EX-13 5 l96333aexv13.txt EX-13 ANNUAL REPORT [PVF CAPITAL CORP. LOGO] ANNUAL REPORT --------------------- JUNE 30, 2002 TABLE OF CONTENTS ------------------------------------------------------ Letter to Shareholders 1 Full Service Locations 3 Selected Consolidated Financial and Other Data 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Independent Auditors' Report 21 [PVF CAPITAL CORP. LETTERHEAD] TO OUR SHAREHOLDERS We are pleased to announce that fiscal 2002 was another successful year for PVF Capital Corp. During the year, the Company completed the move into its new corporate headquarters in Solon, Ohio and successfully opened a branch office on the first floor as well as new branch offices in Avon and Strongsville, Ohio. In addition, we introduced new technology that will bring a higher level of service to our customers, shareholders, and the communities we serve. Despite a weak economy, historically low market interest rates, increased staffing, and increased operating costs attributable to the expansion of our branch network, the Company was able to improve on the prior year's operating results due to strong asset/liability management, our ability to limit the level of credit losses sustained, and a record $3.0 million in income from mortgage banking operations. Consolidated assets of the Company declined by $56.9 million, or 7.7 percent, to $679.6 million at fiscal year end June 30, 2002. The decline in assets was primarily the result of a $46.2 million decrease in cash equivalents and securities that resulted from management's decision to repay borrowed money rather than reinvest funds from maturing securities. The Company originated a record $437.1 million in loans and recorded loan sales of $295.7 million for the year, which increased the loan servicing portfolio to $528.3 million. Earnings were $7.2 million, or $1.24 basic earnings per share and $1.21 diluted earnings per share, for the year ended June 30, 2002. Return on average assets was 1.03 percent and return on average common equity was 14.19 percent for the year. In August 2002, the Company expanded its stock repurchase program to acquire an additional 5 percent of the Company's common stock. The original plan announced in June 1999 was for the purchase of up to 5 percent of the Company's common stock. Pursuant to this plan and our cash dividend policy, the Company repurchased 260,251 shares, or 4.7 percent, of its common stock through June 30, 2002 and paid a $0.296 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 2002, the Company declared a 10 percent stock dividend. We welcome two new members to our Board of Directors. Gerald A. Fallon, a former Executive Vice President and Manager of Capital Markets for KeyBank, NA, Cleveland, Ohio, and Senior Managing Director of Capital Markets for McDonald Investments Inc., Cleveland, Ohio, now retired. Raymond J. Negrelli is an investor in and developer of real estate, primarily retail and office properties, in northeast Ohio. He is President of Raymond J. Negrelli, Inc., a General Partner in Bay Properties Co., and a General Partner of Landerbrook Co., all of which are based in Euclid, Ohio. Visit our web site at www.parkviewfederal.com. The site provides information about our products and services, and provides access to current loan and deposit account rates, terms, and other information. In the coming year, we will be offering a full line of home banking services to better serve our expanding customer base. We invite all shareholders to attend our Annual Meeting of Stockholders of PVF Capital Corp. on Monday October 21, 2002 at PVF Capital Corp.'s Corporate Center, 30000 Aurora Road, Solon, 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 PVF CAPITAL CORP. 2002 Annual Report 2 FULL SERVICE LOCATIONS The significant growth of the Company over the past several years has been the result of our corporate plan to identify markets in need of the types of financial products and personalized service available at a community bank. Management has made a concentrated effort to restructure and expand our branch office network to provide greater accessibility to our present customer base and to attract new customers through a greater presence in higher-growth areas of our market. Following our conversion to a publicly traded stock company, management recognized that the Company's ability to effectively grow and compete within today's ever-changing financial services industry would be based on a strong branch foundation. In 1994, we began building a base for growth and expansion by restructuring our branch office network, which was predominantly located on the East side of Cleveland. Over the next five years, we grew from seven to ten branch locations and expanded our services into Summit and Geauga counties with new offices in Macedonia, Bainbridge, and Chardon, Ohio. We also relocated a branch within Mayfield Heights, Ohio. Beginning in 1999, consolidations within the local banking community presented us with opportunities to expand our branch network to the West side of Cleveland. During that year, we relocated our Parma branch office to North Royalton and opened a new branch in Medina. The following year, we relocated our North Moreland branch near Shaker Square in Cleveland, Ohio to Shaker Towne Centre in Shaker Heights, Ohio and opened a new branch in Solon, Ohio. The year 2001 was a milestone year for the Company. We completed the move into and successfully opened our new Corporate Center headquarters and state-of-the-art branch office in Solon, Ohio. And, just this year, we opened two new branch offices. Our Strongsville branch opened in July and our Avon branch opened this month. The restructuring and expansion of our branch network has positively poised the Company to compete within the rapidly changing financial services industry and has provided a strong foundation for further growth. Our growth has opened new markets to us in residential, construction, multi-family, and commercial real estate lending and has increased our ability to attract consumer deposits. 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. With this in mind, we remain optimistic about the future role of community banks and will continue our efforts to identify new locations for the further growth of our branch network. Park View Federal now has 15 full-service locations serving eight counties throughout the Greater Cleveland area. As we continue to grow, we remain committed to serving the financial needs of our customers and pledge our continued efforts to provide the best personal service to our customers, shareholders, and the communities we serve. [PARK VIEW FEDERAL SAVINGS BANK LOGO] 3 FULL SERVICE LOCATIONS AVON OFFICE 36311 Detroit Rd. [PHOTO] Avon, OH 44011 Tel: 440-934-3580 BAINBRIDGE OFFICE 8500 Washington St. [PHOTO] Chagrin Falls, OH 44023 Tel: 440-543-8889 CORPORATE CENTER OFFICE 30000 Aurora Rd. [PHOTO] Solon, OH 44139 Tel: 440-914-3900 BEACHWOOD OFFICE La Place 2111 Richmond Rd. [PHOTO] Beachwood, OH 44122 Tel: 216-831-6373 BEDFORD HEIGHTS OFFICE 25350 Rockside Rd. [PHOTO] Bedford Hts., OH 44146 Tel: 440-439-2200 CHARDON OFFICE 408 WATER ST. [PHOTO] Chardon, OH 44024 Tel: 440-285-2343 LAKEWOOD-CLEVELAND OFFICE 11010 Clifton Blvd. [PHOTO] Cleveland, OH 44102 Tel: 216-631-8900 MACEDONIA OFFICE 497 East Aurora Rd. [PHOTO] Macedonia, OH 44056 Tel: 330-468-0055 [LOCATIONS MAP] 4 MAYFIELD HEIGHTS OFFICE 1456 SOM Center Rd. [PHOTO] Mayfield Hts., OH 44124 Tel: 440-449-8597 MEDINA OFFICE Reserve Square 3613 Medina Rd. [PHOTO] Medina, OH 44256 Tel: 330-721-7484 MENTOR OFFICE Heisley Corners 6990 Heisley Rd. [PHOTO] Mentor, OH 44060 Tel: 440-944-0276 NORTH ROYALTON OFFICE 13901 Ridge Rd. [PHOTO] North Royalton, OH 44133 Tel: 440-582-7417 SHAKER HEIGHTS OFFICE Shaker Towne Centre 16909 Chagrin Blvd. [PHOTO] Shaker Hts., OH 44120 Tel: 216-283-4003 SOLON OFFICE Solar Shopping Center [PHOTO] 34400 Aurora Rd. Solon, OH 44139 Tel: 440-542-6070 STRONGSVILLE OFFICE 17780 Pearl Rd. [PHOTO] Strongsville, OH 44136 Tel: 440-878-6010 Park View Federal's conveniently located full-service branch offices, with ample parking facilities immediately adjacent to each office, are equipped with state-of-the-art technology to process any transaction quickly and efficiently. Our loan officers and account representatives are available to answer any questions about our financial products and services. We pride ourselves on providing our customers with the best in financial assistance and personal service. [PARK VIEW FEDERAL SAVINGS BANK LOGO] 5 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA FINANCIAL CONDITION DATA:
At June 30, ----------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------------------------------------------------------------- (dollars in thousands) Total assets............................................ $679,620 $736,525 $612,986 $449,201 $433,279 Loans receivable held for investment, net............... 563,550 573,643 513,670 395,551 368,998 Loans receivable held for sale, net..................... 11,680 6,152 10,738 1,772 1,645 Mortgage-backed securities held for investment, net..... 7,297 18,124 1,215 1,733 2,951 Cash equivalents and securities......................... 69,435 115,607 70,931 35,423 51,017 Deposits................................................ 479,672 480,532 440,982 331,242 344,229 FHLB advances and notes payable......................... 129,028 190,567 114,974 66,041 47,384 Stockholders' equity.................................... 52,299 48,006 42,900 38,856 31,209 Number of: Real estate loans outstanding......................... 4,484 4,431 4,160 3,527 2,676 Savings accounts...................................... 30,223 30,567 28,915 24,346 25,122 Offices............................................... 13 12 11 10 10
OPERATING DATA:
Year Ended June 30, ----------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------------------------------------------------------------- (dollars in thousands except for earnings per share) Interest income........................................ $48,814 $53,962 $42,026 $35,347 $34,365 Interest expense....................................... 27,060 34,118 23,972 19,863 19,558 ------- ------- ------- ------- ------- Net interest income before provision for loan losses..................... 21,754 19,844 18,054 15,484 14,807 Provision for loan losses.............................. 558 225 850 0 246 ------- ------- ------- ------- ------- Net interest income after provision for loan losses...................... 21,196 19,619 17,204 15,484 14,561 Non-interest income.................................... 3,751 2,600 2,681 5,435 1,597 Non-interest expense................................... 14,139 12,218 10,410 9,649 8,851 ------- ------- ------- ------- ------- Income before federal income taxes..................... 10,808 10,001 9,475 11,270 7,307 Federal income taxes................................... 3,635 3,365 3,163 3,551 2,379 ------- ------- ------- ------- ------- Net income............................................. $ 7,173 $ 6,636 $ 6,312 $ 7,719 $ 4,928 ======= ======= ======= ======= ======= Basic earnings per share............................... $ 1.24 $ 1.15 $ 1.09 $ 1.32 $ 0.85 ======= ======= ======= ======= ======= Diluted earnings per share............................. $ 1.21 $ 1.12 $ 1.05 $ 1.27 $ 0.82 ======= ======= ======= ======= =======
PVF CAPITAL CORP. 2002 Annual Report 6 OTHER DATA:
At or For the Year Ended June 30, ----------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------------------------------------------------------------- Return on average assets.............. 1.03% 1.00% 1.21% 1.77% 1.23% Return on average equity.............. 14.19% 14.62% 15.45% 22.21% 17.11% Interest rate spread information: Average during year.................. 2.95% 2.75% 3.21% 3.26% 3.38% Net interest margin................... 3.26% 3.09% 3.59% 3.68% 3.78% Average interest-earning assets to average interest-bearing liabilities 107.64% 106.45% 107.98% 108.92% 107.93% Non-accruing loans (> 90 days) and repossessed assets to total assets... 1.23% 0.91% 0.87% 0.85% 0.92% Stockholders' equity to total assets.. 7.70% 6.52% 7.00% 8.65% 7.20% Ratio of average equity to average assets....................... 7.24% 6.79% 7.80% 7.95% 7.18% Dividend payout ratio 21.42% 20.78% 21.77% 0.00% 0.00%
BANK REGULATORY CAPITAL RATIOS: Ratio of tangible capital to adjusted total assets................ 7.88% 6.46% 6.68% 7.99% 7.21% Ratio of core capital to adjusted total assets................ 7.88% 6.46% 6.68% 7.99% 7.21% Ratio of Tier-1 risk-based capital to risk-weighted assets.................. 10.84% 9.56% 9.24% 10.43% 10.11% Ratio of risk-based capital to risk-weighted assets................. 11.63% 10.26% 10.00% 11.17% 10.93%
PVF CAPITAL CORP. 2002 Annual Report 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL PVF Capital Corp. ("PVF" or the "Company") owns and operates Park View Federal Savings Bank ("Park View Federal" or the "Bank"), its principal and wholly-owned subsidiary, PVF Service Corporation, a wholly-owned real estate subsidiary, and Mid-Pines Land Co., a wholly-owned real estate subsidiary. Park View Federal has 13 offices located in Cleveland and surrounding communities, including recently opened branches in North Royalton, Medina, Solon, and Shaker Heights, Ohio. Offices in Strongsville and Avon, Ohio will open later this year. 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 Cuyahoga, Lake, Geauga, Portage, 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, 2002, 2001, AND 2000 PVF had total assets of $679.6 million, $736.5 million, and $613.0 million at June 30, 2002, 2001, and 2000, respectively. The primary source of the Bank's total assets has been its loan portfolio. Net loans receivable and mortgage-backed securities totaled $582.5 million, $597.9 million, and $525.6 million at June 30, 2002, 2001, and 2000, respectively. The decrease of $15.4 million in net loans and mortgage-backed securities at June 30, 2002 resulted primarily from the repayment of mortgage-backed securities of $10.8 million. In addition, loans receivable decreased by $4.6 million. This resulted from decreases of $44.3 million in one-to-four family residential loans and $0.3 million in multi-family loans. These decreases were offset by increases of $15.7 million in home equity line of credit loans, $7.6 million in commercial equity line of credit loans, $7.4 million in commercial loans, $5.3 million in construction loans, $2.7 million in consumer loans, and $1.3 million in land loans. The decrease of $44.3 million in one-to-four family residential loans is attributable to historically low market interest rates that resulted in the origination of fixed-rate loans that are originated for sale. In addition, securities totaled $55.1 million, $50.2 million, and $65.3 million, and cash and cash equivalents totaled $14.3 million, $65.4 million, and $5.7 million at June 30, 2002, 2001, and 2000, respectively. Funds from the decrease of $15.4 million in PVF CAPITAL CORP. 8 2002 Annual Report net loans and mortgage-backed securities and $51.1 million in cash and cash equivalents and the increase of $3.6 million in notes payable were used to repay $65.1 million and $0.9 million in Federal Home Loan Bank ("FHLB") advances and deposits, respectively, and fund the increase of $4.9 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 $479.7 million, $480.5 million, and $441.0 million at June 30, 2002, 2001, and 2000, respectively. Advances from the FHLB of Cincinnati amounted to $120.7 million, $185.9 million, and $115.0 million at June 30, 2002, 2001, and 2000, respectively. Management's decision to repay FHLB advances and not to aggressively compete with market savings rates resulted in decreases in FHLB advances of $65.1 million and savings deposits of $0.9 million for the year ended June 30, 2002. CAPITAL PVF's stockholders' equity totaled $52.3 million, $48.0 million, and $42.9 million at the years ended June 30, 2002, 2001, and 2000, 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, 2002, 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 $ 53,553 7.91% N/A Tangible capital $ 53,394 7.88% N/A Core capital $ 53,394 7.88% 5.00% Tier-1 risk-based capital $ 53,394 10.84% 6.00% Risk-based capital $ 57,266 11.63% 10.00%
(1) Tangible and core capital shown as a percentage of total levels are adjusted assets; capital levels are as a percentage of risk-based shown risk-weighted assets. COMMON STOCK AND DIVIDENDS The Company's common stock trades under the symbol "PVFC" on the Nasdaq Small-Cap Market. 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, a 10 percent stock dividend was issued in August 2001, and a 10 percent stock dividend was issued in August 2002. As adjusted to reflect all stock dividends and all stock splits, the Company had 5,858,606 shares of common stock outstanding and approximately 267 holders of record of the common stock at September 10, 2002. 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 August 2002, the Company announced that it had extended its stock repurchase program to acquire up to an additional 5 percent of the Company's common stock. 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, 2002, the Company had acquired 260,251 shares, or 4.7 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. A quarterly cash dividend of $0.072 per share, $0.073 per share, and $0.074 per share was paid on the Company's outstanding common stock in fiscal 2000, 2001, and 2002, respectively. PVF CAPITAL CORP. 2002 Annual Report 9 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 2002 Fiscal 2001 ----------- ----------- High Bid Low Bid High Bid Low Bid -------- ------- -------- ------- Fourth Quarter $ 12.05 $ 9.82 $ 9.30 $ 7.99 Third Quarter 10.15 9.09 8.26 7.44 Second Quarter 10.23 8.45 8.47 7.03 First Quarter 12.73 8.45 8.57 6.76
(1) Quotations reflect inter-dealer prices without retail mark-up, mark-down, or commission, and may not represent actual Bid prices transactions. have been adjusted to reflect the previously described dividends stock 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, 2002, the Bank had commitments to originate loans totaling $44.4 million and had $58.1 million of undisbursed loans in process. Scheduled maturities of certificates of deposit during the 12 months following June 30, 2002 totaled $291.1 million. Management believes that a significant portion of the amounts maturing during fiscal 2003 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. 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 PROFILE OF INTEREST SENSITIVE ASSETS [PIE CHART] Adjustable-rate other mortgage loans 39.6% Consumer loans 1.2% Investment securities 60 months or less 8.8% Overnight Fed funds 1.3% Adjustable-rate single-family mortgage loans 40.5% Fixed-rate other mortgage loans 3.8% Fixed-rate single-family mortgage loans 3.7% Adjustable-rate mortgage-backed securities 1.1%
PVF CAPITAL CORP. 10 2002 Annual Report PROFILE OF INTEREST SENSITIVE LIABILITIES [PIE CHART] FHLB Advances over 13 months 20.2% Other borrowings 60 months or less 1.4% Transaction accounts 9.9% Passbook accounts 6.2% CDs 12 months or less 42.6% CDs over 36 months 2.6% CDs 13 to 24 months 4.1% CDs 25 to 36 months 13.0%
minimize the impact of sudden and sustained changes in interest rates on NPV and net interest income. 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, 2002 and 2001. 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, 2002 June 30, 2001 ------------- ------------- Change in Market Value of Dollar NPV Market Value of Dollar NPV Interest Rates Portfolio Equity Change Ratio Portfolio Equity Change Ratio -------------- ---------------- ------ ----- ---------------- ------ ----- +2% $ 74,641 $ 678 10.67% $ 54,695 $ (12,267) 7.35% +1% 75,347 1,384 10.71 61,312 (5,650) 8.15 0 73,963 10.46 66,962 8.80 -1% 70,065 (3,897) 9.88 68,323 1,361 8.93 -2% N/A N/A N/A 67,227 265 8.73
PVF CAPITAL CORP. 2002 Annual Report 11 The table illustrates that at June 30, 2002, in the event of an immediate and sustained increase in prevailing market interest rates, the Bank's NPV ratio would be expected to increase, while in the event of an immediate and sustained decrease in prevailing market rates, the Bank's NPV ratio would be expected to decrease. While at June 30, 2001, in the event of an immediate and sustained increase in prevailing market interest rates, the Bank's NPV ratio would decrease, while an immediate and sustained decrease in market interest rates had little impact on the Bank's NPV ratio. 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, 2002, 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 increase in prevailing market interest rates, but slightly exceeded Board-approved target levels in a decreasing interest rate environment. The Bank's interest rate risk ("IRR") position currently exceeds Board-approved target levels in a decreasing interest rate environment because of the maturity and repricing characteristics of assets and liabilities. The balance sheet is primarily comprised of interest-earning assets having a maturity and repricing period of from one month 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, 2002 and 2001, 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, 2002. The table indicates that the Bank's one year and under ratio of cumulative gap to total assets is a positive 10.0 percent, one-to-three year ratio of cumulative gap to total assets is a positive 7.6 percent, and three-to-five year ratio of cumulative gap to total assets is a positive 19.6 percent. PVF CAPITAL CORP. 12 2002 Annual Report The positive gap position of the Bank explains the change in the Bank's NPV ratio to an immediate and sustained 1 and 2 percent increase and a 1 percent decrease in market interest rates.
Within 1-3 3-5 >5 (dollars in thousands) 1 Year Years Years Years Total ---------------------- ------ ----- ----- ----- ----- Total interest-rate-sensitive assets $ 321,183 $ 143,586 $ 119,384 $ 57,282 $ 647,435 Total interest-rate-sensitive liabilities 259,071 159,835 38,362 139,339 596,607 Periodic GAP 68,112 (16,249) 81,022 82,057 50,828 Cumulative GAP 68,112 51,863 132,885 50,828 Ratio of cumulative GAP to total assets 10.0% 7.6% 19.6% 7.5%
RESULTS OF OPERATIONS GENERAL PVF Capital Corp.'s net income for the year ended June 30, 2002 was $7.2 million, or $1.24 basic earnings per share and $1.21 diluted earnings per share as compared to $6.6 million, or $1.15 basic earnings per share and $1.12 diluted earnings per share for fiscal 2001, and $6.3 million, or $1.09 basic earnings per share and $1.05 diluted earnings per share for fiscal 2000. All per share amounts have been adjusted for stock dividends and stock splits. Net income for the current year increased by $0.5 million from the prior fiscal year and was $0.9 million greater than net income for fiscal 2000. NET INTEREST INCOME Net interest income amounted to $21.8 million for the year ended June 30, 2002, as compared to $19.8 million and $18.1 million for the years ended June 30, 2001 and 2000, 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. 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 PVF CAPITAL CORP. 2002 Annual Report 13 Table 1 AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES FOR THE YEAR ENDED JUNE 30,
2002 2001 2000 ------------------------------------------------------------------------------------ Average Yield/ Average Yield/ Average Yield/ (dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost ---------------------- ------- -------- ---- ------- -------- ---- ------- -------- ---- Interest-earning assets: Loans $581,812 $ 44,323 7.62% $551,424 $ 48,101 8.72% $448,163 $ 38,390 8.57% Mortgage-backed securities 11,662 719 6.17 16,059 1,189 7.40 1,401 90 6.42 Securities and other interest- earning assets 73,588 3,772 5.13 74,046 4,672 6.31 53,808 3,546 6.59 -------- -------- -------- -------- -------- -------- Total interest-earning assets 667,062 48,814 7.32 641,529 53,962 8.41 503,372 42,026 8.35 -------- -------- -------- Non-interest-earning assets 30,112 26,786 20,251 -------- -------- -------- Total assets $697,174 $668,315 $523,623 ======== ======== ======== Interest-bearing liabilities: Deposits $471,320 $ 20,995 4.45 $480,692 $ 27,080 5.63 $386,242 $ 19,409 5.03 FHLB advances 142,820 5,824 4.08 117,624 6,682 5.68 79,862 4,558 5.71 Notes payable 5,600 241 4.30 4,331 356 8.22 53 5 9.50 -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities 619,740 27,060 4.37 602,647 34,118 5.66 466,157 23,972 5.14 -------- ---- -------- ---- -------- ---- Non-interest-bearing liabilities 26,947 20,267 16,604 -------- -------- -------- Total liabilities 646,687 622,914 482,761 Stockholders' equity 50,487 45,401 40,862 -------- -------- -------- Total liabilities and stockholders' equity $697,174 $668,315 $523,623 ======== ======== ======== Net interest income $ 21,754 $ 19,844 $ 18,054 ======== ======== ======== Interest rate spread 2.95% 2.75% 3.21% ==== ==== ==== Net yield on interest-earning assets 3.26% 3.09% 3.59% ==== ==== ==== Ratio of average interest-earning assets to average interest-bearing liabilities 107.64% 106.43% 107.98% ====== ====== ======
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 positive effect on the Bank's net interest income for the year ended June 30, 2002, 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, 2002 and June 30, 2001, the Bank experienced an increase of 20 basis points in its interest rate spread to 2.95 percent for fiscal 2002 from 2.75 percent for fiscal 2001, and during fiscal 2001 its interest rate spread decreased 46 basis points from 3.21 percent for fiscal 2000. These changes in average interest rate spread contributed to an increase in net interest income for the year ended June 30, 2002 of $0.5 million, and a decrease in net interest income for the year ended June 30, 2001 of $1.7 million due to interest rate changes. Net interest income was favorably affected by volume changes during the years ended June 30, 2002 and 2001. Accordingly, net interest income grew by $1.4 million and $3.5 million due to volume changes for the years ended June 30, 2002 and 2001, 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. PVF CAPITAL CORP. 14 2002 Annual Report
Table 2 YEAR ENDED JUNE 30, ------------------------------------------------------------------------ 2002 vs. 2001 2001 vs. 2000 ---- --- ---- ---- --- ---- Increase (Decrease) Increase (Decrease) Due to Due to ---------------------------------- -------------------------------- (dollars in thousands) Volume Rate Total Volume Rate Total ---------------------- ------ ---- ----- ------ ---- ----- Interest income: Loans $ 2,315 $(6,093) $(3,778) $ 9,006 $ 704 $ 9,710 Mortgage-backed securities (271) (199) (470) 1,086 14 1,100 Securities and other interest-earning assets (23) (877) (900) 1,241 (115) 1,126 ------- ------- ------- ------- ------- ------- Total interest-earning assets 2,021 (7,169) (5,148) 11,333 603 11,936 ------- ------- ------- ------- ------- ------- Interest expense: Deposits (417) (5,667) (6,084) 5,321 2,350 7,671 FHLB advances 1,028 (1,886) (858) 2,144 (22) 2,122 Notes payable 54 (170) (116) 352 1 353 ------- ------- ------- ------- ------- ------- Total interest-bearing liabilities 665 (7,723) (7,058) 7,817 2,329 10,146 ------- ------- ------- ------- ------- ------- Net interest income $ 1,356 $ 554 $ 1,910 $ 3,516 $(1,726) $ 1,790 ======= ======= ======= ======= ======= =======
PROVISION FOR LOAN LOSSES The Bank carefully monitors its loan portfolio and establishes levels of general 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 general 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. PVF CAPITAL CORP. 2002 Annual Report 15 During 2002, the Bank experienced a decline in the loan portfolio of $4.6 million, or 0.8 percent, while maintaining the composition of the loan portfolio. In addition, the level of impaired loans increased from $5.4 million to $13.0 million, while the specific allowance related to impaired loans increased from $25,000 to $30,000. The increase in the level of impaired loans to total loans caused the percentage of allowance for loan losses to impaired loans to decrease from 65 to 30 percent. Net charge-offs increased from $93,000 in 2001 to $176,000 in 2002. Therefore, taking into consideration the higher level of impaired loans, as well as the higher level of net charge-offs and the overall performance of the loan portfolio, the Bank provided $558,000 of additional provision to increase the allowance to a level deemed appropriate of $3.9 million. 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 addition, the level of impaired loans increased from $5.1 million to $5.4 million, while the specific allowance related to impaired loans increased from $1,000 to $25,000. The increase in the level of impaired loans to total loans caused the percentage of allowance for loan losses to impaired loans to decrease from 67 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 loan portfolio, the Bank provided $225,000 of additional provision to maintain the allowance at a level deemed appropriate of $3.5 million. NON-INTEREST INCOME Non-interest income amounted to $3.8 million, $2.6 million, and $2.7 million for the years ended June 30, 2002, 2001, and 2000, 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 $2,985,000, $1,135,000, and $718,000 for the years ended June 30, 2002, 2001, and 2000, respectively. The increase in income from mortgage banking activities of $1.9 million from the year ended June 30, 2001 to 2002 is due to an increase in net profit realized on the sale of loans. 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. Gain on the sale of real estate amounted to $301,000 and $207,000 for the years ended June 30, 2001 and 2000, respectively. Other non-interest income amounted to $766,000, $1,164,000, and $1,755,000 for the years ended June 30, 2002, 2001, and 2000, respectively. The decrease in other non-interest income of $398,000 from the year ended June 30, 2001 to June 30, 2002 is attributable to a decline in rental income in 2002. The decrease in other non-interest income of $591,000 from the year ended June 30, 2000 to June 30, 2001 is primarily due to insurance proceeds of $672,000 recovered in 2000 for legal costs previously incurred relating to the settlement of a lawsuit by PVF Holdings, Inc., a wholly-owned subsidiary of PVF Capital Corp. 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 $14.1 million, $12.2 million, and $10.4 million for the years ended June 30, 2002, 2001, and 2000, respectively. The principal component of non-interest expense is compensation and related benefits which amounted to $7.6 million, $6.5 million, and $5.7 million for the years ended June 30, 2002, 2001, and 2000, respectively. The increase in compensation for the years ended June 30, 2002 and 2001 is due primarily to growth in the staff, employee 401K benefits, a compensation incentive plan for management, and inflationary salary and wage adjustments to employees. Office occupancy totaled $2.8 million, $2.6 million, and $2.0 million for the years ended June 30, 2002, 2001, and 2000, respectively. The increased occupancy expense is attributable to the cost of our new corporate center in Solon, Ohio, maintenance and repairs to office buildings, and the cost of opening and operating additional branch offices. Other non-interest expense totaled $3.7 million, $3.1 million, and $2.7 million for the years ended June 30, 2002, 2001, and 2000, 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. PVF CAPITAL CORP. 16 2002 Annual Report FEDERAL INCOME TAXES The Company's federal income tax expense was $3.6 million, $3.4 million, and $3.2 million for the years ended June 30, 2002, 2001, and 2000, respectively. Due to the availability of tax credits for the years ended June 30, 2002, 2001, and 2000, 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, 34, and 33 percent for the years ended June 30, 2002, 2001, and 2000, 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. PVF Capital Corp. adopted Statement 141 on July 1, 2001 and adopted Statement 142 on July 1, 2002. Management determined that the adoption of Statement 142 will not have a material impact on the Company's Consolidated Financial Statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which amends SFAS No. 121 by addressing business segments accounted for as a discontinued operation under Accounting Principles Board Opinion No. 30. This Statement is effective for fiscal years beginning after December 15, 2001. The effect of this Statement on the financial position and results of operations of the Company is not expected to be material. In July 2002, FASB issued SFAS No. 146, "Obligations Associated with Disposal Activities." This standard covers accounting for costs associated with exit or disposal activities, such as lease termination costs or employee severance costs. The Statement replaces EITF 94-3, and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. It requires these costs to be recognized when they are incurred rather than at date of commitment to an exit or disposal plan. Management has not yet determined the impact of adopting this standard. [PVF CAPITAL CORP. LOGO] 17 [PARKVIEW FEDERAL SAVINGS BANK LOGO] 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 GERALD A. FALLON Retired ROBERT K. HEALEY Retired STANLEY T. JAROS Partner Moriarty & Jaros, P.L.L. RAYMOND J. NEGRELLI President Raymond J. Negrelli, Inc. STUART D. NEIDUS Chairman and Chief Executive Officer Anthony & Sylvan Pools Corporation 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 Office Locations and Hours AVON OFFICE 36311 Detroit Road Avon, Ohio 44011 440-934-3580 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 Reserve Square 3613 Medina Road Medina, Ohio 44256 330-721-7484 MENTOR OFFICE Heisley Corners 6990 Heisley Road Mentor, Ohio 44060 440-944-0276 NORTH ROYALTON OFFICE 13901 Ridge Road North Royalton, Ohio 44133 440-582-7417 SOLON OFFICE Solar Shopping Center 34400 Aurora Road Solon, Ohio 44139 440-542-6070 STRONGSVILLE OFFICE 17780 Pearl Road Strongsville, Ohio 44136 440-878-6010 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 - 4:30 pm FRIDAY: 9:00 am - 6:00 pm SATURDAY: 9:00 am - 1:00 pm CORPORATE CENTER OFFICE 30000 Aurora Road Solon, Ohio 44139 440-914-3900 LOBBY & AUTO TELLER MONDAY - FRIDAY: 9:00 am - 5:00 pm CLOSED SATURDAY 19 [PVF CAPITAL CORP. LOGO] [PICTURE OF BUILDING] INDEPENDENT AUDITORS' REPORT The Board of Directors PVF Capital Corp. We have audited the accompanying consolidated statements of financial condition of PVF Capital Corp. (Company) as of June 30, 2002 and the related consolidated statements of operations, stockholders' equity, and cash flows the year then ended. 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. The 2001 and 2000 financial statements were audited by other auditors, whose reported dated July 27, 2001 expressed on unqualified opinion on those statements. We conducted our audit 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. as of June 30, 2002, and the results of its operations and its cash flows of the year then ended, in conformity with accounting principles generally accepted in the United States of America. [CROWE CHIZEK AND COMPANY LLP] Cleveland, Ohio July 17, 2002 21 PVF CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION JUNE 30, 2002 AND 2001
ASSETS 2002 2001 ----------------- ----------------- Cash and amounts due from depository institutions...................... $ 4,526,976 $ 8,144,926 Interest bearing deposits.............................................. 1,736,712 1,200,192 Federal funds sold..................................................... 8,050,000 56,050,000 ----------------- ----------------- Cash and cash equivalents........................................ 14,313,688 65,395,118 Securities held to maturity (fair values of $55,751,561 and $50,211,605, respectively)....................... 55,121,211 50,211,605 Mortgage-backed securities held to maturity (fair values of $7,500,739 and $18,585,184, respectively)........................ 7,297,206 18,123,936 Loans receivable held for long-term investment, net of allowance for loan losses of $3,901,839 and $3,520,198, respectively............................. 563,550,556 573,643,498 Loans receivable held for sale, net.................................... 11,679,735 6,151,814 Office properties and equipment, net................................... 9,817,348 7,783,457 Real estate held for investment........................................ 1,650,000 1,300,000 Real estate owned...................................................... 564,316 547,279 Stock in the Federal Home Loan Bank of Cincinnati...................... 9,947,624 9,442,305 Prepaid expenses and other assets...................................... 5,678,431 3,925,903 ----------------- ----------------- Total assets.................................................. $ 679,620,115 $ 736,524,915 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits ........................................................... $ 479,672,218 $ 480,532,150 Advances from the Federal Home Loan Bank of Cincinnati.............. 120,739,695 185,866,855 Notes payable....................................................... 8,288,020 4,700,000 Advances from borrowers for taxes and insurance..................... 7,320,613 6,469,061 Accrued expenses and other liabilities.............................. 11,300,991 10,950,714 ----------------- ----------------- Total liabilities............................................. 627,321,537 688,518,780 ----------------- ----------------- 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; 6,045,352 and 5,331,314 shares issued, respectively.............. 60,454 53,313 Additional paid-in capital.......................................... 37,342,458 31,237,583 Retained earnings (substantially restricted)........................ 17,697,883 17,877,854 Treasury stock, at cost, 260,251 and 123,857 shares, respectively... (2,802,217) (1,162,615) ----------------- ----------------- Total stockholders' equity.................................... 52,298,578 48,006,135 ----------------- ----------------- Total liabilities and stockholders' equity.................... $ 679,620,115 $ 736,524,915 ================= =================
See accompanying notes to consolidated financial statements. 22 PVF CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 2002, 2001, AND 2000
2002 2001 2000 ---------------- ----------------- ----------------- Interest income: Loans ............................................ $ 44,322,897 $ 48,100,662 $ 38,390,556 Mortgage-backed securities........................ 719,321 1,189,468 89,987 Cash and securities............................... 3,772,463 4,671,814 3,545,785 ---------------- ----------------- ----------------- Total interest income.......................... 48,814,681 53,961,944 42,026,328 ---------------- ----------------- ----------------- Interest expense: Deposits.......................................... 20,995,003 27,079,731 19,409,126 Short-term borrowings............................. 6,065,389 7,038,219 4,563,252 ---------------- ----------------- ----------------- Total interest expense......................... 27,060,392 34,117,950 23,972,378 ---------------- ----------------- ----------------- Net interest income............................ 21,754,289 19,843,994 18,053,950 Provision for loan losses......................... 558,000 225,000 850,000 ---------------- ----------------- ----------------- Net interest income after provision for loan losses ................................ 21,196,289 19,618,994 17,203,950 ---------------- ----------------- ----------------- Noninterest income: Service and other fees............................ 625,631 562,613 482,208 Mortgage banking activities, net.................. 2,985,424 1,134,505 717,986 Gain on sale of real estate....................... - 300,790 207,165 Rental income..................................... - 270,528 301,426 Insurance proceeds................................ - - 672,243 Other, net........................................ 139,913 331,150 299,952 ---------------- ----------------- ----------------- Total noninterest income....................... 3,750,968 2,599,586 2,680,980 ---------------- ----------------- ----------------- Noninterest expense: Compensation and benefits......................... 7,643,251 6,493,661 5,659,378 Office, occupancy, and equipment.................. 2,758,158 2,586,580 2,002,573 Insurance......................................... 226,511 208,279 232,491 Professional and legal............................ 425,185 344,849 331,103 Other ............................................ 3,085,530 2,584,041 2,183,795 ---------------- ----------------- ----------------- Total noninterest expense...................... 14,138,635 12,217,410 10,409,340 ---------------- ----------------- ----------------- Income before federal income taxes............. 10,808,622 10,001,170 9,475,590 Federal income taxes: Current........................................... 3,431,586 3,128,578 3,099,581 Deferred.......................................... 203,727 236,714 63,679 ---------------- ----------------- ----------------- 3,635,313 3,365,292 3,163,260 ---------------- ----------------- ----------------- Net income..................................... $ 7,173,309 $ 6,635,878 $ 6,312,330 ================ ================= ================= Basic earnings per share............................. $ 1.24 $ 1.15 $ 1.09 ================ ================= ================= Diluted earnings per share........................... $ 1.21 $ 1.12 $ 1.05 ================ ================= =================
See accompanying notes to consolidated financial statements. 23 PVF CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 2002, 2001, AND 2000
ADDITIONAL COMMON PAID-IN RETAINED TREASURY STOCK CAPITAL EARNINGS STOCK TOTAL ----------- ----------- ----------- ----------- ----------- Balance at July 1, 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 ...................... 48,833 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 Net income ................................. -- -- 7,173,309 -- 7,173,309 Stock options exercised, 173,492 shares .... 1,735 293,425 -- -- 295,160 Stock dividend issued, 540,600 shares ...... 5,406 5,811,450 (5,816,856) -- -- Cash dividend .............................. -- -- (1,536,424) -- (1,536,424) Purchase of 136,395 shares of Treasury stock -- -- -- (1,639,602) (1,639,602) ----------- ----------- ----------- ----------- ----------- Balance at June 30, 2002 ...................... $ 60,454 37,342,458 17,697,883 (2,802,217) 52,298,578 =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. 24 PVF CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2002, 2001, AND 2000
2002 2001 2000 ------------- ------------- ------------- Operating activities: Net income ........................................................ $ 7,173,309 6,635,878 6,312,330 Adjustments required to reconcile net income to net cash provided by (used in) operating activities: Accretion of discount on securities .......................... -- (618,845) (9,297) Depreciation and amortization ................................ 1,060,530 710,375 587,993 Provision for loan losses .................................... 558,000 225,000 850,000 Accretion of unearned discount and deferred loan origination fees, net ........................ (1,130,822) (1,132,931) (1,085,706) Deferred income tax provision ................................ (203,727) (236,714) (63,679) Proceeds from loans held for sale ............................ 295,706,407 106,047,642 37,826,392 Originations of loans held for sale .......................... (301,234,328) (46,791,937) Gain on the sale of loans, net ............................... (2,981,311) (633,362) (170,199) Net change in other assets and other liabilities ............. (1,213,531) 4,356,135 48,841 ------------- ------------- ------------- Net cash from operating activities .......................... (2,265,473) 13,891,443 (2,495,262) ------------- ------------- ------------- Investing activities: Loans originated .................................................. (135,864,877) (226,319,550) (236,094,858) Principal repayments on loans ..................................... 149,065,323 147,331,835 117,791,239 Principal repayments on mortgage-backed securities held to maturity 10,918,228 3,926,715 522,969 Purchase of mortgage-backed securities held to maturity ........... -- (977,611) -- Purchase of securities held to maturity ........................... (55,000,000) (99,918,836) (39,995,313) Maturities and calls of securities held to maturity ............... 50,090,394 115,584,929 79,798 Federal Home Loan Bank (FHLB) stock purchased, net ................ (505,319) (3,601,078) (2,081,775) Additions to office properties and equipment ...................... (3,094,421) (6,636,488) (442,127) Disposals of real estate owned .................................... 353,100 740,442 478,410 (Additions) disposal of real estate held for investment, net ....................................... (350,000) 2,794,020 (297,168) ------------- ------------- ------------- Net cash from investing activities .......................... 15,612,428 (67,075,622) (160,038,825) ------------- ------------- -------------
(Continued) 25 PVF CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 2002, 2001, AND 2000
2002 2001 2000 ------------- -------------- -------------- Financing activities: Payments on FHLB advances................................... $(183,127,160) (89,106,985) (124,066,896) Proceeds from FHLB advances................................. 118,000,000 160,000,000 173,000,000 Proceeds from notes payable................................. 6,650,000 4,700,000 1,000,000 Repayment of notes payable.................................. (3,061,980) (1,000,000) -- Net increase in NOW and passbook savings.................... 23,728,050 2,913,422 10,847,871 Proceeds from issuance of certificates of deposit........... 88,664,759 124,038,791 160,039,738 Payments on maturing certificates of deposit................ (113,252,740) (87,401,922) (61,147,486) Increase in advances from borrowers......................... 851,552 -- -- Payment of cash dividend.................................... (1,536,424) (1,378,774) (1,374,230) Purchase of Treasury stock.................................. (1,639,602) (189,437) (901,928) Other ...................................................... 295,160 332,347 719,541 ------------- -------------- -------------- Net cash from financing activities..................... (64,428,385) 112,907,442 158,116,610 ------------- -------------- -------------- Net increase (decrease) in cash and cash equivalents... (51,081,430) 59,723,263 (4,417,477) Cash and cash equivalents at beginning of year................. 65,395,118 5,671,855 10,089,332 ------------- -------------- -------------- Cash and cash equivalents at end of year....................... $ 14,313,688 65,395,118 5,671,855 ============= ============== ============== Supplemental disclosures of cash flow information: Cash payments of interest................................... $ 28,600,682 32,577,423 23,766,847 Cash payments of income taxes............................... 2,825,000 3,399,482 2,780,000 ============= ============== ============== Supplemental schedule of noncash investing and financing activities: Transfers to real estate owned.............................. $ 355,132 742,981 585,226 Loans securitized into mortgage-backed securities........... -- 16,400,000 -- ============= ============== ==============
See accompanying notes to consolidated financial statements. 26 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 (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 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. The allowance for loan losses and fair value of financial instruments are particularly subject to change. (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. Uncollectable 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 27 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 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. (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. Estimated lives range from one to forty years. Land is carried at cost. 28 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 (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 or fair value less estimated selling costs. Costs after acquisition are expensed. (J) LONG-TERM ASSETS Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. (K) 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. Net cash flows are reported for now and passbook savings accounts. (L) STOCK COMPENSATION Employee compensation expense under stock option plans is reported if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are shown using the fair value method of SFAS No. 123 to measure expense for options granted after 1994, using an option pricing model to estimate fair value. 29 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 (M) FINANCIAL INSTRUMENTS Financial Instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. (N) 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 2002, 2001 and 2000 are adjusted to reflect the 10% stock dividends declared July 2002, July 2001 and July 2000. (O) LOSS CONTINGENCIES Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe thee now are such matters that will have a material effect on the financial statements. (P) FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. (Q) OPERATING SEGMENTS While the Company's chief decision-makers monitor the revenue streams of the various Company products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company's financial service operations are considered by management to be aggregated in one reportable operating segment. (R) RECLASSIFICATIONS Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. 30 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 (2) SECURITIES Securities held to maturity at June 30, 2002 and 2001, are summarized as follows:
2002 ---- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAIN LOSS FAIR VALUE ----------- ---------- ---------- ---------- United States Government and agency securities $55,000,000 639,100 (8,750) 55,630,350 Municipal bond 121,211 -- -- 121,211 ----------- ---------- ---------- ---------- Total $55,121,211 639,100 (8,750) 55,751,561 =========== ========== ========== ========== Due after one year through five years $55,121,211 639,100 (8,750) 55,751,561 =========== ========== ========== ==========
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 =========== ========== ========== ==========
There were no sales of securities for the years ended June 30, 2002, 2001 or 2000. $50,000,000 of United States Government securities was called in the year ended June 30, 2002. All United States Government and agency securities were callable within one year of June 30, 2002 and June 30, 2001. 31 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 (3) MORTGAGE-BACKED SECURITIES Mortgage-backed securities held to maturity at June 30, 2002 and 2001, are summarized as follows:
2002 ---- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAIN LOSS FAIR VALUE ---------- ---------- ---------- ---------- FNMA mortgage-backed securities $ 188,732 3,564 -- 192,296 FHLMC mortgage-backed securities 7,022,569 199,969 -- 7,222,538 Accrued interest receivable 85,905 -- -- 85,905 ---------- ---------- ---------- ---------- $7,297,206 203,533 -- 7,500,739 ========== ========== ========== ==========
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 =========== ========== ========== ==========
There were no sales of mortgage-backed securities for the years ended June 30, 2002, 2001 or 2000. 32 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 (4) LOANS RECEIVABLE HELD FOR LONG-TERM INVESTMENT Loans receivable held for long-term investment at June 30, 2002 and 2001, consist of the following:
2002 2001 ------------- ------------- Real estate mortgages: One-to-four family residential ........... $ 158,833,656 207,345,895 Home equity line of credit ............... 53,349,287 37,596,975 Multifamily residential .................. 43,451,715 43,771,548 Commercial ............................... 133,145,924 125,769,417 Commercial equity line of credit ......... 22,872,121 15,232,077 Land ..................................... 11,276,593 8,520,091 Land Development ......................... 48,848,284 50,313,182 Construction - residential ............... 110,596,307 106,275,470 Construction - multi-family .............. 1,084,805 306,000 Construction - commercial ................ 33,451,288 28,962,103 ------------- ------------- Total real estate mortgages ........... 616,909,981 624,092,758 Consumer ................................. 8,459,413 5,773,178 ------------- ------------- 625,369,394 629,865,936 Accrued interest receivable .............. 3,415,327 3,415,327 Deferred loan origination fees ........... (2,789,665) (2,318,127) Unearned discount ........................ (3,085) (4,072) Undisbursed portion of loan proceeds ..... (58,097,903) (53,795,368) Allowance for loan losses ................ (3,901,839) (3,520,198) ------------- ------------- $ 563,550,556 573,643,498 ============= =============
A summary of the changes in the allowance for loan losses for the years ended June 30, 2002, 2001, and 2000, is as follows:
2002 2001 2000 ----------- ----------- ----------- Beginning balance .............. $ 3,520,198 3,387,474 2,629,743 Provision charged to operations 558,000 225,000 850,000 Charge-offs .................... (206,078) (112,435) (92,855) Recoveries ..................... 29,719 20,159 586 ----------- ----------- ----------- Ending balance ................. $ 3,901,839 3,520,198 3,387,474 =========== =========== ===========
33 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 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:
2002 2001 ------------ ------------ Loans on nonaccrual status: Real estate mortgages: One-to-four family residential .......... $ 2,700,000 1,491,000 Commercial .............................. 1,200,000 1,016,000 Multi-family residential ................ 100,000 115,000 Construction and land ................... 3,800,000 2,763,000 ------------ ------------ Total loans on nonaccrual status ...... 7,800,000 5,385,000 ------------ ------------ Past due loans on accrual status - real estate mortgages - construction and land ...................... -- 20,000 ------------ ------------ Total nonaccrual and past due loans ............ $ 7,800,000 5,405,000 ============ ============
During the years ended June 30, 2002, 2001 and 2000, gross interest income of $548,000, $769,931, and $502,840, 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, 2002 and 2001, the recorded investment in loans, which have been identified as being impaired, totaled $13,016,000 and $5,385,000, respectively. Included in the impaired amount at June 30, 2002 and 2001, is $115,362 and $237,338, respectively, related to loans with a corresponding valuation allowance of $29,719 and $47,746, respectively. The Company recognized no interest on impaired loans in 2002, 2001, and 2000 (during the portion of the respective years that they were impaired). Average impaired loans for the years ended June 30, 2002 and 2001 amounted to $6,983,200 and $5,504,500, respectively. 34 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 (5) MORTGAGE BANKING ACTIVITIES 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, 2002, consist of the following:
2002 2001 2000 ----------- ----------- ----------- Mortgage loan servicing fees ................. $ 1,116,929 810,567 755,705 Amortization of mortgage servicing rights .... (1,112,817) (354,424) (162,918) Gross realized: Gains on sales of loans ................... 3,079,814 1,766,805 613,584 Losses on sales of loans .................. (98,502) (1,133,443) (443,385) Market valuation provision for losses on loans receivable held for sale .................. -- -- (45,000) Market valuation recoveries .................. -- 45,000 -- ----------- ----------- ----------- $ 2,985,424 1,134,505 717,896 =========== =========== ===========
The allowance for mortgage banking market value losses was $0, $0, and $45,000 for the years ended June 30, 2002, 2001 and 2000. At June 30, 2002 and 2001, the Company was servicing whole and participation mortgage loans for others aggregating approximately $528,319,233 and $351,657,535, respectively. The Company had $6,069,959 and $4,817,581 at June 30, 2002 and 2001, respectively, of funds collected on mortgage loans serviced for others due to investors, which is included in accrued expenses and other liabilities. Originated mortgage servicing rights capitalized and amortized during the years ended June 30, 2002, 2001 and 2000 were as follows:
2002 2001 2000 ----------- ----------- ----------- Beginning balance .............. $ 1,284,678 833,558 798,973 Originated ..................... 3,083,286 805,544 197,503 Amortized ...................... (1,112,817) (354,424) (162,918) ----------- ----------- ----------- Ending balance ................. $ 3,255,147 1,284,678 833,558 =========== =========== =========== Estimated fair value ........... $ 5,141,780 3,548,783 2,349,255 =========== =========== ===========
No valuation allowance has been established for mortgage servicing rights, as there has been no impairment on those rights. 35 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 (6) OFFICE PROPERTIES AND EQUIPMENT Office properties and equipment at cost, less accumulated depreciation and amortization at June 30, 2002 and 2001 are summarized as follows:
2002 2001 ------------ ------------ Land and land improvements ................... $ 847,500 682,500 Building and building improvements ........... 4,715,304 4,217,307 Leasehold improvements ....................... 3,793,711 2,446,845 Furniture and equipment ...................... 6,532,717 5,450,947 ------------ ------------ 15,889,232 12,797,599 Less accumulated depreciation and amortization (6,071,884) (5,014,142) ------------ ------------ $ 9,817,348 7,783,457 ============ ============
36 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 (7) DEPOSITS Deposit balances at June 30, 2002 and 2001 are summarized by interest rate as follows:
2002 2001 ---- ---- AMOUNT % AMOUNT % ------------ ------ ------------ ------ NOW and money market accounts Noninterest bearing $ 12,092,628 2.5% $ 12,131,093 2.5% 2.00 - 5.00% 58,813,116 12.3 40,968,105 8.5 ------------ ------ ------------ ------ 70,905,744 14.8 53,099,198 11.0 Passbook savings 3.00 - 5.00% 37,166,435 7.7 31,244,931 6.5 Certificates of deposit 2.50 - 2.99% 91,168,895 19.0 253,089 0.1 3.00 - 3.99 117,780,641 24.6 11,015,229 2.3 4.00 - 4.99 49,071,134 10.2 58,371,097 12.1 5.00 - 5.99 26,261,752 5.5 73,859,206 15.4 6.00 - 6.99 43,549,703 9.1 154,064,360 32.1 7.00 - 7.99 43,693,887 9.1 98,547,027 20.5 8.00 - 8.99 74,029 0.0 78,013 0.0 ------------ ------ ------------ ------ 371,600,039 77.5 396,188,021 82.5 ------------ ------ ------------ ------ $479,672,218 100.0% $480,532,150 100.0% ============ ====== ============ ====== Weighted average rate on deposits 5.43% 5.53% ====== ======
2002 2001 ---- ---- AMOUNT % AMOUNT % ------------ ------ ------------ ------ Remaining term to maturity of certificates of deposit: 12 months or less $254,171,324 68.4 $291,120,701 73.5% 13 to 24 months 77,333,220 20.8 88,000,633 22.2 25 to 36 months 24,414,990 6.6 7,055,108 1.8 Over 36 months 15,680,505 4.2 10,011,579 2.5 ------------ ------ ------------ ------ $371,600,039 100.0% $396,188,021 100.0% ============ ====== ============ ====== Weighted average rate on certificates of deposit 4.57% 6.23% ====== ======
Time deposits in amounts of $100,000 or more totaled approximately $105,828,000 and $119,310,000 at June 30, 2002 and 2001, respectively. 37 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 Interest expense on deposits is summarized as follows:
2002 2001 2000 ----------- ----------- ----------- NOW accounts ...................... $ 1,079,276 1,292,321 978,645 Passbook accounts ................. 660,260 771,793 812,545 Certificates of deposit ........... 19,255,467 25,015,617 17,617,936 ----------- ----------- ----------- $20,995,003 27,079,731 19,409,126 =========== =========== ===========
(8) ADVANCES FROM THE FEDERAL HOME LOAN BANK OF CINCINNATI Advances from the Federal Home Loan Bank of Cincinnati (FHLB), with maturities and interest rates thereon at June 30, 2002 and 2001, were as follows:
MATURITY INTEREST RATE 2002 2001 -------- ------------- ---- ---- June 2002 5.37% $ -- 65,000,000 February 2003 6.00 500,000 500,000 February 2006 6.05 239,695 366,855 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 50,000,000 May 2011 4.16 50,000,000 50,000,000 ------------ ------------ $120,739,695 185,866,855 ============ ============ Weighted average interest rate 4.30% 4.68% ============ ============
In order to secure these advances, the Bank has pledged mortgage loans with unpaid principal balances aggregating approximately $150,925,000 and $191,095,000 at June 30, 2002 and 2001, respectively. In addition, stock in the FHLB is pledged for such advances. 38 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 (9) NOTES PAYABLE On July 26, 2000, the Company 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, 2002 and June 30, 2001 was $4,900,000 and $4,700,000, respectively. The line was extended in July 2002 for an additional year and can be extended indefinitely. The line is secured by all of the Company's stock in the Bank. On March 8, 2002, one of the Company's subsidiaries obtained a $3.4 million term loan from another federally insured institution to refinance the Company's Solon headquarters building. The note carries a variable interest rate that adjusts to LIBOR plus 230 basis points. The loan matures on March 15, 2007. The loan is guaranteed by the Company. (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:
2002 2001 2000 ---- ---- ---- AMOUNT % AMOUNT % AMOUNT % ----------- ----- ----------- ----- ----------- ----- Computed expected tax ......... $ 3,783,018 35.0 $ 3,500,410 35.0% $ 3,316,457 35.0% Decrease in tax resulting from: Benefit of graduated rates . (100,000) (1.0) (100,000) (1.0) (94,756) (1.0) Tax credits ................ (111,646) (1.0) (111,646) (1.1) (111,774) (1.2) Other, net ................. 63,941 0.6 76,528 0.8 53,333 0.6 ----------- ----- ----------- ----- ----------- ----- $ 3,635,313 33.6% $ 3,365,292 33.7% $ 3,163,260 33.4% =========== ===== =========== ===== =========== =====
39 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 The net tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at June 30, 2002 and 2001 are:
2002 2001 ---- ---- Deferred tax assets: Loan loss and other reserves ............. $ 1,345,883 1,188,320 Deferred Compensation .................... 428,385 200,940 Unrealized gains on loans held for sale .. 91,637 -- Other .................................... 25,737 5,087 ------------ ------------ Total gross deferred tax assets .... 1,891,642 1,394,347 Less valuation allowance ..................... -- -- ------------ ------------ Net deferred tax assets ............ 1,891,642 1,394,347 ------------ ------------ Deferred tax liabilities: Deferred loan fees, net .................. 309,847 421,069 FHLB stock dividend ...................... 1,034,365 845,427 Unrealized losses on loan held for sale .. -- 116,711 Originated mortgage servicing asset ...... 1,106,750 436,791 Fixed assets ............................. 798,412 874,116 Other .................................... 193,413 199,094 ------------ ------------ Total gross deferred tax liabilities 3,442,787 2,893,208 ------------ ------------ Net deferred tax liability ......... $ (1,551,145) (1,498,861) ============ ============
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, 2002 or 2001. Retained earnings at June 30, 2002 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. 40 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 (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, 2002: YEAR ENDING JUNE 30, 2003............................................ $ 348,070 2004............................................ 264,838 2005............................................ 221,056 2006............................................ 166,845 2007............................................ 111,082 Thereafter...................................... 145,600 ----------- Total minimum lease payments.................... $ 1,257,491 ===========
During the years ended June 30, 2002, 2001, and 2000, rental expense was $555,030, $809,169, and $593,331, 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. 41 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 At June 30, 2002 and 2001, the Bank had the following commitments:
2002 2001 ----------- ----------- Commitments to sell mortgage loans in the secondary market $25,733,000 $ 100,000 Commitments to fund variable mortgage loans .............. 14,173,479 37,223,216 Commitments to fund fixed mortgage loans ................. 30,247,388 18,667,550
The fixed rate loan commitments have interest rates ranging from 5.125% to 8.25%. 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, 2002, 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 4%; and a minimum ratio of total capital to risk weighted assets of 8%. At June 30, 2002, the Bank exceeded all of the aforementioned regulatory capital requirements. Regulations limit capital distributions by savings institutions. Generally, capital distributions are limited to undistributed net income for the current and prior two years. At June 30, 2002, these limitations are not expected to prevent the company from paying its normal cash dividends. 42 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 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, 2002 and 2001, 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, 2002: GAAP capital .............................. $ 53,553 53,553 53,553 53,553 Nonallowable component .................... -- (159) (159) (159) General loan valuation allowances ......... -- -- 3,872 -------- -------- -------- -------- Regulatory capital ..................... 53,553 53,394 53,394 57,266 Total assets .............................. 671,894 671,894 671,894 671,894 Adjusted total assets ..................... 671,735 Risk-weighted assets ...................... 492,375 492,375 Actual capital ratio ...................... 7.97% 7.95% 10.84% 11.63% Regulatory requirement for capital adequacy purposes ............................. 1.50% 4.00% 8.00% Regulatory capital category - well-capitalized - equal to or greater than ............ 5.00% 6.00% 10.00%
43 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000
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 47,698 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 for capital adequacy purposes 1.50% 4.00% 8.00% Regulatory capital category - well-capitalized - equal to or greater than 5.00% 6.00% 10.00%
(14) RELATED PARTY TRANSACTIONS Loans to principal officers, directors, and their affiliates in 2002 were as follows. Beginning balance $ 1,730,000 New Loans 4,750,000 Repayments (2,013,000) ----------- Ending balance $ 4,467,000 ===========
(15) 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 20,145 options, adjusted to reflect all stock dividends, remain outstanding at June 30, 2002. 44 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 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, in fiscal year 2001, 64,700 options were originally authorized and granted, and in fiscal year 2002, 31,800 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, 2002, 270,711 options, adjusted to reflect all stock dividends, remain as issued but outstanding, and 90,209 options are still available to be issued. Under the 2000 plan, in fiscal year 2002, 28,000 options were originally authorized and granted. These options are exercisable for a ten-year period and can be exercised at any time. As of June 30, 2002, all options granted under the 2000 plan remain outstanding. 240,020 options are still available to be issued. 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:
2002 2001 2000 -------------------- -------------------- -------------------- AVERAGE AVERAGE AVERAGE OPTION OPTION OPTION SHARES PRICE SHARES PRICE SHARES PRICE -------- ------- -------- ------- -------- ------- Outstanding beginning of year 457,065 405,748 $ 5.09 346,073 $ 3.95 Exercised ................... (198,009) 2.14 (22,878) 1.68 (4,818) 1.68 Expired ..................... -- -- -- -- -- -- Granted ..................... 59,800 10.84 74,195 9.02 64,493 10.69 -------- ------- -------- ------- -------- ------- Outstanding end of year ..... 318,856 9.10 457,065 $ 5.93 405,748 $ 5.09 ======== ======= ======== ======= ======== ======= Exercisable end of year ..... 4.99 367,032 $ 4.99 310,083 $ 5.09 ======== ======= ======== ======= ======== =======
As of June 30, 2002, options outstanding have exercise prices between $1.67 and $11.39 and a weighted average remaining contractual life of 6.86 years. The Company's pro forma information for the years ended June 30:
2002 2001 2000 ------------ ------------ ------------ Net income ..................................... $ 7,173,139 6,635,878 6,312,330 Less: Pro forma compensation expense, net of tax 52,035 129,146 90,372 ------------ ------------ ------------ Pro forma earnings ....................... $ 7,121,104 6,506,732 6,221,958 ============ ============ ============ Basic earnings per share ....................... $ 1.24 1.27 1.20 ============ ============ ============ Pro forma basic earnings per share ............. $ 1.23 1.25 1.18 ============ ============ ============ Diluted earning per share ...................... $ 1.21 1.23 1.16 ============ ============ ============ Pro forma diluted earnings per share ........... $ 1.20 1.21 1.15 ============ ============ ============
The above results may not be representative of the effects of SFAS No. 123 on net income for future years. 45 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 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 2002, 2001, and 2000: expected dividend yield of 2.73% in 2002 and 2.00% in 2001 and 2000; expected option lives of 7 years in 2002, 2001 and 2000; expected volatility of 7% in 2002, and 30% in 2001 and 2000 and average risk free interest rates of 4.73%, 5.71 %, and 6.14 %, 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. (16) EARNINGS PER SHARE Reconciliation of basic earnings per share to diluted earnings per share for the years ended June 30:
2002 ------------------------------------- PER-SHARE NET INCOME SHARES AMOUNT ---------- ---------- --------- Basic EPS Income available to common shareholders $7,173,139 5,796,596 1.24 Effect of stock options ............... -- 151,346 0.03 ---------- ---------- ---- Diluted EPS Income available to common shareholders $7,173,139 5,947,942 1.21 ========== ========== ====
2001 ------------------------------------- PER-SHARE NET INCOME SHARES AMOUNT ---------- ---------- --------- Basic EPS Income available to common shareholders $6,635,878 5,736,139 1.15 Effect of stock options ............... -- 194,739 0.03 ---------- ---------- ---- Diluted EPS Income available to common shareholders $6,635,878 5,930,878 1.12 ========== ========== ====
2000 ------------------------------------- PER-SHARE NET INCOME SHARES AMOUNT ---------- ---------- --------- Basic EPS Income available to common shareholders $6,312,330 5,787,330 1.09 Effect of stock options ............... -- 214,629 0.04 ---------- ---------- ---- Diluted EPS Income available to common shareholders $6,312,330 6,001,959 1.05 ========== ========== ====
46 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 (17) 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, 2002 JUNE 30, 2001 ------------- ------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------ ---------- ------ ---------- Assets: Cash and amounts due from depository institutions .... $ 4,526,976 4,526,976 8,144,926 8,144,926 Interest-bearing deposits ............................ 1,736,712 1,736,712 1,200,192 1,200,192 Federal funds sold ................................... 8,050,000 8,050,000 56,050,000 56,050,000 Securities held to maturity .......................... 55,121,211 55,751,561 50,211,605 50,211,605 Mortgage-backed securities held to maturity .......... 7,297,206 7,500,739 18,123,936 18,585,184 Loans receivable held for: Long-term investment, net ............................ 563,550,556 597,488,000 573,643,498 580,385,000 Sale, net ............................................ 11,679,735 11,940,309 6,151,814 6,198,747 Stock in the Federal Home Loan Bank of Cincinnati ........ 9,947,624 9,947,624 9,442,305 9,442,305 Liabilities: Demand deposits and passbook savings ................. $(108,072,179) (108,072,179) (84,344,129) (84,344,129) Time deposits ........................................ (371,600,039) (376,534,000) (396,188,021) (401,746,000) Advances from the Federal Home loan Bank of Cincinnati (120,739,695) (125,205,695) (185,866,855) (186,563,000) Notes payable ........................................ (8,288,020) (8,288,020) (4,700,000) (4,700,000)
47 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 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, 2002 and 2001. 48 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 (18) PARENT COMPANY The following condensed statements of financial condition as of June 30, 2002 and 2001 and related condensed statements of operations and cash flows for the years ended June 30, 2002, 2001 and 2000 for PVF Capital Corp. should be read in conjunction with the consolidated financial statements and the notes thereto.
CONDENSED STATEMENTS OF FINANCIAL CONDITION 2002 2001 ------------------------------------------- ----------- ----------- Cash and amounts due from depository institutions $ 106,598 $ 44,578 Prepaid expenses and other assets 1,701,403 3,279,888 Investment in subsidiaries, at equity in underlying book value of net assets 55,409,326 49,396,610 ----------- ----------- Total assets $57,217,327 $52,721,076 =========== =========== Accrued expenses and other liabilities 18,749 14,941 Note payable 4,900,000 4,700,000 Stockholders' equity 52,298,578 48,006,135 ----------- ----------- Total liabilities and stockholders' equity $57,217,327 $52,721,076 =========== ===========
CONDENSED STATEMENTS OF OPERATIONS 2002 2001 2000 ---------------------------------- ----------- ---------- --------- Income: Mortgage banking activities $ 142,140 213,171 251,349 Other, net -- -- 12,261 ----------- ---------- --------- 142,140 213,171 263,610 ----------- ---------- --------- Expenses: Interest expense 276,418 304,688 -- General and administrative 214,296 184,532 206,579 ----------- ---------- --------- 490,714 489,220 206,579 ----------- ---------- --------- (Loss) income before federal income taxes and equity in undistributed net income of subsidiaries (348,574) (276,049) 57,031 Federal income taxes 116,951 93,856 20,267 ----------- ---------- --------- (Loss) income before equity in undistributed net income of subsidiaries (231,623) (182,193) 36,764 Equity in undistributed net income of subsidiaries 7,404,932 6,818,071 6,275,566 ----------- ---------- --------- Net income $ 7,173,309 6,635,878 6,312,330 =========== ========== =========
49 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000
CONDENSED STATEMENTS OF CASH FLOWS 2002 2001 2000 ---------------------------------- ----------- ----------- ---------- Operating activities: Net income $ 7,173,309 6,635,878 6,312,330 Equity in undistributed net income of subsidiaries (7,404,932) (6,818,071) (6,275,566) Repayment of advance from subsidiary 1,615,873 10,175,000 1,890,000 Other, net (33,581) (6,890,112) (436,314) ----------- ----------- ---------- Net cash provided by (used in) operating activities 1,350,669 3,102,695 1,490,450 ----------- ----------- ---------- 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 (3,050,000) (1,400,000) -- Proceeds from note payable 3,250,000 -- -- Proceeds from exercise of stock options 142,376 38,405 8,083 Cash paid in lieu of fractional shares -- -- (2,110) Dividends received from subsidiaries 1,545,000 350,000 1,500,000 Dividends paid (1,536,423) (1,378,774) (1,378,774) Purchase of Treasury stock (1,639,602) (189,437) (901,928) ----------- ----------- ---------- Net cash provided by (used in) financing activities (1,288,649) (2,579,806) (768,075) ----------- ----------- ---------- Net increase (decrease) in cash and cash equivalents 62,020 22,889 (42,625) Cash and cash equivalents at beginning of year 44,578 21,689 64,314 ----------- ----------- ---------- Cash and cash equivalents at end of year $ 106,598 44,578 21,689 =========== =========== ==========
50 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000 (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 ratably over six years. The total of the Company's matching and profit sharing contribution cost related to the plan for the years ended June 30, 2002, 2001, and 2000 was $89,966, $83,255, and $78,295, respectively. (20) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the unaudited consolidated quarterly results of operations for 2002 and 2001 (in thousands of dollars, except per share data): (1)
QUARTERS FOR THE YEAR ENDED JUNE 30, 2002 FIRST SECOND THIRD FOURTH ------- ------ ------ ------ Interest income.................. $12,889 12,715 11,611 11,599 Interest expense................. 7,885 7,005 6,231 5,940 ------- ------ ------ ------ Net interest income............ 5,005 5,710 5,380 5,659 Provision for losses on loans.... 125 228 50 155 Noninterest income............... 781 1,070 870 1,030 Noninterest expense.............. 3,159 3,732 3,548 3,700 ------- ------ ------ ------ Income before taxes............ 2,502 2,820 2,652 2,834 Federal income taxes............. 832 977 889 938 ------- ------ ------ ------ Net income..................... $ 1,671 1,843 1,763 1,896 ======= ====== ====== ====== Basic earnings per share (2)..... $ 0.29 0.32 0.30 0.33 ======= ====== ====== ====== Diluted earnings per share (2)... $ 0.28 0.31 0.29 0.32 ======= ====== ====== ======
51 PVF CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002, 2001, AND 2000
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 ======= ====== ====== ======
-------------- (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, 2001 and issued on September 1, 2001 and a 10% stock dividend, declared on June 25, 2002 and issued on August 30, 2002. 52 [PVF CAPITAL CORP. LOGO] BOARD OF DIRECTORS JOHN R. MALE Chairman of the Board and Chief Executive Officer C. KEITH SWANEY President, Chief Operating Officer and Treasurer GERALD A. FALLON Retired ROBERT K. HEALEY Retired STANLEY T. JAROS Partner Moriarty & Jaros, P.L.L. RAYMOND J. NEGRELLI President Raymond J. Negrelli, Inc. STUART D. NEIDUS Chairman and Chief Executive Officer Anthony & Sylvan Pools Corporation 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 Crowe, Chizek and Company LLP Landerbrook Corporate Center One 5900 Landerbrook Drive Suite 205 Cleveland, Ohio 44124 GENERAL COUNSEL Moriarty & Jaros, P.L.L. 30195 Chagrin Boulevard Suite 110 North Pepper Pike, Ohio 44124 TRANSFER AGENT AND REGISTRAR National City Bank, Dept. 5352 Corporate Trust Operations P.O. Box 92301 Cleveland, Ohio 44193-0900 SPECIAL COUNSEL Stradley Ronon Stevens & Young, LLP 1220 19th Street, N.W., Suite 700 Washington, D.C. 20036 STOCK LISTING NASDAQ Small-Cap Market Symbol: PVFC ANNUAL MEETING The 2002 Annual Meeting of Stockholders will be held on October 21, 2002 at 10:00 a.m. at the Company's Corporate Center, 30000 Aurora Road, Solon, 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, 2002 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. [PVF CAPITAL CORP. LOGO] CORPORATE CENTER 30000 Aurora Road Solon, OH 44139 440-248-7171 www.parkviewfederal.com