<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, 1999
/_/ TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
COMMISSION FILE NUMBER 0-24948
PVF CAPITAL CORP.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1659805
- ------------------------------------------ --------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
25350 ROCKSIDE ROAD, BEDFORD HTS., OHIO 44146
- ------------------------------------------ --------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (216) 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. [X]
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 September 7, 1999,
was $47,532,083. For purposes of this calculation, it is assumed that directors,
executive officers and 5% stockholders of the registrant are affiliates. As of
September 7, 1999, the registrant had 4,389,742 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended June
30, 1999. (Parts I, II and IV)
2. Portions of Proxy Statement for the 1999 Annual Meeting of Stockholders.
(Part III)
<PAGE> 2
PART I
ITEM 1. BUSINESS
- -----------------
GENERAL
PVF Capital Corp. ("PVF" or the "Company") is the Holding Company for
Park View Federal Savings Bank ("Park View Federal" or the "Bank"). 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 79 years, having been founded as
an Ohio chartered savings and loan association in 1920. 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, 1999, 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, Medina 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 $399.1 million at June 30, 1999, representing 88.8% of total assets at
such date. It is the Bank's policy to concentrate its lending in its market
area.
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, 1999, the
Bank had no concentrations of loans exceeding 10% of total loans other than as
disclosed below.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------ -------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family residential (1) ...... $ 141,308 35.41% $ 142,223 38.07% $ 128,908 37.62%
Multi-family residential ........... 34,075 8.54% 31,493 8.43% 31,090 9.07%
Commercial ......................... 105,427 26.42% 94,588 25.32% 84,940 24.79%
Home equity lines of credit ........ 22,956 5.75% 18,762 5.02% 16,941 4.94%
Construction ....................... 101,032 25.32% 96,063 25.71% 82,611 24.11%
Land ............................... 42,003 10.53% 30,462 8.15% 32,045 9.35%
Mortgage-backed securities
held for sale, net ................. 0 0.00% 0 0.00% 0 0.00%
Mortgage-backed securities
held to maturity ................... 1,733 0.43% 2,949 0.79% 505 0.15%
Consumer loans:
Property improvement ............... 6 0.00% 20 0.01% 34 0.01%
Passbook loans ..................... 552 0.14% 614 0.16% 615 0.18%
Mobile home ........................ 146 0.04% 213 0.06% 191 0.06%
Other .............................. 7,095 1.78% 3,040 0.81% 2,756 0.80%
--------- --------- ---------
456,333 114.36% 420,427 112.53% 380,636 111.08%
--------- --------- ---------
Less:
Accrued interest receivable ........ 2,202 0.55% 2,217 0.59% 2,097 0.61%
Deferred loan fees ................. (1,951) -0.49% (1,689) -0.45% (1,733) -0.51%
Unearned discount .................. (23) -0.01% (36) -0.01% (48) -0.01%
Undisbursed discount FHLMC MBS ..... (11) 0.00% (16) 0.00% 0 0.00%
Unrealized loss FHLMC MBS .......... 0 0.00% 0 0.00% 0 0.00%
Undisbursed portion of loan proceeds (54,864) -13.75% (44,622) -11.94% (35,653) -10.41%
Market valuation reserve ........... 0 0.00% 0 0.00% 0 0.00%
Allowance for loan losses .......... (2,630) -0.66% (2,687) -0.72% (2,675) -0.76%
--------- --------- ---------
Total other items ................ (57,277) -14.36% (46,833) -12.53% (38,012) -11.08%
--------- --------- ---------
Total loans and mortgage-backed
securities ...................... $ 399,056 100.00% $ 373,594 100.00% $ 342,624 100.00%
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
-----------------------------------------------------
1996 1995
------------------------- -------------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
Single-family residential (1) ...... $ 109,687 36.84% $ 98,203 38.56%
Multi-family residential ........... 30,607 10.28% 39,531 15.52%
Commercial ......................... 72,543 24.36% 57,498 22.58%
Home equity lines of credit ........ 8,749 2.94% 3,314 1.30%
Construction ....................... 76,725 25.77% 61,653 24.21%
Land ............................... 30,686 10.31% 18,318 7.19%
Mortgage-backed securities
held for sale, net ................. 7,963 2.67% 989 0.39%
Mortgage-backed securities
held to maturity ................... 629 0.21% 2,747 1.08%
Consumer loans:
Property improvement ............... 43 0.01% 76 0.03%
Passbook loans ..................... 742 0.25% 999 0.39%
Mobile home ........................ 328 0.11% 519 0.20%
Other .............................. 1,244 0.41% 701 0.27%
--------- ---------
339,946 114.16% 284,548 111.72%
--------- ---------
Less:
Accrued interest receivable ........ 1,709 0.57% 1,589 0.62%
Deferred loan fees ................. (2,098) -0.70% (1,811) -0.71%
Unearned discount .................. (165) -0.06% (336) -0.13%
Undisbursed discount FHLMC MBS ..... (158) -0.05% (2) 0.00%
Unrealized loss FHLMC MBS .......... (234) -0.08% 0 0.00%
Undisbursed portion of loan proceeds (38,649) -12.98% (26,891) -10.56%
Market valuation reserve ........... (13) 0.00% 0 0.00%
Allowance for loan losses .......... (2,565) -0.86% (2,402) -0.94%
--------- ---------
Total other items ................ (42,173) -14.16% (29,853) -11.72%
--------- ---------
Total loans and mortgage-backed
securities ...................... $ 297,773 100.00% $ 254,695 100.00%
========= =========
</TABLE>
- -----------------
(1) Includes loans held for sale in the amounts of $1.7 million, $1.6
million, $0.7 million, $11.2 million and $4.5 million at June 30, 1999,
1998, 1997, 1996, and 1995 respectively.
4
<PAGE> 5
The following table presents at June 30, 1999 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,
2000 1999 1999
---------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate mortgage loans............. $139,134 $168,319 $28,684
Real estate construction loans......... 53,388 0 0
Consumer loans......................... 6,439 1,275 84
-------- -------- -------
Total.............................. $198,961 $169,594 $28,768
======== ======== =======
</TABLE>
5
<PAGE> 6
The following table apportions the dollar amount of the loans due or
repricing after June 30, 2000 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................... $31,417 $165,586 $197,003
Consumer loans............................... 1,359 0 1,359
------- -------- --------
Total.................................... $32,776 $165,586 $198,362
======= ======== ========
</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.
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,
-----------------------------------
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Loans originated:
Real estate:........................................
Residential and commercial (1).................... $130,515 $111,912 $ 81,707
Construction (1).................................. 104,911 97,569 88,936
Land.............................................. 28,814 16,237 18,818
Passbook loans...................................... 209 308 435
Other............................................... 1,202 29 467
-------- -------- --------
Total loans originated............................ $265,651 $226,055 $190,363
======== ======== ========
Loans refinanced...................................... $ 13,699 $ 16,210 $ 16,193
======== ======== ========
Loans and mortgage-backed securities sold............. $107,978 $ 81,294 $ 56,618
======== ======== ========
</TABLE>
- -------------------
(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 $750,000 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, 1999,
$141.3 million, or 35.4%, of the Bank's net loan and mortgage-backed securities
portfolio consisted of single-family, conventional mortgage loans, of which
approximately $124.0 million, or 87.8%, carried adjustable interest rates.
Included in this amount are $6.5 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 $139.5 million, or 35.0%, of the total loan and mortgage-backed
securities portfolio at June 30, 1999.
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, 1999, $101.0 million or 25.3%, 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 $42.0 million, or 10.5% of its net loan and mortgage-backed
securities portfolio, in land loans at June 30, 1999.
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, 1999, the Bank had $23.0 million in home equity lines of
credit, which amounted to 5.7% 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, 1999, the Bank reported net loan
servicing fee income of $422,304, and at June 30, 1999 was servicing $277.3
million of loans for others. 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, 1999 the Bank was
servicing $70.2 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 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.
9
<PAGE> 10
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, 1999 and June 30, 1998, the Bank had $1,772,000 and
$1,645,000 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.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans (1):
Real estate................................................... $3,639 $3,262 $4,097 $2,272 $3,497
Consumer loans.............................................. 0 15 40 80 109
------ ------ ------ ------ ------
Total..................................................... $3,639 $3,277 $4,137 $2,352 $3,606
====== ====== ====== ====== ======
Accruing loans which are
contractually past due 90
days or more:
Real estate............................................... $ 248 $ 163 $ 476 $ 95 $1,028
------ ------ ------ ------ ------
Total................................................... $ 248 $ 163 $ 476 $ 95 $1,028
====== ====== ====== ====== ======
Total nonaccrual and 90 days
past due loans.......................................... $3,887 $3,440 $4,613 $2,447 $4,634
====== ====== ====== ====== ======
Ratio of non-performing loans to total loans
and mortgage-backed securities.............................. 0.97% .92% 1.35% 0.82% 1.81%
====== ====== ====== ====== ======
Other non-performing assets (2)............................... 168 699 0 $ 53 $ 0
====== ====== ====== ====== ======
Total non-performing assets................................... $4,055 $4,139 $4,613 $2,500 $4,634
====== ====== ====== ====== ======
Total non-performing assets to
total assets............................................... 0.90% 0.96% 1.24% 0.75% 1.47%
====== ====== ====== ====== ======
</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 not record into income partial interest
payments. During the year ended June 30, 1999, gross interest income of $350,000
would have been recorded on loans accounted for on a non-accrual basis if such
loans had been current throughout the period. No interest was included in income
on non-accruing loans.
At June 30, 1999, non-accruing loans consisted of 25 loans totalling
$3.6 million, and included 14 conventional mortgage loans aggregating $1.3
million, 4 land loans in the amount of $1.1 million, 4 construction loans in the
amount of $0.5 million, 1 commercial loan in the amount of $0.5 million and 2
multi-family loans in the amount of $0.2 million. 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, 1999,
the Bank had 2 real estate owned properties totaling $168,500. 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
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, 1999, total non-accrual and 90 days past
due loans and other non-performing assets were $4.1 million, of which amount
approximately $3.7 million were classified as substandard. 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 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 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.
11
<PAGE> 12
The following table summarizes the activity in the allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.................... $2,687 $2,675 $2,565 $2,402 $2,075
------ ------ ------ ------ ------
Charge-offs:
Mortgage loans................................ 42 238 174 241 77
Consumer loans (1)............................ 20 0 24 24 18
------ ------ ------ ------ ------
Total charge-offs........................... 62 238 198 265 95
------ ------ ------ ------ ------
Recoveries:
Mortgage loans................................ 5 4 117 5 4
Consumer loans (1)............................ 0 0 4 6 2
------ ------ ------ ------ ------
Total recoveries............................ 5 4 121 11 6
------ ------ ------ ------ ------
Net charge-offs................................. 57 234 77 254 89
------ ------ ------ ------ ------
Provision charged to income..................... 0 246 187 417 416
------ ------ ------ ------ ------
Balance at end of year.......................... $2,630 $2,687 $2,675 $2,565 $2,402
====== ====== ====== ====== ======
Ratio of net charge-offs during
the year to average loans
outstanding during the year................... 0.0% 0.0% 0.0% 0.0% 0.0%
====== ====== ====== ====== ======
</TABLE>
- ---------------------
(1) Consists primarily of mobile home loans.
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,
1999 1998 1997
------------------------ ------------------------ ------------------------
% 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.................. $ 727 52.84% $ 925 57.19% $ 899 56.19%
Multi-family................... 201 8.53% 203 8.44% 291 9.00%
Commercial..................... 1,438 26.17% 1,227 25.19% 990 24.54%
Land........................... 218 10.51% 230 8.16% 361 9.26%
Unallocated.................... 0 0.00% 0 0.00% 0 0.00%
------ ------- ------ ------- ------ -------
Total mortgage loans......... $2,584 98.05% $2,585 98.98% $2,541 98.99%
====== ======= ====== ======= ====== =======
Consumer loans (1)............... 46 1.95% 102 1.02% 134 1.01%
------ ------- ------ ------- ------ -------
Total allowance for
loan losses.................. $2,630 100.00% $2,687 100.00% $2,675 100.00%
====== ======= ====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
1996 1995
------------------------ ------------------------
% 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.................. $ 977 53.49% $ 857 54.27%
Multi-family................... 163 10.51% 295 15.36%
Commercial..................... 968 24.71% 940 22.42%
Land........................... 210 10.52% 154 7.11%
Unallocated.................... 123 0.00% 0 0.00%
------ ------- ------ -------
Total mortgage loans......... $2,441 99.23% $2,246 99.16%
====== ======= ====== =======
Consumer loans (1)............... 124 0.77% 156 0.84%
------ ------- ------ -------
Total allowance for
loan losses.................. $2,565 100.00% $2,402 100.00%
====== ======= ====== =======
</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 9.8% at June 30, 1999 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, 1999, 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, 1999, the fair market values of the Bank's
securities portfolio was $24.9 million. All securities are held to maturity.
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------
1999 1998 1997
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Investment securities:
Municipal Security................................. 376 0 0
U.S. Government and agency securities..............$24,958 $27,800 $13,995
------- ------- -------
Total securities............................... 25,334 27,800 13,995
Interest-bearing deposits............................ 574 394 445
Federal funds sold................................... 5,375 20,375 1,375
FHLB of Cincinnati stock............................. 3,759 3,508 2,762
------- ------- -------
Total investments................................$35,042 $52,077 $18,577
======= ======= =======
</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,
1999.
<TABLE>
<CAPTION>
AT JUNE 30, 1999
--------------------------------------------------------------------------------------------
ONE YEAR ONE TO FIVE FIVE TO 10 MORE THAN
OR LESS YEARS YEARS 10 YEARS
--------------------- --------------------- --------------------- -------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
------- --------- ------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Municipal security.......... $ 80 6.25% $ 296 6.25% $ 0 0.00% $ 0 0.00%
U.S. Government and
agency securities......... 0 0.00% 24,958 6.03% 0 0.00% 0 0.00%
Deposits(1)................. 5,949 4.75% 0 0.00% 0 0.00% 0 0.00%
FHLB stock.................. 0 0.00% 0 0.00% 0 0.00% 3,759 7.25%
--------- --------- --------- -------
Total..................... $ 6,029 4.77% $25,254 6.03% $ 0 0.00% $ 3,759 7.25%
======= ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1999
--------------------------------
TOTAL SECURITIES
--------------------------------
CARRYING MARKET AVERAGE
VALUE VALUE YIELD
------- ------- -------
<S> <C> <C> <C>
Municipal security.......... $ 376 $ 376 6.25%
U.S. Government and
agency securities......... 24,958 24,519 6.03%
Deposits(1)................. 5,949 5,949 4.75%
FHLB stock.................. 3,759 3,759 7.25%
-------- --------
Total..................... $35,042 $34,603 5.95%
======= =======
</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 a moderate decline
experienced during the fiscal year ended June 30, 1999. Deposit balances
totalled $331.2 million, $344.3 million and $288.3 million at the fiscal years
ended June 30, 1999, 1998, and 1997 respectively.
Deposits in the Bank as of June 30, 1999 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>
2.30% NOW accounts $ 50 $ 21,748 6.57%
2.50% Passbook statement accounts 5 33,254 10.04%
3.40% Money market accounts 1,000 8,399 2.54%
0.00% Non-interest-earning demand accounts 50 7,182 2.17%
-------- -------
$ 70,583 21.31%
-------- -------
</TABLE>
<TABLE>
<CAPTION>
CERTIFICATES OF DEPOSIT
-----------------------
<S> <C> <C> <C> <C>
5.51% 3 months or less 500 90,277 27.25%
5.32% 3 - 6 months 500 51,689 15.60%
5.18% 6 - 12 months 500 74,390 22.46%
5.58% 1 - 3 years 500 38,789 11.71%
5.68% More than three years 500 5,514 1.66%
-------- -------
5.39% Total certificates of deposit $260,659 78.69%
-------- -------
4.73% Total deposits $331,242 100.00%
======== =======
</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, 1999 AT JUNE 30, 1998
------------------------------------- --------------------------------------
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)........................ $ 28,930 8.73% $ 5,098 $ 23,832 6.92% $ 3,556
Super NOW checking and money market..... 8,399 2.54% 1,212 7,187 2.09% 1,879
Passbook and regular savings............ 33,254 10.04% 1,410 31,844 9.25% 258
Jumbo certificates...................... 58,427 17.64% 1,099 57,328 16.65% 13,839
Other certificates...................... 165,516 49.97% (19,529) 185,045 53.76% 34,060
Keogh accounts.......................... 229 0.07% 20 209 0.06% (1,789)
IRA accounts............................ 36,487 11.02% (2,297) 38,784 11.27% 4,156
-------- -------- -------- -------
Total............................... $331,242 100.00% (12,987) $344,229 100.00% $55,959
======== ======= ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-------------------
% of
Balance Deposits
------- --------
(Dollars in thousands)
<S> <C> <C>
NOW checking (1)........................ $ 20,276 7.03%
Super NOW checking and money market..... 5,308 1.84%
Passbook and regular savings............ 31,586 10.96%
Jumbo certificates...................... 43,489 15.09%
Other certificates...................... 150,985 52.38%
Keogh accounts.......................... 1,998 0.69%
IRA accounts............................ 34,628 12.01%
--------
Total............................... $288,270 100.00%
======== =======
</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,
--------------------------------------------------------------------------------------
1999 1998
---------------------------------------- --------------------------------------
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........ $27,646 $32,209 $268,501 $21,628 $31,634 $264,348
Average rate paid...... 2.64% 2.58% 5.74% 2.77% 2.75% 5.90%
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
-----------------------------------------
1997
-----------------------------------------
INTEREST-
BEARING
DEMAND SAVINGS TIME
DEPOSITS DEPOSITS DEPOSITS
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average balance........ $19,631 $31,549 $218,302
Average rate paid...... 2.70% 2.75% 5.75%
</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,
1999.
<TABLE>
<CAPTION>
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- ----------
(IN THOUSANDS)
<S> <C>
Three months or less............................................... $23,141
Three through six months........................................... 15,767
Six through 12 months.............................................. 16,307
Over 12 months..................................................... 9,898
-------
Total..................................................... $65,113
=======
</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, 1999. 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,
---------------------------------------
1999 1998 1997
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Maximum amount outstanding at any
month end........................................... $66,041 $67,852 $54,412
Approximate average outstanding balance............... 52,102 40,240 41,083
Approximate weighted average rate
paid (1)............................................ 5.55% 5.84% 5.76%
</TABLE>
- ---------------------
(1) Computed from average monthly balances.
The weighted average rates outstanding on FHLB advances was 5.65%,
5.71% and 5.83% at June 30, 1999, 1998 and 1997, respectively.
At June 30, 1998 and 1997, PVFSC had one note payable for $1.1 million,
and $1.7 million, respectively, collateralized by real estate and guaranteed by
PVF. At June 30, 1997 PVF had one note payable for $0.6 million collateralized
by mortgage servicing rights. See Note 9 of Notes to Consolidated Financial
Statement.
SUBSIDIARY ACTIVITIES
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, 1999, Park View Federal was authorized to invest up
to approximately $13.5 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 real estate investment. At June 30,
1999, PVFSC has an investment of $3.8 million in a strip center
19
<PAGE> 20
in Berea, Ohio. 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.
PVF Service Corporation. In March of 1998 PVFSC entered into an option
agreement with Cameratta Properties Limited for the sale of Mid Pines, its 257
acre parcel of land in Solon, Ohio. PVFSC had acquired 150 acres of this land in
1983 from the Bank, which property the Bank acquired in foreclosure. The
additional 107 acre parcel of land was acquired by PVFSC in 1985 for $150,000.
PVFSC acquired and held the property as an investment. In March of 1999,
according to the terms of the option agreement and upon voter approval of the
planned development project, the Mid Pines sale to Cameratta Properties Limited
was completed for $4.8 million. The property was carried at a book value of $1.0
million by PVFSC, and the sale resulted in a pre-tax gain on the sale of real
estate of $3.8 million.
The proceeds from this sale were used by PVF Service Corporation to
purchase a strip center in Berea, Ohio at a cost of $3.8 million.
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, 1999, PVF and its subsidiaries had 117 full-time
employees and 30 part-time employees, none of whom was represented by a
collective bargaining agreement. The Company believes it enjoys a good
relationship with its personnel.
20
<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, 1999 the Bank's risk-weighted assets were
$344.8 million, and its total regulatory capital was $38.5 million, or 11.2% of
risk-weighted assets.
21
<PAGE> 22
The table below presents the Bank's capital position at June 30, 1999,
relative to its various minimum regulatory capital requirements.
<TABLE>
<CAPTION>
AT JUNE 30, 1999
PERCENT OF
AMOUNT ASSETS (1)
------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tangible Capital........................... $35,950 7.99%
Tangible Capital Requirement............... 6,751 1.50
------- -----
Excess .................................. $29,199 6.49%
======= =====
Tier 1/Core Capital........................ $35,950 7.99%
Tier 1/Core Capital Requirement............ 18,002 4.00
------- -----
Excess .................................. $17,948 3.99%
======= =====
Tier 1 Risk-Based Capital.................. $35,950 10.43%
Tier 1 Risk-Based Capital Requirement...... 13,790 4.00
------- -----
Excess .................................. $22,160 6.43%
======= =====
Risk-Based Capital......................... $38,524 11.17%
Risk-Based Capital Requirement............. 27,580 8.00
------- -----
Excess................................... $10,944 3.17%
======= =====
</TABLE>
- -------------
(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.
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, 1999 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.
22
<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
23
<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,
1999 of $3.8 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, 1999, the Bank had $66.0 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, 1999 was 9.8%.
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, 1999, 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.
25
<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.
OTS regulations require that savings institutions submit notice to
the OTS prior to making a capital distrubution if (a) they would not be
well-capitalized after the distribution, (b) the distribution would result in
the
26
<PAGE> 27
retirement of any of the institution's common or preferred stock or debt counted
as its regulatory capital, or (c) the institution is a subsidiary of a holding
company. A savings institution must make application to the OTS to pay a capital
distribution if (x) the institution would not be adequately capitalized
following the distribution, (y) the institution's total distributions for the
calandar year exceeds the institution's net income for the calandar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution would otherwise violate applicable law or regulation or an
agreement with or conditions imposed by the OTS. If neither the savings
institution nor the proposed capital distribution meet any of the foregoing
criteria, then no notice or application is required to be filed with the OTS
before making a capital distribution. The OTS may disapprove or deny a capital
distribution if in the view of the OTS, the capital distribution would
constitute an unsafe or unsound practice.
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, 1999, 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
ss.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 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
27
<PAGE> 28
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 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.
28
<PAGE> 29
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. ss. 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 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
29
<PAGE> 30
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.
PROPOSED LEGISLATIVE AND REGULATORY CHANGES. The U.S. Congress is
in the process of drafting legislation which may have a profound effect on the
financial services industry. In January 1999 legislation restructuring the
activities and regulations oversight of the financial services industry was
reintroduced in both houses of the U.S. Congress. The stated purposes of the
legislation are to enhance consumer choice in the financial services
marketplace, level the playing field among providers of financial services and
increase competition and would permit affiliations between commercial banks,
securities firms, insurance companies and, subject to certain limitations, other
commercial enterprises allowing holding companies to offer new services and
products. In particular, the legislation repeals the Glass-Steagall Act
prohibitions on bank affiliating with securities firms and thereby allow holding
companies to engage in securities underwriting and dealing without limits and to
sponsor and act as distributor for mutual funds. The legislation also removes
the Bank Holding Company Act's prohibitions on insurance underwriting allowing
holding companies to underwrite and broker any type of insurance product, calls
for a new regulatory framework for financial institution's and their holding
companies and preserves the thrift charter and all existing thrift powers. Both
the House and Senate passed separate versions of this legislation. The Senate
bill differs from the House's principally with respect to the powers of
operating subsidiaries, permissable activities of well managed holding companies
and restrictions on nonfinancial activities of unitary thrift holding companies.
It is expected that both versions will be reconciled during 1999. At this time,
it is unknown how the legislation will be modified, or if enacted, what form the
final version of the legislation might take and how it will affect the Company's
and the Bank's business and operations and competitive environment.
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
30
<PAGE> 31
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
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).
31
<PAGE> 32
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 1999, 1998 and 1997. 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.
32
<PAGE> 33
ITEM 2. PROPERTIES
The following table sets forth the location and certain additional
information regarding the Company's offices at June 30, 1999.
<TABLE>
<CAPTION>
YEAR NET BOOK OWNED OR APPROXIMATE
OPENED/ TOTAL VALUE AT LEASED/ SQUARE
LOCATION ACQUIRED DEPOSITS JUNE 30, 1999 EXPIRATION FOOTAGE
- -------- -------- -------- ------------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MAIN OFFICE:
2618 N. Moreland Blvd. 1963 $41,107 $ 354 Owned 16,800
Cleveland, Ohio
BRANCH OFFICES:
2111 Richmond Road 1967 54,635 102 Lease 2,750
Beachwood, Ohio 3/1/09
25350 Rockside Road 1969 58,329 31 Lease 14,400
Bedford Heights, Ohio 3/1/03
11010 Clifton Blvd. 1974 22,167 8 Lease 1,550
Cleveland, Ohio 8/1/05
7448 Ridge Road 1979 28,741 0 Lease 3,200
Parma, Ohio Monthly
6990 Heisley Road 1994 28,029 0 Lease 2,400
Mentor, Ohio 10/25/03
1456 SOM Center Road 1995 26,189 198 Lease 2,200
Mayfield Heights, Ohio 9/30/04
497 East Aurora Road 1994 24,844 14 Lease 2,400
Macedonia, Ohio 9/30/04
8500 Washington Street 1995 26,745 68 Lease 2,700
Chagrin Falls, Ohio 11/30/04
408 Water Street 1997 20,456 273 Lease 2,800
Chardon, Ohio 8/31/02
</TABLE>
At June 30, 1999 the net book value of the Bank's premises, furniture,
fixtures and equipment was $2.0 million. See Note 6 of Notes to Consolidated
Financial Statements for further information.
The Company also owns real estate in the City of Berea, Ohio. See
Subsidiary Activities for futher information.
33
<PAGE> 34
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 alleged 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. The Toth suit against PVFFP and Emissary has been dismissed
without prejudice. In the Ashtabula suit, a notice of automatic stay was filed
in August 1998 in connection with the bankruptcy of one of the parties
controlled by Schefchuk, and the case has been largely inactive since that time.
A total of nine additional cases have been filed against some
combination of PVFFP, Emissary, the Company and/or the Bank. Five of these cases
are arbitration proceedings with the NASD, two were filed in the Court of Common
Pleas in Lake and Cuyahoga Counties in Ohio, and two were filed in the United
States District Court for the Northern District of Ohio, Eastern Division. The
plaintiffs in these cases alleged 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. Schefchuk, various entities that he controlled and Money Concepts.
The plaintiffs claim generally that certain monies they allegedly invested
through Mr. Schefchuk, or an organization controlled by him or PVFFP, were
misappropriated. Where the damages sought have been specified, the plaintiffs
seek compensatory damages ranging from $25,000 to $1.5 million and punitive
damages of up to $1.0 million. One case filed in the United States District
Court is a putative class action suit. None of these plaintiffs, however, had
established an account with PVFFP. In five of these cases, the lawsuit either
has been dismissed against PVFFP, Emissary, the Company and/or the Bank without
prejudice or the
34
<PAGE> 35
plaintiff has agreed to dismiss the suit without prejudice. The remaining four
cases, including the putative class action claim, are still pending.
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. That
case has been settled with no material adverse consequence to the Company. 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. That case has
been dismissed.
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 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. The SEC has moved for an order dismissing the case and
dissolving the preliminary injunction.
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, 1999.
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, 1999 (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.
35
<PAGE> 36
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.
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 1999 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)
36
<PAGE> 37
(a) Consolidated Statements of Financial Condition, at
June 30, 1999 and 1998
(b) Consolidated Statements of Operations for the Years
Ended June 30, 1999, 1998 and 1997
(c) Consolidated Statements of Stockholders' Equity for
the Years Ended June 30, 1999, 1998 and 1997
(d) Consolidated Statements of Cash Flows for the Years
Ended June 30, 1999, 1998 and 1997
(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.
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> <C> <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 Agreement 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, 1999
21 Subsidiaries of the Registrant
23 Consent of KPMG, LLP
27 Financial Data Schedule
</TABLE>
- ---------
* 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).
** Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1998 (Commission File No. 0-24948).
(b) During the last quarter of the fiscal year ended June 30, 1999, the
Company filed a Current Reports on Form 8-K.
(c) All required exhibits are filed as attached.
(d) No financial statement schedules are required.
37
<PAGE> 38
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 21, 1999 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>
<S> <C>
/s/ John R. Male September 21, 1999
- ----------------------------------------
John R. Male
President and Chief Executive Officer
(Principal Executive Officer)
/s/ C. Keith Swaney September 21, 1999
- ---------------------------------------
C. Keith Swaney
Vice President and Treasurer
(Principal Financial and Accounting Officer)
/s/ James W. Male September 21, 1999
- ---------------------------------------
James W. Male
Chairman of the Board
/s/ Robert K. Healey September 21, 1999
- ----------------------------------------
Robert K. Healey
Director
/s/ Stanley T. Jaros September 21, 1999
- -----------------------------------------
Stanley T. Jaros
Director
/s/ Creighton E. Miller September 21, 1999
- ----------------------------------------
Creighton E. Miller
Director
/s/ Stuart D. Neidus September 21, 1999
- -----------------------------------------
Stuart D. Neidus
Director
/s/ Robert F. Urban September 21, 1999
- ----------------------------------------
Robert F. Urban
Director
</TABLE>
<PAGE> 1
Exhibit 13
[PVF CAPITAL CORP. LOGO]
Annual Report
June 30, 1999
<PAGE> 2
TABLE OF CONTENTS
Letter to Shareholders................................................2
Selected Consolidated Financial and Other Data........................4
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................6
Independent Auditors' Report.........................................16
<PAGE> 3
TO OUR SHAREHOLDERS
We are pleased to announce that fiscal 1999 was another successful year for
PVF Capital Corp. With the assistance of a strong economy, we achieved record
earnings and substantial growth in loans, and made much progress toward
introducing new technology that will bring a higher level of service to our
customers, shareholders, and the communities we serve.
Earnings were a record $7,719,000, or $1.70 diluted earnings per share, for
the year ended June 30, 1999. In addition, return on average assets was 1.77
percent and return on average common equity was 22.21 percent for fiscal 1999.
In March 1999, the previously announced sale by PVF Service Corporation, a
wholly-owned subsidiary of PVF Capital Corp., of its 250-acre parcel of land in
Solon, Ohio to Cameratta Properties Limited was completed. This sale resulted in
an after-tax profit of approximately $2.5 million, or $0.55 diluted earnings per
share, for the year ended June 30, 1999.
In June 1999, the Company announced a stock repurchase program to acquire
up to 5 percent of the outstanding common stock and a quarterly cash dividend
policy. The stock repurchase program and the cash dividend policy will be
dependent on the Company's financial condition, earnings, capital needs,
regulatory requirements, and market conditions. Also, in August 1999, the
company declared a 10 percent stock dividend.
The continued consolidation of the banking industry has presented the
Company with new growth opportunities. Recent acquisition activity has reduced
competition among local community banks and has opened new markets to us for the
future expansion of our branch network. Park View Federal remains committed to
the community bank concept of providing its customers personalized service and
financial products that may not be available to them at large commercial banks.
With this in mind, we remain optimistic about the future role of community banks
and look to the future with much anticipation.
In the coming year, Park View Federal is planning the following growth and
restructuring of its branch network.
In November 1999, Park View Federal will relocate its Parma, Ohio
branch to North Royalton, Ohio. This new full-service branch office
will be equipped with an ATM machine and will be located near the
northeast corner of Route 82 and Ridge Road.
In December 1999, Park View Federal will open a new branch office in
Medina, Ohio. This new full-service branch office will also be equipped
with an ATM machine and will be located in the Reserve Square Shopping
Center on Route 18 just west of Interstate 71.
2 PVF Capital Corp. 1999 Annual Report
<PAGE> 4
On or before March 31, 2000, Park View Federal is planning to relocate
its North Moreland branch office near Shaker Square in Cleveland, Ohio
to Shaker Towne Centre in Shaker Heights, Ohio. This move will provide
our customers a more spacious office in a more easily accessible
location with ample parking not available at the North Moreland
facility. The administrative offices will remain at North Moreland.
The reconfiguration of our branch network will give us a greater presence
in new higher-growth areas. These offices are expected to open new markets to us
in residential, construction, multi-family, and commercial real estate lending
and also increase our ability to attract consumer deposits. Upon completion,
Park View Federal will have a total of eleven full-service branch office
locations throughout northeast Ohio.
On or before December 31, 1999, the Company is expecting to launch its Web
site on the Internet. This Web site will provide information about our products
and services, and allow our customers access to current loan and deposit rate
information. Our ultimate goal is to provide a full line of home banking
services to our customers, including the ability to make loan applications
on-line and access account balances and information. Other available features
will be a community news and updates bulletin board and calculators providing
analytical ability for our customers. Look for us at www.parkviewfederal.com.
The Company has made every effort to ensure that the Bank will continue to
deliver financial services to its customers on an uninterrupted basis as we move
into the next century. All Y2K mission critical systems have been tested and
remediated. Also, in preparation for potential Y2K problems, the Company has
initiated a business resumption contingency plan and a customer awareness
program to educate and inform our customers of Y2K issues.
Finally, we invite all shareholders to attend the Annual Meeting of
Stockholders of PVF Capital Corp. on Monday, October 18, 1999 at 10:00 a.m. at
the Cleveland Marriott East, 3663 Park East Drive, Beachwood, Ohio. 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
PVF Capital Corp. 1999 Annual Report 3
<PAGE> 5
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
FINANCIAL CONDITION DATA:
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total assets ....................................... $449,201 $433,279 $373,081 $331,634 $315,432
Loans receivable and mortgage-backed
securities held for investment, net .............. 397,284 371,949 341,914 278,956 250,244
Loans receivable held for sale and
mortgage-backed securities available for sale, net 1,772 1,645 710 18,817 4,451
Cash equivalents and securities .................... 35,423 51,017 23,576 27,884 53,812
Deposits ........................................... 331,242 344,229 288,270 271,045 272,290
FHLB advances and notes payable .................... 66,041 47,384 49,715 30,191 16,800
Stockholders' equity ............................... 38,856 31,209 26,273 22,474 18,818
Number of:
Real estate loans outstanding ................... 3,527 2,676 2,648 2,527 2,512
Savings accounts ................................ 24,346 25,122 23,190 23,259 24,007
Offices ......................................... 10 10 9 9 9
</TABLE>
OPERATING DATA:
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------
(dollars in thousands except for earnings per share)
<S> <C> <C> <C> <C> <C>
Interest income ........................ $35,347 $34,365 $30,963 $27,761 $22,941
Interest expense ....................... 19,863 19,558 16,561 15,703 12,261
------- ------- ------- ------- -------
Net interest income
before provision for loan losses ..... 15,484 14,807 14,402 12,058 10,680
Provision for loan losses .............. 0 246 187 417 416
------- ------- ------- ------- -------
Net interest income
after provision for loan losses ...... 15,484 14,561 14,215 11,641 10,264
Non-interest income .................... 5,435 1,597 1,336 1,747 1,514
Non-interest expense ................... 9,649 8,851 10,000 7,989 7,177
------- ------- ------- ------- -------
Income before federal income tax expense 11,270 7,307 5,551 5,399 4,601
Federal income taxes ................... 3,551 2,379 1,904 1,613 1,244
------- ------- ------- ------- -------
Net income ............................. $ 7,719 $ 4,928 $ 3,647 $ 3,786 $ 3,357
======= ======= ======= ======= =======
Basic earnings per share ............... $ 1.76 $ 1.14 $ 0.86 $ 0.90 $ 0.80
======= ======= ======= ======= =======
Diluted earnings per share ............. $ 1.70 $ 1.09 $ 0.81 $ 0.84 $ 0.76
======= ======= ======= ======= =======
</TABLE>
4 PVF Capital Corp. 1999 Annual Report
<PAGE> 6
<TABLE>
<CAPTION>
OTHER DATA:
At or For the Year Ended June 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate spread information:
Average during year..................................... 3.26% 3.38% 3.84% 3.45% 3.67%
Net interest margin....................................... 3.68% 3.78% 4.22% 3.90% 4.00%
Average interest-earning assets to
average interest-bearing liabilities.................... 108.92% 107.93% 107.93% 108.83% 107.08%
Non-accruing loans (> 90 days) and
repossessed assets to total assets...................... 0.85% 0.92% 1.11% 0.73% 1.14%
Stockholders' equity to total assets...................... 8.65% 7.20% 7.04% 6.78% 5.97%
Return on average assets.................................. 1.77% 1.23% 1.04% 1.19% 1.23%
Return on average equity ................................. 22.21% 17.11% 15.19% 18.43% 19.61%
Ratio of average equity to
average assets.......................................... 7.95% 7.18% 6.84% 6.47% 6.26%
Dividend payout ratio..................................... 0.00% 0.00% 0.00% 0.00% 8.37%
BANK REGULATORY CAPITAL RATIOS:
Ratio of tangible capital to
adjusted total assets................................... 7.99% 7.21% 7.34% 7.25% 6.10%
Ratio of core capital to
adjusted total assets................................... 7.99% 7.21% 7.34% 7.25% 6.10%
Ratio of total capital to
risk-weighted assets.................................... 11.17% 10.93% 10.62% 11.42% 10.77%
</TABLE>
PVF Capital Corp. 1999 Annual Report 5
<PAGE> 7
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 a recently opened branch in Chardon, Ohio. 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,
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 equity line of credit loans secured by real estate 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, competition that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected, and Year 2000 issues. 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, 1999, 1998, AND 1997
PVF had total assets of $449.2 million, $433.3 million, and $373.1 million at
June 30, 1999, 1998, and 1997, 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 $399.1 million, $373.6 million, and $342.6
million at June 30, 1999, 1998, and 1997, respectively. The increase of $25.5
million in net loans and mortgage-backed securities at June 30, 1999 resulted
primarily from increases in land loans, commercial real estate loans, and home
equity line of credit loans of $11.5 million, $10.8 million, and $4.2 million,
respectively. The Bank's current loans-to-one-borrower limitation was
approximately $4.0 million at June 30, 1999. In addition, securities totaled
$25.3 million, $27.8 million, and $14.0 million at the years ended June 30,
1999, 1998, and 1997, respectively. The increase of $25.5 million in net loans
and mortgage-backed securities and the decrease of $13.0 million in deposits at
June 30, 1999, were funded by an increase of $19.7 million in Federal Home Loan
Bank ("FHLB") advances, and decreases of $13.1 million in cash and cash
equivalents and $2.5 million in securities.
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
FHLB of Cincinnati. Approximately $6.0 million, or 19.3 percent, of the
securities portfolio has a repricing period of one year or less, the entire
portfolio matures within five years or less, and the Bank has no plans to change
the short-term nature of its securities portfolio.
6 PVF Capital Corp. 1999 Annual Report
<PAGE> 8
The Bank's deposits totaled $331.2 million, $344.2 million, and $288.3 million
at June 30, 1999, 1998, and 1997, respectively. Advances from the FHLB of
Cincinnati amounted to $66.0 million, $46.3 million, and $47.4 million at June
30, 1999, 1998, and 1997, respectively. Management's decision to borrow
utilizing attractive FHLB advance rates rather than to aggressively compete with
market savings rates resulted in an increase in FHLB advances of $19.7 million
and a decrease in savings deposits of $13.0 million for the year ended June 30,
1999.
CAPITAL
PVF's stockholders' equity totaled $38.9 million, $31.2 million, and $26.3
million at the years ended June 30, 1999, 1998, and 1997, 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, 1999, 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:
<TABLE>
<CAPTION>
Park View Requirement for
Federal Percent of Well-Capitalized
(dollars in thousands) Capital Assets (1) Institution
--------------------------------------------
<S> <C> <C>
GAAP capital $35,950 7.99% N/A
Tangible capital $35,950 7.99% N/A
Core capital $35,950 7.99% 5.00%
Tier 1 risk-based capital $35,950 10.43% 6.00%
Risk-based capital $38,524 11.17% 10.00%
</TABLE>
(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 percent 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 percent stock dividend was issued in September 1997, a
three-for-two stock split effected in the form of a dividend was issued in
August 1998, and a 10 percent stock dividend was issued in September 1999. As
adjusted to reflect all stock dividends and all stock splits, the Company had
4,389,742 shares of common stock outstanding and approximately 320 holders of
record of the common stock at September 7, 1999. 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.
In June 1999, the Company announced a stock repurchase program to acquire up to
5 percent of the Company's common stock and a quarterly cash dividend policy.
The stock repurchase program will be dependent on market conditions with no
guarantee as to the exact number of shares to be repurchased, while the cash
dividend policy will be dependent upon the Company's financial condition,
earnings, capital needs, regulatory requirements, and economic conditions.
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 1999 Fiscal 1998
------------------- -------------------
High Bid Low Bid High Bid Low Bid
<S> <C> <C> <C> <C>
Fourth Quarter $12.95 $ 9.55 $17.12 $14.47
Third Quarter 12.95 10.45 14.55 11.52
Second Quarter 12.39 8.86 12.57 11.52
First Quarter 15.61 9.55 13.03 10.98
</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.
PVF Capital Corp. 1999 Annual Report 7
<PAGE> 9
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, 1999, the Bank had
commitments to originate loans totaling $52.1 million and had $54.9 million of
undisbursed loans in process. Scheduled maturities of certificates of deposit
during the twelve months following June 30, 1999 totaled $216.4 million.
Management believes that a significant portion of the amounts maturing during
fiscal 2000 will be 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 percent 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, 1999 was 9.8 percent, and its
short-term liquidity ratio was significantly above regulatory requirements.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates, and
equity prices. The Company's market risk is composed of interest rate risk.
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
PROFILE OF INTEREST SENSITIVE ASSETS
[PIE GRAPH]
Fixed rate other mortgage loans (3.9%)
Fixed-rate single-family mortgage loans (5.4%)
Adjustable-rate mortgage-backed securities (0.4%)
Adjustable-rate other mortgage loans (40.7%)
Adjustable-rate single-family mortgage loans (40.6%)
Overnight Fed Funds (1.3%)
Investment securities 60 months or less (5.9%)
Consumer loans (1.8%)
8 PVF Capital Corp. 1999 Annual Report
<PAGE> 10
PROFILE OF INTEREST SENSITIVE LIABILITIES
[PIE GRAPH]
CDs 12 months or less (55.5%)
CDs 25 to 36 months (1.9%)
CDs 13 to 24 months (8.1%)
CDs over 36 months (1.4%)
Transaction accounts (7.7%)
FHLB Advances over 36 months (9.2%)
FHLB Advances 13 to 36 months (1.3%)
FHLB Advances 12 months or less (6.4%)
Passbook accounts (8.5%)
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 risk
policy which establishes maximum decreases in the NPV ratio (ratio of market
value of portfolio equity to the market value of portfolio assets) of 0.5 and
1.0 percent 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, 1999. All
market risk sensitive instruments presented in this table are held to maturity
or available for sale. The Bank has no trading securities.
(dollars in thousands)
<TABLE>
<CAPTION>
Change in Market Value of Dollar Percentage
Interest Rates Portfolio Equity Change Change
-------------- ---------------- ------ ------
<S> <C> <C> <C> <C>
+200 $ 45,027 $ (1,398) (0.3)%
+100 46,254 (171) 0.0
0 46,425
-100 45,571 (854) (0.2)
-200 44,841 (1,584) (0.4)
</TABLE>
The table indicates that at June 30, 1999, 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, 1999, the Bank's estimated changes in NPV were well 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, 1999, 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
PVF Capital Corp. 1999 Annual Report 9
<PAGE> 11
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 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, 1999. The table indicates that the Company's one year and
under ratio of cumulative gap to total assets is negative 8.6 percent and
one-to-three year ratio of cumulative gap to total assets is negative 1.5
percent. The well-matched maturities along with the short-term repricing nature
of interest-rate-sensitive assets to interest-rate-sensitive liabilities
explains the Company's strong NPV position to an immediate and sustained 1 and 2
percent increase or decrease in market interest rates.
<TABLE>
<CAPTION>
Within 1-3 3-5 >5
(dollars in thousands) 1 Year Years Years Years Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest-rate-sensitive assets......................... $206,643 $110,046 $ 84,882 $ 28,768 $430,339
Total interest-rate-sensitive liabilities.................... 245,277 78,101 17,944 48,778 390,100
Periodic GAP................................................. (38,634) 31,945 66,938 (20,010) 40,239
Cumulative GAP............................................... (38,634) (6,689) 60,249 40,239
Ratio of cumulative GAP to total assets...................... (8.6)% (1.5)% 13.4% 9.0%
</TABLE>
RESULTS OF OPERATIONS
GENERAL
PVF Capital Corp.'s net income for the year ended June 30, 1999 was $7.7
million, or $1.76 basic earnings per share and $1.70 diluted earnings per share,
as compared to $4.9 million, or $1.14 basic earnings per share and $1.09 diluted
earnings per share for fiscal 1998, and $3.6 million, or $0.86 basic earnings
per share and $0.81 diluted earnings per share for fiscal 1997. All per share
amounts have been adjusted for stock dividends and stock splits.
Net income for the current year increased by $2.8 million from the prior fiscal
year and exceeded net income for fiscal 1997 by $4.1 million. In fiscal 1999,
the Company recorded an after-tax gain of approximately $2.5 million as a result
of the closing on the sale by PVF Service Corporation of its 250-acre parcel of
land in Solon, Ohio. In 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.
10 PVF Capital Corp. 1999 Annual Report
<PAGE> 12
NET INTEREST INCOME
Net interest income amounted to $15.5 million for the year ended June 30, 1999,
as compared to $14.8 million and $14.4 million for the years ended June 30, 1998
and 1997, respectively. The increase in net interest income of $0.7 million and
$0.4 million from the year ended June 30, 1998 to 1999 and from the year ended
June 30, 1997 to 1998, 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 securities) 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 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.
<TABLE>
<CAPTION>
Table 1 AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES
FOR THE YEAR ENDED JUNE 30,
1999 1998
-------------------------------------------------------------------------------
Average Yield/ Average Yield/
(dollars in thousands) Balance Interest Cost Balance Interest Cost
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ...................................... $ 384,420 $ 33,146 8.62% $ 361,308 $ 32,500 9.00%
Mortgage-backed securities ................. 2,338 147 6.29 2,439 155 6.36
Securities and other interest-earning
assets ................................... 34,500 2,054 5.95 27,918 1,710 6.13
---------- ---------- ---------- ----------
Total interest-earning assets ............ 421,258 35,347 8.39 391,665 34,365 8.77
Non-interest-earning assets .................. 16,071 ---------- 9,291
---------- ----------
Total assets ............................. $ 437,329 $ 400,956
========== ==========
Interest-bearing liabilities:
Deposits ................................... $ 334,530 $ 16,961 5.07 $ 321,039 $ 17,062 5.31
FHLB advances .............................. 52,102 2,891 5.55 40,240 2,351 5.84
Notes payable .............................. 122 11 9.02 1,604 145 9.04
---------- ---------- ---------- ----------
Total interest-bearing liabilities 386,754 19,863 5.14 362,883 19,558 5.39
---------- ---- ---------- ----
Non-interest-bearing liabilities............ 15,818 9,267
---------- ----------
Total liabilities ..................... 402,572 372,150
Stockholders' equity.......................... 34,757 28,806
---------- ----------
Total liabilities and stockholders'
equity .............................. $ 437,329 $ 400,956
========== ==========
Net interest income .......................... $ 15,484 $ 14,807
========== ==========
Interest rate spread ......................... 3.26% 3.38%
==== ====
Net yield on interest-earning assets ......... 3.68% 3.78%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities .... 108.92% 107.93%
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Table 1 AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES
FOR THE YEAR ENDED JUNE 30,
1997
--------------------------------------
Average Yield/
(dollars in thousands) Balance Interest Cost
--------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans ...................................... $ 317,453 $ 29,419 9.27%
Mortgage-backed securities ................. 3,832 285 7.44
Securities and other interest-earning
assets ................................... 19,706 1,259 6.39
---------- ----------
Total interest-earning assets ............ 340,991 30,963 9.08
Non-interest-earning assets .................. 9,773 ----------
----------
Total assets ............................. $ 350,764
==========
Interest-bearing liabilities:
Deposits ................................... $ 272,341 $ 13,957 5.12
FHLB advances .............................. 41,083 2,367 5.76
Notes payable .............................. 2,510 237 9.44
---------- ----------
Total interest-bearing liabilities 315,934 16,561 5.24
---------- ----
Non-interest-bearing liabilities............ 10,825
----------
Total liabilities ..................... 326,759
Stockholders' equity.......................... 24,005
----------
Total liabilities and stockholders'
equity .............................. $ 350,764
===========
Net interest income .......................... $ 14,402
==========
Interest rate spread ......................... 3.84%
====
Net yield on interest-earning assets ......... 4.22%
====
Ratio of average interest-earning assets
to average interest-bearing liabilities .... 107.93%
===========
</TABLE>
PVF Capital Corp. 1999 Annual Report 11
<PAGE> 13
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 years ended June 30, 1999 and 1998. 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 years ended June 30, 1999 and 1998, the Bank
experienced a decrease of 12 basis points in its interest rate spread to 3.26
percent for fiscal 1999 from 3.38 percent for fiscal 1998, and during fiscal
1998 its interest rate spread decreased 46 basis points from 3.84 percent for
fiscal 1997. These changes in average interest rate spread resulted in a
decrease in net interest income for the years ended June 30, 1999 and 1998 of
$0.5 million and $1.5 million, respectively, due to interest rate changes.
Net interest income was favorably affected by volume changes during the two
years ended June 30, 1999 and 1998. Accordingly, net interest income grew by
$1.2 million and $2.1 million due to volume changes for the years ended June 30,
1999 and 1998, respectively. Changes attributable to both rate and volume
impacted net interest income negatively during the years ended June 30, 1999 and
June 30, 1998.
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,
--------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
-------------------------------------------- -----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------------------- -----------------------------------------
Rate/ Rate/
(dollars in thousands) Volume Rate Volume Total Volume Rate Volume Total
-------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans ........................... $ 2,079 $(1,347) $ (86) $ 646 $ 4,064 $ (864) $ (119) $ 3,081
Mortgage-backed securities ...... (7) (2) 0 (9) (104) (41) 15 (130)
Securities and other
interest-earning assets ....... 403 (47) (11) 345 525 (52) (22) 451
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets 2,475 (1,396) (97) 982 4,485 (957) (126) 3,402
------- ------- ------- ------- ------- ------- ------- -------
Interest expense:
Deposits ........................ 717 (784) (33) (100) 2,496 517 92 3,105
FHLB advances ................... 693 (119) (35) 539 (49) 34 (1) (16)
Other borrowings ................ (134) 0 0 (134) (86) (10) 4 (92)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities ............... 1,276 (903) (68) 305 2,361 541 95 2,997
------- ------- ------- ------- ------- ------- ------- -------
Net interest income ............... $ 1,199 $ (493) $ (29) 677 $ 2,124 $(1,498) $ (221) $ 405
======= ======= ======= === ======= ======= ======= =======
</TABLE>
12 PVF Capital Corp. 1999 Annual Report
<PAGE> 14
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
inherent in the loan portfolio as of each balance sheet date, 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. During the year ended June 30, 1999,
management conducted a review of the established reserve percentages used in
calculating the required loan loss allowance. This review was conducted using
the most currently available national and regional aggregate thrift industry
data on charge-offs along with an analysis of historical losses experienced by
the Company according to type of loan. As a result of this analysis, management
made moderate adjustments to the required reserve percentages on various loan
categories to more accurately reflect probable losses. 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 1999, the Company experienced growth in the loan portfolio of $26.7
million, or 7.2 percent, while maintaining the composition of the loan
portfolio. In addition, the level of impaired loans increased from $3.3 million
to $3.6 million, while allowance related to impaired loans decreased from
$89,000 to $55,000. The increase in the level of impaired loans caused the
percentage of allowance for loan losses to impaired loans to decrease from 82 to
72 percent. Net charge-offs decreased from $234,000 in 1998 to $57,000 in 1999.
Therefore, taking into consideration the growth of the portfolio, the lower
level of impaired loans to total loans, as well as the lower level of net
charge-offs, the overall performance of the portfolio, and adjustments made to
the systematic established reserve percentages, the Company made no provision
and maintained the allowance at a level deemed appropriate of $2.6 million.
During 1998, the Company experienced growth in the loan portfolio of $28.5
million, or 8.3 percent, while 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
$76,000 to $89,000. The decrease in the level of impaired loans caused the
percentage of allowance for loan losses to impaired loans to increase from 65 to
82 percent. 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.
NON-INTEREST INCOME
Non-interest income amounted to $5.4 million, $1.6 million, and $1.3 million for
the years ended June 30, 1999, 1998, and 1997, 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. The increase in non-interest income of $3.8
million for the year ended June 30, 1999 is primarily the result of a gain
PVF Capital Corp. 1999 Annual Report 13
<PAGE> 15
on the sale of real estate by PVF Service Corporation, a wholly-owned subsidiary
of PVF Capital Corp., attributable to the sale of its 250-acre parcel of land in
Solon, Ohio. Income from mortgage banking activities amounted to $1,023,000,
$869,000, and $663,000 for the years ended June 30, 1999, 1998, and 1997,
respectively. The increase in income from mortgage banking activities of
$154,000 from the year ended June 30, 1998 to 1999 is primarily due to an
increase in net profit realized on the sale of loans. Other non-interest income
amounted to $611,000, $727,000, and $673,000 for the years ended June 30, 1999,
1998, and 1997, 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 $9.6 million, $8.9 million, and $10.0 million
for the years ended June 30, 1999, 1998, and 1997, respectively. The principal
component of non-interest expense is compensation and related benefits which
amounted to $4.8 million, $4.5 million, and $4.4 million for the years ended
June 30, 1999, 1998, and 1997, respectively. The increase in compensation for
the years ended June 30, 1999 and 1998 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
$1.8 million, $1.6 million, and $1.6 million for the years ended June 30, 1999,
1998, and 1997, respectively. The increased occupancy expense is attributable to
maintenance and repairs to office buildings, and the cost of opening and
operating an additional branch office. Other non-interest expense totaled $3.0
million, $2.7 million, and $4.0 million for the years ended June 30, 1999, 1998,
and 1997, respectively. Changes in other non-interest expense are the result of
advertising, professional and legal services, regulatory and insurance expenses,
and franchise tax expense. The decrease in other non-interest expense of $1.3
million from the year ended June 30, 1997 to 1998 is primarily attributable to
the payment of the SAIF assessment in fiscal 1997. The increase in other
non-interest expense of $0.3 million from the year ended June 30, 1998 to 1999
is attributable to increased legal expenses. Information pertaining to these
expenses is set forth in Item 3 of Form 10-K.
FEDERAL INCOME TAXES
The Bank's federal income tax expense was $3.6 million, $2.4 million, and $1.9
million for the years ended June 30, 1999, 1998, and 1997, respectively. Due to
the availability of tax credits for the year ended June 30, 1998 and 1999, and
other miscellaneous deductions, the Bank's effective federal income tax rate was
below the expected tax rate of 35 percent with an effective rate of 32, 33, and
34 percent for the years ended June 30, 1999, 1998, and 1997, respectively.
YEAR 2000
Park View Federal realizes the challenges of the Year 2000 (Y2K) issue and, in
compliance with federal regulators, has assembled a project team to assess and
remediate any deficient system in use within the Bank. A formal plan, approved
by the Board of Directors, called for the inventory of all internal systems and
third-party relationships to determine the impact on Bank operations. Following
this assessment, correction, testing, validation and installation of affected
systems was completed without any complications. These systems are currently in
production within the organization and have been operating successfully.
As part of the effort to assure continued inter-operability with third-party
relationships, the Bank was an active participant in the Mortgage Bankers
Association Y2K readiness testing program. This program established specific
guidelines and standards for testing information exchange between financial
organizations. The Bank successfully completed all required testing and did
additional testing to assure readiness in this area.
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. In addition, non-compliance by third parties
(including loan customers) and disruptions to the economy in general resulting
from Year 2000 issues could also have a negative impact.
As part of its Y2K readiness efforts, the Bank has initiated a customer
awareness program to educate and inform its customers of Y2K issues and progress
made in resolving these issues. The Bank has developed a Y2K business
14 PVF Capital Corp. 1999 Annual Report
<PAGE> 16
resumption contingency plan for all mission critical systems that augments its
existing disaster recovery plan.
The cost for the Bank to become Year 2000 ready is not anticipated to be
material to the Bank's net income for any year. The Board of Directors and Bank
staff are making every effort to ensure that the Bank will continue to deliver
financial services to its customers.
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 "Market Risk Management."
EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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. The Company adopted SFAS No. 130 on July 1, 1998. However,
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. The Company determined that the
adoption of SFAS No. 131 has no effect on its consolidated financial statements
as the Company's operations are managed and performance is evaluated on a
corporate-wide basis. Accordingly, all of the Company's operations are
considered by management to be aggregated in one reportable operating segment.
In June 1998, the FASB 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, 2000. Management is currently analyzing the
effect of the adoption of SFAS No. 133 on the Bank's consolidated financial
statements.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained after Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise. This statement amends SFAS No. 65 to require that
after the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities must classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. After the securitization of a mortgage loan held for
sale, any retained mortgage-backed securities shall be classified in accordance
with the provisions of SFAS No. 115. However, a mortgage banking enterprise must
classify as trading any retained mortgage-backed securities that it commits to
sell before or after the securitization process. This statement is effective for
the first fiscal quarter beginning after December 15, 1998. The Bank has not
historically securitized mortgage loans and retained the mortgage-backed
security. Therefore, the adoption did not have any impact on the Company's
consolidated financial statements.
PVF Capital Corp. 1999 Annual Report 15
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PVF Capital Corp. and Subsidiaries:
We have audited the accompanying consolidated statements of financial condition
of PVF Capital Corp. and subsidiaries (Company) as of June 30, 1999 and 1998,
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, 1999.
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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Cleveland, Ohio
July 15, 1999
<PAGE> 18
PVF CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------------ -----------------
<S> <C> <C>
Cash and amounts due from depository institutions $ 4,140,460 2,447,631
Interest bearing deposits 573,872 394,331
Federal funds sold 5,375,000 20,375,000
------------------ -----------------
Cash and cash equivalents 10,089,332 23,216,962
Securities held to maturity (fair values of $24,895,033 and
$27,767,525, respectively) 25,334,041 27,800,000
Mortgage-backed securities held to maturity (fair values
of $1,728,656 and $2,965,247, respectively) 1,732,726 2,950,856
Loans receivable held for long-term investment, net of allowance
for loan losses of $2,629,743 and $2,686,521, respectively 395,550,737 368,998,087
Loans receivable held for sale, net 1,772,176 1,644,735
Office properties and equipment, net 2,003,211 2,313,546
Real estate held for investment 3,796,852 938,071
Real estate owned 168,500 699,236
Investment required by law -
stock in the Federal Home Loan Bank of Cincinnati 3,759,452 3,507,564
Prepaid expenses and other assets 4,994,438 1,210,099
------------------ -----------------
Total assets $ 449,201,465 433,279,156
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 331,241,736 344,228,729
Advances from the Federal Home Loan Bank of Cincinnati 66,040,736 46,324,456
Notes payable -- 1,060,000
Advances from borrowers for taxes and insurance 5,463,660 4,931,114
Accrued expenses and other liabilities 7,599,525 5,526,147
------------------ -----------------
Total liabilities 410,345,657 402,070,446
------------------ -----------------
Commitments
Stockholders' equity:
Serial preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value, 15,000,000 shares authorized;
4,389,888 and 3,990,808 shares issued, respectively 43,899 39,908
Additional paid-in capital 20,250,236 14,517,452
Retained earnings (substantially restricted) 18,632,923 16,651,350
Treasury stock, at cost 5,000 shares (71,250) --
------------------ -----------------
Total stockholders' equity 38,855,808 31,208,710
------------------ -----------------
Total liabilities and stockholders' equity $ 449,201,465 433,279,156
================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 19
PVF CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Interest income:
Loans $ 33,145,769 32,499,826 29,418,869
Mortgage-backed securities 146,865 155,446 285,246
Cash and securities 2,054,310 1,709,951 1,258,732
----------------- ------------------ ------------------
Total interest income 35,346,944 34,365,223 30,962,847
Interest expense:
Deposits 16,960,961 17,062,418 13,957,543
Short-term borrowings 2,901,621 978,144 1,182,874
Long-term borrowings -- 1,517,766 1,420,346
----------------- ------------------ ------------------
Total interest expense 19,862,582 19,558,328 16,560,763
----------------- ------------------ ------------------
Net interest income 15,484,362 14,806,895 14,402,084
Provision for loan losses -- 246,000 187,000
----------------- ------------------ ------------------
Net interest income after provision for loan losses 15,484,362 14,560,895 14,215,084
----------------- ------------------ ------------------
Noninterest income:
Service and other fees 492,316 621,277 519,512
Mortgage banking activities, net 1,023,360 869,535 663,002
Gain on sale of real estate 3,800,696 -- --
Other, net 119,090 105,905 153,253
----------------- ------------------ ------------------
Total noninterest income 5,435,462 1,596,717 1,335,767
Noninterest expense:
Compensation and benefits 4,848,030 4,512,664 4,423,470
Office, occupancy, and equipment 1,783,631 1,631,802 1,603,583
Insurance 272,607 255,365 445,804
Special SAIF assessment -- -- 1,707,867
Professional and legal 921,664 264,555 208,164
Other 1,823,225 2,185,965 1,611,475
----------------- ------------------ ------------------
Total noninterest expense 9,649,157 8,850,351 10,000,363
----------------- ------------------ ------------------
Income before federal income taxes 11,270,667 7,307,261 5,550,488
Federal income taxes:
Current 2,437,926 2,332,125 1,975,742
Deferred 1,113,454 47,230 (72,093)
----------------- ------------------ ------------------
3,551,380 2,379,355 1,903,649
----------------- ------------------ ------------------
Net income $ 7,719,287 4,927,906 3,646,839
================= ================== ==================
Basic earnings per share $ 1.76 1.14 0.86
================= ================== ==================
Diluted earnings per share $ 1.70 1.09 0.81
================= ================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 20
PVF CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHEN- TREASURY
STOCK CAPITAL EARNINGS SIVE INCOME STOCK TOTAL
=========== ============== =============== ============== ============== ===============
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 23,235 9,995,916 12,608,775 (154,268) -- 22,473,658
Comprehensive income:
Net income -- -- 3,646,839 -- -- 3,646,839
Net change in unrealized securities
losses, net of taxes of $79,471 -- -- -- 154,268 -- 154,268
---------------
Comprehensive income 3,801,107
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)
----------- -------------- --------------- -------------- -------------- ---------------
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
Net income -- -- 7,719,287 -- -- 7,719,287
Cash paid in lieu of fractional shares -- -- (939) -- -- (939)
Stock dividend issued, 399,080 shares 3,991 5,732,784 (5,736,775) -- -- --
Purchase of 5,000 shares of
Treasury stock -- -- -- -- (71,250) (71,250)
----------- -------------- --------------- -------------- -------------- ---------------
Balance at June 30, 1999 $ 43,899 20,250,236 18,632,923 -- (71,250) 38,855,808
=========== ============== =============== ============== ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 21
PVF CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Operating activities:
Net income $ 7,719,287 4,927,906 3,646,839
Adjustments required to reconcile net income to net cash
provided by (used in) operating activities:
Accretion of discount on securities (1,458) (4,650) (1,250)
Depreciation and amortization 605,453 512,290 468,296
Provision for loan losses -- 246,000 187,000
Accretion of unearned discount and deferred loan
origination fees, net (1,263,266) (1,464,630) (1,660,399)
Deferred income tax provision (1,113,454) (47,230) 72,093
Proceeds from loans held for sale 107,977,623 81,294,421 46,020,308
Originations of loans held for sale (108,105,064) (82,229,552) (53,500,828)
Mortgage banking operations, excluding mortgage loan
servicing fees and amortization of mortgage servicing
rights (601,056) (483,915) (250,757)
Net change in other assets and other liabilities (649,409) 1,342,926 (62,112)
----------------- ----------------- -----------------
Net cash provided by (used in) operating activities 4,568,656 4,093,566 (5,080,810)
----------------- ----------------- -----------------
Investing activities:
Loans originated (157,546,496) (143,825,436) (136,862,188)
Principal repayments on loans 132,682,883 116,232,185 87,823,393
Proceeds from sales of mortgage-backed securities
available for sale -- -- 12,598,136
Principal repayments on mortgage-backed securities
available for sale -- -- 241,974
Principal repayments on mortgage-backed securities
held to maturity 1,223,417 589,488 123,716
Purchase of mortgage-backed securities held to maturity -- (3,017,075) --
Purchase of securities held to maturity (25,389,250) (27,800,000) --
Maturities of securities held to maturity 27,856,667 14,000,000 100,000
Federal Home Loan Bank (FHLB) stock purchased, net (251,888) (745,250) (882,314)
(Additions) disposal to office properties and equipment (295,118) (943,445) 220,880
Disposals of real estate owned 752,636 1,025,818 508,837
(Additions) disposal of real estate
held for investment, net (2,858,782) (28,313) (54,867)
----------------- ----------------- -----------------
Net cash used in investing activities (23,825,931) (44,512,028) (36,182,433)
----------------- ----------------- -----------------
</TABLE>
(Continued)
20
<PAGE> 22
PVF CAPITAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Financing activities:
Payments on FHLB advances $ (10,283,720) (92,580,968) (72,576,227)
Proceeds from FHLB advances 30,000,000 91,500,000 92,500,000
Repayment of notes payable (1,060,000) (1,250,000) (400,000)
Net increase (decrease) in NOW and passbook savings 7,719,664 5,693,428 (48,405)
Proceeds from issuance of certificates of deposit 46,744,489 85,884,130 58,655,161
Payments on maturing certificates of deposit (67,451,145) (35,618,504) (41,382,167)
Other 531,607 426,908 305,095
Purchase of Treasury stock (71,250) -- --
----------------- ----------------- -----------------
Net cash provided by financing activities 6,129,645 54,054,994 37,053,457
Net increase (decrease) in cash and cash equivalents (13,127,630) 13,636,532 (4,209,786)
Cash and cash equivalents at beginning of year 23,216,962 9,580,430 13,790,216
----------------- ----------------- -----------------
Cash and cash equivalents at end of year $ 10,089,332 23,216,962 9,580,430
================= ================= =================
Supplemental disclosures of cash flow information:
Cash payments of interest expense $ 19,922,567 19,530,151 16,416,368
Cash payments of income taxes 2,480,000 2,617,000 1,580,000
================= ================= =================
Supplemental schedule of noncash investing and financing activities:
Loans exchanged for mortgage-backed securities $ -- -- 5,376,484
Transfers from real estate owned (700,736) (989,299) (481,567)
Transfers to real estate owned 170,000 2,714,353 428,982
================= ================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 23
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(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, Medina 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.
(a) 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.
(b) 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.
(c) 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 allowance for loan losses is maintained at a level to absorb
probable losses inherent in the portfolio as of the balance sheet
date. 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.
(Continued)
22
<PAGE> 24
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(d) MORTGAGE BANKING ACTIVITIES
Mortgage loans held for sale are carried at the lower of cost or
market value, determined on a net aggregate basis.
The Company retains servicing on loans that are sold. 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.
(e) 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 Company 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 component of accumulated other comprehensive
income, 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). Premiums and discounts are
amortized or accredited over the life of the related security as
an adjustment to yield. Dividends and interest income are
recognized when earned.
(f) 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.
23
(Continued)
<PAGE> 25
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(g) 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.
(h) LOAN ORIGINATION AND COMMITMENT FEES
The Company 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.
(i) 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.
(j) 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.
(k) EARNINGS PER SHARE
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 1999, 1998, and 1997 are adjusted to
reflect the 10% stock dividend declared July, 1997; the
three-for-two stock issuance declared July, 1998; and the 10%
stock dividend declared August, 1999.
(l) RECLASSIFICATION
Certain reclassifications have been made to the prior year amounts
to conform to the current year presentation.
24
(Continued)
<PAGE> 26
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(2) SECURITIES
Securities held to maturity at June 30, 1999 and 1998, are summarized as
follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED COST UNREALIZED UNREALIZED LOSS ESTIMATED FAIR
GAIN VALUE
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
United States Government and agency
securities $ 24,957,708 -- (439,008) 24,518,700
Municipal bond 376,333 -- -- 376,333
-------------- -------------- -------------- -------------
Total $ 25,334,041 -- (439,008) 24,895,033
============== ============== ============== =============
Due after one year through five years $ 25,334,041 -- (439,008) 24,895,033
============== ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED COST UNREALIZED UNREALIZED LOSS ESTIMATED FAIR
GAIN VALUE
---------------- --------------- --------------------------------
<S> <C> <C> <C> <C>
United States Government and agency
securities $ 27,800,000 4,565 (37,040) 27,767,525
============== ============== ============== =============
Due after one year through five years 9,800,000 4,565 -- 9,804,565
Due after five years 18,000,000 -- (37,040) 17,962,960
-------------- -------------- -------------- -------------
$ 27,800,000 4,565 (37,040) 27,767,525
============== ============== ============== =============
</TABLE>
There were no sales of securities for the year ended June 30, 1999
or 1998.
25
(Continued)
<PAGE> 27
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held to maturity at June 30, 1999 and 1998,
are summarized as follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED COST UNREALIZED UNREALIZED LOSS ESTIMATED FAIR
GAIN VALUE
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
FHLMC mortgage-backed securities $ 1,721,883 -- (4,070) 1,717,813
Accrued interest receivable 10,883 -- -- 10,843
-------------- -------------- -------------- -------------
$ 1,732,726 -- (4,070) 1,728,656
============== ============== ============== =============
Due after one year through five years 1,434,965 -- (4,070) 1,430,895
Due after five years 297,761 -- -- 297,761
-------------- -------------- -------------- -------------
$ 1,732,726 -- (4,070) 1,728,656
============== ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED COST UNREALIZED UNREALIZED LOSS ESTIMATED FAIR
GAIN 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>
There were no sales of mortgage-backed securities for the years ended
June 30, 1999 or 1998.
26
(Continued)
<PAGE> 28
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(4) LOANS RECEIVABLE HELD FOR LONG-TERM INVESTMENT
Loans receivable held for long-term investment at June 30, 1999 and
1998, consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------
<S> <C> <C>
Real estate mortgages:
One-to-four family residential $ 139,505,849 140,562,371
Home equity line of credit 22,956,231 18,761,725
Multifamily residential 34,074,620 31,493,450
Commercial 105,426,600 94,587,534
Commercial equity line of credit 4,712,750 1,878,826
Land 42,003,325 30,462,374
Construction 101,031,742 96,062,788
----------------- -----------
Total real estate mortgages 449,711,117 413,809,068
Consumer 3,085,680 2,008,437
----------------- -----------
452,796,797 415,817,505
Accrued interest receivable 2,191,226 2,198,910
Deferred loan origination fees (1,920,738) (1,673,697)
Unearned discount (22,752) (35,887)
Undisbursed portion of loan proceeds (54,864,053) (44,622,223)
Allowance for loan losses (2,629,743) (2,686,521)
----------------- -----------
$ 395,550,737 368,998,087
================= ===========
</TABLE>
A summary of the changes in the allowance for loan losses for the years
ended June 30, 1999, 1998, and 1997, is as follows (write-offs include
transfers to real estate owned):
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Beginning balance $ 2,686,521 2,674,537 2,564,720
Provision charged to operations -- 246,000 187,000
Write-offs (62,097) (236,593) (197,875)
Recoveries 5,319 2,577 120,692
----------- ----------- -----------
Ending balance $ 2,629,743 2,686,521 2,674,537
=========== =========== ===========
</TABLE>
27
(Continued)
<PAGE> 29
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
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>
1999 1998
---------- ----------
<S> <C> <C>
Loans on nonaccrual status:
Real estate mortgages:
One-to-four family residential $1,242,000 1,236,000
Commercial 551,000 551,000
Multi-family residential 230,000 263,000
Construction and land 1,616,000 1,212,000
Consumer -- 15,000
---------- ----------
Total loans on nonaccrual status 3,639,000 3,277,000
---------- ----------
Past due loans on accrual status -
real estate mortgages -
construction and land 248,000 163,000
---------- ----------
Total past due loans $3,887,000 3,440,000
========== ==========
</TABLE>
During the years ended June 30, 1999 and 1998, gross interest income of
$349,539 and $204,736, 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, 1999 and 1998, the recorded investment in loans which have
been identified as being impaired totaled $3,639,000 and $3,277,000,
respectively. Included in the impaired amount at June 30, 1999 and 1998,
is $443,062 and $453,113, respectively, related to loans with a
corresponding valuation allowance of $202,334 and $196,386,
respectively. The Company recognized no interest on impaired loans in
1999, 1998, and 1997 (during the portion of the respective years that
they were impaired).
Average impaired loans for the years ended June 30, 1999, 1998, and
1997 amounted to $3,522,000, $3,026,000, and $2,482,000, respectively.
(5) LOANS RECEIVABLE HELD FOR SALE
Loans receivable held for sale at June 30, 1999 and 1998, consist of the
following:
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED COST UNREALIZED UNREALIZED LOSS ESTIMATED FAIR
GAIN VALUE
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Real estate mortgages $ 1,802,323 -- (27,717) 1,774,606
Deferred loan origination fees (30,147) -- -- (30,147)
-------------- -------------- -------------- -------------
$ 1,772,176 -- (27,717) 1,744,459
============== ============== ============== =============
</TABLE>
28
(Continued)
<PAGE> 30
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------
GROSS GROSS
AMORTIZED COST UNREALIZED UNREALIZED LOSS ESTIMATED FAIR
GAIN 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 30,065 -- 1,674,800
============== ============== ============== =============
</TABLE>
Mortgage banking activities, net, for each of the years in the
three-year period ended June 30, 1999, consist of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------- -------
<S> <C> <C> <C>
Mortgage loan servicing fees $ 702,645 617,080 580,328
Amortization of mortgage servicing rights (280,341) (231,460) (168,083)
Gross realized:
Gains on sales of loans 1,506,985 1,209,893 975,826
Losses on sales of loans (905,929) (725,978) (578,053)
Gains on sales of mortgage-backed securities -- -- 16,673
Losses on sales of mortgage-backed securities -- -- (81,759)
Market valuation provision for losses on loans
receivable held for sale -- -- (176,514)
Market valuation recoveries -- -- 94,584
----------- ------- -------
$ 1,023,360 869,535 663,002
=========== ======= =======
</TABLE>
A summary of the changes in the allowance for mortgage banking market
value losses for the years ended June 30, 1999, 1998, and 1997 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- ---------------
<S> <C> <C> <C>
Balance at beginning of year $ -- -- 13,314
Market valuation provision for losses on loans
receivable held for sale -- -- 176,514
Market valuation loss on loans and mortgage-backed securities
sold -- -- (95,244)
Market valuation recoveries -- -- (94,584)
-------------- ------------- ---------------
Balance at end of year $ -- -- --
============== ============= ===============
</TABLE>
At June 30, 1999, 1998, and 1997, the Bank was servicing whole and
participation mortgage loans for others aggregating approximately
$277,288,302, $233,893,979, and $195,250,000, respectively. The Bank had
$3,458,030 and $3,304,702 at June 30, 1999 and 1998, respectively, of
funds collected on mortgage loans serviced for others due to investors,
which is included in accrued expenses and other liabilities.
29
(Continued)
<PAGE> 31
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
Originated mortgage servicing rights capitalized and amortized during
the years ended June 30, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Beginning balance $ 606,200 451,000 241,000
Originated 473,114 386,600 378,000
Amortized (280,341) (231,400) (168,000)
----------- ----------- -----------
Ending balance $ 798,973 606,200 451,000
=========== =========== ===========
Estimated fair value $ 2,334,665 1,639,261 865,481
=========== =========== ===========
</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, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land and land improvements $ 207,092 207,092
Building and building improvements 1,062,525 1,062,525
Leasehold improvements 1,849,929 1,847,269
Furniture and equipment 3,788,158 3,512,837
----------- -----------
6,907,704 6,629,723
Less accumulated depreciation and amortization (4,904,493) (4,316,177)
----------- -----------
$ 2,003,211 2,313,546
=========== ===========
</TABLE>
30
(Continued)
<PAGE> 32
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(7) DEPOSITS
Deposit balances at June 30, 1999 and 1998 are summarized by interest
rate as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
AMOUNT % AMOUNT %
---------------- --------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
NOW and money market accounts
Noninterest bearing $ 7,182,506 2.2% $ 6,261,947 1.8%
2.00 - 5.00% 30,146,167 9.1 24,756,893 7.2
---------------- --------- --------------- ---------
37,328,673 11.3 31,018,840 9.0
Passbook savings 3.00 - 5.00% 33,254,163 10.0 31,844,333 9.3
Certificates of deposit 2.50 - 2.99% 750,000 .2 385,101 .1
4.00 - 4.99 86,009,310 26.0 9,568,477 2.8
5.00 - 5.99 115,086,171 34.7 121,695,954 35.4
6.00 - 6.99 48,828,427 14.7 137,125,129 39.8
7.00 - 7.99 9,784,800 3.0 12,406,221 3.5
8.00 - 8.99 200,192 .1 184,674 .1
---------------- --------- ---------------- ---------
260,658,900 78.7 281,365,556 81.7
---------------- --------- ---------------- ---------
$ 331,241,736 100.0%$ 344,228,729 100.0%
================ ========= ================ =========
Weighted average rate on deposits 4.80% 5.32%
========= =========
</TABLE>
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
AMOUNT % AMOUNT %
---------------- --------- ---------------- ---------
<S> <C> <C> <C> <C>
Remaining term to maturity of certificates of deposit:
12 months or less $ 216,355,447 83.0% $ 211,559,590 75.2%
13 to 24 months 32,535,028 12.5 52,392,548 18.6
25 to 36 months 6,253,664 2.4 13,613,228 4.8
Over 36 months 5,514,761 2.1 3,800,190 1.4
---------------- --------- ---------------- ---------
$ 260,658,900 100.0%$ 281,365,556 100.0%
================ ========= ================ =========
Weighted average rate on certificates of deposit 5.48% 5.95%
========= =========
</TABLE>
Time deposits in amounts of $100,000 or more totaled $65,113,000 and
$64,157,000 at June 30, 1999 and 1998, respectively.
31
(Continued)
<PAGE> 33
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- ----------------
<S> <C> <C> <C>
NOW accounts $ 730,099 599,436 529,889
Passbook accounts 832,070 870,661 867,687
Certificates of deposit 15,398,792 15,592,321 12,559,967
--------------- -------------- ---------------
$ 16,960,961 17,062,418 13,957,543
=============== ============== ===============
</TABLE>
(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, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
MATURITY INTEREST RATE 1999 1998
-------- ------------- ---------------- ---------------
<S> <C> <C> <C>
March 1999 6.50% $ -- 10,000,000
July 1999 6.00 25,000,000 --
March 2001 5.93 5,000,000 5,000,000
February 2003 6.00 500,000 500,000
February 2006 6.05 540,736 824,456
February 2008 5.37 10,000,000 10,000,000
March 2008 5.15 5,000,000 5,000,000
March 2008 5.64 10,000,000 10,000,000
March 2008 5.13 5,000,000 5,000,000
July 2008 5.15 5,000,000 --
---------------- ---------------
$ 66,040,736 46,324,456
================ ===============
Weighted average interest rate 5.65% 5.71%
================ ===============
</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 March 2000. 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 October 1999. Serving as collateral for such
advances, the Bank has pledged mortgage loans with unpaid principal
balances aggregating approximately $99,061,104 and $69,486,683 at June
30, 1999 and 1998, respectively. In addition, stock in the FHLB is
pledged for such advances.
The Bank has the capacity to borrow up to 25% of its assets, upon
approval of the FHLB. At June 30, 1999 and 1998, the Bank had the
capacity to borrow an additional $27,000,000 and $47,000,000,
respectively, in FHLB advances.
32
(Continued)
<PAGE> 34
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(9) NOTES PAYABLE
On August 16, 1996, PVF Service Corporation, a wholly owned subsidiary
of the Company, secured a mortgage note from another federally insured
institution at a variable interest rate that adjusts to prime plus 1%
without notice on the effective date of each change in the lender's
prime rate. The balance at June 30, 1998 was $1,060,000. The note was
paid in full in August of 1998.
(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>
1999 1998 1997
------------------------- ------------------------- -------------------------
AMOUNT % AMOUNT % AMOUNT %
--------------- --------- --------------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax $ 3,944,733 35.0% $ 2,557,541 35.0% $ 1,942,671 35.0%
Decrease in tax resulting from:
Benefit of graduated rates (112,706) (1.0) (73,073) (1.0) (55,505) (1.0)
Tax credits (219,332) (2.0) (287,788) (3.9) -- --
Other, net (61,315) (0.5) 182,675 2.5 16,483 0.3
--------------- --------- --------------- --------- --------------- ---------
$ 3,551,380 31.5% $ 2,379,355 32.6% $ 1,903,649 34.3%
=============== ========= =============== ========= =============== =========
</TABLE>
33
(Continued)
<PAGE> 35
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
The net tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at June
30, 1999 and 1998 are:
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
Deferred tax assets:
Loan loss and other reserves $ 875,271 883,039
Capital loss carryforward -- 102,374
Basis differences - fixed assets -- 94,836
Other 282,819 67,871
----------------- ----------------
Total gross deferred tax assets 1,158,090 1,148,120
Less valuation allowance -- (102,374)
----------------- ----------------
Net deferred tax assets 1,158,090 1,045,746
----------------- ----------------
Deferred tax liabilities:
Deferred loan fees 257,290 262,929
FHLB stock dividend 582,845 517,587
Unrealized gains on loan sales, net 95,871 --
Originated mortgage servicing asset 271,637 206,094
Basis differences - fixed assets 968,345 --
Other 180,570 144,150
----------------- ----------------
Total gross deferred tax liabilities 2,356,558 1,130,760
----------------- ----------------
Net deferred tax liability $ (1,198,468) (85,014)
================= ================
</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, 1999 or 1998, other than as noted above
for the capital loss carryforward.
Retained earnings at June 30, 1999 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 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
34
(Continued)
<PAGE> 36
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
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, 1999:
YEAR ENDING JUNE 30,
--------------------
2000 $ 322,889
2001 283,848
2002 283,848
2003 213,966
Thereafter 171,318
---------------
Total minimum lease payments $ 1,275,869
===============
During the years ended June 30, 1999, 1998, and 1997, rental expense was
$460,313, $435,097, and $374,420, respectively.
(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.
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.
35
(Continued)
<PAGE> 37
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
At June 30, 1999 and 1998, the Bank had the following commitments:
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
Commitments to sell mortgage loans in the secondary market $ 540,000 3,407,600
Commitments to fund variable mortgage loans 43,472,000 21,871,601
Commitments to fund fixed mortgage loans 8,669,000 5,736,100
</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
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific
capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
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, 1999, the minimum regulatory capital regulations
require institutions to have equity capital to total tangible assets of
1.5%; a minimum leverage ratio of core (Tier 1) capital to total
adjusted tangible assets of 3%; and a minimum ratio of total capital to
risk weighted assets of 8%. At June 30, 1999, the Bank exceeded all of
the aforementioned regulatory capital requirements.
36
(Continued)
<PAGE> 38
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
The most recent notification from the Office of Thrift Supervision
categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Company must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There
are no conditions or events since that notification that management
believes have changed the institution's category.
At June 30, 1999 and 1998, the Bank was in compliance with regulatory
capital requirements as set forth below (dollars in thousands):
<TABLE>
<CAPTION>
CORE/ TIER-1 TOTAL
EQUITY CAPITAL LEVERAGE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
June 30, 1999:
GAAP capital $ 35,950 35,950 35,950 35,950
General loan valuation allowances -- -- 2,574
-------------- -------------- --------------
35,950 35,950 38,524
Regulatory capital
Total assets 450,039
---------------
Adjusted total assets 450,039
--------------
Risk-weighted assets 344,753 344,753
-------------- --------------
Capital ratio 7.99% 7.99% 10.43% 11.17%
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>
37
(Continued)
<PAGE> 39
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
CORE/ TIER-1 TOTAL
EQUITY CAPITAL LEVERAGE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
June 30, 1998:
GAAP capital $ 31,727 31,727 31,727 31,727
General loan valuation allowances -- -- 2,597
-------------- -------------- --------------
Regulatory capital 31,727 31,727 34,324
Total assets 440,065
---------------
Adjusted total assets 440,065
--------------
Risk-weighted assets 313,915 313,915
-------------- --------------
Capital ratio 7.21% 7.21% 10.11% 10.93%
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>
38
(Continued)
<PAGE> 40
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(14) STOCK OPTIONS
The Bank offered stock options to the directors and officers of the bank
in fiscal years 1993, 1997, 1998 and 1999. 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
originally granted, in 1997 32,550 options were originally granted, and
in 1998, 21,700 options were originally granted, which are exercisable
for a ten-year period, with 20% 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>
1999 1998 1997
-------------------------------------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
OPTION OPTION OPTION
SHARES PRICE SHARES PRICE SHARES PRICE
-------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of
year 262,131 $ 4.25 439,057 $ 2.58 400,216 $ 2.03
Exercised -- -- (210,553) 2.05 -- --
Expired -- -- (2,178) 8.26 -- --
Granted 23,870 10.56 35,805 11.96 38,841 8.26
------------ --------- ---------- --------- ------- ----------
Outstanding end of year 286,001 $ 4.78 262,131 $ 4.25 439,057 $ 2.58
============ ========= ========= ========= ======= ==========
Exercisable end of year 230,757 $ 4.78 211,489 $ 4.25 407,985 $ 2.58
============ ========= ========= ========= ======= =========
</TABLE>
As of June 30, 1999, options outstanding have exercise prices between
$2.03 and $13.16 and a weighted average remaining contractual life of
4.6 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>
1999 1998 1997
--------------- --------------------------------
<S> <C> <C> <C>
Net income $ 7,719,287 4,927,906 3,646,839
Less: Compensation expense, net of tax 48,427 34,589 58,516
--------------- ----------------- --------------
Pro forma earnings $ 7,670,860 4,893,317 3,588,323
=============== ================= ==============
Basic earnings per share $ 1.76 1.14 .86
=============== ================= ==============
Pro forma basic earnings per share $ 1.75 1.13 .85
=============== ================= ==============
Diluted earning per share $ 1.70 1.09 .81
=============== ================= ==============
Pro forma diluted earnings per share $ 1.69 1.09 .80
=============== ================= ==============
</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.
39
(Continued)
<PAGE> 41
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
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 1999, 1998, and 1997; expected dividend
yield of -0-, and expected option lives of 7 years; expected volatility
of 30%, 5%, and 20%, and risk free interest rates of 4.33 %, 5.56%, and
6%, respectively.
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>
1999
------------------------------------------------
PER-SHARE
NET INCOME SHARES AMOUNT
--------------- ---------------- ---------------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $ 7,719,287 4,389,888 1.76
Effect of stock options -- 161,254 .06
--------------- ----------------- --------------
Diluted EPS
Income available to common shareholders $ 7,719,287 4,551,142 1.70
=============== ================= ==============
1998
------------------------------------------------
PER-SHARE
NET INCOME SHARES AMOUNT
--------------- ---------------- ---------------
Basic EPS
Income available to common shareholders $ 4,927,906 4,332,217 1.14
Effect of stock options -- 174,706 .05
--------------- ----------------- --------------
Diluted EPS
Income available to common shareholders $ 4,927,906 4,506,923 1.09
=============== ================= ==============
</TABLE>
40
(Continued)
<PAGE> 42
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1997
------------------------------------------------
PER-SHARE
NET INCOME SHARES AMOUNT
--------------- ------------------ --------------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $ 3,646,839 4,216,677 .86
Effect of stock options -- 299,883 .05
--------------- ------------------ --------------
Diluted EPS
Income available to common shareholders $ 3,646,839 4,516,560 .81
=============== ================== ==============
</TABLE>
(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, 1999 JUNE 30, 1998
------------------------------- --------------------------------
CARRYING ESTIMATED FAIR CARRYING AMOUNT ESTIMATED
AMOUNT VALUE FAIR VALUE
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Assets:
Cash and amounts due from depository
institutions $ 4,140,460 4,140,460 2,447,631 2,447,631
Interest-bearing deposits 573,872 573,872 394,331 394,331
Federal funds sold 5,375,000 5,375,000 20,375,000 20,375,000
Securities held to maturity 25,334,041 24,895,033 27,800,000 27,767,525
Mortgage-backed securities held to maturity
1,732,726 1,728,656 2,950,856 2,965,247
Loans receivable held for:
Long-term investment, net 395,550,737 398,014,043 368,998,087 378,879,256
Sale, net 1,772,176 1,744,459 1,644,735 1,674,800
Stock in the Federal Home Loan Bank of
Cincinnati 3,759,452 3,759,452 3,507,564 3,507,564
Liabilities:
Demand deposits and passbook savings $ 70,582,836 70,582,836 62,863,173 62,863,173
Time deposits 260,658,900 258,939,726 281,365,556 282,062,000
Advances from the Federal Home loan Bank of
Cincinnati 66,040,736 63,240,609 46,324,456 45,434,000
Notes payable -- -- 1,060,000 1,060,000
</TABLE>
41
(Continued)
<PAGE> 43
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
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.
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, 1999 and 1998.
42
(Continued)
<PAGE> 44
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(17) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited consolidated quarterly
results of operations for 1999 and 1998 (in thousands of dollars, except
per share data): (1)
<TABLE>
<CAPTION>
QUARTERS FOR THE YEAR ENDED JUNE 30, 1999
---------------------------------- ------------------------------
FIRST SECOND THIRD FOURTH
--------------- ------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Interest income $ 8,938 8,935 8,666 8,808
Interest expense 5,165 5,079 4,878 4,740
--------------- ------------------ -------------- ---------------
Net interest income 3,773 3,856 3,788 4,068
Provision for losses on loans -- -- -- --
Noninterest income 363 445 4,221 407
Noninterest expense 2,241 2,198 2,713 2,498
--------------- ------------------ -------------- ---------------
Income before taxes 1,895 2,103 5,296 1,977
Federal income taxes 632 696 1,804 420
--------------- ------------------ -------------- ---------------
Net income $ 1,263 1,407 3,492 1,557
=============== ================== ============== ===============
Basic earnings per share (2) $ .29 .32 .79 .35
=============== ================== ============== ===============
Diluted earnings per share (2) $ .27 .31 .76 .34
=============== ================== ============== ===============
</TABLE>
43
(Continued)
<PAGE> 45
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
<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) $ 0.30 0.30 0.30 0.24
=============== ================ ================ ===============
Diluted earnings per share (2) $ 0.28 0.29 0.29 0.23
=============== ================ ================ ===============
</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 and a 10% stock dividend,
declared on July 27, 1999 and issued on September 7, 1999.
44
(Continued)
<PAGE> 46
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(18) PARENT COMPANY
Condensed parent company only financial information as of and for the
years ended June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION 1999 1998
------------------------------------------- ----------------- ----------------
<S> <C> <C>
Cash and amounts due from depository institutions $ 64,314 27,949
Prepaid expenses and other assets 1,888,123 621,904
Investment in subsidiaries, at equity in underlying value of net assets 36,887,972 30,559,036
----------------- ----------------
Total assets $ 38,840,409 31,208,889
================= ================
Accrued expenses and other liabilities (15,399) 179
----------------- ----------------
Stockholders' equity 38,855,808 31,208,710
----------------- ----------------
Total liabilities and stockholders' equity $ 38,840,409 31,208,889
================= ================
CONDENSED STATEMENTS OF OPERATIONS 1999 1998 1997
---------------------------------- --------------- ------------------ -------------
Income -
mortgage banking activities $ 310,930 421,344 493,440
Expenses:
Interest expense -- 7,758 70,136
General and administrative 249,630 266,287 255,804
--------------- ----------------- --------------
249,630 274,045 325,940
--------------- ----------------- --------------
Income before federal income taxes and
equity in undistributed net income of
subsidiaries 61,300 147,299 167,500
Federal income taxes 20,950 50,266 57,146
--------------- ------------------ -------------
Income before equity in undistributed
net income of subsidiaries 40,350 97,033 110,354
Equity in undistributed net income of subsidiaries 7,678,937 4,830,873 3,536,485
--------------- ------------------ -------------
Net income $ 7,719,287 4,927,906 3,646,839
=============== ================== =============
</TABLE>
45
(Continued)
<PAGE> 47
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS 1999 1998 1997
---------------------------------- --------------- ----------------- ---------------
<S> <C> <C> <C>
Operating activities:
Net income $ 7,719,287 4,927,906 3,646,839
Equity in undistributed net income of subsidiaries (7,678,937) (4,830,873) (3,536,485)
Other, net (221,796) (326,913) 50,443
--------------- ----------------- ---------------
Net cash provided by (used in) operating
activities (181,446) (229,880) 160,797
--------------- ----------------- ---------------
Investing activities:
Investment in PVF Holdings Inc. -- (301,100) --
--------------- ----------------- ---------------
Net cash used in investing activities -- (301,100) --
--------------- ----------------- ---------------
Financing activities:
Repayment on note payable (1,060,000) (600,000) (400,000)
Proceeds from exercise of stock options -- 9,529 --
Cash paid in lieu of fractional shares (939) (2,141) (1,349)
Dividends received from subsidiaries 1,350,000 1,100,000 300,000
Purchase of Treasury stock (71,250) -- --
--------------- ----------------- ---------------
Net cash provided by (used in) financing
activities 217,811 507,388 (101,349)
--------------- ----------------- ---------------
Net increase (decrease) in cash and cash
equivalents 36,365 (23,592) (59,448)
Cash and cash equivalents at beginning of year 27,949 51,541 110,989
--------------- ----------------- ---------------
Cash and cash equivalents at end of year $ 64,314 27,949 51,541
=============== ================= ===============
</TABLE>
46
(Continued)
<PAGE> 48
PVF CAPITAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998, and 1997
(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%
of their compensation, with the Company matching up to 50% of the first
4% 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% of the employees
compensation. Participants vest in the Company's contributions as
follows:
YEARS OF SERVICE PERCENT VESTED
------------------
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
==================
The total of the Company's matching and profit sharing contribution cost
related to the plan for the years ended June 30, 1999, 1998, and 1997
was $79,638, $72,602, and $76,300, respectively.
47
<PAGE> 49
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
BEDFORD HEIGHTS OFFICE Mon., Tue., Wed., Thurs. ...9:00 a.m. - 5:00 p.m. MAYFIELD HEIGHTS OFFICE
25350 Rockside Road Fri.........................9:00 a.m. - 6:00 p.m. 1456 SOM Center Road
Bedford Hts., Ohio 44146 Sat.........................9:00 a.m. - 1:00 p.m. Mayfield Hts., Ohio 44124
440-439-2200 440-449-8597
CHARDON OFFICE MENTOR OFFICE
408 Water Street 6990 Heisley Road
Chardon, Ohio 44024 Mentor, Ohio 44060
440-285-2343 440-944-0276
</TABLE>
ADMINISTRATIVE OFFICES
25350 Rockside Road
Bedford Hts., Ohio 44146
440-439-6790
Monday - Friday
9:00 a.m. - 5:00 p.m.
<PAGE> 50
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
Chairman and
Chief Executive Officer
Anthony & Sylvan Pools 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 and
Marketing Director
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 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
Corporate Trust Services
Mail Drop 10AT66-4129
38 Fountain Square
Cincinnati, Ohio 45263
SPECIAL COUNSEL
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
STOCK LISTING
NASDAQ Small-Cap Market
Symbol: PVFC
ANNUAL MEETING
The 1999 Annual Meeting of
Stockholders will be held on
October 18, 1999 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, 1999 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> 51
[PVF CAPITAL CORP. LOGO]
2618 North Moreland Blvd., Cleveland, Ohio 44120, 216-991-9600
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
PVF Capital Corp.
<TABLE>
<CAPTION>
State or Other
Jurisdiction of Percentage
Subsidiaries (1) Incorporation Ownership
- ---------------- --------------- -----------
<S> <C> <C>
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%
</TABLE>
- ---------------
(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 15, 1999, relating to the consolidated statements of financial condition of
PVF Capital Corp. and subsidiaries as of June 30, 1999 and 1998, 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, 1999 which report
appears in the June 30, 1999 Annual Report on Form 10-K of PVF Capital Corp.
/s/ KPMG LLP
Cleveland, Ohio
September 21, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF CONDITION AND THE STATEMENT OF OPERATION FOR THE PERIOD ENDED JUNE
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 4,140
<INT-BEARING-DEPOSITS> 574
<FED-FUNDS-SOLD> 5,375
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 25,334
<INVESTMENTS-MARKET> 24,895
<LOANS> 397,323
<ALLOWANCE> 2,630
<TOTAL-ASSETS> 449,201
<DEPOSITS> 331,242
<SHORT-TERM> 25,000
<LIABILITIES-OTHER> 13,062
<LONG-TERM> 41,041
0
0
<COMMON> 44
<OTHER-SE> 38,812
<TOTAL-LIABILITIES-AND-EQUITY> 449,201
<INTEREST-LOAN> 33,293
<INTEREST-INVEST> 2,054
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 35,347
<INTEREST-DEPOSIT> 16,961
<INTEREST-EXPENSE> 19,863
<INTEREST-INCOME-NET> 15,484
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,649
<INCOME-PRETAX> 11,271
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,719
<EPS-BASIC> 1.76
<EPS-DILUTED> 1.70
<YIELD-ACTUAL> 3.680
<LOANS-NON> 3,639
<LOANS-PAST> 248
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,687
<CHARGE-OFFS> 62
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 2,630
<ALLOWANCE-DOMESTIC> 2,630
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,574
</TABLE>
