<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
(Mark One)
- --
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
- --
/ / TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-24948
PVF CAPITAL CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C>
OHIO 34-1659805
- ---------------------------- -------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
25350 ROCKSIDE ROAD, BEDFORD HTS., OHIO 44146
- -------------------------------------------- -------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (440) 991-9600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.01 per share)
---------------------------------------
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The registrant's voting stock is listed on the National Association of
Securities Dealers Automated Quotation ("Nasdaq") System Small-Cap Market under
the symbol "PVFC." The aggregate market value of the voting stock held by
nonaffiliates of the registrant, based on the closing sales price of the
registrant's common stock as quoted on the Nasdaq System on August 31, 1998, was
$36,832,152. For purposes of this calculation, it is assumed that directors,
executive officers and 5% stockholders of the registrant are affiliates. As of
August 31, 1998, the registrant had 3,990,808 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended June
30, 1998. (Parts I, II and IV)
2. Portions of Proxy Statement for the 1998 Annual Meeting of Stockholders.
(Part III)
<PAGE> 2
PART I
ITEM 1. BUSINESS
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GENERAL
PVF Capital Corp. ("PVF" or the "Company") announced the reorganization
of Park View Federal Savings Bank ("Park View Federal" or the "Bank") into the
holding company structure of ownership effective October 31, 1994. On that date,
Park View Federal became a wholly owned subsidiary of PVF Capital Corp., and all
issued and outstanding shares of common stock of the Bank were converted on a
three-for-two basis into shares of common stock of PVF Capital Corp. PVF owns
and operates Park View Federal Savings Bank and PVF Service Corporation
("PVFSC"), a real estate subsidiary, purchased by PVF from the Bank during
fiscal 1995. In addition, PVF owns PVF Holdings, Inc., a financial services
subsidiary, currently inactive, and three other subsidiaries chartered for
future operation, but also currently inactive. Park View Federal is a federal
stock savings bank operating through ten offices located in Cleveland and
surrounding communities. Park View Federal has operated continuously for 78
years, having been founded as an Ohio chartered savings and loan association in
1920. Its deposits became federally insured in 1936. The Bank became federally
chartered in 1950. On December 30, 1992, the Bank completed its conversion from
a federally chartered mutual savings and loan association to a federally
chartered stock savings bank (the "Conversion"), at which time it adopted its
present name, Park View Federal. PVFSC was purchased by PVF to improve the
Bank's regulatory capital ratio's and for the purpose of conducting real estate
activities at the holding company level. PVF Capital Corp's main office is
located at 2618 N. Moreland Boulevard, Cleveland, Ohio 44120 and its telephone
number is (216) 991-9600.
The Bank's principal business consists of attracting deposits from the
general public and investing these funds primarily in loans secured by first
mortgages on real estate located in the Bank's market area, which consists of
Portage, Lake, Geauga, Cuyahoga, Summit, Stark, Medina and Lorain Counties in
Ohio. Park View Federal emphasizes the origination of loans for the purchase or
construction of residential real estate, commercial real estate and multi-family
residential property and land loans. To a lesser extent, the Bank originates
loans secured by second mortgages, including home equity lines of credit and
loans secured by savings deposits.
The Bank derives its income principally from interest earned on loans
and, to a lesser extent, loan servicing and other fees, gains on the sale of
loans and mortgage-backed securities and interest earned on investments. The
Bank's principal expenses are interest expense on deposits and borrowings and
non-interest expense such as compensation and employee benefits, office
occupancy expenses and other miscellaneous expenses. Funds for these activities
are provided principally by deposits, FHLB advances, repayments of outstanding
loans, sales of loans and mortgage-backed securities and operating revenues. The
business of PVF consists primarily of the business of the Bank.
Park View Federal is subject to examination and comprehensive
regulation by the Office of Thrift Supervision (the "OTS"), and the Bank's
savings deposits are insured up to applicable limits by the Savings Association
Insurance Fund (the "SAIF"), which is administered by the Federal Deposit
Insurance Corporation (the "FDIC"). The Bank is a member of and owns capital
stock in the Federal Home Loan Bank (the "FHLB") of Cincinnati, which is one of
12 regional banks in the FHLB System. The Bank is further subject to regulations
of the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained and certain other matters. See " --
Regulation."
2
<PAGE> 3
MARKET AREA
The Bank conducts its business through ten offices located in Cuyahoga,
Summit, Lake and Geauga Counties in Ohio, and its market area consists of
Portage, Lake, Geauga, Cuyahoga, Summit, Stark, Medina and Lorain Counties in
Ohio. At June 30, 1998, over 98% of the Bank's net loan portfolio and over 98%
of the Bank's deposits were in the Bank's market area. Park View Federal has
targeted business development efforts in suburban sectors of its market area,
such as Lake, Geauga, and Summit Counties, where demographic growth has been
stronger.
The economy in the Cleveland area historically has been based on the
manufacture of durable goods. Though manufacturing continues to remain an
important sector of the economy, diversification has occurred in recent years
with the growth of service, financial and wholesale and retail trade industries.
LENDING ACTIVITIES
Loan Portfolio Composition
The Bank's net loan portfolio, including mortgage-backed securities,
totalled $373.6 million at June 30, 1998, representing 86.2% of total assets at
such date. It is the Bank's policy to concentrate its lending in its market
area. Single-family residential loans comprise the largest group of loans,
amounting to $142.2 million, or 38.1% of the net loan portfolio at June 30,
1998. In addition, at June 30, 1998, construction loans totalled $96.1 million,
or 25.7% of the net loan portfolio. At June 30, 1998, loans for the purchase of
commercial real estate amounted to $94.6 million, or 25.3% of the net loan
portfolio, at such date. The Bank also had $31.5 million of multi-family
residential real estate loans and $30.5 million of land loans, most of the
latter consisting of loans to acquire land on which the borrowers intended to
construct single-family residences. The Bank also had $18.8 million outstanding
in Home Equity Line of Credit loans. The remainder of the loan portfolio at June
30, 1998 consisted of $3.9 million in consumer loans, which included $213,000 in
mobile home loans, $614,000 in loans secured by savings deposits, $20,000 in
property improvement loans and $3.0 million of other consumer loans, which
consist primarily of lines of credit and demand loans. In addition,
mortgage-backed securities totaled $2.9 million at June 30, 1998.
3
<PAGE> 4
Set forth below is certain data relating to the composition of the Bank's
loan portfolio by type of loan on the dates indicated. As of June 30, 1998, the
Bank had no concentrations of loans exceeding 10% of total loans other than as
disclosed below.
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<CAPTION>
AT JUNE 30,
1998 1997 1996
------------------------ ----------------------- -------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential (1) ...... $ 142,223 38.07% $ 128,908 37.62% $ 109,687 36.84%
Multi-family residential ........... 31,493 8.43% 31,090 9.07% 30,607 10.28%
Commercial ......................... 94,588 25.32% 84,940 24.79% 72,543 24.36%
Home equity lines of credit ........ 18,762 5.02% 16,941 4.94% 8,749 2.94%
Construction ....................... 96,063 25.71% 82,611 24.11% 76,725 25.77%
Land ............................... 30,462 8.15% 32,045 9.35% 30,686 10.31%
Mortgage-backed securities
held for sale, net ................. 0 0.00% 0 0.00% 7,963 2.67%
Mortgage-backed securities
held to maturity ................... 2,949 0.79% 505 0.15% 629 0.21%
Consumer loans:
Property improvement ............... 20 0.01% 34 0.01% 43 0.01%
Passbook loans ..................... 614 0.16% 615 0.18% 742 0.25%
Mobile home ........................ 213 0.06% 191 0.06% 328 0.11%
Other .............................. 3,040 0.81% 2,756 0.80% 1,244 0.41%
--------- --------- ---------
420,427 112.53% 380,636 111.08% 339,946 114.16%
--------- --------- ---------
Less:
Accrued interest receivable ........ 2,217 0.59% 2,097 0.61% 1,709 0.57%
Deferred loan fees ................. (1,689) -0 45% (1,733) -0.51% (2,098) -0.70%
Unearned discount .................. (36) -0.01% (48) -0.01% (165) -0.06%
Undisbursed discount FHLMC MBS ..... (16) 0.00% 0 0.00% (158) -0.05%
Unrealized loss FHLMC MBS .......... 0 0.00% 0 0.00% (234) -0.08%
Undisbursed portion of loan proceeds (44,622) -11.94% (35,653) -10.41% (38,649) -12.98%
Market valuation reserve ........... 0 0.00% 0 0.00% (13) 0.00%
Allowance for possible loan losses . (2,687) -0.72% (2,675) -0.76% (2,565) -0.86%
--------- --------- ---------
Total other items ................ (46,833) -12.53% (38,012) -11.08% (42,173) -14.16%
--------- --------- ---------
Total loans and mortgage-backed
securities ...................... $ 373,594 100.00% $ 342,624 100.00% $ 297,773 100.00%
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
1995 1994
------------------------ -------------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real estate loans:
Single-family residential (1) ...... $ 98,203 38.56% $ 79,901 37.93%
Multi-family residential ........... 39,531 15.52% 33,706 16.00%
Commercial ......................... 57,498 22.58% 53,347 25.33%
Home equity lines of credit ........ 3,314 1.30% 0 0.00%
Construction ....................... 61,653 24.21% 53,774 25.53%
Land ............................... 18,318 7.19% 16,488 7.83%
Mortgage-backed securities
held for sale, net ................. 989 0.39% 0 0.00%
Mortgage-backed securities
held to maturity ................... 2,747 1.08% 0 0.00%
Consumer loans:
Property improvement ............... 76 0.03% 103 0.05%
Passbook loans ..................... 999 0.39% 842 0.40%
Mobile home ........................ 519 0.20% 833 0.40%
Other .............................. 701 0.27% 486 0.23%
--------- ---------
284,548 111.72% 239,480 113.70%
--------- ---------
Less:
Accrued interest receivable ........ 1,589 0.62% 1,083 0.51%
Deferred loan fees ................. (1,811) -0.71% (1,583) -0.75%
Unearned discount .................. (336) -0.13% (347) -0.16%
Undisbursed discount FHLMC MBS ..... (2) 0.00% 0 0.00%
Unrealized loss FHLMC MBS .......... 0 0.00% 0 0.00%
Undisbursed portion of loan proceeds (26,891) -10.56% (25,058) -11.90%
Market valuation reserve ........... 0 0.00% (871) -0.41%
Allowance for possible loan losses . (2,402) -0.94% (2,075) -0.99%
--------- ---------
Total other items ................ (29,853) -11.72% (28,851) -13.70%
--------- ---------
Total loans and mortgage-backed
securities ...................... $ 254,695 100.00% $ 210,629 100.00%
========= ========
</TABLE>
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(1) Includes loans held for sale in the amounts of $1.6 million, $0.7 million,
$11.2 million, $4.5 million, and $4.0 million at June 30, 1998, 1997, 1996,
1995, and 1994 respectively.
4
<PAGE> 5
The following table presents at June 30, 1998 the amounts of loan
principal repayments scheduled to be received by the Bank during the periods
shown based upon the time remaining before contractual maturity. Loans with
adjustable rates are reported as due in the year in which they reprice. Demand
loans, loans having no schedule of repayments and no stated maturity and
overdrafts are reported as due in one year or less. The table below does not
include any estimate of prepayments which significantly shorten the average life
of all mortgage loans and may cause the Bank's actual repayment experience to
differ from that shown below.
<TABLE>
<CAPTION>
DUE DURING DUE ONE
THE YEAR THROUGH FIVE DUE FIVE YEARS
ENDING YEARS AFTER OR MORE AFTER
JUNE 30, JUNE 30, JUNE 30,
1999 1998 1998
---------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate mortgage loans............. $176,201 $162,070 $28,503
Consumer loans......................... 3,594 153 140
-------- -------- -------
Total.............................. $179,795 $162,223 $28,643
======== ======== =======
</TABLE>
5
<PAGE> 6
The following table apportions the dollar amount of the loans due or
repricing after June 30, 1999 between those with predetermined interest rates
and those with adjustable interest rates.
<TABLE>
<CAPTION>
FLOATING OR
PREDETERMINED RATES ADJUSTABLE RATES TOTAL
------------------- ---------------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate mortgage loans................... $27,559 $163,014 $190,573
Consumer loans............................... 293 0 293
------- -------- --------
Total.................................... $27,852 $163,014 $190,866
======= ======== ========
</TABLE>
Scheduled contractual principal repayments of loans and mortgage-backed
securities do not reflect the actual life of such assets. The average life of
loans and mortgage-backed securities is substantially less than their
contractual terms because of prepayments. In addition, due-on-sale clauses on
loans generally give the Bank the right to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase, however, when current mortgage
loan rates are substantially higher than rates on existing mortgage loans and,
conversely, decreases when rates on existing mortgages are substantially higher
than current mortgage loan rates.
Origination, Purchase and Sale of Loans
The Bank generally has authority to originate and purchase loans
secured by real estate located throughout the United States. Consistent with its
emphasis on being a community-oriented financial institution, the Bank
concentrates its lending activities in its market area.
Residential real estate loans typically are originated through salaried
loan officers, while construction loans and commercial real estate loans are
originated through senior management officers. Residential mortgage loan
originations are attributable to depositors, walk-in customers, advertising and
referrals from real estate brokers and developers. Construction and commercial
real estate loan originations are attributable largely to the Bank's reputation
and its long-standing ties to builders in its market area. All loan applications
are evaluated by the Bank's staff to ensure compliance with the Bank's
underwriting standards. See "-- Loan Underwriting Policies."
The Bank originates all fixed-rate, single-family mortgage loans in
conformity with FHLMC (the "FHLMC") and FNMA (the "FNMA") guidelines so as to
permit their being swapped with the FHLMC or the FNMA in exchange for
mortgage-backed securities secured by such loans or their sale in the secondary
market. All such loans are sold or swapped, as the case may be, with servicing
retained, and are sold in furtherance of the Bank's goal of better matching the
maturities and interest rate-sensitivity of its assets and liabilities. The Bank
generally retains responsibility for collecting and remitting loan payments,
inspecting the properties, making certain insurance and tax payments on behalf
of borrowers and otherwise servicing the loans it sells or converts into
mortgage-backed securities, and receives a fee for performing these services.
Sales of loans also provide funds for additional lending and other purposes.
The following table shows total loan origination and sale activity
during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Loans originated:
Real estate:........................................
Residential and commercial (1).................... $111,912 $ 81,707 $ 44,944
Construction (1).................................. 97,569 88,936 90,899
Land.............................................. 16,237 18,818 19,038
Passbook loans...................................... 308 435 410
Other............................................... 29 467 1,157
-------- -------- --------
Total loans originated............................ $226,055 $190,363 $156,448
======== ======== ========
Loans refinanced...................................... $ 16,210 $ 16,193 $ 20,533
======== ======== ========
Loans and mortgage-backed securities sold............. $ 81,294 $ 58,618 $ 48,435
======== ======== ========
</TABLE>
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(1) Includes single-family and multi-family residential and commercial loans.
6
<PAGE> 7
Loan Underwriting Policies
The Bank's lending activities are subject to the Bank's written,
non-discriminatory underwriting standards and to loan origination procedures
prescribed by the Bank's Board of Directors and its management. Detailed loan
applications are obtained to determine the borrower's ability to repay, and the
more significant items on these applications are verified through the use of
credit reports, financial statements and confirmations. Property valuations are
generally performed by an internal staff appraiser and by independent outside
appraisers approved by the Bank's Board of Directors. The Bank's Loan
Underwriter has authority to approve all fixed-rate single-family residential
mortgage loans which meet FHLMC and FNMA underwriting guidelines and those
adjustable-rate single-family residential mortgage loans which meet the Bank's
underwriting standards and are in amounts of less than $400,000. The Board of
Directors has established a Loan Committee comprised of the Chairman of the
Board, President, Senior Vice President, other management and an outside
director of the Bank. This committee reviews all loans approved by the
underwriter and has the authority to approve adjustable rate single-family
residential loans up to $400,000 and construction and commercial real estate
loans up to $500,000. All loans in excess of the above amounts must be approved
by the Board of Directors. All loans secured by savings deposits can be approved
by lending officers based in the Bank's branch offices.
It is the Bank's policy to have a mortgage creating a valid lien on
real estate and to generally obtain a title insurance policy which insures that
the property is free of prior encumbrances. When a title insurance policy is not
obtained, an attorney's certificate is received. Borrowers must also obtain
hazard insurance policies prior to closing and, when the property is in a flood
plain as designated by the Department of Housing and Urban Development, paid
flood insurance policies. Most borrowers are also required to advance funds on a
monthly basis together with each payment of principal and interest to a mortgage
escrow account from which the Bank makes disbursements for items such as real
estate taxes and homeowners insurance.
The Bank is permitted to lend up to 100% of the appraised value of the
real property securing a mortgage loan. However, if the amount of a residential
loan originated or refinanced exceeds 90% of the appraised value, the Bank is
required by federal regulations to obtain private mortgage insurance on that
portion of the principal amount of the loan that exceeds 80% of the appraised
value of the property. The Bank will make a single-family residential mortgage
loan with up to a 97% loan-to-value ratio if the required private mortgage
insurance is obtained. The Bank generally limits the loan-to-value ratio on
multi-family and commercial real estate mortgages to 75%.
Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds available
for lending purposes and, in the case of fixed-rate, single-family residential
loans, rates established by the FHLMC and the FNMA. These factors are, in turn,
affected by general economic conditions, monetary policies of the federal
government, including the Federal Reserve Board, legislative tax policies and
government budgetary matters.
Residential Real Estate Lending. The Bank historically has been and
continues to be an originator of single-family, residential real estate loans in
its market area. The Bank currently originates fixed-rate, residential mortgage
loans in accordance with underwriting guidelines promulgated by the FHLMC and
the FNMA and adjustable-rate mortgage loans for terms of up to 30 years. In
addition, in accordance with FHLMC and FNMA guidelines, the Bank offers 30-year
loans with interest rates that adjust after five or seven years to a rate which
is 0.5% above the FHLMC 60 day delivery rate, at which point the rate is fixed
over the remaining 25 or 23 years of the loan, respectively. At June 30, 1998,
$142.2 million, or 38.1%, of the Bank's net loan and mortgage-backed securities
portfolio consisted of single-family, conventional mortgage loans, of which
approximately $126.0 million, or 88.6%, carried adjustable interest rates.
Included in this amount are $3.1 million in second mortgage loans. Such loans
are for terms of up to fifteen years and adjust annually to a rate which is
3.75% above the treasury rate. Any such loans having fixed rates are loans
originated by the Bank to be swapped with the FHLMC and the FNMA in exchange for
mortgage-backed securities or sold for cash in the secondary market.
7
<PAGE> 8
The Bank offers adjustable-rate residential mortgage loans with
interest rates which adjust annually based upon changes in an index based on the
weekly average yield on United States Treasury securities adjusted to a constant
comparable maturity of one year, as made available by the Federal Reserve Board
(the "Treasury Rate"), plus a margin of 2.75%. The amount of any increase or
decrease in the interest rate is presently limited to 2% per year, with a limit
of 6% over the life of the loan. The adjustable-rate mortgage loans offered by
the Bank, as well as many other savings institutions, provide for initial rates
of interest below the rates which would prevail when the index used for
repricing is applied. However, the Bank underwrites the loan on the basis of the
borrower's ability to pay at the rate which would be in effect without the
discount.
Commercial and Multi-Family Residential Real Estate Lending. The
commercial real estate loans originated by the Bank are primarily secured by
office buildings, shopping centers, warehouses and other income producing
commercial property. The Bank's multi-family residential loans are primarily
secured by apartment buildings. These loans are generally for a term of from 10
to 25 years with interest rates that adjust either annually or every three years
based upon changes in the Treasury Rate, plus a negotiated margin of between
3.0% and 3.5%. Commercial and multi-family residential real estate loans
amounted to $126.1 million, or 33.8%, of the total loan and mortgage-backed
securities portfolio at June 30, 1998.
Commercial real estate lending entails significant additional risks as
compared with residential property lending. Commercial real estate loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans typically is dependent on the
successful operation of the real estate project. These risks can be
significantly impacted by supply and demand conditions in the market for office
and retail space, and, as such, may be subject to a greater extent to adverse
conditions in the economy. To minimize these risks, Park View Federal generally
limits itself to its market area and to borrowers with which it has substantial
experience or who are otherwise well known to the Bank. The Bank obtains
financial statements and personal guarantees from all principals obtaining
commercial real estate loans.
Construction Loans. The Bank also offers residential and commercial
construction loans, with a substantial portion of such loans originated to date
being for the construction of owner-occupied, single-family dwellings in the
Bank's market area. Residential construction loans are offered to selected local
developers to build single-family dwellings and to individuals building their
primary or secondary residence. Generally, loans for the construction of
owner-occupied, single-family residential properties are originated in
connection with the permanent loan on the property and have a construction term
of six to 18 months. Such loans are offered only on an adjustable rate basis.
Interest rates on residential construction loans made to the eventual occupant
are set at the prime rate plus 2%, and are fixed for the construction term.
Interest rates on residential construction loans to builders are set at the
prime rate plus 2%, and adjust quarterly. Interest rates on commercial
construction loans float with a specified index, with construction terms
generally not exceeding 18 months. Advances are generally paid directly to
subcontractor's and suppliers and are made on a percentage of completion basis.
At June 30, 1998, $96.1 million or 25.7%, of the Bank's total loan and
mortgage-backed securities portfolio consisted of construction loans, virtually
all of which were secured by single-family residences.
Prior to making a commitment to fund a loan, the Bank requires both an
appraisal of the property by appraisers approved by the Board of Directors and a
study of the feasibility of the proposed project. The Bank also reviews and
inspects each project at the commencement of construction and prior to every
disbursement of funds during the term of the construction loan.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment.
8
<PAGE> 9
Land Loans. The Bank originates loans to builders and developers for
the acquisition and/or development of vacant land. The proceeds of the loan are
used to acquire the land and/or to make site improvements necessary to develop
the land into saleable lots. The Bank will not originate land loans to
individuals wishing to speculate in the value of land, and limits such loans to
borrowers who have agreed to begin development of the property within two years
of the date of the loan. The term of the loans are generally limited to two
years. Repayments are made on the loans as the developed lots are sold.
Land development and acquisition loans involve significant additional
risks when compared with loans on existing residential properties. These loans
typically involve large loan balances to single borrowers, and the payment
experience is dependent on the successful development of the land and the sale
of the lots. These risks can be significantly impacted by supply and demand
conditions. To minimize these risks, Park View Federal generally limits the
loans to builders and developers with whom it has substantial experience or who
are otherwise well-known to the Bank, and it obtains the financial statements
and personal guarantees of such builders and developers. The Bank also requires
feasibility studies and market analyses to be performed with respect to the
project. The amount of the loan is limited to the lesser of 80% of the estimated
gross sell out value or 100% of the discounted value. If land is being acquired,
the amount of the loan to be used for such purposes is limited to 75% of the
cost of the land. All of these loans originated are within the Bank's market
area. The Bank had $30.5 million, or 8.2% of its net loan and mortgage-backed
securities portfolio, in land loans at June 30, 1998.
Home Equity Line of Credit Loans. The Bank originates loans secured by
mortgages on residential real estate. Such loans are for terms of 5 years with
one 5 year review and renewal option followed by a balloon payment. The rate
adjusts monthly to a rate ranging from the prime lending rate to prime plus
0.5%. At June 30, 1998, the Bank had $18.8 million in home equity lines of
credit, which amounted to 5.0% of its net loan portfolio.
Mortgage Banking Activity
In addition to interest earned on loans, Park View Federal receives
fees for servicing loans which it had sold or swapped for mortgage-backed
securities. During the year ended June 30, 1998, the Bank reported net loan
servicing fee income of $385,620, and was servicing $233.9 million of loans for
others. The reduction in net servicing income is due primarily to the Bank's
adoption of FASB 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, whereby servicing rights are capitalized and
amortized on a level yield basis over the projected life of the underlying
loans. See note 5 of notes to Consolidated Financial Statements. The Bank has
been able to keep delinquencies on loans serviced for others to a relatively low
level of below 1% of the aggregate outstanding balance of loans serviced as a
result of its policy to limit servicing to loans it originated and subsequently
sold to the FHLMC and the FNMA. Because of the success the Bank has experienced
in this area and because it has data processing equipment that will allow it to
expand its portfolio of serviced loans without incurring significant incremental
expenses, the Bank intends in the future to augment its portfolio of loans
serviced by continuing to originate and either swap such fixed-rate,
single-family residential mortgage loans with the FHLMC and the FNMA in exchange
for mortgage-backed securities or sell such loans for cash, while retaining
servicing.
On August 18, 1995, the Bank sold $146.0 million in FHLMC servicing to
PVF and recognized no gain due to the transaction being an intercompany sale.
PVF then entered into an agreement with the Bank to service the underlying loans
for $8.00 per loan monthly. PVF borrowed $1.2 million to finance the purchase of
this servicing. The servicing income from these loans will provide sufficient
funds to pay the servicing fee to the Bank. At June 30, 1998 the Bank was
servicing $94.7 million in FHLMC loans for PVF.
In addition to loan servicing fees, the Bank receives fees in
connection with loan commitments and originations, loan modifications, late
payments and changes of property ownership and for miscellaneous services
related to its loans. Loan origination fees are calculated as a percentage of
the amount loaned. The Bank typically receives fees of up to three points (one
point being equivalent to 1% of the principal amount of the loan) in connection
with the origination of fixed-rate and adjustable-rate residential mortgage
loans. All loan origination fees are deferred and accreted into income over the
contractual life of the loan according to the interest method of
9
<PAGE> 10
recognizing income. If a loan is prepaid, refinanced or sold, all remaining
deferred fees with respect to such loan are taken into income at such time.
Income from these activities varies from period to period with the
volume and type of loans originated, sold and purchased, which in turn is
dependent on prevailing mortgage interest rates and their effect on the demand
for loans in the Bank's market area.
At June 30, 1998 and June 30, 1997, the Bank had $1,645,000 and
$710,000 of fixed rate single family mortgage loans available for sale. In
connection with these activities the Bank establishes a mortgage banking reserve
for market valuation losses. See Note 5 of Notes to Consolidated Financial
Statements.
Non-Performing Loans and Other Problem Assets
It is management's policy to continually monitor its loan portfolio to
anticipate and address potential and actual delinquencies. When a borrower fails
to make a payment on a loan, the Bank takes immediate steps to have the
delinquency cured and the loan restored to current status. Loans which are
delinquent 15 days incur a late fee of 5% of the scheduled principal and
interest payment. As a matter of policy, the Bank will contact the borrower
after the loan has been delinquent 20 days. The Bank orders a property
inspection after a loan payment becomes 45 days past due. If a delinquency
exceeds 90 days in the case of a residential mortgage loan, 30 days in the case
of a construction loan or 30-60 days for a loan on commercial real estate, the
Bank will institute additional measures to enforce its remedies resulting from
the loan's default, including, commencing foreclosure action. Loans which are
delinquent 90 days or more generally are placed on non-accrual status, and
formal legal proceedings are commenced to collect amounts owed.
The following table sets forth information with respect to the Bank's
non-performing loans and other problem assets at the dates indicated. During the
periods shown, the Bank had no material restructured loans.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans (1):
Real estate................................................... $3,268 $4,097 $2,272 $3,497 $3,274
Consumer loans.............................................. 15 40 80 109 151
------ ------ ------ ------ ------
Total..................................................... $3,283 $4,137 $2,352 $3,606 $3,425
====== ====== ====== ====== ======
Accruing loans which are
contractually past due 90
days or more:
Real estate............................................... $ 163 $ 476 $ 95 $1,028 $ 891
------ ------ ------ ------ ------
Total................................................... $ 163 $ 476 $ 95 $1,028 $ 891
====== ====== ====== ====== ======
Total nonaccrual and 90 days
past due loans.......................................... $3,446 $4,613 $2,447 $4,634 $4,316
====== ====== ====== ====== ======
Ratio of non-performing loans to total loans
and mortgage-backed securities.............................. 0.92% 1.35% 0.82% 1.81% 2.05%
====== ====== ====== ====== ======
Other non-performing assets (2)............................... 699 0 53 $ 0 $ 20
====== ====== ====== ====== ======
Total non-performing assets................................... $4,145 $4,613 $2,500 $4,634 $4,336
====== ====== ====== ====== ======
Total non-performing assets to
total assets............................................... 0.96% 1.24% 0.75% 1.47% 1.82%
====== ====== ====== ====== ======
</TABLE>
- ------------------
(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. A policy change to non-accruing loans effective with the
fiscal year ending June 30, 1994 provided for the non-accrual of all
loans classified as substandard, doubtful, or loss and all loans
greater than 90-days past due with a loan-to-value ratio greater than
65%. Payments received on a non-accrual loan are either applied to the
outstanding principal balance or recorded as interest income, depending
on an assessment of the collectibility of the principal balance of the
loan.
(2) Other non-performing assets represent property acquired by the Bank
through foreclosure or repossession.
10
<PAGE> 11
It is the Bank's policy to classify as non-accruing any loan where less
than the full required interest payment is made and to not record into income
such partial interest payments. During the year ended June 30, 1998, gross
interest income of $205,000 would have been recorded on loans accounted for on a
non-accrual basis if such loans had been current throughout the period. At June
30, 1998, the Bank had no restructured loans.
At June 30, 1998, non-accruing loans consisted of 36 loans totalling
$3.3 million, and included 17 conventional mortgage loans aggregating $1.2
million, 3 land loans in the amount of $0.7 million, 5 construction loans in the
amount of $0.5 million, 1 commercial loan in the amount of $0.5 million, 3
multi-family loans in the amount of $0.3 million, and 7 consumer loans
aggregating $15,000. All non-accruing consumer loans at June 30, 1998 were
mobile home loans. Management has reviewed its non-accruing loans and believes
that the allowance for loan losses is adequate to absorb potential losses on
these loans.
Real estate acquired by the Bank as a result of foreclosure is
classified as real estate owned until such time as it is sold. At June 30, 1998,
the Bank had 2 real estate owned properties totaling $0.7 million. The
properties consist of developed residential lots.
Asset Classification and Allowance for Loan Losses. Federal regulations
require savings institutions to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss," if warranted. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss, or
charge off such amount. An asset which does not currently warrant classification
but which possesses weaknesses or deficiencies deserving close attention is
required to be designated as "special mention." The Bank has established an
Asset Classification Committee, which is comprised of the Chairman of the Board,
the Chief Financial Officer and senior employees of the Bank. The Asset
Classification Committee meets quarterly to review the Bank's loan portfolio and
determine which loans should be placed on a "watch-list" of potential problem
loans which are considered to have more than normal credit risk. Currently,
general loss allowances (up to 1.25% of risk-based assets) established to cover
possible losses related to assets classified substandard or doubtful may be
included in determining an institution's regulatory capital, while specific
valuation allowances for loan losses do not qualify as regulatory capital. See
"Regulation -- Regulatory Capital Requirements." OTS examiners may disagree with
the insured institution's classifications and amounts reserved. If an
institution does not agree with an examiner's classification of an asset, it may
appeal this determination to the OTS. At June 30, 1998, total non-accrual and 90
days past due loans and other non-performing assets were $3.4 million, of which
amount approximately $3.3 million were classified as substandard and $23,000
were classified as loss. For additional information, see " -- Non-Performing
Loans and Other Problem Assets" and Note 4 of Notes to Consolidated Financial
Statements.
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. It is management's policy to maintain an
adequate allowance for loan losses based on, among other things, the Bank's and
the industry's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality. The
Bank increases its allowance for loan losses by charging provisions for possible
loan losses against the Bank's income.
General allowances are made pursuant to management's assessment of risk
in the Bank's loan portfolio as a whole. Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loan.
Management continues to actively monitor the Bank's asset quality and to charge
off loans against the allowance for loan losses when appropriate or to provide
specific loss reserves when necessary. Although management believes it uses the
best information available to make determinations with respect
11
<PAGE> 12
to the allowance for loan losses, future adjustments may be necessary if
economic conditions differ substantially from the economic conditions in the
assumptions used in making the initial determinations.
The following table summarizes the activity in the allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.................... $2,675 $2,565 $2,402 $2,075 $2,738
------ ------ ------ ------ ------
Charge-offs:
Mortgage loans................................ 238 174 241 77 140
Consumer loans (1)............................ 0 24 24 18 23
------ ------ ------ ------ ------
Total charge-offs........................... 238 198 265 95 163
------ ------ ------ ------ ------
Recoveries:
Mortgage loans................................ 4 117 5 4 0
Consumer loans (1)............................ 0 4 6 2 0
------ ------ ------ ------ ------
Total recoveries............................ 4 121 11 6 0
------ ------ ------ ------ ------
Net charge-offs................................. 234 77 254 89 163
------ ------ ------ ------ ------
Transfer to mortgage banking reserve............ 0 0 0 0 500
Provision charged to income..................... 246 187 417 416 0
------ ------ ------ ------ ------
Balance at end of year.......................... $2,687 $2,675 $2,565 $2,402 $2,075
====== ====== ====== ====== ======
Ratio of net charge-offs during
the year to average loans
outstanding during the year................... 0.0% 0.0% 0.0% 0.0% 0.1%
====== ====== ====== ====== ======
- ---------------------
(1) Consists primarily of mobile home loans.
</TABLE>
12
<PAGE> 13
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. The allocation of the allowance
to each category is not necessarily indicative of future losses and does not
restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
AT JUNE 30,
1998 1997 1996
------------------------ ------------------------ ------------------------
% OF LOANS IN % OF LOANS IN % OF LOANS IN
CATEGORY TO CATEGORY TO CATEGORY TO
TOTAL NET LOANS TOTAL NET LOANS TOTAL NET LOANS
AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Single-family................. $ 925 57.19% $ 899 56.19% $ 977 53.49%
Multi-family.................. 203 8.44% 291 9.00% 163 10.51%
Commercial.................... 1,227 25.19% 990 24.54% 968 24.71%
Land.......................... 230 8.16% 361 9.26% 210 10.52%
Unallocated................... 0 0.00% 0 0.00% 123 0.00%
------ ------- ------ ------- ------ -------
Total mortgage loans........ $2,585 98.98% $2,541 98.99% $2,441 99.23%
====== ======= ====== ======= ====== =======
Consumer loans (1).............. 102 1.02% 134 1.01% 124 0.77%
------ ------- ------ ------ -------
Total allowance for
loan losses................. $2,687 100.00% $2,675 100.00% $2,565 100.00%
====== ======= ====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
% OF LOANS IN % OF LOANS IN
CATEGORY TO CATEGORY TO
TOTAL NET LOANS TOTAL NET LOANS
AMOUNT OUTSTANDING AMOUNT OUTSTANDING
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Mortgage Loans:
Single-family................. $ 857 54.27% $ 743 50.34%
Multi-family.................. 295 15.36% 188 15.91%
Commercial.................... 940 22.42% 636 25.03%
Land.......................... 154 7.11% 168 7.75%
Unallocated................... 0 0.00% 109 0.00%
------ ------- ------ -------
Total mortgage loans........ $2,246 99.16% $1,844 99.03%
====== ======= ====== =======
Consumer loans (1).............. 156 0.84% 231 0.97%
------ ------- ------ -------
Total allowance for
loan losses................. $2,402 100.00% $2,075 100.00%
====== ======= ====== =======
</TABLE>
- ---------------
(1) Consists of property improvement loans and mobile home loans.
13
<PAGE> 14
INVESTMENT ACTIVITIES
Park View Federal is required under federal regulations to maintain a
minimum amount of liquid assets, which can be invested in specified short-term
securities, and is also permitted to make certain other investments. See
"Regulation -- Liquidity Requirements". Park View Federal maintains a liquidity
portfolio well in excess of the amount required to satisfy regulatory
requirements. The Bank's liquidity ratio of 13.4% at June 30, 1998 exceeded the
4% regulatory requirement. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives, management's judgment as
to the attractiveness of the yields then available in relation to other
opportunities, its expectations of the level of yield that will be available in
the future and its projections as to the short-term demand for funds to be used
in the Bank's loan origination and other activities.
Park View Federal's investment policy currently allows for investment
in various types of liquid assets, including United States Government and Agency
securities, time deposits at the FHLB of Cincinnati, certificates of deposit or
bankers' acceptances at other federally insured depository institutions and
mortgage-backed securities. The general objective of Park View Federal's
investment policy is to maximize returns without compromising liquidity or
creating undue credit or interest rate risk. In accordance with the investment
policy, at June 30, 1998, Park View Federal had investments in agency notes,
federal funds sold, FHLB of Cincinnati stock and interest-bearing deposits in
other financial institutions.
The Bank reports its investments, other than marketable equity
securities and securities available for sale, at cost as adjusted for discounts
and unamortized premiums. The Bank has the intent and ability and generally
holds all securities until maturity. Any FHLMC mortgage-backed securities
created from loans originated by the Bank for sale will be designated available
for sale. For additional information see Notes 1 and 2 of Notes to Consolidated
Financial Statements.
At present, management is not aware of any conditions or circumstances
which could impair its ability to hold its remaining securities to maturity.
The following table sets forth the carrying value of the Bank's
securities portfolio, short-term investments and FHLB of Cincinnati stock at the
dates indicated. At June 30, 1998, the fair market values of the Bank's
securities portfolio was $27.8 million.
<TABLE>
<CAPTION>
AT JUNE 30,
1998 1997 1996
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Investment securities:
U.S. Government and agency securities............ $27,800 $13,995 $14,094
------- ------- -------
Total securities............................. 27,800 13,995 14,094
Interest-bearing deposits.......................... 394 445 245
Federal funds sold................................. 20,375 1,375 6,875
FHLB of Cincinnati stock........................... 3,508 2,762 1,880
------- ------- -------
Total investments.............................. $52,077 $18,577 $23,094
======= ======= =======
</TABLE>
14
<PAGE> 15
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Bank's securities at June 30,
1998.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-------------------------------------------------------------------------------------------
ONE YEAR ONE TO FIVE FIVE TO 10 MORE THAN
OR LESS YEARS YEARS 10 YEARS
------------------ ------------------- ------------------ --------------------
FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency securities.... $ 5,000 6.36% $13,000 6.33% $ 9,800 6.42% $ 0 0.00%
Deposits(1)........... 20,769 5.51% 0 0.00% 0 0.00% 0 0.00%
FHLB stock............ 0 0.00% 0 0.00% 0 0.00% 3,508 7.25%
------- ------- ------- -------
Total............... $25,769 5.67% $13,000 6.33% $ 9,800 6.42% $ 3,508 7.25%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
----------------------------
TOTAL SECURITIES
----------------------------
FAIR MARKET AVERAGE
VALUE VALUE YIELD
------ ----- -----
<S> <C> <C> <C>
U.S. Government and
agency securities.... $27,800 $27,763 6.37%
Deposits(1)........... 20,769 20,769 5.51%
FHLB stock............ 3,508 3,508 7.25%
------- -------
Total............... $52,077 $52,040 6.08%
======= =======
</TABLE>
- ---------------
(1) Includes interest-bearing deposits at other financial institutions and
federal funds sold.
15
<PAGE> 16
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for
lending, investment activities and general operational purposes. In addition to
deposits, Park View Federal derives funds from loan principal and interest
repayments, maturities of securities and interest payments thereon. Although
loan repayments are a relatively stable source of funds, deposit inflows and
outflows are significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds, or on a longer term basis for general
operational purposes.
DEPOSITS. The Bank attracts deposits principally from within its
primary market area by offering a variety of deposit instruments, including
checking accounts, money market accounts, regular savings accounts and
certificates of deposit which range in maturity from seven days to four years.
Deposit terms vary according to the minimum balance required, the length of time
the funds must remain on deposit and the interest rate. Maturities, terms,
service fees and withdrawal penalties for its deposit accounts are established
by the Bank on a periodic basis. Park View Federal generally reviews its deposit
mix and pricing on a weekly basis. In determining the characteristics of its
deposit accounts, Park View Federal considers the rates offered by competing
institutions, funds acquisition and liquidity requirements, growth goals and
federal regulations. The Bank does not accept brokered deposits due to the
volatility and rate sensitivity of such deposits.
Park View Federal competes for deposits with other institutions in its
market area by offering deposit instruments that are competitively priced and
providing customer service through convenient and attractive offices,
knowledgeable and efficient staff and hours of service that meet customers'
needs. To provide additional convenience, Park View Federal participates in MAC
(money access card) Automated Teller Machine networks at locations throughout
Ohio and other participating states, through which customers can gain access to
their accounts at any time.
The Bank's deposits have remained stable with moderate growth
experienced during the fiscal year ended June 30, 1998. Deposit balances
totalled $344.3 million, $288.3 million, and $271.0 million at the fiscal years
ended June 30, 1998, 1997, and 1996 respectively.
Deposits in the Bank as of June 30, 1998 were represented by the
various programs described below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PERCENTAGE
INTEREST MINIMUM BALANCE IN OF TOTAL
RATE CATEGORY BALANCE THOUSANDS DEPOSITS
- ------- -------- ------- ---------- ----------
<S> <C> <C> <C> <C>
2.00% NOW accounts $ 50 $ 17,570 5.10%
2.75% Passbook statement accounts 5 31,844 9.25%
3.88% Money market accounts 1,000 7,187 2.09%
0.00% Non-interest-earning demand accounts 50 6,262 1.82%
-------- -------
$ 62,863 18.26%
-------- -------
CERTIFICATES OF DEPOSIT
-----------------------
5.62% 3 months or less 500 72,027 20.93%
5.64% 3 - 6 months 500 35,562 10.33%
5.95% 6 - 12 months 500 103,971 30.20%
6.45% 1 - 3 years 500 66,006 19.18%
6.25% More than three years 500 3,800 1.10%
-------- -------
5.95% Total certificates of deposit $281,366 81.74%
-------- -------
5.31% Total deposits $344,229 100.00%
======== =======
</TABLE>
16
<PAGE> 17
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30, 1998 AT JUNE 30, 1997
------------------------------------- --------------------------------------
Increase Increase
(Decrease) (Decrease)
% of From Prior % of From Prior
Balance Deposits Year Balance Deposits Year
------- -------- --------- -------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW checking (1)........................ $ 23,832 6.92% $ 3,556 $ 20,276 7.03% $ 220
Super NOW checking and money market..... 7,187 2.09% 1,879 5,308 1.84% 29
Passbook and regular savings............ 31,844 9.25% 258 31,586 10.96% (297)
Jumbo certificates...................... 57,328 16.65% 13,839 43,489 15.09% 11,566
Other certificates...................... 185,045 53.76% 34,060 150,985 52.38% 4,945
Keogh accounts.......................... 209 0.06% (1,789) 1,998 0.69% (263)
IRA accounts............................ 38,784 11.27% 4,156 34,628 12.01% 1,025
-------- ------- ------- -------- -------
Total............................... $344,229 100.00% $55,959 $288,270 100.00% $17,225
======== ======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
----------------------
% of
Balance Deposits
------- --------
<S> <C> <C>
NOW checking (1)........................ $ 20,056 7.40%
Super NOW checking and money market..... 5,279 1.95%
Passbook and regular savings............ 31,883 11.76%
Jumbo certificates...................... 31,923 11.78%
Other certificates...................... 146,040 53.88%
Keogh accounts.......................... 2,261 0.83%
IRA accounts............................ 33,603 12.40%
--------
Total............................... $271,045 100.00%
======== =======
</TABLE>
- -------------
(1) Includes non-interest-bearing demand accounts.
The following table sets forth the average balances and average
interest rates based on month-end balances for interest-bearing demand deposits
and time deposits during the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------------
1998 1997
---------------------------------------- --------------------------------------
INTEREST- INTEREST-
BEARING BEARING
DEMAND SAVINGS TIME DEMAND SAVINGS TIME
DEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Average balance........ $21,628 $31,634 $264,348 $19,631 $31,549 $218,301
Average rate paid...... 2.77% 2.75% 5.90% 2.70% 2.75% 5.75%
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
1996
----------------------------------------
INTEREST-
BEARING
DEMAND SAVINGS TIME
DEPOSITS DEPOSITS DEPOSITS
-------- -------- --------
<S> <C> <C> <C>
Average balance........ $17,703 $31,399 $221,872
Average rate paid...... 2.34% 2.76% 6.13%
</TABLE>
17
<PAGE> 18
The rates currently paid on certificates maturing within one year or less are
lower than the rates currently being paid on similar certificates of deposit
maturing thereafter. The Bank will seek to retain these deposits to the extent
consistent with its long-term objective of maintaining positive interest rate
spreads. Depending upon interest rates existing at the time such certificates
mature, the Bank's cost of funds may be significantly affected by the rollover
of these funds. A decrease in such cost of funds, if any, may have a material
impact on the Bank's operations. To the extent such deposits do not rollover,
the Bank may, if necessary, use other sources of funds, including borrowings
from the FHLB of Cincinnati, to replace such deposits. See "-- Borrowings."
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1998.
<TABLE>
<CAPTION>
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
(IN THOUSANDS)
<S> <C>
Three months or less............................................... $19,598
Three through six months........................................... 7,542
Six through 12 months.............................................. 22,351
Over 12 months..................................................... 14,666
-------
Total..................................................... $64,157
=======
</TABLE>
18
<PAGE> 19
BORROWINGS. Savings deposits historically have been the primary source
of funds for the Bank's lending, investments and general operating activities.
The Bank is authorized, however, to use advances from the FHLB of Cincinnati to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Cincinnati functions as a central reserve bank
providing credit for savings institutions and certain other member financial
institutions. As a member of the FHLB System, Park View Federal is required to
own stock in the FHLB of Cincinnati and is authorized to apply for advances.
Advances are pursuant to several different programs, each of which has its own
interest rate and range of maturities. Park View Federal has a Blanket Agreement
for advances with the FHLB under which the Bank may borrow up to 50% of assets
subject to normal collateral and underwriting requirements. The Bank currently
has two commitments with the Federal Home Loan Bank of Cincinnati for flexible
lines of credit, referred to as a cash management advance and a REPO advance, in
the amounts of $20 million and $40 million respectively, that were not drawn
upon at June 30, 1998. Advances from the FHLB of Cincinnati are secured by the
Bank's stock in the FHLB of Cincinnati and other eligible assets. For additional
information please refer to Note 8 of Notes to Consolidated Financial
Statements.
The following table sets forth certain information regarding the Bank's
advances from the FHLB of Cincinnati for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1998 1997 1996
--------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Maximum amount outstanding at any
month end........................................... $67,852 $54,412 $27,482
Approximate average outstanding balance............... 40,240 41,083 10,623
Approximate weighted average rate
paid (1)............................................ 5.84% 5.78% 5.13%
- ---------------------
(1) Computed from average monthly balances.
</TABLE>
The weighted average rates outstanding on FHLB advances was 5.71%,
5.83% and 5.46% at June 30, 1998, 1997 and 1996, respectively.
At June 30, 1998, 1997, and 1996, PVFSC had one note payable for $1.1
million, $1.7 million and $1.7 million, respectively, collateralized by real
estate and guaranteed by PVF. At June 30, 1997 and 1996 PVF had one note payable
for $0.6 million and $1.0 million, respectively, collateralized by mortgage
servicing rights. See Note 9 of Notes to Consolidated Financial Statement.
SUBSIDIARY ACTIVITIES
Savings associations are reguired to deduct from regulatory capital
calculations their investment in and extensions of credit to service
corporations engaged in activities not permissible for a national bank. The land
acquisition and development activities of PVFSC are not permissible for national
banks. As a result, the Bank's net investment in and extensions of credit to
PVFSC must be deducted from capital in their entirety. It was for this reason
that PVF purchased the stock of PVFSC from Park View Federal. The effect of this
transaction to the Bank was to increase GAAP capital by $785,000 and eliminate
the Bank's net investment in and deduction for PVF Service Corp.
from its books, thus increasing regulatory capital by $1.2 million.
The Bank is required to give the FDIC and the Director of OTS 30 days
prior notice before establishing or acquiring a new subsidiary or commencing a
new activity through an existing subsidiary. Both the FDIC and the Director of
OTS have the authority to prohibit the initiation or to order the termination of
subsidiary activities determined to pose a risk to the safety or soundness of
the institution.
As a federally chartered savings bank, Park View Federal is permitted
to invest an amount equal to 2% of its assets in subsidiaries, with an
additional investment of 1% of assets where such investment serves primarily
community, inner-city and community development purposes. Under such
limitations, as of June 30, 1998, Park
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<PAGE> 20
View Federal was authorized to invest up to approximately $13.0 million in the
stock of or loans to subsidiaries, including the additional 1% investment for
community inner-city and community development purposes. Institutions meeting
their applicable minimum regulatory capital requirements may invest up to 50% of
their regulatory capital in conforming first mortgage loans to subsidiaries in
which they own 10% or more of the capital stock. Park View Federal currently
exceeds its regulatory capital requirements.
PVF has two subsidiaries, Park View Federal and PVFSC, which is engaged
in the activities of land acquisition and development. At June 30, 1998, PVFSC
had an investment in two properties aggregating $938,000, described below. In
addition PVF has three non-active subsidiaries, PVF Community Development Corp.,
PVF Mortgage Corp., and Mid Pines Land Company, which have been chartered for
future activity.
MID PINES. Mid-Pines consists of two adjacent parcels of land
aggregating 257 acres in Solon, Ohio. In 1983, PVFSC acquired a 150 acre parcel
from the Bank, which property the Bank acquired in foreclosure. The 150 acre
parcel included 85 acres of vacant land and a 65 acre golf course. PVFSC
acquired the additional 107 acre parcel of land in 1985 for $150,000. PVFSC
acquired the properties as an investment. Mid Pines had a net book value of
$903,000 at June 30, 1998.
In March of 1998 PVF Service Corp. entered into an option agreement
with Cameratta Properties Limited for the purchase of its 257 acre parcel of
land in Solon, Ohio for $5 million. The option agreement provides for the
payment of a non-refundable deposit of $500,000. If the buyer for any reason
fails to complete the purchase within one year, the buyer would forfeit the
deposit. Completion of the purchase is dependent upon voter approval in
November, 1998 of the planned development project. If the purchase is completed
as provided in the contract, an after tax gain of approximately $2.5 million is
expected.
DEER LAWN FARMS. At June 30, 1998, Deer Lawn Farms, Solon, Ohio, had a
net book value of $35,000. PVF estimates the fair market value of the two
remaining lots to approximate book value at June 30, 1998.
COMPETITION
The Bank faces strong competition both in originating real estate and
other loans and in attracting deposits. The Bank competes for real estate and
other loans principally on the basis of interest rates and the loan fees it
charges, the type of loans it originates and the quality of services it provides
to borrowers. Its competition in originating real estate loans comes primarily
from other savings institutions, commercial banks and mortgage bankers making
loans secured by real estate located in the Bank's market area.
The Bank attracts all its deposits through its branch offices primarily
from the communities in which those branch offices are located. Consequently,
competition for deposits is principally from other savings institutions,
commercial banks, credit unions and brokers in these communities. Park View
Federal competes for deposits and loans by offering a variety of deposit
accounts at competitive rates, a wide array of loan products, convenient
business hours and branch locations, a commitment to outstanding customer
service and a well-trained staff. In addition, the Bank believes it has
developed strong relationships with local businesses, realtors, builders, and
the public in general, giving it an excellent image in the community.
EMPLOYEES
As of June 30, 1998, PVF and its subsidiaries had 110 full-time
employees and 27 part-time employees, none of whom was represented by a
collective bargaining agreement. The Company believes it enjoys a good
relationship with its personnel.
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<PAGE> 21
REGULATION OF THE BANK
GENERAL. As a savings institution, Park View Federal is subject to
extensive regulation by the OTS, and its deposits are insured by the SAIF, which
is administered by the FDIC. The lending activities and other investments of the
Bank must comply with various federal regulatory requirements. The OTS
periodically examines the Bank for compliance with various regulatory
requirements. The FDIC also has the authority to conduct special examinations of
SAIF-insured savings institutions. The Bank must file reports with OTS
describing its activities and financial condition. The Bank is also subject to
certain reserve requirements promulgated by the Federal Reserve Board. This
supervision and regulation is intended primarily for the protection of
depositors. Certain of these regulatory requirements are referred to below or
elsewhere herein.
REGULATORY CAPITAL REQUIREMENTS. Under OTS regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and "total
capital," a combination of core and "supplementary" capital, equal to 8.0% of
"risk-weighted" assets. In addition, the OTS has adopted regulations which
impose certain restrictions on savings associations that have a total risk-based
capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets
of less than 4.0% (or 3.0% if the institution is rated composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definitions as core capital. See "-- Prompt Corrective Regulatory
Action." The Bank is in compliance with all applicable regulatory capital
requirements.
In determining compliance with the risk-based capital requirement, a
savings institution calculates its total capital, which may include both core
capital and supplementary capital, provided the amount of supplementary capital
used does not exceed the savings institution's core capital. Supplementary
capital is defined to include certain preferred stock issues, nonwithdrawable
accounts and pledged deposits that do not qualify as core capital, certain
approved subordinated debt, certain other capital instruments and a portion of
the savings institution's general loss allowances.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighting system, single-family first mortgages not more than
90 days past due with loan-to-value ratios under 80%, and multi-family mortgages
(maximum 36 dwelling units) with loan-to-value ratios under 80% and average
annual occupancy rates over 80%, are assigned a risk weight of 50%. Consumer
loans, residential construction loans and commercial real estate loans are
assigned a risk weight of 100%. Mortgage-backed securities issued, or fully
guaranteed as to principal and interest, by the FNMA or FHLMC are assigned a 20%
risk weight. Cash and United States Government securities backed by the full
faith and credit of the United States Government are given a 0% risk weight.
Under the risk-based capital requirement, a savings institution is required to
maintain total capital, consisting of core capital plus certain other
components, including general valuation allowances, equal to 8.0% of
risk-weighted assets. At June 30, 1998 the Bank's risk-weighted assets were
$313.9 million, and its total regulatory capital was $34.3 million, or 10.9% of
risk-weighted assets.
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<PAGE> 22
The table below presents the Bank's capital position at June 30, 1998,
relative to its various minimum regulatory capital requirements.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
----------------------
PERCENT OF
AMOUNT ASSETS (1)
------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tangible Capital........................... $31,727 7.21%
Tangible Capital Requirement............... 6,601 1.50
------- -----
Excess .................................. $25,126 5.71%
======= =====
Tier 1/Core Capital........................ $31,727 7.21%
Tier 1/Core Capital Requirement............ 17,603 4.00
------- -----
Excess .................................. $14,124 3.21%
======= =====
Tier 1 Risk-Based Capital.................. $31,727 10.11%
Tier 1 Risk-Based Capital Requirement...... 12,557 4.00
------- -----
Excess .................................. $19,170 6.11%
======= =====
Risk-Based Capital......................... $34,324 10.93%
Risk-Based Capital Requirement............. 25,113 8.00
------- -----
Excess................................... $ 9,211 2.93%
======= =====
-------------
(1) Based upon adjusted total assets for purposes of the tangible,
core and Tier 1 capital requirements, and risk-weighted assets
for purposes of the Tier 1 risk-based and risk-based capital
requirements.
</TABLE>
OTS risk-based capital regulations require savings institutions with
more than a "normal" level of interest rate risk to maintain additional total
capital. A savings institution's interest rate risk will be measured in terms of
the sensitivity of its "net portfolio value" to changes in interest rates. Net
portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings institution
will be considered to have a "normal" level of interest rate risk exposure if
the decline in its net portfolio value after an immediate 200 basis point
increase or decrease in market interest rates (whichever results in the greater
decline) is less than two percent of the current estimated economic value of its
assets. A savings institution with a greater than normal interest rate risk will
be required to deduct from total capital, for purposes of calculating its
risk-based capital requirement, an amount (the "interest rate risk component")
equal to one-half the difference between the institution's measured interest
rate risk and the normal level of interest rate risk, multiplied by the economic
value of its total assets. At June 30, 1998 the Bank had no interest rate risk
component deduction from total capital.
The OTS has proposed an amendment to its capital regulations
establishing a minimum 3% core capital ratio for savings institutions in the
strongest financial and managerial condition. For all other savings
associations, the minimum core capital ratio would be 3% plus at least an
additional 100 to 200 basis points. In determining the amount of additional
capital, the OTS would assess both the quality of risk management systems and
the level of overall risk in each individual savings association through the
supervisory process on a case-by-case basis. As a result, the exact effect on
the Bank cannot be predicted at this time.
In addition to requiring generally applicable capital standards for
savings institutions, the Director of OTS may establish the minimum level of
capital for a savings institution at such amount or at such ratio of
capital-to-assets as the Director determines to be necessary or appropriate for
such institution in light of the particular circumstances of the institution.
The Director of OTS may treat the failure of any savings institution to maintain
capital at or above such level as an unsafe or unsound practice and may issue a
directive requiring any savings institution which fails to maintain capital at
or above the minimum level required by the Director to submit and adhere to a
plan for increasing capital. Such an order may be enforced in the same manner as
an order issued by the FDIC.
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<PAGE> 23
PROMPT CORRECTIVE REGULATORY ACTION. The federal banking regulators are
required to take prompt corrective action if an insured depository institution
fails to satisfy certain minimum capital requirements. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees if the institution would thereafter
fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries.
Under implementing regulations, the federal banking regulators will
measure a depository institution's capital adequacy on the basis of the
institution's total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). Under the regulations, a savings association
that is not subject to an order or written directive to meet or maintain a
specific capital level will be deemed "well capitalized" if it also has: (i) a
total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based
capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater.
An "adequately capitalized" savings association is a savings association that
does not meet the definition of well capitalized and has: (i) a total risk-based
capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0%
or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if
the savings association has a composite 1 CAMEL rating). An "undercapitalized
institution" is a savings association that has (i) a total risk-based capital
ratio less than 8.0%; or (ii) a Tier 1 risk-based capital ratio of less than
4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if the association
has a composite 1 CAMEL rating). A "significantly undercapitalized" institution
is defined as a savings association that has: (i) a total risk-based capital
ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital ratio of less than
3.0%; or (iii) a leverage ratio of less than 3.0%. A "critically
undercapitalized" savings association is defined as a savings association that
has a ratio of core capital to total assets of less than 2.0%. The OTS may
reclassify a well capitalized savings association as adequately capitalized and
may require an adequately capitalized or undercapitalized association to comply
with the supervisory actions applicable to associations in the next lower
capital category if the OTS determines, after notice and an opportunity for a
hearing, that the savings association is in an unsafe or unsound condition or
that the association has received and not corrected a less-than-satisfactory
rating for any CAMEL rating category. The Bank is classified as "well
capitalized" under these regulations.
SAFETY AND SOUNDNESS STANDARDS. Interagency Guidelines Establishing
Standards for Safety and Soundness require savings institutions to maintain
internal controls and information systems and internal audit systems that are
appropriate for the size, nature and scope of the institution's business. The
guidelines also establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure, and asset growth. The guidelines
further provide that savings institutions should maintain safeguards to prevent
the payment of compensation, fees and benefits that are excessive or that could
lead to material financial loss, and should take into account factors such as
comparable compensation practices at comparable institutions. If the OTS
determines that a savings institution is not in compliance with the safety and
soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A savings institution must
submit an acceptable compliance plan to the OTS within 30 days of receipt of a
request for such a plan. Failure to submit or implement a compliance
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<PAGE> 24
plan may subject the institution to regulatory sanctions. Additionally, a
savings institution should maintain systems, commensurate with its size and the
nature and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
Management believes that the Bank meets substantially all the standards adopted
in the interagency guidelines.
FEDERAL HOME LOAN BANK SYSTEM. Park View Federal is a member of the
FHLB System, which consists of 12 regional FHLBs subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The FHLBs provide a
central credit facility primarily for member institutions. As a member of the
FHLB System, the Bank is required to acquire and hold shares of capital stock in
the FHLB of Cincinnati in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB of Cincinnati, whichever is greater. The Bank was in compliance
with this requirement with an investment in FHLB of Cincinnati stock at June 30,
1998 of $3.5 million.
The FHLB of Cincinnati serves as a reserve or central bank for its
member institutions within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB of Cincinnati.
Long-term advances may be made only for the purpose of providing funds for
residential housing finance. At June 30, 1998, the Bank had $46.3 million in
advances outstanding from the FHLB of Cincinnati. See " -- Deposit Activity and
Other Sources of Funds -- Borrowings."
LIQUIDITY REQUIREMENT. Park View Federal generally is required to
maintain average daily balances of liquid assets (generally, cash, certain time
deposits, bankers' acceptances, highly rated corporate debt and commercial
paper, securities of certain mutual funds, and specified United States
government, state or federal agency obligations) equal to 4% of its net
withdrawable accounts plus short-term borrowings either at the end of the
preceding calendar quarter or on an average daily basis during the preceding
quarter. Park View Federal also is required to maintain sufficient liquidity to
ensure its safe and sound operation. Monetary penalties may be imposed for
failure to meet liquidity requirements. The average daily balance of liquid
assets ratio of Park View Federal at June 30, 1998 was 13.4%.
QUALIFIED THRIFT LENDER TEST. A savings association that does not meet
the Qualified Thrift Lender test ("QTL Test") must either convert to a bank
charter or comply with the following restrictions on its operations: (i) the
institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the institution shall be restricted
to those of a national bank; (iii) the institution shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the institution
ceases to be a Qualified Thrift Lender, it must cease any activity, and not
retain any investment not permissible for a national bank and immediately repay
any outstanding FHLB advances (subject to safety and soundness considerations).
To meet the QTL test, an institution's "Qualified Thrift Investments"
must total at least 65% of "portfolio assets." Under OTS regulations, portfolio
assets are defined as total assets less intangibles, property used by a savings
institution in its business and liquidity investments in an amount not exceeding
20% of assets. Qualified Thrift Investments consist of (i) loans, equity
positions or securities related to domestic, residential real estate or
manufactured housing, and educational, small business and credit card loans,
(ii) 50% of the dollar amount of residential mortgage loans subject to sale
under certain conditions, and (iii) stock in an FHLB or the FHLMC or FNMA. In
addition, subject to a 20% of portfolio assets limit, savings institutions are
able to treat as Qualified Thrift Investments 200% of their investments in loans
to finance "starter homes" and loans for construction, development or
improvement of housing and community service facilities or for financing small
businesses in "credit-needy" areas. In order to maintain QTL status, the savings
institution must maintain a weekly average
24
<PAGE> 25
percentage of Qualified Thrift Investments to portfolio assets equal to 65% on a
monthly average basis in nine out of 12 months. A savings institution that fails
to maintain QTL status will be permitted to requalify once, and if it fails the
QTL test a second time, it will become immediately subject to all penalties as
if all time limits on such penalties had expired. Failure to qualify as a QTL
results in a number of sanctions, including the imposition of certain operating
restrictions imposed on national banks and a restriction on obtaining additional
advances from the FHLB System. At June 30, 1998, the Bank qualified as a QTL.
UNIFORM LENDING STANDARDS. Under OTS regulations, savings institutions
must adopt and maintain written policies that establish appropriate limits and
standards for extensions of credit that are secured by liens or interests in
real estate or are made for the purpose of financing permanent improvements to
real estate. These policies must establish loan portfolio diversification
standards, prudent underwriting standards, including loan-to-value limits, that
are clear and measurable, loan administration procedures and documentation,
approval and reporting requirements. The real estate lending policies must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the federal
bank regulators.
The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits; (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multifamily or other nonresidential property, the supervisory limit is 80%; (iv)
for loans for the construction of one-to-four family properties, the supervisory
limit is 85%; and (v) for loans secured by other improved property (e.g.,
farmland, completed commercial property and other income-producing property
including non-owner-occupied, one-to-four family property), the limit is 85%.
Although no supervisory loan-to-value limit has been established for
owner-occupied, one-to-four family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
The Interagency Guidelines state that it may be appropriate in
individual cases to originate or purchase loans with loan-to-value ratios in
excess of the supervisory loan-to-value limits, based on the support provided by
other credit factors. The aggregate amount of loans in excess of the supervisory
loan-to-value limits, however, should not exceed 100% of total capital and the
total of such loans secured by commercial, agricultural, multifamily and other
non-one-to-four family residential properties should not exceed 30% of total
capital. The supervisory loan-to-value limits do not apply to certain categories
of loans including loans insured or guaranteed by the U.S. government and its
agencies or by financially capable state, local or municipal governments or
agencies, loans backed by the full faith and credit of a state government, loans
that are to be sold promptly after origination without recourse to a financially
responsible party, loans that are renewed, refinanced or restructured without
the advancement of new funds, loans that are renewed, refinanced or restructured
in connection with a workout, loans to facilitate sales of real estate acquired
by the institution in the ordinary course of collecting a debt previously
contracted and loans where the real estate is not the primary collateral.
The Bank believes that its current lending policies conform to the
Interagency Guidelines.
DEPOSIT INSURANCE. The Bank is required to pay assessments, based on a
percentage of its insured deposits, to the FDIC for insurance of its deposits by
the FDIC through the Savings Association Insurance Fund ("SAIF") of the FDIC.
The FDIC is required to set semi-annual assessments for SAIF-insured
institutions at a level necessary to maintain the designated reserve ratio of
the SAIF at 1.25% of estimated insured deposits, or at a higher percentage of
estimated insured deposits that the FDIC determines to be justified for that
year by circumstances indicating a significant risk of substantial future losses
to the SAIF.
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<PAGE> 26
Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations. See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority, and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
In past semi-annual periods, institutions with SAIF-assessable
deposits, like the Bank, have been required to pay higher deposit insurance
premiums than institutions with deposits insured by the BIF. In order to
recapitalize the SAIF and address the premium disparity, the Deposit Insurance
Funds Act of 1996 authorized the FDIC to impose a one-time special assessment on
institutions with SAIF-assessable deposits, based on the amount determined by
the FDIC to be necessary to increase the reserve levels of the SAIF to the
designated reserve ratio of 1.25% of insured deposits. Institutions were
assessed at the rate of 65.7 basis points based on the amount of their
SAIF-assessable deposits as of March 31, 1995. As a result of the special
assessment the Bank incurred a pre-tax expense of $1,707,867, during the fiscal
year ended June 30, 1997.
The FDIC has lowered the regular semi-annual SAIF assessment rates by
establishing a base assessment rate schedule ranging from 4 to 31 basis points
effective October 1, 1996. Until December 31, 1999, however, SAIF-insured
institutions will be required to pay assessments to the FDIC at the rate of 6.44
basis points to help fund interest payments on certain bonds issued by the
Financing Corporation ("FICO"), an agency of the federal government established
to finance takeovers of insolvent thrifts. During this period, BIF members will
be assessed for these obligations at the rate of 1.3 basis points. After
December 31, 1999, both BIF and SAIF members will be assessed at the same rate
for FICO payments.
SAIF members are generally prohibited from converting to BIF, also
administered by the FDIC, or merging with or transferring assets to a BIF member
before the date on which the SAIF first meets or exceeds the designated reserve
ratio of 1.25% of insured deposits. However, the FDIC may approve such a
transaction in the case of a SAIF member in default or if the transaction
involves an insubstantial portion of the deposits of each participant. In
addition, mergers, transfer of assets and assumptions of liabilities may be
approved by the appropriate bank regulator so long as deposit insurance premiums
continue to be paid to the SAIF for deposits attributable to the SAIF members,
plus an adjustment for the annual rate of growth of deposits in the surviving
bank without regard to subsequent acquisitions. Each depository institution
participating in a SAIF-to-BIF conversion transaction is required to pay an exit
fee to SAIF equal to 0.90% of the deposits transferred and an entrance fee to
BIF based on the current reserve ratio of the BIF. A savings institution is not
prohibited from adopting a commercial bank or savings bank charter if the
resulting bank remains a SAIF member.
DIVIDEND LIMITATIONS. Under OTS regulations, the Bank may not pay
dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of the conversion
of the bank from the mutual to stock form. In addition, savings institution
subsidiaries of savings and loan holding companies are required to give the OTS
30 days' prior notice of any proposed declaration of dividends to the holding
company.
Federal regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by the Bank. Under these regulations, a savings association that,
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<PAGE> 27
immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS regulation)
that is equal to or greater than the amount of its fully phased-in capital
requirements (a "Tier 1 Association") is generally permitted without OTS
approval to make capital distributions during a calendar year in an amount equal
to the greater of (i) 75% of net income for the previous four quarters or (ii)
100% of its net income to date during the calendar year plus an amount that
would reduce by one-half the amount by which its total capital to assets ratio
exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year. A savings association with total capital in
excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Association") is permitted to make capital
distributions without OTS approval of up to 75% of its net income for the
previous four quarters, less dividends already paid for such period depending on
the savings association's level of risk-based capital. A savings association
that fails to meet current minimum capital requirements (a "Tier 3 Association")
is prohibited from making any capital distributions without the prior approval
of the OTS. Tier 1 Associations that have been notified by the OTS that they are
in need of more than normal supervision will be treated as either a Tier 2 or
Tier 3 Association. At June 30, 1994, the Bank was a Tier 1 Association.
The Bank is prohibited from making any capital distributions if after
making the distribution, it would be undercapitalized as defined in the OTS'
prompt corrective action regulations. After consultation with the FDIC, the OTS
may permit a savings association to repurchase, redeem, retire or otherwise
acquire shares or ownership interests if the repurchase, redemption, retirement
or other acquisition: (i) is made in connection with the issuance of additional
shares or other obligations of the institution in at least an equivalent amount;
and (ii) will reduce the institution's financial obligations or otherwise
improve the institution's financial condition.
In addition to the foregoing, earnings of the Bank appropriated to bad
debt reserves and deducted for Federal income tax purposes are not available for
payment of cash dividends without payment of taxes at the then current tax rate
by the Bank on the amount of earnings removed from the reserves for such
distributions. See "Taxation." The Bank intends to make full use of this
favorable tax treatment afforded to the Bank and does not contemplate use of any
earnings of the Bank in a manner which would limit the Bank's bad debt deduction
or create federal tax liabilities.
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, a savings institution must maintain average daily reserves as follows: no
reserves are required on the first $4.7 million of transaction accounts,
reserves equal to 3% on the next $47.8 million of transaction accounts, plus 10%
on the remainder. These percentages are subject to adjustment by the Federal
Reserve Board. Because required reserves must be maintained in the form of vault
cash or in a noninterest-bearing account at a Federal Reserve Bank, the effect
of the reserve requirement is to reduce the amount of the institution's
interest-earning assets. At June 30, 1998, Park View Federal met its reserve
requirements.
INTERSTATE AND INTERINDUSTRY ACQUISITIONS. OTS regulations permit
federal associations to branch in any state or states of the United States and
its territories. Except in supervisory cases or when interstate branching is
otherwise permitted by state law or other statutory provision, a federal
association may not establish an out-of-state branch unless (i) the federal
association qualifies as a "domestic building and loan association" under
?7701(a)(19) of the Internal Revenue Code and the total assets attributable to
all branches of the association in the state would qualify such branches taken
as a whole for treatment as a domestic building and loan association and (ii)
such branch would not result in (a) formation of a prohibited multi-state
multiple savings and loan holding company or (b) a violation of certain
statutory restrictions on branching by savings association subsidiaries of
banking holding companies. Federal associations generally may not establish new
branches unless the association meets or exceeds minimum regulatory capital
requirements. The OTS will also consider the association's record of compliance
with the Community Reinvestment Act of 1977 in connection with any branch
application.
The Federal Reserve Board may permit the acquisition of a savings
institution by a bank holding company. In approving an application by a bank
holding company to acquire a savings institution, the Federal Reserve Board
27
<PAGE> 28
is prohibited from imposing restrictions on tandem operations of the subsidiary
savings institution and its holding company affiliates except as required under
Sections 23A and 23B of the Federal Reserve Act, as amended.
A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a BIF member
with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings association plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.
LOANS-TO-ONE-BORROWER LIMITATIONS. Under federal law, loans and
extensions of credit outstanding at one time to a person shall not exceed 15% of
the unimpaired capital and surplus of the savings association. Loans and
extensions of credit fully secured by certain readily marketable collateral may
represent an additional 10% of unimpaired capital and surplus. Applicable law
authorizes savings associations to make loans to one borrower, for any purpose,
in an amount not to exceed $500,000 or, by order of the Director of OTS, in an
amount not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and
surplus to develop residential housing, provided: (i) the purchase price of each
single-family dwelling in the development does not exceed $500,000; (ii) the
savings association is in compliance with the fully phased-in capital standards
of FIRREA; (iii) the loans comply with applicable loan-to-value requirements,
and; (iv) the aggregate amount of loans made under this authority does not
exceed 150% of unimpaired capital and surplus. FIRREA also authorizes a savings
association to make loans to one borrower to finance the sale of real property
acquired in satisfaction of debts in an amount up to 50% of unimpaired capital
and surplus.
TRANSACTIONS WITH AFFILIATES. Transactions between savings associations
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings association is any company or entity which
controls, is controlled by or is under common control with the savings
association. In a holding company context, the parent holding company of a
savings association and any companies which are controlled by such parent
holding company are affiliates of the savings association. Generally, Sections
23A and 23B (i) limit the extent to which the savings institution or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, and contain
an aggregate limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings association may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding companies, or
(ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings association.
Savings institutions are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to a director,
executive officer or greater than 10% stockholder of a savings association and
certain affiliated interests of the foregoing, may not exceed, together with all
other outstanding loans to such person and affiliated interests, the
association's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus) and all loans to such persons may
not exceed the institution's unimpaired capital and unimpaired surplus. Section
22(h) also prohibits loans, above amounts prescribed by the appropriate federal
banking agency, to directors, executive officers and greater than 10%
stockholders of a savings association, and their respective affiliates, unless
such loan is approved in advance by a majority of the board of directors of the
association with any "interested" director not participating in the voting. The
Federal Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval is required, as being
28
<PAGE> 29
the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further,
the Federal Reserve Board pursuant to Section 22(h) requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(h) also prohibits a depository institution from paying the overdrafts
of any of its executive officers or directors.
Savings institutions are also subject to the requirements and
restrictions of Section 22(g) of the Federal Reserve Act on loans to executive
officers and the restrictions of 12 U.S.C. ? 1972 on certain tying arrangements
and extensions of credit by correspondent banks. Section 22(g) of the Federal
Reserve Act requires that loans to executive officers of depository institutions
not be made on terms more favorable than those afforded to other borrowers,
requires approval for such extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
REGULATION OF THE COMPANY
GENERAL.
The company is a savings and loan holding company as defined by the
HOLA. As such, the Company is registered with the OTS and is subject to OTS
regulation, examination, supervision and reporting requirements. As a subsidiary
of a savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with the Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. The Board of Directors of the Company
presently intends to operate the Company as a unitary savings and loan holding
company. There are generally no restrictions on the activities of a unitary
savings and loan holding company. However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director of the OTS may impose such restrictions as deemed necessary to address
such risk including limiting: (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings and loan holding
companies, if the savings institution subsidiary of such a holding company fails
to meet the QTL test, then such unitary holding company shall also presently
become subject to the activities restrictions applicable to multiple holding
companies and, unless the savings institution requalifies as a QTL within one
year thereafter, register as, and become subject to the restrictions applicable
to a bank holding company. See "--Regulation of the Bank-- Qualified Thrift
Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and
29
<PAGE> 30
where each subsidiary savings institution meets the QTL test, the activities of
the Company and any of its subsidiaries (other than the Bank or other subsidiary
savings institutions) would thereafter be subject to further restrictions. Among
other things, no multiple savings and loan holding company or subsidiary thereof
which is not a savings institution shall commence or continue for a limited
period of time after becoming a multiple savings and loan holding company or
subsidiary thereof, any business activity, upon prior notice to, and no
objection by, the OTS, other than: (i) furnishing or performing management
services for a subsidiary savings institution; (ii) conducting an insurance
agency or escrow business; (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple holding companies; or (vii) unless
the Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies, those activities authorized by the Federal
Reserve Board as permissible for bank holding companies. Those activities
described in (vii) above must also be approved by the Director of the OTS prior
to being engaged in by a multiple holding company.
RESTRICTIONS ON ACQUISITIONS. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the Director of OTS, (i)
control of any other savings institution or savings and loan holding company or
substantially all the assets thereof or (ii) more than 5% of the voting shares
of a savings institution or holding company thereof which is not a subsidiary.
Under certain circumstances, a registered savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
the voting shares of an under-capitalized savings institution pursuant to a
"qualified stock issuance" without that savings institution being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company' other subsidiaries must have tangible capital
of at least 6-1/2% of total assets, there must not be more than one common
director or officer between the savings and loan holding company and the issuing
savings institution, and transactions between the savings institution and the
savings and loan holding company and any of its affiliates must conform to
Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval
of the Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may also acquire control of any savings institution, other
than a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
TAXATION
GENERAL
The Company and its subsidiaries currently file a consolidated federal
income tax return based on a fiscal year ending June 30. Consolidated returns
have the effect of eliminating intercompany distributions, including dividends,
from the computation of consolidated taxable income for the taxable year in
which the distributions occur.
FEDERAL INCOME TAXATION
Savings institutions are subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Code") in the same general manner as
other corporations. Prior to recent legislation, institutions such as the Bank
30
<PAGE> 31
which met certain definitional tests and other conditions prescribed by the Code
benefitted from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans were separated into "qualifying real
property loans," which generally were loans secured by interests in certain real
property, and nonqualifying loans, which were all other loans. The bad debt
reserve deduction with respect to nonqualifying loans was based on actual loss
experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans was based upon actual loss experience (the
"experience method") or a percentage of taxable income determined without regard
to such deduction (the "percentage of taxable income method"). The legislation
repealed the percentage of taxable income method of calculating the bad debt
reserve. The Bank has generally elected to use the method which has resulted in
the greatest deductions for federal income tax purposes.
Legislation that is effective for tax years beginning after December
31, 1995 requires institutions to recapture into taxable income over a six
taxable year period the portion of the tax loan loss reserve that exceeds the
pre-1988 tax loan loss reserve. The Bank has no such excess reserve. The Bank
will no longer be allowed to use the percentage of taxable income method for tax
loan loss provisions, but will be allowed to use the experience method of
accounting for bad debts. Beginning with the June 30, 1997 taxable year, the
Bank will be treated the same as a small commercial bank. Institutions with $500
million or more in assets will only be able to take a tax deduction when a loan
is actually charged off. Institutions with less than $500 million in assets will
still be permitted to make deductible bad debt additions to reserves, but only
using the experience method.
Earnings appropriated to the Bank's bad debt reserve and claimed as a
tax deduction are not available for the payment of cash dividends or for
distribution to stockholders (including distributions made on dissolution or
liquidation), unless the Bank includes the amount in taxable income, along with
the amount deemed necessary to pay the resulting federal income tax.
For taxable years beginning after December 31, 1986, the Tax Reform Act
of 1986 (the "Tax Reform Act") changed the corporate minimum tax from an add-on
tax to a tax based on alternative minimum taxable income ("AMTI"), and increased
the tax rate from 15% to 20%. The Internal Revenue Code provisions relating to
the alternative minimum tax ("AMTI") also include in AMTI (for tax years
beginning in 1987-1989) an amount equal to one-half of the amount by which a
corporation's book income (as specifically defined) exceeds its AMTI (determined
without regard to this preference and prior to reduction by net operating
losses). Also, only 90% of AMTI can be offset by net operating losses. For
taxable years beginning after December 31, 1989, the adjustment to AMTI based on
book income is an amount equal to 75% of the amount by which a corporation's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses).
The Bank's federal income tax returns through June 30, 1992 were
audited by the IRS.
For further information regarding federal income taxes, see Note 10 of
Notes to Consolidated Financial Statements.
STATE INCOME TAXATION
The Company is subject to an Ohio franchise tax based on its equity
capital plus certain reserve amounts. Total equity capital for this purpose is
reduced by certain exempted assets. The resulting net taxable value of capital
was taxed at a rate of 1.5% for fiscal years 1998, 1997 and 1996. Recent Ohio
legislation will change the methodology for the computation of net worth in the
future, as well as the rate of tax on financial institutions.
31
<PAGE> 32
ITEM 2. PROPERTIES
The following table sets forth the location and certain additional
information regarding the Company's offices at June 30, 1998.
<TABLE>
<CAPTION>
YEAR NET BOOK OWNED OR APPROXIMATE
OPENED/ TOTAL VALUE AT LEASED/ SQUARE
LOCATION ACQUIRED DEPOSITS JUNE 30, 1997 EXPIRATION FOOTAGE
- -------- -------- -------- ------------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MAIN OFFICE:
2618 N. Moreland Blvd. 1963 $40,345 $ 382 Owned 16,800
Cleveland, Ohio
BRANCH OFFICES:
2111 Richmond Road 1967 56,184 117 Lease 2,750
Beachwood, Ohio 3/1/99
25350 Rockside Road 1969 54,411 53 Lease 14,400
Bedford Heights, Ohio 3/1/03
11010 Clifton Blvd. 1974 24,984 10 Lease 1,550
Cleveland, Ohio 8/1/05
7448 Ridge Road 1979 32,533 0 Lease 3,200
Parma, Ohio 10/11/97
6990 Heisley Road 1994 30,972 22 Lease 2,400
Mentor, Ohio 10/25/98
1456 SOM Center Road 1995 31,137 227 Lease 2,200
Mayfield Heights, Ohio 9/30/04
497 East Aurora Road 1994 23,253 46 Lease 2,400
Macedonia, Ohio 9/30/04
8500 Washington Street 1995 26,020 88 Lease 2,700
Chagrin Falls, Ohio 11/30/04
408 Water Street 1997 24,390 350 Lease 2,800
Chardon, Ohio 8/31/02
</TABLE>
At June 30, 1998 the net book value of the Bank's premises, furniture,
fixtures and equipment was $2.3 million. See Note 6 of Notes to Consolidated
Financial Statements for further information.
The Company also owns real estate in the City of Solon, Ohio. See
Subsidiary Activities for further information.
32
<PAGE> 33
ITEM 3. LEGAL PROCEEDINGS.
- --------------------------
From time to time, the Company and/or the Bank is a party to various
legal proceedings incident to its business. There are no other material legal
proceedings to which the Bank or PVF is a party or to which any of their
property is subject except as set forth below.
Various subsidiaries of the Company are parties to lawsuits related to
the Company's efforts, which have since been suspended, to develop a business
offering financial planning advice and the sale of mutual funds and insurance
products on any agency basis. The entities named in the lawsuits are the Bank
and two other entities, PVF Financial Planning Inc.("PVFFP") and Emissary
Financial Group, Inc.("Emissary"), which are majority-owned subsidiaries of the
Company's wholly owned subsidiary, PVF Holdings, Inc. The Company's proposed
business plan called for PVFFP to establish offices in certain of the Bank's
locations, from which offices PVFFP would provide financial planning advice to
customers and sell insurance and mutual fund products to those customers on an
agency basis. Emissary was proposed to act as a broker dealer that would execute
any trades directed by PVFFP and by entities unrelated to PVFFP or the Company.
Through PVF Holdings, Inc., the Company invested a total of $300,000 in PVFFP
and Emissary, virtually all of which was invested in Emissary. The other
investor in PVFFP and Emissary was to be an individual named Gregory Shefchuk.
Mr. Shefchuk owned a financial planning service that traded through Money
Concepts Capital Corp.("Money Concepts"), a broker dealer based in Chicago,
Illinois. Mr. Shefchuk intended to utilize Emissary as the broker dealer for his
proposed activities with PVFFP.
Shortly after PVFFP and Emissary commenced operations, officers of the
Bank learned of alleged improprieties regarding other businesses operated by Mr.
Shefchuk, including allegations that his other business entities misappropriated
funds. Several days later, Mr. Shefchuk committed suicide, and it was determined
to cease all activities of Emissary and PVFFP. Since that time, PVFFP and
Emissary have not resumed operations and have determined to permanently cease
operations and liquidate as expeditiously as possible.
PVFFP and Emissary have been named as defendants in two lawsuits
pending in the Court of Common Pleas in Lake County, Ohio. One suit was filed
April 14, 1998 by Gary Toth and the Gary A. Toth Trust, and the second suit was
filed on May 22, 1998 by Ashtabula County Residential Services
Corp.("Ashtabula"). Both plaintiffs allege causes of action premised on breach
of fiduciary duty, fraud and misrepresentation, negligence, breach of contract,
accounting, conversion and constructive trust against the defendants, which also
include Mr. Shefchuk, various entities that he controlled and Money Concepts.
The plaintiffs claim generally that certain monies they invested through Mr.
Shefchuk, or an organization controlled by him or PVFFP, were misappropriated.
Mr. Toth seeks compensatory damages and punitive damages in excess of $2
million, and Ashtabula seeks $80,000 in compensatory damages and $1 million in
punitive damages. Neither of these plaintiffs, however, had established an
account with PVFFP.
In two other lawsuits, one filed against Emissary, Shefchuk and others
in an arbitration proceeding with the NASD, and the other filed against the Bank
in the United States District Court for the Northern District of Ohio, Eastern
Division, Money Concepts claims that the defendants damaged Money Concepts by
inducing registered representatives of Money Concepts to leave their positions
to affiliate with Emissary. In the arbitration proceeding, Money Concepts
alleged causes of action premised on breach of contract, conversion, intentional
interference with contract and unfair competition/raiding against Emissary, and
in the proceeding in the United States District Court, Money Concepts alleged
causes of action premised on interference with contract and business
relationships, misappropriation of trade secrets and confidential business
information, conversion, unfair competition and civil conspiracy.
In addition, on May 5, 1998, the Securities and Exchange Commission
("SEC") sued Mr. Shefchuk and entities affiliated with him, as well as Emissary,
in the United States District Court, Northern District of Ohio. The SEC alleged
causes of action premised on the Securities Act of 1933, the Securities Exchange
Act of 1934 and regulations promulgated thereunder, contending that it is
entitled to injunctive relief and civil and criminal penalties as a result of
the defendants' misappropriation of funds of clients an entity affiliated with
Shefchuk. The entity
33
<PAGE> 34
alleged to have misappropriated funds was not affiliated with the Company, the
Bank, PVFFP or Emissary. The court entered a preliminary injunction requiring
Emissary not to violate certain provisions of the securities laws. Emissary had
already ceased operations and determined to liquidate its business, and as a
result the Company does not consider this ruling to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- -------------------------------------------------------------------------
MATTERS
-------
The information contained under the section captioned "Market
Information" in the Company's Annual Report to Stockholders for the Fiscal Year
Ended June 30, 1998 (the "Annual Report") is incorporated herein by reference.
For information regarding restrictions on the payment of dividends see "Item 1.
Business -- Regulation of the Bank -- Dividend Limitations."
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" in the Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
-------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management" in the Annual Report incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The consolidated financial statements contained in the Annual Report
which are listed under Item 14 herein are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
34
<PAGE> 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Company's definitive proxy statement for the
Company's 1998 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" and "-- Directors'
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
(a) and (b) The information required by this item is incorporated herein
by reference to the sections captioned "Proposal I - Election
of Directors" and "Voting Securities and Principal Holders
Thereof" of the Proxy Statement.
(c) Management knows of no arrangements, including any pledge by
any person of securities of the Bank, the operation of which
may at a subsequent date result in a change in control of the
registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" of the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) 1. Independent Auditors' Report (incorporated by reference to
the Annual Report)
Consolidated Financial Statements (incorporated by reference
to the Annual Report)
(a) Consolidated Statements of Financial Condition, at
June 30, 1998 and 1997
(b) Consolidated Statements of Operations for the Years
Ended June 30, 1998, 1997 and 1996
(c) Consolidated Statements of Stockholders' Equity for
the Years Ended June 30, 1998, 1997 and 1996
(d) Consolidated Statements of Cash Flows for the Years
Ended June 30, 1998, 1997 and 1996
(e) Notes to Consolidated Financial Statements.
2. All schedules have been omitted as the required information is
either inapplicable or included in the Notes to Consolidated
Financial Statements.
35
<PAGE> 36
3. Exhibits and Index to Exhibits
The following exhibits are either attached to or incorporated
by reference in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
No. Description
- --- -----------
<S> <S> <C>
3.1 Certificate of Incorporation *
3.2 Code of Regulations *
3.3 Bylaws *
4 Specimen Stock Certificate *
10.1 Park View Federal Savings Bank Conversion Stock Option Plan *
10.2 PVF Capital Corp. 1996 Incentive Stock Option Plan *
10.3 Severance Agreements between PVF Capital Corporation and
each of John R. Male, C. Keith Swaney and Jeffrey N. Male
10.4 Park View Federal Savings Bank Supplemental Executive
Retirement Plan
13 PVF Capital Corp. Annual Report to Stockholders for the year ended
June 30, 1998
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick, LLP
27 Financial Data Schedule
- --------------
* Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1996 (Commission File No. 0-24948).
(b) During the last quarter of the fiscal year ended June 30, 1998, the
Company did not file any Current Reports on Form 8-K.
(c) All required exhibits are filed as attached.
(d) No financial statement schedules are required.
</TABLE>
36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
September 23, 1998 By: /s/ John R. Male
-------------------------------------
John R. Male
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
/s/ John R. Male September 23, 1998
- ----------------------------------------
John R. Male
President and Chief Executive Officer
(Principal Executive Officer)
/s/ C. Keith Swaney September 23, 1998
- ---------------------------------------
C. Keith Swaney
Vice President and Treasurer
(Principal Financial and Accounting Officer)
/s/ James W. Male September 23, 1998
- ---------------------------------------
James W. Male
Chairman of the Board
/s/ Robert K. Healey September 23, 1998
- ----------------------------------------
Robert K. Healey
Director
/s/ Stanley T. Jaros September 23, 1998
- -----------------------------------------
Stanley T. Jaros
Director
/s/ Creighton E. Miller September 23, 1998
- ----------------------------------------
Creighton E. Miller
Director
/s/ Stuart D. Neidus September 23, 1998
- -----------------------------------------
Stuart D. Neidus
Director
/s/ Robert F. Urban September 23, 1998
- ----------------------------------------
Robert F. Urban
Director
</TABLE>
37
<PAGE> 1
FORM OF SEVERANCE AGREEMENT
This AGREEMENT is made and entered into this 1st day of July, 1998 by and among
PVF Capital Corporation (the "Corporation"), a corporation organized under the
laws of the State of Ohio, Park View Federal Savings Bank (the "Bank"), an
OTS-chartered, FDIC- insured savings association with its main office located
in Bedford Heights, Ohio and ____________________ (the "Executive"). Any
reference to the "Board of Directors" herein shall mean the Board of Directors
of the Bank or a committee serving at the pleasure of the Board of Directors of
the Bank.. Any reference to "FDIC" herein shall mean the Federal Deposit
Insurance Corporation. Any reference to "OTS" shall mean the Office of Thrift
Supervision.
WHEREAS, the Executive has heretofore served as an employee of the Bank:
NOW THEREFORE, in consideration of the performance of the responsibilities of
the Executive and upon the other terms and conditions hereinafter provided, the
parties hereto agree as follows:
1. No Employment Contract
----------------------
The parties hereto acknowledge and agree that this Agreement is not a management
or employment agreement and that nothing in this Agreement shall give the
Executive any rights or impose any obligations to continued employment by the
Bank or Corporation or any subsidiary or successor of the Bank or Corporation,
nor shall it give the Bank or Corporation any rights or impose any obligations
for the continued performance of duties by the Executive for the Bank or
Corporation or any subsidiary or successor of the Bank or Corporation.
2. Term of Agreement
-----------------
The initial term of this Agreement shall be for a period of three (3) years
commencing July 1, 1998 (hereafter referred to as the "Anniversary Date").
Commencing on the first Anniversary Date of this Agreement, and continuing at
each Anniversary Date thereafter, the Agreement shall automatically renew for
one (1) additional year beyond the then effective
1
<PAGE> 2
expiration date only upon a determination and resolution of the Board of
Directors that the performance of the Executive has met the requirements and
standards of the Board and that such term shall be extended If the Board of
Directors determines not to extend the term, it shall promptly so notify the
Executive, with such election by the Board not to extend the term not to
otherwise affect the then effective term of this Agreement. Reference herein to
the term of this Agreement shall refer both to such initial term and such
extended terms. Unless sooner terminated as set forth herein, this contract
shall terminate when the Executive reaches age sixty-five (65).
3. Termination for Cause
---------------------
If the Corporation or Bank terminates the Executive's employment for cause (as
defined below), all of the Bank's and Corporation's obligations hereunder shall
immediately terminate as of the termination date. As used herein, "for cause"
shall mean (i) gross misconduct by the Executive that is materially inconsistent
with the terms hereof, or (ii) material failure by the Executive to perform his
duties, either of which continues after written notice thereof and a fifteen
(15) day chance to cure or (iii) the Executive's conviction for committing a
felony.
4. Voluntary Termination of Agreement
----------------------------------
This Agreement may be terminated by the Executive at any time upon ninety (90)
days' written notice to either the Bank or the Corporation or upon such shorter
period as may be agreed upon between the Executive and the Board of Directors.
5. Governmental Termination of Agreement
-------------------------------------
(a) If the Executive is removed from office and/or permanently prohibited from
participating in the conduct of the Bank's or the Corporation's affairs by an
order issued under Section 8(e) of the Federal Deposit Insurance Act, 12 U.S.C.
ss.1818(e), all obligations of the Bank and the Corporation under this Agreement
shall terminate, as of the effective date of the order.
2
<PAGE> 3
(b) If the Bank is in default (as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act), all obligations under this Agreement shall terminate.
(c) All obligations under this Agreement shall be terminated, except to the
extent determined that continuation of the contract is necessary for the
continued operation of the Bank, by the Director of the OTS or his or her
designee at the time the FDIC enters into an agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c) of the
Federal Deposit Insurance Act, or by the Director of the OTS or his or her
designee at the time the Director of the OTS or his or her designee approves a
supervisory merger to resolve problems related to the operation of the Bank or
when the Bank is determined by the Director of the OTS to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
(d) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
ss.1818(e)(3) or (g)(1), the Corporation's and the Bank's obligations under
subparagraphs 6(a), (b) and (c) of this Agreement shall be suspended as the date
of service, unless stayed by appropriate proceedings.
(e) If the charges in the notice referenced in subparagraph 5(d) are dismissed,
the Board of Directors
may in its discretion:
(i) pay the Executive all or part of the severance benefits while
its contract obligations were suspended, and
(ii) reinstate (in whole or in part) any of its obligations which
were suspended as required in subparagraph (d) above.
3
<PAGE> 4
6. Severance Payments or Termination Benefits
------------------------------------------
For purposes of this Agreement, the severance payments and termination benefits
specified in this Paragraph 6 shall be payable to the Executive subsequent to
the occurrence of one of the following events:
- Involuntary termination of the Executive's employment with the
Bank or Corporation with or within one (1) year after a Change
in Control other than for Cause or pursuant to Paragraphs 4 or
5 of this Agreement. For purposes of this section, Change in
Control shall have the same meaning as such term is defined in
Paragraph 8 and Cause shall have the same meaning as such term
is defined in Paragraph 3.
- Voluntary of involuntary termination for Good Reason, as
defined in Paragraph 7, and other than for Cause or pursuant
to Paragraphs 4 or 5 of this Agreement.
(a) Upon the Executive's termination as a result of one of the events specified
in this Paragraph 6, the Bank or Corporation shall pay to Executive, or in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate
as the case may be, as severance pay or liquidated damages, or both, a sum equal
to two times the Executive's annual compensation For purposes of this Paragraph,
compensation shall be defined as the Executive's base salary and annual
incentive compensation for the calendar year immediately preceding the year in
which the above-mentioned event occurs. Such payment shall be paid to the
Executive in a lump sum within thirty (30) days of the Executive's date of
termination.
(b) Upon the Executive's termination as a result of one of the events specified
in this Paragraph 6, the Bank or Corporation shall cause the Executive to become
fully vested in any qualified and/or nonqualified plans, programs or
arrangements in which the Executive participated in subject to the limitations
described in Paragraph 6(d) and notwithstanding any provisions contained in the
respective Agreement of the plan, program or arrangement. The Bank shall also
contribute to the Executive's 401(k) Plan Account the Bank's matching and/or
profit sharing which would have been paid had the Executive remained in the
employ of the Bank throughout the remainder of the 401(k) Plan year.
4
<PAGE> 5
(c) Upon the Executive's termination as a result of one of the events specified
in this Paragraph 6, the Corporation or Bank will cause to be continued life,
health and disability insurance coverage substantially identical to the coverage
maintained by the Bank or the Corporation for the Executive prior to his
severance. Such coverage shall cease upon the earlier of Executive's employment
by another employer or twelve (12) months from such termination. Upon the
expiration of the twelve (12) month period, Executive shall have the option of
continuing health insurance coverage at his/her own expense for a period not
less than the number of months by which the Consolidated Omnibus Budget
Reconciliation Act (COBRA) continuation period exceeds twelve (12) months.
(d) Notwithstanding any provision in this Agreement to the contrary, if the
compensation and benefits provided to the Executive pursuant to or under this
Agreement, either alone or in combination with other compensation and benefits
received by the Executive from the Bank or Corporation, would constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986 as amended (the "Code") or the regulations adopted or proposed
thereunder, then the compensation and benefits payable pursuant to or under this
Agreement shall be reduced to the extent necessary so that no portion thereof
shall be subject to any excise tax imposed by Section 4999 or other Section of
the Code. The determination of what amounts would constitute "parachute
payments" within the meaning of Section 280G of the Code shall be made by an
independent accounting firm or other independent tax counsel selected by the
Corporation and approved by the Executive or any other party entitled to receive
compensation or benefits provided hereunder. In the event that any reduction of
amounts to be paid is required under this Paragraph, the Corporation and the
Bank shall consult with the Executive in determining the order in which
compensation and benefits shall be reduced.
(e) The Executive shall not be required to mitigate the amount of any payment
required hereunder by seeking other employment or otherwise nor shall the amount
paid hereunder be reduced or offset by any compensation earned or received by
the Executive as a result of employment with another employer or
self-employment. The amount paid hereunder shall not be reduced by any other
plan, program, policy or arrangement of the Bank or Corporation provided such
amounts are not included in the computation of the Executive's "parachute
payment" as defined by Section 280G(b)(2) and as determined by the independent
accounting firm referred to
5
<PAGE> 6
in Paragraph 6(d). Benefits provided under Paragraph 6(c) shall be reduced to
the extent comparable benefits are actually received by the Executive from or
through another employer.
7. Good Reason
-----------
For purposes of this Agreement, "Good Reason" shall mean the occurrence any of
the events or conditions described in subparagraphs (a) through (f) hereof
without the Executive's express written consent; provided the Executive's right
to terminate his employment pursuant to this Paragraph 7 shall not be affected
by his incapacity due to physical or mental illness.
(a) A change in the Executive's status, title, position or responsibilities
(including reporting responsibilities) which, in the Executive's reasonable
judgment, does not represent a promotion from his status, title, position or
responsibilities as in effect immediately prior thereto; the assignment to the
Executive of any duties or responsibilities which, in the Executive's reasonable
judgment, are inconsistent with such status, title, position or
responsibilities; or any removal of the Executive from or failure to reappoint
him to any of such positions, except in connection with the termination of his
employment for (i) Cause, (ii) pursuant to Paragraphs 4 or 5, (iii) by the
Executive other than for Good Reason;
(b) A material reduction by the Bank or the Corporation in the Executive's base
salary. For purpose of this Agreement, The determination of whether a reduction
in the executives base salary is considered material shall be at the discretion
of the Board.
(c) The relocation of Executive's principal place of employment to a location
that is more than thirty five (35)-miles from the location where Executive was
principally employed immediately prior to such relocation or the Bank's or the
Corporation's requiring the Executive to be based at any place other than the
location where the Executive was based immediately prior such change except for
reasonably required travel (as determined by the Board of Directors) on the
Bank's or the Corporation's business.
(d) The failure by the Bank or the Corporation to continue to provide the
Executive with benefits substantially similar to those provided to him under any
of the employee benefit plans in which the
6
<PAGE> 7
Executive becomes a participant, or Bank or the Corporation which would directly
or indirectly materially reduce any of such benefits or deprive the Executive of
any material fringe benefit enjoyed by him. For purposes of this Agreement, the
determination of a direct or material indirect reduction or material fringe
benefit shall be made by the Board of Directors in its sole discretion.
(e) Death prior to retirement. In the event the Executive should die while
actively employed by the Bank or Corporation prior to retirement.
(f) Disability prior to retirement. Should the Executive become totally disabled
while actively employed by the Bank or Corporation prior to retirement. For
purpose of this agreement, the term "Totally disabled" means that because of
injury or sickness, Executive is unable to perform the duties of his occupation.
8. Change in Control
-----------------
(a) If, during the term of this Agreement, there is a Change in Control of the
Bank or Corporation, the Executive shall be entitled to severance payments
and/or termination benefits as described in Paragraph 6 in the event the
Executive's employment with the Bank or the Corporation is involuntarily
terminated, in connection with or within one (1) year after the Change in
Control, other than for Cause or pursuant to Paragraphs 4 or 5. This payment
shall also be made in the case of the Executive's voluntary termination of
employment for Good Reason (as defined in Paragraph 7) in connection with, or
within one (1) year after, a Change in Control of the Bank or Corporation. Such
voluntary termination of employment for Good Reason in connection with or within
one (1) year after a Change in Control of the Bank or Corporation shall not
constitute a termination for Cause or a voluntary termination subject to
Paragraph 4 of this Agreement.
(b) For purposes of this Agreement, a "Change in Control of the Bank or
Corporation" shall mean:
7
<PAGE> 8
(i) The acquisition by a person or persons acting in concert of
the power to vote twenty five percent (25%) or more of a class
of the Corporation's voting securities, or the acquisition by
a person of the power to direct the Bank's or Corporation's
management or policies, if the Board of Directors or the OTS
has made a determination that such acquisition constitutes or
will constitute an acquisition of control of the Bank or
Corporation for the purposes of the Savings & Loan Holding
Company Act or the Change in Bank Control Act and the
regulations thereunder;
(ii) during any period of two (2) consecutive years during the term
of this Agreement, individuals who at the beginning of such
period constitute the Board of Directors of the Bank or the
Corporation cease, for any reason, to constitute at least a
majority thereof, unless the election of each director who was
not a director at the beginning of such period has been
approved in advance by directors representing at least
two-thirds (2/3) of the directors then in office who were
directors in office at the beginning of the period.
(iii) the Corporation shall have merged into or consolidated with
another corporation, or merged another corporation into the
Corporation, on a basis whereby less than fifty percent (50%)
of the total voting power of the surviving corporation is
represented by shares held by former shareholders of the
Corporation prior to such merger or consolidation; or
(iv) the Corporation shall have sold (i) substantially all of its
assets; or, (ii) the Bank, to another person. The term
"person" refers to an individual, corporation, partnership,
trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or other entity.
8
<PAGE> 9
9. Withholding of Taxes
--------------------
The Bank or Corporation may withhold from any benefits payable under this
Agreement all Federal, state, city or other taxes as may be required pursuant to
any law, governmental
regulation or ruling.
10. Payment of Legal and/or Accounting Fees
---------------------------------------
Reasonable legal and/or accounting fees and expenses paid or incurred any
dispute or question of interpretation relating to the Agreement shall be paid or
reimbursed by the Corporation in accordance with the following:
(a) If the Executive, the Bank or the Corporation initiates a proceeding and the
Executive prevails, all reasonable legal and/or accounting fees and expenses
shall be paid by the Corporation.
(b) If the Executive initiates a proceeding and does not prevail on his/her
claim, then the Corporation shall reimburse the Executive for all legal and/or
accounting fees and expenses but not to exceed the sum of $25,000.
11. Successor Organization
----------------------
The obligations of the Corporation and the Bank as set forth herein shall
continue to be the obligation of any successor organization, any organization
which purchases substantially all of the liabilities of the Corporation or the
Bank, as well as any organization which assumes substantially all of the
liabilities of the Corporation or the Bank whether by merger, consolidation, or
other form of business combination. This Agreement is personal to the Executive
and the Executive may not delegate his duties hereunder.
9
<PAGE> 10
12. Notices
All notices, requests, demands and other communications hereunder shall be in
writing and shall be deemed to have been duly given if delivered by hand or
mailed, certified or registered mail, return receipt requested, with postage
prepaid, to the following addresses or to such other address as either party may
designate by like notice.
(a) If to the Bank, to:
Park View Federal Savings Bank
------------------------------
2618 N. Moreland Blvd.
------------------------------
Cleveland, OH 44120
------------------------------
------------------------------
(b) If to the Executive, to:
------------------------------
------------------------------
------------------------------
------------------------------
and to such other or additional person or persons as either party shall have
designated to the other party in writing by like notice.
13. Amendments
----------
No amendments or additions to this Agreement shall be binding unless in writing
and signed by both parties, except as herein otherwise provided.
10
<PAGE> 11
14. Paragraph Headings
------------------
The paragraph headings used in this Agreement are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. Severability
------------
The provisions of this Agreement shall be deemed severable and the invalidity or
unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
16. Governing Law
-------------
This Agreement shall, except to the extent that federal law (including any law,
rule, or regulations of the OTS or the FDIC) shall be deemed to apply, be
governed by and construed and enforced in accordance with the laws of Ohio.
17. Arbitration
-----------
Any dispute or controversy arising under or in connection with this Agreement
shall be settled exclusively by arbitration in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction.
18. Safety and Soundness Limitations
--------------------------------
Notwithstanding any other provision of this Agreement, no severance benefits
under Paragraph 8 shall be paid or payable in respect of any year in which the
Bank (i) fails to meet any applicable capital requirements imposed by Part 567
of the OTS regulations (or successor regulations) after giving effect to the
payment of severance benefits hereunder, (ii) receives or maintains a safety and
soundness CAMEL rating of 4 or 5 from the OTS, or (iii) is subject to a
proceeding to terminate deposit insurance. Severance benefits can be paid under
clause (i) above to the extent that such payment would not cause the Bank to
fail to meet any applicable capital requirements imposed by Part 567 of the OTS
regulations. In addition, no severance benefits under Paragraph 8
11
<PAGE> 12
shall be paid or payable if the Executive has committed any fraudulent act or
omission or other fiduciary breach that had or is likely to have a material
adverse affect on the Bank or the Corporation.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year
first herein above written.
WITNESSES: PVF CAPITAL CORP.
BY:
- --------------------------------- --------------------------------
ITS:
- --------------------------------- --------------------------------
WITNESSES: PARK VIEW FEDERAL SAVINGS BANK
BY:
- --------------------------------- --------------------------------
ITS:
- --------------------------------- --------------------------------
WITNESSES:
("Executive)
- --------------------------------- -------------------------
- ---------------------------------
12
<PAGE> 1
PARK VIEW FEDERAL SAVINGS BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
ARTICLE 1
DEFINITIONS
Section 1.1 ADMINISTRATOR. The Administrator of the Plan shall be the
Compensation Committee.
Section 1.2 ACTUARIAL EQUIVALENT. At any date, with respect to any Plan
Benefit hereunder, a payment or payments equal in the aggregate
to the value at such date of such Plan Benefit determined
actuarially on the basis of the current Pension Benefit Guarantee
Corporation ("PBGC") interest rate and the mortality table
currently used by the PBGC at such date.
Section 1.3 BANK. Park View Federal Savings Bank, a federally chartered
savings association, or any successor thereto as provided in
Section 10.12 herein.
Section 1.4 BOARD. The Board of Directors of Park View Federal Savings Bank.
Section 1.5 COMPENSATION COMMITTEE. The Compensation Committee of the Board
of Directors of Park View Federal Savings Bank.
Section 1.6 CODE. The Internal Revenue Code of 1986, as amended, or as it may
be amended from time to time.
Section 1.7 COMPANY. PVF Capital Corporation, an Ohio corporation, or any
successor thereto as provided in Section 10.12 herein, or any
subsidiary thereof.
Section 1.8 EFFECTIVE DATE. The effective date of the Plan shall be July 1,
1998.
Section 1.9 PLAN. The Park View Federal Savings Bank Supplemental Executive
Retirement Plan.
Section 1.10 PLAN Benefit. Retirement benefits payable under the Park View
Federal Savings Bank Supplemental Executive Retirement Plan.
Section 1.11 PARTICIPANT. An employee who is eligible to participate in the
Park View Federal Savings Bank Supplemental Executive Retirement
Plan.
Section 1.12 RETIREMENT DATE. The first day of any calendar month following
the Participant's sixty fifth (65th) birthday on which the
Participant elects to retire, or such earlier date as the Board,
by resolution, may agree to grant the Participant early
retirement.
1
<PAGE> 2
ARTICLE 2
PURPOSE OF PLAN
Section 2.1 PURPOSE. The Plan is designed to provide retirement benefits
payable out of the general assets of the Bank as provided in
Article 4.
ARTICLE 3
ELIGIBILITY
Section 3.1 ELIGIBILITY. Eligibility to participate in the Plan is limited to
Employees of the Bank who are designated by the Compensation
Committee of the Board of Directors of the Bank.
ARTICLE 4
BENEFITS
Section 4.1 AMOUNT OF BENEFITS. The annual amount of benefits payable to each
Participant under the Plan shall be equal to sixty percent (60%)
of the Participant's Final Pay, reduced by the Actuarial
Equivalent of the annual benefits payable to the Participant
under the Bank's Qualified Retirement Plans consistent with the
form of benefits paid under Section 4.2. For purposes of this
Section, the reduction for benefits payable under Qualified
Retirement Plans shall not include elective deferrals made by the
employee and earnings thereon. For purposes of this Section,
Final Pay shall be defined as the highest year's combined salary
and target bonus (as defined in the Bank's Management Incentive
Compensation Plan established July 1, 1997) during the last five
years of the Participant's employment with the Bank. The
determination of combined salary and target bonus shall include
any amounts electively deferred by the Participant to any of the
Bank's qualified or nonqualified employee benefit plans.
Section 4.2 FORM OF BENEFIT PAYMENTS. The benefits payable to or on behalf of
a Participant as determined under Section 4.1 shall be paid in
the form of a single life annuity or converted to the Actuarial
Equivalent joint and survivor annuity.
The Participant may petition the Compensation Committee of the
Board to have the Plan Benefits payable under this Section
converted to the Actuarial Equivalent single lump sum
distribution.
Section 4.3 TIME OF BENEFIT PAYMENTS. Payment of benefits (annuity payments
or the lump sum equivalent of the annuity payments if approved by
the Compensation Committee) due under the Plan to the Participant
shall
2
<PAGE> 3
commence on the Participant's Normal Retirement Date or, such
earlier date as otherwise provided in this Agreement or as the
Compensation Committee of the Board may, by resolution, otherwise
determine. Subsequent annual payments of benefits shall be paid
to the Participant each year, thereafter, on the anniversary date
of the initial payment described in the previous sentence.
Annuity payments shall continue for the lifetime of the
Participant, or for the joint lives of the Participant and his or
her spouse if actuarially converted pursuant to Section 4.2. In
the event the Participant dies prior to commencement of benefit
payments, the benefits payable shall be paid in a lump sum
Actuarial Equivalent to the named beneficiary under Article 7
herein within one year from the date of death of the Participant.
ARTICLE 5
VESTING
Section 5.1 PRO RATA VESTING. Provided that the Participant has remained
continuously in the employ of the Bank (except for normal vacation
time and such other leaves of absence as may be approved by the
Board), the Participant shall vest in the Plan Benefits described
in Article 4 of this Agreement each year, on a pro rata basis,
beginning with the one year anniversary date of the effective date
that the Participant becomes eligible to participate in the Plan
and continuing with each succeeding annual anniversary date
thereafter until the Participant's attainment of age sixty-five
(65). Upon the Participant's attainment of age sixty-five (65) and
provided the Participant has remained continuously in the employ of
the Bank, the Participant shall be fully vested in the Plan
Benefits described in Article 4 of this Agreement.
Section 5.2 EXAMPLE. A Participant is age forty-five (45) at the effective date
of this Agreement. Assuming the Participant remains in the employ
of the Bank for another fifteen (15) years until he is age sixty
(60), he will be entitled to an annual benefit under Article 4 and
Section 5.1 of this Agreement that is equal to forty-five percent
(45%) of the Participant's highest combined salary and target bonus
during the last five years of his employment determined as follows:
15 years credited service x 60% Final Pay = 45% Final Pay at
--------------------------
20 year vesting period age sixty-five (65)1
Years of credited service shall be equal to the number of years the
Participant remains in the employ of the Bank after becoming an
eligible Participant of the Plan as determined by the Board.
- --------
1 If payments begin earlier than age sixty-five (65), the benefit will be
actuarially reduced. If requested by the Participant and approved by the
Compensation Committee, the actuarially reduced lump sum equivalent may be paid
in lieu of annual benefits.
3
<PAGE> 4
Vesting period shall be equal to the difference between
sixty-five (65) and the Participant's age at the time he becomes
a Participant in the Plan.
Section 5.3 DEATH OR DISABILITY. In the event that the Participant dies or
becomes permanently and totally disabled while in the employ of
the Bank and prior to age sixty-five (65), the Participant shall
become fully vested in the Plan Benefits described in Article 4
of this Agreement.
(a) For purposes of this Agreement, total disability means the
Participant's inability to engage in his or her occupation as a
result of sickness or bodily injury.
(b) If any dispute arises as to whether the Participant is or was
physically or mentally unable to perform his duties pursuant to
this Agreement, the parties shall submit such questions to a
licensed physician agreed upon by the parties, or, if the parties
are unable to agree, to a licensed physician appointed by the
President of the Academy of Medicine of Cleveland located in
Cleveland, Ohio, at the request of either party. The Participant
shall submit to such examinations and provide information as such
physician may request and the determination of such physical as
to the Participant's physical or mental condition shall be
binding and conclusive on the parties. The Bank agrees to pay the
cost of any such physician and examinations.
Section 5.4 EARLY RETIREMENT. In the event the Participant wishes to retire
prior to age sixty-five (65), the Compensation Committee of the
Board may agree, by resolution, to fully vest the Participant in
the entire Plan Benefit described in Article 4. The Compensation
Committee of the Board may also agree, by resolution, and with
the approval of the Participant, to begin payment of the
Participant's Plan Benefits prior to the Participant's attainment
of age sixty-five (65). Benefits commencing earlier than the
Participant's age 65 will be actuarially reduced for the
Participant's age at commencement.
Section 5.5 CHANGE IN CONTROL. (a) In the event of a change in control of the
Company, the entire Plan Benefit described in Article 4 shall
become fully vested and be immediately payable to the Participant
in full.
(b) For purposes of this Agreement, a change in control shall
mean:
(i) The acquisition by a person or persons acting in concert
of the power to vote twenty-five percent (25%) or more of a class
of the Company's voting securities, or the acquisition by a
person of the power to direct the Company's management or
policies, if the Board of Directors or the Office of Thrift
Supervision (the "OTS") or successor regulatory agency has made a
determination that such acquisition constitutes or will
constitute an acquisition of control of the Company for the
purposes of the Savings and Loan Holding
4
<PAGE> 5
Company Act or the Change in Bank Control Act and the regulations
thereunder (12 CFR Part 574 or any successor provision);
(ii) during the period of two (2) consecutive years during
the term of this Agreement, individuals who at the beginning of
such period constitute the Board of Directors of the Company
cease for any reason to constitute at least a majority thereof,
unless the election of each director who was not a director at
the beginning of such period has been approved in advance by
directors representing at least two thirds (2/3) of the directors
then in office who were directors in office at the beginning of
the period;
(iii) the Company shall have merged into or consolidated
with another company, or merged another company into the Company,
on a basis whereby less than fifty percent (50%) of the total
voting power of the surviving company is represented by shares
held by former shareholders of the Company prior to such merger
or consolidation; or
(iv) The Company shall have sold (i) substantially all of
its assets; or, (ii) the Bank, to another person. The term
"person" refers to an individual, corporation, partnership,
trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or other entity.
ARTICLE 6
TERMINATION FOR CAUSE
Section 6.1 In the event of the termination of the Participant for Cause, the
Bank shall have no further obligations under this Agreement other
than payment to the Participant at the Retirement Date of any
vested portion of the Plan Benefit. For purposes of this
Agreement, Cause shall be defined as termination as a result of
the Participant's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation
of any law, rule or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement.
Sections 6.2 If any events specified in Section 563.39(b)(2) through (5) of
the OTS Regulations (or any successor provision thereto) shall
occur, the Participant's rights under this Agreement shall be
determined in accordance with the provisions of such Sections.
5
<PAGE> 6
ARTICLE 7
BENEFICIARY DESIGNATION
Section 7.1 BENEFICIARY DESIGNATION. Each Participant shall have the right,
at any time, to designate any person or persons as his
Beneficiary or Beneficiaries (both primary and contingent) to
whom payment under this Plan shall be paid in the event of death
prior to complete distribution of the Participant's Plan Benefits
under the Plan. Each Beneficiary Designation shall be in a
written form prescribed by the Administrator and will be
effective only when filed with the Administrator during the
Participant's lifetime.
Section 7.2 AMENDMENTS. Any Beneficiary Designation may be changed by a
Participant without the consent of any designated Beneficiary by
the filing of a new Beneficiary Designation with the
Administrator. The filing of a new Beneficiary Designation form
will cancel all Beneficiary Designations previously filed.
Section 7.3 NO BENEFICIARY DESIGNATION. If any Participant fails to designate
a Beneficiary in the manner provided above, or if the Beneficiary
designated by a deceased Participant predeceases the Participant,
the Administrator shall direct the Bank to distribute such
Participant's remaining benefits under the Plan as follows:
a. To the Participant's surviving spouse, if any; or
b. If the Participant has no surviving spouse, then to the
Participant's children in equal shares by right of
representation; or
c. If the Participant shall have no surviving spouse or
children, then to the Participant's estate; or
d. In the absence of a will, in accordance with the intestate
statute of the Participant's domicile.
Section 7.4 EFFECT OF PAYMENT. Payment to the Beneficiary or as provided in
Section 4.3 above, shall completely discharge the Bank's
obligations under this Plan.
Section 7.5 DEATH OF BENEFICIARY. Following commencement of payment of
benefits under the Plan, if the Beneficiary designated by the
deceased Participant dies before receiving complete distribution
of such benefits any remaining benefits shall be paid:
a. As designated by the Beneficiary in a written form prescribed
by the Administrator which is effective only when filed with
the Administrator during the Beneficiary's lifetime; or
6
<PAGE> 7
b. If the Beneficiary shall not have made such designation, then
to the Beneficiary's estate.
ARTICLE 8
CLAIMS PROCEDURE
Section 8.1 CLAIM. Any person claiming a benefit under the Plan, requesting
an interpretation or ruling under the Plan, or requesting
information under the Plan shall present the request in writing
to the Administrator who shall respond in writing as soon as
practicable, and in no event later than ninety (90) days after
the date of the written request.
Section 8.2 DENIAL OF CLAIM. If the claim or request is denied, the written
notice of denial shall be made within ninety (90) days of the
date of receipt of such claim or request by the Administrator and
shall state:
a. The reason for denial, with specific reference to the Plan
provision on which the denial is based.
b. A description of any additional material or information
required and an explanation of why it is necessary.
c. An explanation of the Plan's claim review procedure.
Section 8.3 REVIEW OF CLAIM. Any person whose claim or request is denied or
who has not received a response within ninety (90) days may
request review by notice given in writing to the Administrator
within (60) days of receiving a response or one hundred fifty
(150) days from the date the claim was received by the
Administrator. The claim or request shall be reviewed by the
Administrator who may, but shall not be required to, grant the
claimant a hearing. On review, the claimant may have
representation, examine pertinent documents, and submit issues
and comments in writing.
Section 8.4 FINAL DECISION. The decision on review shall normally be made
within sixty (60) days after the Administrator's receipt of a
request for review. If an extension of time is required for a
hearing or other special circumstances, the claimant shall be
notified and the time limit shall be one hundred twenty (120)
days after the Administrator's receipt of a request for review.
The decision shall be in writing and shall state the reasons and
relevant Plan provision. All decisions on review shall be final
and bind all parties concerned.
7
<PAGE> 8
ARTICLE 9
AMENDMENT OF PLAN
Section 9.1 AMENDMENT OF PLAN. The Board may, at any time, amend the Plan in
whole or in part, provided, however, that no amendment shall be
effective to decrease or restrict any vested Plan Benefits
accrued under the Plan.
ARTICLE 10
MISCELLANEOUS
Section 10.1 BENEFITS UNFUNDED. The benefits payable under the Plan shall be
paid by the Bank each year out of its general assets.
Section 10.2 UNSECURED GENERAL CREDITOR. Participants have the status of
unsecured general creditors of the Bank. The Bank's obligation
under the Plan shall be merely that of an unfunded and unsecured
promise of the Bank to make benefit payments in the future.
Section 10.3 NONASSIGNABILITY. Neither a Participant nor any other person
shall have any right to alienate, commute, sell, assign,
transfer, pledge, anticipate, mortgage or otherwise encumber,
transfer, hypothecate or convey in advance of actual receipt the
amounts, if any, payable hereunder, or any part thereof, which
are, and all rights which are, expressly declared to be
unassignable and non-transferable. No part of the amounts payable
shall, prior to actual payment, be subject to seizure or
separation for the payment of any other person, nor be
transferable by operation of law in the event of a Participant's
or another person's bankruptcy or insolvency.
Section 10.4 PAYMENT OF TAXES. The Bank shall have the right to deduct from
all benefits paid hereunder any Federal, state or local taxes
required to be withheld with respect to such benefit payments.
Section 10.5 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this
Plan shall not be deemed to constitute a contract of employment
between the Bank and the Participant, except as may otherwise be
specifically provided herein. Moreover, nothing in this Plan
shall be deemed to give the Participant the right to be retained
in the service of the Bank or to interfere with the right of the
Bank to discipline or discharge the Participant at any time.
Section 10.6 PARTICIPANT COOPERATION. A Participant will cooperate with the
Bank by furnishing any and all information requested by the Bank
in order to facilitate the payment of benefits hereunder and such
other action as may be requested by the Bank.
8
<PAGE> 9
Section 10.7 TERMS. Whenever any words are used herein in the masculine, they
shall be construed as though they were used in the feminine in
all cases where they would so apply; and wherever any words are
used herein in the singular or in the plural, they shall be
construed as though they were used in the plural or the singular,
as the case may be, in all cases where they would so apply.
Section 10.8 CAPTION. The captions of articles, sections, and paragraphs of
the Plan are for convenience only and shall not control or affect
the meaning or construction of any of its provisions.
Section 10.9 GOVERNING Law. This agreement shall, except to the extent that
Federal Laws (including a law, rule or regulation of the OTS or
Federal Deposit Insurance Corporation (FDIC)) shall be deemed to
apply, be governed by and construed and enforced in accordance
with the laws of Ohio.
Section 10.10 VALIDITY. In case any provision of this Plan shall be held
illegal or invalid for any reason, said illegality or invalidity
shall not affect the remaining parts hereof, but this Plan shall
be construed and enforced as if such illegal and invalid
provision had never been inserted herein.
Section 10.11 NOTICE. All notices or other communications under this Plan shall
be made in writing and either hand delivered or sent by
registered or certified mail to the Administrator.
Section 10.12 SUCCESSORS. All obligations of the Company and the Bank,
respectively, under the Plan shall be binding on any successor to
the Company and the Bank, respectively, whether the existence of
such successor is the result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all
of the business and/or assets of the Company or the Bank.
IN WITNESS WHEREOF, and pursuant to resolution of the Board of Directors of the
undersigned, the Bank has caused this instrument to be executed by its duly
authorized officer this ____ day of _____________, 1998 but effective as of the
date specified in Section 1.8 herein.
PARK VIEW FEDERAL SAVINGS BANK
By:
- ----------------------------
9
<PAGE> 1
PVF
-------------
CAPITAL CORP.
-------------
ANNUAL REPORT
JUNE 30, 1998
<PAGE> 2
Table of Contents
Letter to Shareholders................................................1
Special Shareholder Information.......................................3
Selected Consolidated Financial and Other Data........................4
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................6
Independent Auditors' Report.........................................15
<PAGE> 3
To Our Shareholders
Fiscal 1998 was another successful year for PVF Capital Corp. We
exceeded our financial goals and objectives and feel much progress was made in
bringing a higher level of service to our customers, shareholders, and the
communities we serve. We are most proud and gratified by the many favorable
responses received from our customers regarding the quality of service provided
by our staff.
In the fiscal year ended June 30, 1998, net income was a record $4.9
million, or $1.20 per share diluted, up 34.8% from fiscal 1997. Return on equity
reached 17.11% and return on assets was 1.23%, both returns among the best as
compared to all other Ohio publicly-traded thrifts. These results reflect the
success of our basic strategy of functioning as a niche lender, providing our
customers a wide range of lending products, collateralized by real estate, that
may not be available to them at larger banks.
For the fiscal year ended June 30, 1998, assets increased by $62
million to $433 million, deposits grew $56 million to $344 million, and
stockholders' equity increased $4.9 million to $32 million. Additionally, we
originated in excess of $250 million in new loans.
In January 1998, Park View Federal Savings Bank opened a full-service
branch office in the rapidly growing city of Chardon, Ohio in Geauga County. In
less than six months, the office has grown to just over $24 million in deposits
and originated an impressive number of loans in the local market area. This
opening brings the number of full-service branch office locations to ten.
Information on the location of each branch office and their hours of service is
provided at the end of this report.
In March 1998, PVF Service Corporation, a subsidiary of PVF Capital
Corp., entered into an option agreement with Cameratta Properties Limited for
the purchase of its 250-acre parcel of land in Solon, Ohio for $5 million. The
option agreement provides for the payment of a $500,000 non-refundable deposit
that requires the buyer to purchase the property within one year or forfeit the
deposit. Completion of the purchase is dependent upon obtaining voter approval
for the planned development project from the residents of the city of Solon. The
project has the full support of the Solon City Council and will appear on the
November 1998 ballot. If the purchase is completed as provided in the contract,
an after-tax gain of approximately $2.5 million is expected to be earned in
fiscal 1999.
<PAGE> 4
We want to assure you that PVF Capital Corp. has addressed the Year
2000 issue. This issue centers on the inability of today's computer hardware and
software, if left unaltered, to recognize the Year 2000. A project team has been
assembled and a formal plan of action was developed to take all steps possible
to prepare for potential Year 2000 problems.
We have included Special Shareholder Information on the opposite page
that clearly demonstrates the performance of your stock since it became publicly
traded. As we continue to expand and grow, we pledge our continued efforts to
provide the best personal service to our customers, community, and shareholders.
Finally, we invite all shareholders to attend the Annual Meeting of PVF
Capital Corp. on Monday, October 19, 1998, at 10:00 a.m., at the Cleveland
Marriott East in Beachwood, Ohio. As we continue to grow, we look forward to
another successful year of service and dedication to the community, its members,
our shareholders, and our customers.
Sincerely,
/s/ John R. Male
John R. Male
President
<PAGE> 5
SPECIAL SHAREHOLDER INFORMATION
The performance of PVF Capital Corp. was recognized by The Cleveland
Plain Dealer in its annual published listing of the 100 Top Performing Public
Companies in the State of Ohio. The Board of Directors and management are proud
to inform our shareholders that the Company has made this select listing for the
third consecutive year.
The success and profitability of the Company has resulted in an
annualized return of approximately 43% to an original investor in the stock. For
every 100 shares of stock purchased at $10.00 per share or $1,000.00 at the time
of our initial public offering, the purchaser would own 447 shares of stock with
a per share market value of $16.33 for a total market value of $7,300.00 at June
30, 1998. The following illustration summarizes the lifetime growth in value of
PVF Capital Corp. stock and offers a comparison to all NASDAQ Banks.
LIFETIME GROWTH IN MARKET VALUE OF $100
<TABLE>
<CAPTION>
30 30 30 30 30 30 30
Dec June June June June June June
1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
PVF Capital Corp. $100.00 $144.84 $164.57 $218.39 $330.49 $492.38 $732.29
NASDAQ Banks $100.00 $106.93 $121.61 $137.35 $178.77 $279.47 $387.09
</TABLE>
3
<PAGE> 6
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
FINANCIAL CONDITION DATA:
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Total assets.............................................. $433,279 $373,081 $331,634 $315,432 $238,245
Loans receivable and mortgage-backed
securities held for investment, net..................... 371,949 341,914 278,956 250,244 206,674
Loans receivable held for sale and
mortgage-backed securities available for sale, net...... 1,645 710 18,817 4,451 3,954
Cash equivalents and securities........................... 51,017 23,576 27,884 53,812 22,226
Deposits.................................................. 344,229 288,270 271,045 272,290 197,042
FHLB advances and notes payable........................... 47,384 49,715 30,191 16,800 18,160
Stockholders' equity...................................... 31,209 26,273 22,474 18,818 15,742
Number of:
Real estate loans outstanding.......................... 2,676 2,648 2,527 2,512 2,259
Savings accounts....................................... 25,122 23,190 23,259 24,007 19,007
Offices ............................................... 10 9 9 9 7
</TABLE>
OPERATING DATA:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------
(in thousands except for earnings per share)
<S> <C> <C> <C> <C> <C>
Interest income........................................... $ 34,365 $ 30,963 $ 27,761 $ 22,941 $ 17,050
Interest expense.......................................... 19,558 16,561 15,703 12,261 8,113
--------- -------- --------- --------- --------
Net interest income
before provision for loan losses........................ 14,807 14,402 12,058 10,680 8,937
Provision for loan losses................................. 246 187 417 416 0
----------- -------- ----------- ----------- -----------
Net interest income
after provision for loan losses......................... 14,561 14,215 11,641 10,264 8,937
Non-interest income....................................... 1,597 1,336 1,747 1,514 1,703
Non-interest expense...................................... 8,851 10,000 7,989 7,177 6,295
---------- -------- ---------- ---------- ---------
Income before federal income tax expense and
cumulative effect of a change in accounting principle... 7,307 5,551 5,399 4,601 4,345
Federal income taxes...................................... 2,379 1,904 1,613 1,244 1,215
Cumulative effect of a change
in accounting principle................................. 0 0 0 0 755
---------- -------- ---------- ---------- ---------
Net income................................................ $ 4,928 $ 3,647 $ 3,786 $ 3,357 $ 3,885
======== ======== ======== ======== ========
Basic earnings per share.................................. $ 1.25 $ 0.95 $ 0.99 $ 0.88 $ 1.00
========= ========= ========= ========= =========
Diluted earnings per share................................ $ 1.20 $ 0.89 $ 0.93 $ 0.83 $ 0.95
========= ========= ========= ========= =========
</TABLE>
4
<PAGE> 7
OTHER DATA:
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Interest rate spread information:
Average during year................................... 3.38% 3.84% 3.45% 3.67% 4.04%
Average end of year................................... 3.05% 3.90% 3.51% 3.84% 4.25%
Net interest margin....................................... 3.78% 4.22% 3.90% 4.00% 4.30%
Average interest-earning assets to
average interest-bearing liabilities.................... 107.93% 107.93% 108.83% 107.08% 106.64%
Non-accruing loans (> 90 days) and
repossessed assets to total assets...................... 0.76% 1.11% 0.73% 1.14% 1.45%
Stockholders' equity to total assets...................... 7.20% 7.04% 6.78% 5.97% 6.61%
Return on average assets.................................. 1.23% 1.04% 1.19% 1.23% 1.78%
Return on average equity ................................. 17.11% 15.19% 18.43% 19.61% 27.53%
Ratio of average equity to
average assets.......................................... 7.18% 6.84% 6.47% 6.26% 6.46%
Ratio of tangible capital to
adjusted total assets................................... 7.21% 7.34% 7.25% 6.10% 6.37%
Ratio of core capital to
adjusted total assets................................... 7.21% 7.34% 7.25% 6.10% 6.37%
Ratio of total capital to
risk-weighted assets.................................... 10.93% 10.62% 11.42% 10.77% 10.37%
Dividend payout ratio..................................... 0.00% 0.00% 0.00% 8.37% 0.00%
</TABLE>
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
PVF Capital Corp. ("PVF" or the "Company") owns and operates Park View Federal
Savings Bank ("Park View Federal" or the "Bank"), its principal and wholly-owned
subsidiary, and PVF Service Corporation, a wholly-owned real estate subsidiary.
Park View Federal has ten offices located in Cleveland and surrounding
communities, including three recently opened branches in Chardon, Bainbridge,
and Macedonia. The Bank's principal business consists of attracting deposits
from the general public through its branch offices and investing these funds in
loans secured by first mortgages on real estate located in its market area,
which consists of Portage, Lake, Geauga, Cuyahoga, Summit, Stark, Medina, and
Lorain Counties in Ohio. The Bank has concentrated its activities on serving the
borrowing needs of local homeowners and builders in its market area by
originating both fixed-rate and adjustable-rate single-family mortgage loans, as
well as construction loans and commercial real estate and multi-family
residential real estate loans. In addition, to a lesser extent, the Bank
originates loans secured by second mortgages, including home equity line of
credit loans secured by single-family residential properties and loans secured
by savings deposits. Lending activities are influenced by the demand for and
supply of housing, competition among lenders, the level of interest rates, and
the availability of funds. Deposit flows and cost of funds are influenced by
prevailing market rates of interest, primarily on competing investments, account
maturities, and the level of personal income and savings in the market area.
FORWARD-LOOKING STATEMENTS
When used in this Annual Report, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area, and competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result 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.
OVERVIEW OF FINANCIAL CONDITION
AT JUNE 30, 1998, 1997, AND 1996
PVF had total assets of $433.3 million, $373.1 million, and $331.6 million at
June 30, 1998, 1997, and 1996, respectively. The primary source of the Bank's
increase in total assets has been its loan portfolio. Net loans receivable and
mortgage-backed securities totaled $373.6 million, $342.6 million, and $297.8
million at June 30, 1998, 1997, and 1996, respectively. The increase of $31.0
million in net loans and mortgage-backed securities at June 30, 1998 resulted
primarily from increases in one-to-four family residential loans, commercial
real estate loans, and one-to-four family residential construction loans of
$13.3 million, $9.6 million, and $6.2 million, respectively. The Bank's current
loans-to-one-borrower limitation was approximately $4.0 million at June 30,
1998. In addition, securities totaled $27.8 million, $14.0 million, and $14.1
million at the fiscal years ended June 30, 1998, 1997, and 1996, respectively.
The increase of $31.0 million in net loans and mortgage-backed securities, $13.8
million in securities, and $13.6 million in cash and cash equivalents at June
30, 1998 were funded by growth of $55.9 million in deposits.
The securities portfolio has been and will continue to be used primarily to meet
the regulatory liquidity requirements of the Bank in its deposit taking and
lending activities. The Bank has adopted a policy that permits investment only
in U.S. government and agency securities or Triple-A-rated securities. The Bank
invests primarily in securities having a final maturity of five years or less
that qualify as regulatory liquidity, federal funds sold, and deposits at the
Federal Home Loan Bank ("FHLB") of Cincinnati. Approximately $25.7 million, or
53.1% of the securities portfolio, has a repricing period of one year or less,
and the Bank has no plans to change the short-term nature of its securities
portfolio.
6
<PAGE> 9
The Bank's deposits totaled $344.2 million, $288.3 million, and $271.0 million
at June 30, 1998, 1997, and 1996, respectively. Advances from the FHLB of
Cincinnati amounted to $46.3 million, $47.4 million, and $27.5 million at June
30, 1998, 1997, and 1996, respectively. The opening of a new branch office along
with management's decision to aggressively compete with market savings rates
resulted in an increase in savings deposits of $55.9 million for the fiscal year
ended June 30, 1998.
CAPITAL
PVF's stockholders' equity totaled $31.2 million, $26.3 million, and $22.5
million at the fiscal years ended June 30, 1998, 1997, and 1996, respectively.
The increases were the result of the retention of net earnings.
The Bank's primary regulator, The Office of Thrift Supervision ("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 June 30, 1998, 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:
Park View Requirement for
Federal Percent of Well-Capitalized
(in thousands) Capital Assets (1) Institution
----------------------------------------
GAAP capital $ 31,727 7.21% N/A
Tangible capital $ 31,727 7.21% N/A
Core capital $ 31,727 7.21% 5.00%
Tier 1 risk-based capital$ 31,727 10.11% 6.00%
Risk-based capital $ 34,324 10.93% 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.
COMMON STOCK AND DIVIDENDS
The Company's common stock trades under the symbol "PVFC" on the Nasdaq
Small-Cap Market. A 10% stock dividend was issued in August 1995, a
three-for-two stock split effected in the form of a dividend was issued in
August 1996, a 10% stock dividend was issued in September 1997, and a
three-for-two stock split effected in the form of a dividend was issued in
August 1998. As adjusted to reflect all stock dividends and all stock splits,
the Company had 3,990,808 shares of common stock outstanding and approximately
318 holders of record of the common stock at August 31, 1998. OTS regulations
applicable to all Federal Savings Banks such as Park View Federal limit the
dividends that may be paid by the Bank to PVF. Any dividends paid may not reduce
the Bank's capital below minimum regulatory requirements.
The following table sets forth certain information as to the range of the high
and low bid prices for the Bank's common stock for the calendar quarters
indicated.(1)
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
-------------------------------------
High Bid Low Bid High Bid Low Bid
-------------------------------------
<S> <C> <C> <C> <C>
Fourth Quarter $ 18.83 $ 15.92 $ 10.99 $ 10.15
Third Quarter 16.00 12.67 10.15 9.09
Second Quarter 13.83 12.67 9.24 8.79
First Quarter 14.33 12.08 8.79 7.27
</TABLE>
(1) Quotations reflect inter-dealer prices, without retail mark-up, mark-down,
or commission, and may not represent actual transactions. Bid prices have been
adjusted to reflect the previously described stock dividends and stock splits.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity measures its ability to fund loans and meet withdrawals
of deposits and other cash outflows in a cost-effective manner. The Company's
primary sources of funds for operations are deposits from its primary market
area, principal and interest payments on loans and mortgage-backed securities,
sales of loans and mortgage-backed securities, and proceeds from maturing
securities and advances from the FHLB of Cincinnati. While loan and
mortgage-backed securities payments and maturing securities are relatively
stable sources of funds, deposit flows and loan prepayments are greatly
influenced by prevailing interest rates, economic conditions, and competition.
FHLB advances may be used on a short-term basis to compensate for deposit
outflows or on a long-term basis to support expanded lending and investment
activities.
The Bank uses its capital resources principally to meet its ongoing commitment
to fund maturing certificates of deposit and deposit withdrawals, repay
borrowings, fund existing and continuing loan commitments, maintain its
liquidity, and meet operating expenses. At June 30, 1998, the Bank had
commitments to originate loans totaling $27.6 million and had $44.6 million of
undisbursed loans in process. Scheduled maturities of certificates of deposit
during the twelve months following June 30, 1998 totaled $211.6 million.
Management believes that a significant portion of the amounts maturing during
fiscal 1999 will be
7
<PAGE> 10
reinvested with the Bank because they are retail deposits, however, no
assurances can be made that this will occur.
Park View Federal is required by current OTS regulations to maintain specified
liquid assets of at least 4% of its net withdrawable accounts plus short-term
borrowings. Such investments serve as a source of liquid funds which the Bank
may use to meet deposit withdrawals and other short-term needs. The Bank's most
liquid assets are cash and cash equivalents, which are short-term, highly-liquid
investments with original maturities equal to or less than three months that are
readily convertible to known amounts of cash. The levels of such assets are
dependent upon the Bank's operating, financing, and investment activities at any
given time. Management believes that the liquidity levels maintained are more
than adequate to meet potential deposit outflows, repay maturing FHLB advances,
fund new loan demand, and cover normal operations. Park View Federal's daily
liquidity ratio at June 30, 1998 was 13.4%, and its short-term liquidity ratio
was significantly above regulatory requirements.
ASSET/LIABILITY MANAGEMENT
The Company'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. Park View Federal'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 Company's exposure to interest rate risk is reviewed on a quarterly basis by
the Board of Directors and the ALCO. Exposure to interest rate risk is measured
with the use of interest rate sensitivity analysis to determine the Company'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 Company has
developed strategies to manage its liquidity, shorten its 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 residential mortgage loans and adjustable-rate
mortgage loans for the acquisition, development, and construction of residential
and commercial real estate, all of which are retained by the Bank for its
portfolio. In addition, all long-term, fixed-rate mortgages are underwritten
according to guidelines of the Federal Home Loan Mortgage Corporation ("FHLMC")
and the Federal National Mortgage Association ("FNMA") and are either swapped
with the FHLMC and the FNMA in exchange for mortgage-backed securities secured
by such loans which are then sold in the market or sold directly for cash in the
secondary market.
Interest rate sensitivity analysis is used to measure the Company's interest
rate risk by computing estimated changes in NPV of its cash flows from assets,
liabilities, and off-balance sheet items in the event of a range of assumed
changes in market interest rates. NPV represents the market value of portfolio
equity and is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items. This analysis
assesses the risk of loss in market risk sensitive instruments in the event of
an immediate and sustained 1 and 2 percent increase or decrease in market
interest rates. The Bank's Board of Directors has adopted an interest rate
PROFILE OF INTEREST SENSITIVE ASSETS
(3.0%) Fixed-rate other mortgage loans
(5.8%) Fixed-rate single-family mortgage loans
(36.1%) Adjustable-rate other mortgage loans
(42.1%) Adjustable-rate single-family mortgage loans
(4.8%) Overnight Fed Funds
(0.7%) Adjustable-rate mortgage-backed securities
(6.6%) Investment securities 60 months or less
(0.9%) Consumer loans
8
<PAGE> 11
PROFILE OF INTEREST SENSITIVE LIABILITIES
(54.9%) CD's 12 months or less
(3.5%) CD's 25 to 36 months
(13.6%) CD's 13 to 24 months
(1.0%) CD's over 36 months
(0.3%) Notes Payable 12 months or less
(8.1%) FHLB Advances over 36 months
(1.3%) FHLB Advances 13 to 36 months
(2.6%) FHLB Advances 12 months or less
(8.3%) Passbook accounts
(6.4%) Transaction accounts
risk policy which establishes maximum decreases in the NPV of 5% and 10% in
the event of an immediate and sustained 1 and 2 percent increase or decrease in
market interest rates. The following table presents the Bank's projected change
in NPV for the various rate shock levels at June 30, 1998. All market risk
sensitive instruments presented in this table are held to maturity or available
for sale. The Bank has no trading securities.
(in thousands)
<TABLE>
<CAPTION>
Change in Market Value of Dollar Percentage
Interest Rates Portfolio Equity Change Change
-------------- ---------------- ------ ------
<S> <C> <C> <C> <C>
+200 $ 44,137 $ (624) (2)%
+100 44,997 186 0
0 44,811
-100 44,146 (665) (1)
-200 43,190 (1,621) (4)
</TABLE>
The above table indicates that at June 30, 1998, in the event of either an
immediate and sustained increase or decrease in prevailing market interest
rates, the Bank's NPV would not be materially impacted, but would be expected to
decrease slightly. This is the case, because of the current flatness of the
yield curve along with the borrowers' and/or lenders' ability to prepay or
extend the terms of loans, investments, deposits, and borrowings. 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. At June 30, 1998, the Bank's estimated changes in NPV were within
the targets established by the Board of Directors.
NPV is calculated by the OTS using information provided by the Bank. The
calculation is based on the net present value of discounted cash flows utilizing
market prepayment assumptions and market rates of interest provided by Bloomberg
quotations and surveys performed during the quarter ended June 30, 1998, with
adjustments made to reflect the shift in the Treasury yield curve between the
survey date and the quarter-end date.
Computation of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments, and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Bank may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in the
computation of NPV. Actual values may differ from those projections set forth in
the table, should market conditions vary from assumptions used in the
preparation of the table. Certain assets, such as adjustable-rate loans, which
represent the Bank's primary loan product, have features which restrict changes
in interest rates on a short-term basis and over the life of the asset. In
addition, the proportion of adjustable-rate loans in the Bank's portfolio could
decrease in future periods if market interest rates remain at or decrease below
current levels due to refinance activity. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in the table. Finally, the ability of many
borrowers to repay their adjustable-rate debt may decrease in the event of an
interest rate increase.
In addition, the Bank uses interest rate sensitivity gap analysis to monitor the
relationship between the maturity and repricing of its interest-earning assets
and interest-bearing liabilities, while maintaining an acceptable interest rate
spread. Interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing
9
<PAGE> 12
within a specific time period and the amount of interest-bearing liabilities
maturing or repricing within that time period. A gap is considered positive when
the amount of interest-rate-sensitive assets exceeds the amount of
interest-rate-sensitive liabilities, and is considered negative when the amount
of interest-rate-sensitive liabilities exceeds the amount of
interest-rate-sensitive assets. Generally, during a period of rising interest
rates, a negative gap would adversely affect net interest income, while a
positive gap would result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap would result in an
increase in net interest income, while a positive gap would negatively affect
net interest income. Management's goal is to maintain a reasonable balance
between exposure to interest rate fluctuations and earnings. The following table
summarizes the Company's interest rate sensitivity gap analysis at June 30,
1998.
<TABLE>
<CAPTION>
Within 1-3 3-5 greater than
(in thousands) 1 Year Years Years 5 Years Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest-rate-sensitive assets......................... $206,003 $101,571 $ 76,146 $ 38,443 $422,163
Total interest-rate-sensitive liabilities.................... 221,560 106,027 14,956 42,808 385,351
Periodic GAP................................................. (15,557) (4,456) 61,190 (4,365) 36,812
Cumulative GAP............................................... (15,557) (20,013) 41,177 36,812
Ratio of cumulative GAP to total assets...................... (4.0)% (5.0)% 9.1% 8.5%
</TABLE>
RESULTS OF OPERATIONS
GENERAL
PVF Capital Corp.'s net income for the fiscal year ended June 30, 1998 was $4.9
million, or $1.25 basic earnings per share and $1.20 diluted earnings per share,
as compared to $3.6 million, or $0.95 basic earnings per share and $0.89 diluted
earnings per share for fiscal 1997, and $3.8 million, or $0.99 basic earnings
per share and $0.93 diluted earnings per share for fiscal 1996. All per share
amounts have been adjusted for stock dividends and stock splits.
Net income for the current year increased by $1.3 million from the prior fiscal
year and exceeded net income for fiscal 1996 by $1.1 million. In the first
quarter of fiscal 1997, the Bank recorded a one-time special assessment to
recapitalize the Savings Association Insurance Fund ("SAIF") that required
SAIF-insured savings institutions to pay 65.7 cents for every $100 of deposits.
This assessment was charged against earnings in fiscal 1997 and had an after-tax
impact of $1.1 million.
NET INTEREST INCOME
Net interest income amounted to $14.8 million for the fiscal year ended June 30,
1998, as compared to $14.4 million and $12.1 million for the fiscal years ended
June 30, 1997 and 1996, respectively. The increase in net interest income of
$0.4 million and $2.3 million from the fiscal year ended June 30, 1997 to 1998
and from the fiscal year ended June 30, 1996 to 1997, respectively, is due to
changes in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities. Tables 1 and 2 provide information as to change in
the Bank's net interest income.
Table 1 sets forth certain information relating to the Bank's average
interest-earning assets (loans and investments) and interest-bearing liabilities
(deposits and borrowings) and reflects the average yield on assets and average
cost of liabilities for the periods and at the dates indicated. Such yields and
costs are derived by dividing interest income or interest expense by the average
daily balance of assets or liabilities, respectively, for the periods presented.
During the periods indicated, non-accrual loans are included in the net loan
category.
This table also presents information for the periods indicated and at June 30,
1998 with respect to the difference between the weighted-average yield earned on
interest-earning assets and weighted-average rate paid on interest-bearing
liabilities, or "interest rate spread," which savings institutions have
traditionally used as an indicator of profitability. Another indicator of an
institution's net interest income is its "net yield on interest-earning assets,"
which is its net interest income divided by the average balance of net
interest-earning assets. Net interest income is affected by the interest rate
spread and by the relative amounts of interest-earning assets and
interest-bearing liabilities.
10
<PAGE> 13
Table 1
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES
FOR THE YEAR ENDED JUNE 30,
1998 1997 1996
------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
(in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans................................... $361,308 $ 32,500 9.00% $317,453 $ 29,419 9.27% $272,768 $ 25,572 9.38%
Mortgage-backed securities.............. 2,439 155 6.36 3,832 285 7.44 3,961 269 6.79
Securities and other interest-earning assets 27,918 1,710 6.13 19,706 1,259 6.39 32,732 1,920 5.87
-------- -------- -------- -------- -------- --------
Total interest-earning assets...... 391,665 34,365 8.77 340,991 30,963 9.08 309,461 27,761 8.97
-------- -------- --------
Non-interest-earning assets............. 9,291 9,773 7,775
-------- -------- --------
Total assets....................... $400,956 $350,764 $317,236
======== ======== ========
Interest-bearing liabilities:
Deposits................................ $321,039 $ 17,062 5.31 $272,341 $ 13,957 5.12 $270,975 $ 14,889 5.49
FHLB advances........................... 40,240 2,351 5.84 41,083 2,367 5.76 10,638 546 5.13
-------- -------- ---- -------- -------- ---- -------- -------- ----
Notes payable........................... 1,604 145 9.04 2,510 237 9.44 2,746 268 9.80
Total interest-bearing liabilities. 362,883 19,558 5.39 315,934 16,561 5.24 284,359 15,703 5.52
-------- ---- -------- ---- -------- ----
Non-interest-bearing liabilities........ 9,267 10,825 12,337
-------- -------- --------
Total liabilities ................. 372,150 326,759 296,696
Stockholders' equity...................... 28,806 24,005 20,540
-------- -------- --------
Total liabilities and stockholders'
equity $400,956 $350,764 $317,236
Net interest income....................... $ 14,807 $ 14,402 $ 12,058
======== ======== ========
Interest rate spread...................... 3.38% 3.84% 3.45%
==== ==== ====
Net yield on interest-earning assets...... 3.78% 4.22% 3.90%
==== ==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities. 107.93% 107.93% 108.83%
====== ====== ======
</TABLE>
Table 2 illustrates the extent to which changes in interest rates and shifts in
the volume of interest-related assets and liabilities have affected the Bank's
interest income and expense during the years indicated. The table shows the
changes by major component, distinguishing between changes relating to volume
(changes in average volume multiplied by average old rate), changes relating to
rate (changes in average rate multiplied by average old volume), and changes
relating to rate and volume (changes in average rate multiplied by changes in
average volume).
As is evidenced by these tables, interest rate changes unfavorably affected the
Bank's net interest income for the fiscal year ended June 30, 1998, while
favorably affecting the Bank's net interest income for the fiscal year ended
June 30, 1997. Due to the long-term nature of the Bank's loan portfolio and
short-term nature of its deposit portfolio, along with decreasing interest rates
and a relatively flat yield curve during much of the fiscal year ended June 30,
1998, the Bank experienced a decrease of 46 basis points in its interest rate
spread to 3.38% for fiscal 1998 from 3.84% for fiscal 1997, while during fiscal
1997 its interest rate spread increased 39 basis points from 3.45% for fiscal
1996. These changes in average interest rate spread resulted in a decrease in
net interest income for the year ended June 30, 1998 of $1.5 million due to
interest rate changes and an increase of $845,000 for the year ended June 30,
1997.
Net interest income was favorably affected by volume changes during the two
years ended June 30, 1998 and 1997. Accordingly, net interest income grew by
$2.1 million and $1.8 million due to volume changes for the fiscal years ended
June 30, 1998 and 1997, respectively. Changes attributable to both rate and
volume impacted net interest income negatively during the fiscal years ended
June 30, 1998 and June 30, 1997.
11
<PAGE> 14
The rate/volume analysis illustrates the effect that volatile interest rate
environments can have on a financial institution. Increasing interest rates or a
flattening yield curve will both have a negative effect on net interest income,
while decreasing interest rates or a steepening yield curve will both have a
positive effect on net interest income.
<TABLE>
<CAPTION>
Table 2 YEAR ENDED JUNE 30,
--------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
--------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------------- -------------------------------------
Rate/ Rate/
(in thousands) Volume Rate Volume Total Volume Rate Volume Total
------------------------------------- -------------------------------------
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans........................... $ 4,064 $ (864) $ (119) $ 3,081 $ 4,190 $ (295) $ (48) $ 3,847
Mortgage-backed securities...... (104) (41) 15 (130) (9) 26 (1) 16
Securities and other
interest-earning assets....... 525 (52) (22) 451 (764) 170 (67) (661)
--------- --------- -------- -------- --------- ------- ------- --------
Total interest-earning assets 4,485 (957) (126) 3,402 3,417 (99) (116)
----------------------------------------------------------- ---------
3,202
Interest expense:
Deposits........................ 2,496 517 92 3,105 75 (1,001) (5) (931)
FHLB advances................... (49) 34 (1) (16) 1,561 67 193 1,821
Other borrowings................ (86) (10) 4 (92) (23) (10) 1 (32)
------------------------------ ---------- ---------- --------- ------------------
Total interest-bearing
liabilities............... 2,361 541 95 2,997 1,613 (944) 189 858
-------------------------------------------------- --------- -------- ---------
Net interest income............... $ 2,124 $(1,498) $ (221) $ 405 $ 1,804 $ 845 $ (305) $ 2,344
======= ======= ====== ======== ======= ======== ====== =======
</TABLE>
PROVISION FOR LOAN LOSSES
Due to the increased risks associated with commercial real estate, construction,
and land loans, the Bank carefully monitors its loan portfolio and establishes
levels of unallocated and specific reserves for loan losses. Provisions for loan
losses are charged to earnings to bring the total allowances for loan losses to
a level considered adequate by management to provide for probable loan losses,
based on prior loss experience, volume and type of lending conducted by the
Bank, industry standards, and past due loans in the Bank's loan portfolio. The
Bank's policies require the review of assets on a regular basis, and the Bank
appropriately classifies loans as well as other assets if warranted. The Bank
establishes specific provisions for loan losses when a loan is deemed to be
uncollectible in an amount equal to the net book value of the loan or to any
portion of the loan deemed uncollectible. A loan that is classified as either
substandard or doubtful is assigned an allowance based upon the specific
circumstances on a loan-by-loan basis after consideration of the underlying
collateral and other pertinent economic and market conditions. In addition, the
Bank maintains unallocated allowances based upon the establishment of a risk
category for each type of loan in the Bank's portfolio.
The Company uses a systematic approach in determining the adequacy of its loan
loss allowance and the necessary provision for loan losses, whereby the loan
portfolio is reviewed generally and delinquent loan accounts are analyzed
individually, on a monthly basis. Consideration is given primarily to the types
of loans in the portfolio and the overall risk inherent in the portfolio, as
well as, with respect to individual loans, account status, payment history,
ability to repay and probability of repayment, and loan-to-value percentages.
After reviewing current economic conditions, changes in delinquency status, and
actual loan losses incurred by the Company, management establishes an
appropriate reserve percentage applicable to each category of loans, and a
provision for loan losses is recorded when necessary to bring the allowance to a
level consistent with this analysis. Management believes it uses the best
information available to make a determination with respect to the allowance for
loan losses, recognizing that future adjustments may be necessary depending upon
a change in economic conditions.
During 1998, the Company experienced growth in the loan portfolio of $28.5
million, or 8.3%, while
12
<PAGE> 15
maintaining the composition of the loan portfolio. In addition, the level of
impaired loans decreased from $4.1 million to $3.3 million, while allowance
related to impaired loans increased from $69,000 to $196,000. The decrease in
the level of impaired loans caused the percentage of impaired loans to allowance
for loan losses to increase from 65% to 82%. Net charge-offs increased from
$77,000 in 1997 to $234,000 in 1998. Therefore, taking into consideration the
growth of the portfolio, the lower level of impaired loans, as well as the
higher level of net charge-offs and the overall performance of the portfolio,
the Company provided $246,000 of additional provision to maintain the allowance
at a level deemed appropriate of $2.7 million.
During 1997, the Company experienced growth in the loan portfolio of $52.6
million, or 18.2%, while maintaining the composition of the loan portfolio.
Although the level of impaired loans increased from $2.4 million to $4.1
million, the allowance related to impaired loans decreased from $394,000 to
$69,000 due to the adequate underlying value of impaired loans. Therefore,
despite the fact that the level of impaired loans increased, causing the
percentage of impaired loans to allowance for loan losses to decrease from 109%
to 65%, this did not result in a need to increase the allowance significantly.
Net charge-offs also decreased from $254,000 in 1996 to $77,000 in 1997.
Therefore, taking into consideration the growth of the portfolio, as well as the
low level of net charge-offs and the overall performance of the portfolio, the
Company provided $187,000 of additional provision to maintain the allowance at a
level deemed appropriate of $2.7 million.
NON-INTEREST INCOME
Non-interest income amounted to $1.6 million, $1.3 million, and $1.7 million for
the fiscal years ended June 30, 1998, 1997, and 1996 respectively. The
fluctuations in non-interest income are due primarily to fluctuations in income
derived from mortgage banking activities and fee income on deposit accounts.
Income attributable to mortgage banking activities consists of loan servicing
income, gains and losses on the sale of loans and mortgage-backed securities,
and market valuation provisions and recoveries. Income from mortgage banking
activities amounted to $869,000, $663,000, and $925,000 for the fiscal years
ended June 30, 1998, 1997, and 1996, respectively. The increase in income from
mortgage banking activities of $206,000 from the fiscal year ended June 30, 1997
to 1998 is primarily due to an increase in net profit realized on the sale of
loans and mortgage-backed securities. Other non-interest income amounted to
$727,000, $673,000, and $822,000 for the fiscal years ended June 30, 1998, 1997,
and 1996, respectively. Changes in other non-interest income are the result of
service and other miscellaneous fee income, income realized on the sale of
assets and investments, and the disposal of real estate owned properties.
NON-INTEREST EXPENSE
Non-interest expense amounted to $8.9 million, $10.0 million, and $8.0 million
for the fiscal years ended June 30, 1998, 1997, and 1996, respectively. The
principal component of non-interest expense is compensation and related benefits
which amounted to $4.5 million, $4.4 million, and $4.1 million for the fiscal
years ended June 30, 1998, 1997, and 1996, respectively. The increase in
compensation for the fiscal years ended June 30, 1998 and 1997 is due primarily
to growth in the staff, the opening of a new branch in fiscal 1998, employee
401K benefits, a compensation incentive plan for both management and loan
originators, and inflationary salary and wage adjustments to employees. Office
occupancy totaled $1.6 million, $1.6 million, and $1.4 million for the fiscal
years ended June 30, 1998, 1997, and 1996, respectively. The increased occupancy
expense is attributable to maintenance and repairs to office buildings, and
costs attributable to opening and operating additional branch offices. Other
non-interest expense totaled $2.7 million, $4.0 million, and $2.4 million for
the fiscal years ended June 30, 1998, 1997, and 1996, respectively. The increase
in other non-interest expense of $1.6 million from the fiscal year ended June
30, 1996 to 1997 is attributable to the previously mentioned SAIF assessment.
Changes in other non-interest expense are the result of advertising,
professional and legal services, regulatory and insurance expenses, and
franchise tax expense.
FEDERAL INCOME TAXES
The Bank's federal income tax expense was $2.4 million, $1.9 million, and $1.6
million for the fiscal years ended June 30, 1998, 1997, and 1996, respectively.
Due to the availability of tax credits for the fiscal year ended June 30, 1998
and statutory bad debt deductions for the fiscal year ended June 30, 1996, and
other miscellaneous deductions, the Bank's effective federal income tax rate was
below the expected tax rate of 35% with an effective rate of 33%, 34%, and 30%
for the fiscal years ended June 30, 1998, 1997, and 1996, respectively.
YEAR 2000
Park View Federal realizes the challenges of the Year 2000 issue. In compliance
with regulatory guidelines, a project team was assembled to review the effects
the century
13
<PAGE> 16
change has on current systems and to assess the potential risks that it
presents. A formal plan of action was developed to address and correct this
issue and has been approved by the Bank's Board of Directors with the full
support of senior management. An inventory of internal systems, both computer
and non-computer related, was completed in this process. Relationships with
third-party vendors were also analyzed. Potential weaknesses were then
documented and prioritized as to their effect on critical business functions.
Our major software supplier has dedicated tremendous resources to help in
addressing this issue. They recently released the remediated version of the
system that has undergone extensive beta testing. All user departments are
involved in the testing process in-house to assure validation of the changes.
Our software supplier has advised us that this testing is expected to reveal any
potential problems well in advance of the impending deadline. At the same time,
testing will take place of those external relationships with which the Bank
exchanges information. Additional testing is also expected to take place on all
other mission-critical information systems. It is believed that this readiness
will increase the likelihood of uninterrupted operation of Bank functions.
In addressing this issue, the Bank has used its current internal staffing with
little reliance on outside resources. Major vendors have provided remediated
software at no expense to the Bank. No major system had to be replaced and none
is expected to be replaced in the coming years. As a result, expenses were
approximately $5,000 for fiscal year 1997 with expenditures for fiscal year 1998
estimated at $20,000. These expenditures are in the areas of customer awareness
and additional software tools for testing.
Rapid and accurate data processing is essential to Company operations. If
testing reveals that any system critical to continued business operation should
fail, all internal and external resources available will be directed toward
correcting these systems. System delays, mistakes, or failures could have an
adverse impact on the Company. We are currently under contract with an external
consulting service should a system failure occur. End-user contingencies are
also being developed. It is expected that these plans will be in place during
the fourth quarter of 1998.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein have
been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, substantially all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a more significant impact on the Bank's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services since
such prices are affected by inflation to a larger extent than interest rates.
For further information regarding the effect of interest rate fluctuations on
the Bank, see "Asset/Liability Management."
EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 requires public business enterprises to additionally report items that
affect comprehensive income but not net income. Examples of these items relevant
to the Company include unrealized gains and losses on securities available for
sale. At this time, the Company does not have other comprehensive income to be
reported.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 requires public business
enterprises to report certain information about operating segments. Also
required is certain information about products and services, geographic areas in
which an enterprise operates, and any major customers. SFAS No. 131 is effective
for years beginning after December 15, 1997. Management does not expect the
implementation of SFAS No. 131 to have a material impact on the Company's
consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes comprehensive accounting and reporting requirements for derivative
instruments and hedging activities. This statement requires entities to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for gains and losses resulting from
changes in fair value of the derivative instrument depends on the use of the
derivative and the type of risk being hedged. This statement is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999. Earlier
adoption, however, is permitted. At the present time, the Bank has not fully
analyzed the effect or timing of the adoption of SFAS No. 133 on the Bank's
consolidated financial statements.
14
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PVF Capital Corp. and Subsidiaries
Cleveland, Ohio:
We have audited the accompanying consolidated statements of financial condition
of PVF Capital Corp. and subsidiaries (Company) as of June 30, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended June 30, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PVF Capital Corp.
and subsidiaries as of June 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Cleveland, Ohio
July 16, 1998
15
<PAGE> 18
PVF CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
------ ---- ----
<S> <C> <C>
Cash and amounts due from depository institutions $ 2,447,631 7,760,029
Interest bearing deposits 394,331 445,401
Federal funds sold 20,375,000 1,375,000
------------ ------------
Cash and cash equivalents 23,216,962 9,580,430
Securities held to maturity (fair values of
$27,767,525 and $13,899,370, respectively) 27,800,000 13,995,350
Mortgage-backed securities held to maturity, net (market
values of $2,965,247 and $516,579, respectively) 2,950,856 511,530
Loans receivable held for long-term investment, net of allowance
for loan losses of $2,686,521 and $2,674,537, respectively 368,998,087 341,402,566
Loans receivable held for sale, net 1,644,735 709,604
Office properties and equipment, net 2,313,546 1,882,390
Real estate in development 938,071 909,758
Real estate owned 699,236 --
Investment required by law
Stock in the Federal Home Loan Bank of Cincinnati 3,507,564 2,762,314
Prepaid expenses and other assets 1,210,099 1,327,358
------------ ------------
Total assets $433,279,156 373,081,300
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Deposits $344,228,729 288,269,674
Advances from the Federal Home Loan Bank of Cincinnati 46,324,456 47,405,424
Notes payable 1,060,000 2,310,000
Advances from borrowers for taxes and insurance 4,931,114 4,511,595
Accrued expenses and other liabilities 5,526,147 4,311,191
------------ ------------
Total liabilities 402,070,446 346,807,884
Commitments -- --
Stockholders' equity
Serial preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value, 5,000,000 shares authorized;
3,990,808 and 3,485,007 shares issued and outstanding,
respectively 39,908 25,556
Additional paid-in capital 14,517,452 14,522,275
Retained earnings (substantially restricted) 16,651,350 11,725,585
------------ ------------
Total stockholders' equity 31,208,710 26,273,416
Total liabilities and stockholders' equity $433,279,156 373,081,300
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 19
PVF CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans $32,499,826 29,418,869 25,572,082
Mortgage-backed securities 155,446 285,246 268,604
Cash and securities 1,709,951 1,258,732 1,920,620
----------- ----------- -----------
Total interest income 34,365,223 30,962,847 27,761,306
Interest expense
Deposits 17,062,418 13,957,543 14,888,819
Short-term borrowings 978,144 1,182,874 327,751
Long-term borrowings 1,517,766 1,420,346 486,609
----------- ----------- -----------
Total interest expense 19,558,328 16,560,763 15,703,179
----------- ----------- -----------
Net interest income 14,806,895 14,402,084 12,058,127
Provision for loan losses 246,000 187,000 417,000
----------- ----------- -----------
Net interest income after provision for loan losses 14,560,895 14,215,084 11,641,127
----------- ----------- -----------
Noninterest income
Service and other fees 621,277 519,512 462,985
Mortgage banking activities, net 869,535 663,002 924,657
Gain on sale of securities available for sale, net -- -- 74,721
Other, net 105,905 153,253 284,505
----------- ----------- -----------
Total noninterest income, net 1,596,717 1,335,767 1,746,868
Noninterest expense
Compensation and benefits 4,512,664 4,423,470 4,136,243
Office, occupancy, and equipment 1,631,802 1,603,583 1,433,037
Insurance 255,365 445,804 737,845
Special SAIF assessment -- 1,707,867 --
Professional and legal 264,555 208,164 167,689
Other 2,185,965 1,611,475 1,513,650
----------- ----------- -----------
Total noninterest expense 8,850,351 10,000,363 7,988,464
----------- ----------- -----------
Income before federal income taxes 7,307,261 5,550,488 5,399,531
Federal income taxes
Current 2,332,125 1,975,742 1,280,375
Deferred 47,230 (72,093) 333,000
----------- ----------- -----------
2,379,355 1,903,649 1,613,375
----------- ----------- -----------
Net income $ 4,927,906 3,646,839 3,786,156
=========== =========== ===========
Basic earnings per share $ 1.25 .95 .99
=========== =========== ===========
Diluted earnings per share $ 1.20 .89 .93
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
PVF CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Net
Additional Unrealized
Common Paid-In Retained Securities
Stock Capital Earnings Losses Total
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995 $ 14,041 8,155,885 10,647,942 -- 18,817,868
Net income -- -- 3,786,156 -- 3,786,156
Stock dividend issued,
140,325 shares 1,404 1,822,821 (1,824,225) -- --
Cash paid in-lieu of
fractional shares -- -- (1,098) -- (1,098)
Stock options exercised,
4,537 shares 45 24,955 -- -- 25,000
Net change in unrealized
securities losses, net of
taxes of $79,471 -- -- -- (154,268) (154,268)
Three-for-two stock split
effected in the form of a
dividend 7,745 (7,745) -- -- --
---------- ----------- ----------- ----------- -----------
Balance at June 30, 1996 23,235 9,995,916 12,608,775 (154,268) 22,473,658
Net income -- -- 3,646,839 -- 3,646,839
Stock dividend issued,
232,224 shares 2,321 4,526,359 (4,528,680) -- --
Cash paid in-lieu of
fractional shares -- -- (1,349) -- (1,349)
Net change in unrealized
securities losses, net of
taxes of $79,471 -- -- -- 154,268 154,268
---------- ----------- ----------- ----------- -----------
Balance at June 30, 1997 25,556 14,522,275 11,725,585 -- 26,273,416
Net income -- -- 4,927,906 -- 4,927,906
Stock options exercised,
127,278 shares 1,049 8,480 -- -- 9,529
Cash paid in-lieu of
fractional shares -- -- (2,141) -- (2,141)
Three-for-two stock split
effected in the form of a
dividend 13,303 (13,303) -- -- --
---------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 $ 39,908 14,517,452 16,651,350 -- 31,208,710
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 21
PVF CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income $ 4,927,906 3,646,839 3,786,156
Adjustments required to reconcile net income to net
cash used in operating activities
Accretion of discount on securities (4,650) (1,250) (25,475)
Depreciation and amortization 512,290 468,296 477,946
Provision for loan losses 246,000 187,000 417,000
Accretion of unearned discount and deferred loan
origination fees, net (1,464,630) (1,660,399) (1,554,098)
Deferred income tax provision (47,230) 72,093 (333,000)
Gain on sale of securities, net -- -- (74,721)
Proceeds from loans held for sale 81,294,421 46,020,308 36,564,603
Originations of loans held for sale (82,229,552) (53,500,828) (51,350,242)
Mortgage banking operations, excluding mortgage
loan servicing fees and amortization of MSRs (483,915) (250,757) (382,898)
Net change in other assets and other liabilities 1,342,926 (62,112) 1,461,043
------------- ------------- -------------
Net cash provided by (used in) operating
activities 4,093,566 (5,080,810) (11,013,686)
------------- ------------- -------------
Investing activities
Loans originated (143,825,436) (136,862,188) (105,097,698)
Principal repayments on loans 116,232,185 87,823,393 76,464,071
Loans purchased -- -- (13,161,755)
Loans sold -- -- 10,976,057
Proceeds from sales of mortgage-backed securities
available for sale -- 12,598,136 894,443
Principal repayments on mortgage-backed securities
available for sale -- 241,974 195,177
Principal repayments on mortgage-backed securities
held to maturity 589,488 123,716 2,246,171
Proceeds from sales of securities available
for sale -- -- 10,007,188
Purchase of mortgage-backed securities held to maturity (3,017,075) -- --
Purchase of securities held to maturity (27,800,000) -- (24,298,789)
Maturities of securities held to maturity 14,000,000 100,000 41,491,590
Federal Home Loan Bank (FHLB) stock purchased,
net (745,250) (882,314) (123,865)
(Additions) disposal to office properties and
equipment (943,445) 220,880 (322,935)
Disposals of real estate owned 1,025,818 508,837 826,080
(Additions) disposals of real estate in development, net (28,313) (54,867) 30,859
------------- ------------- -------------
Net cash provided by (used in)
investing activities (44,512,028) (36,182,433) 126,594
------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 22
PVF CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Financing activities
Payments on FHLB advances $(92,580,968) (72,576,227) (25,018,349)
Proceeds from FHLB advances 91,500,000 92,500,000 37,500,000
Proceeds from notes payable -- -- 1,200,000
Repayment of notes payable (1,250,000) (400,000) (290,000)
Net increase (decrease) in NOW and passbook savings 5,693,428 (48,405) 5,132,229
Proceeds from issuance of certificates of deposit 85,884,130 58,655,161 45,556,108
Payments on maturing certificates of deposit (35,618,504) (41,382,167) (51,933,694)
Other 426,908 305,095 (87,566)
------------ ------------ ------------
Net cash provided by financing activities 54,054,994 37,053,457 12,058,728
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 13,636,532 (4,209,786) 1,171,636
Cash and cash equivalents at beginning of year 9,580,430 13,790,216 12,618,580
------------ ------------ ------------
Cash and cash equivalents at end of year $ 23,216,962 9,580,430 13,790,216
============ ============ ============
Supplemental disclosures of cash flow information
Cash payments of interest expense $ 19,530,151 16,416,368 15,611,439
Cash payments of income taxes 2,617,000 1,580,000 1,165,000
============ ============ ============
Supplemental schedule of noncash investing and
financing activities
Loans exchanged for mortgage-backed securities $ -- 5,376,484 8,052,331
Transfers from real estate owned (989,299) (481,567) (706,538)
Transfers to real estate owned 2,714,353 428,982 759,122
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 23
09/12/98
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997, and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
The accounting and reporting policies of PVF Capital Corp. and its
subsidiaries (Company) conform to generally accepted accounting
principles and general industry practice. The Company's principal
subsidiary, Park View Federal Savings Bank (Bank), is principally engaged
in the business of offering savings 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 and eastern Lorain
Counties, Ohio. The deposit accounts of the Bank are insured under the
Savings Association Insurance Fund (SAIF) of the Federal Deposit
Insurance Corporation (FDIC) and are backed by the full faith and credit
of the United States government. The following is a description of the
significant policies which the Company follows in preparing and
presenting its consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PVF Capital
Corp. and its wholly owned subsidiaries, Park View Federal Savings Bank
and PVF Service Corporation. All significant intercompany transactions
and balances are eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with 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.
ALLOWANCE FOR LOSSES
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal and interest according to the contractual
terms of the loan agreement. Since the Bank's loans are primarily
collateral dependent, measurement of impairment is based on the fair
value of the collateral.
The adequacy of the allowance for loan losses is periodically evaluated
by the Bank based upon the overall portfolio composition and general
market conditions. 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. Future adjustments to the
allowance may also be required by regulatory examiners based on their
judgments about information available to them at the time of their
examination.
Uncollectible interest on loans that are contractually 90 days or more
past due is charged off, or an allowance is established. The allowance is
established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the
extent cash payments are received until the loan is determined to be
performing in accordance with the applicable loan terms in which case the
loan is returned to accrual status.
MORTGAGE BANKING ACTIVITIES
Mortgage loans held for sale are carried at the lower of cost or market
value, determined on a net aggregate basis.
21
<PAGE> 24
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company retains servicing on loans that are sold. Effective January
1, 1996, the Company adopted Statement of Financial Accounting Standards
No. 122, Accounting for Mortgage Servicing Rights. Effective January 1,
1997, the Company adopted Statement of Financial Accounting Standards No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which supersedes SFAS No. 122 and
provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities.
As a result of the adoption, the Company recognizes an asset for mortgage
servicing rights based on an allocation of total loan cost using relative
fair values, or a liability for mortgage servicing rights based on fair
value, if the benefits of servicing are not expected to adequately
compensate the Company. The cost of mortgage servicing rights is
amortized in proportion to, and over the period of, estimated net
servicing revenues. Impairment of mortgage servicing rights is assessed
based on the fair value of those rights. Fair values are estimated using
discounted cash flows based on current market interest rates and
prepayment assumptions. For purposes of measuring impairment, the rights
are stratified based on predominant risk characteristics of the
underlying loans such as interest rates and scheduled maturity. The
amount of impairment recognized is the amount by which the capitalized
mortgage servicing rights exceed their fair value. The Company monitors
prepayments, and in the event that actual prepayments exceed original
estimates, amortization is adjusted accordingly.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Company classifies all securities as held to maturity or available
for sale. Securities held to maturity are limited to debt securities that
the holder has the positive intent and the ability to hold to maturity;
these securities are reported at amortized cost. Securities available for
sale consist of all other securities; these securities are reported at
fair value, and unrealized gains and losses are not reflected in earnings
but are reflected as a separate component of stockholders' equity, net of
tax. Investment and mortgage-backed securities that could be sold in the
future because of changes in interest rates or other factors are not be
classified as held to maturity.
Gains or losses on the sales of all securities are recognized at the date
of sale (trade date).
OFFICE PROPERTIES AND EQUIPMENT
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.
FEDERAL INCOME TAXES
The Company files a consolidated tax return with its wholly owned
subsidiaries and provides deferred federal income taxes in recognition of
temporary differences between financial statement and income tax
reporting. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled, and the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(Continued)
22
<PAGE> 25
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
LOAN ORIGINATION AND COMMITMENT FEES
The Bank defers loan origination and commitment fees and certain direct
loan origination costs and amortizes the net amount over the lives of the
related loans as a yield adjustment if the loans are held for investment,
or recognizes the net fees as mortgage banking income when the loans are
sold.
REAL ESTATE IN DEVELOPMENT
Real estate in development is carried at the lower of cost, including
capitalized holding costs, or fair value less estimated selling costs.
STATEMENTS OF CASH FLOWS
For purposes of the consolidated statements of cash flows, the Company
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.
EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," was adopted for 1998 with all
prior-period earnings per share data restated. The statement requires
dual presentation of basic earnings per share and diluted earnings per
share on the Consolidated Statements of Operations. 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
assumed exercise of stock options is included in the calculation of
diluted earnings per share.
The per share data for 1998, 1997, and 1996 are adjusted to reflect the
three-for-two stock issuance declared July 1996; and the 10 percent stock
dividend declared July 1997 and the three-for-two stock issuance declared
July, 1998.
RECLASSIFICATION
Certain reclassifications have been made to the prior year amounts to
conform to the current year presentation.
(2) Securities
Securities held to maturity at June 30, 1998 and 1997, are summarized as
follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
<S> <C> <C> <C> <C>
United States Government and
agency securities $27,800,000 4,565 (37,040) 27,767,525
=========== =========== =========== ===========
Due after five years $18,000,000 -- (37,040) 17,962,960
Due after one year through five years 9,800,000 4,565 -- 9,804,565
----------- ----------- ----------- -----------
$27,800,000 4,565 (37,040) 27,767,525
=========== =========== =========== ===========
</TABLE>
(Continued)
23
<PAGE> 26
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government and
agency securities $ 13,995,350 - (95,980) 13,899,370
============ ============ ====== ==========
Due after one year through five years 13,995,350 - (95,980) 13,899,370
---------- ------------ ------ ----------
$ 13,995,350 - (95,980) 13,899,370
============ ============ ====== ==========
</TABLE>
There were no sales of securities for the year ended June 30, 1998 or
1997. Realized gains and losses on sales of securities available for sale
were $100,658 and $25,937, respectively, for the year ended June 30,
1996.
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity at June 30, 1998 and 1997, are
summarized as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------
1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC mortgage-backed securities $ 2,932,491 14,391 - 2,946,882
Accrued interest receivable 18,365 - - 18,365
-------------- --------- ------------ -----------
$ 2,950,856 14,391 - 2,965,247
============== ====== ============ =========
Due after one year through five years $ 2,950,856 14,391 - 2,965,247
============== ====== ============ =========
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------
1997
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC mortgage-backed securities $ 504,903 5,049 - 509,952
Accrued interest receivable 6,627 - - 6,627
---------- -------- ------------ ---------
$ 511,530 5,049 - 516,579
========== ===== ============ =======
Due after ten years $ 511,530 5,049 - 516,579
========== ===== ============ =======
</TABLE>
(Continued)
24
<PAGE> 27
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) LOANS RECEIVABLE HELD FOR LONG-TERM INVESTMENT
Loans receivable held for long-term investment at June 30, 1998 and 1997,
consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Real estate mortgages
One-to-four family residential $ 140,562,371 128,186,837
Home equity line of credit 18,761,725 16,941,154
Multifamily residential 31,493,450 31,090,035
Commercial 94,587,534 84,940,296
Land 30,462,374 32,045,277
Construction 96,062,788 82,610,430
--------------- -----------
Total real estate mortgages 411,930,242 375,814,029
Consumer 3,887,263 3,595,550
--------------- -----------
415,817,505 379,409,579
Accrued interest receivable 2,198,910 2,086,288
Deferred loan origination fees (1,673,697) (1,717,859)
Unearned discount (35,887) (47,715)
Undisbursed portion of loan proceeds (44,622,223) (35,653,190)
Allowance for loan losses (2,686,521) (2,674,537)
--------------- -----------
$ 368,998,087 341,402,566
=============== ===========
</TABLE>
A summary of the changes in the allowance for loan losses for the years
ended June 30, 1998, 1997, and 1996, is as follows (write-offs include
transfers to real estate owned):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Beginning Balance $ 2,674,537 2,564,720 2,402,098
Provision charged to operations 246,000 187,000 417,000
Write-offs (236,593) (197,875) (265,361)
Recoveries 2,577 120,692 10,983
--------------- --------- ---------
Ending Balance $ 2,686,521 2,674,537 2,564,720
=============== ========= =========
</TABLE>
The following is a summary of the principal balances (as rounded) of
loans on nonaccrual status, and loans past due 90 days or more which were
on accrual status, at June 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Loans on nonaccrual status
Real estate mortgages
One-to-four family residential $ 1,242,000 918,000
Construction and land 2,026,000 3,179,000
Consumer 15,000 40,000
------------ ---------
Total loans on nonaccrual status 3,283,000 4,137,000
------------ ---------
Past due loans on accrual status
Real estate mortgages
Construction and land 163,000 476,000
------------ ---------
Total past due loans $ 3,446,000 4,613,000
============ =========
</TABLE>
(Continued)
25
<PAGE> 28
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
It is the Bank's policy to not record into income partial interest
payments. During the years ended June 30, 1998 and 1997, gross interest
income of $204,736 and $310,162, respectively, would have been recorded
on loans accounted for on a nonaccrual basis if the loans had been
current throughout the period.
At June 30, 1998 and 1997, the recorded investment in loans which have
been identified as being impaired totaled $3,283,000 and $4,137,000,
respectively. Included in the impaired amount at June 30, 1998 and 1997,
is $453,113 and $159,863, respectively, related to loans with a
corresponding valuation allowance of $196,386 and $68,763, respectively.
The Company recognized no interest on impaired loans in 1998, 1997, and
1996 (during the portion of the respective years that they were
impaired).
Average impaired loans for the years ended June 30, 1998, 1997, and 1996
amounted to $3,791,500, $3,245,000, and $2,979,000, respectively.
(5) LOANS RECEIVABLE HELD FOR SALE
Loans receivable held for sale at June 30, 1998 and 1997, consist of the
following:
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate mortgages $ 1,660,719 30,065 - 1,690,784
Deferred loan origination fees (15,984) - - (15,984)
------------ ---------- --------- -----------
$ 1,644,735 - - 1,674,800
============ ========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate mortgages $ 721,502 14,286 - 735,788
Deferred loan origination fees (11,898) - - (11,898)
--------- --------- --------- -------
$ 709,604 14,286 - 723,890
============ ====== ========= =======
</TABLE>
Mortgage banking activities, net, for each of the years in the three-year
period ended June 30, 1998, consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Mortgage loan servicing fees $ 617,080 580,328 541,759
Amortization of mortgage servicing rights (231,460) (168,083) -
Gross realized
Gains on sales of loans 1,209,893 975,826 831,283
Losses on sales of loans (725,978) (578,053) (347,142)
Gains on sales of mortgage-backed securities - 16,673 21,386
Losses on sales of mortgage-backed securities - (81,759) (40,625)
Market valuation provision for losses on loans
held for sale - (176,514) (82,004)
Market valuation recoveries - 94,584 -
------------- -------- -------
$ 869,535 663,002 924,657
=========== ======= =======
</TABLE>
(Continued)
26
<PAGE> 29
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of the changes in the allowance for mortgage banking market
value losses for the years ended June 30, 1998, 1997, and 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C>
Balance at beginning of year $ - 13,314 -
Market valuation provision for losses on loans
held for sale - 176,514 82,004
Market valuation loss on loans and mortgage-
backed securities sold - (95,244) -
Market valuation recoveries - (94,584) -
Discount on loans transferred to held for investment - - (68,690)
------ --------- --------
Balance at end of year $ - - 13,314
====== ========= ========
</TABLE>
At June 30, 1998, 1997, and 1996, the Bank was servicing whole and
participation mortgage loans for others aggregating approximately
$233,893,979; $195,250,000; and $171,043,000, respectively. The Bank had
$3,304,702; and $2,186,100 at June 30, 1998 and 1997, respectively, of
funds collected on mortgage loans serviced for others due to investors,
which is included in accrued expenses and other liabilities.
Originated mortgage servicing rights capitalized and amortized during the
years ended June 30, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C>
Beginning balance $ 451,000 241,000 -
Originated 386,600 378,000 241,000
Amortized (231,400) (168,000) -
---------- ------- -----
Ending balance $ 606,200 451,000 241,000
========== ======= =======
Estimated fair value $ 1,639,261 865,481 241,000
========= ======= =======
</TABLE>
No valuation allowance has been established for mortgage servicing rights
as there has been no impairment on those rights.
(6) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at cost, less accumulated depreciation
and amortization at June 30, 1998 and 1997, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and land improvements $ 207,092 207,092
Building and building improvements 1,062,525 1,059,793
Leasehold improvements 1,847,269 1,457,711
Furniture and equipment 3,512,837 2,961,682
------------- ---------
6,629,723 5,686,278
Less accumulated depreciation and amortization (4,316,177) (3,803,888)
------------- ---------
$ 2,313,546 1,882,390
============= =========
</TABLE>
(Continued)
27
<PAGE> 30
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) DEPOSITS
Deposit balances at June 30, 1998 and 1997, are summarized by interest
rate as follows:
<TABLE>
<CAPTION>
1998 1997
------------------ -------------------
Amount % Amount %
------ ---- ------- ----
<S> <C> <C> <C> <C> <C>
NOW and money
market accounts Noninterest bearing $ 6,261,947 1.8% $ 5,619,988 1.9%
2.00 - 5.00% 24,756,893 7.2 19,963,938 6.9
---------- ------- ------------- -------
31,018,840 9.0 25,583,926 8.8
Passbook savings 3.00 - 5.00% 31,844,333 9.3 31,585,818 11.0
Certificates of deposit 2.50 - 2.99% 385,101 .1 456,618 .2
3.00 - 3.99 - - - -
4.00 - 4.99 9,568,477 2.8 12,352,923 4.2
5.00 - 5.99 121,695,954 35.4 119,613,292 41.5
6.00 - 6.99 137,125,129 39.8 82,592,866 28.7
7.00 - 7.99 12,406,221 3.5 15,906,866 5.5
8.00 - 8.99 184,674 .1 170,361 .1
9.00 - 9.99 - - 7,004 -
--------------- ------- ------------- -------
281,365,556 81.7 231,099,930 80.2
--------------- ----- ------------- ------
$ 344,228,729 100.0% $ 288,269,674 100.0%
=============== ===== ============= =====
Weighted average rate on deposits 5.32% 5.22%
====== ======
</TABLE>
<TABLE>
<CAPTION>
1998 1997
------------------- ------------------
Amount % Amount %
------- --- ------ ----
Remaining term to maturity of
certificates of deposit
<S> <C> <C> <C> <C> <C>
12 months or less $ 211,559,590 75.2% $ 172,492,046 74.6%
13 to 24 months 52,392,548 18.6 32,592,344 14.1
25 to 36 months 13,613,228 4.8 20,728,309 9.0
Over 36 months 3,800,190 1.4 5,287,231 2.3
--------------- ------- ------------- -------
$ 281,365,556 100.0% $ 231,099,930 100.0%
=============== ===== =========== =====
Weighted average rate on certificates
of deposit 5.95% 5.90%
====== ======
</TABLE>
Time deposits in amounts of $100,000 or more totaled $47,573,221 and
$48,907,331 at June 30, 1998 and 1997, respectively.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NOW accounts $ 599,436 529,889 414,869
Passbook accounts 870,661 867,687 865,170
Certificates of deposit 15,592,321 12,559,967 13,608,780
---------- ---------- ----------
$ 17,062,418 13,957,543 14,888,819
========== ========== ==========
</TABLE>
(Continued)
28
<PAGE> 31
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF CINCINNATI
Advances from the Federal Home Loan Bank of Cincinnati, with maturities
and interest rates thereon at June 30, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
Maturity Interest Rate 1998 1997
-------- ------------- ---- ----
<S> <C> <C> <C> <C>
March 1998 5.50 $ - 5,000,000
March 2001 5.93 5,000,000 5,000,000
February 2003 6.00 500,000 500,000
February 2006 6.05 824,456 905,424
September 1998 6.63 - 26,000,000
March 1999 6.50 10,000,000 10,000,000
February 2008 5.37 10,000,000 -
March 2008 5.15 5,000,000 -
March 2008 5.64 10,000,000 -
March 2008 5.13 5,000,000 -
--------------- ----------
$ 46,324,456 47,405,424
=============== ==========
Weighted average interest rate 5.71% 6.39%
==== ====
</TABLE>
The Bank maintains two lines of credit, totaling $60,000,000, with the
Federal Home Loan Bank of Cincinnati (FHLB). The $40,000,000 repurchase
line matures in September 1998. The Bank has chosen to take daily
advances from this line, with the interest rate set daily. The
$20,000,000 cash management line matures in December 1998. Serving as
collateral for such advances, the Bank has pledged mortgage loans with
unpaid principal balances aggregating approximately $69,486,683 and
$71,108,136 at June 30, 1998 and 1997, respectively.
In addition, stock in the FHLB is pledged for such advances.
The Bank has the capacity to borrow up to 25 percent of its assets, upon
approval of the FHLB. At June 30, 1998 and 1997, the Bank had the
capacity to borrow an additional $62,000,000 and $46,000,000,
respectively, in FHLB advances.
(9) NOTES PAYABLE
Notes payable consist of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Maturity Interest Rate 1998 1997
-------- ------------- ---- ----
<S> <C> <C> <C> <C>
Promissory note September 2000 9.50% $ - 600,000
Mortgage note July 2000 9.00% 1,060,000 1,710,000
--------- ---------
$ 1,060,000 2,310,000
========= =========
</TABLE>
On June 30, 1996, PVF Capital Corp. secured a mortgage note from a
federally insured institution at a fixed interest rate. Interest payments
are due on the first day of each month, and principal payments of $10,000
per month are due beginning in August 1998 through the date of maturity,
July 2000, at which time the remaining unpaid principal balance is due
and payable in full. The note was paid in full on October 2, 1997.
On August 16, 1996, PVF Service Corporation, a wholly owned subsidiary of
the Company, secured a promissory note from another federally insured
institution at a variable interest rate that adjusts to prime plus 1
percent without notice on the effective date of each change in the
lender's prime rate.
(Continued)
29
<PAGE> 32
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) FEDERAL INCOME TAXES AND RETAINED EARNINGS
The accompanying consolidated financial statements reflect provisions for
federal income taxes differing from the amounts computed by applying the
U.S. federal income tax statutory rate to income before federal income
taxes. These differences are reconciled as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- --------------------
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax $ 2,557,541 35.0% 1,942,671 35.0 % 1,889,836 35.0%
Decrease in tax resulting from
Benefit of graduated rates (73,073) (1.0) (55,505) (1.0) (53,995) (1.0)
Tax credits (287,788) (3.9) - - - -
Other, net 182,675 2.5 16,483 (0.3) (222,466) (4.1)
-------------- ----- ----------- ----- --------- -----
$ 2,379,355 32.6% 1,903,649 34.3% 1,613,375 29.9%
============== ==== =========== ==== ========= ====
</TABLE>
The net tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at June
30, 1998 and 1997, are:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Loan loss and other reserves $ 883,039 883,466
Capital loss carryforward 102,374 -
Other 162,707 66,170
---------- --------
Total gross deferred tax assets 1,148,120 949,636
Less valuation allowance (102,374) -
---------- -------
Net deferred tax assets 1,045,746 949,636
--------- -------
Deferred tax liabilities
Deferred loan fees 262,929 218,165
FHLB stock dividend 517,587 442,226
Unrealized gains on loan sales, net - 3,140
Originated mortgage servicing asset 206,094 153,423
Bad debt reserves over base year reserves - 55,433
Other 144,150 115,033
------------- -------
Total gross deferred tax liabilities 1,130,760 987,420
------------- -------
Net deferred tax (liability) $ (85,014) (37,784)
============= ========
</TABLE>
A valuation allowance is established to reduce the deferred tax asset if
it is more likely than not that the related tax benefits will not be
realized. In management's opinion, it is more likely than not that the
tax benefits will be realized; consequently, no valuation allowance has
been established as of June 30, 1998 or 1997, other than as noted above
for the capital loss carryforward.
Retained earnings at June 30, 1998 includes approximately $4,516,000 for
which no provision for federal income tax has been made. This amount
represents allocations of income during years prior to 1988 to bad debt
deductions for tax purposes only. These qualifying and nonqualifying base
year reserves and supplemental reserves will be recaptured into income in
the event of certain distributions and redemptions. Such recapture would
create income for tax purposes only, which would be subject to the then
current
(Continued)
30
<PAGE> 33
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
corporate income tax rate. Recapture would not occur upon the
reorganization, merger, or acquisition of the Bank, nor if the Bank is
merged or liquidated tax-free into a bank or undergoes a charter change.
If the Bank fails to qualify as a bank or merges into a nonbank entity,
these reserves will be recaptured into income.
The favorable reserve method previously afforded to thrifts was repealed
for tax years beginning after December 31, 1995. Large thrifts must
switch to the specific charge-off method of section 166, while small
thrifts, such as the Bank, must switch to the reserve method of section
585 (the method used by small commercial banks). In general, a thrift is
required to recapture the amount of its qualifying and nonqualifying
reserves in excess of its qualifying and nonqualifying base year
reserves. There is an exception to the general recapture provision for
small thrifts. A small thrift is required to recapture the portion of its
reserves that exceeds the greater of (1) the experience method reserve
computed as if the thrift had always been a small bank, or (2) the lesser
of the qualifying and nonqualifying base year reserves or the contracted
base year reserves.
The Bank has no such excess reserves to recapture.
(11) LEASES
Future minimum payments under noncancelable operating leases with initial
or remaining terms of one year or more consisted of the following at June
30, 1998:
<TABLE>
<CAPTION>
Year Ending June 30,
--------------------
<S> <C> <C>
1999 $ 332,798
2000 249,014
2001 242,645
2002 242,645
Thereafter 316,613
-------------
Total minimum lease payments $ 1,383,715
=============
</TABLE>
During the years ended June 30, 1998, 1997, and 1996, rental expense is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net rental expense $ 435,097 374,420 331,941
=========== ======= =======
</TABLE>
(12) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank enters into commitments with
off-balance sheet risk to meet the financing needs of its customers.
Commitments to extend credit involve elements of credit risk and interest
rate risk in excess of the amount recognized in the consolidated
statements of financial condition. The Bank's exposure to credit loss in
the event of nonperformance by the other party to the commitment is
represented by the contractual amount of the commitment. The Bank uses
the same credit policies in making commitments as it does for on-balance
sheet instruments. Interest rate risk on commitments to extend credit
results from the possibility that interest rates may have moved
unfavorably from the position of the Bank since the time the commitment
was made.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates of 60 to 120 days or
other termination clauses and may require payment of a fee. Since some of
the commitments may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
(Continued)
31
<PAGE> 34
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained by the Bank upon extension of
credit is based on management's credit evaluation of the applicant.
Collateral held is generally residential and commercial real estate.
The Bank's lending is concentrated in Northeastern Ohio, and as a result,
the economic conditions and market for real estate in Northeastern Ohio
could have a significant impact on the Bank.
At June 30, 1998 and 1997, the Bank had the following commitments:
<TABLE>
<CAPTION>
1998 1997
---- ----
Commitments to sell mortgage loans
<S> <C> <C>
in the secondary market $ 3,407,600 773,000
Commitments to fund variable mortgage loans 21,871,601 29,098,000
Commitments to fund fixed mortgage loans 5,736,100 2,103,000
</TABLE>
There are pending against the Company various lawsuits and claims which
arise in the normal course of business. In the opinion of management, any
liabilities that may result from pending lawsuits and claims will not
materially affect the financial position of the Company.
(13) REGULATORY CAPITAL
Office of Thrift Supervision (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 June 30,
1998, the minimum regulatory capital regulations require institutions to
have tangible capital equal to 1.5 percent of adjusted total assets, a 3
percent leverage capital ratio, and an 8 percent risk-based capital
ratio. At June 30, 1998, the Bank exceeded all of the aforementioned
regulatory capital requirements.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) was
signed into law on December 19, 1991. Regulations implementing the prompt
corrective action provisions of FDICIA became effective on December 19,
1992. The prompt corrective action regulations define specific capital
categories based on an institution's capital ratios. The capital
categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To be considered "well capitalized," an
institution must generally have a leverage ratio of at least 5 percent, a
Tier 1 risk-based capital ratio of at least 6 percent, and a total
risk-based capital ratio of at least 10 percent. As of June 30, 1998, the
most recent notification from the OTS categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective action.
(Continued)
32
<PAGE> 35
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At June 30, 1998 and 1997, the Bank was in compliance with regulatory
capital requirements as set forth below (dollars in thousands):
<TABLE>
<CAPTION>
Tier-1 Total
Core/ Risk- Risk-
Equity Tangible Leverage Based Based
Capital Capital Capital Capital Capital
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
June 30, 1998
GAAP capital $ 31,727 31,727 31,727 31,727 31,727
General loan valuation allowances - - - 2,597
------------ ------------ --------- ---------
Regulatory capital 31,727 31,727 31,727 34,324
Total assets 440,065
-------
Adjusted total assets 440,065 440,065
------- -------
Risk-weighted assets 313,915 313,915
------- -------
Capital ratio 7.21% 7.21% 7.21% 10.11% 10.93%
Regulatory requirement 1.5% 3.00% 8.00%
Regulatory capital category
Well capitalized -
equal to or greater than 5.00% 6.00% 10.00%
</TABLE>
<TABLE>
<CAPTION>
Tier-1 Total
Core/ Risk- Risk-
Equity Tangible Leverage Based Based
Capital Capital Capital Capital Capital
------- ------- ------- ------- -------
June 30, 1997
<S> <C> <C> <C> <C> <C>
GAAP capital $ 27,604 27,604 27,604 27,604 27,604
General loan valuation allowances - - - 2,598
------------ ----------- --------- --------
Regulatory capital 27,604 27,604 27,604 30,202
Total assets 375,915
-------
Adjusted total assets 375,915 375,915
------- -------
Risk-weighted assets 284,483 284,483
------- -------
Capital ratio 7.34% 7.34% 7.34% 9.70% 10.62%
Regulatory requirement 1.50% 3.00% 8.00%
Regulatory capital category
Well capitalized -
equal to or greater than 5.00% 6.00% 10.00%
</TABLE>
(Continued)
33
<PAGE> 36
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) STOCK OPTIONS
The Bank offered stock options to the directors and officers of the bank
in 1993, 1997, and 1998. Under the 1992 plan, 381,830 options were
originally granted, which are exercisable for a ten-year period and can
be exercised at any time. In 1996, 32,100 options were granted and in
1997 32,550 were granted which are exercisable for a ten-year period,
with 20 percent of the options vesting each year. Options were granted at
fair market value and, accordingly, no charges were reflected in the
compensation and benefits expense due to the granting of stock options.
The excess of the option price over the par value of the shares purchased
through the exercise of stock options is credited to additional capital:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -------------------
Average Average Average
Option Option Option
(Shares in 000's) Shares Price Shares Price Shares Price
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of year 399,143 $ 2.84 363,833 $ 2.23 375,062 $ 2.23
Exercised (191,412) 2.25 - 2.23 (11,229) 2.23
Expired (1,980) 9.09 - - - -
Granted 32,550 13.16 35,310 9.09 - -
Outstanding end of year 238,301 4.67 399,143 2.84 363,833 2.23
Exercisable end of year 192,560 4.67 370,895 2.84 291,066 2.23
</TABLE>
As of June 30, 1998, options outstanding have exercise prices between
$2.23 and $13.17 and a weighted average remaining contractual life of 5.2
years.
The Company has elected to disclose pro forma net income and net income
per share as if the fair-value-based method had been applied in measuring
compensation costs. The Company's pro forma information for the years
ended June 30:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $ 4,927,906 3,646,839 3,786,156
Less: Compensation expense,
net of tax 34,720 60,539 43,966
------------ --------- ---------
Pro forma earnings $ 4,893,186 3,586,300 3,742,190
============ ========= =========
Basic earnings per share $ 1.25 .95 .99
==== === ===
Pro forma basic earnings per share $ 1.24 .94 .98
==== === ===
Diluted earning per share $ 1.20 .89 .93
==== === ===
Pro forma diluted earnings per share $ 1.19 .87 .92
==== === ===
</TABLE>
Compensation expense reflected in the pro forma disclosures is not
indicative of future amounts when the SFAS No. 123 prescribed method will
apply to all outstanding nonvested awards.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1998, 1997, and 1996; expected dividend
yield of -0-, and expected option lives of 7 years; expected volatility
of 5 percent, 20 percent, and 20 percent, and risk free interest rates of
5.56 percent, 6 percent, and 6 percent, respectively.
(Continued)
34
<PAGE> 37
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Pursuant to the terms of the plans, share information and exercise prices
have been adjusted to reflect the impact of stock splits and dividends
subsequent to the granting dates of the options.
(15) EARNINGS PER SHARE
Reconciliation of Basic Earnings Per Share to Diluted Earnings Per Share
for The Years Ended June 30:
<TABLE>
<CAPTION>
1998
-----------------------------------------
Net Per-Share
Income Shares Amount
------ ------ ------
<S> <C> <C> <C>
Basic EPS $ 4,927,906 3,938,379 1.25
Income available to common shareholders
Effect of Stock Options - 158,824 .05
------------ ---------- -----
Diluted EPS
Income available to common
shareholders $ 4,927,906 4,097,203 1.20
============ ========= ====
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------
Net Per-Share
Income Shares Amount
------ ------ ------
<S> <C> <C> <C>
Basic EPS $ 3,646,839 3,833,343 .95
Income available to common shareholders
Effect of Stock Options - 272,621 .06
------------ ---------- ---
Diluted EPS
Income available to common
shareholders $ 3,646,839 4,105,964 .89
========= ========= ===
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------
Net Per-Share
Income Shares Amount
------ ------ ------
<S> <C> <C> <C>
Basic EPS $ 3,786,156 3,833,343 .99
Income available to common shareholders
Effect of Stock Options - 223,346 .06
------------ ---------- ---
Diluted EPS
Income available to common
shareholders $ 3,786,156 4,066,689 .93
========= ========= ===
</TABLE>
(Continued)
35
<PAGE> 38
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Bank using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret
market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts
the Bank 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.
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
--------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Assets
Cash and amounts due from
depository institutions $ 2,447,631 2,447,631 7,760,029 7,760,029
Interest bearing deposits 394,331 394,331 445,401 445,401
Federal funds sold 20,375,000 20,375,000 1,375,000 1,375,000
Securities held to maturity 27,800,000 27,767,525 13,995,350 13,899,370
Mortgage-backed securities
held to maturity, net 2,950,856 2,965,247 511,530 516,579
Loans receivable held for
Long-term investment, net 368,998,087 378,879,256 341,402,566 348,162,337
Sale, net 1,644,735 1,674,800 709,604 723,890
Stock in the Federal Home
Loan Bank of Cincinnati 3,507,564 3,507,564 2,762,314 2,762,314
Liabilities
Demand deposits 62,863,173 62,683,173 57,169,744 56,586,613
Time deposits 281,365,556 282,062,000 231,099,930 226,477,931
Advances from the Federal
Home Loan Bank of
Cincinnati 46,324,456 45,434,000 47,405,424 47,072,000
Notes payable 1,060,000 1,060,000 2,310,000 2,310,000
</TABLE>
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.
Securities and mortgage-backed securities. Estimated fair value for
securities and mortgage-backed securities is based on quoted market
prices.
Loans receivable held for investment and held for sale. For loans
receivable held for sale, fair value is estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences
in loan characteristics. For performing loans receivable held for
investment, 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. For other loans, cash flows and maturities are estimated based on
contractual interest rates and historical experience and are discounted
using secondary market rates adjusted for differences in servicing and
credit costs.
Fair value for significant nonperforming loans is based on recent
external appraisals. If appraisals are not available, estimated cash
flows are discounted using a rate commensurate with the risk associated
with the estimated cash flows. Assumptions regarding credit risk, cash
flows, and discount rates are judgmentally determined using available
market information and specific borrower information.
(Continued)
36
<PAGE> 39
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock in the Federal Home Loan Bank of Cincinnati. This item is valued at
cost, which represents redemption value and approximate fair value.
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.
Advances from the Federal Home Loan Bank of Cincinnati. The fair value of
the Bank's FHLB debt is estimated based on the current rates offered to
the Bank for debt of the same remaining maturities.
Notes payable. The carrying value of the Company's fixed rate note
payable is a reasonable estimate of fair value based on the current
incremental borrowing rate for similar types of borrowing arrangements.
For the variable rate note payable, the carrying amount is a reasonable
estimate of fair value.
Off-balance sheet instruments. The fair value of commitments is estimated
using the fees currently charged to enter similar agreements, taking into
account the remaining terms of the agreements and the counterparties'
credit standing. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates. The fair value of undisbursed lines of credit is based
on fees currently charged for similar agreements or on estimated cost to
terminate them or otherwise settle the obligations with the
counterparties at the reporting date. The carrying amount and fair value
of off-balance sheet instruments is not significant as of June 30, 1998
and 1997.
(Continued)
37
<PAGE> 40
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited consolidated quarterly
results of operations for 1998 and 1997 (in thousands of dollars, except
per share data): (1)
<TABLE>
<CAPTION>
Quarters for the Year Ended June 30, 1998
-----------------------------------------
First Second Third Fourth
------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 8,196 8,569 8,713 8,887
Interest expense 4,683 4,782 4,861 5,232
----- ----- ----- -----
Net interest income 3,513 3,787 3,852 3,655
Provision for losses on loans 45 50 106 45
Noninterest income 425 367 461 344
Noninterest expense 2,006 2,104 2,173 2,568
----- ----- ----- -----
Income before taxes 1,887 2,000 2,034 1,386
Federal income taxes 626 699 700 354
------ ------ ------ ------
Net income $ 1,261 1,301 1,334 1,032
===== ===== ===== =====
Basic earnings per share (2) $ 0.33 0.33 0.33 0.26
====== ====== ====== ======
Diluted earnings per share (2) $ 0.31 0.32 0.32 0.25
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Quarters for the Year Ended June 30, 1997
-----------------------------------------
First Second Third Fourth
-----------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 7,536 7,662 7,733 8,032
Interest expense 4,015 4,099 4,133 4,314
----- ----- ----- -----
Net interest income 3,521 3,563 3,600 3,718
Provision for losses on loans - - 107 80
Noninterest income 234 295 464 343
Noninterest expense 3,756 2,068 2,097 2,079
----- ----- ----- -----
Income (loss) before taxes (1) 1,790 1,860 1,902
Federal income taxes (10) 609 638 647
------- ------ ------ ------
Net income (loss) $ (11) 1,181 1,222 1,255
====== ===== ===== =====
Basic earnings per share (2) $ 0.00 0.31 0.32 0.33
====== ====== ====== ======
Diluted earnings per share (2) $ 0.00 .29 .30 .31
====== ====== ====== ======
</TABLE>
- ----------------------------------
(1) The total of the four quarterly amounts may not equal the full year
amount due to rounding.
(2) After giving effect to a three-for-two stock split, declared on July 16,
1998 and distributed on August 17, 1998.
(Continued)
38
<PAGE> 41
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(18) PARENT COMPANY
Condensed parent company only financial information as of and for the
years ended June 30, 1998 and 1997, follows:
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition 1998 1997
------------------------------------------- ---- ----
<S> <C> <C>
Cash and amounts due from depository institutions $ 27,949 51,541
Prepaid expenses and other assets 621,904 364,730
Investment in subsidiaries, at equity in underlying
value of net assets 30,559,036 26,527,063
----------- -----------
Total assets $31,208,889 26,943,334
=========== ===========
Notes payable $ -- 600,000
Accrued expenses and other liabilities 179 69,918
----------- -----------
179 669,918
Stockholders' equity 31,208,710 26,273,416
----------- -----------
Total liabilities and stockholders' equity $31,208,889 26,943,334
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Operations 1998 1997 1996
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Income
Mortgage banking activities $ 421,344 493,440 488,814
Expenses
Interest expense 7,758 70,136 92,513
General and administrative 266,287 255,804 234,063
---------- ---------- ----------
274,045 325,940 326,576
---------- ---------- ----------
Income before federal income
taxes and equity in undistributed
net income of subsidiaries 147,299 167,500 162,238
Federal income taxes 50,266 57,146 55,160
---------- ---------- ----------
Income before equity in
undistributed net income of
subsidiaries 97,033 110,354 107,078
Equity in undistributed net income of
subsidiaries 4,830,873 3,536,485 3,679,078
---------- ---------- ----------
Net income $4,927,906 3,646,839 3,786,156
========== ========== ==========
</TABLE>
(Continued)
39
<PAGE> 42
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows 1998 1997 1996
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Operating activities
Net income $ 4,927,906 3,646,839 3,786,156
Equity in undistributed net income
of subsidiaries (4,830,873) (3,536,485) (3,679,078)
Other, net (326,913) 50,443 (206,134)
----------- ----------- -----------
Net cash provided by (used in)
operating activities (229,880) 160,797 (99,056)
----------- ----------- -----------
Investing activities
Investment in PVF Holdings Inc. (301,100) -- --
Purchase of servicing portfolio -- -- (2,154,535)
Net cash used in investing activities (301,100) -- (2,154,535)
Financing activities
Proceeds from notes payable -- -- 1,200,000
Repayment on note payable (600,000) (400,000) (200,000)
Proceeds from exercise of stock options 9,529 -- 25,000
Cash paid in lieu of fractional shares (2,141) (1,349) (1,098)
Dividends received from subsidiaries 1,100,000 300,000 1,154,535
----------- ----------- -----------
Net cash provided by (used in)
financing activities 507,388 (101,349) 2,178,437
----------- ----------- -----------
Net decrease in cash and cash
equivalents (23,592) (59,448) (75,154)
Cash and cash equivalents at beginning of year 51,541 110,989 186,143
----------- ----------- -----------
Cash and cash equivalents at end of year $ 27,949 51,541 110,989
=========== =========== ===========
</TABLE>
(19) 401(K) SAVINGS PLAN
Employees who have reached age 18 and have completed one year of
eligibility service are eligible to participate in the Company's 401(k)
Savings Plan. The plan allows eligible employees to contribute up to 7
percent of their compensation, with the Company matching up to 50 percent
of the first 4 percent contributed by the employee, as determined by the
Company for the contribution period. The plan also permits the Company to
make a profit sharing contribution at its discretion up to 4 percent of
the employees compensation.
Participants vest in the Company's contributions as follows:
<TABLE>
<CAPTION>
Years of Service Percent Vested
---------------- --------------
<S> <C> <C>
Less than 2 0%
2 but less than 3 20
3 but less than 4 40
4 but less than 5 60
5 but less than 6 80
6 or more 100
</TABLE>
The total of the Company's matching and profit sharing contribution cost
related to the plan for the years ended June 30, 1998, 1997, and 1996 was
$72,602; $76,300; and $68,100, respectively.
40
<PAGE> 43
NOTES
<PAGE> 44
Park View Federal Savings Bank
Office Locations and Hours
<TABLE>
<S> <C> <C>
MAIN OFFICE LOBBY PARMA OFFICE
2618 N. Moreland Blvd. Mon., Tue., Thurs...........9:00 a.m. - 4:30 p.m. 7448 Ridge Road
Cleveland, Ohio 44120 Fri.........................9:00 a.m. - 5:00 p.m. Parma, Ohio 44129
(216) 991-9600 Sat.........................9:00 a.m. - 1:00 p.m. (440) 845-5300
Closed Wednesday
DRIVE-UP WINDOW
Mon., Tue., Thurs., Fri.....9:00 a.m. - 5:00 p.m.
Sat.........................9:00 a.m. - 1:00 p.m.
LA PLACE OFFICE LOBBY LAKEWOOD-CLEVELAND OFFICE
2111 Richmond Road Mon., Tue., Thurs...........9:00 a.m. - 4:30 p.m. 11010 Clifton Blvd.
Beachwood, Ohio 44122 Fri.........................9:00 a.m. - 5:30 p.m. Cleveland, Ohio 44102
(216) 831-6373 Sat.........................9:00 a.m. - 1:00 p.m. (216) 631-8900
Closed Wednesday
DRIVE-UP WINDOW
Mon., Tue., Thurs...........9:00 a.m. - 5:00 p.m.
Fri.........................9:00 a.m. - 6:00 p.m.
Sat.........................9:00 a.m. - 1:00 p.m.
BAINBRIDGE OFFICE LOBBY MACEDONIA OFFICE
8500 Washington Street Mon., Tue., Wed., Thurs.....9:00 a.m. - 4:30 p.m. 497 East Aurora Road
Chagrin Falls, Ohio 44023 Fri.........................9:00 a.m. - 5:30 p.m. Macedonia, Ohio 44056
(440) 543-8889 Sat.........................9:00 a.m. - 1:00 p.m. (330) 468-0055
Drive-Up Window
Mon., Tue., Wed., Thurs. ...9:00 a.m. - 5:00 p.m. MAYFIELD HEIGHTS OFFICE
BEDFORD HEIGHTS OFFICE Fri.........................9:00 a.m. - 6:00 p.m. 1456 SOM Center Road
25350 Rockside Road Sat.........................9:00 a.m. - 1:00 p.m. Mayfield Hts., Ohio 44124
Bedford Hts., Ohio 44146 (440) 449-8597
(440) 439-2200
MENTOR OFFICE
CHARDON OFFICE 6990 Heisley Road
408 Water Street Mentor, Ohio 44060
Chardon, Ohio 44024 (440) 944-0276
(440) 285-2343
</TABLE>
ADMINISTRATIVE OFFICES
25350 Rockside Road
Bedford Hts., Ohio 44146
(440) 439-6790
Monday - Friday
9:00 a.m. - 5:00 p.m.
<PAGE> 45
PVF CAPITAL CORP.
BOARD OF DIRECTORS
JAMES W. MALE
Chairman of the Board
JOHN R. MALE
President and
Chief Executive Officer
ROBERT K. HEALEY
Retired
STANLEY T. JAROS
Partner
Moriarty & Jaros, P.L.L.
CREIGHTON E. MILLER
Partner
Miller, Stillman & Bartel
STUART D. NEIDUS
Executive Vice President and
Chief Financial Officer
ESSEF Corporation
ROBERT F. URBAN
Retired
EXECUTIVE OFFICERS
JAMES W. MALE
Chairman of the Board
JOHN R. MALE
President and
Chief Executive Officer
C. KEITH SWANEY
Vice President and Treasurer
JEFFREY N. MALE
Vice President and
Corporate Secretary
PARK VIEW FEDERAL SAVINGS BANK
EXECUTIVE OFFICERS
JOHN R. MALE
President and
Chief Executive Officer
C. KEITH SWANEY
Executive Vice President and
Chief Financial Officer
JEFFREY N. MALE
Senior Vice President
CAROL S. PORTER
Corporate Secretary
EDWARD B. DEBEVEC
Treasurer
OTHER OFFICERS
ANNE M. JOHNSON
Vice President
Mortgage Loan Servicing
ADELINE NOVAK
Vice President
Human Resources
ROBERT J. PAPA
Vice President
Construction Lending
JOHN E. SCHIMMELMANN
Vice President
Savings Administration
KENNAIRD H. STEWART
Vice President
Commercial Real Estate Lending
ROBERT D. TOTH
Vice President
Data Processing
GENERAL INFORMATION
INDEPENDENT
CERTIFIED ACCOUNTANTS
KPMG Peat Marwick LLP
1500 National City Center
1900 East Ninth Street
Cleveland, Ohio 44114
GENERAL COUNSEL
Moriarty & Jaros, P.L.L.
30195 Chagrin Boulevard
Suite 110 North
Pepper Pike, Ohio 44124
TRANSFER AGENT AND REGISTRAR
Fifth Third Bank
Fifth Third Center
38 Fountain Square
Cincinnati, Ohio 45263
SPECIAL COUNSEL
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
ANNUAL MEETING
The 1998 Annual Meeting of
Stockholders will be held on
October 19, 1998 at 10:00 a.m.
at the Cleveland Marriott East,
3663 Park East Drive, Beachwood, Ohio.
ANNUAL REPORT ON FORM 10-K
A copy of the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1998 as filed with the
Securities and Exchange Commission will be furnished without charge to
stockholders upon written request to the Corporate Secretary, PVF Capital Corp.,
2618 N. Moreland Boulevard, Cleveland, Ohio 44120.
<PAGE> 46
[PVF - LOGO]
CAPITAL CORP.
2618 North Moreland Blvd., Cleveland, Ohio 44120, (216) 991-9600
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
PARENT
- ------
PVF Capital Corp.
State or Other
Jurisdiction of Percentage
Subsidiaries (1) Incorporation Ownership
- ---------------- --------------- ----------
Park View Federal Savings Bank Ohio 100%
PVF Service Corporation Ohio 100%
PVF Mortgage Corp. Ohio 100%
PVF Community Development Corp. Ohio 100%
Mid Pines Land Co. Ohio 100%
PVF Holdings Inc. Ohio 100%
- ------------------------------
(1) The assets, liabilities and operations of the subsidiaries are included in
the consolidated financial statements contained in the Annual Report to
Stockholders attached hereto as an exhibit.
<PAGE> 1
EXHIBIT 23
The Board of Directors
PVF Capital Corp:
We consent to incorporation by reference in the registration statements (No.
33-97450 and No. 33-86116) on Form S-8 of PVF Capital Corp. of our report dated
July 16, 1998, relating to the consolidated statements of financial condition of
PVF Capital Corp. and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1998 which report
appears in the June 30, 1998 Annual Report on Form 10-K of PVF Capital Corp.
/s/ KPMG Peat Marwick LLP
Cleveland, Ohio
September 23, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF CONDITION AND STATEMENT OF OPERATION FOR THE PERIOD ENDED JUNE 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000928592
<NAME> PVF CAPITAL CORP
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 2,448
<INT-BEARING-DEPOSITS> 394
<FED-FUNDS-SOLD> 20,375
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 27,800
<INVESTMENTS-MARKET> 27,768
<LOANS> 370,643
<ALLOWANCE> 2,687
<TOTAL-ASSETS> 433,279
<DEPOSITS> 344,229
<SHORT-TERM> 11,060
<LIABILITIES-OTHER> 11,457
<LONG-TERM> 36,324
0
0
<COMMON> 40
<OTHER-SE> 31,169
<TOTAL-LIABILITIES-AND-EQUITY> 433,279
<INTEREST-LOAN> 32,655
<INTEREST-INVEST> 1,710
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 34,365
<INTEREST-DEPOSIT> 17,062
<INTEREST-EXPENSE> 19,558
<INTEREST-INCOME-NET> 14,807
<LOAN-LOSSES> 246
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,850
<INCOME-PRETAX> 7,307
<INCOME-PRE-EXTRAORDINARY> 7,307
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,928
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.20
<YIELD-ACTUAL> 3.78
<LOANS-NON> 3,283
<LOANS-PAST> 163
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,675
<CHARGE-OFFS> 237
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 2,687
<ALLOWANCE-DOMESTIC> 2,687
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,597
</TABLE>
