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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended June 30, 1997
/ / TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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COMMISSION FILE NUMBER 0-24948
PVF CAPITAL CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1659805
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
25350 ROCKSIDE ROAD, BEDFORD HTS., OHIO 44146
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (216) 991-9600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK (PAR VALUE $.01 PER SHARE)
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Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The registrant's voting stock is listed on the National Association of
Securities Dealers Automated Quotation ("Nasdaq") System Small-Cap Market under
the symbol "PVFC." The aggregate market value of the voting stock held by
nonaffiliates of the registrant, based on the closing sales price of the
registrant's common stock as quoted on the Nasdaq System on September 5, 1997,
was $42,333,131. For purposes of this calculation, it is assumed that
directors, executive officers and 5% stockholders of the registrant are
affiliates. As of September 5, 1997, the registrant had 2,590,155 shares of
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended June
30, 1997. (Parts I, II and IV)
2. Portions of Proxy Statement for the 1997 Annual Meeting of Stockholders.
(Part III)
PART I
ITEM 1. BUSINESS
GENERAL
PVF Capital Corp. ("PVF" or the "Company") announced the reorganization of
Park View Federal Savings Bank ("Park View Federal" or the "Bank") into the
holding company structure of ownership effective October 31, 1994. On that
date, Park View Federal became a wholly owned subsidiary of PVF Capital Corp.,
and all issued and outstanding shares of common stock of the Bank were
converted on a three-for-two basis into shares of common stock of PVF Capital
Corp. PVF owns and operates Park View Federal Savings Bank and PVF Service
Corporation ("PVFSC"), a real estate subsidiary, purchased by PVF from the Bank
during fiscal 1995. Park View Federal is a federal stock savings bank
operating through nine offices located in Cleveland and surrounding
communities. Park View Federal has operated continuously for 77 years, having
been founded as an Ohio chartered savings and loan association in 1920. Its
deposits became federally insured in 1936. The Bank became federally chartered
in 1950. On December 30, 1992, the Bank completed its conversion from a
federally chartered mutual savings and loan association to a federally
chartered stock savings bank (the "Conversion"), at which time it adopted its
present name, Park View Federal. PVFSC was purchased by PVF to improve the
Bank's regulatory capital ratio's and for the purpose of conducting real estate
activities at the holding company level. PVF Capital Corp's main office is
located at 2618 N. Moreland Boulevard, Cleveland, Ohio 44120 and its telephone
number is (216) 991-9600.
The Bank's principal business consists of attracting deposits from the
general public and investing these funds primarily in loans secured by first
mortgages on real estate located in the Bank's market area, which consists of
Portage, Lake, Geauga, Cuyahoga, Summit, Stark, Medina and Lorain Counties in
Ohio. Park View Federal emphasizes the origination of loans for the purchase
or construction of residential real estate, commercial real estate and multi-
family residential property and land loans. To a lesser extent, the Bank
originates loans secured by second mortgages, including home equity lines of
credit and loans secured by savings deposits.
The Bank derives its income principally from interest earned on loans and,
to a lesser extent, loan servicing and other fees, gains on the sale of loans
and mortgage-backed securities and interest earned on investments. The Bank's
principal expenses are interest expense on deposits and borrowings and non-
interest expense such as compensation and employee benefits, office occupancy
expenses and other miscellaneous expenses. Funds for these activities are
provided principally by deposits, repayments of outstanding loans, sales of
loans and mortgage-backed securities and operating revenues. The business of
PVF consists primarily of the business of the Bank.
Park View Federal is subject to examination and comprehensive regulation
by the Office of Thrift Supervision (the "OTS"), and the Bank's savings
deposits are insured up to applicable limits by the Savings Association
Insurance Fund (the "SAIF"), which is administered by the Federal Deposit
Insurance Corporation (the "FDIC"). The Bank is a member of and owns capital
stock in the Federal Home Loan Bank (the "FHLB") of Cincinnati, which is one of
12 regional banks in the FHLB System. The Bank is further subject to
regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") governing reserves to be maintained and certain other
matters. See " -- Regulation."
2
MARKET AREA
The Bank conducts its business through nine offices located in Cuyahoga,
Summit, Lake and Geauga Counties in Ohio, and its market area consists of
Portage, Lake, Geauga, Cuyahoga, Summit, Stark, Medina and Lorain Counties in
Ohio. At June 30, 1997, over 98% of the Bank's net loan portfolio and over 98%
of the Bank's deposits were in the Bank's market area. Park View Federal has
targeted business development efforts in suburban sectors of its market area,
such as Lake, Geauga, and Summit Counties, where demographic growth has been
stronger.
The economy in the Cleveland area historically has been based on the
manufacture of durable goods. Though manufacturing continues to remain an
important sector of the economy, diversification has occurred in recent years
with the growth of service, financial and wholesale and retail trade
industries.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION
The Bank's net loan portfolio, including mortgage-backed securities,
totalled $342.6 million at June 30, 1997, representing 91.8% of total assets at
such date. It is the Bank's policy to concentrate its lending in its market
area. Single-family residential loans comprise the largest group of loans,
amounting to $128.9 million, or 37.6% of the net loan portfolio at June 30,
1997. In addition, at June 30, 1997, construction loans totalled $82.6 million,
or 24.1% of the net loan portfolio. At June 30, 1997, loans for the purchase
of commercial real estate amounted to $84.9 million, or 24.8% of the net loan
portfolio, at such date. The Bank also had $31.1 million of multi-family
residential real estate loans and $32.0 million of land loans, most of the
latter consisting of loans to acquire land on which the borrowers intended to
construct single-family residences. The Bank also had $16.9 million
outstanding in Home Equity Line of Credit loans. The remainder of the loan
portfolio at June 30, 1997 consisted of $3.6 million in consumer loans, which
included $191,000 in mobile home loans, $615,000 in loans secured by savings
deposits, $34,000 in property improvement loans and $2.8 of other consumer
loans, which consist primarily of lines of credit and demand loans. In
addition, mortgage-backed securities totaled $0.5 million at June 30, 1997.
3
Set forth below is certain data relating to the composition of the Bank's
loan portfolio by type of loan on the dates indicated. As of June 30, 1997,
the Bank had no concentrations of loans exceeding 10% of total loans other than
as disclosed below.
AT JUNE 30,
-------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ----------------- ----------------- ---------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Real estate loans:
Single-family residential(1). $128,908 37.62% $109,687 36.84% $ 98,203 38.56% $ 79,901 37.93% $ 79,031 48.08%
Multi-family residential..... 31,090 9.07% 30,607 10.28% 39,531 15.52% 33,706 16.00% 16,647 10.13%
Commercial................... 84,940 24.79% 72,543 24.36% 57,498 22.58% 53,347 25.33% 38,233 23.26%
Home equity LOC.............. 16,941 4.94% 8,749 2.94% 3,314 1.30% 0 0.00% 0 0.00%
Construction................. 82,611 24.11% 76,725 25.77% 61,653 24.21% 53,774 25.53% 31,701 19.29%
Land......................... 32,045 9.35% 30,686 10.31% 18,318 7.19% 16,488 7.83% 12,341 7.51%
Mortgage-backed
securities held for sale, net 0 0.00% 7,963 2.67% 989 0.39% 0 0.00% 3,006 1.83%
Mortgage-backed securities
held to maturity............. 505 0.15% 629 0.21% 2,747 1.08% 0 0.00% 0 0.00%
Consumer loans: 43
Property improvement......... 34 0.01% 0.01% 76 0.03% 103 0.05% 176 0.11%
Passbook loans............... 615 0.18% 742 0.25% 999 0.39% 842 0.40% 666 0.41%
Mobile home.................. 191 0.06% 328 0.11% 519 0.20% 833 0.40% 1,386 0.84%
Other........................ 2,756 0.80% 1,244 0.42% 701 0.28% 486 0.23% 433 0.26%
-------- -------- -------- ------- -------
380,636 111.08% 339,946 114.16% 284,548 111.72% 239,480 113.70% 183,620 117.71%
-------- ------- -------- ------- ------- ------- ------- ------- ------- -------
Less:
Accrued interest receivable.. 2,097 0.61% 1,709 0.57% 1,589 0.62% 1,083 0.51% 950 0.58%
Deferred loan fees........... (1,733) -0.51% (2,098) -0.70% (1,811) -0.71% (1,583) -0.75% (942) -0.57%
Unearned discount............ (48) -0.01% (165) -0.06% (336) -0.13% (347) -0.16% (272) -0.17%
Undisbursed discount FHLMC MBS 0 0.00% (158) -0.05% (2) 0.00% 0 -0.00% 0 0.00%
Unrealized loss FHLMC MBS.... 0 0.00% (234) -0.08% 0 0.00% 0 -0.00% 0 0.00%
Undisbursed portion
of loan proceeds........... (35,653) -10.41% (38,649) 12.98% (26,891) -10.56% (25,058) -11.90% (16,244) -9.88%
Market valuation reserve..... 0 0.00% (13) -0.00% 0 0.00% (871) -0.41% 0 0.00%
Allowance for possible
loan losses................ (2,675) -0.76% (2,565) -0.86% (2,402) -0.94% (2,075) -0.99% (2,738) -1.67%
-------- -------- -------- ------- -------
Total other items.......... (38,012) -11.08% (42,173) 14.16% (29,853) -11.72% (28,851) -13.70% (19,246) -11.71%
-------- -------- -------- ------- -------
Total loans and
mortgage-backed securities. $342,624 100.00% $297,773 100.00% $254,695 100.00% $210,629 100.00% $164,374 100.00%
-------- ------- -------- ------- ------- ------- ------- ------- ------- -------
-------- ------- -------- ------- ------- ------- ------- ------- ------- -------
- -------------------------
(1) Includes loans held for sale in the amounts of $0.7 million, $11.2 million,
$4.5 million, $4.0 million, and $4.9 million at June 30, 1997, 1996, 1995,
1994 and 1993 respectively.
4
The following table presents at June 30, 1997 the amounts of loan
principal repayments scheduled to be received by the Bank during the periods
shown based upon the time remaining before contractual maturity. Loans with
adjustable rates are reported as due in the year in which they reprice. Demand
loans, loans having no schedule of repayments and no stated maturity and
overdrafts are reported as due in one year or less. The table below does not
include any estimate of prepayments which significantly shorten the average
life of all mortgage loans and may cause the Bank's actual repayment experience
to differ from that shown below.
DUE DURING DUE ONE DUE THREE DUE FIVE DUE 10
THE YEAR THROUGH THREE THROUGH FIVE THROUGH 10 THROUGH 20 DUE 20 YEARS
ENDING YEARS AFTER YEARS AFTER YEARS AFTER YEARS AFTER OR MORE AFTER
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1997 1997 1997 1997
---------- ------------- ------------ ----------- ----------- -------------
(IN THOUSANDS)
Real estate mortgage loans..... $174,189 $86,348 $52,907 $12,234 $8,041 $4,797
Consumer loans................. 3,295 7 78 159 57 0
-------- ------- ------- ------- ------ ------
Total $177,484 $86,355 $52,985 $12,393 $8,098 $4,797
-------- ------- ------- ------- ------ ------
-------- ------- ------- ------- ------ ------
5
The following table apportions the dollar amount of the loans due or
repricing after June 30, 1998 between those with predetermined interest rates
and those with adjustable interest rates.
Floating or
Predetermined Rates Adjustable Rates Total
------------------- ---------------- -----
(In thousands)
Real estate mortgage loans... $21,820 $142,507 $164,327
Consumer loans............... 301 0 301
------- -------- --------
Total.................... $22,121 $142,507 $164,628
------- -------- --------
------- -------- --------
Scheduled contractual principal repayments of loans and mortgage-backed
securities do not reflect the actual life of such assets. The average life of
loans and mortgage-backed securities is substantially less than their
contractual terms because of prepayments. In addition, due-on-sale clauses on
loans generally give the Bank the right to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid.
The average life of mortgage loans tends to increase, however, when current
mortgage loan rates are substantially higher than rates on existing mortgage
loans and, conversely, decreases when rates on existing mortgages are
substantially higher than current mortgage loan rates.
ORIGINATION, PURCHASE AND SALE OF LOANS
The Bank generally has authority to originate and purchase loans secured
by real estate located throughout the United States. Consistent with its
emphasis on being a community-oriented financial institution, the Bank
concentrates its lending activities in its market area.
Residential real estate loans typically are originated through salaried
loan officers, while construction loans and commercial real estate loans are
originated through senior management officers. Residential mortgage loan
originations are attributable to depositors, walk-in customers, advertising and
referrals from real estate brokers and developers. Construction and commercial
real estate loan originations are attributable largely to the Bank's reputation
and its long-standing ties to builders in its market area. All loan
applications are evaluated by the Bank's staff to ensure compliance with the
Bank's underwriting standards. See "-- Loan Underwriting Policies."
The Bank originates all fixed-rate, single-family mortgage loans in
conformity with FHLMC and FNMA guidelines so as to permit their being swapped
with the FHLMC or the FNMA in exchange for mortgage-backed securities secured
by such loans or their sale in the secondary market. All such loans are sold
or swapped, as the case may be, with servicing retained, and are sold in
furtherance of the Bank's goal of better matching the maturities and interest
rate-sensitivity of its assets and liabilities. The Bank generally retains
responsibility for collecting and remitting loan payments, inspecting the
properties, making certain insurance and tax payments on behalf of borrowers
and otherwise servicing the loans it sells or converts into mortgage-backed
securities, and receives a fee for performing these services. Sales of loans
also provide funds for additional lending and other purposes.
The following table shows total loan origination and sale activity during
the periods indicated.
Year Ended June 30,
----------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Loans originated:
Real estate:
Residential and commercial (1)..... $ 81,707 $ 44,944 $ 40,030
Construction....................... 88,936 90,899 72,752
Land............................... 18,818 19,038 11,761
Passbook loans....................... 435 410 747
Other................................ 467 1157 367
-------- -------- --------
Total loans originated............. $190,363 $156,448 $125,657
-------- -------- --------
-------- -------- --------
Loans refinanced....................... $ 16,193 $ 20,533 $ 17,043
-------- -------- --------
-------- -------- --------
Loans and mortgage-backed
securities sold...................... $ 58,618 $ 48,435 $ 36,251
-------- -------- --------
-------- -------- --------
- ---------------------
(1) Includes single-family and multi-family residential and commercial loans.
6
LOAN UNDERWRITING POLICIES
The Bank's lending activities are subject to the Bank's written, non-
discriminatory underwriting standards and to loan origination procedures
prescribed by the Bank's Board of Directors and its management. Detailed loan
applications are obtained to determine the borrower's ability to repay, and the
more significant items on these applications are verified through the use of
credit reports, financial statements and confirmations. Property valuations
are generally performed by an internal staff appraiser and by independent
outside appraisers approved by the Bank's Board of Directors. The Bank's Loan
Underwriter has authority to approve all fixed-rate single-family residential
mortgage loans which meet FHLMC and FNMA underwriting guidelines and those
adjustable-rate single-family residential mortgage loans which meet the Bank's
underwriting standards and are in amounts of less than $400,000. The Board of
Directors has established a Loan Committee comprised of the Chairman of the
Board, President, Senior Vice President, other management and an outside
director of the Bank. This committee reviews all loans approved by the
underwriter and has the authority to approve adjustable rate single-family
residential loans up to $400,000 and construction and commercial real estate
loans up to $500,000. All loans in excess of the above amounts must be
approved by the Board of Directors. All loans secured by savings deposits can
be approved by lending officers based in the Bank's branch offices.
It is the Bank's policy to have a mortgage creating a valid lien on real
estate and to generally obtain a title insurance policy which insures that the
property is free of prior encumbrances. When a title insurance policy is not
obtained, an attorney's certificate is received. Borrowers must also obtain
hazard insurance policies prior to closing and, when the property is in a flood
plain as designated by the Department of Housing and Urban Development, paid
flood insurance policies. Most borrowers are also required to advance funds on
a monthly basis together with each payment of principal and interest to a
mortgage escrow account from which the Bank makes disbursements for items such
as real estate taxes and homeowners insurance.
The Bank is permitted to lend up to 100% of the appraised value of the
real property securing a mortgage loan. However, if the amount of a
residential loan originated or refinanced exceeds 90% of the appraised value,
the Bank is required by federal regulations to obtain private mortgage
insurance on that portion of the principal amount of the loan that exceeds 80%
of the appraised value of the property. The Bank will make a single-family
residential mortgage loan with up to a 97% loan-to-value ratio if the required
private mortgage insurance is obtained. The Bank generally limits the loan-to-
value ratio on multi-family and commercial real estate mortgages to 75%.
Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds
available for lending purposes and, in the case of fixed-rate, single-family
residential loans, rates established by the FHLMC and the FNMA. These factors
are, in turn, affected by general economic conditions, monetary policies of the
federal government, including the Federal Reserve Board, legislative tax
policies and government budgetary matters.
RESIDENTIAL REAL ESTATE LENDING. The Bank historically has been and
continues to be an originator of single-family, residential real estate loans
in its market area. The Bank currently originates fixed-rate, residential
mortgage loans in accordance with underwriting guidelines promulgated by the
FHLMC and the FNMA and adjustable-rate mortgage loans for terms of up to 30
years. In addition, in accordance with FHLMC and FNMA guidelines, the Bank
offers 30-year loans with interest rates that adjust after five or seven years
to a rate which is 0.5% above the FHLMC 60 day delivery rate, at which point
the rate is fixed over the remaining 25 or 23 years of the loan, respectively.
At June 30, 1997, $128.9 million, or 37.6%, of the Bank's net loan and mortgage-
backed securities portfolio consisted of single-family, conventional mortgage
loans, of which approximately $114.7 million, or 89.0%, carried adjustable
interest rates. Included in this amount are $3.5 million in second mortgage
loans. Such loans are for terms of up to fifteen years and adjust annually to
a rate which is 3.75% above the treasury rate. Any such loans having fixed
rates are loans originated by the Bank to be swapped with the FHLMC and the
FNMA in exchange for mortgage-backed securities or sold for cash in the
secondary market.
The Bank offers adjustable-rate residential mortgage loans with interest
rates which adjust annually based upon changes in an index based on the weekly
average yield on United States Treasury securities adjusted
7
to a constant comparable maturity of one year, as made available by the
Federal Reserve Board (the "Treasury Rate"), plus a margin of 2.75%. The
amount of any increase or decrease in the interest rate is presently limited
to 2% per year, with a limit of 6% over the life of the loan. The
adjustable-rate mortgage loans offered by the Bank, as well as many other
savings institutions, provide for initial rates of interest below the rates
which would prevail when the index used for repricing is applied. However,
the Bank underwrites the loan on the basis of the borrower's ability to pay
at the rate which would be in effect without the discount.
COMMERCIAL AND MULTI-FAMILY RESIDENTIAL REAL ESTATE LENDING. The
commercial real estate loans originated by the Bank are primarily secured by
office buildings, shopping centers, warehouses and other income producing
commercial property. The Bank's multi-family residential loans are primarily
secured by apartment buildings. These loans are generally for a term of from
10 to 25 years with interest rates that adjust either annually or every three
years based upon changes in the Treasury Rate, plus a negotiated margin of
between 3.0% and 3.5%. Commercial and multi-family residential real estate
loans amounted to $116.0 million, or 33.9%, of the total loan and mortgage-
backed securities portfolio at June 30, 1997.
Commercial real estate lending entails significant additional risks as
compared with residential property lending. Commercial real estate loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience on such loans typically is dependent on the
successful operation of the real estate project. These risks can be
significantly impacted by supply and demand conditions in the market for office
and retail space, and, as such, may be subject to a greater extent to adverse
conditions in the economy. To minimize these risks, Park View Federal
generally limits itself to its market area and to borrowers with which it has
substantial experience or who are otherwise well known to the Bank. The Bank
obtains financial statements and personal guarantees from all principals
obtaining commercial real estate loans.
CONSTRUCTION LOANS. The Bank also offers residential and commercial
construction loans, with a substantial portion of such loans originated to date
being for the construction of owner-occupied, single-family dwellings in the
Bank's market area. Residential construction loans are offered to selected
local developers to build single-family dwellings and to individuals building
their primary or secondary residence. Generally, loans for the construction of
owner-occupied, single-family residential properties are originated in
connection with the permanent loan on the property and have a construction term
of six to 18 months. Such loans are offered only on an adjustable rate basis.
Interest rates on residential construction loans made to the eventual occupant
are set at the prime rate plus 2%, and are fixed for the construction term.
Interest rates on residential construction loans to builders are set at the
prime rate plus 2%, and adjust quarterly. Interest rates on commercial
construction loans float with a specified index, with construction terms
generally not exceeding 18 months. Advances are generally paid directly to
subcontractor's and suppliers and are made on a percentage of completion basis.
At June 30, 1997, $82.6 million or 24.1%, of the Bank's total loan and mortgage-
backed securities portfolio consisted of construction loans, virtually all of
which were secured by single-family residences.
Prior to making a commitment to fund a loan, the Bank requires both an
appraisal of the property by appraisers approved by the Board of Directors and
a study of the feasibility of the proposed project. The Bank also reviews and
inspects each project at the commencement of construction and prior to every
disbursement of funds during the term of the construction loan.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction.
During the construction phase, a number of factors could result in delays and
cost overruns. If the estimate of construction costs proves to be inaccurate,
the Bank may be required to advance funds beyond the amount originally
committed to permit completion of the development. If the estimate of value
proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment.
LAND LOANS. The Bank originates loans to builders and developers for the
acquisition and/or development of vacant land. The proceeds of the loan are
used to acquire the land and/or to make site
8
improvements necessary to develop the land into saleable lots. The Bank will
not originate land loans to individuals wishing to speculate in the value of
land, and limits such loans to borrowers who have agreed to begin development
of the property within two years of the date of the loan. The term of the
loans are generally limited to two years. Repayments are made on the loans
as the developed lots are sold.
Land development and acquisition loans involve significant additional
risks when compared with loans on existing residential properties. These loans
typically involve large loan balances to single borrowers, and the payment
experience is dependent on the successful development of the land and the sale
of the lots. These risks can be significantly impacted by supply and demand
conditions. To minimize these risks, Park View Federal generally limits the
loans to builders and developers with whom it has substantial experience or who
are otherwise well-known to the Bank, and it obtains the financial statements
and personal guarantees of such builders and developers. The Bank also
requires feasibility studies and market analyses to be performed with respect
to the project. The amount of the loan is limited to the lesser of 80% of the
estimated gross sell out value or 100% of the discounted value. If land is
being acquired, the amount of the loan to be used for such purposes is limited
to 75% of the cost of the land. All of these loans originated are within the
Bank's market area. The Bank had $32.0 million, or 9.4% of its net loan and
mortgage-backed securities portfolio, in land loans at June 30, 1997.
HOME EQUITY LINE OF CREDIT LOANS. The Bank originates loans secured by
mortgages on residential real estate. Such loans are for terms of 5 years with
one 5 year review and renewal option followed by a balloon payment. The rate
adjusts monthly to a rate ranging from the prime lending rate to prime plus
0.5%. At June 30, 1997, the Bank had $16.9 million in home equity lines of
credit, which amounted to 4.9% of its net loan portfolio.
MORTGAGE BANKING ACTIVITY
In addition to interest earned on loans, Park View Federal receives fees
for servicing loans which it had sold or swapped for mortgage-backed
securities. During the year ended June 30, 1997, the Bank reported net loan
servicing fee income of $412,245, and was servicing $195.3 million of loans for
others. The reduction in net servicing income is due primarily to the Bank's
adoption of FASB 125 whereby servicing rights are capitalized and amortized on
a level yield basis over the projected life of the underlying loans. See note
5 of notes to Consolidated Financial Statements. The Bank has been able to
keep delinquencies on loans serviced for others to a relatively low level of
below 1% of the aggregate outstanding balance of loans serviced as a result of
its policy to limit servicing to loans it originated and subsequently sold to
the FHLMC and the FNMA. Because of the success the Bank has experienced in
this area and because it has data processing equipment that will allow it to
expand its portfolio of serviced loans without incurring significant
incremental expenses, the Bank intends in the future to augment its portfolio
of loans serviced by continuing to originate and either swap such fixed-rate,
single-family residential mortgage loans with the FHLMC and the FNMA in
exchange for mortgage-backed securities or sell such loans for cash, while
retaining servicing.
On August 18, 1995, the Bank sold $146.0 million in FHLMC servicing to PVF
and recognized no gain due to the transaction being an intercompany sale. PVF
then entered into an agreement with the Bank to service the underlying loans
for $8.00 per loan monthly. PVF borrowed $1.2 million to finance the purchase
of this servicing. The servicing income from these loans will provide
sufficient funds to pay both the servicing fee to the Bank and finance the debt
incurred for the purchase of the servicing. At June 30, 1997 the Bank was
servicing $107.8 million in FHLMC loans for PVF.
In addition to loan servicing fees, the Bank receives fees in connection
with loan commitments and originations, loan modifications, late payments and
changes of property ownership and for miscellaneous services related to its
loans. Loan origination fees are calculated as a percentage of the amount
loaned. The Bank typically receives fees of up to three points (one point
being equivalent to 1% of the principal amount of the loan) in connection
with the origination of fixed-rate and adjustable-rate residential mortgage
loans. All loan
9
origination fees are deferred and accreted into income over the contractual
life of the loan according to the interest method of recognizing income. If a
loan is prepaid, refinanced or sold, all remaining deferred fees with respect
to such loan are taken into income at such time.
Income from these activities varies from period to period with the
volume and type of loans originated, sold and purchased, which in turn is
dependent on prevailing mortgage interest rates and their effect on the
demand for loans in the Bank's market area.
At June 30, 1997 and June 30, 1996, the Bank had $710,000 and
$11,204,000 of fixed rate single family mortgage loans available for sale. In
connection with these activities the Bank establishes a mortgage banking
reserve for market valuation losses. See Note 5 of Notes to Consolidated
Financial Statements.
NON-PERFORMING LOANS AND OTHER PROBLEM ASSETS
It is management's policy to continually monitor its loan portfolio to
anticipate and address potential and actual delinquencies. When a borrower
fails to make a payment on a loan, the Bank takes immediate steps to have the
delinquency cured and the loan restored to current status. Loans which are
delinquent 15 days incur a late fee of 5% of the scheduled principal and
interest payment. As a matter of policy, the Bank will contact the borrower
after the loan has been delinquent 20 days. The Bank orders a property
inspection after a loan payment becomes 45 days past due. If a delinquency
exceeds 90 days in the case of a residential mortgage loan, 30 days in the
case of a construction loan or 30-60 days for a loan on commercial real
estate, the Bank will institute additional measures to enforce its remedies
resulting from the loan's default, including, commencing foreclosure action.
Loans which are delinquent 90 days or more generally are placed on
non-accrual status, and formal legal proceedings are commenced to collect
amounts owed.
The following table sets forth information with respect to the Bank's
non-performing loans and other problem assets at the dates indicated. During
the periods shown, the Bank had no material restructured loans within the
meaning of SFAS No. 15 as amended by SFAS No. 114.
At June 30,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------ ------ ------ ------
(Dollars in thousands)
Non-accruing loans (1):
Real estate................................... $4,097 $2,272 $3,497 $3,274 $1,846
Consumer loans.............................. 40 80 109 151 280
------ ------ ------ ------ ------
Total..................................... $4,137 $2,352 $3,606 $3,425 $2,126
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Accruing loans which are
contractually past due 90
days or more:
Real estate............................... $ 476 $ 95 $1,028 $ 891 $ 688
------ ------ ------ ------ ------
Total................................... $ 476 $ 95 $1,028 $ 891 $ 688
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total nonaccrual and 90 days
past due loans.......................... $4,613 $2,447 $4,634 $4,316 $2,814
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of non-performing loans to total loans
and mortgage-backed securities.............. 1.35% 0.82% 1.81% 2.05% 1.71%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Other non-performing assets (2)............... 0 53 $ 0 $ 20 $ 521
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total non-performing assets................... $4,613 $2,500 $4,634 $4,336 $3,335
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total non-performing assets to
total assets................................ 1.24% 0.75% 1.47% 1.82% 1.73%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
- -------------------------
(1) Non-accrual status denotes loans on which, in the opinion of management,
the collection of additional interest is unlikely, or loans that meet the
non-accrual criteria established by regulatory authorities. A policy
change to non-accruing loans effective with the fiscal year ending June
30, 1994 provided for the non-accrual of all loans classified as
substandard, doubtful, or loss and all loans greater than 90-days past due
with a loan-to-value ratio greater than 65%. Payments received on a non-
accrual loan are either applied to the outstanding principal balance or
recorded as interest income, depending on an assessment of the
collectibility of the principal balance of the loan.
(2) Other non-performing assets represent property acquired by the Bank
through foreclosure or repossession.
10
It is the Bank's policy to classify as non-accruing any loan where less
than the full required interest payment is made and to not record into income
such partial interest payments. During the year ended June 30, 1997, gross
interest income of $310,000 would have been recorded on loans accounted for on
a non-accrual basis if such loans had been current throughout the period. At
June 30, 1997, the Bank had no restructured loans.
At June 30, 1997, non-accruing loans consisted of 41 loans totalling $4.1
million, and included 6 land loans in the amount of $1.7 million, 9
construction loans in the amount of $1.5 million, 21 conventional mortgage
loans aggregating $0.9 million and 5 consumer loans aggregating $40,000. All
non-accruing consumer loans at June 30, 1997 were mobile home loans.
Management has reviewed its non-accruing loans and believes that the allowance
for loan losses is adequate.
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold. At June 30, 1997, the Bank
had no real estate owned properties.
ASSET CLASSIFICATION AND ALLOWANCE FOR LOAN LOSSES. Federal regulations
require savings institutions to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss," if warranted. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is
classified loss, the insured institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount. An asset which does not currently
warrant classification but which possesses weaknesses or deficiencies deserving
close attention is required to be designated as "special mention." The Bank
has established an Asset Classification Committee, which is comprised of the
Chairman of the Board, the Chief Financial Officer and senior employees of the
Bank. The Asset Classification Committee meets quarterly to review the Bank's
loan portfolio and determine which loans should be placed on a "watch-list" of
potential problem loans which are considered to have more than normal credit
risk. Currently, general loss allowances (up to 1.25% of risk-based assets)
established to cover possible losses related to assets classified substandard
or doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses do not qualify as
regulatory capital. See "Regulation -- Regulatory Capital Requirements." OTS
examiners may disagree with the insured institution's classifications and
amounts reserved. If an institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the OTS. At
June 30, 1997, total non-accrual and 90 days past due loans and other non-
performing assets were $4.6 million, of which amount approximately $3.9 million
were classified as follows: $3.85 million were classified as substandard;
$46,000 were classified as loss. In addition, the Bank has determined that at
June 30, 1997, it had $3.85 million in assets classified as substandard,
$46,000 of assets classified as loss and $918,000 of assets designated as
special mention. Special mention loans consisted of one performing
construction loan. For additional information, see " -- Non-Performing Loans
and Other Problem Assets" and Note 4 of Notes to Consolidated Financial
Statements.
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. It is management's policy to maintain an
adequate allowance for loan losses based on, among other things, the Bank's and
the industry's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality.
The Bank increases its allowance for loan losses by charging provisions for
possible loan losses against the Bank's income.
General allowances are made pursuant to management's assessment of risk
in the Bank's loan portfolio as a whole. Specific allowances are provided
for individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are
contractually past due and considering the net realizable value of the
security for the loan. Management continues to actively monitor the Bank's
asset quality and to charge off loans against the allowance for loan losses
when appropriate or to provide specific loss reserves when
11
necessary. Although management believes it uses the best information
available to make determinations with respect to the allowance for loan
losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making
the initial determinations.
The following table summarizes the activity in the allowance for loan
losses for the periods indicated.
Year Ended June 30,
-------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------ ------ ------
(In thousands)
Balance at beginning of year........... $2,565 $2,402 $2,075 $2,738 $2,949
------ ------ ------ ------ ------
Charge-offs:
Mortgage loans....................... 174 241 77 140 334
Consumer loans (1)................... 24 24 18 23 70
------ ------ ------ ------ ------
Total charge-offs.................. 198 265 95 163 404
------ ------ ------ ------ ------
Recoveries:
Mortgage loans....................... 117 5 4 0 0
Consumer loans (1)................... 4 6 2 0 25
------ ------ ------ ------ ------
Total recoveries................... 121 11 6 0 25
------ ------ ------ ------ ------
Net charge-offs........................ 77 254 89 163 379
------ ------ ------ ------ ------
Transfer to mortgage banking reserve... 0 0 0 500 0
Provision charged to income............ 187 417 416 0 168
------ ------ ------ ------ ------
Balance at end of year................. $2,675 $2,565 $2,402 $2,075 $2,738
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Ratio of net charge-offs during
the year to average loans
outstanding during the year.......... 0.0% 0.0% 0.0% 0.1% 0.2%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
- -------------------------
(1) Consists primarily of mobile home loans.
12
The following table sets forth the breakdown of the allowance for
loan losses by loan category at the dates indicated. The allocation of the
allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any category.
At June 30,
1997 1996 1995 1994
--------------------- --------------------- ---------------------- ---------------------
% of Loans in % of Loans in % of Loans in % of Loans in
Category to Category to Category to Category to
Total Net Loans Total Net Loans Total Net Loans Total Net Loans
Amount Outstanding Amount Outstanding Amount Outstanding Amount Outstanding
------ --------------- ------ --------------- ------ --------------- ------ ---------------
(Dollars in Thousands)
Mortgage Loans:
Single-family. . . . . $ 899 56.19% $ 977 53.49% $ 857 54.27% $ 743 50.34%
Multi-family . . . . . 291 9.00% 163 10.51% 295 15.36% 188 15.91%
Commercial . . . . . . 990 24.54% 968 24.71% 940 22.42% 636 25.03%
Land . . . . . . . . . 361 9.26% 210 10.52% 154 7.11% 168 7.75%
Unallocated. . . . . . 0 0.00% 123 0.00% 0 0.00% 109 0.00%
------ ------ ------ ------- ------
Total mortgage loans. $2,541 98.99% $2,441 99.23% $2,246 99.16% $1,844 99.03%
------ ------ ------ ------ ------ ------- ------ ------
------ ------ ------ ------ ------ ------- ------ ------
Consumer loans (1). . . 134 1.01% 124 0.77% 156 0.84% 231 0.97%
Total allowance for ------ ------ ------- ------ ------- ------ ------
loan losses . . . . . $2,675 100.00% $2,565 100.00% $2,402 100.00% $2,075 100.00%
------ ------ ------ ------ ------ ------- ------ ------
------ ------ ------ ------ ------ ------- ------ ------
1993
------------------------
% of Loans in
Category to
Total Net Loans
Amount Outstanding
------ -------------
Mortgage Loans:
Single-family. . . . . $ 137 58.47%
Multi-family . . . . . 363 9.91%
Commercial . . . . . . 619 22.90%
Land . . . . . . . . . 27 7.49%
Unallocated. . . . . . 959 0.00%
------
Total mortgage loans. $2,105 98.77%
------ ------
------ ------
Consumer loans (1). . . 633 1.23%
Total allowance for ------ -------
loan losses . . . . . $2,738 100.00%
------ ------
------ ------
- ---------------
(1) Consists of property improvement loans and mobile home loans.
13
INVESTMENT ACTIVITIES
Park View Federal is required under federal regulations to maintain a
minimum amount of liquid assets, which can be invested in specified
short-term securities, and is also permitted to make certain other
investments. See "Regulation -- Liquidity Requirements". Park View Federal
maintains a liquidity portfolio well in excess of the amount required to
satisfy regulatory requirements. The Bank's liquidity ratio of 8.6% at June
30, 1997 exceeded the 5% regulatory requirement. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives,
management's judgment as to the attractiveness of the yields then available
in relation to other opportunities, its expectations of the level of yield
that will be available in the future and its projections as to the short-term
demand for funds to be used in the Bank's loan origination and other
activities.
Park View Federal's investment policy currently allows for investment in
various types of liquid assets, including United States Government and Agency
securities, time deposits at the FHLB of Cincinnati, certificates of deposit
or bankers' acceptances at other federally insured depository institutions
and mortgage-backed securities. The general objective of Park View Federal's
investment policy is to maximize returns without compromising liquidity or
creating undue credit or interest rate risk. In accordance with the
investment policy, at June 30, 1997, Park View Federal had investments in
agency notes, federal funds sold, FHLB of Cincinnati stock and
interest-bearing deposits in other financial institutions.
In accordance with GAAP, the Bank reports its investments, other than
marketable equity securities and investments available for sale, at cost as
adjusted for discounts and unamortized premiums and only recognizes realized
gains or losses in income. The Bank's generally holds all investment
securities until maturity. Any FHLMC mortgage-backed securities created from
loans originated by the Bank for sale will be designated available for sale.
For additional information see Notes 1 and 2 of Notes to Consolidated
Financial Statements.
At present, management is not aware of any conditions or circumstances
which could impair its ability to hold its remaining investment securities to
maturity. Accordingly, management does not anticipate that it will be
required to reclassify any other investment securities as available for sale.
The following table sets forth the carrying value of the Bank's
investment securities portfolio, short-term investments and FHLB of
Cincinnati stock at the dates indicated. At June 30, 1997, the market values
of the Bank's investment securities portfolio was $13.9 million.
At June 30,
----------------------------
1997 1996 1995
------ ------ ------
(in Thousands)
Investment securities:
U.S. Government and agency securities. . . $13,995 $14,094 $41,194
------- ------- -------
Total investment securities. . . . . . 13,995 14,094 41,194
Interest-bearing deposits. . . . . . . . . . 445 245 650
Federal funds sold . . . . . . . . . . . . . 1,375 6,875 5,325
FHLB of Cincinnati stock . . . . . . . . . . 2,762 1,880 1,756
------- ------- -------
Total investments. . . . . . . . . . . . $18,577 $23,094 $48,925
------- ------- -------
------- ------- -------
14
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Bank's investment securities
at June 30, 1997.
AT JUNE 30, 1997
---------------------------------------------------------------------------------------------------------
ONE YEAR ONE TO FIVE FIVE TO 10 MORE THAN
OR LESS YEARS YEARS 10 YEARS TOTAL INVESTMENT SECURITIES
----------------- ----------------- ----------------- ----------------- ---------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE VALUE YIELD
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------ -------
(DOLLARS IN THOUSANDS)
U.S. Government and
agency securities.. $5,000 7.04% $8,995 6.39% $0 0.00% $ 0 0.00% $13,995 $13,899 6.62%
Deposits(1)......... 1,820 5.44% 0 0.00% 0 0.00% 0 0.00% 1,820 1,820 5.44%
FHLB stock.......... 0 0.00% 0 0.00% 0 0.00% 2,762 7.25% 2,762 2,762 7.25%
------ ------ -- ------ ------- -------
Total............. $6,820 6.61% $8,995 6.39% $0 0.00% $2,762 7.25% $18,577 $18,481 6.60%
------ ------ -- ------ ------- -------
------ ------ -- ------ ------- -------
_______________
(1) Includes interest-bearing deposits at other financial institutions and
federal funds sold.
15
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for
lending, investment activities and general operational purposes. In addition
to deposits, Park View Federal derives funds from loan principal and interest
repayments, maturities of investment securities and interest payments
thereon. Although loan repayments are a relatively stable source of funds,
deposit inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term
basis to compensate for reductions in the availability of funds, or on a
longer term basis for general operational purposes.
DEPOSITS. The Bank attracts deposits principally from within its
primary market area by offering a variety of deposit instruments, including
checking accounts, money market accounts, regular savings accounts and
certificates of deposit which range in maturity from seven days to four
years. Deposit terms vary according to the minimum balance required, the
length of time the funds must remain on deposit and the interest rate.
Maturities, terms, service fees and withdrawal penalties for its deposit
accounts are established by the Bank on a periodic basis. Park View Federal
generally reviews its deposit mix and pricing on a weekly basis. In
determining the characteristics of its deposit accounts, Park View Federal
considers the rates offered by competing institutions, funds acquisition and
liquidity requirements, growth goals and federal regulations. The Bank does
not accept brokered deposits due to the volatility and rate sensitivity of
such deposits.
Park View Federal competes for deposits with other institutions in its
market area by offering deposit instruments that are competitively priced and
providing customer service through convenient and attractive offices,
knowledgeable and efficient staff and hours of service that meet customers'
needs. To provide additional convenience, Park View Federal participates in
MAC (money access card) Automated Teller Machine networks at locations
throughout Ohio and other participating states, through which customers can
gain access to their accounts at any time.
The Bank's deposits have remained stable with moderate growth
experienced during the fiscal year ended June 30, 1997. Deposit balances
totalled $288.3 million, $271.0 million, and $272.3 million at the fiscal
years ended June 30, 1997, 1996, and 1995 respectively.
Deposits in the Bank as of June 30, 1997 were represented by the various
programs described below.
Weighted
Average Percentage
Interest Minimum Minimum Balance in of Total
Rate Term Category Balance Thousands Deposits
- -------- ------- -------- ------- ---------- ---------
2.00% None NOW accounts $ 50 $ 14,656 5.08%
2.75% None Passbook statement accounts 5 31,586 10.96%
4.03% None Money market accounts 1,000 5,308 1.84%
0.00% None Non-interest-earning demand accounts 50 5,620 1.95%
-------- -------
$ 57,170 19.83%
-------- -------
Certificates of Deposit
-----------------------
5.55% 3 months or less 500 64,264 22.29%
5.75% 3 - 6 months 500 38,195 13.25%
5.88% 6 - 12 months 500 70,033 24.29%
6.44% 1 - 3 years 500 53,321 18.50%
6.17% More than three years 500 5,287 1.84%
-------- -------
5.90% Total certificates of deposit $231,100 80.17%
-------- -------
5.22% Total deposits $288,270 100.00%
-------- -------
-------- -------
16
The following table sets forth the change in dollar amount of deposits
in the various types of accounts offered by the Bank between the dates
indicated.
At June 30, 1997 At June 30, 1996 At June 30, 1995
-------------------------------- -------------------------------- -------------------
Increase Increase
(Decrease) (Decrease)
% of From Prior % of From Prior % of
Balance Deposits Year Balance Deposits Year Balance Deposits
--------- --------- ----------- --------- -------- ----------- --------- --------
(Dollars in thousands)
NOW checking (1). . . $ 20,276 7.03% $ 220 $ 20,056 7.44% $4,294 $ 15,762 5.79%
Super NOW checking
and money market. . . 5,308 1.84% 29 5,279 1.91% 125 5,153 1.89%
Passbook and regular
savings . . . . . . . 31,586 10.96% (297) 31,883 11.76% 712 31,171 11.45%
Jumbo certificates. . 43,489 15.09% 11,566 31,923 11.78% (1,728) 33,651 12.36%
Other certificates. . 150,985 52.38% 4,945 146,040 53.88% (5,011) 151,051 55.47%
Keogh accounts. . . . 1,998 0.69% (263) 2,261 0.83% 41 2,220 0.82%
IRA accounts. . . . . 34,628 12.01% 1,025 33,603 12.40% 321 33,282 12.22%
--------- --------- ----------- --------- -------- ----------- --------- --------
Total $288,270 100.00% $17,225 $271,045 100.00% ($1,245) $272,290 100.00%
--------- --------- ----------- --------- -------- ----------- --------- --------
--------- --------- ----------- --------- -------- ----------- --------- --------
_____________
(1) Includes non-interest-bearing demand accounts.
The following table sets forth the average balances and average interest
rates based on month-end balances for interest-bearing demand deposits and
time deposits during the periods indicated.
For the Year Ended June 30,
----------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ---------------------------- -------------------------------
Interest- Interest- Interest-
Bearing Bearing Bearing
Demand Savings Time Demand Savings Time Demand Savings Time
Deposits Deposits Deposits Deposits Deposits Deposits Deposits Deposits Deposits
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Average balance. . . $19,631 $31,549 $218,301 $17,703 $31,399 $221,872 $16,469 $32,775 $182,740
Average rate paid. . 2.70% 2.75% 5.75% 2.34% 2.76% 6.13% 2.20% 2.78% 5.57%
17
The following table sets forth the time deposits in the Bank classified
by rates as of the dates indicated.
At June 30,
----------------------------------
Rate 1997 1996 1995
- ---------------- -------- --------- --------
(In thousands)
2.50% - 3.99% . . . . . . $ 457 $ 7 $ 0
4.00% - 5.99% . . . . . . 131,966 147,934 68,400
6.00% - 7.99% . . . . . . 98,500 65,721 149,960
8.00% - 9.99% . . . . . . 177 165 1,497
10.00% - 11.99% . . . . . . 0 0 349
--------- --------- ---------
$231,100 $213,827 $220,206
--------- --------- ---------
--------- --------- ---------
The following table sets forth the amount and maturities of time deposits
in specified weighted average interest rate categories at June 30, 1997.
Amount Due
--------------------------------------------------------
One Year After
Rate or Less 1-2 Years 2-3 Years 3 Years Total
-------------- --------- --------- ---------- ------- --------
(In thousands)
2.50% - 3.99%. . . $ 6 $ 450 $ 0 $ 0 $ 456
4.00% - 5.99%. . . 118,179 9,631 1,488 2,669 131,967
6.00% - 7.99%. . . 54,300 22,511 19,240 2,449 98,500
8.00% - 9.99%. . . 7 0 0 170 177
$172,492 $32,592 $20,728 $5,288 $231,100
--------- --------- ---------- ------- --------
--------- --------- ---------- ------- --------
The rates currently paid on certificates maturing within one year or
less are lower than the rates currently being paid on similar certificates of
deposit maturing thereafter. The Bank will seek to retain these deposits to
the extent consistent with its long-term objective of maintaining positive
interest rate spreads. Depending upon interest rates existing at the time
such certificates mature, the Bank's cost of funds may be significantly
affected by the rollover of these funds. A decrease in such cost of funds,
if any, may have a material impact on the Bank's operations. To the extent
such deposits do not rollover, the Bank may, if necessary, use other sources
of funds, including borrowings from the FHLB of Cincinnati, to replace such
deposits. See "-- Borrowings."
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1997.
Certificates
Maturity Period of Deposit
----------------------- ---------------
(In thousands)
Three months or less. . . . . . . . . . . $13,558
Three through six months. . . . . . . . . 10,610
Six through 12 months . . . . . . . . . . 14,671
Over 12 months. . . . . . . . . . . . . . 10,068
----------
Total . . . . . . . . . . . . $48,907
----------
----------
18
The following table sets forth the Bank's deposit activities for the
periods indicated.
YEAR ENDED JUNE 30,
-------------------------------------------
1997 1996 1995
------ ------ -------
(In thousands)
Deposits ...................... $58,607 $ 50,688 $100,324
Withdrawals.................... 50,993 62,229 33,261
------- -------- --------
Net increase (decrease)
before interest credited... 7,614 (11,541) 67,063
Interest credited.............. 9,611 10,296 8,186
------- --------- --------
Net increase (decrease) in
Savings deposits........... $17,225 $ (1,245) $ 75,249
------- --------- --------
------- --------- --------
BORROWINGS. Savings deposits historically have been the primary source of
funds for the Bank's lending, investments and general operating activities.
The Bank is authorized, however, to use advances from the FHLB of Cincinnati to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Cincinnati functions as a central reserve bank
providing credit for savings institutions and certain other member financial
institutions. As a member of the FHLB System, Park View Federal is required to
own stock in the FHLB of Cincinnati and is authorized to apply for advances.
Advances are pursuant to several different programs, each of which has its own
interest rate and range of maturities. Park View Federal has a Blanket
Agreement for advances with the FHLB under which the Bank may borrow up to 50%
of assets subject to normal collateral and underwriting requirements. The Bank
currently has two commitments with the Federal Home Loan Bank of Cincinnati for
flexible lines of credit, referred to as a cash management advance and a REPO
advance, in the amounts of $30 million and $40 million respectively, that were
drawn upon in the amounts of $0 and $26 million respectively, at June 30, 1997.
Advances from the FHLB of Cincinnati are secured by the Bank's stock in the
FHLB of Cincinnati and other eligible assets. For additional information
please refer to Note 8 of Notes to Consolidated Financial Statements.
The following table sets forth certain information regarding the Bank's
advances from the FHLB of Cincinnati for the periods indicated:
YEAR ENDED JUNE 30,
------------------------------------------
1997 1996 1995
------- ------ ------
(Dollars in thousands)
Maximum amount outstanding at any
month end........................ $54,412 $27,482 $29,000
Approximate average outstanding
balance.......................... 41,083 10,623 16,870
Approximate weighted average rate
paid (1)......................... 5.78% 5.13% 4.39%
_______________________________
(1) Computed from average monthly balances.
The weighted average rates outstanding on FHLB advances was 5.83%, 5.46%
and 4.15% at June 30, 1997, 1996 and 1995, respectively.
At the years ended June 30, 1997, 1996, and 1995, PVFSC had one loan
outstanding for $1.7 million, $1.7 million and $1.8 million, respectively,
collateralized by real estate and guaranteed by PVF. At the years ended June
30, 1997 and 1996 PVF had one loan outstanding for $0.6 million and $1.0
million, respectively, collateralized by mortgage servicing rights. See Note 9
of Notes to Consolidated Financial Statement.
SUBSIDIARY ACTIVITIES
As a result of regulatory changes mandated by FIRREA, savings associations
are currently required to deduct from regulatory capital calculations their
investment in and extensions of credit to service corporations engaged in
activities not permissible for a national bank. The land acquisition and
development activities of PVFSC are not permissible for national banks. As a
result, the Bank's net investment in and extensions of credit to PVFSC must
19
be deducted from capital in their entirety. It was for this reason that PVF
purchased the stock of PVFSC from Park View Federal. The effect of this
transaction to the Bank was to increase GAAP capital by $785,000 and eliminate
the Bank's net investment in and deduction for PVF Service Corp. from its
books, thus increasing regulatory capital by $1.2 million.
The Bank is now required to give the FDIC and the Director of OTS 30 days
prior notice before establishing or acquiring a new subsidiary or commencing a
new activity through an existing subsidiary. Both the FDIC and the Director of
OTS have the authority to prohibit the initiation or to order the termination
of subsidiary activities determined to pose a risk to the safety or soundness
of the institution.
As a federally chartered savings bank, Park View Federal is permitted to
invest an amount equal to 2% of its assets in subsidiaries, with an additional
investment of 1% of assets where such investment serves primarily community,
inner-city and community development purposes. Under such limitations, as of
June 30, 1997, Park View Federal was authorized to invest up to approximately
$11.2 million in the stock of or loans to subsidiaries, including the
additional 1% investment for community inner-city and community development
purposes. Institutions meeting their applicable minimum regulatory capital
requirements may invest up to 50% of their regulatory capital in conforming
first mortgage loans to subsidiaries in which they own 10% or more of the
capital stock. Park View Federal currently exceeds its regulatory capital
requirements.
PVF has two subsidiaries, Park View Federal and PVFSC, which is engaged in
the activities of land acquisition and development. At June 30, 1997, PVFSC
had an investment in two properties aggregating $910,000, described below. In
addition PVF has three non-active subsidiaries, PVF Community Development
Corp., PVF Mortgage Corp., and Mid Pines Land Company, which have been
chartered for future activity.
MID PINES. Mid-Pines consists of two adjacent parcels of land aggregating
257 acres in Solon, Ohio. In 1983, PVFSC acquired a 150 acre parcel from the
Bank, which property the Bank acquired in foreclosure. The 150 acre parcel
included 85 acres of vacant land and a 65 acre golf course. PVFSC acquired the
additional 107 acre parcel of land in 1985 for $150,000. PVFSC acquired the
properties as an investment. Mid-Pines was appraised in 1994 at a value of
$2.5 million. Mid Pines had a net book value of $875,000 at June 30, 1997.
PVFSC is working with the City of Solon for their approval on a Planned Unit
Development (PUD) project.
DEER LAWN FARMS. At June 30, 1997, Deer Lawn Farms, Solon, Ohio, had a
net book value of $35,000. PVF estimates the fair market value of the two
remaining lots to approximate book value at June 30, 1997.
COMPETITION
The Bank faces strong competition both in originating real estate and
other loans and in attracting deposits. The Bank competes for real estate and
other loans principally on the basis of interest rates and the loan fees it
charges, the type of loans it originates and the quality of services it
provides to borrowers. Its competition in originating real estate loans comes
primarily from other savings institutions, commercial banks and mortgage
bankers making loans secured by real estate located in the Bank's market area.
The Bank attracts all its deposits through its branch offices primarily
from the communities in which those branch offices are located. Consequently,
competition for deposits is principally from other savings institutions,
commercial banks, credit unions and brokers in these communities. Park View
Federal competes for deposits and loans by offering a variety of deposit
accounts at competitive rates, a wide array of loan products, convenient
business hours and branch locations, a commitment to outstanding customer
service and a well-trained staff. In addition, the Bank believes it has
developed strong relationships with local businesses, realtors, builders, and
the public in general, giving it an excellent image in the community.
20
EMPLOYEES
As of June 30, 1997, PVF and its subsidiaries had 114 full-time employees
and 17 part-time employees, none of whom was represented by a collective
bargaining agreement. The Company believes it enjoys a good relationship with
its personnel.
REGULATION OF THE BANK
GENERAL. As a savings institution, Park View Federal is subject to
extensive regulation by the OTS, and its deposits are insured by the SAIF,
which is administered by the FDIC. The lending activities and other
investments of the Bank must comply with various federal regulatory
requirements. OTS periodically examines the Bank for compliance with various
regulatory requirements. The FDIC also has the authority to conduct special
examinations of SAIF-insured savings institutions. The Bank must file reports
with OTS describing its activities and financial condition. The Bank is also
subject to certain reserve requirements promulgated by the Federal Reserve
Board. This supervision and regulation is intended primarily for the
protection of depositors. Certain of these regulatory requirements are
referred to below or elsewhere herein.
REGULATORY CAPITAL REQUIREMENTS. Under OTS regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and "total
capital," a combination of core and "supplementary" capital, equal to 8.0% of
"risk-weighted" assets. In addition, the OTS has adopted regulations which
impose certain restrictions on savings associations that have a total risk-
based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-
weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted
total assets of less than 4.0% (or 3.0% if the institution is rated composite 1
under the OTS examination rating system). For purposes of these regulations,
Tier 1 capital has the same definitions as core capital. See "-- Prompt
Corrective Regulatory Action." The Bank is in compliance with all applicable
regulatory capital requirements.
The core and tangible capital requirements are measured against adjusted
total assets, which are a savings institution's consolidated total assets as
determined under GAAP adjusted for certain goodwill amounts and increased by a
pro rated portion of the assets of subsidiaries in which the savings
institution holds a minority interest and which are not engaged in activities
for which the capital rules require the savings institution to net its debt and
equity investments in such subsidiaries against capital, as well as a pro rated
portion of the assets of other subsidiaries for which netting is not fully
required under phase-in rules. Adjusted total assets are reduced by the amount
of assets that have been deducted from capital, the portion of savings
institution's investments in subsidiaries that must be netted against capital
under the capital rules and, for purposes of the core capital requirement,
qualifying supervisory goodwill. At June 30, 1997, Park View Federal's
adjusted total assets for purposes of the core and tangible capital
requirements were $375.9 million.
In determining compliance with the risk-based capital requirement, a
savings institution calculates its total capital, which may include both core
capital and supplementary capital, provided the amount of supplementary capital
used does not exceed the savings institution's core capital. Supplementary
capital is defined to include certain preferred stock issues, nonwithdrawable
accounts and pledged deposits that do not qualify as core capital, certain
approved subordinated debt, certain other capital instruments and a portion of
the savings institution's general loss allowances.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighting system, single-family first mortgages not more
than 90 days past due with loan-to-value ratios under 80%, and multi-family
mortgages (maximum 36 dwelling units) with loan-to-value ratios under 80% and
average annual occupancy rates over 80%, are assigned a risk weight of 50%.
Consumer loans, residential construction loans and commercial real estate loans
are assigned a risk weight of 100%. Mortgage-backed securities issued, or
fully guaranteed as to principal and interest, by the FNMA or FHLMC are
assigned a 20% risk
21
weight. Cash and United States Government securities backed by the full
faith and credit of the United States Government are given a 0% risk weight.
Under the risk-based capital requirement, a savings institution is required
to maintain total capital, consisting of core capital plus certain other
components, including general valuation allowances, equal to 8.0% of
risk-weighted assets. At June 30, 1997 the Bank's risk-weighted assets were
$284.5 million, and its total regulatory capital was $30.2 million, or 10.6%
of risk-weighted assets.
The table below presents the Bank's capital position at June 30, 1997,
relative to its various minimum regulatory capital requirements.
At June 30, 1997
---------------------
Percent of
Amount Assets (1)
------- -----------
(Dollars in Thousands)
Tangible Capital......................... $27,604 7.34%
Tangible Capital Requirement............. 5,639 1.50
------- -----
Excess ................................. $21,965 5.84%
------- -----
------- -----
Tier 1/Core Capital...................... $27,604 7.34%
Tier 1/Core Capital Requirement.......... 15,036 4.00
------- -----
Excess.................................. $12,568 3.34%
------- -----
------- -----
Tier 1 Risk-Based Capital.............. $27,604 9.70%
Tier 1 Risk-Based Capital Requirement.. 11,379 4.00
------- -----
Excess................................ $16,225 5.70%
------- -----
------- -----
Risk-Based Capital..................... $30,202 10.62%
Risk-Based Capital Requirement......... 22,758 8.00
------- -----
Excess................................ $ 7,444 2.62%
------- -----
------- -----
-------------
(1) Based upon adjusted total assets for purposes of
the tangible, core and Tier 1 capital requirements,
and risk-weighted assets for purposes of the Tier 1
risk-based and risk-based capital requirements.
OTS risk-based capital regulations require savings institutions with more
than a "normal" level of interest rate risk to maintain additional total
capital. A savings institution's interest rate risk will be measured in terms
of the sensitivity of its "net portfolio value" to changes in interest rates.
Net portfolio value is defined, generally, as the present value of expected
cash inflows from existing assets and off-balance sheet contracts less the
present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. A savings institution with a greater than normal interest
rate risk will be required to deduct from total capital, for purposes of
calculating its risk-based capital requirement, an amount (the "interest rate
risk component") equal to one-half the difference between the institution's
measured interest rate risk and the normal level of interest rate risk,
multiplied by the economic value of its total assets. At June 30, 1997 the
Bank had no interest rate risk component deduction from total capital.
The OTS will calculate the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, to be deducted from a savings institution's total capital will be based on
the institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk
schedule with their Thrift Financial Reports. However, the OTS will require
any exempt savings institution that it determines may have a high level of
interest rate risk exposure to file such schedule on a quarterly basis.
22
The OTS has proposed an amendment to its capital regulations establishing
a minimum 3% core capital ratio for savings institutions in the strongest
financial and managerial condition. For all other savings associations, the
minimum core capital ratio would be 3% plus at least an additional 100 to 200
basis points. In determining the amount of additional capital, the OTS would
assess both the quality of risk management systems and the level of overall
risk in each individual savings association through the supervisory process on
a case-by-case basis. As a result, the exact effect on the Bank cannot be
predicted at this time.
In addition to requiring generally applicable capital standards for
savings institutions, the Director of OTS may establish the minimum level of
capital for a savings institution at such amount or at such ratio of capital-to-
assets as the Director determines to be necessary or appropriate for such
institution in light of the particular circumstances of the institution. The
Director of OTS may treat the failure of any savings institution to maintain
capital at or above such level as an unsafe or unsound practice and may issue a
directive requiring any savings institution which fails to maintain capital at
or above the minimum level required by the Director to submit and adhere to a
plan for increasing capital. Such an order may be enforced in the same manner
as an order issued by the FDIC.
PROMPT CORRECTIVE REGULATORY ACTION. Under FDICIA, the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements.
All institutions, regardless of their capital levels, are restricted from
making any capital distribution or paying any management fees if the
institution would thereafter fail to satisfy the minimum levels for any of its
capital requirements. An institution that fails to meet the minimum level for
any relevant capital measure (an "undercapitalized institution") may be: (i)
subject to increased monitoring by the appropriate federal banking regulator;
(ii) required to submit an acceptable capital restoration plan within 45 days;
(iii) subject to asset growth limits; and (iv) required to obtain prior
regulatory approval for acquisitions, branching and new lines of businesses.
The capital restoration plan must include a guarantee by the institution's
holding company that the institution will comply with the plan until it has
been adequately capitalized on average for four consecutive quarters, under
which the holding company would be liable up to the lesser of 5% of the
institution's total assets or the amount necessary to bring the institution
into capital compliance as of the date it failed to comply with its capital
restoration plan. A "significantly undercapitalized" institution, as well as
any undercapitalized institution that did not submit an acceptable capital
restoration plan, may be subject to regulatory demands for recapitalization,
broader application of restrictions on transactions with affiliates,
limitations on interest rates paid on deposits, asset growth and other
activities, possible replacement of directors and officers, and restrictions on
capital distributions by any bank holding company controlling the institution.
Any company controlling the institution could also be required to divest the
institution or the institution could be required to divest subsidiaries.
Under implementing regulations, the federal banking regulators will
measure a depository institution's capital adequacy on the basis of the
institution's total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). Under the regulations, a savings
association that is not subject to an order or written directive to meet or
maintain a specific capital level will be deemed "well capitalized" if it also
has: (i) a total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-
based capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or
greater. An "adequately capitalized" savings association is a savings
association that does not meet the definition of well capitalized and has: (i)
a total risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-
based ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or greater
(or 3.0% or greater if the savings association has a composite 1 CAMEL rating).
An "undercapitalized institution" is a savings association that has (i) a total
risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0%
if the association has a composite 1 CAMEL rating). A "significantly
undercapitalized" institution is defined as a savings association that has: (i)
a total risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based
capital ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%.
A "critically undercapitalized" savings association is defined as a savings
association that has a ratio of core capital to total assets of less than 2.0%.
The OTS may reclassify a well capitalized savings association as adequately
capitalized and may require an adequately capitalized or undercapitalized
association to comply with the supervisory
23
actions applicable to associations in the next lower capital category if the
OTS determines, after notice and an opportunity for a hearing, that the
savings association is in an unsafe or unsound condition or that the
association has received and not corrected a less-than-satisfactory rating
for any CAMEL rating category. The Bank is classified as "well capitalized"
under these regulations.
SAFETY AND SOUNDNESS STANDARDS. Interagency Guidelines Establishing
Standards for Safety and Soundness require savings institutions to maintain
internal controls and information systems and internal audit systems that are
appropriate for the size, nature and scope of the institution's business.
The guidelines also establish certain basic standards for loan documentation,
credit underwriting, interest rate risk exposure, and asset growth. The
guidelines further provide that savings institutions should maintain
safeguards to prevent the payment of compensation, fees and benefits that are
excessive or that could lead to material financial loss, and should take into
account factors such as comparable compensation practices at comparable
institutions. If the OTS determines that a savings institution is not in
compliance with the safety and soundness guidelines, it may require the
institution to submit an acceptable plan to achieve compliance with the
guidelines. A savings institution must submit an acceptable compliance plan
to the OTS within 30 days of receipt of a request for such a plan. Failure
to submit or implement a compliance plan may subject the institution to
regulatory sanctions. Management believes that the Bank already meets
substantially all the standards adopted in the interagency guidelines, and
therefore does not believe that implementation of these regulatory standards
will materially affect the Bank's operations. Additionally, a savings
institution should maintain systems, commensurate with its size and the
nature and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
FEDERAL HOME LOAN BANK SYSTEM. Park View Federal is a member of the
FHLB System, which consists of 12 regional FHLBs subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The FHLBs provide a
central credit facility primarily for member institutions. As a member of
the FHLB System, the Bank is required to acquire and hold shares of capital
stock in the FHLB of Cincinnati in an amount at least equal to 1% of the
aggregate unpaid principal of its home mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the FHLB of Cincinnati, whichever is greater.
The Bank was in compliance with this requirement with an investment in FHLB
of Cincinnati stock at June 30, 1997 of $2.8 million.
The FHLB of Cincinnati serves as a reserve or central bank for its
member institutions within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes advances to members in accordance with policies and
procedures established by the FHFB and the Board of Directors of the FHLB of
Cincinnati. Under FIRREA, long-term advances may be made only for the
purpose of providing funds for residential housing finance. At June 30,
1997, the Bank had $47.4 million in advances outstanding from the FHLB of
Cincinnati. See " -- Deposit Activity and Other Sources of Funds --
Borrowings."
LIQUIDITY REQUIREMENTS. Park View Federal is required to maintain
average daily balances of liquid assets (cash, certain time deposits,
bankers' acceptances, highly rated corporate debt and commercial paper,
securities of certain mutual funds, mortgage loans and mortgage-related
securities with less than one year to maturity or subject to purchase within
one year and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus short
term borrowings. Savings and loan associations also are required to maintain
average daily balances of short-term liquid assets at a specified percentage
(currently 1%) of the total of their net withdrawable savings accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet liquidity requirements. The average daily liquidity and
short-term liquidity ratios of the Bank for the month of June 1997 were 8.6%
and 3.53%, respectively. A substantial and sustained decline in savings
deposits would adversely affect the Bank's liquidity which may result in
restricted operations and additional borrowings from the FHLB of Cincinnati.
24
QUALIFIED THRIFT LENDER TEST. A savings association that does not meet
the Qualified Thrift Lender test ("QTL Test") must either convert to a bank
charter or comply with the following restrictions on its operations: (i) the
institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for
a national bank; (ii) the branching powers of the institution shall be
restricted to those of a national bank; (iii) the institution shall not be
eligible to obtain any advances from its FHLB; and (iv) payment of dividends
by the institution shall be subject to the rules regarding payment of
dividends by a national bank. Upon the expiration of three years from the
date the institution ceases to be a Qualified Thrift Lender, it must cease
any activity, and not retain any investment not permissible for a national
bank and immediately repay any outstanding FHLB advances (subject to safety
and soundness considerations).
To meet the QTL test, an institution's "Qualified Thrift Investments"
must total at least 65% of "portfolio assets." Under OTS regulations,
portfolio assets are defined as total assets less intangibles, property used
by a savings institution in its business and liquidity investments in an
amount not exceeding 20% of assets. Qualified Thrift Investments consist of
(i) loans, equity positions or securities related to domestic, residential
real estate or manufactured housing, and educational, small business and
credit card loans, (ii) 50% of the dollar amount of residential mortgage
loans subject to sale under certain conditions, and (iii) stock in an FHLB or
the FHLMC or FNMA. In addition, subject to a 20% of portfolio assets limit,
savings institutions are able to treat as Qualified Thrift Investments 200%
of their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas. In
order to maintain QTL status, the savings institution must maintain a weekly
average percentage of Qualified Thrift Investments to portfolio assets equal
to 65% on a monthly average basis in nine out of 12 months. A savings
institution that fails to maintain QTL status will be permitted to requalify
once, and if it fails the QTL test a second time, it will become immediately
subject to all penalties as if all time limits on such penalties had expired.
Failure to qualify as a QTL results in a number of sanctions, including the
imposition of certain operating restrictions imposed on national banks and a
restriction on obtaining additional advances from the FHLB System. At June
30, 1997, the Bank qualified as a QTL.
UNIFORM LENDING STANDARDS. Under OTS regulations, savings institutions
must adopt and maintain written policies that establish appropriate limits
and standards for extensions of credit that are secured by liens or interests
in real estate or are made for the purpose of financing permanent
improvements to real estate. These policies must establish loan portfolio
diversification standards, prudent underwriting standards, including
loan-to-value limits, that are clear and measurable, loan administration
procedures and documentation, approval and reporting requirements. The real
estate lending policies must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies (the "Interagency Guidelines")
that have been adopted by the federal bank regulators.
The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits; (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value
of the collateral; (ii) for land development loans (i.e., loans for the
purpose of improving unimproved property prior to the erection of
structures), the supervisory limit is 75%; (iii) for loans for the
construction of commercial, multifamily or other nonresidential property, the
supervisory limit is 80%; (iv) for loans for the construction of one-to-four
family properties, the supervisory limit is 85%; and (v) for loans secured by
other improved property (e.g., farmland, completed commercial property and
other income-producing property including non-owner-occupied, one-to-four
family property), the limit is 85%. Although no supervisory loan-to-value
limit has been established for owner-occupied, one-to-four family and home
equity loans, the Interagency Guidelines state that for any such loan with a
loan-to-value ratio that equals or exceeds 90% at origination, an institution
should require appropriate credit enhancement in the form of either mortgage
insurance or readily marketable collateral.
The Interagency Guidelines state that it may be appropriate in individual
cases to originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits, based on the support provided by other credit
factors. The aggregate amount of loans in excess of the supervisory loan-to-
value limits, however, should not exceed 100% of total capital and the total of
such loans secured by commercial, agricultural, multifamily and other
25
non-one-to-four family residential properties should not exceed 30% of total
capital. The supervisory loan-to-value limits do not apply to certain
categories of loans including loans insured or guaranteed by the U.S.
government and its agencies or by financially capable state, local or
municipal governments or agencies, loans backed by the full faith and credit
of a state government, loans that are to be sold promptly after origination
without recourse to a financially responsible party, loans that are renewed,
refinanced or restructured without the advancement of new funds, loans that
are renewed, refinanced or restructured in connection with a workout, loans
to facilitate sales of real estate acquired by the institution in the
ordinary course of collecting a debt previously contracted and loans where
the real estate is not the primary collateral.
The Bank believes that its current lending policies conform to the
Interagency Guidelines and does not anticipate that the Interagency
Guidelines will have a material effect on its lending activities.
DEPOSIT INSURANCE. The Bank is required to pay assessments, based on a
percentage of its insured deposits, to the FDIC for insurance of its deposits
by the FDIC through the Savings Association Insurance Fund ("SAIF") of the
FDIC. The FDIC is required to set semi-annual assessments for SAIF-insured
institutions at a level necessary to maintain the designated reserve ratio of
the SAIF at 1.25% of estimated insured deposits, or at a higher percentage of
estimated insured deposits that the FDIC determines to be justified for that
year by circumstances indicating a significant risk of substantial future
losses to the SAIF.
Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC, which
is determined by the institution's capital level and supervisory evaluations.
Based on the data reported to regulators for the date closest to the last day
of the seventh month preceding the semi-annual assessment period,
institutions are assigned to one of three capital groups -- well capitalized,
adequately capitalized or undercapitalized -- using the same percentage
criteria as under the prompt corrective action regulations. See " -- Prompt
Corrective Regulatory Action." Within each capital group, institutions are
assigned to one of three subgroups on the basis of supervisory evaluations by
the institution's primary supervisory authority, and such other information
as the FDIC determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance fund. Subgroup A
consists of financially sound institutions with only a few minor weaknesses.
Subgroup B consists of institutions that demonstrate weaknesses which, if not
corrected, could result in significant deterioration of the institution and
increased risk of loss to the deposit insurance fund. Subgroup C consists of
institutions that pose a substantial probability of loss to the deposit
insurance fund unless effective corrective action is taken.
For the past several semi-annual periods, institutions with
SAIF-assessable deposits, like the Bank, have been required to pay higher
deposit insurance premiums than institutions with deposits insured by the
BIF. In order to recapitalize the SAIF and address the premium disparity,
the recently-enacted Deposit Insurance Funds Act of 1996 authorized the FDIC
to impose a one-time special assessment on institutions with SAIF-assessable
deposits, based on the amount determined by the FDIC to be necessary to
increase the reserve levels of the SAIF to the designated reserve ratio of
1.25% of insured deposits. Institutions were assessed at the rate of 65.7
basis points based on the amount of their SAIF-assessable deposits as of
March 31, 1995. As a result of the special assessment the Bank incurred a
pre-tax expense of $1,707,867, during the fiscal year ended June 30, 1997.
The FDIC has proposed a rule that would lower the regular semi-annual
SAIF assessment rates by establishing a base assessment rate schedule ranging
from 4 to 31 basis points effective October 1, 1996. The rule widens the
range between the lowest and highest assessment rates among healthy and
troubled institutions with the intent of creating an incentive for savings
institutions to control risk-taking behavior. The rule also prevents the
FDIC from collecting more funds than needed to maintain the SAIF's
capitalization at 1.25% of insured deposits. Until December 31, 1999,
however, SAIF-insured institutions will be required to pay assessments to the
FDIC at the rate of 6.44 basis points to help fund interest payments on
certain bonds issued by the Financing Corporation ("FICO"), an agency of the
federal government established to finance takeovers of insolvent thrifts.
During this period, BIF members will be assessed for these obligations at the
rate of 1.3 basis points. After December 31, 1999, both BIF and SAIF members
will be assessed at the same rate for FICO payments.
26
SAIF members are generally prohibited from converting to BIF, also
administered by the FDIC, or merging with or transferring assets to a BIF
member before the date on which the SAIF first meets or exceeds the
designated reserve ratio of 1.25% of insured deposits. However, the FDIC may
approve such a transaction in the case of a SAIF member in default or if the
transaction involves an insubstantial portion of the deposits of each
participant. In addition, mergers, transfer of assets and assumptions of
liabilities may be approved by the appropriate bank regulator so long as
deposit insurance premiums continue to be paid to the SAIF for deposits
attributable to the SAIF members, plus an adjustment for the annual rate of
growth of deposits in the surviving bank without regard to subsequent
acquisitions. Each depository institution participating in a SAIF-to-BIF
conversion transaction is required to pay an exit fee to SAIF equal to 0.90%
of the deposits transferred and an entrance fee to BIF based on the current
reserve ratio of the BIF. A savings institution is not prohibited from
adopting a commercial bank or savings bank charter if the resulting bank
remains a SAIF member.
DIVIDEND LIMITATIONS. Under OTS regulations, the Bank may not pay
dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account
established for the benefit of certain depositors of the Bank at the time of
the conversion of the bank from the mutual to stock form. In addition,
savings institution subsidiaries of savings and loan holding companies are
required to give the OTS 30 days' prior notice of any proposed declaration of
dividends to the holding company.
Federal regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and
cash mergers) by the Bank. Under these regulations, a savings association
that, immediately prior to, and on a pro forma basis after giving effect to,
a proposed capital distribution, has total capital (as defined by OTS
regulation) that is equal to or greater than the amount of its fully
phased-in capital requirements (a "Tier 1 Association") is generally
permitted without OTS approval to make capital distributions during a
calendar year in an amount equal to the greater of (i) 75% of net income for
the previous four quarters or (ii) 100% of its net income to date during the
calendar year plus an amount that would reduce by one-half the amount by
which its total capital to assets ratio exceeded its fully phased-in capital
requirement to assets ratio at the beginning of the calendar year. A
savings association with total capital in excess of current minimum capital
requirements but not in excess of the fully phased-in requirements (a "Tier 2
Association") is permitted to make capital distributions without OTS approval
of up to 75% of its net income for the previous four quarters, less dividends
already paid for such period depending on the savings association's level of
risk-based capital. A savings association that fails to meet current minimum
capital requirements (a "Tier 3 Association") is prohibited from making any
capital distributions without the prior approval of the OTS. Tier 1
Associations that have been notified by the OTS that they are in need of more
than normal supervision will be treated as either a Tier 2 or Tier 3
Association. At June 30, 1994, the Bank was a Tier 1 Association.
The Bank is prohibited from making any capital distributions if after
making the distribution, it would be undercapitalized as defined in the OTS'
prompt corrective action regulations. After consultation with the FDIC, the
OTS may permit a savings association to repurchase, redeem, retire or
otherwise acquire shares or ownership interests if the repurchase,
redemption, retirement or other acquisition: (i) is made in connection with
the issuance of additional shares or other obligations of the institution in
at least an equivalent amount; and (ii) will reduce the institution's
financial obligations or otherwise improve the institution's financial
condition.
In addition to the foregoing, earnings of the Bank appropriated to bad
debt reserves and deducted for Federal income tax purposes are not available
for payment of cash dividends without payment of taxes at the then current
tax rate by the Bank on the amount of earnings removed from the reserves for
such distributions. See "Taxation." The Bank intends to make full use of
this favorable tax treatment afforded to the Bank and does not contemplate
use of any earnings of the Bank in a manner which would limit the Bank's bad
debt deduction or create federal tax liabilities.
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, a savings institution must maintain average daily reserves equal to 3%
on the first $49.3 million of transaction accounts, plus 10% on the
remainder. These percentages are subject to adjustment by the Federal Reserve
Board. Because required reserves
27
must be maintained in the form of vault cash or in a noninterest-bearing
account at a Federal Reserve Bank, the effect of the reserve requirement is
to reduce the amount of the institution's interest-earning assets. At June
30, 1997, Park View Federal met its reserve requirements.
INTERSTATE AND INTERINDUSTRY ACQUISITIONS. OTS regulations permit
federal associations to branch in any state or states of the United States
and its territories. Except in supervisory cases or when interstate
branching is otherwise permitted by state law or other statutory provision, a
federal association may not establish an out-of-state branch unless (i) the
federal association qualifies as a "domestic building and loan association"
under Section 7701(a)(19) of the Internal Revenue Code and the total assets
attributable to all branches of the association in the state would qualify
such branches taken as a whole for treatment as a domestic building and loan
association and (ii) such branch would not result in (a) formation of a
prohibited multi-state multiple savings and loan holding company or (b) a
violation of certain statutory restrictions on branching by savings
association subsidiaries of banking holding companies. Federal associations
generally may not establish new branches unless the association meets or
exceeds minimum regulatory capital requirements. The OTS will also consider
the association's record of compliance with the Community Reinvestment Act of
1977 in connection with any branch application.
FIRREA amended the Bank Holding Company Act of 1956 to authorize the
Federal Reserve Board to permit the acquisition of a savings institution by a
bank holding company. In approving an application by a bank holding company
to acquire a savings institution, the Federal Reserve Board is prohibited
from imposing restrictions on tandem operations of the subsidiary savings
institution and its holding company affiliates except as required under
Sections 23A and 23B of the Federal Reserve Act, as amended. Previously, the
Federal Reserve Board had only approved acquisitions of insolvent savings
institutions and only subject to certain restrictions on tandem operation of
the savings institutions and bank subsidiaries of the bank holding company.
A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a BIF member
with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the
deposits attributable to the merged savings association plus an annual growth
increment. In addition, the transaction must comply with the restrictions on
interstate acquisitions of commercial banks under the Bank Holding Company
Act.
LOANS-TO-ONE-BORROWER LIMITATIONS. Under federal law, loans and
extensions of credit outstanding at one time to a person shall not exceed 15%
of the unimpaired capital and surplus of the savings association. Loans and
extensions of credit fully secured by certain readily marketable collateral
may represent an additional 10% of unimpaired capital and surplus. FIRREA
additionally authorizes savings associations to make loans to one borrower,
for any purpose, in an amount not to exceed $500,000 or, by order of the
Director of OTS, in an amount not to exceed the lesser of $30,000,000 or 30%
of unimpaired capital and surplus to develop residential housing, provided:
(i) the purchase price of each single-family dwelling in the development does
not exceed $500,000; (ii) the savings association is in compliance with the
fully phased-in capital standards of FIRREA; (iii) the loans comply with
applicable loan-to-value requirements, and; (iv) the aggregate amount of
loans made under this authority does not exceed 150% of unimpaired capital
and surplus. FIRREA also authorizes a savings association to make loans to
one borrower to finance the sale of real property acquired in satisfaction of
debts in an amount up to 50% of unimpaired capital and surplus.
TRANSACTIONS WITH AFFILIATES. Transactions between savings associations
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings association is any company or entity which
controls, is controlled by or is under common control with the savings
association. In a holding company context, the parent holding company of a
savings association and any companies which are controlled by such parent
holding company are affiliates of the savings association. Generally,
Sections 23A and 23B (i) limit the extent to which the savings institution or
its subsidiaries may engage in "covered transactions" with any one affiliate
to an amount equal to 10% of such institution's capital stock and surplus,
and contain an aggregate limit on all such
28
transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings association may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate
which engages only in activities which are permissible for bank holding
companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes
or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings association.
Savings institutions are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to a
director, executive officer or greater than 10% stockholder of a savings
association and certain affiliated interests of the foregoing, may not
exceed, together with all other outstanding loans to such person and
affiliated interests, the association's loans to one borrower limit
(generally equal to 15% of the institution's unimpaired capital and surplus)
and all loans to such persons may not exceed the institution's unimpaired
capital and unimpaired surplus. Section 22(h) also prohibits loans, above
amounts prescribed by the appropriate federal banking agency, to directors,
executive officers and greater than 10% stockholders of a savings
association, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the association with any
"interested" director not participating in the voting. The Federal Reserve
Board has prescribed the loan amount (which includes all other outstanding
loans to such person), as to which such prior board of director approval is
required, as being the greater of $25,000 or 5% of capital and surplus (up to
$500,000). Further, the Federal Reserve Board pursuant to Section 22(h)
requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also prohibits a depository
institution from paying the overdrafts of any of its executive officers or
directors.
Savings institutions are also subject to the requirements and
restrictions of Section 22(g) of the Federal Reserve Act on loans to
executive officers and the restrictions of 12 U.S.C. Section 1972 on certain
tying arrangements and extensions of credit by correspondent banks. Section
22(g) of the Federal Reserve Act requires that loans to executive officers of
depository institutions not be made on terms more favorable than those
afforded to other borrowers, requires approval for such extensions of credit
by the board of directors of the institution, and imposes reporting
requirements for and additional restrictions on the type, amount and terms of
credits to such officers. Section 1972 (i) prohibits a depository
institution from extending credit to or offering any other services, or
fixing or varying the consideration for such extension of credit or service,
on the condition that the customer obtain some additional service from the
institution or certain of its affiliates or not obtain services of a
competitor of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution
which has a correspondent banking relationship with the institution, unless
such extension of credit is on substantially the same terms as those
prevailing at the time for comparable transactions with other persons and
does not involve more than the normal risk of repayment or present other
unfavorable features.
PENDING FINANCIAL SERVICES MODERNIZATION LEGISLATION. Legislation
currently under consideration by Congress would repeal the federal thrift
charter and require federal associations like the Bank to convert to national
banks two years after the enactment of the bill. The bill, in its current
form, would permit federal thrifts that converted to national banks to
exercise any authority which they were legally entitled to exercise
immediately prior to such conversion and would not be required to divest any
branches. Further, these institutions could continue to branch in any state
in which they were located to the same extent as national banks. Unitary
savings and loan holding companies, like the Company, could continue to
exercise any powers they had prior to their subsidiary becoming a bank by
operation of law as long as they did not acquire another bank. Powers of
those unitary savings and loan holding companies that were grandfathered,
however, could not be transferred to another company which acquires control
of the unitary holding company after the effective date of the law. There
can be no assurance that this legislation will be passed in its current form.
At this time, the Company is unable to predict whether such legislation
would significantly impact its operations.
29
REGULATION OF THE COMPANY
GENERAL.
The company is a savings and loan holding company as defined by the HOLA.
As such, the Company is registered with the OTS and is subject to OTS
regulation, examination, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to
certain restrictions in its dealings with the Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. The Board of Directors of the Company presently
intends to operate the Company as a unitary savings and loan holding company.
There are generally no restrictions on the activities of a unitary savings and
loan holding company. However, if the Director of the OTS determines that
there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director of the OTS may impose such restrictions as deemed necessary to address
such risk including limiting: (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the
above rules as to permissible business activities of unitary savings and loan
holding companies, if the savings institution subsidiary of such a holding
company fails to meet the QTL test, then such unitary holding company shall
also presently become subject to the activities restrictions applicable to
multiple holding companies and, unless the savings institution requalifies as a
QTL within one year thereafter, register as, and become subject to the
restrictions applicable to a bank holding company. See "--Regulation of the
Bank-- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution shall commence
or continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof, any business activity, upon prior
notice to, and no objection by, the OTS, other than: (i) furnishing or
performing management services for a subsidiary savings institution; (ii)
conducting an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
authorized by regulation as of March 5, 1987 to be engaged in by multiple
holding companies; or (vii) unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies,
those activities authorized by the Federal Reserve Board as permissible for
bank holding companies. Those activities described in (vii) above must also be
approved by the Director of the OTS prior to being engaged in by a multiple
holding company.
RESTRICTIONS ON ACQUISITIONS. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the Director of OTS, (i)
control of any other savings institution or savings and loan holding company or
substantially all the assets thereof or (ii) more than 5% of the voting shares
of a savings institution or holding company thereof which is not a subsidiary.
Under certain circumstances, a registered savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15%
of the voting shares of an under-capitalized savings institution pursuant to a
"qualified stock issuance" without that savings institution being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company' other subsidiaries must have tangible capital
of at least
30
6-1/2% of total assets, there must not be more than one common director or
officer between the savings and loan holding company and the issuing savings
institution, and transactions between the savings institution and the savings
and loan holding company and any of its affiliates must conform to Sections
23A and 23B of the Federal Reserve Act. Except with the prior approval of
the Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25%
of such company's stock, may also acquire control of any savings institution,
other than a subsidiary savings institution, or of any other savings and loan
holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home
or branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
TAXATION
GENERAL
The Company and its subsidiaries currently file a consolidated federal
income tax return based on a fiscal year ending June 30. Consolidated returns
have the effect of eliminating intercompany distributions, including dividends,
from the computation of consolidated taxable income for the taxable year in
which the distributions occur.
FEDERAL INCOME TAXATION
Savings institutions are subject to the provisions of the Internal Revenue
Code of 1986, as amended (the "Code") in the same general manner as other
corporations. Prior to recent legislation, institutions such as the Bank which
met certain definitional tests and other conditions prescribed by the Code
benefitted from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans were separated into "qualifying real
property loans," which generally were loans secured by interests in certain
real property, and nonqualifying loans, which were all other loans. The bad
debt reserve deduction with respect to nonqualifying loans was based on actual
loss experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans was based upon actual loss experience (the
"experience method") or a percentage of taxable income determined without
regard to such deduction (the "percentage of taxable income method"). The
legislation repealed the percentage of taxable income method of calculating the
bad debt reserve. The Bank has generally elected to use the method which has
resulted in the greatest deductions for federal income tax purposes.
Legislation that is effective for tax years beginning after December 31,
1995 requires institutions to recapture into taxable income over a six taxable
year period the portion of the tax loan loss reserve that exceeds the pre-1988
tax loan loss reserve. The Bank has no such excess reserve. The Bank will no
longer be allowed to use the percentage of taxable income method for tax loan
loss provisions, but will be allowed to use the experience method of accounting
for bad debts. Beginning with the June 30, 1997 taxable year, the Bank will be
treated the same as a small commercial bank. Institutions with $500 million or
more in assets will only be able to take a tax deduction when a loan is
actually charged off. Institutions with less than $500 million in assets will
still be permitted to make deductible bad debt additions to reserves, but only
using the experience method.
Earnings appropriated to the Bank's bad debt reserve and claimed as a tax
deduction are not available for the payment of cash dividends or for
distribution to stockholders (including distributions made on dissolution or
liquidation), unless the Bank includes the amount in taxable income, along with
the amount deemed necessary to pay the resulting federal income tax.
31
For taxable years beginning after December 31, 1986, the Tax Reform Act
of 1986 (the "Tax Reform Act") changed the corporate minimum tax from an
add-on tax to a tax based on alternative minimum taxable income ("AMTI"), and
increased the tax rate from 15% to 20%. The Internal Revenue Code provisions
relating to the alternative minimum tax ("AMTI") also include in AMTI (for
tax years beginning in 1987-1989) an amount equal to one-half of the amount
by which a corporation's book income (as specifically defined) exceeds its
AMTI (determined without regard to this preference and prior to reduction by
net operating losses). Also, only 90% of AMTI can be offset by net operating
losses. For taxable years beginning after December 31, 1989, the adjustment
to AMTI based on book income is an amount equal to 75% of the amount by which
a corporation's adjusted current earnings exceeds its AMTI (determined
without regard to this preference and prior to reduction for net operating
losses).
The Bank's federal income tax returns through June 30, 1992 were audited
by the IRS.
For further information regarding federal income taxes, see Note 10 of
Notes to Consolidated Financial Statements.
STATE INCOME TAXATION
The Company is subject to an Ohio franchise tax based on its equity
capital plus certain reserve amounts. Total equity capital for this purpose
is reduced by certain exempted assets. The resulting net taxable value of
capital was taxed at a rate of 1.5% for fiscal years 1997, 1996 and 1995.
Recent Ohio legislation will change the methodology for the computation of
net worth in the future, as well as the rate of tax on financial institutions.
ITEM 2. PROPERTIES
The following table sets forth the location and certain additional
information regarding the Company's offices at June 30, 1997.
YEAR NET BOOK OWNED OR APPROXIMATE
OPENED/ TOTAL VALUE AT LEASED/ SQUARE
LOCATION ACQUIRED DEPOSITS JUNE 30, 1997 EXPIRATION FOOTAGE
- -------- -------- -------- ------------- ---------- -----------
(DOLLARS IN THOUSANDS)
MAIN OFFICE:
2618 N. Moreland Blvd. 1963 $38,999 $ 408 Owned 16,800
Cleveland, Ohio
BRANCH OFFICES:
2111 Richmond Road 1967 50,880 132 Lease 2,750
Beachwood, Ohio 3/1/99
25350 Rockside Road 1969 51,924 93 Lease 14,400
Bedford Heights, Ohio 3/1/03
11010 Clifton Blvd. 1974 22,727 12 Lease 1,550
Cleveland, Ohio 8/1/05
7448 Ridge Road 1979 30,219 0 Lease 3,200
Parma, Ohio 10/11/97
32
6990 Heisley Road 1994 25,926 49 Lease 2,400
Mentor, Ohio 10/25/98
1456 SOM Center Road 1995 27,920 251 Lease 2,200
Mayfield Heights, Ohio 9/30/04
497 East Aurora Road 1994 19,342 79 Lease 2,400
Macedonia, Ohio 9/30/04
8500 Washington Street 1995 20,333 107 Lease 2,700
Chagrin Falls, Ohio 11/30/04
At June 30, 1997 the net book value of the Bank's premises, furniture,
fixtures and equipment as $1.9 million. See Note 6 of Notes to Consolidated
Financial Statements for further information.
The Company also owns real estate in the City of Solon, Ohio. See
Subsidiary Activities for futher information.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company and/or the Bank is a party to various
legal proceedings incident to its business. There are no other material
legal proceedings to which the Bank or PVF is a party or to which any of
their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
The information contained under the section captioned "Market
Information" in the Company's Annual Report to Stockholders for the Fiscal
Year Ended June 30, 1997 (the "Annual Report") is incorporated herein by
reference. For information regarding restrictions on the payment of
dividends see "Item 1. Business -- Regulation of the Bank -- Dividend
Limitations."
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" in the Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Asset/Liability Management" in the Annual Report
incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements contained in the Annual Report
which are listed under Item 14 herein are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the section captioned "Proposal I --
Election of Directors" in the Company's definitive proxy statement for the
Company's 1997 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" and "-- Directors'
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) and (b) The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I -- Election of
Directors" and "Voting Securities and Principal Holders Thereof"
of the Proxy Statement.
(c) Management knows of no arrangements, including any pledge by any
person of securities of the Bank, the operation of which may at
a subsequent date result in a change in control of the
registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" of
the Proxy Statement.
34
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Independent Auditors' Report (incorporated by reference to the
Annual Report)
Consolidated Financial Statements (incorporated by reference to
the Annual Report)
(a) Consolidated Statements of Financial
Condition, at June 30, 1997 and 1996
(b) Consolidated Statements of Operations for
the Years Ended June 30, 1997, 1996 and 1995
(c) Consolidated Statements of Stockholders'
Equity for the Years Ended June 30, 1997, 1996 and 1995
(d) Consolidated Statements of Cash Flows for
the Years Ended June 30, 1997, 1996 and 1995
(e) Notes to Consolidated Financial Statements.
2. All schedules have been omitted as the required information is
either inapplicable or included in the Notes to Consolidated
Financial Statements.
3. Exhibits and Index to Exhibits
The following exhibits are either attached to or incorporated by
reference in this Annual Report on Form 10-K.
No. Description
- --- -----------
3.1 Certificate of Incorporation *
3.2 Code of Regulations *
3.3 Bylaws *
4 Specimen Stock Certificate *
10.1 Park View Federal Savings Bank Conversion Stock Option Plan *
10.2 PVF Capital Corp. 1996 Incentive Stock Option Plan *
13 PVF Capital Corp. Annual Report to Stockholders for the year ended
June 30, 1997
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
____________________
* Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the Year Ended June 30, 1996 (commission file number 0-24948).
(b) During the last quarter of the fiscal year ended June 30, 1997, the
Company did not file any Current Reports on Form 8-K.
(c) All required exhibits are filed as attached.
(d) No financial statement schedules are required.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PVF CAPITAL CORP.
September 12, 1997 By: /s/ John R. Male
-------------------------------------
John R. Male
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ John R. Male September 12, 1997
- ------------------------
John R. Male
President and Chief Executive Officer
(Principal Executive Officer)
/s/ C. Keith Swaney September 12, 1997
- ------------------------
C. Keith Swaney
Vice President and Treasurer
(Principal Financial and Accounting Officer)
/s/ James W. Male September 12, 1997
- ------------------------
James W. Male
Chairman of the Board
/s/ Robert K. Healey September 12, 1997
- ------------------------
Robert K. Healey
Director
/s/ Stanley T. Jaros September 12, 1997
- ------------------------
Stanley T. Jaros
Director
/s/ Creighton E. Miller September 12, 1997
- ------------------------
Creighton E. Miller
Director
/s/ Stuart D. Neidus September 12, 1997
- ------------------------
Stuart D. Neidus
Director
/s/ Robert F. Urban September 12, 1997
- ------------------------
Robert F. Urban
Director