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PVFC > SEC Filings for PVFC > Form 10-Q on 14-Nov-2012All Recent SEC Filings

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Quarterly Report

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 months ended September 30, 2012 for the Company, the Bank, its principal and wholly-owned subsidiary, PVFSC, a wholly-owned real estate subsidiary, Mid Pines Land Company, a wholly-owned real estate subsidiary, and PVF Holdings, Inc., PVF Community Development and PVF Mortgage Corporation, three wholly-owned and currently inactive subsidiaries.

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 under "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2012. The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company advises 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 except as and required by law.

Financial Condition

Consolidated assets of the Company were $779.1 million as of September 30, 2012, a decrease of approximately $12.3 million, or 1.6%, as compared to June 30, 2012. The Company's regulatory capital ratios for Tier 1 (core) capital, Tier 1 risk-based capital, and total risk-based capital were 9.16%, 12.06%, and 13.34%, respectively, at September 30, 2012. At September 30, 2012, the Company's cash and cash equivalents, which consist of cash, interest-bearing deposits and federal funds sold, totaled $114.6 million, a decrease of $5.5 million, or 4.6%, as compared to June 30, 2012. The change in the Company's cash and cash equivalents consisted of increases in cash of $11.1 million and a decrease in interest bearing deposits of $16.6 million as the Company deployed a portion of its liquidity to fund the reduction in deposits and reduce its cost of funds.

The Company continued the origination of fixed-rate, single-family loans in its marketplace, with most originated for sale in the secondary market rather than for its portfolio. The origination and sale of fixed-rate loans has historically generated gains on sale and allowed the Company to increase its investment in loans serviced, without assuming the interest-rate risk associated with holding long-term fixed-rate assets, which facilitates the maintenance of stronger liquidity levels. Mortgage application volume has remained elevated in the current quarter, due to a low interest rate environment.

During the three months ended September 30, 2012, securities available for sale decreased by $.4 million the result of the purchases of $4.0 million in mortgage-backed securities and $3.0 million in corporate securities, which was offset by principal repayments, calls exercised, amortization of book premium and changes in market value of available for sale securities.

Loans receivable increased by $1.6 million, or .3%, during the three months ended September 30, 2012. The Company continued its strategic focus on the origination of high quality commercial and industrial loans and select commercial real estate loans, experiencing growth in performing loans of approximately $3.7 million, or .7%, during this same period. During the quarter ended September 30, 2012, the Company recorded net charge-offs of $1.0 million. The desired decline in nonperforming loans, $2.2 million or 11.01% from June 30, 2012 is due to the successful disposition of problem and nonperforming loans combined with the results of problem loan charge-offs. The Company historically recognized specific impairment on individual loans through the use of specific valuation allowance, but did not charge off the impaired loan amount until the loan was disposed and removed from the loan accounting system. The loan balances were reported in the loan totals, including nonperforming loans, at the contractual amount and the specific allowance was included and reported as part of the allowance for loan losses. During the three months ended December 31, 2011, the Company implemented an enhanced loan accounting system, which provides for the systematic recording of charged-off loans for financial recognition without losing its ability to track the legal contractual amounts. As such, during the quarters ended March 31, 2012 and December 31, 2011, the Company charged off those loan amounts which had previously been specifically impaired through the use of a specific valuation allowance, totaling approximately $0.7 million and $11.8 million, respectively. In addition to reducing loan balances, including nonperforming loans, the implementation of this new enhanced loan accounting system had the impact of elevating reported charge-offs for the quarter ended December 31, 2011 and reducing the allowance for loan losses associated with specific valuation allowances this same period. The remaining decline in nonperforming loans was the result of net dispositions and transfers to other real estate owned. The Company continues to sell almost all new residential loan production in the secondary market in this interest rate environment, as the Company manages its interest rate and liquidity risk along with its capital ratios. As the Company continues to make meaningful progress in its problem asset resolution, it intends to continue accelerating the origination of commercial and industrial loans for its portfolio as part of its plan to diversify the balance sheet.

The Company does not originate sub-prime loans and only originates Alt A loans for sale, without recourse, in the secondary market. The Company considers subprime borrowers typically to have weakened credit histories that include payment delinquencies and possibly more severe problems such as charge-offs, judgments and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories. Subprime loans are loans to borrowers displaying one or more of these characteristics at the time of origination or purchase. The Company also does not originate any hybrid loans, low-doc/no-doc loans or payment option ARMs. All one-to-four family loans are underwritten according to agency underwriting standards. Exceptions, if any, are submitted to the Company's board loan committee for approval. Any exposure the Company may have to these types of loans is immaterial.

The decrease of $5.3 million in loans receivable held for sale as of September 30, 2012 was the result of steady new loan originations and timing differences between the origination and the sale of loans. One-to-four family mortgage application volume has remained elevated in the current period as a result of lower interest rates, resulting in higher refinancing activity and related revenue.

For the three months ended September 30, 2012, other real estate owned decreased $.5 million. The activity for the period consisted of the addition of properties totaling approximately $.8 million, offset by

the disposal of properties totaling $1.1 million. The Company realized a net loss of approximately $0.02 million on the disposition of these properties. The Company also recorded an impairment charge of $.2 million on the carrying amount of real estate still in inventory at September 30, 2012, based on updated valuations and market conditions. At September 30, 2012, the Company held 51 properties, totaling $7.2 million in other real estate owned. The other real estate owned included 24 single-family properties, 20 land properties, and 7 commercial properties.

The Company generally seeks to fund loan activity and liquidity by generating deposits through its branch network and through the use of various borrowing facilities. Deposits decreased by $9.8 million, or 1.5%, which was a result of an increase of $12.9 million in non-maturing deposits partially offset by a decrease of $22.8 million in retail certificates of deposit. The decline in retail certificates of deposit was strategically directed as part of management's relationship pricing initiative which targeted rate sensitive, non-relationship deposits for reduction coupled with an emphasis on increasing commercial deposits. Management will continue to modify its noncore deposit strategies to support the funding needs of the Company's loan activities, while maintaining appropriate liquidity levels, as it executes its strategies to diversify its funding mix by expanding core deposit relationships and building business deposits.

The increase in advances from borrowers for taxes and insurance of $2.5 million for the period ended September 30, 2012 was attributable to timing differences between the collection and payment of taxes and insurance. The increase of $7.1 million in accrued expenses and other liabilities was 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 September 30, 2012, compared to three months ended September 30, 2011.

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 recognized a net profit for the three months ended September 30, 2012 of $1.6 million, or $0.06 per basic and diluted share, as compared to a net loss of $0.8 million, or $0.03 per basic and diluted share, for the prior-year comparable period. The increase in income is the result of an increase in net interest income of $.6 million, a decrease in the provision for loan losses, of $.5 million and an increase in noninterest income primarily associated with mortgage banking activity of $1.6 million offset by an increase in operating expenses of $.3 million.


Net Interest Income

Despite lower interest earning assets and liabilities, net interest income for the three months ended September 30, 2012 increased by $0.6 million, as compared to the prior-year comparable period. Interest income increased slightly with a larger decline realized in interest expense. Total interest income decreased $0.01 million during the current period compared with the same period in the prior year. A continued effort to replace nonperforming loans with performing loans as well as the change in mix of cash and available for sale securities to acquire better yielding assets limited the decline in yield during the ongoing low rate environment. Total interest expense declined $.6 million from a year ago, partially due to a decline in deposits, but primarily due to the Company's ability to lower the cost funds. The low interest rate environment has allowed more repricing opportunities augmenting a more rapid decline in cost of funds.


The following table presents comparative information for the three months ended September 30, 2012 and 2011, respectively, with respect to average balances and average yields and costs for interest-earning assets and interest-bearing liabilities:

                                                       September 30, 2012                              September 30, 2011
                                            Average                        Average          Average                        Average
                                            Balance        Interest       Yield/Cost        Balance        Interest       Yield/Cost
                                                                           (dollars in thousands)
Interest-earning assets

Loans (1)                                  $ 579,092      $    6,986             4.83 %    $ 584,752      $    7,104             4.86 %
Mortgage-backed securities                    16,241              80             1.98 %        4,911              50             4.07 %
Investments and other                        129,776             345             1.06 %      151,019             244             0.65 %

Total interest-earning assets                725,109           7,411             4.09 %      740,682           7,398             4.00 %

Non-interest-earning assets                   55,441                                          42,853

Total assets                               $ 780,550                                       $ 783,535

Interest-bearing liabilities

Deposits                                   $ 647,398      $    1,326             0.82 %    $ 651,711      $    1,949             1.20 %
Borrowings                                    36,028             270             3.00 %       36,135             272             2.98 %

Total interest-bearing liabilities           683,426           1,596             0.93 %      687,846           2,221             1.29 %

Non-interest-bearing liabilities              26,555                                          24,809

Total liabilities                            709,981                                         712,655
Stockholders' equity                          70,570                                          70,880

Total liabilities and stockholders'
equity                                     $ 780,551                                       $ 783,535

Net interest income                                       $    5,815                                      $    5,177

Interest-rate spread                                                             3.16 %                                          2.71 %

Net yield on interest-earning assets                                             3.21 %                                          2.80 %

Interest-earning assets to
interest-bearing liabilities                  106.10 %                                        107.68 %

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


Provision for Loan Losses and Asset Quality

For the three months ended September 30, 2012, a provision for loan losses of $1.1 million was recorded to bring the total allowance for loan losses to a level considered by management to be appropriate, based on management's evaluation of relevant factors, including the risk characteristics and trends of the loan portfolio, historic and current loss experience, current economic conditions and underlying collateral valuations. This compares with the $1.5 million for the three months ended September 30, 2011.

The Company implemented an enhanced loan accounting system in December 2011 which provides for the systematic recording of charged-off loans for financial recognition without losing its ability to track the legal contractual amounts. The Company charged off those loan amounts which had previously been specifically impaired. Remaining specific impairments known in prior periods as specific valuation allowances are now tracked as specific allocations to the allowance. In addition to reducing loan balances, including nonperforming loans, this new enhanced loan accounting system had the impact of elevating reported charge-offs for the quarter ended December 31, 2011 and reducing the allowance for loan losses associated with specific reserves. The provision for loan losses for the current period reflects management's judgments about the credit quality of the Company's loan portfolio. As of September 30, 2012, the allowance for loan losses no longer consists of a specific component and a general component. Rather, the allowance for loan losses maintains specific allocations where appropriate on loans where known risks have been identified but no clear loss has been quantified or deemed appropriate to be taken.

The following is a breakdown of the allowance for loan losses:

                                         September 30, 2012       June 30, 2012
      General allowance                 $         14,683,135     $    14,634,531
      Specific allocation                          1,452,505           1,418,334

      Total allowance for loan losses   $         16,135,640     $    16,052,865

The allowance for loan losses remained flat at 2.9% of loans outstanding at September 30, 2012, and June 30, 2012. The company recorded net charge-offs of $1.0 million for the current quarter down from the $2.4 million recorded for the quarter ended June 30, 2012. The coverage ratio of the allowance for loan losses to nonperforming loans improved to 90.3% at September 30, 2012, compared with 80.7% at June 30, 2012, which is attributable to the ongoing reduction in nonperforming loan balances. Adversely classified assets continue to show reductions falling to $38.4 million at September 30, 2012. Trends continue to reflect directional improvement, management remains cautious due to continued uncertainty surrounding macroeconomic indicators. Furthermore management desires additional time periods of improved conditions and asset quality indicators before releasing reserves.

Management's approach includes establishing a specific allocation 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 allowance for pools of performing loans segregated by collateral type. For the general 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 Company'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 Company'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 provision for loan losses is allocated by loan portfolio segment and lower historical loss factors resulted in recoveries in certain loan portfolio segments in the current period and are illustrated as a negative provision in Note 3 - Loans Receivable. The current period provision for loan losses reflects the continued level of elevated charge-offs during the period.

The total allowance for loan losses increased slightly during the three months ended September 30, 2012. During the quarter $1.0 million was provided to commercial real-estate, $.6 million to one-to-four family, and $.3 million to commercial and industrial segments. While the one-to four family allocation was a replacement of charge offs the commercial and industrial and commercial real-estate were additional allocations reflecting overall changes in the portfolio. The multifamily and land both saw a release of reserves of $.8 million and $.1 million respectively back into the general allocation. The portion of the provision associated with the multi-family category was reduced during the quarter ended September 30, 2012 due to multi-family construction loans being converted to amortizing loans thus resulting in a lower risk profile. The remaining portion of the provision was allocated between consumer and one-to-four family construction. These allocations more than covered the $1.0 million in net charge offs taken during the quarter.

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


Nonperforming assets at September 30, 2012 and June 30, 2012 were as follows:

                                                   September 30,       June 30,
    (Dollars in thousands)                             2012              2012
    Loans on non-accruing status(1)
    Real estate mortgages:
    One-to-four family residential                $         8,131      $   9,191
    Commercial                                              4,405          4,571
    Multi-family residential                                    6            325
    Construction and land                                   5,084          5,551
    Non real estate                                           238            438

    Total loans on nonaccrual status              $        17,864      $  20,076

    Ratio of nonperforming loans to total loans              3.19 %         3.60 %

    Other nonperforming assets(2)                 $         7,232      $   7,734

    Total nonperforming assets(3)                 $        25,096      $  27,927

    Total nonperforming assets to total assets               3.22 %         3.51 %

The levels of nonperforming loans at September 30, 2012 and June 30, 2012 were attributable to continued challenging local economic conditions. Residential markets nationally and locally have been adversely impacted by an elevated level of 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 Company has significant exposure to the residential market in the Greater Cleveland, Ohio area. As a result, the Company continues to experience an elevated, but improving level of nonperforming loans. Due to an increase in foreclosure activity in the area, the foreclosure process in Cuyahoga County, the Company's primary market remains elongated. As such, loans have remained past due for considerable periods prior to being collected, transferred to other real estate owned, or charged off.

Non-Interest Income

For the three months ended September 30, 2012, non-interest income increased by $1.6 million from the prior-year comparable period. The increase in the current period was primarily attributed to higher income from net mortgage banking activities of approximately $2.1 million partially offset by higher provision for write downs and losses on the disposal of other real estate owned totaling $0.3 million. Also the Company did not sell the guaranteed portions on its Small Business Administration ("SBA") loan originations during the quarter. This compares with SBA gains of $0.2 million in the quarter ended September 30, 2011.

The Company 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. The majority of the mortgage lending activities in the current environment continues to involve refinancing and is highly correlated to interest rate movements and levels. The net gains on loan origination and sales activities totaled $4.0 million for the current period, which represented an increase of $2.2 million


compared with the prior-year period of $1.8 million. The high level of refinancing in the current period resulted in a loan servicing loss of $0.9 million compared to $0.8 million in the prior-year comparable quarter end. The Company recorded a valuation impairment charge against the book value of the mortgage loan servicing rights of $0.6 million and $0.7 million for the three months ended September 30, 2012 and 2011, respectively.

Gains and losses on the sale of other real estate owned, including write-downs, is recorded in non-interest income and was a net loss of $0.3 million for the quarter ended September 30, 2012, down from the net gains of $.1 million for the same prior-year period.

Non-Interest Expense

Non-interest expense for the three months ended September 30, 2012 increased by $0.3 million, or 5.0%, from the prior-year comparable period. This resulted from increased compensation of $.2 million, and outside service costs of $.3 million offset by lower other real estate owned expenses of $0.2 million.

The decrease to other real estate owned expense for the current period is . . .

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