UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-22444
WVS Financial Corp.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1710500
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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 May 1, 2007: 2,319,155 shares Common Stock,
$.01 par value.
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
INDEX
-----
PART I. Financial Information Page
------- --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheet as of
March 31, 2007 and June 30, 2006
(Unaudited) 3
Consolidated Statement of Income
for the Three and Nine Months Ended
March 31, 2007 and 2006 (Unaudited) 4
Consolidated Statement of Changes in
Stockholders' Equity for the Nine Months
Ended March 31, 2007 (Unaudited) 5
Consolidated Statement of Cash Flows
for the Nine Months Ended March 31,
2007 and 2006 (Unaudited) 6
Notes to Unaudited Consolidated
Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations for the Three and Nine Months
Ended March 31, 2007 12
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 19
Item 4. Controls and Procedures 24
PART II. Other Information Page
-------- ----------------- ----
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits 26
Signatures 27
2
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(In thousands)
March 31, 2007 June 30, 2006
-------------- -------------
Assets
------
Cash and due from banks $ 591 $ 1,099
Interest-earning demand deposits 1,530 97
------------ ------------
Total cash and cash equivalents 2,121 1,196
Investment securities available-for-sale (amortized cost of
$4,502 and $8,497) 4,487 8,469
Investment securities held-to-maturity (market value of
$180,732 and $185,680) 180,433 187,952
Mortgage-backed securities available-for-sale (amortized cost of
$2,197 and $2,229) 2,271 2,292
Mortgage-backed securities held-to-maturity (market value of
$128,646 and $152,706) 128,397 153,461
Net loans receivable (allowance for loan losses of $999 and
$957) 60,547 55,702
Accrued interest receivable 3,075 2,921
Federal Home Loan Bank stock, at cost 6,501 7,861
Premises and equipment 841 864
Other assets 1,069 1,024
------------ ------------
TOTAL ASSETS $ 389,742 $ 421,742
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings Deposits:
Non-interest-bearing accounts $ 11,694 $ 11,315
NOW accounts 19,112 18,083
Savings accounts 32,492 36,851
Money market accounts 17,775 16,562
Certificates of deposit 74,492 67,890
Advance payments by borrowers for taxes and insurance 733 1,012
------------ ------------
Total savings deposits 156,298 151,713
Federal Home Loan Bank advances: long-term 133,579 138,579
Federal Home Loan Bank advances: short-term -- 23,150
Other short-term borrowings 64,500 76,048
Accrued interest payable 1,689 1,451
Other liabilities 2,937 1,383
------------ ------------
TOTAL LIABILITIES 359,003 392,324
------------ ------------
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;
3,786,238 and 3,769,838 shares issued 38 38
Additional paid-in capital 21,073 20,817
Treasury stock: 1,467,023 and 1,434,606 shares at cost,
respectively (22,213) (21,679)
Retained earnings, substantially restricted 31,804 30,221
Accumulated other comprehensive income 39 23
Unreleased shares - Recognition and Retention Plans (2) (2)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 30,739 29,418
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 389,742 $ 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 Nine Months Ended
March 31, March 31,
------------------------- -------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
INTEREST AND DIVIDEND INCOME:
Loans $ 1,120 $ 965 $ 3,218 $ 3,016
Investment securities 2,708 2,520 8,135 6,343
Mortgage-backed securities 2,110 2,404 6,766 6,555
Interest-earning deposits with other
institutions 2 4 7 11
Federal Home Loan Bank stock 111 61 274 162
----------- ----------- ----------- -----------
Total interest and dividend income 6,051 5,954 18,400 16,087
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits 1,054 779 3,068 2,246
Federal Home Loan Bank advances 1,829 1,968 5,932 6,002
Other short-term borrowings 984 1,344 3,227 3,012
----------- ----------- ----------- -----------
Total interest expense 3,867 4,091 12,227 11,260
----------- ----------- ----------- -----------
NET INTEREST INCOME 2,184 1,863 6,173 4,827
PROVISION (RECOVERY) FOR LOAN LOSSES 34 (38) 25 (149)
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
(RECOVERY) FOR LOAN LOSSES 2,150 1,901 6,148 4,976
----------- ----------- ----------- -----------
NON-INTEREST INCOME:
Service charges on deposits 86 96 267 283
Investment securities gains -- -- -- 30
Other 66 75 198 232
----------- ----------- ----------- -----------
Total non-interest income 152 171 465 545
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 499 500 1,483 1,458
Occupancy and equipment 94 91 289 292
Data processing 63 73 190 208
Correspondent bank service charges 25 38 90 105
Other 151 170 573 566
----------- ----------- ----------- -----------
Total non-interest expense 832 872 2,625 2,629
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,470 1,200 3,988 2,892
INCOME TAXES 515 412 1,291 886
----------- ----------- ----------- -----------
NET INCOME $ 955 $ 788 $ 2,697 $ 2,006
=========== =========== =========== ===========
EARNINGS PER SHARE:
Basic $ 0.41 $ 0.34 $ 1.16 $ 0.85
Diluted $ 0.41 $ 0.34 $ 1.16 $ 0.85
AVERAGE SHARES OUTSTANDING:
Basic 2,322,962 2,346,959 2,320,227 2,363,817
Diluted 2,324,278 2,348,619 2,322,059 2,366,651
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 2,697 2,697
Other comprehensive
income:
Change in unrealized
holding gains on
securities, net of
income tax effect of
$8 16 16
-----------
Comprehensive income 2,713
Purchase of shares for
treasury stock (534) (534)
Accrued compensation
expense for Recognition
and Retention Plans (RRP) -- --
Exercise of stock options -- 256 256
Cash dividends declared
($0.48 per share) (1,114) (1,114)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31,
2007 $ 38 $ 21,073 $ (22,213) $ 31,804 $ 39 $ (2) $ 30,739
=========== =========== =========== =========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
5
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended
March 31,
----------------------
2007 2006
--------- ---------
OPERATING ACTIVITIES
Net income $ 2,697 $ 2,006
Adjustments to reconcile net income to cash provided by operating
activities:
Provision (Recovery) for loan losses 25 (149)
Depreciation 105 119
Investment securities gains -- (30)
Amortization of discounts, premiums and deferred loan fees (156) (161)
Increase in accrued and deferred taxes 379 509
Increase in accrued interest receivable (154) (1,123)
Increase in accrued interest payable 238 206
Other, net 60 162
--------- ---------
Net cash provided by operating activities 3,194 1,539
--------- ---------
INVESTING ACTIVITIES
Available-for-sale:
Purchases of investments and mortgage-backed securities (3,992) (700)
Proceeds from repayments of investments and mortgage-backed securities 8,032 9,384
Proceeds from sale of investment and mortgage-backed securities -- 1,016
Held-to-maturity:
Purchases of investments (91,303) (111,348)
Purchases of mortgage-backed securities (4,998) (86,461)
Proceeds from repayments of investments 98,943 72,416
Proceeds from repayments of mortgage-backed securities 30,101 80,289
(Increase) decrease in net loans receivable (4,886) 4,484
Purchase of Federal Home Loan Bank stock (4,063) (4,677)
Redemption of Federal Home Loan Bank stock 5,423 5,137
Acquisition of premises and equipment (83) (36)
Other, net -- 60
--------- ---------
Net cash provided by (used for) investing activities 33,174 (30,436)
--------- ---------
6
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine Months Ended
March 31,
--------------------
2007 2006
-------- --------
FINANCING ACTIVITIES
Net decrease in transaction and passbook accounts (676) (10,856)
Net increase (decrease) in certificates of deposit 6,602 (1,630)
Net (decrease) increase in FHLB short-term advances (23,150) 1,600
Net (decrease) increase in other short-term borrowings (11,548) 43,663
Repayments of Federal Home Loan Bank long-term advances (5,000) (4,000)
Net decrease in advance payments by borrowers for taxes and insurance (279) (297)
Cash dividends paid (1,114) (1,136)
Funds used for purchase of treasury stock (534) (922)
Net proceeds from exercise of stock options 256 91
-------- --------
Net cash (used for) provided by financing activities (35,443) 26,513
-------- --------
Increase (decrease) in cash and cash equivalents 925 (2,384)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 1,196 3,566
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD 2,121 1,182
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits, escrows and borrowings $ 11,989 $ 11,054
Income taxes $ 920 $ 332
Non-cash item:
Due to Federal Reserve Bank $ 1,062 --
Mortgage loan transferred to other Assets -- $ 10
See accompanying notes to unaudited consolidated financial statements.
7
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore do not
include information or footnotes necessary for a complete presentation of
financial condition, results of operations, and cash flows in conformity with
U.S. generally accepted accounting principles. However, all adjustments
(consisting only of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation have been included. The
results of operations for the three and nine months ended March 31, 2007, are
not necessarily indicative of the results which may be expected for the entire
fiscal year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In September 2006, the FASB issued FAS No. 157, Fair Value
Measurements, which provides enhanced guidance for using fair value to measure
assets and liabilities. The standard applies whenever other standards require or
permit assets or liabilities to be measured at fair value. The Standard does not
expand the use of fair value in any new circumstances. FAS No. 157 is effective
for financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. Early adoption is permitted.
The 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 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 September 2006, the SEC issued Staff Accounting Bulletin No. 108
("SAB 108"), Considering the Effects of Prior Year Misstatements When
Quantifying Misstatements in Current Year Financial Statements, providing
guidance on quantifying financial statement misstatement and implementation when
first applying this guidance. Under SAB No. 108, companies should evaluate a
misstatement based on its impact on the current year income statement, as well
as the cumulative effect of correcting such misstatements that existed in prior
years existing in the current year's ending balance sheet. SAB 108 is effective
for fiscal years ending after November 15, 2006. 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 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 EITF will have on the Company's results of operations
or financial condition.
8
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.
In February 2007, the FASB issued FAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115, which provides all entities with an option to report selected
financial assets and liabilities at fair value. The objective of the FAS No. 159
is to improve financial reporting by providing entities with the opportunity to
mitigate volatility in earnings caused by measuring related assets and
liabilities differently without having to apply the complex provisions of hedge
accounting. FAS No. 159 is effective as of the beginning of an entity's first
fiscal year beginning after November 15, 2007. Early adoption is permitted as of
the beginning of a fiscal year that begins on or before November 15, 2007
provided the entity also elects to apply the provisions of FAS No. 157, Fair
Value Measurements. The Company is currently evaluating the impact the adoption
of the standard will have on the Company's financial position.
In March 2007, the FASB ratified Emerging Issues Task Force Issue No.
06-10 ("EITF 06-10"), Accounting for Collateral Assignment Split-Dollar Life
Insurance Agreements. EITF 06-10 provides guidance for determining a liability
for the postretirement benefit obligation as well as recognition and measurement
of the associated asset on the basis of the terms of the collateral assignment
agreement. EITF 06-10 is effective for fiscal years beginning after December 15,
2007. The Company is currently evaluating the impact the adoption of the EITF
will have on the Company's results of operations or financial condition.
9
3. EARNINGS PER SHARE
------------------
The following table sets forth the computation of the weighted-average
common shares used to calculate basic and diluted earnings per share.
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Weighted average common shares
Outstanding 3,785,629 3,767,010 3,775,025 3,764,061
Average treasury stock shares (1,462,667) (1,420,051) (1,454,798) (1,400,244)
---------- ---------- ---------- ----------
Weighted average common shares
and common stock equivalents
used to calculate basic earnings
per share 2,322,962 2,346,959 2,320,227 2,363,817
Additional common stock
equivalents (stock options) used
to calculate diluted earnings per
share 1,316 1,660 1,832 2,834
---------- ---------- ---------- ----------
Weighted average common shares
and common stock equivalents
used to calculate diluted earnings
per share 2,324,278 2,348,619 2,322,059 2,366,651
========== ========== ========== ==========
All options at March 31, 2007 and March 31, 2006 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. 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.
10
5. COMPREHENSIVE INCOME
--------------------
Other comprehensive income primarily reflects changes in net unrealized
gains/losses on available-for-sale securities. Total comprehensive income is
summarized as follows (dollars in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------------- -------------------------------------
2007 2006 2007 2006
----------------- ----------------- ----------------- -----------------
(Dollars in Thousands)
Net income $ 955 $ 788 $ 2,697 $ 2,006
Other comprehensive
income (loss):
Unrealized gains
(losses) on
available for sale
securities $ 6 $ (40) $ 24 $ (129)
Less:
Reclassification
adjustment for gain
included in net
income -- -- -- (30)
------- ------- ------- ------- ------- ------- ------- -------
Other comprehensive
income (loss) before tax 6 (40) 24 (159)
Income tax (benefit)
expense related to other
comprehensive income
(loss) 2 (7) 8 (54)
------- ------- ------- -------
Other comprehensive income
(loss), net of tax 4 (33) 16 (105)
------- ------- ------- -------
Comprehensive income $ 959 $ 755 $ 2,713 $ 1,901
======= ======= ======= =======
11
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2007
FORWARD LOOKING STATEMENTS
In the normal course of business, we, in an effort to help keep our
shareholders and the public informed about our operations, may from time to time
issue or make certain statements, either in writing or orally, that are or
contain forward-looking statements, as that term is defined in the U.S. federal
securities laws. Generally, these statements relate to business plans or
strategies, projected or anticipated benefits from acquisitions made by or to be
made by us, projections involving anticipated revenues, earnings, profitability
or other aspects of operating results or other future developments in our
affairs or the industry in which we conduct business. Forward-looking statements
may be identified by reference to a future period or periods or by the use of
forward-looking terminology such as "anticipated," "believe," "expect,"
"intend," "plan," "estimate" or similar expressions.
Although we believe that the anticipated results or other expectations
reflected in our forward-looking statements are based on reasonable assumptions,
we can give no assurance that those results or expectations will be attained.
Forward-looking statements involve risks, uncertainties and assumptions (some of
which are beyond our control), and as a result actual results may differ
materially from those expressed in forward-looking statements. Factors that
could cause actual results to differ from forward-looking statements include,
but are not limited to, the following, as well as those discussed elsewhere
herein:
o our investments in our businesses and in related technology
could require additional incremental spending, and might not
produce expected deposit and loan growth and anticipated
contributions to our earnings;
o general economic or industry conditions could be less
favorable than expected, resulting in a deterioration in
credit quality, a change in the allowance for loan losses or a
reduced demand for credit or fee-based products and services;
o changes in the interest rate environment could reduce net
interest income and could increase credit losses;
o the conditions of the securities markets could change, which
could adversely affect, among other things, the value or
credit quality of our assets, the availability and terms of
funding necessary to meet our liquidity needs and our ability
to originate loans and leases;
o changes in the extensive laws, regulations and policies
governing financial holding companies and their subsidiaries
could alter our business environment or affect our operations;
o the potential need to adapt to industry changes in information
technology systems, on which we are highly dependent, could
present operational issues or require significant capital
spending;
o competitive pressures could intensify and affect our
profitability, including as a result of continued industry
consolidation, the increased availability of financial
services from non-banks, technological developments such as
the internet or bank regulatory reform;
o acquisitions may result in one-time 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
12
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 March 31, 2007.
The operating results of the Company depend primarily upon its net
interest income, which is determined by the difference between income on
interest-earning assets, principally loans, mortgage-backed securities and
investment securities, and interest expense on interest-bearing liabilities,
which consist primarily of deposits and borrowings. The Company's net income is
also affected by its provision for loan losses, as well as the level of its
non-interest income, including loan fees and service charges, and its
non-interest expenses, such as compensation and employee benefits, income taxes,
deposit insurance and occupancy costs.
FINANCIAL CONDITION
The Company's assets totaled $389.7 million at March 31, 2007, as
compared to $421.7 million at June 30, 2006. The $32.0 million or 7.6% decrease
in total assets was primarily comprised of a $25.1 million or 16.1% decrease in
mortgage-backed securities, a $11.5 million or 5.9% decrease in investment
securities, and a $1.4 million or 17.3% decrease in FHLB stock, which were
partially offset by a $4.8 million or 8.7% increase in net loans receivable, a
$925 thousand or 77.3% increase in cash and cash equivalents and a $154 thousand
or 5.3% increase in accrued interest receivable. The decrease in investment
securities is attributable to calls of fixed to floating rate and step-up 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 $33.3 million or 8.5% to
$359.0 million as of March 31, 2007, from $392.3 million as of June 30, 2006.
The $33.3 million decrease in total liabilities was primarily comprised of a
$23.2 million or 100.0% decrease in short-term FHLB advances, a $11.5 million or
15.2% decrease in other short-term borrowings and a $5.0 million or 3.6%
decrease in long-term FHLB advances, which were partially offset by a $4.6
million or 3.0% increase in total savings deposits and a $1.6 million or 112.5%
increase in other liabilities. Certificates of deposit increased $6.6 million,
demand deposits increased $1.4 million and money market accounts increased $1.2
million while savings accounts decreased $4.4 million and advanced payments by
borrowers for taxes and insurance decreased $279 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 purchases of certificates of deposit, transactional
needs and seasonal payments of local and school real estate taxes.
13
Total stockholders' equity increased $1.3 million or 4.4% to $30.7
million as of March 31, 2007, from $29.4 million as of June 30, 2006. Company
net income of $2.7 million was partially offset by capital expenditures for the
Company's stock repurchase program and cash dividends which totaled $534
thousand and $1.1 million, respectively, for the nine months ended March 31,
2007.
RESULTS OF OPERATIONS
General. WVS reported net income of $955 thousand or $0.41 diluted
earnings per share and $2.7 million or $1.16 diluted earnings per share for the
three and nine months ended March 31, 2007, respectively. Net income increased
$167 thousand or 21.2% and diluted earnings per share increased $0.07 or 20.6%
for the three months ended March 31, 2007, when compared to the same period in
2006. The increase in net income for the quarter was primarily attributable to a
$321 thousand increase in net interest income and a $40 thousand decrease in
non-interest expense, which were partially offset by a $103 thousand increase in
income tax expense, a $72 thousand change in provision (recovery) for loan
losses and a $19 thousand decrease in non-interest income. For the nine months
ended March 31, 2007, net income increased $691 thousand or 34.4% and diluted
earnings per share increased $0.31 or 36.5% when compared to the same period in
2006. The increase for the nine month period was primarily the result of a $1.3
million increase in net interest income, which was partially offset by a $405
thousand increase in income tax expense, a $174 thousand change in provisions
(recovery) for loan losses and a $80 thousand decrease in non-interest income.
Net Interest Income. The Company's net interest income increased by
$321 thousand or 17.2% and $1.3 million or 27.9% for the three and nine months
ended March 31, 2007, respectively, when compared to the same periods in 2006.
The increases in net interest income for the three and nine month periods were
primarily attributable to higher rates received on the Company's
interest-earning assets, which more than offset 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 $155
thousand or 16.1% and $202 thousand or 6.7% for the three and nine months ended
March 31, 2007, respectively, when compared to the same periods in 2006. The
increases were primarily attributable to an increase of 66 basis points in the
weighted average yield earned on net loans receivable and an increase of $3.3
million in the average balance of net loans receivable outstanding for the three
months ended March 31, 2007, when compared to the same period in 2006, and an
increase of 51 basis points in the weighted average yield earned on net loans
receivable was partially offset by a decrease of $413 thousand in the average
balance of net loans receivable for the nine months ended March 31, 2007 when
compared to the same period in 2006. The changes in the average loan balances
outstanding for the three and nine months ended March 31, 2007 were attributable
in part to the Company's asset/liability management strategy. The Company has
limited its portfolio origination of longer-term fixed rate real estate loans
while emphasizing floating rate commercial and intermediate term fixed-rate
consumer 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 $294 thousand or 12.2%
for the three months ended March 31, 2007, when compared to the same period in
2006. The decrease for the three months ended March 31, 2007 was primarily
attributable to a $38.5 million decrease in the average balance of
mortgage-backed securities outstanding for the period, which was partially
offset by a 71 basis point increase in the weighted average yield earned on
mortgage-backed securities outstanding for the period, when compared to the same
period in 2006. Interest on mortgage-backed securities increased $211 thousand
or 3.2% for the nine months ended March 31, 2007, when compared to the same
period in 2006. The increase for the nine months ended March 31, 2007 was
primarily attributable to a 123 basis point increase in the weighted average
yield earned on mortgage-backed securities for the period, which was partially
offset by a $29.3 million decrease in the average balance of mortgage-backed
securities outstanding for the nine months
14
ended March 31, 2007, when compared to the same period in 2006. The increase in
the weighted average yield earned on mortgage-backed securities was consistent
with higher market interest rates for the three and nine months ended March 31,
2007. The decrease in the average balances of mortgage-backed securities during
the three and nine months ended March 31, 2007 was primarily attributable to
paydowns on floating rate mortgage-backed securities in the Company's portfolio.
Due to unattractive spreads in this sector, the Company used a substantial
portion of these paydowns to reduce short-term borrowings, and to purchase other
investment securities.
Interest on investment securities increased by $188 thousand or 7.5%
and $1.8 million or 28.3% for the three and nine months ended March 31, 2007,
respectively, when compared to the same periods in 2006. The increase for the
three months ended March 31, 2007 was attributable to a 77 basis point increase
in the weighted average yield earned on the Company's investment securities,
which was partially offset by a $14.2 million decrease in the average balance of
investments outstanding. The increase for the nine months ended March 31, 2007
was primarily attributable to a 90 basis point increase in the weighted average
yield earned on investment securities for the period and a $11.1 million
increase in the average balance of investments outstanding for the nine months
ended March 31, 2007 when compared to the same period in 2006. The increases in
yields earned were consistent with increases in market interest rates. The
increases in average balances for the nine months ended March 31, 2007 were
associated with the Company's reinvestment of proceeds from floating rate
mortgage-backed securities into fixed rate callable U.S. Government Agency
securities. During the quarter ended March 31, 2007, proceeds from maturing
investment securities were used to paydown short-term debt due to lower market
spreads in this sector.
Dividends received on FHLB stock increased by $50 thousand or 82.0% and
$112 thousand or 69.1% for the three and nine months ended March 31, 2007,
respectively, when compared to the same period in 2006. The increase was
primarily attributable to increases of 333 and 219 basis points in the dividend
rates received for the three and nine month periods ending March 31, 2007,
respectively, when compared to the same periods in 2006.
Interest Expense. Interest expense on deposits and escrows increased
$275 thousand or 35.3% for the three months ended March 31, 2007 when compared
to the same period in 2006. The increase in interest expense on deposits for the
three months ended March 31, 2007 was attributable to increases of 84 and 72
basis point increases in the weighted average rate paid on time and money market
deposits, respectively, and increases of $9.0 million and $2.3 million in the
average balances of time and money market deposits, respectively, for the three
months ended March 31, 2007, when compared to the same period in 2006. Interest
expense on deposits and escrows increased $822 thousand or 36.6% for the nine
months ended March 31, 2007, when compared to the same period in 2006. The
increase in interest expense on deposit and escrows was primarily attributable
to a 101 and 92 basis point increase in the weighted average rate paid on time
and money market deposits, respectively, and a $5.6 million and $2.5 million
increase in the average balance of time and money markets deposits,
respectively, for the nine months ended March 31, 2007, when compared to the
same period in 2006. The average yield paid on interest-bearing deposits
reflects higher market interest rates for time and money market deposits for the
three and nine months ended March 31, 2007.
Interest paid on FHLB advances decreased $139 thousand or 7.1% for the
three months ended March 31, 2007 when compared to the same period in 2006. The
decrease for the three months ended March 31, 2007 was primarily attributable to
a $8.4 million decrease in the average balances of FHLB long-term advances and a
$2.6 million decrease in the average balances of FHLB short-term advances when
compared to the same period in 2006. Interest paid on FHLB advances decreased
$70 thousand or 1.2% for the nine months ended March 31, 2007 when compared to
the same period in 2006. The decrease for the nine months was primarily
attributable to a $8.5 million decrease in the average balances of FHLB
long-term advances which were partially offset by a decrease of $6.0 million
increase in the average balances of FHLB short-term advances when compared to
the same period in 2006. 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.
15
Interest paid on other short-term borrowings decreased $360 thousand or
26.8% and increased $215 thousand or 7.1% for the three and nine months ended
March 31, 2007 when compared to the same periods in 2006. The decrease for the
three months ended March 31, 2007 was attributable to a $44.4 million decrease
in associated average balances, which was partially offset by a 78 basis point
increase in rates paid. The increase for the nine months ended March 31, 2007
was primarily attributable to a 123 basis point increase in the average rate
paid, which was partially offset by a $16.6 million decrease in the average
balances of other borrowings when compared to the same period in 2006. The
increase in rates paid was consistent with increases in short-term market
interest rates. The decrease in average balances is attributable to the
Company's decision to paydown short-term borrowings due to reduced market
spreads available in the mortgage-backed and investment securities sectors.
Provision (Recovery) for Loan Losses. A provision (recovery) for loan
losses is charged (credited) to earnings to maintain the total allowance at a
level considered adequate by management to absorb potential losses in the
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio considering past experience, current economic
conditions, volume, growth and composition of the loan portfolio, and other
relevant factors.
The Company recorded a provision of $34 thousand for loan losses for
the three months ended March 31, 2007 compared to a recovery for loan loss of
$38 thousand for the same period in 2006. The $38 thousand recovery during the
quarter ended March 31, 2006 was primarily attributable to the paydowns on
non-accrual loans. The Company recorded a provision for loan loss of $25
thousand for the nine months ended March 31, 2007 in conjunction with higher
average loan balances compared to a recovery for loan loss of $149 thousand for
the same period in 2006. At March 31, 2007, the Company's total allowance for
loan losses amounted to $999 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 $19 thousand or
11.1% and $80 thousand or 14.7% for the three and nine months ended March 31,
2007 when compared to the same periods in 2006. The decrease for the three month
period ended March 31, 2007 was primarily attributable to a $10 thousand
decrease in deposit fee income and a $6 thousand decrease in ATM and debit card
fee income. The decrease for the nine months ended March 31, 2007 was primarily
attributable to a decrease of $30 thousand in pre-tax gains on the sale of
investment securities, a $16 thousand decrease in service charges on deposits, a
$19 thousand decrease in ATM and debit card fee income and a $4 thousand
decrease in correspondent loan fees.
Non-Interest Expense. Non-interest expense decreased $40 thousand or
4.6% and $4 thousand or 0.2% for the three and nine months ended March 31, 2007
when compared to the same period in 2006. The decrease for the three month
period ended March 31, 2007 was primarily attributable to a $13 thousand
decrease in correspondent bank service charges, a $10 thousand decrease in data
processing expense, an $8 thousand decrease in outside service fees and an $8
thousand increase in credit provisions for losses on off-balance sheet
liabilities. The decrease for the nine months ended March 31, 2007 was
principally attributable to a $43 thousand change in provisions/credits for
losses on off balance sheet liabilities, an $18 thousand decrease in data
processing expense and a $15 thousand decrease in correspondent bank service
charges, which were partially offset by a $40 thousand increase in charitable
contributions eligible for Pennsylvania state tax credits and a $25 thousand
increase in employee related costs when compared to the same period in 2006.
Income Tax Expense. Income tax expense increased $103 thousand or 25.0%
and $405 thousand or 45.7% for the three and nine months ended March 31, 2007
when compared to the same period in 2006. The increases were primarily
attributable to an increased level of taxable income for the three and nine
months ended March 31, 2007 when compared to the same periods in 2006.
16
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $3.2 million during
the nine months ended March 31, 2007. Net cash provided by operating activities
was primarily comprised of $2.7 million of net income, a $379 thousand increase
in accrued and deferred taxes, a $238 thousand increase in accrued interest
payable and $105 thousand in fixed asset depreciation, which were partially
offset by a $154 increase in accrued interest receivable, and a $156 thousand in
amortization of discounts, premiums and deferred loan fees.
Funds provided by investing activities totaled $33.2 million during the
nine months ended March 31, 2007. Primary sources of funds during the nine
months ended March 31, 2007, included maturities and repayments of investment,
mortgage-backed securities and FHLB Stock totaling $106.9 million, $30.1 million
and $5.4 million, respectively, which were partially offset by purchases of
investments, mortgage-backed securities and FHLB Stock totaling $95.3 million,
$5.0 million and $4.1 million, respectively, and a $4.9 million increase in net
loans receivable.
Funds used for financing activities totaled $35.4 million for the nine
months ended March 31, 2007. The primary uses included a $23.2 million decrease
in short-term FHLB advances, $11.5 million decrease in other short-term
borrowings, a $5.0 million decrease in long-term FHLB advances, $1.1 million in
cash dividends paid on the Company's common stock and $534 thousand in treasury
stock purchases, which were partially offset by a $5.6 million increase in total
deposits. The $5.6 million increase in total deposits consisted of a $6.6
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 $676 thousand decrease in transaction and passbook accounts and a
$279 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 March 31, 2007, the total approved loan
commitments outstanding amounted to approximately $603 thousand. At the same
date, commitments under unused lines of credit amounted to $7.1 million and the
unadvanced portion of construction loans approximated $12.1 million.
Certificates of deposit scheduled to mature in one year or less at March 31,
2007 totaled $53.4 million. Management believes that a significant portion of
maturing deposits will remain with the Company.
Historically, the Company used its sources of funds primarily to meet
its ongoing commitments to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain a substantial portfolio of
investment securities. The Company has been able to generate sufficient cash
through the retail deposit market, its traditional funding source, and through
FHLB advances and other borrowings, to provide the cash utilized in investing
activities. The Company also has access to the Federal Reserve Bank Primary
Credit Program. Management believes that the Company currently has adequate
liquidity available to respond to liquidity demands.
On April 24, 2007, the Company's Board of Directors declared a cash
dividend of $0.16 per share payable May 24, 2007, to shareholders of record at
the close of business on May 14, 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 March 31, 2007, WVS Financial Corp. exceeded all regulatory
capital requirements and maintained Tier I and total risk-based capital equal to
$30.7 million or 23.3% and $31.7 million or 24.1%,
17
respectively, of total risk-weighted assets, and Tier I leverage capital of
$30.7 million or 7.79% of average quarterly assets.
Nonperforming assets consist of nonaccrual loans and real estate owned.
A loan is placed on nonaccrual status when, in the judgment of management, the
probability of collection of interest is deemed insufficient to warrant further
accrual. When a loan is placed on nonaccrual status, previously accrued but
uncollected interest is deducted from interest income. The Company normally does
not accrue interest on loans past due 90 days or more, however, interest may be
accrued if management believes that it will collect on the loan.
The Company's nonperforming assets at March 31, 2007 totaled
approximately $1.2 million or 0.31% of total assets as compared to $318 thousand
or 0.08% of total assets at June 30, 2006. Nonperforming assets at March 31,
2007 consisted of: one commercial real estate loan totaling $973 thousand, three
single-family real estate loans totaling $215 thousand, two line of credits
secured by single-family real estate totaling $18 thousand and one single-family
real estate owned property with a book value of approximately $2 thousand.
The $890 thousand increase in nonperforming assets during the nine
months ended March 31, 2007 was primarily attributable to the addition to
non-accrual status of one commercial real estate loan totaling $973 thousand (as
further discussed below) and one line of credit secured by single-family real
estate which were partially offset by 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.
The loans are in various stages of collection activity and the real estate owned
parcel is being marketed.
At March 31, 2007, the Company had one previously restructured and
non-accrual 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
March 31, 2007, this credit was classified as non-performing. The project is
experiencing lower than desired levels of occupancy and the borrower is working
to increase occupancy.
At March 31, 2007, the Company had one previously restructured loan
secured by undeveloped land totaling $338 thousand and one previously
restructured unsecured loan totaling $37 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 nine months ended March 31, 2007, approximately $7 thousand
of interest income would have been recorded on loans accounted for on a
non-accrual basis if such loans had been current according to the original loan
agreements for the entire period. These amounts were not included in the
Company's interest income for the nine months ended March 31, 2007. The Company
continues to work with the borrowers in an attempt to cure the defaults and is
also pursuing various legal avenues in order to collect on these loans.
18
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 March 31, 2007, 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 March 31, 2006, June 30, 2006 and March 31, 2007.
Yield on:
-------------------------------
Targeted Two (2) Ten (10)
Federal Year Year
Funds Treasury Treasury
---------------- ------------- -------------
March 31, 2006 4.75% 4.82% 4.86%
June 30, 2006 5.25% 5.16% 5.15%
March 31, 2007 5.25% 4.58% 4.65%
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,
19
investment and mortgage-backed securities portfolios and a marked compression of
industry-wide net interest margins. The difference in yields on the ten year and
two year Treasury's is often used to determine the steepness of the yield curve
and to assess the term premium of market interest rates. The term premium of
market interest rates is often used to determine the relative merits of taking
on additional interest rate risk and to gauge the market's expectation of future
interest rates.
Principal repayments on the Company's loan, investment and
mortgage-backed securities portfolios for the nine months ended March 31, 2007,
totaled $15.1 million, $106.9 million and $30.1 million, respectively. Due to a
marked compression of Treasury yields, low market volatility and reduced spreads
available on mortgage-backed and investment securities, the Company chose to use
principal repayments to reduce short and long-term debt during most of fiscal
2007. This strategy has allowed the Company to increase operating margins and
capital ratios while reducing overall interest rate risk.
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 loans for commercial real estate, land acquisition
and development, shorter-term construction loans, (primarily on residential
properties), and commercial loans on business assets 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 March 31, 2007, principal investment purchases
were comprised of callable fixed rate government agency bonds with ten year
final maturities and initial lock-out periods as follows: 6 months or less -
$14.6 million with weighted average yields to call of approximately 6.11%; 6
thru 12 months - $8.0 million with a weighted average yield to call of
approximately 6.04%; 13 thru 18 months - $3.0 million with a weighted average
yield to call of 6.01%. The Company also purchased $4.0 million in short-term
commercial paper with a yield of approximately 5.43%. Major investment proceeds
received during the quarter ended March 31, 2007 were: callable government
agency bonds - $50.8 million with a weighted average yield of approximately
4.93%; mortgage-backed securities - $8.0 million.
As of March 31, 2007, the implementation of these asset and liability
management initiatives resulted in the following:
1) $128.4 million or 98.2% 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) $25.0 million or 13.5% of the Company's investment portfolio
was comprised of fixed to floating rate U.S. Government Agency
bonds which will reprice as follows: 6 months or less - $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) $139.0 million or 75.2% 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 - $29.4
million; 3 - 6 months - $14.6 million; 6 - 12 months - $36.6
million; 1 - 2 years - $55.5 million; and over 2 years - $3.0
million. These bonds may or may not actually be redeemed prior
to maturity (i.e. called) depending upon the level of market
interest rates at their respective call dates.
4) $4.7 million or 2.5% 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 - $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 $34.6 million or 57.2% 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 - $64.5 million or 32.5%; 1 - 3 years
- $8.5 million or 4.3%; 3 - 5 years - $117.6 million or 59.4%;
and over 5 years - $7.5 million or 3.8%.
20
The effect of interest rate changes on a financial institution's assets
and liabilities may be analyzed by examining the "interest rate sensitivity" of
the assets and liabilities and by monitoring an institution's interest rate
sensitivity "gap". An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within a given time
period. A gap is considered positive (negative) when the amount of rate
sensitive assets (liabilities) exceeds the amount of rate sensitive liabilities
(assets). During a period of falling interest rates, a negative gap would tend
to result in an increase in net interest income. During a period of rising
interest rates, a positive gap would tend to result in an increase in net
interest income.
As part of its asset/liability management strategy, the Company
maintained an asset sensitive financial position. An asset sensitive financial
position may benefit earnings during a period of rising interest rates and
reduce earnings during a period of declining interest rates.
The following table sets forth certain information at the dates
indicated relating to the Company's interest-earning assets and interest-bearing
liabilities which are estimated to mature or are scheduled to reprice within one
year.
March 31, June 30,
-------- --------------------
2007 2006 2005
-------- -------- --------
(Dollars in Thousands)
Interest-earning assets maturing or
repricing within one year $233,684 $273,884 $318,015
-------- -------- --------
Interest-bearing liabilities maturing or
repricing within one year 162,558 194,509 181,085
-------- -------- --------
Interest sensitivity gap $ 71,126 $ 79,375 $136,930
======== ======== ========
Interest sensitivity gap as a percentage of
total assets 18.25% 18.82% 32.5%
Ratio of assets to liabilities
maturing or repricing within one year 143.75% 140.81% 175.6%
During the quarter ended March 31, 2007, the Company managed its one
year interest sensitivity gap by: (1) paying down approximately $28.4 million in
short-term borrowings; (2) reducing overall purchases of investment securities
due to lower market spreads; and (3) limiting the portfolio origination of
long-term fixed rate mortgages and emphasizing loans with shorter-terms or
repricing frequencies.
21
The following table illustrates the Company's estimated stressed
cumulative repricing gap - the difference between the amount of interest-earning
assets and interest-bearing liabilities expected to reprice at a given point in
time - at March 31, 2007. The table estimates the impact of an upward or
downward change in market interest rates of 100 and 200 basis points.
Cumulative Stressed Repricing Gap
---------------------------------
Month 3 Month 6 Month 12 Month 24 Month 36 Month 60 Long Term
------- ------- -------- -------- -------- -------- ---------
(Dollars in Thousands)
Base Case Up 200 bp
-------------------
Cummulative
Gap ($'s) (63,241) (82,451) (101,450) (95,352) (95,934) (102,546) 30,818
% of Total
Assets -16.2% -21.2% -26.0% -24.5% -24.6% -26.3% 7.9%
Base Case Up 100 bp
-------------------
Cummulative
Gap ($'s) (69,706) (90,043) (102,769) (102,385) (102,920) (106,539) 30,818
% of Total
Assets -17.9% -23.1% -26.4% -26.3% -26.4% -27.3% 7.9%
Base Case No Change
-------------------
Cummulative
Gap ($'s) 60,784 41,158 71,126 128,225 132,201 19,386 30,818
% of Total
Assets 15.6% 10.6% 18.2% 32.9% 33.9% 5.0% 7.9%
Base Case Down 100 bp
---------------------
Cummulative
Gap ($'s) 91,624 87,872 113,766 168,806 170,492 56,420 30,818
% of Total
Assets 23.5% 22.5% 29.2% 43.3% 43.7% 14.5% 7.9%
Base Case Down 200 bp
---------------------
Cummulative
Gap ($'s) 94,490 92,808 119,483 175,061 175,118 57,454 30,818
% of Total
Assets 24.2% 23.8% 30.7% 44.9% 44.9% 14.7% 7.9%
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.
22
The following table presents the simulated impact of a 100 and 200
basis point upward or downward (parallel) shift in market interest rates on net
interest income, return on average equity, return on average assets and the
market value of portfolio equity at March 31, 2007. This analysis was done
assuming that the interest-earning assets will average approximately $399
million over a projected twelve month period for the estimated impact on change
in net interest income, return on average equity and return on average assets.
The estimated changes in market value of equity were calculated using balance
sheet levels at March 31, 2007.
Analysis of Sensitivity to Changes in Market Interest Rates
-----------------------------------------------------------
Modeled Change in Market Interest Rates
------------------------------------------------------------------
Estimated impact on: -200 -100 0 +100 +200
-------------------
Change in net interest income -22.7% - 9.3 0.00% - 6.6 -27.6%
Return on average equity 8.17% 10.37% 11.88% 10.84% 7.47%
Return on average assets 0.62% 0.80% 0.92% 0.83% 0.57%
Market value of equity (in
thousands) $ 27,355 $ 32,423 $ 36,267 $ 27,081 $ 12,336
The table below provides information about the Company's anticipated
transactions comprised of firm loan commitments and other commitments, including
undisbursed letters and lines of credit. The Company used no derivative
financial instruments to hedge such anticipated transactions as of March 31,
2007.
Anticipated Transactions
-----------------------------------------------------------
(Dollars in Thousands)
Undisbursed construction and
land development loans
Fixed rate $ 6,609
7.17%
Adjustable rate $ 5,451
6.34%
Undisbursed lines of credit
Adjustable rate $ 7,113
8.37%
Loan origination commitments
Fixed rate $ 78
8.50%
Adjustable rate $ 525
9.75%
Letters of credit
Adjustable rate $ 1,011
9.26%
$ 20,787
==========
23
In the ordinary course of its construction lending business, the
Savings Bank enters into performance standby letters of credit. Typically, the
standby letters of credit are issued on behalf of a builder to a third party to
ensure the timely completion of a certain aspect of a construction project or
land development. At March 31, 2007, the Savings Bank had eleven performance
standby letters of credit outstanding totaling approximately $1.0 million. Two
letters of credit are secured by deposits with the Savings Bank and nine letters
of credit are secured by developed property. Eight of the letters of credit will
mature within twelve months, two will mature within twenty four 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 March 31, 2007. 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 third quarter of fiscal 2007 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
24
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
The Company is involved with various legal actions arising in the
ordinary course of business. Management believes the outcome of these matters
will have no material effect on the consolidated operations or consolidated
financial condition of WVS Financial Corp.
ITEM 1A. Risk Factors
------------
There are no material changes to the risk factors included in Item 1A
of the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
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 March 31, 2007.
-------------------------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------------------------------------------------------------------
Total Number of Maximum Number of
Total Shares Purchased Shares that May Yet
Number of as Part of Publicly Be Repurchased
Shares Average Price Announced Plans or Under the Plans or
Period Purchased Paid per Share ($) Programs (1) Programs (2)
-------------------------------------------------------------------------------------------------
01/01/07 - 01/31/07 1,000 16.40 1,000 57,428
-------------------------------------------------------------------------------------------------
02/01/07 - 02/28/07 -- 0.00 -- 57,428
-------------------------------------------------------------------------------------------------
03/01/07 - 03/31/07 6,000 16.50 6,000 51,428
-------------------------------------------------------------------------------------------------
Total 7,000 16.49 7,000 51,428
-------------------------------------------------------------------------------------------------
--------------------
(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 has not expired and had 51,428 shares
remaining to be purchased at March 31, 2007.
(e) Not applicable.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
25
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
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 Chief E-1
Executive Officer
31.2 Rule 13a-14(a) / 15d-14(a) Certification of the Chief E-2
Accounting Officer
32.1 Section 1350 Certification of the Chief Executive Officer E-3
32.2 Section 1350 Certification of the Chief Accounting Officer E-4
99 Report of Independent Registered Public Accounting Firm E-5
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WVS FINANCIAL CORP.
May 4, 2007 BY: /s/ David J. Bursic
------------------------------------------
Date David J. Bursic
President and Chief Executive Officer
(Principal Executive Officer)
May 4, 2007 BY: /s/ Keith A. Simpson
------------------------------------------
Date Keith A. Simpson
Vice-President, Treasurer and Chief
Accounting Officer
(Principal Accounting Officer)
27