Attached files
file | filename |
---|---|
EX-32 - EX-32 - PVF CAPITAL CORP | l37891exv32.htm |
EX-4.1 - EX-4.1 - PVF CAPITAL CORP | l37891exv4w1.htm |
EX-4.2 - EX-4.2 - PVF CAPITAL CORP | l37891exv4w2.htm |
EX-10.1 - EX-10.1 - PVF CAPITAL CORP | l37891exv10w1.htm |
EX-31.1 - EX-31.1 - PVF CAPITAL CORP | l37891exv31w1.htm |
EX-10.2 - EX-10.2 - PVF CAPITAL CORP | l37891exv10w2.htm |
EX-31.2 - EX-31.2 - PVF CAPITAL CORP | l37891exv31w2.htm |
EX-10.3 - EX-10.3 - PVF CAPITAL CORP | l37891exv10w3.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2009.
o | 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 0-24948
PVF Capital Corp.
Ohio | 34-1659805 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
30000 Aurora Road, Solon, Ohio | 44139 | |
(Address of principal executive offices) | (Zip Code) |
(440) 248-7171
Not Applicable
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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
YES o NO o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
YES o NO þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Common Stock, $0.01 Par Value | 7,979,120 | |
(Class) | (Outstanding at November 6, 2009) |
PVF CAPITAL CORP.
INDEX
Page | ||||||||
1 | ||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
19 | ||||||||
28 | ||||||||
29 | ||||||||
29 | ||||||||
29 | ||||||||
29 | ||||||||
33 | ||||||||
33 | ||||||||
33 | ||||||||
34 | ||||||||
34 | ||||||||
EX-4.1 | ||||||||
EX-4.2 | ||||||||
EX-10.1 | ||||||||
EX-10.2 | ||||||||
EX-10.3 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 |
Table of Contents
Part I Financial Information
Item 1 Financial Statements
September 30, | June 30, | |||||||
2009 | 2009 | |||||||
unaudited | ||||||||
ASSETS |
||||||||
Cash and cash equivalents: |
||||||||
Cash and amounts due from depository institutions |
$ | 16,546,693 | $ | 8,464,544 | ||||
Interest bearing deposits |
$ | 823,972 | 1,939,514 | |||||
Federal funds sold |
11,633,000 | 10,809,000 | ||||||
Total cash and cash equivalents |
29,003,665 | 21,213,058 | ||||||
Securities available for sale |
136,800 | 102,800 | ||||||
Securities held to maturity (fair values of $57,021,500
and
$49,999,939, respectively) |
57,000,000 | 49,999,939 | ||||||
Mortgage-backed securities available for sale |
60,629,712 | 64,177,633 | ||||||
Loans receivable held for sale, net |
6,428,165 | 27,078,472 | ||||||
Loans receivable, net of allowance of
$31,823,982 and $31,483,205, respectively |
653,224,139 | 668,460,029 | ||||||
Office properties and equipment, net |
8,433,097 | 8,624,496 | ||||||
Real estate owned, net |
11,569,225 | 11,607,758 | ||||||
Federal Home Loan Bank stock |
12,811,100 | 12,811,100 | ||||||
Bank owned life insurance |
22,914,407 | 22,894,013 | ||||||
Prepaid expenses and other assets |
24,930,350 | 25,239,535 | ||||||
Total Assets |
$ | 887,080,660 | $ | 912,208,833 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Liabilities |
||||||||
Deposits |
$ | 696,931,038 | $ | 724,931,569 | ||||
Short-term advances from the Federal Home Loan Bank |
10,000,000 | 0 | ||||||
Note payable |
1,339,444 | 1,366,111 | ||||||
Long-term advances from the Federal Home Loan Bank |
35,000,000 | 35,000,000 | ||||||
Repurchase agreement |
50,000,000 | 50,000,000 | ||||||
Subordinated debentures |
10,000,000 | 20,000,000 | ||||||
Advances from borrowers for taxes and insurance |
7,030,609 | 9,555,137 | ||||||
Accrued expenses and other liabilities |
21,885,356 | 21,850,819 | ||||||
Total Liabilities |
832,186,447 | 862,703,636 | ||||||
Stockholders Equity |
||||||||
Serial preferred stock, none issued |
| | ||||||
Common stock, $0.01 par value, 15,000,000 shares
authorized;
8,451,845 and 8,246,548 shares issued, respectively |
84,518 | 82,465 | ||||||
Additional paid-in-capital |
69,894,176 | 69,377,852 | ||||||
Retained earnings (accumulated deficit) |
(12,338,587 | ) | (16,538,515 | ) | ||||
Accumulated other comprehensive income |
1,091,253 | 420,542 | ||||||
Treasury Stock, at cost 472,725 shares |
(3,837,147 | ) | (3,837,147 | ) | ||||
Total Stockholders Equity |
54,894,213 | 49,505,197 | ||||||
Total Liabilities and Stockholders Equity |
$ | 887,080,660 | $ | 912,208,833 | ||||
See accompanying notes to consolidated financial statements
Page 1
Table of Contents
Part I Financial Informaton
Item 1 Financial Statements
Three Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Interest and dividends income |
||||||||
Loans |
$ | 9,157,018 | $ | 11,412,241 | ||||
Mortgage-backed securities |
663,405 | 700,273 | ||||||
Federal Home Loan Bank stock dividends |
159,700 | 170,557 | ||||||
Securities |
9,895 | 121,059 | ||||||
Federal funds sold and interest bearing deposits |
7,393 | 86,793 | ||||||
Total interest and dividends income |
9,997,411 | 12,490,923 | ||||||
Interest expense |
||||||||
Deposits |
4,358,532 | 5,942,553 | ||||||
Short-term borrowings |
0 | 9,099 | ||||||
Long-term borrowings |
912,097 | 910,714 | ||||||
Subordinated debt |
250,099 | 325,445 | ||||||
Total interest expense |
5,520,728 | 7,187,811 | ||||||
Net interest income |
4,476,683 | 5,303,112 | ||||||
Provision for loan losses |
1,760,000 | 691,000 | ||||||
Net interest income after provision for loan losses |
2,716,683 | 4,612,112 | ||||||
Noninterest income, net |
||||||||
Service and other fees |
165,584 | 178,254 | ||||||
Mortgage banking activities, net |
1,054,727 | 457,699 | ||||||
Increase (decrease) in cash surrender value of bank owned life
insurance |
20,393 | 52,926 | ||||||
Impairment of securities |
0 | (1,738,800 | ) | |||||
Gain (loss) on real estate owned |
(90,113 | ) | (13,408 | ) | ||||
Gain on the cancellation of subordinated debt |
8,561,530 | 0 | ||||||
Other, net |
151,724 | 21,965 | ||||||
Total noninterest income, net |
9,863,845 | (1,041,364 | ) | |||||
Noninterest expense |
||||||||
Compensation and benefits |
2,241,679 | 2,558,015 | ||||||
Office occupancy and equipment |
678,267 | 706,750 | ||||||
Outside services |
852,359 | 75,000 | ||||||
Federal deposit insurance premium |
565,733 | 191,403 | ||||||
Real estate owned expense |
782,188 | 188,915 | ||||||
Other |
1,115,874 | 1,215,534 | ||||||
Total noninterest expense |
6,236,100 | 4,935,617 | ||||||
Income (loss) before federal income tax provision |
6,344,428 | (1,364,869 | ) | |||||
Federal income tax provision (benefit) |
2,144,500 | (463,612 | ) | |||||
Net income (loss) |
$ | 4,199,928 | ($901,257 | ) | ||||
Basic earnings (loss) per share |
$ | 0.54 | ($0.12 | ) | ||||
Diluted earnings (loss) per share |
$ | 0.54 | ($0.12 | ) | ||||
Dividends declared per common share |
$ | 0.000 | $ | 0.010 | ||||
See accompanying notes to consolidated financial statements
Page 2
Table of Contents
Part I Financial Information
Item 1 Financial Statements
Three Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Operating Activities |
||||||||
Net income (loss) |
$ | 4,199,928 | ($901,257 | ) | ||||
Adjustments to reconcile net income to net cash from operating activities |
||||||||
Amortization of premium on mortgage-backed securities |
123,659 | 1,814 | ||||||
Depreciation and amortization |
242,933 | 314,723 | ||||||
Provision for loan losses |
1,760,000 | 691,000 | ||||||
Impairment of securites |
| 1,738,800 | ||||||
Accretion of deferred loan origination fees, net |
(380,986 | ) | (223,035 | ) | ||||
(Gain) loss on cancellation of subordinated debt |
(8,561,530 | ) | ||||||
(Gain) loss on sale of loans receivable held for sale, net |
(1,627,541 | ) | (126,492 | ) | ||||
Loss on disposal of real estate owned, net |
90,113 | 299,408 | ||||||
Market adjustment for loans held for sale |
14,858 | (67,332 | ) | |||||
Change in fair value of mortgage banking derivatives |
701,092 | (111,618 | ) | |||||
Stock compensation |
18,377 | 26,270 | ||||||
Federal Home Loan Bank stock dividends |
| (170,500 | ) | |||||
Change in accrued interest on securities, loans, and borrowings, net |
62,130 | 1,108,214 | ||||||
Origination of loans receivable held for sale, net |
(56,721,105 | ) | (10,856,452 | ) | ||||
Sale of loans receivable held for sale, net |
77,971,294 | 15,316,926 | ||||||
Increase in cash surrender value of bank owned life insurance |
(20,394 | ) | (52,926 | ) | ||||
Net change in other assets and other liabilities |
(2,715,215 | ) | (1,743,921 | ) | ||||
Net cash from operating activities |
15,157,613 | 5,243,622 | ||||||
Investing Activities |
||||||||
Loan repayments and originations, net |
12,160,065 | (10,568,538 | ) | |||||
Principal repayments on mortgage-backed securities held to maturity |
5,908,206 | 1,153,610 | ||||||
Purchase of mortgage-backed securities available for sale |
(1,501,775 | ) | (3,000,000 | ) | ||||
Purchase of securities held to maturity |
(57,000,000 | ) | 0 | |||||
Maturities of securities held to maturity |
50,000,000 | 0 | ||||||
Proceeds from sale of real estate owned |
1,645,231 | 3,713,463 | ||||||
Additions to office properties and equipment, net |
(51,535 | ) | (339,708 | ) | ||||
Net cash from investing activities |
11,160,192 | (9,041,173 | ) | |||||
Financing activities |
||||||||
Net increase (decrease) in demand deposits, NOW, and passbook savings |
8,511,227 | (9,493,854 | ) | |||||
Net increase (decrease) in time deposits |
(36,511,758 | ) | 59,828,535 | |||||
Net increase (decrease) in short-term Federal Home Loan Bank advances |
10,000,000 | (9,000,000 | ) | |||||
Repayment of note payable |
(26,667 | ) | 0 | |||||
Net proceeds from (repayment of) line of credit |
0 | 425,000 | ||||||
Payment in exchange for cancellation of subordinated debt |
(500,000 | ) | 0 | |||||
Cash dividend paid |
0 | (155,438 | ) | |||||
Net cash from financing activities |
(18,527,197 | ) | 41,604,243 | |||||
Net increase in cash and cash equivalents |
7,790,607 | 37,806,692 | ||||||
Cash and cash equivalents at beginning of period |
21,213,058 | 17,804,394 | ||||||
Cash and cash equivalents at end of period |
$ | 29,003,665 | $ | 55,611,086 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash payments of interest expense |
$ | 5,740,043 | $ | 6,002,738 | ||||
Cash payments of income taxes |
$ | 0 | $ | 0 | ||||
Supplemental noncash investing activity: |
||||||||
Transfer of loans to real estate owned |
$ | 1,696,811 | $ | 7,890,196 | ||||
Supplemental noncash financing activity: |
||||||||
Commpon stock and warrants issued in exchange for cancellation of
subordinated debt |
$ | 1,329,645 | $ | 0 |
See accompanying notes to consolidated financial statements
Page 3
Table of Contents
Part I Financial Information
Item 1
PVF CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended
September 30, 2009 and 2008
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended
September 30, 2009 and 2008
(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, 2009 consolidated
statement of financial condition, which was derived from the Corporations audited financial
statements. For reasons more fully described in Note 9 to these interim financial statements, the
Companys auditors added an explanatory paragraph to its opinion on the Companys June 30, 2009
consolidated financial statements expressing substantial doubt about the ability of the Company to
continue as a going concern. Certain information required for a complete presentation in accordance
with U.S. generally accepted accounting principles 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 months ended September 30, 2009 are not necessarily indicative
of the results to be expected for the entire year ending June 30, 2010. 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 operations of Park View Federal Savings Bank (the Bank). PVF
Capital Corp.s common stock is traded on the NASDAQ CAPITAL MARKET under the symbol PVFC.
2. Securities available for sale: The Companys securities available-for-sale consists of floating
rate preferred stock issued by the Federal Home Loan Mortgage Corporation (FHLMC) and Federal
National Mortgage Association (FNMA). For the three months ended September 30, 2008, the Company
recognized a $1,739,000 pre-tax charge for the other-than-temporary decline in fair value of this
stock.
On September 7, 2008, the U.S. Treasury Department and the Federal Housing Finance Agency announced
that FNMA and the Federal Home Loan Mortgage Corp (FHLMC) had been placed into conservatorship.
Dividends on the preferred shares of the entities have been suspended.
The fair value of the Companys holdings of these securities was $136,800 at September 30, 2009 and
$102,800 at June 30, 2009. The Companys written-down cost basis in these securities was $47,600.
4
Table of Contents
Part I Financial Information
Item 1
As of September 30, 2009, the fair value of mortgage-backed securities available for sale and the
related gross unrealized gains and losses recognized in accumulated other comprehensive income
(loss) were as follows:
Gross | Gross | |||||||||||||||
Carrying | Unrealized | Unrealized | Fair | |||||||||||||
Amount | Gains | Losses | Value | |||||||||||||
FNMA
mortgage-backed
securities |
$ | 32,654,950 | $ | 831,349 | $ | | $ | 33,486,299 | ||||||||
FHLMC
mortgage-backed
securities |
22,203,157 | 589,655 | | 22,792,812 | ||||||||||||
GNMA
mortgage-backed
securities |
4,207,387 | 143,214 | | 4,350,601 | ||||||||||||
Total |
$ | 59,065,494 | $ | 1,564,215 | $ | | $ | 60,629,712 |
The carrying amount, unrealized gains and losses, and fair value of mortgage-backed securities
available for sale at June 30, 2009 were as follows:
Gross | Gross | |||||||||||||||
Carrying | Unrealized | Unrealized | Fair | |||||||||||||
Amount | Gains | Losses | Value | |||||||||||||
FNMA
mortgage-backed
securities |
$ | 32,999,418 | $ | 262,310 | $ | (17,721 | ) | $ | 33,244,007 | |||||||
FHLMC
mortgage-backed
securities |
26,029,802 | 256,223 | | 26,286,025 | ||||||||||||
GNMA
mortgage-backed
securities |
4,566,428 | 81,173 | | 4,647,601 | ||||||||||||
Total |
$ | 63,595,648 | $ | 599,706 | $ | (17,721 | ) | $ | 64,177,633 |
None of the Companys securities available for sale mature at a single maturity date.
Securities held to maturity: As of September 30, 2009, the amortized cost, the related gross
unrecognized gains and losses, and fair value of securities held to maturity as of September 30,
2009 were as follows:
Gross | Gross | |||||||||||||||
Amortized | Unrecognized | Unrecognized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S Treasury |
$ | 50,000,000 | $ | | $ | | $ | 50,000,000 | ||||||||
FHLB debenture |
5,000,000 | 11,830 | | 5,011,830 | ||||||||||||
FHLMC medium-term note |
2,000,000 | 9,670 | | 2,009,670 | ||||||||||||
Total |
$ | 57,000,000 | $ | 21,500 | $ | | $ | 57,021,500 |
5
Table of Contents
Part I Financial Information
Item 1
The Companys U.S. Treasury security matured on October 1, 2009. Both the FHLB debenture and the
FHLMC medium-term note are callable quarterly and mature in 2014.
3. Allowance for loan losses: A summary of the changes in the allowance for loan losses for the
three months ended September 30, 2009 and 2008 is as follows:
Three months | Three months | |||||||
ended | ended | |||||||
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Beginning balance |
$ | 31,483,205 | $ | 9,653,972 | ||||
Provision for
loan losses |
1,760,000 | 691,000 | ||||||
Charge-offs |
(1,419,223 | ) | (1,501,694 | ) | ||||
Recoveries |
| | ||||||
Ending balance |
$ | 31,823,982 | $ | 8,843,278 | ||||
At September 30, 2009 and June 30, 2009, the recorded investment in loans, which have
individually been identified as being impaired, totaled $58,416,870 and $58,583,559, respectively.
Included in the impaired amount at September 30, 2009 and June 30, 2009 is $37,932,191 and
$40,535,752, respectively, related to loans with a corresponding valuation allowance of $13,231,275
and $12,684,241, respectively. At September 30, 2009 and June 30, 2009, $20,484,679 and $18,047,807
of impaired loans had no allowance for loan losses allocated.
4. Mortgage Banking Activities: The Company services real estate loans for investors that are not
included in the accompanying consolidated financial statements. Mortgage servicing rights are
established based on the 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.
Three Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Servicing rights: |
||||||||
Beginning of period |
$ | 6,097,861 | $ | 4,398,783 | ||||
Additions |
1,012,802 | 172,059 | ||||||
Amortized to expense |
(491,068 | ) | (360,423 | ) | ||||
End of period |
$ | 6,619,595 | $ | 4,210,419 | ||||
6
Table of Contents
Part I Financial Information
Item 1
Mortgage banking activities, net as presented in the consolidated statements of operations consist
of the following. These amounts do not include non-interest expense related to mortgage banking
activities.
Three Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Mortgage loan servicing fees |
$ | 634,204 | $ | 512,680 | ||||
Amortization of mortgage loan servicing rights |
(491,068 | ) | (360,423 | ) | ||||
Loan
organisation and sales activity |
911,591 | 305,442 | ||||||
Mortgage banking activities, net |
$ | 1,054,727 | $ | 457,699 | ||||
At September 30, 2009 and June 30, 2009, the Bank had interest rate-lock commitments on
$35,099,499 and $48,161,785 of loans intended for sale in the secondary market. These commitments
are considered to be free-standing derivatives and the change in fair value is recorded in the
financial statements. The fair value of these commitments as of September 30, 2009 and June 30,
2009 was estimated to be $613,886 and $505,810, respectively, which is included in prepaid expenses
and other assets in the consolidated statements of financial position. To mitigate the interest
rate risk represented by these interest rate-lock commitments the Bank entered into contracts to
sell mortgage loans of $24,849,000 and $42,620,000 as of September 30, 2009 and June 30, 2009.
These contracts are also considered to be free-standing derivatives and the change in fair value
also is recorded in the financial statements. The fair value of these contracts at September 30,
2009 and June 30, 2009 was estimated to be $(110,203) and $698,965, respectively. These amounts are
(netted against) added to the fair value of interest rate lock commitments recorded in prepaid and
other assets. Changes in fair value for both types of derivatives are reported in mortgage banking
activities in the consolidated statements of operations.
5. Stock Compensation: Employee compensation expense under stock options is reported using the fair
value recognition provisions under FASB Statement 123 (revised 2004) (FAS 123R), Share Based
Payment. The Company has adopted FAS 123R using the modified prospective method. Under this
method, compensation expense is being recognized for the unvested portion of previously issued
awards that remained outstanding as of July 1, 2005 and for any granted since that date. Prior
interim periods and fiscal year results were not restated. For the quarters ended September 30,
2009 and 2008, compensation expense of $18,377 and $26,270, respectively, was recognized in the
income statement related to the vesting of previously issued awards plus vesting of new awards. No
income tax benefit was recognized related to these expenses.
7
Table of Contents
Part I Financial Information
Item 1
As of September 30, 2009, there was $201,897 of compensation expense related to unvested awards not
yet recognized in the financial statements. The weighted-average period over which this expense is
to be recognized is 3.1 years.
The Company can issue incentive stock options and nonqualified stock options under the 2000 Plan
and the 2008 Plan. Generally, for incentive stock options, one-fifth of the options awarded become
exercisable on the date of grant and on each of the first four anniversaries of the date of grant.
The option period expires ten years from the date of grant, except for awards to individuals who
own more than 10% of the Companys outstanding stock. Awards to these individuals expire after five
years from the date of grant and are exercisable at 110 percent of the market price at the date of
grant.
Nonqualified stock options are granted periodically to directors and vest immediately. The option
period expires ten years from the date of grant and the exercise price is the market price at the
date of grant.
The aggregate intrinsic value of all options outstanding at September 30, 2009 was $800. The
aggregate intrinsic value of all options that were exercisable at September 30, 2009 was $0.
A summary of the activity in the plan is as follows:
Three months ended | ||||||||
September 30, 2009 | ||||||||
Total options outstanding | ||||||||
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
Shares | Price | |||||||
Options outstanding, beginning of period |
582,792 | $ | 8.54 | |||||
Forfeited |
(68,607 | ) | 8.48 | |||||
Expired |
(35,431 | ) | 7.76 | |||||
Exercised |
| | ||||||
Granted |
| | ||||||
Options outstanding, end of period |
478,754 | $ | 8.60 | |||||
Options exercisable, end of period |
373,894 | $ | 8.47 |
The weighted average remaining contractual life of options outstanding as of September 30, 2009 was
4.7 years. The weighted average remaining contractual life of vested options outstanding as of
September 30, 2009 was 4.3 years.
No options were exercised in the three month periods ended September 30, 2009 and 2008. There were
no options granted during the three-month periods ended September 30, 2009 and 2008.
8
Table of Contents
Part I Financial Information
Item 1
6. The following table discloses earnings (loss) per Share for the three months ended September 30,
2009 and September 30, 2008.
Three months ended September 30, | ||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
Income | Income | |||||||||||||||||||||||
(loss) | Shares | Per Share | (loss) | Shares | Per Share | |||||||||||||||||||
(Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | |||||||||||||||||||
Basic EPS
Net Income
(loss) |
$ | 4,199,928 | 7,825,147 | $ | 0.54 | ($901,257 | ) | 7,747,683 | ($0.12 | ) | ||||||||||||||
Effect of
Stock Options |
| 0.00 | | 0.00 | ||||||||||||||||||||
Diluted EPS
Net Income
(loss) |
$ | 4,199,928 | 7,825,147 | $ | 0.54 | ($901,257 | ) | 7,747,683 | ($0.12 | ) |
There were 476,254 options not considered in the diluted Earnings per Share calculation for
the three-month period ended September 30, 2009, because they were not dilutive. There were 533,426
options not considered in the diluted Earnings per Share calculation for the three-month period
ended September 30, 2008 because they were not dilutive.
Also not included in the Diluted Earnings per Share calculation for the three-month period ended
September 30, 2009 were warrants to acquire the Companys shares of common stock issued as part of
an exchange more fully described in note 8. These warrants include a warrant to purchase 769,608
shares of common stock. This warrant is exercisable at any time before September 30, 2011 at a
price equal to the lesser of (i) $4.00 per share, (ii) the offering price for shares of the
Companys common stock in any subsequent public offering or private placement, or (iii) the price
of the Companys shares in a subsequent exchange of the Companys common stock for trust preferred
debt.
These warrants also include a warrant to purchase a number of shares equal to 9.9% of any of the
Companys common stock issued in a subsequent exchange of the Companys common stock for trust
preferred debt. This warrant is exercisable at the price of the Companys shares issued in such an
exchange.
7. Fair Value: U.S. generally accepted accounting principles (U.S. GAAP) defines fair value as the
exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. U.S. GAAP also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three levels of inputs that
may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets
that the entity has the ability to access as of the measurement date.
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Level 2: Significant other observable inputs other than Level 1 prices, such as quoted
prices for similar assets or liabilities, quoted market prices in markets that are not
active, and other inputs that are observable or can be corroborated by observable market
data.
Level 3: Significant unobservable inputs that reflect a companys own assumptions about the
assumptions that market participants would use to price an asset or liability.
The Company used the following methods and significant assumptions to estimate fair value.
Securities. The fair values of securities available for sale are determined by obtaining quoted
market prices on nationally recognized securities exchanges (Level 1 inputs). The fair values of
mortgage-backed securities are determined through matrix pricing. This is a mathematical technique
widely used in the industry to value debt securities without relying exclusively on quoted prices
for the specific securities but rather by relying on the securities relationship to other
benchmark quoted securities (Level 2 inputs).
Loans held for sale. The fair value of loans held for sale is determined using quoted secondary
market prices.
Mortgage banking pipeline derivatives. The fair value of loan commitments is measured using
current market rates for the associated mortgage loans. The fair value of mandatory forward sales
contracts is measured using secondary market pricing.
Warrants. Warrants to acquire the Companys common stock are valued using a closed form option
valuation model (Black-Scholes) that uses various assumptions regarding expected volatility, the
expected term of the warrants, and expected dividends on the Companys common stock.
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Assets and liabilities measured at fair value on a recurring basis at September 30, 2009 are
summarized below:
Quoted | ||||||||||||||||
Prices in | ||||||||||||||||
Active | ||||||||||||||||
Markets | Significant | |||||||||||||||
for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
September 30, | Assets | Inputs (Level | Inputs | |||||||||||||
2009 | (Level 1) | 2) | (Level 3) | |||||||||||||
Assets: |
||||||||||||||||
Securities
available for sale |
$ | 136,800 | $ | 136,800 | $ | | | |||||||||
Loans held for sale |
6,428,165 | | 6,428,165 | |||||||||||||
Mortgage-backed
securities
available for sale: |
||||||||||||||||
FNMA MBS |
33,486,000 | | 33,486,000 | | ||||||||||||
FHLMC MBS |
22,793,000 | | 22,793,000 | | ||||||||||||
GNMA MBS |
4,351,000 | | 4,351,000 | | ||||||||||||
Interest rate lock
commitments |
613,886 | | 613,886 | |||||||||||||
Liabilities: |
||||||||||||||||
Mandatory forward
sales contracts |
(110,203 | ) | | (110,203 | ) | | ||||||||||
Warrants |
(829,645 | ) | | | (829,645 | ) |
Assets and liabilities measured at fair value on a nonrecurring basis at September 30, 2009
are summarized below:
Quoted | ||||||||||||||||
Prices in | ||||||||||||||||
Active | ||||||||||||||||
Markets | Significant | |||||||||||||||
for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
September 30, | Assets | Inputs | Inputs | |||||||||||||
2009 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets: |
||||||||||||||||
Impaired loans |
$ | 24,700,916 | | | $ | 24,700,916 | ||||||||||
Real estate
owned |
11,569,225 | | | 11,569,225 |
Impaired loans, which are usually measured for impairment using the fair value of the
collateral, had a carrying amount of $58.4 million. Of these, $24.7 million were carried at fair
value as a result of a specific valuation allowance of $13.2 million. The fair value of collateral
is usually estimated by third-party or internal appraisals of the collateral. The present value of
estimated cash flows is based on internal models of expected borrower activity. The provision for
loan losses related to changes in the fair value of impaired loans increased by $1.7 million during
the three months ended September 30, 2009.
Real estate owned is recorded at fair value based on property appraisals, less estimated selling
costs, at the date of transfer. The carrying amount of real estate owned is not re-measured to fair
value on a recurring basis, but is subject to fair value adjustments when the carrying amount
exceeds the fair value, less estimated selling costs.
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The carrying amount and estimated fair values of financial instruments at year end were as follows:
September 30, 2009 | June 30, 2009 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
(in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Cash and amounts due from
depository institutions |
$ | 16,547 | $ | 16,547 | $ | 8,465 | $ | 8,465 | ||||||||
Interest-bearing deposits |
824 | 824 | 1,940 | 1,940 | ||||||||||||
Federal funds sold |
11,633 | 11,633 | 10,809 | 10,809 | ||||||||||||
Securities held to maturity |
57,000 | 57,021 | 50,000 | 50,000 | ||||||||||||
Equity securities |
137 | 137 | 103 | 103 | ||||||||||||
Mortgage-backed securities available
for sale |
60,630 | 60,630 | 64,178 | 64,178 | ||||||||||||
Loans receivable, net |
653,224 | 656,235 | 668,460 | 667,697 | ||||||||||||
Loans receivable held for sale, net |
6,428 | 6,428 | 27,078 | 27,078 | ||||||||||||
Federal Home Loan Bank stock |
12,811 | NA | 12,811 | NA | ||||||||||||
Accrued interest receivable |
3,194 | 3,194 | 3,475 | 3,475 | ||||||||||||
Mandatory forward sales contracts |
| | 699 | 699 | ||||||||||||
Commitments to make loans
intended to be sold |
614 | 614 | 506 | 506 | ||||||||||||
Warrants issued |
||||||||||||||||
Liabilities: |
||||||||||||||||
Demand deposits and
passbook savings |
(196,709 | ) | (196,709 | ) | (188,198 | ) | (188,198 | ) | ||||||||
Time deposits |
(500,222 | ) | (510,562 | ) | (536,734 | ) | (547,620 | ) | ||||||||
Line of credit |
(1,339 | ) | (1,339 | ) | (1,366 | ) | (1,366 | ) | ||||||||
Advances from the Federal Home Loan Bank
of Cincinnati |
(45,000 | ) | (46,822 | ) | (35,000 | ) | (36,517 | ) | ||||||||
Repurchase agreement |
(50,000 | ) | (53,000 | ) | (50,000 | ) | (53,900 | ) | ||||||||
Subordinated debentures |
(10,000 | ) | (1,900 | ) | (20,000 | ) | (3,800 | ) | ||||||||
Accrued interest payable |
(1,156 | ) | (1,156 | ) | (1,379 | ) | (1,379 | ) | ||||||||
Mandatory
forward sales contracts |
(110 | ) | (110 | ) | | | ||||||||||
Warrants |
(830 | ) | (830 | ) | | |
The estimated fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable judgment is necessary to
interpret market data to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
The Company used the following methods and assumptions to estimate fair value for items not
described above.
Cash and amounts due from depository institutions, interest bearing deposits, and federal funds
sold. The carrying amount is a reasonable estimate of fair value because of the short maturity of
these instruments.
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Loans receivable. For performing loans receivable, fair value is estimated by discounting
contractual cash flows adjusted for prepayment estimates using discount rates based on secondary
market sources adjusted to reflect differences in servicing and credit costs.
Federal Home Loan Bank stock. It was not practical to determine fair value of FHLB stock due to
restrictions placed on its transferability.
Demand deposits and time deposits. The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using discounted cash flows and rates currently
offered for deposits of similar remaining maturities.
Line of credit. The carrying amount is a reasonable estimate of the fair value.
Advances from the Federal Home Loan Bank of Cincinnati. The fair value of the Banks FHLB debt is
estimated based on the current rates offered to the Bank for debt of the same remaining maturities.
Notes payable and subordinated debentures. The carrying value of the Companys variable-rate note
payable and the Companys subordinated debt is a reasonable estimate of fair value based on the current incremental borrowing rate for
similar types of borrowing arrangements adjusted for the Companys credit risk profile.
Accrued interest receivable and accrued interest payable. The carrying amount is a reasonable
estimate of the fair value.
8. Subordinated debt: On September 1, 2009, the Company entered into an Exchange Agreement (the
Exchange Agreement) with Alesco Preferred Funding IV, Ltd. (the Alesco CDO) and Cohen & Company
Financial Management, LLC (Cohen). The Alesco CDO is the holder of $10.0 million principal amount
trust preferred securities issued by PVF Capital Trust I (the Trust), and Cohen is the collateral
manager for the Alesco CDO. In June 2004, the Company formed the Trust as a special purpose entity
for the sole purpose of issuing $10.0 million of variable-rate trust preferred securities (the
Capital Securities). The Company issued subordinated debentures to the Trust in exchange for the
proceeds of the offering of the trust preferred securities. The trust preferred securities carried
a variable interest rate that adjusts to the three month LIBOR rate plus 260 basis points. The
subordinated debentures were the sole asset of the Trust.
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Under the Exchange Agreement, on September 3, 2009, the Alesco CDO exchanged its $10.0 million of
trust preferred securities for consideration paid by the Company. The consideration paid by the
Company consisted of (i) a cash payment of $500,000; (ii) a number of shares of Company common
stock equal to $500,000 divided by the average daily closing price of the Companys common stock
for the twenty (20) business days prior to September 1, 2009 (the Initial Shares), equating to
205,297 shares; (iii) a warrant (Warrant A) to purchase 769,608 shares of Company common stock;
and (iv) a warrant (Warrant B and together with Warrant A, the Warrants) to purchase a number
of shares of Company common stock equal to 9.9% of any shares of Company common stock issued,
exclusive of any warrant or warrant shares, in exchange for capital securities of PVF Capital Trust
II (Trust II) in the event the Company in the future issues shares of its common stock in
exchange for Trust II capital securities (see Note 12 for more information on Trust II).
The number of shares of Company common stock issuable pursuant to each of Warrant A and Warrant B
may not exceed certain limits. Specifically, the number shares issuable upon the exercise of
Warrant A or Warrant B may not exceed the maximum number of shares of the Companys common stock
such that the Alesco CDO, upon its exercise of the applicable Warrant, shall own 9.9% of the
Companys common stock then issued and outstanding, except that in the event the Alesco CDO
receives comfort from the Office of Thrift Supervision (the OTS) that allows it to rebut the
presumption that its holdings of the Companys common stock constitute control of the Company for
the purpose of the applicable OTS regulations, this limitation shall have no effect. In addition,
the number of shares of Company common stock issuable upon the exercise of Warrant B may not exceed
a number of shares equal to 1,546,991 shares minus the sum of the Initial Shares and 769,608
shares.
As a result of this transaction, the Company recorded a gain of $8,561,530 included in non-interest
income for the period ended September 30, 2009. The estimated fair values of Warrant A and Warrant
B were estimated to be $807,780 and $21,548, respectively and are recorded in accrued expenses and
other liabilities. Warrant A and Warrant B are considered to be derivatives that are not indexed to
the Companys stock and so are not recorded to equity.
The shares of stock, warrants and stock issuable upon the exercise of warrants issued in the
transaction have not been registered under the Securities Act of 1933, as amended and may not be
offered or sold in the United States absent registration or an applicable exemption from such
registration requirements.
9. Regulatory Matters and Managements Plans: On October 19, 2009, the Company and the Bank, each
entered into a Stipulation and Consent to the Issuance of Order to Cease and Desist with the Office
of Thrift Supervision (the OTS), whereby the Company and the Bank each consented to the issuance
of an Order to Cease and Desist promulgated by the OTS without admitting or denying that grounds
exist for the OTS to initiate an administrative proceeding against the Company or the Bank.
The Bank Order requires the Bank to take certain actions including: (i) by December 31, 2009, meet
and maintain a tier one (core) capital ratio of at least 8.0% and a total risk-based capital ratio
of at least 12.0% after the funding of an adequate allowance for loan and lease losses and submit a
detailed plan to accomplish this; (ii) adopt revisions to the Banks liquidity policy to, among
other things, increase the Banks minimum liquidity ratio; (iii) reduce the level of adversely
classified assets to no more than 50% of core capital plus allowance for loan and lease losses
by December 31, 2010 and to reduce the level of adversely classified assets and assets designated
as special mention to no more than 65% of core capital plus
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allowance for loan and lease losses by December 31, 2010; (iv) prepare a new business plan that
will include the requirements contained in the Bank Order and
that also will include well supported and realistic strategies to achieve consistent profitability
by September 30, 2010; (v) restrict quarterly asset growth to an amount not to exceed net interest
credited on deposit liabilities until the OTS approves of the new business plan; (vi) cease to
accept, renew or roll over any brokered deposit or act as a deposit broker, without the prior
written waiver of the Federal Deposit Insurance Corporation; (vii) not declare or pay dividends or
make any other capital distributions from the Bank without receiving prior OTS approval; (viii) not
make any severance or indemnification payments without complying with regulatory requirements
regarding such payments; (ix) comply with prior regulatory notification requirements for any
changes in directors or senior executive officers; (x) not enter into, renew, extend or revise any
contractual arrangement relating to compensation or benefits for any senior executive officer or
director of the Bank, without first providing 30 days prior written regulatory notice of the
proposed transaction; (xi) not increase any salaries, bonuses or directors fees to directors or
senior executive officers without the prior written consent of the OTS; and (xii) ensure compliance
with regulatory requirements for affiliate and insider transactions.
The Company Order contains the following requirements: (i) the Company must submit a capital plan
that includes, among other things, the establishment of a minimum tangible capital ratio of
tangible equity capital to total tangible assets commensurate with the Companys consolidated risk
profile, and specific plans to reduce the risks to the Company from its current debt levels and
debt servicing requirements; (ii) the Company shall not declare, make or pay any cash dividends or
other capital distributions or purchase, repurchase or redeem or commit to purchase, repurchase or
redeem any Company equity stock without the prior non-objection of the OTS, except that this
provision does not apply to immaterial capital stock redemptions that arise in the normal course of
the Companys business in connection with its stock-based compensation plans; (iii) the Company
shall not incur, issue, renew, roll over or increase any debt or commit to do so without the prior
non-objection of the OTS (debt includes loans, bonds, cumulative preferred stock, hybrid capital
instruments such as subordinated debt or trust preferred securities, and guarantees of debt); (iv)
the Company may not engage in transactions with any subsidiary or affiliate without the prior
non-objection of the OTS except certain transactions exempt under applicable regulations and
inter-company cost-sharing transaction; and (v) the Company must comply with similar restrictions
on the payment of severance and indemnification payments, prior OTS approval of directorate and
management changes and prior OTS approval of employment contracts and compensation arrangements
contained in the Bank Order.
The Bank Order and the Company Order will remain in effect until terminated, modified, or suspended
in writing by the OTS.
At September 30, 2009, the Banks tier one (core) capital ratio was 6.70% and its total risk-based
capital ratio was 10.03%. The Company has established a Capital Committee to put action plans in
place to raise the Banks capital to the threshold specified in the Bank Order.
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10. Other comprehensive income: Other comprehensive income (loss) components and related tax
effects were as follows at September 30, 2009 and 2008:
2009 | 2008 | |||||||
Unrealized holding gains (losses) on
available for sale securities |
$ | 1,016,230 | $ | (1,738,800 | ) | |||
Reclassification adjustment for losses (gains)
realized in income |
| 1,738,800 | ||||||
Net unrealized gains (losses) |
1,016,230 | | ||||||
Tax effect |
355,681 | | ||||||
Other comprehensive income |
$ | 670,711 | $ | |||||
Total comprehensive income (loss), which includes net income (loss) plus other comprehensive
income, was $4,870,639 and $(901,257) for the three months ended September 30, 2009 and 2008.
11. Adoption of New Accounting Standards: On December 4, 2007, the Financial Accounting Standards
Board (FASB) issued new guidance impacting Accounting Standards Codification (ASC) 805, Business
Combinations, with the objective to improve the comparability of information that a company
provides in its financial statements related to a business combination. This new guidance
establishes principles and requirements for how the acquirer: (i) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and (iii) determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects
of the business combination. The statement does not apply to combinations between entities under
common control. This statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The impact of adoption of this standard on the Companys financial
statements was not material.
In December 2007, the FASB issued guidance impacting ASC 810-10, Consolidation, establishing the
accounting for noncontrolling interests. A noncontrolling interest, also known as a minority
interest, is the portion of equity in a subsidiary not attributable to a parent. The objective of
this statement is to improve upon the consistency of financial information that a company provides
in its consolidated financial statements. Consistent with SFAS No. 141(R), SFAS No. 160 is
effective for fiscal years beginning on or after December 15, 2008. The impact of adoption of this
standard on the Companys financial statements was not material.
Effect of Newly Issued but not yet Effective Accounting Standards
In June 2009, FASB issued guidance impacting ASC 810-10, Consolidation. The objective the new
guidance is to improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial performance, and
cash flows; and a
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transferors continuing involvement in transferred financial assets. The new guidance is effective
as of the beginning of each reporting entitys first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting period, and for interim
and annual reporting periods thereafter. Management does not expect the impact of adoption of this
standard to be material.
In June 2009, FASB issued additional guidance impacting ASC 810-10, Consolidation to improve
financial reporting by enterprises involved with variable interest entities and to provide more
relevant and reliable information to users of financial statements. The new guidance shall be
effective as of the beginning of each reporting entitys first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application is prohibited. Management does
not expect the impact of adoption of this standard to be material.
12. Subsequent events:
Exchange
Agreement
On October 9, 2009, the Company entered into an Exchange Agreement (the
Exchange Agreement) with investors, including principally directors and officers of the Company and the Bank
and certain individuals not affiliated with the Company (collectively, the Investors).
The Investors hold trust preferred securities with an aggregate liquidation amount of $10.0 million
issued by PVF Capital Trust II (the Trust). In July 2006, the Company formed the Trust as a
special purpose entity for the sole purpose of issuing $10.0 million of trust preferred securities
(the Capital Securities). The Company issued subordinated debentures to the Trust in exchange for
the proceeds of the offering of the trust preferred securities. The trust preferred securities
carry a fixed rate of 7.462% until September 15, 2011 and thereafter a variable interest rate that
adjusts to the three month LIBOR rate plus 175 basis points. The subordinated debentures are the
sole asset of the Trust.
The Exchange Agreement provides that on the closing date, the Investors will exchange the $10.0
million of trust preferred securities for aggregate consideration consisting of (i) $400,000 in
cash, (ii) shares of common stock valued at $600,000 based on the average daily closing price of
the common stock over the 20 trading days prior to the closing of the transaction (the 20-Day
Average Closing Price) and (iii) warrants to purchase 769,608 shares of common stock plus a number
of shares of common stock equal to 9.9% of the shares to be issued to the investors as described in
clause (ii) above. In addition, the Investors will receive additional warrants that become
exercisable in the event the Company completes one or more public or private offerings of its
common stock within a year. The additional warrants will give the Investors the right to acquire
additional shares of common stock so that the total number of shares they could acquire under all
warrants would entitle them to purchase an aggregate of 4.9% of the Companys common stock
outstanding following the offering or offerings completed during that one-year period. The exercise
price for the warrants is the lesser of (i) $4.00 per share, (ii) the 20-Day Average Closing Price,
or (iii) if during the term of the warrants the Company sells shares of common stock in a public or
private offering, the price at which shares are sold in that offering. The Warrants are exercisable
for five years following the closing.
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Upon consummation of the transaction, the Company anticipates that the Capital Securities, common
securities issued by the Trust and the Subordinated Debentures will be cancelled and will no longer
be outstanding.
Consummation of the Exchange is subject to the approval of the Exchange by the shareholders of the
Company pursuant to the rules and regulations of The Nasdaq Stock Market, Inc. The Company intends
to submit a proposal for the approval of the Exchange to its shareholders at the Companys upcoming
2009 annual meeting of stockholders. The directors of the Company have executed voting agreements
agreeing to vote shares of Common Stock they hold in favor of the Exchange. Consummation of the
Exchange also is subject to other customary closing conditions.
The shares of stock, warrants and stock issuable upon the exercise of warrants to be issued in the
Exchange have not been registered under the Securities Act of 1933, as amended and may not be
offered or sold in the United States absent registration or an applicable exemption from such
registration requirements.
PVF Capital Corp. will file a preliminary proxy statement concerning the exchange with the
Securities and Exchange Commission and expects to file and mail a definitive proxy statement to
shareholders as soon as practicable. Shareholders of PVF Capital Corp. are urged to read the proxy
statement when it is available because it will contain important information. Investors are able to
obtain all documents filed with the SEC by PVF Capital Corp. free of charge at the SECs website,
www.sec.gov. In addition, documents filed with the SEC by PVF Capital Corp. may be read and copied
at the SECs public reference room at 100 F Street, N.E., Washington, DC. The directors, executive
officers, and certain other members of management and employees of PVF Capital Corp. are expected
to be participants in the solicitation of proxies in favor of the exchange from the shareholders of
PVF Capital Corp. Information about the directors and executive officers of PVF Capital Corp. will
be included in the proxy statement to be filed with the SEC.
Repurchase
Agreement
On October 29, 2009, the Company received notice from the counter-party to its repurchase agreement
stating that due to the regulatory capital requirements included in
the Cease and Desist Orders, more fully
described in Note 9, that the counter-party is entitled to declare that an Event of Default had occurred
and pursue all its remedies under the repurchase agreement. The counter-party did not indicate its
intention to declare the Company in default. Among its remedies, the counter-party could unwind the
trade at market value. This would result in a loss to the Company of approximately $3.0 million.
Other
Management has evaluated events occurring subsequent to the balance sheet date through November 6,
2009 (the date on which the financial statements were issued) and determined no other items require
adjustment in or additional disclosure to the financial statements.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis discusses changes in financial condition and results of operations at and
for the three-month period ended September 30, 2009 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, 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 Companys market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Companys 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 Companys financial performance and could
cause the Companys 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
The Company generally seeks to fund loan activity and liquidity by generating deposits through its
branch network and through the use of various borrowing facilities. During the period, the Company
funded a decrease in deposits and an increase in cash and cash equivalents with repayments of loans
and short-term advances from the Federal Home Loan Bank. Additionally, the Company exchanged cash,
common stock and warrants to acquire common stock in exchange for the cancellation of $10 million
of subordinated debt.
In addition, the Company continued the origination of fixed-rate single-family loans for sale in
the secondary market. The origination and sale of fixed-rate loans has historically generated gains
on sale and allowed the Company to increase its investment in loans serviced. Consolidated assets
of PVF were $887.1 million as of September 30, 2009, a decrease of approximately $25.1 million, or
2.8%, as compared to June 30, 2009. The Banks regulatory capital ratios for tier one core capital,
tier one risk-based capital, and total risk-based capital were 6.70%, 8.77% and 10.03%,
respectively, at September 30, 2009.
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Part I Financial Information
Item 2
During the three months ended September 30, 2009, the Companys cash and cash equivalents, which
consist of cash, interest-bearing deposits and federal funds sold, increased $7.8 million, or
36.7%, as compared to June 30, 2009. The change in the Companys cash, cash equivalents and federal
funds sold consisted of increases to cash and federal funds sold offset by a decrease to
interest-bearing deposits. The increase in cash and cash equivalents resulted from the Banks
borrowing of a Federal Home Loan Bank advance of $10 million dollars at the end of the quarter in
order to maintain sufficient liquidity for the origination of loans receivable held for sale and is
in accordance with the Banks decision to maintain higher cash balances in order to bolster the
Companys liquidity.
Mortgage-backed securities available for sale decreased by $3.5 million as the result of the
purchase of $1.5 million in mortgage-backed securities, the principal repayment of $6.0 million,
and a positive market valuation adjustment of $1.0 million for securities held for sale.
Securities held to maturity increased by $7.0 million during the three months ended September 30,
2009 as a result of the Bank purchasing agency securities for investment and to pledge as
collateral against the repurchase agreement.
Loans receivable, net, decreased by $15.2 million, or 2.3%, during the three months ended September
30, 2009. The decrease in loans receivable included decreases to multi-family residential, land,
commercial equity line of credit, construction residential, construction multi-family, construction
commercial loans, and consumer loans, partially offset by increases to one-to-four family,
commercial, and home equity line of credit loans. The increase to commercial real estate loans was
primarily the result of commercial construction loans converted to permanent financing.
Following is a breakdown of loans receivable at September 30, 2009 and June 30, 2009:
September 30, | June 30, | |||||||
2009 | 2009 | |||||||
Real estate mortgages: |
||||||||
One-to-four family residential |
$ | 160,353,613 | $ | 158,955,714 | ||||
Home equity line of credit |
88,946,898 | 88,406,791 | ||||||
Multi-family residential |
56,749,908 | 58,568,073 | ||||||
Commercial |
195,256,770 | 192,114,887 | ||||||
Commercial equity line of credit |
44,181,563 | 46,286,802 | ||||||
Land |
60,308,532 | 60,922,130 | ||||||
Construction residential |
32,656,177 | 39,237,333 | ||||||
Construction multi-family |
4,944,559 | 5,211,399 | ||||||
Construction commercial |
16,684,318 | 20,381,398 | ||||||
Total real estate mortgages |
660,082,338 | 670,084,527 | ||||||
Non-real estate loans |
26,881,146 | 32,155,056 | ||||||
Total loans receivable |
686,963,484 | 702,239,583 | ||||||
Net deferred loan origination fees |
(1,915,363 | ) | (2,296,349 | ) | ||||
Allowance for loan losses |
(31,823,982 | ) | (31,483,205 | ) | ||||
Loans receivable, net |
$ | 653,224,139 | $ | 668,460,029 | ||||
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Item 2
Park View Federal Savings Bank does not originate sub-prime loans and only originates Alt A loans
for sale, without recourse, in the secondary market. All one-to-four family loans are underwritten
according to agency underwriting standards. Exceptions, if any, are submitted to the loan committee
for approval. Any exposure the Bank may have to these types of loans is immaterial and
insignificant.
The decrease of $20.6 million in loans receivable held for sale is the result of timing differences
between the origination and the sale of loans.
Real estate owned activity for the current three month period consisted of the addition of 4
single-family properties and one commercial property totaling approximately $1.7 million offset by
the disposal of 10 single-family properties, one parcel of land, and 2 commercial properties that
had a carrying amount totaling $1.7 million. The Bank incurred a loss of approximately $90,000 on
the disposition of these properties. At September 30, 2009 the Bank had 39 properties totaling
$11.6 million in real estate owned. The real estate owned included 21 single-family properties, 13
parcels of land, and 5 commercial properties.
Deposits decreased by $28.0 million, or 3.9%, primarily as a result of the maturity of $25.0
million in brokered deposits partially offset by modest increases to retail certificates of deposit
and other transactional accounts. The increase of $10.0 million in short-term advances from the
Federal Home Loan Bank of Cincinnati was the result of the Bank borrowing funds to maintain
sufficient liquidity for the origination of loans receivable held for sale.
The decrease in subordinated debentures is the result of the previously mentioned transaction in
which the Company entered into an exchange agreement whereby the Company paid $500,000 in cash, and
issued $500,000 in common stock and warrants valued at $800,000 in exchange for the cancellation of
$10.0 million of the Trust Preferred Obligation of PVF Capital Trust I. This transaction resulted
in a pretax gain of $8.6 million.
The increase in advances from borrowers for taxes and insurance of $2.5 million is attributable to
timing differences between the collection and payment of taxes and insurance.
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Part I Financial Information
Item 2
RESULTS OF OPERATIONS
Three months ended September 30, 2009,
compared to three months ended
September 30, 2008.
compared to three months ended
September 30, 2008.
PVFs 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 Companys
interest-rate spread is affected by regulatory, economic and competitive factors that influence
interest rates, loan demand, the collectibility of loans, and deposit flows. Net interest income
also includes amortization of loan origination fees, net of origination costs.
PVFs 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, loan loss
provisions and costs associated with the acquisition, maintenance and disposal of real estate.
The Companys net income for the three months ended September 30, 2009 was $4,199,900 as compared
to a loss of $901,200 for the prior year comparable period. This represents an increase of
$5,101,100 when compared with the prior year comparable period. The primary reason the Company was
profitable for the period was a gain on an exchange the Company entered into during the period,
resulting in the cancellation of $10 million of subordinated debt.
Net interest income for the three months ended September 30, 2009 decreased by $826,400, or 15.6%,
as compared to the prior year comparable period. This resulted from a decrease of $2,493,500, or
20.0%, in interest income partially offset by a decrease of $1,667,100, or 23.2%, in interest
expense. The decrease in net interest income was attributable to a decline of 39 basis points in
the interest-rate spread for the quarter ended September 30, 2009 as compared to the prior year
comparable period. The decrease in interest-rate spread resulted from increases in nonperforming
loans in addition to lower market rates on interest earning assets.
22
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Item 2
RESULTS OF OPERATIONS continued
The following table presents comparative information for the three months ended September 30, 2009
and 2008 about average balances and average yields and costs for interest-earning assets and
interest-bearing liabilities (dollars in thousands).
September 30, 2009 | September 30, 2008 | |||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||
Balance | Interest | Yield/Cost | Balance | Interest | Yield/Cost | |||||||||||||||||||
Interest-earning assets |
||||||||||||||||||||||||
Loans (1) |
$ | 732,889 | $ | 9,157 | 5.00 | % | $ | 721,682 | $ | 11,412 | 6.33 | % | ||||||||||||
Mortgage-backed securities |
58,866 | 663 | 4.51 | % | 54,994 | 700 | 5.09 | % | ||||||||||||||||
Investments and other |
37,548 | 177 | 1.89 | % | 39,157 | 379 | 3.87 | % | ||||||||||||||||
Total interest-earning
assets |
829,303 | 9,997 | 4.82 | % | 815,833 | 12,491 | 6.12 | % | ||||||||||||||||
Non-interest-earning assets |
60,342 | 70,627 | ||||||||||||||||||||||
Total Assets |
$ | 889,645 | $ | 886,460 | ||||||||||||||||||||
Interest-bearing
liabilities |
||||||||||||||||||||||||
Deposits |
$ | 689,037 | $ | 4,358 | 2.53 | % | $ | 676,187 | $ | 5,943 | 3.52 | % | ||||||||||||
Borrowings |
90,042 | 912 | 4.05 | % | 87,553 | 920 | 4.20 | % | ||||||||||||||||
Subordinated debt |
16,957 | 250 | 5.90 | % | 20,000 | 325 | 6.50 | % | ||||||||||||||||
Total interest-bearing
liabilities |
797,412 | 5,520 | 2.77 | % | 783,740 | 7,188 | 3.67 | % | ||||||||||||||||
Non-interest-bearing
liabilities |
38,366 | 33,127 | ||||||||||||||||||||||
Total liabilities |
$ | 837,445 | $ | 816,867 | ||||||||||||||||||||
Shareholders equity |
52,200 | 69,593 | ||||||||||||||||||||||
Total
liabilities and shareholders equity |
$ | 889,645 | $ | 886,460 | ||||||||||||||||||||
Net interest income |
$ | 4,477 | $ | 5,303 | ||||||||||||||||||||
Interest-rate spread |
2.05 | % | 2.46 | % | ||||||||||||||||||||
Yield on interest-earning
assets |
2.16 | % | 2.60 | % | ||||||||||||||||||||
Interest-earning assets to
interest-bearing
liabilities |
104.00 | % | 104.09 | % | ||||||||||||||||||||
(1) | Non-accruing loans are included in the average loan balances for the periods presented. |
23
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Part I Financial Information
Item 2
RESULTS OF OPERATIONS continued
For the three months ended September 30, 2009, a provision for loan losses of $1,760,000 was
recorded, while a provision for loan losses of $691,000 was recorded in the prior year comparable
period. The provision for loan losses for the current period reflects managements judgments about
the credit quality of the Banks loan portfolio. The allowance for loan losses consists of a
specific component and a general component.
Following is a breakdown of the valuation allowances:
September 30, 2009 | June 30, 2009 | |||||||
General valuation allowance |
$ | 14,927,162 | $ | 15,071,653 | ||||
Specific valuation allowance |
16,896,743 | 16,411,552 | ||||||
Total valuation allowance |
$ | 31,823,905 | $ | 31,483,205 | ||||
Managements approach includes establishing a specific valuation allowance by evaluating individual
non-performing loans for probable losses based on a systematic approach involving estimating the
realizable value of the underlying collateral. Additionally, management established a general
valuation allowance for pools of performing loans segregated by collateral type. For the general
valuation allowance, management is applying a prudent loss factor based on historical loss
experience, trends based on changes to non-performing loans and foreclosure activity, and a
subjective evaluation of the local population and economic environment. The loan portfolio is
segregated into categories based on collateral type and a loss factor is applied to each category.
The initial basis for each loss factor is the Companys loss experience for each category.
Historical loss percentages are calculated as transfers from the general reserve to the specific
reserve, indicating a loss has been incurred, for each risk category during the past 12 months and
dividing the total by the average balance of each category. Presently, historical loss percentages
are updated on a monthly basis using a 12-month rolling average. Subjective adjustments are made to
the Banks historical experience when deemed necessary by management.
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. The current period provision for
loan losses reflects the impact on the loss factors applied to pools of performing loans due to the
recent increase in the Companys historical loss experience.
The Company continues to aggressively review and monitor its loan portfolio. This review involves
analyzing all large borrowing relationships, delinquency trends, and loan collateral valuation in
order to identify impaired loans. This analysis is performed so that management can identify all
troubled loans and loan relationships as well as deteriorating loans and loan relationships. As a
result of this review detailed action plans are developed to either resolve or liquidate the loan
and end the borrowing relationship.
24
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Part I Financial Information
Item 2
RESULTS OF OPERATIONS continued
The following table provides statistical measures of non-performing assets:
September 30, | June 30, | |||||||
2009 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Loans on non-accruing status (1): |
||||||||
Real estate mortgages: |
||||||||
One-to-four family residential |
$ | 16,494 | $ | 15,551 | ||||
Commercial |
16,294 | 13,140 | ||||||
Multi-family residential (2) |
371 | 371 | ||||||
Construction and land (2) |
40,710 | 39,757 | ||||||
Non real estate |
1,042 | 943 | ||||||
Total loans on non-accrual status: |
$ | 74,911 | $ | 69,762 | ||||
Ratio of non-performing loans to total loans |
10.90 | % | 10.03 | % | ||||
Other non-performing assets (3) |
$ | 11,569 | $ | 11,608 | ||||
Total non-performing assets |
$ | 86,480 | $ | 81,370 | ||||
Total non-performing assets to total assets |
9.75 | % | 8.92 | % | ||||
(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. 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) | Two loans totaling $3,308,500 were reclassified from multi-family residential to construction and land for the period ended June 30, 2009. | |
(3) | Other non-performing assets represent property acquired by the Bank through foreclosure or repossession. |
The levels of non-accruing loans at June 30, 2009 and September 30, 2009 are attributable to
poor current local and economic conditions. Residential markets nationally and locally have been
adversely impacted by a significant increase in foreclosures as a result of the problems faced by
sub-prime borrowers and the resulting contraction of residential credit available to all but the
most credit worthy borrowers. Land development projects nationally and locally have seen slow sales
and price decreases. The Company has significant exposure to the residential market in the Greater
Cleveland, Ohio area. As a result, the Company has seen a significant increase in non-performing
loans. Due to an increase in foreclosure activity in the area, the foreclosure process in Cuyahoga
County, the Companys primary market, has become elongated. As such, loans have remained past due
for considerable periods prior to being collected, transferred to real estate owned, or charged
off.
Of the $74.9 million and $69.8 million in non-accruing loans at September 30, 2009 and June 30,
2009, $58.4 million and $58.6 million, respectively, were individually identified as impaired. All
of these loans are collateralized by various forms of non-residential real estate or residential
construction. These loans were reviewed for the likelihood of full collection based primarily on
the value of the underlying collateral, and, to the extent collection of loan principal was in
doubt, specific
loss reserves were established. The evaluation of the underlying collateral included a
consideration of the potential impact of erosion in real estate values due to poor
25
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Part I Financial Information
Item 2
RESULTS OF OPERATIONS continued
local economic conditions and a potentially long foreclosure process. This consideration involves
obtaining an updated valuation of the underlying real estate collateral and estimating carrying and
disposition costs to arrive at an estimate of the net realizable value of the collateral. Through
this process, specific loss reserves were established related to these loans outstanding at
September 30, 2009 and June 30, 2009 of $12,339,379 and $12,684,241, respectively.
The remaining balance of non-performing loans represents homogeneous one-to-four family loans.
These loans are also subject to the rigorous process for evaluating and accruing for specific loan
loss situations described above. Through this process, specific loan loss reserves of $3.1 million
and $2.1 million were established for these loans as of September 30, 2009 and June 30, 2009,
respectively.
There are $15.6 million and $4.4 million in performing loans for which the Company has established
specific loan loss reserves as of September 30, 2009 and June 30, 2009. These loans are
collateralized by various forms of one-to-four family real estate, non-residential real estate or
residential construction. These loans are also subject to the rigorous process for evaluating and
accruing for specific loan loss situations described above. Through this process, specific loan
loss reserves of $1.5 million and $1.6 million were established for these loans as of September 30,
2009 and June 30, 2009, respectively.
For the three months ended September 30, 2009, non-interest income increased by $10,905,000 from
the prior year comparable period. This resulted primarily from the Company entering into an
exchange agreement whereby the Company paid $500,000 in cash, and issued $500,000 in common stock
and warrants valued at $800,000 in exchange for the cancellation of $10.0 million of the Trust
Preferred Obligation of PVF Capital Trust I. This transaction resulted in a pretax gain of
$8,561,500. In addition, income from mortgage banking activities increased by $597,000 as a result
of increased loan refinance activity resulting from cyclically low market rates in the current
period. In the three month period ended September 30, 2008, the Company recorded an impairment loss
on FHLMC and FNMA preferred stock totaling $1,738,800. Other, net increased by 129,700 primarily
due to income generated by the Companys partnership interest in a Title Company. These increases
were partially offset by increases to losses on real estate owned of $76,700, and declines in
income on bank-owned life insurance (BOLI) of $32,500, and service and other fees of $12,700.
During these periods, the Company pursued a strategy of originating long-term fixed-rate loans
pursuant to FHLMC and FNMA guidelines and selling such loans to the FHLMC or the FNMA, while
retaining the servicing.
The decline in earnings on BOLI is the result of the Bank transferring the balances held in
separate accounts from investment in mortgage-backed securities to money
market accounts because of market volatility. The earnings of the money market account were
insufficient to offset the cost of the insurance for most of the current period. The Bank was able
to restructure its investment in BOLI in the current three month period, transferring the balances
from money market accounts into separate accounts generating earnings in excess of the cost of
insurance.
26
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Part I Financial Information
Item 2
RESULTS OF OPERATIONS continued
Non-interest expense for the three months ended September 30, 2009 increased by $1,300,500, or
26.3%, from the prior year comparable period. This resulted from an increase in outside services of
$777,400, federal deposit insurance of $374,300, and an increase in real estate owned expense of
$593,300, partially offset by decreases in compensation and benefits of 316,300, office occupancy
and equipment of $28,500 and other, net of $99,700.
The increase in outside services is due to increased consulting fees. The increase in the cost of
FDIC insurance is due to a change in risk rating for the Bank and higher assessment rates charged
on deposits, while the increase to real estate owned expense is attributable to the acquisition and
maintenance of properties acquired through foreclosure.
The federal income tax provision for the three-month period ended September 30, 2009 represented an
effective rate of 33.8% for the current period compared to a negative effective rate of 34.0% for
the prior year comparable period.
LIQUIDITY AND CAPITAL RESOURCES
The Companys 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. The primary sources of funds are deposits,
principal and interest payments on loans, proceeds from the sale of loans, repurchase agreements,
and advances from the 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. The Companys most liquid assets are cash and
cash equivalents. The levels of these assets are dependent on the Companys operating, financing,
lending and investing activities during any given period. Additional sources of funds include lines
of credit available from the FHLB.
During the current period the Company enhanced its liquidity position by using payments received on
loans and mortgage-backed securities to repay the decrease in deposits and increase cash and cash
equivalents. Management believes the Company maintains sufficient liquidity to meet current
operational needs.
The holding company, PVF Capital Corp., has certain ongoing cash needs primarily related to trust
preferred securities and the payment of dividends to stockholders. During the Dec 2008 quarter, the
Company elected to defer interest payments on the trust preferred securities and suspend the
payment of cash dividends to stockholders. As previously stated, the Company has entered into an
exchange agreement whereby the Company paid $500,000 in cash, and issued $500,000 in common
27
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Part I Financial Information
Item 2
LIQUIDITY AND CAPITAL RESOURCES continued
stock and warrants valued at $800,000 in exchange for the cancellation of $10.0 million of the
Trust Preferred Obligation of PVF Capital Trust I. Additionally, the Company has entered into an
agreement to exchange cash, common shares and warrants to acquire common shares for the $10.0
million Trust Preferred Obligation of PVF Capital Trust II. The Company anticipates that the
Capital Securities, common securities issued by the Trust and the Subordinated Debentures will be
cancelled and will no longer be outstanding. This transaction is pending shareholder approval, and
is expected to be completed in December 2009 and to result in a pretax gain of approximately $8.7
million. The completion of both transactions will result in an annual reduction in cash paid for
interest expense of approximately $1.1 million. Cash dividends to stockholders totaled $77,700 for
the three months ended September 30, 2008. Cash at the holding company totaled $420,900 at
September 30, 2009.
On October 19, 2009, the Company and the Bank each entered into a Stipulation and Consent to the
Issuance of Order to Cease and Desist with the Office of Thrift Supervision (the OTS). Under the
Order, the Bank may not declare or pay dividends or make any other capital distributions from the
Bank without receiving prior OTS approval. The Company shall not declare, make or pay any cash
dividends or other capital distributions or purchase, repurchase or redeem or commit to purchase,
repurchase or redeem any Company equity stock without the prior non-objection of the OTS. The
Company has withdrawn its application to participate in the U.S. Treasurys Capital Purchase
Program.
Item 3
QUANTITATIVE AND QUALTITATIVE DISCLOSURES ABOUT MARKET RISK
Risk management is essential in operating a financial services company effectively and
successfully. Risks inherent in the financial services industry include credit, operational,
interest rate, market and liquidity risk. Credit risk involves the risk of uncollectible amounts
due on loans or other financial or insurance instruments. Operational risk is the risk of fraud,
legal and compliance issues, processing errors, technology and disaster recovery, and breaches in
business continuation and internal controls. Changes in interest rates affecting net interest
income are interest rate risk. Market risk is the risk that a financial institutions earnings and
capital are adversely affected by movements in market rates and prices. The inability to fund
obligations due to investors, borrowers and depositors is liquidity risk. The primary risks are
credit risk and market risk.
During most of the three-month period ended September 30, 2009, declining short-term rates,
competitive local market demand for deposits has resulted in a decrease to the Banks cost of
funds, while the yield on interest-earning assets has declined due to decreases in short-term
borrowing rates along with increases in impaired loans, resulting in a decrease in interest-rate
spread. The compression of interest-rate spread is a function of a flatter yield curve for much of
the period. Although the yield curve has returned to a more traditional positive slope during the
current quarter, there remains a lag between market rates and the re-pricing of interest-earning
assets and interest-bearing liabilities. The Companys strategy is to keep the maturities of
interest-earning assets and interest-bearing liabilities short. Managements efforts are focused on
mitigating the impact of the shape of the yield curve on the interest-rate spread.
28
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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 Companys principal executive
officer and principal financial officer, of the effectiveness of the Companys disclosure controls
and procedures. Based on this evaluation, the Companys principal executive officer and principal
financial officer concluded that the Companys 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: (i) is recorded, processed,
summarized and reported, within the time periods specified in the Securities and Exchange
Commissions rules and forms; and (ii) is accumulated and communicated to the Companys management,
including its principal executive and principal financial officers or persons performing similar
functions, as appropriate to allow timely decisions regarding disclosure. It should be noted that
the design of the Companys 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 Companys
principal executive and financial officers have concluded that the Companys disclosure controls
and procedures are, in fact, effective at a reasonable assurance level. There have been no changes
in the Companys internal control over financial reporting identified in connection with the
evaluation required by paragraph (d) of Securities and Exchange Commission Rule 13a-15 that
occurred during the Companys last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over financial reporting except as set
forth in its Annual Report on Form 10-K for the year ended June 30, 2009.
Part II Other Information
Item 1. Legal Proceedings. N/A
Item 1A. Risk Factors
For information regarding the Companys risk factors see Risk Factors, in the Companys Form 10-K
for the fiscal year ended June 30, 2009 filed with the Securities and Exchange Commission on
September 28, 2009. As of September 30, 2009, the risk factors of the Company have not changed
materially from those reported in the Form 10-K except as set forth below.
The Company and the Bank are subject to restrictions and conditions of Cease and Desist Orders
issued by the Office of Thrift Supervision. Both entities have incurred and expect to continue to
incur significant additional regulatory compliance expense in connection with the Cease and Desist
Orders. Failure to comply with the Cease and Desist Orders could result in additional enforcement
action against us.
The Office of Thrift Supervision has issued Cease and Desist Orders against PVF and Park View
Federal. The Cease and Desist Orders contain a number of significant directives, including higher
capital requirements, requirements to reduce the level of classified and criticized assets, growth
and operating restrictions, restrictions on brokered deposits and
29
Table of Contents
Part II Other Information continued
restrictions on dividend payments. These restrictions may impede the Companys ability to operate
its own business and to effectively compete in our markets. If we fail to comply with the terms and
conditions of the Cease and Desist Orders, the Office of Thrift Supervision could take additional
enforcement action against us, including the imposition of further operating restrictions or
directing us to seek a merger partner. We have incurred and expect to continue to incur significant
additional regulatory compliance expense in connection with the Cease and Desist Orders, and we
will incur ongoing expenses attributable to compliance with the terms of the orders. It is possible
regulatory compliance expenses related to the Cease and Desist Orders could have a material adverse
impact on us in the future. In addition, the Office of Thrift Supervision must approve any
deviation from our business plan, which could limit our ability to make any changes to our
business, which could negatively impact the scope and flexibility of our business activities.
Further, the imposition of the Cease and Desist Orders may make it more difficult to attract and
retain qualified employees. While we plan to take appropriate actions and intend to seek to have
the Cease and Desist Orders terminated in the future, such actions may not result in the Office of
Thrift Supervision terminating the Cease and Desist Orders.
Our classified asset levels currently are not sufficient to achieve compliance with the classified
asset levels we must meet by December 31, 2010.
The Office of Thrift Supervision has directed Park View Federal to reduce the level of adversely
classified assets to no more than 50% of core capital plus allowance for loan and lease losses by
December 31, 2010 and to reduce the level of adversely classified assets and assets designated as
special mention to no more than 65% of core capital plus allowance for loan and lease losses by
December 31, 2010. At September 30, 2009, we did not meet these requirements and our levels of
adversely classified assets and adversely classified assets and assets designated as special
mention to core capital plus allowance for loan and lease losses were 1.40% and 1.73%,
respectively. We do not expect to achieve compliance with these classified asset ratios prior to
December 31, 2010. If we fail to meet the required classified asset ratios by December 31, 2010,
the Office of Thrift Supervision could take additional enforcement action against us, including the
imposition of further operating restrictions. The Office of Thrift Supervision also could also
direct us to seek a merger partner.
Higher loan losses could require us to increase our allowance for loan losses through a charge to
earnings.
When we loan money we incur the risk that our borrowers do not repay their loans. We reserve for
loan losses by establishing an allowance through a charge to earnings. The amount of this allowance
is based on our assessment of loan losses inherent in our loan portfolio. The process for
determining the amount of the allowance is critical to our financial results and condition. It
requires subjective and complex judgments about the future, including forecasts of economic or
market conditions that might impair the ability of our borrowers to repay their loans. We might
underestimate the loan losses inherent in our loan portfolio and have loan losses in excess of the
amount reserved. We might increase the allowance because of changing economic conditions. For
example, in a rising interest rate environment, borrowers with adjustable-rate loans could see
their payments increase. There may be a
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Part II Other Information continued
significant increase in the number of borrowers who are unable or unwilling to repay their loans,
resulting in our charging off more loans and increasing our allowance. In addition, when real
estate values decline, the potential severity of loss on a real estate-secured loan can increase
significantly, especially in the case of loans with high combined loan-to-value ratios. The recent
decline in the national economy and the local economies of the areas in which the loans are
concentrated could result in an increase in loan delinquencies, foreclosures or repossessions
resulting in increased charge-off amounts and the need for additional loan loss allowances in
future periods. In addition, our determination as to the amount of our allowance for loan losses is
subject to review by our primary regulator, the Office of Thrift Supervision, as part of its
examination process, which may result in the establishment of an additional allowance based upon
the judgment of the Office of Thrift Supervision after a review of the information available at the
time of its examination. Our allowance for loan losses amounted to $31.8 million, or 4.82% of total
loans outstanding and 42.5% of nonperforming loans, at September 30, 2009. Our allowance for loan
losses at September 30, 2009 may not be sufficient to cover future loan losses. A large loss could
deplete the allowance and require increased provisions to replenish the allowance, which would
decrease our earnings. In addition, at September 30, 2009, we had 31 loan relationships with
outstanding balances that exceeded $3.0 million, all of which were performing according to their
original terms. However, the deterioration of one or more of these loans could result in a
significant increase in our nonperforming loans and our provision for loan losses, which would
negatively impact our results of operations.
A continuation of recent turmoil in the financial markets could have an adverse effect on our
financial position or results of operations.
Since 2008, United States and global financial markets have experienced severe disruption and
volatility, and general economic conditions have declined significantly. Adverse developments in
credit quality, asset values and revenue opportunities throughout the financial services industry,
as well as general uncertainty regarding the economic, industry and regulatory environment, have
had a marked negative impact on the industry. Dramatic declines in the U.S. housing market over the
past two years, with falling home prices, increasing foreclosures and increasing unemployment, have
negatively affected the credit performance of mortgage loans and resulted in significant
write-downs of asset values by many financial institutions. The United States and the governments
of other countries have taken steps to try to stabilize the financial system, including investing
in financial institutions, and have also been working to design and implement programs to improve
general economic conditions. Notwithstanding the actions of the United States and other
governments, these efforts may not succeed in restoring industry, economic or market conditions and
may result in adverse unintended consequences. Factors that could continue to pressure financial
services companies, including PVF, are numerous and include (i) worsening credit quality, leading
among other things to increases in loan losses and reserves, (ii) continued or worsening disruption
and volatility in financial markets, leading to among other things, continuing reductions in asset
values, (iii) capital and liquidity concerns regarding financial institutions generally, (iv)
limitations resulting from or imposed in connection with governmental actions intended to stabilize
or provide additional regulation of the financial system, or (v) recessionary conditions that are
deeper or last longer than currently anticipated.
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Part II Other Information continued
The current economic recession could result in increases in our level of non-performing loans
and/or reduce demand for our products and services, which would lead to lower revenue, higher loan
losses and lower earnings.
Our business activities and earnings are affected by general business conditions in the United
States and in our local market area. These conditions include short-term and long-term interest
rates, inflation, unemployment levels, monetary supply, consumer confidence and spending,
fluctuations in both debt and equity capital markets and the strength of the economy in the United
States generally and in our market area in particular. In the current recession, the national
economy has experienced a general economic downturn, with rising unemployment levels, declines in
real estate values and erosion in consumer confidence. Our primary market area has also been
negatively impacted by the current economic recession. From September 2008 to August 2009,
unemployment rates in the Cleveland-Elyria-Mentor metropolitan statistical area increased from 6.5%
to 8.9%. In addition, our primary market area has also experienced a softening of the local real
estate market, a reduction in local property values and a decline in the local manufacturing
industry, which employs many of our borrowers. A prolonged or more severe economic downturn,
continued elevated levels of unemployment, further declines in the values of real estate, or other
events that affect household and/or corporate incomes could impair the ability of our borrowers to
repay their loans in accordance with their terms. Nearly all of our loans are secured by real
estate or made to businesses in our primary market area, the greater Cleveland metropolitan area
and the surrounding areas. As a result of this concentration, a prolonged or more severe downturn
in the local economy could result in significant increases in nonperforming loans, which would
negatively impact our interest income and result in higher provisions for loan losses, which would
decrease our earnings and further increase the capital required to comply with the Cease and Desist
Orders. The economic downturn could also result in reduced demand for credit or fee-based products
and services, which also would decrease our revenues.
Increased and/or special FDIC assessments will hurt our earnings
Beginning in late 2008, the economic environment caused higher levels of bank failures, which
dramatically increased FDIC resolution costs and led to a significant reduction in the Deposit
Insurance Fund. As a result, the FDIC has significantly increased the initial base assessment rates
paid by financial institutions for deposit insurance. The base assessment rate was increased by
seven basis points (7 cents for every $100 of deposits) for the first quarter of 2009. Effective
April 1, 2009, initial base assessment rates were changed to range from 12 basis points to 45 basis
points across all risk categories with possible adjustments to these rates based on certain
debt-related components. These increases in the base assessment rate have increased our deposit
insurance costs and negatively impacted our earnings. In addition, in May 2009, the FDIC imposed a
special assessment on all insured institutions due to recent bank and savings association failures.
The emergency assessment amounted to 5 basis points on each institutions assets minus tier one
(core) capital as of June 30, 2009, subject to a maximum equal to 10 basis points times the
institutions assessment base. Our special assessment, which was reflected in earnings for the
quarter ended June 30, 2009, was $430,581. In addition, the FDIC may impose additional emergency
special assessments after June 30, 2009, of up to 5 basis points per quarter on each institutions
assets minus tier one (core) capital if necessary to maintain public confidence in federal deposit
insurance or as a result of deterioration in the deposit insurance fund
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Part II Other Information continued
reserve ratio due to institution failures. The latest date possible for imposing any such
additional special assessment is December 31, 2009, with collection on March 30, 2010. Any
additional emergency special assessment imposed by the FDIC will further hurt our earnings.
In lieu of imposing a special assessment, the FDIC has proposed that all institutions prepay their
assessments for the fourth quarter of 2009 and all of 2010, 2011 and 2012. This pre-payment would
be due on December 30, 2009. Under the proposal, the assessment rate for the fourth quarter of 2009
and for 2010 would be based on each institutions total base assessment rate for the third quarter
of 2009, modified to assume that the assessment rate in effect on September 30, 2009 had been in
effect for the entire third quarter, and the assessment rate for 2011 and 2012 would be equal to
the modified third quarter assessment rate plus an additional 3 basis points. In addition, each
institutions base assessment rate for each period would be calculated using its third quarter
assessment base, adjusted quarterly for an estimated 5% annual growth rate in the assessment base
through the end of 2012. If the FDIC adopts this proposal, we would be required to make a payment
of approximately $6.0 million to the FDIC on December 30, 2009. We would record this payment as a
prepaid expense and amortize the expense over three years.
The Bank has been notified by the counterparty to a repurchase agreement that the counterparty is
entitled to declare that an event of default has occurred under the repurchase agreement. If the
counterparty were to declare a default and pursue its remedies, the Bank could incur an expense of
approximately $3.0 million related to the early termination of the repurchase transaction.
The Bank is a party to a repurchase agreement, pursuant to which it has sold $50.0 million in
securities to a counterparty with an obligation to repurchase such securities at a later date. The
Banks obligation to repurchase securities is fully collateralized by the securities sold to the
counterparty under obligation to repurchase. This transaction provides additional liquidity to the
Bank at an imputed interest rate to the Bank of 4.99%. The Bank has been notified by the
counterparty that as a result of the Banks failure to remain well capitalized, as described in
the repurchase agreement, the counterparty is entitled to declare that an event of default has
occurred under the agreement. While the counterparty has not at this time declared that an event of
default has occurred, if it were to elect to do so and pursue its remedies under the repurchase
agreement, it would be entitled to seize and sell the collateral it holds and use the proceeds from
such sale to satisfy amounts owed it under the repurchase agreement. In such event, because market
interest rates are below the imputed interest rate in the repurchase transaction, the Bank
estimates based on current market rates that it could incur an expense of approximately $3.0
million related to the early termination of the repurchase transaction.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.
(a) | N/A |
(b) | N/A |
(c) | The Company did not repurchase its equity securities during the period ended September 30, 2009: |
Item 3. Defaults Upon Senior Securities. N/A
Item 4. Submission of Matters to a Vote of Security Holders. N/A
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Part II Other Information continued
Item 5. Other Information. N/A.
Item 6.
|
(a) Exhibits | |
4.1
|
Form of Common Stock Warrant issued to Alesco Preferred Funding IV, Ltd. | |
4.2
|
Form of Common Stock Warrant issued to Alesco Preferred Funding IV, Ltd. | |
10.1
|
Exchange Agreement by and among Alesco Preferred Funding IV, Ltd., Cohen & Company Financial Management, LLC and PVF Capital Corp., dated September 1, 2009 | |
10.2
|
Joint Cancellation Direction and Release by and among PVF Capital Corp., PVF Capital Trust I and The Bank of New York Mellon, dated September 3, 2009 | |
10.3
|
Exchange Agreement between PVF Capital Corp., Marty E. Adams, Umberto P. Fedeli, Robert J. King, Jr., James B. Pastore, John S. Loeber, Lee Burdman, Jonathan A. Levy, Richard R. Hollington Jr. and Richard R. Hollington, III, dated October 9, 2009 | |
10.4
|
Stipulation and Consent to the Issuance of an Order to Cease and Desist between Park View Federal Savings Bank and the Office of Thrift Supervision (1) | |
10.5
|
Order to Cease and Desist issued by the Office of Thrift Supervision for Park View Federal Savings Bank (1) | |
10.6
|
Stipulation and Consent to the Issuance of an Order to Cease and Desist between PVF Capital Corp. and the Office of Thrift Supervision (1) | |
10.7
|
Order to Cease and Desist issued by the Office of Thrift Supervision for PVF Capital Corp. (1) | |
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 |
(1) | Incorporated herein by reference to the Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on October 23, 2009 (Commission File No. 0-24948). |
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Signature
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.
PVF Capital Corp. (Registrant) |
||||
Date: November 6, 2009 | /s/ Robert J. King, Jr. | |||
Robert J. King, Jr. | ||||
President and Chief Executive Officer (Duly authorized officer) |
||||
/s/ Edward B. Debevec | ||||
Edward B. Debevec | ||||
Treasurer (Principal financial officer) |