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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 March 31, 2004.
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 0-24948
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PVF Capital Corp.
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(Exact name of registrant as specified in its charter)
Ohio 34-1659805
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30000 Aurora Road, Solon, Ohio 44139
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(Address of principal executive offices) (Zip Code)
(440) 248-7171
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report.)
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
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 Par Value 6,387,330
- ----------------------------- ---------
(Class) (Outstanding at April 30, 2004)
PVF CAPITAL CORP.
INDEX
Page
----
Part I Financial Information
Item 1 Financial Statements
Consolidated Statements of Financial
Condition, March 31, 2004 (unaudited)
and June 30, 2003. 1
Consolidated Statements of Operations
for the three and nine months ended
March 31, 2004 and 2003 (unaudited). 2
Consolidated Statements of Cash Flows
for the nine months ended March 31,
2004 and 2003 (unaudited). 3
Notes to Consolidated Financial
Statements (unaudited). 4
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7
Liquidity and Capital Resources 13
Item 3 Quantitative and Qualitative Disclosures
about Market Risk 14
Item 4 Controls and Procedures 14
Part II Other Information 15
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
PVF CAPITAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, JUNE 30,
ASSETS 2004 2003
------ UNAUDITED
--------------- ----------------
Cash and cash equivalents:
Cash and amounts due from depository institutions $9,939,012 $9,755,224
Interest bearing deposits 923,059 3,946,019
Federal funds sold 23,050,000 83,050,000
---------- ----------
Total cash and cash equivalents 33,912,071 96,751,243
Securities held to maturity 10,001,930 33,252
Mortgage-backed securities held to maturity 39,316,976 2,964,798
Loans receivable held for sale, net 12,400,389 33,603,895
Loans receivable, net of allowance of
$4,211,704 and $3,882,839 598,133,477 579,670,681
Office properties and equipment, net 13,582,682 11,555,919
Real estate owned, net 270,000 448,865
Federal Home Loan Bank stock 10,712,458 10,396,399
Prepaid expenses and other assets 23,258,185 7,978,751
------------- ------------
Total Assets $741,588,168 $743,403,803
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities
Deposits $536,719,708 $526,428,927
Advances from the Federal Home Loan Bank of Cincinnati 120,045,186 120,123,220
Notes payable 2,506,785 5,815,150
Advances from borrowers for taxes and insurance 4,482,914 7,964,653
Accrued expenses and other liabilities 15,552,310 24,468,717
------------ ------------
Total Liabilities 679,306,903 684,800,667
Stockholders' Equity
Serial preferred stock, none issued -- --
Common stock, $0.01 par value, 15,000,000 shares authorized;
6,730,849 and 6,717,283 shares issued, respectively 67,308 67,173
Additional paid-in-capital 47,228,104 47,176,696
Retained earnings 18,113,046 14,486,460
Treasury Stock, at cost 343,519 shares (3,127,193) (3,127,193)
----------- ------------
Total Stockholders' Equity 62,281,265 58,603,136
----------- ------------
Total Liabilities and Stockholders' Equity $741,588,168 $743,403,803
------------ ------------
See accompanying notes to consolidated financial statements
Page 1
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
PVF CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
===============================================================
2004 2003 2004 2003
Interest income
Loans $8,971,243 $9,888,547 $27,655,512 $30,809,110
Mortgage-backed securities 477,430 59,648 1,410,528 235,632
Cash and securities 127,664 467,092 398,404 2,074,355
---------- ----------- ----------- ------------
Total interest income 9,576,337 10,415,287 29,464,444 33,119,097
---------- ----------- ----------- ------------
Interest expense
Deposits 2,756,733 3,403,048 8,406,921 11,756,659
Borrowings 1,339,912 1,336,654 4,078,317 4,125,325
---------- ----------- ----------- ------------
Total interest expense 4,096,645 4,739,702 12,485,238 15,881,984
---------- ---------- ----------- ------------
Net interest income 5,479,692 5,675,585 16,979,206 17,237,113
Provision for loan losses 140,300 0 432,300 0
---------- ----------- ----------- ------------
Net interest income after provision for loan losses 5,339,392 5,675,585 16,546,906 17,237,113
---------- ---------- ----------- ------------
Noninterest income, net
Service and other fees 132,458 227,912 436,668 575,615
Mortgage banking activities, net 638,512 1,340,555 3,916,466 3,471,254
Other, net 65,963 28,481 662,932 138,169
---------- ----------- ----------- ------------
Total noninterest income, net 836,933 1,596,948 5,016,066 4,185,038
---------- ---------- ---------- ------------
Noninterest expense
Compensation and benefits 2,393,752 2,170,039 7,246,651 6,497,460
Office occupancy and equipment 845,902 838,755 2,450,307 2,361,199
Other 1,185,288 1,105,525 3,627,711 3,469,367
---------- ----------- ----------- ------------
Total noninterest expense 4,424,942 4,114,319 13,324,669 12,328,026
---------- ---------- ----------- ------------
Income before federal income tax provision 1,751,383 3,158,214 8,238,303 9,094,125
Federal income tax provision 565,649 1,063,599 2,770,749 3,055,264
---------- ----------- ----------- ------------
Net income $1,185,734 $2,094,615 $5,467,554 $6,038,861
---------- ----------- ----------- ------------
Basic earnings per share $0.19 $0.33 $0.86 $0.95
------ ------ ------ ------
Diluted earnings per share $0.18 $0.32 $0.84 $0.93
------ ------ ------ ------
Dividends declared per common share $0.074 $0.067 $0.222 $0.202
------ ------- ------- -------
See accompanying notes to consolidated financial statements
Page 2
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
PVF CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
---- ----
OPERATING ACTIVITIES
Net income $5,467,554 $6,038,861
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization 1,219,509 1,037,131
Provision for losses on loans 432,300 0
Accretion of unearned discount and deferred loan origination fees, net (844,866) (928,800)
Gain on sale of loans receivable held for sale, net (4,362,111) (4,432,233)
Gain on disposal of real estate owned, net (488,839) 0
Federal Home Loan Bank stock dividends (316,059) (352,575)
Change in accrued interest on investments, loans, and borrowings, net (23,194) 25,532
Origination of loans receivable held for sale, net (220,892,440) (286,234,946)
Sale of loans receivable held for sale, net 246,458,057 267,807,051
Increase (decrease) in other, net (13,595,176) 4,579,569
------------ -------------
Net cash from operating activities 13,054,735 (12,460,410)
------------ -------------
INVESTING ACTIVITIES
Loan repayments and originations, net (17,851,940) (19,567,009)
Principal repayments on mortgage-backed securities held to maturity 3,501,125 3,664,880
Purchase of mortgage-backed securities held for investment (39,853,303) 0
Disposals of real estate owned 937,704 22,779
Purchase of securities held to maturity (10,001,930) (30,000,000)
Maturities of securities held to maturity 33,252 55,071,590
Purchase of BOLI (15,000,000) 0
Additions to office properties and equipment, net (3,246,272) (2,755,880)
------------ -------------
Net cash from investing activities (81,481,364) 6,436,360
------------ -------------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW, and passbook savings (7,142,093) 12,991,354
Net increase (decrease) in time deposits 17,432,874 (4,400,481)
Net decrease in Federal Home Loan Bank advances (78,034) (606,255)
Net decrease in notes payable (3,308,365) (1,803,910)
Purchase of treasury stock 0 (181,876)
Proceeds from exercise of stock options 51,543 40,513
Cash dividend paid (1,368,468) (1,226,643)
------------ -------------
Net cash from financing activities 5,587,457 4,812,702
------------ -------------
Net decrease in cash and cash equivalents (62,839,172) (1,211,348)
Cash and cash equivalents at beginning of period 96,751,243 14,313,688
------------ -------------
Cash and cash equivalents at end of period $33,912,071 $13,102,340
------------ -------------
Supplemental disclosures of cash flow information:
Cash payments of interest expense $12,489,008 $15,949,322
Cash payments of income taxes $2,385,000 $3,070,000
Supplemental noncash investing activity:
Transfer of loans to real estate owned $270,000 $0
See accompanying notes to consolidated financial statements
Page 3
Part I Financial Information
Item 1
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004 and 2003
(Unaudited)
1. The accompanying consolidated interim financial statements were prepared in
accordance with regulations of the Securities and Exchange Commission for Form
10-Q. All information in the consolidated interim financial statements is
unaudited except for the June 30, 2003 consolidated statement of financial
condition, which was derived from the Corporation's audited financial
statements. Certain information required for a complete presentation in
accordance with accounting principles generally accepted in the United States of
America has been condensed or omitted. However, in the opinion of management,
these interim financial statements contain all adjustments, consisting only of
normal recurring accruals, necessary to fairly present the interim financial
information. The results of operations for the three and nine months ended March
31, 2004 are not necessarily indicative of the results to be expected for the
entire year ending June 30, 2004. The results of operations for PVF Capital
Corp. ("PVF" or the "Company") for the periods being reported have been derived
primarily from the results of operation of Park View Federal Savings Bank (the
"Bank"). PVF Capital Corp.'s common stock is traded on the NASDAQ SMALL-CAP
ISSUES under the symbol PVFC.
2. Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic valuation method. No stock-based compensation cost
is reflected in net income, as all options granted had an exercise price equal
to or greater than the market price of the underlying common stock at the date
of grant. The following table illustrates the effect on net income and earnings
per share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, "Accounting for Stock Based Compensation."
Three months ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
----------------------------------- -----------------------------------
Net Income as reported $1,185,734 $2,094,615 $5,467,554 $6,038,861
Less: Pro forma compensation
expense, net of tax $ 25,034 $ 35,982 $ 74,547 $ 107,948
---------- ---------- --------- ----------
Pro forma net income $1,160,700 $2,058,633 $5,393,007 $5,930,913
---------- ---------- --------- ----------
Basic earnings per share $ 0.19 $ 0.33 $ 0.86 $ 0.95
Pro forma basic earnings per share $ 0.18 $ 0.32 $ 0.85 $ 0.93
Diluted earnings per share $ 0.18 $ 0.32 $ 0.84 $ 0.93
Pro forma basic earnings per share $ 0.18 $ 0.32 $ 0.82 $ 0.92
4
Part I Financial Information
Item 1
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
Three months ended Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
-------------------------- ----------------------------
Risk-free interest rate 3.50% 3.50% 3.50% 3.50%
Expected Option life 7 years 7 years 7 years 7 years
Expected stock price volatility 29.15% 35.00% 29.15% 35.00%
Dividend yield 1.86% 2.50% 1.86% 2.50%
3. The following table discloses Earnings Per Share for the three and nine
months ended March 31, 2004 and March 31, 2003.
Three months ended March 31,
2004 2003
---------------------------------------------- ------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic EPS
Net Income $1,185,734 6,386,386 $0.19 $2,094,615 6,369,029 $0.33
Effect of Stock
Options 161,825 0.01 125,529 0.01
Diluted EPS
Net Income $1,185,734 6,548,211 $0.18 $2,094,615 6,494,558 $0.32
Nine months ended March 31,
2004 2003
---------------------------------------------- -------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic EPS
Net Income $5,467,554 6,380,360 $0.86 $6,038,861 6,370,540 $0.95
Effect of Stock
Options 157,400 0.02 93,511 0.02
Diluted EPS
Net Income $5,467,554 6,537,760 $0.84 $6,038,861 6,464,051 $0.93
There were 7,000 options not considered in the diluted Earnings Per Share
calculation for the three- and nine-month periods ended March 31, 2004, because
they were anti-dilutive. There were no anti-dilutive options for the three- and
nine-month periods ended March 31, 2003.
5
Part I Financial Information
Item 1
4. Mortgage Banking Activities: The Company services real estate loans for
investors that are not included in the accompanying condensed consolidated
financial statements. Mortgage servicing rights are established based on the
allocated fair value of servicing rights retained on loans originated by the
Bank and subsequently sold in the secondary market. Mortgage servicing rights
are included in the consolidated statements of financial condition under the
caption "Prepaid expenses and other assets."
2004 2003
---------------------- --------------------
Servicing rights:
Beginning of period $ 4,655,182 $ 3,255,147
Additions 3,063,299 2,531,791
Amortized to expense (2,420,329) (2,025,013)
----------- -----------
End of period $ 5,298,152 $ 3,761,614
=========== ===========
Valuation allowance:
Beginning of period 670,000 0
Additions expensed 0 370,000
Reductions credited to expense 670,000 0
----------- -----------
End of period $ 0 $ 370,000
=========== ===========
Mortgage banking activities, net consists of the following:
Three Months Ended Nine Months Ended
March 31 March 31,
2004 2003 2004 2003
------------------------------------------------------------------------------
Mortgage Loan Servicing Fees $ 449,807 $ 367,776 $ 1,304,684 $ 1,064,345
Amortization and impairment of
mortgage loan servicing fees $(457,117) $ (957,042) $(1,750,329) $ (2,025,324)
Gross realized:
Gain on sales of loans $ 882,559 $2,117,201 $ 5,703,747 $ 5,267,013
Losses on sales of loans $(236,737) $ (187,380) $(1,341,636) $ (834,780)
--------- ---------- ----------- ------------
Mortgage banking activities, net $ 638,512 $1,340,555 $3,916,466 $ 3,471,254
--------- ---------- ----------- ------------
6
Part I Financial Information
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis discusses changes in financial condition and results of
operations at and for the three-month and nine-month periods ended March 31,
2004 for PVF Capital Corp. ("PVF" or the "Company"), Park View Federal Savings
Bank (the "Bank"), its principal and wholly-owned subsidiary, PVF Service
Corporation ("PVFSC"), a wholly-owned real estate subsidiary, Mid Pines Land
Co., a wholly-owned real estate subsidiary, and PVF Holdings, Inc., PVF
Community Development, and PVF Mortgage Corporation, three wholly-owned and
currently inactive subsidiaries.
FORWARD-LOOKING STATEMENTS
- --------------------------
When used in this Form 10-Q, 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, 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 results of any revisions, which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
FINANCIAL CONDITION
- -------------------
Consolidated assets of PVF were $741.6 million as of March 31, 2004, a
decrease of approximately $1.8 million, or 0.2%, as compared to June 30, 2003.
The Bank remained in regulatory capital compliance for a well- capitalized
institution with tangible, core, and risk-based capital levels on a fully
phased-in basis of 8.08%, 8.08% and 10.42%, respectively at March 31, 2004.
During the nine months ended March 31, 2004, the Company's cash and cash
equivalents, which consist of cash, interest-bearing deposits and federal funds
sold, decreased $62.8 million, or 64.9%, as compared to June 30, 2003. The
change in the Company's cash and cash equivalents consisted of decreases in
interest-bearing deposits and federal funds sold of $63.0 million and an
increase in cash of $0.2 million.
7
Part I Financial Information
Item 2
FINANCIAL CONDITION CONTINUED
- -----------------------------
The net $33.6 million, or 5.5%, increase in loans receivable, loans receivable
held for sale and mortgage-backed securities during the nine months ended March
31, 2004, resulted from increases in loans receivable of $18.4 million,
mortgage-backed securities of $36.4 million and a decrease in loans receivable
held for sale of $21.2 million. The increase of $18.4 million in loans
receivable included increases of $13.8 million in home equity loans, $12.9
million in commercial real estate loans, $6.3 million in construction and land
loans, net, $0.7 million in consumer loans, and $0.2 million in multi-family
loans. These increases were offset by decreases of $14.2 million in
single-family mortgage loans and $1.3 million in commercial equity line of
credit loans. The increase of $36.4 million in mortgage-backed securities
resulted from the purchase of $39.9 million in mortgage-backed securities less
payments received of $3.5 million. The decrease of $21.2 million in loans
receivable held for sale is attributable to a slowdown in refinancing activity
during the period.
The Bank typically originates single-family, fixed-rate loans for sale, while
retaining single-family, adjustable-rate loans for investment. During periods of
lower interest rates borrowers are generally attracted to fixed-rate financing,
while the reverse is true during periods of higher interest rates.
Securities increased by $10.0 million as the result of the purchase of $10.0
million in newly issued securities.
The increase in prepaid expenses and other assets of $15.3 million is primarily
attributable to the purchase of $15.0 million of Bank Owned Life Insurance
("BOLI") during the current period. The BOLI was purchased to improve return on
assets and return on equity, as well as to take advantage of the tax-exempt
return on investment.
At March 31, 2004, the Company serviced $735.3 million in single-family mortgage
loans and carried an asset for mortgage servicing rights totaling $5.3 million,
or 72 basis points, of total serviced loans.
The increase of $2.0 million, or 17.5%, in office properties and equipment is
the result of capital improvements to our Corporate Center office in Solon,
Ohio, investment in new technology and the opening of a new branch office.
Investment in stock of the Federal Home Loan Bank of Cincinnati increased by
$0.3 million due to the receipt of stock dividends.
The decrease of $0.2 million in real estate owned properties resulted from the
disposal of $0.5 million in real estate owned offset by the acquisition of
$0.3 million in new real estate owned during the period.
Deposits increased by $10.3 million, or 2.0%, as a result of special promotional
rates offered with the opening of a new branch office. The Company will consider
the use of special promotional rates in the future to attract new deposits or to
establish a deposit base when opening new branches. The decrease in accrued
expenses and other liabilities of $8.9 million, or 36.4%, is primarily the
result of timing differences between the collection and remittance of payments
received on loans serviced for others. Notes payable decreased by $3.3
million, or 56.9%, as a result of principal
8
Part I Financial Information
Item 2
FINANCIAL CONDITION CONTINUED
- -----------------------------
repayments. The decrease in advances from borrowers for taxes and insurance of
$3.5 million, or 43.7%, is due to timing differences between the collection and
payment of escrow funds.
The decrease in cash and cash equivalents of $62.8 million, the increase in
deposits of $10.3 million, earnings of $5.5 million, proceeds from the sale and
repayment of loans receivable of $2.8 million, and net proceeds of $0.2 million
from the sale of real estate owned were used to fund the net increase of $36.4
million in mortgage-backed securities, purchase $10.0 million in securities,
purchase $15.0 million in BOLI, fund the increase of $2.0 million in office
properties and equipment, the decreases of $8.9 million in accrued expenses and
other liabilities and $3.5 million in advances from borrowers for taxes and
insurance, repay $3.3 million in notes payable, and pay a cash dividend of $1.4
million to stockholders.
RESULTS OF OPERATIONS Three months ended March 31, 2004,
- --------------------- compared to three months ended
March 31, 2003.
PVF's net income is dependent primarily on its net interest income, which is the
difference between interest earned on its loans and investments and interest
paid on interest-bearing liabilities. Net interest income is determined by (i)
the difference between yields earned on interest- earning assets and rates paid
on interest-bearing liabilities ("interest- rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities. The
Company's interest-rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. Net interest income also includes amortization of loan origination fees,
net of origination costs.
PVF's net income is also affected by the generation of non-interest income,
which primarily consists of loan servicing income, service fees on deposit
accounts, and gains on the sale of loans held for sale. In addition, net income
is affected by the level of operating expenses and loan loss provisions.
The Company's net income for the three months ended March 31, 2004 was
$1,185,700 as compared to $2,094,600 for the prior year comparable period. This
represents a decrease of $908,900, or 43.4%, when compared with the prior year
comparable period.
Net interest income for the three months ended March 31, 2004 decreased by
$195,900, or 3.5%, as compared to the prior year comparable period. This
resulted from a decrease of $839,000, or 8.1%, in interest income and a
decrease of $643,100, or 13.6%, in interest expense. The decrease in interest
income resulted primarily from a decrease of 59 basis points in the return on
interest-earning assets in the current period. This decrease in yield combined
with an increase of $5.9 million in the average balance of interest-earning
assets resulted in an overall decrease to interest income of $839,000 in the
current period. The average balance on interest-bearing liabilities increased by
$14.5 million from the prior year comparable period. The average cost of funds
on interest-bearing liabilities decreased by 50 basis points in the current
period, as a result of declining market interest rates, resulting in an overall
decrease in interest expense of $643,100. The Company's net interest income
decreased by $195,900 due to a
9
Part I Financial Information
Item 2
RESULTS OF OPERATIONS CONTINUED
- -------------------------------
decrease of 9 basis points in the Company's interest-rate spread during the
current period as compared to the prior year comparable period. A continued
decline in market interest rates could result in a negative impact to net
interest income.
For the three months ended March 31, 2004, a provision for loan losses of
$140,300 was recorded, while no provision for loan losses was recorded in the
prior year comparable period. The Company uses a systematic approach to
determine the adequacy of its loan loss allowance and the necessary provision
for loan losses. The loan portfolio is reviewed and delinquent loan accounts are
analyzed individually on a monthly basis with respect to payment history,
ability to repay, probability of repayment, and loan-to-value percentage.
Consideration is given to the types of loans in the portfolio and the overall
risk inherent in the portfolio. After reviewing current economic conditions,
changes to the size and composition of the loan portfolio, changes in
delinquency status, levels of non-accruing loans, non-performing assets,
non-accruing loans, and actual loan losses incurred by the Company, management
establishes an appropriate reserve percentage applicable to each category of
loans, and a provision for loan losses is recorded when necessary to bring the
allowance to a level consistent with this analysis. Management believes it uses
the best information available to make a determination as to the adequacy of the
allowance for loan losses.
During the three months ended March 31, 2004, the Company experienced an
increase in loans held for investment of $1.4 million, increases in the level of
non-accruing loans and classified assets of $1.5 million each, and had $108,000
in loans charged off. Due to the increase in loans held for investment and
increases in impaired loans and classified assets, along with loans charged off
during the period, management determined it was necessary to record a provision
for general loan losses of $140,300 in the current period. During the three
months ended March 31, 2003, the Company experienced a decrease in loans held
for investment of $3.7 million. In addition, the level of non-accruing loans
and classified assets increased by $325,000 and $1.0 million, respectively,
while $19,000 in loans were charged off. Management determined it was not
necessary to record a provision for general loan losses in the prior period,
due to the application of revised reserve percentages reflecting the Company's
historic loss experience to certain loan categories. At March 31, 2004, the
allowance for loan losses was $4.2 million, which represented 40.6% of
non-performing loans and 0.69% of net loans. At June 30, 2003, the allowance
for loan losses was $3.9 million, which represented 52.2% of non-performing
loans and 0.63% of net loans.
10
Part I Financial Information
Item 2
RESULTS OF OPERATIONS CONTINUED
- -------------------------------
At March 31, June 30,
2004 2003
---------------------------------------------
(Dollars in thousands)
Non-accruing lonas (1):
Real estate $ 10,374 $ 7,437
-------------- -------------
Accruing loans which are contractually
past due 90 days or more:
Real estate $ 226 $ 275
-------------- -------------
Total non-accrual and 90 days
past due loans $ 10,600 $ 7,712
============== =============
Ratio of non-performing loans to total loans
and mortgage-backed securities 1.63% 1.26%
============== =============
Other non-performing assets (2) $ 270 $ 449
============== =============
Total non-performing assets $ 10,870 $ 8,161
============== =============
Total non-performing assets to total assets 1.47% 1.10%
============== =============
(1) Non-accrual status denotes loans on which, in the opinion of management,
the collection of additional interest is unlikely, or loans that meet the
non-accrual criteria established by regulatory authorities. Non-accrual
loans include all loans classified as doubtful or loss, loans in
foreclosure, and all loans greater than 90 days past due. Payments received
on a non-accrual loan are either applied to the outstanding principal
balance or recorded as interest income, depending on an assessment of the
collectibility of the principal balance of the loan.
(2) Other non-performing assets represent property acquired by the Bank through
foreclosure or repossession.
For the three months ended March 31, 2004, non-interest income decreased by
$760,000, or 47.6%, from the prior year comparable period. This resulted
primarily from a decrease of $702,000, or 52.4%, in mortgage- banking activities
that resulted from a decrease of $1,284,000 in profit on loan sales in the
current period offset by an increase of $582,000 in loan servicing income. The
increase in loan servicing income is attributable to an increase in the volume
of loans serviced for others along with a slowdown in the amortization of
mortgage loan servicing rights that resulted from increasing market interest
rates and decreased prepayment speed on loans serviced for others. During these
periods, PVF pursued a strategy of originating long-term, fixed-rate loans
pursuant to Federal Home Loan Mortgage Corporation ("FHLMC") and Federal
National Mortgage Association ("FNMA") guidelines and selling such loans to the
FHLMC or the FNMA, while retaining the servicing. The reduction in profit on
loan sales for the quarter is the direct result of a slowdown in refinancing
activities. Those gains are expected to remain soft for at least the rest of the
fiscal year.
Service and other fees decreased by $95,500, or 41.9%, in the current period,
primarily due to decreases in loan prepayment penalties. Other, net increased by
$37,500 primarily due to income recognized on the investment in BOLI in the
current period.
11
Part I Financial Information
Item 2
RESULTS OF OPERATIONS CONTINUED
- -------------------------------
Non-interest expense for the three months ended March 31, 2004 increased by
$310,600, or 7.5%, from the prior year comparable period. This was primarily the
result of an increase in compensation and benefits of $223,700, or 10.3%, as the
result of increased staffing, incentive bonuses paid, and salary and wage
adjustments. Office occupancy and equipment increased by $7,100 in the current
period. The increase of $79,800, or 7.2%, in other non-interest expense was
attributable to increases in telephone line costs resulting from an upgrade to
our computer network, increased legal fees, and checks charged off in the
current period.
The federal income tax provision for the three-month period ended March 31, 2004
decreased to an effective rate of 32.3% for the current period from an effective
rate of 33.7% for the prior year comparable period. The decrease is attributable
to the Bank's tax-exempt income arising from the investment in BOLI.
RESULTS OF OPERATIONS Nine months ended March 31, 2004,
- --------------------- compared to nine months ended
March 31, 2003.
The Company's net income for the nine months ended March 31, 2004 was $5,467,600
as compared to $6,038,900 for the prior year comparable period. This represents
a decrease of $571,300, or 9.5%, when compared with the prior year comparable
period.
Net interest income for the nine months ended March 31, 2004 decreased by
$257,900, or 1.5%, as compared to the prior year comparable period. This
resulted from a decrease of $3,654,700, or 11.0%, in interest income and a
decrease of $3,396,800, or 21.4%, in interest expense. The decrease in interest
income resulted primarily from a decrease of 80 basis points in the return on
interest-earning assets in the current period. This decrease in yield combined
with a modest increase of $1.6 million in the average balance of
interest-earning assets resulted in an overall decrease to interest income of
$3,654,700 in the current period. The average balance on interest-bearing
liabilities increased by $2.1 million from the prior year comparable period. The
average cost of funds on interest-bearing liabilities decreased by 72 basis
points in the current period, as a result of declining market interest rates,
resulting in an overall decrease in interest expense of $3,396,800. The
Company's net interest income decreased by $257,900 primarily due to a decrease
of 8 basis points in the Company's interest-rate spread during the current
period as compared to the prior year comparable period. A continued decline in
market interest rates could result in a negative impact to net interest income.
For the nine months ended March 31, 2004, a provision for loan losses of
$432,300 was recorded, while no provision for loan losses was recorded in the
prior year comparable period.
During the nine months ended March 31, 2004, the Company experienced an increase
in loans held for investment of $18.5 million, an increase in the level of
non-accruing loans of $2.9 million, an increase in classified assets of $1.3
million, and had $132,000 in loans charged off. Due to increases in loans held
for investment, non-accruing loans and classified assets, along with loans
charged off during the period, management determined it was necessary to record
a provision for loan losses of $432,300 in the current period. During the nine
months ended March 31, 2003, the Company experienced growth in loans held for
investment of $20.4 million, a decrease in the level of non-accruing loans of
$433,000, an
12
Part I Financial Information
Item 2
RESULTS OF OPERATIONS CONTINUED
- -------------------------------
increase in classified assets of $115,000, and had $19,000 in loans charged
off. Management determined it was not necessary to record a provision for
general loan losses in the prior period, due to the application of revised
reserve percentages reflecting the Company's historic loss experience to certain
loan categories, along with a decrease to non-accruing loans.
For the nine months ended March 31, 2004, non-interest income increased by
$831,000, or 19.9%, from the prior year comparable period. This resulted from an
increase of $445,200, or 12.8%, in mortgage-banking activities that resulted
from a decrease of $70,100 in profit on loan sales in the current period and an
increase of $515,300 in loan servicing income attributable to the recovery of
impairment charges previously taken. The increase in loan servicing income is
attributable to an increase in the volume of loans serviced for others along
with a slowdown in the amortization of mortgage loan servicing rights that
resulted from increasing market interest rates and decreased prepayment speed on
loans serviced for others. During these periods, PVF pursued a strategy of
originating long-term, fixed-rate loans pursuant to Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA")
guidelines and selling such loans to the FHLMC or the FNMA, while retaining the
servicing.
In addition, other non-interest income, net, increased by $524,700 in the
current period primarily due to increased gains on the sale of real estate
owned. Service and other fees decreased by $138,900, or 24.1%, primarily due to
decreases in loan prepayment penalties and late charge fee income.
Non-interest expense for the nine months ended March 31, 2004 increased by
$996,600, or 8.1%, from the prior year comparable period. This was primarily the
result of an increase in compensation and benefits of $749,200, or 11.5%, as the
result of increased staffing, incentive bonuses paid, and salary and wage
adjustments. Office occupancy and equipment increased $89,100, or 3.8%, due to
the operation of an additional branch office along with repairs and maintenance
costs to our Corporate Center office building. The increase of $158,300, or
4.6%, in other non-interest expense was attributable to costs of outside
services, increased telephone line costs resulting from an upgrade to our
computer network, increased charitable contributions, and checks charged off in
the current period.
The federal income tax provision for the nine-month period ended March 31, 2004
was at an effective rate of 33.6% for both the current and prior year comparable
periods.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's liquidity measures its ability to generate adequate amounts of
funds to meet its cash needs. Adequate liquidity guarantees that sufficient
funds are available to meet deposit withdrawals, fund loan commitments, purchase
securities, maintain adequate reserve requirements, pay operating expenses,
provide funds for debt service, pay dividends to stockholders and meet other
general commitments in a cost-effective manner.
13
Part I Financial Information
Item 2
LIQUIDITY AND CAPITAL RESOURCES CONTINUED
- -----------------------------------------
Our primary source of funds are deposits, principal and interest payments on
loans, proceeds from the sale of loans, and advances from the Federal Home Loan
Bank of Cincinnati ("FHLB"). While maturities and scheduled amortization of
loans are predictable sources of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and local
competition.
Our most liquid assets are cash and cash equivalents. The levels of these assets
are dependent on our operating, financing, lending and investing activities
during any given period. Additional sources of funds include lines of credit
available from the FHLB.
Management believes the Company maintains sufficient liquidity to meet current
operational needs.
Part I Financial Information
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -----------------------------------------------------------
There have been no significant changes to the Company's interest rate risk
position or any changes to how the Company manages its Asset/Liability position
since June 30, 2003. This is attributable to the Company's Asset/Liability
Management policy of monitoring and matching the maturity and re-pricing
characteristics of its interest-earning assets and interest-bearing liabilities,
while remaining short-term with the weighted-average maturity and re-pricing
periods.
Part I Financial Information
Item 4
CONTROLS AND PROCEDURES
- -----------------------
As of the end of the period covered by this report, management of the Company
carried out an evaluation, under the supervision and with the participation of
the Company's principal executive officer and principalfinancial officer, of the
effectiveness of the Company's disclosure controls and procedures. Based on this
evaluation, the Company's principal executive officer and principal financial
officer concluded that the Company's disclosure controls and procedures are
effective in ensuring that information required to be disclosed by the Company
in reports that it files or submits under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
It should be noted that the design of the Company's disclosure controls and
procedures is based in part upon certain reasonable assumptions about the
likelihood of future events, and there can be no reasonable assurance that any
design of disclosure controls and procedures will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote,
but the Company's principal executive and financial officers have concluded that
the Company's disclosure controls and procedures are, in fact, effective at a
reasonable assurance level.
14
Part I Financial Information
Item 4
CONTROLS AND PROCEDURES CONTINUED
- ---------------------------------
There have been no changes in the Company's internal control over financial
reporting (to the extent that elements of internal control over financial
reporting are subsumed within disclosure controls and procedures) identified in
connection with the evaluation described in the above paragraph that occurred
during the Company's last fiscal quarter, that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II OTHER INFORMATION
- -------------------------
Item 1. Legal Proceedings. N/A
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
(a) N/A
(b) N/A
(c) N/A
(d) N/A
(e) N/A
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders. N/A
Item 5. Other Information. N/A
Item 6. (a) Exhibits
--------
The following exhibits are filed herewith:
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32 Section 1350 Certification
(b) Reports on Form 8-K
-------------------
The Registrant filed the following Current Reports on Form 8-K
during the quarter ended March 31, 2004:
Date of Report Item(s) Reported Financial Statements Filed
-------------- ---------------- --------------------------
January 15, 2004 7, 12 N/A
15
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PVF Capital Corp.
--------------------
(Registrant)
Date: May 14, 2004 /s/ C. Keith Swaney
-------------- ---------------------------------------
C. Keith Swaney President, Chief
Operating Officer and Treasurer
(Only authorized officer and
Principal Financial Officer)