<PAGE> 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 December 31, 1998.
[_] 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
- ----------------------------- ---------------------------------
(Class) (Outstanding at January 31, 1999)
<PAGE> 2
PVF CAPITAL CORP.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Statements of
Financial Condition, December 31, 1998
(unaudited) and June 30, 1998. 1
Condensed Consolidated Statements of
Operations for the three and six months
ended December 31, 1998 and 1997
(unaudited). 2
Condensed Consolidated Statements of Cash
Flows for the six months ended December 31,
1998 and 1997 (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
</TABLE>
<PAGE> 3
PART I Financial Information
Item 1
PVF CAPITAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1998 1998
------ ------------ ------------
<S> <C> <C>
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 909,664 $ 2,447,631
Interest bearing deposits 2,353,587 394,331
Federal funds sold 14,375,000 20,375,000
------------ ------------
Total cash and cash equivalents 17,638,251 23,216,962
Securities held to maturity, at cost 15,414,404 27,800,000
Loans receivable, net 388,152,672 368,998,087
Loans receivable held for sale, net 1,891,653 1,644,735
Mortgage-backed securities held to maturity, at cost 2,320,875 2,950,856
Office properties and equipment, net 2,087,803 2,313,546
Real estate owned, net 468,920 699,236
Real estate in development 1,060,572 938,071
Investment required by law
Stock in the Federal Home Loan Bank of Cincinnati 3,636,856 3,507,564
Prepaid expenses and other assets 3,219,113 1,210,099
------------ ------------
Total Assets $435,891,119 $433,279,156
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities
Deposits $339,300,844 $344,228,729
Advances from the Federal Home Loan Bank of Cincinnati 51,178,551 46,324,456
Notes payable 0 1,060,000
Advances from borrowers for taxes and insurance 5,266,491 4,931,114
Accrued expenses and other liabilities 6,267,277 5,526,147
------------ ------------
Total Liabilities 402,013,163 402,070,446
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 14,517,140 14,517,452
Retained earnings-substantially restricted 19,320,908 16,651,350
------------ ------------
Total Stockholders' Equity 33,877,956 31,208,710
------------ ------------
Total Liabilities and Stockholders' Equity $435,891,119 $433,279,156
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
PAGE 1
<PAGE> 4
PART I Financial Information
Item 1
PVF CAPITAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ --------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income
Loans $ 8,383,739 $ 8,227,571 $16,651,096 $16,101,911
Mortgage-backed securities 40,374 43,656 84,866 53,429
Cash and securities 510,787 298,193 1,136,875 609,924
----------- ----------- ----------- -----------
Total interest income 8,934,900 8,569,420 17,872,837 16,765,264
----------- ----------- ----------- -----------
Interest expense
Deposits 4,348,972 4,184,766 8,787,947 8,345,511
Borrowings 729,569 597,609 1,455,823 1,119,921
----------- ----------- ----------- -----------
Total interest expense 5,078,541 4,782,375 10,243,770 9,465,432
----------- ----------- ----------- -----------
Net interest income 3,856,359 3,787,045 7,629,067 7,299,832
Provisions for loan losses 0 50,000 0 95,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 3,856,359 3,737,045 7,629,067 7,204,832
----------- ----------- ----------- -----------
Noninterest income, net
Service and other fees 125,451 127,413 228,613 264,548
Mortgage banking activities, net 293,155 198,541 531,856 387,256
Other, net 25,790 41,071 47,448 140,657
----------- ----------- ----------- -----------
Total noninterest income 444,396 367,025 807,917 792,461
----------- ----------- ----------- -----------
Noninterest expense
Compensation and benefits 1,109,830 1,147,110 2,303,291 2,252,432
Office, occupancy, and equipment 466,186 388,328 895,025 787,545
Other 621,955 568,316 1,240,484 1,069,711
----------- ----------- ----------- -----------
Total noninterest expense 2,197,971 2,103,754 4,438,800 4,109,688
----------- ----------- ----------- -----------
Income before federal income taxes 2,102,784 2,000,316 3,998,184 3,887,605
Federal income taxes 696,000 699,000 1,328,000 1,325,000
----------- ----------- ----------- -----------
Net income $ 1,406,784 $ 1,301,316 $ 2,670,184 $ 2,562,605
=========== =========== =========== ===========
Basic earnings per share $ 0.35 $ 0.33 $ 0.67 $ 0.66
=========== =========== =========== ===========
Diluted earnings per share $ 0.34 $ 0.32 $ 0.64 $ 0.63
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
PAGE 2
<PAGE> 5
PART I Financial Information
Item 1
PVF CAPITAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31ST
-----------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 2,670,184 $ 2,562,605
Adjustments to reconcile net income to net cash provided by operating activities
Accretion of discount on securities 0 (624)
Depreciation and amortization 303,230 228,088
Provision for losses on loans 0 95,000
Accretion of unearned discount and deferred loan origination fees, net (356,609) (437,136)
Proceeds from loans held for sale 56,809,132 24,006,054
Origination of loans held for sale (56,716,330) (24,698,583)
Mortgage banking operations, excluding mortgage loan servicing fees
and amortization of mortgage servicing rights (339,720) (180,571)
Change in accrued interest on investments, loans, and borrowings, net (79,958) (186,627)
Net change in other assets and other liabilities (1,371,324) (1,168,949)
------------ ------------
Net cash provided by operating activities 918,605 219,257
------------ ------------
INVESTING ACTIVITIES
Loan and mortgage-backed securities repayments and originations, net (17,840,824) (23,034,045)
Mortgage-backed securities held to maturity purchases, net 0 (3,017,178)
Investment securities held to maturity purchases (10,433,000) (3,000,000)
Investment securities maturities 22,818,595 6,000,000
Disposal of real-estate owned properties 438,816 257,815
FHLB stock purchases dividends, net (129,292) (105,981)
Office properties and equipment (purchases) sales, net (77,487) (104,999)
Change in real estate in development, net (122,501) (7,504)
------------ ------------
Net cash used in investing activities (5,345,693) (23,011,892)
------------ ------------
FINANCING ACTIVITIES
Net increase in demand deposits, NOW, and passbook savings 4,755,910 2,791,855
Net increase (decrease) in time deposits (9,700,690) 25,029,937
Net increase (decrease) in FHLB advances 4,854,095 (7,539,873)
Repayment of notes payable (1,060,000) (600,000)
Other (938) 2,378
------------ ------------
Net cash provided by (used in) financing activities (1,151,623) 19,684,297
------------ ------------
Net decrease in cash and cash equivalents (5,578,711) (3,108,338)
Cash and cash equivalents at beginning of period 23,216,962 9,580,430
------------ ------------
Cash and cash equivalents at end of period $ 17,638,251 $ 6,472,092
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
PAGE 3
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Part I Financial Information
Item 1
PVF CAPITAL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(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 six months ended December 31, 1998 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. Examples of these items relevant to the Company include unrealized
gains and losses on securities. The Company adopted SFAS No. 130 on July 1,
1998. At this time, the Company does not have other comprehensive income 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 is 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 Company does not anticipate any impact to its consolidated financial
statements as a result of the adoption of SFAS No. 134.
3. The following table discloses Earnings Per Share for the three and six months
ended December 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
Three months ended December 31,
1998 1997
------------------------------------- -------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net Income $1,406,784 3,990,808 $ 0.35 $1,301,316 3,939,833 $ 0.33
EFFECT OF STOCK OPTIONS 146,788 0.01 154,635 0.01
DILUTED EPS
Net Income $1,406,784 4,137,596 $ 0.34 $1,301,316 4,094,468 $ 0.32
Six months ended December 31,
1998 1997
------------------------------------- -------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ---------- ----------- ------------- ---------
BASIC EPS
Net Income $2,670,184 3,990,808 $ 0.67 $2,562,605 3,894,194 $ 0.66
EFFECT OF STOCK OPTIONS 152,612 0.03 203,279 0.03
DILUTED EPS
Net Income $2,670,184 4,143,420 $ 0.64 $2,562,605 4,097,473 $ 0.63
</TABLE>
Page 5
<PAGE> 8
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 six-month periods ended December 31,
1998 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, and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the 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 $435.9 million as of December 31, 1998, an
increase of approximately $2.6 million, or 0.6%, 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 7.50%,
7.50% and 10.83% respectively at December 31, 1998.
During the six months ended December 31, 1998, the Company's cash and cash
equivalents, which consist of cash, interest-bearing deposits and federal funds
sold, decreased $5.6 million, or 24.0%, 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 $0.4 million and a decrease in federal funds sold
of $6.0 million.
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Part I Financial Information
Item 2
FINANCIAL CONDITION CONTINUED
The net $18.8 million, or 5.0%, increase in loans receivable and mortgage-backed
securities during the six months ended December 31, 1998, resulted from an
increase in loans receivable of $19.4 million and a decrease in mortgage-backed
securities of $0.6 million. The increase of $19.4 million in loans receivable
included increases of $5.6 million in land loans, $5.0 million in construction
loans, $2.8 million in commercial real estate loans, $2.0 million in
multi-family loans, $1.8 million in single-family mortgage loans, $1.2 million
in installment loans, and $1.0 million in home equity loans. The decrease in
mortgage-backed securities was the result of payments received of $0.6 million.
The growth of the loan portfolio resulted in no material change to the
composition of the portfolio.
Securities decreased by $12.4 million, or 44.5%, as a result of scheduled
maturities of $22.8 million and the purchase of $10.0 million in agency
securities and a $0.4 million municipal security. The increase in prepaid
expenses and other assets of $2.0 million is primarily the result of adjustments
to N.O.W. clearings accounts. The decrease of $0.2 million in real estate owned
("REO") is the result of a $0.2 million addition to REO and the disposal of $0.4
million in developed building lots.
During the six months ended December 31, 1998, management's decision not to
compete aggressively with market savings rates to retain deposits resulted in a
decrease of $4.9 million, or 1.4%, in deposits. The increase of $4.9 million, or
10.5%, 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 increase in advances from borrowers for taxes and insurance of $0.3 million,
or 6.8%, is due to timing differences between the collection and payment of
escrow funds. The increase of $0.7 million, or 13.4%, in accrued expenses and
other liabilities is primarily the result of timing differences between the
collection and remittance of payments received on loans serviced for investors.
The increase in Federal Home Loan Bank advances of $4.9 million along with a
reduction in cash and cash equivalents of $5.6 million and securities of $12.4
million along with net income of $2.7 million were used to fund the net increase
in loans receivable and mortgage-backed securities of $18.8 million, the
reduction in deposits of $4.9 million, and repay the note payable of $1.1
million.
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Part I Financial Information
Item 2
RESULTS OF OPERATIONS Three months ended December 31, 1998, compared to three
months ended December 31, 1997.
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 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. 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 December 31, 1998 was
$1,406,800 as compared to $1,301,300 for the prior year comparable period. This
represents an increase of $105,500, or 8.1%, when compared with the prior year
comparable period.
Net interest income for the three months ended December 31, 1998 increased by
$69,300, or 1.8%, as compared to the prior year comparable period, primarily due
to an increase of $365,500, or 4.3%, in interest income that resulted from an
increase of $38.9 million in the average balance of interest-earning assets.
This increased balance was offset partially by a 47 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 $35.4 million from the
prior year comparable period. This increased balance, along with a 14 basis
point decrease in the average cost of funds for the current period, resulted in
an overall increase in interest expense of $296,200, or 6.2%. The Company's net
interest income increased despite a decrease of 33 basis points in the Company's
interest-rate spread, during the current period as compared to the prior year
comparable period, due to balance sheet growth in both interest-earning assets
and interest-bearing liabilities.
For the three months ended December 31, 1998, no provision for loan losses was
recorded as compared to a $50,000 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
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Part I Financial Information
Item 2
RESULTS OF OPERATIONS CONTINUED
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 quarter ended December 31, 1998, 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. The analysis revealed a dramatic reduction in charge-offs during the past
five years. 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 December 31, 1998, the Company experienced a
decrease in the level of impaired loans of $607,000 and a decrease of $370,000
in classified assets. Despite growth in the loan portfolio of $9.2 million, it
was not necessary to record a provision for loan losses due to a decrease in
impaired loans and classified assets, no net charge-offs in the current period,
and adjustments made to the systematic calculation of required reserve
percentages in the current period. For the three months ended December 31, 1997,
the Company experienced a decrease in the level of impaired loans of $0.3
million. The decrease in impaired loans was offset by growth in the loan
portfolio of $9.8 million that made it necessary to record a provision for loan
losses of $50,000 in the period. At December 31, 1998, the allowance for loan
losses was $2.7 million, which represented 51.4% of nonperforming loans and 0.7%
of net loans.
For the three months ended December 31, 1998, noninterest income increased
$77,400, or 21.1%, from the prior year comparable period. This resulted from an
increase of $94,600, or 47.6%, in income from mortgage-banking activities that
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. Other noninterest income,
decreased by $15,300, or 37.2%, from the previous year's comparable period,
primarily due to a decline in rental income of $10,000 in the current period.
Noninterest expense for the three months ended December 31, 1998 increased by
$94,200, or 4.5%, from the prior year comparable period. This was primarily the
result of an increase in office occupancy and equipment of $77,900, or 20.0%,
due to the opening of a
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Part I Financial Information
Item 2
RESULTS OF OPERATIONS CONTINUED
new branch office. In addition, other noninterest expense increased by $53,600,
or 9.4%, primarily attributable to an increase in legal expenses of $50,000, the
write-off of $24,000 in the current period attributable to the Bank's
participation as a limited partner in a low-income affordable housing
partnership, and a decrease in professional services of $25,000 in the current
period. 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 three-month period ended December 31, 1998.
The federal income tax provision for the three-month period ended December 31,
1998 decreased to an effective rate of 33.1% for the current period from an
effective rate of 34.9% 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.
RESULTS OF OPERATIONS Six months ended December 31, 1998, compared to six
months ended December 31, 1997.
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 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. 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 six months ended December 31, 1998 was
$2,670,200 as compared to $2,562,600 for the prior year comparable period. This
represents an increase of $107,600, or 4.2%, when compared with the prior year
comparable period.
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Part I Financial Information
Item 2
RESULTS OF OPERATIONS CONTINUED
Net interest income for the six months ended December 31, 1998 increased by
$329,200, or 4.5%, primarily due to an increase of $1,107,600, or 6.6%, in
interest income that resulted from an increase of $43.3 million in the average
balance of interest-earning assets. This increased balance was offset partially
by a 38 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 $39.4 million from the prior year comparable period. This
increased balance along with an 11 basis point decrease in the average cost of
funds for the current period resulted in an overall increase in interest expense
of $778,300, or 8.2%. Despite a decrease of 27 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.
For the six months ended December 31, 1998, no provision for loan losses was
recorded as compared to a $95,000 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 quarter ended December 31, 1998, 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. The analysis revealed a dramatic reduction in charge-offs
during the past five years. 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 six months ended December 31, 1998, the Company experienced a
decrease in the level of impaired loans of $477,000 and an increase of $2.8
million in classified assets. Despite growth in the loan portfolio of $19.4
million and an increase in classified assets, it was not necessary to record a
provision for loan losses due to a decrease in impaired loans, no net
charge-offs and adjustments made to the systematic calculation of required
reserve percentages in the
Page 11
<PAGE> 14
Part I Financial Information
Item 2
RESULTS OF OPERATIONS CONTINUED
current period. For the six months ended December 31, 1997, the Company
experienced decreases in the levels of impaired loans and classified assets of
$1.4 million and $1.7 million, respectively. The decrease in impaired loans and
classified assets was offset by growth in the loan portfolio of $23.4 million
and net charge-offs of $12,000 that made it necessary to record a provision for
loan losses of $95,000 in the period. At December 31, 1998, the allowance for
loan losses was $2.7 million, which represented 51.4% of nonperforming loans and
0.7% of net loans.
For the six months ended December 31, 1998, noninterest income increased
$15,500, or 2.0%, from the prior year comparable period. This resulted from an
increase of $144,600, or 37.3%, in income from mortgage-banking activities that
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 $36,000, or 13.6%, from the prior year comparable period, primarily
due to decreases in NOW account fee income. Other noninterest income, decreased
by $93,200, or 66.3%, from the previous year's comparable period, primarily due
to a decline in rental income of $70,000 in the current period.
Noninterest expense for the six months ended December 31, 1998 increased by
$329,100, or 8.0%, from the prior year comparable period. This resulted from a
$50,900, or 2.3%, increase in compensation and benefits attributable to
increased staffing, employee 401K benefits, incentive bonuses paid, and salary
and wage adjustments. In addition, office occupancy and equipment increased by
$107,500, or 13.6%, due to the opening of a new branch office. Other noninterest
expense increased by $170,800, or 16.0%, primarily attributable to an increase
in legal expenses of $95,000, the write-off of $48,000 in the current period
attributable to the Bank's participation as a limited partner in an affordable
housing partnership, an increase in the Federal Deposit Insurance Premium of
$12,000 due to greater deposit volume, and an increase in charitable
contributions of $10,000 in the current period. 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 six-month period ended December
31, 1998.
The federal income tax provision for the three-month period ended December 31,
1998 decreased to an effective rate of 33.2% for the current period from an
effective rate of 34.1% 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.
Page 12
<PAGE> 15
Part I Financial Information
Item 2
YEAR 2000
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 first
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.
Page 13
<PAGE> 16
Part I Financial Information
Item 2
LIQUIDITY AND CAPITAL RESOURCES
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 December 31, 1998 was 9.4%. Management believes the Bank has
sufficient liquidity to meet its operational needs.
ANNUAL MEETING VOTING RESULTS
The Company's Annual Meeting of Stockholders was held on October 19, 1998. A
total of 3,483,573 shares of the Company's common stock were represented at the
Annual Meeting in person or by proxy.
Stockholders voted in favor of the election of four nominees for director. The
voting results for each nominee were as follows:
<TABLE>
<CAPTION>
Votes in Favor
Nominee of Election Votes Withheld
- ------- ---------------- --------------
<S> <C> <C>
Robert F. Urban 3,458,709 24,864
Robert K. Healey 3,475,099 8,474
James W. Male 3,475,099 8,474
Stuart D. Neidus 3,469,393 14,180
</TABLE>
There were 507,235 nonvotes on the matter.
The Amendment of the Company's First Amended and Restated Articles of
Incorporation to increase the authorized number of shares of common stock from
5,000,000 to 15,000,000.
<TABLE>
<CAPTION>
Votes For Votes Against Abstain Not Voting
--------- ------------- ------- ----------
<S> <C> <C> <C>
3,341,145 137,936 4,492 507,235
</TABLE>
Proposal to ratify the appointment of KPMG LLP as independent certified public
accountants of the Company for the fiscal year ending June 30, 1999.
<TABLE>
<CAPTION>
Votes For Votes Against Abstain Not Voting
--------- ------------- ------- ----------
<S> <C> <C> <C>
3,470,873 10,450 2,250 507,235
</TABLE>
There were no broker non-votes for the annual meeting.
Page 14
<PAGE> 17
Part I Financial Information
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to the Company's interest rate risk
position or any changes to how the Company manages its Asset/ Liability position
since June 30, 1998.
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) PVF filed a Form 8-K on December 2, 1998.
Page 15
<PAGE> 18
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PVF Capital Corp.
-----------------
(Registrant)
Date: February 5, 1999 /s/ C. Keith Swaney
------------------ ----------------------------
C. Keith Swaney
Vice President and Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Condition and the Statement to Operation for the period ended
December 31, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 910
<INT-BEARING-DEPOSITS> 2,353
<FED-FUNDS-SOLD> 14,375
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 15,414
<INVESTMENTS-MARKET> 15,371
<LOANS> 390,044
<ALLOWANCE> 2,690
<TOTAL-ASSETS> 435,891
<DEPOSITS> 339,301
<SHORT-TERM> 10,000
<LIABILITIES-OTHER> 11,533
<LONG-TERM> 41,179
0
0
<COMMON> 40
<OTHER-SE> 33,838
<TOTAL-LIABILITIES-AND-EQUITY> 435,891
<INTEREST-LOAN> 16,736
<INTEREST-INVEST> 1,137
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 17,873
<INTEREST-DEPOSIT> 8,788
<INTEREST-EXPENSE> 10,244
<INTEREST-INCOME-NET> 7,629
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,439
<INCOME-PRETAX> 3,998
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,670
<EPS-PRIMARY> $0.67
<EPS-DILUTED> $0.64
<YIELD-ACTUAL> 3.250
<LOANS-NON> 2,806
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,687
<CHARGE-OFFS> 3
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 2,690
<ALLOWANCE-DOMESTIC> 2,690
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,537
</TABLE>
