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WVFC > SEC Filings for WVFC > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for WVS FINANCIAL CORP

Form 10-Q for WVS FINANCIAL CORP


13-Nov-2012

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012

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:

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;

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;

changes in the interest rate environment could reduce net interest income and could increase credit losses;

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;

changes in the extensive laws, regulations and policies governing financial holding companies and their subsidiaries could alter our business environment or affect our operations;

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;

competitive pressures could intensify and affect our profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments such as the internet or bank regulatory reform; and

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.


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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. (the "Company") is the parent holding company of West View Savings Bank ("West View" or the "Savings Bank"). The Company was organized in July 1993 as a Pennsylvania-chartered unitary bank holding company and acquired 100% of the common stock of the Savings Bank in November 1993.

West View Savings Bank is a Pennsylvania-chartered, FDIC-insured stock savings bank conducting business from six offices in the North Hills suburbs of Pittsburgh. The Savings Bank converted from the mutual to the stock form of ownership in November 1993. The Savings Bank had no subsidiaries at September 30, 2012.

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 $296.9 million at September 30, 2012, as compared to $273.3 million at June 30, 2012. The $23.6 million or 8.6% increase in total assets was primarily comprised of a $23.8 million increase in investment securities - available for sale, a $5.6 million increase in mortgage-backed securities - held to maturity, and a $255 thousand increase in accrued interest receivable, which were partially offset by a $4.5 million decrease in investment securities held to maturity, a $729 thousand decrease in net loans receivable, and a $727 thousand decrease in Federal Home Loan Bank Stock. The increase in investment securities available for sale was primarily due to purchases of fixed-rate investment grade corporate bonds totaling $24.7 million, floating-rate investment grade corporate bonds totaling $3.0 million, fixed-rate U.S. dollar denominated investment grade foreign bonds totaling $1.7 million, and floating-rate U.S. dollar denominated investment grade foreign bonds totaling $1.2 million to bolster overall liquidity. The increase in mortgage-backed securities held to maturity was primarily due to purchases of floating-rate U.S. Government agency CMO's totaling $23.5 million, which was partially offset by repayments on floating-rate U.S. Government agency CMO's and floating-rate private-label CMO's totaling $15.8 million and $2.3 million, respectively. The decrease in investment securities held to maturity was primarily due to maturities/redemptions of investment-grade corporate bonds and U.S. Government agency step-up bonds totaling $2.7 million and $2.2 million, respectively. The decrease in Federal Home Loan Bank ("FHLB") stock was due to the continued redemption of excess stock by the FHLB of Pittsburgh. See "Asset and Liability Management".

The Company's total liabilities increased $22.8 million or 9.4% to $265.7 million as of September 30, 2012 from $242.9 million as of June 30, 2012. The $22.8 million increase in total liabilities was primarily comprised of a $26.2 million or 33.0% increase in short-term FHLB advances, which was partially offset by a $2.9 million or 76.5% decrease in other liabilities, and a $499 thousand or 0.4% decrease in total savings deposits. The decrease in other liabilities was primarily due to the funding of a $2.8 million commitment to purchase three fixed-rate investment grade corporate bonds. The increase in FHLB short-term advances was primarily a result of funding needs for the purchase of investments and mortgage-backed securities. See also "Asset and Liability Management".


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Total stockholders' equity increased $696 thousand or 2.3% to $31.1 million as of September 30, 2012, from approximately $30.4 million as of June 30, 2012. The increase was primarily attributable to Company net income of $385 thousand and other comprehensive income totaling $386 thousand, for the three months ended September 30, 2012, which were partially offset by cash dividends totaling $81 thousand. The other comprehensive income was primarily attributable to a $146 thousand (net of tax effect) reversal of unrealized holding losses on three private-label CMO's with previously identified OTTI, and a $240 thousand (net of tax effect) on unrealized holding gains on the Company's available for sale investment portfolio.

RESULTS OF OPERATIONS

General. WVS reported net income of $385 thousand or $0.19 earnings per share (basic and diluted) for the three months ended September 30, 2012. Net income decreased by $25 thousand or 6.1% and earnings per share (basic and diluted) decreased $0.01 or 5.0% for the three months ended September 30, 2012, when compared to the same period in 2011. The decrease in net income was primarily attributable to a $215 thousand decrease in net-interest income, which was partially offset by a $112 thousand decrease in income tax expense, a $44 thousand decrease in non-interest expense, a $29 thousand increase in non-interest income, and a $5 thousand change in the recovery of loan losses.

Net Interest Income. The Company's net interest income decreased by $215 thousand or 14.7% for the three months ended September 30, 2012, when compared to the same period in 2011. The decrease in net interest income is attributable to a $250 thousand decrease in interest income, which was partially offset by a $35 thousand decrease in interest expense. The decrease in interest income was primarily due to lower realized yields and average balances on the Company's loan portfolio for the quarter ended September 30, 2012, which was partially offset by higher average balances of interest earning financial assets, when compared to the same period in 2011. The decrease in interest expense was primarily attributable to lower average balances of legacy high-cost FHLB long-term advances and lower rates paid on the Company's interest-bearing liabilities during the quarter ended September 30, 2012, when compared to the same period in 2011.

Interest Income. Interest income on net loans receivable decreased $274 thousand or 31.9% for the three months ended September 30, 2012, when compared to the same period in 2011. The decrease for the three months ended September 30, 2012 was primarily attributable to a $10.6 million decrease in the average balance of net loans receivable outstanding, and a decrease of 94 basis points in the weighted average yield earned on net loans receivable for the three months ended September 30, 2012, when compared to the same period in 2011. The decrease in the average balance of loans outstanding was primarily attributable to lower construction loans outstanding, payoffs on non-accrual loans, and repayments on performing loans in excess of originations. The decrease in the yield on loans was primarily attributable to payoffs of higher yielding construction loans. The quarter ended September 30, 2011, also included non-recurring collection of past due interest and late charges of approximately $110 thousand.

Interest income on FDIC insured bank certificates of deposit decreased $9 thousand or 81.8% for the three months ended September 30, 2012, when compared to the same period in 2011. The decrease for the three months ended September 30, 2012 was primarily attributable to a $1.3 million decrease in the average portfolio balance of certificates of deposit and a 30 basis point decrease in the weighted average yield earned when compared to the same period in 2011. The certificates have remaining maturities ranging from two to twenty-four months. Due to decreases in yields in this investment sector, the Company has decided to limit reinvestments in certificates of deposit and to redeploy maturities and early issuer redemptions to other investment portfolio segments.

Interest income on mortgage-backed securities increased $17 thousand or 7.4% for the three months ended September 30, 2012, when compared to the same period in 2011. The increase for the three


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months ended September 30, 2012 was primarily attributable to an 11 basis point increase in the weighted average yield earned on private-label mortgage-backed securities, and to a $19.4 million increase in the average balance of U.S. Government agency mortgage-backed securities outstanding, which were partially offset by a $12.9 million decrease in the average balance of private-label mortgage-backed securities outstanding, and a 4 basis point decrease in the weighted average yield earned on U.S. Government agency mortgage-backed securities for the three months ended September 30, 2012, when compared to the same period in 2011. The decrease in the average balances of private-label mortgage-backed securities during the three months ended September 30, 2012 was attributable to principal paydowns of private-label mortgage-backed securities during the period. The increase in the average balance of U.S. Government agency mortgage-backed securities for the three months ended September 30, 2012, was primarily attributable to $23.5 million in purchases of U.S. Government agency mortgage-backed securities during the quarter, which was partially offset by $15.8 million in repayments on the U.S. Government agency mortgage-backed securities portfolio.

Interest income on investment securities increased $14 thousand or 1.8% for the three months ended September 30, 2012, when compared to the same period in 2011. The increase for the three months ended September 30, 2012 was primarily attributable to a $71.6 million increase in the average balance of investment securities outstanding, which was partially offset by a 171 basis point decrease in the weighted average yield on investment securities, when compared to the same period in 2011.

Interest income on FHLB stock totaled $2 thousand for the three months ended September 30, 2012. This was attributable to the Federal Home Loan Bank of Pittsburgh's payment of a dividend on its common stock during the quarter ended September 30, 2012. In December 2008, the FHLB of Pittsburgh announced that it was suspending payments of dividends and redemptions of excess capital stock from members. The FHLB's stated purpose of these actions was to build retained earnings to ensure adequate regulatory capital. Beginning in the December 2010 quarter, the FHLB began redeeming excess capital stock from members. Redemptions of excess FHLB stock totaling $727 thousand were recorded for the three months ended September 30, 2012. The FHLB restarted paying dividends on the FHLB stock in March 2012.

Interest Expense. Interest expense on deposits and escrows decreased $44 thousand or 28.9% for the three months ended September 30, 2012, when compared to the same period in 2011. The decrease in interest expense on deposits for the three months ended September 30, 2012 was primarily attributable to a 15 basis point decrease in the weighted average rate paid on time deposits, a $6.1 decrease in the average balance of time deposits, a 9 basis point decrease in the weighted average rate paid on savings accounts, and a 7 basis point decrease in the weighted average rate paid on money market accounts.

The increase for the three months ended September 30, 2012 was primarily attributable to a $62.7 million increase in the average balance of FHLB short-term borrowings which more than offset a $2.6 million decrease in the average balance of FHLB long-term borrowings when compared to the same period in 2011.

Interest paid on FHLB advances increased $9 thousand or 3.5% for the three months ended September 30, 2012, when compared to the same period in 2011. The Company increased its average balances of FHLB short-term borrowings during the quarter ended September 30, 2012 primarily to fund purchases of investment and mortgage-backed securities. The decreases in the average balances of fixed-rate legacy long-term FHLB advances during the three months ended September 30, 2011 were due to repayments at maturity.

Recovery of 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.

Recoveries for loan losses increased $5 thousand for the three months ended September 30, 2012, when compared to the same period in 2011. The change in the recoveries for loan losses was primarily


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attributable to lower levels of non-performing loans. At September 30, 2012, the Company's total allowance for loan losses amounted to $361 thousand or 0.9% of the Company's total loan portfolio, as compared to $385 thousand or 1.0% at June 30, 2012. At September 30, 2012, the Company's non-performing loans totaled $1.6 million as compared to $1.5 million at June 30, 2012.

Non-Interest Income. Non-interest income increased by $29 thousand or 28.7% for the three months ended September 30, 2012, when compared to the same period in 2011. The increase for the three months ended September 30, 2012 was primarily attributable to the absence of a $24 thousand other-than-temporary impairment charge on one private-label mortgage-backed security recorded in the quarter ended September 30, 2011 and $8 thousand of gains on sales of investment securities in the quarter ended September 30, 2012, compared to no gains in the same quarter in 2011, partially offset by a $9 thousand decrease in service charges on deposits in the quarter ended September 30, 2012.

Non-Interest Expense. Non-interest expense decreased $44 thousand or 4.5% for the three months ended September 30, 2012, when compared to the same period in 2011. The decrease for the three months ended September 30, 2012 was principally attributable to a $19 thousand decrease in Federal Deposit Insurance Corporation (FDIC) deposit insurance expense, a decrease of $12 thousand in charitable contributions which are eligible for PA tax credits, an $8 thousand decrease in legal expenses, and a $7 thousand decrease in real estate owned expense, when compared to the same period in 2011, partially offset by increased salaries and benefits.

Income Tax Expense. Income tax expense decreased $112 thousand for the three months ended September 30, 2012, when compared to the same period in 2011. The decrease for the three months ended September 30, 2012 was primarily due to lower levels of taxable income, and the use of PA tax credits, when compared to the same period in 2011, and the use of PA tax credits.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities totaled $732 thousand during the three months ended September 30, 2012. Net cash provided by operating activities was primarily comprised of Company net income of $385 thousand, $668 thousand of amortization of investment premiums, a $208 thousand decrease in deferred income taxes, and $23 thousand in depreciation of the Company's fixed assets, which were partially offset by a $255 thousand decrease in accrued interest receivable, and a $24 thousand recovery of loan losses.

Funds used for investing activities totaled $26.3 million during the three months ended September 30, 2012. Primary uses of funds during the three months ended September 30, 2012 were purchases of: investment securities available for sale totaling $31.5 million and mortgage-backed securities held to maturity of $23.5 million. Primary sources of funds during the three months ended September 30, 2012 consisted of proceeds from investments and mortgage-backed securities within the held to maturity portfolio totaling $4.5 million and $18.1 million, respectively, proceeds from investment securities in the available for sale portfolio of $4.7 million; $752 thousand of net loan repayments, and $727 thousand of FHLB stock redemptions. During the three months ended September 30, 2012, the Company has substantially increased the available for sale allocation to bolster balance sheet liquidity due to turmoil in the global financial markets while seeking to earn additional net interest income.

Funds provided by financing activities totaled $25.6 million for the three months ended September 30, 2012. The primary sources included a $26.2 million increase in FHLB short-term borrowings, and a $738 thousand increase in transaction and savings deposits, which were partially offset by a $1.1 million decrease in retail certificates of deposit, a $369 thousand decrease in escrow accounts, and $81 thousand in cash dividends paid on the Company's common stock. The $26.2 million increase in FHLB short-term borrowings was primarily used to fund investment and mortgage-backed securities purchases. Management believes that a significant portion of our local maturing deposits will remain with the Company.

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. Certificates of deposit scheduled to mature in one year or less at September 30, 2012 totaled $30.6 million.


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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. At September 30, 2012, total approved loan commitments outstanding were $260 thousand. At the same date, commitments under unused lines of credit amounted to $5.7 million and the unadvanced portion of construction loans approximated $3.5 million. 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's available for sale segment of the investment portfolio totaled $81.4 million at September 30, 2012. Management believes that the Company currently has adequate liquidity available to respond to liquidity demands.

On October 30, 2012, the Company's Board of Directors declared a cash dividend of $0.04 per share payable November 29, 2012, to shareholders of record at the close of business on November 12, 2012. Dividends are subject to determination and declaration by the Board of Directors, which take into account the Company's financial condition, statutory and regulatory restrictions, general economic conditions and other factors. There can be no assurance that dividends will in fact be paid on the Common Stock in future periods or that, if paid, such dividends will not be reduced or eliminated.

As of September 30, 2012, WVS Financial Corp. exceeded all regulatory capital requirements and maintained Tier I and total risk-based capital equal to $32.1 million or 18.4% and $32.5 million or 18.6%, respectively, of total risk-weighted assets, and Tier I leverage capital of $32.1 million or 11.3% of average quarterly assets.

Nonperforming assets consist of nonaccrual loans and real estate owned. A loan is placed on nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed insufficient to warrant further accrual. When a loan is placed on nonaccrual status, previously accrued but uncollected interest is deducted from interest income. The Company normally does not accrue interest on loans past due 90 days or more, however, interest may be accrued if management believes that it will collect on the loan.

The Company's nonperforming assets at September 30, 2012 totaled approximately $1.8 million or 0.6% of total assets as compared to $1.7 million or 0.6% of total assets at June 30, 2012. Nonperforming assets at September 30, 2012 consisted of: two single-family real estate loans totaling $73 thousand, two single-family construction loans totaling $1.1 million, one single-family real estate owned property totaling $239 thousand, one land loan totaling $290 thousand, and one home equity line of credit totaling $150 thousand. The loans are in various stages of collection activity and the real estate owned property is being marketed for sale.

The $65 thousand increase in nonperforming assets during the three months ended September 30, 2012 was primarily attributable to the classification to non-performing status of one single-family construction loan totaling $351 thousand, which was partially offset by the payoff of one single-family real estate loan totaling $288 thousand.

During the three months ended September 30, 2012, the Company collected $41 thousand of interest income on non-accrual loans that were paid off or brought current. Approximately $27 thousand of interest income would have been recorded on non-accrual loans if such loans had been current according to the original loan agreements for the entire period. These amounts were not included in the Company's interest income for the three months ended September 30, 2012. 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.


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