1
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
For the fiscal year ended June 30, 1998
- --
/ / TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- -- EXCHANGE ACT OF 1934
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: (440) 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. [ ]
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 August 31, 1998, was
$36,832,152. For purposes of this calculation, it is assumed that directors,
executive officers and 5% stockholders of the registrant are affiliates. As of
August 31, 1998, the registrant had 3,990,808 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended June
30, 1998. (Parts I, II and IV)
2. Portions of Proxy Statement for the 1998 Annual Meeting of Stockholders.
(Part III)
2
PART I
ITEM 1. BUSINESS
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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. In addition, PVF owns PVF Holdings, Inc., a financial services
subsidiary, currently inactive, and three other subsidiaries chartered for
future operation, but also currently inactive. Park View Federal is a federal
stock savings bank operating through ten offices located in Cleveland and
surrounding communities. Park View Federal has operated continuously for 78
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, FHLB advances, repayments of outstanding
loans, sales of loans and mortgage-backed securities and operating revenues. The
business of PVF consists primarily of the business of the Bank.
Park View Federal is subject to examination and comprehensive
regulation by the Office of Thrift Supervision (the "OTS"), and the Bank's
savings deposits are insured up to applicable limits by the Savings Association
Insurance Fund (the "SAIF"), which is administered by the Federal Deposit
Insurance Corporation (the "FDIC"). The Bank is a member of and owns capital
stock in the Federal Home Loan Bank (the "FHLB") of Cincinnati, which is one of
12 regional banks in the FHLB System. The Bank is further subject to regulations
of the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained and certain other matters. See " --
Regulation."
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MARKET AREA
The Bank conducts its business through ten offices located in Cuyahoga,
Summit, Lake and Geauga Counties in Ohio, and its market area consists of
Portage, Lake, Geauga, Cuyahoga, Summit, Stark, Medina and Lorain Counties in
Ohio. At June 30, 1998, 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 $373.6 million at June 30, 1998, representing 86.2% 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 $142.2 million, or 38.1% of the net loan portfolio at June 30,
1998. In addition, at June 30, 1998, construction loans totalled $96.1 million,
or 25.7% of the net loan portfolio. At June 30, 1998, loans for the purchase of
commercial real estate amounted to $94.6 million, or 25.3% of the net loan
portfolio, at such date. The Bank also had $31.5 million of multi-family
residential real estate loans and $30.5 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 $18.8 million outstanding
in Home Equity Line of Credit loans. The remainder of the loan portfolio at June
30, 1998 consisted of $3.9 million in consumer loans, which included $213,000 in
mobile home loans, $614,000 in loans secured by savings deposits, $20,000 in
property improvement loans and $3.0 million of other consumer loans, which
consist primarily of lines of credit and demand loans. In addition,
mortgage-backed securities totaled $2.9 million at June 30, 1998.
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4
Set forth below is certain data relating to the composition of the Bank's
loan portfolio by type of loan on the dates indicated. As of June 30, 1998, the
Bank had no concentrations of loans exceeding 10% of total loans other than as
disclosed below.
AT JUNE 30,
1998 1997 1996
------------------------ ----------------------- -------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
Real estate loans:
Single-family residential (1) ...... $ 142,223 38.07% $ 128,908 37.62% $ 109,687 36.84%
Multi-family residential ........... 31,493 8.43% 31,090 9.07% 30,607 10.28%
Commercial ......................... 94,588 25.32% 84,940 24.79% 72,543 24.36%
Home equity lines of credit ........ 18,762 5.02% 16,941 4.94% 8,749 2.94%
Construction ....................... 96,063 25.71% 82,611 24.11% 76,725 25.77%
Land ............................... 30,462 8.15% 32,045 9.35% 30,686 10.31%
Mortgage-backed securities
held for sale, net ................. 0 0.00% 0 0.00% 7,963 2.67%
Mortgage-backed securities
held to maturity ................... 2,949 0.79% 505 0.15% 629 0.21%
Consumer loans:
Property improvement ............... 20 0.01% 34 0.01% 43 0.01%
Passbook loans ..................... 614 0.16% 615 0.18% 742 0.25%
Mobile home ........................ 213 0.06% 191 0.06% 328 0.11%
Other .............................. 3,040 0.81% 2,756 0.80% 1,244 0.41%
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420,427 112.53% 380,636 111.08% 339,946 114.16%
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Less:
Accrued interest receivable ........ 2,217 0.59% 2,097 0.61% 1,709 0.57%
Deferred loan fees ................. (1,689) -0 45% (1,733) -0.51% (2,098) -0.70%
Unearned discount .................. (36) -0.01% (48) -0.01% (165) -0.06%
Undisbursed discount FHLMC MBS ..... (16) 0.00% 0 0.00% (158) -0.05%
Unrealized loss FHLMC MBS .......... 0 0.00% 0 0.00% (234) -0.08%
Undisbursed portion of loan proceeds (44,622) -11.94% (35,653) -10.41% (38,649) -12.98%
Market valuation reserve ........... 0 0.00% 0 0.00% (13) 0.00%
Allowance for possible loan losses . (2,687) -0.72% (2,675) -0.76% (2,565) -0.86%
--------- --------- ---------
Total other items ................ (46,833) -12.53% (38,012) -11.08% (42,173) -14.16%
--------- --------- ---------
Total loans and mortgage-backed
securities ...................... $ 373,594 100.00% $ 342,624 100.00% $ 297,773 100.00%
========= ========= =========
1995 1994
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AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Real estate loans:
Single-family residential (1) ...... $ 98,203 38.56% $ 79,901 37.93%
Multi-family residential ........... 39,531 15.52% 33,706 16.00%
Commercial ......................... 57,498 22.58% 53,347 25.33%
Home equity lines of credit ........ 3,314 1.30% 0 0.00%
Construction ....................... 61,653 24.21% 53,774 25.53%
Land ............................... 18,318 7.19% 16,488 7.83%
Mortgage-backed securities
held for sale, net ................. 989 0.39% 0 0.00%
Mortgage-backed securities
held to maturity ................... 2,747 1.08% 0 0.00%
Consumer loans:
Property improvement ............... 76 0.03% 103 0.05%
Passbook loans ..................... 999 0.39% 842 0.40%
Mobile home ........................ 519 0.20% 833 0.40%
Other .............................. 701 0.27% 486 0.23%
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284,548 111.72% 239,480 113.70%
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Less:
Accrued interest receivable ........ 1,589 0.62% 1,083 0.51%
Deferred loan fees ................. (1,811) -0.71% (1,583) -0.75%
Unearned discount .................. (336) -0.13% (347) -0.16%
Undisbursed discount FHLMC MBS ..... (2) 0.00% 0 0.00%
Unrealized loss FHLMC MBS .......... 0 0.00% 0 0.00%
Undisbursed portion of loan proceeds (26,891) -10.56% (25,058) -11.90%
Market valuation reserve ........... 0 0.00% (871) -0.41%
Allowance for possible loan losses . (2,402) -0.94% (2,075) -0.99%
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Total other items ................ (29,853) -11.72% (28,851) -13.70%
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Total loans and mortgage-backed
securities ...................... $ 254,695 100.00% $ 210,629 100.00%
========= ========
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(1) Includes loans held for sale in the amounts of $1.6 million, $0.7 million,
$11.2 million, $4.5 million, and $4.0 million at June 30, 1998, 1997, 1996,
1995, and 1994 respectively.
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5
The following table presents at June 30, 1998 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
THE YEAR THROUGH FIVE DUE FIVE YEARS
ENDING YEARS AFTER OR MORE AFTER
JUNE 30, JUNE 30, JUNE 30,
1999 1998 1998
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(IN THOUSANDS)
Real estate mortgage loans............. $176,201 $162,070 $28,503
Consumer loans......................... 3,594 153 140
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Total.............................. $179,795 $162,223 $28,643
======== ======== =======
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The following table apportions the dollar amount of the loans due or
repricing after June 30, 1999 between those with predetermined interest rates
and those with adjustable interest rates.
FLOATING OR
PREDETERMINED RATES ADJUSTABLE RATES TOTAL
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(IN THOUSANDS)
Real estate mortgage loans................... $27,559 $163,014 $190,573
Consumer loans............................... 293 0 293
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Total.................................... $27,852 $163,014 $190,866
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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 (the "FHLMC") and FNMA (the "FNMA") guidelines so as to
permit their being swapped with the FHLMC or the FNMA in exchange for
mortgage-backed securities secured by such loans or their sale in the secondary
market. All such loans are sold or swapped, as the case may be, with servicing
retained, and are sold in furtherance of the Bank's goal of better matching the
maturities and interest rate-sensitivity of its assets and liabilities. The Bank
generally retains responsibility for collecting and remitting loan payments,
inspecting the properties, making certain insurance and tax payments on behalf
of borrowers and otherwise servicing the loans it sells or converts into
mortgage-backed securities, and receives a fee for performing these services.
Sales of loans also provide funds for additional lending and other purposes.
The following table shows total loan origination and sale activity
during the periods indicated.
YEAR ENDED JUNE 30,
---------------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
Loans originated:
Real estate:........................................
Residential and commercial (1).................... $111,912 $ 81,707 $ 44,944
Construction (1).................................. 97,569 88,936 90,899
Land.............................................. 16,237 18,818 19,038
Passbook loans...................................... 308 435 410
Other............................................... 29 467 1,157
-------- -------- --------
Total loans originated............................ $226,055 $190,363 $156,448
======== ======== ========
Loans refinanced...................................... $ 16,210 $ 16,193 $ 20,533
======== ======== ========
Loans and mortgage-backed securities sold............. $ 81,294 $ 58,618 $ 48,435
======== ======== ========
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(1) Includes single-family and multi-family residential and commercial loans.
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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, 1998,
$142.2 million, or 38.1%, of the Bank's net loan and mortgage-backed securities
portfolio consisted of single-family, conventional mortgage loans, of which
approximately $126.0 million, or 88.6%, carried adjustable interest rates.
Included in this amount are $3.1 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.
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The Bank offers adjustable-rate residential mortgage loans with
interest rates which adjust annually based upon changes in an index based on the
weekly average yield on United States Treasury securities adjusted to a constant
comparable maturity of one year, as made available by the Federal Reserve Board
(the "Treasury Rate"), plus a margin of 2.75%. The amount of any increase or
decrease in the interest rate is presently limited to 2% per year, with a limit
of 6% over the life of the loan. The adjustable-rate mortgage loans offered by
the Bank, as well as many other savings institutions, provide for initial rates
of interest below the rates which would prevail when the index used for
repricing is applied. However, the Bank underwrites the loan on the basis of the
borrower's ability to pay at the rate which would be in effect without the
discount.
Commercial and Multi-Family Residential Real Estate Lending. The
commercial real estate loans originated by the Bank are primarily secured by
office buildings, shopping centers, warehouses and other income producing
commercial property. The Bank's multi-family residential loans are primarily
secured by apartment buildings. These loans are generally for a term of from 10
to 25 years with interest rates that adjust either annually or every three years
based upon changes in the Treasury Rate, plus a negotiated margin of between
3.0% and 3.5%. Commercial and multi-family residential real estate loans
amounted to $126.1 million, or 33.8%, of the total loan and mortgage-backed
securities portfolio at June 30, 1998.
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, 1998, $96.1 million or 25.7%, of the Bank's total loan and
mortgage-backed securities portfolio consisted of construction loans, virtually
all of which were secured by single-family residences.
Prior to making a commitment to fund a loan, the Bank requires both an
appraisal of the property by appraisers approved by the Board of Directors and a
study of the feasibility of the proposed project. The Bank also reviews and
inspects each project at the commencement of construction and prior to every
disbursement of funds during the term of the construction loan.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the development. If the estimate of
value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment.
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9
Land Loans. The Bank originates loans to builders and developers for
the acquisition and/or development of vacant land. The proceeds of the loan are
used to acquire the land and/or to make site improvements necessary to develop
the land into saleable lots. The Bank will not originate land loans to
individuals wishing to speculate in the value of land, and limits such loans to
borrowers who have agreed to begin development of the property within two years
of the date of the loan. The term of the loans are generally limited to two
years. Repayments are made on the loans as the developed lots are sold.
Land development and acquisition loans involve significant additional
risks when compared with loans on existing residential properties. These loans
typically involve large loan balances to single borrowers, and the payment
experience is dependent on the successful development of the land and the sale
of the lots. These risks can be significantly impacted by supply and demand
conditions. To minimize these risks, Park View Federal generally limits the
loans to builders and developers with whom it has substantial experience or who
are otherwise well-known to the Bank, and it obtains the financial statements
and personal guarantees of such builders and developers. The Bank also requires
feasibility studies and market analyses to be performed with respect to the
project. The amount of the loan is limited to the lesser of 80% of the estimated
gross sell out value or 100% of the discounted value. If land is being acquired,
the amount of the loan to be used for such purposes is limited to 75% of the
cost of the land. All of these loans originated are within the Bank's market
area. The Bank had $30.5 million, or 8.2% of its net loan and mortgage-backed
securities portfolio, in land loans at June 30, 1998.
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, 1998, the Bank had $18.8 million in home equity lines of
credit, which amounted to 5.0% 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, 1998, the Bank reported net loan
servicing fee income of $385,620, and was servicing $233.9 million of loans for
others. The reduction in net servicing income is due primarily to the Bank's
adoption of FASB 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, 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 the servicing fee to the Bank. At June 30, 1998 the Bank was
servicing $94.7 million in FHLMC loans for PVF.
In addition to loan servicing fees, the Bank receives fees in
connection with loan commitments and originations, loan modifications, late
payments and changes of property ownership and for miscellaneous services
related to its loans. Loan origination fees are calculated as a percentage of
the amount loaned. The Bank typically receives fees of up to three points (one
point being equivalent to 1% of the principal amount of the loan) in connection
with the origination of fixed-rate and adjustable-rate residential mortgage
loans. All loan origination fees are deferred and accreted into income over the
contractual life of the loan according to the interest method of
9
10
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, 1998 and June 30, 1997, the Bank had $1,645,000 and
$710,000 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.
At June 30,
--------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ -----
(Dollars in thousands)
Non-accruing loans (1):
Real estate................................................... $3,268 $4,097 $2,272 $3,497 $3,274
Consumer loans.............................................. 15 40 80 109 151
------ ------ ------ ------ ------
Total..................................................... $3,283 $4,137 $2,352 $3,606 $3,425
====== ====== ====== ====== ======
Accruing loans which are
contractually past due 90
days or more:
Real estate............................................... $ 163 $ 476 $ 95 $1,028 $ 891
------ ------ ------ ------ ------
Total................................................... $ 163 $ 476 $ 95 $1,028 $ 891
====== ====== ====== ====== ======
Total nonaccrual and 90 days
past due loans.......................................... $3,446 $4,613 $2,447 $4,634 $4,316
====== ====== ====== ====== ======
Ratio of non-performing loans to total loans
and mortgage-backed securities.............................. 0.92% 1.35% 0.82% 1.81% 2.05%
====== ====== ====== ====== ======
Other non-performing assets (2)............................... 699 0 53 $ 0 $ 20
====== ====== ====== ====== ======
Total non-performing assets................................... $4,145 $4,613 $2,500 $4,634 $4,336
====== ====== ====== ====== ======
Total non-performing assets to
total assets............................................... 0.96% 1.24% 0.75% 1.47% 1.82%
====== ====== ====== ====== ======
- ------------------
(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
11
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, 1998, gross
interest income of $205,000 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, 1998, the Bank had no restructured loans.
At June 30, 1998, non-accruing loans consisted of 36 loans totalling
$3.3 million, and included 17 conventional mortgage loans aggregating $1.2
million, 3 land loans in the amount of $0.7 million, 5 construction loans in the
amount of $0.5 million, 1 commercial loan in the amount of $0.5 million, 3
multi-family loans in the amount of $0.3 million, and 7 consumer loans
aggregating $15,000. All non-accruing consumer loans at June 30, 1998 were
mobile home loans. Management has reviewed its non-accruing loans and believes
that the allowance for loan losses is adequate to absorb potential losses on
these loans.
Real estate acquired by the Bank as a result of foreclosure is
classified as real estate owned until such time as it is sold. At June 30, 1998,
the Bank had 2 real estate owned properties totaling $0.7 million. The
properties consist of developed residential lots.
Asset Classification and Allowance for Loan Losses. Federal regulations
require savings institutions to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss," if warranted. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss, or
charge off such amount. An asset which does not currently warrant classification
but which possesses weaknesses or deficiencies deserving close attention is
required to be designated as "special mention." The Bank has established an
Asset Classification Committee, which is comprised of the Chairman of the Board,
the Chief Financial Officer and senior employees of the Bank. The Asset
Classification Committee meets quarterly to review the Bank's loan portfolio and
determine which loans should be placed on a "watch-list" of potential problem
loans which are considered to have more than normal credit risk. Currently,
general loss allowances (up to 1.25% of risk-based assets) established to cover
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, 1998, total non-accrual and 90
days past due loans and other non-performing assets were $3.4 million, of which
amount approximately $3.3 million were classified as substandard and $23,000
were classified as loss. 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 necessary. Although management believes it uses the
best information available to make determinations with respect
11
12
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,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- ------
(IN THOUSANDS)
Balance at beginning of year.................... $2,675 $2,565 $2,402 $2,075 $2,738
------ ------ ------ ------ ------
Charge-offs:
Mortgage loans................................ 238 174 241 77 140
Consumer loans (1)............................ 0 24 24 18 23
------ ------ ------ ------ ------
Total charge-offs........................... 238 198 265 95 163
------ ------ ------ ------ ------
Recoveries:
Mortgage loans................................ 4 117 5 4 0
Consumer loans (1)............................ 0 4 6 2 0
------ ------ ------ ------ ------
Total recoveries............................ 4 121 11 6 0
------ ------ ------ ------ ------
Net charge-offs................................. 234 77 254 89 163
------ ------ ------ ------ ------
Transfer to mortgage banking reserve............ 0 0 0 0 500
Provision charged to income..................... 246 187 417 416 0
------ ------ ------ ------ ------
Balance at end of year.......................... $2,687 $2,675 $2,565 $2,402 $2,075
====== ====== ====== ====== ======
Ratio of net charge-offs during
the year to average loans
outstanding during the year................... 0.0% 0.0% 0.0% 0.0% 0.1%
====== ====== ====== ====== ======
- ---------------------
(1) Consists primarily of mobile home loans.
12
13
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. The allocation of the allowance
to each category is not necessarily indicative of future losses and does not
restrict the use of the allowance to absorb losses in any category.
AT JUNE 30,
1998 1997 1996
------------------------ ------------------------ ------------------------
% OF LOANS IN % OF LOANS IN % OF LOANS IN
CATEGORY TO CATEGORY TO CATEGORY TO
TOTAL NET LOANS TOTAL NET LOANS TOTAL NET LOANS
AMOUNT OUTSTANDING AMOUNT OUTSTANDING AMOUNT OUTSTANDING
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Mortgage Loans:
Single-family................. $ 925 57.19% $ 899 56.19% $ 977 53.49%
Multi-family.................. 203 8.44% 291 9.00% 163 10.51%
Commercial.................... 1,227 25.19% 990 24.54% 968 24.71%
Land.......................... 230 8.16% 361 9.26% 210 10.52%
Unallocated................... 0 0.00% 0 0.00% 123 0.00%
------ ------- ------ ------- ------ -------
Total mortgage loans........ $2,585 98.98% $2,541 98.99% $2,441 99.23%
====== ======= ====== ======= ====== =======
Consumer loans (1).............. 102 1.02% 134 1.01% 124 0.77%
------ ------- ------ ------ -------
Total allowance for
loan losses................. $2,687 100.00% $2,675 100.00% $2,565 100.00%
====== ======= ====== ======= ====== =======
1995 1994
------------------------ ------------------------
% OF LOANS IN % OF LOANS IN
CATEGORY TO CATEGORY TO
TOTAL NET LOANS TOTAL NET LOANS
AMOUNT OUTSTANDING AMOUNT OUTSTANDING
------ ----------- ------ -----------
Mortgage Loans:
Single-family................. $ 857 54.27% $ 743 50.34%
Multi-family.................. 295 15.36% 188 15.91%
Commercial.................... 940 22.42% 636 25.03%
Land.......................... 154 7.11% 168 7.75%
Unallocated................... 0 0.00% 109 0.00%
------ ------- ------ -------
Total mortgage loans........ $2,246 99.16% $1,844 99.03%
====== ======= ====== =======
Consumer loans (1).............. 156 0.84% 231 0.97%
------ ------- ------ -------
Total allowance for
loan losses................. $2,402 100.00% $2,075 100.00%
====== ======= ====== =======
- ---------------
(1) Consists of property improvement loans and mobile home loans.
13
14
INVESTMENT ACTIVITIES
Park View Federal is required under federal regulations to maintain a
minimum amount of liquid assets, which can be invested in specified short-term
securities, and is also permitted to make certain other investments. See
"Regulation -- Liquidity Requirements". Park View Federal maintains a liquidity
portfolio well in excess of the amount required to satisfy regulatory
requirements. The Bank's liquidity ratio of 13.4% at June 30, 1998 exceeded the
4% regulatory requirement. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives, management's judgment as
to the attractiveness of the yields then available in relation to other
opportunities, its expectations of the level of yield that will be available in
the future and its projections as to the short-term demand for funds to be used
in the Bank's loan origination and other activities.
Park View Federal's investment policy currently allows for investment
in various types of liquid assets, including United States Government and Agency
securities, time deposits at the FHLB of Cincinnati, certificates of deposit or
bankers' acceptances at other federally insured depository institutions and
mortgage-backed securities. The general objective of Park View Federal's
investment policy is to maximize returns without compromising liquidity or
creating undue credit or interest rate risk. In accordance with the investment
policy, at June 30, 1998, Park View Federal had investments in agency notes,
federal funds sold, FHLB of Cincinnati stock and interest-bearing deposits in
other financial institutions.
The Bank reports its investments, other than marketable equity
securities and securities available for sale, at cost as adjusted for discounts
and unamortized premiums. The Bank has the intent and ability and generally
holds all securities until maturity. Any FHLMC mortgage-backed securities
created from loans originated by the Bank for sale will be designated available
for sale. For additional information see Notes 1 and 2 of Notes to Consolidated
Financial Statements.
At present, management is not aware of any conditions or circumstances
which could impair its ability to hold its remaining securities to maturity.
The following table sets forth the carrying value of the Bank's
securities portfolio, short-term investments and FHLB of Cincinnati stock at the
dates indicated. At June 30, 1998, the fair market values of the Bank's
securities portfolio was $27.8 million.
AT JUNE 30,
1998 1997 1996
------- ------- ------
(IN THOUSANDS)
Investment securities:
U.S. Government and agency securities............ $27,800 $13,995 $14,094
------- ------- -------
Total securities............................. 27,800 13,995 14,094
Interest-bearing deposits.......................... 394 445 245
Federal funds sold................................. 20,375 1,375 6,875
FHLB of Cincinnati stock........................... 3,508 2,762 1,880
------- ------- -------
Total investments.............................. $52,077 $18,577 $23,094
======= ======= =======
14
15
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Bank's securities at June 30,
1998.
AT JUNE 30, 1998
-------------------------------------------------------------------------------------------
ONE YEAR ONE TO FIVE FIVE TO 10 MORE THAN
OR LESS YEARS YEARS 10 YEARS
------------------ ------------------- ------------------ --------------------
FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
U.S. Government and
agency securities.... $ 5,000 6.36% $13,000 6.33% $ 9,800 6.42% $ 0 0.00%
Deposits(1)........... 20,769 5.51% 0 0.00% 0 0.00% 0 0.00%
FHLB stock............ 0 0.00% 0 0.00% 0 0.00% 3,508 7.25%
------- ------- ------- -------
Total............... $25,769 5.67% $13,000 6.33% $ 9,800 6.42% $ 3,508 7.25%
======= ======= ======= =======
----------------------------
TOTAL SECURITIES
----------------------------
FAIR MARKET AVERAGE
VALUE VALUE YIELD
------ ----- -----
U.S. Government and
agency securities.... $27,800 $27,763 6.37%
Deposits(1)........... 20,769 20,769 5.51%
FHLB stock............ 3,508 3,508 7.25%
------- -------
Total............... $52,077 $52,040 6.08%
======= =======
- ---------------
(1) Includes interest-bearing deposits at other financial institutions and
federal funds sold.
15
16
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for
lending, investment activities and general operational purposes. In addition to
deposits, Park View Federal derives funds from loan principal and interest
repayments, maturities of securities and interest payments thereon. Although
loan repayments are a relatively stable source of funds, deposit inflows and
outflows are significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds, or on a longer term basis for general
operational purposes.
DEPOSITS. The Bank attracts deposits principally from within its
primary market area by offering a variety of deposit instruments, including
checking accounts, money market accounts, regular savings accounts and
certificates of deposit which range in maturity from seven days to four years.
Deposit terms vary according to the minimum balance required, the length of time
the funds must remain on deposit and the interest rate. Maturities, terms,
service fees and withdrawal penalties for its deposit accounts are established
by the Bank on a periodic basis. Park View Federal generally reviews its deposit
mix and pricing on a weekly basis. In determining the characteristics of its
deposit accounts, Park View Federal considers the rates offered by competing
institutions, funds acquisition and liquidity requirements, growth goals and
federal regulations. The Bank does not accept brokered deposits due to the
volatility and rate sensitivity of such deposits.
Park View Federal competes for deposits with other institutions in its
market area by offering deposit instruments that are competitively priced and
providing customer service through convenient and attractive offices,
knowledgeable and efficient staff and hours of service that meet customers'
needs. To provide additional convenience, Park View Federal participates in MAC
(money access card) Automated Teller Machine networks at locations throughout
Ohio and other participating states, through which customers can gain access to
their accounts at any time.
The Bank's deposits have remained stable with moderate growth
experienced during the fiscal year ended June 30, 1998. Deposit balances
totalled $344.3 million, $288.3 million, and $271.0 million at the fiscal years
ended June 30, 1998, 1997, and 1996 respectively.
Deposits in the Bank as of June 30, 1998 were represented by the
various programs described below.
WEIGHTED
AVERAGE PERCENTAGE
INTEREST MINIMUM BALANCE IN OF TOTAL
RATE CATEGORY BALANCE THOUSANDS DEPOSITS
- ------- -------- ------- ---------- ----------
2.00% NOW accounts $ 50 $ 17,570 5.10%
2.75% Passbook statement accounts 5 31,844 9.25%
3.88% Money market accounts 1,000 7,187 2.09%
0.00% Non-interest-earning demand accounts 50 6,262 1.82%
-------- -------
$ 62,863 18.26%
-------- -------
CERTIFICATES OF DEPOSIT
-----------------------
5.62% 3 months or less 500 72,027 20.93%
5.64% 3 - 6 months 500 35,562 10.33%
5.95% 6 - 12 months 500 103,971 30.20%
6.45% 1 - 3 years 500 66,006 19.18%
6.25% More than three years 500 3,800 1.10%
-------- -------
5.95% Total certificates of deposit $281,366 81.74%
-------- -------
5.31% Total deposits $344,229 100.00%
======== =======
16
17
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Bank between the dates indicated.
AT JUNE 30, 1998 AT JUNE 30, 1997
------------------------------------- --------------------------------------
Increase Increase
(Decrease) (Decrease)
% of From Prior % of From Prior
Balance Deposits Year Balance Deposits Year
------- -------- --------- -------- -------- ----------
(Dollars in thousands)
NOW checking (1)........................ $ 23,832 6.92% $ 3,556 $ 20,276 7.03% $ 220
Super NOW checking and money market..... 7,187 2.09% 1,879 5,308 1.84% 29
Passbook and regular savings............ 31,844 9.25% 258 31,586 10.96% (297)
Jumbo certificates...................... 57,328 16.65% 13,839 43,489 15.09% 11,566
Other certificates...................... 185,045 53.76% 34,060 150,985 52.38% 4,945
Keogh accounts.......................... 209 0.06% (1,789) 1,998 0.69% (263)
IRA accounts............................ 38,784 11.27% 4,156 34,628 12.01% 1,025
-------- ------- ------- -------- -------
Total............................... $344,229 100.00% $55,959 $288,270 100.00% $17,225
======== ======= ======= ======== ======= =======
AT JUNE 30, 1996
----------------------
% of
Balance Deposits
------- --------
NOW checking (1)........................ $ 20,056 7.40%
Super NOW checking and money market..... 5,279 1.95%
Passbook and regular savings............ 31,883 11.76%
Jumbo certificates...................... 31,923 11.78%
Other certificates...................... 146,040 53.88%
Keogh accounts.......................... 2,261 0.83%
IRA accounts............................ 33,603 12.40%
--------
Total............................... $271,045 100.00%
======== =======
- -------------
(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,
-----------------------------------------------------------------------------------------
1998 1997
---------------------------------------- --------------------------------------
INTEREST- INTEREST-
BEARING BEARING
DEMAND SAVINGS TIME DEMAND SAVINGS TIME
DEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Average balance........ $21,628 $31,634 $264,348 $19,631 $31,549 $218,301
Average rate paid...... 2.77% 2.75% 5.90% 2.70% 2.75% 5.75%
----------------------------------------
1996
----------------------------------------
INTEREST-
BEARING
DEMAND SAVINGS TIME
DEPOSITS DEPOSITS DEPOSITS
-------- -------- --------
Average balance........ $17,703 $31,399 $221,872
Average rate paid...... 2.34% 2.76% 6.13%
17
18
The rates currently paid on certificates maturing within one year or less are
lower than the rates currently being paid on similar certificates of deposit
maturing thereafter. The Bank will seek to retain these deposits to the extent
consistent with its long-term objective of maintaining positive interest rate
spreads. Depending upon interest rates existing at the time such certificates
mature, the Bank's cost of funds may be significantly affected by the rollover
of these funds. A decrease in such cost of funds, if any, may have a material
impact on the Bank's operations. To the extent such deposits do not rollover,
the Bank may, if necessary, use other sources of funds, including borrowings
from the FHLB of Cincinnati, to replace such deposits. See "-- Borrowings."
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1998.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
(IN THOUSANDS)
Three months or less............................................... $19,598
Three through six months........................................... 7,542
Six through 12 months.............................................. 22,351
Over 12 months..................................................... 14,666
-------
Total..................................................... $64,157
=======
18
19
BORROWINGS. Savings deposits historically have been the primary source
of funds for the Bank's lending, investments and general operating activities.
The Bank is authorized, however, to use advances from the FHLB of Cincinnati to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Cincinnati functions as a central reserve bank
providing credit for savings institutions and certain other member financial
institutions. As a member of the FHLB System, Park View Federal is required to
own stock in the FHLB of Cincinnati and is authorized to apply for advances.
Advances are pursuant to several different programs, each of which has its own
interest rate and range of maturities. Park View Federal has a Blanket Agreement
for advances with the FHLB under which the Bank may borrow up to 50% of assets
subject to normal collateral and underwriting requirements. The Bank currently
has two commitments with the Federal Home Loan Bank of Cincinnati for flexible
lines of credit, referred to as a cash management advance and a REPO advance, in
the amounts of $20 million and $40 million respectively, that were not drawn
upon at June 30, 1998. 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,
1998 1997 1996
--------- -------- ------
(DOLLARS IN THOUSANDS)
Maximum amount outstanding at any
month end........................................... $67,852 $54,412 $27,482
Approximate average outstanding balance............... 40,240 41,083 10,623
Approximate weighted average rate
paid (1)............................................ 5.84% 5.78% 5.13%
- ---------------------
(1) Computed from average monthly balances.
The weighted average rates outstanding on FHLB advances was 5.71%,
5.83% and 5.46% at June 30, 1998, 1997 and 1996, respectively.
At June 30, 1998, 1997, and 1996, PVFSC had one note payable for $1.1
million, $1.7 million and $1.7 million, respectively, collateralized by real
estate and guaranteed by PVF. At June 30, 1997 and 1996 PVF had one note payable
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
Savings associations are reguired 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 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 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, 1998, Park
19
20
View Federal was authorized to invest up to approximately $13.0 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, 1998, PVFSC
had an investment in two properties aggregating $938,000, 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 had a net book value of
$903,000 at June 30, 1998.
In March of 1998 PVF Service Corp. entered into an option agreement
with Cameratta Properties Limited for the purchase of its 257 acre parcel of
land in Solon, Ohio for $5 million. The option agreement provides for the
payment of a non-refundable deposit of $500,000. If the buyer for any reason
fails to complete the purchase within one year, the buyer would forfeit the
deposit. Completion of the purchase is dependent upon voter approval in
November, 1998 of the planned development project. If the purchase is completed
as provided in the contract, an after tax gain of approximately $2.5 million is
expected.
DEER LAWN FARMS. At June 30, 1998, 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, 1998.
COMPETITION
The Bank faces strong competition both in originating real estate and
other loans and in attracting deposits. The Bank competes for real estate and
other loans principally on the basis of interest rates and the loan fees it
charges, the type of loans it originates and the quality of services it provides
to borrowers. Its competition in originating real estate loans comes primarily
from other savings institutions, commercial banks and mortgage bankers making
loans secured by real estate located in the Bank's market area.
The Bank attracts all its deposits through its branch offices primarily
from the communities in which those branch offices are located. Consequently,
competition for deposits is principally from other savings institutions,
commercial banks, credit unions and brokers in these communities. Park View
Federal competes for deposits and loans by offering a variety of deposit
accounts at competitive rates, a wide array of loan products, convenient
business hours and branch locations, a commitment to outstanding customer
service and a well-trained staff. In addition, the Bank believes it has
developed strong relationships with local businesses, realtors, builders, and
the public in general, giving it an excellent image in the community.
EMPLOYEES
As of June 30, 1998, PVF and its subsidiaries had 110 full-time
employees and 27 part-time employees, none of whom was represented by a
collective bargaining agreement. The Company believes it enjoys a good
relationship with its personnel.
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REGULATION OF THE BANK
GENERAL. As a savings institution, Park View Federal is subject to
extensive regulation by the OTS, and its deposits are insured by the SAIF, which
is administered by the FDIC. The lending activities and other investments of the
Bank must comply with various federal regulatory requirements. The OTS
periodically examines the Bank for compliance with various regulatory
requirements. The FDIC also has the authority to conduct special examinations of
SAIF-insured savings institutions. The Bank must file reports with OTS
describing its activities and financial condition. The Bank is also subject to
certain reserve requirements promulgated by the Federal Reserve Board. This
supervision and regulation is intended primarily for the protection of
depositors. Certain of these regulatory requirements are referred to below or
elsewhere herein.
REGULATORY CAPITAL REQUIREMENTS. Under OTS regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and "total
capital," a combination of core and "supplementary" capital, equal to 8.0% of
"risk-weighted" assets. In addition, the OTS has adopted regulations which
impose certain restrictions on savings associations that have a total risk-based
capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted
assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets
of less than 4.0% (or 3.0% if the institution is rated composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definitions as core capital. See "-- Prompt Corrective Regulatory
Action." The Bank is in compliance with all applicable regulatory capital
requirements.
In determining compliance with the risk-based capital requirement, a
savings institution calculates its total capital, which may include both core
capital and supplementary capital, provided the amount of supplementary capital
used does not exceed the savings institution's core capital. Supplementary
capital is defined to include certain preferred stock issues, nonwithdrawable
accounts and pledged deposits that do not qualify as core capital, certain
approved subordinated debt, certain other capital instruments and a portion of
the savings institution's general loss allowances.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighting system, single-family first mortgages not more than
90 days past due with loan-to-value ratios under 80%, and multi-family mortgages
(maximum 36 dwelling units) with loan-to-value ratios under 80% and average
annual occupancy rates over 80%, are assigned a risk weight of 50%. Consumer
loans, residential construction loans and commercial real estate loans are
assigned a risk weight of 100%. Mortgage-backed securities issued, or fully
guaranteed as to principal and interest, by the FNMA or FHLMC are assigned a 20%
risk weight. Cash and United States Government securities backed by the full
faith and credit of the United States Government are given a 0% risk weight.
Under the risk-based capital requirement, a savings institution is required to
maintain total capital, consisting of core capital plus certain other
components, including general valuation allowances, equal to 8.0% of
risk-weighted assets. At June 30, 1998 the Bank's risk-weighted assets were
$313.9 million, and its total regulatory capital was $34.3 million, or 10.9% of
risk-weighted assets.
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The table below presents the Bank's capital position at June 30, 1998,
relative to its various minimum regulatory capital requirements.
AT JUNE 30, 1998
----------------------
PERCENT OF
AMOUNT ASSETS (1)
------ ----------
(DOLLARS IN THOUSANDS)
Tangible Capital........................... $31,727 7.21%
Tangible Capital Requirement............... 6,601 1.50
------- -----
Excess .................................. $25,126 5.71%
======= =====
Tier 1/Core Capital........................ $31,727 7.21%
Tier 1/Core Capital Requirement............ 17,603 4.00
------- -----
Excess .................................. $14,124 3.21%
======= =====
Tier 1 Risk-Based Capital.................. $31,727 10.11%
Tier 1 Risk-Based Capital Requirement...... 12,557 4.00
------- -----
Excess .................................. $19,170 6.11%
======= =====
Risk-Based Capital......................... $34,324 10.93%
Risk-Based Capital Requirement............. 25,113 8.00
------- -----
Excess................................... $ 9,211 2.93%
======= =====
-------------
(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, 1998 the Bank had no interest rate risk
component deduction from total capital.
The OTS has proposed an amendment to its capital regulations
establishing a minimum 3% core capital ratio for savings institutions in the
strongest financial and managerial condition. For all other savings
associations, the minimum core capital ratio would be 3% plus at least an
additional 100 to 200 basis points. In determining the amount of additional
capital, the OTS would assess both the quality of risk management systems and
the level of overall risk in each individual savings association through the
supervisory process on a case-by-case basis. As a result, the exact effect on
the Bank cannot be predicted at this time.
In addition to requiring generally applicable capital standards for
savings institutions, the Director of OTS may establish the minimum level of
capital for a savings institution at such amount or at such ratio of
capital-to-assets as the Director determines to be necessary or appropriate for
such institution in light of the particular circumstances of the institution.
The Director of OTS may treat the failure of any savings institution to maintain
capital at or above such level as an unsafe or unsound practice and may issue a
directive requiring any savings institution which fails to maintain capital at
or above the minimum level required by the Director to submit and adhere to a
plan for increasing capital. Such an order may be enforced in the same manner as
an order issued by the FDIC.
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PROMPT CORRECTIVE REGULATORY ACTION. The federal banking regulators are
required to take prompt corrective action if an insured depository institution
fails to satisfy certain minimum capital requirements. All institutions,
regardless of their capital levels, are restricted from making any capital
distribution or paying any management fees if the institution would thereafter
fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") may be: (i) subject to increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries.
Under implementing regulations, the federal banking regulators will
measure a depository institution's capital adequacy on the basis of the
institution's total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). Under the regulations, a savings association
that is not subject to an order or written directive to meet or maintain a
specific capital level will be deemed "well capitalized" if it also has: (i) a
total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based
capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater.
An "adequately capitalized" savings association is a savings association that
does not meet the definition of well capitalized and has: (i) a total risk-based
capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0%
or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if
the savings association has a composite 1 CAMEL rating). An "undercapitalized
institution" is a savings association that has (i) a total risk-based capital
ratio less than 8.0%; or (ii) a Tier 1 risk-based capital ratio of less than
4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if the association
has a composite 1 CAMEL rating). A "significantly undercapitalized" institution
is defined as a savings association that has: (i) a total risk-based capital
ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital ratio of less than
3.0%; or (iii) a leverage ratio of less than 3.0%. A "critically
undercapitalized" savings association is defined as a savings association that
has a ratio of core capital to total assets of less than 2.0%. The OTS may
reclassify a well capitalized savings association as adequately capitalized and
may require an adequately capitalized or undercapitalized association to comply
with the supervisory actions applicable to associations in the next lower
capital category if the OTS determines, after notice and an opportunity for a
hearing, that the savings association is in an unsafe or unsound condition or
that the association has received and not corrected a less-than-satisfactory
rating for any CAMEL rating category. The Bank is classified as "well
capitalized" under these regulations.
SAFETY AND SOUNDNESS STANDARDS. Interagency Guidelines Establishing
Standards for Safety and Soundness require savings institutions to maintain
internal controls and information systems and internal audit systems that are
appropriate for the size, nature and scope of the institution's business. The
guidelines also establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure, and asset growth. The guidelines
further provide that savings institutions should maintain safeguards to prevent
the payment of compensation, fees and benefits that are excessive or that could
lead to material financial loss, and should take into account factors such as
comparable compensation practices at comparable institutions. If the OTS
determines that a savings institution is not in compliance with the safety and
soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A savings institution must
submit an acceptable compliance plan to the OTS within 30 days of receipt of a
request for such a plan. Failure to submit or implement a compliance
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plan may subject the institution to regulatory sanctions. Additionally, a
savings institution should maintain systems, commensurate with its size and the
nature and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
Management believes that the Bank meets substantially all the standards adopted
in the interagency guidelines.
FEDERAL HOME LOAN BANK SYSTEM. Park View Federal is a member of the
FHLB System, which consists of 12 regional FHLBs subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The FHLBs provide a
central credit facility primarily for member institutions. As a member of the
FHLB System, the Bank is required to acquire and hold shares of capital stock in
the FHLB of Cincinnati in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB of Cincinnati, whichever is greater. The Bank was in compliance
with this requirement with an investment in FHLB of Cincinnati stock at June 30,
1998 of $3.5 million.
The FHLB of Cincinnati serves as a reserve or central bank for its
member institutions within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB of Cincinnati.
Long-term advances may be made only for the purpose of providing funds for
residential housing finance. At June 30, 1998, the Bank had $46.3 million in
advances outstanding from the FHLB of Cincinnati. See " -- Deposit Activity and
Other Sources of Funds -- Borrowings."
LIQUIDITY REQUIREMENT. Park View Federal generally is required to
maintain average daily balances of liquid assets (generally, cash, certain time
deposits, bankers' acceptances, highly rated corporate debt and commercial
paper, securities of certain mutual funds, and specified United States
government, state or federal agency obligations) equal to 4% of its net
withdrawable accounts plus short-term borrowings either at the end of the
preceding calendar quarter or on an average daily basis during the preceding
quarter. Park View Federal also is required to maintain sufficient liquidity to
ensure its safe and sound operation. Monetary penalties may be imposed for
failure to meet liquidity requirements. The average daily balance of liquid
assets ratio of Park View Federal at June 30, 1998 was 13.4%.
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
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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, 1998, the Bank qualified as a QTL.
UNIFORM LENDING STANDARDS. Under OTS regulations, savings institutions
must adopt and maintain written policies that establish appropriate limits and
standards for extensions of credit that are secured by liens or interests in
real estate or are made for the purpose of financing permanent improvements to
real estate. These policies must establish loan portfolio diversification
standards, prudent underwriting standards, including loan-to-value limits, that
are clear and measurable, loan administration procedures and documentation,
approval and reporting requirements. The real estate lending policies must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the federal
bank regulators.
The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits; (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multifamily or other nonresidential property, the supervisory limit is 80%; (iv)
for loans for the construction of one-to-four family properties, the supervisory
limit is 85%; and (v) for loans secured by other improved property (e.g.,
farmland, completed commercial property and other income-producing property
including non-owner-occupied, one-to-four family property), the limit is 85%.
Although no supervisory loan-to-value limit has been established for
owner-occupied, one-to-four family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
The Interagency Guidelines state that it may be appropriate in
individual cases to originate or purchase loans with loan-to-value ratios in
excess of the supervisory loan-to-value limits, based on the support provided by
other credit factors. The aggregate amount of loans in excess of the supervisory
loan-to-value limits, however, should not exceed 100% of total capital and the
total of such loans secured by commercial, agricultural, multifamily and other
non-one-to-four family residential properties should not exceed 30% of total
capital. The supervisory loan-to-value limits do not apply to certain categories
of loans including loans insured or guaranteed by the U.S. government and its
agencies or by financially capable state, local or municipal governments or
agencies, loans backed by the full faith and credit of a state government, loans
that are to be sold promptly after origination without recourse to a financially
responsible party, loans that are renewed, refinanced or restructured without
the advancement of new funds, loans that are renewed, refinanced or restructured
in connection with a workout, loans to facilitate sales of real estate acquired
by the institution in the ordinary course of collecting a debt previously
contracted and loans where the real estate is not the primary collateral.
The Bank believes that its current lending policies conform to the
Interagency Guidelines.
DEPOSIT INSURANCE. The Bank is required to pay assessments, based on a
percentage of its insured deposits, to the FDIC for insurance of its deposits by
the FDIC through the Savings Association Insurance Fund ("SAIF") of the FDIC.
The FDIC is required to set semi-annual assessments for SAIF-insured
institutions at a level necessary to maintain the designated reserve ratio of
the SAIF at 1.25% of estimated insured deposits, or at a higher percentage of
estimated insured deposits that the FDIC determines to be justified for that
year by circumstances indicating a significant risk of substantial future losses
to the SAIF.
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Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations. See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority, and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.
In past semi-annual periods, institutions with SAIF-assessable
deposits, like the Bank, have been required to pay higher deposit insurance
premiums than institutions with deposits insured by the BIF. In order to
recapitalize the SAIF and address the premium disparity, the Deposit Insurance
Funds Act of 1996 authorized the FDIC to impose a one-time special assessment on
institutions with SAIF-assessable deposits, based on the amount determined by
the FDIC to be necessary to increase the reserve levels of the SAIF to the
designated reserve ratio of 1.25% of insured deposits. Institutions were
assessed at the rate of 65.7 basis points based on the amount of their
SAIF-assessable deposits as of March 31, 1995. As a result of the special
assessment the Bank incurred a pre-tax expense of $1,707,867, during the fiscal
year ended June 30, 1997.
The FDIC has lowered the regular semi-annual SAIF assessment rates by
establishing a base assessment rate schedule ranging from 4 to 31 basis points
effective October 1, 1996. Until December 31, 1999, however, SAIF-insured
institutions will be required to pay assessments to the FDIC at the rate of 6.44
basis points to help fund interest payments on certain bonds issued by the
Financing Corporation ("FICO"), an agency of the federal government established
to finance takeovers of insolvent thrifts. During this period, BIF members will
be assessed for these obligations at the rate of 1.3 basis points. After
December 31, 1999, both BIF and SAIF members will be assessed at the same rate
for FICO payments.
SAIF members are generally prohibited from converting to BIF, also
administered by the FDIC, or merging with or transferring assets to a BIF member
before the date on which the SAIF first meets or exceeds the designated reserve
ratio of 1.25% of insured deposits. However, the FDIC may approve such a
transaction in the case of a SAIF member in default or if the transaction
involves an insubstantial portion of the deposits of each participant. In
addition, mergers, transfer of assets and assumptions of liabilities may be
approved by the appropriate bank regulator so long as deposit insurance premiums
continue to be paid to the SAIF for deposits attributable to the SAIF members,
plus an adjustment for the annual rate of growth of deposits in the surviving
bank without regard to subsequent acquisitions. Each depository institution
participating in a SAIF-to-BIF conversion transaction is required to pay an exit
fee to SAIF equal to 0.90% of the deposits transferred and an entrance fee to
BIF based on the current reserve ratio of the BIF. A savings institution is not
prohibited from adopting a commercial bank or savings bank charter if the
resulting bank remains a SAIF member.
DIVIDEND LIMITATIONS. Under OTS regulations, the Bank may not pay
dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of the conversion
of the bank from the mutual to stock form. In addition, savings institution
subsidiaries of savings and loan holding companies are required to give the OTS
30 days' prior notice of any proposed declaration of dividends to the holding
company.
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,
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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 as follows: no
reserves are required on the first $4.7 million of transaction accounts,
reserves equal to 3% on the next $47.8 million of transaction accounts, plus 10%
on the remainder. These percentages are subject to adjustment by the Federal
Reserve Board. Because required reserves must be maintained in the form of vault
cash or in a noninterest-bearing account at a Federal Reserve Bank, the effect
of the reserve requirement is to reduce the amount of the institution's
interest-earning assets. At June 30, 1998, 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
?7701(a)(19) of the Internal Revenue Code and the total assets attributable to
all branches of the association in the state would qualify such branches taken
as a whole for treatment as a domestic building and loan association and (ii)
such branch would not result in (a) formation of a prohibited multi-state
multiple savings and loan holding company or (b) a violation of certain
statutory restrictions on branching by savings association subsidiaries of
banking holding companies. Federal associations generally may not establish new
branches unless the association meets or exceeds minimum regulatory capital
requirements. The OTS will also consider the association's record of compliance
with the Community Reinvestment Act of 1977 in connection with any branch
application.
The Federal Reserve Board may permit the acquisition of a savings
institution by a bank holding company. In approving an application by a bank
holding company to acquire a savings institution, the Federal Reserve Board
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is prohibited from imposing restrictions on tandem operations of the subsidiary
savings institution and its holding company affiliates except as required under
Sections 23A and 23B of the Federal Reserve Act, as amended.
A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a BIF member
with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings association plus an annual growth increment.
In addition, the transaction must comply with the restrictions on interstate
acquisitions of commercial banks under the Bank Holding Company Act.
LOANS-TO-ONE-BORROWER LIMITATIONS. Under federal law, loans and
extensions of credit outstanding at one time to a person shall not exceed 15% of
the unimpaired capital and surplus of the savings association. Loans and
extensions of credit fully secured by certain readily marketable collateral may
represent an additional 10% of unimpaired capital and surplus. Applicable law
authorizes savings associations to make loans to one borrower, for any purpose,
in an amount not to exceed $500,000 or, by order of the Director of OTS, in an
amount not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and
surplus to develop residential housing, provided: (i) the purchase price of each
single-family dwelling in the development does not exceed $500,000; (ii) the
savings association is in compliance with the fully phased-in capital standards
of FIRREA; (iii) the loans comply with applicable loan-to-value requirements,
and; (iv) the aggregate amount of loans made under this authority does not
exceed 150% of unimpaired capital and surplus. FIRREA also authorizes a savings
association to make loans to one borrower to finance the sale of real property
acquired in satisfaction of debts in an amount up to 50% of unimpaired capital
and surplus.
TRANSACTIONS WITH AFFILIATES. Transactions between savings associations
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings association is any company or entity which
controls, is controlled by or is under common control with the savings
association. In a holding company context, the parent holding company of a
savings association and any companies which are controlled by such parent
holding company are affiliates of the savings association. Generally, Sections
23A and 23B (i) limit the extent to which the savings institution or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, and contain
an aggregate limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings association may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding companies, or
(ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings association.
Savings institutions are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to a director,
executive officer or greater than 10% stockholder of a savings association and
certain affiliated interests of the foregoing, may not exceed, together with all
other outstanding loans to such person and affiliated interests, the
association's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus) and all loans to such persons may
not exceed the institution's unimpaired capital and unimpaired surplus. Section
22(h) also prohibits loans, above amounts prescribed by the appropriate federal
banking agency, to directors, executive officers and greater than 10%
stockholders of a savings association, and their respective affiliates, unless
such loan is approved in advance by a majority of the board of directors of the
association with any "interested" director not participating in the voting. The
Federal Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval is required, as being
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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. ? 1972 on certain tying arrangements
and extensions of credit by correspondent banks. Section 22(g) of the Federal
Reserve Act requires that loans to executive officers of depository institutions
not be made on terms more favorable than those afforded to other borrowers,
requires approval for such extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
REGULATION OF THE COMPANY
GENERAL.
The company is a savings and loan holding company as defined by the
HOLA. As such, the Company is registered with the OTS and is subject to OTS
regulation, examination, supervision and reporting requirements. As a subsidiary
of a savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with the Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. The Board of Directors of the Company
presently intends to operate the Company as a unitary savings and loan holding
company. There are generally no restrictions on the activities of a unitary
savings and loan holding company. However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director of the OTS may impose such restrictions as deemed necessary to address
such risk including limiting: (i) payment of dividends by the savings
institution; (ii) transactions between the savings institution and its
affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings and loan holding
companies, if the savings institution subsidiary of such a holding company fails
to meet the QTL test, then such unitary holding company shall also presently
become subject to the activities restrictions applicable to multiple holding
companies and, unless the savings institution requalifies as a QTL within one
year thereafter, register as, and become subject to the restrictions applicable
to a bank holding company. See "--Regulation of the Bank-- Qualified Thrift
Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and
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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 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
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which met certain definitional tests and other conditions prescribed by the Code
benefitted from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans were separated into "qualifying real
property loans," which generally were loans secured by interests in certain real
property, and nonqualifying loans, which were all other loans. The bad debt
reserve deduction with respect to nonqualifying loans was based on actual loss
experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans was based upon actual loss experience (the
"experience method") or a percentage of taxable income determined without regard
to such deduction (the "percentage of taxable income method"). The legislation
repealed the percentage of taxable income method of calculating the bad debt
reserve. The Bank has generally elected to use the method which has resulted in
the greatest deductions for federal income tax purposes.
Legislation that is effective for tax years beginning after December
31, 1995 requires institutions to recapture into taxable income over a six
taxable year period the portion of the tax loan loss reserve that exceeds the
pre-1988 tax loan loss reserve. The Bank has no such excess reserve. The Bank
will no longer be allowed to use the percentage of taxable income method for tax
loan loss provisions, but will be allowed to use the experience method of
accounting for bad debts. Beginning with the June 30, 1997 taxable year, the
Bank will be treated the same as a small commercial bank. Institutions with $500
million or more in assets will only be able to take a tax deduction when a loan
is actually charged off. Institutions with less than $500 million in assets will
still be permitted to make deductible bad debt additions to reserves, but only
using the experience method.
Earnings appropriated to the Bank's bad debt reserve and claimed as a
tax deduction are not available for the payment of cash dividends or for
distribution to stockholders (including distributions made on dissolution or
liquidation), unless the Bank includes the amount in taxable income, along with
the amount deemed necessary to pay the resulting federal income tax.
For taxable years beginning after December 31, 1986, the Tax Reform Act
of 1986 (the "Tax Reform Act") changed the corporate minimum tax from an add-on
tax to a tax based on alternative minimum taxable income ("AMTI"), and increased
the tax rate from 15% to 20%. The Internal Revenue Code provisions relating to
the alternative minimum tax ("AMTI") also include in AMTI (for tax years
beginning in 1987-1989) an amount equal to one-half of the amount by which a
corporation's book income (as specifically defined) exceeds its AMTI (determined
without regard to this preference and prior to reduction by net operating
losses). Also, only 90% of AMTI can be offset by net operating losses. For
taxable years beginning after December 31, 1989, the adjustment to AMTI based on
book income is an amount equal to 75% of the amount by which a corporation's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses).
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 1998, 1997 and 1996. 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.
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ITEM 2. PROPERTIES
The following table sets forth the location and certain additional
information regarding the Company's offices at June 30, 1998.
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 $40,345 $ 382 Owned 16,800
Cleveland, Ohio
BRANCH OFFICES:
2111 Richmond Road 1967 56,184 117 Lease 2,750
Beachwood, Ohio 3/1/99
25350 Rockside Road 1969 54,411 53 Lease 14,400
Bedford Heights, Ohio 3/1/03
11010 Clifton Blvd. 1974 24,984 10 Lease 1,550
Cleveland, Ohio 8/1/05
7448 Ridge Road 1979 32,533 0 Lease 3,200
Parma, Ohio 10/11/97
6990 Heisley Road 1994 30,972 22 Lease 2,400
Mentor, Ohio 10/25/98
1456 SOM Center Road 1995 31,137 227 Lease 2,200
Mayfield Heights, Ohio 9/30/04
497 East Aurora Road 1994 23,253 46 Lease 2,400
Macedonia, Ohio 9/30/04
8500 Washington Street 1995 26,020 88 Lease 2,700
Chagrin Falls, Ohio 11/30/04
408 Water Street 1997 24,390 350 Lease 2,800
Chardon, Ohio 8/31/02
At June 30, 1998 the net book value of the Bank's premises, furniture,
fixtures and equipment was $2.3 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 further information.
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ITEM 3. LEGAL PROCEEDINGS.
- --------------------------
From time to time, the Company and/or the Bank is a party to various
legal proceedings incident to its business. There are no other material legal
proceedings to which the Bank or PVF is a party or to which any of their
property is subject except as set forth below.
Various subsidiaries of the Company are parties to lawsuits related to
the Company's efforts, which have since been suspended, to develop a business
offering financial planning advice and the sale of mutual funds and insurance
products on any agency basis. The entities named in the lawsuits are the Bank
and two other entities, PVF Financial Planning Inc.("PVFFP") and Emissary
Financial Group, Inc.("Emissary"), which are majority-owned subsidiaries of the
Company's wholly owned subsidiary, PVF Holdings, Inc. The Company's proposed
business plan called for PVFFP to establish offices in certain of the Bank's
locations, from which offices PVFFP would provide financial planning advice to
customers and sell insurance and mutual fund products to those customers on an
agency basis. Emissary was proposed to act as a broker dealer that would execute
any trades directed by PVFFP and by entities unrelated to PVFFP or the Company.
Through PVF Holdings, Inc., the Company invested a total of $300,000 in PVFFP
and Emissary, virtually all of which was invested in Emissary. The other
investor in PVFFP and Emissary was to be an individual named Gregory Shefchuk.
Mr. Shefchuk owned a financial planning service that traded through Money
Concepts Capital Corp.("Money Concepts"), a broker dealer based in Chicago,
Illinois. Mr. Shefchuk intended to utilize Emissary as the broker dealer for his
proposed activities with PVFFP.
Shortly after PVFFP and Emissary commenced operations, officers of the
Bank learned of alleged improprieties regarding other businesses operated by Mr.
Shefchuk, including allegations that his other business entities misappropriated
funds. Several days later, Mr. Shefchuk committed suicide, and it was determined
to cease all activities of Emissary and PVFFP. Since that time, PVFFP and
Emissary have not resumed operations and have determined to permanently cease
operations and liquidate as expeditiously as possible.
PVFFP and Emissary have been named as defendants in two lawsuits
pending in the Court of Common Pleas in Lake County, Ohio. One suit was filed
April 14, 1998 by Gary Toth and the Gary A. Toth Trust, and the second suit was
filed on May 22, 1998 by Ashtabula County Residential Services
Corp.("Ashtabula"). Both plaintiffs allege causes of action premised on breach
of fiduciary duty, fraud and misrepresentation, negligence, breach of contract,
accounting, conversion and constructive trust against the defendants, which also
include Mr. Shefchuk, various entities that he controlled and Money Concepts.
The plaintiffs claim generally that certain monies they invested through Mr.
Shefchuk, or an organization controlled by him or PVFFP, were misappropriated.
Mr. Toth seeks compensatory damages and punitive damages in excess of $2
million, and Ashtabula seeks $80,000 in compensatory damages and $1 million in
punitive damages. Neither of these plaintiffs, however, had established an
account with PVFFP.
In two other lawsuits, one filed against Emissary, Shefchuk and others
in an arbitration proceeding with the NASD, and the other filed against the Bank
in the United States District Court for the Northern District of Ohio, Eastern
Division, Money Concepts claims that the defendants damaged Money Concepts by
inducing registered representatives of Money Concepts to leave their positions
to affiliate with Emissary. In the arbitration proceeding, Money Concepts
alleged causes of action premised on breach of contract, conversion, intentional
interference with contract and unfair competition/raiding against Emissary, and
in the proceeding in the United States District Court, Money Concepts alleged
causes of action premised on interference with contract and business
relationships, misappropriation of trade secrets and confidential business
information, conversion, unfair competition and civil conspiracy.
In addition, on May 5, 1998, the Securities and Exchange Commission
("SEC") sued Mr. Shefchuk and entities affiliated with him, as well as Emissary,
in the United States District Court, Northern District of Ohio. The SEC alleged
causes of action premised on the Securities Act of 1933, the Securities Exchange
Act of 1934 and regulations promulgated thereunder, contending that it is
entitled to injunctive relief and civil and criminal penalties as a result of
the defendants' misappropriation of funds of clients an entity affiliated with
Shefchuk. The entity
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alleged to have misappropriated funds was not affiliated with the Company, the
Bank, PVFFP or Emissary. The court entered a preliminary injunction requiring
Emissary not to violate certain provisions of the securities laws. Emissary had
already ceased operations and determined to liquidate its business, and as a
result the Company does not consider this ruling to be material.
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, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- -------------------------------------------------------------------------
MATTERS
-------
The information contained under the section captioned "Market
Information" in the Company's Annual Report to Stockholders for the Fiscal Year
Ended June 30, 1998 (the "Annual Report") is incorporated herein by reference.
For information regarding restrictions on the payment of dividends see "Item 1.
Business -- Regulation of the Bank -- Dividend Limitations."
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" in the Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
-------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management" in the Annual Report incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The consolidated financial statements contained in the Annual Report
which are listed under Item 14 herein are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
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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 1998 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" and "-- Directors'
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
(a) and (b) The information required by this item is incorporated herein
by reference to the sections captioned "Proposal I - Election
of Directors" and "Voting Securities and Principal Holders
Thereof" of the Proxy Statement.
(c) Management knows of no arrangements, including any pledge by
any person of securities of the Bank, the operation of which
may at a subsequent date result in a change in control of the
registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" of the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) 1. Independent Auditors' Report (incorporated by reference to
the Annual Report)
Consolidated Financial Statements (incorporated by reference
to the Annual Report)
(a) Consolidated Statements of Financial Condition, at
June 30, 1998 and 1997
(b) Consolidated Statements of Operations for the Years
Ended June 30, 1998, 1997 and 1996
(c) Consolidated Statements of Stockholders' Equity for
the Years Ended June 30, 1998, 1997 and 1996
(d) Consolidated Statements of Cash Flows for the Years
Ended June 30, 1998, 1997 and 1996
(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.
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3. Exhibits and Index to Exhibits
The following exhibits are either attached to or incorporated
by reference in this Annual Report on Form 10-K.
No. Description
- --- -----------
3.1 Certificate of Incorporation *
3.2 Code of Regulations *
3.3 Bylaws *
4 Specimen Stock Certificate *
10.1 Park View Federal Savings Bank Conversion Stock Option Plan *
10.2 PVF Capital Corp. 1996 Incentive Stock Option Plan *
10.3 Severance Agreements between PVF Capital Corporation and
each of John R. Male, C. Keith Swaney and Jeffrey N. Male
10.4 Park View Federal Savings Bank Supplemental Executive
Retirement Plan
13 PVF Capital Corp. Annual Report to Stockholders for the year ended
June 30, 1998
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 No. 0-24948).
(b) During the last quarter of the fiscal year ended June 30, 1998, 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.
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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 23, 1998 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 23, 1998
- ----------------------------------------
John R. Male
President and Chief Executive Officer
(Principal Executive Officer)
/s/ C. Keith Swaney September 23, 1998
- ---------------------------------------
C. Keith Swaney
Vice President and Treasurer
(Principal Financial and Accounting Officer)
/s/ James W. Male September 23, 1998
- ---------------------------------------
James W. Male
Chairman of the Board
/s/ Robert K. Healey September 23, 1998
- ----------------------------------------
Robert K. Healey
Director
/s/ Stanley T. Jaros September 23, 1998
- -----------------------------------------
Stanley T. Jaros
Director
/s/ Creighton E. Miller September 23, 1998
- ----------------------------------------
Creighton E. Miller
Director
/s/ Stuart D. Neidus September 23, 1998
- -----------------------------------------
Stuart D. Neidus
Director
/s/ Robert F. Urban September 23, 1998
- ----------------------------------------
Robert F. Urban
Director
37