate
opportunity arise. Management has also observed a marked upward deviation in
short-term LIBOR as compared to the Federal Reserve's targeted federal funds
rate. Should this deviation continue, the Company may earn additional net
interest income. Management expects this situation to reverse over time as
liquidity is restored to the global short-term credit markets.
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, June 30, 2008 and September 30, 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)
Federal Year Year Shape of Yield
Funds Treasury Treasury Curve
-------- -------- -------- -------------------
September 30, 2006 5.25% 4.71% 4.64% Inverted
December 31, 2006 5.25% 4.82% 4.71% Inverted
March 31, 2007 5.25% 4.58% 4.65% Slightly Positive
June 30, 2007 5.25% 4.87% 5.03% Slightly Positive
September 30, 2007 4.75% 3.97% 4.59% Moderately Positive
December 31, 2007 4.25% 3.05% 4.04% Positive
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
These changes in intermediate and long-term market interest rates, the
changing slope of the Treasury yield curve, and continued high levels of
interest rate volatility have impacted prepayments on the Company's loan,
investment and mortgage-backed securities portfolios and have caused a marked
compression of industry-wide net interest margins. Principal repayments on the
Company's loan, investment and mortgage-backed securities portfolios for the
three months ended September 30, 2008, totaled $6.3 million, $44.1 million and
$3.2 million, respectively. Included in the Company's investment repayments are
commercial paper maturities totaling $7.5 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 three months ended
September 30, 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, 2008. As financial market
conditions deteriorated, the Company purchased short-term investment grade
commercial paper. With respect to short-term borrowings, the Company replaced
FRB short-term borrowings and 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, continued weakness in
the economy, an excess supply of existing homes available for sale, and lower
levels of housing starts, 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. We expect that the housing market likely will
continue to be weak through fiscal 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 borrowings while limiting interest rate risk within the
portfolio. Each of the aforementioned strategies also
20
helped to better match the interest-rate and liquidity risks associated with the
Savings Bank's customers' liquidity preference for shorter term money market and
time deposit products.
During the quarter ended September 30, 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 - $9.0 million with a
weighted average yield to call of approximately 10.00% and a weighted average
yield to maturity of 6.04%; 6 - 12 months - $4.1 million with a weighted average
yield to call of approximately 6.11%; and over 36 months - $2.6 million with a
weighted average yield to call of approximately 6.09%; and short-term investment
grade commercial paper - $12.6 million with a weighted average yield of 5.93%.
The Company also purchased $3.1 million of FDIC bank insured certificates of
deposit with a weighted average yield of 4.38%. Major investment proceeds
received during the quarter ended September 30, 2008 were: callable government
agency bonds - $36.0 million with a weighted average yield of approximately
6.01%; short-term investment grade commercial paper - $7.5 million with a
weighted average yield of approximately 3.16%; mortgage-backed securities - $3.2
million. The Company also had $1.6 million in FDIC insured bank certificates of
deposit mature or be redeemed with a weighted average yield of approximately
3.59%.
As of September 30, 2008, the implementation of these asset and liability
management initiatives resulted in the following:
1) $210.5 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) $72.9 million or 64.6% 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 - $32.8 million; 3 - 6 months - $7.3 million; 6
- 12 months - $23.0 million; and 1 - 3 years - $9.8 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) $12.6 million or 11.2% of the Company's investment portfolio was comprised
of investment grade commercial paper with maturities of less than 10 days.
4) $12.8 million or 11.3% of the Company's investment portfolio consisted of
investment grade fixed rate corporate bonds with maturities between six
and eighteen months;
5) $5.7 million or 5.0% of the Company's investment portfolio consisted of
investment grade floating rate corporate bonds which will reprice within
three months and will mature within three to nine months;
6) $10.9 million or 2.7% 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 $30.1 million or 52.3% 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 - $89.5 million or 39.8%; 6 - 12 months - $5.5 million or
2.4%; 1 - 3 years - $112.6 million or 50.0%; and over 5 years - $17.5
million or 7.8%.
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.
September 30, June 30,
------------- ---------------------
2008 2008 2007
------------- --------- ---------
(Dollars in Thousands)
Interest-earning assets maturing or
repricing within one year $ 369,585 $ 377,916 $ 206,136
Interest-bearing liabilities maturing or
repricing within one year 192,240 207,133 187,494
------------- --------- ---------
Interest sensitivity gap $ 177,345 $ 170,783 $ 18,642
============= ========= =========
Interest sensitivity gap as a percentage of
total assets 43.14% 40.36% 4.57%
Ratio of assets to liabilities
maturing or repricing within one year 192.25% 182.45% 109.94%
During the quarter ended September 30, 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) adjusting its investment portfolio to include
investment grade fixed and floating rate corporate bonds, (4) investing in
short-term investment grade commercial paper, and (5) 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 September 30, 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 ($'s) 114,407 104,039 105,454 47,572 (20,710) 9,882 32,839
% of Total Assets 27.8% 25.3% 25.6% 11.6% -5.0% 2.4% 8.0%
Base Case Up 100 bp
-------------------
Cummulative Gap ($'s) 114,756 104,675 106,393 48,529 (12,674) 20,993 32,839
% of Total Assets 27.9% 25.5% 25.9% 11.8% -3.1% 5.1% 8.0%
Base Case No Change
-------------------
Cummulative Gap ($'s) 148,747 146,911 177,345 125,515 60,584 61,352 32,839
% of Total Assets 36.2% 35.7% 43.1% 30.5% 14.7% 14.9% 8.0%
Base Case Down 100 bp
---------------------
Cummulative Gap ($'s) 150,444 149,933 182,165 131,925 67,036 65,360 32,839
% of Total Assets 36.6% 36.5% 44.3% 32.1% 16.3% 15.9% 8.0%
Base Case Down 200 bp
---------------------
Cummulative Gap ($'s) 150,825 150,625 183,168 133,008 68,011 65,498 32,839
% of Total Assets 36.7% 36.6% 44.6% 32.4% 16.5% 15.9% 8.0%
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 September 30, 2008. This analysis was done
assuming that the interest-earning assets will average approximately $412
million over a projected twelve month period for the estimated impact on change
in net interest income, return on average equity and return on average assets.
The estimated changes in market value of equity were calculated using balance
sheet levels at September 30, 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 -60.5% -26.3% 17.0% 34.7%
Return on average equity 0.63% 6.01% 9.97% 12.42% 14.92%
Return on average assets 0.05% 0.46% 0.77% 0.98% 1.18%
Market value of equity (in
thousands) $ 25,438 $ 29,406 $ 32,127 $ 34,823 $ 32,225
The table below provides information about the Company's anticipated
transactions comprised of firm loan commitments and other commitments, including
undisbursed letters and lines of credit. The Company used no derivative
financial instruments to hedge such anticipated transactions as of September 30,
2008.
Anticipated Transactions
-------------------------------------------------------
(Dollars in Thousands)
Undisbursed construction and
land development loans
Fixed rate $ 4,072
7.07%
Adjustable rate $ 6,088
5.92%
Undisbursed lines of credit
Adjustable rate $ 5,298
5.72%
Loan origination commitments
Fixed rate $ 695
6.87%
Letters of credit
Adjustable rate $ 549
6.00%
-------
$16,702
=======
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 September 30, 2008, the Savings Bank had five performance
standby letters of credit outstanding totaling approximately $262 thousand and
two financial letter of credit totaling $287 thousand. All performance letters
of credit are secured by developed property while the financial letter of
credits 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 September 30, 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
September 30, 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 fiscal quarter of
fiscal 2009 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,
2008.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) The following table sets forth information with respect to purchases
of common stock of the Company made by or on behalf of the Company
during the three months ended September 30, 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)
------------------------------------------------------------------------------------------------
07/01/08 - 07/31/08 35,800 15.96 35,800 28,794
------------------------------------------------------------------------------------------------
08/01/08 - 08/31/08 23,455 15.92 23,455 45,339
------------------------------------------------------------------------------------------------
09/01/08 - 09/30/08 0 -- 0 45,339
------------------------------------------------------------------------------------------------
Total 59,255 15.95 59,255 45,339
------------------------------------------------------------------------------------------------
----------
(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 45,339 shares
remaining to be repurchased at September 30, 2008.
(e) Not applicable.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
26
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Company's 2008 Annual Meeting of Stockholders was held on
October 28, 2008.
(b) Not applicable.
(c) Three matters were voted upon at the annual meeting held on October
28, 2008: Item 1: Proposal to elect two directors for a four-year
term or until their successors are elected and qualified; Item 2:
Proposal to approve the WVS Financial Corp 2008 Stock Incentive
Plan; and Item 3: Proposal to ratify the appointment by the Board of
Directors of S.R. Snodgrass, A.C. as the Company's Independent
Registered Public Accounting Firm for the fiscal year ending June
30, 2009.
Each of the three proposals received stockholder approval. There
were 2,167,524 shares outstanding on the record date eligible to
vote at the meeting and 1,799,961 shares were present in person or
by proxy at the meeting. The voting record with respect to each item
voted upon is enumerated below:
Item Nominee
Number (if Applicable) For Against Abstain
------ ---------------------- --------- ------- -------
1 David J. Bursic 1,699,279 100,682
Jonathan D. Hoover 1,702,910 97,051
2 Approval of WVS
Financial Corp. 2008
Stock Incentive Plan 1,167,767 165,965 68,187
3 Ratification of the
registered independent
public accounting firm 1,791,418 6,263 2,280
There were no broker non-votes with respect to items 1 and 3. There
were 386,242 broker non-votes with respect to Item 2.
(d) Not applicable.
ITEM 5. Other Information
-----------------
(a) Not applicable.
(b) Not applicable.
ITEM 6. Exhibits
--------
The following exhibits are filed as part of this Form 10-Q, and this list
includes the Exhibit Index.
Number Description Page
------ ---------------------------------------------------------- ----
31.1 Rule 13a-14(a) / 15d-14(a) Certification of the Chief
Executive Officer E-1
31.2 Rule 13a-14(a) / 15d-14(a) Certification of the
Chief Accounting Officer E-2
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.
November 10, 2008 BY: /s/ David J. Bursic
Date ------------------------------------------
David J. Bursic
President and Chief Executive Officer
(Principal Executive Officer)
November 10, 2008 BY: /s/ Keith A. Simpson
Date ------------------------------------------
Keith A. Simpson
Vice-President, Treasurer and Chief
Accounting Officer
(Principal Accounting Officer)
28