10-Q 1 pvf10qfeb.txt QUARTERLY REPORT FEBRUARY UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 2003. [ ] 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. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-1659805 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30000 Aurora Road, Solon, Ohio 44139 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (440) 248-7171 ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES NO X --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $0.01 Par Value 6,387,037 ------------------------------ ----------------------------------------------- (Class) (Outstanding at January 31, 2004) PVF CAPITAL CORP. INDEX Page Part I Financial Information Item 1 Financial Statements Consolidated Statements of Financial Condition, December 31, 2003 (unaudited) and June 30, 2003. 1 Consolidated Statements of Operations for the three and six months ended December 31, 2003 and 2002 (unaudited) 2 Consolidated Statements of Cash Flows For the six months ended December 31, 2003 and 2002 (unaudited) 3 Notes to Consolidated Financial Statements (unaudited) 4 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3 Liquidity and Capital Resources 14 Item 4 Quantitative and Qualitative Disclosures about Market Risk 14 Item 5 Controls and Procedures 14 Part II Other Information 15 PART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS PVF CAPITAL CORP. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, JUNE 30, ASSETS 2003 2003 ------ ------------ -------- unaudited Cash and cash equivalents: Cash and amounts due from depository institutions $5,246,925 $9,755,224 Interest bearing deposits 2,404,523 3,946,019 Federal funds sold 50,000 83,050,000 ------------ ------------ Total cash and cash equivalents 7,701,448 96,751,243 Securities held to maturity 0 33,252 Mortgage-backed securities held to maturity 40,801,622 2,964,798 Loans receivable held for sale, net 9,924,234 33,603,895 Loans receivable, net of allowance of $4,179,793 and $3,882,839 596,748,604 579,670,681 Office properties and equipment, net 12,566,491 11,555,919 Real estate owned, net 0 448,865 Federal Home Loan Bank stock 10,606,918 10,396,399 Prepaid expenses and other assets 9,052,877 7,978,751 ------------ ------------ Total Assets $687,402,194 $743,403,803 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities Deposits $475,258,642 $526,428,927 Advances from the Federal Home Loan Bank of Cincinnati 122,102,310 120,123,220 Notes payable 4,776,240 5,815,150 Advances from borrowers for taxes and insurance 8,373,969 7,964,653 Accrued expenses and other liabilities 15,351,731 24,468,717 ------------ ------------ Total Liabilities 625,862,892 684,800,667 Stockholders' Equity Serial preferred stock, none issued -- -- Common stock, $0.01 par value, 15,000,000 shares authorized; 6,727,367 and 6,717,283 shares issued, respectively 67,274 67,173 Additional paid-in-capital 47,207,212 47,176,696 Retained earnings 17,392,009 14,486,460 Treasury Stock, at cost 343,519 shares (3,127,193) (3,127,193) ------------ ------------ Total Stockholders' Equity 61,539,302 58,603,136 ------------ ------------ Total Liabilities and Stockholders' Equity $687,402,194 $743,403,803 ============ ============
Page 1 PART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS PVF CAPITAL CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended December 31, December 31, ----------------------------------------------------------- 2003 2002 2003 2002 Interest income Loans $9,220,741 $10,486,097 $18,684,269 $20,920,563 Mortgage-backed securities 489,656 75,652 933,098 175,984 Cash and securities 119,349 737,575 270,740 1,607,263 ---------- ----------- ----------- ---------- Total interest income 9,829,746 11,299,324 19,888,107 22,703,810 ---------- ----------- ----------- ---------- Interest expense Deposits 2,720,009 3,923,304 5,650,188 8,353,611 Borrowings 1,357,694 1,393,667 2,738,405 2,788,671 ---------- ----------- ----------- ---------- Total interest expense 4,077,703 5,316,971 8,388,593 11,142,282 ---------- ---------- ---------- ---------- Net interest income 5,752,043 5,982,353 11,499,514 11,561,528 Provision for loan losses 192,000 0 292,000 0 ---------- ----------- ----------- ---------- Net interest income after provision for loan losses 5,560,043 5,982,353 11,207,514 11,561,528 ---------- ---------- ----------- ---------- Noninterest income, net Service and other fees 157,564 218,279 304,210 347,703 Mortgage banking activities, net 604,707 1,534,385 3,277,954 2,130,699 Other, net 105,506 85,598 596,969 109,688 ---------- ----------- ----------- ---------- Total noninterest income, net 867,777 1,838,262 4,179,133 2,588,090 -------- ---------- ---------- --------- Noninterest expense Compensation and benefits 2,346,503 2,223,861 4,852,899 4,327,421 Office occupancy and equipment 806,681 775,274 1,604,405 1,522,444 Other 1,208,498 1,413,130 2,442,423 2,363,842 ---------- ----------- ----------- ---------- Total noninterest expense 4,361,682 4,412,265 8,899,727 8,213,707 ---------- ---------- ---------- --------- Income before federal income tax provision 2,066,138 3,408,350 6,486,920 5,935,911 Federal income tax provision 716,400 1,151,190 2,205,100 1,991,665 ---------- ----------- ----------- ---------- Net income $1,349,738 $2,257,160 $4,281,820 $3,944,246 =========== =========== =========== ========== Basic earnings per share $0.21 $0.35 $0.67 $0.62 ====== ====== ====== ===== Diluted earnings per share $0.21 $0.35 $0.66 $0.61 ====== ====== ====== ===== Dividends declared per common share $0.074 $0.067 $0.148 $0.134 ======= ======= ======= ======
See accompanying notes to consolidated financial statements Page 2 PART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS PVF CAPITAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended December 31, --------------------------------- 2003 2002 ---- ---- OPERATING ACTIVITIES Net income $4,281,820 $3,944,246 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 791,822 664,097 Provision for losses on loans 292,000 0 Accretion of unearned discount and deferred loan origination fees, net (610,458) (608,691) Gain on sale of loans receivable held for sale, net (3,716,289) (2,502,412) Gain on disposal of real estate owned, net (488,839) 0 Federal Home Loan Bank stock dividends (210,519) (252,068) Change in accrued interest on investments, loans, and borrowings, net (174,517) 66,056 Origination of loans receivable held for sale, net (177,798,831) (188,241,355) Sale of loans receivable held for sale, net 205,194,781 171,114,985 Increase (decrease) in other, net (10,697,920) 3,302,134 ----------- ----------- Net cash from operating activities 16,863,050 (12,513,008) ----------- ------------ INVESTING ACTIVITIES Loan and mortgage-backed securities repayments and originations, net (14,124,845) (20,822,222) Purchase of mortgage-backed securities held for investment (39,853,303) 0 Disposals of real estate owned 937,704 22,779 Securities purchased 0 (30,000,000) Maturities of securities held to maturity 33,252 50,047,354 Additions to office properties and equipment, net (1,802,394) (1,923,373) ----------- ---------- Net cash used in investing activities (54,809,586) (2,675,462) ----------- ---------- FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW, and passbook savings (1,858,010) 13,483,132 Net increase (decrease) in time deposits (49,312,275) 5,774,074 Net increase (decrease) in Federal Home Loan Bank advances 1,979,090 (28,914) Net decrease in notes payable (1,038,910) (1,035,940) Purchase of treasury stock 0 (110,114) Proceeds from exercise of stock options 30,617 33,716 Cash dividend paid (903,771) (798,112) ----------- ---------- Net cash from financing activities (51,103,259) 17,317,842 ----------- ---------- Net increase (decrease) in cash and cash equivalents (89,049,795) 2,129,372 Cash and cash equivalents at beginning of period 96,751,243 14,313,688 ----------- ----------- Cash and cash equivalents at end of period $ 7,701,448 $16,443,060 =========== =========== Supplemental disclosures of cash flow information: Cash payments of interest expense $8,393,834 $11,191,880 Cash payments of income taxes $1,760,000 $2,195,000
See accompanying notes to consolidated financial statements. Page 3 Part I Financial Information Item 1 PVF CAPITAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 (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, 2003 consolidated statement of financial condition, which was derived from the Corporation's audited financial statements. Certain information required for a complete presentation in accordance with 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, 2003 are not necessarily indicative of the results to be expected for the entire year ending June 30, 2004. The results of operations for PVF Capital Corp. ("PVF" or the "Company") for the periods being reported have been derived primarily from the results of operation of Park View Federal Savings Bank (the "Bank"). PVF Capital Corp.'s common stock is traded on the NASDAQ SMALL-CAP ISSUES under the symbol PVFC. 2. Stock Compensation: Employee compensation expense under stock is reported using the intrinsic valuation method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at the date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock Based Compensation."
Three Months Ended Six Months Ended December 31, December 31, 2003 2002 2003 2002 ---------------- ----------------- ------------------ ------------------ Net Income as reported $1,349,738 $2,257,160 $4,281,820 $3,944,246 Less: Pro forma compensation expense, net of tax $ 23,383 $ 31,034 $ 49,513 $ 62,068 ---------- ---------- ---------- ---------- Pro forma net income $1,326,355 $2,226,126 $4,232,307 $3,882,178 ========== ========== ========== ========== Basic earnings per share $ 0.21 $ 0.35 $ 0.67 $ 0.62 Pro forma basic earnings per share $ 0.21 $ 0.35 $ 0.66 $ 0.61 Diluted earnings per share $ 0.21 $ 0.35 $ 0.66 $ 0.61 Pro forma diluted earnings per share $ 0.20 $ 0.34 $ 0.65 $ 0.60
Page 4 Part I Financial Information Item 1 3. The following table discloses earnings per share for the three and six months ended December 31, 2003 and December 31, 2002.
Three months ended December 31, 2003 2002 ----------------------------------------------- ---------------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount BASIC EPS Net Income $1,349,738 6,379,917 $0.21 $2,257,160 6,371,460 $0.35 EFFECT OF STOCK OPTIONs 158,669 0.00 87,838 0.00 DILUTED EPS Net Income $1,349,738 6,538,586 $0.21 $2,257,160 6,459,298 $0.35
Six months ended December 31, 2003 2002 ----------------------------------------------- ---------------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount BASIC EPS Net Income $4,281,820 6,377,414 $0.67 $3,944,246 6,366,542 $0.62 EFFECT OF STOCK OPTIONS 155,188 0.01 78,274 0.01 DILUTED EPS Net Income $4,281,820 6,532,602 $0.66 $3,944,246 6,444,816 $0.61
Page 5 Part I Financial Information Item 1 4. Mortgage Banking Activities: The Company services real estate loans for investors that are not included in the accompanying condensed consolidated financial statements. Mortgage servicing rights are established based on the allocated fair value of servicing rights retained on loans originated by the Bank and subsequently sold in the secondary market. Mortgage servicing rights are included in the consolidated statement of financial condition under the caption "Prepaid expenses and other assets."
2003 2002 ------------------ ------------------ Servicing rights: Beginning of period $4,655,182 $3,255,147 Additions 2,643,810 1,587,045 Amortized to expense (1,963,212) (1,068,282) ---------- ---------- End of period $5,335,780 $3,773,910 ========== ========== Valuation allowance: Beginning of period $ 670,000 $ 0 Reductions credited to expense 670,000 0 ---------- ---------- End of period $ 0 $ 0 ========== ==========
Mortgage banking activities, net consists of the following:
Three Months Ended Six Months Ended December 31, December 31, 2003 2002 2003 2002 ---------------- ------------------- ------------------- ------------------ Mortgage Loan Servicing Fees $ 447,260 $ 375,556 $ 854,877 $ 696,569 Amortization and impairment of mortgage loan servicing fees $(442,289) $ (695,585) $(1,293,212) $(1,068,282) Gross realized: Gain on sales of loans $ 913,530 $2,121,156 $ 4,821,188 $ 3,149,812 Losses on sales of loans $(313,794) $ (266,742) $(1,104,899) $ (647,400) --------- ---------- ----------- ----------- Mortgage banking activities, net $ 604,707 $1,534,385 $ 3,277,954 $ 2,130,699 ========= ========== =========== ===========
Page 6 Part I Financial Information Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis discusses changes in financial condition and results of operations at and for the three-month and six-month periods ended December 31, 2003 for PVF Capital Corp. ("PVF" or the "Company"), Park View Federal Savings Bank (the "Bank"), its principal and wholly-owned subsidiary, PVF Service Corporation ("PVFSC"), a wholly-owned real estate subsidiary, Mid Pines Land Co., a wholly-owned real estate subsidiary, and PVF Holdings, Inc., a wholly-owned and currently inactive 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 $687.4 million as of December 31, 2003, a decrease of approximately $56.0 million, or 7.5%, as compared to June 30, 2003. The Bank remained in regulatory capital compliance for tangible, core, and risk-based capital on a fully phased-in basis with capital levels of 8.66%, 8.66%, and 10.83%, respectively, at December 31, 2003. During the six months ended December 31, 2003, the Company's cash and cash equivalents, which consist of cash, interest-bearing deposits, and federal funds sold, decreased $89.0 million, or 92.0%, as compared to June 30, 2003. The change in the Company's cash and cash equivalents consisted of a decrease in cash and interest-bearing Page 7 Part I Financial Information Item 2 FINANCIAL CONDITION continued ----------------------------- deposits of $6.0 million and a decrease in federal funds sold of $83.0 million. The net $31.2 million, or 5.1%, increase in loans receivable and mortgage-backed securities during the six months ended December 31, 2003, resulted from an increase in loans receivable held for investment of $17.1 million, a decrease in loans receivable held for sale of $23.7 million, and an increase in mortgage-backed securities of $37.8 million. The increase of $17.1 million in loans receivable held for investment included increases of $10.2 million in home equity line of credit loans, $2.3 million in commercial line of credit loans, $8.7 million in commercial real estate loans, $10.7 million in construction loans, and $0.2 million in multi-family loans, offset by decreases of $12.2 million in one-to-four family residential loans held for investment and $2.8 million in land loans. The increase of $37.8 million in mortgage-backed securities resulted from the purchase of $39.9 million in mortgage-backed securities less payments received of $2.1 million. The decrease of $23.7 million in loans receivable held for sale is attributable to a slowdown in refinancing activity during the period. The increase of $1.0 million in office properties and equipment is the result of capital improvements to our Corporate Center office in Solon, Ohio, investment in new technology, and the opening of a new branch office. The increase in prepaid expenses and other assets of $1.1 million, or 13.5%, is primarily attributable to an increase of $0.7 million in the mortgage servicing asset that resulted from the reversal of the impairment charge in the six months ended December 31, 2003. The decrease of $0.4 million in real estate owned properties is attributable to the sale of real estate owned. As a result of management's decision not to match market certificate of deposit rates, management allowed deposits to decrease by $51.2 million, or 9.7%. The decrease in notes payable of $1.0 million, or 17.9%, is the result of payments made on notes payable. Advances increased by $2.0 million as a result of short-term borrowings from the Federal Home Loan Bank of Cincinnati. The decrease in accrued expenses and other liabilities of $9.1 million, or 37.3%, is primarily the result of timing differences between the collection and remittance of payments received on loans serviced for investors. The decrease in cash and cash equivalents of $89.0 million, proceeds from the sale and repayment of loans receivable of $6.6 million, earnings of $4.3 million, advances of $2.0 million, and proceeds of $0.4 million from the sale of real estate owned, were used to repay maturing deposits of $51.2 million, fund the net increase of $37.8 million in mortgage-backed securities, fund the decrease in accrued expenses and other liabilities of $9.1 million, fund the increase of Page 8 Part I Financial Information Item 2 FINANCIAL CONDITION continued ----------------------------- $1.1 million in prepaid expenses and other assets and $1.0 million in office properties and equipment, repay $1.0 million in notes payable and pay a cash dividend of $0.9 million to stockholders. RESULTS OF OPERATIONS Three months ended December 31, 2003, --------------------- compared to three months ended December 31, 2002. PVF's net income is dependent primarily on its net interest income, which is the difference between interest earned on its loans and investments and interest paid on interest-bearing liabilities. Net interest income is determined by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities ("interest-rate spread") and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. The Company's interest-rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. Net interest income also includes amortization of loan origination fees, net of origination costs. PVF's net income is also affected by the generation of non-interest income, which primarily consists of loan servicing income, service fees on deposit accounts, and gains on the sale of loans held for sale. In addition, net income is affected by the level of operating expenses and loan loss provisions. The Company's net income for the three months ended December 31, 2003 was $1,349,700 as compared to $2,257,100 for the prior year comparable period. This represents a decrease of $907,400, or 40.2%, when compared with the prior year comparable period. Net interest income for the three months ended December 31, 2003 decreased by $230,300, or 3.8%, as compared to the prior year comparable period. This resulted from a decrease of $1,469,600, or 13.0%, in interest income and a decrease of $1,239,300, or 23.3%, in interest expense. The decrease in interest income resulted primarily from a decrease of 80 basis points in the return on interest-earning assets in the current period. This decrease in yield along with a decrease of $24.1 million in the average balance of interest-earning assets resulted in an overall decrease to interest income of $1,469,600 in the current period. The average balance on interest-bearing liabilities decreased by $20.8 million from the prior year comparable period. The average cost of funds on interest-bearing liabilities decreased by 65 basis points in the current period, as a result of declining market interest rates, resulting in an overall decrease in interest expense of $1,239,300. The Company's net interest income decreased by $230,300 due to a decline in the average balances of both interest-earning assets and interest-bearing liabilities, in addition to a decrease of 15 basis points in the Company's interest-rate spread during the current period as compared to the prior year comparable period. Page 9 Part I Financial Information Item 2 RESULTS OF OPERATIONS continued ------------------------------- For the three months ended December 31, 2003, a provision for loan losses of $192,000 was recorded, while no provision for loan losses was recorded in the prior year comparable period. The Company uses a systematic approach to determine the adequacy of its loan loss allowance and the necessary provision for loan losses. The loan portfolio is reviewed and delinquent loan accounts are analyzed individually on a monthly basis, with respect to payment history, ability to repay, probability of repayment, and loan-to-value percentage. Consideration is given to the types of loans in the portfolio and the overall risk inherent in the portfolio. After reviewing current economic conditions, changes to the size and composition of the loan portfolio, changes in delinquency status, levels of non-accruing loans, non-performing assets, 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. 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, 2003, the Company experienced an increase in loans held for investment of $24.9 million and an increase in the level of impaired loans of $1.3 million. Due to the increase in loans held for investment along with an increase in the level of impaired loans and recognition of specific loan losses, management determined it was necessary to record a provision for loan losses of $192,000 in the current period. During the three months ended December 31, 2002, the Company experienced an increase in loans held for investment of $0.6 million. In addition, the level of impaired loans and classified assets decreased by $541,000 and $3.4 million, respectively. Management determined it was not necessary to record a provision for loan losses in the prior period due to the application of revised reserve percentages reflecting the Company's historic loss experience to certain loan categories, along with decreases to impaired loans and classified assets. At December 31, 2003, the allowance for loan losses was $4.2 million, which represented 46.9% of non-performing loans and 0.69% of net loans. At June 30, 2003, the allowance for loan losses was $3.9 million, which represented 52.2% of non-performing loans and 0.63% of net loans. Page 10 Part I Financial Information Item 2 RESULTS OF OPERATIONS continued -------------------------------
At December 31, June 30, 2003 2003 ---------------------------------------------- (Dollars in thousands) Non-accruing loans (1): Real estate.................................... $8,919 $7,437 ------ ------ Accruing loans which are contractually past due 90 days or more: Real estate.................................... $ 124 $ 275 --------- --------- Total non-accrual and 90 days past due loans.............................. $ 9,043 $ 7,712 ========= ========= Ratio of non-performing loans to total loans and mortgage-backed securities..................... 1.40% 1.26% ======== ======== Other non-performing assets (2)...................... $ 0 $ 449 ========= ========= Total non-performing assets.......................... $ 9,043 $ 8,161 ========= ========= Total non-performing assets to total assets....................................... 1.32% 1.10% ======== ========
(1) Non-accrual status denotes loans on which, in the opinion of management, the collection of additional interest is unlikely, or loans that meet the non-accrual criteria established by regulatory authorities. Non-accrual loans include all loans classified as doubtful or loss, loans in foreclosure, and all loans greater than 90 days past due. Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on an assessment of the collectibility of the principal balance of the loan. (2) Other non-performing assets represent property acquired by the Bank through foreclosure or repossession. For the three months ended December 31, 2003, non-interest income decreased by $970,500, or 52.8%, from the prior year comparable period. This resulted primarily from a decrease of $929,700, or 60.6%, in mortgage-banking activities that resulted from a decrease of $1,254,400 in profit on loan sales in the current period offset by an increase of $324,700 in loan servicing income. The increase in loan servicing income is attributable to an increase in the volume of loans serviced for others along with a slowdown in the amortization of mortgage loan servicing rights that resulted from increasing market interest rates and decreased prepayment speed on loans serviced for others. During these periods, PVF pursued a strategy of originating long-term, fixed-rate loans pursuant to Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") guidelines and selling such loans to the FHLMC or the FNMA, while retaining the servicing. The reduction in profit on loan sales for the quarter is the direct result of a slowdown in refinancing activities. Those gains are expected to remain soft for at least the rest of the fiscal year. In addition, service and other fees decreased by $60,700, or 27.8%, primarily due to decreases in loan prepayment penalties and late charge fee income. Other non-interest income, net, increased by $19,900, or 23.3%, in the current period primarily due to an increase in gains on the sale of real estate owned. Non-interest expense for the three months ended December 31, 2003 decreased by $50,600, or 1.1%, from the prior year comparable period. Page 11 Part I Financial Information Item 2 RESULTS OF OPERATIONS continued ------------------------------- This was primarily the result of a decrease of $204,600, or 14.5%, in other non-interest expense that was primarily attributable to decreases in legal fees and advertising expenses. Compensation and benefits increased $122,600, or 5.5%, as the result of increased staffing, incentive bonuses paid, and salary and wage adjustments. Office occupancy and equipment increased $31,400, or 4.1%, due to the operation of one additional branch office along with repairs and maintenance costs to our Corporate Center office. The federal income tax provision for the three-month period ended December 31, 2003 increased to an effective rate of 34.7% for the current period from an effective rate of 33.8% for the prior year comparable period. RESULTS OF OPERATIONS Six months ended December 31, 2003, --------------------- compared to six months ended December 31, 2002. The Company's net income for the six months ended December 31, 2003 was $4,281,800 as compared to $3,944,200 for the prior year comparable period. This represents an increase of $337,600, or 8.6%, when compared with the prior year comparable period. Net interest income for the six months ended December 31, 2003 decreased by $62,000, or 0.5%, due to a decrease of $2,815,700, or 12.4%, in interest income and a $2,753,700, or 24.7%, decrease in interest expense. The decrease in interest income resulted primarily from a decrease of 91 basis points in the return on interest-earning assets in the current period. This decrease in yield along with a decrease of $0.5 million in the average balance of interest-earning assets resulted in an overall decrease to interest income of $2,815,700 in the current period. The average balance on interest-bearing liabilities decreased by $14.0 million from the prior year comparable period. The average cost of funds on interest-bearing liabilities decreased by 84 basis points in the current period, as a result of declining market interest rates, resulting in an overall decrease in interest expense of $2,753,700. The Company's net interest income decreased by $62,000 due to a decrease of 7 basis points in the Company's interest-rate spread during the current period as compared to the prior year comparable period. For the six months ended December 31, 2003, a provision for loan losses of $292,000 was recorded, while no provision for loan losses was recorded in the prior year comparable period. During the six months ended December 31, 2003, the Company experienced an increase in loans held for investment of $17.1 million and an increase in the level of impaired loans of $1.5 million. Due to the increase in loans receivable held for investment along with an increase in the level of impaired loans and recognition of specific loan losses, management determined it was necessary to record a provision for loan losses of $292,000 in the current period. During the six months ended December 31, 2002, the Company experienced an Page 12 Part I Financial Information Item 2 RESULTS OF OPERATIONS continued ------------------------------- increase in loans receivable held for investment of $24.2 million. In addition, the level of impaired loans and classified assets decreased by $758,000 and $934,000, respectively. Management determined it was not necessary to record a provision for loan losses in the prior period due to the application of revised reserve percentages reflecting the Company's historic loss experience to certain loan categories, along with decreases to impaired loans and classified assets. At December 31, 2003, the allowance for loan losses was $4.2 million, which represented 46.9% of non-performing loans and 0.69% of net loans. At June 30, 2003, the allowance for loan losses was $3.9 million, which represented 52.2% of non-performing loans and 0.63% of net loans. For the six months ended December 31, 2003, non-interest income increased by $1,591,000, or 61.5%, from the prior year comparable period. This resulted primarily from an increase of $1,147,200, or 53.8%, in mortgage-banking activities that resulted from an increase of $1,213,900 in profit on loan sales in the current period offset by a decrease of $66,700 in loan servicing income. The decrease in loan servicing income is attributable to an increase in the amortization of mortgage loan servicing rights that resulted from declining market interest rates and increased prepayment speed on loans serviced for others. During these periods, PVF pursued a strategy of originating long-term, fixed-rate loans pursuant to Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") guidelines and selling such loans to the FHLMC or the FNMA, while retaining the servicing. In addition, other non-interest income, net, increased by $487,300 in the current period primarily due to increased gains on the sale of real estate owned. Service and other fees decreased by $43,500, or 12.5%, primarily due to decreases in loan prepayment penalties and late charge fee income. Non-interest expense for the six months ended December 31, 2003 increased by $686,000, or 8.4%, from the prior year comparable period. This was primarily the result of an increase in compensation and benefits of $525,500, or 12.1%, as the result of increased staffing, incentive bonuses paid, and salary and wage adjustments. Office occupancy and equipment increased by $81,900, or 5.4%, due to the operation of one additional branch office along with repairs and maintenance costs to our Corporate Center office. Other non-interest expense increased by $78,600, or 3.3%, primarily as the result of increases in outside services and charitable contributions. The federal income tax provision for the six-month period ended December 31, 2003 increased to an effective rate of 34.0% for the current period from an effective rate of 33.6% for the prior year comparable period. Page 13 Part I Financial Information Item 3 LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company's liquidity measures its ability to generate adequate amounts of funds to meet its cash needs. Adequate liquidity guarantees that sufficient funds are available to meet deposit withdrawals, fund loan commitments, purchase securities, maintain adequate reserve requirements, pay operating expenses, provide funds for debt service, pay dividends to stockholders and meet other general commitments in a cost-effective manner. Our primary source of funds are deposits, principal and interest payments on loans, proceeds from the sale of loans, and advances from the Federal Home Loan Bank of Cincinnati ("FHLB"). While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and local competition. Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. Additional sources of funds include lines of credit available from the FHLB. Management believes the Company maintains sufficient liquidity to meet current operational needs. Part I Financial Information Item 4 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- There have been no significant changes to the Company's interest rate risk position or any changes to how the Company manages its Asset/Liability position since June 30, 2003. This is attributable to the Company's Asset/Liability Management policy of monitoring and matching the maturity and re-pricing characteristics of its interest-earning assets and interest-bearing liabilities, while remaining short-term with the weighted-average maturity and re-pricing periods. Part I Financial Information Item 5 CONTROLS AND PROCEDURES ----------------------- As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company's principal executive officer and principal financial officer, of the effectiveness of the Company's disclosure controls and procedures. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized Page 14 Part I Financial Information Item 5 CONTROLS AND PROCEDURES continued --------------------------------- and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. It should be noted that the design of the Company's disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company's principal executive and financial officers have concluded that the Company's disclosure controls and procedures are, in fact, effective at a reasonable assurance level. There have been no changes in the Company's internal control over financial reporting (to the extent that elements of internal control over financial reporting are subsumed within disclosure controls and procedures) identified in connection with the evaluation described in the above paragraph that occurred during the Company's last fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II OTHER INFORMATION ------------------------- Item 1. Legal Proceedings. N/A Item 2. Changes in Securities and Use of Proceeds. N/A Item 3. Defaults Upon Senior Securities. N/A Item 4. Submission of Matters to a Vote of Security Holders. The Company's Annual Meeting of Stockholders was held on October 20, 2003. A total of 5,752,109 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:
Votes in Favor Nominee of election Votes Against --------------------- --------------- ------------- John R. Male 5,612,892 -0- Stanley T. Jaros 5,612,121 -0- Raymond J. Negrelli 5,662,975 -0- Ronald D. Holman, II 5,672,637 -0-
Page 15 Part II Other Information continued Proposal to ratify the appointment of Crowe, Chizek and Company LLP as independent certified public accountants of the Company for the fiscal year ending June 30, 2004.
Votes For Votes against Abstain Not Voting --------- ------------- ------- ---------- 5,610,867 120,942 20,300 -0-
There were no broker non-votes. Approval of the amendment and restatement of the PVF Capital Corp. 2000 Incentive Stock Option Plan as the PVF Capital Corp. 2000 Incentive Stock Option and Deferred Compensation Plan.
Votes For Votes against Abstain Not Voting --------- ------------- ------- ---------- 3,290,945 213,106 22,826 2,225,232
Item 5. Other Information. N/A Item 6. (a) Exhibits -------- The following exhibits are filed herewith: 31.1 Rule 13a-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a) Certification of Chief Financial Officer 32 Section 1350 Certification (b) Reports on Form 8-K The Registrant filed the following Current Reports on Form 8-K during the quarter ended December 31, 2003:
Date of Report Item(s) Reported Financial Statements Filed ---------------- ---------------- -------------------------- October 15, 2003 7, 12 N/A
Page 16 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 11, 2004 /s/ C. Keith Swaney ------------------- ------------------------------ C. Keith Swaney President, Chief Operating Officer and Treasurer (Only authorized officer and Principal Financial Officer)