1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20552
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1999.
[ ] 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
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PVF Capital Corp.
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( Exact name of registrant as specified in its charter)
United States 34-1659805
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25350 Rockside Road, Bedford Heights, Ohio 44146
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(Address of principal executive offices) (Zip Code)
(440) 439-2200
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES / X / NO / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 Par Value 3,990,808
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(Class) (Outstanding at April 30, 1999)
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PVF CAPITAL CORP.
INDEX
Page
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Statements of
Financial Condition, March 31, 1999
and June 30, 1998 (unaudited). 1
Condensed Consolidated Statements of
Operations for the three and nine months
ended March 31, 1999 and 1998
(unaudited). 2
Condensed Consolidated Statements of Cash
Flows for the nine months ended March 31,
1999 and 1998 (unaudited). 3
Notes to Condensed Consolidated Financial
Statements (unaudited). 4
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 6
Item 3 Quantitative and Qualitative Disclosures
about Market Risk 15
Part II Other Information 15
3
PART I Financial Information
Item 1
PVF CAPITAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
MARCH 31, JUNE 30,
ASSETS 1999 1998
------ ------------ -------------
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 5,631,069 $ 2,447,631
Interest bearing deposits 469,148 394,331
Federal funds sold 13,375,000 20,375,000
------------ ------------
Total cash and cash equivalents 19,475,217 23,216,962
Securities held to maturity, at cost
(fair value of $20,261,503 and $27,767,525, respectively) 20,399,753 27,800,000
Loans receivable, net 384,182,438 368,998,087
Loans receivable held for sale, net 1,964,522 1,644,735
Mortgage-backed securities held to maturity, at cost
(market value of $2,040,717 and $2,965,247, respectively) 2,044,998 2,950,856
Office properties and equipment, net 2,004,849 2,313,546
Real estate owned, net 330,420 699,236
Investment in real estate 3,782,722 938,071
Investment required by law
Stock in the Federal Home Loan Bank of Cincinnati 3,695,088 3,507,564
Prepaid expenses and other assets 2,806,441 1,210,099
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Total Assets $440,686,448 $433,279,156
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities
Deposits $335,351,086 $344,228,729
Advances from the Federal Home Loan Bank of Cincinnati 56,056,839 46,324,456
Notes payable 0 1,060,000
Advances from borrowers for taxes and insurance 3,129,003 4,931,114
Accrued expenses and other liabilities 8,779,500 5,526,147
------------ ------------
Total Liabilities 403,316,428 402,070,446
Stockholders' Equity
Serial preferred stock, none issued -- --
Common stock, $0.01 par value, 15,000,000 shares authorized;
3,990,808 issued and outstanding 39,908 39,908
Additional paid in capital 14,517,141 14,517,141
Retained earnings-substantially restricted 22,812,971 16,651,661
------------ ------------
Total Stockholders' Equity 37,370,020 31,208,710
------------ ------------
Total Liabilities and Stockholders' Equity $440,686,448 $433,279,156
============ ============
See accompanying notes to condensed consolidated financial statements
PAGE 1
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PART I Financial Information
Item 1
PVF CAPITAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- -------------------------
1999 1998 1999 1998
Interest income
Loans $ 8,202,412 $ 8,280,263 $24,853,508 $24,382,174
Mortgage-backed securities 33,485 52,476 118,351 105,905
Cash and securities 430,256 380,368 1,567,131 990,292
----------- ----------- ----------- -----------
Total interest income 8,666,153 8,713,107 26,538,990 25,478,371
----------- ----------- ----------- -----------
Interest expense
Deposits 4,163,653 4,167,891 12,951,600 12,513,402
Borrowings 714,596 692,790 2,170,419 1,812,711
----------- ----------- ----------- -----------
Total interest expense 4,878,249 4,860,681 15,122,019 14,326,113
----------- ----------- ----------- -----------
Net interest income 3,787,904 3,852,426 11,416,971 11,152,258
Provision for loan losses 0 106,000 0 201,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 3,787,904 3,746,426 11,416,971 10,951,258
----------- ----------- ----------- -----------
Noninterest income, net
Service and other fees 133,790 150,361 362,403 414,909
Mortgage banking activities, net 269,825 283,071 801,681 670,327
Other, net 16,245 27,189 63,693 167,846
Gain on sale of real estate 3,770,057 0 3,770,057 0
----------- ----------- ----------- -----------
Total noninterest income, net 4,189,917 460,621 4,997,834 1,253,082
----------- ----------- ----------- -----------
Noninterest expense
Compensation and benefits 1,329,592 1,165,832 3,632,883 3,418,264
Office, occupancy, and equipment 440,034 412,234 1,335,059 1,199,779
Other 912,284 595,542 2,152,768 1,665,253
----------- ----------- ----------- -----------
Total noninterest expense 2,681,910 2,173,608 7,120,710 6,283,296
----------- ----------- ----------- -----------
Income before federal income tax provision 5,295,911 2,033,439 9,294,095 5,921,044
Federal income tax provision 1,803,846 699,745 3,131,846 2,024,745
----------- ----------- ----------- -----------
Net income $ 3,492,065 $ 1,333,694 $ 6,162,249 $ 3,896,299
=========== =========== =========== ===========
Basic earnings per share $ 0.88 $ 0.33 $ 1.54 $ 0.99
=========== =========== =========== ===========
Diluted earnings per share $ 0.84 $ 0.32 $ 1.49 $ 0.96
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements
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PART I Financial Information
Item 1
PVF CAPITAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31
--------------------------------
1999 1998
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OPERATING ACTIVITIES
Net income $ 6,162,249 $ 3,896,299
Adjustments to reconcile net income to net cash provided by operating activities
Accretion of discount on securities 0 (4,650)
Depreciation and amortization 454,909 361,091
Provision for losses on loans 0 201,000
Accretion of unearned discount and deferred loan origination fees, net (506,949) (676,904)
Proceeds from sale of loans held for sale 84,858,622 57,632,507
Origination of loans held for sale (84,657,923) (58,053,796)
Mortgage banking operations, excluding mortgage loan servicing fees
and amortization of mortgage servicing rights (520,486) (379,052)
Change in accrued interest on investments, loans, and borrowings, net 11,247 (66,190)
Gain on sale of real estate (3,770,057) 0
Net change in other assets and other liabilities (719,641) (2,202,311)
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Net cash provided by operating activities 1,311,971 707,994
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INVESTING ACTIVITIES
Loan and mortgage-backed securities repayments and originations, net (13,416,401) (26,751,374)
Mortgage-backed securities held to maturity purchases 0 (3,017,178)
Investment securities held to maturity purchases (20,433,000) (13,000,000)
Investment securities maturities 27,833,247 14,000,000
Disposal of real-estate owned properties 574,541 484,366
FHLB stock purchases 0 (523,600)
FHLB stock dividends (187,524) (159,720)
Office properties and equipment (purchases) sales, net (146,212) (834,882)
Change in investment in real estate, net 925,406 (28,313)
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Net cash used in investing activities (4,849,943) (29,830,701)
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FINANCING ACTIVITIES
Net increase in demand deposits, NOW, and passbook savings 5,472,752 2,229,338
Net increase (decrease) in time deposits (14,347,970) 41,304,076
Net increase (decrease) in FHLB advances 9,732,383 (1,060,266)
Repayment of notes payable (1,060,000) (750,000)
Other (938) 4,882
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Net cash provided by (used in) financing activities (203,773) 41,728,030
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Net decrease in cash and cash equivalents (3,741,745) 12,605,323
Cash and cash equivalents at beginning of period 23,216,962 9,580,430
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Cash and cash equivalents at end of period $ 19,475,217 $ 22,185,753
============ ============
See accompanying notes to condensed consolidated financial statements
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Part I Financial Information
Item 1
PVF CAPITAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(UNAUDITED)
1. The accompanying condensed 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, 1998 consolidated statement of
financial condition which was derived from the Corporation's audited financial
statements. Certain information required for a complete presentation in
accordance with 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 and nine months ended March 31, 1999 are
not necessarily indicative of the results to be expected for the entire year
ending June 30, 1999. The results of operations for PVF Capital Corp. ("PVF" or
the "Company") for the periods being reported have been derived primarily from
the results of operation of Park View Federal Savings Bank (the "Bank"). PVF
Capital Corp.'s common stock is traded on the NASDAQ SMALL-CAP ISSUES under the
symbol PVFC.
2. Recently Issued Accounting Standards
SFAS No. 130, "Reporting Comprehensive Income" was issued in June, 1997 and is
effective for fiscal years beginning after December 15, 1997. The Statement
requires additional reporting of items that affect comprehensive income but not
net income. An examples of these items relevant to the Company include
unrealized gains and losses on securities available for sale. The Company
adopted SFAS No. 130 on July 1, 1998. At this time, the Company does not have
other comprehensive income items to be reported.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June, 1997 and is effective for fiscal years
beginning after December 15, 1997. The statement requires financial disclosure
and descriptive information about reportable operating segments. Also required
is certain information about products and services, geographic areas in which an
enterprise operates, and any major customers. Management does not expect the
implementation of SFAS No. 131 to have a material impact on the Company's
consolidated financial position or results of operations.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was
issued in June, 1998 and is effective for fiscal years beginning after June 15,
1999. This statement establishes comprehensive accounting and reporting
requirements for derivative instruments and hedging activities. This statement
requires entities
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Part I Financial Information
Item 1
to recognize all derivatives as either assets or liabilities, with the
instruments measured at fair value. The accounting for gains and losses
resulting from changes in fair value of the derivative instrument depends on the
use of the derivative and the type of risk being hedged. At the present time,
the Bank has not fully analyzed the effect or timing of the adoption of SFAS No.
133 on the Bank's consolidated financial statements.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
was issued in October, 1998 and was effective for the first fiscal quarter
beginning after December 15, 1998. This statement amends SFAS No. 65 to require
that after the securitization of mortgage loans held for sale, an entity engaged
in mortgage banking activities must classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. After the securitization of a mortgage loan held for
sale, any retained mortgage-backed securities shall be classified in accordance
with the provisions of SFAS No. 115. However, a mortgage banking enterprise must
classify as trading any retained mortgage-backed securities that it commits to
sell before or after the securitization process. The Bank has not historically
securitized mortgage loans and retained the mortgage-backed security. Therefore,
the adoption did not have any impact on the Company's consolidated financial
statements.
3. The following table discloses Earnings Per Share for the three and nine
months ended March 31, 1999 and March 31, 1998.
Three months ended March 31,
1999 1998
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Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- -------- ----------- ------------- --------
BASIC EPS
Net Income $3,492,065 3,990,808 $ 0.88 $1,333,694 3,989,459 $ 0.33
EFFECT OF STOCK OPTIONS 147,724 0.04 160,983 0.01
DILUTED EPS
Net Income $3,492,065 4,138,532 $ 0.84 $1,333,694 4,150,442 $ 0.32
Nine months ended March 31,
1999 1998
------------------------------------- -------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- -------- ----------- ------------- --------
BASIC EPS
Net Income $6,162,249 3,990,808 $ 1.54 $3,896,299 3,922,858 $ 0.99
EFFECT OF STOCK OPTIONS 151,789 0.05 155,055 0.03
DILUTED EPS
Net Income $6,162,249 4,142,597 $ 1.49 $3,896,299 4,077,913 $ 0.96
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Part I Financial Information
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis discusses changes in financial condition and results of
operations at and for the three-month and nine-month periods ended March 31,
1999 for PVF Capital Corp. ("PVF" or the "Company") and Park View Federal
Savings Bank (the "Bank"), its principal and wholly-owned subsidiary.
FORWARD-LOOKING STATEMENTS
- --------------------------
When used in this Form 10-Q, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected, and Year 2000 issues. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the results of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
FINANCIAL CONDITION
- -------------------
Consolidated assets of PVF were $440.7 million as of March 31, 1999, an increase
of approximately $7.4 million, or 1.7%, as compared to June 30, 1998. The Bank
remained in regulatory capital compliance for tangible, core, and risk-based
capital on a fully phased-in basis with capital levels of 7.78%, 7.78% and
11.12% respectively at March 31, 1999.
During the nine months ended March 31, 1999, the Company's cash and cash
equivalents, which consist of cash, interest-bearing deposits and federal funds
sold, decreased $3.7 million, or 16.1%, as compared to June 30, 1998. The change
in the Company's cash and cash equivalents consisted of an increase in cash and
interest-bearing deposits of $3.3 million and a decrease in federal funds sold
of $7.0 million.
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Part I Financial Information
Item 2
FINANCIAL CONDITION CONTINUED
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The net $14.6 million, or 3.9%, increase in loans receivable and mortgage-backed
securities during the nine months ended March 31, 1999, resulted from an
increase in loans receivable of $15.5 million and a decrease in mortgage-backed
securities of $0.9 million. The increase of $15.5 million in loans receivable
included increases of $11.4 million in land loans, $4.3 million in commercial
real estate loans, $2.1 million in multi-family loans, $2.0 million in home
equity loans, $2.0 million in installment loans, and decreases of $3.6 million
in construction loans and $2.7 million in single-family mortgage loans. The
decrease in mortgage-backed securities was the result of payments received of
$0.9 million. The growth of the loan portfolio resulted in no material change to
the composition of the portfolio.
Securities decreased by $7.4 million, or 26.6%, as a result of scheduled
maturities of $27.8 million and the purchase of $20.0 million in agency
securities and a $0.4 million municipal security. The increase in prepaid
expenses and other assets of $1.6 million is primarily the result of adjustments
to N.O.W. clearings accounts. The decrease of $0.4 million in real estate owned
("REO") is the result of a $0.2 million addition to REO and the disposal of $0.6
million in developed building lots. The decrease of $0.3 million in office
properties and equipment, net is the result of the acquisition of $0.2 million
in fixed assets net of $0.5 million in depreciation expense.
The increase of $2.8 million in investment in real estate is the result of the
sale by PVF Service Corporation, a wholly-owned subsidiary of PVF Capital Corp.,
of its 250-acre parcel of land in Solon, Ohio carried at a book value of $1.0
million to Cameratta Properties Limited for $4.8 million. The proceeds from this
sale were used by PVF Service Corporation to purchase a strip center in Berea,
Ohio at a cost of $3.8 million. This strip center is expected to generate future
annual earnings after expenses of $300,000. In addition, the Bank is
anticipating the expansion of its branch network into this new market location.
During the nine months ended March 31, 1999, management's decision not to
compete aggressively with market savings rates to retain deposits resulted in a
decrease of $8.9 million, or 2.6%, in deposits. The increase of $9.7 million, or
21.0%, in advances from the Federal Home Loan Bank of Cincinnati was a result of
the Bank's decision to take advantage of attractive borrowing rates. The
decrease in notes payable resulted from management's decision to pay off a $1.1
million note held by the Company.
The decrease in advances from borrowers for taxes and insurance of $1.8 million,
or 36.5%, is due to timing differences between the collection and payment of
escrow funds. The increase of $3.3 million, or 58.9%, in accrued expenses and
other liabilities is primarily the result of an increase of $1.1 million in
income taxes payable and timing differences of approximately $1.6 million
between the collection and remittance of payments received on loans serviced for
investors.
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Part I Financial Information
Item 2
FINANCIAL CONDITION CONTINUED
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The increase in Federal Home Loan Bank advances of $9.7 million along with a
reduction in cash and cash equivalents of $3.7 million and securities of $7.4
million along with net income of $6.2 million were used to fund the net increase
in loans receivable and mortgage-backed securities of $14.6 million, the
reduction in deposits of $8.9 million, repay the note payable of $1.1 million,
and purchase the strip center in Berea, Ohio for $3.8 million.
RESULTS OF OPERATIONS Three months ended March 31, 1999,
compared to three months ended March 31, 1998.
PVF's net income is dependent primarily on its net interest income, which is the
difference between interest earned on its loans and investments and interest
paid on interest-bearing liabilities. Net interest income also includes
amortization of loan origination fees, net of origination costs.
PVF's net income is also affected by the generation of noninterest income, which
primarily consists of loan servicing income, service fees on deposit accounts,
and gains on the sale of loans held for sale. Net interest income is determined
by (i) the difference between yields earned on interest-earning assets and rates
paid on interest-bearing liabilities ("interest-rate spread") and (ii) the
relative amounts of interest-earning assets and interest-bearing liabilities.
The Company's interest-rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. In addition, net income is affected by the level of operating expenses
and loan loss provisions.
The Company's net income for the three months ended March 31, 1999 was
$3,492,100 as compared to $1,333,700 for the prior year comparable period. This
represents an increase of $2,158,400, or 161.8%, when compared with the prior
year comparable period. Earnings for the three-month period ended March 31, 1999
include an after-tax gain of aproximately $2,488,000 as a result of the closing
on the sale by PVF Service Corporation of its 250-acre parcel of land in Solon,
Ohio.
The Company's net income from operations for the three months ended March 31,
1999 was $1,004,100 as compared to $1,333,700 for the prior year comparable
period. This represents a decrease of $329,600, or 24.7%, when compared with the
prior year comparable period. This decrease is primarily the result of a
$300,000 provision for legal expenses in the current period.
Net interest income for the three months ended March 31, 1999 decreased by
$64,500, or 1.7%, as compared to the prior year comparable period, primarily due
to a decrease of $47,000, or 0.5%, in interest income that resulted from an
increase of $28.5 million in the average balance of interest-earning assets.
This increased balance, however, was offset by a 61 basis point decrease in the
average return
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Part I Financial Information
Item 2
RESULTS OF OPERATIONS CONTINUED
- -------------------------------
on interest-earning assets from the prior year comparable period. The average
balance on deposits and advances increased by $22.9 million from the prior year
comparable period. This increased balance, along with a 26 basis point decrease
in the average cost of funds for the current period, resulted in an overall
increase in interest expense of $17,500, or 0.4%. The Company's net interest
income decreased slightly because of a decrease of 35 basis points in the
Company's interest-rate spread, during the current period as compared to the
prior year comparable period, despite balance sheet growth in both
interest-earning assets and interest-bearing liabilities.
For the three months ended March 31, 1999, no provision for loan losses was
recorded as compared to a $106,000 provision that was recorded in the prior year
comparable period. The Company uses a systematic approach to determine the
adequacy of its loan loss allowance and the necessary provision for loan losses.
The loan portfolio is reviewed and delinquent loan accounts are analyzed
individually on a monthly basis with respect to payment history, ability to
repay, probability of repayment, and loan-to-value percentage. Consideration is
given to the types of loans in the portfolio and the overall risk inherent in
the portfolio. After reviewing current economic conditions, changes to the size
and composition of the loan portfolio, changes in delinquency status, levels of
non-accruing loans, non-performing assets, impaired loans, and actual loan
losses incurred by the Company, management establishes an appropriate reserve
percentage applicable to each category of loans, and a provision for loan losses
is recorded when necessary to bring the allowance to a level consistent with
this analysis. During the nine-month period ended March 31, 1999, management
conducted a review of the established reserve percentages used in calculating
the required loan loss allowance. This review was conducted using the most
currently available national and regional aggregate thrift industry data on
charge-offs along with an analysis of historical losses experienced by the
Company according to type of loan. As a result of this analysis, management made
moderate adjustments to the required reserve percentages on various loan
categories to more accurately reflect actual anticipated losses. Management
believes it uses the best information available to make a determination as to
the adequacy of the allowance for loan losses.
During the three months ended March 31, 1999, the Company experienced an
increase in the level of impaired loans of $2,080,000 and a decrease of $379,000
in classified assets. Despite the increase in impaired loans and net charge-offs
of $18,000, it was not necessary to record a provision for loan losses due to a
decrease in classified assets, a decline in the loan portfolio of $3.9 million,
and adjustments made to the systematic calculation of required reserve
percentages in the current period. For the three months ended March 31, 1998,
the Company experienced decreases in the level of impaired loans and classified
assets of $0.7 million and $0.5 million, respectively. Despite these decreases,
growth in the loan portfolio of $4.1 million and net charge-offs of $105,000
made it necessary to
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Part I Financial Information
Item 2
RESULTS OF OPERATIONS CONTINUED
- -------------------------------
record a provision for loan losses of $106,000 in the prior period. At March 31,
1999, the allowance for loan losses was $2.6 million, which represented 53.8% of
nonperforming loans and 0.7% of loans.
For the three months ended March 31, 1999, noninterest income increased
$3,729,000, or 809.6%, from the prior year comparable period. Gain on the sale
of real estate increased by $3,770,000, due to the gain resulting from the sale
by PVF Service Corporation of its 250-acre parcel of land in Solon, Ohio. In
addition, a decrease of $13,200, or 4.7%, in income from mortgage banking
activities resulted from a decrease in gain on loan sales in the current period.
During these periods, PVF pursued a strategy of originating long-term,
fixed-rate loans pursuant to Federal Home Loan Mortgage Corporation ("FHLMC")
and Federal National Mortgage Association ("FNMA") guidelines and selling such
loans to the FHLMC or the FNMA, while retaining the servicing. Service and other
fees decreased by $16,600, or 11.0%, from the prior year comparable period,
primarily due to decreases in NOW checking account fee income.
Noninterest expense for the three months ended March 31, 1999 increased by
$508,300, or 23.4%, from the prior year comparable period. This was primarily
the result of an increase in other noninterest expense of $316,700, or 53.2%,
primarily attributable to a provision for legal expenses of $300,000 in the
current period. The provision for legal expenses is for costs incurred in
defending lawsuits filed against the Bank and two other entities, PVF Financial
Planning, Inc. and Emissary Financial Group, Inc., which are majority-owned
subsidiaries of the Company's wholly-owned subsidiary, PVF Holdings, Inc.
Information pertaining to these lawsuits is set forth in Item 3 of Form 10-K for
the year ended June 30, 1998. There have been no significant changes to these
lawsuits for the three-month period ended March 31, 1999. In addition, a
write-off of $24,000 in the current period was attributable to the Bank's
participation as a limited partner in a low-income affordable housing
partnership. Compensation and benefits increased by $163,800, or 14.0%, as a
result of increased staffing, incentive bonuses paid, and salary and wage
adjustments. The increase in office occupancy and equipment of $27,800, or 6.7%,
was due to the opening of a new branch office.
The federal income tax provision for the three-month period ended March 31, 1999
decreased to an effective rate of 34.1% for the current period from an effective
rate of 34.4% for the prior year comparable period. The decrease in the
effective tax rate is attributable to the availability of low-income affordable
housing credits in the current period.
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Part I Financial Information
Item 2
RESULTS OF OPERATIONS CONTINUED
- -------------------------------
RESULTS OF OPERATIONS Nine months ended March 31, 1999, compared
to nine months ended March 31, 1998.
PVF's net income is dependent primarily on its net interest income, which is the
difference between interest earned on its loans and investments and interest
paid on interest-bearing liabilities. Net interest income also includes
amortization of loan origination fees, net of origination costs.
PVF's net income is also affected by the generation of noninterest income, which
primarily consists of loan servicing income, service fees on deposit accounts,
and gains on the sale of loans held for sale. Net interest income is determined
by (i) the difference between yields earned on interest-earning assets and rates
paid on interest-bearing liabilities ("interest-rate spread") and (ii) the
relative amounts of interest-earning assets and interest-bearing liabilities.
The Company's interest-rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. In addition, net income is affected by the level of operating expenses
and loan loss provisions.
The Company's net income for the nine months ended March 31, 1999 was $6,162,200
as compared to $3,896,300 for the prior year comparable period. This represents
an increase of $2,265,900, or 58.2%, when compared with the prior year
comparable period. Earnings for the nine-month period ended March 31, 1999
include an after-tax gain of aproximately $2,488,000 as a result of the closing
on the sale by PVF Service Corporation of its 250-acre parcel of land in Solon,
Ohio.
The Company's net income from operations for the nine months ended March 31,
1999 was $3,674,200 as compared to $3,896,300 for the prior year comparable
period. This represents a decrease of $222,100, or 5.7%, when compared with the
prior year comparable period. This decrease is primarily the result of a
$395,000 provision for legal expenses in the current period.
Net interest income for the nine months ended March 31, 1999 increased by
$264,700, or 2.4%, primarily due to an increase of $1,060,600, or 4.2%, in
interest income that resulted from an increase of $38.4 million in the average
balance of interest-earning assets. This increased balance was offset partially
by a 46 basis point decrease in the average return on interest-earning assets
from the prior year comparable period. The average balance on deposits and
advances increased by $33.9 million from the prior year comparable period. This
increased balance along with a 16 basis point decrease in the average cost of
funds for the current period resulted in an overall increase in interest expense
of $795,900, or 5.6%. Despite a decrease of 30 basis points in the Bank's
interest-rate spread during the current period, as compared to the prior year
comparable period, the Bank's net interest income increased due to balance sheet
growth in both interest-earning assets and interest-bearing liabilities.
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14
Part I Financial Information
Item 2
RESULTS OF OPERATIONS CONTINUED
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For the nine months ended March 31, 1999, no provision for loan losses was
recorded as compared to a $201,000 provision that was recorded in the prior year
comparable period. The Company uses a systematic approach to determine the
adequacy of its loan loss allowance and the necessary provision for loan losses.
The loan portfolio is reviewed and delinquent loan accounts are analyzed
individually on a monthly basis with respect to payment history, ability to
repay, probability of repayment, and loan-to-value percentage. Consideration is
given to the types of loans in the portfolio and the overall risk inherent in
the portfolio. After reviewing current economic conditions, changes to the size
and composition of the loan portfolio, changes in delinquency status, levels of
non-accruing loans, non-performing assets, impaired loans, and actual loan
losses incurred by the Company, management establishes an appropriate reserve
percentage applicable to each category of loans, and a provision for loan losses
is recorded when necessary to bring the allowance to a level consistent with
this analysis. During the nine-month period ended March 31, 1999, management
conducted a review of the established reserve percentages used in calculating
the required loan loss allowance. This review was conducted using the most
currently available national and regional aggregate thrift industry data on
charge-offs along with an analysis of historical losses experienced by the
Company according to type of loan. As a result of this analysis, management made
moderate adjustments to the required reserve percentages on various loan
categories to more accurately reflect actual anticipated losses. Management
believes it uses the best information available to make a determination as to
the adequacy of the allowance for loan losses.
During the nine months ended March 31, 1999, the Company experienced an increase
in the level of impaired loans of $1.6 million and an increase of $2.4 million
in classified assets. Despite growth in the loan portfolio of $15.5 million, net
charge-offs of $14,000, and an increase in impaired loans and classified assets,
it was not necessary to record a provision for loan losses due to adjustments
made to the systematic calculation of required reserve percentages in the
current period. For the nine months ended March 31, 1998, the Company
experienced decreases in the levels of impaired loans and classified assets of
$2.2 million and $2.2 million, respectively. Despite these decreases, growth in
the loan portfolio of $27.5 million and net charge-offs of $115,000 made it
necessary to record a provision for loan losses of $201,000 in the current
period. At March 31, 1999, the allowance for loan losses was $2.6 million, which
represented 53.8% of nonperforming loans and 0.7% of loans.
For the nine months ended March 31, 1999, noninterest income increased
$3,745,000, or 298.8%, from the prior year comparable period. Gain on the sale
of real estate increased by $3,770,000 due to a gain resulting from the sale by
PVF Service Corporation of its 250-acre parcel of land in Solon, Ohio. Other,
net decreased by $104,000, or 62.0%, from the previous years comparable period,
primarily due to a decline in rental income of $70,000 in the current period. In
addition, an increase of $131,400, or 19.6%, in income from mortgage
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15
Part I Financial Information
Item 2
RESULTS OF OPERATIONS CONTINUED
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banking activities resulted from an increase in gain on loan sales in the
current period. During these periods, PVF pursued a strategy of originating
long-term, fixed-rate loans pursuant to Federal Home Loan Mortgage Corporation
("FHLMC") and Federal National Mortgage Association ("FNMA") guidelines and
selling such loans to the FHLMC or the FNMA, while retaining the servicing.
Service and other fees decreased by $52,500, or 12.6%, from the prior year
comparable period, primarily due to decreases in NOW checking account fee
income.
Noninterest expense for the nine months ended March 31, 1999 increased by
$837,400, or 13.3%, from the prior year comparable period. This resulted from a
$214,600, or 6.3%, increase in compensation and benefits attributable to
increased staffing, incentive bonuses paid, and salary and wage adjustments. In
addition, office occupancy and equipment increased by $135,300, or 11.3%, due to
the opening of a new branch office. Other noninterest expense increased by
$487,500, or 29.3%, primarily attributable to an increase in legal expenses of
$390,000 and the write-off of $72,000 in the current period attributable to the
Bank's participation as a limited partner in an affordable housing partnership.
The increase in legal expenses is the result of costs incurred in defending
lawsuits filed against the Bank and two other entities, PVF Financial Planning,
Inc. and Emissary Financial Group, Inc., which are majority-owned subsidiaries
of the Company's wholly-owned subsidiary, PVF Holdings, Inc. Information
pertaining to these lawsuits is set forth in Item 3 of Form 10-K for the year
ended June 30, 1998. There have been no significant changes to these lawsuits
for the nine-month period ended March 31, 1999.
The federal income tax provision for the nine-month period ended March 31, 1999
decreased to an effective rate of 33.7% for the current period from an effective
rate of 34.2% for the prior year comparable period. The decrease in the
effective tax rate is attributable to the availability of low-income affordable
housing credits in the current period.
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16
Part I Financial Information
Item 2
YEAR 2000
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The Company has assembled a project team to review the effects the century
change has on current systems and to assess the potential risks that it
presents. A formal plan of action was developed to address and correct this
issue and has been approved by the Bank's Board of Directors with the full
support of senior management. A plan is in place to educate our staff personnel
and to inform our customer base of the year 2000 issue. An inventory of internal
systems, both computer and non-computer related, was completed in this process.
Relationships with third-party vendors were also analyzed. Potential weaknesses
were then documented and prioritized as to their effect on critical business
functions. Our major software supplier has dedicated tremendous resources to
help in addressing this issue. They recently released the remediated version of
the system that has undergone extensive beta testing. All user departments are
involved in the testing process in-house to assure validation of the changes.
Our software supplier has advised us that this testing is expected to reveal any
potential problems well in advance of the impending deadline. At the same time,
testing will take place of those external relationships with which the Bank
exchanges information. Additional testing is also expected to take place on all
mission-critical information systems. It is believed that this preparation will
increase the likelihood of uninterrupted operation of Bank functions.
In addressing this issue, the Bank has used its current internal staffing with
little reliance on outside resources. Major vendors have provided remediated
software at no expense to the Bank. No major system had to be replaced and none
is expected to be replaced in the coming years. As a result, expenses were
approximately $5,000 for fiscal year 1997 and $20,000 for fiscal year 1998, with
anticipated expenses of $5,000 for fiscal year 1999. These expenditures are in
the areas of customer awareness and additional software tools for testing.
Rapid and accurate data processing is essential to Company operations. If
testing reveals that any system critical to continued business operation should
fail, all internal and external resources available will be directed toward
correcting these systems. System delays, mistakes, or failures could have an
adverse impact on the Company. We are currently under contract with an external
consulting service should a system failure occur. End-user contingencies are
also being developed. Current testing of mission-critical systems started in the
fourth quarter of 1998 and is expected to continue through the end of the fourth
quarter of 1999. Testing includes all core systems required for continued Bank
operation and includes interfaces with critical third-party vendors. At this
time, testing has not revealed any deficiencies in the remediated systems and
all testing is progressing as planned.
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LIQUIDITY AND CAPITAL RESOURCES
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The Bank is required by federal regulations to maintain specific levels of
"liquid" assets consisting of cash and other eligible investments. The current
level of liquidity required by the Office of Thrift Supervision is 4% of the sum
of net withdrawable savings and borrowings due within one year. The Bank's
liquidity at March 31, 1999 was 11.0%. Management believes the Bank has
sufficient liquidity to meet its operational needs.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to the Company's interest rate risk
position or any changes to how the Company manages its Asset/ Liability position
since June 30, 1998.
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) PVF did not file any reports on Form 8-K during the quarter ended
March 31, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PVF Capital Corp.
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(Registrant)
Date: May 7, 1999 /s/ C. Keith Swaney
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C. Keith Swaney
Vice President and Treasurer