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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, 2004
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-22444
WVS Financial Corp.
----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1710500
- ---------------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9001 Perry Highway
Pittsburgh, Pennsylvania 15237
- ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
(412) 364-1911
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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 an accelerated filer (as
defined in Rule 12 b-2 of the Exchange Act).
YES |_| NO |X|
Shares outstanding as of February 10, 2005: 2,437,360 shares Common Stock,
$.01 par value.
WVS FINANCIAL CORP. AND SUBSIDIARY
----------------------------------
INDEX
-----
PART I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheet as of
December 31, 2004 and June 30, 2004
(Unaudited) 3
Consolidated Statement of Income
for the Three and Six Months Ended
December 31, 2004 and 2003 (Unaudited) 4
Consolidated Statement of Cash Flows
for the Six Months Ended December 31,
2004 and 2003 (Unaudited) 5
Consolidated Statement of Changes in
Stockholders' Equity for the Six Months
Ended December 31, 2004 (Unaudited) 7
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, 2004 11
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 17
Item 4. Controls and Procedures 23
PART II. Other Information Page
- -------- ----------------- ----
Item 1. Legal Proceedings 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, 2004 June 30, 2004
----------------- -------------
Assets
------
Cash and due from banks $ 849 $ 769
Interest-earning demand deposits 2,373 2,285
--------- ---------
Total cash and cash equivalents 3,222 3,054
Trading assets -- 993
Investment securities available-for-sale (amortized cost of
$5,356 and $4,112) 5,352 4,416
Investment securities held-to-maturity (market value of
$221,925 and $271,104) 220,591 269,173
Mortgage-backed securities available-for-sale (amortized cost of
$2,960 and $3,234) 3,079 3,357
Mortgage-backed securities held-to-maturity (market value of
$116,293 and $72,100) 115,766 72,233
Net loans receivable (allowance for loan losses of $1,231 and
$1,370) 61,548 67,968
Federal Home Loan Bank stock, at cost 9,257 7,532
Accrued interest receivable 1,894 2,456
Premises and equipment 1,024 1,077
Other assets 1,217 1,365
--------- ---------
TOTAL ASSETS $ 422,950 $ 433,624
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Savings Deposits:
Non-interest-bearing accounts $ 12,143 $ 10,996
NOW accounts 23,273 22,897
Savings accounts 43,484 45,837
Money market accounts 12,980 14,226
Certificates of deposit 64,218 65,362
Advance payments by borrowers for taxes and insurance 783 1,245
--------- ---------
Total savings deposits 156,881 160,563
Federal Home Loan Bank advances 185,136 149,736
Other borrowings 48,980 91,639
Accrued interest payable 1,300 1,197
Other liabilities 1,386 1,290
--------- ---------
TOTAL LIABILITIES $ 393,683 $ 404,425
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;
3,762,968 and 3,762,968 shares issued 38 38
Additional paid-in capital 20,727 20,727
Treasury stock: 1,317,908 and 1,296,544 shares at cost,
Respectively (19,742) (19,377)
Retained earnings, substantially restricted 28,173 27,535
Accumulated other comprehensive income 76 281
Unreleased shares - Recognition and Retention Plans (5) (5)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY $ 29,267 $ 29,199
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 422,950 $ 433,624
========= =========
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,
------------------------ -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
INTEREST AND DIVIDEND INCOME:
Loans $ 1,057 $ 1,331 $ 2,152 $ 2,858
Investment securities 2,227 2,061 4,951 3,642
Mortgage-backed securities 1,070 543 1,653 1,199
Interest-earning deposits with other
institutions 2 1 5 6
Federal Home Loan Bank stock 49 20 74 61
---------- ---------- ---------- ----------
Total interest and dividend income 4,405 3,956 8,835 7,766
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposits 527 598 1,041 1,265
Federal Home Loan Bank advances 2,055 2,039 4,099 4,084
Other borrowings 395 123 588 180
---------- ---------- ---------- ----------
Total interest expense 2,977 2,760 5,728 5,529
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,428 1,196 3,107 2,237
PROVISION (RECOVERY) FOR LOAN LOSSES (7) (624) 72 (757)
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
(RECOVERY) FOR LOAN LOSSES 1,435 1,820 3,035 2,994
---------- ---------- ---------- ----------
NON-INTEREST INCOME:
Service charges on deposits 90 104 185 198
Investment securities gains 99 -- 335 --
Other 77 57 154 158
---------- ---------- ---------- ----------
Total non-interest income 266 161 674 356
---------- ---------- ---------- ----------
NON-INTEREST EXPENSE:
Salaries and employee benefits 496 505 999 1,016
Occupancy and equipment 114 106 219 211
Data processing 66 57 130 113
Correspondent bank service charges 33 37 68 76
Other 194 233 365 414
---------- ---------- ---------- ----------
Total non-interest expense 903 938 1,781 1,830
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 798 1,043 1,928 1,520
INCOME TAXES 209 273 505 398
---------- ---------- ---------- ----------
NET INCOME $ 589 $ 770 $ 1,423 $ 1,122
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic $ 0.24 $ 0.30 $ 0.58 $ 0.44
Diluted $ 0.24 $ 0.30 $ 0.58 $ 0.44
AVERAGE SHARES OUTSTANDING:
Basic 2,445,349 2,560,420 2,449,269 2,567,831
Diluted 2,451,242 2,569,578 2,455,084 2,577,330
See accompanying notes to unaudited consolidated financial statements.
4
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
December 31,
----------------------
2004 2003
--------- ---------
OPERATING ACTIVITIES
Net income $ 1,423 $ 1,122
Adjustments to reconcile net income to cash provided by operating
activities:
Provision for (recovery of) loan losses 72 (757)
Investment securities gains (329) --
Depreciation and amortization, net 90 94
Amortization of discounts, premiums and deferred loan fees (266) 814
Sale of trading securities 1,000 --
Decrease in accrued interest receivable 562 241
Increase (decrease) in accrued interest payable 103 (70)
Increase in accrued and deferred taxes 136 180
Other, net 208 106
--------- ---------
Net cash provided by operating activities 2,999 1,730
--------- ---------
INVESTING ACTIVITIES
Available-for-sale:
Purchases of investments and mortgage-backed securities (16,394) (20,828)
Proceeds from repayments of investments and mortgage-backed securities 14,346 38,291
Proceeds from sale of investments securities 1,409 --
Held-to-maturity:
Purchases of investments and mortgage-backed securities (240,274) (250,708)
Proceeds from repayments of investments and mortgage-backed securities 245,616 163,133
Decrease in net loans receivable 6,320 19,912
Purchase of Federal Home Loan Bank stock (4,057) (967)
Redemption of Federal Home Loan Bank stock 2,332 1,210
Acquisition of premises and equipment (38) (11)
Other, net -- 500
--------- ---------
Net cash provided by (used for) investing activities 9,260 (49,468)
--------- ---------
5
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
December 31,
--------------------
2004 2003
-------- --------
FINANCING ACTIVITIES
Net (decrease) increase in transaction and passbook accounts (2,076) 1,731
Net decrease in certificates of deposit (1,144) (5,091)
Net increase (decrease) in FHLB short-term advances 35,400 (3,875)
Net (decrease) increase in other borrowings (42,659) 58,395
Repayments of FHLB long-term advances -- (279)
Net decrease in advance payments by borrowers for taxes and insurance (462) (799)
Net proceeds from issuance of common stock -- 119
Funds used for purchase of treasury stock (365) (682)
Cash dividends paid (785) (820)
-------- --------
Net cash (used for) provided by financing activities (12,091) 48,699
-------- --------
Increase in cash and cash equivalents 168 961
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 3,054 2,815
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 3,222 $ 3,776
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on deposits, escrows and borrowings $ 5,625 $ 5,599
Income taxes $ 263 $ 240
Non-cash items:
Cancellation of unallocated RRP shares $ -- $ 39
Mortgage Loan Transferred to Other Assets $ -- $ 500
See accompanying notes to unaudited consolidated financial statements.
6
WVS FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
Accumulated
Retained Other
Additional Earnings Unallocated Compre-
Common Paid-In Treasury Substantially Shares Held hensive
Stock Capital Stock Restricted by RRP Income Total
----- ------- ----- ---------- ------ ------ -----
Balance at June 30, 2004 $ 38 $ 20,727 $(19,377) $ 27,535 $ (5) $ 281 $ 29,199
Comprehensive income:
Net Income 1,423 1,423
Other comprehensive
income:
Change in unrealized
holding gains on
securities, net of
income tax effect
of $106 (205) (205)
--------
Comprehensive income 1,218
Purchase of treasury stock (365) (365)
Accrued compensation
expense for Recognition
and Retention Plans (RRP) -- --
Exercise of stock options -- -- --
Cash dividends declared
($0.32 per share) (785) (785)
-------- -------- -------- -------- -------- -------- --------
Balance at Dec. 31, 2004 $ 38 $ 20,727 $(19,742) $ 28,173 $ (5) $ 76 $ 29,267
======== ======== ======== ======== ======== ======== ========
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, 2004, are
not necessarily indicative of the results which may be expected for the entire
fiscal year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In March 2004, the Financial Accounting Standards Board ("FASB") reached
consensus on the guidance provided by Emerging Issues Task Force Issue 03-1
("EITF 03-1"), The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments. The guidance is applicable to debt and
equity securities that are within the scope of FASB Statement of Financial
Accounting Standard ("SFAS") No. 115, Accounting for Certain Investments In Debt
and Equity Securities and certain other investments. EITF 03-1 specifies that an
impairment would be considered other-than-temporary unless (a) the investor has
the ability and intent to hold an investment for a reasonable period of time
sufficient for the recovery of the fair value up to (or beyond) the cost of the
investment and (b) evidence indicating the cost of the investment is recoverable
within a reasonable period of time outweighs evidence to the contrary. EITF 03-1
cost method investment and disclosure provisions were effective for reporting
periods ending after June 15, 2004. The measurement and recognition provisions
relating to debt and equity securities have been delayed until the FASB issues
additional guidance. The Company adopted cost method investment and disclosure
provisions of EITF 03-1 on June 30, 2004. The adoption did not have a material
impact on the consolidated financial statements, results of operations or
liquidity of the Company.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 123 (Revised 2004),
Share-Based Payment. 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. 123 (Revised 2004) 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 will adopt FAS No. 123 (Revised 2004) on July 1,
2005 and is currently evaluating the impact the adoption of the standard will
have on the Company's results of operations.
In October 2003, the American Institute of Certified Public Accountants
issued SOP 03-3, "Accounting for Loans or Certain Debt Securities Acquired in a
Transfer." SOP 03-3 applies to a loan that is acquired where it is probable, at
acquisition, that a transferee will be unable to collect all contractually
required payments receivable. SOP 03-3 requires the recognition, as accretable
yield, the excess of all cash flows expected at acquisition over the investor's
Initial investment in the loan as interest income on a level-yield basis over
the life of the loan. The amount by which the loan's contractually required
payments exceed the amount of its expected cash flows at acquisition may not be
recognized as an adjustment to yield, a loss accrual or a valuation allowance
for credit risk. SOP 03-3 is effective for loans acquired in fiscal years
beginning after December 31, 2004. Early adoption is permitted. The adoption of
SOP 03-3 is not expected to have a material impact on the consolidated financial
statements.
8
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,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Weighted average common shares
outstanding 3,762,968 3,734,816 3,762,968 3,735,731
Average treasury stock shares (1,317,619) (1,174,396) (1,313,699) (1,167,900)
----------- ----------- ----------- -----------
Weighted average common shares
and common stock equivalents
used to calculate basic earnings
per share 2,445,349 2,560,420 2,449,269 2,567,831
Additional common stock
equivalents (stock options) used
to calculate diluted earnings per
share 5,893 9,158 5,815 9,499
----------- ----------- ----------- -----------
Weighted average common shares
and common stock equivalents
used to calculate diluted earnings
per share 2,451,242 2,569,578 2,455,084 2,577,330
=========== =========== =========== ===========
All options at December 31, 2004 and December 31, 2003 were included in
the computation of diluted earnings per share.
4. STOCK BASED COMPENSATION DISCLOSURE
-----------------------------------
As permitted under Statement of Financial Accounting Standards No. 123
"Accounting for Stock-based Compensation," the Company has elected to continue
following Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations, in accounting for
stock-based awards to employees. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of the grant, no compensation expense is recognized in the Company's
financial statements. Had compensation expense included stock option plan costs
determined based on the fair value at the grant dates for options granted under
these plans consistent with Statement No. 123, pro forma net income and earnings
per share would not have been materially different than that presented on the
Consolidated Statement of Income.
9
5. COMPREHENSIVE INCOME
--------------------
Other comprehensive income primarily reflects changes in net unrealized
gains/losses on available-for-sale securities. Total comprehensive income is
summarized as follows:
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------------------- -----------------------------------------
2004 2003 2004 2003
------------------ ------------------ ------------------ ------------------
(Dollars in Thousands)
Net income $ 589 $ 770 $ 1,423 $ 1,122
Other comprehensive
income:
Unrealized gains on
available for sale
securities $ 14 $ 82 $ 24 $ 65
Less:
Reclassification
adjustment for gain
included in net
income (99) -- (329) --
------- ------- ------- ------- ------- ------- ------- -------
Other comprehensive
(loss) income before tax (85) 82 (311) 65
Income tax
(benefit)
expense related to other
comprehensive income (29) 28 (106) 22
------- ------- ------- -------
Other comprehensive
(loss) income, net of tax (56) 54 (205) 43
------- ------- ------- -------
Comprehensive income $ 533 $ 824 $ 1,218 $ 1,165
======= ======= ======= =======
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2004
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q, in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project" or similar expressions are intended to identify "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to forward
looking statements to reflect events or circumstances after the date of
statements or to reflect the occurrence of anticipated or unanticipated events.
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, 2004.
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 $422.9 million at December 31, 2004, as
compared to $433.6 million at June 30, 2004. The $10.7 million or 2.5% decrease
in total assets was primarily comprised of a $46.9 million or 16.6% decrease in
investment securities and FHLB stock, a $6.4 million or 9.4% decrease in net
loans receivable, and a $562 thousand or 22.9% decrease in accrued interest
receivable, which were partially offset by a $43.3 million or 57.2% increase in
mortgage-backed securities and a $168 thousand or 5.5% increase in cash and cash
equivalents. The decreases in investment securities and loans outstanding were
attributable to higher rates of repayments caused by declines in intermediate
and long-term market interest rates. The increase in mortgage-backed securities
is attributable to purchases of floating rate collateralized
11
mortgage obligations in response to increases in short-term market interest
rates. See "Asset and Liability Management".
The Company's total liabilities decreased $10.7 million or 2.6% to $393.7
million as of December 31, 2004, from $404.4 million as of June 30, 2004. The
$10.7 million decrease in total liabilities was primarily comprised of a $42.7
million or 46.6% decrease in other short-term borrowings and a $3.7 million or
2.3% decrease in total savings deposits, which were partially offset by a $35.4
million or 23.6% increase in FHLB advances scheduled to mature within 7 days.
Savings accounts decreased $2.4 million, money market accounts decreased $1.2
million, certificates of deposit decreased $1.2 million and advanced payments by
borrowers for taxes and insurance decreased $462 thousand, while demand deposits
increased $1.5 million.
Total stockholders' equity increased $68 thousand or 0.2% to $29.3 million
as of December 31, 2004, from approximately $29.2 million as of June 30, 2004.
Company net income of $1.4 million was partially offset by cash dividends and
capital expenditures for the Company's stock repurchase program of $785 thousand
and $365 thousand, respectively, and accumulated other comprehensive income
decreased $205 thousand for the six months ended December 31, 2004.
RESULTS OF OPERATIONS
General. WVS reported net income of $589 thousand or $0.24 diluted
earnings per share and $1.4 million or $0.58 diluted earnings per share for the
three and six months ended December 31, 2004, respectively. Net income decreased
by $181 thousand or 23.5% and diluted earnings per share decreased $0.06 or
20.0% for the three months ended December 31, 2004, when compared to the same
period in 2003. The decrease in net income was primarily attributable to a $617
thousand decrease in credit provisions for loan losses, which was partially
offset by a $232 thousand increase in net interest income, a $105 thousand
increase in non-interest income, a $64 thousand decrease in income tax expense
and a $35 thousand decrease in non-interest expense. For the six months ended
December 31, 2004, net income increased by $301 thousand or 26.8% and diluted
earnings per share increased $0.14 or 31.8% when compared to the same period in
2003. The increase for the six month period was principally the result of a $870
thousand increase in net interest income, a $318 thousand increase in
non-interest income and a $49 thousand decrease in non-interest expense, which
were partially offset by a $829 thousand change in the provision for loan losses
and a $107 thousand increase in income tax expense.
Net Interest Income. The Company's net interest income increased by $232
thousand or 19.4% for the three months ended December 31, 2004, when compared to
the same period in 2003. The increase in net interest income for the three month
period was principally attributable to higher yields earned on Company assets
due to higher levels of discount accretion on called U.S. Government Agency
bonds, lower levels of premium amortization on matured corporate bonds,
increases in short-term market interest rates, higher average balances of
mortgage-backed securities and lower average balances of time deposits, which
were partially offset by increased average balances of the Company's borrowings
outstanding and lower average balances of net loans receivable and investment
securities. The Company continued to experience high levels of repayments on its
mortgage-backed securities portfolio due to refinancing activities for the three
months ended December 31, 2004. The Company's net interest income increased $870
thousand or 38.9% for the six months ended December 31, 2004. The increase in
net income for the six months ended December 31, 2004 was primarily attributable
to higher yields earned on Company assets due to higher levels of discount
accretion on called U.S. Government Agency bonds, lower levels of premium
amortization on matured corporate bonds, increases in short-term market interest
rates, higher average balances of investment and mortgage-backed securities,
lower rates paid on deposits and Company borrowings and lower average balances
of time deposits, which were partially offset by higher average balances of
Company borrowings outstanding and lower average balances of net loans
receivable.
Interest Income. Total interest and dividend income increased $449
thousand or 11.3% and $1.1 million or 13.8% for the three and six months ended
December 31, 2004, respectively, when compared to the same periods in 2003.
12
Interest on mortgage-backed securities increased $527 thousand or 97.1%
for the three months ended December 31, 2004, when compared to the same period
in 2003. The increase for the three months ended December 31, 2004 was primarily
attributable to a $44.8 million increase in the average balance of
mortgage-backed securities outstanding for the period and a 68 basis point
increase in the average yield earned on mortgage-backed securities for the three
months ended December 31, 2004 when compared to the same period in 2003.
Interest on mortgage-backed securities increased $454 thousand or 37.9% for the
six months ended December 31, 2004, when compared to the same period in 2003.
The increases for the six months ended December 31, 2004 was primarily
attributable to a 76 basis point increase in the average yield earned on
mortgage-backed securities and a $6.5 million increase in the average balance of
mortgage-backed securities outstanding for the six months ended December 31,
2004 when compared to the same period in 2003. The increase in the weighted
average yield earned on mortgage-backed securities was consistent with market
conditions for the three and six months ended December 31, 2004. The increase in
the average balances of mortgage-backed securities during the three and six
months ended December 31, 2004 was primarily attributable to purchases of
floating rate mortgage-backed securities.
Interest and dividend income on interest-bearing deposits with other
institutions, investment securities and FHLB stock ("other investment
securities") increased by $196 thousand or 9.4% for the three months ended
December 31, 2004 when compared to the same period in 2003 and includes a $348
thousand change in recognized discounts/premiums on investment securities. The
increase was principally attributable to a 52 basis point increase in the
weighted average yield earned on other investment securities which was partially
offset by a $8.8 million decrease in the average balance outstanding of other
investment securities for the three months ended December 31, 2004 when compared
to the same period in 2003. Interest and dividend income on other investment
securities increased $1.3 million or 35.6% for the six months ended December 31,
2004, when compared to the same period in 2003 and includes a $924 thousand
change in recognized discounts/premiums on investment securities. The increase
for the six months ended December 31, 2004 was primarily attributable to a $32.1
million increase in the average balance of other investment securities
outstanding and a 60 basis point increase in the weighted average yield earned
on other investment securities outstanding from the six months ended December
31, 2004, when compared to the same period in 2003. The increase in the weighted
average yield earned was consistent with market conditions for the three and six
months ended December 31, 2004.
Interest on net loans receivable decreased $274 thousand or 20.6% for the
three months ended December 31, 2004, when compared to the same period in 2003.
The decrease for the three months ended December 31, 2004 was attributable to a
decrease of $13.1 million in the average balance of net loans receivable
outstanding and a decrease of 31 basis points in the weighted average yield
earned on net loans receivable for the three months ended December 31, 2004,
when compared to the same period in 2003. Interest on net loans receivable
decreased $706 thousand or 24.7% for the six months ended December 31, 2004,
when compared to the same period in 2003. The decrease for the six months ended
December 31, 2004 was attributable to a $26.4 million decrease in the average
balance of net loans receivable outstanding and a decrease of 41 basis points in
the weighted average yield earned on net loans receivable for the six months
ended December 31, 2004. The decrease in the average loan balance outstanding
for the three and six months ended December 31, 2004 was primarily attributable
to increased levels of mortgage prepayments and refinancings due to lower market
rates on mortgages. As part of its 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 Expense. Total interest expense increased $217 thousand or 7.9%
and $199 thousand or 3.6% for the three and six months ended December 31, 2004,
respectively, when compared to the same period in 2003.
Interest on FHLB advances and other borrowings increased $288 thousand or
13.3% for the three months ended December 31, 2004 when compared to the same
period in 2003. The increase for the three months ended December 31, 2004 was
attributable to a $35.2 million increase in the average balance of FHLB advances
and other borrowings for the period which was partially offset by a 19 basis
point decrease in
13
the weighted average rate paid on such borrowings when compared to the same
period in 2003. Interest on FHLB advances and other borrowings increased $423
thousand or 9.9% for the six months ended December 31, 2004, when compared to
the same period in 2003. The increase for the six months ended December 31, 2004
was attributable to a $33.9 million increase in the average balance of FHLB
advances and other borrowings for the period which was partially offset by a 34
basis point decrease in the weighted average rate paid on such borrowings when
compared to the same period in 2003. The weighted average rate paid on FHLB
advances and other borrowings declined in contrast to increases in the
proportion of short-term advances and borrowings to total Company borrowings.
Interest expense on deposits and escrows decreased $71 thousand or 11.9%
for the three months ended December 31, 2004 when compared to the same period in
2003. The decrease in interest expense on deposits and escrows for the three
months ended December 31, 2004 was attributable to a $9.7 million decrease in
the average balance of interest-bearing deposits and escrows for the period,
which was partially offset by a 5 basis point decrease in the weighted average
yield paid on time deposits and escrows for the three months ended December 31,
2004, when compared to the same period in 2003. Interest expense on deposits and
escrows decreased $224 thousand or 17.7% for the six months ended December 31,
2004 when compared to the same period in 2003. The decrease in interest expense
on deposits and escrows for the six months ended December 31, 2004 was primarily
attributable to a $9.5 million decrease in the average balance of
interest-bearing deposits and escrows for the period and a 20 basis point
decrease in the weighted average yield paid on interest-bearing deposit and
escrows for the six months ended December 31, 2004, when compared to the same
period in 2003.
Provision for Loan Losses. A provision for loan losses is charged 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 credit provision for loan losses of $7 thousand for
the three months ended December 31, 2004 compared to a $624 thousand credit
provision for the same period in 2003. For the six months ended December 31,
2004, the Company recorded a $72 thousand provision for loan losses compared to
recording a credit provision of $757 thousand for the same period in 2003. At
December 31, 2004, the Company's total allowance for loan losses amounted to
$1.2 million or 2.0% of the Company's total loan portfolio, as compared to $1.4
million or 2.0% at June 30, 2004. The decrease in the allowance for loan losses
is primarily the result of the Company charging off approximately $186 thousand
of a commercial loan participation interest collateralized by a first mortgage
loan on a full-service hotel located within the Company's market area. The
Company took this charge-off due to the sale of the loan by the lead lender over
the Company's objection. The Company is pursuing further recovery options with
the lead lender which may involve litigation.
Non-Interest Income. Non-interest income increased $105 thousand or 65.2%
and $318 thousand or 89.3% for the three and six months ended December 31, 2004,
respectively, when compared to the same periods in 2003. The increases were
primarily attributable to pre-tax securities gains of $99 thousand and $329
thousand for the three and six months ended December 31, 2004, respectively.
Non-Interest Expense. Non-interest expense decreased $35 thousand or 3.7%
and $49 thousand or 2.7% for the three and six months ended December 31, 2004,
respectively, when compared to the same periods in 2003. The decrease for the
three months ended December 31, 2004 was primarily attributable to a $30
thousand decrease in legal expenses and costs associated with the work-out of
non-performing assets, a $9 thousand decrease in payroll related costs and a $4
thousand decrease in correspondent bank service charges which were partially
offset by a $9 thousand increase in data processing expense. The decrease for
the six months ended December 31, 2004 was primarily attributable to $42
thousand decrease in legal expenses and costs, a $17 thousand decrease in
payroll related costs and a $8 thousand decrease in correspondent bank service
charges which were partially offset by a $17 thousand increase in data
processing expense.
14
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $3.0 million during the
six months ended December 31, 2004. Net cash provided by operating activities
was primarily comprised of $1.4 million of net income, $1.0 million from the
sale of trading assets and a $0.5 million decrease in accrued interest
receivable.
Funds provided by investing activities totaled $9.3 million during the six
months ended December 31, 2004. Primary sources of funds during the six months
ended December 31, 2004, included $262.3 million from repayments of investment
and mortgage-backed securities including Federal Home Loan Bank stock, a $6.3
million decrease in net loans receivable and $1.4 million from the sale of
investments from the Company's investment portfolio, which were partially offset
by $260.7 million of purchases of investments and mortgage-backed securities
including Federal Home Loan Bank stock.
Funds used for financing activities totaled $12.1 million for the six
months ended December 31, 2004. The primary uses included a $42.7 million
decrease in other short-term borrowings, a $3.7 million decrease in deposits and
escrows, a $785 thousand in cash dividends paid on the Company's common stock
and $365 thousand in purchased treasury stock, which were partially offset by a
$35.4 million increase in short-term FHLB advances. Management believes that it
currently is maintaining adequate liquidity and continues to match funding
sources with lending and investment opportunities.
During the quarter ended December 31, 2004, the Company incurred $745.7
million in other short-term borrowings with a weighted average rate of 2.02% and
incurred approximately $50.9 million in various short-term borrowings from the
FHLB with a weighted average rate of 2.26%. During the three months ended
December 31, 2004, the Company repaid $747.0 million of other short-term
borrowings with weighted average rates of 1.99% and $17.4 million of various
short-term borrowings from the FHLB with weighted average rates of 2.28%.
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, 2004, the total approved loan
commitments outstanding amounted to $1.8 million. At the same date, commitments
under unused lines of credit amounted to $6.1 million, the unadvanced portion of
construction loans approximated $10.3 million and commitments to fund security
purchases totaled $15.0 million. Certificates of deposit scheduled to mature in
one year or less at December 31, 2004 totaled $41.3 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 25, 2005, the Company's Board of Directors declared a cash
dividend of $0.16 per share payable February 17, 2005, to shareholders of record
at the close of business on February 7, 2005. 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, 2004, WVS Financial Corp. exceeded all regulatory
capital requirements and maintained Tier I and total risk-based capital equal to
$29.2 million or 21.3% and $30.4 million or 22.2%,
15
respectively, of total risk-weighted assets, and Tier I leverage capital of
$29.2 million or 7.02% of average quarterly assets.
Nonperforming assets consist of nonaccrual loans and real estate owned. A
loan is placed on nonaccrual status when, in the judgment of management, the
probability of collection of interest is deemed insufficient to warrant further
accrual. When a loan is placed on nonaccrual status, previously accrued but
uncollected interest is deducted from interest income. The Company normally does
not accrue interest on loans past due 90 days or more, however, interest may be
accrued if management believes that it will collect on the loan.
The Company's nonperforming assets at December 31, 2004 totaled
approximately $1.2 million or 0.28% of total assets as compared to $828 thousand
or 0.19% of total assets at June 30, 2004. Nonperforming assets at December 31,
2004 consisted of: one speculative construction loan totaling $449 thousand, one
land loan totaling $407 thousand, three single-family real estate loans totaling
$199 thousand, one unsecured consumer loan totaling $65 thousand, one commercial
loan totaling $45 thousand and one home equity loan totaling $17 thousand.
The $354 thousand increase in nonperforming assets during the six months
ended December 31, 2004 was primarily attributable to the addition to
non-accrual status of two mortgages secured by single-family real estate
totaling approximately $507 thousand and the addition of one home equity loan
totaling approximately $17 thousand which were partially offset by the payoff in
full of: two mortgages secured by single-family real estate totaling
approximately $140 thousand; a $4 thousand loan secured by commercial real
estate; and principal paydowns totaling approximately $36 thousand on two loans
related to a bankruptcy discussed below.
At December 31, 2004, the Company had one loan secured by undeveloped land
totaling $407 thousand and one unsecured loan totaling $65 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 to be paid in accordance with a Bankruptcy Plan of Reorganization.
All Court ordered plans have been received in a timely manner. In accordance
with generally accepted accounting principles, payments received are being
applied on a cost recovery basis.
During the six months ended December 31, 2004, approximately $30 thousand
of interest income would have been recorded on loans accounted for on a
non-accrual basis and troubled debt restructurings 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, 2004. 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.
16
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 six months ended December 31, 2004, the level of short-term
market interest rates began to increase. The Federal Open Market Committee
increased its intended federal funds rate by twenty-five basis points at their
August 10, September 21, November 10 and December 14, 2004 meetings. This
followed a twenty-five basis point increase at their June 30, 2004 meeting. As
economic conditions continue to improve, we anticipate continued increases in
short-term market interest rates. Intermediate and longer-term yields fell,
however, due to rising oil prices and weakness in some sectors of the economy.
The benchmark ten year treasury yield declined thirty-eight basis points from
4.62% at June 30, 2004 to 4.24% at December 31, 2004. This decline precipitated
additional prepayments in the Company's loan, investment and mortgage-backed
securities portfolios.
Principal repayments on the Company's loan, investment and mortgage-backed
securities portfolios for the six months ended December 31, 2004, totaled $17.0
million, $226.1 million and $35.6 million, respectively. In response to higher
levels of liquidity the Company rebalanced its loan, investment and
mortgage-backed securities portfolios. Due to the low level of market interest
rates, the Company continued to reduce its portfolio originations of long-term
fixed rate mortgages while continuing to offer consumer home equity and
construction loans. The Company continues to purchase callable U. S. Government
Agency bonds that reprice within twelve to twenty-four months in order to earn a
higher return while limiting interest
17
rate risk within the portfolio. Within the mortgage-backed securities portfolio,
the Company continued to aggressively purchase floating rate securities in order
to provide current income and protection against eventual rises in market
interest rates. Each of the aforementioned strategies also helped to improve the
interest-rate and liquidity risks associated with the Savings Bank's customers'
liquidity preference for shorter term deposit products.
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, 2004, principal investment purchases
were comprised of: callable floating rate government agency bonds which will
reprice within twenty-four months - $92.9 million with a weighted average yield
of approximately 3.79%; floating rate collateralized mortgage obligations which
reprice monthly - $47.0 million with an original weighted average yield of
approximately 3.21%; and government agency step-up bonds which will reprice
within one year - $4.7 million with a weighted average yield of approximately
4.76%. Major investment proceeds received during the quarter ended December 31,
2004 were: callable government agency bonds - $73.5 million with a weighted
average yield of approximately 3.68%; investment grade corporate bonds - $1.0
million with a weighted average yield of approximately 7.40%; investment grade
commercial paper - $3.3 million with a weighted average yield of approximately
1.85%; and tax-free municipal bonds - $4.3 million with a weighted average yield
of approximately 5.48%.
As of December 31, 2004, the implementation of these asset and liability
management initiatives resulted in the following:
1) the Company's liquidity profile remains strong with $117.8 million
of U.S. Government Agency securities that were callable within 3
months and, $74.9 million being callable within 3 to 6 months. Based
upon current market conditions, management anticipates that a
portion of the investments will be called within the above time
intervals;
2) $114.1 million or 96.0% of the Company's portfolio of
mortgage-backed securities (including collateralized mortgage
obligations - "CMOs") were comprised of floating rate instruments
that reprice on a monthly basis;
3) $49.6 million or 21.1% of the Company's investment portfolio
(including FHLB stock) was comprised of U.S. Government Agency
Step-up bonds which will reprice from initial rates of 3.35% - 4.70%
and increase to 6.00% - 7.50% within thirty-six months;
4) $137.9 million or 58.6% of the Company's investment portfolio
(including FHLB stock) was comprised of floating rate bonds which
will reprice quarterly within twenty-four months;
5) $4.9 million or 2.1% of the Company's investment portfolio
(including FHLB stock) was comprised of investment grade corporate
demand notes;
6) the maturity distribution of the Company's borrowings is as follows:
10 days or less: $84.4 million or 36.0%; 1-3 years: $4.2 or 1.8%;
3-5 years: $13.5 million or 5.8%; over 5 years: $132.1 million or
56.4%; and
7) an aggregate of $31.9 million or 51.9% of the Company's net loan
portfolio had adjustable interest rates or maturities of less than
12 months.
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.
18
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,
------------ ----------------------
2004 2004 2003
------------ --------- ---------
(Dollars in Thousands)
Interest-earning assets maturing or
repricing within one year $272,728 $288,451 $262,782
Interest-bearing liabilities maturing or
repricing within one year 179,394 171,655 133,418
-------- -------- --------
Interest sensitivity gap $ 93,334 $116,796 $129,364
======== ======== ========
Interest sensitivity gap as a percentage of
total assets 22.1% 26.9% 35.2%
Ratio of assets to liabilities
maturing or repricing within one year 152.0% 168.0% 197.0%
During the quarter ended December 31, 2004, the Company managed its one
year interest sensitivity gap by: (1) limiting the portfolio origination of
long-term fixed rate mortgages; (2) emphasizing loans with shorter-terms or
repricing frequencies; (3) purchasing investments with maturities/repricing
dates within thirty-six months; and (4) purchasing floating rate CMO's which
reprice on a monthly basis.
19
The following table illustrates the Company's estimated stressed
cumulative repricing gap - the difference between the amount of interest-earning
assets and interest-bearing liabilities expected to reprice at a given point in
time - at December 31, 2004. The table estimates the impact of an upward or
downward change in market interest rates of 100 and 200 basis points.
Cumulative Stressed Repricing Gap
---------------------------------
Month 3 Month 6 Month 12 Month 24 Month 36 Month 60 Long Term
------- ------- -------- -------- -------- -------- ---------
(Dollars in Thousands)
Base Case Up 200 bp
- -------------------
Cummulative
Gap ($'s) 25,038 12,195 70,250 131,632 119,219 115,105 27,507
% of Total
Assets 5.9% 2.9% 16.6% 31.1% 28.2% 27.2% 6.5%
Base Case Up 100 bp
- -------------------
Cummulative
Gap ($'s) 25,495 28,005 88,906 180,862 168,670 164,837 27,507
% of Total
Assets 6.0% 6.6% 21.0% 42.7% 39.8% 38.9% 6.5%
Base Case No Change
- -------------------
Cummulative
Gap ($'s) 27,210 31,112 93,334 186,716 179,781 177,454 27,507
% of Total
Assets 6.4% 7.3% 22.0% 44.1% 42.5% 41.9% 6.5%
Base Case Down 100 bp
- ---------------------
Cummulative
Gap ($'s) 35,313 41,432 105,782 200,129 187,354 180,008 27,507
% of Total
Assets 8.3% 9.8% 25.0% 47.3% 44.3% 42.5% 6.5%
Base Case Down 200 bp
- ---------------------
Cummulative
Gap ($'s) 93,588 131,232 172,257 203,539 188,284 180,081 27,507
% of Total
Assets 22.1% 31.0% 40.7% 48.1% 44.5% 42.5% 6.5%
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.
20
The following table presents the simulated impact of a 100 and 200 basis
point upward or downward 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, 2004.
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 -58.9% -33.1% 0.00% 24.6% 62.0%
Return on average equity -1.36% 3.13% 8.57% 12.42% 18.00%
Return on average assets -0.08% 0.21% 0.58% 0.86% 1.28%
Market value of equity (in
thousands) $12,051 $19,094 $24,554 $27,047 $25,836
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,
2004.
Anticipated Transactions
----------------------------------------------------------------
(Dollars in Thousands)
Undisbursed construction and
land development loans
Fixed rate $ 2,814
5.86%
Adjustable rate $ 7,458
5.96%
Undisbursed lines of credit
Adjustable rate $ 6,145
5.28%
Loan origination commitments
Fixed rate $ 1,176
6.22%
Adjustable rate $ 667
5.21%
Letters of credit
Adjustable rate $ 1,383
6.26%
Commitments to purchase mortgage-backed securities
Adjustable rate $14,995
4.56%
-------
$34,638
=======
21
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, 2004, the Savings Bank had six performance standby
letters of credit outstanding totaling approximately $1.4 million. One letter of
credit is secured by deposits with the Savings Bank, three letters of credit are
secured by undisbursed construction loan funds and two letters of credit are
secured by developed property. All six letters of credit will mature within
eighteen months. 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.
22
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, 2004. 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 fiscal quarter of fiscal 2005 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 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, 2004.
---------------------------------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
---------------------------------------------------------------------------------------------------
Total Number of Maximum Number of
Shares Purchased Shares that May Yet
Total Number as Part of Publicly Be Repurchased
of Shares Average Price Paid Announced Plans or Under the Plans or
Period Purchased per Share ($) Programs(1) Programs(2)
--------------------------------------------------------------------------------------------------
10/01/04 - 10/31/04 1,564 17.00 1,564 75,543
--------------------------------------------------------------------------------------------------
11/01/04 - 11/30/04 0 0.00 0 75,543
--------------------------------------------------------------------------------------------------
12/01/04 - 12/31/04 0 0.00 0 75,543
--------------------------------------------------------------------------------------------------
Total 1,564 17.00 1,564 75,543
--------------------------------------------------------------------------------------------------
- ----------
(1) All shares indicated were purchased under the Company's Seventh Stock
Repurchase Program.
(2) Seventh Stock Repurchase Program
(a) Announced February 24, 2004.
(b) 125,000 common shares approved for repurchase.
(c) No fixed date of expiration.
(d) This Program has not expired and has 75,543 shares remaining to be
purchased at December 31, 2004.
(e) Not applicable.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
24
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Company's 2004 Annual Meeting of Stockholders was held on
October 26, 2004.
(b) Not applicable.
(c) Two matters were voted upon at the annual meeting held on October
26, 2004: Item 1: Proposal to elect two directors for a four-year
term or until their successors are elected and qualified; Item 2:
Proposal to ratify the appointment by the Board of Directors of S.R.
Snodgrass, A.C. as the Company's independent auditors for the fiscal
year ending June 30, 2005.
Each of the two proposals received stockholder approval. There were
2,446,624 shares outstanding on the record date eligible to vote at
the meeting and 2,093,284 shares were present in person or by proxy
at the meeting. The voting record with respect to each item voted
upon is enumerated below:
Item Nominee
Number (if Applicable) For Against Abstain
------ --------------- --- ------- -------
1 Donald E. Hook 1,964,551 128,733
David J. Bursic 1,965,768 127,516
2 Ratification of Auditors 2,050,142 11,567 31,575
There were no broker non-votes with respect to any matter voted
upon.
(d) 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
Executive Officer E-1
31.2 Rule 13a-14(a) / 15d-14(a) Certification of the Chief
Accounting Officer E-2
32.1 Section 1350 Certification of the Chief Executive Officer E-3
32.2 Section 1350 Certification of the Chief Accounting Officer E-4
99 Report of Independent Registered Public Accounting Firm E-5
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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 11, 2005 BY: /s/ David J. Bursic
Date --------------------------------------
David J. Bursic
President and Chief Executive Officer
(Principal Executive Officer)
February 11, 2005 BY: /s/ Keith A. Simpson
Date --------------------------------------
Keith A. Simpson
Vice-President, Treasurer and
Chief Accounting Officer
(Principal Accounting Officer)
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