-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QwyJSh0mGPoShPZtE2CuBI+YQF1aHs/IONRHYIiUZcWRyaHJXwbNXRf5F1NbRcnG WFxYLch1jAA4ibRxrxu6qQ== 0000912057-97-030742.txt : 19970918 0000912057-97-030742.hdr.sgml : 19970918 ACCESSION NUMBER: 0000912057-97-030742 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970915 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PVF CAPITAL CORP CENTRAL INDEX KEY: 0000928592 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 341659805 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24948 FILM NUMBER: 97680216 BUSINESS ADDRESS: STREET 1: 2618 N MORELAND BLVD CITY: CLEVELAND HEIGHTS STATE: OH ZIP: 44120 BUSINESS PHONE: 2164396790 MAIL ADDRESS: STREET 1: 25350 ROCKSIDE ROAD CITY: BEDFORD HEIGHTS STATE: OH ZIP: 44146 10-K 1 10-K 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 [NO FEE REQUIRED] For the fiscal year ended June 30, 1997 / / TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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 5, 1997, was $42,333,131. For purposes of this calculation, it is assumed that directors, executive officers and 5% stockholders of the registrant are affiliates. As of September 5, 1997, the registrant had 2,590,155 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Annual Report to Stockholders for the Fiscal Year Ended June 30, 1997. (Parts I, II and IV) 2. Portions of Proxy Statement for the 1997 Annual Meeting of Stockholders. (Part III) PART I ITEM 1. BUSINESS GENERAL PVF Capital Corp. ("PVF" or the "Company") announced the reorganization of Park View Federal Savings Bank ("Park View Federal" or the "Bank") into the holding company structure of ownership effective October 31, 1994. On that date, Park View Federal became a wholly owned subsidiary of PVF Capital Corp., and all issued and outstanding shares of common stock of the Bank were converted on a three-for-two basis into shares of common stock of PVF Capital Corp. PVF owns and operates Park View Federal Savings Bank and PVF Service Corporation ("PVFSC"), a real estate subsidiary, purchased by PVF from the Bank during fiscal 1995. Park View Federal is a federal stock savings bank operating through nine offices located in Cleveland and surrounding communities. Park View Federal has operated continuously for 77 years, having been founded as an Ohio chartered savings and loan association in 1920. Its deposits became federally insured in 1936. The Bank became federally chartered in 1950. On December 30, 1992, the Bank completed its conversion from a federally chartered mutual savings and loan association to a federally chartered stock savings bank (the "Conversion"), at which time it adopted its present name, Park View Federal. PVFSC was purchased by PVF to improve the Bank's regulatory capital ratio's and for the purpose of conducting real estate activities at the holding company level. PVF Capital Corp's main office is located at 2618 N. Moreland Boulevard, Cleveland, Ohio 44120 and its telephone number is (216) 991-9600. The Bank's principal business consists of attracting deposits from the general public and investing these funds primarily in loans secured by first mortgages on real estate located in the Bank's market area, which consists of Portage, Lake, Geauga, Cuyahoga, Summit, Stark, Medina and Lorain Counties in Ohio. Park View Federal emphasizes the origination of loans for the purchase or construction of residential real estate, commercial real estate and multi- family residential property and land loans. To a lesser extent, the Bank originates loans secured by second mortgages, including home equity lines of credit and loans secured by savings deposits. The Bank derives its income principally from interest earned on loans and, to a lesser extent, loan servicing and other fees, gains on the sale of loans and mortgage-backed securities and interest earned on investments. The Bank's principal expenses are interest expense on deposits and borrowings and non- interest expense such as compensation and employee benefits, office occupancy expenses and other miscellaneous expenses. Funds for these activities are provided principally by deposits, 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 MARKET AREA The Bank conducts its business through nine 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, 1997, over 98% of the Bank's net loan portfolio and over 98% of the Bank's deposits were in the Bank's market area. Park View Federal has targeted business development efforts in suburban sectors of its market area, such as Lake, Geauga, and Summit Counties, where demographic growth has been stronger. The economy in the Cleveland area historically has been based on the manufacture of durable goods. Though manufacturing continues to remain an important sector of the economy, diversification has occurred in recent years with the growth of service, financial and wholesale and retail trade industries. LENDING ACTIVITIES LOAN PORTFOLIO COMPOSITION The Bank's net loan portfolio, including mortgage-backed securities, totalled $342.6 million at June 30, 1997, representing 91.8% of total assets at such date. It is the Bank's policy to concentrate its lending in its market area. Single-family residential loans comprise the largest group of loans, amounting to $128.9 million, or 37.6% of the net loan portfolio at June 30, 1997. In addition, at June 30, 1997, construction loans totalled $82.6 million, or 24.1% of the net loan portfolio. At June 30, 1997, loans for the purchase of commercial real estate amounted to $84.9 million, or 24.8% of the net loan portfolio, at such date. The Bank also had $31.1 million of multi-family residential real estate loans and $32.0 million of land loans, most of the latter consisting of loans to acquire land on which the borrowers intended to construct single-family residences. The Bank also had $16.9 million outstanding in Home Equity Line of Credit loans. The remainder of the loan portfolio at June 30, 1997 consisted of $3.6 million in consumer loans, which included $191,000 in mobile home loans, $615,000 in loans secured by savings deposits, $34,000 in property improvement loans and $2.8 of other consumer loans, which consist primarily of lines of credit and demand loans. In addition, mortgage-backed securities totaled $0.5 million at June 30, 1997. 3 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, 1997, the Bank had no concentrations of loans exceeding 10% of total loans other than as disclosed below.
AT JUNE 30, ------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------------ ----------------- ----------------- ---------------- ----------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT -------- ------- -------- ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Real estate loans: Single-family residential(1). $128,908 37.62% $109,687 36.84% $ 98,203 38.56% $ 79,901 37.93% $ 79,031 48.08% Multi-family residential..... 31,090 9.07% 30,607 10.28% 39,531 15.52% 33,706 16.00% 16,647 10.13% Commercial................... 84,940 24.79% 72,543 24.36% 57,498 22.58% 53,347 25.33% 38,233 23.26% Home equity LOC.............. 16,941 4.94% 8,749 2.94% 3,314 1.30% 0 0.00% 0 0.00% Construction................. 82,611 24.11% 76,725 25.77% 61,653 24.21% 53,774 25.53% 31,701 19.29% Land......................... 32,045 9.35% 30,686 10.31% 18,318 7.19% 16,488 7.83% 12,341 7.51% Mortgage-backed securities held for sale, net 0 0.00% 7,963 2.67% 989 0.39% 0 0.00% 3,006 1.83% Mortgage-backed securities held to maturity............. 505 0.15% 629 0.21% 2,747 1.08% 0 0.00% 0 0.00% Consumer loans: 43 Property improvement......... 34 0.01% 0.01% 76 0.03% 103 0.05% 176 0.11% Passbook loans............... 615 0.18% 742 0.25% 999 0.39% 842 0.40% 666 0.41% Mobile home.................. 191 0.06% 328 0.11% 519 0.20% 833 0.40% 1,386 0.84% Other........................ 2,756 0.80% 1,244 0.42% 701 0.28% 486 0.23% 433 0.26% -------- -------- -------- ------- ------- 380,636 111.08% 339,946 114.16% 284,548 111.72% 239,480 113.70% 183,620 117.71% -------- ------- -------- ------- ------- ------- ------- ------- ------- ------- Less: Accrued interest receivable.. 2,097 0.61% 1,709 0.57% 1,589 0.62% 1,083 0.51% 950 0.58% Deferred loan fees........... (1,733) -0.51% (2,098) -0.70% (1,811) -0.71% (1,583) -0.75% (942) -0.57% Unearned discount............ (48) -0.01% (165) -0.06% (336) -0.13% (347) -0.16% (272) -0.17% Undisbursed discount FHLMC MBS 0 0.00% (158) -0.05% (2) 0.00% 0 -0.00% 0 0.00% Unrealized loss FHLMC MBS.... 0 0.00% (234) -0.08% 0 0.00% 0 -0.00% 0 0.00% Undisbursed portion of loan proceeds........... (35,653) -10.41% (38,649) 12.98% (26,891) -10.56% (25,058) -11.90% (16,244) -9.88% Market valuation reserve..... 0 0.00% (13) -0.00% 0 0.00% (871) -0.41% 0 0.00% Allowance for possible loan losses................ (2,675) -0.76% (2,565) -0.86% (2,402) -0.94% (2,075) -0.99% (2,738) -1.67% -------- -------- -------- ------- ------- Total other items.......... (38,012) -11.08% (42,173) 14.16% (29,853) -11.72% (28,851) -13.70% (19,246) -11.71% -------- -------- -------- ------- ------- Total loans and mortgage-backed securities. $342,624 100.00% $297,773 100.00% $254,695 100.00% $210,629 100.00% $164,374 100.00% -------- ------- -------- ------- ------- ------- ------- ------- ------- ------- -------- ------- -------- ------- ------- ------- ------- ------- ------- -------
- ------------------------- (1) Includes loans held for sale in the amounts of $0.7 million, $11.2 million, $4.5 million, $4.0 million, and $4.9 million at June 30, 1997, 1996, 1995, 1994 and 1993 respectively. 4 The following table presents at June 30, 1997 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.
DUE DURING DUE ONE DUE THREE DUE FIVE DUE 10 THE YEAR THROUGH THREE THROUGH FIVE THROUGH 10 THROUGH 20 DUE 20 YEARS ENDING YEARS AFTER YEARS AFTER YEARS AFTER YEARS AFTER OR MORE AFTER JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1998 1997 1997 1997 1997 1997 ---------- ------------- ------------ ----------- ----------- ------------- (IN THOUSANDS) Real estate mortgage loans..... $174,189 $86,348 $52,907 $12,234 $8,041 $4,797 Consumer loans................. 3,295 7 78 159 57 0 -------- ------- ------- ------- ------ ------ Total $177,484 $86,355 $52,985 $12,393 $8,098 $4,797 -------- ------- ------- ------- ------ ------ -------- ------- ------- ------- ------ ------
5 The following table apportions the dollar amount of the loans due or repricing after June 30, 1998 between those with predetermined interest rates and those with adjustable interest rates.
Floating or Predetermined Rates Adjustable Rates Total ------------------- ---------------- ----- (In thousands) Real estate mortgage loans... $21,820 $142,507 $164,327 Consumer loans............... 301 0 301 ------- -------- -------- Total.................... $22,121 $142,507 $164,628 ------- -------- -------- ------- -------- --------
Scheduled contractual principal repayments of loans and mortgage-backed securities do not reflect the actual life of such assets. The average life of loans and mortgage-backed securities is substantially less than their contractual terms because of prepayments. In addition, due-on-sale clauses on loans generally give the Bank the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decreases when rates on existing mortgages are substantially higher than current mortgage loan rates. ORIGINATION, PURCHASE AND SALE OF LOANS The Bank generally has authority to originate and purchase loans secured by real estate located throughout the United States. Consistent with its emphasis on being a community-oriented financial institution, the Bank concentrates its lending activities in its market area. Residential real estate loans typically are originated through salaried loan officers, while construction loans and commercial real estate loans are originated through senior management officers. Residential mortgage loan originations are attributable to depositors, walk-in customers, advertising and referrals from real estate brokers and developers. Construction and commercial real estate loan originations are attributable largely to the Bank's reputation and its long-standing ties to builders in its market area. All loan applications are evaluated by the Bank's staff to ensure compliance with the Bank's underwriting standards. See "-- Loan Underwriting Policies." The Bank originates all fixed-rate, single-family mortgage loans in conformity with FHLMC and 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.
Year Ended June 30, ---------------------------- 1997 1996 1995 ---- ---- ---- (In thousands) Loans originated: Real estate: Residential and commercial (1)..... $ 81,707 $ 44,944 $ 40,030 Construction....................... 88,936 90,899 72,752 Land............................... 18,818 19,038 11,761 Passbook loans....................... 435 410 747 Other................................ 467 1157 367 -------- -------- -------- Total loans originated............. $190,363 $156,448 $125,657 -------- -------- -------- -------- -------- -------- Loans refinanced....................... $ 16,193 $ 20,533 $ 17,043 -------- -------- -------- -------- -------- -------- Loans and mortgage-backed securities sold...................... $ 58,618 $ 48,435 $ 36,251 -------- -------- -------- -------- -------- --------
- --------------------- (1) Includes single-family and multi-family residential and commercial loans. 6 LOAN UNDERWRITING POLICIES The Bank's lending activities are subject to the Bank's written, non- discriminatory underwriting standards and to loan origination procedures prescribed by the Bank's Board of Directors and its management. Detailed loan applications are obtained to determine the borrower's ability to repay, and the more significant items on these applications are verified through the use of credit reports, financial statements and confirmations. Property valuations are generally performed by an internal staff appraiser and by independent outside appraisers approved by the Bank's Board of Directors. The Bank's Loan Underwriter has authority to approve all fixed-rate single-family residential mortgage loans which meet FHLMC and FNMA underwriting guidelines and those adjustable-rate single-family residential mortgage loans which meet the Bank's underwriting standards and are in amounts of less than $400,000. The Board of Directors has established a Loan Committee comprised of the Chairman of the Board, President, Senior Vice President, other management and an outside director of the Bank. This committee reviews all loans approved by the underwriter and has the authority to approve adjustable rate single-family residential loans up to $400,000 and construction and commercial real estate loans up to $500,000. All loans in excess of the above amounts must be approved by the Board of Directors. All loans secured by savings deposits can be approved by lending officers based in the Bank's branch offices. It is the Bank's policy to have a mortgage creating a valid lien on real estate and to generally obtain a title insurance policy which insures that the property is free of prior encumbrances. When a title insurance policy is not obtained, an attorney's certificate is received. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a flood plain as designated by the Department of Housing and Urban Development, paid flood insurance policies. Most borrowers are also required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes and homeowners insurance. The Bank is permitted to lend up to 100% of the appraised value of the real property securing a mortgage loan. However, if the amount of a residential loan originated or refinanced exceeds 90% of the appraised value, the Bank is required by federal regulations to obtain private mortgage insurance on that portion of the principal amount of the loan that exceeds 80% of the appraised value of the property. The Bank will make a single-family residential mortgage loan with up to a 97% loan-to-value ratio if the required private mortgage insurance is obtained. The Bank generally limits the loan-to- value ratio on multi-family and commercial real estate mortgages to 75%. Interest rates charged by the Bank on loans are affected principally by competitive factors, the demand for such loans and the supply of funds available for lending purposes and, in the case of fixed-rate, single-family residential loans, rates established by the FHLMC and the FNMA. These factors are, in turn, affected by general economic conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies and government budgetary matters. RESIDENTIAL REAL ESTATE LENDING. The Bank historically has been and continues to be an originator of single-family, residential real estate loans in its market area. The Bank currently originates fixed-rate, residential mortgage loans in accordance with underwriting guidelines promulgated by the FHLMC and the FNMA and adjustable-rate mortgage loans for terms of up to 30 years. In addition, in accordance with FHLMC and FNMA guidelines, the Bank offers 30-year loans with interest rates that adjust after five or seven years to a rate which is 0.5% above the FHLMC 60 day delivery rate, at which point the rate is fixed over the remaining 25 or 23 years of the loan, respectively. At June 30, 1997, $128.9 million, or 37.6%, of the Bank's net loan and mortgage- backed securities portfolio consisted of single-family, conventional mortgage loans, of which approximately $114.7 million, or 89.0%, carried adjustable interest rates. Included in this amount are $3.5 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. 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 7 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 $116.0 million, or 33.9%, of the total loan and mortgage- backed securities portfolio at June 30, 1997. 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, 1997, $82.6 million or 24.1%, 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. 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 8 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 $32.0 million, or 9.4% of its net loan and mortgage-backed securities portfolio, in land loans at June 30, 1997. 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, 1997, the Bank had $16.9 million in home equity lines of credit, which amounted to 4.9% 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, 1997, the Bank reported net loan servicing fee income of $412,245, and was servicing $195.3 million of loans for others. The reduction in net servicing income is due primarily to the Bank's adoption of FASB 125 whereby servicing rights are capitalized and amortized on a level yield basis over the projected life of the underlying loans. See note 5 of notes to Consolidated Financial Statements. The Bank has been able to keep delinquencies on loans serviced for others to a relatively low level of below 1% of the aggregate outstanding balance of loans serviced as a result of its policy to limit servicing to loans it originated and subsequently sold to the FHLMC and the FNMA. Because of the success the Bank has experienced in this area and because it has data processing equipment that will allow it to expand its portfolio of serviced loans without incurring significant incremental expenses, the Bank intends in the future to augment its portfolio of loans serviced by continuing to originate and either swap such fixed-rate, single-family residential mortgage loans with the FHLMC and the FNMA in exchange for mortgage-backed securities or sell such loans for cash, while retaining servicing. On August 18, 1995, the Bank sold $146.0 million in FHLMC servicing to PVF and recognized no gain due to the transaction being an intercompany sale. PVF then entered into an agreement with the Bank to service the underlying loans for $8.00 per loan monthly. PVF borrowed $1.2 million to finance the purchase of this servicing. The servicing income from these loans will provide sufficient funds to pay both the servicing fee to the Bank and finance the debt incurred for the purchase of the servicing. At June 30, 1997 the Bank was servicing $107.8 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 9 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. 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, 1997 and June 30, 1996, the Bank had $710,000 and $11,204,000 of fixed rate single family mortgage loans available for sale. In connection with these activities the Bank establishes a mortgage banking reserve for market valuation losses. See Note 5 of Notes to Consolidated Financial Statements. NON-PERFORMING LOANS AND OTHER PROBLEM ASSETS It is management's policy to continually monitor its loan portfolio to anticipate and address potential and actual delinquencies. When a borrower fails to make a payment on a loan, the Bank takes immediate steps to have the delinquency cured and the loan restored to current status. Loans which are delinquent 15 days incur a late fee of 5% of the scheduled principal and interest payment. As a matter of policy, the Bank will contact the borrower after the loan has been delinquent 20 days. The Bank orders a property inspection after a loan payment becomes 45 days past due. If a delinquency exceeds 90 days in the case of a residential mortgage loan, 30 days in the case of a construction loan or 30-60 days for a loan on commercial real estate, the Bank will institute additional measures to enforce its remedies resulting from the loan's default, including, commencing foreclosure action. Loans which are delinquent 90 days or more generally are placed on non-accrual status, and formal legal proceedings are commenced to collect amounts owed. The following table sets forth information with respect to the Bank's non-performing loans and other problem assets at the dates indicated. During the periods shown, the Bank had no material restructured loans within the meaning of SFAS No. 15 as amended by SFAS No. 114.
At June 30, --------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------ ------ ------ ------ (Dollars in thousands) Non-accruing loans (1): Real estate................................... $4,097 $2,272 $3,497 $3,274 $1,846 Consumer loans.............................. 40 80 109 151 280 ------ ------ ------ ------ ------ Total..................................... $4,137 $2,352 $3,606 $3,425 $2,126 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Accruing loans which are contractually past due 90 days or more: Real estate............................... $ 476 $ 95 $1,028 $ 891 $ 688 ------ ------ ------ ------ ------ Total................................... $ 476 $ 95 $1,028 $ 891 $ 688 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total nonaccrual and 90 days past due loans.......................... $4,613 $2,447 $4,634 $4,316 $2,814 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Ratio of non-performing loans to total loans and mortgage-backed securities.............. 1.35% 0.82% 1.81% 2.05% 1.71% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Other non-performing assets (2)............... 0 53 $ 0 $ 20 $ 521 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total non-performing assets................... $4,613 $2,500 $4,634 $4,336 $3,335 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total non-performing assets to total assets................................ 1.24% 0.75% 1.47% 1.82% 1.73% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
- ------------------------- (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 It is the Bank's policy to classify as non-accruing any loan where less than the full required interest payment is made and to not record into income such partial interest payments. During the year ended June 30, 1997, gross interest income of $310,000 would have been recorded on loans accounted for on a non-accrual basis if such loans had been current throughout the period. At June 30, 1997, the Bank had no restructured loans. At June 30, 1997, non-accruing loans consisted of 41 loans totalling $4.1 million, and included 6 land loans in the amount of $1.7 million, 9 construction loans in the amount of $1.5 million, 21 conventional mortgage loans aggregating $0.9 million and 5 consumer loans aggregating $40,000. All non-accruing consumer loans at June 30, 1997 were mobile home loans. Management has reviewed its non-accruing loans and believes that the allowance for loan losses is adequate. 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, 1997, the Bank had no real estate owned properties. ASSET CLASSIFICATION AND ALLOWANCE FOR LOAN LOSSES. Federal regulations require savings institutions to review their assets on a regular basis and to classify them as "substandard," "doubtful" or "loss," if warranted. Assets classified as substandard or doubtful require the institution to establish general allowances for loan losses. If an asset or portion thereof is classified loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge off such amount. An asset which does not currently warrant classification but which possesses weaknesses or deficiencies deserving close attention is required to be designated as "special mention." The Bank has established an Asset Classification Committee, which is comprised of the Chairman of the Board, the Chief Financial Officer and senior employees of the Bank. The Asset Classification Committee meets quarterly to review the Bank's loan portfolio and determine which loans should be placed on a "watch-list" of potential problem loans which are considered to have more than normal credit risk. Currently, general loss allowances (up to 1.25% of risk-based assets) established to cover possible losses related to assets classified substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses do not qualify as regulatory capital. See "Regulation -- Regulatory Capital Requirements." OTS examiners may disagree with the insured institution's classifications and amounts reserved. If an institution does not agree with an examiner's classification of an asset, it may appeal this determination to the OTS. At June 30, 1997, total non-accrual and 90 days past due loans and other non- performing assets were $4.6 million, of which amount approximately $3.9 million were classified as follows: $3.85 million were classified as substandard; $46,000 were classified as loss. In addition, the Bank has determined that at June 30, 1997, it had $3.85 million in assets classified as substandard, $46,000 of assets classified as loss and $918,000 of assets designated as special mention. Special mention loans consisted of one performing construction loan. For additional information, see " -- Non-Performing Loans and Other Problem Assets" and Note 4 of Notes to Consolidated Financial Statements. In originating loans, the Bank recognizes that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. It is management's policy to maintain an adequate allowance for loan losses based on, among other things, the Bank's and the industry's historical loan loss experience, evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. The Bank increases its allowance for loan losses by charging provisions for possible loan losses against the Bank's income. General allowances are made pursuant to management's assessment of risk in the Bank's loan portfolio as a whole. Specific allowances are provided for individual loans when ultimate collection is considered questionable by management after reviewing the current status of loans which are contractually past due and considering the net realizable value of the security for the loan. Management continues to actively monitor the Bank's asset quality and to charge off loans against the allowance for loan losses when appropriate or to provide specific loss reserves when 11 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. The following table summarizes the activity in the allowance for loan losses for the periods indicated.
Year Ended June 30, ------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------ ------ ------ (In thousands) Balance at beginning of year........... $2,565 $2,402 $2,075 $2,738 $2,949 ------ ------ ------ ------ ------ Charge-offs: Mortgage loans....................... 174 241 77 140 334 Consumer loans (1)................... 24 24 18 23 70 ------ ------ ------ ------ ------ Total charge-offs.................. 198 265 95 163 404 ------ ------ ------ ------ ------ Recoveries: Mortgage loans....................... 117 5 4 0 0 Consumer loans (1)................... 4 6 2 0 25 ------ ------ ------ ------ ------ Total recoveries................... 121 11 6 0 25 ------ ------ ------ ------ ------ Net charge-offs........................ 77 254 89 163 379 ------ ------ ------ ------ ------ Transfer to mortgage banking reserve... 0 0 0 500 0 Provision charged to income............ 187 417 416 0 168 ------ ------ ------ ------ ------ Balance at end of year................. $2,675 $2,565 $2,402 $2,075 $2,738 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Ratio of net charge-offs during the year to average loans outstanding during the year.......... 0.0% 0.0% 0.0% 0.1% 0.2% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
- ------------------------- (1) Consists primarily of mobile home loans. 12 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.
At June 30, 1997 1996 1995 1994 --------------------- --------------------- ---------------------- --------------------- % of Loans in % of Loans in % of Loans in % of Loans in Category to Category to Category to Category to Total Net Loans Total Net Loans Total Net Loans Total Net Loans Amount Outstanding Amount Outstanding Amount Outstanding Amount Outstanding ------ --------------- ------ --------------- ------ --------------- ------ --------------- (Dollars in Thousands) Mortgage Loans: Single-family. . . . . $ 899 56.19% $ 977 53.49% $ 857 54.27% $ 743 50.34% Multi-family . . . . . 291 9.00% 163 10.51% 295 15.36% 188 15.91% Commercial . . . . . . 990 24.54% 968 24.71% 940 22.42% 636 25.03% Land . . . . . . . . . 361 9.26% 210 10.52% 154 7.11% 168 7.75% Unallocated. . . . . . 0 0.00% 123 0.00% 0 0.00% 109 0.00% ------ ------ ------ ------- ------ Total mortgage loans. $2,541 98.99% $2,441 99.23% $2,246 99.16% $1,844 99.03% ------ ------ ------ ------ ------ ------- ------ ------ ------ ------ ------ ------ ------ ------- ------ ------ Consumer loans (1). . . 134 1.01% 124 0.77% 156 0.84% 231 0.97% Total allowance for ------ ------ ------- ------ ------- ------ ------ loan losses . . . . . $2,675 100.00% $2,565 100.00% $2,402 100.00% $2,075 100.00% ------ ------ ------ ------ ------ ------- ------ ------ ------ ------ ------ ------ ------ ------- ------ ------ 1993 ------------------------ % of Loans in Category to Total Net Loans Amount Outstanding ------ ------------- Mortgage Loans: Single-family. . . . . $ 137 58.47% Multi-family . . . . . 363 9.91% Commercial . . . . . . 619 22.90% Land . . . . . . . . . 27 7.49% Unallocated. . . . . . 959 0.00% ------ Total mortgage loans. $2,105 98.77% ------ ------ ------ ------ Consumer loans (1). . . 633 1.23% Total allowance for ------ ------- loan losses . . . . . $2,738 100.00% ------ ------ ------ ------ - --------------- (1) Consists of property improvement loans and mobile home loans.
13 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 8.6% at June 30, 1997 exceeded the 5% 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, 1997, Park View Federal had investments in agency notes, federal funds sold, FHLB of Cincinnati stock and interest-bearing deposits in other financial institutions. In accordance with GAAP, the Bank reports its investments, other than marketable equity securities and investments available for sale, at cost as adjusted for discounts and unamortized premiums and only recognizes realized gains or losses in income. The Bank's generally holds all investment 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 investment securities to maturity. Accordingly, management does not anticipate that it will be required to reclassify any other investment securities as available for sale. The following table sets forth the carrying value of the Bank's investment securities portfolio, short-term investments and FHLB of Cincinnati stock at the dates indicated. At June 30, 1997, the market values of the Bank's investment securities portfolio was $13.9 million. At June 30, ---------------------------- 1997 1996 1995 ------ ------ ------ (in Thousands) Investment securities: U.S. Government and agency securities. . . $13,995 $14,094 $41,194 ------- ------- ------- Total investment securities. . . . . . 13,995 14,094 41,194 Interest-bearing deposits. . . . . . . . . . 445 245 650 Federal funds sold . . . . . . . . . . . . . 1,375 6,875 5,325 FHLB of Cincinnati stock . . . . . . . . . . 2,762 1,880 1,756 ------- ------- ------- Total investments. . . . . . . . . . . . $18,577 $23,094 $48,925 ------- ------- ------- ------- ------- ------- 14 The following table sets forth the scheduled maturities, carrying values, market values and average yields for the Bank's investment securities at June 30, 1997.
AT JUNE 30, 1997 --------------------------------------------------------------------------------------------------------- ONE YEAR ONE TO FIVE FIVE TO 10 MORE THAN OR LESS YEARS YEARS 10 YEARS TOTAL INVESTMENT SECURITIES ----------------- ----------------- ----------------- ----------------- --------------------------- CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE VALUE YIELD -------- ------- -------- ------- -------- ------- -------- ------- -------- ------ ------- (DOLLARS IN THOUSANDS) U.S. Government and agency securities.. $5,000 7.04% $8,995 6.39% $0 0.00% $ 0 0.00% $13,995 $13,899 6.62% Deposits(1)......... 1,820 5.44% 0 0.00% 0 0.00% 0 0.00% 1,820 1,820 5.44% FHLB stock.......... 0 0.00% 0 0.00% 0 0.00% 2,762 7.25% 2,762 2,762 7.25% ------ ------ -- ------ ------- ------- Total............. $6,820 6.61% $8,995 6.39% $0 0.00% $2,762 7.25% $18,577 $18,481 6.60% ------ ------ -- ------ ------- ------- ------ ------ -- ------ ------- -------
_______________ (1) Includes interest-bearing deposits at other financial institutions and federal funds sold. 15 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 investment securities and interest payments thereon. Although loan repayments are a relatively stable source of funds, deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds, or on a longer term basis for general operational purposes. DEPOSITS. The Bank attracts deposits principally from within its primary market area by offering a variety of deposit instruments, including checking accounts, money market accounts, regular savings accounts and certificates of deposit which range in maturity from seven days to four years. Deposit terms vary according to the minimum balance required, the length of time the funds must remain on deposit and the interest rate. Maturities, terms, service fees and withdrawal penalties for its deposit accounts are established by the Bank on a periodic basis. Park View Federal generally reviews its deposit mix and pricing on a weekly basis. In determining the characteristics of its deposit accounts, Park View Federal considers the rates offered by competing institutions, funds acquisition and liquidity requirements, growth goals and federal regulations. The Bank does not accept brokered deposits due to the volatility and rate sensitivity of such deposits. Park View Federal competes for deposits with other institutions in its market area by offering deposit instruments that are competitively priced and providing customer service through convenient and attractive offices, knowledgeable and efficient staff and hours of service that meet customers' needs. To provide additional convenience, Park View Federal participates in MAC (money access card) Automated Teller Machine networks at locations throughout Ohio and other participating states, through which customers can gain access to their accounts at any time. The Bank's deposits have remained stable with moderate growth experienced during the fiscal year ended June 30, 1997. Deposit balances totalled $288.3 million, $271.0 million, and $272.3 million at the fiscal years ended June 30, 1997, 1996, and 1995 respectively. Deposits in the Bank as of June 30, 1997 were represented by the various programs described below.
Weighted Average Percentage Interest Minimum Minimum Balance in of Total Rate Term Category Balance Thousands Deposits - -------- ------- -------- ------- ---------- --------- 2.00% None NOW accounts $ 50 $ 14,656 5.08% 2.75% None Passbook statement accounts 5 31,586 10.96% 4.03% None Money market accounts 1,000 5,308 1.84% 0.00% None Non-interest-earning demand accounts 50 5,620 1.95% -------- ------- $ 57,170 19.83% -------- ------- Certificates of Deposit ----------------------- 5.55% 3 months or less 500 64,264 22.29% 5.75% 3 - 6 months 500 38,195 13.25% 5.88% 6 - 12 months 500 70,033 24.29% 6.44% 1 - 3 years 500 53,321 18.50% 6.17% More than three years 500 5,287 1.84% -------- ------- 5.90% Total certificates of deposit $231,100 80.17% -------- ------- 5.22% Total deposits $288,270 100.00% -------- ------- -------- -------
16 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.
At June 30, 1997 At June 30, 1996 At June 30, 1995 -------------------------------- -------------------------------- ------------------- Increase Increase (Decrease) (Decrease) % of From Prior % of From Prior % of Balance Deposits Year Balance Deposits Year Balance Deposits --------- --------- ----------- --------- -------- ----------- --------- -------- (Dollars in thousands) NOW checking (1). . . $ 20,276 7.03% $ 220 $ 20,056 7.44% $4,294 $ 15,762 5.79% Super NOW checking and money market. . . 5,308 1.84% 29 5,279 1.91% 125 5,153 1.89% Passbook and regular savings . . . . . . . 31,586 10.96% (297) 31,883 11.76% 712 31,171 11.45% Jumbo certificates. . 43,489 15.09% 11,566 31,923 11.78% (1,728) 33,651 12.36% Other certificates. . 150,985 52.38% 4,945 146,040 53.88% (5,011) 151,051 55.47% Keogh accounts. . . . 1,998 0.69% (263) 2,261 0.83% 41 2,220 0.82% IRA accounts. . . . . 34,628 12.01% 1,025 33,603 12.40% 321 33,282 12.22% --------- --------- ----------- --------- -------- ----------- --------- -------- Total $288,270 100.00% $17,225 $271,045 100.00% ($1,245) $272,290 100.00% --------- --------- ----------- --------- -------- ----------- --------- -------- --------- --------- ----------- --------- -------- ----------- --------- -------- _____________ (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.
For the Year Ended June 30, ---------------------------------------------------------------------------------------------- 1997 1996 1995 ----------------------------- ---------------------------- ------------------------------- Interest- Interest- Interest- Bearing Bearing Bearing Demand Savings Time Demand Savings Time Demand Savings Time Deposits Deposits Deposits Deposits Deposits Deposits Deposits Deposits Deposits --------- --------- --------- --------- --------- --------- --------- --------- --------- (Dollars in Thousands) Average balance. . . $19,631 $31,549 $218,301 $17,703 $31,399 $221,872 $16,469 $32,775 $182,740 Average rate paid. . 2.70% 2.75% 5.75% 2.34% 2.76% 6.13% 2.20% 2.78% 5.57%
17 The following table sets forth the time deposits in the Bank classified by rates as of the dates indicated. At June 30, ---------------------------------- Rate 1997 1996 1995 - ---------------- -------- --------- -------- (In thousands) 2.50% - 3.99% . . . . . . $ 457 $ 7 $ 0 4.00% - 5.99% . . . . . . 131,966 147,934 68,400 6.00% - 7.99% . . . . . . 98,500 65,721 149,960 8.00% - 9.99% . . . . . . 177 165 1,497 10.00% - 11.99% . . . . . . 0 0 349 --------- --------- --------- $231,100 $213,827 $220,206 --------- --------- --------- --------- --------- --------- The following table sets forth the amount and maturities of time deposits in specified weighted average interest rate categories at June 30, 1997. Amount Due -------------------------------------------------------- One Year After Rate or Less 1-2 Years 2-3 Years 3 Years Total -------------- --------- --------- ---------- ------- -------- (In thousands) 2.50% - 3.99%. . . $ 6 $ 450 $ 0 $ 0 $ 456 4.00% - 5.99%. . . 118,179 9,631 1,488 2,669 131,967 6.00% - 7.99%. . . 54,300 22,511 19,240 2,449 98,500 8.00% - 9.99%. . . 7 0 0 170 177 $172,492 $32,592 $20,728 $5,288 $231,100 --------- --------- ---------- ------- -------- --------- --------- ---------- ------- -------- 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, 1997. Certificates Maturity Period of Deposit ----------------------- --------------- (In thousands) Three months or less. . . . . . . . . . . $13,558 Three through six months. . . . . . . . . 10,610 Six through 12 months . . . . . . . . . . 14,671 Over 12 months. . . . . . . . . . . . . . 10,068 ---------- Total . . . . . . . . . . . . $48,907 ---------- ---------- 18 The following table sets forth the Bank's deposit activities for the periods indicated. YEAR ENDED JUNE 30, ------------------------------------------- 1997 1996 1995 ------ ------ ------- (In thousands) Deposits ...................... $58,607 $ 50,688 $100,324 Withdrawals.................... 50,993 62,229 33,261 ------- -------- -------- Net increase (decrease) before interest credited... 7,614 (11,541) 67,063 Interest credited.............. 9,611 10,296 8,186 ------- --------- -------- Net increase (decrease) in Savings deposits........... $17,225 $ (1,245) $ 75,249 ------- --------- -------- ------- --------- --------
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 $30 million and $40 million respectively, that were drawn upon in the amounts of $0 and $26 million respectively, at June 30, 1997. 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: YEAR ENDED JUNE 30, ------------------------------------------ 1997 1996 1995 ------- ------ ------ (Dollars in thousands) Maximum amount outstanding at any month end........................ $54,412 $27,482 $29,000 Approximate average outstanding balance.......................... 41,083 10,623 16,870 Approximate weighted average rate paid (1)......................... 5.78% 5.13% 4.39%
_______________________________ (1) Computed from average monthly balances. The weighted average rates outstanding on FHLB advances was 5.83%, 5.46% and 4.15% at June 30, 1997, 1996 and 1995, respectively. At the years ended June 30, 1997, 1996, and 1995, PVFSC had one loan outstanding for $1.7 million, $1.7 million and $1.8 million, respectively, collateralized by real estate and guaranteed by PVF. At the years ended June 30, 1997 and 1996 PVF had one loan outstanding for $0.6 million and $1.0 million, respectively, collateralized by mortgage servicing rights. See Note 9 of Notes to Consolidated Financial Statement. SUBSIDIARY ACTIVITIES As a result of regulatory changes mandated by FIRREA, savings associations are currently required to deduct from regulatory capital calculations their investment in and extensions of credit to service corporations engaged in activities not permissible for a national bank. The land acquisition and development activities of PVFSC are not permissible for national banks. As a result, the Bank's net investment in and extensions of credit to PVFSC must 19 be deducted from capital in their entirety. It was for this reason that PVF purchased the stock of PVFSC from Park View Federal. The effect of this transaction to the Bank was to increase GAAP capital by $785,000 and eliminate the Bank's net investment in and deduction for PVF Service Corp. from its books, thus increasing regulatory capital by $1.2 million. The Bank is now 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, 1997, Park View Federal was authorized to invest up to approximately $11.2 million in the stock of or loans to subsidiaries, including the additional 1% investment for community inner-city and community development purposes. Institutions meeting their applicable minimum regulatory capital requirements may invest up to 50% of their regulatory capital in conforming first mortgage loans to subsidiaries in which they own 10% or more of the capital stock. Park View Federal currently exceeds its regulatory capital requirements. PVF has two subsidiaries, Park View Federal and PVFSC, which is engaged in the activities of land acquisition and development. At June 30, 1997, PVFSC had an investment in two properties aggregating $910,000, described below. In addition PVF has three non-active subsidiaries, PVF Community Development Corp., PVF Mortgage Corp., and Mid Pines Land Company, which have been chartered for future activity. MID PINES. Mid-Pines consists of two adjacent parcels of land aggregating 257 acres in Solon, Ohio. In 1983, PVFSC acquired a 150 acre parcel from the Bank, which property the Bank acquired in foreclosure. The 150 acre parcel included 85 acres of vacant land and a 65 acre golf course. PVFSC acquired the additional 107 acre parcel of land in 1985 for $150,000. PVFSC acquired the properties as an investment. Mid-Pines was appraised in 1994 at a value of $2.5 million. Mid Pines had a net book value of $875,000 at June 30, 1997. PVFSC is working with the City of Solon for their approval on a Planned Unit Development (PUD) project. DEER LAWN FARMS. At June 30, 1997, Deer Lawn Farms, Solon, Ohio, had a net book value of $35,000. PVF estimates the fair market value of the two remaining lots to approximate book value at June 30, 1997. 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. 20 EMPLOYEES As of June 30, 1997, PVF and its subsidiaries had 114 full-time employees and 17 part-time employees, none of whom was represented by a collective bargaining agreement. The Company believes it enjoys a good relationship with its personnel. 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. 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. The core and tangible capital requirements are measured against adjusted total assets, which are a savings institution's consolidated total assets as determined under GAAP adjusted for certain goodwill amounts and increased by a pro rated portion of the assets of subsidiaries in which the savings institution holds a minority interest and which are not engaged in activities for which the capital rules require the savings institution to net its debt and equity investments in such subsidiaries against capital, as well as a pro rated portion of the assets of other subsidiaries for which netting is not fully required under phase-in rules. Adjusted total assets are reduced by the amount of assets that have been deducted from capital, the portion of savings institution's investments in subsidiaries that must be netted against capital under the capital rules and, for purposes of the core capital requirement, qualifying supervisory goodwill. At June 30, 1997, Park View Federal's adjusted total assets for purposes of the core and tangible capital requirements were $375.9 million. 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 21 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, 1997 the Bank's risk-weighted assets were $284.5 million, and its total regulatory capital was $30.2 million, or 10.6% of risk-weighted assets. The table below presents the Bank's capital position at June 30, 1997, relative to its various minimum regulatory capital requirements.
At June 30, 1997 --------------------- Percent of Amount Assets (1) ------- ----------- (Dollars in Thousands) Tangible Capital......................... $27,604 7.34% Tangible Capital Requirement............. 5,639 1.50 ------- ----- Excess ................................. $21,965 5.84% ------- ----- ------- ----- Tier 1/Core Capital...................... $27,604 7.34% Tier 1/Core Capital Requirement.......... 15,036 4.00 ------- ----- Excess.................................. $12,568 3.34% ------- ----- ------- ----- Tier 1 Risk-Based Capital.............. $27,604 9.70% Tier 1 Risk-Based Capital Requirement.. 11,379 4.00 ------- ----- Excess................................ $16,225 5.70% ------- ----- ------- ----- Risk-Based Capital..................... $30,202 10.62% Risk-Based Capital Requirement......... 22,758 8.00 ------- ----- Excess................................ $ 7,444 2.62% ------- ----- ------- -----
------------- (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, 1997 the Bank had no interest rate risk component deduction from total capital. The OTS will calculate the sensitivity of a savings institution's net portfolio value based on data submitted by the institution in a schedule to its quarterly Thrift Financial Report and using the interest rate risk measurement model adopted by the OTS. The amount of the interest rate risk component, if any, to be deducted from a savings institution's total capital will be based on the institution's Thrift Financial Report filed two quarters earlier. Savings institutions with less than $300 million in assets and a risk-based capital ratio above 12% are generally exempt from filing the interest rate risk schedule with their Thrift Financial Reports. However, the OTS will require any exempt savings institution that it determines may have a high level of interest rate risk exposure to file such schedule on a quarterly basis. 22 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. PROMPT CORRECTIVE REGULATORY ACTION. Under FDICIA, 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 23 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 plan may subject the institution to regulatory sanctions. Management believes that the Bank already meets substantially all the standards adopted in the interagency guidelines, and therefore does not believe that implementation of these regulatory standards will materially affect the Bank's operations. 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. 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, 1997 of $2.8 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. Under FIRREA, long-term advances may be made only for the purpose of providing funds for residential housing finance. At June 30, 1997, the Bank had $47.4 million in advances outstanding from the FHLB of Cincinnati. See " -- Deposit Activity and Other Sources of Funds -- Borrowings." LIQUIDITY REQUIREMENTS. Park View Federal is required to maintain average daily balances of liquid assets (cash, certain time deposits, bankers' acceptances, highly rated corporate debt and commercial paper, securities of certain mutual funds, mortgage loans and mortgage-related securities with less than one year to maturity or subject to purchase within one year and specified United States government, state or federal agency obligations) equal to the monthly average of not less than a specified percentage (currently 5%) of its net withdrawable savings deposits plus short term borrowings. Savings and loan associations also are required to maintain average daily balances of short-term liquid assets at a specified percentage (currently 1%) of the total of their net withdrawable savings accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet liquidity requirements. The average daily liquidity and short-term liquidity ratios of the Bank for the month of June 1997 were 8.6% and 3.53%, respectively. A substantial and sustained decline in savings deposits would adversely affect the Bank's liquidity which may result in restricted operations and additional borrowings from the FHLB of Cincinnati. 24 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 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, 1997, 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 25 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 and does not anticipate that the Interagency Guidelines will have a material effect on its lending activities. 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. 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. For the past several 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 recently-enacted 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 proposed a rule that would lower 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. The rule widens the range between the lowest and highest assessment rates among healthy and troubled institutions with the intent of creating an incentive for savings institutions to control risk-taking behavior. The rule also prevents the FDIC from collecting more funds than needed to maintain the SAIF's capitalization at 1.25% of insured deposits. 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. 26 SAIF members are generally prohibited from converting to BIF, also administered by the FDIC, or merging with or transferring assets to a BIF member before the date on which the SAIF first meets or exceeds the designated reserve ratio of 1.25% of insured deposits. However, the FDIC may approve such a transaction in the case of a SAIF member in default or if the transaction involves an insubstantial portion of the deposits of each participant. In addition, mergers, transfer of assets and assumptions of liabilities may be approved by the appropriate bank regulator so long as deposit insurance premiums continue to be paid to the SAIF for deposits attributable to the SAIF members, plus an adjustment for the annual rate of growth of deposits in the surviving bank without regard to subsequent acquisitions. Each depository institution participating in a SAIF-to-BIF conversion transaction is required to pay an exit fee to SAIF equal to 0.90% of the deposits transferred and an entrance fee to BIF based on the current reserve ratio of the BIF. A savings institution is not prohibited from adopting a commercial bank or savings bank charter if the resulting bank remains a SAIF member. DIVIDEND LIMITATIONS. Under OTS regulations, the Bank may not pay dividends on its capital stock if its regulatory capital would thereby be reduced below the amount then required for the liquidation account established for the benefit of certain depositors of the Bank at the time of the conversion of the bank from the mutual to stock form. In addition, savings institution subsidiaries of savings and loan holding companies are required to give the OTS 30 days' prior notice of any proposed declaration of dividends to the holding company. Federal regulations impose additional limitations on the payment of dividends and other capital distributions (including stock repurchases and cash mergers) by the Bank. Under these regulations, a savings association that, immediately prior to, and on a pro forma basis after giving effect to, a proposed capital distribution, has total capital (as defined by OTS regulation) that is equal to or greater than the amount of its fully phased-in capital requirements (a "Tier 1 Association") is generally permitted without OTS approval to make capital distributions during a calendar year in an amount equal to the greater of (i) 75% of net income for the previous four quarters or (ii) 100% of its net income to date during the calendar year plus an amount that would reduce by one-half the amount by which its total capital to assets ratio exceeded its fully phased-in capital requirement to assets ratio at the beginning of the calendar year. A savings association with total capital in excess of current minimum capital requirements but not in excess of the fully phased-in requirements (a "Tier 2 Association") is permitted to make capital distributions without OTS approval of up to 75% of its net income for the previous four quarters, less dividends already paid for such period depending on the savings association's level of risk-based capital. A savings association that fails to meet current minimum capital requirements (a "Tier 3 Association") is prohibited from making any capital distributions without the prior approval of the OTS. Tier 1 Associations that have been notified by the OTS that they are in need of more than normal supervision will be treated as either a Tier 2 or Tier 3 Association. At June 30, 1994, the Bank was a Tier 1 Association. The Bank is prohibited from making any capital distributions if after making the distribution, it would be undercapitalized as defined in the OTS' prompt corrective action regulations. After consultation with the FDIC, the OTS may permit a savings association to repurchase, redeem, retire or otherwise acquire shares or ownership interests if the repurchase, redemption, retirement or other acquisition: (i) is made in connection with the issuance of additional shares or other obligations of the institution in at least an equivalent amount; and (ii) will reduce the institution's financial obligations or otherwise improve the institution's financial condition. In addition to the foregoing, earnings of the Bank appropriated to bad debt reserves and deducted for Federal income tax purposes are not available for payment of cash dividends without payment of taxes at the then current tax rate by the Bank on the amount of earnings removed from the reserves for such distributions. See "Taxation." The Bank intends to make full use of this favorable tax treatment afforded to the Bank and does not contemplate use of any earnings of the Bank in a manner which would limit the Bank's bad debt deduction or create federal tax liabilities. FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve Board, a savings institution must maintain average daily reserves equal to 3% on the first $49.3 million of transaction accounts, plus 10% on the remainder. These percentages are subject to adjustment by the Federal Reserve Board. Because required reserves 27 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, 1997, 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 Section 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. FIRREA amended the Bank Holding Company Act of 1956 to authorize the Federal Reserve Board to 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. Previously, the Federal Reserve Board had only approved acquisitions of insolvent savings institutions and only subject to certain restrictions on tandem operation of the savings institutions and bank subsidiaries of the bank holding company. A bank holding company that controls a savings association may merge or consolidate the assets and liabilities of the savings association with, or transfer assets and liabilities to, any subsidiary bank which is a BIF member with the approval of the appropriate federal banking agency and the Federal Reserve Board. The resulting bank will be required to continue to pay assessments to the SAIF at the rates prescribed for SAIF members on the deposits attributable to the merged savings association plus an annual growth increment. In addition, the transaction must comply with the restrictions on interstate acquisitions of commercial banks under the Bank Holding Company Act. LOANS-TO-ONE-BORROWER LIMITATIONS. Under federal law, loans and extensions of credit outstanding at one time to a person shall not exceed 15% of the unimpaired capital and surplus of the savings association. Loans and extensions of credit fully secured by certain readily marketable collateral may represent an additional 10% of unimpaired capital and surplus. FIRREA additionally 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 28 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. 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. Section 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. PENDING FINANCIAL SERVICES MODERNIZATION LEGISLATION. Legislation currently under consideration by Congress would repeal the federal thrift charter and require federal associations like the Bank to convert to national banks two years after the enactment of the bill. The bill, in its current form, would permit federal thrifts that converted to national banks to exercise any authority which they were legally entitled to exercise immediately prior to such conversion and would not be required to divest any branches. Further, these institutions could continue to branch in any state in which they were located to the same extent as national banks. Unitary savings and loan holding companies, like the Company, could continue to exercise any powers they had prior to their subsidiary becoming a bank by operation of law as long as they did not acquire another bank. Powers of those unitary savings and loan holding companies that were grandfathered, however, could not be transferred to another company which acquires control of the unitary holding company after the effective date of the law. There can be no assurance that this legislation will be passed in its current form. At this time, the Company is unable to predict whether such legislation would significantly impact its operations. 29 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 acquired from a subsidiary savings institution; (iv) holding or managing properties used or occupied by a subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi) those activities authorized by regulation as of March 5, 1987 to be engaged in by multiple holding companies; or (vii) unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies, those activities authorized by the Federal Reserve Board as permissible for bank holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS prior to being engaged in by a multiple holding company. RESTRICTIONS ON ACQUISITIONS. Savings and loan holding companies are prohibited from acquiring, without prior approval of the Director of OTS, (i) control of any other savings institution or savings and loan holding company or substantially all the assets thereof or (ii) more than 5% of the voting shares of a savings institution or holding company thereof which is not a subsidiary. Under certain circumstances, a registered savings and loan holding company is permitted to acquire, with the approval of the Director of the OTS, up to 15% of the voting shares of an under-capitalized savings institution pursuant to a "qualified stock issuance" without that savings institution being deemed controlled by the holding company. In order for the shares acquired to constitute a "qualified stock issuance," the shares must consist of previously unissued stock or treasury shares, the shares must be acquired for cash, the savings and loan holding company' other subsidiaries must have tangible capital of at least 30 6-1/2% of total assets, there must not be more than one common director or officer between the savings and loan holding company and the issuing savings institution, and transactions between the savings institution and the savings and loan holding company and any of its affiliates must conform to Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock, may also acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company. The Director of the OTS may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings institutions in more than one state if: (i) the multiple savings and loan holding company involved controls a savings institution which operated a home or branch office in the state of the institution to be acquired as of March 5, 1987; (ii) the acquiror is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act; or (iii) the statutes of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). TAXATION GENERAL The Company and its subsidiaries currently file a consolidated federal income tax return based on a fiscal year ending June 30. Consolidated returns have the effect of eliminating intercompany distributions, including dividends, from the computation of consolidated taxable income for the taxable year in which the distributions occur. FEDERAL INCOME TAXATION Savings institutions are subject to the provisions of the Internal Revenue Code of 1986, as amended (the "Code") in the same general manner as other corporations. Prior to recent legislation, institutions such as the Bank 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. 31 For taxable years beginning after December 31, 1986, the Tax Reform Act of 1986 (the "Tax Reform Act") changed the corporate minimum tax from an add-on tax to a tax based on alternative minimum taxable income ("AMTI"), and increased the tax rate from 15% to 20%. The Internal Revenue Code provisions relating to the alternative minimum tax ("AMTI") also include in AMTI (for tax years beginning in 1987-1989) an amount equal to one-half of the amount by which a corporation's book income (as specifically defined) exceeds its AMTI (determined without regard to this preference and prior to reduction by net operating losses). Also, only 90% of AMTI can be offset by net operating losses. For taxable years beginning after December 31, 1989, the adjustment to AMTI based on book income is an amount equal to 75% of the amount by which a corporation's adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). The Bank's federal income tax returns through June 30, 1992 were audited by the IRS. For further information regarding federal income taxes, see Note 10 of Notes to Consolidated Financial Statements. STATE INCOME TAXATION The Company is subject to an Ohio franchise tax based on its equity capital plus certain reserve amounts. Total equity capital for this purpose is reduced by certain exempted assets. The resulting net taxable value of capital was taxed at a rate of 1.5% for fiscal years 1997, 1996 and 1995. 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. ITEM 2. PROPERTIES The following table sets forth the location and certain additional information regarding the Company's offices at June 30, 1997.
YEAR NET BOOK OWNED OR APPROXIMATE OPENED/ TOTAL VALUE AT LEASED/ SQUARE LOCATION ACQUIRED DEPOSITS JUNE 30, 1997 EXPIRATION FOOTAGE - -------- -------- -------- ------------- ---------- ----------- (DOLLARS IN THOUSANDS) MAIN OFFICE: 2618 N. Moreland Blvd. 1963 $38,999 $ 408 Owned 16,800 Cleveland, Ohio BRANCH OFFICES: 2111 Richmond Road 1967 50,880 132 Lease 2,750 Beachwood, Ohio 3/1/99 25350 Rockside Road 1969 51,924 93 Lease 14,400 Bedford Heights, Ohio 3/1/03 11010 Clifton Blvd. 1974 22,727 12 Lease 1,550 Cleveland, Ohio 8/1/05 7448 Ridge Road 1979 30,219 0 Lease 3,200 Parma, Ohio 10/11/97 32 6990 Heisley Road 1994 25,926 49 Lease 2,400 Mentor, Ohio 10/25/98 1456 SOM Center Road 1995 27,920 251 Lease 2,200 Mayfield Heights, Ohio 9/30/04 497 East Aurora Road 1994 19,342 79 Lease 2,400 Macedonia, Ohio 9/30/04 8500 Washington Street 1995 20,333 107 Lease 2,700 Chagrin Falls, Ohio 11/30/04
At June 30, 1997 the net book value of the Bank's premises, furniture, fixtures and equipment as $1.9 million. See Note 6 of Notes to Consolidated Financial Statements for further information. The Company also owns real estate in the City of Solon, Ohio. See Subsidiary Activities for futher information. 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. 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, 1997. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS The information contained under the section captioned "Market Information" in the Company's Annual Report to Stockholders for the Fiscal Year Ended June 30, 1997 (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. 33 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. CONSOLIDATED 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 1997 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. 34 PART IV ITEM 14. FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Independent Auditors' Report (incorporated by reference to the Annual Report) Consolidated Financial Statements (incorporated by reference to the Annual Report) (a) Consolidated Statements of Financial Condition, at June 30, 1997 and 1996 (b) Consolidated Statements of Operations for the Years Ended June 30, 1997, 1996 and 1995 (c) Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1997, 1996 and 1995 (d) Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996 and 1995 (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.
No. Description - --- ----------- 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 * 13 PVF Capital Corp. Annual Report to Stockholders for the year ended June 30, 1997 21 Subsidiaries of the Registrant 23 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule
____________________ * Incorporated by reference to the Registrant's Annual Report on Form 10-K for the Year Ended June 30, 1996 (commission file number 0-24948). (b) During the last quarter of the fiscal year ended June 30, 1997, the Company did not file any Current Reports on Form 8-K. (c) All required exhibits are filed as attached. (d) No financial statement schedules are required. 35 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 12, 1997 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. /s/ John R. Male September 12, 1997 - ------------------------ John R. Male President and Chief Executive Officer (Principal Executive Officer) /s/ C. Keith Swaney September 12, 1997 - ------------------------ C. Keith Swaney Vice President and Treasurer (Principal Financial and Accounting Officer) /s/ James W. Male September 12, 1997 - ------------------------ James W. Male Chairman of the Board /s/ Robert K. Healey September 12, 1997 - ------------------------ Robert K. Healey Director /s/ Stanley T. Jaros September 12, 1997 - ------------------------ Stanley T. Jaros Director /s/ Creighton E. Miller September 12, 1997 - ------------------------ Creighton E. Miller Director /s/ Stuart D. Neidus September 12, 1997 - ------------------------ Stuart D. Neidus Director /s/ Robert F. Urban September 12, 1997 - ------------------------ Robert F. Urban Director EX-13 2 EXHIBIT 13 [PVF CAPITAL CORP. LOGO] ANNUAL REPORT June 30, 1997 A LOOK AT THE PAST FIVE YEARS This is our fifth Annual Report since the completion of our stock conversion on December 30, 1992. At this time, we thought it would be appropriate to provide our shareholders with a review of the performance of their investment in PVF Capital Corp. On July 30, 1997, the Board of Directors declared a 10% stock dividend to be distributed on September 1, 1997. Taking this stock dividend and all previous stock dividends and stock splits into account, for every 100 shares of stock purchased at $10.00 per share at the time of our stock conversion, the purchaser would own 299 shares with a per share market value of $16.48 at June 30, 1997. On September 1, 1997, PVF Capital Corp. common stock opened for trading at $20.25 per share. The table below fully illustrates the performance of the stock over this 4 1/2 year period. For the past five years, THE CLEVELAND PLAIN DEALER has published a complete business section on the 100 Top Performing Companies in the State of Ohio. The Board of Directors and management are very pleased to inform our shareholders that PVF Capital Corp. was on this select list in both 1997 and 1996.
At June 30, ------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ------------------------------------------------------------------------ Total assets $373,081,300 $331,634,081 $315,431,779 $238,245,225 $193,288,998 Stockholders' equity (net worth) $ 26,273,416 $ 22,473,658 $ 18,817,868 $ 15,742,180 $ 11,847,666 Common shares outstanding 2,555,562 2,323,338 1,404,095 936,090 850,000 Market value of common shares outstanding(1) $ 42,110,501 $ 28,268,465 $ 18,604,259 $ 14,041,350 $ 12,325,000 Tangible book value per share(2) $ 10.28 $8.79 $ 7.38 $ 6.18 $ 4.65 Market value per share(2) $16.48 $11.06 $ 7.30 $ 5.51 $ 4.84 Market value/Tangible book value 160.3% 125.8% 98.9% 89.2% 104.0%
- --------------- (1) CALCULATION IS AN ESTIMATE BASED ON COMMON SHARES OUTSTANDING MULTIPLIED BY THE BID PRICE AT THE END OF THE PERIOD. (2) PER SHARE AMOUNTS HAVE BEEN ADJUSTED FOR STOCK SPLITS AND STOCK DIVIDENDS. TABLE OF CONTENTS Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Coming Soon To Chardon, Ohio . . . . . . . . . . . . . . . . . . . . . . . 2 Financial Planning Centers . . . . . . . . . . . . . . . . . . . . . . . . 3 Selected Consolidated Financial and Other Data . . . . . . . . . . . . . . 4 Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . 6 Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . 15 TO OUR SHAREHOLDERS The last fiscal year was highlighted by the resolution of the Savings Association Insurance Fund ("SAIF") dilemma that had been the subject of political debate between the Administration and Congress for several years. Legislation pertaining to SAIF was finally passed and went into effect on September 30, 1996. In brief, the savings accounts held principally by the thrift industry were assessed 65.7 cents for every $100 of savings deposits in each institution. This one-time assessment brought the fund to a fully paid-up status. The SAIF legislation provides for the merger of SAIF with the Bank Insurance Fund by the end of 1999. Park View Federal's pre-tax share of the assessment was $1,708,000, or $1,127,000 after tax. This exceeded our first quarter net income by $11,000. However, the resulting future reduction of SAIF premiums by 16.7 cents per $100 of deposits will represent annual cost savings to future earnings of approximately $500,000. We are pleased to inform our shareholders and customers of some recent and upcoming events. We will be opening a new branch office in Chardon, Ohio, within the next three to four months. In addition, we are very enthusiastic about our newly formed joint venture with Money Concepts that will bring financial planning services to our bank customers. We would also like to announce that Stanley T. Jaros, a partner with Moriarty & Jaros, P.L.L., has joined the Board of Directors to replace Richard J. Moriarty who retired from the Board this year. We urge all shareholders to try to attend the Annual Meeting of the Shareholders on October 20, 1997, 10:00 a.m., at the Cleveland Marriott East in Beachwood, Ohio. As we continue to grow, we look forward to another successful year of service and dedication to the community, its members, our shareholders, and our customers. Sincerely, /s/ John R. Male John R. Male President COMING SOON TO CHARDON, OHIO [PHOTOGRAPH] On or before January 1, 1998, Park View Federal Savings Bank will open a full- service branch office in the rapidly growing city of Chardon, Ohio in Geauga County. This 2,800 square-foot facility, just west of Chardon Square on Route 6, was occupied formerly by The Medicine Shoppe. The building will be extensively remodeled and will feature ample, convenient parking, drive-in banking facilities, and a complete array of financial services for the community. Park View Federal is a community bank that serves eight counties in northeast Ohio. The Chardon office will be Park View Federal's second office in the expanding Geauga County market. The bank's Bainbridge office, located at the intersection of Washington Street and Route 306, has been serving the western part of Geauga County since February, 1995. The new addition to Park View Federal will bring the total of full-service branch office locations to ten. Each of our Branch Administrators is actively involved in the communities served. All of our branches offer convenient parking and drive-in banking facilities. The office lobby and auto teller hours are scheduled with the customer in mind, and many of the branches are open six days a week. Information on the location of each of our full-service offices and their hours of service is provided at the end of this report. Park View Federal prides itself on providing its customers superior service, flexible lending programs, and a full range of deposit accounts and services. Because your business is important to us, our loan officers and account representatives are always available to help you with any questions you may have concerning your loan or savings account. The bank's product line includes residential mortgage loans, home equity lines of credit, commercial and multi- family real estate loans, savings and checking accounts, and certificates of deposit. Park View Federal specializes in single-family, construction, and construction/permanent loan programs. Whether you are buying, building, or refinancing a home, or saving for a college education, a vacation, or retirement, Park View Federal has the right mortgage loan AND the right savings account for you. 2 FINANCIAL PLANNING CENTERS Over the last seventy-seven years, Park View Federal Savings Bank has provided the funds for hundreds of thousands of middle-income Ohioans to help them make one of the most important decisions of their lives - buying a home for the family. For many years, a debt-free home, a reasonable savings account, and Social Security with Medicare provided a satisfactory retirement for most people. That is not true today. Fifteen years ago, financial planning was limited to a relatively few high- income individuals who could afford the expensive services provided by trust departments of large financial institutions. Today, more and more middle-income Americans are faced with the prospect of losing many thousands of dollars due to poor investment strategies and the increasing complexity of financial services. Opportunities for attaining a comfortable retirement are lost by insufficient tax planning, the failure to take advantage of recently enacted government programs, and the failure to realize the long-term income potential of new innovative and safe investment products now available to the smaller investor. The Board of Directors of PVF Capital Corp. has been exploring the idea of an affiliation with a quality provider of these important services to our customers for quite some time, and the decision was made to form a joint venture between the Capital Corp. and Money Concepts, a worldwide network of financial planning centers which has been a successful provider of financial planning services to small businesses and middle-income families since 1979. The CEO of this new joint venture, to be known as PVF Financial Planning, Inc., will be Gregory Shefchuk, CFP, who has a proven record in this field since 1984 serving thousands of families in northern Ohio. PVF Financial Planning will provide financial planning services to both individuals and small businesses throughout the Park View Federal branch system. The company's principal objective will be to deliver professional financial planning on an individualized basis, at NO COST to our customers. This financial planning approach can review a single issue such as Retirement Planning, or a complete, comprehensive financial plan that can include Retirement Planning; Investment Management; Pension Plan Services; Family Needs Analysis; Tax Planning; or Discount Brokerage Services, to name but a few. The key is that these services will be offered within the context of a professionally prepared financial plan with annual reviews. An important part of the company's business plan will be to offer an ongoing schedule of educational financial planning workshops and seminars as a customer service. These seminars will be conducted on an adult education basis and will be free to Park View Federal customers. Our objective is simple: PVF Financial Planning wants to become the place where customers feel comfortable having their financial planning questions answered in a friendly atmosphere from a name that they can trust. We hope to have at least two of these financial planning centers in operation by the beginning of 1998, one at our Bainbridge office and one at our La Place office, with a financial planning center to be in operation at all offices by the end of 1998. We will keep all of our customers fully informed as we progress. 3 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA FINANCIAL CONDITION DATA:
At June 30, --------------------------------------------------- 1997 1996 1995 1994 1993 --------------------------------------------------- (in thousands) Total assets . . . . . . . . . . . . . . . . . . . . . . . . $373,081 $331,634 $315,432 $238,245 $193,289 Loans receivable and mortgage-backed securities held for investment, net. . . . . . . . . . . . 341,914 278,956 250,244 206,674 156,402 Loans receivable and mortgage-backed securities available for sale, net . . . . . . . . . . . . 710 18,817 4,451 3,954 7,972 Cash and investment securities . . . . . . . . . . . . . . . 23,576 27,884 53,812 22,226 23,708 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 288,270 271,045 272,290 197,042 170,617 FHLB advances and notes payable. . . . . . . . . . . . . . . 49,715 30,191 16,800 18,160 2,560 Stockholders' equity . . . . . . . . . . . . . . . . . . . . 26,273 22,474 18,818 15,742 11,848 Number of: Real estate loans outstanding. . . . . . . . . . . . . . . 2,648 2,527 2,512 2,259 2,165 Savings accounts . . . . . . . . . . . . . . . . . . . . . 23,190 23,259 24,007 19,007 18,777 Offices. . . . . . . . . . . . . . . . . . . . . . . . . . 9 9 9 7 8
OPERATING DATA:
Year Ended June 30, ---------------------------------------------------- 1997 1996 1995 1994 1993 ---------------------------------------------------- (in thousands except for earnings per share) Interest income. . . . . . . . . . . . . . . . . . . . . . . $ 30,963 $ 27,761 $ 22,941 $ 17,050 $ 15,503 Interest expense . . . . . . . . . . . . . . . . . . . . . . 16,561 15,703 12,261 8,113 8,531 -------- -------- -------- -------- -------- Net interest income before provision for loan losses . . . . . . . . . . . . . 14,402 12,058 10,680 8,937 6,972 Provision for loan losses. . . . . . . . . . . . . . . . . . 187 417 416 0 168 -------- -------- -------- -------- -------- Net interest income after provision for loan losses. . . . . . . . . . . . . . 14,215 11,641 10,264 8,937 6,804 Non-interest income. . . . . . . . . . . . . . . . . . . . . 1,336 1,747 1,514 1,703 2,468 Non-interest expense . . . . . . . . . . . . . . . . . . . . 10,000 7,989 7,177 6,295 5,622 -------- -------- -------- -------- -------- Income before federal income tax expense and cumulative effect of a change in accounting principle. . . 5,551 5,399 4,601 4,345 3,650 Federal income taxes . . . . . . . . . . . . . . . . . . . . 1,904 1,613 1,244 1,215 1,147 Cumulative effect of a change in accounting principle. . . . . . . . . . . . . . . . . . 0 0 0 755 0 -------- -------- -------- -------- -------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,647 $ 3,786 $ 3,357 $ 3,885 $ 2,503 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Earnings per share . . . . . . . . . . . . . . . . . . . . . $ 1.33 $ 1.39 $ 1.25 $ 1.42 $ 0.91 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
4 OTHER DATA:
At or For the Year Ended June 30, ----------------------------------------------- 1997 1996 1995 1994 1993 ----------------------------------------------- (in thousands) Interest rate spread information: Average during year . . . . . . . . . . 3.84% 3.45% 3.67% 4.04% 3.58% Average end of year . . . . . . . . . . 3.90% 3.51% 3.84% 4.25% 4.14% Net interest margin at end of year . . . . 4.22% 3.90% 4.00% 4.30% 3.78% Average interest-earning assets to average interest-bearing liabilities. . 107.93% 108.83% 107.08% 106.64% 104.42% Non-accruing loans (> 90 days) and repossessed assets to total assets. . . 1.11% 0.73% 1.14% 1.45% 1.37% Stockholders' equity to total assets . . . 7.04% 6.78% 5.97% 6.61% 6.13% Return on average assets . . . . . . . . . 1.04% 1.19% 1.23% 1.78% 1.29% Return on average equity . . . . . . . . . 15.19% 18.43% 19.61% 27.53% 34.56% Ratio of average equity to average assets. . . . . . . . . . . . . 6.84% 6.47% 6.26% 6.46% 3.74% Ratio of tangible capital to adjusted total assets . . . . . . . . . 7.34% 7.25% 6.10% 6.37% 5.71% Ratio of core capital to adjusted total assets . . . . . . . . . 7.34% 7.25% 6.10% 6.37% 5.71% Ratio of total capital to risk-weighted assets. . . . . . . . . . 10.62% 11.42% 10.77% 10.37% 10.83% Dividend payout ratio. . . . . . . . . . . 0.00% 0.00% 8.37% 0.00% 0.00%
5 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 nine offices located in Cleveland and surrounding communities, including two recently opened branches in Macedonia and Bainbridge. The Bank's principal business consists of attracting deposits from the general public through its branch offices and investing these funds in loans secured by first mortgages on real estate located in its market area, which consists of Portage, Lake, Geauga, Cuyahoga, Summit, Stark, Medina and Lorain Counties in Ohio. The Bank has concentrated its activities on serving the borrowing needs of local homeowners and builders in its market area by originating both fixed-rate and adjustable-rate single-family mortgage loans, as well as construction loans and commercial real estate and multi-family residential real estate loans. In addition, to a lesser extent, the Bank originates loans secured by second mortgages, including home equity line of credit loans secured by single-family residential properties and loans secured by savings deposits. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates, and the availability of funds. Deposit flows and cost of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities, and the level of personal income and savings in the market area. FORWARD-LOOKING STATEMENTS When used in this Annual Report, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area, and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward- looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. OVERVIEW OF FINANCIAL CONDITION AT JUNE 30, 1997, 1996, AND 1995 PVF had total assets of $373.1 million, $331.6 million, and $315.4 million at the fiscal years ended June 30, 1997, 1996, and 1995 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 $342.6 million, $297.8 million, and $254.7 million at June 30, 1997, 1996, and 1995 respectively. The increase of $44.8 million in net loans and mortgage-backed securities at June 30, 1997 resulted primarily from increases in one-to-four family residential loans, commercial real estate loans and home equity line of credit loans of $19.2 million, $12.4 million, and $8.2 million respectively. The Bank's current loans-to-one-borrower limitation was approximately $4.0 million at June 30, 1997. In addition, investment securities totaled $14.0 million, $14.1 million, and $41.2 million at the fiscal years ended June 30, 1997, 1996, and 1995 respectively. The decrease of $27.1 million in investment securities at June 30, 1996 resulted from management's decision to reinvest funds from investment maturities and sales into the origination of real estate loans. The investment 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 an investment policy that permits investment only in U.S. government and agency securities or Triple-A-rated securities. The Bank invests primarily in securities having a final maturity of five years or less that qualify as regulatory liquidity, federal funds sold, and deposits at the Federal Home Loan Bank ("FHLB") of Cincinnati. Approximately $6.8 million, or 43.1% of the investment portfolio, has a repricing period of one year or less, and the Bank has no plans to change the short-term nature of its investment portfolio. 6 The Bank's deposits totaled $288.3 million, $271.0 million, and $272.3 million at the fiscal years ended June 30, 1997, 1996, and 1995 respectively. Advances from the FHLB of Cincinnati amounted to $47.4 million, $27.5 million, and $15.0 million at the fiscal years ended June 30, 1997, 1996, and 1995 respectively. Management's decision to borrow funds from the FHLB and aggressively compete with market savings rates resulted in an increase of $19.9 million in FHLB advances and an increase in savings deposits of $17.3 million. CAPITAL PVF's shareholders' equity totaled $26.3 million, $22.5 million, and $18.8 million at the fiscal years ended June 30, 1997, 1996, and 1995 respectively. The increases were the result of the retention of net earnings after payment of dividends to shareholders, net of capital adjustments resulting from unrealized gains and losses on securities available for sale. The sale of PVF Service Corporation during fiscal 1995 and mortgage servicing rights during fiscal 1996 from the Bank to PVF, net of dividends paid by the Bank to PVF, resulted in an increase of $1.9 million to the Bank's capital. 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, 1997, the Bank was in compliance with all of the current applicable regulatory capital measurements to meet the definition of a well- capitalized institution, as demonstrated in the following table: Park View Requirement for Federal Percent of Well-Capitalized Capital Assets (1) Institution ----------------------------------------- (in thousands) GAAP capital $ 27,604 7.34% N/A Tangible capital $ 27,604 7.34% N/A Core capital $ 27,604 7.34% 5.00% Tier 1 risk-based capital $ 27,604 9.70% 6.00% Risk-based capital $ 30,202 10.62% 10.00% (1) TANGIBLE AND CORE CAPITAL LEVELS ARE SHOWN AS A PERCENTAGE OF TOTAL ADJUSTED ASSETS; RISK-BASED CAPITAL LEVELS ARE SHOWN AS A PERCENTAGE OF RISK-WEIGHTED ASSETS. COMMON STOCK AND DIVIDENDS On December 30, 1992, Park View Federal converted to a stock company by issuing 850,000 shares of common stock. A 10% stock dividend was issued in February 1994. PVF Capital Corp. announced the reorganization of Park View Federal into the holding company structure of ownership effective October 31, 1994, and concurrently converted all outstanding shares of common stock of the Bank on a three-for-two basis into shares of common stock of PVF Capital Corp. The Company's common stock trades under the symbol "PVFC" on the Nasdaq Small-Cap Market. A 10% stock dividend was issued in August 1995, a three-for-two stock split effected in the form of a dividend was issued in August 1996, and a 10% stock dividend was issued in September 1997. As adjusted to reflect stock dividends and the three-for-two stock split, the Company had 2,555,562 shares of common stock outstanding and approximately 307 holders of record of the common stock at August 31, 1997. OTS regulations applicable to all Federal Savings Banks such as Park View Federal limit the dividends that may be paid by the Bank to PVF. Any dividends paid may not reduce the Bank's capital below minimum regulatory requirements. The payment of cash dividends is continually reviewed by management and the Board of Directors. An $0.11 per share cash dividend, as adjusted for stock dividends and stock splits, was paid by the Bank in August 1994. 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) Fiscal 1997 Fiscal 1996 ------------------------------------- High Bid Low Bid High Bid Low Bid ------------------ ----------------- Fourth Quarter $ 16.48 $ 15.23 $ 12.27 $ 11.06 Third Quarter 15.23 13.64 12.57 10.61 Second Quarter 13.86 13.18 10.30 8.64 First Quarter 13.18 10.91 8.64 7.16 (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 7 and mortgage-backed securities, and proceeds from maturing investment securities and advances from the FHLB of Cincinnati. While loan and mortgage-backed securities payments and maturing investments are relatively stable sources of funds, deposit flows and loan prepayments are greatly influenced by prevailing interest rates, economic conditions and competition. FHLB advances may be used on a short-term basis to compensate for deposit outflows or on a long-term basis to support expanded lending and investment activities. The Bank uses its capital resources principally to meet its ongoing commitment to fund maturing certificates of deposit and deposit withdrawals, repay borrowings, fund existing and continuing loan commitments, maintain its liquidity, and meet operating expenses. At June 30, 1997, the Bank had commitments to originate loans totaling $31.2 million and had $35.7 million of undisbursed loans in process. Scheduled maturities of certificates of deposit during the twelve months following June 30, 1997 totaled $172.5 million. Management believes that a significant portion of the amounts maturing during fiscal 1998 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 5% 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 average daily liquidity ratio for the month of June 1997 was 7.3%, and its average short-term liquidity ratio for such period was significantly above regulatory requirements. [PIE-CHART] [PIE-CHART] 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 8 sought to decrease the average maturity of its assets by emphasizing the origination of adjustable-rate residential mortgage loans and adjustable-rate mortgage loans for the acquisition, development, and construction of residential and commercial real estate, all of which are retained by the Bank for its portfolio. In addition, all long-term, fixed-rate mortgages are underwritten according to guidelines of the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA") and are either swapped with the FHLMC and the FNMA in exchange for mortgage-backed securities secured by such loans which are then sold in the market or sold directly for cash in the secondary market. Interest rate sensitivity analysis is used to measure the Company's interest rate risk by computing estimated changes in NPV of its cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 1 to 4 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 of 5%, 10%, 15% and 20% in the event of a sudden and sustained 1 to 4 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, 1997. All market risk sensitive instruments presented in this table are held to maturity or available for sale. The Bank has no trading securities. (in thousands) Change in Market Value of Dollar Percentage Interest Rates Portfolio Equity Change Change -------------- ---------------- ------ ------ +400 $35,500 $(8,625) (20)% +300 38,327 (5,798) (13) +200 40,861 (3,264) (7) +100 42,859 (1,266) (3) 0 44,125 -100 44,505 380 1 -200 44,219 94 0 -300 44,396 271 1 -400 45,492 1,367 3 The above table indicates that at June 30, 1997, in the event of a sudden and sustained increase in prevailing market interest rates, the Bank's NPV would be expected to decrease, and that in the event of a sudden and sustained decrease in prevailing market interest rates, the Bank's NPV would be expected to increase. At June 30, 1997, the Bank's estimated changes in NPV were within the targets established by the Board of Directors. NPV is calculated by the OTS using information provided by the Bank. The calculation is based on the net present value of discounted cash flows utilizing market prepayment assumptions and market rates of interest provided by Bloomberg quotations and surveys performed during the quarter ended June 30, 1997, with adjustments made to reflect the shift in the Treasury yield curve between the survey date and the quarter-end date. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Bank may undertake in response to changes in interest rates. Certain shortcomings are inherent in the method of analysis presented in the computation of NPV. Actual values may differ from those projections set forth in the table, should market conditions vary from assumptions used in the preparation of the table. Certain assets, such as adjustable-rate loans, which represent the Bank's primary loan product, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. In addition, the proportion of adjustable-rate loans in the Bank's portfolio could decrease in future periods if market interest rates remain at or decrease below current levels due to refinance activity. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in the table. Finally, the ability of many borrowers to repay their adjustable-rate debt may decrease in the event of an interest rate increase. In addition, the Bank uses interest rate sensitivity gap analysis to monitor the relationship between the maturity and repricing of its interest-earning assets and interest-bearing liabilities, while maintaining an acceptable interest rate spread. Interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing 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 9 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. RESULTS OF OPERATIONS GENERAL PVF Capital Corp.'s net income for the fiscal year ended June 30, 1997 was $3.6 million, or $1.33 per share, as compared to $3.8 million, or $1.39 per share for fiscal 1996, and $3.4 million, or $1.25 per share for fiscal 1995. All per share amounts have been adjusted for stock dividends and the three-for-two stock split effective with the holding company reorganization on October 31, 1994. Net income for the current year decreased by $139,000 from the prior fiscal year and exceeded net income for fiscal 1995 by $290,000. In the first quarter of fiscal 1997, the Bank recorded a one-time special assessment to recapitalize the Savings Association Insurance Fund ("SAIF") that required SAIF-insured savings institutions to pay 65.7 cents for every $100 of deposits. This assessment was charged against earnings in fiscal 1997 and had an after-tax impact of $1.1 million.
Table 1 AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES FOR THE YEAR ENDED JUNE 30, 1997 -------------------------------------------- At 6/30/97 Yield/ Average Yield/ (in thousands) Cost Balance Interest Cost - ------------------------------------------------------------------------------------------------------------ Interest-earning assets: Loans. . . . . . . . . . . . . . . . . . . . . 9.29% $317,453 $ 29,419 9.27% Mortgage-backed securities . . . . . . . . . . 7.88 3,832 285 7.44 Investment securities and other interest-earning assets. . . . . . . . . . . 5.62 19,706 1,259 6.39 -------- -------- Total interest-earning assets . . . . . . 9.07 340,991 30,963 9.08 -------- Non-interest-earning assets. . . . . . . . . . 9,773 -------- Total assets. . . . . . . . . . . . . . . $350,764 -------- -------- Interest-bearing liabilities: Deposits . . . . . . . . . . . . . . . . . . . 5.16 $272,341 $ 13,957 5.12 FHLB advances. . . . . . . . . . . . . . . . . 5.86 41,083 2,367 5.76 Notes payable. . . . . . . . . . . . . . . . . 9.13 2,510 237 9.44 -------- -------- Total interest-bearing liabilities. . . . 5.17 315,934 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 . . . . . . . . . . . . . . 3.90% 3.84% ---- ---- ---- ---- Net yield on interest-earning assets . . . . . . 4.22% ---- ---- Ratio of average interest-earning assets to average interest-bearing liabilities. . . . 107.93% ------ ------
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES FOR THE YEAR ENDED JUNE 30, 1996 1995 ---------------------------------------------------------------------- Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost - ---------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans. . . . . . . . . . . . . . . . . . . . . $272,768 $ 25,572 9.38% $230,846 $ 20,624 8.93% Mortgage-backed securities . . . . . . . . . . 3,961 269 6.79 5,635 432 7.67 Investment securities and other interest-earning assets. . . . . . . . . . . 32,732 1,920 5.87 30,633 1,886 6.16 -------- -------- -------- -------- Total interest-earning assets . . . . . . 309,461 27,761 8.97 267,114 22,942 8.59 -------- -------- Non-interest-earning assets. . . . . . . . . . 7,775 6,595 -------- -------- Total assets. . . . . . . . . . . . . . . $317,236 $273,709 -------- ------- -------- ------- Interest-bearing liabilities: Deposits . . . . . . . . . . . . . . . . . . . $270,975 $ 14,889 5.49 $231,984 $ 11,462 4.94 FHLB advances. . . . . . . . . . . . . . . . . 10,638 546 5.13 16,870 740 4.39 Notes payable. . . . . . . . . . . . . . . . . 2,746 268 9.80 600 59 9.83 -------- -------- -------- -------- Total interest-bearing liabilities. . . . 284,359 15,703 5.52 249,454 12,261 4.92 -------- ---- -------- ---- Non-interest-bearing liabilities . . . . . . . 12,337 7,132 -------- -------- Total liabilities . . . . . . . . . . . . 296,696 256,586 Stockholders' equity . . . . . . . . . . . . . . 20,540 17,123 -------- -------- Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . $317,236 $273,709 -------- -------- -------- -------- Net interest income. . . . . . . . . . . . . . . $ 12,058 $ 10,681 -------- -------- -------- -------- Interest rate spread . . . . . . . . . . . . . . 3.45% 3.67% ---- ---- ---- ---- Net yield on interest-earning assets . . . . . . 3.90% 4.00% ---- ---- ---- ---- Ratio of average interest-earning assets to average interest-bearing liabilities. . . . 108.83% 107.08% -------- -------- -------- --------
10 NET INTEREST INCOME Net interest income amounted to $14.4 million for the fiscal year ended June 30, 1997, as compared to $12.1 million and $10.7 million for the fiscal years ended June 30, 1996 and 1995 respectively. The increase in net interest income of $2.3 million and $1.4 million from the fiscal year ended June 30, 1996 to 1997 and from the fiscal year ended June 30, 1995 to 1996, respectively, is due to changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities. Tables 1 and 2 provide information as to change in the Bank's net interest income. Table 1 sets forth certain information relating to the Bank's average interest-earning assets (loans and investments) and interest-bearing liabilities (deposits and borrowings) and reflects the average yield on assets and average cost of liabilities for the periods and at the dates indicated. Such yields and costs are derived by dividing interest income or interest expense by the average daily balance of assets or liabilities, respectively, for the periods presented. During the periods indicated, non-accrual loans are included in the net loan category. This table also presents information for the periods indicated and at June 30, 1997 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 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 favorably affected the Bank's net interest income for the fiscal year ended June 30, 1997, while unfavorably affecting the Bank's net interest income for the fiscal year ended June 30, 1996. 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
Table 2 YEAR ENDED JUNE 30, ---------------------------------------------------- 1997 vs. 1996 ---------------------------------------------------- Increase (Decrease) Due to ---------------------------------------------------- Rate/ (in thousands) Volume Rate Volume Total ---------------------------------------------------- Interest income: Loans. . . . . . . . . . . . . . . . . . . . . $ 4,190 $ (295) $ (48) $ 3,847 Mortgage-backed securities . . . . . . . . . . (9) 26 (1) 16 Investment securities and other interest-earning assets. . . . . . . . (764) 170 (67) (661) ------- ------- ------- ------- Total interest-earning assets. . . . . . . 3,417 (99) (116) 3,202 ------- ------- ------- ------- Interest expense: Savings deposits . . . . . . . . . . . . . . . 75 (1,001) (5) (931) FHLB advances. . . . . . . . . . . . . . . . . 1,561 67 193 1,821 Other borrowings . . . . . . . . . . . . . . . (23) (10) 1 (32) ------- ------- ------- ------- Total interest-bearing liabilities. . . . . . . . . . . . . . . 1,613 (944) 189 858 ------- ------- ------- ------- ------- ------- ------- ------- Net interest income. . . . . . . . . . . . . . . $ 1,804 $ 845 $ (305) $ 2,344 ------- ------- ------- ------- ------- ------- ------- -------
YEAR ENDED JUNE 30, ---------------------------------------------------- 1996 vs. 1995 ---------------------------------------------------- Increase (Decrease) Due to ---------------------------------------------------- Rate/ (in thousands) Volume Rate Volume Total ---------------------------------------------------- Interest income: Loans. . . . . . . . . . . . . . . . . . . . . $ 3,746 $ 1,017 $ 185 $ 4,948 Mortgage-backed securities . . . . . . . . . . (128) (50) 15 (163) Investment securities and other interest-earning assets. . . . . . . . 129 (89) (6) 34 ------- ------- ------- ------- Total interest-earning assets. . . . . . . 3,747 878 194 4,819 ------- ------- ------- ------- Interest expense: Savings deposits . . . . . . . . . . . . . . . 1,925 1,285 216 3,426 FHLB advances. . . . . . . . . . . . . . . . . (274) 125 (46) (195) Other borrowings . . . . . . . . . . . . . . . 210 0 1 211 ------- ------- ------- ------- Total interest-bearing liabilities. . . . . . . . . . . . . . . 1,861 1,410 171 3,442 ------- ------- ------- ------- Net interest income. . . . . . . . . . . . . . . $ 1,886 $ (532) $ 23 $ 1,377 ------- ------- ------- ------- ------- ------- ------- -------
11 and a relatively flat yield curve during much of the fiscal year ended June 30, 1997, the Bank experienced an increase of 39 basis points in its interest rate spread to 3.84% for fiscal 1997 from 3.45% for fiscal 1996, while during fiscal 1996 its interest rate spread decreased 22 basis points from 3.67% for fiscal 1995. These changes in average interest rate spread resulted in an increase in net interest income for the year ended June 30, 1997 of $845,000 due to interest rate changes and a decrease of $532,000 for the year ended June 30, 1996. Net interest income was favorably affected by volume changes during the two years ended June 30, 1997 and 1996. Accordingly, net interest income grew by $1.8 million and $1.9 million due to volume changes for the fiscal years ended June 30, 1997 and 1996 respectively. Changes attributable to both rate and volume impacted net interest income negatively during the fiscal year ended June 30, 1997 and positively during the fiscal year ended June 30, 1996, with an increase in average interest rate spread and average volume during the fiscal year ended June 30, 1997 and the reduction in average interest rate spread being offset by an increase in average volume during the fiscal year ended June 30, 1996. 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. PROVISION FOR LOAN LOSSES Due to the increased risks associated with commercial real estate, construction, and land loans, the Bank carefully monitors its loan portfolio and establishes levels of unallocated and specific reserves for loan losses. Provisions for loan losses are charged to earnings to bring the total allowances for loan losses to a level considered adequate by management to provide for probable loan losses, based on prior loss experience, volume and type of lending conducted by the Bank, industry standards, and past due loans in the Bank's loan portfolio. The Bank's policies require the review of assets on a regular basis, and the Bank appropriately classifies loans as well as other assets if warranted. The Bank establishes specific provisions for loan losses when a loan is deemed to be uncollectible in an amount equal to the net book value of the loan or to any portion of the loan deemed uncollectible. A loan that is classified as either substandard or doubtful is assigned an allowance based upon the specific circumstances on a loan-by-loan basis after consideration of the underlying collateral and other pertinent economic and market conditions. In addition, the Bank maintains unallocated allowances based upon the establishment of a risk category for each type of loan in the Bank's portfolio. 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. The allowance for loan losses increased from $2.4 million at June 30, 1995 to $2.6 million at June 30, 1996 and to $2.7 million at June 30, 1997. At June 30, 1997, the [CHART] allowance for loan losses represented 58.0% of total non-performing loans, compared to 104.8% and 51.8% of total non-performing loans at June 30, 1996 and 1995 respectively. Non-performing loans consist of all non-accrual loans and all loans 90 days or more past due. For the fiscal years ended June 30, 1997, 1996 and 1995, the Bank recorded provisions for loan losses of $187,000, $417,000, and $416,000 respectively. The Bank increased its unallocated reserves for loan losses based on management's evaluation of the quality of the loan portfolio, prevailing economic conditions, changes in the volume of the loan portfolio, and other factors deemed relevant. Actual net charge-offs totaled $77,000, $254,000, and $89,000 for the fiscal years ended June 30, 1997, 1996, and 1995 respectively. At June 30, 1997, the allowance for loan losses represented 0.8% of net loans and mortgage-backed securities. NON-INTEREST INCOME Non-interest income amounted to $1.3 million, $1.7 million, and $1.5 million for the fiscal years ended June 30, 1997, 1996, and 1995 respectively. The fluctuations in non-interest income are due primarily to fluctuations in income derived from mortgage banking activities and fee income on deposit accounts. Income attributable to mortgage banking activities consists of loan servicing income, gains and losses on the sale of loans and mortgage-backed securities, and market valuation provisions and recoveries. Income from mortgage banking activities amounted to $663,000, $925,000, and $906,000 for the fiscal years ended June 30, 1997, 1996, and 1995 respectively. The reduction in income from mortgage banking activities of $262,000 from the fiscal year ended June 30, 1996 to 1997 is primarily due to a decrease in net profit realized on the sale of loans and mortgage-backed securities. Other non-interest income amounted to $673,000, $822,000, and $607,000 for the fiscal years ended June 30, 1997, 1996, and 1995 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 $10.0 million, $8.0 million, and $7.2 million for the fiscal years ended June 30, 1997, 1996, and 1995 respectively. The principal component of non-interest expense is compensation and related benefits which amounted to $4.4 million, $4.1 million, and $3.7 million for the fiscal years ended June 30, 1997, 1996, and 1995 respectively. The increase in compensation for the fiscal years ended June 30, 1997 and 1996 is due primarily to growth in the staff, the opening of two new branches in fiscal 1995, employee 401K benefits, a compensation incentive plan for both management and loan originators, and inflationary salary and wage adjustments to employees. Office occupancy totaled $1.6 million, $1.4 million, and $1.2 million for the fiscal years ended June 30, 1997, 1996, and 1995 respectively. The increased occupancy expense is attributable to maintenance and repairs to office buildings and costs attributable to opening and operating two additional branch offices. Other non-interest expense totaled $4.0 million, $2.4 million, and $2.2 million for the fiscal years ended June 30, 1997, 1996, and 1995 respectively. The increase in other non-interest expense of $1.6 million from the fiscal year ended June 30, 1996 to 1997 is attributable to the previously mentioned SAIF assessment. Changes in other non-interest expense are the result of advertising, professional and legal services, regulatory and insurance expenses, and franchise tax expense. FEDERAL INCOME TAXES The Bank's federal income tax expense was $1.9 million, $1.6 million, and $1.2 million for the fiscal years ended June 30, 1997, 1996, and 1995 respectively. Due to the availability of statutory bad debt deductions for the fiscal years ended June 30, 1996 and 1995, and other miscellaneous deductions, the Bank's effective federal income tax rate was below the expected tax rate of 35% with an effective rate of 34%, 30%, and 27% for the fiscal years ended June 30, 1997, 1996, and 1995 respectively. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related data presented herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a more significant impact on the Bank's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services since such prices are affected by inflation to a larger extent than interest rates. For further information regarding the effect of interest rate fluctuations on the Bank, see "Asset/Liability Management." 13 EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, which supersedes Accounting Principles Board ("APB") No. 15, Earnings per Share, and replaces the presentation of primary and fully diluted earnings per share with basic and diluted earnings per share. SFAS No. 128 was issued to simplify the computation of earnings per share and make the U.S. standard more compatible with the earnings per share standards of other countries and that of the International Accounting Standards Committee ("IASC"). SFAS No. 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted, however, pro forma earnings per share is permitted for periods prior to required adoption. The following table discloses pro forma earnings per share pursuant to SFAS No. 128 for the fiscal years ended June 30, 1997 and June 30, 1996.
FISCAL YEAR ENDED JUNE 30, -------------------------------------------------------------------------------------- 1997 1996 ---------------------------------------- ----------------------------------------- Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ---------------------------------------- ----------------------------------------- Basic Earnings Per Share Income available to common stockholders $3,646,839 2,555,562 $ 1.43 $3,786,156 2,555,562 $ 1.48 Effect of Dilutive Securities Stock options 184,880 $ 0.10 162,173 $ 0.09 Diluted Earnings Per Share Income available to common stockholders $3,646,839 2,740,442 $ 1.33 $3,786,156 2,717,735 $ 1.39
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 after December 15, 1997. Management does not expect the implementation of SFAS No. 131 to have a material impact on the Company's consolidated financial position or results of operations. 14 INDEPENDENT AUDITORS' REPORT The Board of Directors PVF Capital Corp. and Subsidiaries Cleveland, Ohio: We have audited the accompanying consolidated statements of financial condition of PVF Capital Corp. and subsidiaries (Company) as of June 30, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1997, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statements of Financial Accounting Standards No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, in 1997; No. 122, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS, in 1996; and No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND DISCLOSURES, in 1995. Cleveland, Ohio July 23, 1997 15 PVF CAPITAL CORP. AND SUBSIDIARIES Consolidated Statements of Financial Condition June 30, 1997 and 1996
ASSETS 1997 1996 ---- ---- Cash and amounts due from depository institutions $ 7,760,029 6,670,604 Interest bearing deposits 445,401 244,612 Federal funds sold 1,375,000 6,875,000 Investment securities held to maturity (market values of $13,899,370 and $13,893,836, respectively) 13,995,350 14,094,100 Mortgage-backed securities held to maturity, net (market values of $516,579 and $648,170, respectively) 511,530 637,022 Mortgage-backed securities available for sale, net - 7,613,365 Loans receivable held for long-term investment, net of allowance for loan losses of $2,674,537 and $2,564,720, respectively 341,402,566 278,318,945 Loans receivable held for sale, net 709,604 11,203,705 Office properties and equipment, net 1,882,390 2,571,566 Real estate in development 909,758 854,891 Investment required by law Stock in the Federal Home Loan Bank of Cincinnati 2,762,314 1,880,000 Prepaid expenses and other assets 1,327,358 670,271 ----------- ----------- Total assets $ 373,081,300 331,634,081 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits $ 288,269,674 271,045,085 Advances from the Federal Home Loan Bank of Cincinnati 47,405,424 27,481,651 Notes payable 2,310,000 2,710,000 Advances from borrowers for taxes and insurance 4,511,595 4,205,151 Accrued expenses and other liabilities 4,311,191 3,718,536 ----------- ----------- Total liabilities 346,807,884 309,160,423 Stockholders' equity Serial preferred stock, $.01 par value, 1,000,000 shares authorized; none issued - - Common stock, $.01 par value, 5,000,000 shares authorized; 2,323,338 and 2,555,562 shares issued and outstanding, respectively 25,556 23,235 Additional paid-in capital 14,522,275 9,995,916 Retained earnings (substantially restricted) 11,725,585 12,608,775 Net unrealized securities losses - (154,268) ----------- ----------- Total stockholders' equity 26,273,416 22,473,658 Commitments Total liabilities and stockholders' equity $ 373,081,300 331,634,081 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. 16 PVF CAPITAL CORP. AND SUBSIDIARIES Consolidated Statements of Operations Years ended June 30, 1997, 1996, and 1995
1997 1996 1995 ---- ---- ---- Interest income Loans $ 29,418,869 25,572,082 20,623,768 Mortgage-backed securities 285,246 268,604 432,016 Cash and investment securities 1,258,732 1,920,620 1,885,677 ---------- ---------- ---------- Total interest income 30,962,847 27,761,306 22,941,461 Interest expense Deposits 13,957,543 14,888,819 11,462,392 Short-term borrowings 1,182,874 327,751 798,518 Long-term borrowings 1,420,346 486,609 - ---------- ---------- ---------- Total interest expense 16,560,763 15,703,179 12,260,910 ---------- ---------- ---------- Net interest income 14,402,084 12,058,127 10,680,551 Provision for loan losses 187,000 417,000 416,000 ---------- ---------- ---------- Net interest income after provision for loan losses 14,215,084 11,641,127 10,264,551 ---------- ---------- ---------- Noninterest income, net Service and other fees 519,512 462,985 434,150 Mortgage banking activities, net 663,002 924,657 906,347 Gain on sale of investment securities, net - 74,721 - Other, net 153,253 284,505 172,934 ---------- ---------- ---------- Total noninterest income, net 1,335,767 1,746,868 1,513,431 Noninterest expense Compensation and benefits 4,423,470 4,136,243 3,693,088 Office, occupancy, and equipment 1,603,583 1,433,037 1,233,111 Insurance 445,804 737,845 593,836 Special SAIF assessment 1,707,867 - - Professional and legal 208,164 167,689 248,697 Other 1,611,475 1,513,650 1,408,135 ---------- ---------- ---------- Total noninterest expense 10,000,363 7,988,464 7,176,867 ---------- ---------- ---------- Income before federal income taxes 5,550,488 5,399,531 4,601,115 Federal income taxes Current 1,975,742 1,280,375 1,097,800 Deferred (72,093) 333,000 146,200 ---------- ---------- ---------- 1,903,649 1,613,375 1,244,000 ---------- ---------- ---------- Net income $ 3,646,839 3,786,156 3,357,115 ---------- ---------- ---------- ---------- ---------- ---------- Earnings per share $ 1.33 1.39 1.25 ---- ---- ---- ---- ---- ----
See accompanying notes to consolidated financial statements. 17 PVF CAPITAL CORP. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended June 30, 1997, 1996, and 1995
Net Additional Unrealized Common Paid-In Retained Securities Stock Capital Earnings Losses Total -------- ---------- ---------- ---------- ---------- Balance at June 30, 1994 $9,361 8,160,565 7,572,254 - 15,742,180 Net income - - 3,357,115 - 3,357,115 Cash dividend, $.18 per share - - (281,427) - (281,427) Three-for-two stock exchange in connection with formation of the holding company 4,680 (4,680) - - - ------- ---------- ---------- ---------- ---------- Balance at June 30, 1995 14,041 8,155,885 10,647,942 - 18,817,868 Net income - - 3,786,156 - 3,786,156 Stock dividend issued, 140,325 shares 1,404 1,822,821 (1,824,225) - - Cash paid in-lieu of fractional shares - - (1,098) - (1,098) Stock options exercised, 4,537 shares 45 24,955 - - 25,000 Net change in unrealized securities losses, net of taxes of $79,471 - - - (154,268) (154,268) Three-for-two stock split effected in the form of a dividend 7,745 (7,745) - - - ------- ---------- ---------- ---------- ---------- Balance at June 30, 1996 23,235 9,995,916 12,608,775 (154,268) 22,473,658 Net income - - 3,646,839 - 3,646,839 Stock dividend issued, 232,224 shares 2,321 4,526,359 (4,528,680) - - Cash paid in-lieu of fractional shares - - (1,349) - (1,349) Net change in unrealized securities losses, net of taxes of $79,471 - - - 154,268 154,268 ------- ---------- ---------- ---------- ---------- Balance at June 30, 1997 $25,556 14,522,275 11,725,585 - 26,273,416 ------- ---------- ---------- ---------- ---------- ------- ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. 18 PVF CAPITAL CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended June 30, 1997, 1996, and 1995
1997 1996 1995 ---- ---- ---- Operating activities Net income $ 3,646,839 3,786,156 3,357,115 Adjustments required to reconcile net income to net cash used in operating activities Accretion of discount on securities (1,250) (25,475) (42,767) Depreciation and amortization 468,296 477,946 359,450 Provision for loan losses 187,000 417,000 416,000 Accretion of unearned discount and deferred loan origination fees, net (1,660,399) (1,554,098) (1,245,139) Deferred income tax provision 72,093 (333,000) (146,200) Gain on sale of investment securities, net - (74,721) - Proceeds from loans held for sale 46,020,308 36,564,603 14,623,166 Originations of loans held for sale (53,500,828) (51,350,242) (23,526,731) Mortgage banking operations, excluding mortgage loan servicing fees and amortization of MSRs (250,757) (382,898) (345,978) Net change in other assets and other liabilities (62,112) 1,461,043 (204,158) ------------- ------------ ------------ Net cash used in operating activities (5,080,810) (11,013,686) (6,755,242) ------------- ------------ ------------ Investing activities Loans originated (136,862,188) (105,097,698) (102,130,657) Principal repayments on loans 87,823,393 76,464,071 60,937,038 Loans purchased - (13,161,755) (11,169,245) Loans sold - 10,976,057 13,422,886 Proceeds from sales of mortgage-backed securities available for sale 12,598,136 894,443 8,205,393 Principal repayments on mortgage-backed securities available for sale 241,974 195,177 - Purchase of mortgage-backed securities held to maturity - - (4,829,371) Principal repayments on mortgage-backed securities held to maturity 123,716 2,246,171 1,095,219 Proceeds from sales of investment securities available for sale - 10,007,188 - Purchase of investment securities held to maturity - (24,298,789) (53,000,000) Maturities of investment securities held to maturity 100,000 41,491,590 20,200,000 Federal Home Loan Bank (FHLB) stock purchased, net (882,314) (123,865) (423,805) (Additions) disposal to office properties and equipment 220,880 (322,935) (1,361,726) Disposals of real estate owned 508,837 826,080 373,337 Disposals of real estate in development, net (54,867) 30,859 123,162 ------------- ------------ ------------ Net cash (used in) provided by investing activities (36,182,433) 126,594 (68,557,769) ------------- ------------ ------------
See accompanying notes to consolidated financial statements. (Continued) 19 PVF CAPITAL AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended June 30, 1997, 1996, and 1995
1997 1996 1995 ---- ---- ---- Financing activities Payments on FHLB advances $ (72,576,227) (25,018,349) (28,560,000) Proceeds from FHLB advances 92,500,000 37,500,000 26,000,000 Proceeds from notes payable - 1,200,000 1,800,000 Repayment of notes payable (400,000) (290,000) (600,000) Net increase (decrease) in NOW and passbook savings (48,405) 5,132,229 (5,785,818) Proceeds from issuance of certificates of deposit 58,655,161 45,556,108 106,109,678 Payments on maturing certificates of deposit (41,382,167) (51,933,694) (25,074,965) Other 305,095 (87,566) 167,388 ------------- ----------- ----------- Net cash provided by financing activities 37,053,457 12,058,728 74,056,283 ------------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (4,209,786) 1,171,636 (1,256,728) Cash and cash equivalents at beginning of year 13,790,216 12,618,580 13,875,308 ------------- ----------- ----------- Cash and cash equivalents at end of year $9,580,430 13,790,216 12,618,580 ------------- ----------- ----------- ------------- ----------- ----------- Supplemental disclosures of cash flow information Cash payments of interest expense $ 16,416,368 15,611,439 12,254,542 Cash payments of income taxes 1,580,000 1,165,000 1,297,000 ------------- ----------- ----------- ------------- ----------- ----------- Supplemental schedule of noncash investing and financing activities Loans exchanged for mortgage-backed securities $ 5,376,484 8,052,331 8,812,249 Transfers from real estate owned (481,567) (706,538) (342,867) Transfers to real estate owned 428,982 759,122 322,867 ------------- ----------- ----------- ------------- ----------- -----------
See accompanying notes to consolidated financial statements. 20 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997, 1996, and 1995 (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, and Lake Counties, Ohio. The deposit accounts of the Bank are insured under the Savings Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC) and are backed by the full faith and credit of the United States government. The following is a description of the significant policies which the Company follows in preparing and presenting its consolidated financial statements. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of PVF Capital Corp. and its wholly owned subsidiaries, Park View Federal Savings Bank and PVF Service Corporation. All significant intercompany transactions and balances are eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ALLOWANCE FOR LOSSES Under Statement of Financial Accounting Standards No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, and No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND DISCLOSURES, 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 increased by charges to income and decreased by charge-offs (net of recoveries) based on the Bank's evaluation of impairment of its loans. 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. 21 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statments 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. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 122, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, which supersedes SFAS No. 122 and provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. As a result of the adoption, the Company recognizes an asset for mortgage servicing rights based on 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 servicer. 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 Bank monitors prepayments, and in the event that actual prepayments exceed original estimates, amortization is adjusted accordingly. INVESTMENT AND MORTGAGE-BACKED SECURITIES Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, requires that debt and equity securities be classified into one of three categories: held to maturity, available for sale, or held for trading. Securities held to maturity are limited to debt securities that the holder has the positive intent and the ability to hold to maturity; these securities are reported at amortized cost. Securities held for trading are limited to debt and equity securities that are held principally to be sold in the near term; these securities are reported at fair value, and unrealized gains and losses are reflected in earnings. Securities held as available for sale consist of all other securities; these securities are reported at fair value, and unrealized gains and losses are not reflected in earnings but are reflected as a separate component of stockholders' equity, net of tax. Under Statement 115, investment and mortgage-backed securities that could be sold in the future because of changes in interest rates or other factors may not be classified as held to maturity. Gains or losses on the sales of all securities are recognized at the date of sale (trade date). OFFICE PROPERTIES AND EQUIPMENT Depreciation and amortization are computed using the straight-line method at rates expected to amortize the cost of the assets over their estimated useful lives or, with respect to leasehold improvements, the term of the lease, if shorter. FEDERAL INCOME TAXES The Company files a consolidated tax return with its wholly owned subsidiaries and provides deferred federal income taxes in recognition of timing differences between financial statement and income tax reporting. (Continued) 22 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statments Under the asset and liability method of Statement 109, 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. LOAN ORIGINATION AND COMMITMENT FEES The Bank defers loan origination and commitment fees and certain direct loan origination costs and amortizes the net amount over the lives of the related loans as a yield adjustment if the loans are held for investment, or recognizes the net fees as mortgage banking income when the loans are sold. REAL ESTATE IN DEVELOPMENT Real estate in development is carried at the lower of cost, including capitalized holding costs, or fair value less estimated selling costs. STATEMENTS OF CASH FLOWS For purposes of the consolidated statements of cash flows, the Company considers cash and amounts due from depository institutions, interest bearing deposits, and federal funds sold with original maturities of less than three months to be cash equivalents. EARNINGS PER SHARE The per share data for 1997, 1996, and 1995 are calculated on a primary basis because of the dilutive effect of unexercised options and are adjusted to reflect the three-for-two stock issuance of PVF Capital Corp. on October 31, 1994; the 10 percent stock dividends declared February 1994 and July 1995; the three-for-two stock issuance declared July 1996; and the 10 percent stock dividend declared July 1997. The weighted average number of shares of common stock and common stocks equivalents outstanding during the years ended June 30, 1997, 1996, and 1995 were 2,740,442, 2,717,735, and 2,691,552, respectively. Fully diluted earnings per share is not materially different than primary earnings per share. RECLASSIFICATION Certain reclassifications have been made to 1996 and 1995 amounts to conform to the 1997 presentation. (2) INVESTMENT SECURITIES Investment securities, held to maturity, at June 30, 1997 and 1996, are summarized as follows:
1997 ----------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gain Loss Value ----------- ---------- ---------- ---------- United States Government and agency securities $13,995,350 - (95,980) 13,899,370 ---------- --------- ------ ---------- ---------- --------- ------ ---------- Due after one year through five years $13,995,350 - (95,980) 13,899,370 ---------- --------- ------ ---------- $13,995,350 - (95,980) 13,899,370 ---------- --------- ------ ---------- ---------- --------- ------ ----------
(Continued) 23 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements
1996 ----------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gain Loss Value ----------- ---------- ---------- ---------- United States Government and agency securities $ 14,094,100 - (200,264) 13,893,836 ------------ ---------- --------- ---------- ------------ ---------- --------- ---------- Due in one year or less $ 100,000 - - 100,000 Due after one year through five years 13,994,100 - (200,264) 13,793,836 ------------ ---------- --------- ---------- $ 14,094,100 - (200,264) 13,893,836 ------------ ---------- --------- ---------- ------------ ---------- --------- ----------
Realized gains on sales of investment securities were $-0-, $100,658, and $-0- for the years ended June 30, 1997, 1996, and 1995, respectively, and realized losses for the years ended June 30, 1997, 1996, and 1995 were $-0-, $25,937, and $-0-, respectively. On November 16, 1995, the Company adopted the implementation guidance in the Special Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, issued by the Financial Accounting Standards Board in November 1995, and reassessed the appropriateness of the classification of all securities held at that date. Investment securities held to maturity and mortgage-backed securities with amortized costs of $9,932,467 were transferred to the available-for-sale classification, and a valuation account was established for the unrealized gain, totaling $90,105, to increase the recorded balance of such securities to their fair value on that date. Subsequent to the transfer to the available-for-sale category, the investment securities and mortgage-backed securities were sold, and net realized gains of $74,721 were recognized. (3) MORTGAGE-BACKED SECURITIES Mortgage-backed securities at June 30, 1997 and 1996, are summarized as follows:
1997 ------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Loss Gain Value --------- ---------- ---------- --------- Held to maturity FHLMC mortgage-backed securities $ 504,903 5,049 - 509,952 Accrued interest receivable 6,627 - - 6,627 ------- ----- ------- ------- $ 511,530 5,049 - 516,579 ------- ----- ------- ------- ------- ----- ------- ------- Due after ten years $ 511,530 5,049 - 516,579 ------- ----- ------- ------- ------- ----- ------- -------
(Continued) 24 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements
1996 ----------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gain Loss Value ----------- ---------- ---------- --------- Held to maturity FHLMC mortgage-backed securities $ 628,640 11,148 - 639,788 Accrued interest receivable 8,382 - - 8,382 ----------- ------ -------- --------- $ 637,022 11,148 - 648,170 ----------- ------ -------- --------- ----------- ------ -------- --------- Due after ten years $ 637,022 11,148 - 648,170 ----------- ------ -------- --------- ----------- ------ -------- --------- Available for sale FHLMC mortgage-backed securities $ 7,963,363 - (233,739) 7,729,624 Accrued interest receivable 41,608 - - 41,608 Unearned discount (157,867) - - (157,867) ----------- ------ -------- --------- $ 7,847,104 - (233,739) 7,613,365 ----------- ------ -------- --------- ----------- ------ -------- --------- Due after ten years $ 7,847,104 - (233,739) 7,613,365 ----------- ------ -------- --------- ----------- ------ -------- ---------
(4) LOANS RECEIVABLE HELD FOR LONG-TERM INVESTMENT Loans receivable held for long-term investment at June 30, 1997 and 1996, consist of the following: 1997 1996 ---- ---- Real estate mortgages One-to-four family residential $ 128,186,837 98,437,543 Home equity line of credit 16,941,154 8,748,668 Multifamily residential 31,090,035 30,607,353 Commercial 84,940,296 72,542,642 Land 32,045,277 30,685,999 Construction 82,610,430 76,725,176 ----------- ----------- Total real estate mortgages 375,814,029 317,747,381 Consumer 3,595,550 2,356,776 ----------- ----------- 379,409,579 320,104,157 Accrued interest receivable 2,086,288 1,615,633 Deferred loan origination fees (1,717,859) (2,021,580) Unearned discount (47,715) (165,295) Undisbursed portion of loan proceeds (35,653,190) (38,649,250) Allowance for loan losses (2,674,537) (2,564,720) ----------- ----------- $ 341,402,566 278,318,945 ----------- ----------- ----------- ----------- (Continued) 25 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements A summary of the changes in the allowance for loan losses for the years ended June 30, 1997, 1996, and 1995, is as follows (write-offs include transfers to real estate owned): Balance at June 30, 1994 $ 2,074,553 Provision charged to operations 416,000 Write-offs (94,455) Recoveries 6,000 --------- Balance at June 30, 1995 2,402,098 Provision charged to operations 417,000 Write-offs (265,361) Recoveries 10,983 --------- Balance at June 30, 1996 2,564,720 Provision charged to operations 187,000 Write-offs (197,875) Recoveries 120,692 --------- Balance at June 30, 1997 $ 2,674,537 --------- --------- 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: 1997 1996 ---- ---- Loans on nonaccrual status Real estate mortgages One-to-four family residential $ 918,000 1,500,000 Construction and land 3,179,000 612,000 Commercial - 160,000 Consumer 40,000 80,000 --------- --------- Total loans on nonaccrual status 4,137,000 2,352,000 --------- --------- Past due loans on accrual status Real estate mortgages Construction and land 476,000 95,000 --------- --------- Total past due loans on accrual status 476,000 95,000 --------- --------- Total past due loans $ 4,613,000 2,447,000 --------- --------- --------- --------- It is the Bank's policy to classify as nonaccruing any loan where less than the full required interest payment is made and to not record into income partial interest payments. During the years ended June 30, 1997 and 1996, gross interest income of $310,162 and $331,395, 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, 1997 and 1996, the recorded investment in loans which have been identified as being impaired and have been evaluated in accordance with Statement of Financial Accounting Standards No. 114 and No. 118 totaled $4,137,000 and $2,352,000, respectively. Included in the impaired amount at June 30, 1997 and 1996, is $159,863 and $480,840, respectively, related to loans with a corresponding valuation allowance of $68,763 and $393,730, respectively. The Company recognized no interest on impaired loans in 1997, 1996, and 1995 (during the portion of the respective years that they were impaired). (Continued) 26 PVF CAPITAL CORP. AND SUBDIARIES Notes to Consolidated Financial Statements Average impaired loans for the years ended June 30, 1997, 1996, and 1995 amounted to $3,245,000, $2,979,000, and $3,515,000, respectively. (5) LOANS RECEIVABLE HELD FOR SALE Loans receivable held for sale at June 30, 1997 and 1996, consist of the following:
1997 ----------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gain Loss Value ----------- ---------- ---------- --------- Real estate mortgages $ 721,502 14,286 - 735,788 Deferred loan origination fees (11,898) - - (11,898) ------- ------ ------- ------- $ 709,604 14,286 - 723,890 ------- ------ ------- ------- ------- ------ ------- ------- 1996 ----------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gain Loss Value ----------- ---------- ---------- --------- Real estate mortgages $ 11,249,868 - (13,314) 11,236,554 Accrued interest receivable 43,188 - - 43,188 Deferred loan origination fees (76,037) - - (76,037) ---------- -------- ------ ---------- $ 11,217,019 - (13,314) 11,203,705 ---------- -------- ------ ---------- ---------- -------- ------ ----------
Mortgage banking activities, net, for each of the years in the three-year period ended June 30, 1997, consist of the following:
1997 1996 1995 ---- ---- ---- Mortgage loan servicing fees $ 580,328 541,759 560,379 Amortization of mortgage servicing rights (168,083) - - Amortization of deferred premiums - - (35,685) Gross realized Gains on sales of loans 975,826 831,283 144,827 Losses on sales of loans (578,053) (347,142) (27,742) Gains on sales of mortgage-backed securities 16,673 21,386 - Losses on sales of mortgage-backed securities (81,759) (40,625) (606,856) Market valuation provision for losses on loans held for sale (176,514) (82,004) (115,000) Market valuation recoveries 94,584 - 986,434 ------- ------- ------- $ 663,002 924,657 906,357 ------- ------- ------- ------- ------- -------
(Continued) 27 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements A summary of the changes in the allowance for mortgage banking market value losses for the years ended June 30, 1997, 1996, and 1995 is as follows: 1997 1996 1995 ---- ---- ---- Balance at beginning of year $ 13,314 - 871,434 Market valuation provision for losses on loans held for sale 176,514 82,004 115,000 Market valuation loss on loans and mortgage - backed securities sold (95,244) - - Recoveries (94,584) - (986,434) Discount on loans transferred to held for investment - (68,690) - ------- ------ ------- Balance at end of year $ - 13,314 - ------- ------ ------- ------- ------ ------- At June 30, 1997, 1996, and 1995, the Bank was servicing whole and participation mortgage loans for others aggregating approximately $195,250,000; $171,043,000; and $156,423,000, respectively. The Bank had $2,186,100 and $2,431,750 at June 30, 1997 and 1996, respectively, of funds collected on mortgage loans serviced for others due to investors, which is included in accrued expenses and other liabilities. Originated mortgage servicing rights capitalized and amortized during the years ended June 30, 1997 and 1996, as a result of the adoption of Statement of Financial Accounting Standards No. 122, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS, and No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, were as follows: 1997 1996 ---- ---- Beginning balance $ 241,000 - Originated 378,000 241,000 Amortized (168,000) - ------- ------- Ending balance 451,000 241,000 ------- ------- ------- ------- Estimated fair value $ 865,481 241,000 ------- ------- ------- ------- No valuation allowance has been established for mortgage servicing rights as there has been no impairment on their rights. (6) OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment at cost, less accumulated depreciation and amortization at June 30, 1997 and 1996, are summarized as follows: 1997 1996 ---- ---- Land and land improvements $ 207,092 520,402 Building and building improvements 1,059,793 1,479,913 Leasehold improvements 1,457,711 1,334,532 Furniture and equipment 2,961,682 3,040,041 --------- --------- 5,686,278 6,374,888 Less accumulated depreciation and amortization (3,803,888) (3,803,322) --------- --------- $ 1,882,390 2,571,566 --------- --------- --------- --------- (Continued) 28 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (7) DEPOSITS Deposit balances at June 30, 1997 and 1996, are summarized by interest rate as follows:
1997 1996 ------------------ ------------------ Amount % Amount % ------ -- ------ -- NOW and money market accounts Noninterest bearing $ 5,619,988 1.9% 5,528,238 2.0% 2.00 - 5.00% 19,963,938 6.9 19,807,255 7.3 ----------- ----- ----------- ----- 25,583,926 8.8 25,335,493 9.3 Passbook savings 3.00 - 5.00% 31,585,818 11.0 31,882,656 11.8 Certificates of deposit 2.50 - 2.99% 456,618 .2 7,455 - 3.00 - 3.99 - - - - 4.00 - 4.99 12,352,923 4.2 23,125,606 8.5 5.00 - 5.99 119,613,292 41.5 124,808,178 46.1 6.00 - 6.99 82,592,866 28.7 46,387,193 17.1 7.00 - 7.99 15,906,866 5.5 19,333,358 7.1 8.00 - 8.99 170,361 .1 157,173 0.1 9.00 - 9.99 7,004 - 7,973 - ----------- ----- ----------- ----- 231,099,930 80.2 213,826,936 78.9 ----------- ----- ----------- ----- $288,269,674 100.0% 271,045,085 100.0% ----------- ----- ----------- ----- ----------- ----- ----------- ----- Weighted average rate on deposits 5.22% 5.06% ---- ---- ---- ---- 1997 1996 ------------------ ------------------ Amount % Amount % ------ -- ------ -- Remaining term to maturity of certificates of deposit 12 months or less $172,492,046 74.6% 166,412,661 77.8% 13 to 24 months 32,592,344 14.1 15,023,122 7.0 25 to 36 months 20,728,309 9.0 10,722,530 5.0 Over 36 months 5,287,231 2.3 21,668,623 10.2 ----------- ----- ----------- ----- $231,099,930 100.0% 213,826,936 100.0% ----------- ----- ----------- ----- ----------- ----- ----------- ----- Weighted average rate on certificates of deposit 5.90% 5.76% ---- ---- ---- ----
Time deposits in amounts of $100,000 or more totaled $48,907,331 and $36,771,491 at June 30, 1997 and 1996, respectively. Interest expense on deposits is summarized as follows: 1997 1996 1995 ---- ---- ---- NOW accounts $ 529,889 414,869 362,059 Passbook accounts 867,687 865,170 910,723 Certificates of deposit 12,559,967 13,608,780 10,189,610 ---------- ---------- ---------- $ 13,957,543 14,888,819 11,462,392 ---------- ---------- ---------- ---------- ---------- ---------- (Continued) 29 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (8) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF CINCINNATI Advances from the Federal Home Loan Bank of Cincinnati, with maturities and interest rates thereon at June 30, 1997 and 1996, were as follows: Maturity Interest Rate 1997 1996 -------- ------------- ---- ---- December 1996 5.25 $ - 16,000,000 March 1998 5.50 5,000,000 5,000,000 March 2001 5.93 5,000,000 5,000,000 February 2003 6.00 500,000 500,000 February 2006 6.05 905,424 981,651 September 1997 set daily (1) 26,000,000 - March 1999 6.50 10,000,000 - ---------- ---------- $ 47,405,424 27,481,651 ---------- ---------- ---------- ---------- Weighted average interest rate 6.39% 5.46% ---- ---- ---- ---- (1) The rate as of June 30, 1997 was 6.63% The Bank maintains two lines of credit, totaling $70,000,000, with the Federal Home Loan Bank of Cincinnati (FHLB). The $40,000,000 repurchase line matures in September 1997. The Bank has chosen to take daily advances from this line, with the interest rate set daily. The $30,000,000 cash management line matures in December 1997. Serving as collateral for such advances, the Bank has pledged mortgage loans with unpaid principal balances aggregating approximately $71,108,136 and $41,222,000 at June 30, 1997 and 1996, respectively. In addition, stock in the FHLB is pledged for such advances. The Bank has the capacity to borrow up to 25 percent of its assets, upon approval of the FHLB. At June 30, 1997 and 1996, the Bank had the capacity to borrow an additional $46,000,000 and $55,000,000, respectively, in FHLB advances. (9) NOTES PAYABLE Notes payable consist of the following at June 30, 1997 and 1996: Maturity Interest Rate 1997 1996 -------- ------------- ---- ---- Promissory note September 2000 9.50% $ 600,000 1,000,000 Mortgage note July 2000 9.00% 1,710,000 1,710,000 --------- --------- $ 2,310,000 2,710,000 --------- --------- --------- --------- On June 30, 1995, PVF Capital Corp. secured a mortgage note from a federally insured institution at a fixed interest rate. Interest payments are due on the first day of each month, and principal payments of $10,000 per month are due beginning in August 1998 through the date of maturity, July 2000, at which time the remaining unpaid principal balance is due and payable in full. On August 16, 1995, PVF Service Corporation, a wholly owned subsidiary of the Company, secured a promissory note from another federally insured institution at a variable interest rate that adjusts to prime plus 1 percent without notice to the Company on the effective date of each change in the lender's prime rate. Interest payments are due on the first day of each month, and principal payments of $50,000 per quarter are due commencing January 1996 through the date of maturity, September 2000, at which time any remaining unpaid principal balance is due and payable in full. Additional principal payments may be required in accordance with the terms of the note. (Continued) 30 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (10) FEDERAL INCOME TAXES AND RETAINED EARNINGS The accompanying consolidated financial statements reflect provisions for federal income taxes differing from the amounts computed by applying the U.S. federal income tax statutory rate to income before federal income taxes. These differences are reconciled as follows:
1997 1996 1995 ------------------------- ------------------------- ------------------------- Percent Percent Percent Amount of Pretax Amount of Pretax Amount of Pretax ------ Income ------ Income ------ Income ------ ------ ------ Computed expected tax $ 1,942,671 35.0 % 1,889,836 35.0% 1,610,390 35.0% Decrease in tax resulting from Book under tax bad debt deduction - - - - (108,893) (2.4) Benefit of graduated rates (55,505) (1.0) (53,995) (1.0) (46,011) (1.0) Other, net 16,483 (0.3) (222,466) (4.1) (211,486) (4.6) --------- ----- --------- ----- --------- ---- $ 1,903,649 34.3% 1,613,375 29.9% 1,244,000 27.0% --------- ----- --------- ----- --------- ---- --------- ----- --------- ----- --------- ----
The net tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30, 1997 and 1996, are: 1997 1996 ---- ---- Deferred tax assets Loan loss and other reserves $ 883,466 815,639 Other 66,170 38,954 ------- ------- Total gross deferred tax assets 949,636 854,593 ------- ------- Deferred tax liabilities Deferred loan fees 218,165 162,162 FHLB stock dividend 442,226 389,759 Unrealized gains on loan sales, net 3,140 199,325 Originated mortgage servicing asset 153,423 81,997 Bad debt reserves over base year reserves 55,433 - Other 115,033 131,227 ------- ------- Total gross deferred tax liabilities 987,420 964,470 ------- ------- Net deferred tax asset (liability) $ (37,784) (109,877) ------- ------- ------- ------- Of the deferred tax liability at June 30, 1997 and June 30, 1996, a deferred tax liability of $-0- and $79,471, respectively, is included in unrealized losses on securities available for sale. Under Statement 109, 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, 1997 or 1996. Retained earnings at June 30, 1997 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, (Continued) 31 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements merger, or acquisition of the Bank, nor if the Bank is merged or liquidated tax-free into a bank or undergoes a charter change. If the Bank fails to qualify as a bank or merges into a nonbank entity, these reserves will be recaptured into income. The favorable reserve method previously afforded to thrifts was repealed for tax years beginning after December 31, 1995. Large thrifts must switch to the specific charge-off method of section 166, while small thrifts, such as the Bank, must switch to the reserve method of section 585 (the method used by small commercial banks). In general, a thrift is required to recapture the amount of its qualifying and nonqualifying reserves in excess of its qualifying and nonqualifying base year reserves. There is an exception to the general recapture provision for small thrifts. A small thrift is required to recapture the portion of its reserves that exceeds the greater of (1) the experience method reserve computed as if the thrift had always been a small bank, or (2) the lesser of the qualifying and nonqualifying base year reserves or the contracted base year reserves. The Bank has no such excess reserves to recapture. The opening tax bad debt reserve for a small thrift for the first taxable year beginning after December 31, 1995 is the greater of the two amounts described in (1) and (2) above. A small thrift that switches to the section 585 experience method must make an annual addition to its reserve for bad debts. Under section 593, a thrift was not required to make a minimum addition to its reserve for any taxable year. (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, 1997: Year Ending June 30, -------------------- 1998 $ 323,430 1999 268,674 2000 198,614 2001 192,245 2002 192,245 Thereafter 308,213 --------- Total minimum lease payments $1,483,421 --------- --------- During the years ended June 30, 1997, 1996, and 1995, rental expense is as follows: 1997 1996 1995 ---- ---- ---- Net rental expense $ 374,420 331,941 295,145 ------- ------- ------- ------- ------- ------- (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 (Continued) 32 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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. At June 30, 1997 and 1996, the Bank had the following commitments: 1997 1996 ---- ---- Commitments to sell mortgage loans in the secondary market $ 773,000 1,169,000 Commitments to fund variable mortgage loans 29,098,000 21,945,000 Commitments to fund fixed mortgage loans 2,103,000 2,951,000 There are pending against the Company various lawsuits and claims which arise in the normal course of business. In the opinion of management, any liabilities that may result from pending lawsuits and claims will not materially affect the financial position of the Company. (13) REGULATORY CAPITAL Office of Thrift Supervision (OTS) regulations require savings institutions to maintain certain minimum levels of regulatory capital. An institution that fails to comply with its regulatory capital requirements must obtain OTS approval of a capital plan and can be subject to a capital directive and certain restrictions on its operations. At June 30, 1997, the minimum regulatory capital regulations require institutions to have tangible capital equal to 1.5 percent of adjusted total assets, a 3 percent leverage capital ratio, and an 8 percent risk-based capital ratio. At June 30, 1997, the Bank exceeded all of the aforementioned regulatory capital requirements. The Federal Deposit Insurance Corporation Improvement Act (FDICIA) was signed into law on December 19, 1991. Regulations implementing the prompt corrective action provisions of FDICIA became effective on December 19, 1992. The prompt corrective action regulations define specific capital categories based on an institution's capital ratios. The capital categories, in declining order, are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." To be considered "well capitalized," an institution must generally have a leverage ratio of at least 5 percent, a Tier 1 risk-based capital ratio of at least 6 percent, and a total risk-based capital ratio of at least 10 percent. As of June 30, 1997, the most recent notification from the OTS categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. (Continued) 33 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements At June 30, 1997 and 1996, the Bank was in compliance with regulatory capital requirements as set forth below (dollars in thousands):
Tier-1 Total Core/ Risk- Risk- Equity Tangible Leverage Based Based Capital Capital Capital Capital Capital ------- --------- --------- -------- ------- June 30, 1997 GAAP capital $ 27,604 27,604 27,604 27,604 27,604 General loan valuation allowances - - - 2,598 ------- -------- -------- ------- Regulatory capital 27,604 27,604 27,604 30,202 Total assets 375,915 ------- Adjusted total assets 375,915 375,915 ------- ------- Risk-weighted assets 284,483 284,483 -------- -------- Capital ratio 7.34% 7.34% 7.34% 9.70% 10.62% Regulatory requirement 1.50% 3.00% 8.00% Regulatory capital category Well capitalized - equal to or greater than 5.00% 6.00% 10.00% Tier-1 Total Core/ Risk- Risk- Equity Tangible Leverage Based Based Capital Capital Capital Capital Capital ------- --------- --------- -------- ------- June 30, 1996 GAAP capital $ 24,128 24,128 24,128 24,128 24,128 Unrealized depreciation or loss on securities available for sale, net 154 154 154 154 General loan valuation allowances - - - 2,228 ------- ------- -------- ------- Regulatory capital 24,282 24,282 24,282 26,510 Total assets 334,765 ------- Adjusted total assets 335,022 335,022 ------- ------- Risk-weighted assets 232,060 232,060 -------- ------- Capital ratio 7.21% 7.25% 7.25% 10.46% 11.42% Regulatory requirement 1.50% 3.00% 8.00% Regulatory capital category Well capitalized - equal to or greater than 5.00% 6.00% 10.00%
(Continued) 34 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (14) STOCK OPTIONS The Bank offered stock options to the directors and officers of the bank in 1994 and 1996. Under the 1994 plan, 83,500 options were originally granted (prior to adjustment for stock splits and dividends), which are exercisable for a ten-year period and can be exercised at any time. In 1996, 20,200 options were granted which are exercisable for a ten-year period, with 20 percent of the options vesting each year. Options were granted at fair market value and, accordingly, no charges were reflected in the salaries and employee 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. There were no options exercised during the year. An analysis of the stock option plans as of June 30, 1997 follows: Plan year 1996 1994 --------- ---- ---- Options outstanding: Total 22,220 242,576 Vested 4,444 242,576 Exercise price $ 13.64 3.34 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. In 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which defines a fair value method of accounting for stock options and similar equity instruments. Pursuant to SFAS No. 123, companies who elect not to adopt the fair value method of accounting for employee stock-based transactions are required to disclose in the footnotes to the financial statements pro forma net earnings and pro forma earnings per share as if the company had adopted the new method of accounting. The bank has elected not to adopt SFAS No. 123 as this new method of accounting did not have a material effect on either earnings or earnings per share. Therefore, pro forma disclosures are not presented. (15) FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT 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. (Continued) 35 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements
June 30, 1997 June 30, 1996 ------------------------- --------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------- ---------- ------- ----------- Assets Cash and amounts due from depository institutions $ 7,760,029 7,760,029 6,670,604 6,670,604 Interest bearing deposits 445,401 445,401 244,612 244,612 Federal funds sold 1,375,000 1,375,000 6,875,000 6,875,000 Investment securities 13,995,350 13,899,370 14,094,100 13,893,836 Mortgage-backed securities Held to maturity, net 511,530 516,579 637,022 648,170 Available for sale, net - - 7,613,365 7,613,365 Loans receivable held for Long-term investment, net 341,402,566 348,162,337 278,318,945 278,990,000 Sale, net 709,604 723,890 11,203,705 11,203,705 Stock in the Federal Home Loan Bank of Cincinnati 2,762,314 2,762,314 1,880,000 1,880,000 Liabilities Demand deposits 57,169,744 56,586,613 57,218,149 51,718,000 Time deposits 231,099,930 226,477,931 213,826,936 217,193,000 Advances from the Federal Home Loan Bank of Cincinnati 47,405,424 47,072,000 27,481,651 27,135,000 Notes payable 2,310,000 2,310,000 2,710,000 2,710,000
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. INVESTMENT AND MORTGAGE-BACKED SECURITIES. Estimated fair value for investment 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- (Continued) 36 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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, 1997 and 1996. (16) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the unaudited consolidated quarterly results of operations for 1997 and 1996 (in thousands of dollars, except per share data):
Quarters for the Year Ended June 30, 1997 (1) ---------------------------------------------------- First Second Third Fourth ----- ------ ----- ------ Interest income $ 7,536 7,662 7,733 8,032 Interest expense 4,015 4,099 4,133 4,314 ------- ------ ------ ----- Net interest income 3,521 3,563 3,600 3,718 Provision for losses on loans - - 107 80 Noninterest income 234 295 464 343 Noninterest expense 3,756 2,068 2,097 2,079 ------- ------ ------ ----- Income before taxes (1) 1,790 1,860 1,902 Federal income taxes (10) 609 638 647 ------- ------ ------ ----- Net income $ (11) 1,181 1,222 1,255 ------- ------ ------ ----- ------- ------ ------ ----- Earnings per share (2) $ 0.00 0.43 0.45 0.46 ------- ------ ------ ----- ------- ------ ------ -----
- --------------------------------- (1) The total of the four quarterly amounts may not equal the full year amount due to rounding. (2) After giving effect to a ten percent stock dividend, declared on July 30, 1997 and distributed on September 1, 1997. (Continued) 37 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements
Quarters for the Year Ended June 30, 1996 (1) ---------------------------------------------------- First Second Third Fourth ----- ------ ----- ------ Interest income $ 6,862 6,912 6,770 7,217 Interest expense 4,129 3,970 3,810 3,793 ----- ------ ----- ------ Net interest income 2,733 2,942 2,960 3,424 Provision for losses on loans 20 374 23 - Noninterest income 319 584 382 461 Noninterest expense 1,965 1,813 1,928 2,282 ----- ------ ----- ------ Income before taxes 1,067 1,339 1,391 1,603 Federal income taxes 316 420 458 420 ----- ------ ----- ------ Net income $ 751 919 933 1,183 ----- ------ ----- ------ ----- ------ ----- ------ Earnings per share (2) $ 0.27 0.34 0.34 0.43 ----- ------ ----- ------ ----- ------ ----- ------
- --------------------- (1) The total of the four quarterly amounts may not equal the full year amount due to rounding. (2) After giving effect to a ten percent stock dividend, declared on July 30, 1997 and distributed on September 1, 1997. (17) PARENT COMPANY On October 31, 1994, PVF Capital Corp. became a savings and loan holding company and the sole shareholder of Park View Federal Savings Bank. The holding company structure was created pursuant to a plan of reorganization which had been approved by the Bank's shareholders on October 26, 1994 and by regulatory authorities on September 22, 1994. Under the agreement, three shares of PVF Capital Corp. common stock were issued and exchanged for two shares of Park View Federal Savings Bank common stock outstanding as of October 31, 1994. Condensed parent company only financial information as of and for the years ended June 30, 1997 and 1996, follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION 1997 1996 ---- ---- Cash and amounts due from depository institutions $ 51,541 110,989 Prepaid expenses and other assets 364,730 292,159 Investment in subsidiaries, at equity in underlying value of net assets 26,527,063 23,136,310 ---------- ---------- Total assets $ 26,943,334 23,539,458 ---------- ---------- ---------- ---------- Notes payable $ 600,000 1,000,000 Accrued expenses and other liabilities 69,918 65,800 ---------- ---------- 669,918 1,065,800 Stockholders' equity 26,273,416 22,473,658 ---------- ---------- Total liabilities and stockholders' equity $ 26,943,334 23,539,458 ---------- ---------- ---------- ----------
(Continued) 38 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements
CONDENSED STATEMENTS OF OPERATIONS 1997 1996 1995 ---------- --------- --------- Income Mortgage banking activities $ 493,440 488,814 - Expenses Interest expense 70,136 92,513 - General and administrative 255,804 234,063 - ---------- --------- --------- 325,940 326,576 - ---------- --------- --------- Income before federal income taxes and equity in undistributed net income of subsidiaries 167,500 162,238 - Federal income taxes 57,146 55,160 10,937 ---------- --------- --------- Income (loss) before equity in undistributed net income of subsidiaries 110,354 107,078 (10,937) Equity in undistributed net income of subsidiaries 3,536,485 3,679,078 3,368,052 ---------- --------- --------- Net income $3,646,839 3,786,156 3,357,115 ---------- --------- --------- ---------- --------- --------- CONDENSED STATEMENTS OF CASH FLOWS Operating activities Net income $3,646,839 3,786,156 3,357,115 Equity in undistributed net income of subsidiaries (3,536,839) (3,679,078) (3,368,052) Other, net 50,797 (206,134) 249,257 ---------- --------- --------- Net cash provided (used) by operating activities 160,797 (99,056) 238,320 ---------- --------- --------- Investing activities Acquisition of PVF Service Corp. - - (919,649) Purchase of servicing portfolio from bank - (2,154,535) - ---------- --------- --------- Net cash used by investing activities - (2,154,535) (919,649) Financing activities Proceeds from notes payable - 1,200,000 - Repayment on note payable (400,000) (200,000) - Proceeds from exercise of stock options - 25,000 - Cash dividend (1,349) (1,098) (281,427) Dividends received from subsidiaries 300,000 1,154,535 1,148,899 ---------- --------- --------- Net cash provided by financing activities (101,349) 2,178,437 867,472 ---------- --------- --------- Net increase (decrease) in cash and cash equivalents (59,448) (75,154) 186,143 Cash and cash equivalents at beginning of year 110,989 186,143 - ---------- --------- --------- Cash and cash equivalents at end of year $ 51,541 110,989 186,143 ---------- --------- --------- ---------- --------- ---------
(Continued) 39 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (18) 401(k) SAVINGS PLAN Employees who have reached age 18 and have completed one year of eligibility service are eligible to participate in the Company's 401(k) Savings Plan. The plan allows eligible employees to contribute up to 7 percent of their compensation, with the Company matching up to 50 percent of the first 4 percent contributed by the employee, as determined by the Company for the contribution period. The plan also permits the Company to make a profit sharing contribution at its discretion up to 4 percent of the employees compensation. Participants vest in the Company's contributions as follows: 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, 1997, 1996, and 1995 was $76,300; $68,100; and $102,100, respectively. 40 NOTES PARK VIEW FEDERAL SAVINGS BANK OFFICE LOCATIONS AND HOURS 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 MENTOR OFFICE 6990 Heisley Road Mentor, Ohio 44060 (440) 944-0276 ADMINISTRATIVE OFFICER 25350 Rockside Road OPENING IN 1998 Bedford Hts., Ohio 44146 CHARDON OFFICE (440) 439-6790 400 Water Street Monday - Friday Chardon, Ohio 44024 9:00 a.m. - 5:00 p.m.
PVF CAPITAL CORP. BOARD OF DIRECTORS James W. Male Chairman of the Board John R. Male President and Chief Executive Officer Robert K. Healey Retired Stanley T. Jaros Partner Moriarty & Jaros, P.L.L. Creighton E. Miller Partner Miller, Stillman & Bartel Stuart D. Neidus Executive Vice President and Chief Financial Officer ESSEF Corporation Robert F. Urban Retired EXECUTIVE OFFICERS James W. Male Chairman of the Board John R. Male President and Chief Executive Officer C. Keith Swaney Vice President and Treasurer Jeffrey N. Male Vice President and Corporate Secretary PARK VIEW FEDERAL SAVINGS BANK EXECUTIVE OFFICERS John R. Male President and Chief Executive Officer C. Keith Swaney Executive Vice President and Chief Financial Officer Jeffrey N. Male Senior Vice President Carol S. Porter Corporate Secretary Edward B. Debevec Treasurer OTHER OFFICERS Anne M. Johnson Vice President Adeline Novak Vice President Robert J. Papa Vice President John E. Schimmelmann Vice President Robert D. Toth Vice President GENERAL INFORMATION INDEPENDENT CERTIFIED ACCOUNTANTS KPMG Peat Marwick LLP 1500 National City Center 1900 East Ninth Street Cleveland, Ohio 44114 GENERAL COUNSEL Moriarty & Jaros, P.L.L. 30195 Chagrin Boulevard Suite 110 North Pepper Pike, Ohio 44124 TRANSFER AGENT AND REGISTRAR Fifth Third Bank Fifth Third Center 38 Fountain Square Cincinnati, Ohio 45263 SPECIAL COUNSEL Housley Kantarian & Bronstein, P.C. 1220 19th Street, N.W., Suite 700 Washington, D.C. 20036 ANNUAL MEETING The 1997 Annual Meeting of Stockholders will be held on October 20, 1997 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, 1997 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. [LOGO] 2618 North Moreland Blvd., Cleveland, Ohio 44120, (216) 991-9600 EX-21 3 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Parent - ------ PVF Capital Corp. State or Other Jurisdiction of Percentage Subsidiaries (1) Incorporation Ownership - ------------------ -------------- --------- Park View Federal Savings Bank Ohio 100% PVF Service Corporation Ohio 100% PVF Mortgage Corp. Ohio 100% PVF Community Development Corp. Ohio 100% Mid Pines Land Co. Ohio 100% - ------------------------ (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. EX-23 4 EXHIBIT 23 CONSENT OF KPMG PEAT MARWICK LLP 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 Forms S-8 of PVF Capital Corp. of our report dated July 23, 1997, relating to the consolidated statements of financial condition of PVF Capital Corp. and subsidiaries as of June 30, 1997 and 1996, 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, 1997 which report appears in the June 30, 1997 annual report on Form 10-K of PVF Capital Corp. /s/ KPMG Peat Marwick LLP Cleveland, Ohio September 12, 1997 EX-27 5 EXHIBIT 27
9 This schedule contains summary financial information extracted from the Statement of Condition and the Statement of Operation for the period ended June 30, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS JUN-30-1997 JUL-01-1996 JUN-30-1997 7,760 445 1,375 0 0 13,995 13,899 342,112 2,675 373,081 288,270 31,000 8,823 18,715 0 0 26 26,247 373,081 29,704 1,259 0 30,963 13,958 16,561 14,402 187 0 10,000 5,550 0 0 0 3,647 1.43 1.33 3.840 4,137 476 0 918 2,565 198 121 2,675 2,675 0 2,598
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