UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2006
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, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12 b-2 of the Exchange
Act. (Check one):
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12 b-2 of the Exchange Act).
YES [_] NO [X]
Shares outstanding as of February 02, 2007: 2,325,215 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
December 31, 2006 and June 30, 2006
(Unaudited) 3
Consolidated Statement of Income
for the Three and Six Months Ended
December 31, 2006 and 2005 (Unaudited) 4
Consolidated Statement of Changes in
Stockholders' Equity for the Six Months
Ended December 31, 2006 (Unaudited) 5
Consolidated Statement of Cash Flows
for the Six Months Ended December 31,
2006 and 2005 (Unaudited) 6
Notes to Unaudited Consolidated
Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations for the Three and Six Months
Ended December 31, 2006 11
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 18
Item 4. Controls and Procedures 23
PART II. Other Information Page
-------- ----------------- ----
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits 25
Signatures 26
2
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In thousands)
December 31, 2006 June 30, 2006
----------------- -----------------
Assets
------
Cash and due from banks $ 784 $ 1,099
Interest-earning demand deposits 1,637 97
----------------- -----------------
Total cash and cash equivalents 2,421 1,196
Investment securities available-for-sale (amortized cost of
$504 and $8,497) 488 8,469
Investment securities held-to-maturity (market value of
$205,963 and $185,680) 206,167 187,952
Mortgage-backed securities available-for-sale (amortized cost of
$2,209 and $2,229) 2,279 2,292
Mortgage-backed securities held-to-maturity (market value of
$136,800 and $152,706) 136,365 153,461
Net loans receivable (allowance for loan losses of $955 and
$957) 57,487 55,702
Accrued interest receivable 3,651 2,921
Federal Home Loan Bank stock, at cost 6,579 7,861
Premises and equipment 845 864
Other assets 1,195 1,024
----------------- -----------------
TOTAL ASSETS $ 417,477 $ 421,742
================= =================
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings Deposits:
Non-interest-bearing accounts $ 12,367 $ 11,315
NOW accounts 19,460 18,083
Savings accounts 32,077 36,851
Money market accounts 16,803 16,562
Certificates of deposit 75,403 67,890
Advance payments by borrowers for taxes and insurance 616 1,012
----------------- -----------------
Total savings deposits 156,726 151,713
Federal Home Loan Bank advances: long-term 133,579 138,579
Federal Home Loan Bank advances: short-term -- 23,150
Other short-term borrowings 92,900 76,048
Accrued interest payable 1,767 1,451
Other liabilities 2,494 1,383
----------------- -----------------
TOTAL LIABILITIES 387,466 392,324
----------------- -----------------
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;
3,769,838 and 3,769,838 shares issued 38 38
Additional paid-in capital 20,817 20,817
Treasury stock: 1,460,023 and 1,434,606 shares at cost,
respectively (22,098) (21,679)
Retained earnings, substantially restricted 31,221 30,221
Accumulated other comprehensive income 35 23
Unreleased shares - Recognition and Retention Plans (2) (2)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 30,011 29,418
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 417,477 $ 421,742
================= =================
See accompanying notes to unaudited consolidated financial statements.
3
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(In thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
INTEREST AND DIVIDEND INCOME:
Loans $ 1,046 $ 999 $ 2,098 $ 2,051
Investment securities 2,860 1,966 5,426 3,822
Mortgage-backed securities 2,257 2,269 4,656 4,152
Interest-earning deposits with other
institutions 1 5 5 7
Federal Home Loan Bank stock 66 54 163 101
----------- ----------- ----------- -----------
Total interest and dividend income 6,230 5,293 12,348 10,133
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits 1,047 756 2,015 1,467
Federal Home Loan Bank advances 2,195 2,027 4,103 4,034
Other short-term borrowings 1,080 1,001 2,242 1,668
----------- ----------- ----------- -----------
Total interest expense 4,322 3,784 8,360 7,169
----------- ----------- ----------- -----------
NET INTEREST INCOME 1,908 1,509 3,988 2,964
PROVISION (RECOVERY) FOR LOAN LOSSES -- (45) (9) (111)
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
(RECOVERY) FOR LOAN LOSSES 1,908 1,554 3,997 3,075
----------- ----------- ----------- -----------
NON-INTEREST INCOME:
Service charges on deposits 93 92 181 186
Investment securities gains -- -- -- 30
Other 68 75 132 157
----------- ----------- ----------- -----------
Total non-interest income 161 167 313 373
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 494 488 984 957
Occupancy and equipment 103 100 194 201
Data processing 64 68 127 134
Correspondent bank service charges 27 32 65 68
Other 202 180 422 396
----------- ----------- ----------- -----------
Total non-interest expense 890 868 1,792 1,756
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,179 853 2,518 1,692
INCOME TAXES 342 243 776 474
----------- ----------- ----------- -----------
NET INCOME $ 837 $ 610 $ 1,742 $ 1,218
=========== =========== =========== ===========
EARNINGS PER SHARE:
Basic $ 0.36 $ 0.26 $ 0.75 $ 0.51
Diluted $ 0.36 $ 0.26 $ 0.75 $ 0.51
AVERAGE SHARES OUTSTANDING:
Basic 2,310,596 2,356,470 2,318,890 2,372,062
Diluted 2,312,838 2,359,671 2,320,980 2,375,483
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, 2006 $ 38 $ 20,817 $ (21,679) $ 30,221 $ 23 $ (2) $ 29,418
Comprehensive income:
Net Income 1,742 1,742
Other comprehensive
income:
Change in unrealized
holding gains on
securities, net of
income tax effect of
$6 12 12
---------
Comprehensive income 1,754
Purchase of shares for
treasury stock (419) (419)
Accrued compensation
expense for Recognition
and Retention Plans (RRP) -- --
Exercise of stock options -- -- --
Cash dividends declared
($0.32 per share) (742) (742)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 2006 $ 38 $ 20,817 $ (22,098) $ 31,221 $ 35 $ (2) $ 30,011
========= ========= ========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
5
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
December 31,
--------------------
2006 2005
-------- --------
OPERATING ACTIVITIES
Net income $ 1,742 $ 1,218
Adjustments to reconcile net income to cash provided by operating
activities:
Recovery for loan losses (9) (111)
Depreciation 70 87
Investment securities gains -- (30)
Amortization of discounts, premiums and deferred loan fees (93) (120)
(Decrease) increase in accrued and deferred taxes (138) 206
Increase in accrued interest receivable (730) (156)
Increase in accrued interest payable 316 227
Other, net 138 170
-------- --------
Net cash provided by operating activities 1,296 1,491
-------- --------
INVESTING ACTIVITIES
Available-for-sale:
Purchases of investments and mortgage-backed securities -- (700)
Proceeds from repayments of investments and mortgage-backed securities 8,019 9,374
Proceeds from sale of investment and mortgage-backed securities -- 1,016
Held-to-maturity:
Purchases of investments (65,710) (75,448)
Purchases of mortgage-backed securities (4,998) (84,543)
Proceeds from repayments of investments 47,563 56,981
Proceeds from repayments of mortgage-backed securities 22,123 65,973
(Increase) decrease in net loans receivable (1,788) 4,430
Purchase of Federal Home Loan Bank stock (3,936) (4,057)
Redemption of Federal Home Loan Bank stock 5,218 4,033
Acquisition of premises and equipment (51) (21)
Other, net -- 60
-------- --------
Net cash provided by (used for) investing activities 6,440 (22,902)
-------- --------
6
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
December 31,
--------------------
2006 2005
-------- --------
FINANCING ACTIVITIES
Net decrease in transaction and passbook accounts (1,169) (8,518)
Net increase (decrease) in certificates of deposit 7,513 (4,966)
Net (decrease) increase in FHLB short-term advances (23,150) 12,500
Net increase in other short-term borrowings 16,852 24,424
Repayments of Federal Home Loan Bank long-term advances (5,000) --
Net decrease in advance payments by borrowers for taxes and insurance (396) (349)
Cash dividends paid (742) (760)
Funds used for purchase of treasury stock (419) (686)
-------- --------
Net cash (used for) provided by financing activities (6,511) 21,645
-------- --------
Increase in cash and cash equivalents 1,225 234
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 1,196 3,566
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 2,421 $ 3,800
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits, escrows and borrowings $ 8,044 $ 6,942
Income taxes $ 920 $ 230
Non-cash item:
Due to Federal Reserve Bank $ 935 --
See accompanying notes to unaudited consolidated financial statements.
7
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore do not
include information or footnotes necessary for a complete presentation of
financial condition, results of operations, and cash flows in conformity with
U.S. generally accepted accounting principles. However, all adjustments
(consisting only of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation have been included. The
results of operations for the three and six months ended December 31, 2006, 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 September 2006, the FASB issued FAS No. 158, Employers' Accounting
for Defined Benefit Pension and Other Post Retirement Plans, an amendment of
FASB Statements No. 87, 88, 106 and 132(R). FAS No. 158 requires that a company
recognize the overfunded or underfunded status of its defined benefit post
retirement plans (other than multiemployer plans) as an asset or liability in
its statement of financial position and that it recognize changes in the funded
status in the year in which the changes occur through other comprehensive
income. FAS No. 158 also requires the measurement of defined benefit plan assets
and obligations as of the fiscal year end, in addition to footnote disclosures.
FAS No. 158 is effective for fiscal years ending after December 15, 2006. The
Company is currently evaluating the impact the adoption of the standard will
have on the Company's financial position.
In June 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of FAS
No. 109, Accounting for Income Taxes, and it seeks to reduce the diversity in
practice associated with certain aspects of measurement and recognition in
accounting for income taxes. This Interpretation clarifies that management is
expected to evaluate an income tax position taken or expected to be taken for
likelihood of realization before recording any amounts for such position in the
financial statement. FIN 48 also requires expanded disclosure with respect to
income tax positions taken that are not certain to be realized. This
Interpretation is effective for fiscal years beginning after December 15, 2006,
and will require management to evaluate every open tax position that exists in
every jurisdiction on the date of initial adoption. The Company is currently
evaluating the impact the adoption of the standard will have on the Company's
results of operations.
In September 2006, the FASB reached consensus on the guidance provided
by Emerging Issues Task Force Issue 06-4 ("EITF 06-4"), Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements. The guidance is applicable to endorsement split-dollar
life insurance arrangements, whereby the employer owns and controls the
insurance policy, that are associated with a postretirement benefit. EITF 06-4
requires that for a split-dollar life insurance arrangement within the scope of
the Issue, an employer should recognize a liability for future benefits in
accordance with FAS No. 106 (if, in substance, a postretirement benefit plan
exists) or Accounting Principles Board Opinion No. 12 (if the arrangement is, in
substance, an individual
8
deferred compensation contract) based on the substantive agreement with the
employee. EITF 06-4 is effective for fiscal years beginning after December 15,
2007. The Company is currently evaluating the impact the adoption of the
standard will have on the Company's results of operations or financial
condition.
In September 2006, the FASB reached consensus on the guidance provided
by Emerging Issues Task Force Issue 06-5("EITF 06-5"), Accounting for Purchases
of Life Insurance--Determining the Amount That Could Be Realized in Accordance
with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life
Insurance. EITF 06-5 states that a policyholder should consider any additional
amounts included in the contractual terms of the insurance policy other than the
cash surrender value in determining the amount that could be realized under the
insurance contract. EITF 06-5 also states that a policyholder should determine
the amount that could be realized under the life insurance contract assuming the
surrender of an individual-life by individual-life policy (or certificate by
certificate in a group policy). EITF 06-5 is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
impact the adoption of the standard will have on the Company's results of
operations or financial condition.
3. EARNINGS PER SHARE
------------------
The following table sets forth the computation of the weighted-average
common shares used to calculate basic and diluted earnings per share.
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ ------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Weighted average common shares
outstanding 3,769,838 3,762,618 3,769,838 3,762,618
Average treasury stock shares (1,459,242) (1,406,148) (1,450,948) (1,390,556)
---------- ---------- ---------- ----------
Weighted average common shares
and common stock equivalents
used to calculate basic earnings
per share 2,310,596 2,356,470 2,318,890 2,372,062
Additional common stock
equivalents (stock options) used
to calculate diluted earnings per
share 2,242 3,201 2,090 3,421
---------- ---------- ---------- ----------
Weighted average common shares
and common stock equivalents
used to calculate diluted earnings
per share 2,312,838 2,359,671 2,320,980 2,375,483
========== ========== ========== ==========
All options at December 31, 2006 and December 31, 2005 were included in
the computation of diluted earnings per share.
4. STOCK BASED COMPENSATION DISCLOSURE
-----------------------------------
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (FAS No. 123R). FAS No.
9
123R revised FAS No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. FAS No. 123R requires compensation costs
related to share-based payment transactions to be recognized in the financial
statement (with limited exceptions). The amount of compensation cost will be
measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award.
The Statement requires that compensation cost relating to share-based
payment transactions be recognized in financial statements and that this cost be
measured based on the fair value of the equity or liability instruments issued.
FAS No. 123R covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. The Company adopted FAS
No. 123R on July 1, 2005. Management has determined that unless additional
options are granted, there will be no impact on future earnings as a result of
the adoption.
5. COMPREHENSIVE INCOME
--------------------
Other comprehensive income primarily reflects changes in net unrealized
gains/losses on available-for-sale securities. Total comprehensive income is
summarized as follows (dollars in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------------- -------------------------------------
2006 2005 2006 2005
----------------- ----------------- ----------------- -----------------
(Dollars in Thousands)
Net income $ 837 $ 610 $ 1,742 $ 1,218
Other comprehensive
income (loss):
Unrealized gains
(losses) on
available for sale $ (17) $ (31) $ 18 $ (89)
securities
Less:
Reclassification
adjustment for gain
included in net
income -- -- -- (30)
------- ------- ------- ------- ------- ------- ------- -------
Other comprehensive
gain (loss) before tax (17) (31) 18 (119)
Income tax (benefit) expense
related to other
comprehensive income (loss) (6) (17) 6 (47)
------- ------- ------- -------
Other comprehensive gain
(loss), net of tax (11) (14) 12 (72)
------- ------- ------- -------
Comprehensive income $ 826 $ 596 $ 1,754 $ 1,146
======= ======= ======= =======
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2006
FORWARD LOOKING STATEMENTS
In the normal course of business, we, in an effort to help keep our
shareholders and the public informed about our operations, may from time to time
issue or make certain statements, either in writing or orally, that are or
contain forward-looking statements, as that term is defined in the U.S. federal
securities laws. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits from acquisitions made by or to be
made by us, projections involving anticipated revenues, earnings, profitability
or other aspects of operating results or other future developments in our
affairs or the industry in which we conduct business. Forward-looking statements
may be identified by reference to a future period or periods or by the use of
forward-looking terminology such as "anticipated," "believe," "expect,"
"intend," "plan," "estimate" or similar expressions.
Although we believe that the anticipated results or other expectations
reflected in our forward-looking statements are based on reasonable assumptions,
we can give no assurance that those results or expectations will be attained.
Forward-looking statements involve risks, uncertainties and assumptions (some of
which are beyond our control), and as a result actual results may differ
materially from those expressed in forward-looking statements. Factors that
could cause actual results to differ from forward-looking statements include,
but are not limited to, the following, as well as those discussed elsewhere
herein:
o our investments in our businesses and in related technology could
require additional incremental spending, and might not produce
expected deposit and loan growth and anticipated contributions to
our earnings;
o general economic or industry conditions could be less favorable than
expected, resulting in a deterioration in credit quality, a change
in the allowance for loan losses or a reduced demand for credit or
fee-based products and services;
o changes in the interest rate environment could reduce net interest
income and could increase credit losses;
o the conditions of the securities markets could change, which could
adversely affect, among other things, the value or credit quality of
our assets, the availability and terms of funding necessary to meet
our liquidity needs and our ability to originate loans and leases;
o changes in the extensive laws, regulations and policies governing
financial holding companies and their subsidiaries could alter our
business environment or affect our operations;
o the potential need to adapt to industry changes in information
technology systems, on which we are highly dependent, could present
operational issues or require significant capital spending;
o competitive pressures could intensify and affect our profitability,
including as a result of continued industry consolidation, the
increased availability of financial services from non-banks,
technological developments such as the internet or bank regulatory
reform;
o acquisitions may result in one-time changes to income, may not
produce revenue enhancements or cost savings at levels or within
time frames originally anticipated and may result in unforeseen
integration difficulties; and
11
o acts or threats of terrorism and actions taken by the United States
or other governments as a result of such acts or threats, including
possible military action, could further adversely affect business
and economic conditions in the United States generally and in our
principal markets, which could have an adverse effect on our
financial performance and that of our borrowers and on the financial
markets and the price of our common stock.
You should not put undue reliance on any forward-looking statements.
Forward-looking statements speak only as of the date they are made, and we
undertake no obligation to update them in light of new or future events except
to the extent required by federal securities laws.
GENERAL
WVS Financial Corp. ("WVS" or the "Company") is the parent holding
company of West View Savings Bank ("West View" or the "Savings Bank"). The
Company was organized in July 1993 as a Pennsylvania-chartered unitary bank
holding company and acquired 100% of the common stock of the Savings Bank in
November 1993.
West View Savings Bank is a Pennsylvania-chartered, SAIF-insured stock
savings bank conducting business from six offices in the North Hills suburbs of
Pittsburgh. The Savings Bank converted to the stock form of ownership in
November 1993. The Savings Bank had no subsidiaries at December 31, 2006.
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 $417.5 million at December 31, 2006, as
compared to $421.7 million at June 30, 2006. The $4.2 million or 1.0% decrease
in total assets was primarily comprised of a $17.1 million or 10.9% decrease in
mortgage-backed securities and a $1.3 million or 16.3% decrease in FHLB stock,
which was partially offset by a $10.2 million or 5.2% increase in investment
securities, a $1.8 million or 3.2% increase in net loans receivable, and a $1.2
million or 102.4% increase in cash and cash equivalents. The increase in
investment securities is attributable to purchases of fixed-rate callable U.S.
government agency bonds, while the decrease in mortgage-backed securities was
attributable to repayments on the Company's portfolio of floating rate
collateralized mortgage obligations. See "Asset and Liability Management".
The Company's total liabilities decreased $4.8 million or 1.2% to
$387.5 million as of December 31, 2006, from $392.3 million as of June 30, 2006.
The $4.8 million decrease in total liabilities was primarily comprised of a
$23.2 million or 100.0% decrease in short-term FHLB advances and a $5.0 million
or 3.6% decrease in long-term FHLB advances, which was partially offset by a
$16.9 million or 22.2% increase in other short-term borrowings, a $5.0 million
or 3.3% increase in total savings deposits and a $1.1 million or 80.3% increase
in other liabilities. Certificates of deposit increased $7.5 million, demand
deposits increased $2.4 million while savings accounts decreased $4.8 million
and advanced payments by borrowers for taxes and insurance decreased $396
thousand. The increase in certificates of deposit was principally attributable
to investments by local governments and school districts. Management believes
that the changes in savings accounts and advance payments by borrowers for taxes
and insurance were primarily attributable to seasonal payments of local and
school real estate taxes.
12
Total stockholders' equity increased $593 thousand or 2.0% to $30.0
million as of December 31, 2006, from approximately $29.4 million as of June 30,
2006. Company net income of $1.7 million was partially offset by capital
expenditures for the Company's stock repurchase program and cash dividends which
totaled $419 thousand and $742 thousand, respectively, for the six months ended
December 31, 2006.
RESULTS OF OPERATIONS
General. WVS reported net income of $837 thousand or $0.36 diluted
earnings per share and $1.7 million or $0.75 diluted earnings per share for the
three and six months ended December 31, 2006, respectively. Net income increased
$227 thousand or 37.2% and diluted earnings per share increased $0.10 or 38.5%
for the three months ended December 31, 2006, when compared to the same period
in 2005. The increase in net income for the quarter was primarily attributable
to a $399 thousand increase in net interest income, which was partially offset
by a $99 thousand increase in income tax expense, a $45 thousand decrease in
recovery for loan losses, a $22 thousand increase in non-interest expense and a
$6 thousand decrease in non-interest income. For the six months ended December
31, 2006, net income increased $524 thousand or 43.0% and diluted earnings per
share increased $0.24 or 47.1% when compared to the same period in 2005. The
increase for the six month period was primarily the result of a $1.0 million
increase in net interest income, which was partially offset by a $302 thousand
increase in income tax expense, a $102 thousand decrease in credit provisions
for loan losses, a $60 thousand decrease in non-interest income and a $36
thousand increase in non-interest expense.
Net Interest Income. The Company's net interest income increased by
$399 thousand or 26.4% and $1.0 million or 34.6% for the three and six months
ended December 31, 2006, respectively, when compared to the same periods in
2005. The increases in net interest income for the three and six month periods
were primarily attributable to higher rates received on the Company's
interest-earning assets, which more than offset by higher rates paid on other
short-term borrowings and time deposits. The increases in both rates earned on
interest-earning assets and rates paid on interest-bearing liabilities reflects
the higher levels of short and intermediate term market interest rates fueled by
the Federal Reserve Board's increases in its targeted Federal Funds Rate.
Interest Income. Interest on net loans receivable increased $47
thousand or 4.7% and $47 thousand or 2.3% for the three and six months ended
December 31, 2006, when compared to the same periods in 2005. An increase of 39
basis points in the weighted average yield earned on net loans receivable was
partially offset by a decrease of $570 thousand in the average balance of net
loans receivable outstanding for the three months ended December 31, 2006, when
compared to the same period in 2005, and an increase of 43 basis points in the
weighted average yield earned on net loans receivable was partially offset by a
decrease of $2.2 million in the average balance of net loans receivable for the
six months ended December 31, 2006 when compared to the same period in 2005. The
decreases in the average loan balances outstanding for the three and six months
ended December 31, 2006 were attributable in part to the Company's
asset/liability management strategy. 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 decreased $12 thousand or 0.5%
for the three months ended December 31, 2006, when compared to the same period
in 2005. The decrease for the three months ended December 31, 2006 was primarily
attributable to a $37.1 decrease in the average balance of mortgage-backed
securities outstanding for the period, which was partially offset by a 126 basis
point increase in the weighted average yield earned on mortgage-backed
securities outstanding for the period, when compared to the same period in 2005.
Interest on mortgage-backed securities increased $504 thousand or 12.1% for the
six months ended December 31, 2006, when compared to the same period in 2005.
The increase for the six months ended December 31, 2006 was primarily
attributable to a 148 basis point increase in the weighted average yield earned
on mortgage-backed securities for the period, which was partially offset by a
$24.9 million decrease in the average balance of mortgage-backed securities
outstanding for the six months ended December 31, 2006, when compared to the
same period in 2005. The increase in
13
the weighted average yield earned on mortgage-backed securities was consistent
with higher market interest rates for the three and six months ended December
31, 2006. The decrease in the average balances of mortgage-backed securities
during the three and six months ended December 31, 2006 was primarily
attributable to paydowns on floating rate mortgage-backed securities in the
Company's portfolio.
Interest on investment securities increased by $894 thousand or 45.5%
and $1.6 million or 42.0% for the three and six months ended December 31, 2006,
respectively, when compared to the same periods in 2005. The increase for the
three months ended December 31, 2006 was attributable to a 89 basis point
increase in the weighted average yield earned on the Company's investment
securities. The increase for the six months ended December 31, 2006 was
primarily attributable to a 97 basis point increase in the weighted average
yield earned on investment securities for the period and a $24.7 million
increase in the average balance of investments outstanding for the six months
ended December 31, 2006 when compared to the same period in 2005. The increases
in yields earned were consistent with increases in market interest rates. The
increases in average balances for the six months ended December 31, 2006 were
associated with the Company's reinvestment of proceeds from floating rate
mortgage-backed securities into fixed rate callable U.S. Government Agency
securities.
Dividends received on FHLB stock increased by $12 thousand or 22.2% and
$62 thousand or 61.4% for the three and six months ended December 31, 2006,
respectively, when compared to the same period in 2005. The increase was
primarily attributable to increases of 48 and 170 basis points in the dividend
rates received for the three and six month periods ending December 31, 2006,
respectively when compared to the same periods in 2005.
Interest Expense. Interest expense on deposits and escrows increased
$291 thousand or 38.5% for the three months ended December 31, 2006 when
compared to the same period in 2005. The increase in interest expense on
deposits for the three months ended December 31, 2006 was attributable to
increases of 104 and 91 basis point increases in the weighted average rate paid
on time and money market deposits, respectively, increases of $6.8 million and
$2.6 million in the average balances of time and money market deposits,
respectively, for the three months ended December 31, 2006, when compared to the
same period in 2005. Interest expense on deposits and escrows increased $548
thousand or 37.4% for the six months ended December 31, 2006, when compared to
the same period in 2005. The increase in interest expense on deposit and escrows
was primarily attributable to a 108 and 103 basis point increase in the weighted
average rate paid on time and money market deposits, respectively, and a $3.9
million and $2.6 million increase in the average balance of time and money
markets deposits, respectively, for the six months ended December 31, 2006, when
compared to the same period in 2005. The average yield paid on interest-bearing
deposits reflects higher market interest rates for time and money market
deposits for the three and six months ended December 31, 2006.
Interest paid on FHLB advances increased $168 thousand or 8.3% for the
three months ended December 31, 2006 when compared to the same period in 2005.
The increase for the three months ended December 31, 2006 was primarily
attributable to a $20.7 million increase in the average balances of FHLB
short-term advances, which was partially offset by a $9.2 million decrease in
the average balances of FHLB long-term advances when compared to the same period
in 2005. Interest paid on FHLB advances increased $69 thousand or 1.7% for the
six months ended December 31, 2006 when compared to the same period in 2005. The
increase for the six months was primarily attributable to a $10.2 million
increase in the average balances of FHLB short-term advances, which were
partially offset by a decrease of $8.5 million in the average balances of FHLB
long-term advances when compared to the same period in 2005. The increase in
FHLB short-term advances was the result of the Company's repositioning of its
liability structure to take advantage of lower rates on FHLB short-term
advances, as compared to other short-term funding sources, while the decrease in
FHLB long-term advances was a result of payoffs of such advances.
Interest paid on other short-term borrowings increased $79 thousand or
7.9% and $574 thousand or 34.4% for the three and six months ended December 31,
2006 when compared to the same periods in 2005. The increase for the three
months ended December 31, 2006 was attributable to a 126 basis point increase in
rates paid, which was partially offset by a $16.4 million decrease in associated
average balances. The increase for the six months ended December 31, 2006 was
primarily attributable to a 154 basis point
14
increase in the average rate paid, which was partially offset by a $3.0 million
decrease in the average balances of other borrowings when compared to the same
period in 2005. The increase in rates paid was consistent with increases in
short-term market interest rates. The decrease in average balances is
attributable to the repositioning of a portion of the Company's liability
structure to take advantage of lower rates on FHLB short-term advances.
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 no provision or recovery for loan losses for the
three months ended December 31, 2006 compared to a recovery for loan loss of $45
thousand for the same period in 2005. The $45 thousand recovery during the
quarter ended December 31, 2005 was primarily attributable to the paydowns on
non-accrual loans. The Company recorded a recovery for loan loss of $9 thousand
for the six months ended December 31, 2006 compared to a recovery for loan loss
of $111 thousand for the same period in 2005. During the quarter ended September
30, 2005, the Company reallocated a portion of its allowance for loan and lease
losses attributable to off-balance sheet liabilities (primarily undisbursed
lines of credit and letters of credit) to a separate reserve account for
financial reporting purposes. The provision for loan losses was reduced by, and
a non-interest expense was charged, $35 thousand in connection with this
reallocation of allowances. At December 31, 2006, the Company's total allowance
for loan losses amounted to $955 thousand or 1.6% of the Company's total loan
portfolio, as compared to $957 thousand or 1.7% at June 30, 2006.
Non-Interest Income. Non-interest income decreased by $6 thousand or
3.6% and $60 thousand or 16.1% for the three and six months ended December 31,
2006 when compared to the same periods in 2005. The decrease for the three month
period ended December 31, 2006 was primarily attributable to a $7 thousand
decrease in ATM and debit card fee income. The decrease for the six months ended
December 31, 2006 was primarily attributable to a decrease of $30 thousand in
pre-tax gains on the sale of investment securities, a $5 thousand decrease in
service charges on deposits, a $12 thousand decrease in ATM and debit card fee
income, and a $8 thousand decrease in correspondent loan fees.
Non-Interest Expense. Non-interest expense increased $22 thousand or
2.5% and $36 thousand or 2.1% for the three and six months ended December 31,
2006 when compared to the same period in 2005. The increase for the three month
period ended December 31, 2006 was primarily attributable to a $40 thousand
increase in charitable contributions eligible for Pennsylvania state tax
credits, which was partially offset by a $15 thousand increase in credit
provisions for losses on off-balance sheet liabilities. The increase for the six
months ended December 31, 2006 was principally attributable to a $40 thousand
increase in charitable contributions eligible for Pennsylvania state tax
credits, which were partially offset by a $7 thousand decrease in occupancy and
equipment costs when compared to the same period in 2005.
Income Tax Expense. Income tax expense increased $99 thousand or 40.7%
and $302 thousand or 63.7% for the three and six months ended December 31, 2006
when compared to the same period in 2005. The increases were primarily
attributable to an increased level of taxable income for the three and six
months ended December 31, 2006 when compared to the same period in 2005.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $1.3 million during
the six months ended December 31, 2006. Net cash provided by operating
activities was primarily comprised of $1.7 million of net income, a $316
thousand increase in accrued interest payable and $70 thousand in fixed asset
depreciation, which were partially offset by a $730 increase in accrued interest
receivable, and a $138 decrease in accrued and deferred taxes.
15
Funds provided by investing activities totaled $6.4 million during the
six months ended December 31, 2006. Primary sources of funds during the six
months ended December 31, 2006, included maturities and repayments of
investment, mortgage-backed securities and FHLB Stock totaling $55.6 million,
$22.1 million and $5.2 million, respectively, which were partially offset by
purchases of investments, mortgage-backed securities and FHLB Stock totaling
$65.7 million, $5.0 million and $3.9 million, respectively, and a $1.8 million
increase in net loans receivable.
Funds used for financing activities totaled $6.5 million for the six
months ended December 31, 2006. The primary uses included a $23.2 million
decrease in short-term FHLB advances, a $5.0 million decrease in long-term FHLB
advances, $742 thousand in cash dividends paid on the Company's common stock and
$419 thousand in treasury stock purchases, which were partially offset by a
$16.9 million increase in other short-term borrowings and a $6.3 million
increase in deposits. The $6.3 million increase in total deposits consisted of a
$7.5 million increase in certificates of deposit primarily due to accounts
opened by local county municipal governments and school districts, which was
partially offset by a $1.2 million decrease in transaction and passbook accounts
and a $396 thousand decrease in mortgage escrow accounts. Management believes
that it currently is maintaining adequate liquidity and continues to match
funding sources with lending and investment opportunities.
The Company's primary sources of funds are deposits, amortization,
repayments and maturities of existing loans, mortgage-backed securities and
investment securities, funds from operations, and funds obtained through FHLB
advances and other borrowings. At December 31, 2006, the total approved loan
commitments outstanding amounted to approximately $439 thousand. At the same
date, commitments under unused lines of credit amounted to $7.3 million and the
unadvanced portion of construction loans approximated $12.5 million.
Certificates of deposit scheduled to mature in one year or less at December 31,
2006 totaled $52.7 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 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 January 30, 2007, the Company's Board of Directors declared a cash
dividend of $0.16 per share payable February 15, 2007, to shareholders of record
at the close of business on February 5, 2007. Dividends are subject to
determination and declaration by the Board of Directors, which take into account
the Company's financial condition, statutory and regulatory restrictions,
general economic conditions and other factors. There can be no assurance that
dividends will in fact be paid on the Common Stock in future periods or that, if
paid, such dividends will not be reduced or eliminated.
As of December 31, 2006, WVS Financial Corp. exceeded all regulatory
capital requirements and maintained Tier I and total risk-based capital equal to
$30.0 million or 23.6% and $31.0 million or 24.4%, respectively, of total
risk-weighted assets, and Tier I leverage capital of $30.0 million or 7.06% 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.
16
The Company's nonperforming assets at December 31, 2006 totaled
approximately $276 thousand or 0.07% of total assets as compared to $318
thousand or 0.08% of total assets at June 30, 2006. Nonperforming assets at
December 31, 2006 consisted of: four single-family real estate loans totaling
$257 thousand, one line of credit secured by single-family real estate totaling
$17 thousand and one single-family real estate owned property with a book value
of approximately $2 thousand.
The $42 thousand decrease in nonperforming assets during the six months
ended December 31, 2006 was primarily attributable to the reclassification of
two single-family real estate loans totaling $75 thousand from non-performing to
performing and an $8 thousand charge off related to the single-family real
estate owned property, which were partially offset by the addition to
non-accrual status of one single-family real estate loan totaling approximately
$41 thousand. The loans are in various stages of collection activity and the
real estate owned parcel is being marketed.
At December 31, 2006, the Company had one previously restructured and
potential problem commercial real estate loan to a retirement village located in
the North Hills totaling $973 thousand. The Savings Bank's outstanding principal
balance on this loan 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 $984 thousand at June 30, 2006. The Company had
recorded interest received on this credit on a cost recovery basis until
September 30, 2003 and is now recording interest income on a cash basis. At
December 31, 2006, this credit was less than three payments past due. The
project is experiencing lower than desired levels of occupancy and the borrower
is working to increase occupancy.
At December 31, 2006, the Company had one previously restructured loan
secured by undeveloped land totaling $341 thousand and one previously
restructured unsecured loan totaling $40 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 on
these loans in accordance with a Bankruptcy Plan of Reorganization. All Court
ordered plan payments have been received in a timely manner. In accordance with
generally accepted accounting principles, the Company had recorded interest
payments received on a cost recovery basis until June 30, 2006 and is now
recording interest income.
During the six months ended December 31, 2006, approximately $6
thousand of interest income would have been recorded on loans accounted for on a
non-accrual basis if such loans had been current according to the original loan
agreements for the entire period. These amounts were not included in the
Company's interest income for the six months ended December 31, 2006. 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.
17
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET AND LIABILITY MANAGEMENT
The Company's primary market risk exposure is interest rate risk and,
to a lesser extent, liquidity risk. All of the Company's transactions are
denominated in US dollars with no specific foreign exchange exposure. The
Savings Bank has no agricultural loan assets and therefore would not have a
specific exposure to changes in commodity prices. Any impacts that changes in
foreign exchange rates and commodity prices would have on interest rates are
assumed to be exogenous and will be analyzed on an ex post basis.
-- ----
Interest rate risk ("IRR") is the exposure of a banking organization's
financial condition to adverse movements in interest rates. Accepting this risk
can be an important source of profitability and shareholder value, however,
excessive levels of IRR can pose a significant threat to the Company's earnings
and capital base. Accordingly, effective risk management that maintains IRR at
prudent levels is essential to the Company's safety and soundness.
Evaluating a financial institution's exposure to changes in interest
rates includes assessing both the adequacy of the management process used to
control IRR and the organization's quantitative level of exposure. When
assessing the IRR management process, the Company seeks to ensure that
appropriate policies, procedures, management information systems and internal
controls are in place to maintain IRR at prudent levels with consistency and
continuity. Evaluating the quantitative level of IRR exposure requires the
Company to assess the existing and potential future effects of changes in
interest rates on its consolidated financial condition, including capital
adequacy, earnings, liquidity, and, where appropriate, asset quality.
Financial institutions derive their income primarily from the excess of
interest collected over interest paid. The rates of interest an institution
earns on its assets and owes on its liabilities generally are established
contractually for a period of time. Since market interest rates change over
time, an institution is exposed to lower profit margins (or losses) if it cannot
adapt to interest-rate changes. For example, assume that an institution's assets
carry intermediate or long-term fixed rates and that those assets were funded
with short-term liabilities. If market interest rates rise by the time the
short-term liabilities must be refinanced, the increase in the institution's
interest expense on its liabilities may not be sufficiently offset if assets
continue to earn interest at the long-term fixed rates. Accordingly, an
institution's profits could decrease on existing assets because the institution
will either have lower net interest income or, possibly, net interest expense.
Similar risks exist when assets are subject to contractual interest-rate
ceilings, or rate sensitive assets are funded by longer-term, fixed-rate
liabilities in a decreasing-rate environment.
During the quarter ended December 31, 2006, the Federal Open Market
Committee held its targeted federal funds rate at 5.25%. The table below shows
the targeted federal funds rate and the benchmark two and ten year treasury
yields at December 31, 2005, June 30, 2006 and December 31, 2006.
Yield on:
--------------------
Targeted Two (2) Ten (10)
Federal Year Year
Funds Treasury Treasury
----------- -------- --------
December 31, 2005 4.25% 4.38% 4.37%
June 30, 2006 5.25% 5.16% 5.15%
December 31, 2006 5.25% 4.70% 4.60%
These changes in short, intermediate and long-term market interest
rates, the inversion of the Treasury yield curve and continued high levels of
interest rate volatility have impacted prepayments in the Company's loan,
18
investment and mortgage-backed securities portfolios and a marked compression of
industry-wide net interest margins.
Principal repayments on the Company's loan, investment and
mortgage-backed securities portfolios for the six months ended December 31,
2006, totaled $47.6 million, $22.1 million and $11.1 million, respectively. In
response to higher levels of liquidity the Company continued to rebalance its
loan, investment and mortgage-backed securities portfolios.
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.
During the quarter ended December 31, 2006, principal investment
purchases were comprised of callable fixed rate government agency bonds with ten
year final maturities and initial lock-out periods as follows: less than 3
months - $17.3 million with weighted average yields to call of approximately
6.42%; 3 thru 12 months - $15.0 million with a weighted average yield to call of
approximately 6.05%; 13 thru 24 months - $15.1 million with a weighted average
yield to call of 6.08%. Major investment proceeds received during the quarter
ended December 31, 2006 were: mortgage-backed securities - $9.5 million;
callable government agency bonds - $41.4 million with a weighted average yield
of approximately 4.52%; and Small Business Association pool - $189 thousand with
a weighted average yield of approximately 5.87%.
As of December 31, 2006, the implementation of these asset and
liability management initiatives resulted in the following:
1) $136.4 million or 98.4% 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) $50.0 million or 24.2% of the Company's investment portfolio was
comprised of fixed to floating rate U.S. Government Agency bonds which
will reprice as follows: 3 months or less - $25.0 million; 6 - 12
months - $10.0 million; and over 1 year - $15.0 million. Management
currently believes that these bonds are likely to be repaid during the
intervals shown.
3) $128.7 million or 62.4% 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 - $24.3 million; 3 - 6
months - $20.3 million; 6 - 12 months - $15.0 million; 1 - 2 years -
$58.8 million; and over 2 years - $10.3 million. These bonds may or
may not actually be redeemed prior to maturity (i.e. called) depending
upon the level of market interest rates at their respective call
dates.
4) $15.2 million or 7.4% of the Company's investment portfolio was
comprised of U.S. Government Agency Step-up bonds which will reprice
as follows: 3 months or less - $8.5 million with coupons increasing
from 4.00% to 7.00%, $2.0 million with coupons increasing from 4.40%
to 7.00%; and 3 - 12 months - $4.7 million with coupons increasing
from 4.70% to 6.00%. Management believes that substantially all of
these bonds are likely to be repaid during the intervals shown.
5) An aggregate of $32.7 million or 56.9% of the Company's net loan
portfolio had adjustable interest rates or maturities of less than 12
months; and
6) The maturity distribution of the Company's borrowings is as follows: 1
month or less - $92.9 million or 41.0%; 1 - 3 years - $8.5 million or
3.8%; 3 - 5 years - $117.6 million or 51.9%; and over 5 years - $7.5
million or 3.3%.
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
19
period if it will mature or reprice within a given time period. A gap is
considered positive (negative) when the amount of rate sensitive assets
(liabilities) exceeds the amount of rate sensitive liabilities (assets). During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income. During a period of rising interest rates, a
positive gap would tend to result in an increase in net interest income.
As part of its asset/liability management strategy, the Company maintained
an asset sensitive financial position. An asset sensitive financial position may
benefit earnings during a period of rising interest rates and reduce earnings
during a period of declining interest rates.
The following table sets forth certain information at the dates indicated
relating to the Company's interest-earning assets and interest-bearing
liabilities which are estimated to mature or are scheduled to reprice within one
year.
December 31, June 30,
------------ ----------------------------
2006 2006 2005
------------ ------------ ------------
(Dollars in Thousands)
Interest-earning assets maturing or
repricing within one year $ 251,966 $ 273,884 $ 318,015
Interest-bearing liabilities maturing or
repricing within one year 191,011 194,509 181,085
------------ ------------ ------------
Interest sensitivity gap $ 60,955 $ 79,375 $ 136,930
============ ============ ============
Interest sensitivity gap as a percentage of
total assets 14.60% 18.82% 32.5%
Ratio of assets to liabilities
maturing or repricing within one year 131.91% 140.81% 175.6%
During the quarter ended December 31, 2006, 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; and (3) purchasing investments with call protection.
20
The following table illustrates the Company's estimated stressed
cumulative repricing gap - the difference between the amount of interest-earning
assets and interest-bearing liabilities expected to reprice at a given point in
time - at December 31, 2006. 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 ($'s) (82,781) (99,025) (111,282) (106,231) (106,908) (111,341) 17,935
% of Total
Assets -19.8% -23.7% -26.7% -25.4% -25.6% -26.7% 4.3%
Base Case Up 100 bp
-------------------
Cummulative
Gap ($'s) (82,582) (98,652) (105,972) (105,339) (105,953) (110,339) 17,935
% of Total
Assets -19.8% -23.6% -25.4% -25.2% -25.4% -26.4% 4.3%
Base Case No Change
-------------------
Cummulative
Gap ($'s) 65,759 50,215 60,955 59,423 76,159 (4,324) 17,935
% of Total
Assets 15.8% 12.0% 14.6% 14.2% 18.2% -1.0% 4.3%
Base Case Down 100 bp
---------------------
Cummulative
Gap ($'s) 76,443 77,847 92,957 151,387 149,778 36,938 17,935
% of Total
Assets 18.3% 18.6% 22.3% 36.3% 35.9% 8.8% 4.3%
Base Case Down 200 bp
---------------------
Cummulative
Gap ($'s) 83,927 87,138 98,253 156,901 153,745 37,512 17,935
% of Total
Assets 20.1% 20.9% 23.5% 37.6% 36.8% 9.0% 4.3%
Beginning in the third quarter of fiscal 2001, the Company began to
utilize an income simulation model to measure interest rate risk and to manage
interest rate sensitivity. The Company believes that income simulation modeling
may enable the Company to better estimate the possible effects on net interest
income due to changing market interest rates. Other key model parameters
include: estimated prepayment rates on the Company's loan, mortgage-backed
securities and investment portfolios; savings decay rate assumptions; and the
repayment terms and embedded options of the Company's borrowings.
21
The following table presents the simulated impact of a 100 and 200
basis point upward or downward (parallel) shift in market interest rates on net
interest income, return on average equity, return on average assets and the
market value of portfolio equity at December 31, 2006. This analysis was done
assuming that the interest-earning asset and interest-bearing liability levels
at December 31, 2006 remained constant.
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 -19.1% -5.7% 0.00% -6.5% -28.2%
Return on average equity 9.19% 11.46% 12.41% 11.39% 7.77%
Return on average assets 0.67% 0.84% 0.92% 0.84% 0.55%
Market value of equity (in
thousands) $ 28,798 $ 33,634 $ 35,329 $ 28,247 $ 14,091
The table below provides information about the Company's anticipated
transactions comprised of firm loan commitments and other commitments, including
undisbursed letters and lines of credit. The Company used no derivative
financial instruments to hedge such anticipated transactions as of December 31,
2006.
Anticipated Transactions
--------------------------------------------------------------
(Dollars in Thousands)
Undisbursed construction and
land development loans
Fixed rate $ 5,964
8.10%
Adjustable rate $ 6,551
8.77%
Undisbursed lines of credit
Adjustable rate $ 7,330
8.41%
Loan origination commitments
Fixed rate $ 374
7.56%
Adjustable rate $ 65
6.25%
Letters of credit
Adjustable rate $ 1,085
9.26%
$21,369
=======
22
In the ordinary course of its construction lending business, the
Savings Bank enters into performance standby letters of credit. Typically, the
standby letters of credit are issued on behalf of a builder to a third party to
ensure the timely completion of a certain aspect of a construction project or
land development. At December 31, 2006, the Savings Bank had eleven performance
standby letters of credit outstanding totaling approximately $1.1 million. Three
letters of credit are secured by deposits with the Savings Bank and eight
letters of credit are secured by developed property. Seven of the letters of
credit will mature within twelve months, one will mature within twenty four
months, two will mature within thirty six months and one letter of credit is
open-ended. In the event that the obligor is unable to perform its obligations
as specified in the standby letter of credit agreement, the Savings Bank would
be obligated to disburse funds up to the amount specified in the standby letter
of credit agreement. The Savings Bank maintains adequate collateral that could
be liquidated to fund this contingent obligation.
ITEM 4.
CONTROLS AND PROCEDURES
Our management evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of December 31, 2006. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
regulations and are operating in an effective manner.
No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934)
occurred during the second quarter of fiscal 2007 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
23
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,
2006.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
(a) Not applicable.
(b) Not applicable.
(c) The following table sets forth information with respect to
purchases of common stock of the Company made by or on behalf
of the Company during the three months ended December 31,
2006.
--------------------------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
--------------------------------------------------------------------------------------------------
Total Number of Maximum Number of
Total Shares Purchased Shares that May Yet
Number of as Part of Publicly Be Repurchased
Shares Average Price Announced Plans or Under the Plans or
Period Purchased Paid per Share ($) Programs (1) Programs (2)
--------------------------------------------------------------------------------------------------
10/01/06 - 10/31/06 10,532 16.46 10,532 58,428
--------------------------------------------------------------------------------------------------
11/01/06 - 11/30/06 -- 0.00 -- 58,428
--------------------------------------------------------------------------------------------------
12/01/06 - 12/31/06 -- 0.00 -- 58,428
--------------------------------------------------------------------------------------------------
Total 10,532 16.46 10,532 58,428
--------------------------------------------------------------------------------------------------
--------------------
(1) All shares indicated were purchased under the Company's Eighth
Stock Repurchase Program.
(2) Eighth Stock Repurchase Program
(a) Announced September 27, 2005.
(b) 125,000 common shares approved for repurchase.
(c) No fixed date of expiration.
(d) This program had not expired and has 58,428 shares
remaining to be purchased at December 31, 2006.
(e) Not applicable.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
24
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The results of the stockholder vote at the 2006 Annual Meeting of
Stockholders held on October 31, 2006 were previously reported.
ITEM 5. Other Information
-----------------
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 E-1
Chief Executive Officer
31.2 Rule 13a-14(a) / 15d-14(a) Certification of the E-2
Chief Accounting Officer
32.1 Section 1350 Certification of the Chief
Executive Officer E-3
32.2 Section 1350 Certification of the Chief Accounting
Officer E-4
99 Report of Independent Registered Public Accounting
Firm E-5
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WVS FINANCIAL CORP.
February 06, 2007 BY: /s/ David J. Bursic
------------------------------------------------------
Date David J. Bursic
President and Chief Executive Officer
(Principal Executive Officer)
February 06, 2007 BY: /s/ Keith A. Simpson
------------------------------------------------------
Date Keith A. Simpson
Vice-President, Treasurer and Chief Accounting Officer
(Principal Accounting Officer)
26