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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

FORM 10-Q

 

 

 

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2010.

 

¨	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 incorporation or organization)		(I.R.S. Employer 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller Reporting Company		x

Indicate by check mark whether the registrant is a shell company (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		25,669,718
(Class)		(Outstanding at February 10, 2011)

 

 

 

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PVF CAPITAL CORP.

INDEX

 

				Page
PART I FINANCIAL INFORMATION
Item 1.		Financial Statements.
		Consolidated Statements of Financial Condition, December 31, 2010 (unaudited) and June 30, 2010.			1
		Consolidated Statements of Operations for the three and six months ended December 31 2010 and 2009 (unaudited).			2
		Consolidated Statements of Cash Flows for the six months ended December 31, 2010 and 2009 (unaudited).			3
		Notes to Consolidated Financial Statements (unaudited).			4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.			31
Item 3.		Quantitative and Qualitative Disclosures About Market Risk.			43
Item 4.		Controls and Procedures.			43
PART II OTHER INFORMATION
Item 1.		Legal Proceedings.			44
Item 1A.		Risk Factors.			44
Item 2.		Unregistered Sale of Equity Securities and Use of Proceeds.			44
Item 3.		Defaults Upon Senior Securities.			45
Item 4.		(Removed and Reserved).			45
Item 5.		Other Information.			45
Item 6.		Exhibits.			45
		SIGNATURES

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Item 1.

Financial Statements.

PVF CAPITAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

		December 31,				June 30,
		2010				2010
		(unaudited)
ASSETS
Cash and amounts due from depository institutions		$	12,769,043			$	18,283,620
Interest-bearing deposits			108,192,198				111,759,326
Federal funds sold			10,000,000				—
Total cash and cash equivalents			130,961,241				130,042,946
Securities available for sale			16,957,981				20,149,149
Mortgage-backed securities available for sale			43,021,580				47,145,878
Loans receivable held for sale, net			11,278,033				8,717,592
Loans receivable, net of allowance of $31,492,997 and $31,519,466, respectively			561,675,753				587,405,644
Office properties and equipment, net			7,794,802				7,876,320
Real estate owned, net			8,763,893				8,173,741
Federal Home Loan Bank stock			12,811,100				12,811,100
Bank owned life insurance			23,287,655				23,144,033
Prepaid expenses and other assets			14,085,079				14,118,127
Total assets		$	830,637,117			$	859,584,530
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits		$	628,995,188			$	667,546,477
Note payable			1,206,111				1,259,444
Long-term advances from the Federal Home Loan Bank			35,000,000				35,000,000
Repurchase agreement			50,000,000				50,000,000
Advances from borrowers for taxes and insurance			13,538,668				4,930,327
Accrued expenses and other liabilities			24,242,774				17,605,257
Total liabilities		$	752,982,741			$	776,341,505
Stockholders’ equity
Serial preferred stock, none issued			—				—
Common stock, $.01 par value, 65,000,000 shares authorized; 26,142,443 and 26,114,943 shares issued, respectively			261,424				261,149
Additional paid-in capital			100,418,442				100,260,665
Retained earnings (accumulated deficit)			(19,425,999	)			(15,097,658	)
Accumulated other comprehensive income			237,656				1,656,016
Treasury stock at cost, 472,725 shares, respectively			(3,837,147	)			(3,837,147	)
Total stockholders’ equity			77,654,376				83,243,025
Total liabilities and stockholders’ equity		$	830,637,117			$	859,584,530

See Notes to the Consolidated Financial Statements

 

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PVF CAPITAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2010				2009				2010				2009
Interest and dividends income
Loans		$	7,656,063			$	9,139,272			$	15,788,373			$	18,296,290
Mortgage-backed securities			466,463				693,222				927,791				1,356,627
Federal Home Loan Bank stock dividends			129,164				145,309				272,894				305,009
Securities			45,519				31,416				140,922				41,311
Fed funds sold and interest-bearing deposits			60,790				3,006				81,116				10,399
Total interest and dividends income			8,357,999				10,012,225				17,211,096				20,009,636
Interest expense
Deposits			2,346,834				3,763,458				5,013,292				8,121,990
Short-term borrowings			—				50				—				50
Long-term borrowings			903,883				911,835				1,814,952				1,823,932
Subordinated debt			—				194,640				—				444,739
Total interest expense			3,250,717				4,869,983				6,828,244				10,390,711
Net interest income			5,107,282				5,142,242				10,382,852				9,618,925
Provision for loan losses			4,500,000				2,250,000				7,300,000				4,010,000
Net interest income after provision for loan losses			607,282				2,892,242				3,082,852				5,608,925
Non-interest income
Service charges and other fees			188,229				181,499				360,695				347,083
Mortgage banking activities, net			2,560,210				1,451,477				4,974,506				2,506,204
Increase in cash surrender value of bank owned life insurance			68,255				77,849				143,622				98,242
Gain (loss) on real estate owned			(57,554	)			(140,420	)			(223,130	)			(159,533	)
Provision for real estate owned losses			(479,310	)			(430,773	)			(725,310	)			(501,773	)
Gain on the cancellation of subordinated debt			—				—				—				8,561,530
Other, net			329,525				189,239				567,728				340,962
Total non-interest income			2,609,355				1,328,871				5,098,111				11,192,715
Non-interest expense
Compensation and benefits			2,450,454				2,372,132				4,886,445				4,613,811
Office occupancy and equipment			653,673				646,888				1,360,646				1,325,155
Outside services			710,709				492,911				1,261,534				1,345,269
Federal deposit insurance premium			621,407				737,812				1,227,684				1,303,545
Real estate owned expense			622,744				665,496				1,359,309				1,447,685
Other			914,753				1,111,605				1,806,053				2,227,479
Total non-interest expense			5,973,740				6,026,844				11,901,671				12,262,944
Income (loss) before federal income taxes			(2,757,103	)			(1,805,731	)			(3,720,708	)			4,538,696
Federal income tax provision (benefit)			952,825				(524,700	)			607,633				1,619,800
Net income (loss)		$	(3,709,928	)		$	(1,281,031	)		$	(4,328,341	)		$	2,918,896
Basic earnings (loss) per share		$	(0.14	)		$	(0.16	)		$	(0.17	)		$	0.37
Diluted earnings (loss) per share		$	(0.14	)		$	(0.16	)		$	(0.17	)		$	0.37
Dividend declared per common share		$	0.000			$	0.000			$	0.000			$	0.000

See Notes to the Consolidated Financial Statements

 

 

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PVF CAPITAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended December 31,
		2010				2009
Operating activities:
Net income (loss)		$	(4,328,341	)		$	2,918,897
Adjustments to reconcile net income to net cash from operating activities
Amortization of premium on mortgage-backed securities			127,694				174,533
Depreciation and amortization			384,470				467,449
Provision for loan losses			7,300,000				4,010,000
Provision for real estate owned losses			725,310				501,773
Accretion of deferred loan origination fees, net			(302,886	)			(602,134	)
Gain on cancellation of subordinated debt			—				(8,561,530	)
(Gain) loss on sale of loans receivable held for sale, net			(3,691,269	)			(2,955,167	)
Loss on disposal of real estate owned, net			223,130				159,533
Market adjustment for loans held for sale			217,349				59,052
Change in fair value of mortgage banking derivatives			264,849				639,594
Stock compensation			158,052				92,140
Change in accrued interest on securities, loans, and borrowings, net			74,113				296,336
Origination of loans receivable held for sale, net			(241,668,609	)			(114,467,163	)
Sale of loans receivable held for sale, net			239,891,674				135,391,742
(Increase) decrease in cash surrender value of bank owned life insurance			(143,622	)			(98,242	)
Net change in other assets and other liabilities			9,020,868				2,885,136
Net cash from operating activities			8,252,782				20,911,949
Investing activities:
Loan repayments and originations, net			14,584,364				35,023,718
Principal repayments on mortgage-backed securities available for sale			7,909,174				8,938,773
Purchase of mortgage-backed securities available for sale			(5,138,782	)			(1,501,775	)
Purchase of securities held to maturity			—				(112,000,000	)
Purchase of securities available for sale			(29,999,831	)			—
Maturities of securities held to maturity			—				107,000,000
Calls of securities available for sale			33,000,000				—
Proceeds from sale of real estate owned			2,609,821				2,447,120
Additions to office properties and equipment, net			(302,952	)			(50,951	)
Net cash from investing activities			22,661,794				39,856,885
Financing activities:
Net increase (decrease) in demand deposits, NOW, and passbook savings			14,929,404				7,888,905
Net increase (decrease) in time deposits			(53,480,693	)			(49,929,260	)
Net increase in advances from borrowers for taxes and insurance			8,608,341				3,273,112
Repayment of note payable			(53,333	)			(53,333	)
Payment in exchange for cancellation of subordinated debt			—				(500,000	)
Net cash from financing activities			(29,996,281	)			(39,320,576	)
Net increase in cash and cash equivalents			918,295				21,448,258
Cash and cash equivalents at beginning of period			130,042,946				21,213,058
Cash and cash equivalents at end of period		$	130,961,241			$	42,661,316
Supplemental disclosures of cash flow information:
Cash payments of interest		$	7,027,600			$	10,553,661
Cash payments of income taxes		$	—			$	—
Supplemental noncash investing activity:
Transfer of loans to real estate owned		$	3,423,103			$	3,088,476
Supplemental noncash financing activity:
Common stock and warrants exchanged for cancellation of debt		$	—			$	1,329,645

See Notes to the Consolidated Financial Statements

 

 

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PVF CAPITAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended

December 31, 2010 and 2009

(Unaudited)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS

The accounting and reporting policies of PVF conform to U.S. generally accepted accounting principles and general industry practice. PVF’s principal subsidiary, Park View Federal is principally engaged in the business of offering deposits through the issuance of savings accounts, money market accounts, and certificates of deposit and lending funds primarily for the purchase, construction, and improvement of real estate in Cuyahoga, Summit, Geauga, Lake, Medina, Lorain and Portage Counties, Ohio. The deposit accounts of Park View Federal are insured up to applicable limits under the Federal FDIC. The following is a description of the significant policies, which PVF follows in preparing and presenting its consolidated financial statements.

Principles of Consolidation: The consolidated financial statements include the accounts of PVF and its wholly-owned subsidiaries, Park View Federal, PVFSC, PVF Holdings, Inc., and MPLC. PVFSC owns some Park View Federal premises and leases them to the Bank. PVF Holdings, Inc. and MPLC did not have any significant assets or activity as of or for the periods presented. All significant intercompany transactions and balances are eliminated in consolidation.

PVFSC and Park View Federal have entered into various nonconsolidated joint ventures that own real estate including properties leased to the Bank. Park View Federal has created a limited liability company, Crock, LLC that has taken title to property acquired through or in lieu of foreclosure.

Trust I and Trust II were created for the sole purpose of issuing trust preferred securities. The trusts are not consolidated into the financial statements.

Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses, valuation of mortgage servicing rights, fair value of mortgage banking derivatives, valuation of loans held for sale, fair value of securities, valuation of real estate owned, the realizability of deferred tax assets and PVF’s supplemental employee retirement plan accrual are particularly subject to change.

Cash Flows: For purposes of the consolidated statements of cash flows, PVF considers cash and amounts due from depository institutions, interest bearing deposits, and federal funds sold with original maturities of less than three months to be cash equivalents. Net cash flows are reported for customer loan transactions, NOW and passbook savings accounts, time deposits, short-term borrowings, and advances from borrowers.

Interest-bearing Deposits: Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.

Securities: Securities held to maturity are limited to debt securities that PVF has the positive intent and the ability to hold to maturity; these securities are reported at amortized cost. Debt securities that could be sold in the future because of changes in interest rates or other factors are not to be classified as held to maturity. Equity securities with readily determinable fair values are classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Interest income includes amortization of purchase premium or accretion of purchase discount. Premiums and discounts

 

 

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are amortized or accreted over the life of the related security as an adjustment to yield. Prepayment is assumed for mortgage-backed securities. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Available for sale and held to maturity securities are evaluated quarterly for potential other-than-temporary impairment.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

Mortgage Banking Activities: Mortgage loans originated and intended for sale in the secondary market are carried at fair value. PVF sells the loans on either a servicing retained or servicing released basis. Servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. PVF measures servicing assets using the amortization method. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. Loan servicing rights are amortized in proportion to and over the period of estimated net future servicing revenue. The expected period of the estimated net servicing income is based in part on the expected prepayment of the underlying mortgages. The amortized balance of mortgage servicing rights is included in prepaid expenses and other assets on the Consolidated Statement of Financial Condition.

Mortgage servicing rights are periodically evaluated for impairment. Impairment represents the excess of amortized cost over its estimated fair value. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate and original time to maturity. Any impairment is reported as a valuation allowance for an individual tranche. If PVF later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance will be recorded as an increase to income.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Late fees and ancillary fees related to loan servicing are not material.

PVF is exposed to interest rate risk on loans held for sale and rate-locked loan commitments. As market interest rates increase or decrease, the fair value of loans held for sale and rate-lock commitments will decline or increase. PVF enters into derivative transactions principally to protect against the risk of adverse interest movements affecting the value of the Company’s committed loan sales pipeline. In order to mitigate the risk that a change in interest rates will result in a decline in value of PVF’s interest rate lock commitments (“IRLCs”) in the committed mortgage pipeline or its loans held for sale, PVF enters into mandatory forward loan sales contracts with secondary market participants. Mandatory forward sales contracts and committed loans intended to be held for sale are considered free-standing derivative instruments and changes in fair value are recorded in

 

 

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current period earnings. For committed loans, fair value is measured using current market rates for the associated mortgage loans. For mandatory forward sales contracts, fair value is measured using secondary market pricing.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, purchase premiums and discounts deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

Interest income on mortgage and commercial loans is discontinued at the time the loan is greater than 90 days delinquent unless the loan is well-secured with a loan to value ratio of 60% or less and in process of collection. Interest income on consumer loans is discontinued at the time the loan is greater than 90 days delinquent. Consumer loans that become 180 days or more past due will be classified as loss and fully reserved. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due greater than 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to non-accrual status in accordance with the Company’s policy, typically after 90 days of non-payment.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses: The allowance for loan losses is maintained at a level to absorb probable incurred losses in the portfolio as of the balance sheet date. The adequacy of the allowance for loan losses is periodically evaluated by Park View Federal based upon the overall portfolio composition and general market conditions as well as information about specific borrower situations and estimated collateral values. While management uses the best information available to make these evaluations, future adjustments to the allowance may be necessary if economic conditions change substantially from the assumptions used in making the evaluations. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 18 months. During the period ended December 31, 2010, the Company changed the loss history period to 18 months from 12 months. This change was made to capture more appropriately over a longer period of time the Company’s recent loss experience under the current adverse economic conditions.

The portfolio segments include one-to-four family, one-to-four family construction, multi-family, commercial real estate, land, commercial and industrial, and consumer loans. One-to-four family, one-to-four family construction, and consumer loans rely on the historic cash flows of individual borrowers and on the real estate securing the loan. Multi-family, commercial real estate, land, and the commercial and industrial segments are comprised of loans with a reliance on historic cash flows of small business borrowers and of small scale investors, as well as of the underlying real estate projects or of land. The underwriting criteria across all segments consider the risk attributes to be impacted by weak local economic conditions and a weak real estate market.

This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance when

 

 

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management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses.

A loan is considered impaired when, based on current information and events, it is probable that Park View Federal will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement. Since Park View Federal’s loans are primarily collateral dependent, measurement of impairment is based on the fair value of the collateral. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment and accordingly, they are not separately identified for impairment disclosures.

Park View Federal’s loan portfolio is primarily secured by real estate. Collection of real estate secured loans in the portfolio is dependent on court proceedings, and as a result, loans may remain past due for an extended period before being collected, transferred to real estate owned, or charged off. Charge-offs are recorded after the foreclosure process is complete for any deficiency between Park View Federal’s recorded investment in the loan and the fair value of the real estate acquired or sold, to the extent that such a deficiency exists.

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from PVF, the transferee obtains the right (free of conditions to constrain it from taking that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Office Properties and Equipment: Land is carried at cost. Buildings and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method at rates expected to amortize the cost of the assets over their estimated useful lives or, with respect to leasehold improvements, the term of the lease, if shorter. Estimated lives for buildings are 40 years. Estimated lives for equipment range from 1 to 10 years.

Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated selling costs, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.

Federal Home Loan Bank (FHLB) Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Long-Term Assets: Office properties and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Bank-Owned Life Insurance: PVF has purchased life insurance policies on certain key executives. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value, adjusted for other charges or other amounts due that are probable at settlement.

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

 

 

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PVF is subject to federal income tax only. Ohio-domiciled Banks and bank holding companies are not subject to income tax in Ohio. PVF recognizes interest and/or penalties related to income tax matters in income tax expense. PVF is no longer subject to examination by taxing authorities for years before 2003.

Stock Compensation: Employee compensation expense under stock option plans is reported using the fair value recognition provisions under ASC 718, formerly FASB Statement 123 (revised 2004) (FAS 123R), “Share Based Payment.” PVF has adopted FAS 123R using the modified prospective method.

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as a separate component of equity.

Earnings Per Share: Basic earnings per share is calculated by dividing net income for the period by the weighted average number of shares of common stock outstanding during the period. The additional potential common shares issuable under stock options are included in the calculation of diluted earnings per share.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Restrictions on Cash: Cash on deposit with another institution of $2,040,000 and $148,000 was required to meet regulatory reserve requirements at December 31 and June 30, 2010, respectively.

Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividend paid by the Bank to PVF or by the Company to shareholders. See Note 10 for more specific disclosure related to federal savings banks.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

 

 

 

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Operating Segments: While PVF’s chief decision-makers monitor the revenue streams of the various Company products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of PVF’s financial service operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications: Certain reclassifications have been made to the prior year amounts to conform to the current year presentation.

Basis of Presentation

The accompanying consolidated interim financial statements were prepared in accordance with regulations of the Securities and Exchange Commission for Form 10-Q. All information in the consolidated interim financial statements is unaudited except for the June 30, 2010 consolidated statement of financial condition, which was derived from PVF Capital Corp.’s (the “Company”) audited financial statements. Certain information required for a complete presentation in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) 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, 2010 are not necessarily indicative of the results to be expected for the entire year ending June 30, 2011. The results of operations for the Company for the periods being reported have been derived primarily from the results of operations of Park View Federal Savings Bank (the “Bank.”) The Company’s common stock is traded on the NASDAQ Capital Market under the symbol “PVFC”.

NOTE 2 — SECURITIES

Securities available for sale: As of December 31, 2010 and June 30, 2010, respectively, the fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

		December 31, 2010
		Amortized Cost				Gross Unrecognized Gains				Gross Unrecognized Losses				Fair Value
FHLMC structured notes		$	7,000,000			$	—			$	(31,350	)		$	6,968,650
FHLMC discount note			6,999,831				—				—				6,999,831
FNMA structured notes			3,000,000				—				(10,500	)			2,989,500
Total		$	16,999,831			$	—			$	(41,850	)		$	16,957,981

 

		June 30, 2010
		Amortized Cost				Gross Unrecognized Gains				Gross Unrecognized Losses				Fair Value
FHLMC structured notes		$	10,000,000			$	81,325			$	—			$	10,081,325
FNMA structured notes			10,000,000				67,824				—				10,067,824
Total		$	20,000,000			$	149,149			$	—			$	20,149,149

 

 

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Securities available-for-sale at December 31, 2010 are summarized as follows:

 

		December 31, 2010
		Amortized Cost				Fair Value
Available-for-sale
One to five years		$	13,999,831			$	13,984,231
Five to ten years			3,000,000				2,973,750
Total		$	16,999,831			$	16,957,981

The Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”) structured notes are callable quarterly, have multiple coupon resets and maturities ranging up to 10 years. At December 31, 2010, gross unrealized losses have been in a loss position for less than 12 months and no impairment has been taken as the investments are government sponsored entities and are believed to not involve credit risk.

Mortgage-backed securities. As of December 31, 2010 and June 30, 2010, respectively, the fair value of mortgage-backed securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

		December 31, 2010
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
FNMA mortgage-backed securities		$	19,488,856			$	746,471			$	—			$	20,235,327
FHLMC mortgage-backed securities			20,239,645				293,596				—				20,533,241
GNMA mortgage-backed securities			2,159,321				93,691				—				2,253,012
Total		$	41,887,822			$	1,133,758			$	—			$	43,021,580

 

		June 30, 2010
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
FNMA mortgage-backed securities		$	23,208,640			$	1,147,667			$	—			$	24,356,307
FHLMC mortgage-backed securities			18,445,372				1,020,651				—				19,466,023
GNMA mortgage-backed securities			3,131,896				191,652				—				3,323,548
Total		$	44,785,908			$	2,359,970			$	—			$	47,145,878

These mortgage-backed securities are backed by residential mortgage loans and do not mature at a single maturity date.

 

 

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NOTE 3 — LOANS

Loans receivable at December 31, 2010 and June 30, 2010, respectively, consisted of the following:

 

		December 31, 2010				June 30, 2010
One-to-Four Family Loans:
1-4 Family Owner Occupied		$	66,335,278			$	73,471,830
1-4 Family Non-Owner Occupied			40,734,000				44,263,000
1-4 Family Second Mortgage			33,775,036				37,059,590
Home Equity Lines of Credit			72,516,928				74,419,240
Home Equity Investment Lines of Credit			8,174,522				8,841,389
One-to-Four Family Construction Loans:
1-4 Family Construction			3,127,214				6,162,722
1-4 Family Construction Models/Speculative			6,947,339				8,270,000
Multi-Family Loans:
Multi-Family			49,160,966				48,454,790
Multi-Family Second Mortgage			434,458				447,127
Multi-Family Construction			4,370,068				3,293,715
Commercial Real Estate Loans:
Commercial			199,620,933				203,558,052
Commercial Second Mortgage			8,220,640				8,131,965
Commercial Lines of Credit			22,883,705				24,971,468
Commercial Construction			5,049,879				5,293,686
Commercial and Industrial Loans			25,772,595				21,768,428
Land Loans:
Lot Loans			20,205,083				21,939,098
Acquisition and Development Loans			26,688,023				29,871,821
Consumer Loans			231,069				169,208
Total Loans Receivable			594,247,736				620,387,129
Net deferred loan origination fees			(1,078,986	)			(1,462,019	)
Allowance for loan losses			(31,492,997	)			(31,519,466	)
Total loans receivable, net		$	561,675,753			$	587,405,644

A summary of the changes in the allowance for loan losses for the three and six months ended December 31, 2010 and 2009, respectively, is as follows:

 

		Three months ended December 31, 2010				Three months ended December 31, 2009				Six months ended December 31, 2010				Six months ended December 31, 2009
Beginning balance		$	32,629,425			$	31,823,982			$	31,519,466			$	31,483,205
Provision for loan losses			4,500,000				2,250,000				7,300,000				4,010,000
Loans charged-off			(5,952,302	)			(4,161,152	)			(7,642,343	)			(5,580,375	)
Recoveries			315,874				—				315,874				—
Ending balance		$	31,492,997			$	29,912,830			$	31,492,997			$	29,912,830

 

 

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The following table presents the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2010:

 

		One-to-Four Family				One-to-Four Family Construction				Multi- Family				Commercial Real Estate				Commercial and Industrial				Land				Consumer				Total
Allowance for loan losses
Ending allowance balance attributable to loans
Individually evaluated for impairment		$	4,441,457			$	1,344,285			$	1,177,970			$	3,099,056			$	184,561			$	5,230,484			$	—			$	15,477,813
Collectively evaluated for impairment			5,821,737				537,471				1,757,652				5,004,197				484,920				2,408,822				385				16,015,184
Total ending allowance balance		$	10,263,194			$	1,881,756			$	2,935,622			$	8,103,253			$	669,481			$	7,639,306			$	385			$	31,492,997
Loans
Loans individually evaluated for impairment		$	17,341,082			$	4,628,521			$	3,292,246			$	23,676,293			$	324,410			$	14,149,161			$	—			$	63,411,713
Loans collectively evaluated for impairment			203,792,436				5,427,740				50,575,260				211,670,763				25,401,389				32,658,800				230,649				529,757,037
Total ending loans balance		$	221,133,518			$	10,056,261			$	53,867,506			$	235,347,056			$	25,725,799			$	46,807,961			$	230,649			$	593,168,750

 

 

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The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010:

 

		Unpaid Principal Balance(1)				Recorded Investment				Allowance for Loan Losses Allocated
With no related allowance recorded
One-to-Four Family Loans:
1-4 Family Owner Occupied		$	4,152,678			$	4,145,138			$	—
1-4 Family Non-Owner Occupied			660,620				659,440				—
1-4 Family Second Mortgage			72,399				72,268
Home Equity Lines of Credit			1,227,783				1,225,553				—
Home Equity Investment Lines of Credit			168,826				168,519				—
One-to-Four Family Construction Loans:											—
1-4 Family Construction			—				—				—
1-4 Family Construction Models/Specs			363,604				362,944				—
Multi-Family Loans:
Multi-Family			—				—				—
Multi-Family Second Mortgage			—				—				—
Multi-Family Construction			—				—				—
Commercial Real Estate Loans:
Commercial			5,822,952				5,812,379				—
Commercial Second Mortgage			571,473				570,435				—
Commercial Lines of Credit			1,066,505				1,064,569				—
Commercial Construction			370,000				369,328				—
Commercial and Industrial Loans			—				—				—
Land Loans:
Lot loans			103,779				103,591				—
Acquisition and Development loans			174,986				174,668				—
Consumer Loans			—				—				—
Total with no related allowance recorded			14,755,605				14,728,812
With an allowance recorded
One-to-Four Family Loans:
1-4 Family Owner Occupied			1,212,057				1,209,857				419,158
1-4 Family Non-Owner Occupied			6,646,391				6,634,323				2,525,886
1-4 Family Second Mortgage			327,243				326,648				327,631
Home Equity Lines of Credit			2,318,288				2,314,079				980,840
Home Equity Investment Lines of Credit			586,342				585,277				187,942
One-to-Four Family Construction Loans:
1-4 Family Construction			—				—				—
1-4 Family Construction Models/Specs			4,273,336				4,265,577				1,344,285
Multi-Family Loans:
Multi-Family			368,828				368,158				87,016
Multi-Family Second Mortgage			—				—				—
Multi-Family Construction			2,929,407				2,924,088				1,090,954
Commercial Real Estate Loans:
Commercial			11,755,114				11,733,771				1,894,536
Commercial Second Mortgage			—				—				—
Commercial Lines of Credit			681,432				680,195				117,978
Commercial Construction			3,451,883				3,445,616				1,086,542
Commercial and Industrial Loans			325,000				324,410				184,561
Land Loans:
Lot loans			580,706				579,651				211,512
Acquisition and Development loans			13,315,428				13,291,251				5,018,972
Consumer Loans			—				—				—
Total with an allowance recorded			48,771,455				48,682,901				15,477,813
Total loans evaluated for impairment		$	63,527,060			$	63,411,713			$	15,477,813

 

(1)	There is $5.3 million of loans individually identified for impairment accruing interest.

 

 

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The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2010. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

		Nonaccrual(1)				Loans Past Due Over 90 Days Still Acccruing
One-to-Four Family Loans:
1-4 Family Owner Occupied		$	5,354,994				—
1-4 Family Non Owner Occupied			6,359,453				—
1-4 Family Second Mortgage			232,942				—
Home Equity Lines of Credit			3,438,550				—
Home Equity Investment Lines of Credit			753,797				—
One-to-Four Family Construction Loans:
1-4 Family Construction			—				—
1-4 Family Construction Models/Specs			4,551,957				—
Multi-Family Loans:
Multi-Family			368,158				—
Multi-Family Second Mortgage			—				—
Multi-Family Construction			2,924,088				—
Commercial Real Estate Loans:
Commercial			13,848,627				—
Commercial Second Mortgage			570,435				—
Commercial Lines of Credit			1,599,885				—
Commercial Construction			3,814,944				—
Commercial and Industrial Loans			324,410				—
Land Loans:
Lot loans			502,129				—
Acquisition and Development loans			13,465,920				—
Consumer Loans			—				—
Total		$	58,110,289				—

 

(1)

Non-accrual status denotes loans on which, in the opinion of management, the collection of additional interest is unlikely, or loans that meet the non-accrual criteria established by regulatory authorities. Payments received on a non-accrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on an assessment of the collectibility of the principal balance of the loan.

 

 

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The following table presents the aging of the recorded investment in past due loans as of December 31, 2010 by class of loan. Performing loans are accruing loans less than 90 days past due. Nonperforming loans are all loans not accruing.

 

		30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days Past Due				Total Past Due				Loans Not Past Due				Total
Performing Loans
One-to-Four Family Loans:
1-4 Family Owner Occupied		$	867,626			$	430,200			$	—			$	1,297,826			$	59,562,012			$	60,859,838
1-4 Family Non Owner Occupied			420,758				260,991				—				681,749				33,618,836				34,300,585
1-4 Family Second Mortgage			132,341				114,384				—				246,725				33,234,044				33,480,769
Home Equity Lines of Credit			149,348				164,169				—				313,517				68,633,190				68,946,707
Home Equity Investment Lines of Credit			59,737				92,632				—				152,369				7,253,514				7,405,883
One-to-Four Family Construction Loans:
1-4 Family Construction			1,044,460				735,193				—				—				3,121,536				3,121,536
1-4 Family Construction Models/Specs			—				—				—				1,779,653				603,115				2,382,768
Multi-Family Loans:
Multi-Family			—				—				—				—				48,703,545				48,703,545
Multi-Family Second Mortgage			—				—				—				—				433,669				433,669
Multi-Family Construction			—				—				—				—				1,438,046				1,438,046
Commercial Real Estate Loans:
Commercial			854,070				500,611				—				1,354,681				184,055,169				185,409,850
Commercial Second Mortgage			—				—				—				—				7,635,278				7,635,278
Commercial Lines of Credit			453,111				132,771				—				585,882				20,656,388				21,242,270
Commercial Construction			—				—				—				—				1,225,766				1,225,766
Commercial and Industrial Loans			—				—				—				—				25,401,389				25,401,389
Land Loans:
Lot loans			181,112				34,632				—				215,744				19,450,523				19,666,267
Acquisition and Development loans			—				159,695				—				159,695				13,013,951				13,173,646
Consumer Loans			—				—				—				—				230,649				230,649
Total Performing Loans		$	4,162,563			$	2,625,278			$	—			$	6,787,841			$	528,270,620			$	535,058,461
Nonperforming Loans
One-to-Four Family Loans:
1-4 Family Owner Occupied		$	—			$	—			$	3,665,113			$	3,665,113			$	1,689,882			$	5,354,994
1-4 Family Non Owner Occupied			102,496				105,520				5,253,690				5,462,706				896,746				6,359,453
1-4 Family Second Mortgage			—				—				232,942				232,942				—				232,942
Home Equity Lines of Credit			—				—				3,344,103				3,344,103				94,447				3,438,550
Home Equity Investment Lines of Credit			—				—				753,797				753,797				—				753,797
One-to-Four Family Construction Loans:
1-4 Family Construction			—				—				—				—				—				—
1-4 Family Construction Models/Specs			355,354				—				4,148,382				4,503,736				48,221				4,551,957
Multi-Family Loans:
Multi-Family			—				—				368,158				368,158				—				368,158
Multi-Family Second Mortgage			—				—				—				—				—				—
Multi-Family Construction			—				—				2,924,088				2,924,088				—				2,924,088
Commercial Real Estate Loans:
Commercial			3,190,386				705,380				7,242,818				11,138,584				2,710,043				13,848,627
Commercial Second Mortgage			—				—				570,435				570,435				—				570,435
Commercial Lines of Credit			—				—				1,599,885				1,599,885				—				1,599,885
Commercial Construction			—				—				3,445,616				3,445,616				369,328				3,814,944
Commercial and Industrial Loans			—				—				—				—				324,410				324,410
Land Loans:
Lot loans			—				—				502,129				502,129				—				502,129
Acquisition and Development loans			1,011,885				—				11,346,537				12,358,422				1,107,498				13,465,920
Consumer Loans			—				—				—				—				—				—
Total Nonperforming Loans			4,660,121				811,900				45,397,693				50,869,714				7,240,575				58,110,289
Total Loans		$	8,822,684			$	3,437,178			$	45,397,693			$	57,657,555			$	535,511,195			$	593,168,750

 

 

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Troubled Debt Restructurings:

Included in non-accruing loans were $4,137,051 and $2,985,113 of troubled debt restructurings having valuation allowances totaling $1,203,230 and $1,013,106, respectively, at December 31, 2010 and June 30, 2010. There were $10,194,574 and $6,265,784 of troubled debt restructurings having valuation allowances totaling $272,383 and $80,800, respectively, on accruing interest loans at December 31, 2010 and June 30, 2010.

Credit Quality Indicators:

The Bank categorizes loans into risk strata based on relevant borrower information about the ability to service debt. This information includes a review of current financial information, historic payment experience, credit documentation, relevant public information and other factors, as determined by credit underwriting guidelines. The Bank, through its analysis of individual borrowers, classifies each loan as to credit risk. All loans considered non-homogeneous, specifically those that are deemed commercial and industrial or commercial real estate loans, are subject to review annually by the Bank, regardless of loan size. These loans are reviewed continually and changes to the risk rating, if necessary, occur on a quarterly basis. Loans that are considered homogeneous, or those which fall into the categories of one-to-four family loans or into consumer loans, are not individually rated annually. The payment performance of the homogeneous loans serves as the clear credit indicator of classification into the categories of pass-rated loans or into substandard, non-accrual loans. Homogeneous loans that are less than 90 days past due are generally reported as pass-rated loans, unless related to a rated commercial and industrial or commercial real estate loan. Homogeneous loans which are greater than 90 days past due are placed on non-accrual and rated substandard. Payment performance indicators are based on performance through December 31, 2010. The Bank uses the following definitions for adverse risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that requires close attention. If left unattended, the potential weaknesses may result in further deterioration in the repayment prospects of the loan or of the institution’s credit position at a future date.

Substandard. Loans classified as substandard are protected inadequately by the current financial means of the borrower or through the liquidation of collateral pledged. Loans classified as such have a well-defined weakness and without substantial intervention, there is a distinct possibility that the institution may incur a loss. As a matter of practice, if the Bank feels that a total loss is imminent, it designates nearly all of these loans to charge off. Accordingly, the Bank uses the loan classification of doubtful, as defined below, sparingly.

Doubtful. Loans classified as doubtful have all of the inherent weaknesses of those loans classified as substandard with the added structural weakness rendering the collection in full highly unlikely. As such, this category is used sparingly by the Bank.

 

 

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As of December 31, 2010, and based on the most recent analysis performed by the Company, the risk category of loans by class of loans is as follows:

 

		Pass(1)				Special Mention				Substandard				Doubtful				Total
One-to-Four Family Loans:
1-4 Family Owner Occupied		$	59,318,755			$	412,582			$	6,603,941			$	—			$	66,335,278
1-4 Family Non Owner Occupied			33,334,524				78,557				7,320,919				—				40,734,000
1-4 Family Second Mortgage			33,291,594				294,700				188,742				—				33,775,036
Home Equity Lines of Credit			68,378,987				504,119				3,633,823				—				72,516,928
Home Equity Investment Lines of Credit			7,270,067				103,916				800,539				—				8,174,522
One-to-Four Family Construction Loans:
1-4 Family Construction			3,127,214				—				—								3,127,214
1-4 Family Construction Models/Specs			1,251,885				1,006,363				4,689,091				—				6,947,339
Multi-Family Loans:
Multi-Family			46,797,904				1,994,234				368,828				—				49,160,966
Multi-Family Second Mortgage			434,458				—				—				—				434,458
Multi-Family Construction			1,440,661				—				2,929,407				—				4,370,068
Commercial Real Estate Loans:
Commercial			166,316,527				8,867,086				24,437,320				—				199,620,933
Commercial Second Mortgage			8,220,640				—				—				—				8,220,640
Commercial Lines of Credit			21,091,734				1,791,971				—				—				22,883,705
Commercial Construction			1,227,996				—				3,821,883				—				5,049,879
Commercial and Industrial Loans			21,073,810				3,638,587				1,060,197				—				25,772,595
Land Loans:
Lot loans			15,854,600				1,234,636				3,115,847				—				20,205,083
Acquisition and Development loans			12,264,418				377,205				14,046,400				—				28,688,023
Consumer Loans			231,069				—				—				—				231,069
Total		$	500,926,843			$	20,303,956			$	73,016,937			$	—			$	594,247,736

 

(1)	There are $56.6 million non-homogeneous loans which are subject to individual review for risk rating included in the pass risk category based on payment status as they have not yet been individually reviewed.

NOTE 4 — MORTGAGE BANKING ACTIVITIES

Loans held for sale at December 31, 2010 and June 30, 2010 were $11,278,033 and $8,717,592, respectively.

The Bank adopted the fair value option for accounting for its loans held-for-sale effective July 1, 2008. The fair value of loans held-for-sale exceeded the unpaid principal balance of these loans by $106,823 and $324,172 as of December 31, 2010 and June 30, 2010, respectively. The gain on loans held-for-sale as of December 31, 2010 was reported in the mortgage banking activities line of the consolidated statement of operations. Interest on loans held-for-sale was reported in interest income.

The Bank services real estate loans for investors that are not included in the accompanying consolidated financial statements. Mortgage servicing rights are established based on the fair value of servicing rights retained on loans originated by the Bank and subsequently sold in the secondary market. Mortgage servicing rights are included in the consolidated statements of financial condition under the caption “Prepaid expenses and other assets.” At December 31, 2010 the mortgage loan servicing portfolio was approximately $1.1 billion.

 

 

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Originated mortgage servicing rights capitalized and amortized during the six months ended December 31, 2010 and 2009 were as follows:

 

		Six Months Ended December 31,
		2010				2009
Servicing rights:
Beginning of period		$	6,960,969			$	6,097,861
Additions			2,690,414				1,868,939
Amortized to expense			(2,120,838	)			(1,026,105	)
Valuation allowance for impairment			(465,085	)			—
End of period		$	7,065,460			$	6,940,695

Originated mortgage servicing rights capitalized and amortized during the three months ended December 31, 2010 and 2009 were as follows:

 

		Three Months Ended December 31,
		2010				2009
Servicing rights:
Beginning of period		$	6,153,715			$	6,619,595
Additions			1,521,616				856,137
Amortized to expense			(1,328,585	)			(535,037	)
Recovery of valuation allowance for impairment			718,714				—
End of period		$	7,065,460			$	6,940,695

Activity in the valuation allowance for mortgage servicing rights over the six months and three months ended December 31, 2010, as compared with the same periods during 2009, was as follows:

 

		Six months ended December 31, 2010				Six months ended December 31, 2009
Balance, beginning of period		$	—			$	—
Impairment charges			(1,183,799	)			—
Impairment recoveries			718,714				—
Balance, end of period		$	(465,085	)		$	—
		Three months ended December 31, 2010				Three months ended December 31, 2009
Balance, beginning of period		$	(1,183,799	)		$	—
Impairment charges			—				—
Impairment recoveries			718,714				—
Balance, end of period		$	(465,085	)		$	—

 

 

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Mortgage banking activities, net as presented in the consolidated statements of operations consisted of the following:

 

		Three Months Ended December 31,								Six Months Ended December 31,
		2010				2009				2010				2009
Mortgage loan servicing fees		$	652,091			$	641,584			$	1,294,445			$	1,275,788
Amortization and impairment of mortgage loan servicing rights			(1,328,585	)			(535,037	)			(2,120,837	)			(1,026,105	)
Recovery (Impairment) of mortgage loan servicing fees			718,714				—				(465,085	)			—
Loan origination and sales activity			2,517,990				1,344,930				6,265,983				2,256,521
Mortgage banking activities, net		$	2,560,210			$	1,451,477			$	4,974,506			$	2,506,204

The above amounts do not include non-interest expense related to mortgage banking activities.

At December 31, 2010 and June 30, 2010, the Bank had interest rate-lock commitments on $55,604,191 and $49,396,694 of loans intended for sale in the secondary market. These commitments are considered to be free-standing derivatives and the change in fair value is recorded in the financial statements. The fair value of these commitments as of December 31, 2010 and June 30, 2010 was estimated to be $234,182 and $1,022,888, respectively, which is included in accrued expenses and other liabilities in the consolidated statements of financial position. To mitigate the interest rate risk represented by these interest rate-lock commitments, the Bank entered into contracts to sell mortgage loans of $48,693,000 and $33,806,000 as of December 31, 2010 and June 30, 2010, respectively. These contracts are also considered to be free-standing derivatives and the change in fair value also is recorded in the financial statements. The fair value of these contracts at December 31, 2010 and June 30, 2010 was estimated to be $224,822 and $(299,035) respectively. These amounts are added to (netted against) the fair value of interest rate-lock commitments recorded in prepaid and other assets. Changes in fair value for both types of derivatives are reported in mortgage banking activities in the consolidated statements of operations.

NOTE 5 — STOCK COMPENSATION

Employee compensation expense under stock options is reported using the fair value recognition provisions under ASC 718, “Share Based Payment” (“ASC 718”). The Company has adopted ASC 718 using the modified prospective method. For the quarters ended December 31, 2010 and 2009, compensation expense of $26,709 and $73,763, respectively, was recognized in the income statement related to the vesting of previously issued awards plus vesting of new awards. For the six months ended December 31, 2010 and 2009, compensation expense of $45,252 and $92,140, respectively, was recognized in the income statement related to the vesting of previously issued awards plus vesting of new awards. No income tax benefit was recognized related to these expenses for the three and six month periods ended December 31, 2010. For the three and six months ended December 31, 2009 an income tax benefit of $8,575 was recognized related to these expenses.

As of December 31, 2010, there was $319,958 of compensation expense related to unvested awards not yet recognized in the financial statements. The weighted-average period over which this expense is to be recognized is 2.1 years.

 

 

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The 2010 Incentive Plan replaces the 2008 Equity Incentive Plan and all remaining available shares from the 2008 Equity Incentive Plan will be available for distribution under the 2010 Incentive Plan. The Company can issue incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and other stock-based compensation under the 2010 Plan. Generally, for incentive stock options, a percentage of the options awarded become exercisable on the date of grant and on each anniversary date of grant. The option period expires ten years from the date of grant, except for awards to individuals who own more than 10% of the Company’s outstanding stock. Awards to these individuals expire after five years from the date of grant and are exercisable at 110% of the market price at the date of grant.

Previously, nonqualified stock options have been granted to directors, which vest immediately. The option period expires ten years from the date of grant and the exercise price is the market price at the date of grant.

The aggregate intrinsic value of all options outstanding at December 31, 2010 was $5,550. The aggregate intrinsic value of all options that were exercisable at December 31, 2010 was $0.

A summary of the activity in the plans is as follows:

 

		Three months ended December 31, 2010 Total options outstanding								Six months ended December 31, 2010 Total options outstanding
		Shares				Weighted- Average Exercise Price				Shares				Weighted- Average Exercise Price
Options outstanding, beginning of period			458,035			$	6.80				480,151			$	6.92
Forfeited			(3,300	)			5.02				(5,400	)			6.23
Expired			(11,977	)			7.53				(54,493	)			5.95
Exercised			—				—				—				—
Granted			185,000				1.79				207,500				1.81
Options outstanding, end of period			627,758			$	5.32				627,758			$	5.32
Options exercisable, end of period			336,623			$	7.01				336,623			$	7.01

The weighted-average remaining contractual life of options outstanding as of December 31, 2010 was 7.1 years. The weighted-average remaining contractual life of vested options outstanding as of December 31, 2010 was 5.7 years.

No options were exercised in the six-month periods ended December 31, 2010 and 2009, respectively.

 

 

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The fair value for stock options granted during the six months ended December 31, 2010, which consisted of an individual grants in August and December 2010, was determined at the date of grant using a Black-Scholes options-pricing model and the following assumptions:

 

		Fiscal 2011
Expected average risk-free interest rate			3.32	%
Expected average life (in years)			6.00
Expected volatility			34.00	%
Expected dividend yield			0.00	%

The weighted-average fair value of these grants was $0.96 per option. The expected average risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the life of the option. The expected average life represents the weighted-average period of time that options granted are expected to be outstanding giving consideration to vesting schedules, historical exercise and forfeiture patterns. Expected volatility is based on historical volatilities of the Company’s common stock. The expected dividend yield is based on historical information.

There were 267,500 shares of restricted stock issued with a fair value of $1.87 per share at December 31, 2010. The total fair value of restricted stock issued at December 31, 2010 was $500,425. As of December 31, 2010, there was $410,185 of compensation expense related to unvested awards not yet recognized in the financial statements. The weighted average period of time over which this expense is to be recognized is 4.3 years at December 31, 2010.

A summary of changes in the Company’s restricted stock for the six months ended December 31, 2010 is as follows:

 

Nonvested Shares		Shares				Weighted- Average Grant- Date Fair Value
Nonvested at July 1, 2010			240,000			$	451,200
Granted			27,500				49,225
Vested			48,000				90,240
Forfeited			—				—
Nonvested at December 31, 2010			219,500			$	410,185

There were 2,581,000 shares available for future issuance under existing stock plan at December 31, 2010.

 

 

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NOTE 6 — EARNINGS PER SHARE

The following table discloses earnings (loss) per share for the three and six months ended December 31, 2010 and December 31, 2009, respectively:

 

		Three months ended December 31,
		2010												2009
		Income (loss) (Numerator)				Shares (Denominator)				Per Share Amount				Income (loss) (Numerator)				Shares (Denominator)						Per Share Amount
Basic EPS
Net Income (loss)		$	(3,709,928	)			25,643,115			$	(0.14	)		$	(1,281,031	)			7,979,120			$(0.16)
Effect of dilutive securities – stock options and warrants			—				—			$	(0.00	)			—				—			$0.00
Diluted EPS
Net Income (loss)		$	(3,709,928	)			25,643,115			$	(0.14	)		$	(1,281,031	)			7,979,120			$(0.16)
		Six months ended December 31,
		2010												2009
		Income (loss) (Numerator)				Shares (Denominator)				Per Share Amount				Income (loss) (Numerator)				Shares (Denominator)						Per Share Amount
Basic EPS
Net Income (loss)		$	(4,328,341	)			25,642,666			$	(0.17	)		$	2,918,896				7,891,136			$0.37
Effect of dilutive securities – stock options and warrants			—				—			$	(0.00	)			—				2,147			$0.00
Diluted EPS
Net Income (loss)		$	(4,328,341	)			25,642,666			$	(0.17	)		$	2,918,896				7,893,283			$0.37

There were 442,758 options not considered in the diluted earnings per share calculation for the three- and six-month periods ended December 31, 2010, because they were not dilutive. There were 452,692 options not considered in the diluted earnings per share calculation for the three- and six-month periods ended December 31, 2009, because they were not dilutive.

Also included for consideration in the diluted earnings per share calculation for the three-month period ended December 31, 2010 were warrants to acquire the Company’s shares of common stock issued as part of two separate exchanges more fully described in Note 8. The warrants issued on September 3, 2009 include warrants to purchase 797,347 shares of common stock and are exercisable at any time before September 3, 2012 at a price of $1.75 per share. The warrants issued on March 16, 2010 include warrants to purchase 1,246,179 shares of common stock and are exercisable at any time before March 16, 2015 at a price of $1.75 per share. The warrants were considered for potential dilution for the period ended December 31, 2010 because the exercise price of the warrants, $1.75 per warrant, was less than the average market price of the Company’s common stock for the period; however, since the Company was in a net loss position for the period, the warrants were not dilutive.

 

 

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NOTE 7 — FAIR VALUE

U.S. GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted market prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use to price an asset or liability.

The Company used the following methods and significant assumptions to estimate fair value.

Securities and mortgage-backed securities. The fair value of securities available for sale is determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1 inputs). The fair value of mortgage-backed securities is determined through matrix pricing. This is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Loans held for sale. The fair value of loans held for sale is determined using quoted secondary market prices.

Mortgage banking pipeline derivatives. The fair value of loan commitments is measured using current market rates for the associated mortgage loans (Level 2 inputs). The fair value of mandatory forward sales contracts is measured using secondary market pricing (Level 2 inputs).

 

 

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Assets and liabilities measured at fair value on a recurring basis at December 31, and June 30, 2010 are summarized below:

 

		December 31, 2010				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
Securities available for sale – FNMA and FHLMC debentures		$	16,957,981			$	16,957,981			$	—			$	—
Loans held-for-sale			11,278,033				—				11,278,033				—
Mortgage-backed securities available for sale			43,021,580				—				43,021,580				—
Interest rate-lock commitments			234,182				—				234,182				—
Mandatory forward sales contracts			224,822				—				224,822				—
		June 30, 2010				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
Securities available for sale		$	20,149,149			$	20,149,149			$	—			$	—
Loans held-for-sale			8,717,592				—				8,717,592				—
Mortgage-backed securities available-for-sale			47,145,878				—				47,145,878				—
Interest rate-lock commitments			1,022,888				—				1,022,888				—
Liabilities:
Mandatory forward sales contracts			(299,000	)			—				(299,000	)			—

Assets and liabilities measured at fair value on a nonrecurring basis at December 31, and June 30, 2010 are summarized below:

 

		December 31, 2010				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable  Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans		$	22,817,021			$	—			$	—			$	22,784,373
Real estate owned			4,051,610				—				—				4,051,610
Impaired mortgage servicing rights			6,136,236				—				—				6,136,236
		June 30, 2010				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans		$	22,198,789			$	—			$	—			$	22,198,789
Real estate owned			5,700,752				—				—				5,700,752

 

 

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Impaired loans, which are usually measured for impairment using the fair value of the collateral less estimated selling cost, had an unpaid principal of $42,046,898. Of these impaired loans, $33,573,599 was carried at a fair value of $22,817,021, as a result of a specific valuation allowance of $10,756,578. The fair value of collateral is usually estimated by third-party or internal appraisals of the collateral. The present value of estimated cash flows is based on internal models of expected borrower activity. The provision for loan losses related to changes in the fair value of impaired loans was $7.3 million for the six months ended December 31, 2010.

Real estate owned is recorded at fair value based on property appraisals, less estimated selling costs, at the date of transfer. The carrying amount of real estate owned is not re-measured to fair value on a recurring basis, but is subject to fair value adjustments when the carrying amount exceeds the fair value, less estimated selling costs. For the six month period ended December 31, 2010, the Bank recognized $223,130 in loss on the disposal of real estate owned and recorded a provision for the real estate owned losses of $725,310. Additionally, the expense of servicing real estate owned for this six-month period totaled $1,359,000.

The carrying amount and estimated fair values of financial instruments at year end were as follows:

 

		December 31, 2010								June 30, 2010
		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
						(in thousands)
Assets:
Cash and amounts due from depository institutions		$	12,769			$	12,769			$	18,284			$	18,284
Interest-bearing deposits			108,192				108,192				111,759				111,759
Federal funds sold			10,000				10,000				—				—
Securities available for sale			16,958				16,958				20,149				20,149
Mortgage-backed securities available for sale			43,022				43,022				47,146				47,146
Loans receivable, net			561,676				574,920				587,406				606,083
Loans receivable held for sale, net			11,278				11,278				8,718				8,718
Federal Home Loan Bank stock			12,811				NA				12,811				NA
Accrued interest receivable			2,441				2,441				2,715				2,715
Mandatory forward sales contracts			225				225				—				—
Commitments to make loans intended to be sold			234				234				1,023				1,023
Liabilities:
Demand deposits and passbook savings			(216,882	)			(216,882	)			(196,807	)			(196,807	)
Time deposits			(417,260	)			(424,255	)			(470,740	)			(479,680	)
Note payable			(1,206	)			(1,206	)			(1,259	)			(1,259	)
Advances from the Federal Home Loan Bank of Cincinnati			(35,000	)			(37,165	)			(35,000	)			(37,203	)
Repurchase agreement			(50,000	)			(50,445	)			(50,000	)			(51,468	)
Mandatory forward sales contracts			—				—				(299	)			(299	)
Accrued interest payable			(180	)			(180	)			(380	)			(380	)

The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is involved in interpreting market data so as to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The Company used the following methods and assumptions to estimate fair value for items not described above:

Cash and amounts due from depository institutions, interest-bearing deposits, and federal funds sold. The carrying amount is a reasonable estimate of fair value because of the short maturity of these instruments.

 

 

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Note payable. The carrying amount is a reasonable estimate of the fair value.

Advances from the Federal Home Loan Bank of Cincinnati. The fair value of the Bank’s Federal Home Loan Bank of Cincinnati (“FHLB”) debt is estimated based on the current rates offered to the Bank for debt of the same remaining maturities.

Notes payable and subordinated debentures. The carrying value of the Company’s variable-rate note payable and the Company’s subordinated debt is a reasonable estimate of fair value based on the current incremental borrowing rate for similar types of borrowing arrangements adjusted for the Company’s credit risk profile.

Accrued interest receivable and accrued interest payable. The carrying amount is a reasonable estimate of the fair value.

Loans receivable. For performing loans receivable, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs.

Federal Home Loan Bank stock. It was not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Demand deposits and time deposits. The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flows and rates currently offered for deposits of similar remaining maturities.

NOTE 8 — SUBORDINATED DEBT

In June 2004, the Company formed PVF Capital Trust I (“Trust I”), a special purpose entity formed for the sole purpose of issuing $10.0 million of variable-rate trust preferred securities. The Company issued variable-rate Subordinated Deferrable Interest Debentures due June 29, 2034 (the “Trust I Debentures”) to Trust I in exchange for the proceeds of the offering of the trust preferred securities. The trust preferred securities offered by Trust I had a variable interest rate that adjusted to the three-month LIBOR rate plus 260 basis points. The Trust I Debentures were the sole asset of Trust I.

In July 2006, the Company formed PVF Capital Trust II (“Trust II”), a special purpose entity formed for the sole purpose of issuing $10.0 million of variable-rate trust preferred securities. The Company issued variable-rate Subordinated Deferrable Interest Debentures due July 6, 2036 (the “Trust II Debentures”) to Trust II in exchange for the proceeds of the offering of the trust preferred securities. The trust preferred securities issued by Trust II carried a fixed rate of 7.462% until September 15, 2011 and thereafter a variable interest rate that adjusted to the three-month LIBOR rate plus 175 basis points. The Trust II Debentures were the sole asset of Trust II.

On September 1, 2009, the Company entered into an exchange agreement (“Exchange Agreement I”) with the holder and collateral manager of the $10.0 million principal amount trust preferred securities issued by Trust I in 2004. Under Exchange Agreement I, on September 3, 2009, the securities holder exchanged its $10.0 million of trust preferred securities for the following consideration paid by the Company: (i) a cash payment of $500,000; (ii) a number of shares of the Company’s common stock equal to $500,000 divided by the average daily closing price of the Company’s common stock for the 20 business days prior to September 1, 2009, equating to 205,297 shares; (iii) a warrant to purchase 769,608 shares of the Company’s common stock (the “Trust I Warrant A”); and (iv) a warrant to purchase 27,739 shares of Company common stock (the “Trust I Warrant B”) as a result of the issuance of common stock in connection with the second trust preferred exchange as described below. The exercise price for all warrants was $1.75, the price at which the Company completed a rights offering and an

 

 

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offering to a standby investor, which is more fully described in NOTE 11 — COMMON STOCK ISSUANCE. The warrants are exercisable for two years following the closing.

As a result of the repurchase of the trust preferred securities issued by Trust I, the Company recorded a gain of $8,561,530, which was included in non-interest income for the year ended June 30, 2010. The estimated fair values of the Trust I Warrant A and Trust I Warrant B were estimated to be $808,088 and $29,126, respectively, and were recorded in paid-in capital.

On October 9, 2009, the Company entered into an exchange agreement (“Exchange Agreement II”) with investors, including principally directors and officers of the Company and the Bank as well as certain individuals not affiliated with the Company (collectively, the “Investors”), who held trust preferred securities with an aggregate liquidation amount of $10.0 million issued by Trust II in 2006. Under the terms of Exchange Agreement II, on March 16, 2010, the Investors exchanged the $10.0 million of trust preferred securities for aggregate consideration consisting of: (i) $400,000 in cash, (ii) shares of common stock valued at $600,000 based on the average daily closing price of the common stock over the 20 trading days prior to October 9, 2009, equating to 280,241 shares; (iii) warrants to purchase 797,347 shares of the Company’s common stock (the “Trust II A Warrants”); and (iv) warrants to purchase 448,832 shares of the Company’s common stock (the “Trust II B Warrants”) that were issued as a result of the Company completing a rights offering and an offering to a standby investor, which is more fully described in NOTE 11 — COMMON STOCK ISSUANCE. The exercise price for the warrants is $1.75, the price of the shareholder rights offering. The warrants are exercisable for five years following the closing.

As a result of the repurchase of the trust preferred securities issued by Trust II, the Company recorded a gain of $9,065,908, which was included in non-interest income for the year ended June 30, 2010. The estimated fair values of the Trust II A Warrants and Trust II B Warrants were estimated to be $669,771 and $377,019, respectively, and were recorded as paid-in capital.

NOTE 9 — REPURCHASE AGREEMENT

In March 2006, the Bank entered into a $50 million repurchase agreement (“Repo”) with another institution (Citigroup) collateralized by mortgage-backed securities and securities. The Repo is for a five-year term and therefore matures in March 2011. Interest was adjustable quarterly during the first year based on the three-month LIBOR rate minus 100 basis points. After year one, the rate adjusted to 4.99% and the Repo became callable quarterly at the option of the issuer.

On October 29, 2009, the Company received notice from the counter-party to its Repo stating that due to the regulatory capital requirements included in the Company and Bank Orders (which are defined and more fully described in NOTE 10 — REGULATORY MATTERS AND MANAGEMENT’S PLANS, that the counterparty is entitled to declare that an event of default had occurred and pursue all its remedies under the repurchase agreement. The counter-party did not indicate its intention to declare the Company in default. Among its remedies, the counter-party could unwind the trade at market value, which would result in a pre-tax charge to the earnings of the Company of approximately $0.4 million at December 31, 2010.

NOTE 10 — REGULATORY MATTERS AND MANAGEMENT’S PLANS

The Bank is subject to various regulatory capital requirements administered by the Office of Thrift Supervision (“OTS”). Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by banking regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The

 

 

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Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

OTS regulations require savings institutions to maintain certain minimum levels of regulatory capital. An institution that fails to comply with its regulatory capital requirements must obtain OTS approval of a capital plan and can be subject to a capital directive and certain restrictions on its operations. At December 31, 2010, the adjusted total minimum regulatory capital regulations require institutions to have a minimum tangible capital to adjusted total assets ratio of 1.5%; a minimum leverage ratio of core (Tier 1) capital to adjusted total assets of 4.0%; a minimum rate of core (Tier 1) capital to risk-weighted assets of 4.0%; and a minimum ratio of total capital to risk-weighted assets of 8.0%. At December 31, 2010 and 2009, the Bank exceeded all of the aforementioned regulatory capital requirements.

On October 19, 2009, the Company and the Bank each entered into a Stipulation and Consent to the Issuance of Order to Cease and Desist with the OTS, whereby the Company and the Bank each consented to the issuance of an Order to Cease and Desist (the “Bank Order” and the “Company Order”) without admitting or denying that grounds exist for the OTS to initiate an administrative proceeding against the Company or the Bank.

The Bank Order requires the Bank to take several actions, including but not limited to: (i) by December 31, 2009, meet and maintain (1) a Tier 1 (core) capital ratio of at least 8.0% and (2) a total risk-based capital ratio of at least 12.0% after the funding of an adequate allowance for loan and lease losses and submit a detailed plan to accomplish this; (ii) if the Bank fails to meet these capital requirements at any time after December 31, 2009, within 15 days thereafter, prepare a written contingency plan detailing actions to be taken, with specific time frames, providing for (a) a merger with another federally insured depository institution or holding company thereof, or (b) voluntary liquidation; (iii) adopt revisions to the Bank’s liquidity policy to, among other things, increase the Bank’s minimum liquidity ratio; (iv) reduce the level of adversely classified assets to no more than 50% of core capital plus allowance for loan and lease losses by December 31, 2010 and to reduce the level of adversely classified assets and assets designated as special mention to no more than 65% of core capital plus allowance for loan and lease losses by December 31, 2010; (v) submit for OTS approval a new business plan that includes the requirements contained in the Bank Order and that also includes well supported and realistic strategies to achieve consistent profitability by September 30, 2010; (vi) restrict quarterly asset growth to an amount not to exceed net interest credited on deposit liabilities until the OTS approves of the new business plan; (vii) cease to accept, renew or roll over any brokered deposit or act as a deposit broker, without the prior written waiver of the Federal Deposit Insurance Corporation (the “FDIC”); and (viii) not declare or pay dividends or make any other capital distributions from the Bank without receiving prior OTS approval.

The Company Order requires the Company to take several actions, including, but not limited to: (i) submit a capital plan that includes, among other things, (1) the establishment of a minimum tangible capital ratio of tangible equity capital to total tangible assets commensurate with the Company’s consolidated risk profile, and (2) specific plans to reduce the risks to the Company from its current debt levels and debt servicing requirements; (ii) not declare, make or pay any cash dividends or other capital distributions or purchase, repurchase or redeem or commit to purchase, repurchase or redeem Company equity stock without the prior non-objection of the OTS, except that this provision does not apply to immaterial capital stock redemptions that arise in the normal course of the Company’s business in connection with its stock-based compensation plans; and (iii) not incur, issue, renew, roll over or increase any debt or commit to do so without the prior non-objection of the OTS (debt includes loans, bonds, cumulative preferred stock, hybrid capital instruments such as subordinated debt or trust preferred securities, and guarantees of debt).

The Bank Order and the Company Order also impose certain on-going reporting obligations and additional restrictions on severance and indemnification payments, changes in directors and management, employment agreements and compensation arrangements that the Company and the Bank may enter into, third-party service contracts and transactions with affiliates.

 

 

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The Company and the Bank believe they are in compliance with all requirements of the Bank Order and the Company Order that are required to date, with the exception of the level of adversely classified assets and the return to profitability. At December 31, 2010, the Bank’s level of adversely classified assets to core capital plus the allowance for loan and lease losses was 73.83%, and its level of adversely classified assets and assets designated as special mention was 96.44%. Although the Bank did not meet the reduced adversely classified asset levels required by December 31, 2010 and has not yet returned to profitability, it will continue to work to comply with all such requirements in the future.

The Bank Order and the Company Order will remain in effect until terminated, modified, or suspended in writing by the OTS.

Regulations limit capital distributions by savings institutions. Generally, capital distributions are limited to undistributed net income for the current and prior two years. At December 31, 2010, the Bank was not allowed to make any capital distributions without regulatory approval.

NOTE 11 — COMMON STOCK ISSUANCE

On March 26, 2010, the Company completed a rights offering and an offering to a standby investor. Stockholders exercised subscription rights to purchase all 14,706,247 shares offered at a subscription price of $1.75 per share. Additionally, the standby investor purchased 2,436,610 shares at the subscription price of $1.75 per share. In total, the Company raised proceeds of $27,964,015, net of issuance costs. Upon completing the offering, the Company contributed approximately $20.0 million of the proceeds to the capital of the Bank to improve its regulatory capital position. During the quarter ended December 31, 2010 the Company contributed and additional $4.0 million to the capital of the Bank. At December 31, 2010, the Bank’s Tier 1 (core) capital ratio was 8.84% and its total risk-based capital ratio was 13.42%, exceeding the requirements of the Bank Order. With the additional capital invested in the Bank, the Bank exceeded the minimum capital ratios required under the Bank Order. However, until the Bank Order is terminated, the Bank cannot be classified as well-capitalized under prompt corrective action provisions.

NOTE 12 — OTHER COMPREHENSIVE INCOME

Other comprehensive income (loss) components and related tax effects were as follows at December 31, 2010 and 2009:

 

		Three months ended December 31,								Six months ended December 31,
		2010				2009				2010				2009
Unrealized holding gains (losses) on available for sale securities		$	(658,453	)		$	(165,496	)		$	(1,417,211	)		$	850,734
Tax effect of holding gains and losses on available for sale securities			(223,873	)			(56,268	)			(481,851	)			289,251
Tax effect of deferred tax asset valuation allowance			483,000				—				483,000				—
Other comprehensive income (loss)			(917,580	)			(109,228	)			(1,418,360	)			561,483
Net income (loss)			(3,709,928	)			(1,281,031	)			(4,328,341	)			2,918,896
Total comprehensive income (loss)		$	(4,627,508	)		$	(1,390,259	)		$	(5,746,701	)		$	3,480,379

NOTE 13 — ADOPTION OF NEW ACCOUNTING STANDARDS

In January 2010, the FASB issued ASU No. 2010-6 “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” The ASU amends Subtopic 820-10 with new disclosure requirements and clarification of existing disclosure requirements. New disclosures required include the amount of significant transfers in and out of levels 1 and 2 fair value measurements and the reasons for the transfers. In addition, the reconciliation for level 3 activity is required on a gross rather than net basis. The ASU provides additional guidance related to the level of disaggregation in determining classes of assets and liabilities and disclosures about inputs and valuation techniques. The

 

 

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amendments are effective for annual or interim reporting periods beginning after December 15, 2009, except for the requirement to provide the reconciliation for level 3 activity on a gross basis which will be effective for fiscal years beginning after December 15, 2010.

In June 2009, FASB issued ASU 2009-16 “Accounting for Transfers of Financial Assets–an amendment of FASB Statement No. 140.” This removes the concept of a qualifying special-purpose entity from existing GAAP and removes the exception from applying FASB ASC 810-10, Consolidation (FASB Interpretation No. 46 (revised December 2003) Consolidation of Variable Interest Entities) to qualifying special purpose entities. The objective of this new guidance is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.

In June 2009, FASB issued ASU 2009-17 “Amendments to FASB Interpretation No. 46(R).” The objective of this new guidance is to amend certain requirements of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements.

In July 21, 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which requires significant new disclosures about the allowance for credit losses and the credit quality of financing receivables. The requirements are intended to enhance transparency regarding credit losses and the credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired financing receivables and nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings is also required. The disclosures are presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. This ASU is effective for interim and annual reporting periods after December 15, 2010. The Company included these disclosures in the notes to the financial statements this quarter.

NOTE 14 — INCOME TAXES

The Company recorded a valuation allowance against deferred tax assets at December 31, 2010 based on its estimate of future reversal and utilization. In determining the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded as a benefit, the Company conducts a regular assessment of all available information. This information includes, but is not limited to, taxable income in prior periods, projected future income, and projected future reversals of deferred tax items, including feasible tax planning strategies. Based on these criteria, and in particular activity surrounding the provision for loan losses during the quarter, the Company determined that it was necessary to establish a valuation allowance against deferred tax assets of $2.4 million, resulting in a net deferred tax asset of $0 at December 31, 2010. In recording the valuation allowance, $1.9 million was recognized against results from continuing operations, while $0.5 million, the portion of the change in the deferred tax asset relating to changes which flowed through comprehensive loss, was recorded to other comprehensive loss.

 

 

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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- and six-month periods ended December 31, 2010 for the Company, the Bank, its principal and wholly-owned subsidiary, PVF Service Corporation (“PVFSC”), a wholly-owned real estate subsidiary, Mid-Pines Land Co., a wholly-owned real estate subsidiary, PVF Holdings, Inc., PVF Community Development and PVF Mortgage Corporation, three wholly-owned and currently inactive subsidiaries.

The Company, as a savings and loan holding company (SHLC), and the Bank are currently regulated and supervised by the OTS. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the OTS will be merged into the Office of the Comptroller of the Currency (OCC) by July 21, 2011. The OCC will assume responsibility for regulating the Bank. All orders, resolutions, determinations, agreements, interpretations, guidelines, procedures and advisory materials issued by the OTS will remain in effect and shall be enforceable by or against the OCC, until modified, terminated or superseded. The Board of Governors of the Federal Reserve (Fed) will assume responsibility for regulating SHLCs and thus, will be the regulator of the Company. The powers, rulemaking authorities, and duties of the OTS related to savings and loan holding companies and their non-depository institution subsidiaries will also be enforceable by or against the Fed, until modified, terminated or superseded. Additionally, under the Act, the Fed obtains the authority to set capital standards for SHLC.

Forward-Looking Statements

When used in this Quarterly Report on 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. Additional factors that may affect the Company’s results are discussed below under “Item 1A. Risk Factors” and in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010 under “Item 1A. Risk Factors.” 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 the Company were $830.6 million as of December 31, 2010, a decrease of approximately $28.9 million, or 3.4%, as compared to June 30, 2010. The Bank’s regulatory capital ratios for Tier 1 core capital, Tier 1 risk-based capital, and total risk-based capital were 8.84%, 12.16% and 13.42%, respectively, at December 31, 2010.

At December 31, 2010, the Company’s cash and cash equivalents, which consist of cash, interest-bearing deposits and federal funds sold totaled $130.9 million, an increase of $0.9 million, or 0.71%, as compared to June 30, 2010. The change in the Company’s cash, cash equivalents and federal funds sold consisted of a decrease in cash of $5.5 million, which was offset by an increase in federal funds and interest-bearing deposits of $6.4 million. The increase in cash and cash equivalents resulted from the repayment of loans receivable, the

 

 

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repayment of mortgage-backed securities available for sale, and a decline in securities available for sale, offset by a decrease in deposits and an increase in loans receivable available for sale. The slight increase to cash and cash equivalents was in accordance with the Bank’s decision to maintain higher cash balances in order to bolster the Company’s liquidity to meet potential funding needs and reduce its current risk profile.

The Bank continued the origination of fixed-rate single-family loans for sale in the secondary market. The origination and sale of fixed-rate loans has historically generated gains on sale and allowed the Bank to increase its investment in loans serviced. Mortgage application volume remained high as a result of historically low interest rates, economic forecasts and mild inflation results. This resulted in elevated mortgage refinance activity during the six months ended December 31, 2010 and increases in the volume of loan sales and related mortgage banking revenue.

During the six months ended December 31, 2010, mortgage-backed securities available for sale decreased by $4.1 million as a result of principal repayments of $7.9 million, the amortization of $0.1 million in book premium and a decline in the market valuation adjustment of $1.2 million for securities held for sale, which was partially offset by the purchase of $5.1 million in mortgage-backed securities available for sale.

Securities available for sale decreased by $3.2 million during the six months ended December 31, 2010 as a result of calls exercised on agency securities totaling $33.0 million and a decline in the market valuation adjustment of $0.2 million, which was partially offset by the purchase of $30.0 million in agency securities available for sale.

Loans receivable, net, decreased by $25.7 million, or 4.4%, during the six months ended December 31, 2010. The decrease in loans receivable included decreases in one-to-four family, one-to-four family construction, commercial real estate, and land loan categories, partially offset by an increase in the commercial and industrial loan category. This decline was primarily due to portfolio paydowns and amortization combined with the results of problem loan disposition. The Bank has only recently begun to originate high quality commercial and industrial loans and select commercial real estate loans, but has otherwise done very little new loan portfolio origination as it addresses its asset quality issues and works to reposition its balance sheet and strengthen its capital ratios. Additionally, almost all new residential loan production is being sold in the secondary market in this interest rate environment, as the Bank manages its interest rate and liquidity risk along with its capital ratios. Since the Company successfully completed its common stock offering and now exceeds the capital ratio requirements of the OTS, the Bank intends to accelerate the origination of commercial and industrial loans for its portfolio.

The Bank does not originate sub-prime loans and only originates Alt A loans for sale, without recourse, in the secondary market. All one-to-four family loans are underwritten according to agency underwriting standards. Exceptions, if any, are submitted to the Bank’s board loan committee for approval. Any exposure the Bank may have to these types of loans is immaterial.

The increase of $2.6 million in loans receivable held for sale as of December 31, 2010 was the result of increased new loan originations and timing differences between the origination and the sale of loans. One-to-four family mortgage application volume has slowed toward the end of the current period as a result of higher interest rates resulting in less refinance activity and related revenue.

Real estate owned activity for the most recent six-month period ended December 31, 2010 consisted of the addition of 11 single-family properties, 2 land loans and 1 nonresidential real estate property totaling approximately $4.1 million, offset by the disposal of 14 single-family properties and 2 land loans totaling $2.6 million. The Bank incurred a loss of approximately $0.2 million on the disposition of these properties. The Bank also recorded an impairment charge of $0.7 million on the carrying amount of real estate still in inventory at

 

 

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December 31, 2010, based on updated valuations and market conditions. At December 31, 2010, the Bank held 33 properties totaling $8.8 million in real estate owned. The real estate owned included 17 single-family properties, 12 land properties, and 4 commercial properties.

The Bank generally seeks to fund loan activity and liquidity by generating deposits through its branch network and through the use of various borrowing facilities. During the six-month period ending December 31, 2010, the Bank funded a decrease in deposits with the repayment of loans and mortgage-backed securities, and proceeds received on callable securities. Deposits decreased by $38.6 million, or 5.8%, as a result of the maturity of $23.2 million in brokered deposits, $30.3 million in retail certificates of deposit and an increase of $14.9 million in non-maturing deposits. Brokered deposits represent funds which the Bank obtains through a deposit broker that places deposits from third parties with insured depository institutions. Under its regulatory order with the OTS, the Bank is currently prohibited from obtaining or renewing brokered deposits. At December 31, 2010, the Bank has approximately $5.0 million of remaining brokered deposits, all which mature in February 2011. The decline in retail certificates of deposit was strategically intended as part of management’s relationship pricing initiative which targeted rate sensitive non-relationship deposits for reduction. Since December 2010, management has updated its retail certificate of deposit strategy to maintain or grow this portfolio and its liquidity position as it funds anticipated loan portfolio growth. Additionally, the Bank has a $50 million repurchase agreement which matures in March 2011. Management intends to pay off this borrowing by utilizing a portion of its cash and cash equivalents position and retaining the securities currently collateralizing this obligation.

The increase in advances from borrowers for taxes and insurance of $8.6 million for the period ended December 31, 2010 is attributable to timing differences between the collection and payment of taxes and insurance. The increase of $6.6 million in accrued expenses and other liabilities is primarily the result of timing differences between the collection and remittance of funds received on loans serviced for investors.

Results of Operations: Three months ended December 31, 2010, compared to three months ended December 31, 2009.

The Company’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, the collectibility of loans, and deposit flows. Net interest income also includes amortization of loan origination fees, net of origination costs.

The Company’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, loan loss provisions and costs associated with the acquisition, maintenance and disposal of real estate.

The Company’s net loss for the three months ended December 31, 2010 was $3,709,928, as compared to a net loss of $1,281,031 for the prior year comparable period. This represents an increase in the loss of $2,428,897 when compared with the prior year comparable period, as a result of a higher provision for loan losses recorded in the current period.

Net Interest Income

Net interest income for the three months ended December 31, 2010 decreased by $35,000, or 0.7%, as compared to the prior year comparable period. This resulted from a decrease of $1,654,200, or 16.5%, in interest income, which was offset by a decrease of $1,619,200, or 33.2%, in interest expense. The slight decrease in net interest

 

 

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income was attributable to an increase of 3 basis points in the interest-rate spread that was more than offset by a lower volume of interest sensitive assets and liabilities for the quarter ended December 31, 2010, as compared to the prior year comparable period. The increase in the interest-rate spread resulted primarily from significantly lower costs of deposits, which decreased the Bank’s cost on interest-bearing liabilities by 68 basis points from the prior year comparable period (as part of management’s efforts to reduce funding costs), which more than offset the decrease of 65 basis points on interest-earning assets.

Total average interest-earning assets for the quarter ended December 31, 2010 were $29.2 million lower, compared to the comparable quarter in 2009. Average loan balances continued to be impacted by loan payments and payoffs, which are not being totally replaced by new portfolio loan production, as well as loan charge-offs and problem loan disposition contributing to the overall decline. The impact of lower loan balances was partially offset by higher average investments and cash and cash equivalents but funds were reinvested at substantially lower yields.

For the quarter ended December 31, 2010, total average interest-bearing liabilities were $60.5 million lower than the comparable quarter in 2009. This resulted from the deleveraging that occurred as part of management’s strategy to reduce the Company’s risk profile, improve the Company’s capital ratios, as well as a result of a lack of attractive long-term investments and lower deposit balances. Deposit balances dropped significantly as the Bank did not renew maturing brokered deposits and strategically reduced its retail certificates of deposit.

 

 

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The following table presents comparative information for the three months ended December 31, 2010 and 2009, respectively, with respect to average balances and average yields and costs for interest-earning assets and interest-bearing liabilities:

 

		December 31, 2010												December 31, 2009
		Average Balance				Interest				Average Yield/Cost				Average Balance				Interest				Average Yield/Cost
		(dollars in thousands)
Interest-earning assets
Loans (1)		$	619,982			$	7,656				4.94	%		$	687,658			$	9,139				5.32	%
Mortgage-backed securities			43,709				467				4.27				59,724				693				4.64
Investments and other			134,297				235				0.70				79,764				180				0.90
Total interest-earning assets			797,988				8,358				4.19				827,146				10,012				4.84
Non-interest-earning assets			35,704												51,043
Total assets		$	833,692											$	878,189
Interest-bearing liabilities
Deposits		$	643,919			$	2,347				1.46	%		$	694,234			$	3,763				2.17	%
Borrowings			86,220				904				4.19				86,436				912				4.22
Subordinated debt			—				—				—				10,000				195				7.80
Total interest-bearing liabilities			730,139				3,251				1.78				790,670				4,870				2.46
Non-interest-bearing liabilities			23,609												33,283
Total liabilities			753,748												823,953
Stockholders’ equity			79,944												54,236
Total liabilities and stockholders’ equity		$	833,692											$	878,189
Net interest income						$	5,107											$	5,142
Interest-rate spread											2.41	%											2.38	%
Yield on interest-earning assets											2.56	%											2.49	%
Interest-earning assets to interest-bearing liabilities			109.29	%											104.61	%

 

(1)	Non-accruing loans are included in the average loan balances for the periods presented.

 

 

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Provision for Loan Losses and Asset Quality

For the three months ended December 31, 2010, a provision for loan losses of $4.5 million was recorded, while a provision for loan losses of $2.2 million was recorded in the prior year comparable period. The increase in the provision for the current period reflects the declining real estate values in the Bank’s markets resulting in increased loan impairments combined with the costs associated with the successful problem loan dispositions which occurred during the period. During the period, the Bank disposed of $13.6 million in nonperforming assets and charged off an additional $0.7 million in nonperforming assets, utilizing $4.6 million and $0.7 million in specific allowances, respectively.

The provision for loan losses for the current period reflects management’s judgments about the credit quality of the Bank’s loan portfolio. The allowance for loan losses consists of a specific component and a general component.

The following is a breakdown of the valuation allowances:

 

		December 31, 2010				June 30, 2010
General valuation allowance		$	16,015,184			$	16,902,971
Specific valuation allowance			15,477,813				14,616,876
Total valuation allowance		$	31,492,997			$	31,519,847

The allowance for loan losses was 5.30% of loans outstanding at December 31, 2010, compared with 5.09% at June 30, 2010. The general valuation portion of the allowance was 3.18% and 3.08% of performing loans at December 31, 2010 and June 30, 2010, respectively.

Management’s approach includes establishing a specific valuation allowance by evaluating individual nonperforming loans for probable losses based on a systematic approach involving estimating the realizable value of the underlying collateral. Additionally, management establishes a general valuation allowance for pools of performing loans segregated by collateral type. For the general valuation allowance, management is applying a prudent loss factor based on historical loss experience, trends based on changes to nonperforming loans and foreclosure activity, and a subjective evaluation of the local population and economic environment. The loan portfolio is segregated into categories based on collateral type and a loss factor is applied to each category. The initial basis for each loss factor is the Bank’s loss experience for each category. Historical loss percentages are calculated based on transfers from the general reserve to the specific reserve, indicating a loss has been incurred, for each risk category during the historical period and dividing the total by the average balance of each category. Presently, historical loss percentages are updated on a monthly basis using an 18-month rolling average. Subjective adjustments are made to the Bank’s historical experience including consideration of trends in delinquencies and classified loans, portfolio growth, national and local economic and business conditions including unemployment, bankruptcy and foreclosures and effectiveness of credit administration, as appropriate.

A provision for loan losses is recorded when necessary to bring the allowance to a level consistent with this analysis. Management believes it uses the best information available to make a determination as to the adequacy of the allowance for loan losses. The current period provision for loan losses reflects the continued level of elevated charge-offs during the period.

The total allowance for loan loss decreased slightly during the quarter, which was directionally consistent with the reduction in nonperforming loans and improved level of delinquent loans. The composition of the allowance shifted during the period as the general portion declined $888,000, while the specific allowance increased by $861,000. The decline to the general allowance is partly due to the continued run-off and decline of the loans receivable balance. The general valuation allowance to total performing loans percentage increased slightly

 

 

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during the quarter from 3.08% at June 30, 2010 to 3.18% at December 31, 2010. Additionally, based on recent portfolio trends, historical loss experience and management’s factors, the Bank has experienced a decrease to the general valuation allowance allocation to the one-to-four family loan pools, multi-family loan pools, and commercial non real estate loan pools, while commercial real estate loan pools, one-to-four family construction loan pools, one-to-four family second mortgage loan pools, and land loan pools experienced an increased allocation reflecting the levels of recent charge-offs. The increase in the specific valuation allowance fiscal year-to-date was the result of the ongoing review of the individual loans for impairment and updates to valuations. Almost all of these loans are real estate related and considered collateral dependent. Real estate valuations in the Bank’s marketplace have declined and updated valuations have resulted in increased impairment valuation allowances.

The Bank continues to aggressively review and monitor its loan portfolio. This review involves analyzing all large borrowing relationships, delinquency trends, and loan collateral valuation in order to identify impaired loans. This analysis is performed so that management can identify all troubled loans and loan relationships as well as deteriorating loans and loan relationships. As a result of this review, detailed action plans are developed to either resolve or liquidate the loan and end the borrowing relationship.

Nonperforming assets at December 31, 2010 and June 30, 2010 were as follows:

 

		December 31, 2010				June 30, 2010
Total nonperforming loans		$	58,215,992			$	69,565,017
Other nonperforming assets (1)			8,763,893				8,173,741
Total nonperforming assets		$	66,979,885			$	77,738,758
Ratio of nonperforming loans to total loans			9.80	%			11.24	%
Total nonperforming assets to total assets			8.06	%			9.04	%

 

(1)	Other nonperforming assets represent property acquired by the Bank through foreclosure or repossession.

The elevated levels of nonperforming loans at December 31, 2010 and June 30, 2010 were attributable to poor current local economic conditions. Residential markets nationally and locally have been adversely impacted by a significant increase in foreclosures, as a result of the problems faced by sub-prime borrowers and the resulting contraction of residential credit available to all but the most credit worthy borrowers. Land development projects nationally and locally have experienced slow sales and price decreases. The Bank has significant exposure to the residential market in the Greater Cleveland, Ohio area. As a result, the Bank continues to experience an elevated level of nonperforming loans. Due to an increase in foreclosure activity in the area, the foreclosure process in Cuyahoga County, the Bank’s primary market, has become elongated. As such, loans have remained past due for considerable periods prior to being collected, transferred to real estate owned, or charged off. The Bank experienced a decrease in nonperforming loans in the one-to-four family, construction, land, and commercial real estate loan portfolios.

Of the $58.2 million and $69.6 million in non-accruing loans at December 31, 2010 and June 30, 2010, $42.0 million and $50.1 million, respectively, were individually identified as impaired. All of these loans are collateralized by various forms of non-residential real estate or residential construction. These loans were reviewed for the likelihood of full collection based primarily on the value of the underlying collateral and, to the extent collection of loan principal was in doubt, specific loss reserves were established. The evaluation of the underlying collateral included a consideration of the potential impact of erosion in real estate values due to poor

 

 

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local economic conditions and a potentially long foreclosure process. This consideration involves obtaining an updated valuation of the underlying real estate collateral and estimating carrying and disposition costs to arrive at an estimate of the net realizable value of the collateral. Included in the impaired amount at December 31, 2010 and June 30, 2010, were $33,573,599 and $32,521,481, respectively, related to loans with a corresponding valuation allowance of $10,756,578 and $10,322,692, respectively. At December 31, 2010 and June 30, 2010, respectively, $8,473,299 and $18,029,777 of nonperforming loans had no allowance for loan losses allocated. The remaining balance of nonperforming loans represents homogeneous one-to-four family loans. These loans are also subject to the rigorous process for evaluating and accruing for specific loan loss situations described above. Through this process, specific loan loss reserves of $3,893,185, or 24.1%, and $3,966,256, or 20.9%, were established for these loans as of December 31, 2010 and June 30, 2010, respectively.

There are $5.3 million and $1.8 million in performing loans for which the Bank has established specific loan loss reserves as of December 31, 2010 and June 30, 2010, respectively. These loans are collateralized by various forms of one-to-four family real estate, non-residential real estate or residential construction. These loans are also subject to the rigorous process for evaluating and accruing for specific loan loss situations described above. Through this process, specific loan loss reserves of $0.8 million and $0.4 million were established for these loans as of December 31, 2010 and June 30, 2010, respectively. The Bank was accruing interest on $14.9 million and $27.6 million of adversely classified loans at December 31, 2010 and June 30, 2010, respectively.

Non-Interest Income

For the three months ended December 31, 2010, non-interest income increased by $1,280,484 from the prior year comparable period. This resulted primarily from an increase of $1,108,733 in income from mortgage banking activities, net during the current period. Additionally, losses and provision for losses on real estate owned decreased by $34,329, other, net increased by $140,286, and service and other fees increased by $6,730 from the prior year comparable period.

In the current period, income from mortgage banking activities increased by $1,108,733 as a result of increased loan refinance activity resulting from cyclically low market rates during most of the current period that resulted in an increase to gains on loan origination and sales activity of $1,173,060, a valuation impairment recovery of $718,714 recorded to the book value of mortgage loan servicing rights, and an increase to mortgage loan servicing fees of $10,507. This gain was partially offset by an increase to the amortization of mortgage loan servicing rights of $793,548. The Bank pursues a strategy of originating long-term fixed-rate loans pursuant to FHLMC and FNMA guidelines and selling such loans to the FHLMC or the FNMA, while retaining the servicing rights of such loans. In the current period, other, net increased by $140,286 primarily due to increased income generated by the Company’s partnership interest in a title company, as the result of higher loan refinance activity. The title company earnings are directly correlated to loan origination activity of the Bank.

Non-Interest Expense

Non-interest expense for the three months ended December 31, 2010 decreased by $53,104, or 0.9%, from the prior year comparable period. This resulted from decreases in other, net of $196,852, real estate owned expense of $42,752, and FDIC insurance of $116,405, which was partially offset by increases to compensation and benefits of $78,322, office occupancy and equipment of $6,785, and outside services of $217,798.

The increase in outside services is due to increased cost associated with the migration to an outside service provider for information technology. The decrease to other, net is the result of lower legal expenses and lower state franchise tax expense in the current period. The decrease to real estate owned expense is attributable to a decline in the acquisition and maintenance of properties acquired through foreclosure. The increase to compensation and benefits is due to higher staffing and other related compensation benefits. The decrease in the cost of FDIC insurance is due to a lower deposit base.

 

 

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Income Tax Expense (Benefit)

The federal income tax provision (benefit) for the three-month period ended December 31, 2010 represented an effective rate of 34.6% on the loss for the current period, compared to (29.0)% for the prior year comparable period. The Company recorded a valuation allowance against deferred tax assets of $2.4 million, resulting in a net deferred tax asset of $0 at December 31, 2010. In recording the valuation allowance, $1.9 million was recognized against results from continuing operations, while $0.5 million, the portion of the change in the deferred tax asset relating to changes which flowed through comprehensive loss, was recorded to other comprehensive loss.

Results of Operations: Six months ended December 31, 2010, compared to six months ended December 31, 2009.

The Company’s net loss for the six months ended December 31, 2010 was $4,328,341, as compared to net income of $2,918,896 for the prior year comparable period. This represents a decrease of $7,247,238 when compared with the prior year comparable period. The primary reason the Company was profitable in the prior period was the $8,561,530 gain on an exchange the Company entered into during the period, resulting in the cancellation of the $10 million of the Trust I Debentures.

Net interest income for the six months ended December 31, 2010 increased by $763,927, or 7.9%, as compared to the prior year comparable period. This resulted from a decrease of $2,798,540, or 14.0%, in interest income more than offset by a decrease of $3,562,467, or 34.3%, in interest expense. The increase in net interest income was attributable to a 21 basis point increase in the interest-rate spread partially offset by a decrease in the average balance of interest-earning assets and interest-bearing liabilities for the quarter ended December 31, 2010 as compared to the prior year comparable period. The increase in interest-rate spread resulted primarily from a decrease of 77 basis points in rates paid on deposits in the current period. This decrease resulted in an overall decline of 73 basis points on the cost of interest-bearing liabilities and more than offset the decrease of 52 basis points on interest-earning assets.

 

 

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The following table presents comparative information for the six months ended December 31, 2010 and 2009 about average balances and average yields and costs for interest-earning assets and interest-bearing liabilities. Net interest income is affected by the interest-rate spread and by the relative amounts of interest-earning assets and interest-bearing liabilities.

 

		December 31, 2010												December 31, 2009
		Average Balance				Interest				Average Yield/Cost				Average Balance				Interest				Average Yield/Cost
		(dollars in thousands)
Interest-earning assets
Loans (1)		$	622,773			$	15,788				5.07	%		$	695,698			$	18,296				5.26	%
Mortgage-backed securities			44,757				928				4.15				61,278				1,357				4.43
Investments and other			134,311				495				0.74				74,389				357				0.96
Total interest-earning assets			801,841				17,211				4.29				831,365				20,010				4.81
Non-interest-earning assets			40,482												58,164
Total assets		$	842,323											$	889,529
Interest-bearing liabilities
Deposits		$	652,019			$	5,013				1.54	%		$	703,001			$	8,122				2.31	%
Borrowings			86,233				1,815				4.21				86,450				1,824				4.22
Subordinated debt			—				—				—				13,478				445				6.60
Total interest-bearing liabilities			738,252				6,828				1.86				802,929				10,391				2.59
Non-interest-bearing liabilities			23,027												33,941
Total liabilities			761,279												836,870
Stockholders’ equity			81,044												52,659
Total liabilities and stockholders’ equity		$	842,323											$	889,529
Net interest income						$	10,383											$	9,619
Interest-rate spread											2.43	%											2.22	%
Yield on interest-earning assets											2.59	%											2.31	%
Interest-earning assets to interest-bearing liabilities			108.61	%											103.54	%

 

(1)	Non-accruing loans are included in the average loan balances for the periods presented.

Provision for Loan Losses

For the six months ended December 31, 2010, a provision for loan losses of $7,300,000 was recorded, while a provision for loan losses of $4,010,000 was recorded in the prior year comparable period. The current period provision for loan losses reflects increases to specific loan loss reserves, adjustments to historical loan loss percentages based upon the methodology described previously, and the elevated level of charge-offs during the current period.

 

 

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Non-Interest Income

For the six months ended December 31, 2010, non-interest income decreased by $6,094,604 from the prior year comparable period. This resulted primarily from the Company entering into an exchange agreement in the prior period whereby the Company paid $500,000 in cash, and issued $500,000 in common stock and warrants valued at $830,000 in exchange for the cancellation of $10.0 million of the Trust I Debentures. This transaction resulted in a pretax gain of $8,561,530. Income from mortgage banking activities increased by $2,468,302. Other, net increased by $226,766 primarily due to income generated by the Company’s partnership interest in a title company, income on bank owned life insurance (“BOL”I) increased by $45,380, and service and other fees increased by $13,612. These increases were partially offset by increases to the provision for losses and losses on real estate owned of $287,134.

In the current period, income from mortgage banking activities increased by $2,468,302, as a result of: (i) increased loan refinance activity resulting from cyclically low market rates during most of the current period, which resulted in an increase to gains on loan origination and sales activity of $4,009,462; (ii) a valuation impairment charge of $465,085 recorded against the book value of the mortgage loan servicing rights; and (iii) an increase to mortgage loan servicing fees of $18,658. This gain was partially offset by an increase to the amortization of mortgage loan servicing rights of $1,094,733.

During the six months ended December 31, 2009, the Bank was able to restructure its investment in BOLI, transferring the balances from money market accounts into separate accounts generating earnings in excess of the cost of insurance. The Bank realized the full benefit of this restructuring in the current period. For part of the prior year comparable period, the earnings of the money market account were insufficient to offset the cost of BOLI.

Non-Interest Expense

Non-interest expense for the six months ended December 31, 2010 decreased by $361,273, or 2.9%, from the prior year comparable period. This resulted from decreases in other, net of $421,426, real estate owned expense of $88,376, outside services of $83,735, and FDIC insurance of $75,861, partially offset by increases to compensation and benefits of $272,634, and office occupancy and equipment of $35,491.

The decrease to other, net is primarily the result of lower legal expenses and lower state franchise tax expense in the current period. The decrease to real estate owned expense is attributable to a decline in the acquisition and maintenance of properties acquired through foreclosure. The decrease in the cost of FDIC insurance is due to a lower deposit base. The increase to compensation and benefits is due to higher staffing and other related compensation benefits. The increase to office occupancy and equipment is due to the cost of relocating a branch office.

Income Tax Expense (Benefit)

The federal income tax provision (benefit) for the six-month period ended December 31, 2010 represented an effective rate of 16.3% on the loss for the current period compared to an effective rate of 35.7% on income for the prior year comparable period. The Company recorded a valuation allowance against deferred tax assets of $2.4 million, resulting in a net deferred tax asset of $0 at December 31, 2010. In recording the valuation allowance, $1.9 million was recognized against results from continuing operations, while $0.5 million, the portion of the change in the deferred tax asset relating to changes which flowed through comprehensive loss, was recorded to other comprehensive loss.

 

 

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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. The primary sources of funds are deposits, principal and interest payments on loans, proceeds from the sale of loans, repurchase agreements, and advances from the FHLB. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and local competition. The Company’s most liquid assets are cash and cash equivalents. The levels of these assets are dependent on the Company’s operating, financing, lending and investing activities during any given period. Additional sources of funds include lines of credit available from the FHLB.

During the current period, the Company slightly enhanced its liquidity position by using payments received on loans, mortgage-backed securities and securities to redeem brokered and retail certificates of deposit and increase cash and cash equivalents.

Management believes the Company maintains sufficient liquidity to meet current operational needs. Cash at the Company level totaled $5,148,355 at December 31, 2010.

The Bank’s primary regulator, the OTS, has implemented a statutory framework for capital requirements which establishes five categories of capital strength ranging from “well capitalized” to “critically undercapitalized.” An institution’s category depends upon its capital level in relation to relevant capital measures, including two risk-based capital measures, a tangible capital measure and a core/leverage capital measure. At December 31, 2010, the Bank was in compliance with all of the current applicable regulatory capital measurements to meet the definition of a well-capitalized institution, as demonstrated in the following table:

 

(In thousands)		Park View Federal Capital				Percent of Assets (1)				Requirement for Well-Capitalized Institution
Tangible capital		$	74,274				8.84	%			N/A
Tier-1 core capital			74,274				8.84				5.00	%
Tier-1 risk-based capital			74,274				12.16				6.00
Total risk-based capital			82,014				13.42				10.00

 

(1)	Tangible and core capital levels are shown as a percentage of total adjusted assets; risk-based capital levels are shown as a percentage of risk-weighted assets.

Pursuant to the Bank Order, the OTS directed the Bank to raise its Tier 1 (core) capital and total risk-based capital ratios to 8% and 12%, respectively, by December 31, 2009. At December 31, 2010, the Bank continued to meet these capital requirements. During the quarter ended December 31, 2010, the Company invested an additional $4.0 million in the capital of the Bank. With the addition of capital invested in the Bank, the Bank exceeded the required capital ratios under the Bank Order. However, until the Bank Order is terminated, the Bank cannot be classified as well-capitalized under prompt corrective action provisions.

Under the Bank and Company Orders, the Bank may not declare or pay dividends or make any other capital distributions from the Bank without receiving prior OTS approval. In addition, the Company shall not declare, make or pay any cash dividends or other capital distributions or purchase, repurchase or redeem or commit to purchase, repurchase or redeem any Company equity stock without the prior non-objection of the OTS.

 

 

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The Bank’s market risk is generally composed of interest rate risk.

Asset/Liability Management: The Bank’s asset and liability committee (“ALCO”), which includes senior management representatives, monitors and considers methods of managing the rate sensitivity and repricing characteristics of the balance sheet components consistent with maintaining acceptable levels of changes in net portfolio value (“NPV”) and net interest income. The Bank’s asset and liability management program is designed to minimize the impact of sudden and sustained changes in interest rates on NPV and net interest income.

The Bank’s exposure to interest rate risk is reviewed on a quarterly basis by the ALCO and the Bank’s Board of Directors. Exposure to interest rate risk is measured with the use of interest rate sensitivity analysis to determine the Bank’s change in NPV in the event of hypothetical changes in interest rates, while interest rate sensitivity gap analysis is used to determine the repricing characteristics of the Bank’s assets and liabilities. If estimated changes to NPV and net interest income are not within the limits established by the Board, the Board may direct management to adjust its asset and liability mix to bring interest rate risk within Board-approved limits.

In order to reduce the exposure to interest rate fluctuations, the Bank has developed strategies to manage its liquidity, shorten the effective maturity and increase the interest rate sensitivity of its asset base. Management has sought to decrease the average maturity of its assets by emphasizing the origination of adjustable-rate loans and loans with shorter balloon maturities which are retained by the Bank for its portfolio. In addition, all long-term, fixed-rate mortgages are underwritten according to guidelines of the FHLMC and the FNMA, which are then sold directly for cash in the secondary market. The Bank carefully monitors the maturity and repricing of its interest-earning assets and interest-bearing liabilities to minimize the effect of changing interest rates on its NPV. The Bank’s interest rate risk position is the result of the repricing characteristics of assets and liabilities. The balance sheet is primarily comprised of interest-earning assets having a maturity and repricing period of one month to five years. These assets were funded primarily utilizing interest-bearing liabilities having a final maturity of two years or less and a repurchase agreement.

 

Item 4.

Controls and Procedures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, 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: (i) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (ii) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers or persons performing similar functions, as appropriate to allow timely decisions regarding disclosure. It should be noted that the design of the 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. During the period covered by this Quarterly Report on Form 10-Q, there was no change in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

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PART II — OTHER INFORMATION

 

Item 1.

Legal Proceedings.

None.

 

Item 1A.

Risk Factors.

The Company’s results of operations, financial condition or liquidity may be adversely impacted by issues arising in foreclosure practices, including delays in the foreclosure process, related to certain industry deficiencies, as well as potential losses in connection with actual or projected repurchases and indemnification payments related to mortgages sold into the secondary market.

Recent announcements of deficiencies in foreclosure documentation by several large seller/servicer financial institutions have raised various concerns relating to mortgage foreclosure practices in the United States. A group of state attorneys general and state bank and mortgage regulators in all 50 states and the District of Columbia is currently reviewing foreclosure practices and a number of mortgage sellers/servicers have temporarily suspended foreclosure proceedings in some or all states in which they do business in order to evaluate their foreclosure practices and underlying documentation.

The Company primarily conducts its loan sale and securitization activity with the FHLMC, and to a lesser degree the FNMA, and acts as seller and servicer of these mortgage loans. In connection with these and other securitization transactions, the Company makes certain representations and warranties that the loans meet certain criteria, such as collateral type and underwriting standards. The Company may be required to repurchase the loans and/or indemnify these organizations against losses due to material breaches of these representations and warranties.

The Company evaluated its foreclosure documentation procedures, given the recent announcements made by other financial institutions regarding their foreclosure activities. The results of the Company’s review indicate that its procedures for reviewing and validating the information in its documentation are sound and its foreclosure affidavits are accurate. The Company has implemented additional reviews of pending foreclosures to ensure that all appropriate actions are taken to enable foreclosure actions to continue.

Although the Company believes that its mortgage documentation and procedures have been appropriate, it is possible that the Company may receive repurchase requests in the future and the Company may not be able to reach favorable settlements with respect to such requests. During the period, the Company received a request from the FHLMC to repurchase three loans totaling $457,372 due to non-compliance with FHLMC underwriting standards. In addition, the Company could face delays and challenges in the foreclosure process arising from claims relating to industry practices generally, which could adversely affect recoveries and the Company’s financial results, whether through increased expenses of litigation and property maintenance, deteriorating values of underlying mortgaged properties or unsuccessful litigation results generally.

 

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds.

 

(a)

N/A

 

(b)

N/A

 

(c)

The Company did not repurchase its equity securities during the period ended December 31, 2010.

 

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Item 3.

Defaults Upon Senior Securities.

None.

 

Item 4.

(Removed and Reserved).

 

Item 5.

Other Information.

None.

 

Item 6.

Exhibits.

 

3.1 1		First Amended and Restated Articles of Incorporation, as amended
3.2 2		Code of Regulations, as amended and restated
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 Certifications

 

(1)	Incorporated by reference to the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on February 10, 2010 (Commission File No. 333-163037).

(2)	Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Commission on February 6, 2008 (Commission File No. 0-24948).

 

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

		PVF Capital Corp.
		(Registrant)
Date: February 14, 2011		/s/ Robert J. King, Jr.
		Robert J. King, Jr.
		President and Chief Executive Officer
		(Duly authorized officer)
		/s/ James H. Nicholson
		James H. Nicholson
		Chief Financial Officer
		(Principal financial officer)
		/s/ Edward B. Debevec
		Edward B. Debevec
		Treasurer and Principal Accounting Officer
		(Principal accounting officer)