0000950152-01-504697.txt : 20011009 0000950152-01-504697.hdr.sgml : 20011009 ACCESSION NUMBER: 0000950152-01-504697 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010927 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: 1934 Act SEC FILE NUMBER: 000-24948 FILM NUMBER: 1745704 BUSINESS ADDRESS: STREET 1: 2618 N MORELAND BLVD CITY: CLEVELAND HEIGHTS STATE: OH ZIP: 44120 BUSINESS PHONE: 4109919600 MAIL ADDRESS: STREET 1: 25350 ROCKSIDE ROAD CITY: BEDFORD HEIGHTS STATE: OH ZIP: 44146 10-K 1 l90424ae10-k.txt PVF CAPITAL CORP. 10-K/FISCAL YEAR END 6-30-01 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2001 [ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- --------------- COMMISSION FILE NUMBER 0-24948 PVF CAPITAL CORP. -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) OHIO 34-1659805 ----------------------------------------- ---------------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 25350 ROCKSIDE ROAD, BEDFORD HTS., OHIO 44146 ----------------------------------------- ---------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (216) 991-9600 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK (PAR VALUE $.01 PER SHARE) --------------------------------------- Title of Class Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The registrant's voting stock is listed on the NASDAQ SmallCap 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 SmallCap Market on September 7, 2001, was $48,588,828. For purposes of this calculation, it is assumed that directors, executive officers and 5% stockholders of the registrant are affiliates. As of September 7, 2001, the registrant had 5,213,172 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Annual Report to Stockholders for the Fiscal Year Ended June 30, 2001. (Parts II and IV) 2. Portions of Proxy Statement for the 2001 Annual Meeting of Stockholders. (Part III) 2 PART I ITEM 1. BUSINESS GENERAL PVF Capital Corp. ("PVF" or the "Company") is the holding company for Park View Federal Savings Bank ("Park View Federal" or the "Bank"). PVF owns and operates Park View Federal Savings Bank, PVF Service Corporation ("PVFSC"), a real estate subsidiary, and Mid Pines Land Company ("MPLC"), a real estate subsidiary. In addition, PVF owns PVF Holdings, Inc., a financial services subsidiary, currently inactive, and two other subsidiaries chartered for future operation, but which are also currently inactive. Park View Federal is a federal stock savings bank operating through twelve offices located in Cleveland and surrounding communities. Park View Federal has operated continuously for 80 years, having been founded as an Ohio chartered savings and loan association in 1920. PVF Capital Corp's main office is located at 30000 Aurora Road, Solon, Ohio 44139, and its telephone number is (440) 248-7171. 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 noninterest expense such as compensation and employee benefits, office occupancy expenses and other miscellaneous expenses. Funds for these activities are provided principally by deposits, Federal Home Loan Bank advances, repayments of outstanding loans, sales of loans and mortgage-backed securities and operating revenues. The business of PVF consists primarily of the business of the Bank. Park View Federal is subject to examination and comprehensive regulation by the Office of Thrift Supervision (the "OTS"), and the Bank's savings deposits are insured up to applicable limits by the Savings Association Insurance Fund (the "SAIF"), which is administered by the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is a member of and owns capital stock in the Federal Home Loan Bank (the "FHLB") of Cincinnati, which is one of 12 regional banks in the FHLB System. The Bank is further subject to regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") governing reserves to be maintained and certain other matters. See "-- Regulation of the Bank." MARKET AREA The Bank conducts its business through twelve offices located in Cuyahoga, Summit, Medina, 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, 2001, over 98% of the Bank's net loan portfolio and over 98% of the Bank's deposits were in the Bank's market area. Park View Federal has targeted business development efforts in suburban sectors of its market area, such as Lake, Geauga, Medina and Summit Counties, where demographic growth has been stronger. The economy in the Cleveland area historically has been based on the manufacture of durable goods. Though manufacturing continues to remain an important sector of the economy, diversification has occurred in recent years with the growth of service, financial and wholesale and retail trade industries. 2 3 LENDING ACTIVITIES Loan Portfolio Composition The Company's net loan portfolio, including mortgage-backed securities, totaled $597.9 million at June 30, 2001, representing 81.2% of total assets at such date. It is the Company's policy to concentrate its lending in its market area. Set forth below is certain data relating to the composition of the Company's loan portfolio by type of loan on the dates indicated. As of June 30, 2001, the Company had no concentrations of loans exceeding 10% of total loans other than as disclosed below.
AT JUNE 30, -------------------------------------------------------------------- 2001 2000 1999 -------------------- -------------------- -------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT --------- ------- --------- ------- --------- ------- (DOLLARS IN THOUSANDS) Real estate loans: Single-family residential (1) .............. $ 213,525 35.71% $ 208,183 39.61% $ 141,308 35.41% Multi-family residential ................... 43,772 7.32 42,503 8.09 34,075 8.54 Commercial ................................. 125,769 21.03 115,226 21.92 105,427 26.42 Home equity lines of credit ................ 37,597 6.29 30,978 5.89 22,956 5.75 Construction ............................... 135,544 22.67 128,310 24.41 101,032 25.32 Land ....................................... 58,833 9.84 41,583 7.91 42,003 10.53 Mortgage-backed securities held to maturity ... 17,900 2.99 1,214 0.23 1,733 0.43 Consumer loans: Property improvement ....................... 0 0.00 1 0.00 6 0.00 Passbook loans ............................. 540 0.09 582 0.11 552 0.14 Mobile home ................................ 87 0.01 105 0.02 146 0.04 Other ...................................... 20,378 3.41 15,783 3.00 7,095 1.78 --------- ------ --------- ------ --------- ------ 653,945 109.37 584,468 111.20 456,333 114.36 --------- --------- --------- Less: Accrued interest receivable ................ 3,627 0.61 3,027 0.58 2,202 0.55 Deferred loan fees ......................... (2,345) (0.39) (2,130) (0.41) (1,951) (0.49) Unearned discount .......................... (4) 0.00 (16) 0.00 (23) (0.01) Undisbursed discount FHLMC MBS ............. 11 0.00 (6) 0.00 (11) 0.00 Unrealized loss FHLMC MBS .................. 0 0.00 0 0.00 0 0.00 Undisbursed portion of loan proceeds ....... (53,795) (9.00) (56,288) (10.71) (54,864) (13.75) Market valuation reserve ................... 0 0.00 (45) (0.01) 0 0.00 Allowance for loan losses .................. (3,520) (0.59) (3,387) (0.64) (2,630) (0.66) --------- ------ --------- --------- Total other items .......................... (56,026) (9.37) (58,845) (11.20) (57,277) (14.36) --------- ------ --------- ------ --------- ------ Total loans and mortgage-backed securities $ 597,919 100.00% $ 525,623 100.00% $ 399,056 100.00% ========= ====== ========= ====== ========= ====== AT JUNE 30, --------------------------------------------- 1998 1997 -------------------- ---------------------- AMOUNT PERCENT AMOUNT PERCENT --------- ------- --------- --------- (DOLLARS IN THOUSANDS) Real estate loans: Single-family residential (1) .............. $ 142,233 38.07% $ 128,908 37.62% Multi-family residential ................... 31,493 8.43 31,090 9.07 Commercial ................................. 94,588 25.32 84,940 24.79 Home equity lines of credit ................ 18,762 5.02 16,941 4.94 Construction ............................... 96,063 25.71 82,611 24.11 Land ....................................... 30,462 8.15 32,045 9.35 Mortgage-backed securities held to maturity ... 2,949 0.79 505 0.15 Consumer loans: Property improvement ....................... 20 0.01 34 0.01 Passbook loans ............................. 614 0.16 615 0.18 Mobile home ................................ 213 0.06 191 0.06 Other ...................................... 3,040 .81 2,756 .80 --------- ------ --------- --------- 420,427 112.53 380,636 111.08 --------- --------- Less: Accrued interest receivable ................ 2,217 0.59 2,097 0.61 Deferred loan fees ......................... (1,689) (0.45) (1,733) (0.51) Unearned discount .......................... (36) (0.01) (48) (0.01) Undisbursed discount FHLMC MBS ............. (16) 0.00 0 0.00 Unrealized loss FHLMC MBS .................. 0 0.00 0 0.00 Undisbursed portion of loan proceeds ....... (44,622) (11.94) (35,653) (10.41) Market valuation reserve ................... 0 0.00 0 0.00 Allowance for loan losses .................. (2,687) (0.72) (2,675) (0.76) --------- --------- Total other items .......................... (46,833) (12.53) (38,012) (11.08) --------- ------ --------- --------- Total loans and mortgage-backed securities $ 373,594 100.00% $ 342,624 100.00% ========= ====== ========= =========
---------------- (1) Includes loans held for sale in the amounts of $6.2 million, $10.8 million, $1.7 million, $1.6 million and $0.7 million at June 30, 2001, 2000, 1999, 1998 and 1997 respectively. 3 4 The following table presents at June 30, 2001 the amounts of loan principal repayments scheduled to be received by the Company 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 THE YEAR THROUGH FIVE DUE FIVE YEARS ENDING YEARS AFTER OR MORE AFTER JUNE 30, JUNE 30, JUNE 30, 2002 2001 2001 ---- ---- ---- (IN THOUSANDS) Real estate mortgage loans................... $ 211,965 $ 224,032 $ 56,277 Real estate construction loans............... 81,748 0 0 Consumer loans............................... 3,732 608 1,433 ---------- ----------- ---------- Total.................................... $ 297,445 $ 224,640 $ 57,710 ========== =========== ==========
The following table apportions the dollar amount of the loans outstanding at June 30, 2001 that are due or repricing after June 30, 2002 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 (1)............... $ 53,134 $ 227,175 $ 280,309 Consumer loans............................... 2,041 0 2,041 ---------- ----------- ---------- Total.................................... $ 55,175 $ 227,175 $ 282,350 ========== =========== ==========
----------- (1) Includes real estate mortgage loans and construction loans 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 may be substantially less than their contractual terms because of prepayments. In addition, due-on-sale clauses on loans generally give the Bank the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase, however, when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decreases when rates on existing mortgages are substantially higher than current mortgage loan rates. Origination, Purchase and Sale of Loans The Bank generally has authority to originate and purchase loans secured by real estate located throughout the United States. Consistent with its emphasis on being a community-oriented financial institution, the Bank concentrates its lending activities in its market area. The Bank originates all fixed-rate, single-family mortgage loans in conformity with the Federal Home Loan Mortgage Corporation (the "FHLMC") and Federal National Mortgage Association (the "FNMA") guidelines so as to permit their being swapped with the FHLMC or the FNMA in exchange for mortgage-backed securities secured by such loans or their sale in the secondary market. All such loans are sold or swapped, as the case may be, with servicing retained, and are sold in furtherance of the Bank's goal of better matching the maturities and interest rate-sensitivity of its assets and liabilities. The Bank generally retains responsibility for collecting and remitting loan payments, inspecting the properties, making certain insurance and tax payments on behalf of borrowers and otherwise servicing 4 5 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, ----------------------------------- 2001 2000 1999 ---- ---- ---- (IN THOUSANDS) Loans originated: Real estate: Residential and commercial (1).................... $ 156,913 $ 123,663 $ 130,515 Construction (1).................................. 130,227 134,681 104,911 Land.............................................. 38,448 22,587 28,814 Savings Deposit....................................... 735 585 209 Other................................................. 1,458 1,371 1,202 --------- ---------- ---------- Total loans originated......................... $ 327,781 $ 282,887 $ 265,651 ========= ========== ========== Loans refinanced...................................... $ 22,952 $ 6,457 $ 13,699 Loans and mortgage-backed securities sold............. $ 106,048 $ 37,826 $ 107,978 ========= ========== ==========
------------------- (1) Includes single-family and multi-family residential and commercial loans. Loan Underwriting Policies The Bank's lending activities are subject to the Bank's written, nondiscriminatory underwriting standards and to loan origination procedures prescribed by the Bank's Board of Directors and its management. Detailed loan applications are obtained to determine the borrower's ability to repay, and the more significant items on these applications are verified through the use of credit reports, financial statements and confirmations. Property valuations are generally performed by an internal staff appraiser and by independent outside appraisers approved by the Bank's Board of Directors. The Bank's Loan Underwriter has authority to approve all fixed-rate single-family residential mortgage loans which meet FHLMC and FNMA underwriting guidelines and those adjustable-rate single-family residential mortgage loans which meet the Bank's underwriting standards and are in amounts of less than $400,000. The Board of Directors has established a Loan Committee comprised of the Chairman of the Board, President, Senior Vice President, other management and an outside director of the Bank. This committee reviews all loans approved by the underwriter and has the authority to approve adjustable-rate single-family residential loans up to $750,000 and construction and commercial real estate loans up to $500,000. All loans in excess of the above amounts must be approved by the Board of Directors. All loans secured by savings deposits can be approved by lending officers based in the Bank's branch offices. It is the Bank's policy to have a mortgage creating a valid lien on real estate and to generally obtain a title insurance policy which insures that the property is free of prior encumbrances. When a title insurance policy is not obtained, an attorney's certificate is received. Borrowers must also obtain hazard insurance policies prior to closing and, when the property is in a flood plain as designated by the Department of Housing and Urban Development, paid flood insurance policies. Most borrowers are also required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes and homeowners insurance. The Bank is permitted to lend up to 100% of the appraised value of the real property securing a mortgage loan. However, if the amount of a residential loan originated or refinanced exceeds 90% of the appraised value, the Bank is required by federal regulations to obtain private mortgage insurance on that portion of the principal amount of the loan that exceeds 80% of the appraised value of the property. The Bank will make a single-family residential mortgage loan with up to a 97% loan-to-value ratio if the required private mortgage insurance is obtained. The Bank generally limits the loan-to-value ratio on multi-family and commercial real estate mortgages to 75%. 5 6 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, 2001, $213.5 million, or 35.7%, of the Bank's net loan and mortgage-backed securities portfolio consisted of single-family, conventional mortgage loans, of which approximately $178.7 million, or 83.7%, carried adjustable interest rates. Included in this amount are $10.9 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 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 $169.5 million, or 28.4%, of the total loan and mortgage-backed securities portfolio at June 30, 2001. 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 6 7 suppliers and are made on a percentage of completion basis. At June 30, 2001, $135.5 million, or 22.7%, of the Bank's total loan and mortgage-backed securities portfolio consisted of construction loans, virtually all of which were secured by single-family residences. Prior to making a commitment to fund a loan, the Bank requires both an appraisal of the property by appraisers approved by the Board of Directors and a study of the feasibility of the proposed project. The Bank also reviews and inspects each project at the commencement of construction and prior to every disbursement of funds during the term of the construction loan. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. Land Loans. The Bank originates loans to builders and developers for the acquisition and/or development of vacant land. The proceeds of the loan are used to acquire the land and/or to make site improvements necessary to develop the land into saleable lots. The Bank will not originate land loans to individuals wishing to speculate in the value of land, and limits such loans to borrowers who have agreed to begin development of the property within two years of the date of the loan. The term of the loans are generally limited to two years. Repayments are made on the loans as the developed lots are sold. Land development and acquisition loans involve significant additional risks when compared with loans on existing residential properties. These loans typically involve large loan balances to single borrowers, and the payment experience is dependent on the successful development of the land and the sale of the lots. These risks can be significantly impacted by supply and demand conditions. To minimize these risks, Park View Federal generally limits the loans to builders and developers with whom it has substantial experience or who are otherwise well-known to the Bank, and it obtains the financial statements and personal guarantees of such builders and developers. The Bank also requires feasibility studies and market analyses to be performed with respect to the project. The amount of the loan is limited to the lesser of 80% of the estimated gross sell out value or 100% of the discounted value. If land is being acquired, the amount of the loan to be used for such purposes is limited to 75% of the cost of the land. All of these loans originated are within the Bank's market area. The Bank had $58.8 million, or 9.8% of its net loan and mortgage-backed securities portfolio, in land loans at June 30, 2001. 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, 2001, the Bank had $37.6 million in home equity lines of credit, which amounted to 6.3% 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, 2001, the Bank reported net loan servicing fee income of $456,143, and at June 30, 2001 was servicing $351.7 million of loans for others. The Bank has been able to keep delinquencies on loans serviced for others to a relatively low level of below 1% of the aggregate outstanding balance of loans serviced as a result of its policy to limit servicing to loans it originated and subsequently sold to the FHLMC and the FNMA. Because of the success the Bank has experienced in this area and because it has data processing equipment that will allow it to expand its portfolio of serviced loans without incurring significant incremental expenses, the Bank intends in the future to augment its portfolio of loans serviced by continuing to originate and either swap such fixed-rate, single-family residential mortgage loans with the FHLMC and the FNMA in exchange for mortgage-backed securities or sell such loans for cash, while retaining servicing. 7 8 On August 18, 1995, the Bank sold $146.0 million in FHLMC servicing to PVF and recognized no gain due to the transaction being an intercompany sale. PVF then entered into an agreement with the Bank to service the underlying loans for $8.00 per loan monthly. PVF borrowed $1.2 million to finance the purchase of this servicing. The servicing income from these loans will provide sufficient funds to pay the servicing fee to the Bank. At June 30, 2001 the Bank was servicing $47.2 million in FHLMC loans for PVF. In addition to loan servicing fees, the Bank receives fees in connection with loan commitments and originations, loan modifications, late payments and changes of property ownership and for miscellaneous services related to its loans. Loan origination fees are calculated as a percentage of the amount loaned. The Bank typically receives fees of up to three points (one point being equivalent to 1% of the principal amount of the loan) in connection with the origination of fixed-rate and adjustable-rate residential mortgage loans. All loan origination fees are deferred and accreted into income over the contractual life of the loan according to the interest method of recognizing income. If a loan is prepaid, refinanced or sold, all remaining deferred fees with respect to such loan are taken into income at such time. 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, 2001 and June 30, 2000, the Bank had $6,152,000 and $10,738,000 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 at June 30, 2000. 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 nonaccrual status, and formal legal proceedings are commenced to collect amounts owed. 8 9 The following table sets forth information with respect to the Bank's nonperforming loans and other problem assets at the dates indicated.
AT JUNE 30, ----------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Nonaccruing loans (1): Real estate ...................................... $5,385 $4,842 $3,639 $3,262 $4,097 Consumer loans ................................... 0 0 0 15 40 ------ ------ ------ ------ ------ Total ........................................ $5,385 $4,842 $3,639 $3,277 $4,137 ====== ====== ====== ====== ====== Accruing loans which are contractually past due 90 days or more: Real estate .................................. $ 20 $ 935 $ 248 $ 163 $ 476 ------ ------ ------ ------ ------ Total ...................................... $ 20 $ 935 $ 248 $ 163 $ 476 ====== ====== ====== ====== ====== Total nonaccrual and 90 days past due loans ............................. $5,405 $5,777 $3,887 $3,440 $4,613 ====== ====== ====== ====== ====== Ratio of non-performing loans to total loans and mortgage-backed securities ................. 0.90% 1.10% .97% 0.92% 1.35% ====== ====== ====== ====== ====== Other non-performing assets (2) .................. $ 547 $ 488 $ 168 $ 699 $ 0 ====== ====== ====== ====== ====== Total non-performing assets ...................... $5,952 $6,265 $4,055 $4,139 $4,613 ====== ====== ====== ====== ====== Total non-performing assets to total assets ................................... 0.81% 1.02% 0.90% 0.96% 1.24% ====== ====== ====== ====== ======
------------- (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. Non-accrual include 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. It is the Bank's policy to not record into income partial interest payments. During the year ended June 30, 2001, gross interest income of $770,000 would have been recorded on loans accounted for on a non-accrual basis if such loans had been current throughout the period. No interest was included in income on non-accruing loans. At June 30, 2001, non-accruing loans consisted of 31 loans totaling $5.4 million, and included 12 conventional mortgage loans aggregating $1.5 million, 11 land loans in the amount of $2.3 million, 4 construction loans in the amount of $0.5 million, 3 commercial loan in the amount of $1.0 million and 1 multi-family loans in the amount of $0.1 million. Management has reviewed its non-accruing loans and believes that the allowance for loan losses is adequate to absorb probable losses on these loans. Real estate acquired by the Bank as a result of foreclosure is classified as real estate owned until such time as it is sold. At June 30, 2001, the Bank had three real estate owned properties totaling $547,000. The properties consist of two residential construction properties and one commercial property. 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 President and 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 9 10 placed on a "watch-list" of potential problem loans which are considered to have more than normal credit risk. Currently, general loss allowances (up to 1.25% of risk-based assets) established to cover losses related to assets classified substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses do not qualify as regulatory capital. See "Regulation of the Bank -- 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, 2001, total non-accrual and 90 days past due loans and other non-performing assets were $6.0 million, of which amount approximately $5.2 million were classified as substandard. For additional information, see "-- Non-Performing Loans and Other Problem Assets" and Note 4 of Notes to Consolidated Financial Statements. In originating loans, the Bank recognizes that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan, general economic conditions and, in the case of a secured loan, the quality of the security for the loan. It is management's policy to maintain an adequate allowance for loan losses based on, among other things, the Bank's and the industry's historical loan loss experience, evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. The Bank increases its allowance for loan losses by charging provisions for loan losses against the Bank's income. General allowances are made pursuant to management's assessment of risk in the Bank's loan portfolio as a whole. Specific allowances are provided for individual loans when ultimate collection is considered questionable by management after reviewing the current status of loans which are contractually past due and considering the net realizable value of the security for the loan. Management continues to actively monitor the Bank's asset quality and to charge off loans against the allowance for loan losses when appropriate or to provide specific loss reserves when necessary. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations. The following table summarizes the activity in the allowance for loan losses for the periods indicated.
YEAR ENDED JUNE 30, --------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Balance at beginning of year ................... $3,388 $2,630 $2,687 $2,675 $2,565 ------ ------ ------ ------ ------ Charge-offs: Mortgage loans ............................... 106 93 42 238 174 Consumer loans (1) ........................... 7 0 20 0 24 ------ ------ ------ ------ ------ Total charge-offs .......................... 113 93 62 238 198 ------ ------ ------ ------ ------ Recoveries: Mortgage loans ............................... 20 1 5 4 117 Consumer loans (1) ........................... 0 0 0 0 4 ------ ------ ------ ------ ------ Total recoveries ........................... 20 1 5 4 121 ------ ------ ------ ------ ------ Net charge-offs ................................ 93 92 57 234 77 ------ ------ ------ ------ ------ Provision charged to income .................... 225 850 0 246 187 ------ ------ ------ ------ ------ Balance at end of year ......................... $3,520 $3,388 $2,630 $2,687 $2,675 ====== ====== ====== ====== ====== Ratio of net charge-offs during the year to average loans outstanding during the year .................. 0.0% 0.0% 0.0% 0.0% 0.0% ====== ====== ====== ====== ======
--------------------- (1) Consists primarily of mobile home loans. 10 11 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, ------------------------------------------------------------------------------- 2001 2000 1999 ------------------------ ------------------------ ------------------------ % OF LOANS IN % OF LOANS IN % OF LOANS IN CATEGORY TO CATEGORY TO CATEGORY TO TOTAL NET LOANS TOTAL NET LOANS TOTAL NET LOANS AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING ------ --------------- ------ --------------- ------ --------------- (DOLLARS IN THOUSANDS) Mortgage Loans: Single-family ................. $ 841 57.44% $ 885 59.29% $ 727 52.84% Multi-family .................. 233 7.51 234 8.05 201 8.53 Commercial .................... 1,934 21.35 1,596 21.65 1,438 26.17 Land .......................... 307 10.09 261 7.87 218 10.52 Unallocated ................... 130 0.00 349 0.00 0 0.00 ------ ------ ------ ------ ------ ------ Total mortgage loans ........ 3,445 96.39 3,325 96.87 2,584 98.05 Consumer loans (1) .............. 75 3.61 63 3.13 46 1.95 ------ ------ ------ ------ ------ ------ Total allowance for loan losses ................. $3,520 100.00% $3,388 100.00% $2,630 100.00% ====== ====== ====== ====== ====== ====== AT JUNE 30, ----------------------------------------------------- 1998 1997 ------------------------ ------------------------- % OF LOANS IN % OF LOANS IN CATEGORY TO CATEGORY TO TOTAL NET LOANS TOTAL NET LOANS AMOUNT OUTSTANDING AMOUNT OUTSTANDING ------ --------------- ------ --------------- (DOLLARS IN THOUSANDS) Mortgage Loans: Single-family ................. $ 925 57.19% $ 899 56.19% Multi-family .................. 203 8.44 291 9.00 Commercial .................... 1,227 25.19 990 24.54 Land .......................... 230 8.16 361 9.26 Unallocated ................... 0 0.00 0 0.00 ------ ------ ------ ------ Total mortgage loans ........ 2,585 98.98 2,541 98.99 Consumer loans (1) .............. 102 1.02 134 1.01 ------ ------ ------ ------ Total allowance for loan losses ................. $2,687 100.00% $2,675 100.00% ====== ====== ====== ======
------ (1) Consists of property improvement loans and mobile home loans. 11 12 INVESTMENT 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, 2001 Park View Federal had investments in agency notes, federal funds sold, FHLB of Cincinnati stock and interest-bearing deposits in other financial institutions. The Bank reports its investments, other than marketable equity securities and securities available for sale, at cost as adjusted for discounts and unamortized premiums. The Bank has the intent and ability and generally holds all securities until maturity. Any FHLMC mortgage-backed securities created from loans originated by the Bank for sale will be designated available for sale. For additional information see Notes 1 and 2 of Notes to Consolidated Financial Statements. At present, management is not aware of any conditions or circumstances which could impair its ability to hold its remaining securities to maturity. The following table sets forth the carrying value of the Bank's securities portfolio, short-term investments and FHLB of Cincinnati stock at the dates indicated. At June 30, 2001, the fair market values of the Bank's securities portfolio was $50.2 million. All securities are held to maturity, but are callable prior to maturity.
AT JUNE 30, ---------------------------------------- 2001 2000 1999 ---- ---- ---- (IN THOUSANDS) Investment securities: Municipal Security.................................. $ 212 $ 297 $ 376 U.S. Government and agency securities............... 50,000 64,962 24,958 -------- --------- --------- Total securities................................ 50,212 65,259 25,334 Interest-bearing deposits............................. 1,200 815 574 Federal funds sold.................................... 56,050 1,050 5,375 FHLB of Cincinnati stock.............................. 9,442 5,841 3,759 -------- --------- --------- Total investments................................. $116,904 $ 72,965 $ 35,042 ======== ========= =========
12 13 The following table sets forth the scheduled maturities, carrying values, market values and average yields for the Bank's securities at June 30, 2001.
AT JUNE 30, 2001 --------------------------------------------------------------------------------------- ONE YEAR ONE TO FIVE FIVE TO 10 MORE THAN OR LESS YEARS YEARS 10 YEARS ------------------- ------------------ -------------------- ------------------ CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD -------- ----- ----- ----- ------- ----- ----- ----- (DOLLARS IN THOUSANDS) Municipal security .......... $ 91 6.25% $ 121 6.25% $ 0 0.00% $ 0 0.00% U.S. Government and agency securities ......... 0 0.00 50,000 5.79 0 0.00 0 0.00 Deposits(1) ................. 57,250 3.75 0 0.00 0 0.00 0 0.00 FHLB of Cincinnati stock .... 0 0.00 0 0.00 0 0.00 9,442 7.25 -------- -------- -------- -------- Total ..................... $ 57,341 3.75 $ 50,121 5.79 $ 0 0.00 $ 9,442 7.25 ======== ======== ======== ======== AT JUNE 30, 2001 ----------------------------- TOTAL SECURITIES ----------------------------- CARRYING MARKET AVERAGE VALUE VALUE YIELD ----- ----- ------ (DOLLARS IN THOUSANDS) Municipal security .......... $ 212 $ 212 6.25% U.S. Government and agency securities ......... 50,000 50,000 5.79 Deposits(1) ................. 57,250 57,250 3.75 FHLB of Cincinnati stock .... 9,442 9,442 7.25 -------- -------- Total ..................... $116,904 $116,904 4.91 ======== ========
--------------- (1) Includes interest-bearing deposits at other financial institutions and federal funds sold. 13 14 DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS GENERAL. Deposits are the primary source of the Bank's funds for lending, investment activities and general operational purposes. In addition to deposits, Park View Federal derives funds from loan principal and interest repayments, maturities of securities and interest payments thereon. Although loan repayments are a relatively stable source of funds, deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds, or on a longer term basis for general operational purposes. DEPOSITS. The Bank attracts deposits principally from within its primary market area by offering a variety of deposit instruments, including checking accounts, money market accounts, regular savings accounts and certificates of deposit which range in maturity from seven days to four years. Deposit terms vary according to the minimum balance required, the length of time the funds must remain on deposit and the interest rate. Maturities, terms, service fees and withdrawal penalties for its deposit accounts are established by the Bank on a periodic basis. Park View Federal generally reviews its deposit mix and pricing on a weekly basis. In determining the characteristics of its deposit accounts, Park View Federal considers the rates offered by competing institutions, funds acquisition and liquidity requirements, growth goals and federal regulations. The Bank does not accept brokered deposits due to the volatility and rate sensitivity of such deposits. Park View Federal competes for deposits with other institutions in its market area by offering deposit instruments that are competitively priced and providing customer service through convenient and attractive offices, knowledgeable and efficient staff and hours of service that meet customers' needs. To provide additional convenience, Park View Federal participates in MAC (money access card) Automated Teller Machine networks at locations throughout Ohio and other participating states, through which customers can gain access to their accounts at any time. The Bank's deposits increased by $39.5 million for the fiscal year ended June 30, 2001 as compared to the fiscal year ended June 30, 2000, as a result of the opening of one new branch office and the relocation of an existing branch office. Deposit balances totaled $480.5 million, $441.0 million and $331.2 million at the fiscal years ended June 30, 2001, 2000, and 1999, respectively. Deposits in the Bank as of June 30, 2001 were represented by the various programs described below.
WEIGHTED AVERAGE PERCENTAGE INTEREST MINIMUM BALANCE IN OF TOTAL RATE CATEGORY BALANCE THOUSANDS DEPOSITS ---- -------- ------- --------- -------- 2.40 % NOW accounts $ 50 $ 27,518 5.73 % 2.50 Passbook statement accounts 5 31,245 6.50 3.36 Money market accounts 1,000 12,998 2.70 0.00 Non-interest-earning demand accounts 50 12,583 2.62 --------- ----- 84,344 17.55 CERTIFICATES OF DEPOSIT ----------------------- 6.00 3 months or less 500 110,510 23.00 6.15 3 - 6 months 500 84,515 17.59 5.73 6 - 12 months 500 96,096 20.00 6.58 1 - 3 years 500 95,055 19.78 6.26 More than three years 500 10,012 2.08 --------- ------ 6.23 Total certificates of deposit 396,188 82.45 --------- ------ 5.53 Total deposits $ 480,532 100.00% ========= ======
14 15 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, 2001 AT JUNE 30, 2000 AT JUNE 30, 1999 ------------------------------- ------------------------------- ----------------- 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) .................. $ 40,101 8.35 % $ 2,654 $ 37,447 8.49% $ 8,517 $ 28,930 8.73% Super NOW checking and money market 12,998 2.70 1,152 11,846 2.69 3,447 8,399 2.54 Passbook and regular savings ...... 31,245 6.50 (893) 32,138 7.29 (1,116) 33,254 10.04 Jumbo certificates ................ 110,561 23.01 18,735 91,826 20.82 33,399 58,427 17.64 Other certificates ................ 242,848 50.54 13,571 229,277 51.99 63,761 165,516 49.97 Keogh accounts .................... 292 0.06 46 246 0.06 17 229 0.07 IRA accounts ...................... 42,487 8.84 4,285 38,202 8.66 1,715 36,487 11.02 --------- ------ --------- --------- ------ --------- --------- ------ Total ......................... $ 480,532 100.00% $ 39,550 $ 440,982 100.00% $ 109,740 $ 331,242 100.00% ========= ====== ========= ========= ====== ========= ========= ======
------ (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, ---------------------------------------------------------------------------------- 2001 2000 -------------------------------------- --------------------------------------- INTEREST- INTEREST- BEARING BEARING DEMAND SAVINGS TIME DEMAND SAVINGS TIME DEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Average balance . $ 40,034 $ 30,893 $ 399,039 $ 33,043 $ 32,544 $ 315,914 Average rate paid 3.23% 2.50% 6.27% 2.96% 2.50% 5.58% FOR THE YEAR ENDED JUNE 30, ---------------------------------------- 1999 ---------------------------------------- INTEREST- BEARING DEMAND SAVINGS TIME DEPOSITS DEPOSITS DEPOSITS -------- -------- -------- (DOLLARS IN THOUSANDS) Average balance . $ 27,646 $ 32,209 $ 268,501 Average rate paid 2.64% 2.58% 5.74%
15 16 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, 2001. CERTIFICATES MATURITY PERIOD OF DEPOSIT --------------- ---------- (IN THOUSANDS) Three months or less.................................... $ 33,021 Three through six months................................ 27,386 Six through 12 months................................... 28,022 Over 12 months.......................................... 30,881 --------- Total.......................................... $ 119,310 ========= 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 $100 million respectively. The REPO advance was drawn down by $65 million, while the CMA was not drawn down at June 30, 2001. 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:
AT JUNE 30, ------------------------------------------ 2001 2000 1999 ---- ---- ---- (IN THOUSANDS) Amounts outstanding at end of period ............... $185,867 $114,974 $ 66,041 Weighted average rate .............................. 4.68% 6.38% 5.65% Maximum amount outstanding at any month end ........................................ $185,872 $114,974 $ 66,041 Approximate average outstanding balance ............ 117,624 79,862 52,102 Weighted average rate .............................. 5.68% 5.71% 5.55%
At June 30, 2001 PVFCC had one note payable for $5.0 million, and drawn down $4.7 million, collateralized by the stock of PVFSB. At June 30, 2000, PVFSC had one note payable for $1.0 million, collateralized by real estate and guaranteed by PVF. See Note 9 of Notes to Consolidated Financial Statement. 16 17 SUBSIDIARY ACTIVITIES The Bank is required to give the FDIC and the Director of OTS 30 days prior notice before establishing or acquiring a new subsidiary or commencing a new activity through an existing subsidiary. Both the FDIC and the Director of OTS have the authority to prohibit the initiation or to order the termination of subsidiary activities determined to pose a risk to the safety or soundness of the institution. As a federally chartered savings bank, Park View Federal is permitted to invest an amount equal to 2% of its assets in subsidiaries, with an additional investment of 1% of assets where such investment serves primarily community, inner-city and community development purposes. Under such limitations, as of June 30, 2001, ParkView Federal was authorized to invest up to approximately $22.1 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 three active subsidiaries, Park View Federal, PVFSC and MPLC. PVFSC is engaged in the activities of land acquisition and real estate investment. At June 30, 2001, PVFSC has an investment of $0.7 million in real estate. The real estate includes a $0.3 million investment in the constructon of a new branch office in Avon, Ohio, and $0.4 million in the development of land in Newbury, Ohio. In addition, PVF has three non-active subsidiaries, PVF Community Development Corp., PVF Mortgage Corp., and PVF Holdings, which have been chartered for future activity. PVF Service Corporation. In March of 1998, PVFSC entered into an option agreement with Cameratta Properties Limited for the sale of Mid Pines, its 257 acre parcel of land in Solon, Ohio. PVFSC had acquired 150 acres of this land in 1983 from the Bank, which property the Bank acquired in foreclosure. The additional 107 acre parcel of land was acquired by PVFSC in 1985 for $150,000. PVFSC acquired and held the property as an investment. In March of 1999, according to the terms of the option agreement and upon voter approval of the planned development project, the Mid Pines sale to Cameratta Properties Limited was completed for $4.8 million. The property was carried at a book value of $1.0 million by PVFSC, and the sale resulted in a pre-tax gain on the sale of real estate of $3.8 million. The proceeds from this sale were used by PVFSC to purchase a strip center in Berea, Ohio at a cost of $3.8 million. In April of 2000, PVFSC sold the Berea Strip Center for $4.3 million to Berea Square Company, LLC. The proceeds from this sale were used by PVFSC to purchase the Company's new Corporate Center in Solon, Ohio at a cost of $4.3 million. This transaction was handled as a like kind exchange for Federal Income Tax purposes. Mid Pines Land Company. In September of 2000, MPLC purchased a commercial office building in Solon, Ohio and approximately 5 acres of adjoining land from ARAC, Inc. for $4.4 million dollars. The purchase was made for the purpose of facilitating the acquisition in April 2001 by PVFSC of the Company's new Corporate Center. In November of 2000, the commercial office building was sold to Rockside Corporate Woods Limited, LLC for $3.6 million. At June 30, 2001 MPLC had an investment of $0.6 million in land adjacent to the Company's new Corporate Center in Solon, Ohio 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 17 18 loans by offering a variety of deposit accounts at competitive rates, a wide array of loan products, convenient business hours and branch locations, a commitment to outstanding customer service and a well-trained staff. In addition, the Bank believes it has developed strong relationships with local businesses, realtors, builders, and the public in general, giving it an excellent image in the community. EMPLOYEES As of June 30, 2001, PVF and its subsidiaries had 139 full-time employees and 24 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. The OTS periodically examines the Bank for compliance with various regulatory requirements. The FDIC also has the authority to conduct special examinations of SAIF-insured savings institutions. The Bank must file reports with OTS describing its activities and financial condition. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. This supervision and regulation is intended primarily for the protection of depositors. Certain of these regulatory requirements are referred to below or elsewhere herein. FINANCIAL MODERNIZATION LEGISLATION. On November 12, 1999, President Clinton signed legislation which could have a far-reaching impact on the financial services industry. The Gramm-Leach-Bliley ("G-L-B") Act authorizes affiliations between banking, securities and insurance firms and authorizes bank holding companies and national banks to engage in a variety of new financial activities. Among the new activities that will be permitted to bank holding companies are securities and insurance brokerage, securities underwriting, insurance underwriting and merchant banking. The Federal Reserve Board, in consultation with the Secretary of the Treasury, may approve additional financial activities. The G-L-B Act, however, prohibits future acquisitions of existing unitary savings and loan holding companies, like the Company, by firms which are engaged in commercial activities and limits the permissible activities of unitary holding companies formed after May 4, 1999. The G-L-B Act imposes new requirements on financial institutions with respect to customer privacy. The G-L-B Act generally prohibits disclosure of customer information to non-affiliated third parties unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually. Financial institutions, however, will be required to comply with state law if it is more protective of customer privacy than the G-L-B Act. The G-L-B Act directs the federal banking agencies, the National Credit Union Administration, the Secretary of the Treasury, the Securities and Exchange Commission and the Federal Trade Commission, after consultation with the National Association of Insurance Commissioners, to promulgate implementing regulations within six months of enactment. The privacy provisions became effective in July 2001. The G-L-B Act contains significant revisions to the FHLB System. The G-L-B Act imposes new capital requirements on the FHLBs and authorizes them to issue two classes of stock with differing dividend rates and redemption requirements. The G-L-B Act deletes the current requirement that the FHLBs annually contribute $300 million to pay interest on certain government obligations in favor of a 20% of net earnings formula. The G-L-B Act expands the permissible uses of FHLB advances by community financial institutions (under $500 million in assets) to include funding loans to small businesses, small farms and small agri-businesses. The G-L-B Act makes membership in the FHLB voluntary for federal savings associations. The G-L-B Act contains a variety of other provisions including a prohibition against ATM surcharges unless the customer has first been provided notice of the imposition and amount of the fee. The G-L-B Act reduces the frequency of Community Reinvestment Act examinations for smaller institutions and imposes certain reporting requirements on depository institutions that make payments to non-governmental entities in connection with the Community Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and authorizes a federal savings association that converts to a national or state bank charter to continue to use the term "federal" in its name and to retain any interstate branches. 18 19 The Company is unable to predict the impact of the G-L-B Act on its operations at this time. Although the G-L-B Act reduces the range of companies with which may acquire control of the Company, it may facilitate affiliations with companies in the financial services industry. REGULATORY CAPITAL REQUIREMENTS. Under OTS regulations, savings institutions must maintain "tangible" capital equal to 1.5% of adjusted total assets, "core" (also referred to as "Tier 1") capital equal to 4.0% (or 3.0% if the institution is rated composite 1 under the OTS examination rating system) of adjusted total assets and "total capital," a combination of core and "supplementary" capital, equal to 8.0% of "risk-weighted" assets. In addition, the OTS has adopted regulations which impose certain restrictions on savings associations that have a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the institution is rated composite 1 under the OTS examination rating system). For purposes of these regulations, Tier 1 capital has the same definitions as core capital. See "-- Prompt Corrective Regulatory Action." The Bank is in compliance with all applicable regulatory capital requirements. In determining compliance with the risk-based capital requirement, a savings institution calculates its total capital, which may include both core capital and supplementary capital, provided the amount of supplementary capital used does not exceed the savings institution's core capital. Supplementary capital is defined to include certain preferred stock issues, nonwithdrawable accounts and pledged deposits that do not qualify as core capital, certain approved subordinated debt, certain other capital instruments and a portion of the savings institution's general loss allowances, and up to 45% of unrealized net gains of equity securities. The risk-based capital requirement is measured against risk-weighted assets, which equal the sum of each asset and the credit-equivalent amount of each off-balance sheet item after being multiplied by an assigned risk weight. Under the OTS risk-weighting system, single-family first mortgages not more than 90 days past due with loan-to-value ratios under 80%, and multi-family mortgages (maximum 36 dwelling units) with loan-to-value ratios under 80% and average annual occupancy rates over 80%, are assigned a risk weight of 50%. Consumer loans, residential construction loans and commercial real estate loans are assigned a risk weight of 100%. Mortgage-backed securities issued, or fully guaranteed as to principal and interest, by the FNMA or FHLMC are assigned a 20% risk weight. Cash and United States Government securities backed by the full faith and credit of the United States Government are given a 0% risk weight. Under the risk-based capital requirement, a savings institution is required to maintain total capital, consisting of core capital plus certain other components, including general valuation allowances, equal to 8.0% of risk-weighted assets. At June 30, 2001 the Bank's risk-weighted assets were $496.7 million, and its total regulatory capital was $51.0 million, or 10.26% of risk-weighted assets. 19 20 The table below presents the Bank's capital position at June 30, 2001, relative to its various minimum regulatory capital requirements. AT JUNE 30, 2001 ---------------- PERCENT OF AMOUNT ASSETS (1) ------ ---------- (DOLLARS IN THOUSANDS) Tangible Capital........................... $ 47,489 6.46% Tangible Capital Requirement............... 11,033 1.50 -------- ----- Excess .................................. $ 36,456 4.96% ======== ===== Tier 1/Core Capital........................ $ 47,489 6.46% Tier 1/Core Capital Requirement............ 29,420 4.00 -------- ----- Excess .................................. $ 18,069 2.46% ======== ===== Tier 1 Risk-Based Capital.................. $ 47,489 9.56% Tier 1 Risk-Based Capital Requirement...... 19,868 4.00 -------- ---- Excess .................................. $ 27,621 5.56% ======== ===== Risk-Based Capital......................... $ 50,984 10.26% Risk-Based Capital Requirement............. 39,737 8.00 -------- ------ Excess................................... $ 11,247 2.26% ======== ===== ------------- (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, 2001 the Bank had no interest rate risk component deduction from total capital. 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 the Federal Deposit Insurance Corporation Improvement Act of 1991 ("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 20 21 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. The senior executive officers of a significantly undercapitalized institution may not receive bonuses or increases in compensation without prior approval and the institution is prohibited from making payments of principal or interest on its subordinated debt. In their discretion, the federal banking regulators may also impose the foregoing sanctions on an undercapitalized institution if the regulators determine that such actions are necessary to carry out the purposes of the prompt corrective action provisions. If an institution's ratio of tangible capital to total assets falls below a "critical capital level," the institution will be subject to conservatorship or receivership within specified time periods. Under regulations jointly adopted by the federal banking regulators, a savings institution's capital adequacy for purposes of the FDICIA prompt corrective action rules is determined 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 Tier 1 or core capital to adjusted total assets). The following table shows the capital ratio requirements for each prompt corrective action category:
ADEQUATELY SIGNIFICANTLY WELL CAPITALIZED CAPITALIZED UNDERCAPITALIZED UNDERCAPITALIZED ---------------- ----------- ---------------- ---------------- Total risk-based capital ratio 10.0% or more 8.0% or more Less than 8.0% Less than 6.0% Tier 1 risk-based capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0% Leverage ratio 5.0% or more 4.0% or more * Less than 4.0% * Less than 3.0%
----------- * 3.0% if the institution has a composite 1 CAMELS rating. A "critically undercapitalized" savings institution is defined as a savings institution that has a ratio of "tangible equity" to total assets of less than 2.0%. Tangible equity is defined as core capital plus cumulative perpetual preferred stock (and related surplus) less all intangibles other than qualifying supervisory goodwill and certain purchased mortgage servicing rights. The OTS may reclassify a well capitalized savings association as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category (but may not reclassify a significantly undercapitalized institution as critically undercapitalized) if the OTS determines, after notice and an opportunity for a hearing, that the savings institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any CAMELS rating category. For information regarding the position of the Bank with respect to the FDICIA prompt corrective action rules, see Note __ of Notes to Consolidated Financial Statements. 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 21 22 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. Additionally, a savings institution should maintain systems, commensurate with its size and the nature and scope of its operations, to identify problem assets and prevent deterioration in those assets as well as to evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital and reserves. Management believes that the Bank meets substantially all the standards adopted in the interagency guidelines. FEDERAL HOME LOAN BANK SYSTEM. Park View Federal is a member of the FHLB System, which consists of 12 regional FHLBs subject to supervision and regulation by the Federal Housing Finance Board ("FHFB"). The FHLBs provide a central credit facility primarily for member institutions. As a member of the FHLB System, the Bank is required to acquire and hold shares of capital stock in the FHLB of Cincinnati in an amount at least equal to 1% of the aggregate unpaid principal of its home mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB of Cincinnati, whichever is greater. The Bank was in compliance with this requirement with an investment in FHLB of Cincinnati stock at June 30, 2001 of $9.4 million. The FHLB of Cincinnati serves as a reserve or central bank for its member institutions within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB of Cincinnati. Long-term advances may be made only for the purpose of providing funds for residential housing finance, small business loans, small farm loans and small agri-business loans. At June 30, 2001, the Bank had $185.9 million in advances outstanding from the FHLB of Cincinnati. See " -- Deposit Activity and Other Sources of Funds -- Borrowings." 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; and (iii) 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 savings association. To meet the QTL test, the institution must qualify as a domestic building and loan association under the Internal Revenue Code or the 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. At June 30, 2001, 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. 22 23 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, multi-family and other non-one-to-four family residential properties should not exceed 30% of total capital. The supervisory loan-to-value limits do not apply to certain categories of loans including loans insured or guaranteed by the U.S. government and its agencies or by financially capable state, local or municipal governments or agencies, loans backed by the full faith and credit of a state government, loans that are to be sold promptly after origination without recourse to a financially responsible party, loans that are renewed, refinanced or restructured without the advancement of new funds, loans that are renewed, refinanced or restructured in connection with a workout, loans to facilitate sales of real estate acquired by the institution in the ordinary course of collecting a debt previously contracted and loans where the real estate is not the primary collateral. The Bank believes that its current lending policies conform to the Interagency Guidelines. DEPOSIT INSURANCE. The Bank is required to pay assessments, based on a percentage of its insured deposits, to the FDIC for insurance of its deposits by the FDIC through the 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. The FDIC's current regular semi-annual SAIF assessment rates set a base assessment rate schedule ranging from 0 to 27 basis points. Until December 31, 1999, SAIF-insured institutions were 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. 23 24 During this period, Bank Insurance Fund ("BIF") members were assessed for these obligations at the rate of 1.3 basis points. After December 31, 1999, both BIF and SAIF members are assessed at the same rate for FICO payments. 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 Bank's conversion from the mutual to stock form. In addition, savings institution subsidiaries of savings and loan holding companies are required to give the OTS 30 days' prior notice of any proposed declaration of dividends to the holding company. OTS regulations require that savings institutions submit notice to the OTS prior to making a capital distrubution (which includes dividends, stock repurchases and amounts paid to stockholders of another institution in a cash merger) if (a) they would not be well-capitalized after the distribution, (b) the distribution would result in the retirement of any of the institution's common or preferred stock or debt counted as its regulatory capital, or (c) the institution is a subsidiary of a holding company. A savings institution must make application to the OTS to pay a capital distribution if (x) the institution would not be adequately capitalized following the distribution, (y) the institution's total distributions for the calendar year exceeds the institution's net income for the calendar year to date plus its net income (less distributions) for the preceding two years, or (z) the distribution would otherwise violate applicable law or regulation or an agreement with or conditions imposed by the OTS. If neither the savings institution nor the proposed capital distribution meet any of the foregoing criteria, then no notice or application is required to be filed with the OTS before making a capital distribution. The OTS may disapprove or deny a capital distribution if in the view of the OTS, the capital distribution would constitute an unsafe or unsound practice. The Bank is prohibited from making any capital distributions if after making the distribution, it would be undercapitalized as defined in the OTS' prompt corrective action regulations. After consultation with the FDIC, the OTS may permit a savings association to repurchase, redeem, retire or otherwise acquire shares or ownership interests if the repurchase, redemption, retirement or other acquisition: (i) is made in connection with the issuance of additional shares or other obligations of the institution in at least an equivalent amount; and (ii) will reduce the institution's financial obligations or otherwise improve the institution's financial condition. In addition to the foregoing, earnings of the Bank appropriated to bad debt reserves and deducted for federal income tax purposes are not available for payment of cash dividends without payment of taxes at the then current tax rate by the Bank on the amount of earnings removed from the reserves for such distributions. See "Taxation." The Bank intends to make full use of this favorable tax treatment afforded to the Bank and does not contemplate use of any earnings of the Bank in a manner which would limit the Bank's bad debt deduction or create federal tax liabilities. FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve Board, a savings institution must maintain average daily reserves equal to 3% on transaction accounts of between $0 and $42.8 million, plus 10% on the remainder. These percentages are subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a noninterest-bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution's interest-earning assets. At June 30, 2001, Park View Federal met its reserve requirements. INTERSTATE AND INTERINDUSTRY ACQUISITIONS. OTS regulations permit federal savings institutions 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, an institution may not establish an out-of-state branch unless (i) the institution qualifies as a "domestic building and loan association" under sec.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 or as a QTL, 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 savings institutions generally may not establish new branches unless the institution meets or exceeds minimum regulatory capital requirements. The OTS will also consider the institution's record of compliance with the Community Reinvestment Act in connection with any branch application. The Federal Reserve Board may permit the acquisition of a savings institution by a bank holding company. In approving an application by a bank holding company to acquire a savings institution, the Federal Reserve Board is 24 25 prohibited from imposing restrictions on tandem operations of the subsidiary savings institution and its holding company affiliates except as required under Sections 23A and 23B of the Federal Reserve Act, as amended. A bank holding company that controls a savings institution may merge or consolidate the assets and liabilities of the savings institution 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 institution 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 institution. Loans and extensions of credit fully secured by certain readily marketable collateral may represent an additional 10% of unimpaired capital and surplus. Applicable law authorizes savings associations to make loans to one borrower, for any purpose, in an amount not to exceed $500,000 or, by order of the Director of OTS, in an amount not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop residential housing, provided: (i) the purchase price of each single-family dwelling in the development does not exceed $500,000; (ii) the savings institution is in compliance with federal capital requirements; (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. A savings institution is authorized 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 institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings institution is any company or entity which controls, is controlled by or is under common control with the savings institution. In a holding company context, the parent holding company of a savings institution (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings institution. Generally, Sections 23A and 23B (i) limit the extent to which the savings institution or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such institution's capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a nonaffiliated. 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 institution 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 institution. Section 106 of the Bank Holding Company Act of 1956, as amended ("BHCA") which also applies to the Bank, prohibits the Bank from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on condition that the customer obtain some additional services from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain exceptions. Savings institutions are also subject to the restrictions contained in Section 22(h) and Section 22(g) 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 to a greater than 10% stockholder of a savings institution, and certain affiliated entities of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities the institution's loan to one borrower limit (generally equal to 15% of the institution's unimpaired capital and surplus and an additional 10% of such capital and surplus for loans fully secured by certain readily marketable collateral). 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 institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution 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 generally prohibits a depository institution from paying the overdrafts of any of its executive officers or directors. 25 26 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. In addition, Section 106 of the BHCA extensions of credit to executive officers, directors, and greater than 10% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. REGULATION OF THE COMPANY GENERAL The company is a savings and loan holding company as defined by the Home Owners' Loan Act. 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. Since the Company became a unitary savings and loan holding company before May 4, 1999, there are generally no restrictions on the activities of the 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 undercapitalized 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," 26 27 the shares must consist of previously unissued stock or treasury shares, the shares must be acquired for cash, the savings and loan holding company' other subsidiaries must have tangible capital of at least 6 1/2% of total assets, there must not be more than one common director or officer between the savings and loan holding company and the issuing savings institution, and transactions between the savings institution and the savings and loan holding company and any of its affiliates must conform to Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock, may also acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company. The Director of the OTS may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings institutions in more than one state if: (i) the multiple savings and loan holding company involved controls a savings institution which operated a home or branch office in the state of the institution to be acquired as of March 5, 1987; (ii) the acquiror is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act; or (iii) the statutes of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). TAXATION GENERAL The Company and its subsidiaries currently file a consolidated federal income tax return based on a fiscal year ending June 30. Consolidated returns have the effect of eliminating intercompany distributions, including dividends, from the computation of consolidated taxable income for the taxable year in which the distributions occur. FEDERAL INCOME TAXATION Savings institutions are subject to the provisions of the Internal Revenue Code of 1986, as amended (the "Code") in the same general manner as other corporations. Prior to legislation in 1996, institutions such as the Bank which met certain definitional tests and other conditions prescribed by the Code benefited from certain favorable provisions regarding their deductions from taxable income for annual additions to their bad debt reserve. Legislation that is effective for tax years beginning after December 31, 1995 repealed the reserve method available to thrifts and required 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 had 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 was allowed to use the experience method of accounting for bad debts as long as it was not considered a large thrift. Beginning with June 30, 1997 taxable year, the Bank was treated the same as a small commercial bank. Institutions with less than $500 million in assets were still permitted to make deductible bad debt additions to reserves, using the experience method. Beginning with the June 30, 2000 taxable year, the Bank will be taxed as a large thrift and will only be able to take a tax deduction when a loan is actually charged off. 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. In addition to the regular income tax, corporations generally are subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on alternative minimum taxable income, which is the sum of a corporation's regular taxable income (with certain adjustments) and tax preference items, less any available exemption. Net operating losses can offset no more than 90% of alternative minimum taxable income. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax. 27 28 The Bank's federal income tax returns through June 30, 1992 were audited by the IRS, and the Company has federal income tax returns which are open and subject to audit for the tax years 1997 through 1999. With respect to years examined by the IRS, all deficiencies have been satisfied. For further information regarding federal income taxes, see Note 10 of Notes to Consolidated Financial Statements. STATE INCOME TAXATION The Bank 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 1.3%, 1.3% and 1.4% for fiscal years 2001, 2000, and 1999, respectively. The Company generally elects to be taxed as a qualifying holding company and pay Ohio tax based on its net income only. The other subsidiaries of the Company are taxed on the greater of a tax based on net income or net worth. EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth information with respect to the executive officers of the Company.
AGE AS OF NAME SEPTEMBER 11, 2001 TITLE ---- ------------------ ----- John R. Male 53 Chairman of the Board and Chief Executive Officer of the Company and the Bank C. Keith Swaney 58 President and Chief Operating Officer of the Company and the Bank, Treasurer of the Company and Chief Financial Officer of the Bank Jeffrey N. Male 52 Vice President and Secretary of the Company and Executive Vice President of the Bank
JOHN R. MALE. Mr. Male has been with the Bank since 1971, where he has held various positions including branch manager, mortgage loan officer, manager of construction lending, savings department administrator and chief lending officer. Mr. Male was named President and Chief Executive Officer of the Bank in 1986 and was named President of the Company upon its organization in 1994. Mr. Male was named Chairman of the Board of Directors and Chief Executive Officer of the Company and the Bank in October 2000. Mr. Male serves in various public service and charitable organizations. He currently serves on the Board of Trustees for Heather Hill, a long-term care hospital in Chardon, Ohio. He has an undergraduate degree from Tufts University and an MBA from Case Western Reserve University. C. KEITH SWANEY. Mr. Swaney joined the Bank in 1962 and was named Executive Vice President and Chief Financial Officer in 1986. He was named Vice President and Treasurer of the Company upon its organization in 1994. Mr. Swaney was named President and Chief Operating Officer of the Company and the Bank in October 2000. He continues to serve as Treasurer of the Company and as Chief Financial Officer of the Bank. He is responsible for all internal operations of the Company and the Bank. Over the years, he has participated in various charitable organizations. Mr. Swaney attended Youngstown State University and California University in Pennsylvania. JEFFREY N. MALE. Mr. Male has been with the Bank since 1973. He has served in various capacities including supervisor of the construction loan department, personnel director and manager of the collection, foreclosure and REO departments. Mr. Male was named Executive Vice President of the Bank in 2000. In 1986 Mr. Male was named Senior Vice President in charge of residential lending operations. He was named Vice President and Secretary of the Company upon its organization in 1994 and continues to serve in that position. Mr. Male has served in various capacities with public service and charitable organizations, including the Chagrin Valley Jaycees, the Chagrin Falls Chamber of Commerce and the Neighborhood Housing Services Corporate Loan Committee. Mr. Male is a graduate of Denison University. 28 29 ITEM 2. PROPERTIES ------------------- The following table sets forth the location and certain additional information regarding the Company's offices at June 30, 2001.
YEAR NET BOOK OWNED OR APPROXIMATE OPENED/ TOTAL VALUE AT LEASED/ SQUARE LOCATION ACQUIRED DEPOSITS JUNE 30, 2001 EXPIRATION FOOTAGE -------- -------- -------- ------------- ---------- ------- (DOLLARS IN THOUSANDS) MAIN OFFICE: 30000 Aurora Road 2000 $ 0 $ 4,346 Owned 51,635 Solon, Ohio BRANCH OFFICES: 2111 Richmond Road 1967 65,842 74 Lease 2,750 Beachwood, Ohio 3/1/09 25350 Rockside Road 1969 69,539 11 Lease 14,400 Bedford Heights, Ohio 3/1/03 11010 Clifton Blvd 1974 25,490 4 Lease 1,550 Cleveland, Ohio 8/1/05 13901 Ridge Road 1999 48,605 65 Lease 3,278 North Royalton, Ohio 8/31/04 6990 Heisley Road 1994 40,562 0 Lease 2,400 Mentor, Ohio 10/25/03 1456 SOM Center Road 1995 36,094 134 Lease 2,200 Mayfield Heights, Ohio 9/30/04 497 East Aurora Road 1994 34,397 0 Lease 2,400 Macedonia, Ohio 9/30/04 8500 Washington Street 1995 33,081 40 Lease 2,700 Chagrin Falls, Ohio 11/30/04 408 Water Street 1997 21,551 647 Owned 2,800 Chardon, Ohio 3613 Medina Road 2000 26,880 63 Lease 2,440 Medina, Ohio 8/31/04 34400 Aurora Road 2000 29,023 90 Lease 3,000 Solon, Ohio 4/30/10 16909 Chagrin Blvd 2000 49,468 158 Lease 2,904 Shaker Hts., Ohio 6/30/10
At June 30, 2001 the net book value of the Company's premises, furniture, fixtures and equipment was $7.8 million. See Note 6 of Notes to Consolidated Financial Statements for further information. The Company also owns real estate in the Solon, Ohio and Newbury, Ohio. See "-- Subsidiary Activities" for further information. 29 30 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. In its Annual Report on Form 10-K (the "2000 form 10-K") for the year ended June 30, 2000, the Company disclosed that it and various of its subsidiaries had been parties to lawsuits related to the Company's efforts, which have since been suspended, to develop a business offering financial planning advice and the sale of mutual funds and insurance products on any agency basis. The entities named in the lawsuits were the Company, the Bank and two other entities, PVF Financial Planning Inc. ("PVFFP") and Emissary Financial Group, Inc. ("Emissary"), which are majority-owned subsidiaries of the Company's wholly owned subsidiary, PVF Holdings, Inc. The Company's proposed business plan called for PVFFP to establish offices in certain of the Bank's locations, from which offices PVFFP would provide financial planning advice to customers and sell insurance and mutual fund products to those customers on an agency basis. Emissary was proposed to act as a broker dealer that would execute any trades directed by PVFFP and by entities unrelated to PVFFP or the Company. Through PVF Holdings, Inc., the Company invested a total of $300,000 in PVFFP and Emissary, virtually all of which was invested in Emissary. The other investor in PVFFP and Emissary was to be an individual named Gregory Shefchuk. Mr. Shefchuk owned a financial planning service that traded through Money Concepts Capital Corp. ("Money Concepts"), a broker dealer based in Chicago, Illinois. Mr. Shefchuk intended to utilize Emissary as the broker dealer for his proposed activities with PVFFP. All lawsuits disclosed in Item 3 of the 2000 form 10-K have been dismissed with no liability and immaterial expense to the Company. 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, 2001. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER -------------------------------------------------------------------------- MATTERS ------- The information contained under the section captioned "Market Information" in the Company's Annual Report to Stockholders for the Fiscal Year Ended June 30, 2001 (the "Annual Report") is incorporated herein by reference. For information regarding restrictions on the payment of dividends see "Item 1. Business -- Regulation of the Bank -- Dividend Limitations." ITEM 6. SELECTED FINANCIAL DATA -------------------------------- The information contained in the table captioned "Selected Consolidated Financial and Other Data" in the Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS -------------------------------------------------------------------------------- OF OPERATIONS ------------- The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------------------------------------- The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset/Liability Management" in the Annual Report incorporated herein by reference. 30 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ---------------------------------------------------- The consolidated financial statements contained in the Annual Report which are listed under Item 14 herein are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND ------------------------------------------------------------------------ FINANCIAL DISCLOSURE -------------------- Not applicable. 31 32 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 2001 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. [CONFIRM] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Proposal I -- Election of Directors" of the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ------------------------------------------------------------------------- (a) 1. Independent Auditors' Report (incorporated by reference to the Annual Report) Consolidated Financial Statements (incorporated by reference to the Annual Report) (a) Consolidated Statements of Financial Condition, at June 30, 2001 and 2000 (b) Consolidated Statements of Operations for the Years Ended June 30, 2001, 2000 and 1999 (c) Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2001, 2000 and 1999 (d) Consolidated Statements of Cash Flows for the Years Ended June 30, 2001, 2000 and 1999 (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. 32 33 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 * 10.3 Severance Agreement between PVF Capital Corporation and ** each of John R. Male, C. Keith Swaney and Jeffrey N. Male 10.4 Park View Federal Savings Bank Supplemental Executive ** Retirement Plan 10.5 PVF Capital Corp. 2000 Incentive Stock Option Plan and Form of Stock Option *** Agreement 13 PVF Capital Corp. Annual Report to Stockholders for the year ended June 30, 2001 21 Subsidiaries of the Registrant 23 Consent of KPMG LLP
------------- * Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1996 (Commission File No. 0-24948). ** Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1998 (Commission File No. 0-24948). *** Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended June 30, 2000 (Commission File No. 0-24948). (b) No current reports on Form 8-K have been filed during the last quarter of the fiscal year covered by this report. (c) All required exhibits are filed as attached. (d) No financial statement schedules are required. 33 34 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 25, 2001 By: /s/ John R. Male ------------------------------------- John R. Male Chairman of the Board of Directors 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 25, 2001 -------------------------------------------- John R. Male Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) /s/ C. Keith Swaney September 25, 2001 -------------------------------------------- C. Keith Swaney President, Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer) /s/ Robert K. Healey September 25, 2001 -------------------------------------------- Robert K. Healey Director /s/ Stanley T. Jaros September 25, 2001 -------------------------------------------- Stanley T. Jaros Director /s/ Creighton E. Miller September 25, 2001 -------------------------------------------- Creighton E. Miller Director /s/ Stuart D. Neidus September 25, 2001 -------------------------------------------- Stuart D. Neidus Director /s/ Robert F. Urban September 25, 2001 -------------------------------------------- Robert F. Urban Director EX-13 3 l90424aex13.txt EXHIBIT 13 1 Exhibit 13 [LOGO] PVF CAPITAL CORP. [LOGO] ANNUAL REPORT JUNE 30, 2001 2 TABLE OF CONTENTS Letter to Shareholders 1 New Corporate Center 4 Selected Consolidated Financial and Other Data 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Independent Auditors' Report 21 3 [LOGO] PVF CAPITAL CORP. TO OUR SHAREHOLDERS We are pleased to announce that PVF Capital Corp. completed another successful year in fiscal 2001. New market opportunities allowed us to achieve growth in assets of $123.5 million, or 20.2 percent, and increase the loan and mortgage-backed securities portfolios by $72.3 million, or 13.8 percent. During the year, the Company successfully opened its new corporate headquarters along with two new branch offices. Despite substantial costs incurred with our office expansion, a weak economy, and sharply declining interest rates during much of the year, the Company was able to improve on the prior year's operating results due to the growth of our balance sheet, strong asset/liability management, and our ability to limit the level of credit losses sustained. Earnings were $6.6 million, or $1.27 basic earnings per share and $1.23 diluted earnings per share, for the year ended June 30, 2001. Return on average assets was 1.00 percent and return on average common equity was 14.6 percent for the year. Our stock repurchase program announced in June of 1999 was renewed for an additional 12 months in April 2001. Pursuant to this plan and our cash dividend policy, the Company repurchased 123,857 shares, or 2.3 percent, of its common stock through June 30, 2001 and paid a $0.288 per share cash dividend for the year. Continuation of the stock repurchase program and cash dividend policy will be dependent on the Company's financial condition, earnings, capital needs, regulatory requirements, and market conditions. Additionally, in July 2001, the Company declared a 10 percent stock dividend. The significant growth of the Company over the past year has been the result of our corporate plan to identify markets in need of the types of 1 4 personalized service and financial products available at a community bank. With this in mind, we are optimistic about the future role of community banks and will continue with our plan to restructure and expand our branch network into new markets offering opportunity for future growth. Our basic strategy remains to function as a niche lender, providing our customers a wide range of lending products, collateralized by real estate, that may not be available to them at larger banks. In the past year, Park View Federal made the following changes to its branch network. In August 2000, Park View Federal relocated its North Moreland branch office near Shaker Square in Cleveland, Ohio to Shaker Towne Centre in Shaker Heights, Ohio. This move has provided our customers a more spacious office in a more easily accessible location with ample parking not available at the North Moreland facility. At June 30, 2001, this branch had $49.5 million in deposits and generated substantial new loan growth. In August 2000, Park View Federal opened a new branch in Solon, Ohio. This new full-service branch office is located at 34400 Aurora Road in the Solar Shopping Center near the southeast corner of Aurora Road and Route 91. At June 30, 2001, this branch had attracted $29.0 million in new deposits and generated substantial new loan growth. In November of 2000, Park View Federal began the move into a new corporate headquarters in Solon, Ohio. This new corporate office is located at 30000 Aurora Road near the southeast corner of Aurora Road and Harper Road just south of Interstate 480. We are excited about this move because it has given us the room necessary for our current operations, it has united all of the Bank's internal departments under one roof, and it will allow for future growth of the Company. The Corporate Center will feature a full-service branch office that is scheduled to open on or before November 30, 2001. This move has resulted in the closing of our North Moreland and Rockside administrative offices. In the coming year, Park View Federal is planning to further expand its branch network. On or before March 31, 2002, Park View Federal will open a new branch office in Strongsville, Ohio. This new full-service branch office will be equipped with an ATM and will be located at 17780 Pearl Road at the southwest corner of the intersection of Pearl and Drake Roads. [LOGO] PVF CAPITAL CORP. 2001 ANNUAL REPORT 2 5 On or before March 31, 2002, Park View Federal will open a new branch office in Avon, Ohio. This new full-service branch office will be equipped with an ATM and will be located at 36311 Detroit Road. The growth of our branch network has opened new markets to us in residential, construction, multi-family, and commercial real estate lending and has also increased our ability to attract consumer deposits. The opening of the Corporate Center, Strongsville, and Avon, Ohio branch offices will bring the number of full-service branch office locations we have located throughout greater Cleveland to 15. We plan to continue our efforts to identify new locations for the further expansion of our branch network. Visit our Web site on the Internet at www.parkviewfederal.com. This Web site provides information about our products and services, and provides access to current loan and deposit rate information. We are working to enhance this site so that it will provide a full line of home banking services to our customers. We invite all shareholders to attend the Annual Meeting of Stockholders of PVF Capital Corp. on Monday, October 22, 2001 at 10:00 a. m. at the Hilton Cleveland East, 3663 Park East Drive, Beachwood, Ohio. We look forward to another successful year of service and dedication to the community, its members, our shareholders, and our customers. Sincerely, /s/ John R. Male John R. Male Chairman of the Board and Chief Executive Officer /s/ C. Keith Swaney C. Keith Swaney President [LOGO] PVF CAPITAL CORP. 2001 ANNUAL REPORT 3 6 NEW CORPORATE CENTER As we complete our ninth year of operation as a publicly-traded company, we have taken a large step in our long-term plan to improve our corporate infrastructure in order to enhance our efficiency as a company and to make us more responsive to the financial needs of our growing customer base. This large step was taken in November of 2000, with the opening of our new corporate headquarters in Solon, Ohio. During the past two years, the Company has grown significantly. Total assets have increased by over 60 percent from $449.2 million at June 30, 1999 to $736.5 million at June 30, 2001, while our employee base has increased by over 15 percent. The Company's internal operations had been housed at two separate locations and space limitations, along with the expensive upkeep of two older facilities and the inefficiencies involved with running our operations from two separate locations, made it apparent that a change was necessary. With this in mind, management adopted a long-term plan to reorganize the structure of the Company that included a complete upgrade of our in-house technology, and the acquisition of a corporate center that would house our current operations, allow for future growth, and unite our internal operations under one roof. A profile for our new corporate center was developed. This profile included consideration of the ideal location to best meet the needs of our customers, the size of the structure that would best match our corporate needs, and our ability to afford the corporate center at a cost that would not negatively impact future earnings. Our search led us to Solon, Ohio, where we identified the availability of a corporate office that would serve as an ideal facility for the new Park View Federal Corporate Center. The acquisition of our new facilities located at 30000 Aurora Road, Solon, Ohio, was concluded in September 2000. This office is located at the intersection [PICTURE OF BUILDING] [LOGO] PVF CAPITAL CORP. 2001 ANNUAL REPORT 4 7 of Aurora and Harper-Cochran Roads, approximately 1.9 miles east of our previous corporate office on Rockside Road in Bedford Heights, which had been the Company's primary administrative office for the past 29 years. Our new Corporate Center office building is a four-story, 55,000 square-foot facility that was originally built in 1980 as corporate offices for Agency Rent-A-Car, Inc., and was thus easily adaptable to a corporate center that would meet the needs of a bank. Management felt it was vital to invest the resources necessary to improve, renovate, and update the building in order to make it into a modern banking facility. We are, therefore, in the process of constructing a two-story, glass tower at the front of the building that will serve as the entrance to our corporate headquarters as well as the new retail branch, also currently under construction. We hope to complete all improvements to the building by the end of September and to have all department personnel situated in place by the end of October. Adjacent to our new office building, we acquired additional land that includes a beautiful water fountain and will provide a park-like environment for employee lunches and other outdoor activities. [PICTURE] For the present, the first, third, and fourth floors of the building will serve as the corporate headquarters for the management and staff of Park View Federal Savings Bank. This space should provide ample room for the current operations of the bank and allow for future growth. Since the property is prime rental real estate, we intend to lease the entire second floor of the building on a short-term basis. This will allow us to take advantage of the current rental value of the property and will also make the space available to accommodate the future expansion of the Company. We are very excited about our new facility and cordially invite you, as a shareholder of the Company, to visit us in the near future. [PICTURE] [LOGO] PVF CAPITAL CORP. 2001 ANNUAL REPORT 5 8 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA FINANCIAL CONDITION DATA:
At June 30, ------------------------------------------------------------ 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (dollars in thousands) Total assets.............................................. $736,525 $612,986 $449,201 $433,279 $373,081 Loans receivable and mortgage-backed securities held for investment, net..................... 591,767 514,885 397,284 371,949 341,914 Loans receivable held for sale and mortgage-backed securities available for sale, net...... 6,152 10,738 1,772 1,645 710 Cash equivalents and securities........................... 115,607 70,931 35,423 51,017 23,576 Deposits.................................................. 480,532 440,982 331,242 344,229 288,270 FHLB advances and notes payable........................... 185,867 114,974 66,041 47,384 49,715 Stockholders' equity...................................... 48,006 42,900 38,856 31,209 26,273 Number of: Real estate loans outstanding.......................... 4,431 4,160 3,527 2,676 2,648 Savings accounts....................................... 30,567 28,915 24,346 25,122 23,190 Offices ............................................... 12 11 10 10 9
OPERATING DATA:
Year Ended June 30, ---------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- (dollars in thousands except for earnings per share) Interest income $53,962 $42,026 $35,347 $34,365 $30,963 Interest expense 34,118 23,972 19,863 19,558 16,561 ------- ------- ------- ------- ------- Net interest income before provision for loan losses 19,844 18,054 15,484 14,807 14,402 Provision for loan losses 225 850 0 246 187 ------- ------- ------- ------- ------- Net interest income after provision for loan losses 19,619 17,204 15,484 14,561 14,215 Non-interest income 2,600 2,681 5,435 1,597 1,336 Non-interest expense 12,218 10,410 9,649 8,851 10,000 ------- ------- ------- ------- ------- Income before federal income taxes 10,001 9,475 11,270 7,307 5,551 Federal income taxes 3,365 3,163 3,551 2,379 1,904 Net income $ 6,636 $ 6,312 $ 7,719 $ 4,928 $ 3,647 Basic earnings per share $ 1.27 $ 1.20 $ 1.45 $ 0.94 $ 0.71 Diluted earnings per share $ 1.23 $ 1.16 $ 1.40 $ 0.90 $ 0.67
[LOGO] PVF CAPITAL CORP. 2001 ANNUAL REPORT 6 9 OTHER DATA:
At or For the Year Ended June 30, ------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- Return on average assets 1.00% 1.21% 1.77% 1.23% 1.04% Return on average equity 14.62% 15.45% 22.21% 17.11% 15.19% Interest rate spread information: Average during year 2.75% 3.21% 3.26% 3.38% 3.84% Net interest margin 3.09% 3.59% 3.68% 3.78% 4.22% Average interest-earning assets to average interest-bearing liabilities 106.45% 107.98% 108.92% 107.93% 107.93% Non-accruing loans (> 90 days) and repossessed assets to total assets 0.91% 0.87% 0.85% 0.92% 1.11% Stockholders' equity to total assets 6.52% 7.00% 8.65% 7.20% 7.04% Ratio of average equity to average assets 6.79% 7.80% 7.95% 7.18% 6.84% Dividend payout ratio 20.78% 21.77% 0.00% 0.00% 0.00% BANK REGULATORY CAPITAL RATIOS: Ratio of tangible capital to adjusted total assets 6.46% 6.68% 7.99% 7.21% 7.34% Ratio of core capital to adjusted total assets 6.46% 6.68% 7.99% 7.21% 7.34% Ratio of Tier-1 risk-based capital to risk-weighted assets 9.56% 9.24% 10.43% 10.11% 9.70% Ratio of risk-based capital to risk-weighted assets 10.26% 10.00% 11.17% 10.93% 10.62%
[LOGO] PVF CAPITAL CORP. 2001 ANNUAL REPORT 7 10 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, PVF Service Corporation, a wholly-owned real estate subsidiary, and Mid-Pines Land Co., a wholly-owned real estate subsidiary. Park View Federal has 12 offices located in Cleveland and surrounding communities, including recently opened branches in North Royalton, Medina, Solon, and Shaker Heights, Ohio. The Bank's principal business consists of attracting deposits from the general public through its branch offices and investing these funds in loans secured by first mortgages on real estate located in its market area, which consists of Portage, Lake, Geauga, Cuyahoga, Summit, Stark, Medina, and Lorain Counties in Ohio. The Bank has concentrated its activities on serving the borrowing needs of local homeowners and builders in its market area by originating both fixed-rate and adjustable-rate single-family mortgage loans, as well as construction loans, commercial real estate loans, and multi-family residential real estate loans. In addition, to a lesser extent, the Bank originates loans secured by second mortgages, including equity line of credit loans secured by real estate and loans secured by savings deposits. Lending activities are influenced by the demand for and supply of housing, competition among lenders, the level of interest rates, and the availability of funds. Deposit flows and cost of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities, and the level of personal income and savings in the market area. FORWARD-LOOKING STATEMENTS When used in this Annual Report, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area, 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, 2001, 2000, AND 1999 PVF had total assets of $736.5 million, $613.0 million, and $449.2 million at June 30, 2001, 2000, and 1999, 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 $597.9 million, $525.6 million, and $399.1 million at June 30, 2001, 2000, and 1999, respectively. The increase of $72.3 million in net loans and mortgage-backed securities at June 30, 2001 resulted primarily from increases in mortgage-backed securities of $16.9 million, real estate development loans of $17.2 million, commercial real estate loans of $10.5 million, equity line of credit loans of $9.8 million, construction loans of $9.7 million, and one-to-four family residential loans of $5.3 million. The increase in mortgage-backed securities resulted from the Bank's swapping of adjustable one-to-four family mortgage loans with Freddie Mac for mortgage-backed securities. In addition, securities totaled $50.2 million, $65.3 million, and $25.3 million, and cash and cash equivalents totaled $65.4 million, $5.7 million, and $10.0 million at June 30, 2001, 2000, and 1999, respectively. The increase in cash and cash equivalents of $59.7 million at June 30, 2001 was primarily attributable to the maturity of a security for $50.0 million at the end of the year. The increase of $72.3 million in net loans and mortgage-backed securities and $59.7 million [LOGO] PVF CAPITAL CORP. 2001 ANNUAL REPORT 8 11 in cash and cash equivalents were funded by increases of $70.9 million and $39.6 million in Federal Home Loan Bank ("FHLB") advances and deposits, respectively, and a decrease of $15.0 million in securities. The securities portfolio has been and will continue to be used primarily to meet the liquidity requirements of the Bank in its deposit taking and lending activities. The Bank has adopted a policy that permits investment only in U.S. government and agency securities or Triple-A-rated securities. The Bank invests primarily in securities having a final maturity of five years or less, federal funds sold, and deposits at the FHLB of Cincinnati. The entire portfolio matures within five years or less, and the Bank has no plans to change the short-term nature of its securities portfolio. The Bank's deposits totaled $480.5 million, $441.0 million, and $331.2 million at June 30, 2001, 2000, and 1999, respectively. Advances from the FHLB of Cincinnati amounted to $185.9 million, $115.0 million, and $66.0 million at June 30, 2001, 2000, and 1999, respectively. Management's decision to borrow utilizing attractive FHLB advance rates and to aggressively compete with market savings rates resulted in increases in FHLB advances of $70.9 million and savings deposits of $39.6 million for the year ended June 30, 2001. CAPITAL PVF's stockholders' equity totaled $48.0 million, $42.9 million, and $38.9 million at the years ended June 30, 2001, 2000, and 1999, respectively. The increases were the result of the retention of net earnings. The Bank's primary regulator, The Office of Thrift Supervision ("OTS") has implemented a statutory framework for capital requirements which establishes five categories of capital strength, ranging from "well capitalized" to "critically undercapitalized." An institution's category depends upon its capital level in relation to relevant capital measures, including two risk-based capital measures, a tangible capital measure, and a core/leverage capital measure. At June 30, 2001, 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 (dollars in thousands) Capital Assets (1) Institution --------------------------------------- GAAP capital $47,698 6.49% N/A Tangible capital $47,489 6.46% N/A Core capital $47,489 6.46% 5.00% Tier-1 risk-based capital $47,489 9.56% 6.00% Risk-based capital $50,984 10.26% 10.00% (1) Tangible and core capital levels are shown as a percentage of total adjusted assets; risk-based capital levels are shown as a percentage of risk-weighted assets. COMMON STOCK AND DIVIDENDS The Company's common stock trades under the symbol "PVFC" on the Nasdaq Small-Cap Market. A 10 percent stock dividend was issued in September 1997, a three- for-two stock split effected in the form of a dividend was issued in August 1998, a 10 percent stock dividend was issued in September 1999, a 10 percent stock dividend was issued in September 2000, and a 10 percent stock dividend was issued in August 2001. As adjusted to reflect all stock dividends and all stock splits, the Company had 5,337,029 shares of common stock outstanding and approximately 324 holders of record of the common stock at September 11, 2001. OTS regulations applicable to all Federal Savings Banks such as Park View Federal limit the dividends that may be paid by the Bank to PVF. Any dividends paid may not reduce the Bank's capital below minimum regulatory requirements. In June 1999, the Company announced a stock repurchase program to acquire up to 5 percent of the Company's common stock and a quarterly cash dividend policy. In April 2001, this program was renewed for an additional 12 months. The stock repurchase program is dependent on market conditions with no guarantee as to the exact number of shares to be repurchased. At June 30, 2001, the Company had acquired 123,857 shares, or 2.3 percent, of the Company's common stock. The cash dividend policy remains dependent upon the Company's financial condition, earnings, capital needs, regulatory requirements, and economic conditions. Beginning in the first quarter of fiscal 2000, a quarterly cash dividend of $0.072 per share has been paid on the Company's outstanding common stock. [LOGO] PVF CAPITAL CORP. 2001 ANNUAL REPORT 9 12 The following table sets forth certain information as to the range of the high and low bid prices for the Company's common stock for the calendar quarters indicated. (1) Fiscal 2001 Fiscal 2000 High Bid Low Bid High Bid Low Bid ------------------ ----------------- Fourth Quarter $10.23 $8.79 $ 8.26 $ 5.78 Third Quarter 9.09 8.18 9.40 6.82 Second Quarter 9.32 7.73 10.95 9.40 First Quarter 9.43 7.44 10.85 10.02 (1) Quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions. Bid prices have been adjusted to reflect the previously described stock dividends and stock splits. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity measures its ability to fund loans and meet withdrawals of deposits and other cash outflows in a cost-effective manner. The Company's primary sources of funds for operations are deposits from its primary market area, principal and interest payments on loans and mortgage-backed securities, sales of loans and mortgage-backed securities, proceeds from maturing securities, and advances from the FHLB of Cincinnati. While loan and mortgage-backed securities payments and maturing securities are relatively stable sources of funds, deposit flows and loan prepayments are greatly influenced by prevailing interest rates, economic conditions, and competition. FHLB advances may be used on a short-term basis to compensate for deposit outflows or on a long-term basis to support expanded lending and investment activities. The Bank uses its capital resources principally to meet its ongoing commitment to fund maturing certificates of deposit and deposit withdrawals, repay borrowings, fund existing and continuing loan commitments, maintain its liquidity, and meet operating expenses. At June 30, 2001, the Bank had commitments to originate loans totaling $55.9 million and had $53.8 million of undisbursed loans in process. Scheduled maturities of certificates of deposit during the 12 months following June 30, 2001 totaled $291.1 million. Management believes that a significant portion of the amounts maturing during fiscal 2001 will be reinvested with the Bank because they are retail deposits, however, no assurances can be made that this will occur. Park View Federal maintains liquid assets sufficient to meet operational needs. The Bank's most liquid assets are cash and cash equivalents, which are short-term, highly-liquid investments with original maturities equal to or less than three months that are readily convertible to known amounts of cash. The levels of such assets are dependent upon the Bank's operating, financing, and investment activities at any given time. Management believes that the liquidity levels maintained are more than adequate to meet potential deposit outflows, repay maturing FHLB advances, fund new loan demand, and cover normal operations. Park View Federal's daily liquidity ratio at June 30, 2001 was 14.67 percent. MARKET RISK MANAGEMENT Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. The Bank's market risk is composed of interest rate risk. Asset/Liability Management: The Bank's asset and liability committee ("ALCO"), which includes senior management representatives, monitors and considers methods of managing the rate sensitivity and repricing characteristics of the balance sheet components consistent with maintaining acceptable levels of changes in net portfolio value ("NPV") and net interest income. 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. PROFILE OF INTEREST SENSITIVE ASSETS [PIE GRAPH] 7.3% Investment securities 60 months or less 0.9% Consumer loans 31.4% Adjustable-rate other mortgage loans 2.4% Adjustable-rate mortgage-backed securities 7.9% Overnight Fed funds 41.6% Adjustable-rate single-family mortgage loans 3.5% Fixed-rate other mortgage loans 5.0% Fixed-rate single-family mortgage loans [LOGO] PVF CAPITAL CORP. 2001 ANNUAL REPORT 10 13 PROFILE OF INTEREST SENSITIVE LIABILITIES [PIE GRAPH] 0.6% Other borrowings 24 months or less 9.9% FHLB Advances 12 months or less 4.7% Passbook accounts 6.2% Transaction accounts 1.5% CDs over 36 months 13.4% CDs 13 to 24 months 18.4% FHLB Advances over 13 months 44.2% CDs 12 months or less 1.1% CDs 25 to 36 months The Bank'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 Bank's change in NPV in the event of hypothetical changes in interest rates, while interest rate sensitivity gap analysis is used to determine the repricing characteristics of the Bank's assets and liabilities. If estimated changes to NPV and net interest income are not within the limits established by the Board, the Board may direct management to adjust its asset and liability mix to bring interest rate risk within Board-approved limits. In order to reduce the exposure to interest rate fluctuations, the Bank has developed strategies to manage its liquidity, shorten its effective maturity, and increase the interest rate sensitivity of its asset base. Management has sought to decrease the average maturity of its assets by emphasizing the origination of adjustable-rate residential mortgage loans and adjustable-rate mortgage loans for the acquisition, development, and construction of residential and commercial real estate, all of which are retained by the Bank for its portfolio. In addition, all long-term, fixed-rate mortgages are underwritten according to guidelines of the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA") and are either swapped with the FHLMC and the FNMA in exchange for mortgage-backed securities secured by such loans which are then sold in the market or sold directly for cash in the secondary market. Interest rate sensitivity analysis is used to measure the Bank's interest rate risk by computing estimated changes in NPV of its cash flows from assets, liabilities, and off-balance sheet items in the event of a range of assumed changes in market interest rates. NPV represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk sensitive instruments in the event of an immediate and sustained 1 and 2 percent increase or decrease in market interest rates. The Bank's Board of Directors has adopted an interest rate risk policy which establishes maximum decreases in the NPV ratio (ratio of market value of portfolio equity to the market value of portfolio assets) of 0.5 and 1.0 percent in the event of an immediate and sustained 1 and 2 percent increase or decrease in market interest rates. The following table presents the Bank's projected change in NPV for the various rate shock levels at June 30, 2001 and 2000. All market risk sensitive instruments presented in this table are held to maturity or available for sale. The Bank has no trading securities.
(dollars in thousands) June 30, 2001 June 30, 2000 ------------------------------------- ------------------------------------- Change in Market Value of Dollar NPV Market Value of Dollar NPV Interest Rates Portfolio Equity Change Ratio Portfolio Equity Change Ratio -------------- ---------------- ------ ----- ---------------- ------ ----- +2% $ 54,695 $(12,267) 7.35% $ 35,620 $ (9,520) 5.95% +1% 61,312 (5,650) 8.15 40,781 (4,359) 6.72 0 66,962 8.80 45,140 7.35 -1% 68,323 1,361 8.93 48,372 3,232 7.79 -2% 67,227 265 8.73 50,586 5,446 8.08
[LOGO] PVF CAPITAL CORP. 2001 ANNUAL REPORT 11 14 The table illustrates that at June 30, 2001, in the event of an immediate and sustained increase in prevailing market interest rates, the Bank's NPV ratio would be expected to decrease, while an immediate and sustained decrease in market interest rates had little impact on the Bank's NPV ratio. While at June 30, 2000, in the event of an immediate and sustained increase in prevailing market interest rates, the Bank's NPV ratio would be expected to decrease, while in the event of an immediate and sustained decrease in prevailing market rates, the Bank's NPV ratio would be expected to increase. The Bank carefully monitors the maturity and repricing of its interest-earning assets and interest-bearing liabilities to minimize the effect of changing interest rates on its NPV. At June 30, 2001, the Bank's estimated changes in NPV ratio were within the targets established by the Board of Directors in the event of an immediate and sustained decrease in prevailing market interest rates, but exceeded Board-approved target levels in an increasing interest rate environment. The Bank's interest rate risk ("IRR") position currently exceeds Board-approved target levels in an increasing interest rate environment because of the maturity and repricing characteristics of assets and liabilities added to the balance sheet during the past year. The significant growth of the balance sheet, $123.5 million, was accomplished with the addition of interest-earning assets having a maturity and repricing period of from three to five years. These assets were funded utilizing interest-bearing liabilities having a final maturity of two years or less and advances convertible at the option of the FHLB of Cincinnati. Management will carefully monitor its IRR position and will make the necessary adjustments to its asset and liability mix to bring the Bank's NPV ratio to within target levels 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 quarters ended June 30, 2001 and 2000, 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. The Bank uses interest rate sensitivity gap analysis to monitor the relationship between the maturity and repricing of its interest-earning assets and interest-bearing liabilities, while maintaining an acceptable interest rate spread. Interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive liabilities, and is considered negative when the amount of interest-rate-sensitive liabilities exceeds the amount of interest-rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income, while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income, while a positive gap would negatively affect net interest income. Management's goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. The following table summarizes the Bank's interest rate sensitivity gap analysis at June 30, 2001. The table indicates that the Bank's one year and under ratio of cumulative gap to total assets is negative 0.2 percent, one-to-three year ratio of cumulative gap to total assets is [LOGO] PVF CAPITAL CORP. 2001 ANNUAL REPORT 12 15 0.7 percent, and three-to-five year ratio of cumulative gap to total assets is positive 16.8 percent. The well-balanced three-year and under cumulative gap position of the Bank explains the change in the Bank's NPV ratio to an immediate and sustained 1 and 2 percent increase in market interest rates.
Greater than Within 1-3 3-5 5 (dollars in thousands) 1 Year Years Years Years Total ------------------------------------------------------------------------------------------------------------------------- Total interest-rate-sensitive assets......................... $354,695 $149,656 $143,320 $ 57,710 $705,381 Total interest-rate-sensitive liabilities.................... 356,120 143,313 24,717 134,366 658,516 Periodic GAP................................................. (1,425) 6,343 118,603 (76,656) 46,865 Cumulative GAP............................................... (1,425) 4,918 123,521 46,865 Ratio of cumulative GAP to total assets...................... (0.2)% 0.7% 16.8% 6.4%
RESULTS OF OPERATIONS GENERAL PVF Capital Corp.'s net income for the year ended June 30, 2001 was $6.6 million, or $1.27 basic earnings per share and $1.23 diluted earnings per share as compared to $6.3 million, or $1.20 basic earnings per share and $1.16 diluted earnings per share for fiscal 2000, and $7.7 million, or $1.45 basic earnings per share and $1.40 diluted earnings per share for fiscal 1999. All per share amounts have been adjusted for stock dividends and stock splits. Net income for the current year increased by $0.3 million from the prior fiscal year and was $1.1 million less than net income for fiscal 1999. In fiscal 1999, the Company recorded an after-tax gain of approximately $2.5 million as a result of the closing on the sale by PVF Service Corporation of its 250-acre parcel of land in Solon, Ohio. NET INTEREST INCOME Net interest income amounted to $19.8 million for the year ended June 30, 2001, as compared to $18.1 million and $15.5 million for the years ended June 30, 2000 and 1999, respectively. Changes in the level of net interest income reflect changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities. Tables 1 and 2 provide information as to changes in the Bank's net interest income. Table 1 sets forth certain information relating to the Bank's average interest-earning assets (loans and securities) and interest-bearing liabilities (deposits and borrowings) and reflects the average yield on assets and average cost of liabilities for the periods and at the dates indicated. Such yields and costs are derived by dividing interest income or interest expense by the average daily balance of assets or liabilities, respectively, for the periods presented. During the periods indicated, non-accrual loans are included in the net loan category. Table 1 also presents information for the periods indicated with respect to the difference between the weighted-average yield earned on interest-earning assets and weighted-average rate paid on interest-bearing liabilities, or "interest rate spread," which savings institutions have traditionally used as an indicator of profitability. Another indicator of an institution's net interest income is its "net interest margin" or "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. [LOGO] PVF CAPITAL CORP. 2001 ANNUAL REPORT 13 16 Table 1
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES FOR THE YEAR ENDED JUNE 30, 2001 2000 ---------------------------------------------------------- Average Yield/ Average (dollars in thousands) Balance Interest Cost Balance Interest -------- -------- ---- -------- -------- Interest-earning assets: Loans......................................... $551,424 $ 48,101 8.72% $448,163 $ 38,390 Mortgage-backed securities.................... 16,059 1,189 7.40 1,401 90 Securities and other interest-earning assets.. 74,046 4,672 6.31 53,808 3,546 -------- -------- -------- -------- Total interest-earning assets............ 641,529 53,962 8.41 503,372 42,026 -------- -------- Non-interest-earning assets................... 26,786 20,251 ------ ------ Total assets............................. $668,315 $523,623 ======== ======== Interest-bearing liabilities: Deposits...................................... $480,692 $ 27,080 5.63 $386,242 $ 19,409 FHLB advances................................. 117,624 6,682 5.68 79,862 4,558 Notes payable................................. 4,331 356 8.22 53 5 -------- -------- -------- ------ Total interest-bearing liabilities....... 602,647 34,118 5.66 466,157 23,972 -------- ---- ------ Non-interest-bearing liabilities.............. 20,267 16,604 ------ ------ Total liabilities........................ 622,914 482,761 Stockholders' equity............................ 45,401 40,862 ------ ------ Total liabilities and stockholders' equity............... $668,315 $523,623 ======== ======== Net interest income............................. $ 19,844 $ 18,054 ======== ======== Interest rate spread............................ 2.75% ==== Net yield on interest-earning assets............ 3.09% ==== Ratio of average interest-earning assets to average interest-bearing liabilities....... 106.43% 107.98% ====== ====== AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES FOR THE YEAR ENDED JUNE 30, 1999 --------------------------------------------------- Yield/ Average Yield/ (dollars in thousands) Cost Balance Interest Cost ---- -------- -------- ---- Interest-earning assets: Loans........................................... 8.57% $384,420 $ 33,146 8.62% Mortgage-backed securities...................... 6.42 2,338 147 6.29 Securities and other interest-earning assets.... 6.59 34,500 2,054 5.95 -------- -------- Total interest-earning assets.............. 8.35 421,258 35,347 8.39 -------- Non-interest-earning assets..................... 16,071 ------ Total assets............................... $437,329 ======== Interest-bearing liabilities: Deposits........................................ 5.03 $334,530 $ 16,961 5.07 FHLB advances................................... 5.71 52,102 2,891 5.55 Notes payable................................... 9.50 122 11 9.02 -------- -------- Total interest-bearing liabilities......... 5.14 386,754 19,863 5.14 ---- -------- ---- Non-interest-bearing liabilities................ 15,818 ------ Total liabilities.......................... 402,572 Stockholders' equity.............................. 34,757 ------ Total liabilities and stockholders' equity................. $437,329 ======== Net interest income............................... $15,484 ======= Interest rate spread.............................. 3.21% 3.26% ==== ==== Net yield on interest-earning assets.............. 3.59% 3.68% ==== ==== Ratio of average interest-earning assets to average interest-bearing liabilities......... 108.92% ======
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) and changes relating to rate (changes in average rate multiplied by average old volume). Changes not solely attributable to volume or rate have been allocated in proportion to the changes due to volume and rate. As is evidenced by these tables, interest rate changes had a slightly positive effect on the Bank's net interest income for the year ended June 30, 2000, and unfavorably affected the Bank's net interest income for the year ended June 30, 2001. Due to the repricing characteristics of the Bank's loan portfolio and short-term nature of its deposit portfolio, along with declining interest rates during much of the year ended June 30, 2001 and a relatively flat yield curve during much of the year ended June 30, 2000, the Bank experienced a decrease of 46 basis points in its interest rate spread to 2.75 percent for fiscal 2001 from 3.21 percent for fiscal 2000, and during fiscal 2000 its interest rate spread decreased 5 basis points from 3.26 percent for fiscal 1999. These changes in average interest rate spread contributed to a decrease in net interest income for the year ended June 30, 2001 of $1.7 million, and a slight increase in net interest income for the year ended June 30, 2000 of $48,000 due to interest rate changes. Net interest income was favorably affected by volume changes during the years ended June 30, 2001 and 2000. Accordingly, net interest income grew by $3.5 million and $2.5 million due to volume changes for the years ended June 30, 2001 and 2000, respectively. 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. [LOGO] PVF CAPITAL CORP. 2001 ANNUAL REPORT 14 17
Table 2 YEAR ENDED JUNE 30, ----------------------------------------------------------------- 2001 vs. 2000 2000 vs. 1999 ------------------------------ ------------------------------- Increase (Decrease) Increase (Decrease) Due to Due to ------------------------------ ------------------------------- (dollars in thousands) Volume Rate Total Volume Rate Total ------- ------- ------- ------- ------- ------- Interest income: Loans.......................................... $ 9,006 $ 704 $ 9,710 $ 5,460 $ (216) $ 5,244 Mortgage-backed securities..................... 1,086 14 1,100 (60) 3 (57) Securities and other interest-earning assets... 1,241 (115) 1,126 1,297 195 1,492 ------- ------- ------- ------- ------- ------- Total interest-earning assets.............. 11,333 603 11,936 6,697 (18) 6,679 ------- ------- ------- ------- ------- ------- Interest expense: Deposits....................................... 5,321 2,350 7,671 2,599 (151) 2,448 FHLB advances.................................. 2,144 (22) 2,122 1,582 84 1,666 Notes payable.................................. 352 1 353 (6) 1 (5) ------- ------- ------- ------- ------- ------- Total interest-bearing liabilities......... 7,817 2,329 10,146 4,175 (66) 4,109 ------- ------- ------- ------- ------- ------- Net interest income.............................. $ 3,516 $(1,726) $ 1,790 $ 2,522 $ 48 $ 2,570 ======= ======= ======= ======= ======= =======
PROVISION FOR LOAN LOSSES The Bank carefully monitors its loan portfolio and establishes levels of unallocated and specific reserves for loan losses. Provisions for loan losses are charged to earnings to bring the total allowances for loan losses to a level considered adequate by management to provide for probable loan losses inherent in the loan portfolio as of each balance sheet date, based on prior loss experience, volume and type of lending conducted by the Bank, industry standards, and past due loans in the Bank's loan portfolio. The Bank's policies require the review of assets on a regular basis, and the Bank appropriately classifies loans as well as other assets if warranted. The Bank establishes specific provisions for loan losses when a loan is deemed to be uncollectible in an amount equal to the net book value of the loan or to any portion of the loan deemed uncollectible. A loan that is classified as either substandard or doubtful is assigned an allowance based upon the specific circumstances on a loan-by-loan basis after consideration of the underlying collateral and other pertinent economic and market conditions. In addition, the Bank maintains unallocated allowances based upon the establishment of a risk category for each type of loan in the Bank's portfolio. The Bank uses a systematic approach in determining the adequacy of its loan loss allowance and the necessary provision for loan losses, whereby the loan portfolio is reviewed generally and delinquent loan accounts are analyzed individually, on a monthly basis. Consideration is given primarily to the types of loans in the portfolio and the overall risk inherent in the portfolio as well as, with respect to individual loans, account status, payment history, ability to repay and probability of repayment, and loan-to-value percentages. After reviewing current economic conditions, changes in delinquency status, and actual loan losses incurred by the Bank, management establishes an appropriate reserve percentage applicable to each category of loans, and a provision for loan losses is recorded when necessary to bring the allowance to a level consistent with this analysis. During the year ended June 30, 2000, management conducted a review of the established reserve percentages used in calculating the required loan loss allowance. This review was conducted using the most currently available national and regional aggregate thrift industry data on charge-offs along with an analysis of historical losses experienced by the Bank according to type of loan. As a result of this analysis, management made moderate adjustments to the required reserve percentages on various loan categories to more accurately reflect probable losses. Management believes it uses the best information available to make a determination with respect to the allowance for loan losses, recognizing that future adjustments may be necessary depending upon a change in economic conditions. During 2001, the Bank experienced growth in the loan portfolio of $55.4 million, or 10.6 percent, while maintaining the composition of the loan portfolio. In [LOGO] PVF CAPITAL CORP. 2001 ANNUAL REPORT 15 18 addition, the level of impaired loans increased from $4.8 million to $5.4 million, while allowance related to impaired loans increased from $1,000 to $25,000. The decrease in the level of impaired loans to total loans caused the percentage of allowance for loan losses to impaired loans to decrease from 70 to 65 percent. Net charge-offs increased from $92,000 in 2000 to $93,000 in 2001. Therefore, taking into consideration the growth of the portfolio, the higher level of impaired loans, as well as net charge-offs and the overall performance of the portfolio, the Bank provided $225,000 of additional provision to maintain the allowance at a level deemed appropriate of $3.5 million. During 2000, the Bank experienced growth in the loan portfolio of $127.1 million, or 32 percent, while maintaining the composition of the loan portfolio. In addition, the level of impaired loans increased from $3.6 million to $4.8 million, while allowance related to impaired loans decreased from $55,000 to $1,000. The decrease in the level of impaired loans to total loans caused the percentage of allowance for loan losses to impaired loans to decrease from 72 to 70 percent. Net charge-offs increased from $57,000 in 1999 to $92,000 in 2000. Therefore, taking into consideration the growth of the portfolio, the higher level of impaired loans, as well as the higher level of net charge-offs and the overall performance of the portfolio, the Bank provided $850,000 of additional provision to maintain the allowance at a level deemed appropriate of $3.4 million. NON-INTEREST INCOME Non-interest income amounted to $2.6 million, $2.7 million, and $5.4 million for the years ended June 30, 2001, 2000, and 1999, respectively. The fluctuations in non-interest income are due primarily to fluctuations in income derived from mortgage banking activities, fee income on deposit accounts, gain on sale of real estate, and rental income. 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 $1,135,000, $718,000, and $1,023,000 for the years ended June 30, 2001, 2000, and 1999, respectively. The increase in income from mortgage banking activities of $417,000 from the year ended June 30, 2000 to 2001 is primarily due to an increase in net profit realized on the sale of loans. The decrease in income from mortgage banking activities of $305,000 from the year ended June 30, 1999 to 2000 is primarily due to a decrease in net profit realized on the sale of loans. Gain on the sale of real estate amounted to $301,000, $207,000, and $3,800,000 for the years ended June 30, 2001, 2000, and 1999, respectively. Other non-interest income amounted to $1,164,000, $1,755,000, and $611,000 for the years ended June 30, 2001, 2000, and 1999, respectively. The decrease in other non-interest income of $591,000 from the year ended June 30, 2000 to June 30, 2001 is attributable to insurance proceeds of $672,000 received in 2000 offset by an increase in service and other fees of $80,000 in 2001. The increase in other non-interest income of $1.1 million from the year ended June 30, 1999 to June 30, 2000 is primarily due to an insurance payment of $672,000 for legal costs previously incurred relating to the settlement of a lawsuit by PVF Holdings, Inc., a wholly-owned subsidiary of PVF Capital Corp. In addition, rental income increased by $220,000, and gain on the disposal of real estate owned properties increased by $161,000 in the year ended June 30, 2000. Changes in other non-interest income are typically the result of service and other miscellaneous fee income, rental income, insurance proceeds, 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 $12.2 million, $10.4 million, and $9.6 million for the years ended June 30, 2001, 2000, and 1999, respectively. The principal component of non-interest expense is compensation and related benefits which amounted to $6.5 million, $5.7 million, and $4.8 million for the years ended June 30, 2001, 2000, and 1999, respectively. The increase in compensation for the years ended June 30, 2001 and 2000 is due primarily to growth in the staff, the opening of a new branch in fiscal 2001, employee 401K benefits, a compensation incentive plan for both management and loan originators, and inflationary salary and wage adjustments to employees. Office occupancy totaled $2.6 million, $2.0 million, and $1.8 million for the years ended June 30, 2001, 2000, and 1999, respectively. The increased occupancy expense is attributable to the cost of opening and operating our new corporate center in Solon, Ohio, maintenance and repairs to office buildings, the relocation of an existing branch office, and the cost of opening and operating an additional branch office. Other non-interest expense totaled $3.1 million, $2.7 million, and $3.0 million for the years ended June 30, 2001, 2000, [LOGO] PVF CAPITAL CORP. 2001 ANNUAL REPORT 16 19 and 1999, respectively. Changes in other non-interest expense are primarily the result of advertising, professional and legal services, regulatory and insurance expenses, and franchise tax expense. FEDERAL INCOME TAXES The Company's federal income tax expense was $3.4 million, $3.2 million, and $3.6 million for the years ended June 30, 2001, 2000, and 1999, respectively. Due to the availability of tax credits for the years ended June 30, 2001, 2000, and 1999, and other miscellaneous deductions, the Company's effective federal income tax rate was below the expected tax rate of 35 percent with an effective rate of 34, 33, and 32 percent for the years ended June 30, 2001, 2000, and 1999, respectively. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a more significant impact on the Bank's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates. For further information regarding the effect of interest rate fluctuations on the Bank, see "Market Risk Management." EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS On July 20, 2001, The Financial Accounting Standards Board issued Statements No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Poolings initiated prior to June 30, 2001 are grandfathered. Statement 142 replaces the requirement to amortize intangible assets with indefinite lives and goodwill with a requirement for an impairment test. Statement 142 also requires an evaluation of intangible assets and their useful lives and a transitional impairment test for goodwill and certain intangible assets. After transition, the impairment tests will be performed annually. A company must adopt Statement 142 at the beginning of the fiscal year. PVF Capital Corp. will adopt Statement 141 as of July 1, 2001 and Statement 142 as of January 1, 2002. Management is currently analyzing the effect Statement 142 will have on our financial statements. [LOGO] PVF CAPITAL CORP. 17 20 [LOGO] PARK VIEW FEDERAL SAVINGS BANK BOARD OF DIRECTORS JOHN R. MALE Chairman of the Board and Chief Executive Officer C. KEITH SWANEY President, Chief Operating Officer and Chief Financial Officer ROBERT K. HEALEY Retired STANLEY T. JAROS Partner Moriarty & Jaros, P.L.L. CREIGHTON E. MILLER Partner Miller, Stillman & Bartel STUART D. NEIDUS Chairman and Chief Executive Officer Anthony & Sylvan Pools Corporation ROBERT F. URBAN Retired Officers JOHN R. MALE Chairman of the Board and Chief Executive Officer C. KEITH SWANEY President, Chief Operating Officer and Chief Financial Officer JEFFREY N. MALE Executive Vice President ANNE M. JOHNSON Senior Vice President Operations CAROL S. PORTER Corporate Secretary and Marketing Director EDWARD B. DEBEVEC Treasurer MARK E. FOSNAUGHT Vice President Branch Coordinator WILLIAM J. HARR, JR. Vice President ADELINE NOVAK Vice President Human Resources ROBERT J. PAPA Vice President Construction Lending JOHN E. SCHIMMELMANN Vice President Deposit Operations KENNAIRD H. STEWART Vice President Commercial Real Estate Lending ROBERT D. TOTH Vice President Information Systems 18 21 Office Locations and Hours BAINBRIDGE OFFICE 8500 Washington Street Chagrin Falls, Ohio 44023 440-543-8889 BEDFORD HEIGHTS OFFICE 25350 Rockside Road Bedford Hts., Ohio 44146 440-439-2200 CHARDON OFFICE 408 Water Street Chardon, Ohio 44024 440-285-2343 MACEDONIA OFFICE 497 East Aurora Road Macedonia, Ohio 44056 330-468-0055 MAYFIELD HEIGHTS OFFICE 1456 SOM Center Road Mayfield Hts., Ohio 44124 440-449-8597 MEDINA OFFICE 3613 Medina Road Medina, Ohio 44256 330-721-7484 MENTOR OFFICE 6990 Heisley Road Mentor, Ohio 44060 440-944-0276 NORTH ROYALTON OFFICE 13901 Ridge Road North Royalton, Ohio 44133 440-582-7417 SOLON OFFICE 34400 Aurora Road Solon, Ohio 44139 440-542-6070 LOBBY MON., TUES., WED., THURS.: 9:00 am - 4:30 pm FRIDAY: 9:00 am - 5:30 pm SATURDAY: 9:00 am - 1:00 pm AUTO TELLER MON., TUES., WED., THURS.: 9:00 am - 5:00 pm FRIDAY: 9:00 am - 6:00 pm SATURDAY: 9:00 am - 1:00 pm BEACHWOOD OFFICE La Place 2111 Richmond Road Beachwood, Ohio 44122 216-831-6373 LAKEWOOD-CLEVELAND OFFICE 11010 Clifton Blvd. Cleveland, Ohio 44102 216-631-8900 LOBBY MON., TUES., THURS.: 9:00 am - 4:30 pm FRIDAY: 9:00 am - 5:30 pm SATURDAY: 9:00 am - 1:00 pm CLOSED WEDNESDAY AUTO TELLER MON., TUES., THURS.: 9:00 am - 5:00 pm FRIDAY: 9:00 am - 6:00 pm SATURDAY: 9:00 am - 1:00 pm CLOSED WEDNESDAY SHAKER HEIGHTS OFFICE Shaker Towne Centre 16909 Chagrin Blvd. Shaker Hts., Ohio 44120 216-283-4003 LOBBY MON., TUES., WED., THURS: 9:00 am -D 4:30pm FRIDAY: 9:00 am -D 6:00 pm SATURDAY: 9:00 am -D 1:00 pm CORPORATE CENTER 30000 Aurora Road Solon, Ohio 44139 440-248-7171 MONDAY - FRIDAY: 9:00 am -D 5:00pm 19 22 [LOGO] PVF CAPITAL CORP. [PICTURE OF BUILDING] 23 INDEPENDENT AUDITORS' REPORT The Board of Directors PVF Capital Corp.: We have audited the accompanying consolidated statements of financial condition of PVF Capital Corp. and subsidiaries (Company) as of June 30, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Cleveland, Ohio July 27, 2001 21 24 PVF CAPITAL CORP. AND SUBSIDIARIES Consolidated Statements of Financial Condition June 30, 2001 and 2000
ASSETS 2001 2000 ------------- ------------- Cash and amounts due from depository institutions $ 8,144,926 3,806,575 Interest bearing deposits 1,200,192 815,280 Federal funds sold 56,050,000 1,050,000 ------------- ------------- Cash and cash equivalents 65,395,118 5,671,855 Securities held to maturity (fair values of $50,211,605 and $63,853,318, respectively) 50,211,605 65,258,853 Mortgage-backed securities held to maturity (fair values of $18,585,184 and $1,200,418, respectively) 18,123,936 1,215,045 Loans receivable held for long-term investment, net of allowance for loan losses of $3,520,198 and $3,387,474, respectively 573,643,498 513,669,748 Loans receivable held for sale, net 6,151,814 10,737,721 Office properties and equipment, net 7,783,457 1,857,344 Real estate held for investment 1,300,000 4,094,020 Real estate owned 547,279 488,461 Investment required by law - stock in the Federal Home Loan Bank of Cincinnati 9,442,305 5,841,227 Prepaid expenses and other assets 3,925,903 4,151,852 ------------- ------------- Total assets $ 736,524,915 612,986,126 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 480,532,150 440,981,859 Advances from the Federal Home Loan Bank of Cincinnati 185,866,855 114,973,840 Notes payable 4,700,000 1,000,000 Advances from borrowers for taxes and insurance 6,469,061 6,175,119 Accrued expenses and other liabilities 10,950,714 6,955,245 ------------- ------------- Total liabilities 688,518,780 570,086,063 ------------- ------------- Commitments and contingencies Stockholders' equity: Serial preferred stock, $.01 par value, 1,000,000 shares authorized; none issued -- -- Common stock, $.01 par value, 15,000,000 shares authorized; 5,331,314 and 4,833,333 shares issued, respectively 53,313 48,333 Additional paid-in capital 31,237,583 24,785,254 Retained earnings (substantially restricted) 17,877,854 19,039,654 Treasury stock, at cost, 123,857 and 102,369 shares, respectively (1,162,615) (973,178) ------------- ------------- Total stockholders' equity 48,006,135 42,900,063 ------------- ------------- Total liabilities and stockholders' equity $ 736,524,915 612,986,126 ============= =============
See accompanying notes to consolidated financial statements. 22 25 PVF CAPITAL CORP. AND SUBSIDIARIES Consolidated Statements of Operations Years ended June 30, 2001, 2000, and 1999
2001 2000 1999 ----------------- ----------------- ----------------- Interest income: Loans $ 48,100,662 38,390,556 33,145,769 Mortgage-backed securities 1,189,468 89,987 146,865 Cash and securities 4,671,814 3,545,785 2,054,310 ----------------- ----------------- ----------------- Total interest income 53,961,944 42,026,328 35,346,944 ----------------- ----------------- ----------------- Interest expense: Deposits 27,079,731 19,409,126 16,960,961 Short-term borrowings 7,038,219 4,563,252 2,901,621 ----------------- ----------------- ----------------- Total interest expense 34,117,950 23,972,378 19,862,582 ----------------- ----------------- ----------------- Net interest income 19,843,994 18,053,950 15,484,362 Provision for loan losses 225,000 850,000 -- ----------------- ----------------- ----------------- Net interest income after provision for loan losses 19,618,994 17,203,950 15,484,362 ----------------- ----------------- ----------------- Noninterest income: Service and other fees 562,613 482,208 492,316 Mortgage banking activities, net 501,143 547,787 422,304 Gain on sale of loans, net 633,362 170,199 601,056 Gain on sale of real estate 300,790 207,165 3,800,696 Rental income 270,528 301,426 81,779 Insurance proceeds -- 672,243 -- Other, net 331,150 299,952 37,311 ----------------- ----------------- ----------------- Total noninterest income 2,599,586 2,680,980 5,435,462 ----------------- ----------------- ----------------- Noninterest expense: Compensation and benefits 6,493,661 5,659,378 4,848,030 Office, occupancy, and equipment 2,586,580 2,002,573 1,783,631 Insurance 208,279 232,491 272,607 Professional and legal 344,849 331,103 921,664 Other 2,584,041 2,183,795 1,823,225 ----------------- ----------------- ----------------- Total noninterest expense 12,217,410 10,409,340 9,649,157 ----------------- ----------------- ----------------- Income before federal income taxes 10,001,170 9,475,590 11,270,667 Federal income taxes: Current 3,128,578 3,099,581 2,437,926 Deferred 236,714 63,679 1,113,454 ----------------- ----------------- ----------------- 3,365,292 3,163,260 3,551,380 ----------------- ----------------- ----------------- Net income $ 6,635,878 6,312,330 7,719,287 ================= ================= ================= Basic earnings per share $ 1.27 1.20 1.45 ================= ================= ================= Diluted earnings per share $ 1.23 1.16 1.40 ================= ================= =================
See accompanying notes to consolidated financial statements. 23 26 PVF CAPITAL CORP. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended June 30, 2001, 2000, and 1999
ADDITIONAL COMMON PAID-IN RETAINED TREASURY STOCK CAPITAL EARNINGS STOCK TOTAL ----------- ----------- ----------- ----------- ----------- Balance at June 30, 1998 $ 39,908 14,517,452 16,651,350 -- 31,208,710 Net income -- -- 7,719,287 -- 7,719,287 Cash paid in lieu of fractional shares -- -- (939) -- (939) Stock dividend issued, 398,934 shares 3,989 5,730,687 (5,734,676) -- -- Purchase of 6,050 shares of Treasury stock -- -- -- (71,250) (71,250) ----------- ----------- ----------- ----------- ----------- Balance at June 30, 1999 43,897 20,248,139 18,635,022 (71,250) 38,855,808 Net income -- -- 6,312,330 -- 6,312,330 Stock options exercised, 3,982 shares 40 8,043 -- -- 8,083 Cash paid in lieu of fractional shares -- -- (2,110) -- (2,110) Stock dividend issued, 439,609 shares 4,396 4,529,072 (4,533,468) -- -- Cash dividend -- -- (1,372,120) -- (1,372,120) Purchase of 87,013 shares of Treasury stock -- -- -- (901,928) (901,928) ----------- ----------- ----------- ----------- ----------- Balance at June 30, 2000 48,333 24,785,254 19,039,654 (973,178) 42,900,063 Net income -- -- 6,635,878 -- 6,635,878 Stock options exercised, 20,384 shares 204 38,201 -- -- 38,405 Cash paid in lieu of fractional shares -- -- (1,840) -- (1,840) Stock dividend issued, 477,597 shares 4,776 6,414,128 (6,418,904) -- -- Cash dividend -- -- (1,376,934) -- (1,376,934) Purchase of 21,488 shares of Treasury stock -- -- -- (189,437) (189,437) ----------- ----------- ----------- ----------- ----------- Balance at June 30, 2001 $ 53,313 31,237,583 17,877,854 (1,162,615) 48,006,135 =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 24 27 PVF CAPITAL CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended June 30, 2001, 2000, and 1999
2001 2000 1999 ------------- ------------- ------------- Operating activities: Net income $ 6,635,878 6,312,330 7,719,287 Adjustments required to reconcile net income to net cash provided by (used in) operating activities: Accretion of discount on securities (618,845) (9,297) (1,458) Depreciation and amortization 710,375 587,993 605,453 Provision for loan losses 225,000 850,000 -- Accretion of unearned discount and deferred loan origination fees, net (1,132,931) (1,085,706) (1,263,266) Deferred income tax provision (236,714) (63,679) (1,113,454) Proceeds from loans held for sale 106,047,642 37,826,392 107,977,623 Originations of loans held for sale (101,461,735) (46,791,937) (108,105,064) Gain on the sale of loans, net (633,362) (170,199) (601,056) Net change in other assets and other liabilities 4,356,135 48,841 (649,409) ------------- ------------- ------------- Net cash provided by (used in) operating activities 13,891,443 (2,495,262) 4,568,656 ------------- ------------- ------------- Investing activities: Loans originated (226,319,550) (236,094,858) (157,546,496) Principal repayments on loans 147,331,835 117,791,239 132,682,883 Principal repayments on mortgage-backed securities held to maturity 3,926,715 522,969 1,223,417 Purchase of mortgage-backed securities held to maturity (977,611) -- -- Purchase of securities held to maturity (99,918,836) (39,995,313) (25,389,250) Maturities and calls of securities held to maturity 115,584,929 79,798 27,856,667 Federal Home Loan Bank (FHLB) stock purchased, net (3,601,078) (2,081,775) (251,888) Additions to office properties and equipment (6,636,488) (442,127) (295,118) Disposals of real estate owned 740,442 478,410 752,636 (Additions) disposal of real estate held for investment, net 2,794,020 (297,168) (2,858,782) ------------- ------------- ------------- Net cash used in investing activities (67,075,622) (160,038,825) (23,825,931) ------------- ------------- -------------
(Continued) 25 28 PVF CAPITAL CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended June 30, 2001, 2000, and 1999
2001 2000 1999 ------------- ------------- ------------- Financing activities: Payments on FHLB advances $ (89,106,985) (124,066,896) (10,283,720) Proceeds from FHLB advances 160,000,000 173,000,000 30,000,000 Proceeds from notes payable 4,700,000 1,000,000 -- Repayment of notes payable (1,000,000) -- (1,060,000) Net increase in NOW and passbook savings 2,913,422 10,847,871 7,719,664 Proceeds from issuance of certificates of deposit 124,038,791 160,039,738 46,744,489 Payments on maturing certificates of deposit (87,401,922) (61,147,486) (67,451,145) Payment of cash dividend (1,378,774) (1,374,230) (939) Purchase of Treasury stock (189,437) (901,928) (71,250) Other 332,347 719,541 532,546 ------------- ------------- ------------- Net cash provided by financing activities 112,907,442 158,116,610 6,129,645 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents 59,723,263 (4,417,477) (13,127,630) Cash and cash equivalents at beginning of year 5,671,855 10,089,332 23,216,962 ------------- ------------- ------------- Cash and cash equivalents at end of year $ 65,395,118 5,671,855 10,089,332 ============= ============= ============= Supplemental disclosures of cash flow information: Cash payments of interest $ 32,577,423 23,766,847 19,922,567 Cash payments of income taxes 3,399,482 2,780,000 2,480,000 ============= ============= ============= Supplemental schedule of noncash investing and financing activities: Transfers to real estate owned $ 742,980 585,226 170,000 Loans securitized into mortgage-backed securities 16,400,000 -- -- ============= ============= =============
See accompanying notes to consolidated financial statements. 26 29 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS The accounting and reporting policies of PVF Capital Corp. and its subsidiaries (Company) conform to generally accepted accounting principles and general industry practice. The Company's principal subsidiary, Park View Federal Savings Bank (Bank), is principally engaged in the business of offering savings deposits through the issuance of savings accounts, money market accounts, and certificates of deposit and lending funds primarily for the purchase, construction, and improvement of real estate in Cuyahoga, Summit, Geauga, Lake, Medina and eastern Lorain Counties, Ohio. The deposit accounts of the Bank are insured under the Savings Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation (FDIC) and are backed by the full faith and credit of the United States government. The following is a description of the significant policies, which the Company follows in preparing and presenting its consolidated financial statements. (A) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of PVF Capital Corp. and its wholly owned subsidiaries, Park View Federal Savings Bank and PVF Service Corporation. All significant intercompany transactions and balances are eliminated in consolidation. (B) USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (C) ALLOWANCE FOR LOSSES A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreement. Since the Bank's loans are primarily collateral dependent, measurement of impairment is based on the fair value of the collateral. The allowance for loan losses is maintained at a level to absorb probable losses inherent in the portfolio as of the balance sheet date. The adequacy of the allowance for loan losses is periodically evaluated by the Bank based upon the overall portfolio composition and general market conditions. While management uses the best information available to make these evaluations, future adjustments to the allowance may be necessary if economic conditions change substantially from the assumptions used in making the evaluations. Future adjustments to the allowance may also be required by regulatory examiners based on their judgments about information available to them at the time of their examination. Uncollectible interest on loans that are contractually 90 days or more past due is charged off, or an allowance is established. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent cash payments are received until the loan is determined to be performing in accordance with the applicable loan terms in which case the loan is returned to accrual status. 27 30 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 (D) MORTGAGE BANKING ACTIVITIES Mortgage loans held for sale are carried at the lower of cost or market value, determined on an aggregate basis. The Company retains servicing on loans that are sold. The Company recognizes an asset for mortgage servicing rights based on an allocation of total loan cost using relative fair values, or a liability for mortgage servicing rights based on fair value, if the benefits of servicing are not expected to adequately compensate the Company. The cost of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on current market interest rates and prepayment assumptions. For purposes of measuring impairment, the rights are stratified based on predominant risk characteristics of the underlying loans such as interest rates and scheduled maturity. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights exceed their fair value. The Company monitors prepayments, and in the event that actual prepayments exceed original estimates, amortization is adjusted accordingly. (E) INVESTMENT AND MORTGAGE-BACKED SECURITIES The Company classifies all securities as held to maturity or available for sale. Securities held to maturity are limited to debt securities that the Company has the positive intent and the ability to hold to maturity; these securities are reported at amortized cost. Securities available for sale consist of all other securities; these securities are reported at fair value, and unrealized gains and losses are not reflected in earnings but are reflected as a component of accumulated other comprehensive income, net of tax. Investment and mortgage-backed securities that could be sold in the future because of changes in interest rates or other factors are not be classified as held to maturity. Gains or losses on the sales of all securities are recognized at the date of sale (trade date). Premiums and discounts are amortized or accredited over the life of the related security as an adjustment to yield. Dividends and interest income are recognized when earned. A decline in fair value of any available for sale or held to maturity security below cost that is deemed other than temporary is charged to earnings resulting in establishment of a new cost basis for the security. (F) OFFICE PROPERTIES AND EQUIPMENT Depreciation and amortization are computed using the straight-line method at rates expected to amortize the cost of the assets over their estimated useful lives or, with respect to leasehold improvements, the term of the lease, if shorter. 28 31 ' PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 (G) FEDERAL INCOME TAXES The Company files a consolidated tax return with its wholly owned subsidiaries and provides deferred federal income taxes in recognition of temporary differences between financial statement and income tax reporting. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled, and the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (H) LOAN ORIGINATION AND COMMITMENT FEES The Company defers loan origination and commitment fees and certain direct loan origination costs and amortizes the net amount over the lives of the related loans as a yield adjustment if the loans are held for investment, or recognizes the net fees as mortgage banking income when the loans are sold. (I) REAL ESTATE OWNED Real estate owned is carried at the lower of cost, including capitalized holding costs, or fair value less estimated selling costs. (J) STATEMENTS OF CASH FLOWS For purposes of the consolidated statements of cash flows, the Company considers cash and amounts due from depository institutions, interest bearing deposits, and federal funds sold with original maturities of less than three months to be cash equivalents. (K) EARNINGS PER SHARE Earnings per share are calculated by dividing net income for the period by the weighted average number of shares of common stock outstanding during the period. The assumed exercise of stock options is included in the calculation of diluted earnings per share. The per share data for 2001, 2000 and 1999 are adjusted to reflect the 10% stock dividends declared July 1999, July 2000 and July 2001. (L) RECLASSIFICATIONS Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. 29 32 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 (2) SECURITIES Securities held to maturity at June 30, 2001 and 2000, are summarized as follows:
2001 ----------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAIN LOSS FAIR VALUE ---------------- --------------- -------------------------------- United States Government and agency securities $ 50,000,000 -- -- 50,000,000 Municipal bond 211,605 211,605 ---------------- --------------- -------------- ------------ Total $ 50,211,605 -- -- 50,211,605 ================ =============== ============== ============ Due after one year through five years $ 50,211,605 -- -- 50,211,605 ================ =============== ============== ============
2000 ----------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAIN LOSS FAIR VALUE ---------------- --------------- -------------------------------- United States Government and agency securities $ 64,962,318 -- (1,405,535) 63,556,783 Municipal bond 296,535 -- -- 296,535 ---------------- --------------- -------------- ------------ Total $ 65,258,853 -- (1,405,535) 63,853,318 ================ =============== ============== ============ Due after one year through five years $ 65,258,853 -- (1,405,535) 63,853,318 ================ =============== ============== ============
There were no sales of securities for the years ended June 30, 2001, 2000 or 1999. In both fiscal years ended June 30, 2001 and 2000, all United States Government and agency securities are callable. 30 33 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 (3) MORTGAGE-BACKED SECURITIES Mortgage-backed securities held to maturity at June 30, 2001 and 2000, are summarized as follows:
2001 ----------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAIN LOSS FAIR VALUE ---------------- --------------- -------------------------------- FNMA mortgage-backed securities $ 873,612 28,667 -- 902,279 FHLMC mortgage-backed securities 17,038,537 432,581 -- 17,471,118 Accrued interest receivable 211,787 -- -- 211,787 ---------------- --------------- -------------- ------------ 18,123,936 461,248 -- 18,585,184 ================ =============== ============== ============ Due in less than one year 832,698 465 -- 833,163 Due after five years 17,291,238 460,783 -- 17,752,021 ---------------- --------------- -------------- ------------ $ 18,123,936 461,248 -- 18,585,184 ================ =============== ============== ============
2000 ----------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAIN LOSS FAIR VALUE ---------------- --------------- -------------------------------- FHLMC mortgage-backed securities $ 1,207,804 -- (14,627) 1,193,177 Accrued interest receivable 7,241 -- -- 7,241 ---------------- --------------- -------------- ------------ $ 1,215,045 -- (14,627) 1,200,418 ================ =============== ============== ============ Due after one year through five years 1,057,919 -- (14,627) 1,043,292 Due after five years 157,126 -- -- 157,126 ---------------- --------------- -------------- ------------ $ 1,215,045 -- (14,627) 1,200,418 ================ =============== ============== ============
There were no sales of mortgage-backed securities for the years ended June 30, 2001, 2000 or 1999. 31 34 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 (4) LOANS RECEIVABLE HELD FOR LONG-TERM INVESTMENT Loans receivable held for long-term investment at June 30, 2001 and 2000, consist of the following:
2001 2000 ------------- ------------ Real estate mortgages: One-to-four family residential $ 207,345,895 197,226,816 Home equity line of credit 37,596,975 30,978,348 Multifamily residential 43,771,548 42,503,308 Commercial 125,769,417 115,226,307 Commercial equity line of credit 15,232,077 12,078,863 Land 58,833,273 41,583,317 Construction - residential 106,275,470 106,706,249 Construction - multi-family 306,000 -- Construction - commercial 28,962,103 21,603,903 ------------- ------------ Total real estate mortgages 624,092,758 567,907,111 Consumer 5,773,178 4,390,647 ------------- ------------ 629,865,936 572,297,758 Accrued interest receivable 3,415,327 3,019,724 Deferred loan origination fees (2,318,127) (1,956,826) Unearned discount (4,072) (15,529) Undisbursed portion of loan proceeds (53,795,368) (56,287,905) Allowance for loan losses (3,520,198) (3,387,474) ------------- ------------ $ 573,643,498 513,669,748 ============= ============
A summary of the changes in the allowance for loan losses for the years ended June 30, 2001, 2000, and 1999, is as follows:
2001 2000 1999 ----------- ---------- ---------- Beginning balance $ 3,387,474 2,629,743 2,686,521 Provision charged to operations 225,000 850,000 -- Charge-offs (112,435) (92,855) (62,097) Recoveries 20,159 586 5,319 ----------- ---------- ---------- Ending balance $ 3,520,198 3,387,474 2,629,743 =========== ========== ==========
32 35 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 The following is a summary of the principal balances of loans on nonaccrual status, and loans past due 90 days or more which were on accrual status, at June 30:
2001 2000 ---------- --------- Loans on nonaccrual status: Real estate mortgages: One-to-four family residential $1,491,000 1,254,000 Commercial 1,016,000 69,000 Multi-family residential 115,000 253,000 Construction and land 2,763,000 3,266,000 ---------- --------- Total loans on nonaccrual status 5,385,000 4,842,000 ---------- --------- Past due loans on accrual status - real estate mortgages - construction and land 20,000 935,000 ---------- --------- Total past due loans $5,405,000 5,777,000 ========== =========
During the years ended June 30, 2001, 2000 and 1999, gross interest income of $769,931, $502,840 and $349,539, 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, 2001 and 2000, the recorded investment in loans, which have been identified as being impaired, totaled $5,385,000 and $4,842,000, respectively. Included in the impaired amount at June 30, 2001 and 2000, is $237,338 and $188,966, respectively, related to loans with a corresponding valuation allowance of $47,746 and $150,506, respectively. The Company recognized no interest on impaired loans in 2001, 2000, and 1999 (during the portion of the respective years that they were impaired). Average impaired loans for the years ended June 30, 2001 and 2000 amounted to $5,504,500 and $4,240,500, respectively. (5) LOANS RECEIVABLE HELD FOR SALE Loans receivable held for sale at June 30, 2001 and 2000, consist of the following:
2001 ------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAIN LOSS FAIR VALUE ----------- ------ --------- ---------- Real estate mortgages $ 6,178,875 46,933 -- 6,225,808 Deferred loan origination fees (27,061) -- -- (27,061) ----------- ------ --------- ---------- $ 6,151,814 46,933 -- 6,198,747 =========== ====== ========= ==========
33 36 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999
2000 ------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAIN LOSS FAIR VALUE ----------- ------ --------- ----------- Real estate mortgages $ 10,956,179 -- (45,000) 10,911,179 Deferred loan origination fees (173,458) -- -- (173,458) ------------ ------- ---------- ----------- $ 10,782,721 -- (45,000) 10,737,721 ============ ======= ========== ===========
Mortgage banking activities, net, including gains and losses on sales of loans, for each of the years in the three-year period ended June 30, 2001, consist of the following:
2001 2000 1999 ----------- ---------- ---------- Mortgage loan servicing fees $ 810,567 755,705 702,645 Amortization of mortgage servicing rights (354,424) (162,918) (280,341) Gross realized: Gains on sales of loans 1,766,805 613,584 1,506,985 Losses on sales of loans (1,133,443) (443,385) (905,929) Market valuation provision for losses on loans receivable held for sale -- (45,000) -- Market valuation recoveries 45,000 -- -- ----------- ---------- ---------- $ 1,134,505 717,986 1,023,360 =========== ========== ==========
The allowance for mortgage banking market value losses was $0, $45,000, and $0 for the years ended June 30, 2001, 2000 and 1999. At June 30, 2001 and 2000, the Bank was servicing whole and participation mortgage loans for others aggregating approximately $351,657,535 and $288,249,513, respectively. The Bank had $4,817,581 and $3,411,372 at June 30, 2001 and 2000, respectively, of funds collected on mortgage loans serviced for others due to investors, which is included in accrued expenses and other liabilities. 34 37 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 Originated mortgage servicing rights capitalized and amortized during the years ended June 30, 2001, 2000 and 1999 were as follows:
2001 2000 1999 ----------- ---------- ---------- Beginning balance $ 833,558 798,973 606,200 Originated 805,544 197,503 473,114 Amortized (354,424) (162,918) (280,341) ----------- ---------- ---------- Ending balance $ 1,284,678 833,558 798,973 =========== ========== ========== Estimated fair value $ 3,548,783 2,349,255 2,334,665 =========== ========== ==========
No valuation allowance has been established for mortgage servicing rights, as there has been no impairment on those rights. (6) OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment at cost, less accumulated depreciation and amortization at June 30, 2001 and 2000 are summarized as follows:
2001 2000 ------------ ---------- Land and land improvements $ 682,500 -- Building and building improvements 4,217,307 23,747 Leasehold improvements 2,446,845 2,042,976 Furniture and equipment 5,450,947 4,378,276 ------------ ---------- 12,797,599 6,444,999 Less accumulated depreciation and amortization (5,014,142) (4,587,655) ------------ ---------- $ 7,783,457 1,857,344 ============ ==========
35 38 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 (7) DEPOSITS Deposit balances at June 30, 2001 and 2000 are summarized by interest rate as follows:
2001 2000 -------------------------- -------------------------- AMOUNT % AMOUNT % ---------------- --------- ---------------- --------- NOW and money market accounts Noninterest bearing $ 12,131,093 2.5% $ 10,681,710 2.4% 2.00 - 5.00% 40,968,105 8.5 38,611,269 8.8 ---------------- --------- ---------------- --------- 53,099,198 11.0 49,292,979 11.2 Passbook savings 3.00 - 5.00% 31,244,931 6.5 32,137,728 7.3 Certificates of deposit 2.50 - 2.99% 253,089 .1 721,663 .2 3.00 - 3.99 11,015,229 2.3 -- -- 4.00 - 4.99 58,371,097 12.1 20,079,686 4.5 5.00 - 5.99 73,859,206 15.4 108,986,262 24.7 6.00 - 6.99 154,064,360 32.1 214,068,573 48.5 7.00 - 7.99 98,547,027 20.5 15,413,432 3.5 8.00 - 8.99 78,013 0.0 281,536 .1 ---------------- --------- ---------------- --------- 396,188,021 82.5 359,551,152 81.5 ---------------- --------- ---------------- --------- $ 480,532,150 100.0% $ 440,981,859 100.0% ================ ========= ================ ========= Weighted average rate on deposits 5.53% 5.49% ========= =========
2001 2000 -------------------------- -------------------------- AMOUNT % AMOUNT % ---------------- --------- ---------------- --------- Remaining term to maturity of certificates of deposit: 12 months or less $ 291,120,701 73.5 $ 277,540,274 77.2% 13 to 24 months 88,000,633 22.2 43,853,077 12.2 25 to 36 months 7,055,108 1.8 28,263,017 7.9 Over 36 months 10,011,579 2.5 9,894,784 2.7 ---------------- --------- ---------------- --------- $ 396,188,021 100.0% $ 359,551,152 100.0% ================ ========= ================ ========= Weighted average rate on certificates of deposit 6.23% 6.17% ========= =========
Time deposits in amounts of $100,000 or more totaled $119,309,822 and $99,473,486 at June 30, 2001 and 2000, respectively. 36 39 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 Interest expense on deposits is summarized as follows:
2001 2000 1999 ----------- ---------- ---------- NOW accounts $ 1,292,321 978,645 730,099 Passbook accounts 771,793 812,545 832,070 Certificates of deposit 25,015,617 17,617,936 15,398,792 ----------- ---------- ---------- $27,079,731 19,409,126 16,960,961 =========== ========== ==========
(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, 2001 and 2000, were as follows:
MATURITY INTEREST RATE 2001 2000 -------- ------------- ---------------- --------------- June 2002 5.37%for 2001 and 6.60% for 2000 $ 65,000,000 89,000,000 March 2001 5.93 -- 5,000,000 February 2003 6.00 500,000 500,000 February 2006 6.05 366,855 473,840 February 2008 5.37 10,000,000 10,000,000 March 2008 5.64 10,000,000 10,000,000 March 2011 3.94 50,000,000 -- May 2011 4.16 50,000,000 -- ---------------- --------------- $ 185,866,855 114,973,840 ================ =============== Weighted average interest rate 4.68% 6.38% ================ ===============
The Bank maintains two lines of credit, totaling $122,500,000, with the Federal Home Loan Bank of Cincinnati (FHLB). The $100,000,000 repurchase line matures in June 2001. The Bank has chosen to take daily advances from this line, with the interest rate set daily. The $22,500,000 cash management line matures in October 2000. Serving as collateral for such advances, the Bank has pledged mortgage loans with unpaid principal balances aggregating approximately $191,095,000 and $172,460,760 at June 30, 2001 and 2000, respectively. In addition, stock in the FHLB is pledged for such advances. 37 40 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 (9) NOTES PAYABLE On April 12, 2000, PVF Service Corporation, a wholly owned subsidiary of the Company, secured a mortgage note from another federally insured institution at a variable interest rate that adjusts to prime without notice on the effective date of each change in the lender's prime rate. The balance at June 30, 2001 and 2000 was $0 and $1,000,000, respectively. The note was to mature in April of 2002, but was paid in full during the year ended June 30, 2001. On July 26, 2000, PVF Capital Corp. secured a $5 million line of credit from another federally insured institution at a variable interest rate that adjusts to LIBOR plus 200 basis points. Each draw is separately negotiated with respect to rate and term. The outstanding balance at June 30, 2001 was $4,700,000. The line matures on July 31, 2002, but can be extended indefinitely in 2-year increments. (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:
2001 2000 1999 ------------------------- ---------------------- ---------------------- AMOUNT % AMOUNT % AMOUNT % -------------- ----- ------------- ------ -------------- ------ Computed expected tax $3,500,410 35.0% $ 3,316,457 35.0% $ 3,944,733 35.0% Decrease in tax resulting from: Benefit of graduated rates (100,000) (1.0) (94,756) (1.0) (112,706) (1.0) Tax credits (111,646) (1.1) (111,774) (1.2) (219,332) (2.0) Other, net 76,528 0.8 53,333 0.6 (61,315) (0.5) ---------- ----- -------------- ------ -------------- ------ $3,365,292 33.7% $ 3,163,260 33.4% $ 3,551,380 31.5% ========== ===== ============== ====== ============== =====
38 41 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 The net tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30, 2001 and 2000 are:
2001 2000 --------------- -------------- Deferred tax assets: Loan loss and other reserves $ 1,188,320 1,166,543 Other 206,027 151,741 -------------- ------------- Total gross deferred tax assets 1,394,347 1,318,284 Less valuation allowance -- -- -------------- ------------- Net deferred tax assets 1,394,347 1,318,284 -------------- ------------- Deferred tax liabilities: Deferred loan fees, net 421,069 411,289 FHLB stock dividend 845,427 717,315 Unrealized gains on loan sales, net 116,711 192,334 Originated mortgage servicing asset 436,791 283,396 Basis differences - fixed assets 874,116 797,507 Other 199,094 178,590 -------------- ------------- Total gross deferred tax liabilities 2,893,208 2,580,431 -------------- ------------- Net deferred tax liability $ (1,498,861) (1,262,147) ============== =============
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, 2001 or 2000. Retained earnings at June 30, 2001 include approximately $4,516,000 for which no provision for federal income tax has been made. This amount represents allocations of income during years prior to 1988 to bad debt deductions for tax purposes only. These qualifying and nonqualifying base year reserves and supplemental reserves will be recaptured into income in the event of certain distributions and redemptions. Such recapture would create income for tax purposes only, which would be subject to the then current corporate income tax rate. Recapture would not occur upon the reorganization, merger, or acquisition of the Bank, nor if the Bank is merged or liquidated tax-free into a bank or undergoes a charter change. If the Bank fails to qualify as a bank or merges into a nonbank entity, these reserves will be recaptured into income. The favorable reserve method previously afforded to thrifts was repealed for tax years beginning after December 31, 1995. Large thrifts were required to switch to the specific charge-off method of section 166. 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. The Bank has no such excess reserves to recapture. 39 42 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 (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, 2001: YEAR ENDING JUNE 30, 2002 $ 934,688 2003 883,149 2004 778,773 2005 642,531 2006 546,700 Thereafter 1,115,300 ------------- Total minimum lease payments $ 4,901,141 ============= During the years ended June 30, 2001, 2000, and 1999, rental expense was $809,169, $593,331 and $460,313, respectively. (12) COMMITMENTS AND CONTINGENCIES In the normal course of business, the Bank enters into commitments with off-balance sheet risk to meet the financing needs of its customers. Commitments to extend credit involve elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The Bank's exposure to credit loss in the event of nonperformance by the other party to the commitment is represented by the contractual amount of the commitment. The Bank uses the same credit policies in making commitments as it does for on-balance sheet instruments. Interest rate risk on commitments to extend credit results from the possibility that interest rates may have moved unfavorably from the position of the Bank since the time the commitment was made. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates of 60 to 120 days or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained by the Bank upon extension of credit is based on management's credit evaluation of the applicant. Collateral held is generally residential and commercial real estate. The Bank's lending is concentrated in Northeastern Ohio, and as a result, the economic conditions and market for real estate in Northeastern Ohio could have a significant impact on the Bank. 40 43 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 At June 30, 2001 and 2000, the Bank had the following commitments:
2001 2000 ----------------- ---------------- Commitments to sell mortgage loans in the secondary market $ 100,000 1,024,479 Commitments to fund variable mortgage loans 37,223,216 28,615,700 Commitments to fund fixed mortgage loans 18,667,550 4,304,905
There are pending against the Company various lawsuits and claims which arise in the normal course of business. In the opinion of management, any liabilities that may result from pending lawsuits and claims will not materially affect the financial position of the Company. (13) REGULATORY CAPITAL The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Office of Thrift Supervision (OTS) regulations requires 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, 2001, the minimum regulatory capital regulations require institutions to have equity capital to total tangible assets of 1.5%; a minimum leverage ratio of core (Tier 1) capital to total adjusted tangible assets of 3%; and a minimum ratio of total capital to risk weighted assets of 8%. At June 30, 2001, the Bank exceeded all of the aforementioned regulatory capital requirements. 41 44 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 The most recent notification from the Office of Thrift Supervision categorized the Company as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Company must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. At June 30, 2001 and 2000, the Bank was in compliance with regulatory capital requirements as set forth below (dollars in thousands):
CORE/ TIER-1 TOTAL EQUITY LEVERAGE RISK-BASED RISK-BASED CAPITAL CAPITAL CAPITAL CAPITAL --------------- -------------- -------------- -------------- June 30, 2001: GAAP capital $ 47,698 47,698 47,698 47,698 Nonallowable component (209) (209) (209) General loan valuation allowances -- -- 3,495 -------------- -------------- -------------- Regulatory capital 47,489 47,489 50,984 Total assets 735,500 Adjusted total assets 735,291 Risk-weighted assets 496,709 496,709 Actual capital ratio 6.49% 6.46% 9.56% 10.26% Regulatory requirement 1.50% 3.00% 8.00% Regulatory capital category - well-capitalized - equal to or greater than 5.00% 6.00% 10.00%
42 45 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999
CORE/ TIER-1 TOTAL EQUITY LEVERAGE RISK-BASED RISK-BASED CAPITAL CAPITAL CAPITAL CAPITAL --------------- -------------- -------------- -------------- June 30, 2000: GAAP capital $ 40,994 40,994 40,994 40,994 General loan valuation allowances -- -- 3,386 ------------- -------------- -------------- -------------- Regulatory capital 40,994 40,994 44,380 Total assets 613,695 Adjusted total assets 613,695 Risk-weighted assets 443,612 443,612 Actual capital ratio 6.68% 6.68% 9.24% 10.00% Regulatory requirement 1.50% 3.00% 8.00% Regulatory capital category - well-capitalized - equal to or greater than 5.00% 6.00% 10.00%
(14) STOCK OPTIONS The Bank offered stock options to the directors and officers of the bank under a 1992 plan, a 1996 plan, and a 2000 plan. Under the 1992 plan 85,000 options were originally authorized and granted, which are exercisable for a ten-year period and can be exercised at any time. All options under the 1992 plan have been both issued and granted, and 202, 482 options, adjusted to reflect all stock dividends, remain outstanding at June 30, 2001. Under the 1996 plan, in fiscal year 1997, 21,400 options were originally authorized and granted, in fiscal year 1998, 21,700 options were originally authorized and granted, in fiscal year 1999, 21,700 options were originally authorized and granted, in fiscal year 2000, 53,300 options were originally authorized and granted and in fiscal year 2001, 64,700 options were originally authorized and granted. The options are exercisable for a ten-year period, with a vesting period ranging from zero to five years as stated in the individual option agreements. As of June 30, 2001, 254,583 options, adjusted to reflect all stock dividends, remain as issued but outstanding, and 74, 839 options are still available to be issued. 43 46 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 As of June 30, 2001, no options have been issued under the 2000 plan. Options were granted at fair market value and, accordingly, no charges were reflected in compensation and benefits expense due to the granting of stock options. The excess of the option price over the par value of the shares purchased through the exercise of stock options is credited to additional capital:
2001 2000 1999 ---------------------- ----------------------- ----------------------- AVERAGE AVERAGE AVERAGE OPTION OPTION OPTION SHARES PRICE SHARES PRICE SHARES PRICE -------- ------- -------- ------- ------- ------- Outstanding beginning of year 405,748 5.09 346,073 $ 3.95 317,190 $ 3.51 Exercised (22,878) 1.68 (4,818) 1.68 -- -- Expired -- -- -- -- -- -- Granted 74,195 9.02 64,493 10.69 28,883 8.72 -------- ------- -------- ------- ------- ------- Outstanding end of year 457,065 5.93 405,748 $ 5.09 346,073 $ 3.95 ======== ======= ======== ======= ======= ======= Exercisable end of year 367,032 4.99 310,083 $ 5.09 279,216 $ 3.95 ======== ======= ======== ======= ======= =======
As of June 30, 2001, options outstanding have exercise prices between $1.68 and $11.36 and a weighted average remaining contractual life of 4.5 years. The Company has elected to disclose pro forma net income and net income per share as if the fair-value-based method had been applied in measuring compensation costs. The Company's pro forma information for the years ended June 30:
2001 2000 1999 ------------- ------------- ------------- Net income $ 6,635,878 6,312,330 7,719,287 Less: Pro forma compensation expense, net of tax 129,146 90,372 48,427 ------------- ------------- ------------- Pro forma earnings $ 6,506,732 6,221,958 7,670,860 ============= ============= ============= Basic earnings per share $ 1.27 1.20 1.45 ============= ============= ============= Pro forma basic earnings per share $ 1.25 1.18 1.44 ============= ============= ============= Diluted earning per share $ 1.23 1.16 1.40 ============= ============= ============= Pro forma diluted earnings per share $ 1.21 1.15 1.39 ============= ============= =============
The above results may not be representative of the effects of SFAS No. 123 on net income for future years. 44 47 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2001, 2000, and 1999; expected dividend yield of 2%, and expected option lives of 7 years; expected volatility of 30% in 2001, 2000 and 1999 and average risk free interest rates of 5.71 %, 6.14 %, and 4.33 %, respectively. Pursuant to the terms of the plans, share information and exercise prices have been adjusted to reflect the impact of stock splits and dividends subsequent to the granting dates of the options. (15) EARNINGS PER SHARE Reconciliation of basic earnings per share to diluted earnings per share for the years ended June 30:
2001 ------------------------------------------ PER-SHARE NET INCOME SHARES AMOUNT ---------- ---------- ---------- Basic EPS Income available to common shareholders $6,635,878 5,214,672 1.27 Effect of stock options -- 177,035 0.04 ---------- ---------- ---------- Diluted EPS Income available to common shareholders $6,635,878 5,391,707 1.23 ========== ========== ==========
2000 ------------------------------------------ PER-SHARE NET INCOME SHARES AMOUNT ---------- ---------- ---------- Basic EPS Income available to common shareholders $6,312,330 5,261,209 1.20 Effect of stock options -- 195,747 0.04 ---------- ---------- ---------- Diluted EPS Income available to common shareholders $6,312,330 5,456,956 1.16 ========== ========== ==========
1999 ------------------------------------------ PER-SHARE NET INCOME SHARES AMOUNT ---------- ---------- ---------- Basic EPS Income available to common shareholders $7,719,287 5,311,765 1.45 Effect of stock options -- 195,117 0.05 ---------- ---------- ---------- Diluted EPS Income available to common shareholders $7,719,287 5,506,882 1.40 ========== ========= ==========
45 48 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 (16) FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value amounts have been determined by the Bank using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Bank could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
JUNE 30, 2001 JUNE 30, 2000 ---------------------------------------------------------------- CARRYING ESTIMATED FAIR CARRYING AMOUNT ESTIMATED AMOUNT VALUE FAIR VALUE --------------- -------------------------------- --------------- Assets: Cash and amounts due from depository institutions $ 8,144,926 8,144,926 3,806,575 3,806,575 Interest-bearing deposits 1,200,192 1,200,192 815,280 815,280 Federal funds sold 56,050,000 56,050,000 1,050,000 1,050,000 Securities held to maturity 50,211,605 50,211,605 65,258,853 63,853,318 Mortgage-backed securities held to maturity 18,123,936 18,585,184 1,215,045 1,200,418 Loans receivable held for: Long-term investment, net 573,643,498 580,385,000 513,669,748 511,085,000 Sale, net 6,151,814 6,198,747 10,737,721 10,737,721 Stock in the Federal Home Loan Bank of Cincinnati 9,442,305 9,442,305 5,841,227 5,841,227 Liabilities: Demand deposits and passbook savings $ 84,344,129 84,344,129 81,430,707 81,430,707 Time deposits 396,188,021 401,746,000 359,551,152 359,551,152 Advances from the Federal Home loan Bank of Cincinnati 185,866,855 186,563,000 114,973,840 114,334,000 Notes payable 4,700,000 4,700,000 1,000,000 1,000,000
46 49 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 Cash and amounts due from depository institutions, interest bearing deposits, and federal funds sold. The carrying amount is a reasonable estimate of fair value because of the short maturity of these instruments. Securities and mortgage-backed securities. Estimated fair value for securities and mortgage-backed securities is based on quoted market prices. Loans receivable held for investment and held for sale. For loans receivable held for sale, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. For performing loans receivable held for investment, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources adjusted to reflect differences in servicing and credit costs. For other loans, cash flows and maturities are estimated based on contractual interest rates and historical experience and are discounted using secondary market rates adjusted for differences in servicing and credit costs. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Stock in the Federal Home Loan Bank of Cincinnati. This item is valued at cost, which represents redemption value and approximates fair value. Demand deposits and time deposits. The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using discounted cash flows and rates currently offered for deposits of similar remaining maturities. Advances from the Federal Home Loan Bank of Cincinnati. The fair value of the Bank's FHLB debt is estimated based on the current rates offered to the Bank for debt of the same remaining maturities. Notes payable. The carrying value of the Company's variable rate note payable is a reasonable estimate of fair value based on the current incremental borrowing rate for similar types of borrowing arrangements. 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, 2001 and 2000. 47 50 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 (17) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the unaudited consolidated quarterly results of operations for 2001 and 2000 (in thousands of dollars, except per share data): (1)
QUARTERS FOR THE YEAR ENDED JUNE 30, 2001 ------------------------------------------ FIRST SECOND THIRD FOURTH ------- ------ ------ ------ Interest income $13,202 13,856 13,266 13,639 Interest expense 8,365 8,931 8,256 8,567 ------- ------ ------ ------ Net interest income 4,837 4,925 5,010 5,072 Provision for losses on loans -- -- 75 150 Noninterest income 441 589 566 1,108 Noninterest expense 2,841 3,043 3,222 3,215 ------- ------ ------ ------ Income before taxes 2,437 2,471 2,279 2,815 Federal income taxes 808 829 771 957 ------- ------ ------ ------ Net income $ 1,629 1,642 1,508 1,858 ======= ====== ====== ====== Basic earnings per share (2) $ 0.31 0.31 0.29 0.36 ======= ====== ====== ====== Diluted earnings per share (2) $ 0.30 0.30 0.28 0.35 ======= ====== ====== ======
48 51 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999
QUARTERS FOR THE YEAR ENDED JUNE 30, 2000 ------------------------------------------ FIRST SECOND THIRD FOURTH ------ ----- ------ ------ Interest income $9,112 9,930 10,840 12,144 Interest expense 4,900 5,437 6,421 7,215 ------ ----- ------ ------ Net interest income 4,212 4,493 4,419 4,929 Provision for losses on loans 350 100 -- 400 Noninterest income 1,016 657 327 681 Noninterest expense 2,551 2,598 2,631 2,630 ------ ----- ------ ------ Income before taxes 2,327 2,452 2,115 2,580 Federal income taxes 775 818 702 867 ------ ----- ------ ------ Net income $1,552 1,634 1,413 1,713 ====== ===== ====== ====== Basic earnings per share (2) $ 0.29 0.31 0.27 0.33 ====== ===== ====== ====== Diluted earnings per share (2) $ 0.28 0.30 0.25 0.32 ====== ===== ====== ======
-------------------------------------------------- (1) The total of the four quarterly amounts may not equal the full year amount due to rounding. (2) After giving effect to a 10% stock dividend, declared on July 25, 2000 and issued on September 1, 2000 and a 10% stock dividend, declared on July 25, 2001 and issued on August 31, 2001. 49 52 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 (18) PARENT COMPANY The following condensed statements of financial condition as of June 30, 2001 and 2000, and related condensed statements of operations and cash flows for the years ended June 30, 2001, 2000 and 1999 for PVF Capital Corp. should be read in conjunction with the consolidated financial statements and the notes thereto.
CONDENSED STATEMENTS OF FINANCIAL CONDITION 2001 2000 ------------------------------------------- ----------- ---------- Cash and amounts due from depository institutions $ 44,578 21,689 Prepaid expenses and other assets 3,279,888 492,305 Investment in subsidiaries, at equity in underlying value of net assets 49,396,610 42,428,540 ----------- ---------- Total assets $52,721,076 42,942,534 =========== ========== Accrued expenses and other liabilities 14,941 42,471 Note payable 4,700,000 -- Stockholders' equity 48,006,135 42,900,063 ----------- ---------- Total liabilities and stockholders' equity $52,721,076 42,942,534 =========== ==========
CONDENSED STATEMENTS OF OPERATIONS 2001 2000 1999 ---------------------------------- ----------- --------- --------- Income: Mortgage banking activities $ 213,171 251,349 310,930 Other, net -- 12,261 -- ----------- --------- --------- 213,171 263,610 310,930 ----------- --------- --------- Expenses: Interest expense 304,688 -- -- General and administrative 184,532 206,579 249,630 ----------- --------- --------- 489,220 206,579 249,630 ----------- --------- --------- (Loss) income before federal income taxes and equity in undistributed net income of subsidiaries (276,049) 57,031 61,300 Federal income taxes 93,856 20,267 20,950 ----------- --------- --------- (Loss) income before equity in undistributed net income of subsidiaries (182,193) 36,764 40,350 Equity in undistributed net income of subsidiaries 6,818,071 6,275,566 7,678,937 ----------- --------- --------- Net income $ 6,635,878 6,312,330 7,719,287 =========== ========= =========
50 53 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999
CONDENSED STATEMENTS OF CASH FLOWS 2001 2000 1999 ---------------------------------- --------------- -------------- ------------------ Operating activities: Net income $ 6,635,878 6,312,330 7,719,287 Equity in undistributed net income of subsidiaries (6,818,071) (6,275,566) (7,678,937) Repayment of advance from subsidiary 10,175,000 1,890,000 -- Other, net (6,890,112) (436,314) (221,796) ------------ ---------- ---------- Net cash provided by (used in) operating activities 3,102,695 1,490,450 (181,446) ------------ ---------- ---------- Investing activities: Investment in Parkview Federal Savings Bank (500,000) (765,000) -- ------------ ---------- ---------- Net cash used in investing activities (500,000) (765,000) -- ------------ ---------- ---------- Financing activities: Repayment on note payable (1,400,000) -- (1,060,000) Proceeds from exercise of stock options 38,405 8,083 -- Cash paid in lieu of fractional shares -- (2,110) (939) Dividends received from subsidiaries 350,000 1,500,000 1,350,000 Dividends paid (1,378,774) (1,372,120) Purchase of Treasury stock (189,437) (901,928) (71,250) ------------ ---------- ---------- Net cash provided by (used in) financing activities (2,579,806) (768,075) 217,811 ------------ ---------- ---------- Net increase (decrease) in cash and cash equivalents 22,889 (42,625) 36,365 Cash and cash equivalents at beginning of year 21,689 64,314 27,949 ------------ ---------- ---------- Cash and cash equivalents at end of year $ 44,578 21,689 64,314 ============ ========== ==========
51 54 PVF CAPITAL CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 2001, 2000, and 1999 (19) 401(k) SAVINGS PLAN Employees who have reached age 18 and have completed one year of eligibility service are eligible to participate in the Company's 401(k) Savings Plan. The plan allowed eligible employees to contribute up to 7% of their compensation through December 31, 2000 and allows up to 15%, beginning on January 1, 2001, with the Company matching up to 50% of the first 4% contributed by the employee, as determined by the Company for the contribution period. The plan also permits the Company to make a profit sharing contribution at its discretion up to 4% of the employee's 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, 2001, 2000, and 1999 was $83,255, $78,295, and $79,638, respectively. 52 55 [LOGO] PVF CAPITAL CORP. Board of Directors JOHN R. MALE Chairman of the Board and Chief Executive Officer C. KEITH SWANEY President, Chief Operating Officer and Treasurer ROBERT K. HEALEY Retired STANLEY T. JAROS Partner Moriarty & Jaros, P.L.L. CREIGHTON E. MILLER Partner Miller, Stillman & Bartel STUART D. NEIDUS Chairman and Chief Executive Officer Anthony & Sylvan Pools Corporation ROBERT F. URBAN Retired Executive Officers JOHN R. MALE Chairman of the Board and Chief Executive Officer C. KEITH SWANEY President, Chief Operating Officer and Treasurer JEFFREY N. MALE Vice President and Secretary General Information INDEPENDENT CERTIFIED ACCOUNTANTS KPMG LLP One Cleveland Center 1375 East Ninth Street Suite 2600 Cleveland, Ohio 44114 GENERAL COUNSEL Moriarty & Jaros, P.L.L. 30195 Chagrin Boulevard Suite 110 North Pepper Pike, Ohio 44124 TRANSFER AGENT AND REGISTRAR Fifth Third Bank Corporate Trust Services Mail Drop 10AT66-3212 38 Fountain Square Cincinnati, Ohio 45263 SPECIAL COUNSEL Stradley Ronon Housley Kantarian & Bronstein, LLP 1220 19th Street, N.W., Suite 700 Washington, D.C. 20036 STOCK LISTING NASDAQ Small-Cap Market Symbol: PVFC ANNUAL MEETING The 2001 Annual Meeting of Stockholders will be held on October 22, 2001 at 10:00 a.m. at the Hilton Cleveland 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, 2001 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., 30000 Aurora Road, Solon, Ohio 44139. 56 [LOGO] PVF CAPITAL CORP. Corporate Center 30000 Aurora Road Solon, OH 44139 440-248-7171 EX-21 4 l90424aex21.txt EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Parent ------ PVF Capital Corp. State or Other Jurisdiction of Percentage Subsidiaries (1) Incorporation Ownership ---------------- --------------- ---------- Park View Federal Savings Bank U.S. 100% PVF Service Corporation Ohio 100% PVF Mortgage Corp. Ohio 100% PVF Community Development Corp. Ohio 100% Mid Pines Land Co. Ohio 100% PVF Holdings Inc. Ohio 100% (1) The assets, liabilities and operations of the subsidiaries are included in the consolidated financial statements contained in the Annual Report to Stockholders attached hereto as Exhibit 13. EX-23 5 l90424aex23.txt EXHIBIT 23 1 EXHIBIT 23 The Board of Directors PVF Capital Corp: We consent to incorporation by reference in the registration statements (No. 33-97450, No. 33-86116 and No. 333-48446) on Form S-8 of PVF Capital Corp. of our report dated July 27, 2001, relating to the consolidated statements of financial condition of PVF Capital Corp. and subsidiaries as of June 30, 2001 and 2000, 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, 2001, which report appears in the June 30, 2001 Annual Report on Form 10-K of PVF Capital Corp. /s/ KPMG LLP Cleveland, Ohio September 25, 2001